Filed Pursuant to Rule 424(b)(3)
Registration No. 333-112579
eMagin Corporation
7,654,636 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders, who invested
in us on January 9, 2004, of up to 7,654,636 shares of our common stock,
including up to 4,312,215 shares issuable upon the exercise of common stock
purchase warrants. All these securities were previously issued on January 9,
2004. The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions.
The selling stockholders may be deemed underwriters of the shares of common
stock, which they are offering. We will pay the expenses of registering these
shares.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the American Stock Exchange under the symbol "EMA".
The last reported sales price per share of our common stock as reported by the
American Stock Exchange on February 4, 2004, was $2.39.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is February 12, 2004.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by eMagin
Corporation, with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
eMagin Corporation
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 initial production 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.
Our principal offices are located at 2070 Route 52, Hopewell Junction, New York
12533, and our telephone number is (845) 892-1900. We are a Delaware
corporation.
The Offering
Common stock offered by selling stockholders............ Up to 7,654,636 shares, including up to
4,312,215 shares issuable upon the exercise
of common stock purchase warrants, assuming
full exercise of the warrants. This number
represents 13.8% of the total number of
shares to be outstanding following this
offering assuming the exercise of all
securities being registered.
Common stock to be outstanding after the offering........ Up to 55,517,595 shares
Use of proceeds.......................................... We will not receive any proceeds from the sale
of the common stock. However, we will receive
the exercise price of any common stock we sell to
the selling stockholder upon exercise of the
warrants. We expect to use the proceeds
received from the exercise of their
warrants, if any, for general working capital
purposes. We have received gross proceeds
$4,200,039 from the sale of the common stock and warrants.
American Stock Exchange Symbol........................... EMA
The above information regarding common stock to be outstanding after the
offering is based on 47,862,959 shares of common stock outstanding as of
February 2, 2004 and assumes the subsequent issuance of common stock to the
selling stockholders and exercise of warrants by our selling stockholders.
2
Recent Developments
On January 9, 2004, eMagin Corporation and several accredited institutional and
private investors entered into a Securities Purchase Agreement whereby such
investors purchased an aggregate of 3,333,364 shares of common stock for an
aggregate purchase price of $4,200,039.
The shares of common stock were priced at a 20% discount to the average closing
price of the stock from December 30, 2003 to January 6, 2004, which ranged from
$1.38 to $1.94 per share during the period for an average closing price of $1.26
per share. In addition, the investors received warrants to purchase an aggregate
of 2,000,019 shares of common stock (subject to anti-dilution adjustments)
exercisable at a price of $1.74 per share for a period of five (5) years. The
warrants were priced at a 10% premium to the average closing price of the stock
for the pricing period.
eMagin also issued additional warrants to the investors to acquire an aggregate
of 2,312,193 shares of common stock. 1,206,914 of such warrants are exercisable,
within 6 months from the effective date of the registration statement covering
these securities, at a price of $1.74 per share (a 10% premium to the average
closing price of the stock for the pricing period), and 1,105,279 of such
warrants are exercisable within 12 months from the effective date of the
registration statement covering these securities, at a price of $1.90 per share
(a 20% premium to the average closing price of the stock for the pricing
period).
This prospectus covers the resale by the investors of the above-referenced
common stock and common stock underlying the warrants.
3
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Related To Our Financial Results
IF WE CANNOT OPERATE AS A GOING CONCERN, OUR STOCK PRICE WILL DECILNE AND YOU
MAY LOSE YOUR ENTIRE INVESTMENT.
Our auditors included an explanatory paragraph in their report on our financial
statements for the year ended December 31, 2002 which stated 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 three months ended September 30, 2003 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 and we are
unable to secure additional funding to cover these added losses, 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. 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 BE ABLE TO SATISFY THE AMERICAN STOCK EXCHANGE'S CONTINUED LISTING
REQUIREMENTS.
The AMEX staff notified us in June 2003 that we have fallen below Section
1003(a)(i) of the AMEX Company Guide for having shareholders' equity of less
than $2,000,000 and losses from continuing operations and/or net losses in two
out of the three most recent fiscal years. We were afforded the opportunity to
submit a plan of compliance to the AMEX and presented a plan to the AMEX in July
2003. On September 9, 2003, we received notice from the staff of the AMEX that
the AMEX had accepted our plan to regain compliance with AMEX's continued
listing standards and granted us an extension until December 4, 2004 to regain
compliance with those standards. The failure to execute our plan and comply with
the AMEX equity requirement could result in a delisting of our common stock.
We will be subject to periodic review by the AMEX staff during the extension
period. During this time, we must make progress consistent with the terms of the
plan or maintain compliance with the continued listing standards. Other as yet
unidentified issues may arise that could adversely affect the financial or the
potential listing status of the company.
4
WE HAVE A HISTORY OF LOSSES SINCE OUR INCEPTION AND MAY INCUR LOSSES FOR THE
FORESEEABLE FUTURE.
Accumulated losses excluding non-cash transactions as of September 30, 2003,
were $32.5 million and acquisition related non-cash transactions were $101.9
million, which resulted in an accumulated net loss of $134.4 million, the
majority of which was related to the March 2000 merger and the subsequent
write-down of our goodwill. The non-cash losses were dominated by the
amortization and write-down of goodwill and purchased intangibles and write-down
of acquired in-process research and development related to the March 2000
acquisition, and also included some non-cash stock-based compensation. We have
not yet achieved profitability and we can give no assurances that we will
achieve profitability within the foreseeable future as we fund 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 WERE PREVIOUSLY PRIMARILY DEPENDENT ON U.S. GOVERNMENT CONTRACTS.
The majority of our revenues to date have been derived from research and
development contracts with the U.S. federal government. We cannot continue to
rely on such contracts for revenue. We plan to submit proposals for additional
development contract funding; however, funding is subject to legislative
authorization and even if funds are appropriated such funds may be withdrawn
based on changes in government priorities. No assurances can be given that we
will be successful in obtaining new government contracts. Our inability to
obtain revenues from government contracts could have a material adverse effect
on our results of long-term operations, unless substantial product or
non-government contract revenue offsets any lack of government contract revenue.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
We rely on our license agreement with Eastman Kodak for the development of our
products, 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 at various times in the future. Our license with Eastman
Kodak could terminate if we fail to perform any material term or covenant under
the license agreement. Since our license from Eastman Kodak is non-exclusive,
Eastman Kodak could also elect to become a competitor itself or to license OLED
technology for microdisplay applications to others who have the potential to
compete with us. The occurrence of any of these events could have a material
adverse impact on our business.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS.
We rely on a combination of patents, trade secret protection, licensing
agreements and other arrangements to establish and protect our proprietary
technologies. If we fail to successfully enforce our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Patents may not be issued for our current patent applications, third
parties may challenge, invalidate or circumvent any patent issued to us,
unauthorized parties could obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights, rights
granted under patents issued to us may not afford us any competitive advantage,
others may independently develop similar technology or design around our
patents, our technology may be available to licensees of Eastman Kodak, and
protection of our intellectual property rights may be limited in certain foreign
countries. We may be required to expend significant resources to monitor and
police our intellectual property rights. Any future infringement or other claims
or prosecutions related to our intellectual property could have a material
adverse effect on our business. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Protection of intellectual
property has historically been a large yearly expense for eMagin. We have not
been in a financial position to properly protect all of our intellectual
property, and may not be in a position to properly protect our position or stay
ahead of competition in new research and the protecting of the resulting
intellectual property.
5
RISKS RELATED TO THE MICRODISPLAY INDUSTRY
THE COMMERCIAL SUCCESS OF THE MICRODISPLAY INDUSTRY DEPENDS ON THE WIDESPREAD
MARKET ACCEPTANCE OF MICRODISPLAY SYSTEMS PRODUCTS.
The market for microdisplays is emerging. Our success will depend on consumer
acceptance of microdisplays as well as the success of the commercialization of
the microdisplay market. As an OEM supplier, our customer's products must also
be well accepted. At present, it is difficult to assess or predict with any
assurance the potential size, timing and viability of market opportunities for
our technology in this market. The viewfinder microdisplay market sector is well
established with entrenched competitors with whom we must compete.
THE MICRODISPLAY SYSTEMS BUSINESS IS INTENSELY COMPETITIVE.
We do business in intensely competitive markets that are characterized by rapid
technological change, changes in market requirements and competition from both
other suppliers and our potential OEM customers. Such markets are typically
characterized by price erosion. This intense competition could result in pricing
pressures, lower sales, reduced margins, and lower market share. Our ability to
compete successfully will depend on a number of factors, both within and outside
our control. We expect these factors to include the following:
o our success in designing, manufacturing and delivering expected new
products, including those implementing new technologies on a timely basis;
o our ability to address the needs of our customers and the quality of our
customer services;
o the quality, performance, reliability, features, ease of use and pricing of
our products;
o successful expansion of our manufacturing capabilities;
o our efficiency of production, and ability to manufacture and ship products
on time;
o the rate at which original equipment manufacturing customers incorporate
our product solutions into their own products;
o the market acceptance of our customers' products; and o product or
technology introductions by our competitors.
Our competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
THE DISPLAY INDUSTRY IS CYCLICAL.
The display industry is characterized by fabrication facilities that require
large capital expenditures and long lead times for supplies and the subsequent
processing time, leading to frequent mismatches between supply and demand. The
OLED microdisplay sector may experience overcapacity if and when all of the
facilities presently in the planning stage come on line leading to a difficult
market in which to sell our products.
COMPETING PRODUCTS MAY GET TO MARKET SOONER THAN OURS.
Our competitors are investing substantial resources in the development and
manufacture of microdisplay systems using alternative technologies such as
reflective liquid crystal displays (LCDs), LCD-on-Silicon ("LCOS")
microdisplays, active matrix electroluminescence and scanning image systems, and
transmissive active matrix LCDs.
OUR COMPETITORS HAVE MANY ADVANTAGES OVER US.
As the microdisplay market develops, we expect to experience intense competition
from numerous domestic and foreign companies including well-established
corporations possessing worldwide manufacturing and production facilities,
greater name recognition, larger retail bases and significantly greater
financial, technical, and marketing resources than us, as well as from emerging
companies attempting to obtain a share of the various markets in which our
microdisplay products have the potential to compete.
OUR PRODUCTS ARE SUBJECT TO LENGTHY OEM DEVELOPMENT PERIODS.
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.
6
OUR PRODUCTS WILL LIKELY EXPERIENCE RAPIDLY DECLINING UNIT PRICES.
In the markets in which we expect to compete, prices of established products
tend to decline significantly over time. In order to maintain our profit margins
over the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our
products or reduce the cost of producing and delivering our products. While we
anticipate many opportunities to reduce production costs over time, there can be
no assurance that these cost reduction plans will be successful. We may also
attempt to offset the anticipated decrease in our average selling price by
introducing new products, increasing our sales volumes or adjusting our product
mix. If we fail to do so, our results of operations would be materially and
adversely affected.
RISKS RELATED TO MANUFACTURING
WE 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 the silicon integrated circuits on which we incorporate
our OLED technology. 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.
THE MANUFACTURE OF OLED-ON-SILICON IS NEW AND OLED MICRODISPLAYS HAVE NOT BEEN
PRODUCED IN SIGNIFICANT QUANTITIES.
If we are unable to produce our products in sufficient quantity, we will be
unable to attract customers. In addition, we cannot assure you that once we
commence volume production we will attain yields 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 or a serious failure of a critical piece of equipment, we
may be unable to supply microdisplays to our customers. For this reason, some
OEMs may also be reluctant to commit a broad line of products 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.
RISKS RELATED TO OUR BUSINESS
OUR SUCCESS DEPENDS ON ATTRACTING AND RETAINING HIGHLY SKILLED AND QUALIFIED
TECHNICAL AND CONSULTING PERSONNEL.
We must hire highly skilled technical personnel as employees and as independent
contractors in order to develop our products.. The competition for skilled
technical employees is intense and we may not be able to retain or recruit such
personnel. We must compete with companies that possess greater financial and
other resources than we do, and that may be more attractive to potential
employees and contractors. To be competitive, we may have to increase the
compensation, bonuses, stock options and other fringe benefits offered to
employees in order to attract and retain such personnel. The costs of retaining
or attracting new personnel may have a 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.
7
OUR SUCCESS DEPENDS IN A LARGE PART ON THE CONTINUING SERVICE OF KEY PERSONNEL.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of several key management personnel,
including Gary W. Jones, our chief executive officer. This is especially an
issue while the company staffing is small. We will also need to recruit
additional management in order to expand according to our business plan. We are
currently recruiting a chief financial officer. The failure to attract and
retain additional management or personnel could have a material adverse effect
on our operating results and financial performance.
OUR BUSINESS DEPENDS ON NEW PRODUCTS AND TECHNOLOGIES.
The market for our products is characterized by rapid changes in product, design
and manufacturing process technologies. Our success depends to a large extent on
our ability to develop and manufacture new products and technologies to match
the varying requirements of different customers in order to establish a
competitive position and become profitable. Furthermore, we must adopt our
products and processes to technological changes and emerging industry standards
and practices on a cost-effective and timely basis. Our failure to accomplish
any of the above could harm our business and operating results.
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
Our business is operated on the basis of short-term purchase orders and we
cannot guarantee that we will be able to obtain long-term contracts for some
time. Our current purchase agreements can be cancelled or revised without
penalty, depending on the circumstances. In the absence of a backlog of orders
that can only be canceled with penalty, we plan production on the basis of
internally generated forecasts of demand, which makes it difficult to accurately
forecast revenues. If we fail to accurately forecast operating results, our
business may suffer and the value of your investment in the Company may decline.
OUR BUSINESS STRATEGY MAY FAIL IF WE CANNOT CONTINUE TO FORM STRATEGIC
RELATIONSHIPS WITH COMPANIES THAT MANUFACTURE AND USE PRODUCTS THAT COULD
INCORPORATE OUR OLED-ON-SILICON TECHNOLOGY.
Our prospects will be significantly affected by our ability to develop strategic
alliances with OEMs for incorporation of our OLED-on-silicon technology into
their products. While we intend to continue to establish strategic relationships
with manufacturers of electronic consumer products, personal computers,
chipmakers, lens makers, equipment makers, material suppliers and/or systems
assemblers, there is no assurance that we will be able to continue to establish
and maintain strategic relationships on commercially acceptable terms, or that
the alliances we do enter into will realize their objectives. Failure to do so
would have a material adverse effect on our business.
OUR BUSINESS DEPENDS TO SOME EXTENT ON INTERNATIONAL TRANSACTIONS.
We purchase needed materials from companies located abroad and may be adversely
affected by political and currency risk, as well as the additional costs of
doing business with a foreign entity. Some customers in other countries have
longer receivable periods or warranty periods. In addition, many of the OEMs
that are the most likely long-term purchasers of our microdisplays are located
abroad exposing us to additional political and currency risk. We may find it
necessary to locate manufacturing facilities abroad to be closer to our
customers which could expose us to various risks, including management of a
multi-national organization, the complexities of complying with foreign laws and
customs, political instability and the complexities of taxation in multiple
jurisdictions.
OUR BUSINESS MAY EXPOSE US TO PRODUCT LIABILITY CLAIMS.
Our business may expose us to product liability claims. Although no such claims
have been brought against us to date, and to our knowledge no such claim is
threatened or likely, we may face liability to product users for damages
resulting from the faulty design or manufacture of our products. While we plan
to maintain product liability insurance coverage, there can be no assurance that
product liability claims will not exceed coverage limits, fall outside the scope
of such coverage, or that such insurance will continue to be available at
commercially reasonable rates, if at all.
8
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 February 2, 2004, we have outstanding (i) options to
purchase 7,251,574 shares; (ii) warrants to purchase 12,184,061 shares of common
stock; and (iii) 12,345,996 shares of common stock underlying convertible
securities.
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.
9
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
could receive up to $4,200,040 upon exercise of warrants held by the selling
stockholders that expire within 12 months of this prospectus. We expect to use
the proceeds received from the exercise of the warrants, if any, for general
working capital purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the American Stock Exchange under the symbol
"EMA" since March 17, 2000. From November 18, 1997 to March 16, 2000 our common
stock had been quoted on the OTC Bulletin Board under our prior name "Fashion
Dynamics Corp." under the symbol "FSHD." Prior to January 2000, there had been
no public trading of FSHD. The table below sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the American Stock Exchange.
High Low
---- ---
2003
First Quarter 1.00 0.33
Second Quarter 0.85 0.50
Third Quarter 1.99 0.51
Fourth Quarter 1.74 1.15
2002
First Quarter 1.75 0.42
Second Quarter 0.89 0.20
Third Quarter 0.54 0.20
Fourth Quarter 0.40 0.17
As of February 2, 2004, there were 47,862,959 shares of common stock
outstanding.
As of February 2, 2004, there were approximately 469 stockholders of record of
our common stock, respectively. This does not reflect those shares held
beneficially or those shares held in "street" name.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
Equity Compensation Plan Information
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance
outstanding options, warrants and rights
warrants and rights
(a) (b) (c)
Equity compensation plans approved 12,148,570 0.53 2,752,218
by security holders
Equity compensation plans not 0 0.0 0
approved by security holders
Total as of 12/31/03 12,148,570 0.53 2,752,218
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate" and "continue", or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our financial
condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
Overview
We design and manufacture miniature display modules, which we refer to as
OLED-on-silicon-microdisplays, primarily for incorporation into the products of
other manufacturers. Microdisplays are typically smaller than many postage
stamps, but when viewed through a magnifier they can contain all of the
information appearing on a high-resolution personal computer screen. Our
microdisplays use organic light emitting diodes, or OLEDs, which emit light
themselves when a current is passed through the device. Our technology permits
OLEDs to be coated onto silicon chips to produce high resolution OLED-on-silicon
microdisplays.
We believe that our OLED-on-silicon microdisplays offer a number of advantages
in near to the eye applications over other current microdisplay technologies,
including lower power requirements, less weight, fast video speed without
flicker, and wider viewing angles. In addition, many computer and video
electronic system functions can be built directly into the OLED-on-silicon
microdisplay, resulting in compact systems with lower expected overall system
costs relative to alternate microdisplay technologies.
Since our inception in 1996, we derived substantially all of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. As of September 30, 2003, we had
recognized an aggregate of approximately $3.4 million from sales of our
products, and have a backlog of more than $27 million in products ordered for
delivery through 2005. 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. We have also shipped a limited number of prototypes of our eGlass II
Head-wearable Display systems. In addition to marketing OLED-on-silicon
microdisplays as components, we also offer microdisplays as an integrated
package, which we call Microviewer that includes a compact lens for viewing the
microdisplay and electronic interfaces to convert the signal from our customer's
product into a viewable image on the microdisplay. Through our wholly owned
subsidiary, Virtual Vision, Inc., we are also developing head-wearable displays
that incorporate our Microviewer.
We license our core OLED technology from Eastman Kodak and we have developed our
own technology to create high performance OLED-on-silicon microdisplays and
related optical systems. We believe our technology licensing agreement with
Eastman Kodak, coupled with our own intellectual property portfolio, gives us a
leadership position in OLED and OLED-on-silicon microdisplay technology. We are
the only company to demonstrate publicly and market full-color OLED-on-silicon
microdisplays.
Company History
Our history has been as a developmental stage company. As of January 1, 2003, we
are no longer a development stage company. We have transitioned to manufacturing
our product 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.
11
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Not all of the accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, the following policies
could be deemed to be critical within the SEC definition.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, such as when a purchase order or contract is received from
the customer, the price is fixed, title to the goods has changed and there is a
reasonable assurance of collection of the sales proceeds. We obtain written
purchase authorizations from our customers for a specified amount of product at
a specified price and consider delivery to have occurred at the time of
shipment. Revenue is recognized at shipment and we record a reserve for
estimated sales returns, which is reflected as a reduction of revenue at the
time of revenue recognition.
Revenues from research and development activities relating to firm fixed-price
contracts are generally recognized on the percentage-of-completion method of
accounting as costs are incurred (cost-to-cost basis). Revenues from research
and development activities relating to cost-plus-fee contracts include costs
incurred plus a portion of estimated fees or profits based on the relationship
of costs incurred to total estimated costs. Contract costs include all direct
material and labor costs and an allocation of allowable indirect costs as
defined by each contract, as periodically adjusted to reflect revised agreed
upon rates. These rates are subject to audit by the other party. Amounts can be
billed on a bi-monthly basis. Billing is based on subjective cost investment
factors.
Results of Operations
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2002
Revenues
Revenues for the three and nine months ended September 30, 2003 were $0.7
million and $1.5 million, respectively, as compared to $0.5 million and $0.9
million for the three and nine months ended September 30, 2002. Current year
revenues consisted primarily of product sales and increased by $0.2 million and
$0.6 million for the three and nine months ended September 30, 2003,
respectively, as compared to the three and nine months ended September 30, 2003.
We ended the third quarter with a backlog of over $1.5 million in short term
sales orders and $27 million longer term (within 24 months) purchase orders and
purchase agreements. There were $0.3 million government R&D contract revenues
for both the three and nine months ended September 30, 2003, as compared to $200
and $14,000 for the three and nine months ended September 30, 2002. Government
R&D contract revenues will remain significantly lower in 2003 as compared to our
historical average as the company focuses on product revenues rather than
performing government R&D contracts, although product revenues include sales to
government contractors which are funded by government development or procurement
contracts.
Costs and Expenses
Cost of Goods Sold. Cost of goods sold includes direct and indirect costs
associated with production, inventory consumption and outside commissions. Cost
of goods sold for the three and nine months ended September 30, 2003 was $0.4
million and $1.7 million, respectively. We were not in full production in 2002
and had no cost of goods sold to compare against. Gross profit (loss) was $0.4
million and ($0.1) million, respectively, for the three and nine months ended
September 30, 2003 due primarily to line stoppages resulting from lack of
production materials as well as machinery downtime in the first and second
quarters.
12
Research and Development. Research and development expenses for prior periods
include salaries, development materials, equipment leases and depreciation
expenses, electronics, rent, utilities and costs associated with operating our
manufacturing facility. In 2003, research and development expenses included
salaries, development materials and other costs specifically allocated to the
development of new products. Research and development expenses were $600 and
$22,000, respectively, for the three and nine months ended September 30, 2003 as
compared to $1.0 million and $6.4 million respectively for the three and nine
months ended September 30, 2002. Of these amounts, we received $0 in 2003, as
compared to $0.3 million and $0.4 million for the three and nine months ended
September 30, 2002, respectively, in cost sharing from the U.S. Government. The
$1.0 million and $6.4 million decrease in gross expenses for the three and nine
months ended September 30, 2003, as compared to the three and nine months ended
September 30, 2002, reflects reduction in staffing and reduction in expenditures
related to our difficult cash position.
Amortization of Purchased Intangibles. There was no amortization and write down
of purchased intangibles expense for the three months ended September 30, 2003
as compared to $0.3 million for the three months ended September 30, 2002.
Amortization of purchased intangibles expense for the nine months ended
September 30, 2003 was $0.3 million, as compared to $1.0 million for the nine
months ended September 30, 2002. This is the result of the purchased intangibles
being fully amortized by March 31, 2003.
Gain on Payable Forgiveness. We have completed negotiations with various
creditors. We have been mostly successful in obtaining lower negotiated payment
requirements from our larger creditors. We have made the negotiated payments on
our debt, using the funds from the April 2003 financing. A credit of ($2.8)
million and ($4.7) million were recorded as a reduction of expense for the three
and nine months ended September 30, 2003, respectively, from these negotiations.
This also has the added benefit of removing almost all long term lease payments
on machinery.
13
Stock Based Compensation. Non-cash stock-based compensation expense for the
three and nine months ended September 30, 2003 was $1.9 and $2.0 million,
respectively, as compared to $0.3 million and $1.3 million, respectively, for
the three and nine months ended September 30, 2002. The non-cash stock-based
compensation expense for the three and nine months ending September 30, 2003
increased by $1.6 million and $0.7 million, respectively. This increase is
primarily due to the difference between the strike price of the options set at
the market price when granted in October 2002 and the price of the Company's
stock on July 2, 2003 when the options granted in October 2002 were issued under
the 2003 Employee Stock Option Plan. Non-cash stock-based compensation costs are
the result of amortization of the intrinsic value ascribed for the issuance of
stock options at the time of grant. The amortization is done over the vesting
period of such options.
Selling, General and Administrative. Selling, general and administrative
expenses consist principally of salaries and fees for professional services,
legal fees incurred in connection with patent filings and related matters,
amortization, as well as other marketing and administrative expenses. Selling,
general and administrative expenses, for the three and nine months ended
September 30, 2003 were $0.7 million and $2.3 million, respectively, as compared
to $1.6 million and $4.9 million for the three and nine months ended September
30, 2002. The $0.9 million and $2.6 million decrease in the three and nine
months ended September 30, 2003, respectively, as compared to the three and nine
months ended September 30, 2002, was primarily due to the efforts of finding
lower cost suppliers and equity agreements for professional fees, legal fees and
insurance as well as our concentrated efforts to keep our costs lower. We expect
marketing, general and administrative expenses to increase in future periods as
we add to our sales staff and make additional investments in marketing
activities.
Other Income (Expense). Other income (expenses) for the three and nine months
ended September 30, 2003 were ($0.4) million and ($0.7) million, respectively,
as compared to ($0.4) million and ($1.8) million, respectively, for the three
and nine months ended September 30, 2002. While the three month comparison
ending September 30, 2003 and 2002 remained unchanged, the nine month comparison
decreased $1.1 million. The decrease of $1.1 million in expense for this
non-cash charge for the nine months ended September 30, 2003 as compared to the
nine months ended September 30, 2002 was due primarily to the increase in debt
discount from the beneficial conversion of a bridge loan entered into by the
company recorded in 2002. We also recorded the receipt of $0.2 million from the
sale of old unused equipment in the 2nd quarter of 2003.
Liquidity and Capital Resources
Current Financial Position
We have total liabilities and contractual obligations of $11,098,867 as of
September 30, 2003. These contractual obligations, along with the dates on which
such payments are due, are described below:
Payments Due by Period
----------------------
Contractual Obligations Total One Year or Less More than One Year
----------------------- ---------------- ---------------- ------------------
Due to Related Parties $ -- $ -- $ --
Notes Payable - Related
Parties -- -- --
Convertible Debentures 10,107,207 4,338,319 5,768,888
Accounts Payable and
Accrued Expenses 991,660 309,364 682,296
---------------- ---------------- ------------------
Total Contractual
Obligations $11,098,867 $ 4,647,683 $ 6,451,184
================ ================ ==================
In April 2003, we closed on a $6.0 million financing and in January 2004 we
closed on a $4.2 million financing. We estimate that this financing is the
minimum amount of funds that we require to support us until we begin realizing
profits from production in sufficient amount to become profitable through
production alone. No assurance can be given that our estimates will prove to be
correct, or that we will generate sufficient revenues to provide positive cash
flows from operations. These and other factors raise substantial doubt about our
ability to continue as a going concern.
14
During April 2003, we reached agreements with certain creditors and these
agreements were primarily conditioned upon actions to be taken and installment
and buyout payments to be made by us through September 30, 2003. After making
these payments, we recorded approximately $3.9 million in reduction of expenses
in the financial statements ended September 30, 2003.
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 the principal use of our cash. In particular, we expect that
salaries for employees engaged in production operations, purchase of inventory
and expenses of increased sales and marketing efforts would be the principle
uses of cash. We expect that our cash requirements over the next 12 months will
be met by a combination of additional equity or debt financing, and revenues
generated by sales. We expect to continue to devote substantial resources to
manufacturing, marketing and selling our products.
We have received purchase agreements for our products to be delivered now
through 2004 and into early 2005. Management believes that the prospects for
growth of product revenue remain high.
Our customer schedules have been necessarily pushed out due to our financing
issues, but these shipments are being renegotiated now that the funding is
committed. We do not currently anticipate any significant loss of business as a
result of our prior financing related product ramp delays, other than the shift
in delivery schedules. We must ramp our supplies and staffing quickly and
efficiently to meet the anticipated shipping schedules. A significant level of
effort will be required.
We are in the early phases of production, although our progress has been impeded
by our prior cash position. Anticipated increased shipments in the first quarter
were delayed, primarily due to our inability to purchase raw materials. Based on
the planned schedule, we have resolved our supplier issues and have been able to
produce quantities in the late third quarter of 2003.
Our cash requirements depend on numerous factors, including completion of our
product development activities, ability to commercialize our products, timely
market acceptance of our products and our customer's product, and other factors.
We expect to carefully devote capital resources to continue our development
programs directed at commercializing our products in our target markets, hire
and train additional staff, expand our research and development activities,
develop and expand our manufacturing capacity and begin production activities.
Any delays could change the cash requirements of the company. While we believe
that we are in position to handle a significant production increase, there can
be no assurance that we will not experience some issues relating to yield and
throughput risk that could result in production delays.
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 a 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 $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.
15
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. Non-cash stock based compensation reflects the
amortization of deferred compensation costs related to the issuance of stock
options and warrants.
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.
EFFECT OF RECENTLY ISSUED 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
15, 2002. On January 31, 2003, eMagin adopted SFAS No. 143. The adoption of this
standard did not have a significant impact on eMagin's 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. The
Company adopted SFAS No. 145 on January 1, 2003, the adoption had no effect on
the financial results of the Company.
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. eMagin adopted
SFAS No. 146 as of January 1, 2003. Upon adoption of SFAS 146, there was no
effect on the company's financial position, cash flows or results of operations.
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF 00-21"),
"Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The consensus mandates how to
identify whether goods or services or both that are to be delivered separately
in a bundled sales arrangement should be accounted for separately because they
are separate units of accounting. The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in fiscal periods beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." Upon adoption of EIFT 00-21, there was no effect on the company's
financial position, cash flows or results of operations.
16
On April 30, 2003, the FASB issued Statement No. 149 ("SFAS No. 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement No. 133, and
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003 and is to be applied prospectively.
Upon adoption of SFAS No. 149, there was no effect on the company's financial
position, cash flows or results of operations.
On May 15, 2003, the FASB issued Statement No. 150 ("FAS No. 150"), Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. FAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). FAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments.
o mandatorily redeemable shares, which the issuing company is obligated to
buy back in exchange for cash or other assets
o instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets; includes put options and
forward purchase contracts
o obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index,
or varies inversely with the value of the issuers' shares.
FAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. Most of the guidance in FAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Upon adoption of SFAS No. 150, there was no
effect on its financial position, cash flows or results of operations.
17
BUSINESS
Introduction
eMagin Corporation designs, develops, and markets OLED's, or organic light
emitting diodes, OLED-on-silicon microdisplays and related information
technology solutions. We integrate OLED technology with silicon chips to produce
high-resolution microdisplays smaller than one-inch diagonally which, when
viewed through a magnifier, create a virtual image that appears comparable to
that of a computer monitor or a large-screen television. Our products enable our
original equipment manufacturer, or OEM, customers to develop and market
improved or new electronic products. Our first commercial product, the SVGA+, or
Super Video Graphics Array, plus 52 added columns of data, OLED microdisplay was
first offered for sampling in 2001, and our first SVGA-3D, the Super Video
Graphics Array plus built-in stereovision capability, OLED microdisplay was
first shipped in February 2002. We are now accepting 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. The worldwide market for OLED
displays amounted to $91 million in 2002, will reach $215 million in 2003 and
will grow to $3.1 billion in 2009, for a compound annual growth rate of 56
percent from 2003 to 2009, according to iSuppli/Stanford Resources research
reported in April 2003.
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 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.
The microdisplay market, according to McLaughlin Consulting Group in a report
issued in November 2002, is expected to grow on a unit basis at 20% per year,
from a base of less than $1 billion in 2002 to more than $1.4 billion by 2006.
Another leading industry market research organization, DisplaySearch, projects
that the overall microdisplay market is expected to grow to $3.1 billion by
2005.
18
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, or 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 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.
19
Our OLED microdisplay stores, until refreshed, all the color and luminance value
information at each of the more than 1.5 million picture elements, or 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 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 , which
contains 1.53 million picture elements, and our stereovision-capable SVGA-3D
microdisplay, which contains 1.44 million picture elements. We are currently
developing a military and industrial oriented ultra-high-luminance monochrome
SXGA integrated circuit, which contains 1280x1024 picture elements, that is due
for completion in 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 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 and a variety of support products,
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.
20
0.59-inch Diagonal SVGA-3D (Super Video Graphics Array plus built-in
stereovision capability) for Consumer OEMs. This display has a resolution of 800
x 3 x 600 pixels. The SVGA-3D can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as personal computer games and video/data head-wearable displays, but is
also designed to be applicable for digital cameras, video cameras and other
portable electronics applications since the 3D feature is optional. A built-in
circuit provides compatibility with single channel frame sequential stereoscopic
vision without additional external components. In high volumes, the SVGA-3D is
priced lower than the SVGA+, so it is likely to be selected whenever the OEM
customer does not need monochrome NTSC or the extra columns of resolution.
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
the best dual use programs and honors those responsible for developing and
implementing technology beneficial to both military and commercial sectors.
21
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.
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
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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 by General
Dynamics and Rockwell Collins has delayed increased volume use of displays
beyond small quantities for that program until a future date to be determined.
Our display is also used in Kaiser Electro-Optics, Inc.'s commercially available
ProView S035 Monocular HMD. Night Vision Equipment Company supplies a
lightweight, military helmet mounted thermal imager incorporating our displays.
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 in avionics helmets. The Strike Helmet 21 system is targeted for
integration into F-15E aircraft in 2004 time period. We cannot assure that
Government will remain on schedule. Similar systems are of interest for other
military applications as well as for related operations such as fire and rescue.
Commercial, Industrial, and Medical
We believe that a wide variety of commercial and industrial markets offer
significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of microdisplay applications
include: immediate access to inventory such as parts, tools and equipment
availability; instant accessibility to maintenance or construction manuals;
routine quality assurance inspection; 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 VRmagic GmbH, a leading developer of virtual reality simulators, is
using our OLED microdisplays in VRmagic's EYESI (TM) surgical training
equipment.
Consumer
We believe that our head-wearable display products will enhance the following
consumer products:
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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. Recently, eMagin announced that Leadtek Research
Inc. (Taiwan) was planning to introduce a consumer HMD during 2004 using
eMagin SVGA-3D displays.
o Notebook computers, which can use head-wearable devices to reduce power as
well as expand the apparent screen size and increase privacy. Current
notebook computers do not use microdisplays. Our products can apply not
only to new models of notebook computers, but also as aftermarket
attachments to older notebooks still in use. We expect to market our
head-wearable displays to be used as plug-in peripherals to be compatible
with most notebook computers. We believe that the SVGA-3D microdisplay is
well suited for most portable PC headsets. Our microdisplays can be
operated using the USB power source of most portable computers. This
eliminates added power supplies, batteries, and rechargers and reduces
system complexity and cost.
o Handheld personal computers, whose small, direct view screens are often
limitations, but which are now capable of running software applications
that would benefit from a larger display. Microdisplays can be built into
handheld computers to display more information content on virtual screens
without forfeiting portability or adding the cost a larger direct view
screen. Microdisplays are not currently used in this market. We believe
that GPS viewers and other novel products are likely to develop as our
displays become more available.
o Highly compact wearable computers and personal digital assistants, or PDAs
using video headsets as screens can be made possible by high-resolution
microdisplays. A lightweight pocketsize computer that is under one pound
can potentially be created with a foldout keyboard, compact input device,
or voice actuation and a headset that provides a near-desktop personal
computer experience.
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.
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Selected Applications by Market Sector
----------------------------------- ----------------------------------------------------------------------
Sector Representative Applications
----------------------------------- ----------------------------------------------------------------------
Portable Computer Peripheral |X| Notebook and SuperSubnotebook computer headsets
|X| Miniature data viewers
----------------------------------- ----------------------------------------------------------------------
Entertainment |X| Games
|X| Headset Television/DVDs
----------------------------------- ----------------------------------------------------------------------
Industrial, Medical, & |X| Surgery and Dentistry
Administration |X| Industrial Control and Safety
|X| Emergency Services
|X| Inventory and Retail
|X| Institutional Control
|X| Maintenance (Industry & Consumer)
|X| Communications
|X| Finance
|X| Education and Training
----------------------------------- ----------------------------------------------------------------------
Military |X| Communications
|X| Targeting and Enhanced Vision
|X| 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.
25
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 color balance, which is known as
chromaticity, as well as specialized boards or interfaces, and to adjust other
parameters at the customer's request. In the area of lenses and head-wearable
displays, we intend to focus on design and development, while working with third
parties for the manufacture and distribution of finished products. We intend to
prototype new optical systems, provide customization of optical systems, and
manufacture limited volumes at our subsidiary, Virtual Vision, but intend to
outsource high volume manufacturing operations. There are numerous potential
plastics, PC Board, and assembly service companies globally that provide these
outsource services.
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.
26
Our Technology Platforms
OLED-on-Silicon Technology
Scientists working at Eastman Kodak invented OLEDs in the early 1980s. OLEDs are
thin films of stable organic materials that emit light of various colors when a
voltage is impressed across them. OLEDs are emissive devices, which means they
create their own light, as opposed to liquid crystal displays, which require a
separate light source. As a result, OLED devices use less power and can be
capable of higher brightness and fuller color than liquid crystal microdisplays.
Because the light they emit is Lambertian, which means that it appears equally
bright from most forward directions, a moderate movement in the eye does not
change the image brightness or color as it does in existing technologies. OLED
films may be coated on computer chips, permitting millions of individual
low-voltage light sources to be built on silicon integrated circuits to produce
single color, white, or full-color display arrays. Many computer and video
electronic system functions can be built directly into a silicon integrated
circuit as part of the OLED display, resulting in an ultra-compact system. We
believe these features, together with the well-established silicon integrated
circuit fabrication technology of the semiconductor industry, make our
OLED-on-silicon microdisplays attractive for numerous applications.
We believe our technology licensing agreement with Eastman Kodak, coupled with
our own intellectual property portfolio, gives us a leadership position in OLED
and OLED-on-silicon microdisplay technology. Eastman Kodak provides OLED
technology and we provide additional technology advancements that have enabled
us to coat the silicon integrated circuits with OLEDs.
We have developed numerous and significant enhancements to OLED technology as
well as key silicon circuit designs to effectively incorporate the OLED film on
a silicon integrated circuit. For example, we have developed a unique,
up-emitting structure for our OLED-on-silicon devices that enables OLED displays
to be built on opaque silicon integrated circuits rather than only on glass. Our
OLED devices can emit full visible spectrum light that can be isolated with
color filters to create full color images. Our microdisplay prototypes have a
brightness that can be greater than that of a typical notebook computer and can
have a potential useful life of over 50,000 operating hours, in certain
applications. New materials and device improvements in development offer future
potential for even better performance for brightness, efficiency, and lifespan.
Additionally, we have invested considerable work over several years to develop
unique electronics control and drive designs for OLED-on-silicon microdisplays.
In addition to our OLED-on-silicon technology, we have developed compact optic
and lens enhancements which, when coupled with the microdisplay, provide the
high quality large screen appearance that we believe a large proportion of the
marketplace demands.
Advantages of OLED Technology
We believe that our OLED-on-silicon technology provides significant advantages
over existing solutions in our targeted microdisplay markets. We believe these
key advantages will include:
o Low manufacturing cost;
o Low cost system solutions;
o Wide angle light emission resulting in large apparent screen size;
o Low power consumption for improved battery life and longer system life;
o High brightness for improved viewing;
o High-speed performance resulting in clear video images;
o Wide operating temperature range; and
o Good environmental stability (vibration and humidity).
Low manufacturing cost. Many OLED-on-silicon microdisplays can be built on an
8-inch silicon wafer using existing automated OLED and color filter processing
tools. The level of automation used lowers labor costs. Only a minute amount of
OLED material is used in each OLED-on-silicon microdisplay so that material
costs, other than the integrated circuit itself, are small. The number of
displays per silicon wafer may be higher on OLEDs than on liquid crystal
displays, or LCDs, because OLEDs do not require a space-wasting perimeter seal
band.
27
Low cost systems solutions. In general, an OEM using OLED-on-silicon
microdisplays will not need to purchase and incorporate lighting assemblies,
color converter related Applications Specific Integrated Circuits, or ASICs, or
beam splitter lenses as is the case in liquid crystal microdisplays, which also
require illumination. Many important display-related system functions can be
incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of
the system. Non-polarized light from OLEDs permit lenses for many
OLED-on-silicon applications that are made of a single piece of molded plastic,
which reduces size, weight and assembly cost when compared to the multipiece
lens systems used for liquid crystal microdisplays. System cost relative to
liquid crystal and liquid crystal on silicon, or LCOS competitive products is
thus reduced. Because our displays are power efficient, they typically require
less power at the system level than other display technologies at a given
display size and brightness.
Wide-angle light emission simplifies optics for large apparent screen size.
OLEDs emit light at most forward directions from each pixel. This permits the
display to be placed close to the lens in compact optical systems. It also
provides the added benefit of less angular dependence on the image quality
relative to pupil and eye position when showing a large field of view, unlike
reflective LCOS microdisplays. This results in less eye fatigue and makes it
relatively easy to Low power consumption for improved battery life and longer
system life. OLEDs emit light rather than transmitting it, so no power-consuming
backlight or frontlight, as required for liquid crystal displays, is required.
OLEDs can be energy efficient because of their high efficiency light generation.
Furthermore, OLEDs conserve power by powering only those pixels that are on
while liquid crystal on silicon requires light at all pixels all the time. Most
optical systems used for our OLEDs are highly efficient, permitting over 80% of
the light to reach the eye, whereas reflective technologies such as liquid
crystal on silicon require multiple beam splitters to get light to the display,
and then into the optical system. This results in typically less than 25% light
throughput efficiency in reflective microdisplay systems. Most important, we do
not need a power-hungry video frame buffer, as required in liquid crystal
frame-sequential color systems. Battery life can therefore be extended.
High brightness for improved viewing. This feature can be of great value to
military applications, where there is a need to see the computer image overlaid
onto brightly lit real-life backgrounds such as desert sand, water reflections
or sunlit clouds. The OLED can be operated over a large luminance range without
loss of gray level control, permitting the displays to be used in a range of
dark environments to very bright ambient applications. Since military simulation
and situation awareness applications, including night vision, typically require
large fields of view, the OLED's Lambertian optical characteristics make it an
excellent choice.
High-speed performance resulting in clear video images. The OLEDs switch much
more rapidly than liquid crystals or most cathode ray tubes, or CRTs. This
results in smear-free video rate imagery and provides improved image quality for
DVD playback applications. This eliminates visible image smear and makes
practicable three-dimensional stereo imaging using a split frame rate. This
advantage of our OLED-on-silicon is very important for 3-D stereovision gaming
applications.
Flicker-free; 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 degrees Celsius, while our OLEDs turn on instantly and can operate
between -55 degrees Celsius and 130 degrees Celsius. We specify a smaller range
on most products to accommodate low cost packaging. This is an important
characteristic for many portable products that may be used outdoors in many
varying environmental conditions. It is especially important for military
customers. Insensitivity to vibration, shock, and pressure are also important
environmental control attributes.
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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, assuming the final version
of the production lens becomes available and moves into production by our
manufacturing partner.
We believe that the key advantages of our lens technology include:
o Can be very low cost, with minimal assembly. A one piece, molded plastic
optic attached to the microdisplay can serve many consumer end-product
markets. Since our process is plastic molding, our per unit production
costs are low;
o Allows a compact and lightweight lens system that can greatly magnify a
microdisplay to produce a large field of view;
o Can use single-piece molded microdisplay lenses to permit high light
throughput making the display image brighter or permitting the use of less
power for an acceptable brightness;
o Can be designed to provide focusing to enable users with various eyesight
qualities to view images clearly; and
o Can optionally provide focal plane adjustment for simultaneous focusing of
computer images and real world objects. For example, this characteristic is
beneficial for word processing or spreadsheet applications where a person
is typing data in from reference material. This feature can make it easier
for people with moderately poor accommodation to use a head-wearable
display as a portable computer-viewing accessory.
Head-wearable display technology. We have developed ergonomic technologies that
make head-wearable displays easier to use in a wide variety of applications. For
example, the use of our patented rotatable Eyeblocker(TM) provides a sharp image
without requiring most users to squint. The Eyeblocker can also be moved to
create an effective see-through appearance. To our knowledge, we have made the
lightest weight, high-resolution head-wearable display with an over 35(Degree)
diagonal field of view ever publicly demonstrated.
Wireless video technology. We have developed power efficient, miniature, video
and stereo sound, radio frequency transmitter-receiver technology as part of a
government program. This could allow consumers to watch wireless high quality
video from most locations in their home using existing entertainment, such as
DVD or cable/satellite systems, or data systems. If commercialized, we expect
this capability to greatly increase the available market and demand for video
and data head-wearable displays and we are considering this technology for use
in low cost consumer applications. Commercialization of this technology will be
considered in the future.
Sales and Marketing
Current Status
We are now shipping monochrome and full color versions of our first two
commercial microdisplay products. Our SVGA+ resolution OLED microdisplay, which
contains 1.53 million picture elements, was specifically designed to meet the
needs of several military, industrial, and medical customers based on marketing
information obtained prior to the design phase of the display and was first
offered for sampling in April 2001. Our stereovision-capable SVGA-3D
microdisplay, which contains 1.44 million picture elements, was designed with
the input of multiple customers to principally target the mobile personal
computer and PC games markets, and was first shipped in February 2002. We are
currently developing a military and industrial oriented ultra-high-luminance
SXGA resolution integrated circuit, which contains 3.9 million picture elements,
that is due for completion in 2004, and we have shipped limited quantities of
prototypes of our eGlass headsets.
29
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 beginning in 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 have
historically been primarily in the United States. The Company's customer base
includes two customers who account for 32% and 6% of sales in fiscal 2002 and
2001, respectively. One customer represented 18% and 6% and the other customer
represented 14% and 0% of sales in fiscal 2002 and 2001. As we increase our
customer base, we are not as dependent on specific customers. Not including
contract revenue, for the nine months ended September 30, 2003 we had two
customers who accounted for 11.5%, and 10% of sales as compared to the same
period in 2002 where we had one customer that accounted for 32% of sales and
2001 where we had one customer that accounted for 18% of sales.
Backlog
As of December 31, 2003 we had a backlog of purchase agreements of approximately
$30 million. Our backlog consists of both purchase agreements for delivery over
the next 24 months and short-term purchase orders for delivery mostly within 3-6
months. Most orders are subject to cancellation by the customer with no or
limited penalties. Because of the possibility of customer changes in delivery
schedules or cancellations and potential delays in product 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.
30
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, net of U.S. government
funding, 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. On or about April 21, 2003, eMagin and IBM entered into a Stipulation
in order to settle an eviction proceeding originally commenced by IBM against
eMagin on or about April 9, 2003. Thereafter, in accordance with the
Stipulation, on April 23, 2003 the Stipulation was presented to, and approved
by, the court, and a Judgment was issued in favor of IBM. Pursuant to the
Judgment and Stipulation, (i) eMagin paid IBM all rent due and owing to IBM, and
(ii) IBM was awarded possession of the leased premises, was issued a warrant to
remove eMagin from possession of the leased premises, and obtained a monetary
judgment for rent arrears in the sum of Eight Hundred Thirteen Thousand Fifty
Five and 65/100 ($813,055.65) Dollars, which sum is to be paid in equal monthly
installments during the period commencing May 1, 2003 and ending on March 1,
2004.
Such Judgment is being held in escrow by IBM's attorney and the warrant of
eviction is being stayed, so long as the Company continues to timely pay make
the installment payments during the next 12 months and any additional rent
and/or other sums due under the Lease. eMagin has paid its rent and fees for
services in a timely manner since April 2003, and negotiations are in process to
establish a new lease.
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 on a 24 hours a day, 7 days per week basis, 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.
31
Our display fabrication process starts with the silicon wafer, which is
manufactured by a semiconductor foundry using conventional CMOS process. After a
device is designed by a combination of internal and external designers with
customer participation, we outsource wafer fabrication.
Our manufacturing process for OLED-on-silicon microdisplays has three main
components: organic film deposition, organic film encapsulation (also known as
sealing), and color filter processing. All steps are performed in
semi-automated, hands-free environment suitable for high volume throughput. An
automated cluster tool provides all OLED deposition steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. After wafer
processing, each part is inspected using an automated inspection system, prior
to shipment. We have electrical and optical instrumentation required to
characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.
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
32
We also rely on proprietary technology, trade secrets, and know-how, which are
not patented. To protect our rights in these areas, we require all employees,
and where appropriate, contractors, consultants, advisors and collaborators to
enter into confidentiality and noncompetition agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
our trade secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, know-how
or other proprietary information.
We believe that our intellectual property portfolio, coupled with our strategic
relationships and accumulated experience in the OLED field gives us an advantage
over potential competitors.
Competition
We may face competition in the OLED and microdisplay industry from a variety of
companies and technologies. We believe that our key competition will come from
liquid crystal on silicon microdisplays, or LCOS, also known as reflective
liquid crystal displays. While we believe that OLED-on-silicon provides
comparatively lower optics cost, larger apparent image size, reduced electronics
cost and complexity, enhanced color, and improved power efficiency advantages
over liquid crystal on silicon microdisplays, there is no assurance that these
benefits will be realized or that liquid crystal on silicon manufacturers will
not suitably improve these parameters. Companies pursuing liquid crystal on
silicon technology include Microdisplay Corporation and 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
in Britain. We may also compete with potential licensees of Universal Display
Corporation, Cambridge Display Corporation, and Uniax Corporation, each of which
license OLED technology portfolios. Even though we could potentially license
technology from these developers, potential competitors could also obtain
licenses and may do so at more favorable royalty rates. However, should they
decide to embark on developing microdisplays on silicon, we believe that our
progress to date in this area gives us a substantial head start.
Our microdisplays and head-wearable display systems may face competition on a
price and performance basis from major manufacturers such as Sony and Seiko
Epson. However, these companies use first generation liquid crystal on
polysilicon technology and therefore, we believe that they may incorporate our
technology into their products when it becomes available.
Employees
As of January 28, 2004, we had a total of 34 full time, part time, and temporary
staff plus 5 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.
DESCRIPTION OF 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
from IBM, all of which is located in the same industrial park. Approximately
35,000 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 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 2004.
33
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, except as described below.
On or about April 21, 2003, eMagin and IBM entered into a Stipulation in order
to settle an eviction proceeding originally commenced by IBM against eMagin on
or about April 9, 2003. Thereafter, in accordance with the Stipulation, on April
23, 2003 the Stipulation was presented to, and approved by, the court, and a
Judgment was issued in favor of IBM. Pursuant to the Judgment and Stipulation,
(i) eMagin paid IBM all rent due and owing to IBM, and (ii) IBM was awarded
possession of the leased premises, was issued a warrant to remove eMagin from
possession of the leased premises, and obtained a monetary judgment for rent
arrears in the sum of Eight Hundred Thirteen Thousand Fifty Five and 65/100
($813,055.65) Dollars, which sum is to be paid in equal monthly installments
during the period commencing May 1, 2003 and ending on March 1, 2004.
Such Judgment is being held in escrow by IBM's attorney and the warrant of
eviction is being stayed, so long as the Company continues to timely pay make
the installment payments during the next 12 months and any additional rent
and/or other sums due under the Lease.
On or about May 19, 2003, an action was commenced against eMagin by Vertical
Ventures Investments LLC in the Supreme Court of the State of New York, County
of New York. In this action, Vertical Ventures asserted claims for the breach of
a Registration Rights Agreement, and sought compensatory damages against eMagin
in the amount of $1,500,000. On November 18, 2003, a settlement was reached with
Vertical Ventures in the amount of $169,071.11. On November 19, 2003, this
settlement amount was paid with 109,078 shares of common stock of eMagin.
34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors, and their ages and positions are:
Name Age Position
Gary W. Jones ................................. 48 Chairman, Chief Executive Officer, President
K. C. Park..................................... 66 President, Virtual Vision, Inc.
Susan K. Jones................................. 52 Chief Marketing and Strategy Officer, Secretary
Claude Charles (1) ............................ 66 Director
Jacob (Jack) Goldman (2) (3)................... 81 Director
Jack Rivkin (1) (3) ........................... 63 Director
Paul Cronson (1) .............................. 46 Director
Dr. Jill Wittels (2)........................... 54 Director
Rear Admiral Thomas Paulsen, USN (Ret.) (2).... 67 Director
(1) Audit Committee
(2) Governance and Nominating Committee
(3) Compensation Committee
Gary W. Jones has served as Chairman, Chief Executive Officer, and President of
eMagin 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. Prior to founding
FED Corporation/eMagin Corporation, Mr. Jones served as Director of the Device
Development and Processing division at MCNC Center for Microelectronics in North
Carolina from 1985 to 1992. From 1977 to 1985 Mr. Jones managed both
semiconductor manufacturing and research and development programs at Texas
Instruments. Mr. Jones received a B.S. in electrical engineering and physics
from Purdue University. Mr. Jones has served as a member of the Executive
Committee of the Board of the United States Display Consortium.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.
35
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.
Jack Rivkin has served as a director since June of 1996. Mr. Rivkin is Executive
Vice President and Chief Investment Officer of Neuberger Berman, a Lehman
Brothers Company. He previously served as Executive Vice President of Citigroup
Investments Inc., through which the Travelers Group investments in the Company
were managed. He also served as Vice Chairman and a director of Smith Barney,
and held positions at Procter and Gamble, Mitchell Hutchins, Paine Webber and
Lehman Brothers. Mr. Rivkin holds an engineering degree in metallurgy from the
Colorado School of Mines and an MBA from Harvard University.
Paul Cronson has served as a director since July of 2003. Mr. Cronson is
Managing Director of Larkspur Capital Corporation, which he founded in 1992.
Larkspur is a broker dealer that is a member of the National Association of
Securities Dealers and advises companies seeking private equity or debt. Mr.
Cronson's career in finance began in 1979 at Laidlaw, Adams Peck where he worked
in asset management and corporate finance. From 1983 to 1985, Mr. Cronson worked
with Samuel Montagu Co., Inc. in London, where he marketed eurobond issuers and
structured transactions. Subsequently from 1985 to 1987, he was employed by
Chase Investment Bank Ltd., where he structured international debt securities
and he developed "synthetic asset" products using derivatives. Returning to the
U.S., he joined Peter Sharp Co., where he managed a real estate portfolio,
structured financings and assisted with capital market investments from until
1992. Mr. Cronson received his BA from Columbia College in 1979, and his MBA
from Columbia University School of Business Administration in 1982. He is on the
Board of Umbanet, in New York City, a private company specializing in email
based distributed applications and secure messaging.
Dr. Jill Wittels has served as a director since July 2003. Since February 2001,
Dr. Wittels has been the Corporate Vice President, Business Development for L-3
Communications, a merchant supplier of intelligence, surveillance and
reconnaissance systems and products, secure communications systems and products,
avionics and ocean products, training devices and services, microwave components
and telemetry, instrumentations, space and navigation products. Dr. Wittels has
over 25 years of management, engineering and leadership experience. Prior to L-3
Communications, Dr. Wittels worked for 21 years with BAE Systems and its
predecessor companies, including Lockheed Martin, Loral and Honeywell. Most
recently, she served as vice president and general manager of BAE Systems'
Information and Electronic Warfare Systems/Infrared and Imaging Systems
division. Dr. Wittels began her career as a systems engineer and has also served
as a Congressional Fellow for the American Physical Society, a research
associate at Massachusetts Institute of Technology and a senior visiting
scientist for the National Academy of Sciences. Dr. Wittels received a Bachelor
of Science degree in Physics from MIT in 1970 and received a PhD in Physics from
MIT in 1975. She serves on the Board of Overseers for the Department of Energy's
Fermi National Accelerator Lab, is a member of the American Physical Society and
a member of the American Astronomical Society. Dr. Wittels presently serves on
the Boards of Directors of Innovative Micro Technology Inc. and of Millivision
Inc.
36
Admiral Thomas Paulsen has served as a director since July 2003. Admiral Thomas
Paulsen served for over 34 years in the US Navy in Command Control,
Communications and Intelligence (C3I), Telecommunications, Network Systems
Operations, Computers and Computer Systems Operations until his retirement in
1994 as a Rear Admiral. He then served as Chief Information Officer for Williams
Telecommunications. Admiral Paulsen has served as a director Umbanet, Inc. since
2002. Since 2000, Admiral Paulsen has served on the Board of Governors of the
Institute of Knowledge Management, George Washington University. Since 1994, he
has served as the Chairman of the Advisory Board and President Emeritus of the
Center for Advanced Technologies (CAT) and a Managing Partner on the National
Knowledge and Intellectual Property Management Taskforce, a not-for-profit
company headquartered in Dallas, Texas, and is a member of the Board of
Governors for the Japanese American National Museum, Los Angeles, California.
General Information Concerning the Board of Directors
The Board of Directors of eMagin is classified into three classes: Class A,
Class B and Class C. Each Class A director will hold office until the 2005
Annual Meeting of our stockholders. Currently, Mr. Gary Jones and Mr. Jack
Rivkin are the Class A directors. Mr. Paul Cronson and Admiral Thomas Paulsen
are Class B directors. Class C directors will hold office until the 2004 Annual
Meeting of our stockholders. Currently, Mr. Claude Charles, Dr, Jill Wittels and
Dr. Jacob Goldman are the Class C directors. In each case, each director will
hold office until his successor is duly elected or appointed and qualified in
the manner provided in eMagin's Amended and Restated Certificate of
Incorporation and our Amended and Restated Bylaws, or as otherwise provided by
applicable law.
The Board of Directors held 7 meetings during 2003. 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 Audit
Committee, a Governance and Nominating Committee and a Compensation Committee.
During 2002 and 2003, 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 2003. 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 six times during 2003.
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
and Mr. Goldman were members of the Compensation Committee during 2003. The
Compensation Committee met once during 2003.
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 2003. The Executive Committee met once during
2003.
37
The Governance and Nominating Committee provides guidance to and oversight of
the Corporation's governance with the goal of assuring that the composition,
practices, and operation of the Board contribute to value creation and effective
representation of our shareholders. The Committee also recommends to the Board
the Director nominees for the next annual meeting of shareholders and persons to
fill vacancies in the Board that occur between meetings of shareholders. The
Governance and Nominating Committee was established in 2003, and held its first
formal meeting in 2004.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the Company's review of copies of all disclosure reports filed by
directors and executive officers of the Company pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, the following directors and
executive officers of the Company failed to timely file reports during 2002: Mr.
Ajmal Khan failed to file once, Mr. Jack Rivkin failed to file twice, Mr. Gary
Jones failed to file six times, Ms. Susan Jones failed to file six times, Mr.
Claude Charles failed to file twice and Mr. K.C. Park failed to file five times.
38
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and each of
our most highly compensated executive officers whose total annual salary and
bonus for the fiscal year ending December 31, 2002, 2001 and 2000 exceeded
$100,000. 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 allocated
bonuses 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 2001 234,393 0 (1) 0 0
Officer
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 2001 189,207 0 (2) 0 0
Marketing
Officer, and Secretary 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
(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 agreed to defer. Mr. Jones was granted 444,344 options for deferring
pay from January through July 15, 2002. In October Mr. Jones was granted 349,583
options for deferring pay from July 16 through October 8, 2002 until a later
undetermined time.
(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 for agreeing to defer their regular pay. Mrs. Jones was granted 324,572
options for deferring pay from January through July 15, 2002. In October Mrs.
Jones was granted 281,796 options for deferring pay from July 16 through October
8, 2002 until a later undetermined time.
(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
agreeing to defer their regular pay. Dr. Park was granted 112,210 options for
deferring pay from January through July 15, 2002 until a later undetermined
time. In October Dr. Park was granted 192,500 options for deferring 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 all claims related to his employment agreement.
39
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.
---------------------- ---------------- -------------- --------------- ------------- --------------------------
Number of % of Total Exercise Expiration Value at Assumed Annual
Securities Options Price Per Date (3) Rates of Stock Price
Underlying Granted in Share Appreciation for Option
Options Granted Fiscal 2002 Term
(2)
Name
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
5% 10%
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
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.
40
(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.
(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 on Value FY-End FY-End
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
------------------- -------------- -------------- -------------- ---------------- -------------- ----------------
41
In October 2002, the Board allocated options that were not issued due to the
unavailability of shares in the 2000 Stock Option Plan. At the annual
share-holders meeting, held July 2, 2003, the 2003 Stock Option Plan was
approved and these options were issued. Of the options issued, 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 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 2003 Stock Option Plan. Under
the 2003 Plan, a grant of options to purchase 60,000 shares of common stock will
automatically be granted on the date a director is first elected or otherwise
validly appointed to the Board with an exercise price per share equal to 100% of
the market value of one share on the date of grant. Such options granted will
expire ten years after the date of grant and will become exercisable in four
equal installments commencing on the date of grant and annually thereafter. In
addition to the 60,000 shares of common stock automatically granted upon joining
the Board, Directors thereafter receive an annual grant of options to purchase
20,000 shares of common stock at the fair market value as determined on the date
of grant, which options will vest on December 31 in the year granted. Additional
annual stock option awards of 15,000 are issued for each committee a board
member sits on plus 5,000 additional for each chair on the Audit Committee. In
addition, each non-management director is reimbursed for ordinary expenses
incurred in connection with attendance at such meetings.
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.
42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 27, 2002, eMagin Corporation and a group of several accredited
institutional and individual investors entered into a Securities Purchase
Agreement providing for the issuance and sale to the investors of (i) an
aggregate of approximately 3.6 million shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years from the Closing Date for
an aggregate of approximately 1.4 million shares of our common stock (subject to
certain customary anti-dilution adjustments). Rainbow Gate Corporation, a
corporation in which Mortimer D.A. Sackler is the investment manager, invested
$500,000 in the Company under the agreement and received pursuant to such
investment (i) 723,275 shares of our common stock, and (ii) warrants exercisable
for 289,310 shares of our common stock. Mr. Sackler is currently a beneficial
owner of more than five percent of the outstanding shares of our common stock.
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with Mortimer D.A. Sackler (the "Bridge Note"). The secured note
accrues interest at 11% per annum and was due to mature on November 1, 2005 as a
result of a financing we completed in April 2003. The Company also granted
warrants, exercisable for a period of five years, to purchase 300,000 shares of
common stock with an exercise price of $0.4257 per share to the investor;
provided, however, this warrant may not be exercised by the investor so long as
the investor is the beneficial owner, directly or indirectly, of more than ten
percent (10%) of the common stock of eMagin for purposes of Section 16 of the
Securities Exchange Act 1934. The fair value of the warrants issued to this
Investor, which approximated $84,000, has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the period of
the debt. Pursuant to the April 2003 financing described below, the investor
agreed, to (a) amend the secured note issued to them, (b) terminate the security
agreement dated June 20, 2002 that was entered into in connection with the
purchase of the original secured notes and allow the new investors to enter into
a new security agreement with him on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the note
included (i) amending the note issued on June 20, 2002 so as to provide that the
note shall be convertible and will have the same conversion price as the notes
issued pursuant to the April 2003 secured note purchase agreement, (ii)
extending the maturity dates of the note from June 30, 2003 to November 1, 2005,
and (iii) revising and clarifying certain of the other terms and conditions of
the note, including provisions relating to interest payments, conversions,
default and assignment of the note.
On April 25, 2003, eMagin Corporation and a group of several accredited
institutional and individual investors (collectively, the "Investors") entered
into a Global Restructuring and Secured Note Purchase Agreement (the "Secured
Note Purchase Agreement") dated as of April 25, 2003 (the "Closing Date")
whereby Investors agreed to lend eMagin $6,000,000 in exchange for (i) the
issuance of $6,000,000 principal amount of 9.00% Secured Convertible Promissory
Notes due on November 1, 2005 (the "Secured Notes") and (ii) Warrants (the
"Warrants") to purchase an aggregate of 7,749,921 shares of common stock of
eMagin (subject to certain customary anti-dilution adjustments), which Warrants
are exercisable for a period of three (3) years. Mr. Rivkin, who at the time of
the transaction was a member of our Board of Directors, participated as an
investor in the transaction and invested $125,000 in the Company. In return for
such investment, Mr. Rivkin received (i) a Secured Convertible Promissory Note
in an aggregate principal amount of $125,000, and (ii) warrants exercisable for
161,456 of our common shares. In addition, Stillwater LLC, an entity controlled
by Mr. Mortimer D.A. Sackler, agreed to invest an aggregate of $2,600,000 under
the transaction and will receive (i) Secured Convertible Promissory Notes in an
aggregate principal amount of $2,600,000, and (ii) warrants exercisable for
3,358,300 of our common shares. As part of the transactions, Messrs. Sackler and
Rivkin, who were the holders of an aggregate of $1,325,000 principal amount of
secured notes that were purchased pursuant to a secured note purchase agreement
entered into as of November 27, 2001 (collectively, the "Original Secured
Notes"), and Mr. Sackler, who additionally was the holder of a $200,000
principal Bridge Note, agreed to (a) amend their respective Original Secured
Notes and Bridge Note issued to them, (b) terminate the Security Agreement dated
November 20, 2001 that was entered into in connection with the purchase of the
43
Original Secured Notes and the Security Agreements dated June 20, 2002 that were
entered into in connection with the purchase of the Bridge Note and allow the
new investors to enter into a New Security Agreement (as defined below) with
them on a pari passu basis in order for the Company to continue its operations
as a developer of virtual imaging technology. The amendments to the Original
Secured Notes and Bridge Note included (i) amending the Bridge Note so as to
provide that the Bridge Note shall be convertible and will have the same
conversion price as the Notes issued pursuant to the Secured Note Purchase
Agreement, (ii) extending the maturity dates of the Original Secured Notes and
Bridge Note from June 30, 2003 to November 1, 2005, and (iii) revising and
clarifying certain of the other terms and conditions of the Original Secured
Notes and Bridge Note, including provisions relating to interest payments,
conversions, default and assignments of the Original Secured Notes and Bridge
Note. On April 25, 2003, Mr. Sackler transferred all of his holdings in the
Company to Stillwater LLC, a limited liability company in which Mr. Sackler is
the sole member.
eMagin is party to a financial advisory and investment banking agreement with
Larkspur Capital Corporation. Paul Cronson, a director of eMagin, is a founder
and shareholder of Larkspur Capital Corporation. Larkspur Capital Corporation
received as compensation for financial advisory and investment banking services
in connection with the January 2004 private placement a cash fee of 6 3/4% of
the funds raised for a fee of $283,502.64 and warrants to purchase eMagin shares
of common stock equal to 2.5% of the cash netted to eMagin for a total of 43,651
common stock purchase warrants exercisable at $2.41 per share.
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.
44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of January 28, 2004.
o by each person who is known by us to beneficially own more than 5% of our
common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
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**
------------------------------------------------------------ ------------------------- ----------------------
Stillwater LLC (1) 14,753,379 22.0%
------------------------------------------------------------ ------------------------- ----------------------
Gary W. Jones (2) 8,579,613 14.6%
------------------------------------------------------------ ------------------------- ----------------------
Susan K Jones (2) 8,579,613 14.6%
------------------------------------------------------------ ------------------------- ----------------------
George Haywood (3) 6,682,465 11.1%
------------------------------------------------------------ ------------------------- ----------------------
Ginola Limited (4) 6,234,845 10.5%
------------------------------------------------------------ ------------------------- ----------------------
Travelers Insurance Company (5) 5,031,719 8.8%
------------------------------------------------------------ ------------------------- ----------------------
SK Corporation (6) 2,701,312 4.8%
------------------------------------------------------------ ------------------------- ----------------------
Rohm (7) 1,903,245 3.4%
------------------------------------------------------------ ------------------------- ----------------------
Rainbow Gate (8) 1,340,526 2.4%
------------------------------------------------------------ ------------------------- ----------------------
K.C. Park (9) 1,242,547 2.2%
------------------------------------------------------------ ------------------------- ----------------------
Jack Rivkin (10) 1,172,137 2.1%
------------------------------------------------------------ ------------------------- ----------------------
Paul Cronson (11) 481,111 *
------------------------------------------------------------ ------------------------- ----------------------
Claude Charles (12) 277,500 *
------------------------------------------------------------ ------------------------- ----------------------
Jack Goldman (13) 44,167 *
------------------------------------------------------------ ------------------------- ----------------------
Adm. Thomas Paulsen (14) 41,667 *
------------------------------------------------------------ ------------------------- ----------------------
Dr. Jill Wittels (15) 41,667 *
------------------------------------------------------------ ------------------------- ----------------------
All Directors and Executive Officers as a Group (16) 11,880,409 20.5%
------------------------------------------------------------ ------------------------- ----------------------
* Less than 1% of the outstanding common stock.
45
** Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of February 2, 2004 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Percentages are
based on a total of 55,517,595 shares of common stock outstanding on February 2,
2004, and the shares issuable upon the exercise of options and warrants
exercisable on or within 60 days of February 2, 2004, as described below.
(1) This figure represents:
(i) 2,875,976 shares owned by Stillwater LLC, which includes 1,051,216 shares
owned by Rainbow Gate Corporation, in which the sole member of Stillwater LLC is
the investment manager of Rainbow Gate Corporation;
(ii) warrants held by Stillwater LLC to purchase 5,223,966 shares, which
includes:
(a) a warrant to purchase 300,000 shares that may not be exercised by Stillwater
LLC so long as Stillwater LLC is the beneficial owner, directly or indirectly,
of more than ten percent (10%) of the common stock of eMagin for purposes of
Section 16 of the Securities Exchange Act of 1934, and
(b) a warrant to purchase 289,310 shares held by Rainbow Gate Corporation, in
which the sole member of Stillwater LLC is the investment manager of Rainbow
Gate Corporation; and
(iii) 6,653,437 shares underlying convertible notes and interest (calculated
through 60 days after filing) held by Stillwater LLC.
(2) This figure represents shares owned by Gary Jones and Susan Jones who are
married to each other, including (i) 1,460,604 shares of common stock issuable
upon exercise of stock options held by Gary Jones and (ii) 1,676,949 shares of
common stock issuable upon exercise of stock options held by Susan Jones.
(3) This figure includes 1,966,787 shares underlying warrants and convertible
notes and interest to purchase 2,765,821 shares.
(4) This figure represents:
(i) 2,233,222 shares owned by Ginola Limited, which include 1,051,216 shares
held indirectly by Rainbow Gate Corporation, 119,116 shares owned by Ogier
Trustee Limited and 396,223 shares owned by Crestflower Corporation. Ginola
Limited disclaims beneficial ownership of the shares owned by Crestflower
Corporation and Ogier Trustee Limited. (ii) warrants held by Ginola Limited to
purchase 1,922,906 common shares, which includes a warrant to purchase 289,310
shares held by Rainbow Gate Corporation, in which the sole shareholder of Ginola
Limited is also the sole shareholder of Rainbow Gate Corporation; and (iii)
2,078,717 shares underlying convertible notes and interest (calculated through
60 days after filing) held by Ginola Limited.
(5) Shares are owned by Travelers and its affiliates TRAL and Citicorp. This
figure includes warrants held by Travelers to purchase 1,651,843 shares of
common stock.
(6) These shares are owned by SK Corp. This figure includes warrants held by SK
Corp. to purchase 205,479 shares of common stock.
(7) The figure includes 512,820 shares underlying warrants.
(8) This figure includes 289,310 shares underlying warrants.
(9) This figure represents shares owned by K.C. Park. This figure includes
1,027,318 common stock shares issuable upon exercise of stock options.
(10) This figure represents and 83,333 common stock shares, warrants held by Mr.
Rivkin to purchase 303,933 shares of common stock, 320,833 common stock shares
issuable upon exercise of stock options and convertible notes to purchase
464,038 shares which include 65,120 shares estimated for convertible interest.
This figure does not include 14,167 shares of common stock issuable upon
exercise of stock that are not presently exercisable and are not exercisable
within 60 days of February 2, 2004.
46
(11) This figure represents (i) 15,446 common stock shares 129,165 shares
underlying warrants and 56,250 shares underlying options held by Paul Cronson;
(ii) 133,929 common stock shares and 102,670 shares underlying warrants held
indirectly by a family member of Paul Cronson; and (iii) 43,651 shares
underlying warrants held indirectly by Larkspur Corporation of which he is the
Managing Director. This figure does not include 18,750 shares of common stock
issuable upon exercise of stock that are not presently exercisable and are not
exercisable within 60 days of February 2, 2004.
(12) This figure represents shares underlying options. This figure does not
include 7,500 shares of common stock issuable upon exercise of stock that are
not presently exercisable and are not exercisable within 60 days of February 2,
2004.
(13) This figure represents shares underlying options. This figure does not
include 30,833 shares of common stock issuable upon exercise of stock that are
not presently exercisable and are not exercisable within 60 days of February 2,
2004.
(14) This figure represents shares underlying options. This figure does not
include 23,333 shares of common stock issuable upon exercise of stock that are
not presently exercisable and are not exercisable within 60 days of February 2,
2004.
(15) This figure represents shares underlying options. This figure does not
include 23,333 shares of common stock issuable upon exercise of stock that are
not presently exercisable and are not exercisable within 60 days of February 2,
2004.
(16) This figure includes (i) warrants to purchase 579,419 shares of common
stock, (ii) 4,946,955 shares of common stock issuable upon exercise of stock
options, and (iii) a convertible note to purchase 557,784 shares which includes
estimated interest.
47
DESCRIPTION OF SECURITIES BEING REGISTERED
COMMON STOCK
We are authorized to issue up to 200,000,000 shares of Common Stock, par value
$.001. As of February 2, 2004, there were 47,862,959 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Continental Stock Transfer & Trust Company of New York, as
independent transfer agent and registrar.
PREFERRED STOCK
We are authorized to issued up to 10,000,000 shares of preferred stock. The
shares of preferred stock may be issued in series, and shall have such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issuance of such
stock adopted from time to time by the board of directors. The board of
directors is expressly vested with the authority to determine and fix in the
resolution or resolutions providing for the issuances of preferred stock the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent now
or hereafter permitted by the laws of the State of Delaware.
WARRANTS
On January 9, 2004, eMagin Corporation and several accredited institutional and
private investors entered into a Securities Purchase Agreement whereby such
investors purchased an aggregate of 3,333,364 shares of common stock for an
aggregate purchase price of $4,200,039.
The shares of common stock were priced at a 20% discount to the average closing
price of the stock from December 30, 2003 to January 6, 2004, which ranged from
$1.38 to $1.94 per share during the period for an average closing price of $1.26
per share. In addition, the investors received warrants to purchase an aggregate
of 2,000,019 shares of common stock (subject to anti-dilution adjustments)
exercisable at a price of $1.74 per share for a period of five (5) years. The
warrants were priced at a 10% premium to the average closing price of the stock
for the pricing period.
eMagin also issued additional warrants to the investors to acquire an aggregate
of 2,312,193 shares of common stock. 1,206,914 of such warrants are exercisable,
within 6 months from the effective date of the registration statement covering
these securities, at a price of $1.74 per share (a 10% premium to the average
closing price of the stock for the pricing period), and 1,105,279 of such
warrants are exercisable within 12 months from the effective date of the
registration statement covering these securities, at a price of $1.90 per share
(a 20% premium to the average closing price of the stock for the pricing
period).
This prospectus covers the resale by the investors of the above-referenced
common stock and common stock underlying the warrants.
48
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize the
company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any
state or the United States;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o through the writing of options on the shares
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
49
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
50
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
Shares Beneficially Owned Shares Beneficially Owned
Prior to the Offering After the Offering
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Total Shares
Name Number Percent Registered Number Percent
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Langley Partners, L.P. (1) 910,179 1.7% 910,179 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Spectra Capital Management, 910,179 1.7% 910,179 - 0 - 0.0 %
LLC (2)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Truk Opportunity Fund, LLC 630,754 1.2% 630,754 - 0 - 0.0 %
(3)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Ellis International Ltd. (4) 546,107 1.0% 546,107 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Stonestreet, LP (5) 546,107 1.0% 546,107 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
SRG Capital (6) 366,984 * 366,984 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Platinum Partners Value 364,072 * 364,072 - 0 - 0.0 %
Arbitrage Fund LP(7)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
RHP Master Fund, Ltd.(8) 364,072 * 364,072 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Gabriel Capital, L.P. (9) 364,071 * 364,071 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
AS Capital Partners LLC(10) 273,055 * 273,055 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
OTAPE Investments LLC(11) 273,055 * 273,055 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
TCMP3 Partners (12) 272,944 * 272,944 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Basso Equity Opportunity 229,365 * 229,365 - 0 - 0.0 %
Holding Fund Ltd. (13)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Basso Multi-Strategy Holding 229,365 * 229,365 - 0 - 0.0 %
Fund Ltd. (13)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Andrew Burton First Trust & 182,036 * 182,036 - 0 - 0.0 %
Co. Money Purchase Pension
Plan (14)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
West End Convertible Fund 182,036 * 182,036 - 0 - 0.0 %
L.P. (15)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Whalehaven Fund Ltd. (16) 182,036 * 182,036 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
51
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Bristol Investment Fund, 182,036 * 182,036 - 0 - 0.0 %
Ltd. (17)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Gamma Opportunity Capital 182,036 * 182,036 - 0 - 0.0 %
Partners LP (18)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Clearview International 182,036 * 182,036 - 0 - 0.0 %
Investment Ltd. (19)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Trust u/w Ella Grey, Mary 182,036 * 182,036 - 0 - 0.0 %
Cronson (20)
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
Cohanzik Partners, L.P. (21) 91,017 * 91,017 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
U.S. Display Consortium 9,058 * 9,058 - 0 - 0.0 %
------------------------------ --------------------- -------------------- ------------------- ----------------- -------------
7,654,636 14.3% 7,654,636 - 0 - 0.0 %
------------------------------ ===================== ==================== ------------------- ================= =============
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible preferred stock is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Represents (i) 396,825 shares of common stock; (ii) 238,095 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 143,679
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 131,580 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(2) Represents (i) 396,825 shares of common stock; (ii) 238,095 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 143,679
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 131,580 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share. This
entity is an affiliated of a broker-dealer and acquired these shares in
the ordinary course of business and not with a view to distribute.
52
(3) Represents (i) 275,000 shares of common stock; (ii) 165,000 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 99,569
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 91,185 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(4) Represents (i) 238,095 shares of common stock; (ii) 142,857 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 86,207
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 78,948 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(5) Represents (i) 238,095 shares of common stock; (ii) 142,857 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 86,207
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 78,948 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(6) Represents (i) 160,000 shares of common stock; (ii) 96,000 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 57,931
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 53,053 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(7) Represents (i) 158,730 shares of common stock; (ii) 95,238 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 57,472
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 52,632 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(8) Represents (i) 158,730 shares of common stock; (ii) 95,238 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 57,472
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 52,632 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(9) Represents (i) 158,730 shares of common stock; (ii) 95,238 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 57,471
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 52,632 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(10) Represents (i) 119,048 shares of common stock; (ii) 71,429 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 43,104
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 39,474 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
53
(11) Represents (i) 119,048 shares of common stock; (ii) 71,429 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 43,104
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 39,474 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(12) Represents (i) 119,000 shares of common stock; (ii) 71,400 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 43,086
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 39,458 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(13) Represents (i) 100,000 shares of common stock; (ii) 60,000 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 36,207
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 33,158 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(14) Represents (i) 79,365 shares of common stock; (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 28,736
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 26,316 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(15) Represents (i) 79,365 shares of common stock; (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 28,736
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 26,316 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(16) Represents (i) 79,365 shares of common stock; (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 28,736
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 26,316 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(17) Represents (i) 79,365 shares of common stock; (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 28,736
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 26,316 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
54
(18) Represents (i) 79,365 shares of common stock; (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 28,736
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 26,316 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(19) Represents (i) 79,365 shares of common stock; (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 28,736
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 26,316 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(20) Represents (i) 79,365 shares of common stock; (ii) 47,619 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 28,736
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 26,316 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
(21) Represents (i) 39,682 shares of common stock; (ii) 23,809 shares of
common stock underlying warrants that are currently exercisable until
January 2009 at an exercise price of $1.74 per share; (iii) 14,368
shares of common stock underlying warrants that are currently
exercisable until six months after this prospectus is declared
effective by the Securities and Exchange Commission at an exercise
price of $1.74 per share; and (iv) 13,158 shares of common stock
underlying warrants that are currently exercisable until twelve months
after this prospectus is declared effective by the Securities and
Exchange Commission at an exercise price of $1.90 per share.
55
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
A member of Sichenzia Ross Friedman Ference LLP, Richard Friedman, will receive
up to 200,000 shares of common stock, from eMagin, over the next 8 months for
general corporate and litigation matters.
EXPERTS
Grant Thornton LLP, Independent Certified Public Accountants, have audited, as
set forth in their report thereon appearing elsewhere herein, our financial
statements at December 31, 2002, and for the year then ended that appear in the
prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the auditors' opinion based on their expertise in
accounting and auditing.
CHANGE IN ACCOUNTANTS
Prior to the date of this registration statement, the Arthur Andersen
partners who reviewed our audited financial statements, as of December 31, 2001
and 2000 resigned from Arthur Andersen LLP. As a result, after reasonable
efforts, we have been unable to obtain Arthur Andersen's written consent to the
incorporation by reference into this registration statement of its audit reports
with respect to our financial statements.
Under these circumstances, Rule 437(a) under the Securities Act of 1933
permits the filing of this registration statement without including herein a
written consent from Arthur Andersen. Accordingly, Arthur Andersen will not be
liable under Section 11(a) of the Securities Act of 1933 because it has not
consented to being named as an expert in the registration statement.
Section 11(a) of the Securities Act of 1933, as amended, provides that
if any part of a registration statement at the time it becomes effective
contains an untrue statement of a material fact or an omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, any person acquiring a security pursuant to the
registration statement (unless it is proved that at the time of the acquisition
the person knew of the untruth or omission) may sue, among others, every
accountant who has consented to be named as having prepared or certified any
part of the registration statement or as having prepared or certified any report
or valuation which is used in connection with the registration statement with
respect to the statement in the registration statement, report or valuation
which purports to have been prepared or certified by the accountant.
In September 2002, eMagin announced that it had appointed Grant
Thornton as its independent auditor for fiscal year 2002, replacing Arthur
Andersen LLP.
On December 29, 2003, eMagin Corporation, (the "Company") notified
Grant Thornton LLP of its decision to terminate its business relationship with
them. On December 30, 2003, the Company engaged Eisner LLP as independent
auditors of the Company for the fiscal year ending December 31, 2003. The action
to engage Eisner LLP was taken upon the unanimous approval of the Audit
Committee of the Board of Directors of the Company.
56
During the last fiscal year ended December 31, 2002 and through
December 29, 2003, (i) there were no disagreements between the Company and Grant
Thornton on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Grant Thornton would have caused Grant Thornton to make
reference to the matter in its reports on the Company's financial statements,
and (ii) Grant Thornton's reports did not contain an adverse opinion or a
disclaimer of opinion, or was qualified or modified as to uncertainty, audit
scope, or accounting principles. During the last fiscal year ended December 31,
2002 and through December 29, 2003, there were no reportable events as the term
described in Item 304(a)(1)(iv) of Regulation S-B. Grant Thornton's opinion in
its report on the Company's financial statements for the year ended December 31,
2002, included an explanatory paragraph that described uncertainties regarding
the Company's ability to continue as a going concern. The consolidated financial
statements of eMagin Corporation as of December 31, 2001 were audited by Arthur
Anderson LLP 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.
During the two most recent fiscal years and through December 29, 2003,
the Company has not consulted with Eisner LLP regarding either:
1. the application of accounting principles to any specified
transaction, either completed or proposed, or the type of
audit opinion that might be rendered on the Company's
financial statements, and neither a written report was
provided to the Company nor oral advice was provided that
Eisner LLP concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing
or financial reporting issue; or
2. any matter that was either subject of disagreement or event,
as defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the
related instruction to Item 304 of Regulation S-B, or a
reportable event, as that term is explained in Item
304(a)(1)(iv)(A) of Regulation S-B.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of eMagin Corporation, filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 that require us to file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information may be inspected at public reference facilities of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549. Copies of such
material can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed
rates. The public could obtain information on the operation of the public
reference room by calling the Securities and Exchange Commission at
1-800-SEC-0330. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
57
FINANCIAL STATEMENT INDEX
Page
FINANCIAL STATEMENTS FOR eMAGIN CORPORATION
For the Three and Nine Months ended September 30, 2003 and September 30, 2002
Condensed Consolidated Balance Sheets as of September 31, 2003 (unaudited) and December 31, 2002 F-2
Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 31,
2003 and 2002 (unaudited) F-3
Condensed Consolidated Statements of Cash Flows for the Three and Nine Months ended March 31, 2003
and 2002 (unaudited) F-4
Condensed Consolidated Statement of Changes in Stockholder Equity (Unaudited) F-5
Selected Notes to Condensed Consolidated Financial Statements (Unaudited) F-6
Report of Independent Certified Public Accountants F-15
Report of Independent Public Accountants F-16
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-17
Consolidated Statements of Operations for the years ended December 31, 2002 and 2001 and From
Inception to Date F-18
Statement of Changes in Stockholders' Equity from Inception to Date F-19
Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001 and From
Inception to Date F-21
Notes to the Consolidated Financial Statements F-22
F-1
eMAGIN CORPORATION
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------ -------------------------- ---------------------
ASSETS September 30, 2003 December 31, 2002
------------------------------------------------------------------ -------------------------- ---------------------
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 1,378,665 $ 82,951
Trade receivables 785,489 240,136
Unbilled costs and estimated profits on contracts in progress 75,359 125,359
Inventory 364,257 250,998
Prepaid expenses and other current assets 371,953 113,849
--------------------- --------------------
Total current assets 2,975,723 813,293
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: 3,322,094 2,230,674
Less: Accumulated depreciation (1,966,045) (1,596,142)
--------------------- ---------------------
Total equipment and leasehold improvements, net 1,356,049 634,532
INTANGIBLE ASSETS: 18,020,000 18,020,000
Less: Accumulated Amortization (18,020,000) (17,688,558)
--------------------- ---------------------
Total intangible assets, net - 0 - 331,442
OTHER LONG-TERM ASSETS 98,157 55,117
--------------------- ---------------------
Total Assets $ 4,429,929 $ 1,834,384
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 306,803 $ 6,381,036
Accrued payroll and benefits 962,993 1,031,958
Other accrued expenses 45,042 1,207,693
Advanced payments 50,000 - 0 -
Current portion of long-term debt 48,084 49,275
Other short-term debt 4,338,319 5,690,889
Other current liabilities 487,888 53,905
--------------------- ---------------------
Total current liabilities 6,239,129 14,414,756
--------------------- ---------------------
NOTES PAYABLE 1,650,994 - 0 -
OTHER LONG-TERM DEBT 39,475 227,742
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.0001 per share
Shares authorized - 200,000,000 and 100,000,000
Shares issued and outstanding - 41,722,410 and 41,722 30,855
30,854,980
Additional paid-in-capital 131,030,191 119,221,277
Deferred compensation (175,576) (462,983)
Accumulated deficit (134,396,006) (131,597,263)
--------------------- --------------------
Total shareholders' equity (3,499,669) (12,808,114)
--------------------- --------------------
--------------------- --------------------
Total liabilities and shareholders' equity $ 4,429,929 $ 1,834,384
===================== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
EMAGIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months Three months Nine months Nine months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
REVENUE:
Contract revenue $ 275,504 $ 176 $ 275,504 $ 14,284
Product revenue, net of returns 472,983 497,675 1,245,353 909,721
------------------ ---------------- ----------------- ----------------
Total Revenue 748,487 497,851 1,520,857 924,005
------------------ ---------------- ----------------- ----------------
COSTS OF GOODS SOLD:
Costs of goods sold 393,660 - 1,650,969 -
Sales commissions 15,000
------------------ ---------------- ----------------- ----------------
Total Cost of Goods Sold 393,660 - 1,665,969 -
------------------ ---------------- ----------------- ----------------
Gross Profit (loss) 354,827 497,851 (145,112) 924,005
COSTS AND EXPENSES:
Research and development, net of funding 571 947,653 22,419 6,435,467
Manufacturing overhead expense 945,779 1,841,145
Amortization of purchased intangibles 331,449 331,442 994,347
Gain on payable forgiveness (2,752,570) (4,637,993)
Stock based compansation 1,896,011 - 2,095,407 -
Selling, general and administrative 732,438 1,565,377 2,283,476 4,916,824
------------------ ---------------- ----------------- ----------------
Total costs and expenses, net 822,229 2,844,479 1,935,896 12,346,638
------------------ ---------------- ----------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (441,749) (408,010) (927,255) (1,822,5652)
Other Income (expense) 209,520
------------------ ---------------- ----------------- ----------------
Other income (expense) (441,749) (408,010) (717,735) (1,822,562)
------------------ ---------------- ----------------- ----------------
Loss before provision for income taxes (909,151) (2,754,638) (2,798,743) (13,245,195)
------------------ ---------------- ----------------- ----------------
PROVISION FOR INCOME TAXES
------------------ ---------------- ----------------- ----------------
Net loss $ (909,151) $ (2,754,638) $ (2,798,743) $ (13,245,195)
================== ================ ================= ================
Basic and diluted loss per common share $ (0.02) $ (0.09) $ (0.08) $ (0.44)
Weighted average common shares outstanding 38,360,090 30,294,980 34,404,367 30,294,980
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
eMAGIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Nine Months
ended ended
CASH FLOWS FROM OPERATING ACTIVITIES: September 30, 2003 September 30, 2002
--------------------- ----------------------
Net Loss ($2,798,743) ($14,130,835)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 365,535 1,005,413
Amortization of purchased intangibles 331,442 -
Amortization of debt discount 69,432 -
Non-cash compensation for beneficial conversion 32,920 -
Non-cash charge for stock based compensation 2,095,407 2,627,837
Non-cash interest related charges 384,368 1,037,335
Non-cash gain on debt restructure (4,637,993) -
Non-cash charge for services received 443,252 307,657
Non-cash charge for debt discount 70,979 -
Changes in operating assets and liabilities:
Trade receivables (545,353) 279,379
Unbilled costs and estimated profits on contracts in progress 50,000 191,953
Inventory (113,258) 25,120
Prepaid expenses and other current assets (312,833) 124,043
Other long-term assets 61,960 4,469
Advanced payment on contracts to be completed 59,385 (198,362)
Deferred revenue (29,900) 10,071
Accounts payable, accrued expenses and accrued payroll (560,665) 2,937,190
Other current liabilities 282,676
--------------------- ----------------------
Net cash used in operating activities (4,751,390) (5,778,730)
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases/Sales of equipment (880,572) (66,075)
--------------------- ----------------------
Net cash used in investing activities (880,572) (66,075)
--------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs 3,954,509
Proceeds from exercise of stock options and warrants 986,054 887
Proceeds from long- and short-term debt, net 6,000,000 1,443,478
Payments of long-term debt and capital leases (58,378) (195,284)
--------------------- ----------------------
Net cash provided by financing activities 6,927,676 5,203,590
--------------------- ----------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,295,714 (641,215)
CASH AND CASH EQUIVALENTS, beginning of period 82,951 738,342
--------------------- ----------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,378,665 $ 97,127
===================== ======================
Non-cash settlements of long-term debt and capital leases 4,845,537 -
Reclass of prepaid interest to debt restructure 748,116 -
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
eMAGIN CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Common Stock Deferred Paid-in Accumulated
Shares $ Compensation Capital Deficit Total
-------------------------- ---------------- ---------------- ---------------- ---------------- -------------- ------------------
Balance, December 31, 2002 ... 30,855 $ (462,983) $ 30,854,980 $ 119,221,276 $(131,597,263) $ (12,808,115)
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Stock warrants exercised ..... 91,425 91 49,909 50,000
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Issuance of common stock for
services ..................... 339,433 340 273,457 273,796
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Amortization of deferred
compensation ................. 111,385 111,385
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Net loss for period........... (2,405,491) (2,405,491)
Balance, March 31, 2003 ...... 31,285,838 $ 31,286 $ (351,598) $ 119,544,643 $(134,002,753) $ (14,778,422)
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Conversion to common stock for
debt.......................... 4,633,590 4,633 4,239,260 4,243,893
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Issuance of common stock for
services...................... 125,002 125 91,970 92,095
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Exercise of options .......... 129,675 130 53,810 53,940
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Issuance of common stock for
payable forgiveness........... 1,997,840 1,998 1,409,971 1,411,969
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Amortization of deferred
compensation.................. 88,011 88,011
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Warrants issued with
convertible notes payable..... 1,383,203 1,383,203
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Beneficial conversion on
financing..................... 616,797 616,797
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Net income (loss) for period . 515,899 515,899
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Balance, June 30, 2003 ....... 38,171,945 $ 38,172 $ (263,587) $ 127,339,654 $(133,486,854) $ (6,372,615)
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Stock warrants exercised ..... 1,114,933 1,115 732,167 733,282
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Issuance of common stock for
services...................... 98,299 98 77,047 77,145
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Exercise of options .......... 386,708 387 148,446 148,832
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Issuance of common stock for
debt.......................... 482,143 482 716,142 716,624
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Conversion of debt for common
stock......................... 1,468,382 1,468 208,735 210,203
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Amortization of deferred
compensation.................. 88,011 88,011
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Stock Option Compensation..... 1,808,000 1,808,000
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Net income (loss) for period.. (909,151) (909,151)
---------------- ---------------- ---------------- ---------------- -------------- ------------------
Balance, September 30, 2003... 41,722,410 $ 41,722 $ (175,576) $ 131,030,191 $(134,396,006) $ (3,499,669)
---------------- ---------------- ---------------- ---------------- -------------- ------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
eMAGIN CORPORATION
Selected Notes to Consolidated Financial Statements
Note 1 - BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The results of operations for the
period ended September 30, 2003 are not necessarily indicative of the results to
be expected for the full year.
Note 2 - NATURE OF BUSINESS
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"). The merged company changed its name to
eMagin Corporation (the "Company" or "eMagin"). eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision Inc., develops and
markets microdisplay systems and optics technology for commercial, industrial
and military applications. Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
As of January 1, 2003 the Company has completed its development stage, as
defined by Statement of Financial Accounting Standards ("SFAS") No. 7,
Accounting and Reporting by Development Stage Enterprises. The financial
statements results as of December 31, 2002 and the period ended September 30,
2002 have been restated to reflect the current status. We expect our product
revenues to increase as we continue to concentrate on trade revenue, as
additional supplies arrive and volumes of shipments of finished products
continue to increase. The effects on accounting for 2003 will be substantial.
The majority of sales before 2003 were Contract Revenue in which our costs were
treated as overall company losses. In 2002 we started minimal production. We
initially shipped only developer kits and sample quantities of our SVGA+ OLED
microdisplay product. We expanded the product line with a SVGA 3D product. We
now provide both color and several variations of monochrome versions of these
products. Our customers generally spend six to over twelve months evaluating and
testing our product and developing their own end product, which uses our display
before committing to larger orders. We expect the quantities of products shipped
to increase as we receive the materials and supplies we ordered after our recent
financing and we hire additional staff to increase our manufacturing capacity,
enabling us to begin shipping products to fulfill our backlog of orders as well
as ship new orders.
In 2003 we are keeping track of costs of production, classifying direct and
indirect costs to costs of goods sold and tracking our gross profit. Although
R&D is no longer our primary focus, we have a few employees that are working on
projects to create new products and enhance existing products. We are working to
secure new R&D contracts to help create the next generation of lower cost and/or
higher resolution products, as well as to develop other performance and
life-luminance product enhancements. Contract R&D continued in 2003, but at
proportionately much smaller levels than in prior years.
There can be no assurance 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.
F-6
Note 3 - REVENUE AND COST RECOGNITION
The Company has historically earned revenues from certain of its R&D activities
under both firm fixed-price contracts and cost-type contracts, including some
cost-plus-fee contracts. Revenues relating to firm fixed-price contracts are
generally recognized on the percentage-of-completion method of accounting as
costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts
include costs incurred plus a portion of estimated fees or profits based on the
relationship of costs incurred to total estimated costs. Contract costs include
all direct material and labor costs and an allocation of allowable indirect
costs as defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other party. Amounts
can be billed on a bi-monthly basis. Billing is based on subjective cost
investment factors. The Company is currently under contract to one or more
entities for research and development, and expects to undertake activities and
realize revenues related to such research and development work in future
quarters.
In addition, the Company has product sales which are recognized when merchandise
is shipped and such revenue is recorded net of estimated sales returns based
upon past experience. Adjustments to such returns are made as new information
becomes available.
In 2003 we are keeping track of costs of production, classifying direct and
indirect costs to cost of goods sold and tracking our gross profit. Although R&D
as our primary focus will end, we have a few employees that are occasionally
working on projects to create new products and enhance existing products. At
present, we have few direct contracts we are billing to, and we may at times be
asked to work on a completed contract. Although we will not have any income from
that work, it may provide a foundation for future contracts and we will record
those costs in direct contracts.
Note 4 - RESEARCH AND DEVELOPMENT COSTS
R&D costs are expensed as incurred. To date, activities of the Company (and its
predecessor) have included the performance of R&D under cooperative agreements
with United States Government agencies. Funding from such R&D contracts is
recognized as a reduction in operating expenses during the period in which the
services are performed and related direct expenses are incurred.
Note 5 - NET INCOME (LOSS) PER COMMON SHARE
In accordance with SFAS No. 128, net income (loss) per common share amounts
("basic EPS") were computed by dividing net income (loss) by the weighted
average number of common shares outstanding and excluding any potential
dilution. Net loss per common share assuming dilution ("diluted EPS") was
computed by reflecting potential dilution from the exercise of stock options,
warrants and convertible debt where all contingencies have been met. Common
equivalent shares totaling 17,304,028 have been excluded from the computation of
diluted EPS for the three months ended September 30, 2003, which include
5,027,292 weighted options in-the-money, 2,169,529 weighted warrants
in-the-money and 10,107,207 convertible shares. Common equivalent shares
totaling 19,091,435 have been excluded from the computation of diluted EPS for
the nine months ended September 30, 2003, which include 5,988,552 weighted
options in-the-money, 2,995,676 weighted warrants in-the-money and 10,107,207
convertible shares. Common equivalent shares totaling 11,732,954 have been
excluded from the computation of diluted EPS for the three and nine month period
ending September 30, 2002.
Note 6 - DEBT
The debt consisted of the following as of September 30, 2003:
a Current portion of long term debt $ 48,084
b Other short term debt 4,338,319
c Notes payable 1,650,994
d Other long term debt 39,475
e Other - 0 -
---------------------------
Total debt $ 6,076,872
===========================
F-7
(a) This amount includes (i) $11,786 due to Citicorp Leasing over the next 12
months in lease payments for equipment; and (ii) $36,298 due to IBM over the
next 12 months for leasehold improvements.
(b) On April 25, 2003, we entered into a global restructuring and secured note
purchase agreement with a group of several accredited institutional and
individual investors whereby the Investors agreed to lend us $6,000,000 in
exchange for (i) the issuance of $6,000,000 principal amount of 9% secured
convertible promissory notes due and payable on November 1, 2005 and (ii)
warrants to purchase an aggregate of 7,749,921 shares of common stock of eMagin
(subject to certain customary anti-dilution adjustments), such warrants are
exercisable for a period of three (3) years.
Interest is payable on the notes at a rate of 9% per annum and, at our option,
may be paid through the delivery of shares of our common stock (registered
pursuant to the registration rights agreement referred to below) in lieu of cash
interest payments on the maturity date of the loan, November 1, 2005. Subject to
certain limitations, the notes may be converted, at the option of the holder, in
whole or in part, into common shares with a conversion price of $0.7742, an
amount equal to 105% of the volume weighted average of the closing price of our
common shares as reported on The American Stock Exchange by the Wall Street
Journal, New York City edition, for the five (5) trading days immediately
preceding the closing date. The exercise price of the warrants on a per share
basis is $.8110, an amount equal to 110% of the volume weighted average of the
closing price of our common shares as reported on The American Stock Exchange by
the Wall Street Journal, New York City edition, for the five (5) trading days
immediately preceding the closing date.
As of September 30, 2003 we received the entire $6,000,000 of which we received
$2,650,000 in the quarter ended September 30, 2003. As of September 30, 2003 the
Company has recorded a total of ($1,268,967) for original debt discount and
($461,663) for beneficial conversion discount. In the third quarter of 2003, the
Company recorded ($20,608) for the debt discount and ($48,782) for the
beneficial conversion as paid in surplus, which will be amortized through
November 2005. The amount includes warrants that were exercised in the third
quarter of 2003 and the reversal of the remaining balance of the unamortized
balance of beneficial conversion for these exercised warrants. For the quarter
ended September 30, 2003, $38,438 has been amortized to interest expense
relating to the debt discount for the April 2003 Financing.
The terms of the notes contain certain revisions, including financial and other
covenants, which covenants relate to expenses, direct cost of goods sold,
revenues and quarterly revenues. In the event that the Company is not in
compliance with these covenants, 50% or more of the holders of the notes (in
terms of the aggregate dollar value of the principal of the notes then issued
and outstanding under the note purchase agreement) would be able to call an
event of default. As of the date of the final tranche closing related to the
April 2003 financing, we were in violation of one of the representations and
warranties contained in the Note Purchase Agreement, which violation may be
deemed to constitute a default under the promissory notes issued in connection
with the April 2003 financing. Such violation relates to the litigation
commenced by Vertical Ventures. We are in the process of seeking to obtain a
forbearance from a majority in interest of the investors in the April 2003
Financing pursuant to which they will agree not to enforce their remedies for
such event of default. We have reclassified this debt to short term debt until
the forbearance is obtained.
F-8
c) This amount includes: (i) On January 14, 2002, the Company entered into a
$1.0 million bridge loan arrangement with a private investor in connection with
a secured note purchase agreement executed by the Company on November 27, 2001.
This transaction increased the total amount of the secured convertible loan
outstanding under this arrangement to $1,625,000, including amounts previously
made available to the Company in connection with the November 27, 2001 secured
note arrangement, net of repayments of $250,000 to certain investors who elected
not to reinvest. The secured convertible notes accrue interest at a rate of
9.00% per annum and mature on November 1, 2005 as a result of a financing we
completed in April 2003. Terms of the notes issued on January 14, 2002 also
included a fixed conversion rate of $0.5264 per share. The Company also granted
warrants purchasing 921,161 shares of common stock with an exercise price of
$0.5468 per share to the Investor. Such warrants are exercisable through January
2005. Certain investors (the "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 issued in November
2001 equivalent to the terms granted to the investors in January 2002.
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, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the original
period of the debt.
In addition, based on the terms of the 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 connection with the April 2003 financing described above, the Investor
agreed, to (a) amend the secured note issued to them, (b) terminate the security
agreement dated November 20, 2001 that was entered into in connection with the
purchase of the original secured notes and allow the new investors to enter into
a new security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the notes
included (i) extending the maturity dates of the note from June 30, 2003 to
November 1, 2005, and (ii) revising and clarifying certain of the other terms
and conditions of the note, including provisions relating to default and
assignment of the note. The defaults of this note were modified to the same
conditions as the new financing.
(ii) On June 20, 2002, the Company entered into a $0.2 million Secured Note
Purchase Agreement with an Investor. The secured note accrues interest at 11%
per annum and was due to mature on November 1, 2005 as a result of a financing
we completed in April 2003. The Company also granted warrants, exercisable for a
period of five years, to purchase 300,000 shares of common stock with an
exercise price of $0.4257 per share to the investor; provided, however, this
warrant may not be exercised by the investor so long as the investor is the
beneficial owner, directly or indirectly, of more than ten percent (10%) of the
common stock of eMagin for purposes of Section 16 of the Securities Exchange Act
1934. The fair value of the warrants issued to this Investor, which approximated
$84,000, has been recorded as original issue discount, resulting in a reduction
in the carrying value of this debt. The original issue discount was amortized
into interest expense over the period of the debt. Pursuant to the April 2003
financing described above, the investor agreed, to (a) amend the secured note
issued to them, (b) terminate the security agreement dated June 20, 2002 that
was entered into in connection with the purchase of the original secured notes
and allow the new investors to enter into a new security agreement with them on
a pari passu basis in order for eMagin to continue its operations as a developer
of virtual imaging technology, and (c) simultaneously participate in the new
financing. The amendments to the note included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the April 2003 secured
note purchase agreement, (ii) extending the maturity dates of the note from June
30, 2003 to November 1, 2005, and (iii) revising and clarifying certain of the
other terms and conditions of the note, including provisions relating to
interest payments, conversions, default and assignment of the note. Due to the
amendment to a convertible note, we recorded $106,372 beneficial conversion
discount and $93,628 original debt discount, to be amortized through November
2005. As of September 30, 2003 the company has amortized a total of $12,169 for
original debt discount and $13,825 for beneficial conversion discount. For the
quarter ended September 30, 2003, $15,477 has been amortized to interest
expense.
F-9
(d) This amount is due to Citicorp Leasing as long-term debt for lease payments
for equipment.
(e) Other debt transactions - On August 21, 2002, the Company issued two Series
B Convertible Debentures in the amount of $121,739 each. The debentures bore
interest at the rate of 8% per annum and were due August 21, 2004. The Debenture
also included a fixed conversion rate of $0.18 per share. Article 3 of the
Debentures provided, in relevant part, that the Debentures (and any accrued
interest thereon) may be converted to Common Stock, in whole or in part, on any
Business Day at the Conversion Price if the average closing price of the shares
traded exceeded a certain price per share for 10 consecutive trading days. These
convertible debentures were converted on September 10, 2003 into 1,468,382
common shares. This transaction included a write-down of $31,561 in beneficial
conversion feature that remained on the books at the time of conversion.
Note 7 - DEBT RESTRUCTURE
In connection with the April 2003 Financing, we entered into settlement or
restructuring agreements with certain of our other creditors, pursuant to which
the creditors agreed to accept shares of our common stock in full or partial
satisfaction of the amount owed to them, or which allow us to either make
discounted payments to them or to make payments under more favorable payment
terms than previously were in place.
We converted the $1,000,000 loan plus interest to Travelers in common shares
totaling 2,137,757 at a conversion price from the original agreement of
approximately $0.53 per share, based on the market value of our common stock on
the date the agreement was entered into. In June 2003, we recorded 1,013,017 as
paid in capital for this transaction. The company also converted the $3,000,000
loan plus interest to SK Corporation in common shares totaling 2,495,833 at a
conversion price from the original agreement of approximately $1.28 per share,
based on the market value of our common stock on the date the agreement was
entered into. In June 2003 we recorded 2,883,394 as paid in capital for this
transaction. There was no gain recorded on these transactions.
Also in June 2003, the Company negotiated settlement of amounts due and amounts
for future services totaling $418,207 to related parties for services rendered
via issuance of 125,002 shares of common stock. We also received approximately
$52,000 for the exercise of 129,675 option shares. We also issued 1,997,840
shares in partial payment of debt in conjunction with the $1,885,423 reduction
of expense recorded in the financial statement ended June 30, 2003.
In the third quarter of 2003, we took advantage of several operating lease
buyout provisions. With a cash outlay of $950,000, we recorded $950,000 in
purchased equipment, a reduction of $598,493 in prepaid interest and a
write-down of $3,375,000 in long- and short-term debt. We recorded ($2,752,570)
and ($4,637,993) as a gain on settlement of debt for the three and nine month
ending September 30, 2003, respectively.
Note 8 - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consisted of 100,000,000 shares with
a par value of $0.001 per share. On July 2, 2003 the shareholders approved an
increase to 200,000,000 shares.
In September 2003, the Company negotiated settlement of amounts due and amounts
for future services to related parties for services rendered via issuance of
98,299 shares of common stock. As such, the Company recorded the fair value of
the services received of $77,145 and $443,252 in selling, general and
administrative expenses, prepaid expenses and reduction of accounts payable in
the accompanying audited consolidated statement of operations for the three
months and nine months ending September 30, 2003, respectively.
F-10
Also on September 10, 2003, the Company converted two Series B Convertible
Debentures in the amount of $121,739 each. These convertible debentures were
converted at $0.18 per share for a total of 1,468,382 shares. This transaction
included a write-down of $31,561 in beneficial conversion feature that remained
on the books at the time of conversion.
Note 9 - STOCK COMPENSATION
As of September 30, 2003, we have outstanding options to purchase 11,920,723
shares. The Company has elected to follow Accounting Principles Board Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB No. 25,
when the exercise price of employee stock options equals the market price of the
underlying stock on the date of grant no compensation expense is recorded. The
Company discloses information relating to the fair value of stock-based
compensation awards in accordance with Statement of Financial Accounting
Standards No.123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
The following table illustrates the effect on net loss and loss per share as if
the Company had applied the fair value recognition provision of SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in the third quarter of 2003 and 2002, respectively: (1) average expected
volatility of 162% and 150%, (2) average risk-free interest rates of 3.74% and
6.00%, and (3) expected lives of five and seven years for the period ended
September 30, 2003 and expected lives of five and eight years for the period
ended September 30, 2002.
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 three
months ended September 30, 2003 and 2002.
---------------------------------------------- --------------------- -------------------- --------------------- ------------------
For the three and nine months ended Three Months Three Months Nine Months Nine Months
September 30, 2003 2002 2003 2002
---------------------------------------------- --------------------- -------------------- --------------------- ------------------
Net income (loss) applicable to common $(909,151) $(2,754,638) $ (2,798,743) $(13,245,195)
stockholders', as reported
---------------------------------------------- --------------------- -------------------- --------------------- ------------------
Adjust: Stock-based employee compensation
expense determined under fair value method (316) (3,116,892) (1,486,025) (9,350,676)
---------------------------------------------- --------------------- -------------------- --------------------- ------------------
Pro forma net loss $(909,467) $ (5,871,530) $(4,284,768) $(22,595,871)
---------------------------------------------- --------------------- -------------------- --------------------- ------------------
Net loss per share applicable to common
stockholders'
---------------------------------------------- --------------------- -------------------- --------------------- ------------------
Basic and diluted, as reported $ (0.02) $ (0.09) $ (0.08) $ (0.44)
---------------------------------------------- --------------------- -------------------- --------------------- ------------------
Basic and diluted, pro forma $ (0.02) $ (0.19) $ (0.12) $ (0.75)
---------------------------------------------- --------------------- -------------------- --------------------- ------------------
F-11
Note 10 - EFFECT OF RECENTLY ISSUED 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
15, 2002. On January 31, 2003, eMagin adopted SFAS No. 143. The adoption of this
standard did not have a significant impact on eMagin's 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. The
Company adopted SFAS No. 145 on January 1, 2003; the adoption had no effect on
the financial results of the Company.
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. eMagin adopted
SFAS No. 146 as of January 1, 2003. Upon adoption of SFAS 146, there was no
effect on its financial position, cash flows or results of operations.
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF 00-21"),
"Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The consensus mandates how to
identify whether goods or services or both that are to be delivered separately
in a bundled sales arrangement should be accounted for separately because they
are separate units of accounting. The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in periods beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." Upon adoption of EITF 00-21, there was no effect on its financial
position, cash flows or results of operations.
F-12
On April 30, 2003, the FASB issued Statement No. 149 ("SFAS No. 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement No. 133, and
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003 and is to be applied prospectively.
The adoption of this standard did not have a material impact on the Company's
financial position, cash flows or results of operations. On May 15, 2003, the
FASB issued Statement No. 150 ("FAS No. 150"), Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. FAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). FAS No. 150 affects the
issuer's accounting for three types of freestanding financial instruments.
o mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets;
o instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets includes put options and
forward purchase contracts; and
o obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuers'
shares.
FAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. Most of the guidance in FAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company has not yet completed its analysis of
SFAS No. 150 and, therefore, the effect on the Company's combined financial
statements of the implementation of SFAS 150, when effective, has not yet been
determined.
Note 11 - RECLASSIFICATIONS
Certain amounts in the September 30, 2002 financial statements have been
reclassified to conform to the September 2003 classification. As of January 1,
2003 the Company has completed its development stage, as defined by Statement of
Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by
Development Stage Enterprises". The financial statements results as of December
31, 2002 and the period ended September 30, 2002 have been restated to reflect
the current status.
Note 12 - CONTINGENCIES
On or about May 19, 2003, an action was commenced against the Company by
Vertical Ventures Investments LLC in the Supreme Court of the State of New York,
County of New York, Index No. 3601562/03. In this action, the plaintiff has
asserted claims for the breach of a Registration Rights Agreement, and seeks
compensatory damages against the Company in the amount of $1,500,000. The
Company filed its answer on June 23, 2003 and has denied any and all wrongdoing.
The Company intends to vigorously defend this matter. The parties are in the
process of conducting discovery, but at this juncture, it is difficult to
estimate the likelihood of any unfavorable outcome and estimate the amount or
range of potential loss at this time.
F-13
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
F-14
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 SB-2, the
reader's ability to make a claim against such firm may be limited or prohibited.
F-15
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
F-16
eMAGIN CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001
and for the period from inception (January 23, 1996) through December 31, 2002
Period from inception
January 6, 1996
2002 2001 to December 31, 2002
CONTRACT REVENUE:
Contract revenue $ 840,658 $ 5,005,657 $ 8,403,902
Product revenue 1,287,002 841,713 2,128,715
---------------- ------------------------------------------
Total revenue 2,127,660 5,847,370 10,532,617
---------------- ------------------------------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$331,956, $1,555,811,
$3,608,325 respectively 7,254,996 12,724,161 29,614,105
Amortization of purchased intangibles 1,325,796 17,886,838 40,144,954
Acquired In Process Research & Development - 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 24,100,289
---------------- ------------------------------------------
Total costs and expenses, net 14,734,030 72,983,572 138,825,211
---------------- ------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (2,329,452) (1,411,668) (3,232,742)
Other income (expense), net 23,111 61,135 (71,928)
---------------- ------------------------------------------
Other income (expense) (2,306,341) (1,350,533) (3,304,670)
---------------- ------------------------------------------
Loss before provision for income taxes $ (14,912,711) $ (68,486,735) $ (131,597,263)
---------------- ------------------------------------------
PROVISION FOR INCOME TAXES - -
---------------- ------------------------------------------
Net loss $ (14,912,711) $ (68,486,735) $ (131,597,263)
================ ==========================================
Basic and diluted loss per common share (0.51) (2.73)
Weighted average outstanding common stock 29,416,838 25,100,211
The accompanying notes are an integral part of the financial statements.
F-17
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 Deferred 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
6,600,000 6,600 - 24,400 (12,548) 18,452
---------------------------------------------================================================================================
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)
---------------------------------------------================================================================================
F-18
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
F-19
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001 and for the period from inception
(January 23, 1996) to December 31, 2002
Period from
inception
January 23 1996 to
2002 2001 December 31, 2002
--------------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($14,912,711) ($68,486,735) ($131,597,263)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 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 97,713
Non-cash charge for stock based compensation 1,646,917 2,841,003 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
Changes in operating assets and liabilities, net of acquisition:
Trade receivables 593,300 340,606 240,136
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
Inventory 341,718 (90,720) 250,998
Prepaid expenses and other current assets 196,371 276,984 113,849
Other long-term assets 139,033 11,027 55,117
Advanced payment on contracts to be completed (398,343) 86,531
Deferred Revenue 30,400 30,400
Accounts payable, accrued expenses and accrued
payroll 2,738,847 1,932,619 4,722,505
Other current liabilities
-----------------------------------------------
Net cash used in operating activities (5,587,137) ( 10,816,574) (28,447,617)
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (84,745) (464,829) (1,352,607)
Net proceeds from acquisition 1,239,162
-----------------------------------------------
Net cash used in investing activities (84,745) (464,829) (113,445)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance
costs 3,475,621 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) (2,599,967)
-----------------------------------------------
Net cash provided by financing activities 5,016,491 4,652,488 28,644,013
-----------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (655,391) (6,628,915) 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 $ 82,951
===============================================
The accompanying notes are an integral part of these financial statements
F-20
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
$131.6 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 thousand in cash
and cash equivalents, and a working capital deficit of $13.6 million. 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.
F-21
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 and 2001 as follows:
2002 2001
Unfunded research and development $ 7,244,820 $ 11,442,000
Research and development costs 331,956 2,838,000
Funding received (331,956) (1,556,000)
------------ ---------------
$ 7,244,820 $ 12,724,000
============ ===============
F-22
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
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.
F-23
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 and 2001.
Accordingly, the Company's comprehensive income (loss) is the same as its net
income (loss) for all periods presented.
F-24
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 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
----------------------------------------------- --------------------- ---------------------
----------------------------------------------- --------------------- ---------------------
Net loss applicable to common stockholders',
as reported $ (14,912,711) $(68,486,735)
----------------------------------------------- --------------------- ---------------------
Adjust: Stock-based employee compensation
expense determined under fair value method (1,225,884) (992,265)
----------------------------------------------- --------------------- ---------------------
Pro forma net loss $ (16,138,595) $ (69,479,000)
----------------------------------------------- --------------------- ---------------------
Net loss per share applicable to common stockholders':
----------------------------------------------- --------------------- ---------------------
Basic and diluted, as reported $ (0.51) $ (2.73)
----------------------------------------------- --------------------- ---------------------
Basic and diluted, pro forma $ (0.55) $ (2.77)
----------------------------------------------- --------------------- ---------------------
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 and 2001.
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
------------------------------------------- --------------- ---------------
Term (years) 5 3
------------------------------------------- --------------- ---------------
Volatility 150% 128%
------------------------------------------- --------------- ---------------
Risk-free interest rate 6.00% 5.41%
------------------------------------------- --------------- ---------------
Dividend yield 0% 0%
------------------------------------------- --------------- ---------------
Weighted-average fair value per
option $ 0.35 $ 2.72
------------------------------------------- --------------- ---------------
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.
F-25
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.
F-26
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.
F-27
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.
F-28
Note 3 - Receivables
Receivables consist of the following:
December 31,
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 Process 48,831 29,920
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.
F-29
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. Notes 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 Debenture
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,
F-30
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.
F-31
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
F-32
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.
F-33
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
F-34
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 and
2001 is summarized as follows:
Weighted
Average
Shares Exercise Price
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
Options granted 4,788,722 0.40
Options exercised --
Options cancelled (2,440,358) 2.11
-----------
Outstanding at December 31, 2002 5,893,085
===========
At December 31, 2002, there were 6,915 shares a vailable 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.
F-35
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.
F-36
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.
F-37
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)
F-38
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.
F-39
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from the
information contained in this prospectus. This document may only be used where
it is legal to sell the securities. The information in this document may only be
accurate on the date of this document.
UP TO 7,654,636 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 2
Risk Factors 4
Use Of Proceeds 10 eMagin Corporation
Market For Common Equity And Related Stockholder
Matters 10
Management's Discussion And Analysis Or Plan Of
Operation 11
Business 18
Management 35
Certain Relationships And Related Transactions 43 ________________
Security Ownership Of Certain Beneficial Owners
And Management 45 PROSPECTUS
----------------
Description Of Securities 48
Plan Of Distribution 49
Selling Stockholders 51
Legal Matters 56
Experts 56
Available Information 57
Index To Financial Statements F-1 February 12, 2004