SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-24757
eMagin Corporation
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(Exact name of registrant as specified in its charter)
Delaware 56-1764501
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(State or other jurisdiction of incorporation or organization
and I.R.S. Employer Identification No.)
eMagin
2070 Route 52
Hopewell Junction, New York 12533
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(Address of principal executive offices) (Zip Code)
(845) 892-1900
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of April 25, 2003 was approximately $16.8 million, based upon
the closing sales price of the Registrant's common stock as quoted on the AMEX.
The number of shares outstanding of the Registrant's common stock as of April
25, 2003 was 31,174,248.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
PRELIMINARY NOTE:
This Amended Annual Report on Form 10-K/A is being filed to report Part III
information (Items 10, 11, 12 and 13) in lieu of the incorporation of such
information by reference to the Company's definitive proxy material for its 2002
Annual Meeting of Shareholders. In all other material respects, this Amended
Annual Report on Form 10-K/A is unchanged from the 2002 Annual Report on Form
10-K previously filed by the Company on April 15, 2003.
FORM 10-K/A
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
INDEX
PART I
Page
Item 1: Description of Business 5
Item 2: Description of Property 20
Item 3: Legal Proceedings 21
Item 4: Submission of Matters to a Vote of Security Holders 21
PART II
Item 5: Market for the Registrant's Common Equity and Related Shareholder Matters 21
Item 6: Selected Financial Data 24
Item 7: Management's Discussion and Analysis of Financial Conditions and Results of Operations 26
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 34
Item 8: Financial Statements 42
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 67
PART III
Item 10: Directors and Executive Officers of the Registrant 67
Item 11: Executive Compensation 70
Item 12: Security Ownership of Certain Beneficial Owners and Management 71
Item 13: Certain Relationships and Related Transactions 71
PART IV
Item 14: Controls and Procedures 71
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, some of the
statements in this Report contain forward-looking statements that involve risks
and uncertainties. These statements are found in the sections entitled
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Risk Factors." They include statements concerning:
our business strategy; expectations of market and customer response; liquidity
and capital expenditures; future sources of revenues; expansion of our proposed
product line; and trends in industry activity generally. In some cases, you can
identify forward-looking statements by words such as "may," "will," "should,"
"expect," "plan," "could," "anticipate," "intend," "believe," "estimate,"
"predict," "potential," "goal," or "continue" or similar terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including, but not limited to, the risks
outlined under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. For
example, assumptions that could cause actual results to vary materially from
future results include, but are not limited to: our ability to successfully
develop and market our products to customers; our ability to generate customer
demand for our products in our target markets; the development of our target
markets and market opportunities; our ability to manufacture suitable products
at competitive cost; market pricing for our products and for competing products;
the extent of increasing competition; technological developments in our target
markets and the development of alternate, competing technologies in them; and
sales of shares by existing shareholders. Although we believe that the
expectations reflected in the forward looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Unless we are required to do so under US federal securities laws
or other applicable laws, we do not intend to update or revise any
forward-looking statements
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PART I
ITEM 1: BUSINESS
Introduction
eMagin Corporation designs, develops, and markets OLED (organic light
emitting diode)-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 a virtual image that appears comparable to
that of a computer monitor or a large-screen television. Our products enable our
original equipment manufacturer (OEM) customers to develop and market improved
or new electronic products. 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
February 2002. We are now accepting conditional purchase agreements for larger
quantities of our first two commercial microdisplay products. 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 license fundamental OLED technology from Eastman Kodak and we
have developed our own technology to create high performance OLED-on-silicon
microdisplays and related optical systems. iSuppli-Stanford Resources, an
industry market research organization, has identified the emergence of OLED
technology as a major advance, with OLED revenue expected to reach $125 million
in 2003 and rise to more than $3.1 billion in 2009 for a compound annual growth
rate of 56% from 2003 to 2009.
As the first to exploit OLED technology for microdisplays, and with our
partners and intellectual property, we believe that we enjoy a significant
advantage in the commercialization of this display technology. We are the only
company to announce, publicly show and sell full-color OLED-on-silicon
microdisplays.
Our wholly owned subsidiary, Virtual Vision, Inc., provides added value
services to our customers by providing non-recurring engineering (NRE) support
for virtual imaging subsystem design and prototyping, as well as by creating
standardized optic and electronics interfaces to our displays to accelerate the
time to market of our new potential customers.
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 - near-eye microdisplays.
Near-eye 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 0.5-inch to 0.75-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
optics recreates the viewing and sound experience of sitting in the middle seat
of a typical movie theater.
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iSuppli-Stanford Resources, a market intelligence firm focusing on the
global electronic display industry, forecasts that the world market for
microdisplays as components will grow from $669 million in 2001 to $1.9 billion
in 2007, for a compounded annual growth rate of 19%, with 244 million units
projected to be shipped in 2007. Another leading industry market research
organization, DisplaySearch, projects that the overall microdisplay market is
expected to grow to $3.1 billion by 2005.
We believe that the most significant driver of the 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 microdisplay products in two categories: (i) near-eye
microdisplays incorporated in products such as viewfinders, digital cameras,
video cameras and personal viewers for cell phones and (ii) headset-application
platforms which include mobile devices such as notebook and sub-notebook
computers, wearable computers, portable DVD systems, games and other
entertainment.
Until now, 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 alternate 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 (OLED)
technology, dubbed molecular 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
alternate technologies.
We have developed our own proprietary 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 original equipment manufacturer (OEM) customers.
We believe that our OLED-on-silicon microdisplays represent a new
generation of microdisplay technology. 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.
In addition, our OLED-on-silicon microdisplays offer faster response times
and use less power than competitive liquid crystal microdisplay systems. We
expect that our integrated electronics and unique OLED characteristics, coupled
with our lenses, will result in lower overall system costs for OEMs.
Our OLED microdisplay stores, until refreshed, all the color and luminance
value information at each of the more than 1.5 million picture elements (pixels)
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 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
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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
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 in full production.
We have commercialized two products, our SVGA+ resolution microdisplay
(1.53 million picture elements) and our stereovision-capable SVGA-3D
microdisplay (1.44 million picture elements). We are currently developing a
military and industrial oriented ultra-high-luminance SXGA integrated circuit
(3.9 million picture elements) that is due for completion in late 2003 or 2004.
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, which
include a color SVGA+ resolution microdisplay and associated electronics
required for OEMs to build and test new products. This developer kit provides
OEMs with the first opportunity for evaluation of an OLED-on-silicon
microdisplay.
Our Products
We offer our products to Original Equipment Manufacturers (OEM) and other
large volume buyers as both separate components and integrated bundles in a
three-tiered platform:
(1) OLED-on-silicon microdisplays for integration into OEM products for
consumer, industrial, and military markets;
(2) Microviewer(TM) 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. These products have been prototyped and are planned;
(3) Head-wearable display systems that will incorporate our
Microviewers(TM) for consumer and industrial markets. These products
have been prototyped and are planned.
We also plan to offer engineering support, enabling customers to quickly
integrate our products into their own product development programs.
(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 include:
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
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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.
0.98-inch Diagonal SXGA (Super Extended Video Graphics Array) for
Industrial, Medical and Military Applications. We are developing an introductory
SXGA microdisplay product as a personal computer-compatible headset display for
military, medical, high-end commercial, and industrial applications. This
product will have 1280 x 1024 monochrome pixels and will be adaptable to color
VGA resolution. The display will have a capability for very high luminance. We
expect that this display will be able provide over 30,000 Cd/m2 luminance. For
reference, a typical notebook computer operates at 80 Cd/m2 peak luminance. This
digital video and data interface product is being designed to exhibit a wide
dimming range and high luminance for special military applications. We
anticipate that the performance features of the SXGA, such as high-speed digital
video and 256 gray levels, have the potential to serve as a catalyst for the
development of new applications.
(2) Microviewer(TM) Products Incorporating Lenses
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
hold key patents on 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.
(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.
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.
Prior Product and Technology Awards
o Dual Use Technology Achievement Award
March 2002. eMagin and the US Air Force Armstrong Laboratory received first
place for the US Air Force and was recognized as one of the best dual use
technologies in 2001 recognition across all branches of the Armed Services for
the Second Annual Dual Use Science and Technology Achievement Award awarded by
the Deputy Under Secretary for Defense, Charles J. Holland. The award recognizes
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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.
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 Display Search, 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.
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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 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.
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.
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 the US Air Force Joint Strike Fighter, 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
has delayed increased volume use of displays in that program until 2004. Our
display is also used in Kaiser Electro-Optics, Inc.'s commercially available
ProView S035 Monocular HMD. The US Air Force has selected our OLED microdisplay
technology for incorporation into the Strike Helmet 21 system that uses
Integrated Panoramic Night Vision Goggles (IPNVG) in avionics helmets. The
Strike Helmet 21 system is targeted for integration into F-15E aircraft in the
2003-2004 time period. Similar systems are of interest for other military
applications as well as for related operations such as fire and rescue.
Commercial Industrial, and Medical
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 (parts, tools and equipment
availability); instant accessibility to maintenance or construction manuals;
routine quality assurance inspection; and real-time viewing of images and data.
Commercial products in these sectors include Sage Technologies, Ltd.'s Helmet
Vue (TM) Thermal Imaging System and an upcoming accessory to Antelope
Technolgies' MCC Wearable Computing system, which incorporates IBM's wearable PC
technology.
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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.
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. 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
(PDAs) using video headsets as screens can be made possible by
high-resolution microdisplays. A lightweight (under one pound) pocketsize
computer 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.
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
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|X| Institutional Control
|X| Maintenance (Industry & Consumer)
|X| Communications
|X| Finance
|X| Education and Training
----------------------------------- ----------------------------------------------------------------------
Military |X| Communications
|X| Targeting and Enhanced 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, and |X| Cell Phones/Headset phones
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
----------------------------------- ----------------------------------------------------------------------
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:
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.
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.
Reduce production costs. We intend to reduce our production costs by
lowering our fixed costs and improving our manufacturing yields.
Optimize manufacturing efficiencies by outsourcing while protecting
proprietary processes. We intend to outsource certain capital-intensive 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 chromaticity (color balance),
specialized boards or interfaces, and 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.
12
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 have recently announced the execution of an agreement with a major
manufacturing partner 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.
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
13
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 (LCDs) because OLEDs do not require a space-wasting perimeter seal
band.
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 (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
14
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 (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 (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; 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, 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 (degree)C, while our OLEDs turn on instantly and can operate between
-55 (degree)C and 130 (degree)C. 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.
15
Complementary Lens and System Technology
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. During 2003, we plan to outsource manufacturing of our lenses in
order to provide them in larger quantities to our customers.
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
(e.g., 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
Current Status
We are now shipping monochrome and full color versions of our first two
commercial microdisplay products. Our SVGA+ resolution OLED microdisplay (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 (1.44
million picture elements) was designed with the input of multiple customers to
16
principally target the mobile personal computer (PC) 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 (3.9
million picture elements) that is due for completion in 2003, and we have
shipped limited quantities of prototypes of our eGlass headsets. (See "Our
Products")
Near term sales efforts have been focused on our military, industrial, and
medical customers. Our primary production orders and design wins to date have
been for the SVGA+ display. To date, we have shipped products and evaluation
kits to more than 70 OEM customers. OEM evaluation and product design cycles may
take from 6 months to 24 months. 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 during 2002 through 2004. 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.
General Sales and Marketing Effort
We primarily provide display components and Microviewer(TM) display-optic
modules for OEMs to incorporate into their branded products and sell through
their 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.
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.
OEMs develop designs to enable them to develop products for their own
target markets. 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.
Customers
The Company sells products to a large number of customers, which are
primarily in the United States. The Company's customer base includes 2 customers
who account for 32%, 6% and 0% of sales in fiscal 2002, 2001 and 2000,
respectively. One customer represented 18%, 6% and 0% and the other customer
represented 14%, 0% and 0% of sales in fiscal 2002, 2001 and 2000. Although the
Company is directly affected by the well-being of these customers, management
does not believe significant credit risk exists at December 31, 2002.
Backlog
As of December 31, 2002 we had a backlog of purchase agreements of
approximately $10 million and by March 31, 2003 the number had grown to
approximately $27 million. Our backlog consists of both purchase agreements for
delivery over the next 24 months and short-term purchase orders for delivery
within 3-6 months. Most orders are subject to cancellation by the customer with
17
no or limited penalties. Because of the possibility of customer changes in
delivery schedules or cancellations and potential delays in product shipment,
our backlog as of a particular date may not be indicative of net revenue for any
specific succeeding period. Lack of working capital has 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.
Research and Development
OLED technology is a relatively new technology that has considerable room
for substantial improvements in luminance, life, power efficiency, voltage
swing, design compactness, 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 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 four years, we have spent
approximately $32.8 million on research and development. In 2001, we spent
approximately $12.7 million, and in 2002 we spent approximately $7.3 million on
research and development. During the same four-year period, we received $3.6
million in funding from US government under research and development cost
sharing arrangements.
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 45,000 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 believe that our lease agreement with IBM for a 16,300 square foot class 10
clean room space, along with additional, lower level clean room space, and the
associated acquisition of substantial amounts of advanced manufacturing
equipment is at a favorable cost, represents a substantial asset and competitive
advantage. At this time, we owe to IBM previously unpaid lease payments which
must be paid in order to maintain our lease. Our lease runs until 2004 and we
have the option to then renew it on the same terms for five additional one-year
terms.
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
capable of producing over 50,000 SVGA+ or SVGA-3D displays per month once we are
manufacturing around the clock (24 hour/7-days per week) with a fully loaded
manufacturing line.
We lease additional non-cleanroom facilities for chemical mixing, cleaning,
chemical systems, and glass/silicon cutting. OLED chemicals can be purified in
our facility with our 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.
18
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
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 industrial or government products. We
plan to outsource high volume head-wearable display production to low cost
plastics, lenses, and assembly manufacturers, including manufacturers in Asia.
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 require additional
capital to: (1) staff and train employees for round the clock operation, (2)
build suitable inventory of integrated circuits and other raw materials, and (3)
properly maintain and continue to upgrade the equipment set. 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 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. We currently
outsource integrated circuit fabrication while retaining the OLED application
and OLED sealing 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
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
19
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.
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 (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
Three-Five Systems, 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
(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
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 March 31, 2003, we had a total of 18 full time, part time, and
temporary staff plus 4 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: PROPERTIES
Our principal executive offices are located at: 2070 Route 52, Hopewell
Junction, New York 12533. We lease approximately 45,000 square feet of space,
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. Our lease runs until 2004 and we have the option to then renew it on
the same terms for an additional five, one-year terms.
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 December 2003.
eMagin Corporation's telephone number is (845) 892-1900. Our website
address is www.eMagin.com.
20
ITEM 3: Legal Proceedings
None.
Potential Liabilities: We have liabilities for approximately $14.6 million
for unpaid bills, contracts, and other liabilities. We believe that some of
these liabilities are valid and payable, and others may be negotiated. It is
possible that we may be required to pay this entire amount along with additional
legal and defense costs or penalties.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the Fiscal Year covered by this Report.
PART II
ITEM 5: MARKET FOR REGISTRANT'S 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 and the OTC Bulletin Board. With respect
to OTC Bulletin Board quotes, these prices reflect inter-dealer prices, without
retail mark-up, markdown or commissions and may not represent actual
transactions.
----------------------------------------------------------------------------------------- ----------------- ----------
High Low
----------------------------------------------------------------------------------------- ----------------- ----------
2003
----------------------------------------------------------------------------------------- ----------------- ----------
First Quarter 1.00 0.55
----------------------------------------------------------------------------------------- ----------------- ----------
2002
----------------------------------------------------------------------------------------- ----------------- ----------
First Quarter 1.75 0.42
----------------------------------------------------------------------------------------- ----------------- ----------
Second Quarter 0.89 0.20
----------------------------------------------------------------------------------------- ----------------- ----------
Third Quarter 0.54 0.20
----------------------------------------------------------------------------------------- ----------------- ----------
Fourth Quarter 0.40 0.17
----------------------------------------------------------------------------------------- ----------------- ----------
As of December 31, 2002, there were 30,854,980 shares of common stock outstanding.
----------------------------------------------------------------------------------------- ----------------- ----------
High Low
----------------------------------------------------------------------------------------- ----------------- ----------
2001
----------------------------------------------------------------------------------------- ----------------- ----------
First Quarter 7.98 2.50
----------------------------------------------------------------------------------------- ----------------- ----------
Second Quarter 4.45 2.10
----------------------------------------------------------------------------------------- ----------------- ----------
Third Quarter 2.60 1.10
----------------------------------------------------------------------------------------- ----------------- ----------
Fourth Quarter 1.65 0.27
----------------------------------------------------------------------------------------- ----------------- ----------
As of December 31, 2001, there were 25,171,183 shares of common stock outstanding.
As of December 31, 2002 and December 31, 2001, there were approximately 445
and 425 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.
21
Recent Issuances 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, have an
aggregate principal amount of $1,625,000, and are all secured by a general
security interest in the assets of the Company.
The outstanding Secured Convertible Promissory Notes are 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. We
relied on Section 4(2) of the Securities Act and on Rule 506 of Regulation D in
issuing the securities without registering the offering under the Securities
Act.
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. Some of these securities
have already been sold by investors under 144 rules.
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
22
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. The issuance of the shares and the warrants was exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) of such Securities Act and Regulation D promulgated thereunder.
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 may 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 may increase to $20,000,000 provided
certain additional conditions regarding our share price, trading volume and
market capitalization are met. The initial closing of the agreement occurred on
Friday, March 22, 2002. Our right to draw down on the Equity Line is 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 is 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 is 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 will 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 will generally
equal (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 is less than $4.00 per share at the time of determination,
(ii) 90% should such stock price at the time of determination exceed $4.00 per
share, and (iii) 92% should such stock price at the time of determination exceed
$6.00 per share. The discounted purchase price may be 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 is 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 shall be made to the
extent that it would result 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.
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. The
issuance of the shares and the warrants was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of such Securities
Act and Regulation D promulgated thereunder.
In connection with the Equity Line, we also entered into a registration
rights agreement dated as of March 4, 2002 with the Investor that requires 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 must 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.
For information on eMagin's equity compensation plans see Note 9 to Item 8
(Financial Statements and Supplemental Data).
23
ITEM 6: SELECTED FINANCIAL DATA
You should read the following selected financial data together with Item 7
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements including accompanying
notes, and other financial information, all of which are included elsewhere in
this report. The selected financial data for the fiscal years ended December 31,
1998, 1999, 2000, 2001 and 2002 are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP and Grant Thornton
LLP, independent auditors. The historical results are not necessarily indicative
of results to be expected for any future period.
Prior to the acquisition of FED Corporation, Fashion Dynamics Corporation
had no active business operations. Management believes that the comparison of
eMagin's financial results to that of the operating entity (FED Corporation)
provides the most meaningful comparative information to the reader. Accordingly,
the comparative information that follows reflects the operating results of FED
Corporation for all periods prior to the merger and it should be read in
conjunction with the consolidated financial statements and notes thereto of this
Form 10-K.
Fiscal Year Ended December 31,
1998 1999 2000(1) 2001 2002
-------- --------- ---------- --------- ---------
Statement of Operations Data: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Net Contract Revenues..............$6,154 $ 1,895 $ 3,126 $5,005 $841
Product Sales 842 1,287
-------- --------- ---------- --------- ---------
Total revenue................6,154 1,895 3,126 5,847 $2,128
Costs and Expenses:
Research and Development (net
of funding under cost sharing
arrangements) 10,250 10,171 11,815 12,724 7,255
Non-cash expense for
conversion of debt to common
stock .............................. 1,917 -- -- --
--
Non-cash stock-based
compensation........................ -- -- 10,319 2,841 1,647
Amortization of purchase
intangibles......................... -- -- 20,932 17,887 1,326
Write-down of goodwill and
purchased intangibles -- -- -- 32,146 --
Acquired in-process research
and development ....................
-- -- 12,820 -- --
General and Administrative..........
3,514 5,203 6,145 7,385 4,507
-------- --------- ---------- --------- ---------
Loss from operations.................(7,610) (15,396) (58,905) (67,136) (12,607)
-------- --------- ---------- --------- ---------
Other income (expense)................ (122) (404) (2,616) (1,351) (2,306)
-------- --------- ---------- --------- ---------
Net loss........................... $(7,732) $(15,800) $(61,521) $(68,487) $(14,913)
-------- --------- ---------- --------- ---------
---------------------------------
Basic and diluted net $(1.42) $ (6.04) $ (2.78) $ (2.73) $ (0.51)
loss per share........................
Weighted average shares
outstanding used in basic and
diluted per-share calculation
5,450,293 2,614,743 22,144,904 25,100,211 29,416,838
24
(1) The summary financial data for the year ended December 31, 2000
represent a pro forma presentation of the results for this period, containing
the operating results of eMagin Corporation for the year ended December 31,
2000, with the operating results of FED Corporation for the period from January
1, 2000 through March 15, 2000, in order to present operating results for the
year period for comparative purposes.
As of December 31
1998 1999 2000 2001 2002
-------- --------- ---------- --------- ---------
Balance Sheet Data: (IN THOUSANDS)
Working capital (deficit).....................$ 3,371 $(3,295) $ 6,243 $(5,491) $(13,601)
Total assets...................................11,163 5,038 62,549 4,914 1,834
Current maturities of long-term debt........... 62 269 313 693 49
Short-term debt................................ -- 2,127 -- 1,875 5,691
Total shareholders' equity (deficit)...........$ 4,693 $ 60 $59,184 $ (4,878) $(12,808)
25
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion should be read together with our financial
statements and the notes to those statements and other financial information
appearing elsewhere in this report. Our fiscal year ends December 31.
Overview
eMagin Corporation designs, develops, and markets OLED (organic light
emitting diode)-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 a virtual image that appears comparable to
that of a computer monitor or a large-screen television. We shipped initial
samples of our first commercial microdisplay product in March 2001. We are now
accepting orders and shipping larger quantities of our first two commercial
microdisplay products. 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.
Company History
eMagin Corporation was originally incorporated as Fashion Dynamics
Corporation on January 23, 1996 under the laws of the State of Nevada. For the
three years prior its acquisition of FED Corporation, Fashion Dynamics
Corporation had no active business operations, and sought to acquire an interest
in a business with long-term growth potential. On March 16, 2000, Fashion
Dynamics Corporation acquired FED Corporation (derived from field emissive
device), subsequently changed its name to eMagin Corporation (derived from
"electronic imaging") and listed its common stock on the American Stock Exchange
under the "EMA" trading symbol.
Under the terms of the merger agreement that facilitated our acquisition of
FED Corporation, Fashion Dynamics Corporation issued approximately 10.5 million
shares of its common stock to FED Corporation shareholders and issued
approximately 3.9 million options and warrants in exchange for existing FED
options and warrants. The total purchase price of the transaction was
approximately $98.5 million, including $73.4 million of value relating to the
shares issued (at a fair value of $7 per share, the value of a simultaneous
private placement transaction of similar securities), $20.9 million of value
relating to the options and warrants exchanged and $3.8 million of assumed
liabilities. The transaction was accounted for using the purchase method of
accounting. Under the purchase method of accounting, the assets and liabilities
were recorded based upon their fair values at the date of acquisition as
determined by an independent appraisal.
Since for the three-year period prior to the acquisition of FED
Corporation, Fashion Dynamics Corporation had no active business operations,
management believes that the comparison of eMagin's financial results to that of
the operating entity (FED Corporation) provides the most meaningful comparative
information to the reader. Accordingly, the following comparative information
reflects the operating results of FED Corporation for all periods prior to the
merger and it should be read in conjunction with the consolidated financial
statements and notes thereto. The comparison of financial information below for
the period ended December 31, 2000 reflects pro forma results of eMagin for the
period January 1, 2000 through December 31, 2000 and its predecessor FED
Corporation for the period January 1, 2000 to March 15, 2000, on a combined
basis, such that the amounts presented and discussed reflect the full year of
operations for each period. Reference is made to our consolidated financial
statements included herein for further detail on the results of eMagin and FED
Corporation for their respective periods of ownership.
At our annual meeting of stockholders held on July 16, 2001, the
stockholders approved the reincorporation of eMagin Corporation as a Delaware
corporation. The reincorporation became effective on July 16, 2001 by merging
eMagin Corporation, a Nevada corporation ("eMagin-Nevada"), into its then wholly
owned subsidiary, eMagin Corporation, a Delaware corporation (formerly known as
FED Corporation as described above) ("eMagin-Delaware"). Upon completion of this
merger, eMagin-Nevada ceased to exist as a corporate entity and eMagin-Delaware
succeeded to the assets and liabilities of eMagin-Nevada. Under the merger
agreement for the reincorporation, each outstanding share of eMagin-Nevada
common stock was automatically converted into one share of eMagin-Delaware
26
common stock at the time the merger became effective. There has been no
interruption in the trading of our common stock as a result of the
reincorporation. The reincorporation also resulted in the implementation of a
new certificate of incorporation and by-laws for the Company, as the existing
certificate of incorporation and by-laws of eMagin-Delaware continues as the
certificate of incorporation and by-laws of the Company and has replaced the
articles of association and by-laws of eMagin-Nevada. No change in the corporate
name, board members, business, management, fiscal year, assets, liabilities,
employee benefit plans or location of principal facilities of eMagin occurred as
a result of the reincorporation.
Our history has been as a developmental stage company. We are now
transitioning to manufacturing and intend to significantly increase our
marketing, sales, and research and development efforts, and expand our operating
infrastructure. Most of our operating expenses are fixed in the near term. If we
are unable to generate significant revenues, our net losses in any given period
could be greater than expected.
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
Research and development cost
Amounts incurred in connection with research and development activities are
expensed as incurred.
STATEMENT OF OPERATIONS
The following are descriptions of the revenue and expense components of our
statement of operations:
Total revenues currently represent revenues mostly from contracts funded by
U.S. government programs. We have historically earned revenues from certain of
our research and development activities under both fixed-price contracts and
cost-type contracts, including some cost-plus-fee contracts. Revenues relating
to fixed-price contracts are generally recognized on the
27
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 profit based on the relationship of costs
and the allocation of allowable indirect costs as defined by each contract. The
amount of revenues earned is dependent upon the execution of new government
contracts, which may not be predictable or consistent from period to period
because of variations in government funds allocated to research and development
in our field of technology.
Research and development expenses represent salaries, development
materials, external contracts, equipment lease and depreciation expense,
electronics, rent, utilities and costs associated with operating our
manufacturing facility. These costs are expensed as incurred. We have received
cost sharing awards from certain U.S. government agencies to fund certain
research and development. Funding from this type of contract is recognized as a
reduction in research and development operating expenses during the period in
which the services are performed and related direct expenses are incurred. As of
December 31, 2002, we have no remaining amounts in cost sharing contracts to
either incur or bill.
Non-cash stock-based compensation expense represents expenses associated
with stock option grants to our 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. The expense also represents
warrant grants with exercise prices below fair market value to security holders
of eMagin for a reduced number of warrants to induce them to lock-up prior to
the merger.
Amortization of purchased intangibles represents the cost of amortization
of the value of other acquired intangible assets. The purchased intangibles are
amortized over their expected useful lives of three years on a straight-line
basis. In 2001, the Company adopted SFAS No 141 "Business Combinations" and SFAS
No 142 "Goodwill and Other Intangible Assets. After an evaluation, the Company
recorded an impairment write-down of its goodwill in 2001.
Selling, general and administrative expenses principally represent the cost
of salaries and fees for professional services, legal fees incurred in
connection with patent filings and related matters, depreciation and
amortization, and other administrative expenses as well as expenses associated
with marketing.
Basic and diluted net loss per common share is computed by using the
weighted average number of shares of common stock outstanding during the period,
restated for the effect of the merger upon the number of shares outstanding in
the current year, and for the presentation of the net loss per share for the
predecessor, a stock split effected during 1999. No common stock equivalents
have been included in the computation of weighted average shares outstanding, as
their effect would be anti-dilutive.
Results of Operations
Comparison of our financial results for the years ended December 31, 2000,
2001 and 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues
Revenues decreased to $2.1 million for the year ended December 31, 2002
from $5.8 million for the year ended December 31, 2001, representing an decrease
of 64%. This decrease was due primarily to the expiration of Government
contracts and the concentration of the company on transitioning from research
and development to product manufacturing and sales.
Research and Development Expenses
Gross research and development expenses decreased to $7.3 million for the
year ended December 31, 2002 from $12.7 million for the year ended December 31,
2001, representing a 43% decrease. Of these amounts, we received $0.3 million in
cost sharing from the U.S. government for the year ended December 31, 2002, and
28
$1.6 million for the year ended December 31, 2001. The $5.4 million decrease in
gross expenses for the year ended December 31, 2002 reflects reduction in
staffing and reduction in expenditures related to the company's difficult cash
position.
Amortization and Write-Down of Intangibles
Amortization and write down of goodwill and purchased intangibles expense
decreased to $1.3 million for the year ended December 31, 2002 from $50 million
for the year ended December 31, 2001. The $48.7 million decrease is primarily
the result of the goodwill impairment charge recorded in 2001.
Selling, General and Administrative Expenses
General and administrative expenses decreased to $4.5 million for the year
ended December 31, 2002 from $7.4 million for the year ended December 31, 2001.
The decrease of $2.9 million in selling, general and administrative expenses was
due primarily to changes 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. In addition, non-cash stock-based compensation expense was
$1.6 million for the year ended December 31, 2002 versus $2.8 million for the
year ended December 31, 2001. The activity, for the years ended December 31,
2002 and 2001, reflects the amortization of deferred compensation costs related
to the issuance of stock options, warrants issued and re-priced warrants and
options at below fair market values in the first quarter of 2000.
Other Income (Expense)
Other expenses increased to $2.3 million for the year ended December 31,
2002 from $1.4 million for the year ended December 31, 2001. The increase of
$0.9 million was due primarily to increased interest expense. Interest expense
increase was primarily due to the beneficial conversion of debt totaling
approximately $888,000. Net Loss/Net Loss Per Common Share
The following provides a reconciliation of information used in calculating
the per share amounts for the year ended December 31, 2002 2001 and 2000.
2002 2001 2000
Loss attributable to common shareholders
Net loss $(14,912,711) $(68,486,735) $(61,521,866)
Loss attributable to common shareholders $(14,912,711) $(68,486,735) $(61,521,866)
Weighted average shares outstanding 29,416,838 25,100,211 22,144,904
Basic and diluted loss per common share $ (0.51) $ (2.73) $ (2.78)
29
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Revenues increased to $5.8 million for the year ended December 31, 2001
from $3.1 million for the year ended December 31, 2000, representing an increase
of 87%. This increase was due primarily to the recognition of revenue from
certain government contracts relating to head-wearable displays.
Research and Development Expenses
Gross research and development expenses increased to $14.3 million for the
year ended December 31, 2001 from $13.3 million for the year ended December 31,
2000, representing a 7.5% increase. Of these amounts, we received $1.6 million
in cost sharing from the U.S. government for the year ended December 31, 2001,
and $1.5 million for the year ended December 31, 2000. The $1.0 million increase
in gross expenses for the year ended December 31, 2001 reflects the additional
costs associated with personnel costs, equipment leases, depreciation, and
material costs resulting from increased research and development activities and
equipment additions at our manufacturing facility.
Amortization and Write-Down of Goodwill and Purchased Intangibles
Amortization and write down of goodwill and purchased intangibles expense
increased to $50.0 million for the year ended December 31, 2001 from $20.9
million for the year ended December 31, 2000. The $29.1 million increase in
amortization and impairment write-down of its goodwill is primarily the result
of the impairment charge recorded in 2001.
Acquired In-Process Research and Development
In connection with the merger in March 2000, we allocated $12.8 million of
the purchase price to acquired in-process research and development expense.
Accordingly, these costs were expensed during the year ended December 31, 2000
upon finalization of a third party appraisal. No costs were expensed during the
year ended December 31, 2001.
Selling, General and Administrative Expenses
General and administrative expenses increased to $7.4 million for the year
ended December 31, 2001 from $6.1 million for the year ended December 31, 2000,
representing a 1.3% increase. The increase in selling, general and
administrative expenses was due primarily to increases in marketing activity,
personnel costs, travel and patent filings. In addition, non-cash stock-based
compensation expense was $2.8 million for the year ended December 31, 2001
versus $10.3 million for the year ended December 31, 2000. The activity, for the
years ended December 31, 2001 and 2000, reflects the amortization of deferred
compensation costs related to the issuance of stock options, warrants issued and
re-priced warrants and options at below fair market values in the first quarter
of 2000.
Other Income (Expense)
Other expenses increased to $1.4 million for the year ended December 31,
2001 from $(0.4) million in income for the year ended December 31, 2000. The
increase of $1.8 million was due primarily to the decrease in amortization of
the debt discount from the beneficial conversion of a bridge loan entered into
by the company.
Liquidity and Capital Resources
Our cash requirements depend on numerous factors, including completion of
our product development activities, ability to commercialize our products,
market acceptance of our products and other factors. We expect to devote
substantial capital resources to continue our development programs directed at
commercializing our products in our target markets, hire and train additional
30
staff, expand our research and development activities, develop and expand our
manufacturing capacity and begin production activities. Through December 31,
2002 we have incurred accumulated losses of approximately $131.6 million since
our inception and we anticipate incurring significant losses as we fund our
growth. Since inception we have financed our operations through private
placements of equity securities, research and development contracts and
borrowings. As of December 31, 2002, we had $83,000 in cash and cash
equivalents, and a working capital deficit of $13.6 million.
Net cash used in operating activities was $5.6 million for the year ended
December 31, 2002. Cash used in operating activities resulted primarily from our
net loss partially offset by non-cash charges. Cash used in operating activities
for 2001 was $10.8 million and $12.0 million in 2000 resulting primarily from
operating losses.
Net cash used by investing activities was $84,000 for the year ended
December 31, 2002. Net cash used by investing activities in 2001 was $0.5
million used for capital expenditures. Net cash flows from investing activities
in 2000 was $0.4 million with $1.2 million net proceeds from acquisition less
$0.8 million used for capital expenditures.
Net cash provided by financing activities was $5.0 million for the year
ended December 31, 2002, and consisted primarily of proceeds from the sales of
common stock and issuance of debt. Net cash provided by financing activities was
$4.7 million for the year ended December 31, 2001, and consisted primarily of
proceeds from the issuance of debt. Net cash provided by financing activities
was $18.9 million for the year ended December 31, 2000, and consisted primarily
of proceeds from the sales of common stock and issuance of debt. We currently
anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
will be a material use of our cash resources. eMagin's recurring losses from
operations since inception raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are described in
Note 1 to the Item 8 (Financial Statements and Supplementary Data).
Pursuant to a Registration Rights Agreement dated November 27, 2001 by and
between the Company and investors named therein, we may be forced to pay certain
liquidated cash damages in the near future if we fail to use our reasonable best
efforts to cause the registration statement thereunder to be declared effective
by the Commission by June 30, 2003.
We have liabilities for approximately $14.6 million for unpaid bills, rent
and operating leases that are in default, contracts, and other liabilities. As
of April 11, 2003, we are delinquent in our lease obligation to IBM in the
amount of approximately $500,000. We may be denied access to the premises
although the company has entered into negotiations with IBM to settle the amount
due in April 2003.These items could materially affect our liquidity, if we are
not successful in negotiating acceptable settlements or reasonable repayment
terms. It is possible that we may be required to pay this entire amount along
with additional legal and defense costs or penalties. We need to raise
substantial additional equity or debt financing in the near future in order to
continue our development growth and commercialization of our products. There can
be no assurance that additional equity or debt financing will be available on
acceptable terms or at all. If we are unable to obtain additional capital, we
may be required to reduce the scope of our planned product development, selling
and marketing activities and expansion of our manufacturing facilities, which
would have a material adverse effect on our business, financial condition and
operating results and our ability to continue as a going concern. In the event
that we raise additional equity financing, further dilution to investors could
result. Section 7A below, under "Risks Related To Our Financial Results,"
provides a more detailed description.
eMagin has experienced a net loss applicable to common stockholders of
$14.9 million during the year ending December 31, 2002. eMagin had negative cash
flows from operations for the year ending December 31, 2002 of $5.6 million.
eMagin is in default of its loan and equity agreements due to our failure to
register shares. As of April 11, 2003 eMagin was unable to obtain replacement
financing and was not in compliance with several financial covenants under the
credit agreement.
Management has undertaken certain actions in an attempt to improve the
Company's liquidity and return the company to profitability. These actions
included significant overhead reductions instituted in 2002. Management is also
in discussions with several other lenders and investors. We may not be able to
secure a financing or any other replacement financing.
As a result of its liquidity restrictions, eMagin has been unable to meet
certain of vendor payable obligations, and has been forced to extend the terms
of such payments.
31
eMagin's ability to obtain both replacement and additional financing
depends on many factors beyond its control, including the state of the capital
markets, the market price of eMagin's common stock, its customers' willingness
to substantially prepay for product, the prospects of the business. The
necessary additional financing may not be available to eMagin or may be
available only on terms that would result in further dilution to the current
owners of eMagin's common stock. Failure to obtain commitments for interim and
longer term financing would have a material adverse effect on the business,
results of operations and financial condition, which may include ceasing
eMagin's operations . If the financing eMagin requires to sustain its working
capital needs is unavailable or insufficient, eMagin may be unable to continue
as a going concern.
Contractual Obligations at December 31, 2002
Less than One-Three Four-Five Over 5
Contractual Obligations 1 year years years years
Long Term Debt $ - $ 243,478 $ - $ -
Short Term Debt
5,825,000
Operating Leases
1,457,061 1,069,390
Capital Leases
251,249 101,046 27,558
Royalty Commitment
62,500 187,500 250,000
Total per Period $ 7,595,810 $ 1,601,414 $ 277,558 $ -
Quarterly Results of Operations for the Years Ended December 31, 2002 and 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $ 158,027 $ 268,127 $ 497,851 $ 1,203,654
Net loss $(6,489,514) $(4,001,043) $(2,754,638) $ (1,667,516)
Net loss per share
Basic and diluted $ (0.24) $(0.13) $(0.09) $(0.05)
Year ended December 31, 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $2,030,201 $1,616,005 $1,176,628 $1,024,536
Net loss (9,708,435) (10,832,756) (42,377,769) (5,567,775)
Net loss per share
Basic and diluted $(0.39) $(0.43) $(1.69) $(0.22)
32
Recent Accounting Pronouncements
In August 2001, the FASB, issued SFAS, No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
This statement provides that companies should recognize the asset retirement
cost at its fair value as part of the cost of the asset and classify the accrued
amount as a liability. The asset retirement liability is then accreted to the
ultimate payout as interest expense. The initial measurement of the liability
would be subsequently updated for revised estimates of the discounted cash
outflows. The Statement will be effective for fiscal years beginning after June
30, 2002. eMagin has not yet determined the effect that SFAS No. 143 will have
on its consolidated financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the requirement under SFAS 4 to
aggregate and classify all gains and losses from extinguishment of debt as an
extraordinary item, net of related income tax effect. This statement also amends
SFAS 13 to require that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS No. 145 requires reclassification
of gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishment that do not meet the criteria for
extraordinary item in Accounting Principles Board Opinion ("APB") 30. The
statement is effective for fiscal years beginning after May 15, 2002 with early
adoption encouraged. eMagin does not believe the standard will have a material
effect on its financial statements.
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. eMagin is currently evaluating the requirements and
impact of this statement on our consolidated results of operations and financial
position.
In November 2002, the FASB issued interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires certain
guarantees to be recorded at fair value, which is different from current
practice, which is generally to record a liability only when a loss is probable
and reasonably estimable. FIN No. 45 also requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. The disclosure provisions of FIN No. 45 are
effective for financial statements of interim or annual periods after December
15, 2002. eMagin has adopted the recognition and measurement provisions of FIN
No. 45 on a prospective basis with respect to guarantees issued or modified
after December 31, 2002. eMagin has adopted the recognition and measurement
provisions of FIN 45 on a prospective basis with respect to guarantees issued or
modified after December 31, 2002. The adoption of the disclosure provisions has
been reflected in the December 31, 2002 financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
33
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. eMagin has not determined the effect of adoption of EITF
00-21 on its financial statements or the method of adoption it will use.
In November 2002 the Emerging Issues Task Force reached a consensus opinion
on EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized either as revenue or a
reduction of a specific cost incurred. The consensus should be applied
prospectively to new or modified arrangements entered into after December 31,
2002. eMagin has not yet determined the effects of EITF 02-16 on its financial
statements
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based employee compensation. In addition, it also
amends the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income, including per share amounts, of an
entity's accounting policy decisions with respect to stock-based employee
compensation in annual and interim financial statements. SFAS No. 148 does not
amend SFAS No. 123 to require companies to account for their stock-based
employee compensation using the fair value method. The disclosure provisions of
SFAS No. 123 were effective immediately in 2002. SFAS 148 is effective for
fiscal years ending after December 15, 2002. The transition provisions for a
change to the fair value based method may be early adopted, provided that
financial statements for the 2002 fiscal year have not been issued as of
December 31, 2002. As of December 31, 2002, the eMagin does not have any
immediate plans to change its method of accounting for stock-based employee
compensation to the fair value method. Included in the 2002 financial statements
are the required disclosures of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an Interpretation of ARB No. 51 ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. eMagin does not expect this new interpretation to
have a material effect on its future results of operations or cash flows.
ITEM 7A: QUALITATIVE AND QUANTITATIVE Disclosures About Market Risk
This Form 10-K report contains forward-looking statements within the
meaning of the securities laws that are based on current expectations,
estimates, forecasts and projections about the industries in which eMagin
operates, management's beliefs, and assumptions made by management. In addition,
other written or oral statements which constitute forward-looking statements may
be made by or on behalf of eMagin. Words such as "expects", "anticipates",
"intends", "plans", "believes", "could", "seeks", "estimates", variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that could cause
or contribute to such differences in outcomes and results, include, but are not
limited to, those discussed below.
34
Interest Rate Risk
Substantially all of the Company's cash equivalents are at fixed interest
rates, and as such, the fair market value of these instruments is affected by
changes in market interest rates. As of December 31, 2002, all of the Company's
cash equivalents mature within one year. Accordingly, we believe that the market
risk arising from our holdings of these financial instruments is immaterial.
However, in the future, we may invest in securities with maturities of more than
one year, which may carry greater interest rate risk. The Company's outstanding
debt requires a penalty interest rate pegged to the prime rate in the event of a
default. A 1% change in interest rate would increase our interest expense on
debt and penalties approximately $73,000.
Foreign Currency Exchange Risk
Presently, 100%of the Company's customer and supplier payments are made in
U. S. dollars and, consequently, we believe we have no direct foreign currency
exchange rate risk. However, in the future, we may enter into contracts in
foreign currencies, which may subject the Company to foreign exchange rate risk.
We do not have any derivative instruments and do not presently engage in hedging
transactions.
Risk Factors
In evaluating our business, prospective investors and shareholders should
carefully consider the following risks in addition to the other information in
this 10-K or in the documents referred to in this 10-K. Any of the following
risks could have a material adverse impact on our business, operating results
and financial condition and result in a complete loss of your investment.
Risks Related To Our Financial Results
If we cannot operate as a going concern, our stock price will decline and
you may lose your entire investment. Our auditors have included an explanatory
paragraph in their report on our financial statements for the year ended
December 31, 2002 which states that, due to recurring losses from operations
since inception of the Company, there is substantial doubt about our ability to
continue as a going concern. Our financial statements for the year ended
December 31, 2002 do not include any adjustments that might result from our
inability to continue as a going concern. These adjustments could include
additional liabilities and the impairment of certain assets. If we had adjusted
our financial statements for these uncertainties, our operating results and
financial condition would have been materially and adversely affected.
If we do not obtain additional cash to operate our business, we may not be
able to execute our business plan and may not achieve profitability. In the
event that cash flow from operations is less than anticipated, if the costs are
higher than anticipated, or we are unable to secure additional funding or
sufficient product or service prepayments, in order to preserve cash, we would
be required to further reduce expenditures and effect further reductions in our
corporate infrastructure, either of which could have a material adverse effect
on our ability to continue our current level of operations. Even if we obtain
additional working capital in the near future, to the extent that operating
expenses increase or we need additional funds to make acquisitions, develop new
technologies or acquire strategic assets, the need for additional funding may be
accelerated and there can be no assurances that any such additional funding can
be obtained on terms acceptable to us, if at all. If we are not able to generate
sufficient capital, either from operations or through additional financing, to
fund our current operations, we may not be able to continue as a going concern.
If we are unable to continue as a going concern, we may be forced to
significantly reduce or cease our current operations. This could significantly
reduce the value of our securities, which could result in our de-listing from
the American Stock Exchange and cause investment losses for our shareholders.
We may not maintain The American Stock Exchange (the "Exchange") listing
requirements. To maintain the listing of our common stock on the Exchange, we
are required to meet certain listing requirements, including, in the case of our
common stock selling for a substantial period of time at a low price per share,
effecting a reverse split of such shares within a reasonable time after being
notified by the Exchange that such action is appropriate under all the
circumstances. In its review of whether a share price is too low or whether a
35
reverse split is appropriate, the Exchange will consider all pertinent factors,
including market conditions in general, the number of shares outstanding, plans
which may have been formulated by management, applicable regulations of the
state of incorporation or of any governmental agency having jurisdiction over
eMagin, and the relationship to other Exchange policies regarding continued
listing. If the Exchange were to determine that our share price is too low and
that we should reverse split our shares but we were unable to comply for any
reason, our common stock may be delisted from the Exchange. Other rules
regarding timely filing of reports, payments of fees, and other criteria also
could be at issue. For instance, eMagin did not hold an annual meeting in 2001,
which could have been determined to be a listing issue. The 2001 and 2002
meetings are currently planned to be combined and held in 2003. Delisting of our
common stock could materially adversely affect the market price, the market
liquidity of our common stock and our ability to raise necessary capital.
Moreover, it would likely be more difficult to trade in or to obtain accurate
quotations as to the market price of our common stock.
We have a history of losses since our inception and expect to incur losses
for the foreseeable future. Accumulated losses excluding non-cash transactions
as of December 31, 2002, were $28.4 million. Prior 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 operating 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 have been dependent on U.S. government contracts. In past years, the
majority of our revenues to date have been derived from direct research and
development contracts with the U.S. federal government. As we transition from
research and development, some of our key purchase orders relate to their own
procurement or development contracts with the federal government. The government
at its discretion may modify or terminate our or our customers' government
contracts. Our customers and we plan to submit proposals for additional
development contract and product procurement 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 our or our customers' existing contracts will continue, that
we or our customers will be successful in obtaining new government contracts, or
that programs through which our contracts are funded will continue to be funded
beyond the current fiscal year. Our or our customers' inability to obtain
revenues from government contracts could have a material adverse effect on our
results of operations.
Risks Related To Our Intellectual Property
We rely on our license agreement with Eastman Kodak for the development of
certain aspects of our products, and the termination of this license, 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 over a range of years from 2003 to 2020. 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,
36
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 yearly expense for eMagin. We have not
recently been in a financial position to file for patents on a worldwide basis
and may not be in a position to do so for some time. We continue to make an
effort to protect our intellectual property and trade secrets as is practical in
the current difficult situation.
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. 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 who we must displace.
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: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and 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 go construct 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 high volume production 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. Color LCOS displays went into in initial
production several years ahead of eMagin's OLED display introduction, and may be
in higher volume production sooner than our microdisplays, which could have a
significant detrimental effect on our market opportunity.
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
37
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. The Company has been constrained for over 2 years by serious capital
deficiencies, and could continue to be undercapitalized relative to its
competitors even after a modest financing.
Our products are subject to lengthy OEM development periods. We plan to
sell most of our microdisplays to OEMs who will incorporate them into 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
several of 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 expect to depend on semiconductor contract manufacturers to supply our
silicon integrated circuits and other suppliers of key components, materials and
services. We do not manufacture our silicon integrated circuits on which we
incorporate the OLED or printed circuit boards. Instead, we expect to provide
the design layouts to semiconductor contract manufacturers who will manufacture
the integrated circuits on silicon wafers. We also expect to 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 could result in manufacturing delays, increased costs and
ultimately in reduced or delayed sales or lost orders which could materially and
adversely affect our operating results.
38
We have not manufactured OLED-on-silicon products in large commercial
quantities and we do not know if our manufacturing yields or throughput will be
commercially viable. In order for us to be successful as a product or component
manufacturer, our products must be manufactured to meet high quality standards
in commercial quantities at competitive prices. We are not staffed adequately to
achieve our full available capacity for high quantity production. The
manufacture of OLED-on-silicon is new and OLED microdisplays have not been
produced in significant volumes. If we are unable to produce our products in
sufficient quantity, we will be unable to attract or retain customers. In
addition, we cannot assure you that once we commence higher volume production we
will attain yields at high 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 initially expect to
manufacture our products on a single manufacturing line. If we experience any
significant disruption in the operation of our manufacturing facility 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 to 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 extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders 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 or outsource production to other manufacturers.
Risks Related To Our Business
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. We 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 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
materially adverse affect on our business and our operating results. In
addition, difficulties in hiring and retaining technical personnel could delay
the implementation of our business plan.
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.
Our microdisplay business may not be successful. The market for
microdisplays may develop later than anticipated by us may therefore limit our
sales potential for the foreseeable future. Customers may be slow to ramp their
products using our products or pursue other interests
We generally do not have long term contracts with our customers. Our
business has historically operated on the basis of short term purchase orders
and we cannot guarantee that our long term purchase agreements will result in
the desired sales since the penalties for cancellation are small or
non-existent. 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, out business may suffer and the value
of your investment in the Company may decline.
39
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 in to will realize their objectives. Failure to do so would have a
material adverse effect on our business.
We will need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow or continue existing
operations may be limited. Our future liquidity and capital requirements are
difficult to predict because they depend on numerous factors, including our
success in completing the development of our products, manufacturing and
marketing our products and competing technological and market developments. We
may not be able to generate sufficient cash from our operations to meet
additional working capital requirements, support additional capital expenditures
or take advantage of acquisition opportunities. In addition, substantial
additional capital may be required in the future to fund product development and
product launches. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to our shareholders or us. To the extent we raise additional capital
by issuing equity or securities convertible into equity, our current
shareholders will suffer dilution in ownership. If needed capital is
unavailable, our ability to continue to operate and grow our business could be
adversely affected. Even if capital is available at acceptable cost, we might
not be able to manage growth effectively.
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. In addition, many of the OEMs which 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 give expose us to various risks including management of a multi-national
organization, the complexities of complying with foreign law and custom,
political instability and the complexities of taxation in multiple
jurisdictions.
Our business may expose us to product liability claims. Our business
exposes us to potential product liability claims. Although no such claim has
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
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 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 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
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 December 31, 2002, we have outstanding options to
purchase 5,893,085 shares. There are also outstanding warrants to purchase
40
6,894,153 shares of common stock. Incentive options for 5,185,000 Common Shares
at $0.21 per share were approved by the eMagin Board of Directors on October 9,
2002 for issue to employees, directors, and officers. The options were not yet
granted, pending the future availability of Common shares for the options under
the company's qualified option plan. Upon availability, the company may issue
these options at which time the strike price will remain $0.21 and the
difference between the strike price and the fair market value, if the strike
price is under the fair market value at the date of issue, will be recognized as
compensation expense. As of December 31, 2002, there were only approximately
100,000 shares available within the plan. The number of shares actually granted
may be prorated to a much small number.
We do not intend to pay dividends; you will not receive funds without
selling shares; and you may lose the entire amount of your investment. We have
not paid any dividends on our common stock and we do not plan to pay cash
dividends in the foreseeable future. We intend to retain our earnings, if any,
for use in our business. We further cannot assure you that you will receive a
return on your investment when you sell your shares or that you will not lose
the entire amount of your investment.
We have a staggered Board of Directors and other anti-takeover provisions
which could inhibit potential investors or delay or prevent a change of control
that may favor you. Our Board of Directors is divided into three classes and our
Board members are elected for terms that are staggered. This could discourage
the efforts by others to obtain control of the company. Some of the provisions
of our certificate of incorporation, our bylaws and Delaware law could, together
or separately, discourage potential acquisition proposals or delay or prevent a
change in control. In particular, our board of directors is authorized to issue
up to 10,000,000 shares of preferred stock (less any outstanding shares of
preferred stock) with rights and privileges that might be senior to our common
stock, without the consent of the holders of the common stock.
We cannot forecast our future performance. We cannot accurately forecast
our revenues because of our limited commercial operating history and because the
OLED microdisplay market is only beginning to emerge. We may experience
significant fluctuations in our quarterly operating results due to many factors
which are outside our control. These factors include: fluctuation in demand and
orders for our products; timing or cost of future supply or equipment
deliveries; manufacturing capacity and yields; variations in product and process
development costs; expenses or operational disruptions resulting from
acquisitions; activities of our competitors; adequate working capital; and
general economic conditions. Due to these factors, we cannot anticipate with any
degree of certainty what our revenues, if any, will be in future periods. You
have limited historical financial data and operating results with which to
evaluate our business and our prospects. As a result, you should consider our
prospects in light of the expense, difficulties and delays frequently
encountered by early stage companies formed to pursue development of new
technologies.
Our share price is likely to be highly volatile which may result in
substantial losses for investors. Share price volatility may subject us to
securities class action litigation. Prices and trading volume for technology
related stock has been highly volatile. Accordingly, our stock prices are likely
to also be highly volatile. Shareholders may experience a decrease in the value
of their common stock regardless of our operating performance or prospects. In
addition, the trading price of our common stock could be subject to wide
fluctuations in response to: our perceived prospects; quarter to quarter
variations in our operating results; changes in earnings estimates or
recommendations by securities analysts and market perceptions of our operating
results in relation to those estimates or recommendations; changes in market
valuation of companies in the microdisplay systems industry; announcements of
technological innovations or new products by us or our competitors; economic,
political, and issues associated with our customers, suppliers, partners,
accountants, governmental agencies in the USA and elsewhere, or other parties;
sales of shares by other shareholders; and general conditions in the personal
products industries or stock market conditions. In the past, securities class
action litigation has often been instituted against companies following periods
of volatility in their share price. Those companies, like us, that are involved
in rapidly changing technology markets are particularly subject to this risk.
This type of litigation, if instituted against us, could result in substantial
costs and divert our management's attention and resources, which could cause
serious harm to our business.
41
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT INDEX
Page
FINANCIAL STATEMENTS FOR eMAGIN CORPORATION
Report of Independent Certified Public Accountants................................... 43
Report of Independent Public Accountants ........................................................... 44
Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001 .......................... 45
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 and for the
period from inception (January 23, 1996) through December 31, 2002 ................................. 46
Consolidated Statements of Shareholders' Equity for the period from inception to December 31, 1996 and each of
the six years ended December 31, 2002.............................................. 47
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 and for the
period from inception (January 23, 1996) through December 31, 2002 ................................. 49
Notes to the Consolidated Financial Statements............................................................. 50
42
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of eMagin Corporation:
We have audited the accompanying balance sheet of eMagin Corporation (a
Delaware corporation in the development stage; see Note 1) and subsidiaries as
of December 31, 2002 and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the year then ended and the
2002 amounts included in the cumulative period from inception (January 23, 1996)
to 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. The consolidated financial statements
of eMagin Corporation as of December 31, 2001 and for the year then ended and
from inception to December 31, 2001 were audited by other auditors who have
ceased operations and who's report dated March 13, 2002 included an explanatory
paragraph that described uncertainties regarding the Company's ability to
continue as a going concern.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 financial position of eMagin Corporation and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended, and the 2002 amounts included in the
cumulative period from inception (January 23, 1996) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
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
New York, New York
April 11, 2003
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of eMagin Corporation:
We have audited the accompanying consolidated balance sheets of eMagin
Corporation (a Delaware corporation in the development stage; see Note 1) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the period from inception
(January 23, 1996) to December 31, 2001. 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 audits. We have not audited
the financial statements of the Company from inception to December 31, 1999.
These financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
period from inception to December 31, 1999, is based solely on the report of
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of eMagin Corporation and subsidiaries as of December 31,
2001 and 2000, and the results of their operations and their cash flows for the
years then ended, and for the period from inception to December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
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.
Arthur Anderson LLP
New York, New York
March 13, 2002
Note: Reprinted above is a copy of the report previously expressed by such
firm which has ceased operations. The reprinting of this report is not
equivalent to a current re-issuance of such report as would be required if such
firm was still operating. The consolidated operations, shareholders' equity
(deficit) and cash flows for the two years then ended and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the period from inception (January 23, 1996) to December 31, 2001
referred to in this report have been included in the accompanying financial
statements. Because such firm has not consented to the inclusion of this report
in this Form 10-K, the reader's ability to make a claim against such firm may be
limited or prohibited.
44
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS 2002 2001
-------------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents $ 82,951 $ 738,342
Contract receivables 240,136
485,021
Unbilled costs and estimated profits on contracts in progress
125,359 293,273
Inventory 250,998 90,720
Prepaid expenses and other current assets 113,849 388,344
-------------------- --------------------
Total current assets 813,293 1,995,700
Equipment and leasehold improvements 634,532 1,166,509
Patents 331,442 1,657,238
Other long-term assets 55,117 94,367
-------------------- --------------------
Total assets $ 1,834,384 $ 4,913,814
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 49,275 $ 693,197
Other short term debt 5,690,889 1,875,000
Accounts payable 6,381,036 3,116,558
Accrued expenses 1,207,693 615,418
Accrued payroll and benefits 1,031,958 788,302
Deferred Revenue 30,400 289,538
Other current liabilities 23,505 108,805
-------------------- --------------------
Total current liabilities
14,414,756 7,486,818
-------------------- --------------------
LONG-TERM DEBT
227,742 2,305,184
SHAREHOLDERS' EQUITY (DEFICIT):
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 30,854,980 and 25,171,183
30,855 25,171
Additional paid-in capital
119,221,277 114,058,560
Deferred compensation
(462,983) (2,277,367)
Deficit accumulated during the development stage
(131,597,263) (116,684,552)
-------------------- --------------------
Total shareholders' equity (deficit)
(12,808,114) (4,878,188)
-------------------- --------------------
Total liabilities and shareholders' equity (deficit) $ 1,834,384 $ 4,913,814
==================== ====================
The accompanying notes are an integral part of these financial statements
45
eMAGIN CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, 2000
and for the period from inception (January 23, 1996) through December 31, 2002
Period from inception
January 6, 1996
2002 2001 2000 to December 31, 2002
---------------- -------------------------------------------------------
CONTRACT REVENUE:
Contract revenue $ 840,658 $ 5,005,657 $ 2,557,587 $ 8,403,902
Product revenue
1,287,002 841,713 - 2,128,715
---------------- -------------------------------------------------------
Total revenue 2,127,660 5,847,370 2,557,587 10,532,617
---------------- -------------------------------------------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$331,956, $1,555,811, $1,328,121,
$3,608,325 respectively 7,254,996 12,724,161 9,634,948 29,614,105
Amortization of purchased intangibles
1,325,796 17,886,838 20,932,320 40,144,954
Acquired In Process Research & Development
- 12,820,000 12,820,000
Writedown of Goodwill and purchased
intangibles - 32,145,863 - 32,145,863
Selling, general and administrative
6,153,238 10,226,710 7,689,341 24,100,289
---------------- -------------------------------------------------------
Total costs and expenses, net
14,734,030 72,983,572 51,076,609 138,825,211
---------------- -------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense
(2,329,452) (1,411,668) (210,542) (3,232,742)
Other income (expense), net
23,111 61,135 562,747 (71,928)
---------------- -------------------------------------------------------
Other income (expense)
(2,306,341) (1,350,533) 352,205 (3,304,670)
---------------- -------------------------------------------------------
Loss before provision for income taxes $ (14,912,711) $ (68,486,735) $(48,166,817) $ (131,597,263)
---------------- -------------------------------------------------------
PROVISION FOR INCOME TAXES
- -
---------------- -------------------------------------------------------
Net loss $ (14,912,711) $ (68,486,735) $(48,166,817) $ (131,597,263)
================ =======================================================
Basic and diluted loss per common share
(0.51) (2.73) (2.18)
Weighted average outstanding common stock
29,416,838 25,100,211 22,144,904
The accompanying notes are an integral part of the financial statements.
46
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JANUARY 23, 1996) through DECEMBER 31, 2002
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Deferral Additional Accumulated
-----------------------------------------------------------------------------------------------------------------------------
Shares $ Compensation Paid-In Capital Deficit Total
-----------------------------------------------------------------------------------------------------------------------------
Balance, February 6, 1996 600,000 $ 600 $ 5,400 $ 6,000
-----------------------------------------------------------------------------------------------------------------------------
Net loss for period $ (3,803) (3,803)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 600,000 600 - 5,400 (3,803) 2,197
---------------------------------------------================================================================================
Issuance of common stock for cash 500,000 500 24,500 25,000
-----------------------------------------------------------------------------------------------------------------------------
Net loss for period (5,268) (5,268)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,100,000 1,100 - 29,900 (9,071) 21,929
---------------------------------------------================================================================================
Effect of stock split 5,500,000 5,500 (5,500) -
-----------------------------------------------------------------------------------------------------------------------------
Net loss for period (3,477) (3,477)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,600 - 24,400 (12,548) 18,452
6,600,000
---------------------------------------------================================================================================
Effect of stock split 13,556,400 13,556 (13,556) -
-----------------------------------------------------------------------------------------------------------------------------
Net loss for period (18,452) (18,452)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 20,156,400 20,156 - 10,844 (31,000) -
---------------------------------------------================================================================================
Sale of common stock in private placement 3,464,547 3,465 23,246,535 23,250,000
-----------------------------------------------------------------------------------------------------------------------------
Common stock, options and warrants issued
in connection with FED acquisition 10,486,386 10,486 92,354,461 92,364,947
-----------------------------------------------------------------------------------------------------------------------------
Cancellation of existing shareholders (9,356,018) (9,356) 9,356 -
common stock
-----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock related to 1,080 1 1,835 1,836
exercise of warrant
-----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for services 316,748 317 2,216,919 2,217,236
-----------------------------------------------------------------------------------------------------------------------------
Deferred compensation $(13,023,364) (13,023,364)
-----------------------------------------------------------------------------------------------------------------------------
Amortization of deferred compensation 2,539,828 2,539,828
-----------------------------------------------------------------------------------------------------------------------------
To book forfeited stock options 1,217,139 (1,217,139) -
-----------------------------------------------------------------------------------------------------------------------------
Net loss for period (48,166,817)(48,166,817)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 25,069,143 25,069 (9,266,397) 116,622,811 (48,197,817) 59,183,666
---------------------------------------------================================================================================
Sale of warrants 16,002 16 27,507 27,523
-----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for services 86,038 86 116,151 116,237
-----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock related to debt 408,068 408,068
financing
-----------------------------------------------------------------------------------------------------------------------------
Beneficial conversion of debt financings 530,473 530,473
-----------------------------------------------------------------------------------------------------------------------------
OID for debt financings 501,577 501,577
-----------------------------------------------------------------------------------------------------------------------------
Amortization of deferred compensation 2,841,003 2,841,003
-----------------------------------------------------------------------------------------------------------------------------
To book forfeited stock options 4,148,027 (4,148,027) -
-----------------------------------------------------------------------------------------------------------------------------
Net loss for period (68,486,735) (68,486,735)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 25,171,183 $ 25,171 $ (2,277,367) $114,058,560 $(116,684,552) $(4,878,188)
---------------------------------------------================================================================================
47
eMAGIN CORPORATION
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------------------
Additional
-------------------------------------------------------------------------------------------------------------------------------
Common Stock Deferred paid-in Accumulated
-------------------------------------------------------------------------------------------------------------------------------
Shares $ Compensation Capital Deficit Total
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 25,171,183 $ 25,171 $ (2,277,367) $ 114,058,560 $ (116,684,552) $(4,878,188)
-------------------------------================-==============--================-===============-================-=============
-------------------------------------------------------------------------------------------------------------------------------
Sale of common stock in
private placement 4,899,179 4,899 3,475,619 3,480,518
-------------------------------------------------------------------------------------------------------------------------------
Issuance of warrants in debt 140,387 140,387
financing
-------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
related to debt financing 80,000 80 55,570 55,650
-------------------------------------------------------------------------------------------------------------------------------
Buyout of debt financing 500,000 500 89,632 90,132
-------------------------------------------------------------------------------------------------------------------------------
Value related to original
issue discount features of 672,682 672,682
debt financing
-------------------------------------------------------------------------------------------------------------------------------
Amortization of deferred
compensation 739,191 35,329 774,520
-------------------------------------------------------------------------------------------------------------------------------
Stock Options Exercised 2,125 2 885 887
-------------------------------------------------------------------------------------------------------------------------------
Reversal and deferred
compensation balance for 1,075,193 (1,075,193) -
forfeited options
-------------------------------------------------------------------------------------------------------------------------------
Non-Cash Comp Expenses for
Options 872,399 872,399
-------------------------------------------------------------------------------------------------------------------------------
Value related to beneficial
conversion features of debt 783,691 783,691
financing
-------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for 202,493 202 111,716 111,918
services
-------------------------------------------------------------------------------------------------------------------------------
Net Loss for Period (14,912,711) (14,912,711)
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 30,854,980 $ 30,855 $ (462,983) $ 119,221,276 $ (131,597,263) $(12,808,115)
-------------------------------================-==============--================-===============-================-=============
-------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
48
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000 and for the period from inception (January 23, 1996) to
December 31, 2002
Period from
inception
January 23 1996
2002 2001 2000 December 31, 2002
----------------------------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($14,912,711)($68,486,735) ($48,166,817) ($131,597,263)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 21,488,686
1,842,480 18,453,461 41,785,462
Write-down of goodwill and purchased intangibles
32,145,863 32,145,863
Loss on disposal of assets
98,548 97,713
Non-cash charge for stock based compensation
1,646,917 2,841,003 2,539,828 7,027,748
Non-cash interest related charges
1,446,654 1,222,562 2,669,216
Non-cash related to issuance of warrants
140,387 140,387
Non-cash charge for services received
25,050 116,151 141,201
Non-cash charge due to beneficial conversion
783,691 783,691
Acquired in-process research and development
12,820,000 12,820,000
Changes in operating assets and liabilities, net of
acquisition:
Trade receivables
593,300 340,606 (693,770) 240,136
Interest receivable
Unbilled costs and estimated profits on contracts in
progress 125,359 125,359
Costs and estimated profits in excess of billings on
contracts (326,291) 334,074 (7,783)
Inventory 341,718 (90,720) 250,998
Prepaid expenses and other current assets 196,371 276,984 (359,506) 113,849
Other long-term assets 139,033 11,027 (94,943) 55,117
Advanced payment on contracts to be completed (398,343) 86,531 311,812
Deferred Revenue 30,400 30,400
Accounts payable, accrued expenses and accrued
payroll 2,738,847 1,932,619 51,039 4,722,505
Other current liabilities
-------------------------------------------------------------
Net cash used in operating activities (5,587,137) (10,816,574) (12,012,906) (28,447,617)
-------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (84,745) (464,829) (803,033) (1,352,607)
Net proceeds from acquisition 1,239,162 1,239,162
-------------------------------------------------------------
Net cash used in investing activities (84,745) (464,829) 436,129 (113,445)
-------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance
costs 3,475,621 21,250,000 24,756,621
Proceeds from exercise of stock options and warrants 141,272 27,609 168,881
Proceeds from long and short term debt (net) 1,443,478 4,875,000 6,318,478
Payments of long term debt and capital leases (43,880) (250,121) (2,305,966) (2,599,967)
-------------------------------------------------------------
Net cash provided by financing activities 5,016,491 4,652,488 18,944,034 28,644,013
-------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (655,391) (6,628,915) 7,367,257 82,951
CASH AND CASH EQUIVALENTS, beginning of period 738,342 7,367,257
-------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 82,951 $ 738,342 $ 7,367,257 $ 82,951
=============================================================
The accompanying notes are an integral part of these financial statements
49
eMAGIN CORPORATION
(a development stage company)
Notes to the Consolidated Financial Statements
Note 1 - NATURE OF BUSINESS AND DEVELOPMENT STAGE RISKS
Fashion Dynamics Corporation ("FDC") was organized 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"). FED was a developer and manufacturer of
optical systems and micro displays for use in the electronics industry. FED's
wholly owned subsidiary, Virtual Vision, develops and markets micro display
systems and optics technology for commercial, industrial and military
applications. The merged company changed its name to eMagin Corporation (the
"Company" or "eMagin"). Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
The Company continues to be a development stage company, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises," as it continues to devote
substantially all of its efforts to establishing a new business, and it has not
yet commenced its planned principal operations. Revenues earned by the Company
to date are primarily related to research and development type contracts and
sales of its first two commercial organic light emitting diode ("OLED") micro
display products.
Through December 31, 2002 we have incurred accumulated losses of
approximately $131.6million since our inception and we anticipate incurring
significant losses as we fund our growth. Since inception we have financed our
operations through private placements of equity securities, research and
development contracts and borrowings. As of December 31, 2002, we had $83
thousand in cash and cash equivalents, and a working capital deficit of
$13.6million. We are in default of our note agreements (see Note 5) and we are
delinquent in our lease obligation to IBM in the amount of approximately
$150,000. We may be denied access to the premises although the company has
entered into negotiations with IBM to settle the amount due in April 2003.
The Company's ability to continue as a going concern and its future success
is dependent upon its ability to raise capital in the near future to continue:
(1) its research and development efforts, (2) hiring and retaining key
employees, (3) satisfaction of its commitments and (4) the successful
development, marketing and production of its products.
The Company believes that it will be able to secure financing in the near
term and that the proceeds from such financings, and its remaining cash
resources at December 31, 2002, will be sufficient to fund the Company's
operations into the first quarter of 2004 and beyond. However, there can be no
assurance that sufficient capital will be available, when required, to permit
the Company to realize its plan, or even if such capital is available, that it
will be at terms favorable to the Company. Additionally, there can be no
assurance that the Company's efforts to produce a profitable product will be
successful or that the Company will generate sufficient revenues to provide
positive cash flows from operations. These and other factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result should the Company be unable to continue in existence.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements of eMagin Corporation
include the assets, liabilities, revenues and expenses of all majority-owned
subsidiaries over which the Company exercises control. Inter-company
transactions and balances are eliminated in consolidation.
50
Revenue and Cost Recognition
The Company has historically earned revenues from certain of its research
and development 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.
Product revenue is recorded when products are shipped to customers, at
which time, title passes to the customer net of estimated returns. The Company
provides a limited warranty that its products meet the formal specifications at
the time of shipment. Customers are typically provided an ability to return
products with out of specification initial manufacturing defects up to 1 year
after shipment, depending on the arrangements made. Longer limited warrants may
be made. The company does not provide any warranty other than the potential
replacement of our own specific product.
As of December 31, 2002 and 2001, the Company had received advanced
payments on contracts to be completed of $0 and $275,000, respectively. These
amounts, classified as deferred revenues in the accompanying consolidated
balance sheets, represent that portion of amounts billed by the Company, or cash
collected by the Company, for which services have not yet been provided or
products have not yet been delivered.
Costs and Estimated Profits in Excess of Billings on Contracts in Progress
The Company records costs and estimated profits in excess of billings on
contracts in progress as an asset on its balance sheet to the extent such costs,
and related profits, if any, have been incurred under outstanding contracts and
are expected to be collected.
The components of costs and estimated profits in excess of billings on
contracts in progress as of December 31, 2002 and 2001 were as follows:
2002 2001
Total costs incurred and estimated profits $ 840,658 $ 21,414,000
Less amounts billed 840,658 21,121,000
Costs and estimated profits in excess of billings on contracts
in progress $ 0 $ 293,000
============== ===============
Research and Development/Cost-Sharing Arrangements
The Company has entered into three cost-sharing arrangements with an agency
of the U.S. Government and one commercial customer. To date, activities of the
Company include the performance of research and development under cooperative
agreements. Current industry practices provide that costs and related funding
under such agreements be accounted for as incurred and earned. The Company is
reimbursed for expenses plus government rates for research and development costs
and general and administrative costs.
The Company has incurred research and development costs and earned funding
under these agreements as of December 31, 2002, 2001 and 2000 as follows:
2002 2001 2000
Unfunded research and development $ 7,244,820 $ 11,442,000 $ 9,634,948
Research and development costs 331,956 2,838,000 0
Funding received (331,956) (1,556,000) 0
------------ --------------- -----------
$ 7,244,820 $ 12,724,000 $ 9,634,948
============ =============== -----------
51
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
Accounts Receivable
The majority of the Company's commercial accounts receivable are due from
OEM manufacturers. 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 days and are stated at
amounts due from customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, 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
credited to the allowance for doubtful accounts.
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 estimated market value based
upon current market prices and contracts for future sales.
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
their estimated useful lives. 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.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. In accordance with this standard, eMagin performs
impairment tests on its long-lived assets, excluding goodwill and other
intangible 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. If the carrying value is not recoverable, the asset or asset
group is written down to market value.
Goodwill and Other Intangible Assets
Identifiable intangible assets resulting from the acquisition of FED and
the excess purchase price over net assets acquired ("goodwill") are being
amortized on a straight-line basis over their respective estimated useful lives
of approximately three years. The Company's ability to realize its goodwill is
dependent upon its ability to raise sufficient financing in order to expand the
rollout and commercialization of its products. In the third quarter of 2001, the
Company was able to secure a limited amount of additional financing to fund its
operations, however, such financing was not in the amount the Company expected
to be able to secure, nor was it enough to rollout commercialization of its
product on a wide scale basis, as had been contemplated by its business plan.
Based on these factors, among others, the Company revised its future business
plan and evaluated the carrying value of the identifiable intangible assets and
goodwill. Based on this evaluation, the Company determined that the assets were
impaired, and, accordingly, during the quarter ended September 30, 2001, the
Company recorded an impairment write-down of its goodwill and other identifiable
intangible assets of approximately $32.1 based on the estimated discounted net
52
cash flow to be generated over the remaining life of the assets. The impairment
charge is included in the accompanying consolidated statement of operations for
the year ended December 31, 2001. Inclusive of this impairment write-down,
amortization of identified intangibles expense for the year ended December 31,
2001 was approximately $50.0 million and amortization of purchased intangibles
expense for the year ended December 31, 2002 was approximately $1.3 million.
As of December 31, 2002 and 2001, intangible assets was comprised of the
patents as follows (in millions):
2002 2001
Patents .......................................... $ 18.0 $ 18.0
Less: Accumulated amortization ................... (17.7) (16.3)
-------- --------
Patents, net ..................................... $ 0.3 $ 1.7
======== ========
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, 2002 and 2001,
the Company has net deferred tax assets of approximately $29.5 million and $24.4
million respectively, primarily resulting from the future tax benefit of net
operating loss carry forwards discussed below. Such net deferred tax assets are
fully offset by valuation allowances due to the uncertainty as to their
realizability.
At December 31, 2002, the Company has net operating loss carry forwards
totaling approximately $ 72.7 million, inclusive of the net operating losses
acquired as part of the acquisition of FED, which expire through 2021, 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 carry forwards
is limited due to changes in ownership that have occurred.
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.
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, 2002, 2001 and 2000.
Accordingly, the Company's comprehensive income (loss) is the same as its net
income (loss) for all periods presented.
Stock-Based Compensation
Accounting for 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
53
compensation plans equal to the excess of the market price of the underlying
eMagin shares at the date of grant over the exercise price, which equals the
market price of the underlying shares at the grant date and therefore, no
compensation expense is recorded. The following table summarizes the pro forma
operating results of eMagin had compensation cost for stock options granted (See
Note 8) been determined in accordance with the fair value based method
prescribed by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123). eMagin has presented the following
disclosures in accordance with SFAS 148 "Accounting for Stock-Based
Compensation-Transition and Disclosures."
----------------------------------------------- --------------------- --------------------- -------------------
For the year ended December 31, 2002 2001 2000
----------------------------------------------- --------------------- --------------------- -------------------
(In thousands, except per share
amounts)
----------------------------------------------- --------------------- --------------------- -------------------
Net loss applicable to common stockholders',
as reported $ (14,912,711) $(68,486,735) $ (48,166,817)
----------------------------------------------- --------------------- --------------------- -------------------
Adjust: Stock-based employee compensation
expense determined under fair value method (1,225,884) (992,265) (1,303,183)
----------------------------------------------- --------------------- --------------------- -------------------
Pro forma net loss. $ (16,138,595) $ (69,479,000) $ (49,470,000)
----------------------------------------------- --------------------- --------------------- -------------------
Net loss per share applicable to common
stockholders':
----------------------------------------------- --------------------- --------------------- -------------------
Basic and diluted , as reported $ (0.51) $ (2.73) $( 2.18 )
----------------------------------------------- --------------------- --------------------- -------------------
Basic and diluted, pro forma $ (0.55) $ (2.77) $ (2.23)
----------------------------------------------- --------------------- --------------------- -------------------
The pro forma amounts that are disclosed in accordance with SFAS No. 123
reflect the portion of the estimated fair value of awards that were earned for
the years ended December 31, 2002, 2001 and 2000.
The fair value of stock option grants is estimated using the Black-Scholes
option-pricing model with the following assumptions:
------------------------------------------- --------------- --------------- ----------------
For the year ended December 31, 2002 2001 2000
------------------------------------------- --------------- --------------- ----------------
Term (years) 5 3 1.6
------------------------------------------- --------------- --------------- ----------------
Volatility 150% 128% 75%
------------------------------------------- --------------- --------------- ----------------
Risk-free interest rate 6.00% 5.41% 4.48%
------------------------------------------- --------------- --------------- ----------------
Dividend yield 0 % 0 % 0%
------------------------------------------- --------------- --------------- ----------------
Weighted -average fair value per $ 0.35 $ 2.72 $ 0.76
option
------------------------------------------- --------------- --------------- ----------------
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash, cash equivalents, trade receivables, contract
receivables and costs and estimate profits in excess of billings on contracts in
progress.
The Company maintains cash and cash equivalents with various major
financial institutions. The Company limits the amount of credit exposure with
any one financial institution and believes that no significant concentration of
credit risk exists with respect to cash investments.
Contract receivables and costs and estimated profits in excess of billings
on contracts in progress subject the Company to the potential for credit risk
with customers, primarily government contractors. The Company establishes its
credit polices based on an ongoing evaluation of its customers' creditworthiness
and competitive market conditions and does not require collateral.
The Company sells products to a large number of customers which are
primarily in the United States. The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no collateral
from its customers. The Company's customer base includes 2 customers who account
for 32%, 6% and 0% of sales in fiscal 2002, 2001 and 2000, respectively. One
customer represented 18%, 6% and 0% and the other customer represented 14%, 0%
and 0% of sales in fiscal 2002, 2001 and 2000. These same two customers
represented $0% and $23% of accounts receivable at December 31, 2002 and 4% and
0% of accounts receivable at December 31, 2001. Although the Company is directly
affected by the well- being of these customers, management does not believe
significant credit risk exists at December 31, 2002.
54
Fair Value of Financial Instruments
The Company has various financial instruments, including cash, cash
equivalents, accounts receivable, accounts payable and short and long-term debt.
The Company believes the carrying values of its financial instruments
approximate their fair values.
Use of Estimates
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
New Accounting Pronouncements: In August 2001, the FASB, issued SFAS, No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets." SFAS No. 143 addresses financial accounting and reporting for the
retirement obligation of an asset. This statement provides that companies should
recognize the asset retirement cost at its fair value as part of the cost of the
asset and classify the accrued amount as a liability. The asset retirement
liability is then accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently updated for revised
estimates of the discounted cash outflows. The Statement will be effective for
fiscal years beginning after June 30, 2002. eMagin has not yet determined the
effect that SFAS No. 143 will have on its consolidated financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the requirement under SFAS 4 to
aggregate and classify all gains and losses from extinguishment of debt as an
extraordinary item, net of related income tax effect. This statement also amends
SFAS 13 to require that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS No. 145 requires reclassification
of gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishment that do not meet the criteria for
extraordinary item in Accounting Principles Board Opinion ("APB") 30. The
statement is effective for fiscal years beginning after May 15, 2002 with early
adoption encouraged. eMagin does not believe the standard will have a material
effect on its financial statements.
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. eMagin is currently evaluating the requirements and
impact of this statement on our consolidated results of operations and financial
position.
55
In November 2002, the FASB issued interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires certain
guarantees to be recorded at fair value, which is different from current
practice, which is generally to record a liability only when a loss is probable
and reasonably estimable. FIN No. 45 also requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. The disclosure provisions of FIN No. 45 are
effective for financial statements of interim or annual periods after December
15, 2002. eMagin has adopted the recognition and measurement provisions of FIN
No. 45 on a prospective basis with respect to guarantees issued or modified
after December 31, 2002. eMagin has adopted the recognition and measurement
provisions of FIN 45 on a prospective basis with respect to guarantees issued or
modified after December 31, 2002. The adoption of the disclosure provisions has
been reflected in the December 31, 2002 financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. eMagin has not determined the effect of adoption of EITF
00-21 on its financial statements or the method of adoption it will use.
In November 2002 the Emerging Issues Task Force reached a consensus opinion
on EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized either as revenue or a
reduction of a specific cost incurred. The consensus should be applied
prospectively to new or modified arrangements entered into after December 31,
2002. eMagin has not yet determined the effects of EITF 02-16 on its financial
statements
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based employee compensation. In addition, it also
amends the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income, including per share amounts, of an
entity's accounting policy decisions with respect to stock-based employee
compensation in annual and interim financial statements. SFAS No. 148 does not
amend SFAS No. 123 to require companies to account for their stock-based
employee compensation using the fair value method. The disclosure provisions of
SFAS No. 123 were effective immediately in 2002. SFAS 148 is effective for
fiscal years ending after December 15, 2002. The transition provisions for a
change to the fair value based method may be early adopted, provided that
financial statements for the 2002 fiscal year have not been issued as of
December 31, 2002. As of December 31, 2002, the eMagin does not have any
immediate plans to change its method of accounting for stock-based employee
compensation to the fair value method. Included in the 2002 financial statements
are the required disclosures of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an Interpretation of ARB No. 51 ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. eMagin does not expect this new interpretation to
have a material effect on its future results of operations or cash flows.
56
Note 3 - Receivables
Receivables consist of the following:
2002 2001
Trade receivables $ 203,928 $165,946
Contracts:
Billed:
Contracts completed and in progress 72,352 319,181
Unbilled 125,359 293,273
Other 0 (106)
----------- ----------
Total $ 401,639 $778,294
Less allowance for doubtful receivables (36,144) 0
----------- ----------
Net receivables $365,495 $778,294
=========== ==========
Note 4 - INVENTORY
The components of inventories as of December 31, 2002 and 2001 are as follows:
---------------------------------------- -------------------------------------- --------------------------------------
2002 2001
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
Raw Materials $106,800 $ 60,800
---------------------------------------- -------------------------------------- --------------------------------------
Work In 48,831 29,920
Process.
---------------------------------------- -------------------------------------- --------------------------------------
Finished
Goods 95,367 0
---------------------------------------- -------------------------------------- --------------------------------------
$ 250,998 $ 90,720
---------------------------------------- -------------------------------------- --------------------------------------
---------------------------------------- -------------------------------------- --------------------------------------
Note 5 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as
follows at December 31, 2002 and 2001:
Useful
Lives 2002 2001
Computer equipment and software 3 $ 158,922 $ 260,000
Lab and factory equipment 3 1,630,419 1,551,000
Furniture, fixtures and office equipment 10 111,594 154,000
Leasehold improvements Life of lease 329,739 325,000
------------- ------------
2,230,674 2,290,000
Less- Accumulated depreciation and amortization 1,596,142 1,123,000
------------- ------------
$ 634,532 $ 1,167,000
============= ============
Depreciation and amortization expense of equipment and leasehold
improvements for the years ended December 31, 2002 and 2001 was approximately
$473,142 and $567,000, respectively. Cost of fixed assets acquired under a
capital lease included above totals $66,075 as of December 31, 2002 with
accumulated depreciation of $16,519.
Additionally, from time to time, the Company makes deposits on certain
equipment that may ultimately be purchased by a financing company and leased to
the Company. Amounts paid by the Company for such deposits totaled approximately
$225,000 for the year ended December 31, 2001.
57
Note 6 - DEBT
Debt is comprised of the following:
2002 2001
Notes payable (1) $ 65,000 $ 168,000
Capital leases (1) 59,000 32,000
Convertible Debenture (3) 3,069,000 0
SK Loan (4) 3,000,000 2,798,000
-------------- ----------------
6,193,000 2,998,000
Less-Debt Discount ($ 228,000) ($ 693,000)
-------------- ----------------
$ 5,965,000 $ 2,305,000
-------------- ----------------
Current 5,737,000 693,000
Long-Term 228,000 2,998,000
-------------- ----------------
$ 5,965,000 $ 2,305,000
============== ================
1. Note Payable
In June 1999, eMagin entered into a $155,000 five-year uncollateralized
loan agreement. The proceeds were used to finance a leasehold improvement. The
principal balance is $64,653 at December 31, 2002 with payments due through 2004
at an interest rate of 18%.
2. Capital Leases
The Company is party to a capital lease for certain equipment with
aggregate remaining principal balance totaling $59,063 at December 31, 2002,
excluding interest, due through 2007 at an interest rate of 7.27%.
3. Convertible Debentures
a) 2001 Bridge Loan
On November 27, 2001, the Company entered into a secured convertible note
purchase agreement (the "note agreement") with an investor group (the
"Investors") whereby the Company could issue up to $1.5 million of secured
convertible notes to the Investors, as defined. Concurrent with the note
agreement, the Company issued secured promissory notes to the Investors in the
amount of $875,000 (the "secured notes"). The secured notes accrue interest at
an annual rate of 9.00% per annum and mature on August 30, 2002. The Company is
also required to meet certain debt covenants, as defined. In addition, the
Company granted a total of 359,589 warrants to the Investors in connection with
the secured notes at an exercise price of $1.67 per share. Such warrants are
exercisable through November 2004. The fair value of the warrants in the amount
of approximately $262,000 was recorded as original issue discount, resulting in
a reduction in the carrying value of the debt. The fair value of the warrants
was calculated using the Black-Scholes option-pricing model.
The original issue discount was being amortized into interest expense over
the life of the debt. Due to a default on the secured notes which occurred on
November 30, 2001, as discussed below, the remaining value of the original issue
discount as of the date of default was amortized into interest expense.
Accordingly, the related interest expense in the amount of $262,000 is included
in "Other expense, net" in the accompanying consolidated statement of operations
for the year ended December 31, 2001. The secured notes were convertible into
common stock at any time at a conversion price of $1.46 per share. Such
conversion terms provided for a beneficial conversion feature. As the Investors
had the option to convert the notes immediately upon execution of the agreement,
58
the value of the beneficial conversion feature of approximately $244,000 was
recognized immediately as interest expense and is included in "Other expense,
net" in the accompanying consolidated statement of operations for the year ended
December 31, 2001.
On November 30, 2001, the Company was not in compliance with a certain debt
covenant, as defined, and consequently defaulted on the secured notes, causing
the maturity date of the notes to accelerate and become immediately due (the
"default"). The Investors elected not to demand payment immediately. Certain
investors elected to reinvest their respective funds in a subsequent financing
(see below 2002 Bridge Loan), while certain other investors elected for
repayment of their respective funds. The repayments to those investors occurred
in January 2002. The loans have been extended through June 30, 2003 and as of
December 31, 2002 $625,000 of the loans are still outstanding.
b) Bridge Loan 2002
On January 14, 2002, the Company entered into a $1.0 million bridge loan
arrangement convertible into our common stock at a rate of $0.5264 per share.
All of the outstanding warrants issued under the Secured Note Purchase
Agreement, including those issued pursuant to the January 2002 transactions, are
exercisable for an aggregate of up to 1,954,944 shares of our common stock at an
exercise price of $0.5468 per share. The loan had an original maturity date of
August 30, 2002 which has been extended through June 30, 2003. Such warrants are
exercisable through January 2005. Certain investors of the November 27, 2001
financing who elected to remain in the new bridge loan arrangement received
reset provisions of the previous conversion rate and warrant exercise prices to
be equivalent to the terms granted to the new Investor.
The company repriced the warrants issued to the original investors to
$0.5468 per share. The total of the intrinsic value of the warrants issued to
the new Investor and the incremental intrinsic value of the repriced warrants of
certain existing investors of approximately $480,000 has been recorded as
original issue discount . The original issue discount will be amortized into
interest expense over the period of the debt. In the event the debt is converted
prior to maturity, the remaining discount will be amortized into interest
expense at the conversion date. As of December 31, 2002 the entire $480,000 has
been amortized and is included in non-cash interest expense in the accompanying
consolidated statements of operations.
In addition, based on the terms of the bridge loan arrangement, the
conversion terms of the debt provide for a beneficial conversion feature. The
total value of the beneficial feature of the new 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 the
accompanying consolidated statements of operations for year ended December 31,
2002
c) Travelers
On August 20, 2001, the Company entered into a $1.0 million bridge loan
arrangement with The Travelers Insurance Company ("Travelers"). The loan accrues
interest at an annual rate of 9.25%. Additionally, for each week the loan is
outstanding following the closing date of the arrangement (August 20, 2001), the
Company is required to issue $50,000 worth of warrants to Travelers, as defined.
Total warrants issuable to Travelers, per the agreement, are not to exceed an
amount such that the exercise of all related warrants would provide Travelers
greater than 19.9% ownership of the outstanding common stock of the Company This
agreement has been extended to June 30, 2003.
Through December 31, 2002, the Company has issued an aggregate of 451,852
warrants to Travelers at exercise prices ranging from $1.28 to $1.93 per share
in connection with this arrangement. Such warrants are exercisable through
November 2004. Terms of a the 2002 bridge loan arrangement entered into by the
Company and certain private investors (see Note 10) included a cap on the
maximum number of warrants issuable to Travelers under the Travelers bridge loan
arrangement at 451,842 warrants. Travelers agreed to the aforementioned
amendment
d) Series B Convertible Debentures
On August 21, 2002, the Company issued two Series B Convertible Debentures
in the amount of $121,739 each. The debentures bear interest at the rate of 8%
per annum and are due August 21, 2004. The Debenture also includes a fixed
conversion rate of $0.18 per share. Based on the terms of the loan arrangement,
the conversion terms of the debt provide for a beneficial conversion feature.
59
Due to the fact that the note holder had the option to convert the note
immediately upon execution of the agreement, the value of the beneficial
conversion feature of approximately $108,000 was recognized immediately as
interest expense and is included in "Other expense, net" in the accompanying
statement of operations for the nine months ended December 31, 2002.
e) $0.2 million Secured Note Purchase Agreement
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 matures on June 30, 2003. The Company also granted warrants,
exercisable for a period of three years, to purchase 300,000 shares of common
stock with an exercise price of $0.4419 per share to the investor. The fair
value warrants issued to this Investor 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 has been fully amortized. Related interest
expense of approximately $12,000 has been recognized in "Other expense, net" in
the accompanying consolidated statement of operations for the year ended
December 31, 2002
4. SK Loan
On September 18, 2001 (the "closing date") the Company entered into a $3.0
million convertible debt arrangement with SK Corporation ("SK loan"). The SK
loan accrues interest at an annual rate of 4.00% and matures on September 18,
2004. In connection with the debt arrangement, the Company issued warrants for
the purchase of 205,479 shares of the Company's common stock at an exercise
price of $1.46 per share. Such warrants are exercisable through September 2004.
The fair value of the warrants in the amount of $240,000 has been recorded as
original issue discount, resulting in a reduction in the carrying value of the
debt. The fair value of the warrants was calculated using the Black-Scholes
option-pricing model. The original issue discount is being amortized into
interest expense over the three-year life of the debt using the effective
interest method. In the event the debt is converted prior to maturity, the
remaining discount will be amortized into interest expense at the conversion
date. The SK loan is convertible into common stock at any time at a fixed
conversion price of $1.28 per share. Such conversion terms of the debt provide
for a beneficial conversion feature. Due to the fact that the note holder had
the option to convert the note immediately upon execution of the agreement, the
value of the beneficial conversion feature of approximately $287,000 was
recognized immediately as interest expense and is included in "Other expense,
net" in the accompanying statement of operations for the year ended December 31,
2001.
Additionally, the terms of the debt arrangement provide for a put option,
exercisable at the option of SK Corporation, to redeem up to 25% of the face
value of the debt each 90-day period beginning on September 19, 2002.
Accordingly, 25% of the face value of the debt and the proportionate share of
the original issue discount had been classified as short-term debt and was
included in "Current portion of long-term liabilities" in the accompanying
consolidated balance sheet for December 31, 2001. The remaining 75% of
principal, original issue discount and accrued interest was classified as other
long-term debt in the accompanying consolidated balance sheet for December 31,
2001. As of December 31, 2002, the Company was not in compliance on its
$3,000,000 debt payable to SK Corporation, as defined, and consequently
defaulted on the note, causing the maturity date of the notes to accelerate and
become immediately due (the "default"). Accordingly, at December 31, 2002, the
original liability of the notes of $3,000,000, plus accrued but unpaid interest,
is included in current liabilities in the accompanying consolidated balance
sheet.
Maturity of debt for years ending December 31 is as follows:
2003 5,737,000
2004 191,743
2005- Thereafter 36,257
----------
Total $5,965,000
60
Note 7 INCOME TAXES
Significant components of eMagin's deferred tax assets are as follows:
December 31,
--------------------------------------- ---------------------------- ---------------------------
2002 2001
--------------------------------------- ---------------------------- ---------------------------
Net operating losses $ 29,114,272 $ 24,207,988
--------------------------------------- ---------------------------- ---------------------------
Bad debt reserve 14,458 0
--------------------------------------- ---------------------------- ---------------------------
Deferred payroll 261,370 11,400
--------------------------------------- ---------------------------- ---------------------------
Accrued vacation pay 108,811 183,277
--------------------------------------- ---------------------------- ---------------------------
--------------------------------------- ---------------------------- ---------------------------
Total $ 29,498,911 $ 24,402,665
--------------------------------------- ---------------------------- ---------------------------
Valuation allowance (29,498,911) (24,402,665)
--------------------------------------- ---------------------------- ---------------------------
Net Deferred Tax Asset $ - $ -
--------------------------------------- ---------------------------- ---------------------------
As of December 31, 2002, eMagin has Federal and state net operating loss
carryforwards of approximately $72.7 million that will be available to offset
future taxable income, if any, through December 2021. 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.
Note 8- SHAREHOLDERS' EQUITY (DEFICIT)
On July 16, 2001, the shareholders approved an increase in the number of
authorized shares of common stock of the Company to 100,000,000 shares with a
par value of $0.001 per share.
In October 2001, the Company entered into an agreement with a third-party
whereby the Company issued 86,038 shares of common stock in lieu of cash payment
for services rendered on behalf of the Company. The Company recorded an expense
in the amount of approximately $116,000, the fair value of the shares granted
based on the market value of the stock on the date of grant. The expense is
included in "General and administrative" expense in the accompanying
consolidated statement of operations for the year ended December 31, 2001.
Additionally, the issuance of the shares is reflected in the consolidated
statement of shareholders' equity(deficit) for the year ended December 31, 2001.
In connection with the stock agreement, the Company also entered into a supply
agreement with the third-party for future purchases of supplies. (see Note 10)
In June 2001, The Travelers Insurance Company exercised warrants to
purchase 16,002 shares of common stock of the Company at an exercise price of
$1.72 per share.
On December 31, 1999 the Company forward split its common stock 3.054:1,
increasing the number of issued and outstanding common stock from 6,600,000 to
20,156,400.
On March 30, 1998 the Company forward split its common stock 6:1 increasing
the number of issued and outstanding common shares from 1,100,000 to 6,600,000.
Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million were raised through the private placement issuance of approximately 3.5
million shares of common stock. Additionally, approximately 9.4 million shares
of common stock held by FDC's principal shareholders were cancelled at the time
of the Merger.
In October 2001, the Company entered into an agreement with a third-party
whereby the Company issued 86,038 shares of common stock in lieu of cash payment
for services rendered on behalf of the Company. In connection with the stock
agreement, the Company also entered into a supply agreement with the third-party
for future purchases of supplies. In May of 2002, the Company issued 10,000
shares in exchange for supplies valued at $11,000.
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 statement of operations.
61
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 fee arrangement entered into between the two parties. Such
warrants are exercisable through February 2005. We 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. We are
currently in default of this filing requirement. As a result of the default, the
Company has accrued $87,362 in interest and penalties.
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 provides 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 whereby the Investor, retained it's
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 three months ended March 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 first quarter of 2002.
In April 2002, the Company announced a strategic investment from ROHM
Company LTD. 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.
Note 9- STOCK-BASED COMPENSATION PLANS
Stock Option Plans
In 1994, eMagin established the 1994 Stock Plan (the "1994 Plan"), which
has been assumed by the Company. 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 Corporation.
In 2000, eMagin established the 2000 Stock Option Plan (the "2000 Plan"),
which has been assumed by the Company. 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 May 2001, the Company's Board of Directors adopted the eMagin
Corporation Employee Stock Purchase Plan (the "Stock Purchase Plan"), under
which a total of 750,000 shares of its common stock have been reserved for
62
issuance, subject to the approval of the shareholders of the Company. The
shareholders approved the Stock Purchase Plan on July 16, 2001. The Purchase
Plan, which is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Code, provides for consecutive, overlapping
24-month offering periods. Each offering period contains four six-month purchase
periods. Each participant will be granted an option to purchase the Company's
common stock on the first day of each of the six-month purchase periods and such
option will be automatically exercised on the last day of each such purchase
period. The purchase price of each share of common stock under the Purchase Plan
will be equal to 85% of the lesser of the fair market value per share of common
stock on the starting date of that offering period or on the date of the
purchase. Offering periods begin on the first trading day on or after January 1
and July 1 of each year and terminate 24-months later. The first offering
period, however, began on July 16, 2001 and will end on June 30, 2003.
Employees are eligible to participate in the Stock Purchase Plan if they
are employed by the Company, or a subsidiary of the Company designated by the
Board of Directors, for at least 20 hours per week and for more than five months
in any calendar year. The Stock Purchase Plan permits eligible employees to
purchase common stock through payroll deductions, which may not exceed 15% of an
employee's compensation, subject to certain limitations. Employees may modify or
end their participation in the offering at any time during the offering period
or on the date of purchase, subject to certain limitations. Participation ends
automatically on termination of employment with the Company. The Company's Board
of Directors may amend, suspend or terminate the Stock Purchase Plan at any
time, except that certain amendments may be made only with the approval of the
stockholders of eMagin.
Vesting terms of the options range from immediate vesting to a ratable
vesting period of 5-1/2 years. Option activity for the years ended December 31,
2002, 2001 and 2000 is summarized as follows:
Weighted
Average
Exercise Price
Shares
Outstanding at December 31, 1999 -- $ --
Options assumed 3,342,832 2.01
Options granted, post-merger 329,200 9.30
Options exercised -- --
Options canceled (281,842) 1.77
-----------
Outstanding at December 31, 2000 3,390,190 2.72
Options granted 1,078,594 1.05
Options exercised --
Options canceled (924,063) 2.17
-----------
Outstanding at December 31, 2001 3,544,721 2.41
4,788,722 0.40
Options granted --
Options exercised (2,440,358) 2.11
-----------
Options cancelled
Outstanding at December 31, 2002 5,893,085
============
At December 31, 2002, there were 6,915 shares available for grant under the
2000 Plan and the 1994 Plan. Incentive options for 5,185,000 Common Shares at
$0.21 per share were approved by the eMagin Board of Directors on October 9,
2002 for issue to employees, directors, and officers. The options were not yet
granted, pending the future availability of Common shares for the options under
the company's qualified option plan. Upon availability, the company may issue
these options at which time the strike price will remain $0.21 and the
difference between the strike price and the fair market value, if the strike
price is under the fair market value at the date of issue, will be recognized as
compensation expense. As December 31, 2002, there were only 100,000 shares
available within the plan. The number of shares actually granted may be prorated
to a much small number.
63
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
Number Weighted Number Weighted Average
Outstanding at Weighted Average Average Exercisable at Exercisable Price
Range of Exercise December 31, 2002 Remaining Exercise December 31, 2002
Prices Contractual Life Price
(In Years)
$ 0.18 - $1.02 4,739,369 8.45 $ 0.41 4,525,619 $ 0.39
$ 1.72 - $1.72 929,716 7.11 1.72 750,034 1.72
$ 2.25 - $11.06 224,000 7.58 4.08 156,652 4.47
--------- ---------
5,893,085 7.92 $ 0.75 5,432,305 $ 0.69
========= ==== ====== ========= ======
Options granted at greater or lesser fair market value on date of grant for
shares outstanding as of December 31, 2002
------------------------------------------------- ---------------- ------------------ ------------------
2002 Weighted Average Weighted Average
Fair Market Value Strike Price
------------------------------------------------- ---------------- ------------------ ------------------
Options granted above fair market value 450,000 $0.81 $0.83
------------------------------------------------- ---------------- ------------------ ------------------
Options granted at fair market value 2,751,216 $0.61 $ 0.61
------------------------------------------------- ---------------- ------------------ ------------------
Options granted below fair market value 2,691,869 $2.99 $ 0.87
------------------------------------------------- ---------------- ------------------ ------------------
Total Options Granted 5,893,085
------------------------------------------------- ---------------- ------------------ ------------------
Deferred Compensation
Non-cash stock-based compensation expense represents expenses associated
with stock option grants to our 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. The expense also represents
warrant grants with exercise prices below fair market value to security holders
of eMagin for a reduced number of warrants to induce them to lock-up prior to
the merger.
In March 2000, eMagin repriced approximately 325,000 common stock options
issued to employees. The repricing resulted in a non-cash compensation expense
of approximately $2.7 million for the period ended March 15, 2000.
In addition, in March 2000 eMagin repriced approximately 108,000 warrants
issued to outside consultants and organizations that provided bridge loans and
funding commitments to the Company. The repricing resulted in a non-cash charge
of approximately $1.2 million, which is included in the accompanying
consolidated statement of operations for the Company.
In March 2000, eMagin issued options to purchase common stock to employees
at an exercise price below the fair market value on the date of grant of $7.00.
These options vest over a period of 1 - 60 months with a minimum lockup period
of 18 months. As a result, the Company recorded deferred compensation expense in
the amount of approximately $12.5 million, which will be amortized over the
vesting period of the options.
eMagin also issued warrants to shareholders at an exercise price below the
fair market value on the date of grant. As a result, eMagin recorded a one-time
compensation expense of approximately $2.5 million for the period ended March
15, 2000.
The recipients of the repriced options and warrants were required to
execute lock-up agreements that prohibit disposition of the underlying shares
for a period of 18 months following the Merger. Thereafter the recipients may
transfer no more that 20% of the underlying shares in the 6 months following the
end of the 18-month period, and the balance of the underlying shares may be
transferred 24-27 months after the Merger.
64
Warrants
At December 31, 2002, 6,894,153 warrants to purchase shares of common stock
are issued, outstanding and exercisable at exercise prices ranging from $0.43 to
$26.25.
Note 10 - COMMITMENTS AND CONTINGENCIES
Royalty Payments
The Company is obligated to make minimum annual royalty payments to a
corporation commencing January 1, 2001. The minimum royalty of $31,500 per year
due under this agreement commences in the first year of the agreement, and
increases to minimum royalty payment of $125,000 per year starting in the sixth
year of the agreement. 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 with the corporation. 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.
For the year ended December 31, 2002, approximately $61,000 is included in
general and administrative expense in the accompanying consolidated statement of
operations.
License and Technology Agreement
eMagin has a technology development agreement with a large Asian
corporation to permit potential commercialization of small-format OLED displays.
The primary objective of this program is to design a small format, low cost QVGA
display. Other aspects of the effort involve the potential creation of a new
version of eMagin's SVGA-3D display and potentially additional display product
lines. There is no assurance that any such effort(s) will be successful
Supply Agreement
The Company has, and may again in the future, enter into supply agreements
whereby stock is issued in lieu of cash.
Operating Leases
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through 2007. Certain leases provide
for payments of monthly operating expenses. The approximate future minimum lease
payments through 2007 are as follows:
Year ending December 31:
2003 $ 1,708,000
2004 595,000
2005 575,000
2006 23,000
2007 5,000
-------------
Total $ 2,906,000
=============
Rent expense for the years ended December 31, 2002 and 2001 was
approximately $1,107,000 and $1,999,000, respectively. Our lease with IBM
expires in 2004. We have the option to renew for five years, in yearly
increments. Our lease with Redson Building Partners has been paid in advance
through December 2003.
65
EMPLOYMENT BENEFIT PLANS
eMagin has a defined contribution plan (the 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 Plan,
eMagin may match a portion of the participating employees' contributions. There
was no matching to the plan for the years ended December 31, 2002, 2001 and
2000.
LITIGATION
eMagin provides accruals for all direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has incurred and the amount of such liability can be reasonably
estimated.
Note 11 - Related Party Transactions
The Company entered into a consulting agreement dated March 16, 2000 with
Verus International Ltd., of which Mr. Ajmal Khan is Chief Executive Officer and
Mr. Rivkin is the Non-Executive Chairman. Mr. Khan and Mr. Rivkin are also
members of our Board of Directors. Terms of the agreement included monthly
payments of $15,000 by us to Verus International Ltd. for consulting services
rendered. The term of the agreement expired on March 16, 2002.
On November 27, 2001, eMagin Corporation entered into a Secured Note
Purchase Agreement whereby five accredited initial investors agreed to lend us
an aggregate of $875,000 in exchange for (i) 9.00% per annum Secured Convertible
Promissory Notes in an aggregate principal amount of $875,000, and (ii)
three-year warrants to purchase up to an aggregate of 359,589 shares of our
common stock. 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 this investment, Mr. Rivkin received (i)
Secured Convertible Promissory Notes in an aggregate principal amount of
$125,000, and (ii) warrants exercisable for 51,370 of our common shares, which
represent a comparable transaction to the outside investors in the bridge loan.
Sovereign Bancorp Ltd also invested $100,000 under the transaction and
received (i) a Secured Convertible Promissory Note in an aggregate principal
amount of $100,000, and (ii) warrants exercisable for 41,096 of our common
shares. The brother of Mr. Khan, a director of the company, is an officer of
Sovereign Bancorp Ltd. This note has since been redeemed.
The Company believes that the transactions described above were made on
terms no less favorable than could have been obtained from third parties. All
transactions were negotiated at arm's length.
Note 12 Quarterly Information (Unaudited)
Year ended December 31, 2002
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $ 158,027 $ 268,127 $ 497,851 $ 1,203,654
Net loss $(6,489,514) $(4,001,043) $(2,754,638) $ (1,667,516)
Net loss per share
Basic and diluted $ (0.24) $(0.13) $(0.09) $(0.05)
66
Year ended December 31, 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $2,030,201 $1,616,005 $1,176,628 $1,024,536
Net loss (9,708,435) (10,832,756) (42,377,769) (5,567,775)
Net loss per share
Basic and diluted $(0.39) $(0.43) $(1.69) $(0.22)
During the fourth quarter of 2002, the Company reclassified amounts
recorded as expense recovery to revenues, representing amounts earned on
shipment of products to a former cost recovery contract customer.
The effect on the quarterly financial statements is as follows:
--------------------------------------------- -------------------------------------------
September 30, 2002
--------------------------------------------- ------------------------- -----------------
As originally reported As adjusted
--------------------------------------------- ------------------------- -----------------
Contract revenue $ 176 $ 391,966
--------------------------------------------- ------------------------- -----------------
Product revenue 497,675 497,675
--------------------------------------------- ------------------------- -----------------
Cost and expenses 2,844,479 3,236,269
--------------------------------------------- ------------------------- -----------------
Other income (expense) (408,010) (408,010)
--------------------------------------------- ------------------------- -----------------
Net Loss $ (2,754,638) $ (2,754,638)
--------------------------------------------- ------------------------- -----------------
Note 13 - SUBSEQUENT EVENTS
On March 20, 2003, we auctioned off unused leased equipment. The equipment
had zero value on the books. The equipment that sold brought $187,440 in gross
proceeds. Of that amount, Comdisco (lessor) received $81,106. which completes
all of our lease obligations with Comdisco. We paid $23,867. to miscellaneous
vendors involved in the auction and the auctioneer received a 10% commission of
the gross proceeds totaling $18,744 plus auction expenses. The auction expenses
cannot exceed $54,000. If this total is reached, it would mean a net to the
company of $9,721.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 29, 2002, eMagin Corporation was notified by the Security and
Exchange Commission that Arthur Andersen LLP ("Arthur Andersen") had notified it
that Arthur Andersen was unable to perform future audit services for eMagin as a
result of the wind-down of Arthur Andersen's business, effectively terminating
eMagin's relationship with Arthur Andersen. On September 23, 2002, eMagin, upon
recommendation of the Audit Committee of its Board of Directors, engaged Grant
Thornton LLP ("Grant Thornton") to serve as the Company's independent certified
public accountants.
67
Part III
Item 10. Directors and Executive Officers of the Registrant
Our executive officers and directors, and their ages and positions are:
Name Age Position
Gary W. Jones (1) 47 Chairman, Chief Executive Officer, President
K. C. Park 66 President, Virtual Vision, Inc.
Susan K. Jones 51 Chief Marketing and Strategy Officer, Secretary
Claude Charles (2) 65 Director
Jacob (Jack) Goldman 81 Director
Jack Rivkin (1) (2)(3) 62 Director
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
Gary W. Jones has served as our Chairman, Chief Executive Officer, and
President since 1992. Mr. Jones has over 25 years of experience in both public
and private companies in the areas of business development, high volume
manufacturing, product development, research, and marketing. Previously, Mr.
Jones managed both semiconductor manufacturing and research and development
programs at Texas Instruments. Mr. Jones is a director, a member of the
Executive Committee of the Board, and Chairman of the Technology Committee of
the United States Display Consortium. Mr. Jones received a B.S. in electrical
engineering and physics from Purdue University.
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.
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.
68
Jack Rivkin has served as a director since June of 1996. Mr. Rivkin is
Executive Vice President and Chief Investment Officer of Neuberger Berman, LLC.
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.
In April 2003 Ajmal Khan resigned as a director to pursue other interests.
He had served as a director of the Company since March of 2000, when eMagin was
formed through the merger of FED Corporation with the public predecessor of the
Company. Mr. Kahn was an officer of Verus Corporation which advised the Company
..in the course of the merger.
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 2002
Annual Meeting of our stockholders. Currently, Mr. Gary Jones and Mr. Jack
Rivkin are the Class A directors. The Class B directors have resigned and the
board has not yet elected or nominated new directors to replace them. Class C
directors will hold office until the 2004 Annual Meeting of our stockholders.
Currently, Mr. Claude Charles 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.
The Board of Directors held 19 meetings during 2002. Each incumbent
director attended at least 75% of the aggregate of all meetings of the Board of
Directors during the period for which he was a director and the meetings of the
committees on which he or she served. The Board of Directors has established an
Executive Committee, an Audit Committee and a Compensation Committee.
During 2002, the Company's directors received compensation for service to
the Company as directors. (See "Executive Compensation- Compensation of
Directors".) Directors also received reimbursement of ordinary expenses incurred
in connection with attendance at such meetings.
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
The Audit Committee is responsible for (i) determining the adequacy of the
Company's internal accounting and financial controls, (ii) reviewing the results
of the audit of the Company performed by the independent public accountants, and
(iii) recommending the selection of independent public accountants. Messrs.
Charles, Rivkin and Khan, prior to his resignation in 2003, were members of the
Audit Committee during fiscal 2002. 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, the Board confirmed that all members of the Audit
Committee are ``independent'' within the meaning of the Amex's new rules. The
Audit Committee met four times during fiscal 2002.
69
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. Mr. Rivkin was the sole member of the Compensation Committee during
fiscal year 2002. The Compensation Committee met once during fiscal year 2002.
The Executive Committee has authority to act for the Board on most matters
during intervals between Board meetings, subject to Board approval. Messrs.
Jones, Rivkin and Khan, prior to his resignation in April 2003, were members of
the Executive Committee during fiscal year 2002. The Executive Committee met
twice during the fiscal 2002.
The Company has adopted its Code of Ethics and Business Conduct for
Officers, Directors and Employees that applies to all of the officers, directors
and employees of the Company.
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 Company believes that there was
compliance with all filing requirements of Section 16(a) applicable to directors
and executive officers of the Company during fiscal 2002, except that Mr. Ajmal
Khan failed to file once.
Item 11. Executive Compensation
Summary compensation table for named executive officers
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, 2002, were (i) the Chief
Executive Officer of the Company and (ii) the other two most highly compensated
executive officers of the Company (collectively, the "named executive
officers"). Prior to establishment of the Compensation Committee, the Chief
Executive Officer and Board elected not to cash pay bonuses as part of executive
compensation during the development stage years of the Company, and the officers
have not accepted cash bonuses to date. The Compensation Committee plans to
allocate a bonus in stock options to officers and directors for the fiscal year
2002 during 2003.
Long-Term
Compensation
Other Annual Awards (Securities
Name and Positions Year Salary Bonus Compensation Underlying Options)
=================================================================================================================
Gary W. Jones President, Chief 2002 136,050 0 (1) 0 1,589,827
Executive Officer, Acting
Chief Financial Officer, 2001 234,393 (1) 0 0
Chairman Director 2000 227,863 0 0 0
Susan K. Jones Executive Vice President, 2002 143,683 0 (2) 0 1,293,368
Chief Strategy and
Marketing Officer, and 2001 189,207 0 (2) 0 0
2000 183,837 0 0 0
K.C. Park President, Virtual Vision 2002 109,797 0 (3) 0 438,310
2001 171,877 0 0 0
2000 168,623 0 0 0
Andrew P. Savadelis Former Executive Vice 2002 17,389 0 (4) 0 0
President and Chief 2001 255,769 112,500 (4) 0 0
Financial Officer 2000 91,667 37,500 (4) 0 0
70
(1) In 2002 Mr. Jones deferred pay in the amount of $166,522. In
January 2002 Mr. Jones was granted a bonus of 750,000 shares awarded for
the years 2000 and 2001. Also in January all staff received options based
on salary. Mr. Jones received 45,900 options. In July, all officers were
granted options for regular pay they deferred. Mr. Jones was granted
444,344 options for deferred pay from January through July 15, 2002. In
October Mr. Jones was granted 349,583 options for deferred pay from July 16
through October 8, 2002.
(2) In 2002 Mrs. Jones deferred pay in the amount of $127,740. In
January 2002 Mrs. Jones was granted a bonus of 350,000 shares awarded for
the years 2000 and 2001. Also in January all staff received options based
on salary. Mrs. Jones received 37,000 options. In April, Mrs. Jones was
awarded 300,000 options in recognition of additional duties as Chief
Strategy Officer, Chief Marketing Officer, and Secretary. In July, all
officers were granted options for regular pay they deferred. Mrs. Jones was
granted 324,572 options for deferred pay from January through July 15,
2002. In October Mrs. Jones was granted 281,796 options for deferred pay
from July 16 through October 8, 2002.
(3) In 2002 Dr. Park deferred pay in the amount of $65,735. In January
all staff received options based on salary. Dr. Park received 33,600
options. In April, Dr. Park was awarded 100,000 options as compensation for
additional duties as President of Virtual Vision. In July, all officers
were granted options for regular pay they deferred. Dr. Park was granted
112,210 options for deferred pay from January through July 15, 2002. In
October Dr. Park was granted 192,500 options for defer red pay from July 16
through October 8, 2002.
(4) Mr. Savadelis was employed for less than a full year in 2000. As
such, his salary amount for that year represents salary earned from his
start date through the end of the fiscal year. Mr. Savadelis' compensation
included an annual salary of $250,000 and a non- milestone-driven bonus of
$150,000 to be paid quarterly in the period from September 11, 2000 to
September 10, 2001. $37,500 of the non-milestone-driven bonus was paid to
Mr. Savadelis during 2000. In addition, the Company paid relocation
assistance in the amount of $50,000 in October, 2000. Mr. Savadelis ceased
to be employed by the Company in January 2002. In 2003 the Company reached
a settlement with Mr. Savadelis in which he received $100,000 for 2002
salary due him.
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, 2002.
The following table provides information related to options granted to our
named executive officers during the fiscal year ended December 31, 2002.
Number of % of Total Value at Assumed
Securities Options Granted Annual Rates of Stock Price
Underlying in Fiscal 2002 Appreciation for Option Term
Options (2) Exercise Expiration 5% 10%
Granted Price Date
Name (1) Per Share (3)
Gary W. Jones (1) 750,000 15.7% $ 0.42 1/2/07 82,884 183,153
Gary W. Jones (4) 45,900 1.0% $ 0.42 1/2/07 5,073 11,209
Gary W. Jones (7) 444,344 9.3% $ 0.32 7/14/05 49,106 108,511
Gary W. Jones (8) 349,583 7.3% $ 0.18 10/8/05 38,633 85,370
Susan K Jones (1) 350,000 7.3% $ 0.42 1/2/07 38,679 85,471
Susan K Jones (4) 37,000 0.8% $ 0.45 1/14/07 4,089 9,036
Susan K Jones (6) 300,000 6.3% $ 0.83 4/30/05 33,154 73,261
Susan K Jones (7) 324,572 6.8% $ 0.32 7/14/05 35,869 79,262
Susan K Jones (8) 281,796 5.9% $ 0.18 10/8/05 31,142 68,816
K.C. Park (4) 33,600 0.7% $ 0.42 1/2/07 3,713 8,205
K.C. Park (5) 100,000 2.1% $ 0.83 4/30/05 11,051 24,420
K.C. Park (7) 112,210 2.3% $ 0.32 7/14/05 12,401 27,402
K.C. Park (8) 192,500 4.0% $ 0.18 10/8/05 21,274 47,009
(1) Gary W Jones and Susan K Jones were awarded an additional grant of
options during fiscal year 2002 in recognition of their respective contributions
to the Company during fiscal years 2001 and 2002.
(2) All options issued in 2002 vested immediately
(3) The exercise price of the stock options was based on the fair market
value of the stock on the day of the grant.
(4) Options issued to retain key employees based on a percentage of salary.
(5) Dr. Park was awarded an additional grant of options during fiscal year
2002 as compensation for additional duties as President of Virtual Vision, Inc.
71
(6) Mrs. Jones was awarded an additional grant of options during fiscal
year 2002 in recognition of additional duties as Chief Strategy Officer, Chief
Marketing Officer, and Secretary.
(7) Options issued to compensate employees for deferred salary Jan-July 15,
2002.
(8) Options issued to compensate employees for deferred salary July 16-Oct
8, 2002.
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, 2002 by each of the
named executive officers and the number of shares subject to both exercisable
and unexercisable stock options as of December 31, 2002. The common stock price
at December 31, 2002 was $0.40 per share.
# of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Shares Options at Options at
Acquired Value FY-End FY-End
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Gary Jones----------------- - - 941,110 874,472 214,002 0
Susan K. Jones------------- - - 1,071,362 749,274 161,078 0
K.C. Park------------------ - - 419,570 152,571 72,801 0
In October 2002, the Board allocated options that were not issued due to
the unavailability of shares in the 2000 Stock Option Plan. Of the options
allocated, the Board allocated 2,000,000 options to Mr. Jones, 1,000,000 options
to Mrs. Jones and 500,000 options to Dr. Park. These options may or may not be
granted in whole or in part in 2003. These were incentive options to retain the
management and staff through a very difficult period
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 2000 Stock Option Plan
(the "2000 Plan"). Under the 2000 Plan, a grant of options to purchase 40,000
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 40,000 shares of common stock
automatically granted upon joining the Board, Directors thereafter receive an
annual grant of options to purchase 10,000 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. In addition, each non-management director is
reimbursed for ordinary expenses incurred in connection with attendance at such
meetings.
72
Executive Employment Agreements
We currently have no Employment Agreements in place with any officers of
the company. The Company had Employment Agreements with Gary Jones and Susan
Jones that expired on March 16, 2002.
Compensation Committee Interlocks and Insider Participation
Jack Rivkin served as the sole member of the Compensation Committee during
the fiscal year 2002. Mr. Rivkin has never been an officer or employee of the
Company or any of its subsidiaries.
Compensation Committee Report
The Company's executive compensation program is designed to attract, retain
and motivate executive officers capable of leading the Company to meet its
business objectives, to align the interests of executive management with those
of the stockholders, and to incentivize and reward both short and long term
performance based on the success of the Company in meeting its development
milestones and business objectives. The Compensation Committee places a
particular emphasis on variable, performance based components, such as the bonus
potential and stock option awards, the value of which could increase or decrease
to reflect changes in corporate and individual performances.
Components of Compensation. Each executive officer's compensation package
is generally comprised of the following elements: (1) A base salary which is
established at levels considered appropriate for the duties and scope of
responsibilities of each officer's position; (2) A performance-based annual
bonus; (3) Periodic grants of stock options to strengthen the mutuality of
interests between the executive officers and the Company's stockholders. Annual
or quarterly cash bonuses related to the performance of the Company may be made
to executive officers in the sales and marketing functions, and other executive
officers in certain other circumstances, for such executive officer's functional
area. Executive officers are also eligible to participate in compensation and
employee benefits generally available to all employees of the Company, such as
health insurance and participation in the eMagin Employee Savings and Protection
Plan ("401(k) Plan").
The Compensation Committee believes that this three-part approach best
serves the interests of the Company and its stockholders. It enables the Company
to meet the requirements of the highly competitive environment in which the
Company operates while ensuring that executive officers are compensated in a way
that advances both the short- and long-term interests of stockholders. Under
this approach, compensation for these officers involves a high proportion of pay
that is ``at risk''--namely, the annual bonus and stock options. The variable
annual bonus is also based, in significant part, on Company performance. Stock
options relate a significant portion of long-term remuneration directly to stock
price appreciation realized by all of the Company's stockholders.
Base Salary. Base salaries for executive officers are set at levels
believed by the Committee to be sufficient to attract and retain qualified
executive officers based on the stage of development of the Company, the salary
levels in effect for comparable positions in similarly situated companies within
relevant industries, and internal comparability considerations. Base salaries
for the Company's executive officers other than the Chief Executive Officer, as
well as changes in such salaries, are based upon recommendations by the Chief
Executive Officer, taking into account such factors as competitive industry
salaries, a subjective assessment of the nature of the position and the
contribution and experience of the officer and the length of the officer's
service. All such recommendations are subject to approval or disapproval by the
Compensation Committee. Other than provisions provided for in Employment
Agreements, changes in base salaries of executives are based on an evaluation of
the personal performance of the executive, prevailing market practices, and the
performance of the Company as a whole. In determining base salaries, the
Compensation Committee not only considers the short term performance of the
Company, but also the success of the executive officers in developing and
executing the Company's strategic plans, developing management employees and
exercising leadership in the development of the Company.
Cash-Based Incentive Bonus. The Compensation Committee believes that a
portion of the total cash compensation for executive officers should be based on
73
the Company's success in meeting its short term performance objectives and
contributions by the executive officers that enable the Company to meet its long
term objectives, and has structured the executive compensation program to
reflect this philosophy. This approach creates a direct incentive for executive
officers to achieve desired short term corporate goals that also further the
long term objectives of the Company, and places a significant portion of each
executive officer's annual compensation at risk.
Stock Options. The Compensation Committee believes that equity
participation is a key component of the Company's executive compensation
program. Stock options are awarded by the Compensation Committee to executive
officers primarily based on potential contributions to the Company's growth and
development and marketplace practices. These awards are designed to retain
executive officers and to motivate them to enhance stockholder value by aligning
the financial interests of executive officers with those of stockholders. Stock
options provide an effective incentive for management to create stockholder
value over the long term because the full benefits of the option grants cannot
be realized unless an appreciation in the price of the Company's common stock
occurs over a number of years.
Variable Bonus. The Compensation Committee may award annual or interim
Special Bonuses in the form of cash, stock options, or restricted stock to
executive management and employees for achieving certain milestones, progress
made in the staff and organizational development of the Company, and advances in
the market acceptance and commercialization of the Company's technology.
Compensation of Chief Executive Officer. Mr. Jones's base salary as of
December 31, 2002 was $305,095 of which he received $136,049.85. In July 2002,
Mr. Jones was granted 444,344 stock options in lieu of deferred compensation
from January through July 15, 2002. In October 2002, Mr. Jones was granted
349,583 stock options in lieu of deferred compensation from July 15, 2002
through October 8, 2002. The Compensation Committee awarded Mr. Jones a bonus of
750,000 stock options for the combined years 2001 and 2002, which were issued in
January 2002, for accomplishments in readying the company's product, market, and
capability. Additionally, Mr. Jones received an award of 45,900 options as part
of a general retention award.
Compensation Committee
Jack Rivkin
Performance Graph
The following graph compares the cumulative total shareholder return on our
Common Stock from the initial listing date of our Common Stock on the American
Stock Exchange through December 30, 2003 to the AMEX Computer Technology Index
and an index of peer companies selected by the Company ("Peer Index") based on
an unweighted average monthly closing price of the companies in the index. The
companies in the Peer Index are Kopin Corporation (KOPN), Microvision
Corporation (MVIS), Three Five Systems, Inc. (TFS), and Universal Display
Corporation (PANL). The past performance of the Company's Common Stock is not an
indication of future performance. We cannot assure you that the price of the
Company's Common Stock will appreciate at any particular rate or at all in
future years. Notwithstanding any statement to the contrary in any of the
Company's previous or future filings with the Securities and Exchange
Commission, the graph shall not be incorporated by reference into any such
filings.
74
[GRAPHIC OF PERFORMANCE GRAPH]
The above performance graph is based upon the following data:
Date eMagin AMEX Company
Corporation Computer Determined
Technology Peer Index
Index
==================== ================= =================== ==================
12/31/00 $ 100 $ 100 $ 100
12/31/01 $ 20 $ 85 $ 99
12/31/02 $ 19 $ 56 $ 44
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares of our common stock
beneficially owned by (i) each member of our board of directors; (ii) certain of
our executive officers (including all of our named executive officers); (iii)
all of our directors and executive officers as a group; and (iv) all those known
by us to be beneficial owners of more than five percent of the outstanding
shares of our common stock as of April 25, 2003. Unless otherwise indicated, the
shareholders 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**
Mortimer D A Sackler (1) 12,778,212 17.6%
Travelers Insurance Company (2) 8,873,760 12.2%
George Haywood (3). 5,166,620 7.1%
Gary W. Jones (4) 4,747,810 6.5%
Susan K. Jones (4) 2,860,901 3.9%
K.C. Park (5) 1,072,314 1.5%
Jack Rivkin (6) 952,851 1.3%
Claude Charles (7) 210,000 *
All Directors and Executive Officers as a Group (8) 9,843,876 13.5%
--------------------------------------------------------------------- ------------------------ --------------------
75
* Less than 1% of the outstanding common stock.
** Based on 72,726,783 shares of common stock outstanding as of April 25,
2003.
(1) This figure represents shares owned by Mortimer Sackler in the
amount of 3,898,850 shares and includes 2,162,762 shares owned by Rainbow
Gate Corporation, in which Mr. Sackler is the investment manager of the
corporation and 6,716,600 shares owned by Stillwater LLC, in which Mr.
Sackler is the sole member.
(2) Shares are owned by Travelers and its affiliates TRAL and
Citicorp. This figure includes warrants held by Travelers and Citicorp to
purchase 1,655,845 and 127,292 shares of common stock respectively.
[Address: Citigroup Inc. 399 Park Avenue, New York, NY 10043].
(3) Shares owned by George Haywood. This figure includes warrants held
by Mr. Haywood to purchase 2,583,310 shares of common stock.
(4) This figure represents shares owned by Gary Jones and Susan Jones
who are married to each other, including 6,557,646 common stock shares
issuable upon exercise of stock options.
(5) This figure represents shares owned by K.C. Park. This figure
includes 1,072,141 common stock shares issuable upon exercise of stock
options.
(6) These shares are owned by Jack Rivkin. This figure includes
warrants held by Mr. Rivkin to purchase 303,933 shares of common stock and
250,000 common stock shares issuable upon exercise of stock options.
(7) This figure represents 210,000 common stock shares issuable upon
exercise of stock options.
(8) This figure includes 8,249,787 shares of common stock issuable
upon exercise of stock options. This also includes warrants to purchase
345,029 shares of common stock.
Item 13. Certain Relationships And Related Transactions
We entered into a consulting agreement dated as of March 16, 2000 with
Verus International Ltd., of which Mr. Ajmal Khan is Chief Executive Officer and
Mr. Jack Rivkin served as Non-Executive Chairman until he resigned that position
in early 2002 upon retirement from Citigroup. Mr. Khan was a member of our Board
of Directors, but resigned from such position effective as of April 25, 2003.
Mr. Rivkin is a member of our Board of Directors. Terms of the agreement include
monthly payments of $15,000 by us to Verus International Ltd. for consulting
services rendered during 2001. The term of the agreement expired on March 16,
2002.
On November 27, 2001, eMagin Corporation entered into a Secured Note
Purchase Agreement whereby five accredited initial investors agreed to lend us
an aggregate of $875,000 in exchange for (i) 9.00% per annum Secured Convertible
Promissory Notes in an aggregate principal amount of $875,000, and (ii)
three-year warrants to purchase up to an aggregate of 359,589 shares of our
common stock. Messrs. Rivkin and Solomon, who at the time of the transaction
were each members of our Board of Directors, participated as investors in the
transaction and each invested $125,000 in the Company. In return for such
investment, Messrs. Rivkin and Solomon collectively received (i) Secured
Convertible Promissory Notes in an aggregate principal amount of $250,000, and
(ii) warrants exercisable for 102,740 of our common shares. Sovereign Bancorp
Ltd. also invested $100,000 under the transaction and received (i) a Secured
Convertible Promissory Note in an aggregate principal amount of $100,000, and
(ii) warrants exercisable for 41,096 of our common shares. The brother of Mr.
76
Khan, a director of the Company, is an officer of Sovereign Bancorp Ltd. In
addition, Mr. Mortimer D.A. Sackler, who is currently a beneficial owner of more
than five percent of the outstanding shares of our common stock, invested
$200,000 under the transaction and collectively received (i) Secured Convertible
Promissory Notes in an aggregate principal amount of $200,000, and (ii) warrants
exercisable for 82,192 of our common shares. As of January 14, 2002, the Secured
Note Purchase Agreement was amended to increase (i) the aggregate principal
amount of the Secured Convertible Promissory Notes issued thereunder to
$1,625,000, and (ii) the number of shares issuable pursuant to the warrants
issued thereunder to 1,954,944. Pursuant to these amendments, Mr. Mortimer D.A.
Sackler invested an additional $1,000,000 under the Secured Note Purchase
Agreement and received (i) additional Secured Convertible Promissory Notes with
an aggregate principal amount of $1,000,000, and (ii) additional warrants
exercisable for 1,285,589 shares of our common stock. Rainbow Gate Corporation,
pursuant to the November 27, 2001 transaction and the January 14, 2002
amendment, invested $300,000 under the transaction and collectively received (i)
Secured Convertible Promissory Notes in an aggregate principal amount of
$300,000, and (ii) warrants exercisable for 341,945 of our common shares. After
the close of the January 14, 2002 amended transaction, Dr. Mortimer D. Sackler
purchased from Rainbow Gate Corporation the Secured Convertible Promissory Notes
in an aggregate principal amount of $300,000, and (ii) warrants exercisable for
341,945 of our common shares. At the time of the amendment, the Company also
redeemed $250,000 in aggregate principal amount of the then outstanding notes
held by three of the initial investors under the agreement. Pursuant to this
redemption, the notes held by Mr. Solomon, (who at the time of the redemption
was no longer a member of our Board of Directors) and by Sovereign Bancorp Ltd.
were redeemed.
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 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.
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, who is currently a beneficial owner of more than
five percent of the outstanding shares of our common stock, agreed to invest an
aggregate of $2,000,000 under the transaction and will receive (i) Secured
Convertible Promissory Notes in an aggregate principal amount of $2,000,000, 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 amount secured note that was purchased
pursuant to a Secured Note Purchase Agreement entered into as of June 20, 2002
(the "Bridge Note"), agreed to (a) amend their respective Original Secured Notes
and Bridge Note issued to them, (b) terminate the Security Agreement dated
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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. For a complete description of the transaction, including the Secured Note
Purchase Agreement, the Notes and the Warrants, see "Item 7 - Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Subsequent Event."
The Company believes that the transactions described above were made on
terms no less favorable than could have been obtained from third parties. All
transactions were negotiated at arm's length.
Item 14. Controls and Procedures
As of December 31, 2002, an evaluation was performed by our Chief Executive
Officer and Acting Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures. Based on that
evaluation, Our Chief Executive Officer and Acting Chief Accounting Officer,
concluded that our disclosure controls and procedures were effective as of
December 31, 2002. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to December 31, 2002.
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibit List
Exhibit
Number Description
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 Articles of Incorporation filed January 23, 1996, as filed in the Registrant's Form 10-SB (file no.
000-24757) incorporated herein by reference.
3.2 Bylaws, as filed in the Registrant's Form 10-SB (file no. 000-24757) incorporated herein by reference.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws of the Registrant defining rights of
the holders of common stock of the Registrant herein by reference.
4.2 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.
4.3 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.
4.4 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.
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 Consulting Agreement between eMagin Corporation and Verus International Ltd., 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.
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10.3 Employment Agreement with Gary W. Jones, dated March 16, 2000, as filed in the Registrant's Form 10-K/Afor the year ended
December 31, 2000 incorporated by reference herein.
10.4 Employment Agreement with Susan K. Jones, 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 Virtual Vision lease between Redson Building Partnership and Vision Newco dated December 15, 1995, as filed in the
Registrant's Form 10-K/A for the year ended December 31, 2000 incorporated by reference herein.
10.11 Securities Purchase Agreement dated as of September 18, 2001 by and between eMagin Corporation and SK Corporation, as filed
in the Registrant's Form 8-K dated September 26, 2001 incorporated herein by reference.
10.12 Registration Rights Agreement dated as of September 19, 2001 by and between eMagin Corporation and SK Corporation, as filed
in the Registrant's Form 8-K dated September 26, 2001 incorporated herein by reference.
10.13 Note Purchase Agreement entered into as of August 20, 2001, by and among eMagin Corporation and The Travelers Insurance
Company, as filed in the Registrant's Form 8-K dated September 4, 2001 incorporated herein by reference.
10.14 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.
10.15 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.
10.16 Security Agreement dated as of November 20, 2001, by and between eMagin Corporation, Verus International Ltd. and certain
investors named therein, as filed in the Registrant's Form 8-K dated December 18, 2001 incorporated herein by reference.
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10.17 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.
10.18 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.
10.19 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.
21.1 Subsidiaries of the Registrant.
99.1 Certification of the Chief Executive Officer and Acting Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Code of Ethics and Business Conduct of Officers, Directors and Employees, as filed in the Registrant's Form 10-K dated
April 15, 2003, incorporated herein by reference.
(b) Financial Statement Schedules
None
(c) Reports on Form 8-K
The Company filed twenty-six reports on form 8-K during the year ended
December 31, 2002. Information regarding the items reported on is as follows:
DATE OF REPORT ITEM REPORTED ON
January 28,2002 eMagin Corporation entered into a series of transaction
documents to facilitate additional funding of $1,000,000 of
eMagin by a private investor.
March 20, 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 an aggregate of approximately 3.6
million shares of common stock, par value $.001 of eMagin
and warrants exercisable for a period of three years from
the Closing Date for an aggregate of approximately 1.4
million shares of Common Stock.
March 26, 2002 eMagin Corporation entered into a common stock purchase
agreement and related documents with Northwind Associates,
Inc., a Cayman Islands corporation, pursuant to which the
Company may receive in periodic draw downs at its option,
subject to the terms and conditions of the Transaction
Agreements, up to $15,000,000 inequity financing over a
three year period.
May 21, 2002 eMagin Corporation and The Travelers Insurance Company
entered into an amendment agreement to extend the maturity
date of the Convertible Promissory Note.
80
June 3, 2002 eMagin Corporation and The Travelers Insurance Company
entered into a second amendment agreement to amend and
extend the maturity date of the Convertible Promissory Note.
June 06, 2002 eMagin Corporation and The Travelers Insurance Company
entered into a third amendment agreement to amend and extend
the maturity date of the Convertible Promissory Note.
June 10, 2002 eMagin Corporation and The Travelers Insurance Company
entered into a fourth amendment agreement to amend and
extend the maturity date of the Convertible Promissory Note.
June 17, 2002 eMagin Corporation and The Travelers Insurance Company
entered into a fifth amendment agreement to amend and extend
the maturity date of the Convertible Promissory Note.
June 18, 2002 eMagin Corporation and The Travelers Insurance Company
entered into memorandum of understanding to amend and extend
the maturity date of the Convertible Promissory Note.
June 24, 2002 eMagin Corporation and The Travelers Insurance Company
entered into a sixth amendment agreement to amend and extend
the maturity date of the Convertible Promissory Note.
July 3, 2002 eMagin Corporation and an Investor entered into a
Secured Note Purchase Agreement whereby Investors agreed to
lend eMagin $200,000 in exchange for $200,000 11.00% per
annum Secured Promissory Note and Warrants exercisable for a
period of three years to purchase 300,000 shares of common
stock of eMagin.
August 06, 2002 Change in registrant's Certifying Accountant, Arthur
Andersen will no longer serve as eMagin's independent
auditor.
September 3, 2002 eMagin Corporation issued to each of two Investors 8%
Series B Convertible Debentures whereby each of the
Investors agreed to lend eMagin $121,739 for a total of
$243,478. Interest is payable on the Debentures at a rate of
8% per annum.
September 24, 2002 eMagin Corporation engaged Grant Thornton LLP to serve
as the company's Independent auditors upon the
recommendation of its audit committee and Board of
Directors.
October 04, 2002 eMagin Corporation and The Travelers Insurance Company
entered into an eighth amendment agreement to amend and
extend the maturity date of the Convertible Promissory Note.
eMagin and Mr. Mortimer D.A. Sackler entered into
second amendment agreement to amend and extend the maturity
date of the Secured Promissory Note and to amend and extend
the maturity date of the Secured Convertible Promissory
Notes.
eMagin and Ginola Limited, an assignee of Rainbow Gate
Corporation, entered into a second amendment agreement to
amend and extend the maturity date of the Secured
Convertible Promissory.
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eMagin and Mr. Jack Rivkin entered into a second
amendment agreement to amend and extend the maturity date of
the Secured Convertible Promissory.
November 01, 2002 eMagin Corporation and The Travelers Insurance Company
entered into a ninth amendment agreement to amend and extend
the maturity date of the Convertible Promissory Note.
eMagin and Mr. Mortimer D.A. Sackler entered into a
third amendment agreement to amend and extend the maturity
date of the Secured Promissory Note and to amendment
agreement to extend the maturity date of the Secured
Convertible Promissory Notes.
eMagin and Ginola Limited an assignee of Rainbow ate
Corporation, entered into a third amendment agreement to
amend and extend the maturity date of the Secured
Convertible Promissory Note.
eMagin and Mr. Jack Rivkin entered into a third
amendment agreement to amend and extend the maturity date of
the Secured Convertible Promissory.
December 04, 2002 eMagin Corporation and The Travelers Insurance Company
entered into a tenth amendment agreement to amend and extend
the maturity date of the Convertible Promissory Note.
eMagin and Mr. Mortimer D.A. Sackler entered into a
fourth amendment agreement to amend and extend the maturity
date of the Secured Promissory Note. As well, eMagin and
Sackler entered into a fourth amendment agreement to amend
and extend the maturity date of the Secured Convertible
Promissory Notes.
eMagin and Ginola Limited, an assignee of Rainbow Gate
Corporation, entered into a fourth amendment agreement to
amend and extend the maturity date of the Secured
Convertible Promissory Note.
eMagin and Mr. Jack Rivkin entered into a fourth
amendment agreement to amend and extend the maturity date of
the Secured Convertible Promissory Note.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 1st day of May
2003.
EMAGIN CORPORATION
BY: /s/ Gary Jones
Gary Jones
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND ACTING CHIEF
FINANCIAL OFFICER
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PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
NAME TITLE DATE
--------------------------- --------------------------- ---------------
/s/ Gary Jones President, Chief Executive Officer, and May 1, 2003
--------------------------- Acting Chief Financial Officer and Director
Gary Jones (Principal Executive Officer)
Gary Jones
/s/ Claude Charles Director May 1, 2003
---------------------------
Claude Charles
/s/ Jack Goldman Director May 1, 2003
---------------------------
Dr. Jacob E Goldman
/s/ Jack Rivkin Director May 1, 2003
---------------------------
Jack Rivkin
CERTIFICATION
I, Gary W. Jones, CEO and Acting CFO, certify that:
1. I have reviewed this annual report on Form 10-K/A of eMagin Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
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5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 1, 2003
/s/ Gary W. Jones
Chief Executive Officer
Acting Chief Financial Officer
84