UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NO. 001-15751
eMagin Corporation
(Name of Small Business Issuer in Its Charter)
Delaware 56-1764501
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10500 N.E. 8th Street, Suite 1400, Bellevue, WA 98004
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(Address of Principal Executive Offices) (Zip Code)
(425) 749-3600
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(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.001 Par Value Per Share
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days: Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Our revenues for our most recent fiscal year were $3,592,867.
There are 81,872,176 shares outstanding as of March 28, 2005. The aggregate
market value of the issued and outstanding common stock held by non-affiliates
of eMagin based upon the closing price of the common stock as quoted on the
American Stock Exchange on March 28, 2005 of $0.94 was approximately
$33,808,903.
There were 79,638,817 shares of common stock outstanding, as of December 31,
2004.
EXPLANATORY NOTE: This Amended Form 10-KSB/A is being filed for the purpose of
amending the form on which the Company previously filed its Form 10-KSB/A for
the fiscal year ended December 2004 filed by the Company on May 2, 2005. This
amended Form 10-KSB/A is being filed for the sole purpose of modifying Exhibits
31.1 and 31.2 Certification Pursuant to Sarbanes-Oxley Section 302 to complete
the statement under 5(a) by including the term: material weaknesses under 5(a).
In all other material respects this Amended Form 10-KSB/A is unchanged from the
Form 10-KSB/A filed by the Company on May 2, 2005.
In addition, we are revising Item 8A, Controls and Procedures, to disclose that
the Company's management believes that its controls and procedures were not
effective as of the end of the period covered by this report due to the
restatements to the Company's financial statements as set forth above.
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FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX
PART I
Page
Item 1. Description of Business...................................................4
Item 2. Description of Property...................................................22
Item 3. Legal Proceedings.........................................................22
Item 4. Submission of Matters to a Vote of Security Holders.......................22
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters and Small Business Issuer Purchases
of Equity Securities......................................................22
Item 6. Management's Discussion and Analysis or Plan of Operation.................24
Item 7. Financial Statements......................................................F-1
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................36
Item 8A. Controls and Procedures...................................................36
Item 8B. Other Information.........................................................36
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(A) of the Exchange Act.........................37
Item 10. Executive Compensation....................................................40
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...........................................42
Item 12. Certain Relationships and Related Transactions............................43
Item 13. Exhibits..................................................................46
PART IV
Item 14. Principal Accountant Fees and Services....................................48
SIGNATURES...............................................................................46
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this annual report, references to "eMagin Corporation," "eMagin," "Virtual
Vision," "the Company," "we," "us," and "our" refer to eMagin Corporation and
its subsidiary.
Except for the historical information contained herein, some of the statements
in this Report contain forward-looking statements that involve risks and
uncertainties. These statements are found in the sections entitled "Business,"
"Management's Discussion and Analysis or Plan Operations," and "Risk Factors."
They include statements concerning: our business strategy; expectations of
market and customer response; liquidity and capital expenditures; future sources
of revenues; expansion of our proposed product line; and trends in industry
activity generally. In some cases, you can identify forward-looking statements
by words such as "may," "will," "should," "expect," "plan," "could,"
"anticipate," "intend," "believe," "estimate," "predict," "potential," "goal,"
or "continue" or similar terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including, but
not limited to, the risks outlined under "Risk Factors," that may cause our or
our industry's actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. For example, assumptions that could cause actual results to vary
materially from future results include, but are not limited to: our ability to
successfully develop and market our products to customers; our ability to
generate customer demand for our products in our target markets; the development
of our target markets and market opportunities; our ability to manufacture
suitable products at competitive cost; market pricing for our products and for
competing products; the extent of increasing competition; technological
developments in our target markets and the development of alternate, competing
technologies in them; and sales of shares by existing shareholders. Although we
believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Unless we are required to do so under US federal securities
laws or other applicable laws, we do not intend to update or revise any
forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
eMagin Corporation designs, develops, manufactures, and markets virtual
imaging products which utilize OLEDs, or organic light emitting diodes,
OLED-on-silicon microdisplays and related information technology solutions. We
integrate OLED technology with silicon chips to produce high-resolution
microdisplays smaller than one-inch diagonally which, when viewed through a
magnifier, create virtual images that appear comparable in size to that of a
computer monitor or a large-screen television. Our products enable our original
equipment manufacturer, or OEM, customers to develop and market improved or new
electronic products. We believe that virtual imaging will become an important
way for increasingly mobile people to have quick access to high resolution data,
work, and experience new more immersive forms of communications and
entertainment.
Our first commercial product, the SVGA+ (Super Video Graphics Array plus 52
added columns of data) OLED microdisplay was initially offered for sampling in
2001, and our first SVGA-3D (Super Video Graphics Array plus built-in
stereovision capability) OLED microdisplay was shipped in early 2002. We have
now accepted purchase agreements for larger quantities of our commercial
microdisplay products and virtual imaging subsystems which combine displays with
lenses. These products are being applied or considered for near-eye and headset
applications in products such as entertainment and gaming headsets, handheld
Internet and telecommunication appliances, viewfinders, and wearable computers
to be manufactured by OEM customers for military, medical, industrial, and
consumer applications. We market our products in North American, Europe, and
Asia.
Our OLED-on-silicon microdisplays offer a number of advantages over current
liquid crystal microdisplays, including increased brightness, lower power
requirements, less weight and wider viewing angles. Using our active matrix OLED
technology, many computer and video electronic system functions can be built
directly into the OLED-on-silicon microdisplay, resulting in compact systems
with expected lower overall system costs relative to alternate microdisplay
technologies. We have developed our own technology to create high performance
OLED-on-silicon microdisplays and related optical systems and we have licensed
certain fundamental OLED and display technology from Eastman Kodak.
As the first to exploit OLED technology for microdisplays, and with the
support of our partners and the development of our intellectual property, we
believe that we enjoy a significant advantage in the commercialization of this
display technology for virtual imaging. We are the only company to sell
full-color active matrix small molecule OLED-on-silicon microdisplays. In
January 2005 we announced the world's first personal display system to combine
OLED technology with head-tracking and 3D stereovision, the Z800 3D Visor.
Our sub-system group, which produces our headsets, offers value added
services to our customers by providing custom engineering support for virtual
imaging subsystem design and prototyping, as well as by creating standardized
optical and electronics interfaces for our displays that accelerate the time to
market for products offered by our new potential customers.
eMagin Corporation was created through the merger of Fashion Dynamics
Corporation ("FDC"), which was organized on January 23, 1996 under the laws of
the State of Nevada and FED Corporation ("FED") a developer and manufacturer of
optical systems and microdisplays for use in the electronics industry. FDC had
no active business operations other than to acquire an interest in a business.
On March 16, 2000, FDC acquired FED. The merged company changed its name to
eMagin Corporation. Following the Merger, the business conducted by the Company
is the business conducted by FED prior to the Merger.
Our website is located at www.emagin.com. We make available on our website,
free of charge, our annual report on Form 10KSB, our proxy statement, our
quarterly reports on Form 10QSB, our current reports on Form 8K, amendments to
reports filed under the Securities and Exchange Act, earnings press releases,
and other business-related press releases. We also post on our website the
charters of our Audit, Compensation, and Governance and Nominating committees,
our Codes of Ethics and any amendments of or waiver to those codes of ethics,
and other corporate governance materials recommended by the Securities and
Exchange Commission and the American Stock Exchange as they occur.
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Industry Overview
The overall flat panel display industry is predicted to grow to
approximately $70 billion by 2008, according to market research by DisplaySearch
(Q4, 2004 Survey); iSuppli/Stanford Resources is projecting slightly higher
sales of $95 billion (Q1 2005 Forecast Update), with OLED sales of $2.25 billion
and a compound annual growth rate of 51.5%. Within the flat panel industry there
are various sizes and applications of flat panel displays, ranging from wall
size signage to calculator and viewfinder displays. Displays are sold as
independent products (such as flat TVs) or as components of other systems (such
as laptop computers). Our products target one segment of the flat panel industry
which is known as near-to-the-eye or near-eye microdisplays because they are
viewed through a lens rather than directly, in comparison to desktop computer
screens which are know as direct view displays.
Near-eye virtual imaging using microdisplays are used in small optically
magnified devices such as video headsets, camcorders, viewfinders and other
portable devices. Microdisplays are typically of such high resolution that they
are only practically viewed with magnifying optics. Although the displays are
typically physically smaller than a postage stamp, they can provide a magnified
viewing area similar to that of a full size computer screen. For example, when
magnified through a lens, a high-resolution 0.6-inch diagonal display can appear
comparable to a 19 to 21-inch diagonal computer screen at about 2 feet from the
viewer or a 60-inch TV screen at about 6 feet. One version of our display and
optic recreates the virtual imaging viewing and sound experience of sitting in
the middle seat of a typical movie theater.
The microdisplay market, according to McLaughlin Consulting Group in a
report issued in its Microdisplay Forecast Report 2004, is expected to grow from
$1.2 billion in 2003 to at least $4 billion in 2008. Insight Media and the
McLaughlin Consulting Group predict particularly significant growth in one
segment of that market - consumer products. Their joint "Personal Displays:
Opportunity Analysis and Forecast 2004" focuses microdisplay-enabled personal
electronics for consumers as well as professionals in vertical markets and
projects growth in this segment from $73 million in 2004 to $1 billion market by
2008.
We believe that the most significant driver of the near-eye virtual imaging
microdisplay market is growing consumer demand for mobile access to larger
volumes of information and entertainment in smaller packages. This desire for
mobility has resulted in the development of near-eye microdisplay products in
two general categories: (i) an established market for electronic viewers
incorporated in products such as viewfinders for digital cameras and video
cameras which may potentially also be developed as personal viewers for cell
phones and (ii) an emerging market for headset-application platforms which
include accessories for mobile devices such as notebook and sub-notebook
computers, portable DVD systems, electronic games, and other entertainment, and
wearable computers.
Until now, near-eye virtual imaging microdisplay technologies have not
simultaneously met all of the requirements for high resolution, full color, low
power consumption, brightness, lifetime, size and cost which are required for
successful commercialization in OEM consumer products. We believe that our new
OLED-on-silicon microdisplay product line meets these requirements better than
alternative products and will help to enable virtual imaging to emerge as an
important display industry segment.
Our Approach: OLED-on-Silicon Microdisplays and Optics
There are two basic classes of organic light emitting diode, or OLED,
technology, dubbed single molecule or small molecule (monomer) and polymer. Our
microdisplays are currently based upon active matrix molecular OLED technology,
which we call OLED-on-silicon because we build the displays directly on silicon
chips. Our OLED-on-silicon technology uniquely permits millions of individual
low-voltage light sources to be built on low-cost, silicon computer chips to
produce single color, white, or full-color display arrays. OLED-on-silicon
microdisplays offer a number of advantages over current liquid crystal
microdisplays, including increased brightness, lower power requirements, less
weight and wider viewing angles. Using our OLED technology, many computer and
video electronic system functions can be built directly into the silicon chip,
under the OLED film, resulting in very compact, integrated systems with lowered
overall system costs relative to alternative technologies.
5
We have developed our own proprietary and patented technology to create
high performance OLED-on-silicon microdisplays and related optical systems and
we license fundamental OLED technology from Eastman Kodak. (See "Intellectual
Property" and "Strategic Relationships"). We expect that the integration of our
OLED-on-silicon microdisplays into mobile electronic products will result in
lower overall system costs to our OEM customers.
We believe that our OLED-on-silicon microdisplays will initiate a new
generation of virtual imaging products that could have a profound impact on many
industries. Headsets providing virtual screens surrounding the user in a sphere
of data become a practical reality with our displays and a low cost head
tracker. Because our microdisplays generate and emit light, they have a wider
viewing angle than competing liquid crystal microdisplays, and because they have
the same high brightness at all forward viewing angles, our microdisplays permit
a large field-of-view and superior optical image.
The wider viewing angle of our display results in the following superior
optical characteristics:
o the user does not need to as accurately position the head-wearable
display to the eye;
o the image will change minimally with eye movement and appear more
natural; and
o the display can be placed further from the eye and not cut off part of
the image.
In addition, our OLED-on-silicon microdisplays offer faster response times
and use much less power than competitive liquid crystal microdisplay systems.
Our subsystem-level power consumption is so low that two SVGA, full color, full
speed motion video computer displays can easily be run in stereovision off the
power from a single USB port on a portable computer. Battery life is extended or
weight is greatly reduced in systems using our products.
Our SVGA+ OLED microdisplay stores all the color and luminance value
information at each of the more than 1.5 million picture elements, or pixels,
between refresh cycles in the display array, eliminating the flicker or color
breakup seen by most other high-resolution microdisplay technologies. Even power
efficient frame rates as low as 30 Hz can usually be used effectively. Power
consumption at the system level is expected to be the lowest of any full-color,
full-video SVGA resolution range, large view microdisplay on the market. The
OLED's ability to emit light at wide angles allows customers to create large
field of view (approx. 40 degrees), wide image capture range images from very
compact, low-cost, one-piece optical systems. The display contains the majority
of the electronics required for connection to the RGB (red, green, blue signal)
port of a portable computer imbedded in its silicon chip backplane, thereby
eliminating many other components required by other display technologies such as
digital-analog converters, application-specific integrated circuits (ASICs),
light sources, multiple optical elements, and other components. We believe that
these features will enable our new class of microdisplay to potentially be the
most compact, highest image quality, and lowest cost solution for high
resolution near-eye applications, once they are in full production.
We have commercialized two OLED microdisplay products, our SVGA+ resolution
microdisplay, which contains 1.53 million picture elements, and our
stereovision-capable SVGA-3D microdisplay, which contains 1.44 million picture
elements. 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 PC
Interface Kits and Developer Kits, which include a microdisplay and associated
electronics to help OEMs evaluate our microdisplay products and to assist their
efforts to build and test new products incorporating our microdisplays. We are
commencing manufacturing of a personal display system, Z800 3D Visor for PCs,
which incorporates eMagin OLED display stereovision with head tracking
capability.
Our Product Lines
We offer our products to OEMs and other large volume buyers as both
separate components and integrated bundles in a three-tiered platform. We
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believe that our strategy of offering our products both as separate components
and as integrated bundles that include microdisplays and lenses will allow us to
address the needs of the largest number of potential customers.
(1) OLED-on-silicon microdisplays for integration into near-eye virtual
imaging OEM products for consumer, industrial, and military markets;
(2) Microviewer(TM) near-eye virtual imaging modules that incorporate our
OLED-on-silicon microdisplays with compact lenses and electronic interfaces for
integration into OEM products for consumer, industrial, and military markets. We
have shipped customized microviewer modules to several customers, some of which
have incorporated our products into their own commercially available products;
(3) Head-wearable near-eye virtual imaging display systems that will
incorporate our Microviewers(TM) for consumer and industrial markets.
We also offer engineering support and a variety of support products,
including developer kits and PC interface kits, to enable customers to quickly
integrate our products into their own product development programs.
Our Products
(1) OLED Microdisplay Products
We serve as a component manufacturer by supplying our OLED-on-silicon
microdisplays for those customers who have their own lenses or integrated
circuits. Our first commercial microdisplay products are based on our "SVGA
series" OLED microdisplays. We expect to offer our SXGA OLED microdisplay during
early 2006. This is a new design effort for a smaller, lower cost, full-color
SXGA. We have experienced several short delays in the design phase which is
normal, and to be expected in a research and development process. The table
below provides a partial listing of the display products, or in the late stages
of development.
OLED Microdisplays:
Microdisplay Description Resolution Color Size
Product Numbers (pixels) (diagonal)
EMA-100080 SVGA+ OLED microdisplay 852x3x600 color 0.62 inch
EMA-100100 SVGA+ OLED microdisplay 852x3x600 white 0.62 inch
EMA-100116 SVGA+ OLED microdisplay 852x3x600 yellow 0.62 inch
EMA-100110 SVGA+ OLED microdisplay 852x3x600 green 0.62 inch
EMA-100052 SVGA 3D OLED microdisplay 800x3x600 color 0.59 inch
TBD SVGA 3DS OLED microdisplay 800x3x600 various 0.42 inch
TBD SXGA OLED microdisplay 1280x3x1024 various 0.62 inch
TBD QVGA OLED microdisplay 320x3x240 various 0.24 inch
0.62-inch Diagonal SVGA+ (Super Video Graphics Array plus 52 added columns
of data) for Consumer OEMs. This display has a resolution of 852 x 3 x 600
pixels, and was dubbed "SVGA+" because it has 52 more display columns than a
standard SVGA display. The design permits users to run either (1) standard SVGA
(800 x 600 pixels) to interface to the analog output of many portable computers
or (2) 852 x 480, using all the data available from a DVD player in a 16:9 wide
screen entertainment format. The SVGA+ can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as games, video/data head-wearable displays, digital cameras, video cameras
and other portable electronics applications. The display also has an internal
NTSC monochrome video decoder for low power night vision systems. This product
is designed to interface with most portable personal computers.
0.59-inch Diagonal SVGA-3D (Super Video Graphics Array plus built-in
stereovision capability) for Consumer OEMs. This display has a resolution of 800
x 3 x 600 pixels. The SVGA-3D can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as personal computer games and video/data head-wearable displays, but is
also designed to be applicable for digital cameras, video cameras and other
portable electronics applications since the 3D feature is optional. A built-in
circuit provides compatibility with single channel frame sequential stereoscopic
vision without additional external components. In high volumes, the SVGA-3D is
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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.
Under Development - 0.62-inch Diagonal SXGA (Super eXtended Video Graphics
Array) for consumer, industrial, medical and military applications. We are
developing a full color SXGA microdisplay product as a personal
computer-compatible headset display for a large spectrum of applications. We
anticipate that prototypes of this display will become available for sampling in
early 2006. This product will have 1280 x1024 triad color pixels and an active
diagonal similar to that of the SVGA+ microdisplay. It will include luminance
and dimming ranges compatible with the demands of Military applications as well
as those of high-end consumer and industrial markets. Even though this SXGA is
not expected to be a high volume production item, we anticipate that its
performance features combined with a small package will generate a considerable
interest and serve as a catalyst for the development of new applications
Under Development - With our partner Rohm Corporation of Japan we are
developing a new QVGA (Quarter Video Graphics Array) viewfinder microdisplay
with 320x240 resolution for camcorders, digital cameras, web phones, and low end
games.
OLED Microdisplay Kits:
Kit Product Number Description Available colors
EMA-100119 SVGA+ Monocular Developer Kit Color, white, yellow, green
EMA-100120 SVGA+ Binocular Developer Kit Color, white, yellow, green
EMA 100125 SVGA 3D Monocular Developer Kit Color, white, yellow, green
EMA-100126 SVGA 3D Binocular Developer Kit Color, white, yellow, green
EMA-100121 HB High Bright Monocular Developer Kit Yellow
EMA-100135 SVGA Series Monocular PC Interface Kit Color, white, yellow, green
EMA-100136 SVGA Series Binocular PC Interface Kit Color, white, yellow, green
Developer Kit. The multi-functional Developer Kit provides a menu selection
of resolution, frequency, image flip, monochrome operation, gain, and offset. It
also provides NTSC RS-170 video composite input for SVGA+ (monochrome only). An
optional serial-to-I2C adapter provides direct loading and interrogation of
display registers located on the display chip.
The PC Interface Kit provides a simple RGB interface with image flipping
for SVGA+ and SVGA-3D displays, and automatic stereovision signal recognition
for SVGA-3D displays. Interface kits can be provided configured with or without
displays.
(2) Microviewer(TM) Products Incorporating Lenses
By providing an integrated solution of a complete microdisplay and lens
assembly to integrate into OEM customers' end product design, OEM customers can
avoid incurring expensive optics design and tooling costs. Different lens and
microdisplay specifications can be mixed and matched to be adapted to many end
products.
We have developed advanced lens technology for several applications and
believe we hold key patents on certain low cost, high performance lens
technology for microdisplay applications. Our lens technology permits our
OLED-on-silicon microdisplays to provide large field of view images that can be
viewed for extended periods with reduced eye-fatigue.
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We intend to sell Microviewer(TM) modules to OEMs for integration with
their branded products. 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 time required to develop, or integrate a third party high performance lens
system. Custom microviewer products incorporated into specially designed modules
are currently being sold to OEMs, including Sage Technologies, Night Vision
Equipment Corporation, and Total Fire Group.
Molded plastic prism lenses have been developed under eMagin direction to
help our commercial and consumer OEM customers obtain better quality, large area
virtual images using our displays at relatively low cost to alternate
approaches. First sample lens were shipped to select customers for evaluation in
February 2005.
(3) Head-Wearable and Headset Systems
Personal Viewer(TM) [IP COUNSEL SHOULD CHECK STATUS OF TRADEMARKS]
head-wearable systems, such as our Z800 3D Visor (R) and our prototype eGlass(R)
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
distributors, direct sales and our e-commerce website which is under
development.
Our Market Opportunity
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The growth potential of our selected target market segments have been
investigated using information gathered from key industry market research firms,
including DisplaySearch, Frost and Sullivan, Fuji-Chimera, International Data
Corporation, Nikkei, SEMI, Stanford Resources-iSuppli and others. Such data was
obtained using published reports and data obtained at industry symposia. We have
also relied substantially on market projections obtained privately from industry
leaders, industry analysts, and potential customers.
We believe that the consumer oriented, virtual-imaging market is
characterized by about 20 large OEMs that, collectively, dominate 90% of the
market. The non-consumer market consists of niches - industrial, medical,
military, arcade games, 3-D CAD/Virtual Reality, and wearable computers. Within
each of these market sectors, we believe that our microdisplays, when combined
with compact optic lenses, will become a key component for a number of mobile
electronic products. We are targeting the following applications:
(1) Near-Eye Viewers for Digital Cameras, Camcorders and Hand-held Internet
and Telecommunications Appliances
We believe that our microdisplays will enhance near-eye applications
in the following groups of products:
o Digital cameras and camcorders, which typically use direct view
displays at low resolution, offer a small visual image, and are
difficult to see on sunny days. According to Display Search, 41
million digital cameras and 13 million camcorders are expected to be
sold in 2005. Some of these products may incorporate microdisplays as
high-resolution viewfinders which would permit individuals to see
enlarged, high-resolution proofs immediately upon taking the picture,
giving them the opportunity to retake a poor shot.
o Mobile phones and other hand-held Internet and telecommunications
appliances which will enable users to access full web and fax pages,
data lists and maps in a pocket-sized device. According to the Fuji
Chimera Research Institute, an industry market research organization,
by 2005 the cellular phone and handheld portable digital assistant
markets will grow to 655 million units and 20 million units,
respectively. Some of these products may eventually incorporate our
microdisplays. In order for the high-resolution wireless
telecommunications market to develop, Generation 3 (G3) high-speed
data transmission must become widely available. The current cost and
limited availability of broadband services has impeded the development
of this market, but several telecommunication companies have prototype
programs in progress which incorporate our microdisplay products.
For each of these applications, we anticipate that our microdisplays,
combined with compact optic lenses, will offer higher resolution, lower power
and system cost and achieve larger images than are currently available in the
consumer market. As a result, we believe that we can obtain a sizeable share of
the market for the display components of these mobile electronic products.
(2) Head-wearable Display Platforms
Head-wearable displays incorporate microdisplays mounted in or on
eyeglasses, goggles, simple headbands, helmets, or hardhats, and are often
referred to as head-mounted displays (HMDs) or headsets. Head-wearable displays
may block out surroundings for a fully immersive experience, or be designed as
"see-through" or "see-around" to the user's surroundings. They may contain one
(monocular) or two (binocular) displays. Some of the increased current interest
is due to accelerating the timetable to adapt such systems to military
applications such as night vision and fire and rescue applications. These have
military, commercial, and consumer applications.
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
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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 and soldier
applications, including the US Army Land Warrior 1.0 and 2.0 programs, and
Stryker Interoperative, and the US Air Force Joint Strike Fighter and Lil Hal
Digital Kneeboard, among others. Land Warrior, a core program in the Army's
drive to digitize the battlefield, is an integrated digital system that
incorporates computerized communication, navigation, targeting and protection
systems for use by the twenty-first century infantry soldier. Kaiser
Electro-Optics, a Rockwell Collins company and the principal contractor for the
US Army's Land Warrior HMD system, and eMagin will apply their respective
expertise in HMD and imaging technology to develop rugged, yet lightweight and
energy efficient products meeting the requirements of tomorrow's soldier. The US
Army expects to initially equip more than 40,000 soldiers with the Land Warrior
system. The current overall redesign of the Land Warrior system by General
Dynamics and Rockwell Collins has delayed increased volume use of displays
beyond small quantities for that program until a future date to be determined.
Our display is also used in Kaiser Electro-Optics, Inc.'s commercially available
ProView S035 Monocular HMD. Night Vision Equipment Corporation's
HelmetIR-50(TM), a lightweight, military helmet mounted thermal imager, which
provides hands-free operation and allows viewers to see through total darkness,
battlefield obscurants, and even foliage, is the first OLED-equipped product to
be listed on the US Government's GSA schedule. Our displays have been
commercialized, or planned to be commercialized, by military systems integrators
including Insight Technologies, Elbit, Thales, and Sagem. We cannot assure that
the Government will remain on schedule, or be fully implemented. 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; endoscopic surgery; and real-time viewing
of images and data for a variety of applications. As one potential example, a
user wearing a HMD while using test equipment, such as oscilloscopes, can view
technical data while simultaneously probing printed circuit boards. Commercial
products in these sectors include Sage Technologies, Ltd.'s Helmet Vue (TM)
Thermal Imaging System and Liteye's 500, developed as an upcoming accessory to
Antelope Technologies' MCC Wearable Computing system, which incorporates IBM's
wearable PC technology. VRmagic GmbH, a leading developer of virtual reality
simulators, is using our OLED microdisplays in their EYESI(TM) Virtual Reality
Surgical Simulator, which provides real-time simulation of ophthalmic surgery,
high performance biomechanical tissue simulation, precision tracking, and
realistic stereo imaging. Sensics has incorporated our OLED displays in their
immersive SkyVizor (TM) virtual reality headset to serve as the "eyes" of the
Robonaut, a humanoid robot being developed by NASA and DARPA. The Robonaut
system can work side by side with humans, or alone in high-risk situations.
Telepresence uses virtual reality display technology to visually immerse the
operator into the robot's workspace, facilitating operation and interaction with
the Robonaut, and potentially reducing the number of dangerous space walks
required of real astronauts.
Consumer
We believe that our head-wearable display products will enhance the
following consumer products:
o Entertainment and gaming video headset systems, which permit
individuals to view television, including HDTV, video CDs, DVDs and
video games on virtual large screens or stereovision in private
without disturbing others. Even though entertainment and gaming
headsets represent an emerging product class, we are seeing demand
from OEMs. Headset game systems for portable computers with head
tracking and/or stereovision appears to be our predominant high
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quantity near term market opportunity, with several customers
indicating an interest in large production quantities of our displays.
Our current SVGA-3D display was designed specifically for this market.
We believe that these new headset game systems can provide a game or
telepresence experience not otherwise practical using conventional
direct view display technology. We expect low cost to be important for
success in this field, and expect our product cost to decrease in high
quantity production. At the 2004 Consumer Electronics Show, Leadtek
Research Inc. (Taiwan) announced that it was planning to introduce a
consumer HMD using eMagin SVGA-3D displays. The product is currently
under development. At the 2005 Consumer Electronics Show, we announced
our Z800 3D Visor (R), the world's first personal viewer to combine
OLEDs, stereovision, and head tracking.
o Notebook computers, which can use head-wearable devices to reduce
power as well as expand the apparent screen size and increase privacy.
Current notebook computers do not use microdisplays. Our products can
apply not only to new models of notebook computers, but also as
aftermarket attachments to older notebooks still in use. The display
can be easily used as a second monitor on notebook computers for ease
of editing multiple documents to provide multiple screens or for data
privacy while traveling. It can also be used to provide larger screen
capability for viewing spreadsheets or complex computer aided design
(CAD) files. We expect to market our head-wearable displays to be used
as plug-in peripherals to be compatible with most notebook computers.
We believe that the SVGA-3D microdisplay is well suited for most
portable PC headsets. Our microdisplays can be operated using the USB
power source of most portable computers. This eliminates added power
supplies, batteries, and rechargers and reduces system complexity and
cost.
o Handheld personal computers, whose small, direct view screens are
often limitations, but which are now capable of running software
applications that would benefit from a larger display. Microdisplays
can be built into handheld computers to display more information
content on virtual screens without forfeiting portability or adding
the cost a larger direct view screen. Microdisplays are not currently
used in this market. We believe that GPS viewers and other novel
products are likely to develop as our displays become more available.
o Highly compact wearable computers and personal digital assistants, or
PDAs using video headsets as screens can be made possible by
high-resolution microdisplays. A lightweight pocketsize computer that
is less than one pound can potentially be created with a foldout
keyboard, compact input device, or voice actuation and a headset that
provides a near-desktop personal computer experience.
The combination of power efficiency, high resolution, low systems cost,
brightness and compact size offered by our OLED-on-silicon microdisplays has not
been made available to makers and integrators of existing entertainment and
gaming video headset systems, notebook computers and handheld computers. We
believe that our microdisplays will catalyze the growth of new products and
applications such as lightweight wearable computer systems.
Selected Applications by Market Sector
------------------------------------------- ------------------------------------------------
Sector Representative Applications
------------------------------------------- ------------------------------------------------
Portable Computer Peripheral |X| Notebook and SuperSubnotebook computer headsets
|X| Miniature data viewers
------------------------------------------- ------------------------------------------------
Entertainment |X| Games
|X| Headset Television/DVDs
------------------------------------------- ------------------------------------------------
Industrial, Medical, & |X| Surgery and Dentistry
Administration |X| Industrial Control and Safety
|X| Emergency Services
|X| Inventory and Retail
|X| Institutional Control
|X| Maintenance (Industry & Consumer)
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|X| Communications
|X| Finance
|X| Education and Training
------------------------------------------- ------------------------------------------------
Military |X| Communications
|X| Targeting and Enhanced Vision
|X| Night Vision
|X| Handheld & Headmount Equipment
|X| Body worn displays
|X| Avionics (Helmet mount)
|X| Ground and Water Vehicles
|X| Maintenance & Training
|X| Special Applications
------------------------------------------- ------------------------------------------------
Telecommunications, Handheld, |X| Cell Phones/Headset phones
and Small Instruments |X| Handheld & Portable Internet Viewers
|X| Smart Appliances & Instruments
------------------------------------------- ------------------------------------------------
Advanced Computer |X| CAD/CAM
Applications |X| Virtual Reality and Simulations
|X| Ultra-High Resolution
|X| Telepresence
------------------------------------------- ------------------------------------------------
Our Strategy
Our strategy is to establish and maintain a leadership position as a
worldwide supplier of microdisplays and virtual imaging technology solutions for
applications in high growth segments of the electronics industry by capitalizing
on our leadership in both OLED-on-silicon technology and microdisplay lens
technology. We aim to provide microdisplay and complimentary accessories to
enable OEM customers to develop and manufacture new and enhanced electronic
products. Some key elements of our strategy to achieve these objectives include
the following:
o Leverage our superior technology to establish a leading market
position. As the first to exploit OLED-on-silicon microdisplays, we
believe that we enjoy a significant advantage in bringing this
technology to market.
o Develop products for large consumer markets via key relationships with
OEMs. Our relationships with OEMs whose products use microdisplays
have allowed us to identify initial microdisplay products to be
produced for entertainment, industrial, and military headsets, to be
followed by other applications such as digital cameras, camcorders and
hand-held Internet and telecommunications appliances. We target
markets which we believe to have long-term growth potential.
o Optimize manufacturing efficiencies by outsourcing while protecting
proprietary processes. We intend to outsource certain portions of
microdisplay production, such as chip fabrication, to minimize both
our costs and time to market. We intend to retain the OLED application
and OLED sealing processes in-house. We believe that these areas are
where we have a core competency and manufacturing expertise. We also
believe that by keeping these processes under tight control we can
better protect our proprietary technology and process know-how. This
strategy will also enhance our ability to continue to optimize and
customize processes and devices to meet customer needs. By performing
the processes in-house we can continue to directly make improvements
in the processes, which will improve device performance. We also
retain the ability to customize certain aspects such as color balance,
which is known as chromaticity, as well as specialized boards or
interfaces, and to adjust other parameters at the customer's request.
In the area of lenses and head-wearable displays, we intend to focus
on design and development, while working with third parties for the
manufacture and distribution of finished products. We intend to
prototype new optical systems, provide customization of optical
systems, and manufacture limited volumes at our subsidiary, Virtual
13
Vision, but intend to outsource high volume manufacturing operations.
There are numerous companies that provide these outsource services.
o Build and maintain strong internal design capabilities. As more
circuitry is added to OLED-on-silicon devices, the cost of the end
product using the display can be decreased; therefore integrated
circuit design capability will become increasingly important to us. To
meet these requirements, we intend to develop in-house design
capabilities. Building and maintaining this capacity will allow us to
reduce engineering costs, accelerate the design process and enhance
design accuracy to respond to our customers' needs as new markets
develop. In addition, we intend to maintain a product design staff
capable of rapidly developing prototype products for our customers and
strategic partners. Contracting third party design support to meet
demand and for specialized design skills will also remain a part of
our overall long term strategy.
Our Strategic Relationships
Strategic relationships have been an important part of our research and
development efforts to date and are an integral part of our plans for commercial
product launch. We have forged strategic relationships with major OEMs and
strategic suppliers. We believe that strategic relationships allow us to better
determine the demands of the marketplace and, as a result, allow us to focus our
future research and development activities to better meet our customer's
requirements. Moreover, we expect to provide microdisplays and Microviewers(TM)
to some of these partners, thereby taking advantage of established distribution
channels for our products.
Eastman Kodak is a technology partner in OLED development, OLED materials,
and a potential future customer for both specialty market display systems and
consumer market microdisplays. We license Eastman Kodak's OLED and optics
technology portfolio. We have a nonexclusive; perpetual, worldwide license to
use Eastman Kodak patented OLED technology and associated intellectual property
in the development, use, manufacture, import and sale of microdisplays. The
license covers emissive active matrix microdisplays with a diagonal size of less
than 2 inches for all OLED display technology previously developed by Kodak. An
annual minimum royalty is paid at the beginning of each calendar year and is
fully creditable against the royalties we are obligated to pay based on net
sales throughout the year. Eastman Kodak and eMagin have engaged in numerous
discussions regarding potential product applications for eMagin's microdisplays
by Eastman Kodak.
We have an agreement with Rohm Corporation of Japan to develop two new
products: an enhanced version of our SVGA-3D microdisplay with new imbedded
features for consumer head-mounted displays and high resolution games, and a new
QVGA and/or VGA viewfinder microdisplay for camcorder and digital cameras, web
phones, and low end games.
We are working cooperatively with the US Army and with several military
system integrators to further characterize operation of our displays in rugged
military environments.
We are a member of the United States Display Consortium, a cooperative
agency of display and related technology manufacturers whose charter is to
support continued progress of the display industry. We intend to continue to
establish additional strategic relationships in the future.
Our Technology Platforms
OLED-on-Silicon Technology
Scientists working at Eastman Kodak invented OLEDs in the early 1980s.
OLEDs are thin films of stable organic materials that emit light of various
colors when a voltage is impressed across them. OLEDs are emissive devices,
which mean 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
14
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.
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
15
backlight or front light, as required for liquid crystal displays, is required.
OLEDs can be energy efficient because of their high efficiency light generation.
Furthermore, OLEDs conserve power by powering only those pixels that are on
while liquid crystal on silicon requires light at all pixels all the time. Most
optical systems used for our OLEDs are highly efficient, permitting over 80% of
the light to reach the eye, whereas reflective technologies such as liquid
crystal on silicon require multiple beam splitters to get light to the display,
and then into the optical system. This results in typically less than 25% light
throughput efficiency in reflective microdisplay systems. Most important, we do
not need a power-hungry video frame buffer, as required in liquid crystal
frame-sequential color systems. Battery life can therefore be long.
High brightness for improved viewing. This feature can be of great value to
military applications, where there is a need to see the computer image overlaid
onto brightly lit real-life backgrounds such as desert sand, water reflections
or sunlit clouds. The OLED can be operated over a large luminance range without
loss of gray level control, permitting the displays to be used in a range of
dark environments to very bright ambient applications. Since military simulation
and situation awareness applications, including night vision, typically require
large fields of view, the OLED's Lambertian optical characteristics make it an
excellent choice.
High-speed performance resulting in clear video images. The OLEDs switch
much more rapidly than liquid crystals or most cathode ray tubes, or CRTs. This
results in smear-free video rate imagery and provides improved image quality for
DVD playback applications. This eliminates visible image smear and makes
practicable three-dimensional stereo imaging using a split frame rate. This
advantage of our OLED-on-silicon is very important for 3-D stereovision gaming
applications.
Flicker-free and no color breakup. Because the OLED-on-silicon stores
brightness and color information at each pixel, the display can be run with no
noticeable flicker and no color sequential breakup, even at low refresh rates. A
lower refresh rate not only helps reduce power, but it also facilitates system
integration. Color sequential breakup occurs in systems such as liquid crystal
on silicon and some liquid crystal display microdisplays when red, green and
blue frames are sequentially imaged in time for the eye to combine. Since the
different color screens occur at different times, movement of the eye due to
vibration or just fast pupil movement can create color bands at each dark-light
edge, making the image unpleasant to view and making text difficult to read. For
example, the liquid crystal on silicon display needs to run at least three times
the "normal" frame rate or speed to produce color sequential images, which
wastes power and makes for a difficult technological challenge as display
resolutions increase.
Wide operating temperature range. Our OLEDs offer much less temperature
sensitivity at both high and low temperatures than LCDs. LCDs are sluggish or
non-operative much below freezing unless heaters are added and lose contrast
above 50 degrees Celsius, while our OLEDs turn on instantly and can operate
between -55 degrees Celsius and 130 degrees Celsius. We specify a smaller
temperature range on most consumer products to accommodate lower 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.
Complementary Lens and System Technologies
We have developed a wide range of technologies which complement our core
OLED and lens technologies and which will enhance our competitive position in
the microdisplay and head-wearable display markets. These include:
16
Lens technology. High quality, large view lenses with a wide range for eye
positioning are essential for using our displays in near-eye systems. We have
developed advanced lens technology for microdisplays and head-wearable display
systems and hold key patents in these areas. Our lens technology permits our
OLED-on-silicon microdisplays to provide large field of view images that can be
viewed for extended periods with reduced eye-fatigue. We have engaged a firm to
manufacture our lenses in order to provide them in larger quantities to our
customers.
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. We also have access to low cost, small size, high speed
headtrackers to further enhance game and telepresence applications.
Sales and Marketing
We primarily provide display components and Microviewer(TM) display-optic
modules for OEMs to incorporate into their branded products and sell through
their own well-established distribution channels. In addition, we market
head-wearable displays directly to various vertical market channels, such as
medical, industrial, and government customers. A typical buyer is a manufacturer
of a product requiring a specific resolution of visual display or viewfinder for
insertion into a product such as a portable DVD headset, a PC-gaming headset, or
an instrument.
We market our services primarily in North America, Asia, and Europe through
direct technical sales from our headquarters. Regular purchase orders are
processed by our Customer Service Coordinator and technical questions related to
product purchases or product applications are processed by our Technical Support
Coordinator. Additional sales are generated through our sales office located in
Japan. We are in the process of selecting worldwide distributors.
17
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.
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 expect
to ship first quantities of our Z800 3D Visor personal viewer in the second
quarter of 2005.
Near term sales efforts have been focused on our military, industrial, and
medical customers. We have received production orders and design wins for both
the SVGA+ and SVGA 3D displays. To date, we have shipped products and evaluation
kits to more than 100 OEM customers. An OEM design cycle typically requires
between 6 and 24 months, depending on the uniqueness of the market and the
complexity of the end product. New product development may require several
design iterations prior to commercialization. Some of our initial customers have
completed their initial evaluation cycle and we are now receiving follow-on
orders and notification of product purchase decisions. Several customers have
indicated their intent to incorporate potentially high volumes of our
microdisplays into consumer products through 2006, pending successful completion
of their own product development efforts. We have also received notification
that our microdisplays will be used as components in versions 1.0 and 2.0 of the
US Army Land Warrior program and in the US Air Force Joint Strike Fighter
program, among other programs. (See "Our Market Opportunity: Military;
Commercial, Industrial, and Medical; and Consumer")
Customers
Customers for our products include both large multinational and smaller
OEMs. We maintain relationships with OEMs in a diverse range of industries
encompassing the military, industrial, medical, and consumer market sectors.
During 2004, 78% of our net revenue were to firms based in the United States and
22% were to international firms, compared to 70% domestic revenue and 30%
international revenue during 2003. In 2004, we had two customers that
individually accounted for more than 10% of our total net revenue. One customer
accounted for 17% of total net revenue and the other accounted for 15%. In 2003,
we had one customer that individually accounted for more than 10% of our total
net revenue. This customer accounted for 21% of total net revenue.
Backlog
The majority of our backlog consists of purchase agreements for delivery
over the next 24 months. Most purchase orders are subject to rescheduling or
cancellation by the customer with no or limited penalties. Because of the
possibility of customer changes in delivery schedules or cancellations and
potential delays in product shipments, our backlog as of a particular date may
not be indicative of net sales for any succeeding period. Lack of working
capital through the early part of 2004 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. Deliveries
of wafers and other supplies played a negative roll in our 2004 shipments due to
capacity and technical issues at our suppliers, such as our wafer supplier in
Taiwan. Some customers have experienced delays in their expected product launch
schedules due to their own product development delays not directly related to
our microdisplays, such as optics. Some new eMagin products such as plastic
prism optics, PC interfaces and cables may help customers begin their production
more quickly, but there is no guarantee that this will occur.
18
As of February 25, 2005 we had a backlog of purchase agreements of
approximately $28 million from 3 OEMs for purchases through 2007. We determined
that one customer included in the previously reported backlog has incurred
financial difficulties which will significantly delay or prevent completion of
their HMD program, so we removed $10 million from our backlog amount, some of
which was replaced by increases from another customer. Our current backlog is
comprised of 3 customers who are all in the process of completing their own
design work.
Research and Development
Near-to-the-eye virtual imaging and OLED technology are relatively new
technologies that have considerable room for substantial improvements in
luminance, life, power efficiency, voltage swing, design compactness, field of
view, optical range of visibility, headtracking options, wireless control and
many other parameters. We also anticipate that achieving reductions in
manufacturing costs will require new technology developments. We anticipate that
improving the performance, capability and cost of our products will provide an
important competitive advantage in our fast moving, high technology marketplace.
Past and current research activities include development of improved OLED and
display device structures, developing and/or evaluating new materials (including
the synthesis of new organic molecules), manufacturing equipment and process
development, electronics design methodologies and new circuits and the
development of new lenses and related systems. During 2002 and 2003 we focused
primarily on near-term product development projects related to our transition
from research to manufacturing. For example we developed a glass cover plate to
ruggedize our displays to facilitate easier handling by our OEM customers. We
also developed a new high luminance, high efficiency yellow monochrome OLED and
adapted to our SVGA+ display for see-through optic applications and began
sampling the yellow monochrome product in early 2003. However, in order to
improve customer satisfaction and simultaneously maximize our margins, as well
as to maintain competitive technology advantages, we believe that it is
important to continue to engage in long-term research and development. During
the past eight years, we have spent, net of U.S. government funding,
approximately $31 million on research and development. In 2004 we spent
approximately $0.9 million on research and development. In 2004 we continued to
research more efficient materials and processes. We also developed fiber optic
bundling technology to provide custom video sizes and resolutions, and created
what we believe the world's highest resolution OLED display and the world's
highest resolution microdisplay, the tiled UXGA display (1600x3x1200 pixels),
and DUXGA (1600x3x2400 pixels).
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. In 2004 we entered into an amended lease agreement
which extends the term of this lease to May 31, 2009. We lease approximately
40,000 square feet of space housing our own equipment for OLED microdisplay
fabrication and for research and development plus additional space for assembly
and administrative offices. We also entered into lease agreement with IBM for a
16,300 square foot class 10 clean room space, along with additional, lower level
clean room space.
Facilities services provided by IBM include our clean room, 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
ample supplies and a fully loaded manufacturing line assuming good equipment
up-time.
We lease additional non-clean room facilities for chemical mixing,
cleaning, chemical systems, and glass/silicon cutting. OLED chemicals can be
19
purified in our facility with our own equipment, permitting the company to
evaluate new chemicals in pilot production that are not yet available in
suitable purity for OLED applications on the market.
Our display fabrication process starts with the silicon wafer, which is
manufactured by a semiconductor foundry using conventional CMOS process. After a
device is designed by a combination of internal and external designers with
customer participation, we outsource wafer fabrication.
Our manufacturing process for OLED-on-silicon microdisplays has three main
components: organic film deposition, organic film encapsulation (also known as
sealing), and color filter processing. All steps are performed in
semi-automated, hands-free environment suitable for high volume throughput. An
automated cluster tool provides all OLED deposition steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. After wafer
processing, each part is inspected using an automated inspection system, prior
to shipment. We have electrical and optical instrumentation required to
characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing.
We also lease a facility in Redmond, Washington where we operate our system
development effort and business development activities. The lease for this
facility expires in May of 2005 The facilities are well suited for designing and
building limited volume prototypes and small quantity industrial or government
products. Cables and electronic interfaces have recently been produced to permit
our OEM customers to more rapidly create products and shorten their
time-to-market. We plan to outsource medium to high volume subsystem production
to low cost plastics, lenses, and assembly manufacturers. We are currently using
domestic and international outside manufacturers and we are investigating new
outsource opportunities.
We believe that manufacturing efficiency is an important factor for success
in the consumer markets. We believe that high yield and maximum utilization of
our equipment set will be key for profitability. We believe that all of the main
components for manufacturing success are in place, but we will require
additional: (i) staff and training of employees for round the clock operation,
(ii) inventory of integrated circuits and other raw materials, and (iii)
maintenance and upgrades to the equipment set from time to time. The equipment
required for initial profitable production is in place. Some equipment will be
added when our production volume increases or as needed.
We intend to outsource certain capital-intensive portions of microdisplay
production to minimize both our costs and time to market. Joint ventures are
being considered for higher quantity OLED production off shore should suitable
resources not be available for US expansion. We currently outsource all our
integrated circuit fabrication while retaining the final metal, OLED
application, color filter, OLED sealing, and sample packaging processes
in-house.
Intellectual Property
We have developed a significant intellectual property portfolio of patents,
trade secrets and know-how, supported by our license from Eastman Kodak and our
current patent portfolio.
Our license from Eastman Kodak gives us the right to use in miniature
displays a portfolio in organic light emitting diode and optics technology, some
of which are fundamental. Our agreement with Eastman Kodak provides for
perpetual access to the OLED technology for our OLED-on-silicon applications,
provided we remain active in the field and meet our contractual requirements to
Eastman Kodak. We also generate intellectual property as a result of our
internal research and development activities.
Our patents and patent applications cover a wide range of materials, device
structures, processes, and fabrication techniques, such as methods of
fabricating full color OLEDs. We believe that our patent applications relating
to up-emitting structures on opaque substrates such as silicon wafers, which are
critical for OLED microdisplays, and applications relating to the hermetic
sealing of such structures are particularly important.
Our patents are concentrated in the following areas:
o OLED Materials, Structures, and Processes;
20
o Display Color Processing and Sealing;
o Active Matrix Circuit Methodologies and Designs;
o Field Emission and General Display Technologies;
o Lenses and Tracking (Eye and Head);
o Ergonomics and Industrial Design; and
o Wearable Computer Interface Methodology
We also rely on proprietary technology, trade secrets, and know-how, which
are not patented. To protect our rights in these areas, we require all
employees, and where appropriate, contractors, consultants, advisors and
collaborators to enter into confidentiality and non-competition 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
Brillian Corporation, among others, although most of the companies are primarily
focusing on projection microdisplays, which do not compete directly with the
company. In certain markets, we may also face competition from developers of
transmissive liquid crystal displays, such as those developed by Kopin, or laser
scanning systems, such as those developed by Microvision Corporation.
To our knowledge, the only other company that has publicly stated plans to
develop OLED microdisplays for near-eye applications is MicroEmissive Displays
in Britain. We may also compete with potential licensees of Universal Display
Corporation and Cambridge Display Corporation, each of which license OLED
technology portfolios. Even though we could potentially license technology from
these developers, potential competitors could also obtain such licenses and may
do so at more favorable royalty rates. However, should they decide to embark on
developing microdisplays on silicon, we believe that our progress to date in
this area gives us a substantial head start.
Our microdisplays and head-wearable display systems may face competition on
a price and performance basis from major manufacturers such as Sony and Seiko
Epson. However, these companies use first generation liquid crystal on
polysilicon technology and therefore, we believe that they may incorporate our
technology into their products.
Employees
As of February 25, 2005, we had a total of 72 full time and part time
staff. 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.
21
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive offices are located at: 2070 Route 52, Hopewell
Junction, New York 12533. We lease approximately 40,000 square feet of space
from IBM, all of which is located in the same industrial park. Approximately
30,000 square feet of space houses our own equipment for OLED microdisplay
fabrication, and for research and development plus additional space for assembly
operations and storage. Approximately 10,000 square feet of space is used for
administrative offices.
Our lease runs through May 31, 2009. As of December 31, 2004 our monthly
rent was $71,729 per month not including utilities. Our rent payments will
increase 3% per year thereafter through the term of the lease. The average
monthly rent over the 5 years is approximately $74,000.
Our lenses and system development operation lease approximately 7,000
square feet of space in Redmond, Washington. The lease for this facility runs
until May 2005, and we are currently in negotiation to renew the lease. The
average monthly rent is $4,000.
During March 2004 we upgraded our telecommunication system to a digital
system, and our phone and fax numbers changed. eMagin Corporation's main
telephone number is (845) 838-7900 and our main fax number is (845) 838-7901.
Our website address is www.emagin.com.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES .
Our common stock is traded on the American Stock Exchange under the symbol
"EMA".
As of February 25, 2005, there were 463 holders of record of 81,798,903
shares of our common stock. This does not reflect those shares held beneficially
or those shares held in "street" name.
We have never declared or paid cash dividends on our common stock. We
currently anticipate that we will retain all future earnings to fund the
operation of our business and do not anticipate paying dividends on our common
stock in the foreseeable future.
The table below sets forth the high and low closing prices per share of our
common stock for each full quarterly period in the last two fiscal years as
reported on the American Stock Exchange.
High Low
-------------------------------------------- ----------------- ----------
2004
-------------------------------------------- ----------------- ----------
First Quarter 3.15 1.40
-------------------------------------------- ----------------- ----------
Second Quarter 3.80 1.57
-------------------------------------------- ----------------- ----------
Third Quarter 1.73 0.75
-------------------------------------------- ----------------- ----------
Fourth Quarter 1.50 0.90
-------------------------------------------- ----------------- ----------
2003
-------------------------------------------- ----------------- ----------
First Quarter 1.00 0.33
-------------------------------------------- ----------------- ----------
Second Quarter 0.85 0.50
-------------------------------------------- ----------------- ----------
Third Quarter 1.99 0.51
-------------------------------------------- ----------------- ----------
Fourth Quarter 1.74 1.15
-------------------------------------------- ----------------- ----------
On March 28, 2005, the last sale price for our Common Stock was $0.94.
22
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
As of December 31, 2004 warrants and rights
------------------------------------ ------------------------ ---------------------- ------------------------
(a) (b) (c)
Equity compensation plans approved
by security holders 10,546,162 $ 1.05 428,849
Equity compensation plans not
approved by security holders - - -
------------------------ ---------------------- ------------------------
Total 10,546,162 $ 1.05 428,849
======================== ====================== ========================
In addition to the plans listed, eMagin has issued inducement option
compensation awards to new employees in accordance with the provisions of
Section 711 of the American Stock Exchange Company Guide. The outstanding
out-of-plan options as of December 31, 2004 are to purchase an aggregate total
of 3,013,000 shares, vesting over five years at per share prices ranging from
$1.01 to $2.77.
Recent Issuances of Unregistered Securities.
None
23
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto. Our fiscal year ends December 31. This document
contains certain forward-looking statements including, among others, anticipated
trends in our financial condition and results of operations and our business
strategy. (See "Factors Which May Affect Future Results"). These forward-looking
statements are based largely on our current expectations and are subject to a
number of risks and uncertainties. Actual results could differ materially from
these forward-looking statements. Important factors to consider in evaluating
such forward-looking statements include (i) changes in external factors or in
our internal budgeting process which might impact trends in our results of
operations; (ii) unanticipated working capital or other cash requirements; (iii)
changes in our business strategy or an inability to execute our strategy due to
unanticipated changes in the industries in which we operate; and (iv) various
competitive market factors that may prevent us from competing successfully in
the marketplace.
Overview
We design and manufacture miniature displays, which we refer to as
OLED-on-silicon-microdisplays, and microdisplay modules for virtual imaging,
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 the majority 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 December 31, 2004 since our
inception, we have recognized an aggregate of approximately $7.8 million from
sales of our products, and have a backlog of more than $28 million in products
ordered for delivery through 2007. These products are being applied or
considered for near-eye and headset applications in products such as
entertainment and gaming headsets, handheld Internet and
24
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 operations in Washington state 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 were no longer classified as 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.
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 and Cost 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 and risk of loss 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.
Use of estimates:
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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, useful lives and impairment of tangible and intangible
assets, accruals, income taxes, inventory realization and other factors.
Consequently, a change in conditions could affect these estimates.
Fair value of financial instruments:
At December 31, 2004 the Company's cash, cash equivalents, accounts
receivable and accounts payable are earned at cost which appropriates fair value
due to the short-term nature of these instruments.
25
Results of Operations
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues
Revenues increased by $1.0 million to a total of $3.6 million for the year ended
December 31, 2004 from $2.6 million for the year ended December 31, 2003,
representing an increase of 39%. This increase was due primarily to many of our
customers reaching commercial and pre-commercial stages with their systems. Our
contract revenue decreased approximately $0.3 million while our product revenue
increased approximately $1.3 million. Average unit sales price for displays
decreased to $372 in 2004 as compared to $422 in 2003 as we increase our larger
order fulfillment. Our current expectation is that revenue will continue to grow
in 2005 if we successfully execute our business plan.
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs associated with production
and inventory losses. In the year ended December 31, 2004 we recorded
approximately $6.0 million in cost of goods sold which resulted in a gross loss
of $2.4 million as compared to approximately $5.1 million in costs of goods sold
resulting in a gross loss of $2.6 million in the year ended December 31, 2003.
Although both revenue and costs of goods sold increased approximately $1.0
million, our gross loss decreased to (66%) in 2004 from (99%) 2003. We currently
operate two shifts, but we are currently making modifications to the production
line and we are utilizing less than 10% of the line's capacity. Through the
production line modifications and an increase in volume we expect to achieve
gross margin improvements.
Research and Development Expenses
Gross research and development expenses increased by $0.9 million to a total of
$0.9 million for the year ended December 31, 2004 from $19 thousand for the year
ended December 31, 2003. The $0.9 million increase in R&D expenses for the year
ended December 31, 2004 reflects our renewed ability to invest in product
improvement and new product lines. We expect research and development expenses
to increase in the coming year as we move forward with the development of two
new microdisplays and develop additional versions of our visor.
Non-Cash Stock Based Compensation
Non-cash stock based compensation for the year ended December 31, 2004 decreased
$2.1 million to a total of $88 thousand as compared to $2.2 million for the year
ended December 31, 2003. The amount of compensation recorded in 2004 was related
to the balance of options issued in 2000 and re-priced during the merger.
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 was done over the vesting period of such options.
Selling, General and Administrative Expenses
General and administrative expenses increased by $0.8 million to a total of $4.3
million for the year ended December 31, 2004 from $3.5 million for the year
ended December 31, 2003. The increase in selling, general and administrative
expenses was due primarily to an increase in staff and personnel costs. We
expect marketing, general and administrative expense to increase in future
periods as we add to our staff, make additional investments in marketing
activities and as we comply with the Sarbanes Oxley 404 requirements.
Other Income (Expense)
Other expenses for 2004 were $5 million for 2004 up from other income of $3.6
million in 2003. The primary causes of the change were other income of $4.6
million in 2003 related to a gain on debt settlement not repeated in 2004 and an
increase in interest expense to $5.1 million in 2004 up from $1.3 million in
2003. The increase in interest expense for the nine months ended September 30,
2004 was attributable to three factors; (1) $3.18 million of non-cash charges
related to the value of the warrants issued to induce the holders of the $7.825
million in Notes to agree to an early conversion of the Notes into common stock,
(2) $1,598,325 in non-cash charges related to the remaining unamortized debt
26
discount and beneficial conversion feature associated with the aforementioned
Notes, and (3) $74,637 in non-cash charges related to the write-off of the
remaining unamortized deferred financing costs.
Balance Sheet Data as of December 31,
(In thousands)
------------------------------- --------------------- ------------------
2004 2003
------------------------------- --------------------- ------------------
Cash and cash equivalents $ 13,457 $ 1,054
------------------------------- --------------------- ------------------
Working capital 14,925 106
------------------------------- --------------------- ------------------
Total assets 18,436 3,749
------------------------------- --------------------- ------------------
Total liabilities 1,989 8,516
------------------------------- --------------------- ------------------
Total stockholders' equity $ 16,447 $ (4,767)
------------------------------- --------------------- ------------------
Liquidity and Capital Resources
Current Financial Position
We have approximately $28 million of backlog represented by purchase agreements
for our microdisplays to be delivered now through 2007. These agreements can be
cancelled at any time without penalty. Management believes that the prospects
for additional growth of microdisplay revenue remain high and that revenues
derived from our new Z800 3D visor, which contain two microdisplays per system,
should also contribute to revenue growth. As a result we anticipate that our
largest use of cash in 2005 will be the funding of higher accounts receivable
and inventory levels.
To support our projected sales for 2005 we have made strategic purchases of raw
materials and hired additional production personnel in order to increase our
plants realizable production capacity. We anticipate that as product is produced
and shipped that expenses related to costs of goods sold will be our largest
expense category in the coming year.
We currently anticipate that we will also continue to experience growth in our
operating expenses throughout the coming year. In particular, we expect that
salaries for employees would be the principle uses of cash followed by
27
outsourced costs related to new microdisplay designs and costs related to
professional service such as those required to support certification
requirements associated with Sarbanes Oxley section 404.
We also intend to purchase approximately $3 million of capital equipment during
2005 to further increase our production capacity and enable us to be less
sensitive to prolonged equipment downtime.
As of April, 13 2005 we have approximately $10.9 million in cash and cash
equivalents. Based on our current business plans we expect that this cash on
hand will be sufficient to meet our cash requirements over the next 12 months.
Our cash requirements depend on numerous factors, including completion of our
new 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, as well as supply delivery risk that could result in
production delays.
CONTRACTUAL OBLIGATIONS
The following chart describes the outstanding contractual obligations of the
Company as of December 31, 2004:
Payments due by period
Contractual Obligations Total 1 Yr 2-3 Yrs 4-5 Yrs 6-9 Yrs
---------------------------------- --------------- ------------- --------------- -------------- ------------
Long-term debt $ - $ - $ - $ - $ -
Capital lease obligations (a) $ 42,868 $ 18,372 $ 24,496 $ - $ -
Operating lease obligations $ 3,995,350 $ 953,436 $ 1,831,233 $ 1,210,681 $ -
Purchase obligations (b) $ 2,613,073 $ 2,613,073 $ - $ - $ -
Other long-term liabilities (c) $ 875,000 $ 125,000 $ 125,000 $ 125,000 $ 500,000
--------------- ------------- --------------- -------------- ------------
Total $ 7,526,291 $ 3,709,881 $ 1,980,729 $ 1,335,681 $ 500,000
=============== ============= =============== ============== ============
(a) Capital lease obligation includes interest not shown on the balance
sheet.
(b) The majority of purchase orders outstanding contain no cancellation
fee except for minor re-stocking fees. The purchase obligations listed
include $740,000 in 2005 purchase orders for secured purchase
obligations that carry the obligation to pay either in part or in
full.
(c) This amount represents the obligation for royalty payments.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
28
In November 2004, the FASB issued FAS No. 151, "An amendment of ARB No. 43,
Chapter 4" This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing", to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
this statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The statement is effective for fiscal years beginning after June 15,
2005 with early adoption permitted. eMagin is currently evaluating the
requirements and impact of FAS No. 151, but at this point does not believe the
adoption will have a material impact on its financial position, cash flows or
results of operations.
FASB Statement 123R (Revision 2004), "Share-Based Payment", was issued in
December 2004 and is effective for reporting periods beginning after December
31, 2005. The new statement requires all share-based payments to employees to be
recognized in the financial statements based on their fair values. The Company
currently accounts for its share-based payments to employees under the intrinsic
value method of accounting set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issues to Employees". Additionally, the company
complies with the stock-based employer compensation disclosure requirements of
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123". The Company will adopt the
new statement in its financial statements for the quarter ending March 31, 2006.
Factors Which May Affect Future Results
In evaluating our business, prospective investors and shareholders should
carefully consider the risks factors, any of which could have a material adverse
impact on our business, operating results and financial condition and result in
a complete loss of your investment.
29
RISKS RELATED TO OUR FINANCIAL RESULTS
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 December 31, 2004,
were $47 million and acquisition related non-cash transactions were $102
million, which resulted in an accumulated net loss of $149 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 MAY NOT BE ABLE TO EXECUTE OUR BUSINESS PLAN AND MAY NOT GENERATE CASH FROM
OPERATIONS
In the event that cash flow from operations is less than anticipated and we
are unable to secure additional funding to cover our expenses, in order to
preserve cash, we would be required to reduce expenditures and effect 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 were not able to generate sufficient capital, either from operations or
through additional debt or equity financing, to fund our current operations, we
would be forced to significantly reduce or delay our plans for continued
research and development and expansion. This could significantly reduce the
value of our securities.
RISKS RELATED TO MANUFACTURING
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.
WE EXPECT TO DEPEND ON SEMICONDUCTOR CONTRACT MANUFACTURERS TO SUPPLY OUR
SILICON INTEGRATED CIRCUITS AND OTHER SUPPLIERS OF KEY COMPONENTS, MATERIALS AND
SERVICES.
30
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.
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.
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.
31
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
32
sampling of our products by OEMs, the custom design of our products to meet
specific OEM product requirements, and the ultimate incorporation of our
products into OEM consumer products is significant. If our products fail to meet
our OEM customers' cost, performance or technical requirements or if unexpected
technical challenges arise in the integration of our products into OEM consumer
products, our operating results could be significantly and adversely affected.
Long delays in achieving customer qualification and incorporation of our
products could adversely affect our business.
OUR PRODUCTS WILL LIKELY EXPERIENCE RAPIDLY DECLINING UNIT PRICES.
In the markets in which we expect to compete, prices of established
products tend to decline significantly over time. In order to maintain our
profit margins over the long term, we believe that we will need to continuously
develop product enhancements and new technologies that will either slow price
declines of our products or reduce the cost of producing and delivering our
products. While we anticipate many opportunities to reduce production costs over
time, there can be no assurance that these cost reduction plans will be
successful nor is there any assurance that our costs can be reduced as quickly
as any reduction in unit prices. 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 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.
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. We will also need to
recruit additional management in order to expand according to our business plan.
The failure to attract and retain additional management or personnel could have
a material adverse effect on our operating results and financial performance.
OUR BUSINESS DEPENDS ON NEW PRODUCTS AND TECHNOLOGIES.
The market for our products is characterized by rapid changes in product,
design and manufacturing process technologies. Our success depends to a large
extent on our ability to develop and manufacture new products and technologies
to match the varying requirements of different customers in order to establish a
competitive position and become profitable. Furthermore, we must adopt our
products and processes to technological changes and emerging industry standards
and practices on a cost-effective and timely basis. Our failure to accomplish
any of the above could harm our business and operating results.
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
Our business is operated on the basis of short-term purchase orders and we
cannot guarantee that we will be able to obtain long-term contracts for some
time. 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.
33
OUR BUSINESS STRATEGY MAY FAIL IF WE CANNOT CONTINUE TO FORM STRATEGIC
RELATIONSHIPS WITH COMPANIES THAT MANUFACTURE AND USE PRODUCTS THAT COULD
INCORPORATE OUR OLED-ON-SILICON TECHNOLOGY.
Our prospects will be significantly affected by our ability to develop
strategic alliances with OEMs for incorporation of our OLED-on-silicon
technology into their products. While we intend to continue to establish
strategic relationships with manufacturers of electronic consumer products,
personal computers, chipmakers, lens makers, equipment makers, material
suppliers and/or systems assemblers, there is no assurance that we will be able
to continue to establish and maintain strategic relationships on commercially
acceptable terms, or that the alliances we do enter in to will realize their
objectives. Failure to do so would have a material adverse effect on our
business.
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 give 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 potential product liability claims. Although
no such claims have been brought against us to date, and to our knowledge no
such claim is threatened or likely, we may face liability to product users for
damages resulting from the faulty design or manufacture of our products. While
we plan to maintain product liability insurance coverage, there can be no
assurance that product liability claims will not exceed coverage limits, fall
outside the scope of such coverage, or that such insurance will continue to be
available at commercially reasonable rates, if at all.
OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATIONS AND POSSIBLE LIABILITY
ARISING FROM 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 20, 2005, we have outstanding (i) options to
purchase 14,262,162 shares; and (ii) warrants to purchase 19,119,289 shares of
common stock; and (iii) 0 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.
34
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.
35
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT INDEX
Page
Report of Independent Registered Public Accounting Firm................................................F-2
Consolidated Balance Sheet as of December 31, 2004 ....................................................F-3
Consolidated Statement of Operations for the years ended December 31, 2004 and 2003 ...................F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2004 and 2003 ...................................................................................F-5
Consolidated Statement of Cash Flows for the years ended December 31, 2004 and 2003 ...................F-6
Notes to the Consolidated Financial Statements ........................................................F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
eMagin Corporation
We have audited the accompanying consolidated balance sheet of eMagin
Corporation and subsidiary (the "Company") as of December 31, 2004, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2004 and 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, the financial statements enumerated above present fairly, in
all material respects, the consolidated financial position of eMagin Corporation
and subsidiary as of December 31, 2004 and the consolidated results of their
operations and their consolidated cash flows for the years ended December 31,
2004 and 2003 in conformity with accounting principles generally accepted in the
United States of America.
/s/
Eisner LLP
New York, New York
February 11, 2005
F-2
eMagin Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 13,457,465
Accounts receivable, net 535,748
Prepaid expenses and other current assets 879,853
Inventory 2,017,886
-------------
Total current assets 16,890,952
Equipment and leasehold improvements, net 1,304,465
Intangible assets, net 54,123
Other long-term assets 186,258
-------------
Total assets $ 18,435,798
=============
LIABILITIES
Current liabilities:
Accounts payable $ 822,328
Accrued payroll and benefits 674,212
Other accrued expenses, net 356,784
Advanced payments 64,196
Current portion of capitalized lease obligations 14,080
Other current liabilities 34,762
-------------
Total current liabilities 1,966,362
Capitalized lease obligations 22,177
-------------
Total liabilities 1,988,539
-------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock - authorized 10,000,000 shares, none issued
Common Stock - $.001 par value, authorized 200,000,000 shares,
issued and outstanding 79,638,817 shares 79,639
Paid-in surplus 165,398,936
Accumulated deficit (149,031,316)
-------------
Total stockholders' equity 16,447,259
-------------
Total liabilities and stockholders' equity $ 18,435,798
=============
See notes to consolidated financial statements
F-3
eMagin Corporation and Subsidiary
Consolidated Statements of Operations
Year Ended December 31,
2004 2003
------------ ------------
Revenue:
Product revenue $ 3,501,621 $ 2,213,290
Contract revenue 108,000 364,809
Sales returns and allowances (16,754) -
------------ ------------
Total revenue, net 3,592,867 2,578,099
Cost of goods sold 5,966,181 5,141,448
------------ ------------
Gross loss (2,373,314) (2,563,349)
------------ ------------
Costs and expenses:
Research and development 897,969 18,810
Stock based compensation 87,565 2,183,418
Selling, general and administrative 4,340,129 3,529,047
------------ ------------
Total costs and expenses, net 5,325,663 5,731,275
------------ ------------
Other income (expense):
Gain on debt settlement - 4,637,993
Interest expense (5,087,057) (1,283,254)
Other income, net 75,296 216,570
------------ ------------
Total other (expense) income (5,011,761) 3,571,309
------------ ------------
Net loss $(12,710,738) $ (4,723,315)
============ ============
Basic and diluted net loss per common share $ (0.20) $ (0.13)
============ ============
Weighted average outstanding common stock 64,278,144 35,998,435
============ ============
See notes to consolidated financial statements
F-4
eMagin Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
------------------------------------------------------------------------------------------------------------------
Common Common Deferred Paid-in Accumulated Total
Shares Stock Compensation Surplus Deficit
-----------------------------------------------------------------------------------
Balance - December 31, 2002 30,854,980 $ 30,854 $ (462,983) $119,221,276 $(131,597,263) $(12,808,115)
Conversion of debt to equity 6,101,972 6,102 - 4,447,996 - 4,454,098
Debt settlement 1,997,840 1,998 - 1,409,971 - 1,411,969
Exercise of warrants 1,479,900 1,480 - 1,136,595 - 1,138,075
Cashless exercise of warrants 270,910 271 - (271) - -
Original issue discount on
financing - - - 1,383,203 - 1,383,203
Beneficial conversion on
financing - - - 616,797 - 616,797
Stock issued for services 656,435 656 - 561,302 - 561,958
Options exercised 846,793 847 - 279,199 - 280,046
Issuance of equity for
interest and penalties 486,582 486 - 734,841 - 735,327
Amortization of deferred
compensation - - 375,418 - - 375,418
Stock option compensation - - - 1,808,000 - 1,808,000
Net loss for period - - - - (4,723,315) (4,723,315)
-----------------------------------------------------------------------------------
Balance - December 31, 2003 42,695,412 42,694 (87,565) 131,598,910 (136,320,578) (4,766,539)
Sale of equity 16,408,364 16,409 - 16,368,162 - 16,384,571
Conversion of debt to equity 11,394,621 11,395 - 8,556,029 - 8,567,424
Issuance of warrants for
early conversion of debt to
equity - - - 3,180,000 3,180,000
Exercise of warrants 3,533,348 3,534 - 3,785,927 3,789,461
Options exercised 5,221,052 5,221 - 1,379,263 - 1,384,484
Stock issued for services 386,020 386 530,645 531,031
Amortization of deferred
compensation - - 87,565 - - 87,565
Net loss for period - - - - (12,710,738) (12,710,738)
-----------------------------------------------------------------------------------
Balance - December 31, 2004 79,638,817 $79,639 $ - $165,398,936 $(149,031,316) $ 16,447,259
===================================================================================
See notes to consolidated financial statements
F-5
eMagin Corporation and Subsidiary
Consolidated Statements of Cash Flows
Year Ended December 31,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $(12,710,738) $ (4,723,315)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 619,582 884,291
Amortization of financing fees 7,863 37,244
Bad debt expense 466,923 -
Non-cash stock based compensation 87,565 2,183,418
Non-cash interest related charges 5,094,005 1,255,791
Gain on debt settlement - (4,637,993)
Stock issued for services 531,031 561,958
Changes in:
Trade receivables (234,133) (528,401)
Unbilled costs and estimated profits on contracts in progress 75,359 50,000
Inventory (1,742,469) (24,419)
Prepaid expenses and other current assets (400,393) (276,109)
Other long-term assets (99,351) 112,500
Advanced payments (58,166) 122,362
Deferred revenue - (30,400)
Accounts payable, accrued expenses and accrued payroll (49,789) (185,776)
Other current liabilities 16,754 (5,497)
------------ ------------
Net cash used in operating activities (8,395,957) (5,204,146)
------------ ------------
Cash flows used in investing activities:
Purchase of equipment (720,805) (1,120,256)
------------ ------------
Cash flows from financing activities:
Proceeds from sales of common stock, net of issuance costs 16,384,571 -
Proceeds from exercise of stock options and warrants 5,173,945 1,418,121
Proceeds from long- and short-term debt - 6,000,000
Payments of long- and short-term debt (38,184) (122,775)
------------ ------------
Net cash provided by financing activities 21,520,332 7,295,346
------------ ------------
Net increase in cash and cash equivalents 12,403,570 970,944
Cash and cash equivalents - beginning of year 1,053,895 82,951
------------ ------------
Cash and cash equivalents - end of year $ 13,457,465 $ 1,053,895
============ ============
Cash paid for interest $ 7,927 $ 15,649
============ ============
Non-cash transactions:
Conversion of debt to equity $ 8,567,424 $ 4,454,098
Issuance of equity for penalties on interest $ - $ 735,327
Issuance of equity for settlement of accounts payable $ - $ 1,411,969
See notes to consolidated financial statements
F-6
eMAGIN CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Note A - NATURE OF BUSINESS
eMagin Corporation 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.
Note B - SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
eMagin Corporation and its wholly owned subsidiary, Virtual Vision, Inc.
(collectively the "Company"). Inter-company transactions and balances are
eliminated in consolidation.
[2] Revenue and cost recognition:
Revenue is recognized when products are shipped and risk of loss is transferred
to customers, net of allowances for anticipated returns. The Company's
revenue-earning activities generally involve delivering products and revenues
are considered to be earned when the Company has completed the process by which
it is entitled to such revenues. Revenue is recognized when persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable and collection is reasonably assured.
The Company also earns revenues from certain 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.
[3] Research and development expenses:
Research and development costs are expensed as incurred.
[4] Cash and cash equivalents:
All highly liquid instruments with an original maturity of three months or less
at the date of purchase are considered to be cash equivalents.
[5] Accounts receivable:
The majority of commercial accounts receivable are due from Original Equipment
Manufacturers ("OEM"s). Credit is extended based on evaluation of a customers'
financial condition and, generally, collateral is not required. Accounts
receivable are payable in U.S. dollars, are due within 30-90 days and are stated
at amounts due from customers net of an allowance for doubtful accounts. Any
account outstanding longer than the contractual payment terms is considered past
due. The Company determines the allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, eMagin's
previous loss history, the customer's current ability to pay its obligation, and
the condition of the general economy and the industry as a whole. The Company
writes off accounts receivable when they become uncollectable, and if any
payments are subsequently received on such receivables, are reported as a
reduction of bad debt expense in the year the payment is received.
[6] Allowance for doubtful accounts:
F-7
The allowance for doubtful accounts reflects an estimate of probable losses
inherent in the accounts receivable balance. The allowance is determined based
on known troubled accounts, historical experience, and other currently available
evidence.
[7] Inventory:
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in first-out method. Cost includes materials, labor, and manufacturing
overhead related to the purchase and production of inventories. The Company
regularly reviews inventory quantities on hand, future purchase commitments with
our suppliers, and the estimated utility of the inventory. If our review
indicates a reduction in utility below carrying value, we reduce the inventory
to a new cost basis.
[8] Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over its
estimated useful life. Amortization of leasehold improvements is calculated by
using the straight-line method over the shorter of their estimated useful lives
or lease terms. Expenditures for maintenance and repairs are charged to expense
as incurred.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", eMagin performs impairment tests on its long-lived assets,
when circumstances indicate that their carrying amounts may not be recoverable.
If required, recoverability is tested by comparing the estimated future
undiscounted cash flows of the asset or asset group to its carrying value.
Impairment losses, if any, are recognized based on the excess of the assets'
carrying amounts over their estimated fair values.
[9] 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 expected to apply to taxable income in the years
that the asset is to be recovered, and liabilities. At December 31, 2004 and
2003,, the Company has net deferred tax assets of approximately $59 million,and
$57 million, respectively, primarily resulting from the future tax benefit of
net operating loss carryforwards discussed below and temporary differences
relating to amortization of intangible assets. Such net deferred tax assets are
fully offset by a valuation allowance due to the uncertainty as to their
realizability.
[10] Loss per common share:
In accordance with SFAS No. 128, "Basic Earnings Per Share", net loss per common
share amounts ("basic EPS") is 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") is
computed by reflecting the potential dilution from the exercise of stock options
and warrants. Common equivalent shares have been excluded from the computation
of diluted EPS for all periods presented as their effect is antidilutive. The
years ended December 31, 2004 and 2003 do not include options and warrants to
purchase 14,464,123 and 21,725,607, respectively, of common equivalent shares,
as their effect would be antidilutive.
[11] Comprehensive income (loss):
SFAS No. 130, "Reporting Comprehensive Income", 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 other
comprehensive income (loss) items, such as unrealized gains or losses on
securities classified as available-for-sale and foreign currency translation
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 loss for the years ended December 31, 2004 and 2003. Accordingly, the
Company's comprehensive loss is the same as its net income (loss) for the
periods presented.
F-8
[12] Stock-based compensation:
The Company has elected to apply 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, the Company
records expense for employee stock compensation plans equal to the excess of the
market price of the underlying the Company shares at the date of grant over the
exercise price.
As of December 31, 2004, the Company has outstanding options to purchase
13,559,162 shares. 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 2004 and 2003, respectively: (1)
average expected volatility of 63% and 100%, (2) average risk-free interest
rates of 3.94% and 3.52%, and (3) expected lives of 5-7 years and 7-10 years and
(4) dividends of 0% and 0%.
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair values of awards that were earned during the
years ended December 31, 2004 and 2003. The weighted average fair value per
option was $1.57 and $0.76 for options granted in 2004 and 2003, respectively.
2004 2003
----------- ----------
(in thousands)
Net loss $ (12,711) $ (4,723)
Stock-based employee compensation expense included in reported net loss 88 2,183
Stock-based employee compensation expense determined under fair value method (6,777) (3,748)
----------- ----------
Pro forma net loss $ (19,400) $ (6,288)
=========== ==========
Net loss per share:
Basic and diluted, as reported $ (0.20) $ (0.13)
Basic and diluted, pro forma $ (0.30) $ (0.17)
[13] Fair value of financial instruments:
At December 31, 2004 the Company's cash, cash equivalents, accounts receivable
and accounts payable are earned at cost which appropriates fair value due to the
short-term nature of these instruments.
[14] Use of estimates:
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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, useful lives and impairment of tangible and intangible
assets, accruals, income taxes, inventory realization and other factors.
Consequently, a change in conditions could affect these estimates.
[15] Reclassifications:
Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.
F-8
Note C - RECEIVABLES
Receivables at December 31, 2004 consist of the following:
Trade receivables $ 1,282,117
Contract receivables 25,000
------------
Total 1,307,117
Less allowance for doubtful accounts (771,369)
------------
Net receivables $ 535,748
============
Note D - INVENTORY
The components of inventories as of December 31, 2004 are as follows:
Raw materials $ 1,420,612
Work in process 168,645
Finished goods 428,629
------------
Total Inventory $ 2,017,886
============
Note E - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as follows at
December 31, 2004:
Useful
Lives
Computer hardware and software 3 $ 582,389
Lab and factory equipment 3 2,730,497
Furniture, fixtures and office equipment 10 145,812
Capital leases 3 66,075
Leasehold improvements (a) 472,512
Construction In Progress 0 74,450
-------------
Total Fixed Assets 4,071,735
Less accumulated depreciation (2,767,270)
-------------
Equipment and leasehold improvements $ 1,304,465
=============
(a) The shorter of either the life of the lease, or the useful life of the
asset.
Note F - DEBT
Debt consisted of a capitalized leased obligation as of December 31, 2004:
a Current portion $ 14,080
b Long-term portion 22,177
-------------------
Total $ 36,257
===================
Note G - DEBT SETTLEMENT AND DEBT CONVERSION
In 2003, the Company entered into settlements and restructuring agreements with
certain of eMagin's creditors, pursuant to which the creditors agreed to accept
shares of eMagin's common stock in full or partial satisfaction of the amount
owed to them, or which allowed us to either make discounted payments to them or
F-9
to make payments under more favorable payment terms than previously were in
place. As a result of the above transactions, the Company recorded $4,637,993 as
a gain on settlement of debt for the year ended December 31, 2003. No such
settlements were made in the year ended December 31, 2004.
In February 2004, we entered into an agreement whereby the holders of our
Secured Convertible Notes (the "Notes"), which were due in November 2005, agreed
to an early conversion of all of the $7.825 million principal amount of the
Notes, together with the $742,424 of accrued interest on the Notes, into
11,394,621 shares of common stock of eMagin. On the date of the conversion the
Company recorded, $1,598,335 in interest expense related to the unamortized debt
discount and beneficial conversion feature and $74,637 in interest expense
related to the write-off of deferred financing costs.
In consideration of the Note holders agreeing to the early conversion of the
Notes, eMagin issued the Note holders warrants to purchase an aggregate of 2.5
million shares of common stock (the "Warrants"), which Warrants are exercisable
at a price of $2.76 per share. 1.5 million of the Warrants, "D warrants", are
exercisable until December 31, 2005. The remaining 1.0 million of the Warrants,
"E warrants", are exercisable until June 10, 2008. Using the Black Scholes
method of valuating warrants, an expense totaling $3.18 million was recorded in
interest expense in the first quarter of 2004 to record an estimated value for
these warrants. The fair value of the warrants was estimated at $2.30 using the
Black-Scholes option-pricing model with the following assumptions for the two
sets of warrants: (1) average expected volatility of 100%, (2) average risk-free
interest rates of 3.52%, (3) dividends of 0%, and (4) Average Term (in days) of
670 for the D warrants and 1,460 for the E warrants.
Note H - INCOME TAXES
The difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:
2004 2003
------------ ------------
U.S. Federal income tax provision (benefit)
at federal statutory rate (35)% (35)%
Change in valuation allowance 35 % 35 %
------------ ------------
0 % 0 %
============ ============
Significant components of eMagin's deferred tax assets as of December 31, 2004
are as follows (numbers are in thousands):
Net operating losses $ 39,262
Goodwill and other intangibles 19,894
Allowance for doubtful accounts 274
Deferred payroll 25
Accrued vacation pay 81
-----------
Total 59,536
Less valuation allowance (59,536)
-----------
Net Deferred Tax Asset $ 0
===========
As of December 31, 2004, eMagin has federal and state net operating loss
carryforwards of approximately $98 million that will be available to offset
future taxable income, if any, through December 2019. 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. The valuation allowance increased
approximately $2,869,000 and $27,169,000 for the years ended December 31, 2004
and 2003, respectively.
F-10
In 2003, in connection with the restructuring of its indebtedness (see Note G),
the Company realized income of $4,637,993. Under Section 108 of the Internal
Revenue Code, this income is excludable for federal income tax purposes to the
extent that the amount of the Company's liabilities immediately before the
restructuring exceeds the fair market value of its assets as a going concern at
such time. The Company estimates the entire $4,637,993 is excludable under this
exception.
Pursuant to Section 108 of the Internal Revenue Code, the excluded income
reduces the Company's tax attributes as of January 1, 2005. Such reduction is
first applied to reduce net operating loss carryforwards.
Note I - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 200,000,000 shares with a
par value of $0.001 per share.
In April of 2003, the Company converted a $1,000,000 loan plus interest to
Travelers in common shares totaling 2,137,757 at a conversion price from the
original agreement of approximately $0.53 per share, based on the market value
of our common stock on the date the agreement was entered into (see Note G).
The Company also converted a $3,000,000 loan plus interest to SK Corporation in
common shares totaling 2,495,833 at a conversion price from the original
agreement of approximately $1.28 per share, based on the market value of our
common stock on the date the agreement was entered into (see Note G).
In September 2003, the Company converted two Series B Convertible Debentures in
the amount of $121,739 each into 1,468,382 share of the Company's common stock
at a conversion price from the original note purchase agreement of $0.18 per
share. This transaction included a write-down of the unamortized beneficial
conversion feature at the time of conversion.
In 2003, the Company received approximately $1.1 million for the exercise of
1,479,900 warrants to purchase shares of common stock. The Company also issued
270,910 common shares in cashless exercises of warrants in exchange for 579,329
warrant shares.
In 2003, the Company negotiated settlements of amounts due and amounts for
future services, rendered via issuance of 656,435 shares of common stock. As
such, the Company recorded the fair value of the services received and
receivable in the future of $561,958 in selling, general and administrative
expenses, prepaid expenses and reduction of accounts payable.
During 2003, the Company received $280,046 for the exercise of options to
purchase 846,793 shares of common stock.
The Company's April 25, 2003 Registration Rights Agreement, which was entered
into in connection with the Company's April 2003 financing, required the Company
to file a registration statement with the Securities and Exchange Commission no
later than 30 calendar days after the closing of the April 2003 financing. The
Company was not able to file the registration statement within the required
period and caused a default under the Registration Rights Agreement. As a result
of this default, the Company was required to issue an additional 486,582 common
shares for penalties and interest pursuant to the Registration Rights Agreement.
For the year ended December 31, 2003, the Company recorded a charge to earnings
of $735,324 for the penalties and interest. The Company filed its registration
statement in July of 2003.
In connection with the April 2003 financing, eMagin issued 387,496 warrants for
expenses related to the offering. These warrants were issued to Larkspur Capital
Corporation, a company in which one of the Company's directors is the managing
director.
On January 9, 2004, we entered into a Securities Purchase Agreement with several
accredited institutional and private investors whereby such investors purchased
an aggregate of 3,333,363 shares of common stock and 4,312,212 warrant shares
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.
F-11
In connection with the Securities Purchase Agreement, 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).
The Company also entered into a registration rights agreement with the
aforementioned investors with respect to the common stock issued and common
stock issuable upon the exercise of the warrants. The Company filed a
registration statement for the sale of the shares sold and the shares underlying
the warrants which went effective February 12, 2004.
In February 2004, the Company and all of the holders of the Secured Convertible
Notes (the "Notes"), which were due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately $742,000 on the Notes, into 11,394,621 shares of the
Company's common stock. The listing of the shares issuable pursuant to such
agreement was approved by the American Stock Exchange.
In consideration of the Noteholders agreeing to the early conversion of the
Notes, eMagin agreed to issue the Noteholders warrants to purchase an aggregate
of 2.5 million shares of common stock (the "warrants"), which warrants are
exercisable at a price of $2.76 per share. 1.5 million of the warrants (series D
warrants) are exercisable until the later of (i) twelve (12) months from the
date upon which a registration statement covering the shares issuable upon
exercise of the Warrants is declared effective by the Securities and Exchange
Commission, or (ii) December 31, 2005. The remaining 1.0 million of the warrants
(series E warrants) are exercisable until four (4) years from the date upon
which the registration statement covering such shares is declared effective by
the Securities and Exchange Commission. Using the Black Scholes method of
valuating warrants, an expense totaling $3.18 million was recorded in interest
expense during 2004 to record an estimated fair value of these warrants. The
fair value of the warrants, $3.18 million, was estimated at $2.30 using the
Black-Scholes option-pricing model with the following assumptions for the two
sets of warrants: (1) average expected volatility of 100%, (2) average risk-free
interest rates of 3.52%, (3) dividends of 0%, and (4) Average Term (in days) of
670 for the series D warrants and 1,460 for the series E warrants.
In connection with the above conversion, eMagin also entered into a Registration
Rights Agreement with the holders of the Notes providing the holders with
certain registration rights under the Securities Act of 1933, as amended, with
respect to the common stock issuable upon exercise of the warrants.
F-12
In August 2004, the Company and certain of the holders of its outstanding Class
A, B and C common stock purchase warrants entered into an agreement pursuant to
which the Company and the holders of the warrants agreed to the $0.90 re-pricing
and exercise of Class A, B and C common stock purchase warrants. As a condition
to the transaction, the holders of the warrants agreed to limit the right of
participation that they were granted in January 9, 2004. As a result of the
transaction, the holders agreed to re-price and exercise approximately,
2,099,894 Class A, B and/or C common stock purchase warrants for an aggregate of
$1,889,900.
On October 21, 2004, the Company entered into a Securities Purchase Agreement,
pursuant to which we sold and issued 10,334,525 shares of common stock, and
series F common stock warrants to purchase 5,129,762 our common stock for an
aggregate purchase price of $10,772,500. The Common Shares were priced at $1.05.
The Common Shares and the shares underlying the warrants were drawn-down off of
a shelf registration statement which was filed by the Company on May 5, 2004,
and declared effective by the Securities and Exchange Commission on June 10,
2004. Net proceeds received after deducting expenses was approximately $9.75
million.
The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
at an exercise price of $1.21 per share, subject to adjustment upon the
occurrence of specific events, including stock dividends, stock splits,
combinations or reclassifications of our common stock or distributions of cash
or other assets. In addition, the Series F Warrants contain provisions
protecting against dilution resulting from the sale of additional shares of our
common stock for less than the exercise price of the Series F Warrants, or the
market price of the common stock, on the date of such issuance or sale.
On October 28, 2004, we entered into a Securities Purchase Agreement, pursuant
to which we sold and issued 2,740,476 shares of common stock, and series F
common stock purchase warrants to purchase our common stock to purchasers for an
aggregate purchase price of $2,877,500. The common stock shares were priced at
$1.05. The common shares and the shares underlying the warrants were drawn-down
off of a shelf registration statement which was filed by us on May 5, 2004, and
declared effective by the Securities and Exchange Commission on June 10, 2004.
Net proceeds received after deducting expenses was approximately $2.65 million.
The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
to purchase up to 1,370,238 shares of common stock at an exercise price of $1.21
per share, subject to adjustment upon the occurrence of specific events,
including stock dividends, stock splits, combinations or reclassifications of
our common stock or distributions of cash or other assets. In addition, the
Series F Warrants contain provisions protecting against dilution resulting from
the sale of additional shares of our common stock for less than the exercise
price of the Series F Warrants, or the market price of the common stock, on the
date of such issuance or sale.
As a result of the above transaction, 1,213,352 warrants, the outstanding Series
A Common Stock Purchase Warrants, that were issued to participants of the
Securities Purchase Agreement dated January 9, 2004 were re-priced from $1.74 to
$1.05.
The Company paid a Placement Agent $814,000, a fee equal to 6% of the gross
proceeds of these offerings.
In addition, the Company engaged Larkspur Capital Corporation, a Related Party,
to act as an adviser in connection with the sale of these securities. For such
services, the Company paid Larkspur Capital Corporation a fee of $136,500, an
amount equal to 1% of the gross proceeds of these offerings and 93,255 warrants.
In 2004, the Company received $5,173,945 for the exercise of 5,221,052 options
and 3,533,348 warrants.
The Company also issued 386,020 shares of common stock for the payment of
$531,031 for services rendered and to be rendered in the future. As such, the
Company recorded the fair value of the services rendered in selling, general and
administrative expenses in the accompanying audited consolidated statement of
operations for the year ended December 31, 2004.
F-13
Note J - STOCK COMPENSATION
[1] Stock option plans:
In 1994, the Company established the 1994 Stock Plan (the "1994 Plan"), which
has been assumed by eMagin. The plan provided for the granting of options to
purchase an aggregate of 1,286,000 shares of the common stock to employees and
consultants of FED. This Plan expired in 2004.
In 2000, the Company established the 2000 Stock Option Plan (the "2000 Plan").
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 such requirements.
In 2003, eMagin established the 2003 Stock Option Plan (the "2003 Plan"). The
2003 Plan provided for the granting of options to purchase an aggregate of
9,200,000 shares of the common stock to employees and consultants. On July 2,
2003, the shareholders approved the plan and the 2003 Plan was subsequently
amended by the Board of Directors on July 2, 2003 to reduce the number of
additional shares that may be provided for issuance under the "evergreen"
provisions of the 2003 Plan. The amended 2003 Plan provides for an increase of
2,000,000 shares in January 2004 and an annual increase on January 1 of each
year for a period of nine (9) years commencing on January 1, 2005 of 3% of the
diluted shares outstanding.
Vesting terms of the options range from immediate vesting to a ratable vesting
period of 5 years. Option activity for the years ended December 31, 2004 and
2003 are summarized as follows:
Weighted
Average
Exercise
Shares Price
------------ -----------
Outstanding at December 31, 2002 5,893,085 $ 0.75
2003 Options granted 7,528,676 0.42
2003 Options exercised (846,793) 0.33
2003 Options canceled (413,198) 2.14
------------ -----------
Outstanding at December 31, 2003 12,161,770 0.53
2004 Options granted 6,779,900 1.60
2004 Options exercised (5,221,052) 0.27
2004 Options forfeited (161,456) 2.27
------------ -----------
Outstanding at December 31, 2004 13,559,162 $ 1.14
============ ===========
At December 31, 2004, there were 428,849 shares available for grant under the
2003 Plan and the 2000 Plan.
The following table summarizes information about stock options outstanding at
December 31, 2004:
F-14
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercisable
Range of Exercise Prices Outstanding (In Years) Price Exercisable Price
------------------------ ----------- --------------- ----------------- ----------------- -----------------
$ 0.18 - $ 1.02 5,993,909 4.72 $ 0.53 5,270,401 $ 0.48
$ 1.21 - $ 1.96 6,594,753 5.58 1.62 1,206,270 1.56
$ 2.10 - $ 6.30 970,500 5.96 2.33 88,417 2.52
----------- ----------------- ----------------- -----------------
13,559,162 $ 1.14 6,565,088 $ 0.71
=========== ================= ================= =================
[2] Stock based compensation:
Non-cash stock-based compensation expense represents expenses associated with
stock option grants to the Company's officers and employees at below fair market
value as additional compensation for their services and to induce them to
lock-up their options for a longer time than would normally be specified under
the Company's standard option grant. Deferred compensation is amortized over the
remaining vesting period of the underlying options.
[3] Warrants:
At December 31, 2004, 21,618,229 warrants to purchase shares of common stock are
outstanding and exercisable at exercise prices ranging from $0.43 to $2.76 and
expiration dates ranging from January 14, 2005 to February 27, 2012.
Weighted
Average
Exercise
Shares Price
--------- ---------
Outstanding at December 31, 2002 6,894,153 $ 0.93
2003 Warrants granted 8,137,417 0.82
2003 Warrants exercised (2,059,229) 0.78
2003 Warrants expired (636,052) 2.75
---------- ---------
Outstanding at December 31, 2003 12,336,289 0.80
2004 Warrants granted 13,355,866 1.69
2004 Warrants exercised (3,533,348) 1.52
2004 Warrants expired (540,578) 1.12
---------- ---------
Outstanding at December 31, 2004 21,618,229 $ 1.14
========== =========
Note K - RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued FAS No. 151, "An amendment of ARB No. 43,
Chapter 4" This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing", to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
this statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The statement is effective for fiscal years beginning after June 15,
2005 with early adoption permitted. eMagin is currently evaluating the
requirements and impact of FAS No. 151, but at this point does not believe the
adoption will have a material impact on its financial position, cash flows or
results of operations.
FASB Statement 123R (Revision 2004), "Share-Based Payment", was issued in
December 2004 and is effective for public entities that file as small business
issuers as of the first interim or annual reporting period that begins after
December 31, 2005. The new statement requires all share-based payments to
employees to be recognized in the financial statements based on their fair
values. The Company currently accounts for its share-based payments to employees
under the intrinsic value method of accounting set forth in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issues to Employees".
Additionally, the company complies with the stock-based employer compensation
disclosure requirements of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". The Company plans to adopt the new statement in its financial statements
for the quarter ending March 31 2006. Although the impact cannot be ascertained
at this time, the Company believes this will have a material impact on its
financial statements and result of operations.
F-15
Note L - COMMITMENTS AND CONTINGENCIES
[1] Royalties:
The Company, in accordance with a royalty agreement, is obligated to make
minimum annual royalty payments to a corporation commencing January 1, 2001. The
minimum annual royalty, of $31,500 per year, due under this agreement commences
in the first year of the agreement, and increases to minimum royalty payments of
$125,000 in 2006. Under this agreement, the Company must pay a certain
percentage of net sales of certain products, which percentages are defined in
the agreement. The percentages are on a sliding scale depending on the amount of
sales generated. Any minimum royalties paid may be credited against the amounts
due based on the percentage of sales. The royalty agreement terminates upon the
expiration of the last-to-expire issued patent.
For the years ended December 31, 2004 and 2003, royalty expense of approximately
$193,775 and $115,000 respectively, is included in cost of goods sold.
[2] Operating leases:
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through 2009. Certain leases provide
for payments of monthly operating expenses. The future minimum lease payments
through 2009 are as follows:
Year ending December 31,
2005 $ 953,436
2006 902,085
2007 929,148
2008 957,022
2009 253,658
---------
Total $ 3,995,349
=========
Rent expense for the years ended December 31, 2004 and 2003 was approximately
$769,766 and $839,738, respectively. eMagin's lease with IBM expires in March
2009. eMagin's lease with Redson Building Partners was paid in common stock
valued at $48,000 for the 2004 rent and expires May 31, 2005.
[3] Employee benefit plans:
eMagin has a defined contribution plan (the 401(k) Plan) under Section 401(k) of
the Internal Revenue Code, which is available to all employees who meet
established eligibility requirements. Employee contributions are generally
limited to 15% of the employee's compensation. Under the provisions of the
401(k) Plan, eMagin may match a portion of the participating employees'
contributions. There was no matching contribution to the 401(k) Plan for the
years ended December 31, 2004 and 2003.
[4] Legal proceedings
The Company is subject to various claims and proceedings in the ordinary course
of business. The Company believes that none of these current claims or
proceedings individually or in the aggregate, will have a material adverse
impact on the Company; results of operations, cash flows or financial condition,
although it can make no assurances in this regard.
Note M - Related Party Transactions
On February 27, 2002, eMagin Corporation and a group of several accredited
institutional and individual investors entered into a Securities Purchase
Agreement providing for the issuance and sale to the investors of (i) an
aggregate of approximately 3.6 million shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years from the Closing Date for
an aggregate of approximately 1.4 million shares of eMagin's common stock
(subject to certain customary anti-dilution adjustments) (see Note I). Rainbow
Gate Corporation, a corporation in which Mortimer D.A. Sackler is the investment
manager, invested $500,000 in the Company under the agreement and received
pursuant to such investment (i) 723,275 shares of eMagin's common stock, and
(ii) warrants exercisable for 289,310 shares of eMagin's common stock. Mr.
Sackler is currently a beneficial owner of more than five percent of the
outstanding shares of eMagin's common stock.
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with Mortimer D.A. Sackler (the "Bridge Note")(see Note F(c)). The
secured note accrues interest at 11% per annum and was originally due to mature
on June 30, 2003 and was amended as a result of a financing we completed in
April 2003. The Company also granted warrants, exercisable for a period of five
years, to purchase 300,000 shares of common stock with an exercise price of
F-16
$0.4257 per share to the investor, provided, however, this warrant may not be
exercised by the investor so long as the investor is the beneficial owner,
directly or indirectly, of more than ten percent (10%) of the common stock of
eMagin for purposes of Section 16 of the Securities Exchange Act 1934. The fair
value of the warrants issued to this Investor, which approximated $84,000, has
been recorded as original issue discount, resulting in a reduction in the
carrying value of this debt. The original issue discount was amortized into
interest expense over the period of the debt. Pursuant to the April 2003
financing described below, the investor agreed, to (a) amend the secured note
issued to them, (b) terminate the security agreement dated June 20, 2002 that
was entered into in connection with the purchase of the original secured notes
and allow the investors to enter into a new security agreement with him on a
pari passu basis in order for eMagin to continue its operations as a developer
of virtual imaging technology, and (c) simultaneously participate in the new
financing. The amendments to the note included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the April 2003 secured
note purchase agreement, (ii) extending the maturity dates of the note from June
30, 2003 to November 1, 2005, and (iii) revising and clarifying certain of the
other terms and conditions of the note, including provisions relating to
interest payments, conversions, default and assignment of the note.
On April 25, 2003, eMagin Corporation and a group of several accredited
institutional and individual investors (collectively, the "Investors") entered
into a Restructuring Agreement whereby Investors agreed to lend eMagin
$6,000,000 in exchange for (i) the issuance of $6,000,000 principal amount of
9.00% Secured Convertible Promissory Notes due on November 1, 2005 (the "Secured
Notes") and (ii) Warrants (the "Warrants") to purchase an aggregate of 7,749,921
shares of common stock of eMagin (subject to certain customary anti-dilution
adjustments), which Warrants are exercisable for a period of three (3) years.
Mr. Rivkin, who at the time of the transaction was a member of our Board of
Directors, participated as an investor in the transaction and invested $125,000
in the Company. In return for such investment, Mr. Rivkin received (i) a Secured
Convertible Promissory Note in an aggregate principal amount of $125,000, and
(ii) warrants exercisable for 161,456 shares of eMagin's common shares. In
addition, Stillwater LLC, an entity controlled by Mr. Mortimer D.A. Sackler,
agreed to invest an aggregate of $2,600,000 under the transaction and will
receive (i) Secured Convertible Promissory Notes in an aggregate principal
amount of $2,600,000, and (ii) warrants exercisable for 3,358,300 of our common
shares. As part of the transactions, Messrs. Sackler and Rivkin, who were the
holders of an aggregate of $1,325,000 principal amount of secured notes that
were purchased pursuant to a secured note purchase agreement entered into as of
November 27, 2001 (collectively, the "Original Secured Notes"), and Mr. Sackler,
who additionally was the holder of a $200,000 principal Bridge Note, agreed to
(a) amend their respective Original Secured Notes and Bridge Note issued to
them, (b) terminate the Security Agreement dated November 20, 2001 that was
entered into in connection with the purchase of the Original Secured Notes and
the Security Agreements dated June 20, 2002 that were entered into in connection
with the purchase of the Bridge Note and allow the new investors to enter into a
New Security Agreement (as defined below) with them on a pari passu basis in
order for the Company to continue its operations as a developer of virtual
imaging technology. The amendments to the Original Secured Notes and Bridge Note
included (i) amending the Bridge Note so as to provide that the Bridge Note
shall be convertible and will have the same conversion price as the Notes issued
pursuant to the Secured Note Purchase Agreement, (ii) extending the maturity
dates of the Original Secured Notes and Bridge Note from June 30, 2003 to
November 1, 2005, and (iii) revising and clarifying certain of the other terms
and conditions of the Original Secured Notes and Bridge Note, including
provisions relating to interest payments, conversions, default and assignments
of the Original Secured Notes and Bridge Note. On April 25, 2003, Mr. Sackler
transferred all of his holdings in the Company to Stillwater LLC, a limited
liability company in which Mr. Sackler is the sole member.
eMagin is party to a financial advisory and investment banking agreement with
Larkspur Capital Corporation. Paul Cronson, a director of eMagin, is a founder
and shareholder of Larkspur Capital Corporation. Larkspur Capital Corporation
received as compensation for financial advisory and investment banking services
in connection with the January 2004 private placement a cash fee of 6 3/4% of
the funds raised and warrants to purchase eMagin shares of common stock equal to
2.5% of the cash netted to eMagin. $283,503 and 43,651 common stock purchase
warrants exercisable at $2.41 per share which expire in January 2009, were paid
under the terms of the agreement.
A family member of an outside director of eMagin participated in the Securities
Purchase Agreement in January 2004's private placement in the amount of $90,000.
eMagin is party to a financial advisory and investment banking agreement with
Larkspur Capital Corporation "Larkspur". Paul Cronson, an outside director of
eMagin, is a founder and shareholder of Larkspur. Larkspur received as
compensation for financial advisory and investment banking services in
connection with the January 2004 private placement a cash fee of 6 3/4% of the
funds raised and warrants to purchase eMagin shares of common stock equal to
2.5% of the cash netted to eMagin. $283,503 and 43,651 common stock purchase
warrants exercisable at $2.41 per share which expire in January 2009, were paid
under the terms of the agreement.
F-17
Stillwater LLC, a limited liability company and a beneficial owner of more than
five percent of the outstanding shares of eMagin's common stock, held an
aggregate of $4 million of the notes converted in February 2004. Ginola Limited,
a beneficial owner of more than five percent of the outstanding shares of
eMagin's common stock, held an aggregate of $1.3 million of the notes which were
converted.
An outside director of eMagin, held $250,000 of the notes converted.
A family member of an outside director of eMagin participated in the re-pricing
of the Securities Purchase Agreement in August. 2,099,894 warrants were
re-priced and exercised. The family member re-priced and exercised 25,862 B
warrants and 23,684 C warrants.
Paul Cronson, an outside director of eMagin, is a founder and shareholder of
Larkspur was engaged as advisor in connection with the sale of the securities
sold in October 2004 and received a fee of $136,500.
Note - N Concentrations
In 2004, we had two customers that individually accounted for more than 10% of
our total sales. One customer accounted for 17% of net revenues and the other
accounted for 15%. For the year ended December 31, 2003, one company represented
approximately 21% of net revenues.
For the year ended December 31, 2004, approximately 78% of the Company's net
revenues were made to customers in the United States and approximately 22% of
the Company's net revenues were made to international customers. For the year
ended December 31, 2003, approximately 70% of the Company's net revenues were
made to customers in the United States and approximately 30% of the Company's
net revenues were made to international customers.
At December 31, 2004, there were 3 customers which comprised 50% of the
outstanding accounts receivable.
The Company purchases principally all of its silicon wafers from Taiwan
Semiconductor Manufacturing Company Ltd.
F-18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, we conducted an evaluation, under the supervision
and with the participation of our chief executive officer and chief financial
officer of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms.
Notwithstanding the foregoing, in connection with the audit of this annual
report on Form 10-KSB for the year ended December 31, 2004, on March 28, 2005 we
determined that the conversion of the debt to equity during the first quarter of
2004 should have been classified as a debt transaction and therefore an expense
should have been recorded in connection with the conversion. As set forth in our
quarterly report on Form 10-QSB/A for the period ended March 31, and June 30,
2004 which was filed with the SEC on April 12, 2005, the Consolidated Balance
Sheets, Consolidated Statements of Operations, Consolidated Statements of Cash
Flows, Statement of Changes in Shareholders' Equity and Selected Notes to
Consolidated Financial Statements have been restated, where applicable, to
classify the conversion as a debt transaction and record an expense in
connection with the conversion. In addition, on March 28, 2005 we determined
that the re-pricing of our original Class A, B and C warrants in August 2004
should have been classified as an equity transaction and therefore no expense
should have been recorded in connection with the re-pricing of the warrants and
that the unamortized debt discount and the deferred financing costs should have
been recorded as interest expense. As set forth in our quarterly report on Form
10-QSB/A for the period ended September 30, 2004 which was filed with the SEC on
April 12, 2005, the Consolidated Balance Sheets, Consolidated Statements of
Operations, Consolidated Statements of Cash Flows, Statement of Changes in
Shareholders' Equity and Selected Notes to Consolidated Financial Statements
have been restated, where applicable, to record the unamortized debt discount
and the deferred financing costs as interest expense. Accordingly, these
restatements, which were due to interpretations of the accounting treatment of
such transactions which was subsequently determined to be incorrect, has lead
management to determine that our disclosure controls and procedures were not
effective as of the end of the period covered by this report to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms.
(b) Changes in internal controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Notwithstanding the foregoing, we engaged John Atherly in June 2004 as our
Chief Financial Officer, and in May 2005, we appointed Irwin Engelman to our
board of directors and appointed Mr. Engelman as the Chairman of our Audit
Committee immediately following our annual meeting of shareholders which was
held on September 30, 2005. In addition, we have hired a new Director of Finance
to assist the Chief Financial Officer with our filing and other financial
reporting obligations. We believe these additions in personnel enhance our
ability to meet our financial and other reporting obligations as well as
strengthen our disclosure controls and procedures so that they are currently
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms.
ITEM 8B. OTHER INFORMATION
None.
36
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Our executive officers and directors, and their ages and positions are:
Name Age Position
Gary W. Jones 49 Chairman, Chief Executive Officer, President
John Atherly 46 Chief Financial Officer
Dr. K. C. Park 67 Executive Vice President, International Operations
Susan K. Jones 53 Chief Marketing and Strategy Officer, Secretary
Claude Charles (1) 67 Director
Paul Cronson (1) 47 Director
Jacob (Jack) Goldman (2*) (3) 82 Director
Rear Admiral Thomas Paulsen, USN (Ret.) (2) 68 Director
Jack Rivkin (1*) (3*) 64 Director
Dr. Jill Wittels (2) 55 Director
(1) Audit Committee
(2) Governance and Nominating Committee
(3) Compensation Committee
(*) Committee chairman
Gary W. Jones has served as Chairman, Chief Executive Officer, and
President of eMagin since 1992, and as Acting Chief Financial Officer from
August 2002 to June 2004. Mr. Jones has over 20 years of experience in both
public and private companies in the areas of business development, high volume
manufacturing, product development, research, and marketing. Prior to founding
FED Corporation/eMagin Corporation, Mr. Jones served as Director of the Device
Development and Processing division at MCNC Center for Microelectronics in North
Carolina from 1985 to 1992. From 1977 to 1985 Mr. Jones managed both
semiconductor manufacturing and research and development programs at Texas
Instruments. Mr. Jones received a B.S. in electrical engineering and physics
from Purdue University. Mr. Jones has served as a member of the Executive
Committee of the Board of the United States Display Consortium.
John Atherly has served as Chief Financial Officer since June of 2004.
Before joining eMagin Corporation, Mr. Atherly worked for Click2learn, Inc., a
NASDAQ listed enterprise Software Company from 1990 - 2004. He held the
positions of Vice President of Finance and CFO for approximately 8 years and
prior to that held the positions of Director of Finance and Controller. During
his 14 years with Click2learn Mr. Atherly managed the firm's finance and
administration, human resources, IT and manufacturing organizations. From 1987
to 1990, Mr. Atherly was a Finance and Operations Manager at MicroDisk Services,
a manufacturing firm serving the software industry. Mr. Atherly holds a BA in
Business Administration from the University of Washington.
Dr. K.C. Park was re-named Executive Vice President of International
Operations in 2004. Previously he held the position of President of our wholly
owned subsidiary, Virtual Vision, Inc., from 2002 to 2004 after serving as our
Executive Vice President of International Operations from 1998 to 2002. 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.
37
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.
Paul Cronson has served as a director since July of 2003. Mr. Cronson is
Managing Director of Larkspur Capital Corporation, which he founded in 1992.
Larkspur is a broker dealer that is a member of the National Association of
Securities Dealers and advises companies seeking private equity or debt. Mr.
Cronson's career in finance began in 1979 at Laidlaw, Adams Peck where he worked
in asset management and corporate finance. From 1983 to 1985, Mr. Cronson worked
with Samuel Montagu Co., Inc. in London, where he marketed eurobond issuers and
structured transactions. Subsequently from 1985 to 1987, he was employed by
Chase Investment Bank Ltd., where he structured international debt securities
and he developed "synthetic asset" products using derivatives. Returning to the
U.S., he joined Peter Sharp Co., where he managed a real estate portfolio,
structured financings and assisted with capital market investments from until
1992. Mr. Cronson received his BA from Columbia College in 1979, and his MBA
from Columbia University School of Business Administration in 1982. He is on the
Board of Umbanet, in New York City, a private company specializing in email
based distributed applications and secure messaging.
Dr. Jack Goldman joined our board of directors in February of 2003. Dr.
Goldman is the retired senior vice-president for R&D and chief technical officer
of the Xerox Corporation. While at Xerox, he founded and directed the celebrated
Xerox PARC laboratory. Prior to joining Xerox, Dr. Goldman was Director of Ford
Motor Company's Scientific Research Laboratory. He also served as Visiting Edwin
Webster Professor at MIT. Dr. Goldman presently serves on the Boards of
Directors of Umbanet Inc. and Medis Technologies Inc., and he has served on the
Boards of Xerox, General Instrument Corp., United Brands, Intermagnetics
General, GAF and Bank Leumi USA. He has also been active in government and
professional advisory roles including service on the US Dept. of Commerce
Technical Advisory Board, chairman of Statutory Visiting Committee of The
National Bureau of Standards (National Institute of Standards and Technology),
vice-president of the American Association for the Advancement of Science and
president of the Connecticut Academy of Science and Engineering.
Admiral Thomas Paulsen has served as a director since July 2003. Admiral
Thomas Paulsen served for over 34 years in the US Navy in Command Control,
Communications and Intelligence (C3I), Telecommunications, Network Systems
Operations, Computers and Computer Systems Operations until his retirement in
1994 as a Rear Admiral. He then served as Chief Information Officer for Williams
Telecommunications. Admiral Paulsen has served as a director Umbanet, Inc. since
2002. Since 2000, Admiral Paulsen has served on the Board of Governors of the
Institute of Knowledge Management, George Washington University. Since 1994, he
has served as the Chairman of the Advisory Board and President Emeritus of the
Center for Advanced Technologies (CAT) and a Managing Partner on the National
Knowledge and Intellectual Property Management Taskforce, a not-for-profit
company headquartered in Dallas, Texas, and is a member of the Board of
Governors for the Japanese American National Museum, Los Angeles, California.
Jack Rivkin has served as a director since June of 1996. Mr. Rivkin is
Executive Vice President and Chief Investment Officer of Neuberger Berman, a
Lehman Brothers Company. He previously served as Executive Vice President of
Citigroup Investments Inc., through which the Travelers Group investments in the
Company were managed. He also served as Vice Chairman and a director of Smith
Barney, and held positions at Procter and Gamble, Mitchell Hutchins, Paine
Webber and Lehman Brothers. Mr. Rivkin holds an engineering degree in metallurgy
from the Colorado School of Mines and an MBA from Harvard University.
38
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.
General Information Concerning the Board of Directors. The Board of
Directors of eMagin is classified into three classes: Class A, Class B and Class
C. Each Class A director will hold office until the 2005 Annual Meeting of our
stockholders. Currently, Mr. Gary Jones and Mr. Jack Rivkin are the Class A
directors. Each Class B director will hold office until the 2006 Annual Meeting.
Mr. Paul Cronson and Admiral Thomas Paulsen are Class B directors. Class C
directors will hold office until the 2007 Annual Meeting. Currently, Mr. Claude
Charles, Dr. Jill Wittels and Dr. Jacob Goldman are the Class C directors. In
each case, each director will hold office until his successor is duly elected or
appointed and qualified in the manner provided in eMagin's Amended and Restated
Certificate of Incorporation and our Amended and Restated Bylaws, or as
otherwise provided by applicable law.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all
of our directors, officers and employees, including our principal executive
officer, principal financial officer and principal accounting officer. The Code
of Business Conduct and Ethics will be posted on our website at
http://www.emagin.com/investors.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of this Code of Business
Conduct and Ethics by posting such information on our website, at the address
and location specified above and, to the extent required by the listing
standards of the American Stock Exchange, by filing a Current Report on Form 8-K
with the SEC, disclosing such information.
39
ITEM 10. EXECUTIVE COMPENSATION
Summary compensation table for named executive officers
The following table provides information about the total compensation for
services in all capacities to the Company or its subsidiary for the last three
fiscal years of those persons who at December 31, 2004, were (i) the Chief
Executive Officer of the Company and (ii) the other most highly compensated
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 (collectively, the "named executive officers").
Long-Term
Compensation
Awards
Other Annual (Securities
Underlying
Name and Positions Year Salary Bonus Compensation Options)
============================================== ========= ========== ======== ===== ============== ==================
Gary W. Jones President, Chief 2004 305,090 - (1) 46,636 1,200,000
Executive Officer 2003 305,090 - - 516,260
Chairman, Director 2002 297,260 - - 3,589,827
Susan K. Jones Executive Vice President, 2004 245,933 - (2) - 750,000
Chief Strategy and
Marketing 2003 245,933 - - 403,825
Officer, and Secretary 2002 239,621 - - 2,293,368
K.C. Park Executive Vice President 2004 168,000 - (3) 17,200 300,000
of International 2003 168,000 - - 231,697
Operations 2002 175,000 - - 938,310
John Atherly Chief Financial Officer 2004 105,000 - (4) - 750,000
2003 N/A - - N/A
2002 N/A - - N/A
Rick Haug Vice President, Display 2004 156,000 - (5) - 120,000
Manufacturing Operations 2003 156,000 - (5) - 164,394
2002 156,000 - (5) - 701,071
(1) In 2004, Mr. Jones was paid a base salary 305,090, the balance of deferred
pay in the amount of $140,798, as well as a reimbursement for relocation
expenses of $46,636. Mr. Jones was paid the balance of his deferred pay through
the application of these amounts to the exercise of options. In May 2004, Mr.
Jones was granted 1,200,000 shares as part of a company-wide bonus program.
(2) In 2004, Ms. Jones was paid a base salary of $245,933 and the balance of
deferred pay in the amount of $110,134. Ms. Jones was paid the balance of her
deferred pay through the application of these amounts to the exercise of
options. In May 2004, Ms. Jones was granted 750,000 shares as part of a
company-wide bonus program.
(3) In 2004, Dr. Park was paid a base salary of $168,000, the balance of
deferred pay in the amount of $63,190, as well as a reimbursement for relocation
expenses of $17,200. Mr. Park was paid the balance of his deferred pay through
the application of these amounts to the exercise of options. In May 2004, Dr.
Park was granted 300,000 shares as part of a company-wide bonus program.
(4) Mr. Atherly's base salary is $210,00. He joined eMagin Corporation in June
2004 and was paid a salary of $105,000. He was granted 750,000 shares as part of
his hiring package. Of these 750,000 option shares granted, 500,000 shares vest
quarterly over a period of five years. 250,000 shares are target incentive
options based on successful completion of four consecutive EBITA positive
quarters.
(5) In 2004, Mr. Haug was paid a base salary of $156,000 and the balance of
deferred pay in the amount of $44,835. $10,000 of which was paid through the
application of this amount to the exercise of options. In 2003, he earned a
total of $156,000 where he received partial payment of his salary of $126,111
plus a partial payment of deferred 2002 salary of $29,889. In 2003, Mr. Haug was
granted 164,394 option shares for continuing to defer the balance of his pay. In
2002, Mr. Haug earned a total of $156,000 of which $42,287 was deferred. In
October 2002, Mr. Haug was awarded 617,228 option shares which were issued in
July of 2003 after shareholder approval.
40
Options/SARs Grants During Last Fiscal Year
The following table provides information related to options granted to our
named executive officers during the fiscal year ended December 31, 2004.
Number of % of Total
Securities Options Exercise
Underlying Granted in Price
Name Options Granted Fiscal 2004 ($/Share) Expiration Date
----------------- ------------------ ---------------- --------------- -----------------
Gary W. Jones (1) 1,200,000 18% $1.81 5/17/09
Susan K Jones (1) 750,000 11% $1.81 5/17/09
John Atherly (2) 500,000 7% $1.69 6/16/11
John Atherly (2) 250,000 4% N/A (3) 6/16/11
Dr. K.C. Park (1) 300,000 4% $1.79 5/10/09
Rick Haug (1) 120,000 2% $1.69 6/16/09
(1) Options awarded as part of a company-wide bonus program.
(2) Options awarded as inducement option compensation award to new
employees.
(3) Issued as a performance based award. The named employee must achieve
EBITDA profitability for 4 consecutive quarters with the options
priced at the most recent American Stock Exchange closing trade price
of the stock before the accomplishment is reported in a 10K or 10Q.
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, 2004 by each of the
named executive officers and the number of shares subject to both exercisable
and unexercisable stock options as of December 31, 2004. The common stock price
at December 31, 2004 was $1.19 per share.
# of Securities Value of Unexercised
Shares Underlying Unexercised In-the-money
Acquired on Value Options at FY-End Options at FY-End
Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
================= ============= =========== ============= ============== ============ =============
Gary Jones 2,792,666 $3,870,534 1,460,604 1,200,000 $ 911,469 $ -
Susan K. Jones 1,531,796 $2,123,445 1,648,377 750,000 $ 604,641 $ -
Dr. K.C. Park 215,057 $ 177,467 1,027,318 300,000 $ 700,603 $ -
Richard Haug 91,777 $ 171,164 920,774 120,000 $ 621,583 $ -
John Atherly (2) - $ - - 750,000 $ - $ -
(1) Value Realized is calculated based upon the spread between the market
value of the common stock on the date of exercise minus the exercise
price. The Company received $1,175,447 upon exercise of the options.
(2) Performance based award is not exercisable at December 31, 2004. The
value of this award cannot be ascertained at this date due to the fact
that the exercise price will not be determined until the target is
reached.
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.
41
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the number of shares known to be owned by all
persons who own at least 5% of eMagin's outstanding common stock, the Company's
directors, the executive officers, and the directors and executive officers as a
group as of April 26, 2005, unless otherwise noted. Unless otherwise indicated,
the stockholders listed in the table have sole voting and investment power with
respect to the shares indicated.
Common Stock Percentage of
Name of Beneficial Owner Beneficially Owned Common Stock**
--------------------------------------------------------- ------------------ ---------------
Stillwater LLC (1)........................................ 14,576,266 16.7%
George Haywood (2)........................................ 10,169,952 11.9%
Gary W. Jones (3)........................................ 8,778,980 10.2%
Susan K Jones (3)........................................ 8,778,980 10.2%
Ginola Limited(4)......................................... 8,654,795 10.2%
Rainbow Gate (5).......................................... 2,016,745 2.4%
Dr. K.C. Park(6).......................................... 1,258,580 1.5%
Jack Rivkin(7)............................................ 1,213,896 1.5%
Ogier Trustee (Jersey) Limited (8)........................ 976,200 1.2%
Paul Cronson (9).......................................... 506,657 *
Claude Charles (10)....................................... 315,000 *
Chelsea Trust Company Limited ............................ 119,161 *
Jack Goldman(11).......................................... 107,500 *
John Atherly (12)......................................... 100,000 *
Adm. Thomas Paulsen (13).................................. 85,000 *
Dr. Jill Wittels (14)..................................... 85,000 *
All executive officers and directors Officers as a
group (consisting of 9 individuals) (15) ................. 12,450,613 14.6%
*Less than 1*% of the outstanding common stock
** Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of April 26, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Percentages are
based on a total of 82,172,176 shares of common stock outstanding on April 26,
2005, and the shares issuable upon the exercise of options and warrants
exercisable on or within 60 days of April 26, 2005, as described below.
(1) This figure represents: (i) 9,326,145 shares owned by Stillwater LLC, which
includes 1,719,326 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 5,250,121 shares, which
includes: (a) a warrant to purchase 300,000 shares that may not be exercised by
Stillwater LLC so long as Stillwater LLC is the beneficial owner, directly or
indirectly, of more than ten percent (10%) of the common stock of eMagin for
purposes of Section 16 of the Securities Exchange Act of 1934, and (b) warrants
to purchase 297,419 shares held by Rainbow Gate Corporation, in which the sole
member of Stillwater LLC is the investment manager of Rainbow Gate Corporation;
(2) This figure includes 3,586,664 common shares underlying warrants.
(3) This figure represents shares owned by Gary Jones and Susan Jones who are
married to each other, including (i) 1,893,937 shares of common stock issuable
upon exercise of stock options held by Gary Jones and (ii) 1,886,066 shares of
common stock issuable upon exercise of stock options held by Susan Jones. This
does not include (i) 1,116,667 shares underlying options owned by Gary Jones
which are not exercisable within 60 days of April 26, 2005; and (ii) 729,167
shares underlying options owned by Susan Jones which are not exercisable within
60 days of April 26, 2005.
42
(4) This figure represents: (i) 6,026,598 shares owned by Ginola Limited, which
include 1,719,326 shares held indirectly by Rainbow Gate Corporation, 650,800
shares owned by Ogier Trustee(Jersey) Limited, as trustee, 119,161 shares owned
by Chelsea Trust Company Limited, as trustee, and 396,223 shares owned by
Crestflower Corporation. Ginola Limited disclaims beneficial ownership of the
shares owned by Crestflower Corporation, Ogier Trustee (Jersey) Limited, as
trustee, and Chelsea Trust Company Limited, as trustee; and (ii) warrants held
by Ginola Limited to purchase 2,628,197 common shares, which includes warrants
to purchase 297,419 shares held by Rainbow Gate Corporation, in which the sole
shareholder of Ginola Limited is also the sole shareholder of Rainbow Gate
Corporation, and warrants to purchase 325,400 shares owned by Ogier Trustee
(Jersey) Limited, as trustee. Ginola Limited disclaims beneficial ownership of
the shares owned by Ogier Trustee (Jersey) Limited, as trustee.
(5) This figure includes 297,419 shares underlying warrants.
(6) This figure includes 1,135,651 common stock shares issuable upon exercise of
stock options, and does not include 291,667 shares underlying options owned by
Dr. K. C. Park which are not exercisable within 60 days of April 26, 2005.
(7) This figure represents 639,093 shares owned by Mr. Rivkin, warrants held by
Mr. Rivkin to purchase 244,803 shares of common stock, and 330,000 common stock
shares issuable upon exercise of stock options.
(8) This figure includes 325,400 shares underlying warrants.
(9) This figure represents 190,984 shares owned by Mr. Cronson, 215,673, shares
underlying warrants, and 100,000 shares underlying options held directly and
indirectly by Paul Cronson. This includes (i) 120,974 common stock shares and
42,857 shares underlying warrants held indirectly by a family member of Paul
Cronson; and (ii) 43,651 shares underlying warrants held indirectly by Larkspur
Corporation of which he is the Managing Director.
(10) This figure represents shares underlying options.
(11) This figure represents shares underlying options.
(12) This figure represents shares underlying options. This figure does not
include 900,000 shares of common stock issuable upon exercise of stock that are
not presently exercisable and are not exercisable within 60 days of April 26,
2005.
(13) This figure represents shares underlying options.
(14) This figure represents shares underlying options.
(15) This figure includes (i) warrants to purchase 460,476 shares of common
stock, and (ii) 6,038,154 shares of common stock issuable upon exercise of stock
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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
43
the transaction and received (i) Secured Convertible Promissory Notes in an
aggregate principal amount of $2,600,000, and (ii) warrants exercisable for
3,358,300 of our common shares. As part of the transactions, Messrs. Sackler and
Rivkin, who were the holders of an aggregate of $1,325,000 principal amount of
secured notes that were purchased pursuant to a secured note purchase agreement
entered into as of November 27, 2001 (collectively, the "Original Secured
Notes"), and Mr. Sackler, who additionally was the holder of a $200,000
principal Bridge Note, agreed to (a) amend their respective Original Secured
Notes and Bridge Note issued to them, (b) terminate the Security Agreement dated
November 20, 2001 that was entered into in connection with the purchase of the
Original Secured Notes and the Security Agreements dated June 20, 2002 that were
entered into in connection with the purchase of the Bridge Note and allow the
new investors to enter into a New Security Agreement (as defined below) with
them on a pari passu basis in order for the Company to continue its operations
as a developer of virtual imaging technology.
The amendments to the Original Secured Notes and Bridge Note included (i)
amending the Bridge Note so as to provide that the Bridge Note shall be
convertible and will have the same conversion price as the Notes issued pursuant
to the Secured Note Purchase Agreement, (ii) extending the maturity dates of the
Original Secured Notes and Bridge Note from June 30, 2003 to November 1, 2005,
and (iii) revising and clarifying certain of the other terms and conditions of
the Original Secured Notes and Bridge Note, including provisions relating to
interest payments, conversions, default and assignments of the Original Secured
Notes and Bridge Note. On April 25, 2003, Mr. Sackler transferred all of his
holdings in the Company to Stillwater LLC, a limited liability company in which
Mr. Sackler is the sole member.
In February 2004, the Company and all of the holders of the Secured Convertible
Notes (the "Notes"), which were due in November 2005, entered into an agreement
whereby the holders agreed to an early conversion of 100% of the principal
amount of the Notes aggregating $7.825 million, together with all of the accrued
interest of approximately $742,000 on the Notes, into 11,394,621 shares of
common stock of eMagin. The listing of the shares issuable pursuant to such
agreement was approved by the American Stock Exchange.
In consideration of the Noteholders agreeing to the early conversion of the
Notes, eMagin has agreed to issue the Noteholders warrants to purchase an
aggregate of 2.5 million shares of common stock (the "warrants"), which warrants
are exercisable at a price of $2.76 per share. 1.5 million of the warrants are
exercisable until the later of (i) twelve (12) months from the date upon which a
registration statement covering the shares issuable upon exercise of the
Warrants is declared effective by the Securities and Exchange Commission, or
(ii) December 31, 2005. The remaining 1.0 million of the warrants are
exercisable until four (4) years from the date upon which the registration
statement covering such shares is declared effective by the Securities and
Exchange Commission. Stillwater LLC, a limited liability company and a
beneficial owner of more than five percent of the outstanding shares of eMagin's
common stock, held an aggregate of $4 million of the notes converted. Ginola
Limited, a beneficial owner of more than five percent of the outstanding shares
of eMagin's common stock, held an aggregate of $1.3 million of the notes
converted.
In connection with the above conversion, eMagin also entered into a Registration
Rights Agreement with the holders of the Notes providing the holders with
certain registration rights under the Securities Act of 1933, as amended, with
respect to the common stock issuable upon exercise of the warrants. eMagin is
party to a financial advisory and investment banking agreement with Larkspur
Capital Corporation. Paul Cronson, a director of eMagin, is a founder and
shareholder of Larkspur Capital Corporation. Larkspur Capital Corporation
received as compensation for financial advisory and investment banking services
in connection with the January 2004 private placement a cash fee of 6 3/4% of
the funds raised for a fee of $283,503 and warrants to purchase eMagin shares of
common stock equal to 2.5% of the cash netted to eMagin for a total of 43,651
common stock purchase warrants exercisable at $2.41 per share.
In August 2004, eMagin and the certain of the holders of its outstanding Class
A, B and C common stock purchase warrants entered into an agreement pursuant to
which eMagin and the holders of the warrants agreed to the re-pricing and
exercise of an aggregate of 500,952, 862,085 and 736,857 currently outstanding
Class A, B and C common stock purchase warrants. As a condition to the
transaction, the holders of the warrants agreed to limit the right of
participation that they were granted pursuant to Section 4.11 of the Securities
Purchase Agreement, dated January 9, 2004, under which they originally purchased
such securities.
44
Specifically, the Company agreed to lower the exercise price of such warrants
from $1.74, $1.74 and/or $1.90, respectively, to $.90 per share, in
consideration of the holders agreeing to: (i) limit their right of participation
with respect to any proposed financing transaction to the maximum number of
shares that AMEX will allow the Investors to purchase in any subsequent
financing without the Company being required to seek shareholder approval
(provided, however, that in no event will the participation of all investors of
the January 2004 financing in any such subsequent financing exceed 35% of such
financing); and (ii) immediately exercise the re-priced Class A, B and/or C
common stock purchase warrants.
As a result of the transaction, the holders have agreed to re-price and
exercise, for an aggregate of approximately $1,889,900, an aggregate of
2,099,894 Class A, B and/or C common stock purchase warrants.
The Class B common stock purchase warrants were due to expire on August 12,
2004, while the Class A and C common stock purchase warrants remain exercisable
until January 9, 2009 and February 12, 2005, respectively. Following the
completion of the transaction, the Company continues to have outstanding an
aggregate of 1,213,352 and 184,212 Class A and C common stock purchase warrants,
respectively. The remaining outstanding unexercised Class A and C common stock
purchase warrants continue to be exercisable as per their original terms.
On October 21, 2004, eMagin entered into a Securities Purchase Agreement
pursuant to which we sold and issued 10,259,524 shares of common stock, par
value $0.001 per share, and Series F Common Stock Purchase Warrants to purchase
our common stock to purchasers who are a party to the Securities Purchase
Agreement for an aggregate purchase price of $10,772,500. The common shares were
priced at $1.05. The common shares, Series F Warrants and common shares issuable
upon exercise of the warrants were drawn-down off of a shelf registration
statement which was filed by us on May 5, 2004, and declared effective by the
Securities and Exchange Commission on June 10, 2004.
The Series F Warrants are exercisable from April 25, 2005 until April 25, 2010
to purchase up to 1,370,238 shares of common stock at an exercise price of $1.21
per share, subject to adjustment upon the occurrence of specific events,
including stock dividends, stock splits, combinations or reclassifications of
our common stock or distributions of cash or other assets. In addition, the
Series F Warrants contain provisions protecting against dilution resulting from
the sale of additional shares of our common stock for less than the exercise
price of the Series F Warrants, or the market price of the common stock, on the
date of such issuance or sale. The Series F Warrants do not entitle the holders
to any voting or other rights as a stockholder until such Series F Warrants are
exercised and common stock is issued. Under the terms of the offering, in no
event shall any holder of the Series F Warrants become the beneficial owner of
more than 4.99% of the number of shares of our common stock outstanding
immediately after giving effect to such issuance. An exercise that is limited by
this provision may be permitted at a later date if, on such date, such exercise
would not cause such beneficial ownership to exceed 4.99%. This limitation may
be waived, in whole or in part, by a holder of the Series F Warrants upon, at
the election of such holder, not less than 61 days' prior notice to us, and the
provisions of this limitation shall continue to apply until such 61st day (or
such later date, as determined by such holder, as may be specified in such
notice of waiver); provided, however, that four of the investors in this
offering delivered a waiver of this limitation to us prior to the closing date
of this offering, which waiver took effect as of the closing date. In addition,
in no event shall the Company issue to holders of the Series F Warrants, without
first obtaining shareholder approval, shares of common stock which, in the
aggregate, would exceed 19.9% of the number of shares outstanding on the closing
date. The rights of the holder of the Series F Warrants are more fully set forth
in Exhibit 4.1 to our Form 8-K filed with the SEC on October 26, 2004.
On October 29, 2004, eMagin entered into a Securities Purchase Agreement
(pursuant to which we sold and issued, on November 3, 2004, 2,740,476 shares of
common stock, par value $0.001 per share, and Series F Common Stock Purchase
Warrants to purchase our common stock to purchasers who are a party to the
Securities Purchase Agreement for an aggregate purchase price of approximately
$2,877,500. The common shares were priced at $1.05. The Company also issued
75,000 shares to its legal counsel in consideration of legal services rendered
in connection with a recently completed offering. The common shares, Series F
Warrants, common shares issuable upon exercise of the warrants and common shares
issued to its legal counsel were drawn-down off of a shelf registration
statement which was filed by us on May 5, 2004, and declared effective by the
Securities and Exchange Commission on June 10, 2004. The Series F Warrants were
issued under the same terms as our October 21, 2004 financing described above.
45
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit
Number Description
--------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger between Fashion Dynamics Corp., FED
Capital Acquisition Corporation and FED Corporation dated March 13,
2000 (incorporated by reference to exhibit 2.1 to the Registrant's
Current Report on Form 8-K/A filed on March 17, 2000).
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to exhibit 99.2 to the Registrant's Definitive Proxy
Statement filed on June 14, 2001).
3.2 Amended Articles of Incorporation (incorporated by reference to
exhibit A to the Registrant's Definitive Proxy Statement filed on June
13, 2003).
3.3 Bylaws of the Registrant (incorporated by reference to exhibit 99.3 to
the Registrant's Definitive Proxy Statement filed on June 14, 2001).
4.1 Form of Warrant dated as of April 25, 2003 (incorporated by reference
to exhibit 4.3 to the Registrant's Current Report on Form 8-K filed
on April 28, 2003).
4.2 Form of Series A Common Stock Purchase Warrant dated as of January 9,
2004 (incorporated by reference to exhibit 4.1 to the Registrant's
Current Report on Form 8-K filed on January 9, 2004).
4.3 Form of Series B Common Stock Purchase Warrant dated as of January 9,
2004 (incorporated by reference to exhibit 4.2 to the Registrant's
Current Report on Form 8-K filed on January 9, 2004).
4.4 Form of Series C Common Stock Purchase Warrant dated as of January 9,
2004 (incorporated by reference to exhibit 4.3 to the Registrant's
Current Report on Form 8-K filed on January 9, 2004).
4.5 Form of Series D Warrant (incorporated by reference to exhibit 4.1 to
the Registrant's current report on Form 8-K filed on March 4, 2004).
4.6 Form of Series E Warrant (incorporated by reference to exhibit 4.2 to
the Registrant's current report on Form 8-K filed on March 4, 2004).
10.1 2000 Stock Option Plan, (incorporated by reference to exhibit 99.1 to
the Registrant's Registration Statement on Form S-8 filed on March 14,
2000).*
10.2 Form of Agreement for Stock Option Grant pursuant to 2003 Stock Option
Plan (incorporated by reference to exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 filed on March 14, 2000).*
10.3 Nonexclusive Field of Use License Agreement relating to OLED
Technology for miniature, high resolution displays between the Eastman
Kodak Company and FED Corporation dated March 29, 1999 (incorporated
by reference to exhibit 10.6 to the Registrant's Annual Report on Form
10-K/A for the year ended December 31, 2000 filed on April 30, 2001).
10.4 Amendment Number 1 to the Nonexclusive Field of Use License Agreement
relating to the OLED Technology for miniature, high resolution
displays between the Eastman Kodak Company and FED Corporation dated
March 16, 2000 (incorporated by reference to exhibit 10.7 to the
Registrant's Annual Report on Form 10-K/A for the year ended December
31, 2000 filed on April 30, 2001).
46
10.5 Lease between International Business Machines Corporation and FED
Corporation dated May 28, 1999 (incorporated by reference to exhibit
10.9 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000 filed on March 30, 2001),
10.6 Amendment Number 1 to the Lease between International Business
Machines Corporation and FED Corporation dated July 9, 1999
(incorporated by reference to exhibit 10.8 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000 filed on
March 30, 2001).
10.7 Amendment Number 2 to the Lease between International Business
Machines Corporation and FED Corporation dated January 29, 2001
(incorporated by reference to exhibit 10.11 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000 filed on
March 30, 2001).
10.8 Amendment Number 3 to Lease between International Business Machines
Corporation and FED Corporation dated May 28, 2002.
10.9 Amendment Number 4 to Lease between International Business Machines
Corporation and FED Corporation dated December 14, 2004.
10.10 Registration Rights Agreement dated as of April 25, 2003 by and among
eMagin and certain initial investors identified on the signature pages
thereto (incorporated by reference to exhibit 10.3 to the Registrant's
Current Report on Form 8-K filed on April 28, 2003).
10.11 Securities Purchase Agreement dated as of January 9, 2004 by and among
eMagin and the investors identified on the signature pages thereto
(incorporated by reference to exhibit 10.1 to the Registrant's Current
Report on Form 8-K filed on January 9, 2004).
10.12 Registration Rights Agreement dated as of January 9, 2004 by and among
eMagin and certain initial investors identified on the signature pages
thereto (incorporated by reference to exhibit 10.2 to the Registrant's
Current Report on Form 8-K filed on January 9, 2004).
10.13 Master Amendment Agreement dated as of February 17, 2004 by and among
eMagin and the investors identified on the signature pages thereto
(incorporated by reference to exhibit 10.1 to the Registrant's Current
Report on Form 8-K filed on March 4, 2004).
10.14 Registration Rights Agreement dated as of February 17, 2004 by and
among eMagin and certain initial investors identified on the signature
pages thereto (incorporated by reference to exhibit 10.2 to the
Registrant's Current Report on Form 8-K filed on March 4, 2004).
10.15 Letter Agreement amending the Master Amendment Agreement dated as of
March 1, 2004 by and among eMagin and the parties to the Master
Amendment Agreement (incorporated by reference to exhibit 10.3 to the
Registrant's Current Report on Form 8-K filed on March 4, 2004).
10.16 Lease between International Business Machines Corporation and FED
Corporation dated May 28, 1999, as filed in the Registrant's Form
10-K/A for the year ended December 31, 2000 incorporated by reference
herein.
10.17 Amendment Number 2 to the Lease between International Business
Machines Corporation and FED Corporation dated January 29, 2001, as
filed in the Registrant's Form 10-K/A for the year ended December 31,
2000 incorporated by reference herein.
10.18 Secured Note Purchase Agreement entered into as of November 27, 2001,
by and among eMagin Corporation and certain investors named therein,
as filed in the Registrant's Form 8-K dated December 18, 2001
incorporated herein by reference.
47
10.19 Securities Purchase Agreement dated as of April 25, 2003 by and among
eMagin and the investors identified on the signature pages thereto,
filed April 28, 2003, as filed in the Registrant's Form 8-K
incorporated herein by reference.
10.20 Registration Rights Agreement dated as of April 25, 2003 by and among
eMagin and certain initial investors identified on the signature pages
thereto filed April 28, 2003, as filed in the Registrant's Form 8-K
incorporated herein by reference.
10.21 Securities Purchase Agreement dated as of January 9, 2004 by and among
eMagin and the investors identified on the signature pages thereto,
filed January 9, 2004, as filed in the Registrant's Form 8-K
incorporated herein by reference.
10.22 Registration Rights Agreement dated as of January 9, 2004 by and among
eMagin and certain initial investors identified on the signature pages
thereto. Incorporated herein by reference to our January 9, 2004 Form
8-K.
10.23 Master Amendment Agreement dated as of February 17, 2004 by and among
eMagin and the investors identified on the signature pages thereto,
filed March 4, 2004, as filed in the Registrant's Form 8-K
incorporated herein by reference.
10.24 Registration Rights Agreement dated as of February 17, 2004 by and
among eMagin and certain initial investors identified on the signature
pages thereto, filed March 4, 2004, as filed in the Registrant's
Form 8-K incorporated herein by reference.
10.25 Letter Agreement amending the Master Amendment Agreement dated as of
March 1, 2004 by and among eMagin and the parties to the Master
Amendment Agreement, filed March 4, 2004, as filed in the Registrant's
Form 8-K incorporated herein by reference.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification by Chief Executive Officer pursuant to Sarbanes Oxley
Section 302.
31.2 Certification by Chief Financial Officer pursuant to Sarbanes Oxley
Section 302.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S. C.
Section 1350.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S. C.
Section 1350.
* Each of the Exhibits noted by an asterisk is a management compensatory plan or
arrangement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For year ended December 31, 2004, the Company made a cash payment to Eisner LLP,
our Independent Registered Public Accounting Firm, of $82,425, of which $64,440
was for 2003 audit expenses, $7,000 was for 2004 audit expenses and $10,985 was
for 2004 audit related fees.
For 2004 Eisner LLP billed the Company audit fees totaling $93,697, consisting
of $21,197 related to the quarterly reports on Form 10 QSB and $72,500 related
to the annual report on Form 10 KSB, and audit related fees totaling $60,969. We
currently have not received all invoices for 2004 audit expenses and have
accrued an additional amount of $20,000. No tax fees or other fees were incurred
by the Company for Eisner LLP.
In 2004, the Company also paid Grant Thornton LLP, our previous Independent
Registered Public Accounting Firm, a total of $110,335, of which $31,000 was for
audit fees in 2004 and the balance of $79,335 was for outstanding 2003 invoices.
The Company paid $6,000 to an independent accountant for tax preparation
services.
For the year ended December 31, 2003, the aggregate fees for the audit of
eMagin's annual financial statements and the review of Forms 10-Q for the 2003
fiscal year were $70,000. Aggregate fees billed for all other services rendered
by Eisner LLP for the 2003 fiscal year were $0. Aggregate fees billed for all
other services rendered by Grant Thornton for the 2003 fiscal year were
$135,335.
The Audit Committee has considered whether the provision for services covered by
fees other than audit fees is compatible with maintaining the principal
auditor's independence.
48
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 2nd day of November 2005.
EMAGIN CORPORATION
BY: /s/ Gary Jones
--------------
Gary Jones
CHIEF EXECUTIVE OFFICER,
PRESIDENT
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
NAME TITLE DATE
/S/ Gary Jones President, Chief Executive November 2, 2005
------------------ Officer, and Director
Gary Jones
/S/ John Atherly Chief Financial Officer November 2, 2005
------------------
John Atherly
/s/ Claude Charles Director November 2, 2005
------------------
Claude Charles
/s/ Paul Cronson Director November 2, 2005
------------------
Paul Cronson
/S/ Dr. Jacob E Goldman Director November 2, 2005
-----------------------
Dr. Jacob E Goldman
/s/ Adm. Thomas Paulsen Director November 2, 2005
------------------
Adm. Thomas Paulsen
/s/ Dr. Jill Wittels Director November 2, 2005
------------------
Dr. Jill Wittels
/S/ Irwin Engelman Director November 2, 2005
------------------
Irwin Engelman
49