As filed with the Securities and Exchange Commission on January 7, 2005
An Exhibit List can be found on page II-8.
Registration No. 333-112579
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
POST EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
eMagin Corporation
(Name of small business issuer in its charter)
Delaware 3674 56-1764501
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
2070 Route 52
Hopewell Junction, New York 12533
(845) 838-7900
(Address and telephone number of principal executive offices
and principal place of business)
Gary W. Jones
Chief Executive Officer
eMagin Corporation
2070 Route 52
Hopewell Junction, New York 12533
(845) 838-7900
(Name, address and telephone number of agent for service)
Copies to:
Richard A. Friedman, Esq.
Darrin M. Ocasio, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- ------------------ --------------------
Title of each class of Amount to be Proposed Proposed Amount of
securities to be registered registered (1) maximum maximum registration fee
offering aggregate
price per offering price
share (2)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $.001 par value 3,342,421 $1.06 $3,542,966.26 $417.01
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 4,312,214 $1.06 $4,570,946.84 $538.00
Value, issuable upon exercise
of Warrants
------------------------------- -------------------- ---------------- ------------------ --------------------
Total 7,654,635 $8,113,913.10 $955.01
------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon the exercise of warrants held by the selling stockholders.
In addition to the shares set forth in the table, the amount to be registered
includes an indeterminate number of shares issuable upon exercise of the
warrants, as such number may be adjusted as a result of stock splits, stock
dividends and similar transactions in accordance with Rule 416.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the sale prices as reported on the American Stock Exchange
on January 6, 2005, which was $1.06 per share.
EXPLANATORY NOTE
THIS FILING DOES NOT INVOLVE THE REGISTRATION OF ANY NEW SHARES OF COMMON STOCK.
RATHER, THIS FILING UPDATES THE REGISTRATION OF THE COMMON STOCK ORIGINALLY
REGISTERED ON FORM SB-2 FILED ON FEBRUARY 6, 2004. IN ACCORDANCE WITH THE
REGISTRATION RIGHTS AGREEMENT ENTERED INTO WITH THE INVESTORS WHO INVESTED IN
OUR COMMON STOCK ON JANUARY 9, 2004, WE WILL CONTINUE TO MAINTAIN REGISTRATION
OF THESE SHARES UNTIL FEBRUARY 2006.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
2
Registration No. 333-112579
eMagin Corporation
7,654,635 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders, who invested
in our common stock on January 9, 2004, of up to 7,654,635 shares of our common
stock, including up to 4,312,214 shares issuable upon the exercise of common
stock purchase warrants. All these securities were previously issued on January
9, 2004 and registered in February 2004. As of January 7, 2005, 2,914,650 of
these warrants have been exercised leaving a balance of 1,213,352 A warrants
that are exercisable until January 2009 and 184,212 C warrants that are
exercisable until February 2005. The selling stockholders may sell common stock
from time to time in the principal market on which the stock is traded at the
prevailing market price or in negotiated transactions.
THIS FILING DOES NOT INVOLVE THE REGISTRATION OF ANY NEW SHARES OF COMMON STOCK.
RATHER, THIS FILING UPDATES THE REGISTRATION OF THE COMMON STOCK ORIGINALLY
REGISTERED ON FORM SB-2 FILED ON FEBRUARY 6, 2004. IN ACCORDANCE WITH THE
REGISTRATION RIGHTS AGREEMENT ENTERED INTO WITH THE INVESTORS WHO INVESTED IN
OUR COMMON STOCK ON JANUARY 9, 2004, WE WE WILL CONTINUE TO MAINTAIN
REGISTRATION OF THESE SHARES UNTIL FEBRUARY 2006.
The selling stockholders may be deemed underwriters of the shares of common
stock, which they are offering. We will pay the expenses of registering these
shares.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the American Stock Exchange under the symbol "EMA".
The last reported sales price per share of our common stock as reported by the
American Stock Exchange on January 6, 2005, was $1.06.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is January __, 2005.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by eMagin
Corporation, with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
3
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the
"risk factors" section, the financial statements and the notes to the
financial statements.
eMagin Corporation
We design, develop, and market OLED (organic light emitting diode)-on-silicon
microdisplays and related information technology solutions. We integrate high
resolution OLED displays (smaller than one-inch diagonal), magnifying optics,
and systems technologies to create a virtual image that appears comparable to
that of a computer monitor or a large-screen television. We have developed
unique technology for producing high performance OLED microdisplays and related
optical systems. We are the only company to announce, publicly show, and sell
full-color active matrix OLED-on-silicon microdisplays. We are now supplying our
first two commercial microdisplay products (SVGA+ and SVGA 3D OLED
microdisplays) in initial commercial quantities to original equipment
manufacturers (OEMs). In addition, we sell integrated display and optics modules
to military, homeland defense, industrial, and medical customers. These products
are being applied or considered for near-eye and headset applications in
products such as entertainment and gaming headsets, handheld Internet and
telecommunication appliances, viewfinders, night vision viewers, firefighting
helmets, simulation tools, and wearable computers manufactured by OEM customers.
Our principal offices are located at 2070 Route 52, Hopewell Junction, New York
12533, and our telephone number is (845) 838-7900. We are a Delaware
corporation. Our website is www.emagin.com. Information on our website is not
part of this registration statement.
The Offering
Common stock offered by selling stockholders............ Up to 7,654,635 shares, including up to
4,312,214 shares issuable upon the exercise
of common stock purchase warrants, assuming
full exercise of the warrants. This number
represents 9.5% of the total number of
shares to be outstanding following this
offering assuming the exercise of all
securities being registered.
Common stock to be outstanding after the offering........ Up to 81,001,380 shares
Use of proceeds.......................................... We will not receive any proceeds from the sale
of the common stock. However, we will receive
the exercise price of any common stock we issue to
the selling stockholders upon exercise of the
warrants. We expect to use the proceeds
received from the exercise of their
warrants, if any, for general working capital
purposes.
American Stock Exchange Symbol........................... EMA
The above information regarding common stock to be outstanding after the
offering is based on 79,603,816 shares of common stock outstanding as of
January 5, 2005 and assumes the subsequent issuance of common stock to the
selling stockholders and exercise of warrants by our selling stockholders.
4
SECURITIES COVERED BY THIS PROSPECTUS
On January 9, 2004, eMagin Corporation and several accredited institutional and
private investors entered into a Securities Purchase Agreement whereby such
investors purchased an aggregate of 3,333,363 shares of common stock for an
aggregate purchase price of $4,200,039.
The shares of common stock were priced at a 20% discount to the average closing
price of the stock from December 30, 2003 to January 6, 2004, which ranged from
$1.38 to $1.94 per share during the period for an average closing price of $1.58
per share, making the discounted price $1.26 per share. In addition, the
investors received warrants to purchase an aggregate of 2,000,018 shares of
common stock (subject to anti-dilution adjustments) exercisable at a price of
$1.74 per share for a period of five (5) years. The warrants were priced at a
10% premium to the average closing price of the stock for the pricing period.
We also issued additional warrants to the investors to acquire an aggregate of
2,312,196 shares of common stock. 1,206,915 of such warrants are exercisable,
within 6 months from the effective date of the registration statement covering
these securities, at a price of $1.74 per share (a 10% premium to the average
closing price of the stock for the pricing period), and 1,105,281 of such
warrants are exercisable within 12 months from the effective date of the
registration statement covering these securities, at a price of $1.90 per share
(a 20% premium to the average closing price of the stock for the pricing
period).
This prospectus covers the resale by the investors of the above-referenced
common stock and common stock underlying the warrants.
5
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Related To Our Financial Results
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION AND MAY INCUR LOSSES FOR THE
FORESEEABLE FUTURE.
Accumulated net losses as of September 30, 2004, were $(145) million, the
majority of which was related to the March 2000 merger and the subsequent
write-down of goodwill. The non-cash losses were dominated by the amortization
and write-down of goodwill and purchased intangibles and write-down of acquired
in-process research and development related to the March 2000 acquisition, and
also included some non-cash stock-based compensation. We have not yet achieved
profitability and we can give no assurances that we will achieve profitability
within the foreseeable future as we fund our operations and capital expenditures
in areas such as establishment and expansion of markets, sales and marketing,
operating equipment and research and development. We cannot assure investors
that we will ever achieve or sustain profitability or that our operating losses
will not increase in the future.
WE WERE PREVIOUSLY PRIMARILY DEPENDENT ON U.S. GOVERNMENT CONTRACTS.
For many years the majority of our revenues were derived from research and
development contracts with the U.S. government. We no longer rely on such
contracts for revenue. We plan to submit proposals for additional development
contract funding; however, funding is subject to legislative authorization and
even if funds are appropriated such funds may be withdrawn based on changes in
government priorities. No assurances can be given that we will be successful in
obtaining new government contracts. Our inability to obtain revenues from
government contracts could have a material adverse effect on our results of
long-term operations, unless substantial product or non-government contract
revenue offsets any lack of government contract revenue.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
WE RELY ON OUR LICENSE AGREEMENT WITH EASTMAN KODAK FOR THE DEVELOPMENT OF OUR
PRODUCTS. EASTMAN KODAK'S LICENSING OF ITS OLED TECHNOLOGY TO OTHERS FOR
MICRODISPLAY APPLICATIONS, OR THE SUBLICENSING BY EASTMAN KODAK OF OUR OLED
TECHNOLOGY TO THIRD PARTIES, COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR
BUSINESS.
Our principal products under development utilize OLED technology that we license
from Eastman Kodak. We rely upon Eastman Kodak to protect and enforce key
patents held by Eastman Kodak, relating to OLED display technology. Eastman
Kodak's patents expire at various times in the future from near term through
long term patents that are just being issued.. Our license with Eastman Kodak
could terminate if we fail to perform any material term or covenant under the
license agreement. Since our license from Eastman Kodak is non-exclusive,
Eastman Kodak could also elect to become a competitor itself or to license OLED
technology for microdisplay applications to others who have the potential to
compete with us. The occurrence of any of these events could have a material
adverse impact on our business.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS.
We rely on a combination of patents, trade secret protection, licensing
agreements and other arrangements to establish and protect our proprietary
technologies. If we fail to successfully enforce our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Patents may not be issued for our current patent applications, third
parties may challenge, invalidate or circumvent any patent issued to us,
unauthorized parties could obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights, rights
granted under patents issued to us may not afford us any competitive advantage,
others may independently develop similar technology or design around our
patents, our technology may be available to licensees of Eastman Kodak, and
protection of our intellectual property rights may be limited in certain foreign
countries. We may be required to expend significant resources to monitor and
police our intellectual property rights. Any future infringement or other claims
or prosecutions related to our intellectual property could have a material
adverse effect on our business. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Protection of intellectual
property has historically been a large expense for eMagin. We have not been in a
financial position to properly protect all of our intellectual property, and may
not be in a position to properly protect our position or stay ahead of
competition in new research and the protecting of the resulting intellectual
property.
6
RISKS RELATED TO THE MICRODISPLAY INDUSTRY
THE COMMERCIAL SUCCESS OF THE MICRODISPLAY INDUSTRY DEPENDS ON THE WIDESPREAD
MARKET ACCEPTANCE OF MICRODISPLAY SYSTEMS PRODUCTS.
The market for microdisplays is emerging. Our success will depend on consumer
acceptance of microdisplays as well as the success of the commercialization of
the microdisplay market. As an OEM supplier, our customer's products must also
be well accepted. At present, it is difficult to assess or predict with any
assurance the potential size, timing and viability of market opportunities for
our technology in this market. The viewfinder microdisplay market sector is well
established with entrenched competitors with whom we must compete.
THE MICRODISPLAY SYSTEMS BUSINESS IS INTENSELY COMPETITIVE.
We do business in intensely competitive markets that are characterized by rapid
technological change, changes in market requirements and competition from both
other suppliers and our potential OEM customers. Such markets are typically
characterized by price erosion. This intense competition could result in pricing
pressures, lower sales, reduced margins, and lower market share. Our ability to
compete successfully will depend on a number of factors, both within and outside
our control. We expect these factors to include the following:
o our success in designing, manufacturing and delivering expected new products,
including those implementing new technologies on a timely basis;
o our ability to address the needs of our customers and the quality of our
customer services;
o the quality, performance, reliability, features, ease of use and pricing of
our products;
o successful expansion of our manufacturing capabilities;
o our efficiency of production, and ability to manufacture and ship products on
time;
o the rate at which original equipment manufacturing customers incorporate our
product solutions into their own products;
o the market acceptance of our customers' products; and
o product or technology introductions by our competitors.
Our competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
THE DISPLAY INDUSTRY IS CYCLICAL.
The display industry is characterized by fabrication facilities that require
large capital expenditures and long lead times for supplies and the subsequent
processing time, leading to frequent mismatches between supply and demand. The
OLED microdisplay sector may experience overcapacity if and when all of the
facilities presently in the planning stage come on line leading to a difficult
market in which to sell our products.
COMPETING PRODUCTS MAY GET TO MARKET SOONER THAN OURS.
Our competitors are investing substantial resources in the development and
manufacture of microdisplay systems using alternative technologies such as
reflective liquid crystal displays (LCDs), LCD-on-Silicon ("LCOS")
microdisplays, active matrix electroluminescence and scanning image systems, and
transmissive active matrix LCDs. Some of these products have been introduced
years ahead of our products and some are established in segments of the
microdisplay and virtual imaging markets that we have yet to enter. Displacing
entrenched competitors may be difficult, especially in long-term projects or
products, even if our product proves itself to be better.
OUR COMPETITORS HAVE MANY ADVANTAGES OVER US.
As the microdisplay market develops, we expect to experience intense competition
from numerous domestic and foreign companies including well-established
corporations possessing worldwide manufacturing and production facilities,
greater name recognition, larger retail bases and significantly greater
financial, technical, and marketing resources than us, as well as from emerging
companies attempting to obtain a share of the various markets in which our
microdisplay products have the potential to compete.
OUR PRODUCTS ARE SUBJECT TO LENGTHY OEM DEVELOPMENT PERIODS.
7
We plan to sell most of our microdisplays and related products to OEMs who will
incorporate them into or with products they sell. OEMs determine during their
product development phase whether they will incorporate our products. The time
elapsed between initial sampling of our products by OEMs, the custom design of
our products to meet specific OEM product requirements, and the ultimate
incorporation of our products into OEM consumer products is significant. If our
products fail to meet our OEM customers' cost, performance or technical
requirements or if unexpected technical challenges arise in the integration of
our products into OEM consumer products, our operating results could be
significantly and adversely affected. Long delays in achieving customer
qualification and incorporation of our products could adversely affect our
business.
OUR PRODUCTS WILL LIKELY EXPERIENCE RAPIDLY DECLINING UNIT PRICES.
In the markets in which we expect to compete, prices of established products
tend to decline significantly over time. In order to maintain our profit margins
over the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our
products or reduce the cost of producing and delivering our products. While we
anticipate many opportunities to reduce production costs over time, there can be
no assurance that these cost reduction plans will be successful. We may also
attempt to offset the anticipated decrease in our average selling price by
introducing new products, increasing our sales volumes or adjusting our product
mix. If we fail to do so, our results of operations would be materially and
adversely affected.
RISKS RELATED TO MANUFACTURING
WE DEPEND ON SEMICONDUCTOR CONTRACT MANUFACTURERS TO SUPPLY OUR SILICON
INTEGRATED CIRCUITS AND OTHER SUPPLIERS OF KEY COMPONENTS, MATERIALS AND
SERVICES.
We do not manufacture the silicon integrated circuits on which we incorporate
our OLED technology. Instead, we provide the design layouts to semiconductor
contract manufacturers who manufacture the integrated circuits on silicon
wafers. We also depend on suppliers of a variety of other components and
services, including circuit boards, graphic integrated circuits, passive
components, materials and chemicals, and equipment support. Our inability to
obtain sufficient quantities of high quality silicon integrated circuits or
other necessary components, materials or services on a timely basis has resulted
in delays and could result in future manufacturing delays, increased costs and
ultimately in reduced or delayed sales or lost orders which could materially and
adversely affect our operating results.
THE MANUFACTURE OF OLED-ON-SILICON IS NEW AND OLED MICRODISPLAYS HAVE NOT BEEN
PRODUCED IN SIGNIFICANT QUANTITIES.
If we are unable to produce our products in sufficient quantity, we will be
unable to attract customers. In addition, we cannot assure you that once we
commence volume production we will attain yields of throughput that will result
in profitable gross margins or that we will not experience manufacturing
problems which could result in delays in delivery of orders or product
introductions.
WE ARE DEPENDENT ON A SINGLE MANUFACTURING LINE.
We currently manufacture our products on a single manufacturing line. If we
experience any significant disruption in the operation at our manufacturing
facility or a serious failure of a critical piece of equipment, we may be unable
to supply microdisplays to our customers. For this reason, some OEMs may also be
reluctant to commit a broad line of products with our microdisplays without a
second production facility in place. Interruptions in our manufacturing could be
caused by manufacturing equipment problems, the introduction of new equipment
into the manufacturing process or delays in the delivery of new manufacturing
equipment. Lead-time for delivery of manufacturing equipment can be long. No
assurance can be given that we will not lose potential sales or be able to meet
sales orders delivery requirements due to production interruptions in our
manufacturing line. In order to meet the requirements of certain OEMs for
multiple manufacturing sites, we will have to expend capital to secure
additional sites and may not be able to manage multiple sites successfully.
8
RISKS RELATED TO OUR BUSINESS
OUR SUCCESS DEPENDS ON ATTRACTING AND RETAINING HIGHLY SKILLED AND QUALIFIED
TECHNICAL AND CONSULTING PERSONNEL.
We must hire highly skilled technical personnel as employees and as independent
contractors in order to develop our products. The competition for skilled
technical employees is intense and we may not be able to retain or recruit such
personnel. We must compete with companies that possess greater financial and
other resources than we do, and that may be more attractive to potential
employees and contractors. To be competitive, we may have to increase the
compensation, bonuses, stock options and other fringe benefits offered to
employees in order to attract and retain such personnel. The costs of retaining
or attracting new personnel may have a material adverse affect on our business
and operating results. In addition, difficulties in hiring and retaining
technical personnel could delay the implementation of our business plan.
OUR SUCCESS DEPENDS IN A LARGE PART ON THE CONTINUING SERVICE OF KEY PERSONNEL.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of several key management personnel,
including Gary W. Jones, our chief executive officer. This is especially an
issue while the company staffing is small. We will also need to recruit
additional management in order to expand according to our business plan. The
failure to attract and retain additional management or personnel could have a
material adverse effect on our operating results and financial performance.
OUR BUSINESS DEPENDS ON NEW PRODUCTS AND TECHNOLOGIES.
The market for our products is characterized by rapid changes in product, design
and manufacturing process technologies. Our success depends to a large extent on
our ability to develop and manufacture new products and technologies to match
the varying requirements of different customers in order to establish a
competitive position and become profitable. Furthermore, we must adopt our
products and processes to technological changes and emerging industry standards
and practices on a cost-effective and timely basis. Our failure to accomplish
any of the above could harm our business and operating results.
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
Our business is operated on the basis of short-term purchase orders and we
cannot guarantee that we will be able to obtain long-term contracts for some
time. Such purchase orders can be cancelled or revised without penalty,
depending on the circumstances. In the absence of a backlog of orders that can
only be canceled with penalty, we plan production on the basis of internally
generated forecasts of demand, which makes it difficult to accurately forecast
revenues. If we fail to accurately forecast operating results, our business may
suffer and the value of your investment in the Company may decline. Large,
long-term supply line commitments and large inventories of various types of
displays and other products will be required to support our business and provide
reasonable order turn around for customers. Potentially enabling rapid sales
growth targets can greatly increase the cash requirement for these accounts.
Such supplies and inventories are subject to potential obsolescence, long delays
before sale, and potential damage or loss.
9
OUR BUSINESS STRATEGY MAY FAIL IF WE CANNOT CONTINUE TO FORM STRATEGIC
RELATIONSHIPS WITH COMPANIES THAT MANUFACTURE AND USE PRODUCTS THAT COULD
INCORPORATE OUR OLED-ON-SILICON TECHNOLOGY.
Our prospects will be significantly affected by our ability to develop strategic
alliances with OEMs for incorporation of our OLED-on-silicon technology into
their products. While we intend to continue to establish strategic relationships
with manufacturers of electronic consumer products, personal computers,
chipmakers, lens makers, equipment makers, material suppliers and/or systems
assemblers, there is no assurance that we will be able to continue to establish
and maintain strategic relationships on commercially acceptable terms, or that
the alliances we do enter into will realize their objectives. Failure to do so
would have a material adverse effect on our business.
OUR BUSINESS DEPENDS TO SOME EXTENT ON INTERNATIONAL TRANSACTIONS.
We purchase needed materials from companies located abroad and may be adversely
affected by political and currency risk, as well as the additional costs of
doing business with a foreign entity. Some customers in other countries have
longer receivable periods. In addition, many of the OEMs that are the most
likely long-term purchasers of our microdisplays are located abroad exposing us
to additional political and currency risk. We may find it necessary to locate
manufacturing facilities abroad to be closer to our customers which could expose
us to various risks, including management of a multi-national organization, the
complexities of complying with foreign laws and customs, political instability
and the complexities of taxation in multiple jurisdictions.
OUR BUSINESS MAY EXPOSE US TO PRODUCT LIABILITY CLAIMS.
Our business may expose us to product liability claims. Although no such claims
have been brought against us to date, and to our knowledge no such claim is
threatened or likely, we may face liability to product users for damages
resulting from the faulty design or manufacture of our products. While we plan
to maintain product liability insurance coverage, there can be no assurance that
product liability claims will not exceed coverage limits, fall outside the scope
of such coverage, or that such insurance will continue to be available at
commercially reasonable rates, if at all.
Our business is subject to environmental regulations and possible liability
arising from governmental claims related to the disposal of hazardous substances
and/or potential employee claims of exposure to harmful substances used in the
development and manufacture of our products.
We are subject to various governmental regulations related to toxic, volatile,
experimental and other hazardous chemicals used in, and disposed of in
connection with, our design and manufacturing process. Our failure to comply
with these regulations could result in the imposition of fines or in the
suspension or cessation of our operations. Compliance with these regulations
could require us to acquire costly equipment or to incur other significant
expenses. We develop, evaluate and utilize new chemical compounds in the
manufacture of our products. While we attempt to ensure that our employees are
protected from exposure to hazardous materials, we cannot assure you that
potentially harmful exposure will not occur or that we will not be liable to
employees as a result.
RISKS RELATED TO OUR STOCK
WE MAY NOT BE ABLE TO MAINTAIN COMPLIANCE WITH THE AMERICAN STOCK EXCHANGE'S
CONTINUED LISTING REQUIREMENTS.
The AMEX staff notified us in June 2003 that we have fallen below Section
1003(a)(i) of the AMEX Company Guide for having shareholders' equity of less
than $2,000,000 and losses from continuing operations and/or net losses in two
out of the three most recent fiscal years. We were afforded the opportunity to
submit a plan of compliance to the AMEX and presented a plan to the AMEX in July
2003. On September 9, 2003, we received notice from the staff of the AMEX that
the AMEX had accepted our plan to regain compliance with AMEX's continued
listing standards and granted us an extension until December 4, 2004 to regain
compliance with those standards.
On November 15, 2004, we were advised by the AMEX that we have evidenced
compliance with the requirements necessary for continued listing on the AMEX. In
addition, we were advised that we have become subject to the provisions of
Section 1009(h) of the AMEX Company Guide, which states that if we are again
determined to be below the continued listing standards within twelve months of
the end of our plan, the AMEX staff will examine the relationship between the
two incidents of falling below continued listing standards and re-evaluate our
method of financial recovery from the first incident. It will then take
appropriate action, which, depending upon the circumstances, may include
truncating the procedures described above or immediately initiating delisting
procedures. Other as yet unidentified issues may arise that could adversely
affect the financial or the potential listing status of the company.
10
THE SUBSTANTIAL NUMBER OF SHARES THAT ARE OR WILL BE ELIGIBLE FOR SALE COULD
CAUSE OUR COMMON STOCK PRICE TO DECLINE EVEN IF THE COMPANY IS SUCCESSFUL.
Sales of significant amounts of common stock in the public market, or the
perception that such sales may occur, could materially affect the market price
of our common stock. These sales might also make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate. As of January 7, 2005, we had outstanding (i) options to
purchase 13,559,162 shares; and (ii) warrants to purchase 21,618,229 shares of
common stock.
11
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
could receive up to $4,200,040 upon exercise of warrants held by the selling
stockholders that expire within 12 months of this prospectus. We expect to use
the proceeds received from the exercise of the warrants, if any, for general
working capital purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the American Stock Exchange under the symbol
"EMA" since March 17, 2000. From November 18, 1997 to March 16, 2000 our common
stock had been quoted on the OTC Bulletin Board under our prior name "Fashion
Dynamics Corp." under the symbol "FSHD." Prior to January 2000, there had been
no public trading of FSHD. The table below sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the American Stock Exchange.
High Low
---- ---
2004 First Quarter 3.15 1.40
Second Quarter 3.80 1.57
Third Quarter 1.73 0.75
Fourth Quarter 1.50 0.90
2003
First Quarter 1.00 0.33
Second Quarter 0.85 0.50
Third Quarter 1.99 0.51
Fourth Quarter 1.74 1.15
2002
First Quarter 1.75 0.42
As of January 5, 2005, there were 79,603,816 shares of common stock
outstanding.
As of January 5, 2005, there were approximately 471 stockholders of record of
our common stock, respectively. This does not reflect those shares held
beneficially or those shares held in "street" name.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
Equity Compensation Plan Information
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance
outstanding options, warrants and rights
warrants and rights
(a) (b) (c)
Equity compensation plans approved 12,148,570 $ 0.53 2,752,218
by security holders
Equity compensation plans not 0 0.0 0
approved by security holders
--------------- --------------- ---------------
Total as of 12/31/03 12,148,570 $ 0.53 2,752,218
=============== =============== ===============
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate" and "continue", or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our financial
condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
Overview
We design and manufacture miniature display modules, which we refer to as
OLED-on-silicon-microdisplays, primarily for incorporation into the products of
other manufacturers. Microdisplays are typically smaller than a postage stamp,
but when viewed through a magnifier they can contain all of the information
appearing on a high-resolution personal computer screen. Our microdisplays use
organic light emitting diodes, or OLEDs, which emit light themselves when a
current is passed through them. Our technology permits OLEDs to be coated onto
silicon chips to produce high resolution OLED-on-silicon microdisplays.
We believe that our OLED-on-silicon microdisplays offer a number of advantages
in near to the eye applications over other current microdisplay technologies,
including lower power requirements, less weight, fast video speed without
flicker, and wider viewing angles. In addition, many computer and video
electronic system functions can be built directly into the OLED-on-silicon
microdisplay, resulting in compact systems with lower expected overall system
costs relative to alternate microdisplay technologies.
Since our inception in 1996, we derived substantially all of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. government. We have devoted significant resources to the development and
commercial launch of our products. We commenced limited initial sales of our
SVGA+ microdisplay in May 2001 and commenced shipping samples of our SVGA-3D
microdisplay in February 2002. As of September 30, 2004, we have recognized
approximately $7.3 million from sales of our products, and have a backlog of
approximately $35 million in products ordered for delivery through 2007. These
products are being applied or considered for near-eye and headset applications
in products such as entertainment and gaming headsets, handheld Internet and
telecommunication appliances, viewfinders, and wearable computers to be
manufactured by original equipment manufacturer (OEM) customers. In addition to
marketing OLED-on-silicon microdisplays as components, we also offer
microdisplays in an integrated package, which we call Microviewer, which
includes a compact lens for viewing the microdisplay and electronic interfaces
to convert the signal from our customer's product into a viewable image on the
microdisplay. Through our wholly owned subsidiary, Virtual Vision, Inc., we are
also developing head-wearable displays that incorporate our Microviewer.
We license our core OLED technology from Eastman Kodak and we have developed our
own technology to create high performance OLED-on-silicon microdisplays and
related optical systems. We believe our technology licensing agreement with
Eastman Kodak, coupled with our own intellectual property portfolio, gives us a
leadership position in OLED and OLED-on-silicon microdisplay technology. We are
the only company to demonstrate publicly and offer commercially full-color
OLED-on-silicon microdisplays.
Company History
Our history has been as a developmental stage company. As of January 1, 2003, we
are no longer a development stage Company. We have transitioned to manufacturing
our products and intend to significantly increase our marketing, sales, and
research and development efforts, and expand our operating infrastructure. If we
are unable to generate significant revenues, our net losses in any given period
could increase and we may be forced to reduce our expenses or operations.
13
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Not all of the accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, the following policies
could be deemed to be critical within the SEC definition.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, such as when a purchase order or contract is received from
the customer, the price is fixed, title to the goods has changed and there is a
reasonable assurance of collection of the sales proceeds. We obtain written
purchase authorizations from our customers for a specified amount of product at
a specified price and consider delivery to have occurred at the time of
shipment. Revenue is recognized at shipment and we record a reserve for
estimated sales returns, which is reflected as a reduction of revenue at the
time of revenue recognition.
Revenues from research and development activities relating to firm fixed-price
contracts are generally recognized on the percentage-of-completion method of
accounting as costs are incurred (cost-to-cost basis). Revenues from research
and development activities relating to cost-plus-fee contracts include costs
incurred plus a portion of estimated fees or profits based on the relationship
of costs incurred to total estimated costs. Contract costs include all direct
material and labor costs and an allocation of allowable indirect costs as
defined by each contract, as periodically adjusted to reflect revised agreed
upon rates. These rates are subject to audit by the other party. Amounts can be
billed on a bi-monthly basis. Billing is based on subjective cost investment
factors.
Results of Operations
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2003
Revenues
Revenues for the three and nine months ended September 30, 2004 were $1.1
million and $3.1 million, respectively as compared to $0.7 million and $1.5
million for the three and nine months ended September 30, 2003, an increase of
45% and 102%, respectively. The increase in revenue resulted from increased unit
volume to the Company's current customer base. Unit pricing was relatively
unchanged in 2004 as compared to 2003. We currently have firm orders or letters
of intent to purchase our products at significantly higher volume levels than we
have experienced historically. In order to realize revenue from these orders, we
will be required to increase unit production levels and the amount of capital
committed to pre-payments of raw materials and finished goods. The critical raw
materials in the manufacture of our products are silicon wafers used to create
our OLED microdisplays and lenses used in assembly of our subsystems. Both of
these items require significant cash pre-payments and can take up to six months
for delivery once ordered. While we anticipate that our revenues will increase
in the future, we can not reliably estimate when and by how much until
predictable raw material delivery is established or increased levels of these
materials are held in inventory.
Cost of Goods Sold. Cost of goods sold includes direct and indirect costs
associated with production and inventory loss. Cost of goods sold for the three
and nine months ended September 30, 2004 were $1.6 million and $4.5 million,
respectively, as compared to $1.3 million and $3.5 million for the three and
nine months ended September 30, 2003. The $0.3 million and $1.0 million
increase, respectively, in costs was directly related to higher unit volumes in
2004 as compared to 2003. However, our gross loss percentage during the 2004
periods has been reduced significantly due to volume and operating efficiencies
created as we increased production.
We currently record all expenses associated with manufacturing in cost of goods
sold. The full facility overhead as well as the expense of indirect materials is
matched against our units sold. While our production volume is low, the gross
margin reflects the costs that will be absorbed when quantities increase.
Costs and Expenses
Research and Development. Research and development expenses included salaries,
development materials and other costs specifically allocated to the development
of new products. Research and development expenses were $359 thousand and $443
thousand for the three months and nine months ended September 30, 2004,
respectively, as compared to approximately $1 thousand and $22 thousand for the
three and nine months ended September 30, 2003. The increase was a result of new
OLED microdisplay and subsystem development initiatives. We currently anticipate
that research and development expenses will increase over the coming quarters as
these projects progress.
14
Selling, General and Administrative. Selling, general and administrative
expenses consist principally of salaries and fees for professional services,
legal fees incurred in connection with patent filings and related matters,
amortization, as well as other marketing and administrative expenses. Selling,
general and administrative expenses were $0.9 million and $2.8 million for the
three and nine months ended September 30, 2004, respectively, as compared to
$0.7 million and $2.6 million for the three and nine months ended September 30,
2003. The increase of $0.2 million in the three months ended September 30, 2004
as compared to the three months ended September 30, 2003 is primarily due to
relocation expenses associated with staff relocating to Washington State. The
increase of $0.1 million in the nine months ended September 30, 2004 as compared
to the nine months ended September 30, 2003 is primarily due to the same
factors. We currently anticipate that selling, general and administrative
expenses will increase over the coming quarters as we hire additional sales and
support staff.
Other Income (Expense). Other income (expense) for the three and nine months
ended September 30, 2004 were $(0.6) million and ($4.0) million, respectively,
as compared to $(0.4) million and $(0.7) million for the three and nine months
ended September 30, 2003. The $0.1 million increase in other income for the
three months ended September 30, 2004 as compared to the three months ended
September 30, 2003 was due to a non cash charge of approximately $0.6 million
associated with the re-pricing of warrants in relation to obtaining a waiver of
certain participating rights in connection with our shelf financing versus the
interest on debt recorded in 2003. The $3.2 million increase for the nine months
ended September 30, 2004 was primarily due to non cash financing expenses that
recorded the revaluation of warrants issued in conjunction with the early
conversion of the $7.825 million in Notes to equity. Gain on Payable Forgiveness
was a result of restructuring our debt in 2003.
Liquidity and Capital Resources
Current Financial Position
We have total liabilities and contractual obligations of $2,250,089 as of
September 30, 2004. These contractual obligations, along with the dates on which
such payments are due, are described below:
Contractual Obligations Total One Year or Less More than One Year
----------------------- --------------- ---------------- ------------------
Royalties $ 531,250 $ 125,000 $ 406,250
Operating leases 110,892 110,892 -
Capital leases 47,461 18,372 29,089
--------------- ---------------- ------------------
Total contractual obligations $ 689,603 $ 254,264 $ 435,339
=============== ================ ==================
As mentioned in Note 13 - Subsequent Events, in October and November of 2004 we
completed direct equity placements of common stock and warrants that resulted in
net proceeds after expenses of $12.4 million. These funds significantly
strengthen our liquidity and capital resources and will be used in part to fund
the working capital requirements discussed above.
Assuming we are able to increase our revenue, we anticipate that we will
continue to experience growth in our operating expenses for the foreseeable
future and that our operating expenses will be the principal use of our cash. In
particular, we expect that salaries for employees engaged in production
operations, purchase of inventory, funding of receivables and expenses of
increased sales and marketing efforts would be the principle uses of cash. We
expect that our cash requirements over the next 12 months will be met by a
combination of cash on hand, which, as of September 30, 2004 was $4.1 million,
additional financing, the exercise of outstanding options and warrants, and
revenues generated by operations.
We have purchase agreements for approximately $35 million of our products to be
delivered now through 2007. Management believes that the prospects for growth of
product revenue remain high.
Scheduled deliveries against our purchase agreements and other customer
requirements are subject to change depending on a number of factors including,
our production capacity which is heavily dependant on predictable silicon wafer
and lens delivery from our suppliers, our customers' production timing of
related systems into which they are integrating our products and their other
supplier schedules, changes in the expected procurement periods for military
programs and the requirements of the individual agreements and contracts that we
have with our customers. We currently anticipate the need to ramp our supplies
and staffing quickly and efficiently to be prepared to meet the currently
anticipated shipping schedules, which will require significant added effort and
capital.
15
Our cash requirements depend on numerous factors, including new product
development activities, ability to commercialize our products, timely market
acceptance of our products and our customers' products, and other factors. We
expect to carefully devote capital resources to continue our development
programs directed at commercializing our products in our target markets, hire
and train additional staff, expand our research and development activities, and
develop and expand our manufacturing capacity.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Results of Operations
Revenues
Revenues increased by $0.5 million to a total of $2.6 million for the year ended
December 31, 2003 from $2.1 million for the year ended December 31, 2002,
representing an increase of 21%. This increase was due primarily to the
transitioning from research and development to product manufacturing and sales.
Our contract revenue decreased approximately $0.5 million while our product
revenue increased approximately $1.0 million.
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs associated with production
and inventory losses. In the year ended December 31, 2003 we recorded
approximately $5.1 million in cost of goods sold which resulted in a gross loss
of $2.6 million. We expect to prorate a gross profit as we make improvements to
our production line and production staff and increase the utilization of our
production line. In 2003 production was running at a very small portion of our
fabrication line's capacity. We have no relevant production amounts to compare
to, as in 2002 production was at a sampling level.
Research and Development Expenses
Gross research and development expenses decreased by $7.3 million to a total of
$19 thousand for the year ended December 31, 2003 from $7.3 million for the year
ended December 31, 2002, representing a 100% decrease. Of these amounts, we
received $0 in cost sharing from the U.S. government for the year ended December
31, 2003, and $0.3 million for the year ended December 31, 2002. The $7.3
million decrease in R&D expenses for the year ended December 31, 2003 reflects
reduction in staffing and reduction in expenditures related to significant cost
reduction measures undertaken by the company in 2002 and 2003.
Amortization of Purchased Intangibles
Amortization of purchased intangibles expense decreased by $1.0 million to $0.3
million for the year ended December 31, 2003 from $1.3 million for the year
ended December 31, 2002. The decrease is the result of our purchase intangibles
being fully amortized as of March 2003.
Gain on Debt Restructuring
In 2003 we were successful in negotiating with our creditors to reduce amounts
currently owed to them and future contractual obligations. For the year ended
December 31, 2003 we recorded ($4.6) million in gain on debt restructuring. We
also negotiated our lease payments down from approximately $0.3 million a month
to approximately $10 thousand a month.
Non-Cash Stock Based Compensation
Non-cash stock based compensation for the year ended December 31, 2003 increased
$0.6 million to a total of $2.2 million as compared to $1.6 million for the year
ended December 31, 2002. This increase is primarily due to the difference
between the strike price of the options set at the market price when granted in
October 2002 and the price of the Company's stock on July 2, 2003 when the
options granted in October 2002 were issued under the 2003 Employee Stock Option
Plan. Non-cash stock-based compensation costs are the result of amortization of
the intrinsic value ascribed for the issuance of stock options at the time of
grant. The amortization is done over the vesting period of such options.
Selling, General and Administrative Expenses General and administrative expenses
decreased by $1.4 million to a total of $3.1 million for the year ended December
31, 2003 from $4.5 million for the year ended December 31, 2002. The decrease in
selling, general and administrative expenses was due primarily to reductions in
personnel costs, patent filings, and legal fees. We expect marketing, general
and administrative expense to increase in future periods as we add to our sales
staff and make additional investments in marketing activities.
Other Income (Expense)
Other expenses decreased by $1.2 million to a total of ($1.1) million for the
year ended December 31, 2003 from ($2.3) million for the year ended December 31,
2002. The decrease was due primarily to decreased beneficial conversion of debt
recorded as interest expense.
16
The following provides a reconciliation of information used in calculating the
per share amounts for the year ended December 31, 2003 and 2002.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF 00-21"),
"Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The consensus mandates how to
identify whether goods or services or both that are to be delivered separately
in a bundled sales arrangement should be accounted for separately because they
are separate units of accounting. The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in fiscal periods beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." Upon adoption of EIFT 00-21, there was no effect on its financial
position, cash flows or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest
Entities." Until this interpretation, a company generally included another
entity in its consolidated financial statements only if it controlled the entity
through voting interests. FIN 46R requires a variable interest entity, as
defined, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns. Certain
provisions of FIN46R were deferred until the period ending after March 15, 2004.
The adoption of FIN 46R for provisions effective during 2003 has no impact on
the Company's financial position, cash flows or result of operations.
On April 30, 2003, the FASB issued Statement No. 149 ("SFAS No. 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement No. 133, and
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003 and is to be applied prospectively.
Upon adoption of SFAS No. 149, there was no effect on its financial position,
cash flows or results of operations.
On May 15, 2003, the FASB issued Statement No. 150 ("FAS No. 150"), Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. FAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). FAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments.
o mandatorily redeemable shares, which the issuing company is obligated to buy
back in exchange for cash or other assets
o instruments that do or may require the issuer to buy back some of its shares
in exchange for cash or other assets; includes put options and forward purchase
contracts
o obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares.
FAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. Most of the guidance in FAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Upon adoption of SFAS No. 150, there was no
effect on its financial position, cash flows or results of operations.
17
In November 2004, the FASB issued FAS No. 151, "An amendment of ARB No. 43,
Chapter 4" This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing", to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
this statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The statement is effective for fiscal years beginning after June 15,
2005 with early adoption permitted. eMagin is currently evaluating the
requirements and impact of FAS No. 151, but at this point does not believe the
adoption will have a material impact on its financial position, cash flows or
results of operations.
FASB Statement 123 (Revision 2004), "Share-Based Payment," was issued in
December 2004 and is effective for reporting periods beginning after June 15,
2005. The new statement requires all share-based payments to employees to be
recognized in the financial statements based on their fair values. The Company
currently accounts for its share-based payments to employees under the intrinsic
value method of accounting set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issues to Employees." Additionally, the company
complies with the stock-based employer compensation disclosure requirements of
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123." The Company plans to adopt
the new statement in its financial statements for the quarter ending September
2005.
18
BUSINESS
Introduction
eMagin Corporation designs, develops, manufactures, and markets virtual imaging
products which utilize OLEDs, or organic light emitting diodes, OLED-on-silicon
microdisplays and related information technology solutions. We integrate OLED
technology with silicon chips to produce high-resolution microdisplays smaller
than one-inch diagonally which, when viewed through a magnifier, create virtual
images that appear comparable in size to that of a computer monitor or a
large-screen television. Our products enable our original equipment
manufacturer, or OEM, customers to develop and market improved or new electronic
products. We believe that virtual imaging will become an important way for
increasingly mobile people to have quick access to high resolution data, work,
and experience new more immersive forms communications and entertainment.
Our first commercial product, the SVGA+ (Super Video Graphics Array plus 52
added columns of data) OLED microdisplay was first offered for sampling in 2001,
and our first SVGA-3D (Super Video Graphics Array plus built-in stereovision
capability) OLED microdisplay was first shipped in early 2002. We have now
accepted purchase agreements for larger quantities of our commercial
microdisplay products and virtual imaging subsystems which combine displays with
lenses. These products are being applied or considered for near-eye and headset
applications in products such as entertainment and gaming headsets, handheld
Internet and telecommunication appliances, viewfinders, and wearable computers
to be manufactured by OEM customers for military, medical, industrial, and
consumer applications. We market our products in North American, Europe, and
Asia.
Our OLED-on-silicon microdisplays offer a number of advantages over current
liquid crystal microdisplays, including increased brightness, lower power
requirements, less weight and wider viewing angles. Using our active matrix OLED
technology, many computer and video electronic system functions can be built
directly into the OLED-on-silicon microdisplay, resulting in compact systems
with expected lower overall system costs relative to alternate microdisplay
technologies. We have developed our own technology to create high performance
OLED-on-silicon microdisplays and related optical systems and we have licensed
certain fundamental OLED and display technology from Eastman Kodak. The
worldwide market for OLED displays amounted to $91 million in 2002, $249 million
in 2003, and will grow to $3.1 billion in 2009, for a compound annual growth
rate of 56 percent from 2003 to 2009, according to iSuppli/Stanford Resources
research as of March 2004.
As the first to exploit OLED technology for microdisplays, and with the support
of our partners and the development of our intellectual property, we believe
that we enjoy a significant advantage in the commercialization of this display
technology for virtual imaging. We are the only company to announce, publicly
show and sell full-color active matrix OLED-on-silicon microdisplays.
Our wholly owned subsidiary, Virtual Vision, Inc., provides added value services
to our customers by providing custom engineering support for virtual imaging
subsystem design and prototyping, as well as by creating standardized optical
and electronics interfaces for our displays that accelerate the time to market
for products offered by our new potential customers.
Our website is located at www.emagin.com. We make available on our website, free
of charge, our annual report on Form 10KSB, our proxy statement, our quarterly
reports on Form 10QSB, our current reports on Form 8K, amendments to reports
filed under the Securities and Exchange Act, earnings press releases, and other
business-related press releases. We also intend to post on our website the
charters of our Audit, Compensation, and Governance and Nominating committees,
our Codes of Ethics and any amendments of or waiver to those codes of ethics,
and other corporate governance materials recommended by the Securities and
Exchange Commission and the American Stock Exchange.
Industry Overview
The overall flat panel display industry is predicted to grow to over $69 billion
in 2005, according to market research by DisplaySearch. Within the flat panel
industry there are various sizes and applications of flat panel displays,
ranging from wall size signage to calculator and viewfinder displays. Displays
are sold as independent products (such as flat TVs) or as components of other
systems (such as laptop computers). Our products target one segment of the flat
panel industry which is known as near-to-the-eye or near-eye microdisplays
because they are viewed through a lens rather than directly, such as desktop
computer screens which are know as direct view displays.
19
Near-eye virtual imaging using microdisplays are used in small optically
magnified devices such as video headsets, camcorders, viewfinders and other
portable devices. Microdisplays are typically of such high resolution that they
are only practically viewed with magnifying optics. Although the displays are
typically physically smaller than a postage stamp, they can provide a magnified
viewing area similar to that of a full size computer screen. For example, when
magnified through a lens, a high-resolution 0.6-inch diagonal display can appear
comparable to a 19 to 21-inch diagonal computer screen at about 2 feet from the
viewer or a 60-inch TV screen at about 6 feet. One version of our display and
optic recreates the virtual imaging viewing and sound experience of sitting in
the middle seat of a typical movie theater.
The microdisplay market, according to McLaughlin Consulting Group in a report
issued in November 2002, is expected to grow on a unit basis at 20% per year,
from a base of less than $1 billion in 2002 to more than $1.4 billion by 2006.
Another leading industry market research organization, DisplaySearch, projects
that the overall microdisplay market is expected to grow to a $3 billion per
year rate by the end of 2005.
We believe that the most significant driver of the near-eye virtual imaging
microdisplay market is growing consumer demand for mobile access to larger
volumes of information and entertainment in smaller packages. This desire for
mobility has resulted in the development of near-eye microdisplay products in
two general categories: (i) an established market for electronic viewers
incorporated in products such as viewfinders for digital cameras and video
cameras which may potentially also be developed as personal viewers for cell
phones and (ii) an emerging market for headset-application platforms which
include accessories for mobile devices such as notebook and sub-notebook
computers, portable DVD systems, electronic games, and other entertainment, and
wearable computers.
Until now, near-eye virtual imaging microdisplay technologies have not
simultaneously met all of the requirements for high resolution, full color, low
power consumption, brightness, lifetime, size and cost which are required for
successful commercialization in OEM consumer products. We believe that our new
OLED-on-silicon microdisplay product line meets these requirements better than
alternative products and will help to enable virtual imaging to emerge as an
important display industry segment.
Our Approach: OLED-on-Silicon Microdisplays and Optics
There are two basic classes of organic light emitting diode, or OLED,
technology, dubbed single molecule or small molecule (monomer) and polymer. Our
microdisplays are currently based upon active matrix molecular OLED technology,
which we call OLED-on-silicon because we build the displays directly on silicon
chips. Our OLED-on-silicon technology uniquely permits millions of individual
low-voltage light sources to be built on low-cost, silicon computer chips to
produce single color, white, or full-color display arrays. OLED-on-silicon
microdisplays offer a number of advantages over current liquid crystal
microdisplays, including increased brightness, lower power requirements, less
weight and wider viewing angles. Using our OLED technology, many computer and
video electronic system functions can be built directly into the silicon chip,
under the OLED film, resulting in very compact, integrated systems with lowered
overall system costs relative to alternative technologies.
We have developed our own proprietary and patented technology to create high
performance OLED-on-silicon microdisplays and related optical systems and we
license fundamental OLED technology from Eastman Kodak. (See "Intellectual
Property" and "Strategic Relationships"). We expect that the integration of our
OLED-on-silicon microdisplays into mobile electronic products will result in
lower overall system costs to our OEM customers.
We believe that our OLED-on-silicon microdisplays will initiate a new generation
of virtual imaging products that will have a profound impact on many industries.
Headsets providing virtual screens surrounding the user in a sphere of data
become a practical reality with our displays and a low cost head tracker.
Because our microdisplays generate and emit light, they have a wider viewing
angle than competing liquid crystal microdisplays, and because they have the
same high brightness at all forward viewing angles, our microdisplays permit a
large field-of-view and superior optical image.
The wider viewing angle of our display results in the following superior optical
characteristics:
o the user does not need to as accurately position the head-wearable display to
the eye;
o the image will change minimally with eye movement and appear more natural; and
o the display can be placed further from the eye and not cut off part of the
image.
20
In addition, our OLED-on-silicon microdisplays offer faster response times and
use much less power than competitive liquid crystal microdisplay systems. Our
subsystem-level power consumption is so low that two SVGA, full color, full
speed motion video computer displays can easily be run in stereovision off the
power from a single USB port on a portable computer. Battery life is extended or
weight is greatly reduced in systems using our products.
Our OLED microdisplay stores all the color and luminance value information at
each of the more than 1.5 million picture elements, or pixels, between refresh
cycles in the display array, eliminating the flicker or color breakup seen by
most other high-resolution microdisplay technologies. Even power efficient frame
rates as low as 30 Hz can usually be used effectively. Power consumption at the
system level is expected to be the lowest of any full-color, full-video SVGA
resolution range, large view microdisplay on the market. The OLED's ability to
emit light at wide angles allows customers to create large field of view
(approx. 40 degrees), wide image capture range images from very compact,
low-cost, one-piece optical systems. The display contains the majority of the
electronics required for connection to the RGB (red, green, blue signal) port of
a portable computer imbedded in its silicon chip backplane, thereby eliminating
many other components required by other display technologies such as D-A
converters, application-specific integrated circuits (ASICs), light sources,
multiple optical elements, and other components. We believe that these features
will enable our new class of microdisplay to potentially be the most compact,
highest image quality, and lowest cost solution for high resolution near-eye
applications, once they are in full production.
We have commercialized two OLED microdisplay products, our SVGA+ resolution
microdisplay, which contains 1.53 million picture elements, and our built-in 3D
stereovision- compatible SVGA-3D microdisplay, which contains 1.44 million
picture elements. We are currently developing a SVGA-3D chip which will be
approximately 40% smaller than our current SVGA-3D for lower price consumer
applications, with completion expected in late 2005. We are also developing a
SXGA integrated circuit for military, industrial, and commercial applications,
which contains 1280x3x1024 picture elements, that is due for completion in late
2005 or early 2006.
We sell our OLED-on-silicon microdisplays for use as components by customers who
prefer to design and build their own lenses or coupled with our own optics. We
also plan to offer OLED processing on our customers' integrated circuits to some
OEMs who design their own integrated circuits. We provide Developer Kits and PC
Interface Kits, which include a microdisplay and associated electronics to help
OEMs evaluate our microdisplay products and to assist their efforts to build and
test new products incorporating our microdisplays.
We are also currently beginning to directly market large view market PC video
headset systems and will consider coordinating production of headsets for ODM
(original design manufacturer) customers.
Our Product Lines
We offer our products to OEMs and other large volume buyers as both separate
components and integrated bundles in a three-tiered platform. We believe that
our strategy of offering our products both as separate components and as
integrated bundles that include microdisplays and lenses will allow us to
address the needs of the largest number of potential customers.
(1) OLED-on-silicon microdisplays for integration into near-eye virtual imaging
OEM products for consumer, industrial, and military markets;
(2) Microviewer(TM) near-eye virtual imaging modules that incorporate our
OLED-on-silicon microdisplays with compact lenses and electronic interfaces for
integration into OEM products for consumer, industrial, and military markets. We
have shipped customized microviewer modules to several customers, some of which
have incorporated our products into their own commercially available products;
(3) Head-wearable near-eye virtual imaging display systems that will incorporate
our Microviewers(TM) for consumer and industrial markets. These products have
been prototyped and are planned.
We also offer engineering support and a variety of support products, including
developer kits and PC interface kits, to enable customers to quickly integrate
our products into their own product development programs.
Our Products
(1) OLED Microdisplay Products
We serve as a component manufacturer by supplying our OLED-on-silicon
microdisplays for those customers who have their own lenses or integrated
circuits. Our first commercial microdisplay products are based on our "SVGA
series" OLED microdisplays. We expect to offer our SXGA OLED microdisplay during
2004. The table below provides a partial listing of the display products, or in
the late stages of development.
21
OLED Microdisplays:
Microdisplay Description Resolution Color Size
Product Numbers (pixels) (diagonal)
EMA-100080 SVGA+ OLED microdisplay 852x3x600 color 0.62 inch
EMA-100100 SVGA+ OLED microdisplay 852x3x600 white 0.62 inch
EMA-100116 SVGA+ OLED microdisplay 852x3x600 yellow 0.62 inch
EMA-100110 SVGA+ OLED microdisplay 852x3x600 green 0.62 inch
EMA-100052 SVGA 3D OLED microdisplay 800x3x600 color 0.59 inch
0.62-inch Diagonal SVGA+ (Super Video Graphics Array plus 52 added columns of
data) for Consumer OEMs. This display has a resolution of 852 x 3 x 600 pixels,
and was dubbed "SVGA+" because it has 52 more display columns than a standard
SVGA display. The design permits users to run either (1) standard SVGA (800 x
600 pixels) to interface to the analog output of many portable computers or (2)
852 x 480, using all the data available from a DVD player in a 16:9 wide screen
entertainment format. The SVGA+ can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as games, video/data head-wearable displays, digital cameras, video cameras
and other portable electronics applications. The display also has an internal
NTSC monochrome video decoder for low power night vision systems. This product
is designed to interface with most portable personal computers.
0.59-inch Diagonal SVGA-3D (Super Video Graphics Array plus built-in
stereovision capability) for Consumer OEMs. This display has a resolution of 800
x 3 x 600 pixels. The SVGA-3D can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as personal computer games and video/data head-wearable displays, but is
also designed to be applicable for digital cameras, video cameras and other
portable electronics applications since the 3D feature is optional. A built-in
circuit provides compatibility with single channel frame sequential stereoscopic
vision without additional external components. In high volumes, the SVGA-3D is
priced lower than the SVGA+, so it is likely to be selected whenever the OEM
customer does not need monochrome NTSC or the extra columns of resolution.
We are developing a smaller 0.42-inch diagonal size version of our SVGA-3D
display, with target introduction in late 2005. With a smaller size, we will
obtain many more displays per wafer, greatly lowering cost, and each display
will use even less power. This new product is expected to open many new
opportunities in handheld and worn display applications. This display will not
displace the original SVGA-3D as there are many large view applications that
require the larger size chip, but it will permit lower cost
We are also developing an SXGA (Super Extended Video Graphics Array)
microdisplay product as a personal computer-compatible headset display for
military, medical, commercial, and industrial applications. We anticipate that
this display will become available for sampling sometime in late 2005 or early
2006. This product will have 1280 x 1024 full-color pixel triads (3.932 million
total pixels) This digital video and data interface product is being designed to
exhibit a wide dimming range and high luminance for many applications. This
product should be a drop in upgrade for our SVGA+ and SVGA-3D displays to most
of our customers' optical system designs.
We are also beginning to directly market large view market PC headset video
systems and will consider coordinating production of headsets for ODM customers.
Several baseline versions of these PC video headsets are expected to become
available in early 2005.
OLED Microdisplay Kits:
Kit Product Number Description Available colors
EMA-100119 SVGA+ Monocular Developer Kit Color, white, yellow, green
EMA-100120 SVGA+ Binocular Developer Kit Color, white, yellow, green
EMA 100125 SVGA 3D Monocular Developer Kit Color, white, yellow, green
EMA-100126 SVGA 3D Binocular Developer Kit Color, white, yellow, green
EMA-100121 HB High Bright Monocular Developer Kit Yellow
EMA-100135 SVGA Series Monocular PC Interface Kit Color, white, yellow, green
EMA-100136 SVGA Series Binocular PC Interface Kit Color, white, yellow, green
Developer Kit. The multi-functional Developer Kit provides a menu selection of
resolution, frequency, image flip, monochrome operation, gain, and offset. It
also provides NTSC RS-170 video composite input for SVGA+ (monochrome only). An
optional serial-to-I2C adapter provides direct loading and interrogation of
display registers located on the display chip.
The PC Interface Kit provides a simple RGB interface with image flipping for
SVGA+ and SVGA-3D displays, and automatic stereovision signal recognition for
SVGA-3D displays. Interface kits can be provided configured with or without
displays.
(2) Microviewer(TM) Products Incorporating Lenses
22
By providing an integrated solution of a complete microdisplay and lens assembly
to integrate into OEM customers' end product design, OEM customers can avoid
incurring expensive optics design and tooling costs. Different lens and
microdisplay specifications can be mixed and matched to be adapted to many end
products.
We have developed advanced lens technology for several applications and believe
we hold key patents on certain low cost, high performance lens technology for
microdisplay applications. Our lens technology permits our OLED-on-silicon
microdisplays to provide large field of view images that can be viewed for
extended periods with reduced eye-fatigue.
We intend to sell Microviewer(TM) modules to OEMs for integration with their
branded products, or incorporated into eGlass(TM) Personal Viewer(TM)
head-wearable displays to be supplied by our subsidiary, Virtual Vision, Inc.
Some of our potential customers have stated a preference for Microviewers(TM)
over microdisplays since Microviewers(TM) incorporate lenses which save OEMs a
step in their manufacturing process and can save them the long time required to
develop a high performance lens system. Custom microviewer products incorporated
into specially designed modules are currently being sold to OEMs, including Sage
Technologies and Total Fire Group.
Low cost molded plastic lenses are in development under eMagin direction to help
our commercial and consumer OEM customers obtain better quality, large area
virtual images using our displays at relatively low cost to alternate
approaches.
(3) eGlass(TM) Personal Viewer(TM) Head-Wearable Systems
Personal Viewer(TM) head-wearable systems, such as our eGlass(TM) Personal
Viewer(TM), give users the ability to work with their hands while simultaneously
viewing information or video on the display. Our head-wearable displays enable
more versatile portable computing, capable of delivering an image that appears
comparable to that of a 19-inch monitor at 22 to 24 inches from the eye using a
0.59-inch diagonal microdisplay (SVGA-3D). We believe that Personal Viewer
head-wearable displays will fill the increasing demand for instant data
accessibility in mobile workplaces. We expect to sell the head-wearable displays
primarily to OEM systems and equipment customers through direct sales and our
e-commerce website which is under development.
Prior Product and Technology Awards
o Dual Use Technology Achievement Award
March 2002. eMagin and the US Air Force Armstrong Laboratory received First
Place recognition for the US Air Force with a Second Annual Dual Use Science and
Technology Achievement Award. eMagin's technology was also recognized as one of
the best dual use technologies in 2001 across all branches of the Armed
Services. The award, presented by the Deputy Under Secretary for Defense,
Charles J. Holland, recognizes the best dual use programs and honors those
responsible for developing and implementing technology beneficial to both
military and commercial sectors.
o 2001 Product of the Year
January 17, 2001. eMagin received a 2001 Product-of-the-Year Award from
Electronic Products Magazine, honoring eMagin for the development of its
first-of-class high-resolution active matrix OLED-on-silicon microdisplay, based
on significant advances in technology.
o 2001 U.S. Army Phase II Quality Award
August 21, 2001. eMagin received a 2001 US Army SBIR (Small Business Innovation
Research) Phase II Quality Award for the development of high-resolution active
matrix OLED microdisplays for incorporation into military head-mounted displays.
The annual Quality Awards Program recognizes top quality Army Phase II projects
for their technical achievement, contribution to the Army and potential for
commercial use. Selected by a distinguished panel of Army and industry experts,
eMagin's project was among only five selected to receive a 2001 U.S. Army SBIR
Phase II Quality Award through the rigorous Quality Awards competition.
o Display of the Year 2000 Gold Award
June 6, 2001. eMagin was honored by The Information Display Magazine and Society
Information Display with the Display of the Year Gold Award for its
OLED-on-Silicon microdisplay. The Display of the Year Award was established in
1995 to recognize outstanding products chosen for their innovation and potential
impact on current and future display markets. An international committee of
distinguished display technologists and leading editors in a four-month process
of nominations and voting made the selection.
23
Our Market Opportunity
The growth potential of our selected target market segments have been
investigated using information gathered from key industry market research firms,
including DisplaySearch, Frost and Sullivan, Fuji-Chimera, International Data
Corporation, Nikkei, SEMI, Stanford Resources-iSuppli and others. Such data was
obtained using published reports and data obtained at industry symposia. We have
also relied substantially on market projections obtained privately from industry
leaders, industry analysts, and potential customers.
We believe that the consumer oriented, virtual-imaging market is characterized
by about 20 large OEMs that, collectively, dominate 90% of the market. The
non-consumer market consists of niches - industrial, medical, military, arcade
games, 3-D CAD/Virtual Reality, and wearable computers. Within each of these
market sectors, we believe that our microdisplays, when combined with compact
optic lenses, will become a key component for a number of mobile electronic
products. We are targeting the following applications:
(1) Near-Eye Viewers for Digital Cameras, Camcorders and Hand-held Internet and
Telecommunications Appliances
We believe that our microdisplays will enhance near-eye applications in the
following groups of products:
o Digital cameras and camcorders, which typically use direct view displays at
low resolution, offer a small visual image, and are difficult to see on sunny
days. According to Display Search, 41 million digital cameras and 13 million
camcorders are expected to be sold in 2005. Some of these products may
incorporate microdisplays as high-resolution viewfinders which would permit
individuals to see enlarged, high-resolution proofs immediately upon taking the
picture, giving them the opportunity to retake a poor shot.
o Mobile phones and other hand-held Internet and telecommunications appliances
which will enable users to access full web and fax pages, data lists and maps in
a pocket-sized device. According to the Fuji Chimera Research Institute, an
industry market research organization, by 2005 the cellular phone and handheld
portable digital assistant markets will grow to 655 million units and 20 million
units, respectively. Some of these products may eventually incorporate our
microdisplays. In order for the high-resolution wireless telecommunications
market to develop, Generation 3 (G3) high-speed data transmission must become
widely available. The current cost and limited availability of broadband
services has impeded the development of this market, but several
telecommunication companies have prototype programs in progress which
incorporate our microdisplay products.
For each of these applications, we anticipate that our microdisplays, combined
with compact optic lenses, will offer higher resolution, lower power and system
cost and achieve larger images than are currently available in the consumer
market. As a result, we believe that we can obtain a sizeable share of the
market for the display components of these mobile electronic products.
(2) Head-wearable Display Platforms
Head-wearable displays incorporate microdisplays mounted in or on eyeglasses,
goggles, simple headbands, helmets, or hardhats, and are often referred to as
head-mounted displays (HMDs) or headsets. Head-wearable displays may block out
surroundings for a fully immersive experience, or be designed as "see-through"
or "see-around" to the user's surroundings. They may contain one (monocular) or
two (binocular) displays. Some of the increased current interest is due to
accelerating the timetable to adapt such systems to military applications such
as night vision and fire and rescue applications. These have military,
commercial, and consumer applications.
24
Military
Military demand for head-wearable displays is currently being met with
microdisplay technologies that we believe to be inferior to our OLED-on-silicon
products. The new generation of soldiers will be highly mobile, and will often
need to carry highly computerized communications and surveillance equipment. To
enable interaction with the digital battlespace, rugged, yet lightweight and
energy efficient technology is required. Currently available microdisplay
technologies do not meet the requirements for low power, hands-free, day and
night-viewable displays. Our OLED microdisplays demonstrate performance
characteristics important to military and other demanding commercial and
industrial applications including high brightness and resolution, wide dimming
range, wider temperature operating ranges, shock and vibration resistance and
insensitivity to high G-forces. The image does not suffer from flicker or color
breakup in vibrating environments, and the microdisplay's wide viewing angle
allows ease of viewing for long periods of time. The OLED's very low power
consumption reduces battery weight and increases allowed mission length Our high
brightness SXGA display, under development, is expected to provide luminance
levels in excess of 30,000 Cd/m2, will have a number of imbedded control
features, and is expected to use a small fraction of the power required for LCDs
(liquid crystal displays) or CRTs (cathode ray tubes) run at similar luminance
levels, and will permit the use of more compact optical systems. Properly
implemented, we believe that head-mounted systems incorporating our
microdisplays will increase effectiveness by allowing hands-free operation and
increasing situational awareness with enough brightness to be used in daylight,
yet controllable for nighttime light security. The OLED's wide temperature range
is especially of interest for military applications because the display can turn
on instantly at temperatures far below freezing and can operate at very high
temperatures in desert conditions.
Our OLED microdisplays were selected for several aircraft vehicles and soldier
applications, including the US Army Land Warrior 1.0 and 2.0 programs, and
Stryker Interoperative, and the US Air Force Joint Strike Fighter and Lil Hal
Digital Kneeboard, among others. Land Warrior, a core program in the Army's
drive to digitize the battlefield, is an integrated digital system that
incorporates computerized communication, navigation, targeting and protection
systems for use by the twenty-first century infantry soldier. Kaiser
Electro-Optics, a Rockwell Collins company and the principal contractor for the
US Army's Land Warrior HMD system, and eMagin will apply their respective
expertise in HMD and imaging technology to develop rugged, yet lightweight and
energy efficient products meeting the requirements of tomorrow's soldier. The US
Army expects to initially equip more than 40,000 soldiers with the Land Warrior
system. The current overall redesign of the Land Warrior system by General
Dynamics and Rockwell Collins has delayed increased volume use of displays
beyond small quantities for that program until a future date to be determined.
Our display is also used in Kaiser Electro-Optics, Inc.'s commercially available
ProView S035 Monocular HMD. Night Vision Equipment Corporation's
HelmetIR-50(TM), a lightweight, military helmet mounted thermal imager, which
provides hands-free operation and allows viewers to see through total darkness,
battlefield obscurants, and even foliage, is the first OLED-equipped product to
be listed on the US Government's GSA schedule. The US Air Force has selected our
OLED microdisplay technology for incorporation into the Strike Helmet 21 system.
The Strike Helmet 21 system is targeted for integration into F-15E aircraft in
2004-2005 time periods. We have been informed by the US Air Force that our SXGA
resolution OLED microdisplay, currently under development, is planned to be used
in programs such as Integrated Panoramic Night Vision Goggles in avionics
helmets and the Lil HAL digital kneeboard. We cannot assure that the Government
will remain on schedule. Similar systems are of interest for other military
applications as well as for related operations such as fire and rescue.
Commercial, Industrial, and Medical
25
We believe that a wide variety of commercial and industrial markets offer
significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of microdisplay applications
include: immediate access to inventory such as parts, tools and equipment
availability; instant accessibility to maintenance or construction manuals;
routine quality assurance inspection; endoscopic surgery; and real-time viewing
of images and data for a variety of applications. As one potential example, a
user wearing a HMD while using test equipment, such as oscilloscopes, can view
technical data while simultaneously probing printed circuit boards. Commercial
products in these sectors include Sage Technologies, Ltd.'s Helmet Vue (TM)
Thermal Imaging System and Liteye's 500, developed as an upcoming accessory to
Antelope Technologies' MCC Wearable Computing system, which incorporates IBM's
wearable PC technology. VRmagic GmbH, a leading developer of virtual reality
simulators, is using our OLED microdisplays in their EYESI(TM) Virtual Reality
Surgical Simulator, which provides real-time simulation of ophthalmic surgery,
high performance biomechanical tissue simulation, precision tracking, and
realistic stereo imaging. Sensics has incorporated our OLED displays in their
immersive SkyVizor (TM) virtual reality headset to serve as the "eyes" of the
Robonaut, a humanoid robot being developed by NASA and DARPA. The Robonaut
system can work side by side with humans, or alone in high-risk situations.
Telepresence uses virtual reality display technology to visually immerse the
operator into the robot's workspace, facilitating operation and interaction with
the Robonaut, and potentially reducing the number of dangerous space walks
required of real astronauts.
Consumer
We believe that our head-wearable display products will enhance the following
consumer products:
o Entertainment and gaming video headset systems, which permit individuals to
view television, including HDTV, video CDs, DVDs and video games on virtual
large screens or stereovision in private without disturbing others. Even though
entertainment and gaming headsets represent an emerging product class, we are
seeing demand from OEMs. Headset game systems for portable computers with head
tracking and/or stereovision appears to be our predominant high quantity near
term market opportunity, with several customers indicating an interest in large
production quantities of our displays. Our current SVGA-3D display was designed
specifically for this market. We believe that these new headset game systems can
provide a game or telepresence experience not otherwise practical using
conventional direct view display technology. We expect low cost to be important
for success in this field, and expect our product cost to decrease in high
quantity production. At the 2004 Consumer Electronics Show, Leadtek Research
Inc. (Taiwan) announced that it was planning to introduce a consumer HMD using
eMagin SVGA-3D displays.
o Notebook computers, which can use head-wearable devices to reduce power as
well as expand the apparent screen size and increase privacy. Current notebook
computers do not use microdisplays. Our products can apply not only to new
models of notebook computers, but also as aftermarket attachments to older
notebooks still in use. The display can be easily used as a second monitor on
notebook computers for ease of editing multiple documents to provide multiple
screens or for data privacy while traveling. It can also be used to provide
larger screen capability for viewing spreadsheets or complex computer aided
design (CAD) files. We expect to market our head-wearable displays to be used as
plug-in peripherals to be compatible with most notebook computers. We believe
that the SVGA-3D microdisplay is well suited for most portable PC headsets. Our
microdisplays can be operated using the USB power source of most portable
computers. This eliminates added power supplies, batteries, and rechargers and
reduces system complexity and cost.
o Handheld personal computers, whose small, direct view screens are often
limitations, but which are now capable of running software applications that
would benefit from a larger display. Microdisplays can be built into handheld
computers to display more information content on virtual screens without
forfeiting portability or adding the cost a larger direct view screen.
Microdisplays are not currently used in this market. We believe that GPS viewers
and other novel products are likely to develop as our displays become more
available.
o Highly compact wearable computers and personal digital assistants, or PDAs
using video headsets as screens can be made possible by high-resolution
microdisplays. A lightweight pocketsize computer that is less than one pound can
potentially be created with a foldout keyboard, compact input device, or voice
actuation and a headset that provides a near-desktop personal computer
experience.
26
The combination of power efficiency, high resolution, low systems cost,
brightness and compact size offered by our OLED-on-silicon microdisplays has not
been made available to makers and integrators of existing entertainment and
gaming video headset systems, notebook computers and handheld computers. We
believe that our microdisplays will catalyze the growth of new products and
applications such as lightweight wearable computer systems.
Selected Applications by Market Sector
------------------------------------------- -------------------------------------------------
Sector Representative Applications
------------------------------------------- -------------------------------------------------
Portable Computer Peripheral |X| Notebook and SuperSubnotebook computer headsets
|X| Miniature data viewers
------------------------------------------- -------------------------------------------------
Entertainment |X| Games
|X| Headset Television/DVDs
------------------------------------------- -------------------------------------------------
Industrial, Medical, & |X| Surgery and Dentistry
Administration |X| Industrial Control and Safety
|X| Emergency Services
|X| Inventory and Retail
|X| Institutional Control
|X| Maintenance (Industry & Consumer)
|X| Communications
|X| Finance
|X| Education and Training
------------------------------------------- -------------------------------------------------
Military |X| Communications
|X| Targeting and Enhanced Vision
|X| Night Vision
|X| Handheld & Headmount Equipment
|X| Body worn displays
|X| Avionics (Helmet mount)
|X| Ground and Water Vehicles
|X| Maintenance & Training
|X| Special Applications
------------------------------------------- -------------------------------------------------
Telecommunications, Handheld, |X| Cell Phones/Headset phones
and Small Instruments |X| Handheld & Portable Internet Viewers
|X| Smart Appliances & Instruments
------------------------------------------- -------------------------------------------------
Advanced Computer |X| CAD/CAM
Applications |X| Virtual Reality and Simulations
|X| Ultra-High Resolution
|X| Telepresence
------------------------------------------- -------------------------------------------------
Our Strategy
Our strategy is to establish and maintain a leadership position as a worldwide
supplier of microdisplays and virtual imaging technology solutions for
applications in high growth segments of the electronics industry by capitalizing
on our leadership in both OLED-on-silicon technology and microdisplay lens
technology. We aim to provide microdisplay and complimentary accessories to
enable OEM customers to develop and manufacture new and enhanced electronic
products. Some key elements of our strategy to achieve these objectives include
the following:
27
o Leverage our superior technology to establish a leading market position. As
the first to exploit OLED-on-silicon microdisplays, we believe that we enjoy a
significant advantage in bringing this technology to market.
o Develop products for large consumer markets via key relationships with OEMs.
Our relationships with OEMs whose products use microdisplays have allowed us to
identify initial microdisplay products to be produced for entertainment,
industrial, and military headsets, to be followed by other applications such as
digital cameras, camcorders and hand-held Internet and telecommunications
appliances. We target markets which we believe to have long-term growth
potential.
o Optimize manufacturing efficiencies by outsourcing while protecting
proprietary processes. We intend to outsource certain portions of microdisplay
production, such as chip fabrication, to minimize both our costs and time to
market. We intend to retain the OLED application and OLED sealing processes
in-house. We believe that these areas are where we have a core competency and
manufacturing expertise. We also believe that by keeping these processes under
tight control we can better protect our proprietary technology and process
know-how. This strategy will also enhance our ability to continue to optimize
and customize processes and devices to meet customer needs. By performing the
processes in-house we can continue to directly make improvements in the
processes, which will improve device performance. We also retain the ability to
customize certain aspects such as color balance, which is known as chromaticity,
as well as specialized boards or interfaces, and to adjust other parameters at
the customer's request. In the area of lenses and head-wearable displays, we
intend to focus on design and development, while working with third parties for
the manufacture and distribution of finished products. We intend to prototype
new optical systems, provide customization of optical systems, and manufacture
limited volumes at our subsidiary, Virtual Vision, but intend to outsource high
volume manufacturing operations. There are numerous potential plastics, PC
Board, and assembly service companies globally that provide these outsource
services.
o Build and maintain strong internal design capabilities. As more circuitry is
added to OLED-on-silicon devices, the cost of the end product using the display
can be decreased; therefore integrated circuit design capability will become
increasingly important to us. To meet these requirements, we intend to develop
in-house design capabilities. Building and maintaining this capacity will allow
us to reduce engineering costs, accelerate the design process and enhance design
accuracy to respond to our customers' needs as new markets develop. In addition,
we intend to maintain a product design staff capable of rapidly developing
prototype products for our customers and strategic partners. Contracting third
party design support to meet demand and for specialized design skills will also
remain a part of our overall long term strategy.
Our Strategic Relationships
Strategic relationships have been an important part of our research and
development efforts to date and are an integral part of our plans for commercial
product launch. We have forged strategic relationships with major OEMs and
strategic suppliers. We believe that strategic relationships allow us to better
determine the demands of the marketplace and, as a result, allow us to focus our
future research and development activities to better meet our customer's
requirements. Moreover, we expect to provide microdisplays and Microviewers(TM)
to some of these partners, thereby taking advantage of established distribution
channels for our products.
Eastman Kodak is a technology partner in OLED development, OLED materials, and a
potential future customer for both specialty market display systems and consumer
market microdisplays. We license Eastman Kodak's OLED and optics technology
portfolio. We have a nonexclusive, perpetual, worldwide license to use Eastman
Kodak patented OLED technology and associated intellectual property in the
development, use, manufacture, import and sale of microdisplays. The license
covers emissive active matrix microdisplays with a diagonal size of less than 2
inches for all OLED display technology previously developed by Kodak. An annual
minimum royalty is paid at the beginning of each calendar year and is fully
creditable against the royalties we are obligated to pay based on net sales
throughout the year. Eastman Kodak and eMagin have engaged in numerous
discussions regarding potential product applications for eMagin's microdisplays
by Eastman Kodak.
We are working in cooperation with the US Air Force, Ball Aerospace, ITT, and
Kaiser Electro-optics, a subsidiary of Rockwell Collins, to complete development
and characterization of our high brightness SXGA microdisplay. We are working
cooperatively with the US Army and with several system integrators to further
characterize operation of our displays in rugged military environments.
We have recently announced the execution of an agreement with Rohm Corporation
of Japan to develop two new products: an enhanced version of our SVGA-3D
microdisplay with new imbedded features for consumer head-mounted displays and
high resolution games, and a new QVGA and/or VGA viewfinder microdisplay for
camcorder and digital cameras, web phones, and low end games.
28
We are a member of the United States Display Consortium, a cooperative agency of
display and related technology manufacturers whose charter is to support
continued progress of the display industry. We intend to continue to establish
additional strategic relationships in the future.
Our Technology Platforms
OLED-on-Silicon Technology
Scientists working at Eastman Kodak invented OLEDs in the early 1980s. OLEDs are
thin films of stable organic materials that emit light of various colors when a
voltage is impressed across them. OLEDs are emissive devices, which means they
create their own light, as opposed to liquid crystal displays, which require a
separate light source. As a result, OLED devices use less power and can be
capable of higher brightness and fuller color than liquid crystal microdisplays.
Because the light they emit is Lambertian, which means that it appears equally
bright from most forward directions, a moderate movement in the eye does not
change the image brightness or color as it does in existing technologies. OLED
films may be coated on computer chips, permitting millions of individual
low-voltage light sources to be built on silicon integrated circuits to produce
single color, white, or full-color display arrays. Many computer and video
electronic system functions can be built directly into a silicon integrated
circuit as part of the OLED display, resulting in an ultra-compact system. We
believe these features, together with the well-established silicon integrated
circuit fabrication technology of the semiconductor industry, make our
OLED-on-silicon microdisplays attractive for numerous applications.
We believe our technology licensing agreement with Eastman Kodak, coupled with
our own intellectual property portfolio, gives us a leadership position in OLED
and OLED-on-silicon microdisplay technology. Eastman Kodak provides OLED
technology and we provide additional technology advancements that have enabled
us to coat the silicon integrated circuits with OLEDs.
We have developed numerous and significant enhancements to OLED technology as
well as key silicon circuit designs to effectively incorporate the OLED film on
a silicon integrated circuit. For example, we have developed a unique,
up-emitting structure for our OLED-on-silicon devices that enables OLED displays
to be built on opaque silicon integrated circuits rather than only on glass. Our
OLED devices can emit full visible spectrum light that can be isolated with
color filters to create full color images. Our microdisplay prototypes have a
brightness that can be greater than that of a typical notebook computer and can
have a potential useful life of over 50,000 operating hours, in certain
applications. New materials and device improvements in development offer future
potential for even better performance for brightness, efficiency, and lifespan.
Additionally, we have invested considerable work over several years to develop
unique electronics control and drive designs for OLED-on-silicon microdisplays.
In addition to our OLED-on-silicon technology, we have developed compact optic
and lens enhancements which, when coupled with the microdisplay, provide the
high quality large screen appearance that we believe a large proportion of the
marketplace demands.
Advantages of OLED Technology
We believe that our OLED-on-silicon technology provides significant advantages
over existing solutions in our targeted microdisplay markets. We believe these
key advantages will include:
o Low manufacturing cost;
o Low cost system solutions;
o Wide angle light emission resulting in large apparent screen size;
o Low power consumption for improved battery life and longer system life;
o High brightness for improved viewing;
o High-speed performance resulting in clear video images;
o Wide operating temperature range; and
o Good environmental stability (vibration and humidity).
Low manufacturing cost. Many OLED-on-silicon microdisplays can be built on an
8-inch silicon wafer using existing automated OLED and color filter processing
tools. The level of automation used lowers labor costs. Only a minute amount of
OLED material is used in each OLED-on-silicon microdisplay so that material
costs, other than the integrated circuit itself, are small. The number of
displays per silicon wafer may be higher on OLEDs than on liquid crystal
displays, or LCDs, because OLEDs do not require a space-wasting perimeter seal
band.
29
Low cost systems solutions. In general, an OEM using OLED-on-silicon
microdisplays will not need to purchase and incorporate lighting assemblies,
color converter related Applications Specific Integrated Circuits, or ASICs, or
beam splitter lenses as is the case in liquid crystal microdisplays, which also
require illumination. Many important display-related system functions can be
incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of
the system. Non-polarized light from OLEDs permit lenses for many
OLED-on-silicon applications that are made of a single piece of molded plastic,
which reduces size, weight and assembly cost when compared to the multipiece
lens systems used for liquid crystal microdisplays. System cost relative to
liquid crystal and liquid crystal on silicon, or LCOS competitive products is
thus reduced. Because our displays are power efficient, they typically require
less power at the system level than other display technologies at a given
display size and brightness.
Wide-angle light emission simplifies optics for large apparent screen size.
OLEDs emit light at most forward directions from each pixel. This permits the
display to be placed close to the lens in compact optical systems. It also
provides the added benefit of less angular dependence on the image quality
relative to pupil and eye position when showing a large field of view, unlike
reflective LCOS microdisplays. This results in less eye fatigue and makes it
relatively easy to Low power consumption for improved battery life and longer
system life. OLEDs emit light rather than transmitting it, so no power-consuming
backlight or frontlight, as required for liquid crystal displays, is required.
OLEDs can be energy efficient because of their high efficiency light generation.
Furthermore, OLEDs conserve power by powering only those pixels that are on
while liquid crystal on silicon requires light at all pixels all the time. Most
optical systems used for our OLEDs are highly efficient, permitting over 80% of
the light to reach the eye, whereas reflective technologies such as liquid
crystal on silicon require multiple beam splitters to get light to the display,
and then into the optical system. This results in typically less than 25% light
throughput efficiency in reflective microdisplay systems. Most important, we do
not need a power-hungry video frame buffer, as required in liquid crystal
frame-sequential color systems. Battery life can therefore be long.
High brightness for improved viewing. This feature can be of great value to
military applications, where there is a need to see the computer image overlaid
onto brightly lit real-life backgrounds such as desert sand, water reflections
or sunlit clouds. The OLED can be operated over a large luminance range without
loss of gray level control, permitting the displays to be used in a range of
dark environments to very bright ambient applications. Since military simulation
and situation awareness applications, including night vision, typically require
large fields of view, the OLED's Lambertian optical characteristics make it an
excellent choice.
High-speed performance resulting in clear video images. The OLEDs switch much
more rapidly than liquid crystals or most cathode ray tubes, or CRTs. This
results in smear-free video rate imagery and provides improved image quality for
DVD playback applications. This eliminates visible image smear and makes
practicable three-dimensional stereo imaging using a split frame rate. This
advantage of our OLED-on-silicon is very important for 3-D stereovision gaming
applications.
Flicker-free and no color breakup. Because the OLED-on-silicon stores brightness
and color information at each pixel, the display can be run with no noticeable
flicker and no color sequential breakup, even at low refresh rates. A lower
refresh rate not only helps reduce power, but it also facilitates system
integration. Color sequential breakup occurs in systems such as liquid crystal
on silicon and some liquid crystal display microdisplays when red, green and
blue frames are sequentially imaged in time for the eye to combine. Since the
different color screens occur at different times, movement of the eye due to
vibration or just fast pupil movement can create color bands at each dark-light
edge, making the image unpleasant to view and making text difficult to read. For
example, the liquid crystal on silicon display needs to run at least three times
the "normal" frame rate or speed to produce color sequential images, which
wastes power and makes for a difficult technological challenge as display
resolutions increase.
Wide operating temperature range. Our OLEDs offer much less temperature
sensitivity at both high and low temperatures than LCDs. LCDs are sluggish or
non-operative much below freezing unless heaters are added and lose contrast
above 50 degrees Celsius, while our OLEDs turn on instantly and can operate
between -55 degrees Celsius and 130 degrees Celsius. We specify a smaller range
on most products to accommodate low cost packaging. This is an important
characteristic for many portable products that may be used outdoors in many
varying environmental conditions. It is especially important for military
customers. Insensitivity to vibration, shock, and pressure are also important
environmental control attributes.
30
Complementary Lens and System Technologies
We have developed a wide range of technologies which complement our core OLED
and lens technologies and which will enhance our competitive position in the
microdisplay and head-wearable display markets. These include:
Lens technology. We have developed advanced lens technology for microdisplays
and head-wearable display systems and hold key patents in these areas. Our lens
technology permits our OLED-on-silicon microdisplays to provide large field of
view images that can be viewed for extended periods with reduced eye-fatigue. We
have engaged a firm to manufacture our lenses in order to provide them in larger
quantities to our customers, assuming the final version of the production lens
becomes available and moves into production by our manufacturing partner.
We believe that the key advantages of our lens technology include:
o Can be very low cost, with minimal assembly. A one piece, molded plastic optic
attached to the microdisplay can serve many consumer end-product markets. Since
our process is plastic molding, our per unit production costs are low;
o Allows a compact and lightweight lens system that can greatly magnify a
microdisplay to produce a large field of view;
o Can use single-piece molded microdisplay lenses to permit high light
throughput making the display image brighter or permitting the use of less power
for an acceptable brightness;
o Can be designed to provide focusing to enable users with various eyesight
qualities to view images clearly; and
o Can optionally provide focal plane adjustment for simultaneous focusing of
computer images and real world objects. For example, this characteristic is
beneficial for word processing or spreadsheet applications where a person is
typing data in from reference material. This feature can make it easier for
people with moderately poor accommodation to use a head-wearable display as a
portable computer-viewing accessory.
Head-wearable display technology. We have developed ergonomic technologies that
make head-wearable displays easier to use in a wide variety of applications. For
example, the use of our patented rotatable Eyeblocker(TM) provides a sharp image
without requiring most users to squint. The Eyeblocker can also be moved to
create an effective see-through appearance. To our knowledge, we have made the
lightest weight, high-resolution head-wearable display with an over 35 degree
diagonal field of view ever publicly demonstrated.
Wireless video technology. We have developed power efficient, miniature, video
and stereo sound, radio frequency transmitter-receiver technology as part of a
government program. This could allow consumers to watch wireless high quality
video from most locations in their home using existing entertainment, such as
DVD or cable/satellite systems, or data systems. If commercialized, we expect
this capability to greatly increase the available market and demand for video
and data head-wearable displays and we are considering this technology for use
in low cost consumer applications. Commercialization of this technology will be
considered in the future.
Sales and Marketing
We primarily provide display components and Microviewer(TM) display-optic
modules for OEMs to incorporate into their branded products and sell through
their own well-established distribution channels. In addition, we market
head-wearable displays directly to various vertical market channels, such as
medical, industrial, and government customers. A typical buyer is a manufacturer
of a product requiring a specific resolution of visual display or viewfinder for
insertion into a product such as a portable DVD headset, a PC-gaming headset, or
an instrument.
We market our services primarily in North America, Asia, and Europe through
direct technical sales from our headquarters. Regular purchase orders are
processed by our Customer Service Coordinator and technical questions related to
product purchases or product applications are processed by our Technical Support
Coordinator. Additional sales are generated through our subsidiary, Virtual
Vision, and through our sales office located in Japan. We are in the process of
selecting worldwide distributors.
As a market-driven company, we assess customer needs both quantitatively and
qualitatively, through market research and direct communications. Because our
microdisplays are the main functional component that defines many of our
customers' end products, we work closely with potential customers to define our
products to optimize the final design, typically on a senior
engineer-to-engineer basis.
We identify companies with end products and applications for which we believe
that our products will provide a system level solution and for which our
products can be a key differentiator. We target both market leaders and select
early adopter companies; their acceptance validates our technology and approach
in the market. We believe successful marketing will require relationships with
recognized consumer brand companies.
31
We are now shipping monochrome and full color versions of our first two
commercial microdisplay products. Our SVGA+ resolution OLED microdisplay, which
contains 1.53 million picture elements, was specifically designed to meet the
needs of several military, industrial, and medical customers based on marketing
information obtained prior to the design phase of the display and was first
offered for sampling in April 2001. Our stereovision-capable SVGA-3D
microdisplay, which contains 1.44 million picture elements, was designed with
the input of multiple customers to principally target the mobile personal
computer and PC games markets, and was first shipped in February 2002. We are
currently developing a military and industrial oriented ultra-high-luminance
SXGA resolution integrated circuit, which contains 3.9 million picture elements,
that is due for completion in 2004, and we have shipped limited quantities of
prototypes of our eGlass headsets.
Near term sales efforts have been focused on our military, industrial, and
medical customers. We have received production orders and design wins for both
the SVGA+ and SVGA 3D displays. To date, we have shipped products and evaluation
kits to more than 100 OEM customers. An OEM design cycle typically requires
between 6 and 24 months, depending on the uniqueness of the market and the
complexity of the end product. New product development may require several
design iterations prior to commercialization. Some of our initial customers have
completed their initial evaluation cycle and we are now receiving follow-on
orders and notification of product purchase decisions. Several customers have
indicated their intent to incorporate potentially high volumes of our
microdisplays into consumer products beginning in 2004 through 2006, pending
successful completion of their own product development efforts. We have also
received notification that our microdisplays will be used as components in
versions 1.0 and 2.0 of the US Army Land Warrior program and in the US Air Force
Joint Strike Fighter program, among other programs. (See "Our Market
Opportunity: Military; Commercial, Industrial, and Medical; and Consumer")
Customers
Customers for our products include both large multinational and smaller OEMs. We
maintain relationships with OEMs in a diverse range of industries encompassing
the military, industrial, medical, and consumer market sectors. During 2003, 70%
of our sales were to firms based in the United States and 30% were to
international firms, compared to 74% domestic sales and 26% international sales
during 2002. In 2003, three customers accounted for 37% of sales. One customer
represented 21% of sales and the other two represented 8% each. In 2002, our
customer base included two customers who accounted for 32% of sales. One
customer represented 18% and the other customer represented 14% of sales. We
anticipate that international sales will continue to increase as a percentage of
our sales.
Backlog
As of December 31, 2003 we had a backlog of purchase agreements of approximately
$30 million. The majority of our backlog consists of purchase agreements for
delivery over the next 24 months. Most purchase orders are subject to
rescheduling or cancellation by the customer with no or limited penalties.
Because of the possibility of customer changes in delivery schedules or
cancellations and potential delays in product shipments, our backlog as of a
particular date may not be indicative of net sales for any succeeding period.
Lack of working capital through the early part of 2003 delayed our ability to
ship the full quantity of purchase agreements and purchase orders on hand, and
has required negotiations with customers for delays in product launch schedules.
Some customers have experienced delays in their expected product launch
schedules due to their own product development delays not directly related to
our microdisplays. Some new eMagin products such as PC interfaces and cables may
help customers begin their production more quickly, but there is no guarantee
that this will occur. eMagin's deliveries of wafers and other supplies could
play a negative roll in our future shipments due to capacity and technical
issues at our suppliers, such as TSMC in Taiwan.
32
Research and Development
Near-to-the-eye virtual imaging and OLED technology are relatively new
technologies that have considerable room for substantial improvements in
luminance, life, power efficiency, voltage swing, design compactness, field of
view, optical range of visibility, and many other parameters. We also anticipate
that achieving reductions in manufacturing costs will require new technology
developments. We anticipate that improving the performance, capability and cost
of our products will provide an important competitive advantage in our fast
moving, high technology marketplace. Past and current research activities
include development of improved OLED and display device structures, developing
and/or evaluating new materials (including the synthesis of new organic
molecules), manufacturing equipment and process development, electronics design
methodologies and new circuits and the development of new lenses and related
systems. During 2002 and 2003 we focused primarily on near-term product
development projects related to our transition from research to manufacturing.
For example we developed a glass cover plate to ruggedize our displays to
facilitate easier handling by our OEM customers. We also developed a new high
luminance, high efficiency yellow monochrome OLED and adapted to our SVGA+
display for see-through optic applications and began sampling the yellow
monochrome product in early 2003. However, in order to improve customer
satisfaction and simultaneously maximize our margins, as well as to maintain
competitive technology advantages, we believe that it is important to continue
to engage in long-term research and development. During the past eight years, we
have spent, net of U.S. government funding, approximately $34 million on
research and development. In 2001, we spent approximately $13 million, and in
2002 we spent approximately $7 million on research and development. During
1998-2002 we received approximately $4 million in funding from US government
under research and development cost sharing arrangements. Currently, eMagin is
almost entirely focused on production ramping, but contract R&D is expected to
eventually resume at moderate levels.
External relationships play an important role in our research and development
efforts. Suppliers, equipment vendors, government organizations, contract
research groups, external design companies, customer and corporate partners,
consortia, and university relationships all enhance the overall research and
development effort and bring us new ideas (See "Strategic Relationships").
Manufacturing Facilities
We are located at IBM's Microelectronics Division facility, known as the Hudson
Valley Research Park, located about 70 miles north of New York City in Hopewell
Junction, New York. We lease approximately 40,000 square feet of space housing
our own equipment for OLED microdisplay fabrication and for research and
development plus additional space for assembly and administrative offices. We
renewed our lease which expires May 31, 2009. The average monthly rent over the
5 years is approximately $74,000.
Facilities services provided by IBM include our cleanroom, pure gases, high
purity de-ionized water, compressed air, chilled water systems, and waste
disposal support. This infrastructure provided by our lease with IBM provides us
with many of the resources of a larger corporation without the added overhead
costs. It further allows us to focus our resources more efficiently on our
product development and manufacturing goals. We believe that our facility is
anticipated to be capable of producing over 50,000 SVGA+ or SVGA-3D displays per
month once we are manufacturing around the clock on a 24 hours a day, 7 days per
week basis, with ample supplies and a fully loaded manufacturing line.
Pursuant to the IBM lease, we lease non-cleanroom facilities for chemical
mixing, cleaning, chemical systems, and glass/silicon cutting. OLED chemicals
can be purified in our facility with our own equipment, permitting the company
to evaluate new chemicals in pilot production that are not yet available in
suitable purity for OLED applications on the market.
Our display fabrication process starts with the silicon wafer, which is
manufactured by a semiconductor foundry using conventional CMOS process. After a
device is designed by a combination of internal and external designers with
customer participation, we outsource wafer fabrication.
Our manufacturing process for OLED-on-silicon microdisplays has three main
components: organic film deposition, organic film encapsulation (also known as
sealing), and color filter processing. All steps are performed in
semi-automated, hands-free environment suitable for high volume throughput. An
automated cluster tool provides all OLED deposition steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. After wafer
processing, each part is inspected using an automated inspection system, prior
to shipment. We have electrical and optical instrumentation required to
characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.
33
Our system development effort at Virtual Vision operates out of a leased
facility in Redmond, Washington. The facilities are well suited for designing
and building limited volume prototypes and small quantity industrial or
government products. Cables and electronic interfaces have recently been
produced to permit our OEM customers to more rapidly create products and shorten
their time-to-market. We plan to outsource medium to high volume subsystem
production to low cost plastics, lenses, and assembly manufacturers. We are
currently using outside manufacturers including manufacturers in Asia and other
locations, plus we are investigating new outsource opportunities.
We believe that manufacturing efficiency is an important factor for success in
the consumer markets. We believe that high yield and maximum utilization of our
equipment set will be key for profitability. We believe that all of the main
components for manufacturing success are in place, but we will require
additional capital to: (i) staff and train employees for round the clock
operation, (ii) build suitable inventory of integrated circuits and other raw
materials, and (iii) properly maintain and continue to upgrade the equipment set
from time to time. The equipment required for initial profitable production is
in place. Some equipment will be added when our production volume increases or
as needed. We will initially ramp production primarily by adding multi-shift
staff and increasing inventory.
We intend to outsource certain capital-intensive portions of microdisplay
production to minimize both our costs and time to market. Joint ventures are
being considered for higher quantity OLED production off shore should suitable
resources not be available for US expansion. We currently outsource all our
integrated circuit fabrication while retaining the final metal, OLED
application, color filter, OLED sealing, and sample packaging processes
in-house.
Intellectual Property
We have developed a significant intellectual property portfolio of patents,
trade secrets and know-how, supported by our license from Eastman Kodak and our
current patent portfolio.
Our license from Eastman Kodak gives us the right to use in miniature displays a
portfolio in organic light emitting diode and optics technology, some of which
are fundamental. Our agreement with Eastman Kodak provides for perpetual access
to the OLED technology for our OLED-on-silicon applications, provided we remain
active in the field and meet our contractual requirements to Eastman Kodak. We
also generate intellectual property as a result of our internal research and
development activities.
Our patents and patent applications cover a wide range of materials, device
structures, processes, and fabrication techniques, such as methods of
fabricating full color OLEDs. We believe that our patent applications relating
to up-emitting structures on opaque substrates such as silicon wafers, which are
critical for OLED microdisplays, and applications relating to the hermetic
sealing of such structures are particularly important.
Our patents are concentrated in the following areas:
o OLED Materials, Structures, and Processes;
o Display Color Processing and Sealing;
o Active Matrix Circuit Methodologies and Designs;
o Field Emission and General Display Technologies;
o Lenses and Tracking (Eye and Head);
o Ergonomics and Industrial Design; and
o Wearable Computer Interface Methodology
We also rely on proprietary technology, trade secrets, and know-how, which are
not patented. To protect our rights in these areas, we require all employees,
and where appropriate, contractors, consultants, advisors and collaborators to
enter into confidentiality and noncompetition agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
our trade secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, know-how
or other proprietary information.
We believe that our intellectual property portfolio, coupled with our strategic
relationships and accumulated experience in the OLED field gives us an advantage
over potential competitors.
34
Competition
We may face competition in the OLED and microdisplay industry from a variety of
companies and technologies. We believe that our key competition will come from
liquid crystal on silicon microdisplays, or LCOS, also known as reflective
liquid crystal displays. While we believe that OLED-on-silicon provides
comparatively lower optics cost, larger apparent image size, reduced electronics
cost and complexity, enhanced color, and improved power efficiency advantages
over liquid crystal on silicon microdisplays, there is no assurance that these
benefits will be realized or that liquid crystal on silicon manufacturers will
not suitably improve these parameters. Companies pursuing liquid crystal on
silicon technology include Microdisplay Corporation and Brillian Corporation,
among others, although most of the companies are primarily focusing on
projection microdisplays, which do not compete directly with the company. In
certain markets, we may also face competition from developers of transmissive
liquid crystal displays, such as those developed by Kopin, or laser scanning
systems, such as those developed by Microvision Corporation.
To our knowledge, the only other company that has publicly stated plans to
develop OLED microdisplays for near-eye applications is MicroEmissive Displays
in Britain. We may also compete with potential licensees of Universal Display
Corporation, Cambridge Display Corporation, and Uniax Corporation, each of which
license OLED technology portfolios. Even though we could potentially license
technology from these developers, potential competitors could also obtain such
licenses and may do so at more favorable royalty rates. However, should they
decide to embark on developing microdisplays on silicon, we believe that our
progress to date in this area gives us a substantial head start.
Our microdisplays and head-wearable display systems may face competition on a
price and performance basis from major manufacturers such as Sony and Seiko
Epson. However, these companies use first generation liquid crystal on
polysilicon technology and therefore, we believe that they may incorporate our
technology into their products when it becomes available.
Employees
As of January 7, 2005, we had a total of 63 full time, part time, and
temporary staff, including 9 employees at Virtual Vision. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive offices are located at: 2070 Route 52, Hopewell
Junction, New York 12533. We lease approximately 40,000 square feet of space
from IBM, all of which is located in the same industrial park. Approximately
30,000 square feet of space houses our own equipment for OLED microdisplay
fabrication, and for research and development plus additional space for assembly
operations and storage. There are space reductions planned as we look to improve
efficiency and costs. Approximately 10,000 square feet of space is used for
administrative offices. We renewed our lease which expires May 31, 2009. The
average monthly rent over the next 5 years is approximately $74,000.
Our lenses and system development operation at Virtual Vision lease
approximately 7,000 square feet of space in Redmond, Washington. The lease for
this facility runs until March 2005.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors, and their ages and positions are:
Name Age Position
Gary W. Jones 48 Chairman, Chief Executive Officer and President
John Atherly 46 Chief Financial Officer
Dr. K. C. Park 66 Executive VP of International Operations
Susan K. Jones 52 Chief Marketing and Strategy Officer, Secretary
Claude Charles (1) 66 Director
Paul Cronson (1) 46 Director
Jacob (Jack) Goldman (2*) (3) 81 Director
Rear Admiral Thomas Paulsen, USN (Ret.) (2) 67 Director
Jack Rivkin (1*) (3*) 63 Director
Dr. Jill Wittels (2) 54 Director
(1) Audit Committee
(2) Governance and Nominating Committee
(3) Compensation Committee (*) Committee chairman
Gary W. Jones has served as Chairman, Chief Executive Officer, and President of
eMagin since 1992, and as Acting Chief Financial Officer since August 2002. Mr.
Jones has over 20 years of experience in both public and private companies in
the areas of business development, high volume manufacturing, product
development, research, and marketing. Prior to founding FED Corporation/eMagin
Corporation, Mr. Jones served as Director of the Device Development and
Processing division at MCNC Center for Microelectronics in North Carolina from
1985 to 1992. From 1977 to 1985 Mr. Jones managed both semiconductor
manufacturing and research and development programs at Texas Instruments. Mr.
Jones received a B.S. in electrical engineering and physics from Purdue
University. Mr. Jones has served as a member of the Executive Committee of the
Board of the United States Display Consortium.
John Atherly has served as Chief Financial Officer since June of 2004. Before
joining eMagin Corporation, Mr. Atherly worked for Click2learn, Inc., a NASDAQ
listed enterprise Software Company from 1990 - 2004. He held the positions of
Vice President of Finance and CFO for approximately 8 years and prior to that
held the positions of Director of Finance and Controller. During his 14 years
with Click2learn Mr. Atherly managed the firm's finance and administration,
human resources, IT and manufacturing organizations. From 1987 to 1990, Mr.
Atherly was a Finance and Operations Manager at MicroDisk Services, a
manufacturing firm serving the software industry. Mr. Atherly holds a BA in
Business Administration from the University of Washington.
Dr. K.C. Park was named President of our wholly owned subsidiary, Virtual
Vision, Inc., in 2002 after serving as our Executive Vice President of
International Operations since 1998. During his twenty-seven year tenure with
IBM he managed flat panel display and semiconductor programs at the IBM Watson
Research Center, directed the corporate display programs at the IBM Corporate
Headquarters, and established Technical Operations in IBM Korea and served as
Senior Managing Director. Dr. Park joined LG Electronics in 1993 as Executive
Vice President and initiated and led corporate-wide efforts to shift the major
emphasis of the corporation into multimedia. Dr. Park holds a B.S. from the
University of Minnesota, an M.S. from MIT, and a Ph.D. in Solid State Chemistry
from the University of Minnesota and an MBA from New York University.
Susan K. Jones has served as Executive Vice President and Secretary since 1992,
and assumed responsibility of Chief Marketing and Strategy Officer in 2001. Ms.
Jones has 25 years of industrial experience, including senior research,
management, and marketing assignments at Texas Instruments and Merck, Sharp, &
Dohme Pharmaceuticals. Ms. Jones serves on the boards or chairs committees for
industry organizations including IEEE, SPIE, and SID. Ms. Jones served as a
director of eMagin Corporation from 1993 to 2000 and is a director of Virtual
Vision, Inc. Ms. Jones graduated from Lamar University with a B.S. in chemistry
and biology, holds more than a dozen patents, and has authored more than 100
papers and talks.
Claude Charles has served as a director since April of 2000. Mr. Charles has
served as President of Great Tangley Corporation since 1999. From 1996 to 1998
Mr. Charles was Chairman of Equinox Group Holdings in Singapore. Mr. Charles has
also served as a director and in senior executive positions at SG Warburg and
Co. Ltd., Peregrine Investment Holdings, Trident International Finance Ltd., and
Dow Banking Corporation. Mr. Charles holds a B.S. in economics from the Wharton
School at the University of Pennsylvania and a M.S. in international finance
from Columbia University.
36
Paul Cronson has served as a director since July of 2003. Mr. Cronson is
Managing Director of Larkspur Capital Corporation, which he founded in 1992.
Larkspur is a broker dealer that is a member of the National Association of
Securities Dealers and advises companies seeking private equity or debt. Mr.
Cronson's career in finance began in 1979 at Laidlaw, Adams Peck where he worked
in asset management and corporate finance. From 1983 to 1985, Mr. Cronson worked
with Samuel Montagu Co., Inc. in London, where he marketed eurobond issuers and
structured transactions. Subsequently from 1985 to 1987, he was employed by
Chase Investment Bank Ltd., where he structured international debt securities
and he developed "synthetic asset" products using derivatives. Returning to the
U.S., he joined Peter Sharp Co., where he managed a real estate portfolio,
structured financings and assisted with capital market investments from until
1992. Mr. Cronson received his BA from Columbia College in 1979, and his MBA
from Columbia University School of Business Administration in 1982. He is on the
Board of Umbanet, in New York City, a private company specializing in email
based distributed applications and secure messaging.
Dr. Jack Goldman joined our board of directors in February of 2003. Dr. Goldman
is the retired senior vice-president for R&D and chief technical officer of the
Xerox Corporation. While at Xerox, he founded and directed the celebrated Xerox
PARC laboratory. Prior to joining Xerox, Dr. Goldman was Director of Ford Motor
Company's Scientific Research Laboratory. He also served as Visiting Edwin
Webster Professor at MIT. Dr. Goldman presently serves on the Boards of
Directors of Umbanet Inc. and Medis Technologies Inc., and he has served on the
Boards of Xerox, General Instrument Corp., United Brands, Intermagnetics
General, GAF and Bank Leumi USA. He has also been active in government and
professional advisory roles including service on the US Dept. of Commerce
Technical Advisory Board, chairman of Statutory Visiting Committee of The
National Bureau of Standards (National Institute of Standards and Technology),
vice-president of the American Association for the Advancement of Science and
president of the Connecticut Academy of Science and Engineering.
Admiral Thomas Paulsen has served as a director since July 2003. Admiral Thomas
Paulsen served for over 34 years in the US Navy in Command Control,
Communications and Intelligence (C3I), Telecommunications, Network Systems
Operations, Computers and Computer Systems Operations until his retirement in
1994 as a Rear Admiral. He then served as Chief Information Officer for Williams
Telecommunications. Admiral Paulsen has served as a director Umbanet, Inc. since
2002. Since 2000, Admiral Paulsen has served on the Board of Governors of the
Institute of Knowledge Management, George Washington University. Since 1994, he
has served as the Chairman of the Advisory Board and President Emeritus of the
Center for Advanced Technologies (CAT) and a Managing Partner on the National
Knowledge and Intellectual Property Management Taskforce, a not-for-profit
company headquartered in Dallas, Texas, and is a member of the Board of
Governors for the Japanese American National Museum, Los Angeles, California.
Jack Rivkin has served as a director since June of 1996. Mr. Rivkin is Executive
Vice President and Chief Investment Officer of Neuberger Berman, a Lehman
Brothers Company. He previously served as Executive Vice President of Citigroup
Investments Inc., through which the Travelers Group investments in the Company
were managed. He also served as Vice Chairman and a director of Smith Barney,
and held positions at Procter and Gamble, Mitchell Hutchins, Paine Webber and
Lehman Brothers. Mr. Rivkin holds an engineering degree in metallurgy from the
Colorado School of Mines and an MBA from Harvard University.
Dr. Jill Wittels has served as a director since July 2003. Since February 2001,
Dr. Wittels has been the Corporate Vice President, Business Development for L-3
Communications, a merchant supplier of intelligence, surveillance and
reconnaissance systems and products, secure communications systems and products,
avionics and ocean products, training devices and services, microwave components
and telemetry, instrumentations, space and navigation products. Dr. Wittels has
over 25 years of management, engineering and leadership experience. Prior to L-3
Communications, Dr. Wittels worked for 21 years with BAE Systems and its
predecessor companies, including Lockheed Martin, Loral and Honeywell. Most
recently, she served as vice president and general manager of BAE Systems'
Information and Electronic Warfare Systems/Infrared and Imaging Systems
division. Dr. Wittels began her career as a systems engineer and has also served
as a Congressional Fellow for the American Physical Society, a research
associate at Massachusetts Institute of Technology and a senior visiting
scientist for the National Academy of Sciences. Dr. Wittels received a Bachelor
of Science degree in Physics from MIT in 1970 and received a PhD in Physics from
MIT in 1975. She serves on the Board of Overseers for the Department of Energy's
Fermi National Accelerator Lab, is a member of the American Physical Society and
a member of the American Astronomical Society. Dr. Wittels presently serves on
the Boards of Directors of Innovative Micro Technology Inc. and of Millivision
Inc.
37
General Information Concerning the Board of Directors
The Board of Directors of eMagin is classified into three classes: Class A,
Class B and Class C. Each Class A director will hold office until the 2005
Annual Meeting of our stockholders. Currently, Mr. Gary Jones and Mr. Jack
Rivkin are the Class A directors. Each Class B director will hold office until
the 2006 Annual Meeting. Mr. Paul Cronson and Admiral Thomas Paulsen are Class B
directors. Class C directors will hold office until the 2004 Annual Meeting.
Currently, Mr. Claude Charles, Dr. Jill Wittels and Dr. Jacob Goldman are the
Class C directors. In each case, each director will hold office until his
successor is duly elected or appointed and qualified in the manner provided in
eMagin's Amended and Restated Certificate of Incorporation and our Amended and
Restated Bylaws, or as otherwise provided by applicable law.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. The Code of
Business Conduct and Ethics will be posted on our website at
http://www.emagin.com/investors.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of this Code of Business
Conduct and Ethics by posting such information on our website, at the address
and location specified above and, to the extent required by the listing
standards of the American Stock Exchange, by filing a Current Report on Form 8-K
with the SEC, disclosing such information.
Executive Officers of the Company
Officers are appointed to serve at the discretion of the Board of Directors.
Except for Mr. Gary Jones, who is the spouse of Ms. Susan Jones, the Company's
Executive Vice President and Secretary, none of the executive officers or
directors of the Company has a family relationship with any other executive
officer or director of the Company.
Committees of the Board of Directors
Audit Committee. The Audit Committee is responsible for determining the adequacy
of the Company's internal accounting and financial controls, reviewing the
results of the audit of the Company performed by the independent auditors, and
recommending the selection of independent auditors. During the year, the Board
examined the composition of the Audit Committee in light of the adoption by The
American Stock Exchange, Inc. (the "Amex") of new rules governing audit
committees. Based upon this examination, Board has determined that, with the
exception of Mr. Cronson, each of the members of the Audit Committee is
unrelated, an outside member with no other affiliation with the Company and is
independent as defined by the American Stock Exchange. The Board has determined
that Mr. Rivkin is an "audit committee financial expert" as defined by the
Securities and Exchange Commission. During 2003, the Audit Committee held 4
meetings.
Compensation Committee. The Compensation Committee determines matters pertaining
to the compensation of certain executive officers of the Company and administers
the Company's stock option, incentive compensation, and employee stock purchase
plans. During 2003, the Compensation Committee held 1 meeting.
Governance and Nominating Committee. The Board of Directors has established a
Governance and Nominating Committee for purposes of nominating directors and for
all other purposes outlined in the Governance and Nominating Committee Charter,
including nominees submitted to the Board of Directors by shareholders. The
Governance and Nominating Committee is composed of Messrs. Goldman and Paulsen,
and Ms. Wittels. The Board has determined that each of the members of the
Governance and Nominating Committee is unrelated, an outside member with no
other affiliation with the Company and independent as defined by the American
Stock Exchange.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the Company's review of copies of all disclosure reports filed by
directors and executive officers of the Company pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, the following directors and
executive officers of the Company failed to timely file reports during 2002: Mr.
Ajmal Khan failed to file once, Mr. Jack Rivkin failed to file twice, Mr. Gary
Jones failed to file six times, Ms. Susan Jones failed to file six times, Mr.
Claude Charles failed to file twice and Mr. K.C. Park failed to file five times.
38
EXECUTIVE COMPENSATION
The following table provides information about the total compensation for
services in all capacities to the Company or its subsidiary for the last three
fiscal years of those persons who at December 31, 2003, were (i) the Chief
Executive Officer of the Company and (ii) the other most highly compensated
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 (collectively, the "named executive officers").
Long-Term
Compensation
Other Annual Awards (Securities
Name and Position Year Salary Bonus Compensation Underlying Options)
================================= ========== ============== ========== ===== ================= ====================
Gary W. Jones
President, Chief Executive 2003 305,090 0 (1) 0 516,260
Officer, Acting Chief 2002 297,260 0 (1) 0 3,589,827
Financial Officer, Chairman 2001 259,587 0 0 147,183
Susan K. Jones
Executive Vice President, 2003 245,933 0 (2) 0 403,825
Chief Marketing and 2002 239,621 0 (2) 0 2,293,368
Strategy Officer, Secretary 2001 209,254 0 0 -
Dr. K.C. Park
President, Virtual Vision 2003 168,000 0 (3) 0 231,697
2002 175,000 0 (3) 0 938,310
2001 171,877 0 0 60,563
(1) In 2002 Mr. Jones had a total salary of $297,260 of which he deferred
$166,522 and received payment for his salary in the amount of $130,738. In 2003
he received payment of $335,400 which consisted of his salary of $305,090 and a
partial payment of deferred 2002 salary in the amount of $30,310. Mr. Jones was
granted 512,260 option shares for continuing to defer the balance of his pay. In
October, 2002, Mr. Jones was awarded 2,000,000 option shares which were issued
in July of 2003 after shareholder approval. These shares are included in the
2002 total.
(2) In 2002 Ms. Jones had a total salary of $239,621 of which she deferred
$127,740 and received payment for her salary in the amount of $111,881. In 2003
she received payment $268,125 which consisted of her salary of $245,933 and a
partial payment of deferred 2002 salary in the amount of $22,192. Ms. Jones was
granted 403,825 option shares for continuing to defer the balance of her pay. In
October, 2002, Ms. Jones was awarded 1,000,000 option shares which were issued
in July of 2003 after shareholder approval. These shares are included in the
2002 total.
(3) In 2002 Dr. Park had a total salary of $175,000 of which he deferred $72,735
and received payment for his salary in the amount of $102,265. In 2003 he
received payment $175,128.54 which consisted of his salary of $168,000 and a
partial payment of deferred 2002 salary in the amount of $7,129. Dr. Park was
granted 231,697 option shares for continuing to defer the balance of his pay. In
October, 2002, Dr. Park was awarded 500,000 option shares which were issued in
July of 2003 after shareholder approval. These shares are included in the 2002
total. Options/SARs Grants During Last Fiscal Year
The following table provides information related to options granted to our named
executive officers during the fiscal year ended December 31, 2003.
Number of % of Total
Securities Options Exercise
Underlying Granted in Price
Name Options Granted Fiscal 2003 ($/Share) Expiration Date
--------------------------- ------------------ ---------------- --------------- -----------------
Gary W. Jones (1) 234,664 10% $0.67 4/25/13
Gary W. Jones (2) 140,498 6% $1.00 8/30/13
Gary W. Jones (3) 140,798 6% $1.25 12/31/13
Susan K Jones (1) 183,557 8% $0.67 4/25/13
Susan K Jones (2) 110,134 5% $1.00 8/30/13
Susan K Jones (3) 110,134 5% $1.25 12/31/13
Dr. K.C. Park (1) 105,317 4% $0.67 4/25/13
Dr. K.C. Park (2) 63,190 3% $1.00 8/30/13
Dr. K.C. Park (3) 63,190 3% $1.25 12/31/13
(1) Options issued to compensate employees for deferred salary. These options
vested immediately and were granted at Fair Market Value.
(2) Options issued to compensate employees for deferred salary. These options
vested in August and were granted at 32% above Market.
(3) Options issued to compensate employees for deferred salary. These options
vested in December and were granted at 87% above Market.
39
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
The following table provides information regarding the aggregate number of
options exercised during the fiscal year ended December 31, 2003 by each of the
named executive officers and the number of shares subject to both exercisable
and unexercisable stock options as of December 31, 2003. The common stock price
at December 31, 2003 was $1.38 per share.
# of Securities Value of
Underlying Unexercised
Unexercised In-the-money
Shares Options at Options at
Acquired on Value FY-End FY-End
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
=================== ============== =========== ================== ================= ================== ===============
Gary Jones - $ - 4,253,270 - $ 3,860,085 $ -
Susan K. Jones - - 3,208,745 9,312 $ 2,358,624 $ -
Dr. K.C. Park 61,463 $ 19,318 1,242,375 3,535 $ 1,095,847 $ -
Compliance with internal Revenue Code Section 162(m) disallows a tax deduction
to publicly held companies for compensation paid to certain of their executive
officers to the extent that such compensation exceeds $1.0 million per covered
officer in any fiscal year. The limitation applies only to compensation that is
not qualified performance based compensation under the IRS code.
Compensation of Directors
Non-management directors receive options under the 2003 Stock Option Plan. Under
the 2003 Plan, a grant of options to purchase 60,000 shares of common stock will
automatically be granted on the date a director is first elected or otherwise
validly appointed to the Board with an exercise price per share equal to 100% of
the market value of one share on the date of grant. Such options granted will
expire ten years after the date of grant and will become exercisable in four
equal installments commencing on the date of grant and annually thereafter. In
addition to the 60,000 shares of common stock automatically granted upon joining
the Board, Directors thereafter receive an annual grant of options to purchase
20,000 shares of common stock at the fair market value as determined on the date
of grant, which options will vest on December 31 in the year granted. Additional
annual stock option awards of 15,000 are issued for each committee a board
member sits on plus 5,000 additional for each chair on the Audit Committee. In
addition, each non-management director is reimbursed for ordinary expenses
incurred in connection with attendance at such meetings.
40
Executive Employment Agreements
We currently have no Employment Agreements in place with any officers of the
company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 27, 2002, eMagin Corporation and a group of several accredited
institutional and individual investors entered into a Securities Purchase
Agreement providing for the issuance and sale to the investors of (i) an
aggregate of approximately 3.6 million shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years from the Closing Date for
an aggregate of approximately 1.4 million shares of our common stock (subject to
certain customary anti-dilution adjustments). Rainbow Gate Corporation, a
corporation in which the sole member of Stillwater LLC is the investment
manager, invested $500,000 in the Company under the agreement and received
pursuant to such investment (i) 723,275 shares of our common stock, and (ii)
warrants exercisable for 289,310 shares of our common stock. Stillwater is
currently a beneficial owner of more than five percent of the outstanding shares
of our common stock.
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with Mortimer D.A. Sackler, an individual investor (the "Bridge
Note"). The secured note accrued interest at 11% per annum and was due to mature
on November 1, 2005 as a result of a financing we completed in April 2003. The
Company also granted warrants, exercisable for a period of five years, to
purchase 300,000 shares of common stock with an exercise price of $0.4257 per
share to the investor; provided, however, this warrant may not be exercised by
the investor so long as the investor is the beneficial owner, directly or
indirectly, of more than ten percent (10%) of the common stock of eMagin for
purposes of Section 16 of the Securities Exchange Act 1934. The fair value of
the warrants issued to this Investor, which approximated $84,000, has been
recorded as original issue discount, resulting in a reduction in the carrying
value of this debt. The original issue discount was amortized into interest
expense over the period of the debt. Pursuant to the April 2003 financing
described below, the investor agreed, to (a) amend the secured note issued to
them, (b) terminate the security agreement dated June 20, 2002 that was entered
into in connection with the purchase of the original secured notes and allow the
new investors to enter into a new security agreement with him on a pari passu
basis in order for eMagin to continue its operations as a developer of virtual
imaging technology, and (c) simultaneously participate in the new financing. The
amendments to the note included (i) amending the note issued on June 20, 2002 so
as to provide that the note shall be convertible and will have the same
conversion price as the notes issued pursuant to the April 2003 secured note
purchase agreement, (ii) extending the maturity dates of the note from June 30,
2003 to November 1, 2005, and (iii) revising and clarifying certain of the other
terms and conditions of the note, including provisions relating to interest
payments, conversions, default and assignment of the note.
On April 25, 2003, eMagin Corporation and a group of several accredited
institutional and individual investors (collectively, the "Investors") entered
into a Global Restructuring and Secured Note Purchase Agreement (the "Secured
Note Purchase Agreement") dated as of April 25, 2003 (the "Closing Date")
whereby Investors agreed to lend eMagin $6,000,000 in exchange for (i) the
issuance of $6,000,000 principal amount of 9.00% Secured Convertible Promissory
Notes due on November 1, 2005 (the "Secured Notes") and (ii) Warrants (the
"Warrants") to purchase an aggregate of 7,749,921 shares of common stock of
eMagin (subject to certain customary anti-dilution adjustments), which Warrants
are exercisable for a period of three (3) years. Mr. Rivkin, who at the time of
the transaction was a member of our Board of Directors, participated as an
investor in the transaction and invested $125,000 in the Company. In return for
such investment, Mr. Rivkin received (i) a Secured Convertible Promissory Note
in an aggregate principal amount of $125,000, and (ii) warrants exercisable for
161,456 of our common shares. In addition, Stillwater LLC, an entity controlled
by Mr. Mortimer D.A. Sackler, agreed to invest an aggregate of $2,600,000 under
the transaction and received (i) Secured Convertible Promissory Notes in an
aggregate principal amount of $2,600,000, and (ii) warrants exercisable for
3,358,300 of our common shares. As part of the transactions, Messrs. Sackler and
Rivkin, who were the holders of an aggregate of $1,325,000 principal amount of
secured notes that were purchased pursuant to a secured note purchase agreement
entered into as of November 27, 2001 (collectively, the "Original Secured
Notes"), and Mr. Sackler, who additionally was the holder of a $200,000
principal Bridge Note, agreed to (a) amend their respective Original Secured
Notes and Bridge Note issued to them, (b) terminate the Security Agreement dated
November 20, 2001 that was entered into in connection with the purchase of the
Original Secured Notes and the Security Agreements dated June 20, 2002 that were
entered into in connection with the purchase of the Bridge Note and allow the
new investors to enter into a New Security Agreement (as defined below) with
them on a pari passu basis in order for the Company to continue its operations
as a developer of virtual imaging technology.
41
The amendments to the Original Secured Notes and Bridge Note included (i)
amending the Bridge Note so as to provide that the Bridge Note shall be
convertible and will have the same conversion price as the Notes issued pursuant
to the Secured Note Purchase Agreement, (ii) extending the maturity dates of the
Original Secured Notes and Bridge Note from June 30, 2003 to November 1, 2005,
and (iii) revising and clarifying certain of the other terms and conditions of
the Original Secured Notes and Bridge Note, including provisions relating to
interest payments, conversions, default and assignments of the Original Secured
Notes and Bridge Note. On April 25, 2003, Mr. Sackler transferred all of his
holdings in the Company to Stillwater LLC, a limited liability company in which
Mr. Sackler is the sole member.
In February 2004, the Company and all of the holders of the Secured Convertible
Notes (the "Notes"), which were due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately $742,000 on the Notes, into 11,394,621 shares of
common stock of eMagin. The listing of the shares issuable pursuant to such
agreement was approved by the American Stock Exchange.
In consideration of the Noteholders agreeing to the early conversion of the
Notes, eMagin has agreed to issue the Noteholders warrants to purchase an
aggregate of 2.5 million shares of common stock (the "warrants"), which warrants
are exercisable at a price of $2.76 per share. 1.5 million of the warrants are
exercisable until the later of (i) twelve (12) months from the date upon which a
registration statement covering the shares issuable upon exercise of the
Warrants is declared effective by the Securities and Exchange Commission, or
(ii) December 31, 2005. The remaining 1.0 million of the warrants are
exercisable until four (4) years from the date upon which the registration
statement covering such shares is declared effective by the Securities and
Exchange Commission. Stillwater LLC, a limited liability company and a
beneficial owner of more than five percent of the outstanding shares of eMagin's
common stock, held an aggregate of $4 million of the notes converted. Ginola
Limited, a beneficial owner of more than five percent of the outstanding shares
of eMagin's common stock, held an aggregate of $1.3 million of the notes
converted.
42
In connection with the above conversion, eMagin also entered into a Registration
Rights Agreement with the holders of the Notes providing the holders with
certain registration rights under the Securities Act of 1933, as amended, with
respect to the common stock issuable upon exercise of the warrants.
eMagin is party to a financial advisory and investment banking agreement with
Larkspur Capital Corporation. Paul Cronson, a director of eMagin, is a founder
and shareholder of Larkspur Capital Corporation. Larkspur Capital Corporation
received as compensation for financial advisory and investment banking services
in connection with the January 2004 private placement a cash fee of 6 3/4% of
the funds raised for a fee of $283,503 and warrants to purchase eMagin shares of
common stock equal to 2.5% of the cash netted to eMagin for a total of 43,651
common stock purchase warrants exercisable at $2.41 per share.
In August 2004, eMagin and the certain of the holders of its outstanding Class
A, B and C common stock purchase warrants entered into an agreement pursuant to
which eMagin and the holders of the warrants agreed to the re-pricing and
exercise of an aggregate of 500,952, 862,085 and 736,857 currently outstanding
Class A, B and C common stock purchase warrants. As a condition to the
transaction, the holders of the warrants agreed to limit the right of
participation that they were granted pursuant to Section 4.11 of the Securities
Purchase Agreement, dated January 9, 2004, under which they originally purchased
such securities.
Specifically, the Company agreed to lower the exercise price of such warrants
from $1.74, $1.74 and/or $1.90, respectively, to $.90 per share, in
consideration of the holders agreeing to: (i) limit their right of participation
with respect to any proposed financing transaction to the maximum number of
shares that AMEX will allow the Investors to purchase in any subsequent
financing without the Company being required to seek shareholder approval
(provided, however, that in no event will the participation of all investors of
the January 2004 financing in any such subsequent financing exceed 35% of such
financing); and (ii) immediately exercise the re-priced Class A, B and/or C
common stock purchase warrants.
As a result of the transaction, the holders have agreed to re-price and
exercise, for an aggregate of approximately $1,889,900, an aggregate of
2,099,894 Class A, B and/or C common stock purchase warrants.
The Class B common stock purchase warrants were due to expire on August 12,
2004, while the Class A and C common stock purchase warrants remain exercisable
until January 9, 2009 and February 12, 2005, respectively. Following the
completion of the transaction, the Company continues to have outstanding an
aggregate of 1,213,352 and 184,212 Class A and C common stock purchase warrants,
respectively. The remaining outstanding unexercised Class A and C common stock
purchase warrants continue to be exercisable as per their original terms.
On October 21, 2004, eMagin entered into a Securities Purchase Agreement
pursuant to which we sold and issued 10,259,524 shares of common stock, par
value $0.001 per share, and Series F Common Stock Purchase Warrants to purchase
our common stock to purchasers who are a party to the Securities Purchase
Agreement for an aggregate purchase price of $10,772,500. The common shares were
priced at $1.05. The common shares, Series F Warrants and common shares issuable
upon exercise of the warrants were drawn-down off of a shelf registration
statement which was filed by us on May 5, 2004, and declared effective by the
Securities and Exchange Commission on June 10, 2004.
The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
to purchase up to 1,370,238 shares of common stock at an exercise price of $1.21
per share, subject to adjustment upon the occurrence of specific events,
including stock dividends, stock splits, combinations or reclassifications of
our common stock or distributions of cash or other assets. In addition, the
Series F Warrants contain provisions protecting against dilution resulting from
the sale of additional shares of our common stock for less than the exercise
price of the Series F Warrants, or the market price of the common stock, on the
date of such issuance or sale. The Series F Warrants do not entitle the holders
to any voting or other rights as a stockholder until such Series F Warrants are
exercised and common stock is issued. Under the terms of the offering, in no
event shall any holder of the Series F Warrants become the beneficial owner of
more than 4.99% of the number of shares of our common stock outstanding
immediately after giving effect to such issuance. An exercise that is limited by
this provision may be permitted at a later date if, on such date, such exercise
would not cause such beneficial ownership to exceed 4.99%. This limitation may
be waived, in whole or in part, by a holder of the Series F Warrants upon, at
the election of such holder, not less than 61 days' prior notice to us, and the
provisions of this limitation shall continue to apply until such 61st day (or
such later date, as determined by such holder, as may be specified in such
notice of waiver); provided, however, that four of the investors in this
offering delivered a waiver of this limitation to us prior to the closing date
of this offering, which waiver took effect as of the closing date. In addition,
in no event shall the Company issue to holders of the Series F Warrants, without
first obtaining shareholder approval, shares of common stock which, in the
aggregate, would exceed 19.9% of the number of shares outstanding on the closing
date. The rights of the holder of the Series F Warrants are more fully set forth
in Exhibit 4.1 to our Form 8-K filed with the SEC on October 26, 2004.
43
On October 29, 2004, eMagin entered into a Securities Purchase Agreement
(pursuant to which we sold and issued, on November 3, 2004, 2,740,476 shares of
common stock, par value $0.001 per share, and Series F Common Stock Purchase
Warrants to purchase our common stock to purchasers who are a party to the
Securities Purchase Agreement for an aggregate purchase price of approximately
$2,877,500. The common shares were priced at $1.05. The Company also issued
75,000 shares to its legal counsel in consideration of legal services rendered
in connection with a recently completed offering. The common shares, Series F
Warrants, common shares issuable upon exercise of the warrants and common shares
issued to its legal counsel were drawn-down off of a shelf registration
statement which was filed by us on May 5, 2004, and declared effective by the
Securities and Exchange Commission on June 10, 2004. The Series F Warrants were
issued under the same terms as our October 21, 2004 financing described above.
44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares known to be owned by all
persons who own at least 5% of eMagin's outstanding common stock, the Company's
directors and the executive officers, and the directors and executive officers
as a group as of January 5, 2005, unless otherwise noted. Unless otherwise
indicated, the stockholders listed in the table have sole voting and investment
power with respect to the shares indicated.
Common Stock Percentage of
Name of Beneficial Owner Beneficially Owned Common Stock**
------------------------ ------------------ --------------
Stillwater LLC (1)................................................... 14,883,624 17.2%
George Haywood (2)................................................... 10,169,952 12.2%
Ginola Limited (3)................................................... 8,870,788 10.7%
Gary W. Jones (4)................................................... 8,595,458 10.3%
Susan K Jones (4)................................................... 8,595,458 10.3%
Rainbow Gate (5)..................................................... 2,232,783 2.8%
Dr. K.C. Park (6).................................................... 1,225,247 1.5%
Jack Rivkin (7)...................................................... 1,213,896 1.5%
Ogier Trustee (Jersey) Limited (8)................................... 976,200 1.2%
Paul Cronson (9)..................................................... 506,657 *
Claude Charles (10).................................................. 315,000 *
Chelsea Trust Company Limited ....................................... 119,116 *
Jack Goldman (11).................................................... 107,500 *
Adm. Thomas Paulsen (12)............................................. 85,000 *
Dr. Jill Wittels (13)................................................ 85,000 *
John Atherly (14).................................................... 66,667 *
All executive officers and directors Officers as a
group (consisting of 9 individuals) (15) ............................ 12,200,425 14.8%
----------------------------------------------------------
* Less than 1% of the outstanding common stock
** Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of January 5, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Percentages are
based on a total of 79,603,816 shares of common stock outstanding on January 5,
2005, and the shares issuable upon the exercise of options and warrants
exercisable on or within 60 days of January 5, 2005, as described below.
(1) This figure represents:
(i) 8,067,837 shares owned by Stillwater LLC, which includes 1,646,054 shares
owned by Rainbow Gate Corporation, in which the sole member of Stillwater LLC is
the investment manager of Rainbow Gate Corporation;
(ii) warrants held by Stillwater LLC to purchase 6,815,787 shares, which
includes:
(a) a warrant to purchase 300,000 shares that may not be exercised by Stillwater
LLC so long as Stillwater LLC is the beneficial owner, directly or indirectly,
of more than ten percent (10%) of the common stock of eMagin for purposes of
Section 16 of the Securities Exchange Act of 1934, and
(b) warrants to purchase 586,729 shares held by Rainbow Gate Corporation, in
which the sole member of Stillwater LLC is the investment manager of Rainbow
Gate Corporation;
(2) This figure includes 3,586,664 common shares underlying warrants.
(3) This figure represents:
(i) 5,734,624 shares owned by Ginola Limited, which include 1,646,054 shares
held indirectly by Rainbow Gate Corporation, 650,800 shares owned by Ogier
Trustee(Jersey) Limited, as trustee, 119,116 shares owned by Chelsea Trust
Company Limited, as trustee, and 396,223 shares owned by Crestflower
Corporation. Ginola Limited disclaims beneficial ownership of the shares owned
by Crestflower Corporation, Ogier Trustee (Jersey) Limited, as trustee, and
Chelsea Trust Company Limited, as trustee; and
45
(ii) warrants held by Ginola Limited to purchase 3,136,164 common shares, which
includes warrants to purchase 586,729 shares held by Rainbow Gate Corporation,
in which the sole shareholder of Ginola Limited is also the sole shareholder of
Rainbow Gate Corporation, and warrants to purchase 325,400 shares owned by Ogier
Trustee (Jersey) Limited, as trustee. Ginola Limited disclaims beneficial
ownership of the shares owned by Ogier Trustee (Jersey) Limited, as trustee.
(4) This figure represents shares owned by Gary Jones and Susan Jones who are
married to each other, including (i) 1,760,604 shares of common stock issuable
upon exercise of stock options held by Gary Jones and (ii) 1,835,877shares of
common stock issuable upon exercise of stock options held by Susan Jones. This
does not include (i) 900,000 shares underlying options owned by Gary Jones which
are not exercisable within 60 days of January 5, 2005; and (ii) 562,500 shares
underlying options owned by Susan Jones which are not exercisable within 60 days
of January 5, 2005.
(5) This figure includes 586,729 shares underlying warrants.
(6) This figure includes 1,102,318 common stock shares issuable upon exercise of
stock options, and does not include 225,000 shares underlying options owned by
Dr. K. C. Park which are not exercisable within 60 days of January 5, 2005.
(7) This figure represents 547,986 shares owned by Mr. Rivkin, warrants held by
Mr. Rivkin to purchase 335,910 shares of common stock, and 330,000 common stock
shares issuable upon exercise of stock options.
(8) This figure includes 325,400 shares underlying warrants.
(9) This figure represents 190,984 shares owned by Mr. Cronson, 215,673, shares
underlying warrants, and 100,000 shares underlying options held directly and
indirectly by Paul Cronson. This includes (i) 120,974 common stock shares and
42,857 shares underlying warrants held indirectly by a family member of Paul
Cronson; and (ii) 43,651 shares underlying warrants held indirectly by Larkspur
Corporation of which he is the Managing Director.
(10) This figure represents shares underlying options.
(11) This figure represents shares underlying options.
(12) This figure represents shares underlying options.
(13) This figure represents shares underlying options.
(14) This figure represents shares underlying options. This figure does not
include 683,333 shares of common stock issuable upon exercise of stock that are
not presently exercisable and are not exercisable within 60 days of January 5,
2005.
(15) This figure includes (i) warrants to purchase 551,583 shares of common
stock, and (ii) 5,787,966 shares of common stock issuable upon exercise of stock
options.
46
DESCRIPTION OF SECURITIES BEING REGISTERED
COMMON STOCK
We are authorized to issue up to 200,000,000 shares of Common Stock, par value
$.001. As of January 5, 2005, there were 79,603,816 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Continental Stock Transfer & Trust Company of New York, as
independent transfer agent and registrar.
PREFERRED STOCK
We are authorized to issued up to 10,000,000 shares of preferred stock. The
shares of preferred stock may be issued in series, and shall have such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issuance of such
stock adopted from time to time by the board of directors. The board of
directors is expressly vested with the authority to determine and fix in the
resolution or resolutions providing for the issuances of preferred stock the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent now
or hereafter permitted by the laws of the State of Delaware.
WARRANTS
On January 9, 2004, eMagin Corporation and several accredited institutional and
private investors entered into a Securities Purchase Agreement whereby such
investors purchased an aggregate of 3,333,363 shares of common stock for an
aggregate purchase price of $4,200,039.
The shares of common stock were priced at a 20% discount to the average closing
price of the stock from December 30, 2003 to January 6, 2004, which ranged from
$1.38 to $1.94 per share during the period for an average closing price of $1.58
per share, making the discounted price $1.26 per share. In addition, the
investors received warrants to purchase an aggregate of 2,000,018 shares of
common stock (subject to anti-dilution adjustments) exercisable at a price of
$1.74 per share for a period of five (5) years. The warrants were priced at a
10% premium to the average closing price of the stock for the pricing period.
eMagin also issued additional warrants to the investors to acquire an aggregate
of 2,312,196 shares of common stock. 1,206,915 of such warrants are exercisable,
within 6 months from the effective date of the registration statement covering
these securities, at a price of $1.74 per share (a 10% premium to the average
closing price of the stock for the pricing period), and 1,105,281 of such
warrants are exercisable within 12 months from the effective date of the
registration statement covering these securities, at a price of $1.90 per share
(a 20% premium to the average closing price of the stock for the pricing
period).
This prospectus covers the resale by the investors of the above-referenced
common stock and common stock underlying the warrants.
47
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize the
company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any state
or the United States;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o through the writing of options on the shares
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
48
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
49
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering After the Offering
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Total Shares
Name Number Percent Registered Number Percent
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Langley Partners, L.P. (1) 910,179 1.1% 910,179 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Spectra Capital Management, 910,179 1.1% 910,179 - 0 - 0.0 %
LLC (2)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Truk Opportunity Fund, LLC 630,753 % 630,753 - 0 - 0.0 %
(3)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Ellis International Ltd. (4) 546,107 % 546,107 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Stonestreet, LP (5) 546,107 % 546,107 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
SRG Capital (6) 366,984 * 366,984 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Platinum Partners Value 364,072 * 364,072 - 0 - 0.0 %
Arbitrage Fund LP(7)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
RHP Master Fund, Ltd.(8) 364,072 * 364,072 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Gabriel Capital, L.P. (9) 364,071 * 364,071 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
AS Capital Partners LLC(10) 273,055 * 273,055 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
OTAPE Investments LLC(11) 273,055 * 273,055 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
TCMP3 Partners (12) 272,944 * 272,944 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Basso Equity Opportunity 229,365 * 229,365 - 0 - 0.0 %
Holding Fund Ltd. (13)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Basso Multi-Strategy Holding 229,365 * 229,365 - 0 - 0.0 %
Fund Ltd. (13)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Andrew Burton First Trust & 182,036 * 182,036 - 0 - 0.0 %
Co. Money Purchase Pension
Plan (14)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
West End Convertible Fund 182,036 * 182,036 - 0 - 0.0 %
L.P. (15)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Whalehaven Fund Ltd. (16) 182,036 * 182,036 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Bristol Investment Fund, 182,036 * 182,036 - 0 - 0.0 %
Ltd. (17)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Gamma Opportunity Capital 182,036 * 182,036 - 0 - 0.0 %
Partners LP (18)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Clearview International 182,036 * 182,036 - 0 - 0.0 %
Investment Ltd. (19)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Trust u/w Ella Grey, Mary 182,036 * 182,036 - 0 - 0.0 %
Cronson (20)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Cohanzik Partners, L.P. (21) 91,017 * 91,017 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
U.S. Display Consortium 9,058 * 9,058 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
7,654,635 14.3% 7,654,635 - 0 - 0.0 %
------------------------------ ===================== ==================== =================== ================= =============
50
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible preferred stock is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Represents shares of common stock where the original 513,354 warrants have
been exercised.
(2) Represents (i) 540,504 shares of common stock; (ii) 238,095 shares of common
stock underlying warrants that are currently exercisable until January 2009 at
an exercise price of $1.05 per share; and (iii) 131,580 shares of common stock
underlying warrants that are currently exercisable until twelve months after
this prospectus is declared effective by the Securities and Exchange Commission
at an exercise price of $1.90 per share. This entity is an affiliated of a
broker-dealer and acquired these shares in the ordinary course of business and
not with a view to distribute.
(3) Represents (i) 465,753 shares of common stock; and (ii) 165,000 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(4) Represents (i) 403,250 shares of common stock and (ii) 142,857 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(5) Represents shares of common stock where the original 308,012 warrants have
been exercised.
(6) Represents (i) 270,984 shares of common stock and (ii) 96,000 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(7) Represents shares of common stock where the original 205,342 warrants have
been exercised.
(8) Represents (i) 268,834 shares of common stock and (ii) 95,238 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(9) Represents (i) 268,833 shares of common stock and (ii) 95,238 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(10) Represents (i) 201,626 shares of common stock and (ii) 71,429 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(11) Represents (i) 201,626 shares of common stock and (ii) 71,429 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(12) Represents (i) 201,544 shares of common stock and (ii) 71,400 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(13) Represents shares of common stock where the original 129,365 warrants have
been exercised.
(14) Represents (i) 108,101 shares of common stock; (ii) 47,619 shares of common
stock underlying warrants that are currently exercisable until January 2009 at
an exercise price of $1.05 per share; and (iii) 26,316 shares of common stock
underlying warrants that are currently exercisable until twelve months after
this prospectus is declared effective by the Securities and Exchange Commission
at an exercise price of $1.90 per share.
(15) Represents (i) 134,417 shares of common stock and (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(16) Represents shares of common stock where the original 102,671 warrants have
been exercised.
(17) Represents shares of common stock where the original 102,671 warrants have
been exercised.
51
(18) Represents (i) 155,720 shares of common stock and (ii) 26,316 shares of
common stock underlying warrants that are currently exercisable until twelve
months after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(19) Represents shares of common stock where the original 102,671 warrants have
been exercised.
(20) Represents (i) 134,417 shares of common stock and (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
(21) Represents (i) 67,208 shares of common stock and (ii) 23,809 shares of
common stock underlying warrants that are currently exercisable until January
2009 at an exercise price of $1.05 per share.
52
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
A member of Sichenzia Ross Friedman Ference LLP, Richard Friedman, will receive
up to 200,000 shares of common stock, from eMagin, over the next 8 months for
general corporate and litigation matters.
EXPERTS
Eisner LLP, Independent Registered Public Accountants, have audited, as set
forth in their report thereon appearing elsewhere herein, our financial
statements at December 31, 2003, and for the year then ended that appear in the
prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the auditors' opinion based on their expertise in
accounting and auditing.
Grant Thornton LLP, Independent Registered Public Accountants, have audited, as
set forth in their report thereon appearing elsewhere herein, our financial
statements at December 31, 2002, and for the year then ended that appear in the
prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the auditors' opinion based on their expertise in
accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of eMagin Corporation, filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 that require us to file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information may be inspected at public reference facilities of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549. Copies of such
material can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed
rates. The public could obtain information on the operation of the public
reference room by calling the Securities and Exchange Commission at
1-800-SEC-0330. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
53
FINANCIAL STATEMENT INDEX
FINANCIAL STATEMENTS FOR eMAGIN CORPORATION Page
For the Three and Nine Months ended September 30, 2004 and September 30, 2003
Condensed Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003 F-2
Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30,
2004 and 2003 (unaudited) F-3
Condensed Consolidated Statements of Cash Flows for the Three and Nine Months ended September 30, 2004
and 2003 (unaudited) F-4
Condensed Consolidated Statement of Changes in Stockholder Equity (Unaudited) F-5
Selected Notes to Condensed Consolidated Financial Statements (Unaudited) F-6
Report of Independent Registered Public Accounting Firm - Eisner LLP F-11
Report of Independent Registered Public Accounting Firm - Grant Thornton LLP F-12
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-13
Consolidated Statements of Operations for the years ended December 31, 2003 and 2002 and From
Inception to Date F-14
Statement of Changes in Stockholders' Equity from Inception to Date F-15
Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002 and From
Inception to Date F-16
Notes to the Consolidated Financial Statements F-17
eMAGIN CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2004 2003
-------------------------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 4,051,286 $ 1,053,895
Trade receivables, net ........................................ 869,622 768,537
Unbilled costs and estimated profits on contracts in progress . -- 75,359
Inventory ..................................................... 1,457,907 275,417
Prepaid expenses and other current assets ..................... 617,064 287,958
-------------- --------------
Total current assets ....................................... 6,995,879 2,461,166
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: ............................ 3,827,649 3,350,930
Less: Accumulated depreciation .................................. (2,604,631) (2,149,991)
-------------- --------------
Equipment and leasehold improvements, net ........................ 1,223,018 1,200,939
INTANGIBLE ASSETS ................................................ 53,819 --
Less: Accumulated amortization ................................... (1,378) --
-------------- --------------
Intangible assets, net ........................................... 52,441 --
OTHER LONG-TERM ASSETS ........................................... 36,258 86,907
-------------- --------------
Total assets ............................................... $ 8,307,596 $ 3,749,011
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 736,284 $ 234,869
Accrued payroll and benefits .................................. 541,827 952,850
Other accrued expenses ........................................ 211,967 988,569
Advanced payments ............................................. 41,903 122,362
Current portion of long term debt ............................. 13,588 38,184
Other current liabilities ..................................... 34,762 18,008
-------------- --------------
Total current liabilities .................................. 1,580,331 2,354,842
Capitalized lease obligations .................................... 25,887 36,257
Notes payable and short-term debt subsequently converted to equity -- 6,124,451
-------------- --------------
Total liabilities .......................................... 1,606,218 8,515,550
-------------- --------------
SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY):
Common Stock, par value $0.001 per share
Shares authorized - 200,000,000
Shares issued and outstanding - 66,257,590 and 42,695,412 .. 66,258 42,694
Additional paid-in capital .................................... 151,636,859 131,598,910
Deferred compensation ......................................... -- (87,565)
Accumulated deficit ........................................... (145,001,739) (136,320,578)
-------------- --------------
Total shareholders' equity (capital deficiency) ............ 6,701,378 (4,766,539)
-------------- --------------
Total liabilities and shareholders' equity ................. $ 8,307,596 $ 3,749,011
============== ==============
See selected notes to financial statements.
F-2
eMAGIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------------------------------------------------------------------
REVENUE:
Contract revenue $ 108,000 $ 275,504 $ 108,000 $ 275,504
Product revenue, net of returns 980,928 472,983 2,967,151 1,245,353
------------------------------------------------------------------------------
Total revenue 1,088,928 748,487 3,075,151 1,520,857
------------------------------------------------------------------------------
COST OF GOODS SOLD:
Direct cost of goods sold 615,890 393,660 1,632,323 1,665,969
Indirect cost of goods sold 992,102 945,779 2,875,837 1,841,145
------------------------------------------------------------------------------
Total cost of goods sold 1,607,992 1,339,439 4,508,160 3,507,114
------------------------------------------------------------------------------
Gross Loss (519,064) (590,952) (1,433,009) (1,986,257)
COSTS AND EXPENSES:
Research and development 359,453 571 443,349 22,419
Stock based compensation 1,896,011 87,565 2,095,407
Selling, general and administrative 902,389 732,438 2,753,580 2,614,918
------------------------------------------------------------------------------
Total costs and expenses, net 1,261,842 2,629,020 3,284,494 4,732,744
------------------------------------------------------------------------------
Interest income (expenses) (568,561) (441,749) (3,963,658) (717,735)
Gain on payable forgiveness - 2,752,570 - 4,637,993
------------------------------------------------------------------------------
Other income (expenses), net (568,561) 2,310,821 (3,963,658) 3,920,258
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Net loss $ (2,349,467) $ (909,151) $ (8,681,161) $ (2,798,743)
==============================================================================
Basic and diluted loss per common share $ (0.04) $ (0.02) $ (0.14) $ (0.08)
==============================================================================
Weighted average common shares outstanding 65,260,205 38,360,090 60,277,581 34,404,367
==============================================================================
See selected notes to financial statements.
F-3
eMAGIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
ended ended
September 30, September 30,
2004 2003
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(8,681,161) $(2,798,743)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization ............................ 454,640 365,535
Amortization of intangibles ............................. 1,378 331,442
Amortization of financing fees ........................... 7,863 69,432
Bad debt expense ......................................... 33,656 --
Debt discount and charge for beneficial conversion feature 102,214 103,899
Non-cash charge for stock based compensation ............. 87,565 2,095,407
Non-cash interest related charges ........................ 724,987 384,368
Non-cash charge for services received .................... 8,400 443,252
Non-cash financing expense ............................... 3,180,000 --
Non-cash debt restructure ................................ -- (4,637,993)
Changes in operating assets and liabilities:
Trade receivables .................................... (59,381) (545,353)
Unbilled costs and estimated profits on contracts in
progress ............................................ -- 50,000
Inventory ............................................ (982,768) (113,258)
Prepaid expenses and other current assets ............ (318,850) (312,833)
Other long-term assets ............................... (31,851) 61,960
Advanced payment on contracts to be completed ........ (80,459) 59,385
Deferred revenue ..................................... -- (29,900)
Accounts payable and accrued expenses ................ 53,882 (560,665)
Other current liabilities ............................ 16,754 282,676
---------------------------
Net cash used in operating activities .......... (5,483,131) (4,751,389)
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment ................................... (476,175) (880,572)
---------------------------
Net cash used in investing activities .......... (476,175) (880,572)
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs 3,916,536 --
Equity issuance cost...................................... (161,264) --
Proceeds from exercise of stock options and warrants ..... 5,239,687 986,054
Proceeds from long and short term debt ................... -- 6,000,000
Payments for capital leases .............................. (38,262) --
---------------------------
Net cash provided by financing activities ...... 8,956,697 6,927,676
---------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................. 2,997,391 1,295,715
CASH AND CASH EQUIVALENTS, beginning of period .............. 1,053,895 82,951
---------------------------
CASH AND CASH EQUIVALENTS, end of period .................... $ 4,051,286 $ 1,378,666
===========================
Supplemental Cash Flow Disclosure:
Conversion of debt to equity ................................ $ 6,894,452 $ 4,845,537
Payments of A/P through issuance of stock ................... 202,875 --
Stock issued for prepaid services ........................... 186,257 748,116
Cash payments of interest ................................... 5,172 --
See selected notes to financial statements.
F-4
eMAGIN CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(Unaudited)
Additional
Common Stock Deferred paid-in Accumulated
Shares $ Compensation Capital Deficit Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 42,695,412 $ 42,694 $ (87,565) $ 131,598,910 $(136,320,578) $ (4,766,539)
Conversion of debt to equity 11,394,621 11,395 6,883,058 6,894,453
Stock options exercised 5,221,052 5,221 1,379,263 1,384,484
Sale of equity 3,333,363 3,334 3,913,204 3,916,538
Issuance of warrants for debt 3,180,000 3,180,000
conversion
Stock warrants exercised 3,358,691 3,359 4,285,149 4,288,508
Issuance of common stock for 254,451 255 397,275 397,530
services
Amortization of deferred 87,565 87,565
compensation
Net loss for period (8,681,161) (8,681,161)
------------------------------ ----------- ----------- ------------ -------------- -------------- --------------
Balance, September 30, 2004 66,257,590 $ 66,258 $ - $ 151,636,859 $(145,001,739) $ 6,701,378
=========== =========== ============ ============== ============== ==============
See selected notes to financial statements.
F-5
eMAGIN CORPORATION
Selected Notes to Consolidated Financial Statements
Note 1 - ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation. Certain information and footnote disclosure
normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted pursuant
to instructions, rules and regulations prescribed by the Securities and Exchange
Commission. The company believes that the disclosures provided herein are
adequate to make the information presented not misleading when these unaudited
interim condensed consolidated financial statements are read in conjunction with
the audited consolidated financial statements contained in the company's Annual
Report on Form 10-KSB for the year ended December 31, 2003. The results of
operations for the period ended September 30, 2004 are not necessarily
indicative of the results to be expected for the full year.
Stock-Based Compensation Expense
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB No. 25,
when the exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recorded. The
Company discloses information relating to the fair value of stock-based
compensation awards in accordance with Statements of Financial Accounting
Standards No.123, "Accounting for Stock-Based Compensation" And No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure". The
following table illustrates the effect on net loss and loss per share as if the
Company had applied the fair value to all awards. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants in the second quarter of
2004 and 2003, respectively: (1) average expected volatility of 99% and 162%,
(2) average risk-free interest rates of 3.79% and 3.74%, and (3) average
expected lives of seven years.
The pro forma amounts that are disclosed reflect the portion of the fair value
of awards that were earned for the three and nine months ended September 30,
2004 and 2003.
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
For the three and nine months ended September Three Months Three Months Nine Months Nine Months
30, 2004 2003 2004 2003
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
Net loss applicable to common stockholders', $ (2,349,467) $(909,151) $ (8,681,161) $ (2,798,743)
as reported
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
Add: Stock based employee compensation
expense included in reported net loss - - - -
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
Deduct: Stock-based employee compensation (297,750) (316) (7,628,869) (1,486,025)
expense determined under fair value method
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
Pro forma net loss $ (2,647,217) $(909,467) $ (16,310,030) $ (4,284,768)
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
Net loss per share applicable to common stockholders':
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
Basic and diluted, as reported $ (0.04) $ (0.02) $ (0.14) $ (0.08)
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
Basic and diluted, pro forma $ (0.04) $ (0.02) $ (0.27) $ (0.12)
----------------------------------------------- ----------------- -------------------- -------------------- --------------------
Note 2 - NATURE OF BUSINESS
We design and manufacture miniature display modules, which we refer to as
OLED-on-silicon-microdisplays, primarily for incorporation into the products of
other manufacturers. Microdisplays are typically smaller than a postage stamp,
but when viewed through a magnifier they can contain all of the information
appearing on a high-resolution personal computer screen. Our microdisplays use
organic light emitting diodes, or OLEDs, which emit light themselves when a
current is passed through them. Our technology permits OLEDs to be coated onto
silicon chips to produce high resolution OLED-on-silicon microdisplays.
Note 3 - REVENUE AND COST RECOGNITION
Revenue is recognized when products are shipped to customers, net of allowances
for anticipated returns. The Company's revenue-earning activities generally
involve delivering products and revenues are considered to be earned when the
Company has completed the process by which it is entitled to such revenues.
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the selling price is fixed or determinable and collection
is reasonably assured.
F-6
The Company also earns revenues from certain of eMagin's R&D activities under
both firm fixed-price contracts and cost-type contracts, including some
cost-plus-fee contracts. Revenues relating to firm fixed-price contracts are
generally recognized on the percentage-of-completion method of accounting as
costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts
include costs incurred plus a portion of estimated fees or profits based on the
relationship of costs incurred to total estimated costs. Contract costs include
all direct material and labor costs and an allocation of allowable indirect
costs as defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other party. Amounts
can typically be billed on a bi-monthly basis.
Note 4 - RECEIVABLES
The majority of our commercial accounts receivable are due from Original
Equipment Manufacturers ("OEM"s). Credit is extended based on evaluation of a
customers' financial condition and, generally, collateral is not required.
Accounts receivable are payable in U.S. dollars, are due within 30-90 days and
are stated at amounts due from customers net of an allowance for doubtful
accounts. Any account outstanding longer than the contractual payment terms is
considered past due. The Company determines the allowance by considering a
number of factors, including the length of time trade accounts receivable are
past due, eMagin's previous loss history, the customer's current ability to pay
its obligation, and the condition of the general economy and the industry as a
whole. The Company writes off accounts receivable when they are deemed
uncollectible.
Receivables consist of the following for the periods ending:
September 30, 2004 December 31, 2003
------------------ -----------------
Trade receivables $ 1,161,689 $ 899,174
Contract receivables 194,951 173,809
Unbilled receivables - 75,359
------------------ -----------------
Total 1,356,640 1,148,342
Less allowance for doubtful
accounts (487,018) (304,446)
------------------ -----------------
Net receivables $ 869,622 $ 843,896
================== =================
Note 5 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
Note 6 - NET LOSS PER COMMON SHARE
In accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
and ("diluted EPS") were computed by dividing the net loss by the weighted
average number of common shares outstanding, excluding any potential dilution.
Common equivalent shares totaling 11,366,619 and 32,828,735 have been excluded
from the computation of diluted EPS for the three and nine months ended
September 30, 2004 and 17,304,028 and 19,091,435 have been excluded from the
computation of diluted EPS for the three and nine months ended September 30,
2003, respectively as their inclusion would be antidilutive.
Note 7 - INVENTORIES
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in first-out method. The Company reviews the value of its inventory and
reduces the inventory value to its net realized value based upon current market
prices and contracts for future sales.
The components of inventories are as follows for the periods ending:
September 30, 2004 December 31, 2003
------------------ -----------------
Raw materials $ 1,138,370 $ 20,416
Work in process 131,827 43,750
Finished goods 187,710 211,251
------------------ -----------------
Total Inventory $ 1,457,907 $ 275,417
================== =================
F-7
Note 8 - DEBT
The debt consisted of the following for the periods ending:
September 30, 2004 December 31, 2003
------------------ -----------------
a Current portion of long
term debt $ 13,588 $ 38,184
b Restructuring Agreement
and Original Secured Notes - 6,124,451
c Long-term capitalized
lease obligations 25,887 36,257
------------------ -----------------
Total debt $ 39,475 $ 6,198,892
================== =================
a) This amount represents the amount due to Citicorp Leasing over the next 12
months in lease payments for equipment.
b) In February 2004, we entered into an agreement whereby the holders of our
Secured Convertible Notes (the "Notes"), which were due in November 2005, agreed
to an early conversion of all of the $7.825 million principal amount of the
Notes, together with the $742,424 of accrued interest on the Notes, into
11,394,621 shares of common stock of eMagin.
In consideration of the Noteholders agreeing to the early conversion of the
Notes, eMagin issued the Noteholders warrants to purchase an aggregate of 2.5
million shares of common stock (the "Warrants"), which Warrants are exercisable
at a price of $2.76 per share. 1.5 million of the Warrants are exercisable until
December 31, 2005. The remaining 1.0 million of the Warrants are exercisable
until June 10, 2008.
c) This amount is due to Citicorp Leasing as long-term debt for lease payments
for equipment with this balance to be paid in 2005.
Note 9 - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 200,000,000 shares with a
par value of $0.001 per share.
For the three months ended September 30, 2004, the Company received $1,926,795
for the exercise of 2,123,694 warrants. For the nine months ended September 30,
2004, the Company received a total of $5,239,687 for the exercise of 5,221,052
options and 3,358,690 warrants.
In August 2004, the Company and certain of the holders of its outstanding Class
A, B and C common stock purchase warrants entered into an agreement pursuant to
which the Company and the holders of the warrants agreed to the $0.90 re-pricing
and exercise of Class A, B and C common stock purchase warrants. As a condition
to the transaction, the holders of the warrants agreed to limit the right of
participation that they were granted in January 9, 2004. As a result of the
transaction, the holders agreed to re-price and exercise approximately
$1,889,900, for an aggregate of 2,099,894 Class A, B and/or C common stock
purchase warrants. The Company recorded $594,568 in non-cash interest expense
for the Black Scholes calculation of the change in warrant valuation.
The Company issued 162,412 and 254,451 shares of common stock for the payment of
$162,412 and $397,531, respectively, for the three and nine months ended
September 30, 2004, for services rendered and to be rendered in the future. As
such, the Company recorded the fair value of the services rendered in selling,
general and administrative expenses, services to be rendered as prepaid expenses
and reduction of accounts payable for services previously rendered in the
accompanying unaudited consolidated statements of operations.
Note 10 - STOCK COMPENSATION
As of September 30, 2004, the Company has outstanding options to purchase
12,233,306 shares. In 2000 the Company issued options below fair market value.
The Company recorded $87,565 in expense for the nine months ended September 30,
2004 for the amortization of those options. The transaction was fully amortized
in the second quarter of 2004, so no additional expense will be recorded. The
amount was recorded in Selling, General & Administrative expenses.
Note 11 - COMMITMENTS AND CONTINGENCIES
[a] Royalty payments:
The Company, in accordance with a royalty agreement, is obligated to make
F-8
minimum annual royalty payments. Under this agreement, the Company must pay a
certain percentage of net sales of certain products, which percentages are
defined in the agreement. The percentages are on a sliding scale depending on
the amount of sales generated. Any minimum royalties paid may be credited
against the amounts due based on the percentage of sales. The royalty agreement
terminates upon the expiration of the last-to-expire issued patent.
In the three and nine months ended September 30, 2004, $60,434 and $155,293 was
recorded in royalty expense.
[b] Contractual obligations:
We currently lease space from IBM for $78,045 per month that houses our
principal executive offices, our equipment for OLED microdisplay fabrication and
research and development, as well as our assembly operations and storage. We
currently occupy such space on a month-to-month basis. We are currently in
negotiations with IBM for a new lease. No assurance can be given that we will
execute a new lease, or that such new lease will be on terms that are favorable
to us. In the event that we are forced to locate new space, we may experience a
disruption in our operations, which could have a material adverse affect on our
results of operations.
NOTE 12 - RECLASSIFICATIONS
Certain amounts in the September 30, 2003 financial statements have been
reclassified to conform to the September 30, 2004 classification.
NOTE 13 - SUBSEQUENT EVENTS
On October 21, 2004, we entered into a Securities Purchase Agreement, pursuant
to which we sold and issued 10,259,524 shares of common stock, par value $0. 001
per share, and series F common stock purchase warrants to purchase our common
stock to purchasers for an aggregate purchase price of $10,772,500. The Common
Shares were priced at $1.05. The Common Shares and the shares underlying the
warrants were drawn-down off of a shelf registration statement which was filed
by us on May 5, 2004, and declared effective by the Securities and Exchange
Commission on June 10, 2004. Net proceeds received after deducting expenses was
approximately $9.75 million.
The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
to purchase up to 5,129,762 shares of common stock at an exercise price of $1.21
per share, subject to adjustment upon the occurrence of specific events,
including stock dividends, stock splits, combinations or reclassifications of
our common stock or distributions of cash or other assets. In addition, the
Series F Warrants contain provisions protecting against dilution resulting from
the sale of additional shares of our common stock for less than the exercise
price of the Series F Warrants, or the market price of the common stock, on the
date of such issuance or sale.
On October 28, 2004, we entered into a Securities Purchase Agreement, pursuant
to which we sold and issued 2,740,476 shares of common stock, par value $0. 001
per share, and series F common stock purchase warrants to purchase our common
stock to purchasers for an aggregate purchase price of $2,877,500. The Common
Shares were priced at $1.05. The Common Shares and shares underlying the
warrants were drawn-down off of a shelf registration statement which was filed
by us on May 5, 2004, and declared effective by the Securities and Exchange
Commission on June 10, 2004. Net proceeds received after deducting expenses was
approximately $2.65 million.
The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
to purchase up to 1,370,238 shares of common stock at an exercise price of $1.21
per share, subject to adjustment upon the occurrence of specific events,
including stock dividends, stock splits, combinations or reclassifications of
our common stock or distributions of cash or other assets. In addition, the
Series F Warrants contain provisions protecting against dilution resulting from
the sale of additional shares of our common stock for less than the exercise
price of the Series F Warrants, or the market price of the common stock, on the
date of such issuance or sale.
We paid a Placement Agent a fee equal to 6% of the gross proceeds of these
offerings and agreed to reimburse them for reasonable expenses up to $50,000,
incurred in connection with the offerings.
In addition, we engaged Larkspur Capital Corporation to act as an adviser in
connection with the sale of these securities. For such services, we paid
Larkspur Capital Corporation a fee equal to 1% of the gross proceeds of these
offerings (see Note - 14).
As a result of the above transaction, the outstanding Series A Common Stock
Purchase Warrants that were issued to participants of the Securities Purchase
Agreement dated January 9, 2004 were re-priced from $1.74 to $1.05. The Company
expects to record approximately $1 million in non-cash interest expense for the
Black Scholes calculation of the change in warrant valuation in the fourth
quarter of 2004.
F-9
Note 14 - RELATED PARTY TRANSACTIONS
Paul Cronson, a member of our board of directors, is a founder and shareholder
of Larkspur Capital Corporation which was engaged as advisor in connection with
the sale of the securities listed above.
F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
eMagin Corporation
Hopewell Junction, New York
We have audited the accompanying consolidated balance sheet of eMagin
Corporation and subsidiary (the "Company") as of December 31, 2003, and the
related consolidated statements of operations, capital deficiency and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of eMagin Corporation
and subsidiary as of December 31, 2003 and the consolidated results of their
operations and their consolidated cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/
Eisner LLP
--------------
New York, New York
February 13, 2004
With respect to Notes F(b) and O
March 3, 2004
F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of eMagin Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficit) and cash flows of eMagin Corporation and
subsidiaries for the year ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of eMagin
Corporation and subsidiaries in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations since inception and the working capital deficit raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Grant Thornton LLP
------------------
Grant Thornton LLP
New York, New York
April 11, 2003
F-12
eMagin Corporation Consolidated Balance Sheet December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 1,053,895
Trade and contract receivables 768,537
Unbilled costs and estimated profits on contracts in progress 75,359
Prepaid expenses and other current assets 287,957
Inventory 275,417
----------------
Total current assets 2,461,165
Equipment and leasehold improvements, net of accumulated depreciation of $2,149,991 1,200,939
Other long-term assets 86,907
----------------
Total assets $ 3,749,011
================
LIABILITIES
Current liabilities:
Accounts payable $ 234,869
Accrued payroll and benefits 952,850
Other accrued expenses, net dividends 988,569
Advanced payments 122,362
Current portion of long-term debt 38,184
Other current liabilities 18,008
----------------
Total current liabilities 2,354,842
Capitalized lease obligations 36,257
Notes payable and short-term debt subsequently converted to equity 6,124,451
----------------
Total liabilities 8,515,550
----------------
Commitments and contingencies
CAPITAL DEFICIENCY
Preferred Stock - authorized: 10,000,000 shares, none issued -
Common Stock - $.001 par value, authorized 200,000,000 shares,
Issued and outstanding 42,695,412 shares 42,694
Paid-in surplus 131,598,910
Deferred compensation (87,565)
Accumulated deficit (136,320,578)
----------------
Total capital deficiency (4,766,539)
----------------
Total liabilities and capital deficiency $ 3,749,011
================
See notes to consolidated financial statements
F-13
eMagin Corporation Consolidated Statements of Operations
Year Ended December 31,
2003 2002
------------------- ----------------
Revenue:
Product revenue $ 2,213,290 $ 1,314,193
Contract revenue 364,809 840,658
Sales returns and allowances - (27,191)
------------------- ----------------
Total Revenue 2,578,099 2,127,660
Cost of goods sold:
Costs of goods sold 5,141,448 -
------------------- ----------------
Gross (loss) profit (2,563,349) 2,127,660
------------------- ----------------
Costs and expenses:
Research and development, net of funding under cost
sharing arrangements of $0 and $331,956,
respectively 18,810 7,254,996
Amortization of purchased intangibles 331,442 1,325,796
Stock based compensation 2,183,418 1,646,917
Selling, general and administrative 3,197,605 4,506,321
------------------- ----------------
Total costs and expenses, net 5,731,275 14,734,030
------------------- ----------------
Other income (expense):
Gain on on debt settlement 4,637,993 -
Interest expense (1,283,254) (2,329,452)
Other income (expense), net 216,570 23,111
------------------- ----------------
Other income (expense) 3,571,309 (2,306,341)
------------------- ----------------
Net loss $ (4,723,315) $ (14,912,711)
=================== ================
Basic and diluted loss per common share $ (0.13) $ (0.51)
=================== ================
Weighted average outstanding common stock 35,998,435 29,416,838
=================== ================
See notes to consolidated financial statements
F-14
eMagin Corporation
Consolidated Statements of Capital Deficiency
----------------------------------------------------------------------------------
Common Common Deferred Paid-in Accumulated Total
Shares Stock Compensation Surplus Deficit
----------------------------------------------------------------------------------
Balance - December 31, 2001 25,171,183 $ 25,171 $(2,277,367) $ 114,058,560 $ (116,684,552) $ (4,878,188)
------------- --------- ----------- -------------- --------------- -------------
Shares issued for financing
round 4,899,179 4,899 3,475,619 3,480,518
Buyout of debt financing 500,000 500 89,632 90,132
Warrants issued 140,387 140,387
Stock issued for consideration 80,000 80 55,570 55,650
Stock options exercised 2,125 2 885 887
Stock options issued 35,329 35,329
Options forfeited 1,075,193 (1,075,193) -
Finders fee on financing (35,000) (35,000)
Beneficial conversion on
financing 783,691 783,691
Original issue discount on
financing 672,682 672,682
Issuance of common stock for
services 202,493 202 146,716 146,918
Amortization of deferred
compensation 739,191 739,191
Stock based compensation 872,399 872,399
Net loss for period (14,912,711) (14,912,711)
------------- --------- ----------- -------------- --------------- -------------
Balance - December 31, 2002 30,854,980 30,854 (462,983) 119,221,276 (131,597,263) (12,808,115)
Conversion of debt to equity 6,101,972 6,102 - 4,447,996 - 4,454,098
Debt settlement 1,997,840 1,998 - 1,409,971 - 1,411,969
Exercise of warrants 1,479,900 1,480 - 1,136,595 - 1,138,075
Cashless exercise of warrants 270,910 271 - (271) - -
Original issue discount on
financing - - - 1,383,203 - 1,383,203
Beneficial conversion on
financing - - - 616,797 - 616,797
Stock issued for services 656,435 656 - 561,302 - 561,958
Options exercised 846,793 847 - 279,199 - 280,046
Issuance of equity for interest
and penalties 486,582 486 - 734,841 - 735,327
Amortization of deferred
compensation - - 375,418 - - 375,418
Stock option compensation - - - 1,808,000 - 1,808,000
Net loss for period - - - - (4,723,315) (4,723,315)
-------------- --------- ----------- -------------- --------------- -------------
Balance - December 31, 2003 42,695,412 $ 42,694 $ (87,565) $ 131,598,910 $ (136,320,578) $ (4,766,539)
============= ========= =========== ============= =============== =============
See notes to consolidated financial statements
F-15
eMagin Corporation Consolidated Statements of Cash Flows
Year Ended December 31,
2003 2002
--------------------- --------------------
Cash flows from operating activities:
Net loss $ (4,723,315) $(14,912,711)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 552,849 1,842,480
Amortization of purchased intangibles 331,442 -
Amortization of financing fees 37,244 -
Debt discount amortization and charge for beneficial conversion
feature 340,466 783,692
Stock based compensation 2,183,418 1,646,917
Interest related charges 915,325 1,446,654
Related to issuance of warrants - 140,387
Gain on debt settlement (4,637,993) -
Stock issued for services 561,958 25,050
Changes in: - -
Trade receivables (528,401) 593,300
Unbilled costs and estimated profits on contracts in progress 50,000 125,359
Costs and estimated profits in excess of billings on contracts - (326,291)
Inventory (24,419) 341,718
Prepaid expenses and other current assets (276,109) 196,371
Other long-term assets 112,500 139,033
Advanced payments 122,362 (398,343)
Deferred revenue (30,400) 30,400
Accounts payable, accrued expenses and accrued payroll (185,776) 2,738,847
Other current liabilities (5,497) -
--------------- -------------
Net cash used in operating activities (5,204,346) (5,587,137)
--------------- -------------
Cash flows from investing activities:
Purchase of equipment (1,120,256) (84,745)
Cash flows from financing activities:
Proceeds from sales of common stock, net of issuance costs - 3,475,621
Proceeds from exercise of stock options and warrants 1,418,121 141,272
Proceeds from long- and short-term debt 6,000,000 1,443,478
Payments of long- and short-term debt (122,775) (43,880)
--------------- -------------
Net cash provided by financing activities 7,295,346 5,016,491
--------------- -------------
Net increase (decrease) in cash and cash equivalents 970,944 (655,391)
Cash and cash equivalents - beginning of year 82,951 738,342
--------------- -------------
Cash and cash equivalents - end of year $ 1,053,895 $ 82,951
=============== =============
Cash paid for interest $ 15,649
Non-cash transactions:
Conversion of debt to equity $ 4,454,098
Issuance of equity for penalties and interest $ 735,327
Issuance of equity for settlement of accounts payable $ 1,411,969
See notes to consolidated financial statements
F-16
eMAGIN CORPORATION
Notes to Consolidated Financial Statements December 31, 2003 and 2002
Note A - NATURE OF BUSINESS
Fashion Dynamics Corporation ("FDC") was organized on January 23, 1996, under
the laws of the State of Nevada. FDC had no active business operations other
than to acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the "Merger"). The merged company changed its name to
eMagin Corporation (the "Company" or "eMagin"). eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision Inc., develops and
markets microdisplay systems and optics technology for commercial, industrial
and military applications. Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
Through December 31, 2002, the Company was considered a development stage
enterprise, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises". As
of January 1, 2003, the Company has commenced planned principal operations and
as such it is no longer considered to be a development stage enterprise in
accordance with SFAS No 7. In accordance with SFAS No.7, the 2002 financial
statements have been restated to give effect to the Company exiting the
development stage.
Note B - SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The accompanying consolidated financial statements of eMagin Corporation include
the assets, liabilities, revenues and expenses of its wholly owned subsidiary.
Inter-company transactions and balances are eliminated in consolidation.
[2] Revenue and cost recognition:
Revenue is recognized when products are shipped to customers, net of allowances
for anticipated returns. The Company's revenue-earning activities generally
involve delivering products and revenues are considered to be earned when the
Company has completed the process by which it is entitled to such revenues.
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, selling price is fixed or determinable and collection is
reasonably assured.
The Company also earns revenues from certain of eMagin's R&D activities under
both firm fixed-price contracts and cost-type contracts, including some
cost-plus-fee contracts. Revenues relating to firm fixed-price contracts are
generally recognized on the percentage-of-completion method of accounting as
costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts
include costs incurred plus a portion of estimated fees or profits based on the
relationship of costs incurred to total estimated costs. Contract costs include
all direct material and labor costs and an allocation of allowable indirect
costs as defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other party. Amounts
can be billed on a bi-monthly basis. Billing is based on subjective cost
investment factors.
[3] Research and development costs:
R&D costs are expensed as incurred. To date, activities of the Company have
included the performance of R&D under cooperative agreements with United States
Government agencies. Funding from such R&D contracts is recognized as a
reduction in operating expenses during the period in which the services are
performed and related direct expenses are incurred.
The Company has incurred research and development costs and earned funding under
these agreements during the year ended December 31, 2003 as follows:
Unfunded research and development $ 7,244,820
Research and development costs 331,956
Funding received (331,956)
[4] Cash and cash equivalents:
We consider all highly liquid instruments with an original maturity of three
months or less at the date of purchase to be cash equivalents.
[5] Accounts receivable:
F-17
The majority our commercial accounts receivable are due from Original Equipment
Manufacturers ("OEM"s). Credit is extended based on evaluation of a customers'
financial condition and, generally, collateral is not required. Accounts
receivable are payable in U.S. dollars, are due within 30-90 days and are stated
at amounts due from customers net of an allowance for doubtful accounts. Any
account outstanding longer than the contractual payment terms is considered past
due. The Company determines the allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, eMagin's
previous loss history, the customer's current ability to pay its obligation, and
the condition of the general economy and the industry as a whole. The Company
writes off accounts receivable when they become uncollectable, and payments
subsequently received on such receivables are reported as income in the year the
payment is received
[6] Inventory:
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in first-out method. The Company reviews the value of its inventory and
reduces the inventory value to its net realized value based upon current market
prices and contracts for future sales.
[7] Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over its
estimated useful life. Amortization of leasehold improvements is calculated by
using the straight-line method over the shorter of their estimated useful lives
or lease terms. Expenditures for maintenance and repairs are charged to expense
as incurred.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," eMagin performs impairment tests on its long-lived assets,
when circumstances indicate that their carrying amounts may not be recoverable.
If required, recoverability is tested by comparing the estimated future
undiscounted cash flows of the asset or asset group to its carrying value.
Impairment losses, if any, are recognized based on the excess of the assets'
carrying amounts over their fair values.
[8] Income taxes:
Deferred income taxes are recorded by applying enacted statutory tax rates to
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. At December 31, 2003 and 2002, the
Company has net deferred tax assets of approximately $56.7 million and $29.5
million, respectively, primarily resulting from the future tax benefit of net
operating loss carryforwards discussed below and timing differences relating to
amortization of goodwill and other intangible assets. Such net deferred tax
assets are fully offset by valuation allowances due to the uncertainty as to
their realizability.
At December 31, 2003, the Company has net operating loss carryforwards totaling
approximately $ 86.4 million, inclusive of the net operating losses acquired as
part of the acquisition of FED, which expire through 2023, available to offset
future federal taxable income. Pursuant to Section 382 of the Internal Revenue
Code, the usage of a portion of these net operating loss carryforwards is
limited due to changes in ownership that have occurred.
[9] Loss per common share:
In accordance with SFAS No. 128, "Earnings Per Share," net loss per common share
amounts ("basic EPS") were computed by dividing net loss by the weighted average
number of common shares outstanding and excluding any potential dilution. Net
loss per common share amounts assuming dilution ("diluted EPS") were computed by
reflecting potential dilution from the exercise of stock options and warrants.
Common equivalent shares have been excluded from the computation of diluted EPS
for all periods presented as their effect is antidilutive. The Company's
computation of dilutive loss per share for the year ended December 31, 2003 does
not include options and warrants to purchase 21,725,607 common shares, as their
effect would be antidilutive.
F-18
[10] Comprehensive income (loss):
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income (loss) is the total of net income (loss) and all other
non-owner changes in equity (or other comprehensive income (loss) such as
unrealized gains or losses on securities classified as available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive income (loss) must be reported on the face of the
annual financial statements. The Company's operations did not give rise to any
material items includable in comprehensive income (loss), which were not already
in net income (loss) for the years ended December 31, 2003 and 2002.
Accordingly, the Company's comprehensive income (loss) is the same as its net
income (loss) for all periods presented.
[11] Stock-based compensation:
eMagin applies Accounting Principals Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, eMagin records expense for employee
stock compensation plans equal to the excess of the market price of the
underlying eMagin shares at the date of grant over the exercise price.
As of December 31, 2003, the Company has outstanding options to purchase
12,148,570 shares. The Company has elected to follow APB No. 25, in accounting
for its employee stock options. Under APB No. 25, when the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant no compensation expense is recorded. The Company discloses
information relating to the fair value of stock-based compensation awards in
accordance with Statement of Financial Accounting Standards No.123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation." The following table
illustrates the effect on net loss and loss per share as if the Company had
applied the fair value recognition provision of SFAS No. 123. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in 2003 and
2002, respectively: (1) average expected volatility of 100% and 150%, (2)
average risk-free interest rates of 3.52% and 6.00%, and (3) expected lives of
7-10 years and 5-8 years and (4) dividends of 0% and 0%.
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair values of awards that were earned during the
years ended December 31, 2003 and 2002.
2003 2002
-------------------
(in thousands)
Net loss applicable to common stockholders, as reported $ (4,723) $ (14,913)
Stock-based employee compensation expense included in reported net loss 2,183 -
Stock-based employee compensation expense determined under fair value method (3,748) (1,226)
--------- ----------
Pro forma net loss $ (6,288) $ (16,139)
========= ==========
Net loss per share:
Basic and diluted, as reported $ (0.13) $ (0.51)
Basic and diluted, pro forma $ (0.17) $ (0.55)
Weighted average fair value per option $ 0.76 $ 0.74
[12] Fair value of financial instruments:
The Company has various financial instruments, including cash, cash equivalents,
accounts receivable, accounts payable and short and capitalized lease
obligations. The Company believes the carrying values of its financial
instruments approximate their fair values. The carrying amount of the short- and
long-term debt approximates fair value at December 31, 2003 based on interest
rates available to the Company and debt instruments with similar terms.
[13] Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. These estimates and assumptions relate to recording net revenue,
collectibility of accounts receivable, and the realizability of other intangible
assets, accruals, income taxes, inventory realization and other factors.
Management has exercised reasonable judgment in deriving these estimates;
however, actual results could differ from these estimates. Consequently, change
in conditions could affect eMagin's estimates.
F-19
[14] Reclassifications:
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.
Note C - RECEIVABLES
Receivables at December 31, 2003 consist of the following:
Trade receivables $ 899,174
Contract receivables 173,809
Unbilled receivables 75,359
------------
Total 1,148,342
Less allowance for doubtful accounts (304,446)
------------
Net receivables $ 843,896
============
Note D - Inventory
The components of inventories as of December 31, 2003 are as follows:
Raw materials $ 20,416
Work in process 43,750
Finished goods 211,251
-----------
Total Inventory $ 275,417
===========
Note E - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as follows at
December 31, 2003:
Useful
Lives
Computer hardware and software 3 $ 328,758
Lab and factory equipment 3 2,547,165
Furniture, fixtures and office equipment 10 145,268
Leasehold improvements (a) 329,739
------------
Total Fixed Assets 3,350,930
Less accumulated depreciation (2,149,991)
------------
Total Net Book Value $ 1,200,939
============
(a) The shorter of either the life of the lease, or the useful life
Note F - DEBT
The debt consisted of the following as of December 31, 2003:
a Current portion of long term debt $ 38,184
b Restructuring Agreement 4,456,973
c Original Secured Notes 1,667,478
d Capitalized lease obligations 36,257
-----------
e Total debt $ 6,198,892
===========
(a) This amount includes (i) $12,213 due to Citicorp Leasing over the next 12
months in lease payments for equipment; and (ii) $25,971 due to IBM over the
next 12 months for leasehold improvements. The remaining balance under the
Citicorp lease is due in 2005.
F-20
(b) On April 25, 2003, eMagin entered into a Global Restructuring and Secured
Note Purchase Agreement ("Restructuring Agreement") dated as of April 25, 2003
(the "Closing Date") with a group of several accredited institutional and
individual investors whereby the investors agreed to lend the Company $6,000,000
in exchange for (i) the issuance of $6,000,000 principal amount of 9% secured
convertible promissory notes due and payable on November 1, 2005 and (ii)
warrants to purchase an aggregate of 7,749,921 shares of common stock of eMagin
(subject to certain customary anti-dilution adjustments). Such warrants are
exercisable for a period of three (3) years from the issue date.
Interest is payable on the notes at a rate of 9% per annum and, at the Company's
option, may be paid through the delivery of shares of the Company's common stock
in lieu of cash interest payments on the maturity date of the loan, November 1,
2005. Subject to certain limitations, the notes may be converted, at the option
of the holder, in whole or in part, into common shares with a conversion price
of $0.7742, an amount equal to 105% of the volume weighted average of the
closing price of eMagin's common shares as reported on The American Stock
Exchange by the Wall Street Journal, New York City edition, for the five (5)
trading days immediately preceding the closing date. The exercise price of the
warrants on a per share basis is $.8110, an amount equal to 110% of the volume
weighted average of eMagin's closing price of our common shares as reported on
The American Stock Exchange by the Wall Street Journal, New York City edition,
for the five (5) trading days immediately preceding the closing date.
As of December 31, 2003 the Company had received the entire $6,000,000. The
Company recorded $1,289,575 for the debt discount and $510,425 for the
beneficial conversion as paid-in surplus, which is being amortized through
November 1, 2005. For the year ended December 31, 2003, $256,973 was amortized
to interest expense.
The terms of the notes contain certain revisions, including financial and other
covenants, which covenants relate to expenses, direct cost of goods sold,
revenues and quarterly revenues. In the event that the Company is not in
compliance with these covenants, 50% or more of the holders of the notes (in
terms of the aggregate dollar value of the principal of the notes then issued
and outstanding under the note purchase agreement) would be able to call an
event of default. As of December 31, 2003, the Company was in violation of
certain financial covenants. The notes have not been included in current
liabilities because they were converted into shares of the Company's common
stock on March 3, 2004 (see Note O).
(c) This amount includes secured convertible loans aggregating $1,625,000 issued
under the secured note purchase agreements executed from November 27, 2001
through January 14, 2002 ("Original Secured Notes"). The Original Secured Notes
accrue interest at a rate of 9.00% per annum and were due on June 30, 2003.
Terms of the notes issued included a fixed conversion into the Company's shares
of common stock at the rate of $0.5264 per share. The Company also granted
warrants purchasing 921,161 shares of common stock with an exercise price of
$0.5468 per share to the note holders. Such warrants are exercisable through
January 2005.
The total of the intrinsic value of the warrants issued to the note holders and
the incremental intrinsic value of the repriced warrants of certain existing
note holders of approximately $480,000 has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the original
period of the debt.
In addition, based on the terms of the Original Secured Notes, the conversion
terms of the debt provide for a beneficial conversion feature. The total value
of the beneficial feature of the debt and the incremental value of the reset
conversion feature of the existing debt of approximately $780,000 was recorded
at January 14, 2002 as non-cash interest expense.
In connection with the April 2003 financing described above, the note holders
agreed to (a) amend the secured note issued to them, (b) terminate the security
agreement dated November 27, 2001 that was entered into in connection with the
purchase of the Original Secured Notes and allow the note holders to enter into
a new security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the notes
included (i) extending the maturity dates of the note from June 30, 2003 to
November 1, 2005, and (ii) revising and clarifying certain of the other terms
and conditions of the note, including provisions relating to default and
assignment of the note.
F-21
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with an investor. The secured note accrues interest at 11% per annum
and was due to mature on June 30, 2003 and was amended as a result of the
financing the Company completed in April 2003. The Company also granted
warrants, exercisable for a period of five years, to purchase 300,000 shares of
common stock with an exercise price of $0.4257 per share to the investor,
provided, however, that this warrant may not be exercised by the investor so
long as the investor is the beneficial owner, directly or indirectly, of more
than ten percent (10%) of the common stock of eMagin for purposes of Section 16
of the Securities Exchange Act 1934. The fair value of the warrants issued to
this investor, which approximated $84,000, has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the period of
the debt. Pursuant to the April 2003 financing described above, the investor
agreed to (a) amend the secured note issued to them, (b) terminate the security
agreement dated June 20, 2002 that was entered into in connection with the
purchase of the Original Secured Notes and allow the investors to enter into a
new security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the note
included (i) amending the note issued on June 20, 2002 so as to provide that the
note shall be convertible and will have the same conversion price as the notes
issued pursuant to the April 2003 secured note purchase agreement, (ii)
extending the maturity dates of the note from June 30, 2003 to November 1, 2005,
and (iii) revising and clarifying certain of the other terms and conditions of
the note, including provisions relating to interest payments, conversions,
default and assignment of the note. Due to the amendment to a convertible note,
the Company recorded a $106,372 beneficial conversion discount and a $93,628
original debt discount, to be amortized through November 2005. For the year
ended December 31, 2003, the Company has amortized a total of $42,478 for
original debt discount and for beneficial conversion discount.
(d) This amount is due to Citicorp Leasing as long-term debt for lease payments
for equipment.
In September 2003, in accordance with the agreement, the Company was required to
convert two Series B Convertible Debentures in the amount of $121,739 each into
1,468,382 share of the Company's common stock at a conversion price from the
original note purchase agreement of $0.18 per share
Note G - DEBT SETTLEMENT
In connection with the April 2003 Financing, the Company entered into settlement
or restructuring agreements with certain of eMagin's other creditors, pursuant
to which the creditors agreed to accept shares of eMagin's common stock in full
or partial satisfaction of the amount owed to them, or which allow us to either
make discounted payments to them or to make payments under more favorable
payment terms than previously were in place.
The Company converted the $1,000,000 loan plus interest to Travelers Insurance
Company ("Travelers") into 2,137,757 shares of the Company's common shares at a
conversion price from the original agreement of approximately $0.53 per share,
based on the market value of eMagin's common stock on the date the Company
entered into the agreement. The Company also converted the $3,000,000 loan plus
interest to SK Corporation into 2,495,833 shares of the Company's common stock
at a conversion price from the original agreement of approximately $1.28 per
share, based on the market value of eMagin's common stock on the date the
Company entered into the agreement. There was no gain recorded on these
transactions.
During 2003, the Company issued 1,997,840 shares of common stock with a market
value of $1,411,969 in partial payment of accounts payable and debt which
resulted in a $1,575,087 gain on debt settlement.
In the third quarter of 2003, the Company exercised several lease buyout
provisions. The Company purchased for cash, $950,000 of equipment, which
resulted in a reduction of $598,493 in prepaid interest and a write-down of
$3,062,906 in long- and short-term debt.
As a result of the above transactions, the Company recorded $4,637,993 as a gain
on settlement of debt for the year ended December 31, 2003.
F-22
Note H - INCOME TAXES
The difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:
2003
-----
U.S. Federal income tax provision (benefit)
at federal statutory rate (35)%
Change in valuation allowance 35 %
-----
0 %
=====
Significant components of eMagin's deferred tax assets as of December 31, 2003
are as follows:
Net operating losses $ 34,580,000
Goodwill and other intangibles 21,700,000
Allowance for doubtful accounts 121,778
Deferred payroll 195,010
Accrued vacation pay 70,401
--------------
Total 56,667,189
Less valuation allowance (56,667,189)
--------------
Net Deferred Tax Asset $ 0
==============
As of December 31, 2003, eMagin has federal and state net operating loss
carryforwards of approximately $86.4 million that will be available to offset
future taxable income, if any, through December 2023. The utilization of net
operating losses is subject to a substantial limitation due to the change of
ownership provisions under Section 382 of the Internal Revenue Code and similar
state provisions. Such limitation may result in the expiration of the net
operating losses before their utilization. A valuation allowance has been
established to reserve for the deferred tax assets arising from the net
operating losses and other temporary differences due to the uncertainty that
their benefit will be realized in the future.
In 2003, in connection with the restructuring of its indebtedness (see Note G),
the Company realized income of $4,637,993. Under Section 108 of the Internal
F-23
Revenue Code, this income is excludable for federal income tax purposes to the
extent that the amount of the Company's liabilities immediately before the
restructuring exceeds the fair market value of its assets as a going concern at
such time. The Company estimates the entire $4,637,993 is excludable under this
exception.
Pursuant to Section 108 of the Internal Revenue Code, the excluded income
reduces the Company's tax attributes as of January 1, 2004. Such reduction is
first applied to reduce net operating loss carryforwards.
Note I - STOCKHOLDERS' EQUITY
As of December 31, 2002, the authorized number of shares of common stock of the
Company consisted of 100,000,000 shares with a par value of $0.001 per share. On
July 2, 2003 the shareholders approved an increase to 200,000,000 shares.
In January 2002, the Company negotiated settlement of amounts due to a related
party for services previously rendered via issuance of 192,493 shares of common
stock. As such, the Company recorded the fair value of the shares of
approximately $135,000 in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
On February 27, 2002, the Company completed a private placement of securities
with several institutional and individual investors of 3,617,128 shares of
common stock at a price per share of $0.6913, generating gross proceeds of
approximately $2,500,000, less issuance costs of approximately $35,000. In
connection with the financing arrangement, the Company issued to the investors
warrants to purchase 1,446,852 shares of common stock of the Company at an
exercise price of $0.7542 per share. Also, the Company issued to an institution
warrants to purchase 36,164 shares of common stock in connection with a finder's
fee arrangement entered into between the two parties. Such warrants are
exercisable through February 2005. The Company entered into a registration
rights agreement providing for the registration of shares to be issued pursuant
to a conversion of the Original Secured Notes and the shares to be issued
pursuant to the exercise of the warrants issued thereunder. The Company was
currently in default of this filing requirement. As a result of the default, the
Company has accrued $87,362 in interest and penalties in 2002.
On March 4, 2002, the Company entered into an equity line of credit agreement
with a private equity fund (the "Fund") whereby the Company has the option, but
not the obligation, to sell shares of common stock to the Fund for a three-year
period at a price per share, as defined. The agreement provided for certain
minimum and maximum monthly amounts up to a maximum of $15 million and, in
certain circumstances, up to $20 million.
On March 4, 2002 the Company and the Fund entered into an agreement whereby the
Company issued 50,000 shares and the Fund agreed to extend the agreement. This
agreement was terminated in December 2002 whereby the investor retained its
warrants, the Company agreed to issue 500,000 shares of common stock and to pay
the sum of $25,000 upon the completion of specific financing.
In connection with the equity line of credit, the Company issued 30,000 shares
of common stock to the Fund as compensation for certain services rendered in
connection with the closing of the line of credit. As such, the Company recorded
the fair value of the shares of approximately $31,000 in selling, general and
administrative expenses for the year ended December 31, 2002. Also, the Company
granted warrants purchasing up to 150,000 shares of common stock of the Company
at an exercise price of $0.8731 per share. Such warrants are exercisable through
September 2005. The intrinsic value of said warrants of approximately $140,000
is included in selling, general and administrative expenses in the year ended
December 31, 2002.
In April 2002, the Company announced a strategic investment from ROHM Company
LTD ("Rohm"). ROHM purchased 1,282,051 shares of eMagin common stock at $0.78
per share as well as warrants to purchase an additional 512,820 shares of common
stock at a conversion price of $0.85 per share for an investment of $1,000,000.
The fair value of each warrant was estimated on the date of grant using the
Black-Scholes option-pricing model. Such warrants are exercisable through April
2005.
In 2002 the Company issued a third party 192,493 shares for consulting fees in
lieu of cash.
In April of 2003, the Company converted a $1,000,000 loan plus interest to
Travelers in common shares totaling 2,137,757 at a conversion price from the
original agreement of approximately $0.53 per share, based on the market value
of our common stock on the date the agreement was entered into (see Note G).
The Company also converted a $3,000,000 loan plus interest to SK Corporation in
common shares totaling 2,495,833 at a conversion price from the original
agreement of approximately $1.28 per share, based on the market value of our
common stock on the date the agreement was entered into (see Note G). New
paragraph
F-24
In September 2003, the Company converted two Series B Convertible Debentures in
the amount of $121,739 each into 1,468,382 share of the Company's common stock
at a conversion price from the original note purchase agreement of $0.18 per
share. This transaction included a write-down of the unamortized beneficial
conversion feature at the time of conversion.
In 2003, the Company received approximately $1.1 million for the exercise of
1,479,900 warrants to purchase shares of common stock. The Company also issued
270,910 common shares in cashless exercises of warrants in exchange for 579,329
warrant shares.
In 2003, the Company negotiated settlements of amounts due and amounts for
future services, rendered via issuance of 656,435 shares of common stock. As
such, the Company recorded the fair value of the services received and
receivable in the future of $561,958 in selling, general and administrative
expenses, prepaid expenses and reduction of accounts payable.
During 2003, the Company received $280,046 for the exercise of options to
purchase 846,793 shares of common stock.
The Company's April 25, 2003 Registration Rights Agreement, which was entered
into in connection with the Company's April 2003 financing, required the Company
to file a registration statement with the Securities and Exchange Commission no
later than 30 calendar days after the closing of the April 2003 financing. The
Company was not able to file the registration statement within the required
period and caused a default under the Registration Rights Agreement. As a result
of this default, the Company was required to issue an additional 486,582 common
shares for penalties and interest pursuant to the Registration Rights Agreement.
For the year ended December 31, 2003, the Company recorded a charge to earnings
of $735,324 for the penalties and interest. The Company filed its registration
statement in July of 2003.
In connection with the April 2003 financing, eMagin issued 387,496 warrants for
expenses related to the offering. These warrants were issued to Larkspur Capital
Corporation, a company in which one of the Company's directors is the managing
director.
Note J - STOCK COMPENSATION
[1] Stock option plans:
In 1994, the Company established the 1994 Stock Plan (the "1994 Plan"), which
has been assumed by eMagin. The plan provided for the granting of options to
purchase an aggregate of 1,286,000 shares of the common stock to employees and
consultants of FED.
In 2000, the Company established the 2000 Stock Option Plan (the "2000 Plan"),
which has been assumed by eMagin. On July 16, 2001, the shareholders approved an
increase in the aggregate number of shares of the Company's common stock
reserved for issuance under the 2000 Plan from 3,900,000 to 5,900,000 shares.
The Plan permits the granting of options and stock purchase rights to employees
and consultants of the Company. The 2000 Plan allows for the grant of incentive
stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986 (the "Code") or non-qualified stock options which are not intended
to meet the requirements Section 422 of the Code.
In 2003, eMagin established the 2003 Stock Option Plan (the "2003 Plan"). The
2003 Plan provided for the granting of options to purchase an aggregate of
9,200,000 shares of the common stock to employees and consultants. On July 2,
2003, the shareholders approved the plan and the 2003 Plan was subsequently
amended by the Board of Directors on July 2, 2003 to reduce the number of
additional shares that may be provided for issuance under the "evergreen"
provisions of the 2003 Plan. The amended 2003 Plan provides for an increase of
2,000,000 shares in January 2004 and an annual increase on January 1 of each
year for a period of nine (9) years commencing on January 1, 2005 of 3% of the
diluted shares outstanding.
F-25
Vesting terms of the options range from immediate vesting to a ratable vesting
period of 10 years. Option activity for the years ended December 31, 2003 and
2002 are summarized as follows:
Weighted
Average
Shares Exercise Price
------------ ------------
Outstanding at December 31, 2001 3,544,721 $ 2.41
Options granted 4,788,722 0.40
Options canceled (2,440,358) 2.11
------------ ------------
Outstanding at December 31, 2002 5,893,085 0.75
Options granted 7,528,676 0.42
Options exercised (859,993) 0.33
Options canceled (413,198) 2.14
------------ ------------
Outstanding at December 31, 2003 12,148,570 $ 0.53
============ ============
At December 31, 2003, there were 2,091,437 shares available for grant under the
2003 Plan, 2000 Plan and the 1994 Plan.
In October 2002, the Company's Board of Directors approved the issuance of
5,185,000 options to employees, officers and directors. These options were not
issued at the time of the Board of Directors' approval because there were not
enough options available to be issued. Pursuant to the Company's Stock Option
Plans, these options were issued concurrent with the approval of the 2003 Plan
at the July 2003 shareholders' meeting. The Company recorded a charge of
$1,808,000 in the year ended December 31, 2003 for the change in value of these
options from the original Board approval date in October 2002 to the shareholder
approval date in July 2003.
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercisable
Range of Exercise Prices Outstanding Life (In Years) Price Exercisable Price
------------------------ ----------------- ---------------- -------------- ---------------- ----------------
$ 0.18 - $1.02 10,616,901 4.23 $ 0.37 10,078,176 $ 0.35
$ 1.25 - $1.72 1,401,169 6.62 1.56 1,204,335 1.57
$ 2.25 - $6.30 130,500 4.67 2.47 119,750 2.40
----------------- -------------- ---------------- ----------------
12,148,570 $ 0.53 11,402,261 $ 0.50
================= ============== ================ ================
[2] Stock based compensation:
Non-cash stock-based compensation expense represents expenses associated with
stock option grants to the Company's officers and employees at below fair market
value as additional compensation for their services and to induce them to
lock-up their options for a longer time than would normally be specified under
the Company's standard option grant. Deferred compensation is amortized over the
remaining vesting period of the underlying options.
[3] Warrants:
At December 31, 2003, 12,336,289 warrants to purchase shares of common stock are
issued, outstanding and exercisable at exercise prices ranging from $0.53 to
$1.93.
Note K - RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest
Entities." Until this interpretation, a company generally included another
entity in its consolidated financial statements only if it controlled the entity
through voting interests. FIN 46R requires a variable interest entity, as
defined, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns. Certain
provisions of FIN 46R were deferred until the period ending after March 15,
2004. The adoption of FIN 46R for provisions effective during 2003 did not have
a material impact on the Company's financial position, cash flows or results of
operations.
F-26
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." (SFAS No. 149), which amends
SFAS 133 for certain decisions made by the FASB Derivatives Implementation
Group. In particular, SFAS 149: (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (2) clarifies when a derivative contains a financing component, (3)
amends the definition of an underlying financial component to conform it to
language used in FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (4) amends certain other existing pronouncements..
This statement is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. In
addition, most provisions of SFAS 149 are to be applied prospectively. The
adoption of this standard did not have a material impact on the Company's
financial position, cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150 , "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
FAS No. 150 changes the accounting for certain financial instruments that under
previous guidance issuers could be accounted for as equity. It requires that
those instruments be classified as liabilities in balance sheets. The guidance
in SFAS No. 150 is generally effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is effective on July 1, 2003.
The adoption of SFAS No. 150 did not have a material impact on the Company's
financial position, cash flows or results of operations.
Note L - COMMITMENTS AND CONTINGENCIES
[1] Royalty payments:
The Company, in accordance with a royalty agreement, is obligated to make
minimum annual royalty payments to a corporation commencing January 1, 2001. The
minimum annual royalty of $31,500 per year due under this agreement commences in
the first year of the agreement, and increases to minimum royalty payments of
$125,000 in 2006. Under this agreement, the Company must pay to the corporation
a certain percentage of net sales of certain products, which percentages are
defined in the agreement. The percentages are on a sliding scale depending on
the amount of sales generated. Any minimum royalties paid may be credited
against the amounts due based on the percentage of sales. The royalty agreement
terminates upon the expiration of the last-to-expire issued patent.
For the years ended December 31, 2003 and 2002, royalty expense of approximately
$115,000 and $61,000 respectively, is included in general and administrative
expense.
F-27
[2] Operating leases:
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through 2008. Certain leases provide
for payments of monthly operating expenses. The approximate future minimum lease
payments through 2008 are as follows:
Year ending December 31,
2004 $ 257,999
2005 18,372
2006 18,372
2007 6,124
2008 -
-----------
Total $ 300,867
===========
Rent expense for the years ended December 31, 2003 and 2002 was approximately
$839,738 and $1,107,000, respectively. eMagin's lease with IBM expires in March
2004. The Company is currently in the process of renewing the lease. eMagin's
lease with Redson Building Partners has been paid in advance with common stock
valued at $48,000 for the 2004 rent.
[3] Employment benefit plans:
eMagin has a defined contribution plan (the 401(k) Plan) under Section 401(k) of
the Internal Revenue Code, which is available to all employees who meet
established eligibility requirements. Employee contributions are generally
limited to 15% of the employee's compensation. Under the provisions of the
401(k)Plan, eMagin may match a portion of the participating employees'
contributions. There was no matching to the 401(k) Plan for the years ended
December 31, 2003 and 2002.
[4] Legal proceedings
The Company is subject to various claims and proceedings in the ordinary course
of business. The Company believes that none of these current claims or
proceedings individually or in the aggregate, will have a material adverse
impact on the Company; results of operations, cash flows or financial condition,
although it can make no assurances in this regard.
Note M - Related Party Transactions
On February 27, 2002, eMagin Corporation and a group of several accredited
institutional and individual investors entered into a Securities Purchase
Agreement providing for the issuance and sale to the investors of (i) an
aggregate of approximately 3.6 million shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years from the Closing Date for
an aggregate of approximately 1.4 million shares of eMagin's common stock
(subject to certain customary anti-dilution adjustments) (see Note I). Rainbow
Gate Corporation, a corporation in which Mortimer D.A. Sackler is the investment
manager, invested $500,000 in the Company under the agreement and received
pursuant to such investment (i) 723,275 shares of eMagin's common stock, and
(ii) warrants exercisable for 289,310 shares of eMagin's common stock. Mr.
Sackler is currently a beneficial owner of more than five percent of the
outstanding shares of eMagin's common stock.
F-28
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with Mortimer D.A. Sackler (the "Bridge Note")(see Note F(c)). The
secured note accrues interest at 11% per annum and was originally due to mature
on June 30, 2003 and was amended as a result of a financing we completed in
April 2003. The Company also granted warrants, exercisable for a period of five
years, to purchase 300,000 shares of common stock with an exercise price of
$0.4257 per share to the investor, provided, however, this warrant may not be
exercised by the investor so long as the investor is the beneficial owner,
directly or indirectly, of more than ten percent (10%) of the common stock of
eMagin for purposes of Section 16 of the Securities Exchange Act 1934. The fair
value of the warrants issued to this Investor, which approximated $84,000, has
been recorded as original issue discount, resulting in a reduction in the
carrying value of this debt. The original issue discount was amortized into
interest expense over the period of the debt. Pursuant to the April 2003
financing described below, the investor agreed, to (a) amend the secured note
issued to them, (b) terminate the security agreement dated June 20, 2002 that
was entered into in connection with the purchase of the original secured notes
and allow the investors to enter into a new security agreement with him on a
pari passu basis in order for eMagin to continue its operations as a developer
of virtual imaging technology, and (c) simultaneously participate in the new
financing. The amendments to the note included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the April 2003 secured
note purchase agreement, (ii) extending the maturity dates of the note from June
30, 2003 to November 1, 2005, and (iii) revising and clarifying certain of the
other terms and conditions of the note, including provisions relating to
interest payments, conversions, default and assignment of the note.
On April 25, 2003, eMagin Corporation and a group of several accredited
institutional and individual investors (collectively, the "Investors") entered
into a Restructuring Agreement whereby Investors agreed to lend eMagin
$6,000,000 in exchange for (i) the issuance of $6,000,000 principal amount of
9.00% Secured Convertible Promissory Notes due on November 1, 2005 (the "Secured
Notes") and (ii) Warrants (the "Warrants") to purchase an aggregate of 7,749,921
shares of common stock of eMagin (subject to certain customary anti-dilution
adjustments), which Warrants are exercisable for a period of three (3) years.
Mr. Rivkin, who at the time of the transaction was a member of our Board of
Directors, participated as an investor in the transaction and invested $125,000
in the Company. In return for such investment, Mr. Rivkin received (i) a Secured
Convertible Promissory Note in an aggregate principal amount of $125,000, and
(ii) warrants exercisable for 161,456 shares of eMagin's common shares. In
addition, Stillwater LLC, an entity controlled by Mr. Mortimer D.A. Sackler,
agreed to invest an aggregate of $2,600,000 under the transaction and will
receive (i) Secured Convertible Promissory Notes in an aggregate principal
amount of $2,600,000, and (ii) warrants exercisable for 3,358,300 of our common
shares. As part of the transactions, Messrs. Sackler and Rivkin, who were the
holders of an aggregate of $1,325,000 principal amount of secured notes that
were purchased pursuant to a secured note purchase agreement entered into as of
November 27, 2001 (collectively, the "Original Secured Notes"), and Mr. Sackler,
who additionally was the holder of a $200,000 principal Bridge Note, agreed to
(a) amend their respective Original Secured Notes and Bridge Note issued to
them, (b) terminate the Security Agreement dated November 20, 2001 that was
entered into in connection with the purchase of the Original Secured Notes and
the Security Agreements dated June 20, 2002 that were entered into in connection
with the purchase of the Bridge Note and allow the new investors to enter into a
New Security Agreement (as defined below) with them on a pari passu basis in
order for the Company to continue its operations as a developer of virtual
imaging technology. The amendments to the Original Secured Notes and Bridge Note
included (i) amending the Bridge Note so as to provide that the Bridge Note
shall be convertible and will have the same conversion price as the Notes issued
pursuant to the Secured Note Purchase Agreement, (ii) extending the maturity
dates of the Original Secured Notes and Bridge Note from June 30, 2003 to
November 1, 2005, and (iii) revising and clarifying certain of the other terms
and conditions of the Original Secured Notes and Bridge Note, including
provisions relating to interest payments, conversions, default and assignments
of the Original Secured Notes and Bridge Note. On April 25, 2003, Mr. Sackler
transferred all of his holdings in the Company to Stillwater LLC, a limited
liability company in which Mr. Sackler is the sole member.
eMagin is party to a financial advisory and investment banking agreement with
Larkspur Capital Corporation. Paul Cronson, a director of eMagin, is a founder
and shareholder of Larkspur Capital Corporation. Larkspur Capital Corporation
received as compensation for financial advisory and investment banking services
in connection with the January 2004 private placement a cash fee of 6 3/4% of
the funds raised and warrants to purchase eMagin shares of common stock equal to
2.5% of the cash netted to eMagin. $283,503 and 43,651 common stock purchase
warrants exercisable at $2.41 per share which expire in January 2009, were paid
under the terms of the agreement.
Note - N Concentrations
For the year ended December 31, 2003, one company represented approximately 21%
of sales. For the year ended December 31, 2002, two customers accounted for
approximately 32% of sales.
F-29
For the year ended December 31, 2003, approximately 69% of the Company's sales
were made to customers in the United States and approximately 31% of the
Company's sales were made to international customers. For the year ended
December 31, 2002, 74% of the Company's sales were made to customers in the
United States and 26% of the Company's sales were made to international
customers.
The Company also purchases principally all of its wafers from a single supplier.
Note O - Subsequent Events
On January 9, 2004, we entered into a Securities Purchase Agreement with several
accredited institutional and private investors whereby such investors purchased
an aggregate of 3,333,364 shares of common stock for an aggregate purchase price
of $4,200,039. The Company also entered into a registration rights agreement
with the aforementioned investors with respect to the common stock issued and
common stock issuable upon the exercise of the warrants. The Company filed a
registration statement for the sales of these shares in February 2004.
The shares of common stock were priced at a 20% discount to the average closing
price of the stock from December 30, 2003 to January 6, 2004, which ranged from
$1.38 to $1.94 per share during the period for an average closing price of 1.58
per share, making the discounted price $1.26 per share. In addition, the
investors received warrants to purchase an aggregate of 2,000,019 shares of
common stock (subject to anti-dilution adjustments) exercisable at a price of
$1.74 per share for a period of five (5) years. The warrants were priced at a
10% premium to the average closing price of the stock for the pricing period.
In connection with the private placement, eMagin also issued additional warrants
to the investors to acquire an aggregate of 2,312,193 shares of common stock.
1,206,914 of such warrants are exercisable, within 6 months from the effective
date of the registration statement covering these securities, at a price of
$1.74 per share (a 10% premium to the average closing price of the stock for the
pricing period), and 1,105,279 of such warrants are exercisable within 12 months
from the effective date of the registration statement covering these securities,
at a price of $1.90 per share (a 20% premium to the average closing price of the
stock for the pricing period).
In February 2004, the Company and all of the holders of the Secured Convertible
Notes (the "Notes"), which were due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately $74,000 on the Notes, into 11,394,621 shares of common
stock of eMagin. The listing of the shares issuable pursuant to such agreement
was approved by the American Stock Exchange. This debt, net of the unamortized
portion of debt discount and the beneficial feature, have been shown as a
long-term liability in the consolidated balance sheet.
In consideration of the Noteholders agreeing to the early conversion of the
Notes, eMagin has agreed to issue the Noteholders warrants to purchase an
aggregate of 2.5 million shares of common stock (the "warrants"), which warrants
are exercisable at a price of $2.76 per share. 1.5 million of the warrants are
exercisable until the later of (i) twelve (12) months from the date upon which a
registration statement covering the shares issuable upon exercise of the
Warrants is declared effective by the Securities and Exchange Commission, or
(ii) December 31, 2005. The remaining 1.0 million of the warrants are
exercisable until four (4) years from the date upon which the registration
statement covering such shares is declared effective by the Securities and
Exchange Commission.
At December 31, 2003, the Company had approximately $1,189,000 and $512,000
unamortized debt discount and beneficial conversion feature, respectively, in
connection with the Notes. The remaining unamortized balance as of the
conversion date will be charged to operations.
In connection with the above conversion, eMagin also entered into a Registration
Rights Agreement with the holders of the Notes providing the holders with
certain registration rights under the Securities Act of 1933, as amended, with
respect to the common stock issuable upon exercise of the warrants.
F-30
UP TO 7,654,635 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 4
Risk Factors 6
Use Of Proceeds 12 eMagin Corporation
Market For Common Equity And Related Stockholder
Matters 12
Management's Discussion And Analysis Or Plan Of
Operation 13
Business 19
Management 36
Certain Relationships And Related Transactions 41 ----------------
Security Ownership Of Certain Beneficial Owners
And Management 45 PROSPECTUS
Description Of Securities 47
Plan Of Distribution 48 ----------------
Selling Stockholders 50
Legal Matters 53
Experts 53
Available Information 53
Index To Financial Statements F-1 January 7, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize the
company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 955.01
Accounting fees and expenses 15,000.00*
Legal fees and expenses 35,000.00*
-----------
TOTAL $ 50,955.01*
===========
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On January 14, 2002, we entered into additional agreements to facilitate: (i) an
additional funding of $1,000,000 to eMagin by a private investor under the
Secured Note Purchase Agreement, (ii) the repayment (the "Repayment") in full
using the proceeds of the additional funding of three secured convertible notes
held by certain initial investors under the Secured Note Purchase Agreement with
an aggregate principal amount of $250,000 (such notes then in default pursuant
to a monthly expenditure requirement contained therein), and (iii) a repricing
of both the conversion rate of all of the outstanding Secured Convertible Notes
issued under the Secured Note Purchase Agreement into our common stock and the
exercise price of the warrants held by certain initial investors not subject to
the Repayment (the "Continuing Investors") and the issuance of certain
additional warrants to the Continuing Investors in return for their consent to
certain amendments and waivers. In return for the additional funding of
$1,000,000, the private investor received two additional Secured Convertible
Promissory Notes, with an aggregate principal amount of $300,000 and $700,000,
respectively, and related warrants, each issued pursuant to the terms of the
Secured Note Purchase Agreement. The full amount of the outstanding secured
convertible notes issued under the Secured Note Purchase Agreement, after giving
effect to the January 2002 transactions, had an aggregate principal amount of
$1,625,000, and were all secured by a general security interest in the assets of
the Company.
II-1
The outstanding Secured Convertible Promissory Notes were due June 30, 2003 and
bear interest at 9% per annum (payable at maturity or on the effective date of
an early termination). Pursuant to the January 2002 transactions, the conversion
terms of the outstanding secured notes were adjusted so that the notes are
convertible into our common stock at a rate of $0.5264 per share. The conversion
of the notes into eMagin common stock is mandatory upon certain conditions
including the completion of a next round of financing by the Company of
convertible debt securities or equity securities in a minimum amount of $10
million. The holders of the notes may also convert, at their option, the notes
and accrued interest into our common stock. Upon a change of control event, we
may also call and purchase the notes at a purchase price equal to 250% of the
principal amount plus accrued interest. If we do not exercise this call right,
in the event of a change of control, the holders may put the notes to the
Company at the 250% of the principal amount pricing. Pursuant to the terms of
the January 2002 transactions, the exercise price of the outstanding three year
warrants held by the Continuing Investors was adjusted to $0.5469 per share. The
Initial Investors whose secured convertible notes were cancelled pursuant to the
Repayment retained the three-year warrants previously issued to them under the
Purchase Agreement, which have an exercise price of $1.67 per share. All of the
outstanding warrants issued under the Secured Note Purchase Agreement, including
those issued pursuant to the January 2002 transactions described above, are
exercisable for an aggregate of up to 1,954,944 shares of our common stock.
As described below, the Investor agreed, in connection with the financing that
we completed as of April 25, 2003, to (a) amend the secured notes issued to
them, (b) terminate the security agreement dated November 20, 2001 that was
entered into in connection with the purchase of the original secured notes and
allow the new investors to enter into a new security agreement with them on a
pari passu basis in order for eMagin to continue its operations as a developer
of virtual imaging technology, and (c) simultaneously participate in the new
financing.
Pursuant to the issuance of the notes and warrants under the Secured Note
Purchase Agreement, we also entered into a registration rights agreement
providing for the registration of shares to be issued pursuant to a conversion
of the Secured Convertible Promissory Notes and the shares to be issued pursuant
to the exercise of the warrants issued thereunder. The registration rights
agreement required us to file a registration statement no later than 90 days
after the issuance of the notes and warrants at the initial closing. We are
currently in default of this filing requirement. However management has been
advised that the holders of such rights are amenable to waiving and extending
the time period for the filing of the registration statement. Pursuant to a
failure by us to use our reasonable best efforts to cause the registration
statement to be declared effective by the Commission within six months of the
date of the issuance of the Secured Convertible Promissory Notes and warrants,
the registration rights agreement provides for the payment of liquidated damages
at a rate of one percent (1%) per month (calculated to the nearest calendar day)
of the value of the registrable securities not so declared effective until such
registrable securities shall be declared effective.
We entered into a Securities Purchase Agreement dated as of February 27, 2002
providing for the issuance and sale to eight accredited investors of an
aggregate of (i) 3,617,128 restricted shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years for an aggregate of
1,446,852 shares of our common stock. The warrants have an exercise price of
$0.7542. For the issuance of the shares and warrants, we received an aggregate
gross proceeds of $2,500,519, with each share purchased at a purchase price of
$.6913, equal to 110% of the daily volume weighted average closing price per
share of our common stock on the American Stock Exchange for a prescribed five
trading day period. In connection with the sale of the shares and warrants, we
also entered into a registration rights agreement with the investors to register
for resale the shares the investors bought in the transaction and the shares to
be issued pursuant to an exercise of the warrants. We are currently in default
of this agreement due to the fact that we have not register the shares. As a
result we are required to pay to each investor an amount equal to one percent
(1%) per month of (A) the purchase price paid by such investor for the purchased
securities, and (B) the value of any outstanding warrants held by such investor
until such registration default no longer exists. As of December 31, 2002 the
Company has accrued $392,000 in penalties under this agreement. The accrued
penalties payable for a registration default under the registration rights
agreement may be paid in our common shares provided such shares are registered
under the Securities Act.
II-2
On March 4, 2002, we entered into a common stock purchase agreement and related
documents with Northwind Associates, Inc., a Cayman Islands corporation (the
"Investor"), pursuant to which we had the right receive in periodic draw downs
at our option and subject to the terms and conditions of the agreement, up to
$15,000,000 in equity financing (the "Equity Line") over a three year period.
The aggregate amount of the Equity Line could have increased to $20,000,000
provided certain additional conditions regarding our share price, trading volume
and market capitalization were met. The initial closing of the agreement
occurred on Friday, March 22, 2002. Our right to draw down on the Equity Line
was subject to our registering for resale (and the continuing effectiveness of
such registration) with the Commission the shares of eMagin common stock
issuable pursuant to the Equity Line and was also subject to certain other
significant conditions, including limits as to the maximum and minimum draw down
amounts as specified in the common stock purchase agreement. The maximum
investment amount for any draw down was the lesser of (i) $5,000,000, and (ii)
15% of the volume weighted average price for our common stock (as reported by
the American Stock Exchange) for the 30 trading days immediately prior to the
applicable commencement date for such draw down multiplied by the total
aggregate trading volume in respect of our common stock for such period.
Pursuant to a draw down, the Investor agreed to purchase our shares at a
discount to the price of our common shares on the American Stock Exchange. More
specifically, the discounted purchase price to be paid by the Investor under the
Equity Line was generally equal to (i) 88% of the daily volume weighted average
price of our common stock on the American Stock Exchange for a prescribed 10
trading day period provided that the such stock price was less than $4.00 per
share at the time of determination, (ii) 90% if such stock price at the time of
determination exceeded $4.00 per share, and (iii) 92% if such stock price at the
time of determination exceeded $6.00 per share. The discounted purchase price
could have been reduced by an additional 3% pursuant to certain special
conditions as set forth in the agreement. The amount of our shares issued
pursuant to draw downs on the Equity Line was also limited to 19.9% of the
issued and outstanding common stock (unless stockholder approval of any excess
amount is received) and no draw down could have been made to the extent that it
would have resulted in the Investor and its affiliates beneficially owning more
than 9.9% of our outstanding common stock. The agreement also limited our
ability to enter into any other equity line type of financing during the term of
the agreement and provides to the Investor a right of first refusal for
subsequent sales by the Company of its securities.
II-3
Additionally, in consideration for the Investor's purchase commitment under the
Equity Line and certain costs associated therewith, we issued to the Investor
30,000 unregistered shares of eMagin's common stock and warrants to purchase up
to 150,000 shares of our common stock at an exercise price equal to 115% of the
daily volume weighted average price of the common stock for the fifteen trading
days preceding the date of the delivery of the warrant by the Company or
$0.8731. Each warrant is exercisable for a period of three years commencing six
months from the date of their delivery by the Company.
In connection with the Equity Line, we also entered into a registration rights
agreement dated as of March 4, 2002 with the Investor that required the Company
to file, obtain and maintain the effectiveness of a registration statement on an
appropriate form with the Commission in order to register the sale and public
resale of shares of the common stock acquired by the Investor under the
agreement and upon the exercise of the warrants. Under the terms of the
registration rights agreement, the Company was required to file such
registration statement within sixty days of the date of the agreement. This
agreement was terminated in December 2002 whereby the Investor, retained it
warrants and eMagin agreed to pay the sum of $25,000 upon the completion of
specific financing.
On June 20, 2002, we entered into a secured note purchase agreement with an
investor whereby the Investor agreed to lend eMagin $200,000 in exchange for (i)
$200,000 11.00% per annum secured promissory note due on August 30, 2002, and
(ii) warrants exercisable for a period of five (5) years to purchase 300,000
shares of common stock of eMagin. Such warrant may not be exercised by the
holder so long as the holder is the beneficial owner, directly or indirectly, of
more than ten percent (10%) of our common stock for purposes of Section 16 of
the Securities Exchange Act of 1934. We received the proceeds from the secured
note on June 28, 2002.
Interest was payable on the secured note at a rate of 11% per annum and was
payable at maturity or on the effective date of an early termination. The full
amount of the secured note was secured by (i) a first priority general security
interest in the assets of Virtual Vision, Inc., our wholly owned subsidiary,
pursuant to a security agreement dated June 20, 2002 by and between Virtual
Vision, Inc., Alligator Holdings, Inc. and the Investor; and (ii) a second
priority general security interest in our assets pursuant to a subordinated
security agreement dated June 20, 2002, by and between eMagin Corporation,
Alligator and the Investor. Upon a change in control event, we had the right to
call the secured note and purchase all of the aggregate principal amount of the
secured note at a price equal to 250% of the principal amount plus accrued and
unpaid interest. If we did not call the secured note within thirty (30) days of
the event of a change in control, the Investor had the right to put the secured
note to us at a price equal to 250% of the aggregate principal amount for a
period of thirty days following the call period.
As described below, the Investor agreed, in connection with the financing that
we completed as of April 25, 2003, to (a) amend the secured note issued to them,
(b) terminate the security agreements dated June 20, 2002 that was entered into
in connection with the purchase of the secured note and allow the new investors
to enter into a new security agreement with them on a pari passu basis in order
for eMagin to continue its operations as a developer of virtual imaging
technology, and (c) simultaneously participate in the new financing.
In connection with the issuance of the warrants, we entered into a registration
rights agreement dated June 20, 2002, with the Investor, providing the Investor
with certain registration rights under the Securities Act of 1933, as amended,
to register for resale the shares to be issued pursuant to an exercise of the
warrants.
On April 25, 2003, we entered into a global restructuring and secured note
purchase agreement with a group of several accredited institutional and
individual investors whereby the Investors agreed to lend us $6,000,000 in
exchange for (i) the issuance of $6,000,000 principal amount of 9.00% secured
convertible promissory notes due on November 1, 2005 and (ii) warrants to
purchase an aggregate of 7,749,921 shares of common stock of eMagin (subject to
certain customary anti-dilution adjustments), which Warrants are exercisable for
a period of three (3) years.
Interest is payable on the notes at a rate of 9% per annum and, at our option,
may be paid through the delivery of shares of our common stock (registered
pursuant to the registration rights agreement referred to below) in lieu of cash
interest payments. Subject to certain limitations, the notes may be converted,
at the option of the holder, in whole or in part, into common shares with a
conversion price equal to 105% of the volume weighted average of the closing
price of our common shares as reported on The American Stock Exchange by the
Wall Street Journal, New York City edition, for the five (5) trading days
immediately preceding the closing date.
II-4
The exercise price of the warrants on a per share basis is $.8110, an amount
equal to 110% of the volume weighted average of the closing price of our common
shares as reported on The American Stock Exchange by the Wall Street Journal,
New York City edition, for the five (5) trading days immediately preceding the
closing date.
As part of the transactions, the existing the holders of an aggregate of
$1,625,000 principal amount of secured notes that were purchased pursuant to a
secured note purchase agreement entered into as of November 27, 2001, and the
holder of a $200,000 principal amount secured note that was purchased pursuant
to a secured note purchase agreement entered into as of June 20, 2002, agreed to
(a) amend their respective notes issued to them, (b) terminate the respective
security agreements dated November 20, 2001 and June 20, 2002 that were entered
into in connection with the purchase of their notes and allow the new investors
to enter into a new security agreement with them on a pari passu basis in order
for eMagin to continue its operations as a developer of virtual imaging
technology, and (c) simultaneously participate in this new round of financing
(subject to the terms and conditions set forth in the secured note purchase
agreement). The amendments to the notes included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the secured note
purchase agreement, (ii) extending the maturity dates of the notes from June 30,
2003 to November 1, 2005, and (iii) revising and clarifying certain of the other
terms and conditions of the notes, including provisions relating to interest
payments, conversions, default and assignments of the notes.
In connection with the completion of the transactions under the securities
purchase agreement, we also entered into a security agreement with the Investors
dated as of April 25, 2003, and a registration rights agreement dated as of
April 25, 2003 providing the investors with certain registration rights under
the Securities Act of 1933, as amended, with respect to our common stock issued
or issuable in lieu of cash interest payments on the notes, upon conversion of
the notes and/or exercise of the warrants.
II-5
In addition to the foregoing, as a condition to and simultaneously with the
closing of the transaction pursuant to the secured note purchase agreement,
certain holders of our convertible notes agreed to convert approximately $4.9
million of notes and accrued interest into shares of our common stock, subject
to a "lock up" arrangement allowing only limited sales through private
transactions for their remaining shares through December 31, 2003. Specifically,
The Travelers Insurance Company agreed to convert their $1 million convertible
note plus related interest into our common stock at a conversion price of
approximately $0.53 per share, and SK Corporation has agreed to convert its $3
million convertible note and accrued interest into our common stock at an
approximate conversion price of approximately $1.28 per share. As further
conditions to the closing of the transaction pursuant to the secured note
purchase agreement, we have also entered into settlement or restructuring
agreements with certain of our other creditors to whom we owed approximately
$5.2 million of current payables, pursuant to which the creditors have agreed to
accept shares of our common stock in full or partial satisfaction of the amount
owed to them, or which allow us to either make discounted payments to them or to
make payments under more favorable payment terms than previously were in place.
Between March 31, 2003 and May 20, 2003, the Company issued an aggregate of
2,399,656 shares of common stock in consideration of services rendered by
consultants and the satisfaction of certain liabilities.
On January 9, 2004, eMagin Corporation and several accredited institutional and
private investors entered into a Securities Purchase Agreement whereby such
investors purchased an aggregate of 3,333,364 shares of common stock for an
aggregate purchase price of $4,200,039.
The shares of common stock were priced at a 20% discount to the average closing
price of the stock from December 30, 2003 to January 6, 2004, which ranged from
$1.38 to $1.94 per share during the period for an average closing price of $1.58
per share, making the discounted price $1.26 per share. In addition, the
investors received warrants to purchase an aggregate of 2,000,019 shares of
common stock (subject to anti-dilution adjustments) exercisable at a price of
$1.74 per share for a period of five (5) years. The warrants were priced at a
10% premium to the average closing price of the stock for the pricing period.
eMagin also issued additional warrants to the investors to acquire an aggregate
of 2,312,193 shares of common stock. 1,206,914 of such warrants are exercisable,
within 6 months from the effective date of the registration statement covering
these securities, at a price of $1.74 per share (a 10% premium to the average
closing price of the stock for the pricing period), and 1,105,279 of such
warrants are exercisable within 12 months from the effective date of the
registration statement covering these securities, at a price of $1.90 per share
(a 20% premium to the average closing price of the stock for the pricing
period).
On March 3, 2004, eMagin Corporation and the holders of its Secured Convertible
Notes (the "Notes"), which are due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes, together with all of the accrued interest on the Notes,
into 11,394,621 shares of common stock of eMagin.
The principal amount of the Notes, which were all issued pursuant to the Global
Restructuring and Secured Note Purchase Agreement dated as of April 25, 2003,
was $7.825 Million. This amount included $6.0 Million of new notes issued in
April 2003 and $1.825 million of amended and restated notes that were originally
between November 2001 and June 2002. In addition, the accrued interest on the
Notes totaled $742,424. The conversion prices for the Notes were set at the time
of their initial issuance.
In consideration of the noteholders agreeing to the early conversion of the
Notes, eMagin has agreed to issue the noteholders warrants to purchase an
aggregate of 2.5 million shares of common stock (the "Warrants"), which Warrants
are exercisable at a price of $2.76 per share. 1.5 million of the Warrants are
exercisable until the later of (i) twelve (12) months from the date upon which a
registration statement covering the shares issuable upon exercise of the
Warrants is declared effective by the Securities and Exchange Commission, or
(ii) December 31, 2005. The remaining 1.0 million of the Warrants are
exercisable until four (4) years from the date upon which the registration
statement covering such shares is declared effective by the Securities and
Exchange Commission.
II-6
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of eMagin or executive officers of
eMagin, and transfer was restricted by eMagin in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
II-7
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean eMagin Corporation, a Delaware
corporation.
2.1 Agreement and Plan of Merger between Fashion Dynamics Corp., FED Capital
Acquisition Corporation and FED Corporation dated March 13, 2000, as filed
in the Registrant's Form 8-K/A Report (file no. 001-15751) incorporated
herein by reference.
3.1 Amended and Restated Articles of Incorporation, as filed in the
Registrant's Proxy dated June 14, 2001, incorporated herein by reference.
3.2 Bylaws, as filed in the Registrant's Proxy dated June 14, 2001,
incorporated herein by reference.
3.3 Amended Articles of Incorporation, as filed in the Registrant's Proxy
dated June 13, 2003, incorporated herein by reference.
4.1 Form of Secured Convertible Promissory Note dated as of April 25, 2003
filed April 28, 2003, as filed in the Registrant's Form 8-K incorporated
herein by reference.
4.2 Form of Amended and Restated Secured Convertible Promissory Note dated as
of April 25, 2003 filed April 28, 2003, as filed in the Registrant's Form
8-K incorporated herein by reference.
4.3 Form of Warrant dated as of April 25, 2003 filed April 28, 2003, as filed
in the Registrant's Form 8-K incorporated herein by reference.
4.4 Form of Series A Common Stock Purchase Warrant dated as of January 9,
2004. Incorporated herein by reference to our January 9, 2004 Form 8-K.
4.5 Form of Series B Common Stock Purchase Warrant dated as of January 9,
2004. Incorporated herein by reference to our January 9, 2004 Form 8-K.
4.6 Form of Series C Common Stock Purchase Warrant dated as of January 9,
2004. Incorporated herein by reference to our January 9, 2004 Form 8-K.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent
10.1 2000 Stock Option Plan, as filed in the Registrant's Form S-8 (file no.
333-32474) incorporated herein by reference.
10.2 Nonexclusive Field of Use License Agreement relating to OLED Technology
for miniature, high resolution displays between the Eastman Kodak Company
and FED Corporation dated March 29, 1999, as filed in the Registrant's
Form 10-K/A for the year ended December 31, 2000 incorporated by reference
herein.
10.3 Amendment Number 1 to the Nonexclusive Field of Use License Agreement
relating to the OLED Technology for miniature, high resolution displays
between the Eastman Kodak Company and FED Corporation dated March 16,
2000, as filed in the Registrant's Form 10-K/A for the year ended December
31, 2000 incorporated by reference herein.
10.4 Amendment Number 1 to the Lease between International business Machines
Corporation and FED Corporation dated July 9, 1999, as filed in the
Registrant's Form 10-K/A for the year ended December 31, 2000 incorporated
by reference herein.
II-8
10.5 Lease between International Business Machines Corporation and FED
Corporation dated May 28, 1999, as filed in the Registrant's Form 10-K/A
for the year ended December 31, 2000 incorporated by reference herein.
10.6 Amendment Number 2 to the Lease between International Business Machines
Corporation and FED Corporation dated January 29, 2001, as filed in the
Registrant's Form 10-K/A for the year ended December 31, 2000 incorporated
by reference herein.
10.7 Secured Note Purchase Agreement entered into as of November 27, 2001, by
and among eMagin Corporation and certain investors named therein, as filed
in the Registrant's Form 8-K dated December 18, 2001 incorporated herein
by reference.
10.8 Registration Rights Agreement dated November 27, 2001 by and between
eMagin Corporation and certain investors named therein, as filed in the
Registrant's Form 8-K dated December 18, 2001 incorporated herein by
reference.
10.9 Securities Purchase Agreement dated as of April 25, 2003 by and among
eMagin and the investors identified on the signature pages thereto, filed
April 28, 2003, as filed in the Registrant's Form 8-K incorporated herein
by reference.
10.10 Security Agreement dated as of April 25, 2003 by and among eMagin and
certain initial investors identified on the signature pages thereto filed
April 28, 2003, as filed in the Registrant's Form 8-K incorporated herein
by reference.
10.11 Registration Rights Agreement dated as of April 25, 2003 by and among
eMagin and certain initial investors identified on the signature pages
thereto filed April 28, 2003, as filed in the Registrant's Form 8-K
incorporated herein by reference. 10.12 Securities Purchase Agreement
dated as of January 9, 2004 by and among eMagin and the investors
identified on the signature pages thereto. Incorporated herein by
reference to our January 9, 2004 Form 8-K.
10.12 Registration Rights Agreement dated as of January 9, 2004 by and among
eMagin and certain initial investors identified on the signature pages
thereto. Incorporated herein by reference to our January 9, 2004 Form 8-K.
10.13 2003 Stock Option Plan, as filed in the Registrant's Proxy dated June 13,
2003, incorporated herein by reference.
10.14 Master Amendment Agreement dated as of February 17, 2004 by and among
eMagin and the investors identified on the signature pages thereto, filed
March 5, 2004 on our Form 8-K, incorporated herein by reference.
10.15 Registration Rights Agreement dated as of February 17, 2004 by and among
eMagin and the investors identified on the signature pages thereto, filed
March 5, 2004 on our Form 8-K, incorporated herein by reference.
10.16 Letter Agreement amending the Master Amendment Agreement dated as of March
1, 2004 by and among eMagin and the investors identified on the signature
pages thereto, filed March 5, 2004 on our Form 8-K, incorporated herein by
reference.
10.17 Amendment Number 4 to the Lease between International business Machines
Corporation and FED Corporation dated July 9, 1999, as filed December 20,
2004 on our Form 8-K, incorporated by reference herein.
23.1 Consent of Independent Registered Public Accounting Firm - Eisner LLP
23.2 Consent of Independent Registered Public Accounting Firm - Grant Thornton
LLP
23.4 Consent of Sichenzia Ross Friedman Ference LLP (see Exhibit 5.1).
II-9
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-10
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Hopewell
Junction, State of New York, on January 7, 2005.
EMAGIN CORPORATION
BY: /s/ Gary Jones
----------
Gary Jones
CHIEF EXECUTIVE OFFICER,
PRESIDENT
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
NAME TITLE DATE
---- ----- ----
/s/ Gary Jones Chief Executive Officer, President, and January 7, 2005
---------- Chairman (Principal Executive Officer)
Gary Jones
/s/ Claude Charles Director January 7, 2005
--------------
Claude Charles
/s/ Jacob E. Goldman Director January 7, 2005
----------------
Dr. Jacob E Goldman
/s/ Jack Rivkin Director January 7, 2005
-----------
Jack Rivkin
/s/ Paul Cronson Director January 7, 2005
------------
Paul Cronson
/s/ Jill Wittels Director January 7, 2005
------------
Dr. Jill Wittels
/s/ Thomas Paulsen Director January 7, 2005
--------------
Adm. Thomas Paulsen
II-11