UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM
Form 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| R | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the fiscal year ended December 31, 2005 |
| |
| or |
| |
| £ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 000-24757
eMagin Corporation
------------------------------------------------------
(Exactfile number 001-15751
eMAGIN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-1764501
------------------------------- -----------------------------------
(State or other jurisdiction of incorporation or organization
and I.R.S. Employer Identification No.charter)
eMagin
2070 Route 52
Hopewell Junction, New York 12533
----------------------------------------- ----------------------
(Address
Delaware | 56-1764501 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
10500 NE 8th Street, Suite 1400, Bellevue, Washington 98004
(Address of principal executive offices) (Zip Code)
(845) 892-1900
----------------------------------------------------
(Registrant's
(425) 749-3600
(Registrant’s telephone number, including area code)
code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
$.001 Par Value Per Share
Indicate by check mark whether the Registrantregistrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes £ No R
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No R
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/R No / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of April 7, 2003 was approximately $9.6 million, based upon
the closing sales price of the Registrant's common stock as quoted on the AMEX.
The number of shares outstanding of the Registrant's common stock as of April 7,
2003 was 30,854,980
£
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /
£
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
. Large accelerated filer £ | Accelerated filer £ | Non-accelerated filer R |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes £ No R
As of June 30, 2005, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the closing price of the common stock as quoted on the American Stock Exchange of $0.90 was approximately $69.5 million. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
Number of shares of common stock outstanding as of March 17, 2006 was 100,049,382.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting
of Stockholders (the "2003 Proxy Statement") (to be filed with the Securities
and Exchange Commission on or before May 15, 2003 is incorporated by reference
in Part III hereof).
- None
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
2005
INDEX
PART I
| | |
| | Page |
| PART I | |
Item 1: Description of 1 | Business 5
| 4 |
Item 2: Description of Property 20
1A | Risk Factors | 18 |
Item 3: 1B | Unresolved Staff Comments | 22 |
| Item 2 | Properties | 22 |
| Item 3 | Legal Proceedings 21
| 22 |
Item 4: 4 | Submission of Matters to a Vote of Security Holders 21
| 22 |
| PART II | |
Item 5: 5 | Market for the Registrant'sRegistrant’s Common Equity, and Related Shareholder Matters 21
and Issuer Purchases of Equity Securities | 23 |
Item 6: 6 | Selected Financial Data | 24 |
Item 7: Management's7 | Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations 26
| 25 |
Item 7A: 7A | Quantitative and Qualitative Disclosures About Market Risk 34
| 30 |
Item 8: 8 | Financial Statements 42
and Supplementary Data | 31 |
Item 9: 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 67
| 50 |
| Item 9A | Controls and Procedures | 50 |
| Item 9B | Other Information | |
| PART III | |
Item 10: 10 | Directors and Executive Officers of the Registrant 67
| 51 |
Item 11: 11 | Executive Compensation 70
| 55 |
Item 12: 12 | Security Ownership of Certain Beneficial Owners and Management 71
Matters | 61 |
Item 13: 13 | Certain Relationships and Related Transactions 71
| 62 |
| Item 14 | Principal Accounting Fees and Services | 63 |
| PART IV | |
Item 14: Controls15 | Exhibits and Procedures 71
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K
| 64 |
| Signatures | |
| |
SIGNATURES
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 wholly owned subsidiary, Virtual Vision, Inc.
Except for the historical information contained herein, some of the statements in this Report contain forward-looking statements that involve risks and uncertainties. These statements are found in the sections entitled "Business," "Management's Discussion and Analysis
of Financial Condition and
Results ofor 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
4
statements.
PART I
Introduction
eMagin Corporation designs, develops, manufactures, and markets OLED (organicvirtual imaging products which utilize OLEDs, or organic light emitting diode)-on-silicondiodes, OLED-on-silicon microdisplays and related information technology solutions. We integrate OLED technology with silicon chips to produce high-resolution microdisplays smaller than one-inch diagonally which, when viewed through a magnifier, create a virtual imageimages that appearsappear comparable in size to that of a computer monitor or a large-screen television. Our products enable our original equipment manufacturer, (OEM)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 of 800x600 plus 52 added columns of data) OLED microdisplay was firstinitially 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 are in the process of completing development of 2 additional OLED microdisplays, namely the SVGA 3DS (SVGA 3D shrink, a smaller format SVGA display with a new cell architecture with embedded features) and an SXGA (1280 x 1024).
In January 2005 we announced the world's first personal display system to combine OLED technology with head-tracking and 3D stereovision, the Z800 3DVisor(tm), which was first shipped in February 2002. mid-2005. This product received a CES Design and Innovations Award for the electronic gaming category and also received the coveted Best of Innovation Awards for the entire display category. The product was also recognized as a Digital Living Class of 2005 Innovators. In January 2006 we unveiled prototypes of our upcoming X800 3DVisor and Eyebud(tm) Personal Display Systems. The Eyebud for use with video iPods was identified as an important new electronics product by several major publications including USA Today.
We arehave now accepting conditionalaccepted purchase agreements for larger quantities of our first two commercial microdisplay products.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.
globally.
Our OLED-on-silicon microdisplays offer a number of advantages over current liquid crystal microdisplays, including greatly increased brightness, lowersystem level power requirements,efficiency, less weight and wider viewing angles. Using our active matrix OLED technology, many computer and video electronic system functions can be built directly into the OLED-on-silicon microdisplay, resulting in compact systems with expected lower overall system costs relative to alternate microdisplay technologies. We license fundamental OLED technology from Eastman Kodak and we
have developed our own technology to create high performance OLED-on-silicon microdisplays and related optical systems. iSuppli-Stanford Resources, an
industry market research organization, has identified the emergence ofsystems and we have licensed certain fundamental OLED and display technology as a major advance, with OLED revenue expected to reach $125 million
in 2003 and rise to more than $3.1 billion in 2009 for a compound annual growth
rate of 56% from 2003 to 2009.
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.technology for virtual imaging. We believe we are the only company to announce, publicly show and sell full-color active matrix small molecule OLED-on-silicon microdisplays.
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 wholly owned subsidiary, Virtual Vision, Inc., provides added value
serviceswebsite is located at www.emagin.com and our e-commerce site is www.3dvisor.com. We make available on our website, free of charge, our annual report on Forms 10K and 10KSB, our proxy statement, our quarterly reports on Forms 10Q and 10QSB, our current reports on Form 8K, and all amendments to such reports filed under the Securities and Exchange Act, earnings press releases, and other business-related press releases. We also post on our customers by providing non-recurring engineering (NRE) support
for virtual imaging subsystem design and prototyping, as well as by creating
standardized optic and electronics interfaces to our displays to acceleratewebsite the time to marketcharters of our new potential customers.
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.
Industry Overview
The overall flat panel display industry is predicted to grow to over $69approach $100 billion in 2005,2008, according to market research by DisplaySearch.iSuppli Corporation (Strategic Display Outlook, April 2005), 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.
microdisplays because they are viewed through a lens rather than directly, in comparison to desktop computer screens which are known 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
0.5-inch to 0.75-inch0.6-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
opticsdisplay and optic recreates the
virtual imaging viewing and sound experience of sitting in the middle seat of a typical movie theater.
5
iSuppli-Stanford Resources, a
The microdisplay market, intelligence firm focusing on the
global electronic display industry, forecasts that the world market for
microdisplays as components will grow from $669 million in 2001according to $1.9 billion
in 2007, for a compounded annual growth rate of 19%, with 244 million units
projected to be shipped in 2007. Another leading industry market research
organization, DisplaySearch, projects that the overall microdisplay marketMcLaughlin Consulting Group, is expected to grow to $3.1at 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 2005" focuses on microdisplay-enabled personal electronics for consumers as well as professionals in vertical markets. According to the joint analysis, wireless services and consumer electronic companies, in combination with display developers, will introduce a new generation of communications and entertainment solutions incorporating headset personal displays over the next few years. As a result, sales of such display headsets are forecast at over $1 billion by 2005.
2009.
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) near-eye
microdisplaysan established market for electronic viewers incorporated in products such as viewfinders for digital cameras and video cameras andwhich 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, wearable computers, portable DVD systems, electronic games, and other entertainment.
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 alternatealternative products and will help to enable virtual imaging to emerge as an important display industry segment.
Our Approach: OLED-on-Silicon Microdisplays and Optics
There are two basic classes of organic light emitting diode, (OLED)or OLED, technology, dubbed molecularsingle 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 alternatealternative technologies.
We have developed our own proprietary and patented technology to create high performance OLED-on-silicon microdisplays and related optical systems, and we license fundamental OLED technology from Eastman Kodak. (See "Intellectual Property" and "Strategic Relationships"). We expect that the integration of our OLED-on-silicon microdisplays into mobile electronic products will result in lower overall system costs to our original equipment manufacturer (OEM)OEM customers.
We believe that our OLED-on-silicon microdisplays representwill initiate a new generation of microdisplay technology.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-wearablecharacteristics in comparison with LCDs and other near-eye 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.
technologies:
| · | the user does not need to as accurately position the head-wearable display to the eye; |
| · | the image will change minimally with eye movement and appear more natural; and |
| · | 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. We
expectOur 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 and weight is greatly reduced in systems using our integrated electronics and unique OLED characteristics, coupled
with our lenses, will result in lower overall system costs for OEMs.
products.
Our
SVGA+ OLED microdisplay stores
until refreshed, all the color and luminance value information at each of the more than 1.5 million picture elements,
(pixels)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
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emit light at wide angles allows customers to create large field of view (approx. 40 degrees), wide image capture range images from very compact, low-cost, one-piece optical systems. The display contains the majority of the electronics required for connection to the RGB (red, green, blue signal) port of a portable computer imbedded in its silicon chip backplane, thereby eliminating many other components required by other display technologies such as D-Adigital-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, (1.53which contains 1.53 million picture elements)elements, and our stereovision-capable SVGA-3D microdisplay, (1.44which contains 1.44 million picture elements). We are currently developing a
military and industrial oriented ultra-high-luminance SXGA integrated circuit
(3.9 million picture elements) that is due for completion in late 2003 or 2004.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 color SVGA+ resolution microdisplay and associated electronics required forto help OEMs evaluate our microdisplay products and to assist their efforts to build and test new products. This developer kit provides
OEMsproducts incorporating our microdisplays. In 2005, we produced our first personal display system to be sold directly to consumers, the Z800 3DVisor for PCs, which incorporates eMagin OLED display stereovision with the first opportunity for evaluation of an OLED-on-silicon
microdisplay.
head tracking capability. We expect to expand our OLED microdisplay and personal display systems product portfolios during 2006.
Our Products
Product Lines
We offer our products to Original Equipment Manufacturers (OEM)OEMs and other large volume buyers as both separate components and integrated bundles in a three-tiered platform:
platform. We believe that our strategy of offering our products both as separate components and as integrated bundles that include microdisplays and lenses will allow us to address the needs of the largest number of potential customers.
(1) OLED-on-silicon microdisplays for integration into near-eye virtual imaging OEM products for consumer, industrial, and military markets;
(2) Microviewer(TM) near-eye virtual imaging modules that incorporate our OLED-on-silicon microdisplays with compact lenses and electronic interfaces for integration into OEM products for consumer, industrial, and military markets. TheseWe have shipped customized microviewer modules to several customers, some of which have incorporated our products have been prototypedinto their own commercially available products; and are planned;
(3) Head-wearable near-eye virtual imaging display systems that will incorporate our Microviewers(TM) for consumer and industrial markets. These products
have been prototyped and are planned.
We also plan to offer engineering support enablingand 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 include:
are based on our "SVGA series" OLED microdisplays. We
expect to offer two additional display products in 2006, a smaller format (“shrink”) version of our SVGA display and a SXGA OLED microdisplay. The table below provides a partial listing of the display products that have been developed, or that are in the late stages of development.
OLED Microdisplays:
Microdisplay | | Resolution | | Size |
Product Numbers | Description | (pixels) | Color | (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 | 0.44 inch |
| TBD | SXGA OLED microdisplay | 1280x3x1024 | various | 0.62 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
7
portable electronics applications since the 3D feature is optional. A built-in circuit provides compatibility with single channel frame sequential stereoscopic vision without additional external components. In high volumes, the SVGA-3D is priced lower than the SVGA+, so it is likely to be selected whenever the OEM customer does not need monochrome NTSC or the extra columns of resolution.
0.98-inch
Under Development - 0.44-inch Diagonal SVGA-3DS (Super Video Graphics Array plus built-in stereovision capability Shrink Version) for Consumer OEMs. This display also has a resolution of 800 x 3 x 600 pixels. The SVGA-3DS can also 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. This product has most of the features of both the standard SVGA+ and the SVGA-3D along with some important new features, but is smaller so more displays can be placed on each wafer, potentially lowering unit pricing. In high volumes, the SVGA-3DS is expected to be priced lower than the full size SVGA-3D, so it is likely to be selected whenever the OEM customer does not need as large of an image source or needs lower cost.
Under Development - 0.62-inch Diagonal SXGA (Super ExtendedeXtended Video Graphics Array) for Industrial, Medicalconsumer, industrial, medical and Military Applications.military applications. We are developing an introductorya full color SXGA microdisplay product as a personal computer-compatible headset display for military, medical, high-end commercial, and industriala large spectrum of applications. We anticipate that prototypes of this display will become available for sampling in early 2007. This product will have 1280 x 1024 monochromex1024 triad color pixels and an active diagonal similar to that of our original SVGA microdisplays. It will be adaptable to color
VGA resolution. The display will have a capability for very high luminance. We
expect that this display will be able provide over 30,000 Cd/m2 luminance. For
reference, a typical notebook computer operates at 80 Cd/m2 peak luminance. This
digital videoinclude luminance and data interface product is being designed to exhibit a wide
dimming rangeranges compatible with the demands of military applications as well as those of high-end consumer and high luminance for special military applications.industrial markets. We anticipate that theits performance features of the SXGA, such as high-speed digital
video and 256 gray levels, have the potential to1280x3x1024 resolution combined with a small package will generate a considerable interest and serve as a catalyst for the development of new applications.
(2)
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. Molded plastic prism lenses have been developed to help our commercial and consumer OEM customers obtain better quality, large area virtual images using our displays at relatively low cost in comparison to alternate approaches. Large numbers of these lenses have already been produced.
We intend to sell Microviewer(TM) modules to OEMs for integration with their branded products, or incorporated into eGlass(TM) Personal Viewer(TM)
head-wearable displays to be supplied by our subsidiary, Virtual Vision, Inc.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 long 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.
(3) eGlass(TM) Personal Viewer(TM) Head-WearableDisplay Systems (Head-Wearable and Headset Systems)
Personal
Viewer(TM) head-wearabledisplay systems, such as our
eGlass(TM) Personal
Viewer(TM)Z800 3DVisors (TM), and upcoming X800 3DVisor and Eyebud(TM), give users the ability to work with their hands while simultaneously viewing information or video on the display.
OurEach of these head-wearable displays enable more versatile portable computing,
using a 0.59-inch diagonal microdisplay (SVGA-3D capable of delivering an image that appears comparable to that of a 19-inch monitor at 22 to 24 inches from the eye,
usingor a
0.59-inch diagonal microdisplay (SVGA-3D).105 inch movie screen at 12 foot distance. We believe that
Personal Viewer
head-wearable displayspersonal display systems will fill the increasing demand for instant data accessibility
and privacy in mobile workplaces. We expect to sell the
head-wearable displays
primarilypersonal display systems not only to OEM systems and equipment customers through direct sales
but to end users through distributors, and our e-commerce website,
which is under development.
We believe that our strategy of offering our products both as separate
components and as integrated bundles that include microdisplays and lenses will
allow us to address the needs of the largest number of potential customers.
Prior Product and Technology Awards
o Dual Use Technology Achievement Award
March 2002. eMagin and the US Air Force Armstrong Laboratory received first
place for the US Air Force and was recognized as one of the best dual use
technologies in 2001 recognition across all branches of the Armed Services for
the Second Annual Dual Use Science and Technology Achievement Award awarded by
the Deputy Under Secretary for Defense, Charles J. Holland. The award recognizes
8
the best dual use programs and honors those responsible for developing and
implementing technology beneficial to both military and commercial sectors.
o 2001 Product of the Year
January 17, 2001. eMagin received a 2001 Product-of-the-Year Award from
Electronic Products Magazine, honoring eMagin for the development of its
first-of-class high-resolution active matrix OLED-on-silicon microdisplay, based
on significant advances in technology.
o 2001 U.S. Army Phase II Quality Award
August 21, 2001. eMagin received a 2001 US Army SBIR (Small Business
Innovation Research) Phase II Quality Award for the development of
high-resolution active matrix OLED microdisplays for incorporation into military
head-mounted displays. The annual Quality Awards Program recognizes top quality
Army Phase II projects for their technical achievement, contribution to the Army
and potential for commercial use. Selected by a distinguished panel of Army and
industry experts, eMagin's project was among only five selected to receive a
2001 U.S. Army SBIR Phase II Quality Award through the rigorous Quality Awards
competition.
o Display of the Year 2000 Gold Award
June 6, 2001. eMagin was honored by The Information Display Magazine and
Society Information Display with the Display of the Year Gold Award for its
OLED-on-Silicon microdisplay. The Display of the Year Award was established in
1995 to recognize outstanding products chosen for their innovation and potential
impact on current and future display markets. An international committee of
distinguished display technologists and leading editors in a four-month process
of nominations and voting made the selection.
www.3dvisor.com.
Our Market Opportunity
The growth potential of our selected target market segments have been investigated using information gathered from key industry market research firms, including Display Search,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.
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| · | 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 leading consumer and retail information provider The NPD Group, forecasts show the U.S. digital camera market will generate more than million units in 2006. The digital camera market is expected to increase by eight percent in revenue and 17 percent in units over 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. |
| · | 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 IDC's Worldwide Quarterly Mobile Phone Tracker, in the fourth quarter of 2005 alone, worldwide mobile phone shipments rose 19.3 percent year over year and increased sequentially 16.8 percent to reach a single quarter record of 245.2 million units. In addition, worldwide converged mobile device shipments rose 100.3 percent year over year and increased sequentially 20 percent during the quarter to reach 16.8 million units. According to Gartner, Inc. worldwide mobile phone sales totaled 816.6 million units in 2005. According to DisplaySearch, by 2010, 3.8 billion people, half the people on the planet, are expected to own a mobile phone, Worldwide personal digital assistant shipments totaled a record 14.9 million units in 2005, a 19 percent increase from 2004, according to Gartner, Inc. 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 requirements 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) Personal Display Systems Platforms, including Head-wearable Display Platforms
Displays
Head-wearable displays incorporate microdisplays mounted in or on eyeglasses, goggles, simple headbands, helmets, or hardhats, and are often referred to as HMDshead-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 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 werehave been selected for several aircraft vehicles and
soldiera range of defense-security applications, including a situational awareness HMD for the US Army Land Warrior 1.0programs, a handheld thermal imager for border patrol and 2.0 programstraining, and the US Air Force Joint Strike Fighter, among others.simulation virtual monitors for Quantum 3D. The 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 applyapplied 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 inbeyond small quantities for that program until 2004.a future date to be determined. Our display is also used in Kaiser Electro-Optics, Inc.'sRockwell Collins’ commercially available ProView S035 Monocular HMD. The US Air Force has selected our OLED microdisplay
technology for incorporation into the Strike Helmet 21 system that uses
Integrated Panoramic Night Vision Goggles (IPNVG) in avionics helmets. The
Strike Helmet 21 systemEquipment 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 targetedthe first OLED-equipped product to be listed on the US Government's GSA schedule. Virtually Better Inc. has incorporated our Z800 3DVisor into its “Virtual Iraq” treatment for integration into F-15E aircraft in the
2003-2004 time period.post-traumatic stress disorders. In addition, our displays have been commercialized, or planned to be commercialized, by military systems integrators including Insight Technologies, Elbit, Thales, and Nivisys, among others. We cannot assure that Government projects 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
(parts,such as parts, tools and equipment
availability);availability; instant accessibility to maintenance or construction manuals; routine quality assurance inspection;
endoscopic surgery; and real-time viewing of images and
data.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
an upcoming accessory to Antelope
Technolgies' MCC Wearable Computing system,Liteye's 500, which incorporates IBM's wearable PC technology.
10
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 Department of Defense agencies. 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),
| · | Entertainment and gaming video headset systems, which permit individuals to view television, including HDTV, video CDs, DVDs and video games on virtual large screens or stereovision in private without disturbing others. Even though entertainment and gaming headsets represent an emerging product class, we are seeing demand from OEMs. Headset game systems for portable computers with head tracking and/or stereovision appears to be our predominant high quantity near term market opportunity, with several customers indicating an interest in large production quantities of our displays. Our current SVGA-3D display was designed specifically for this market. We believe that these new headset game systems can provide a game or telepresence experience not otherwise practical using conventional direct view display technology. We expect low cost to be important for success in this field, and expect our product cost to decrease with high quantity production. At the 2005 Consumer Electronics Show, we announced a prototype of our Z800 3D Visor (TM), the world's first personal viewer to combine OLEDs, stereovision, and head tracking. In 2006 this product garnered numerous awards including Best of Innovations for displays at the Consumer Electronics Show (CES). |
The advent of video iPods and the rapidly increasing amount of downloadable content have accelerated the movement toward portable video technology. At the same time, the desire for larger screen sizes while retaining the iPod portability has been referenced in many publications. Virtual imaging uniquely provides a large, high resolution view in a small portable package, and we believe that these new headset game
systems can provideour OLED on silicon technology is a game or telepresence experience not otherwise
practical using conventional direct view display technology. We expect low
costbest fit to be important for success inhelp open this field, and expect our product cost
to decrease in high quantity production.
o Notebook computers, which can use head-wearable devices to reduce
power as well as expand the apparent screen size and increase privacy.
Current notebook computers do not use microdisplays. Our products can apply
not only to new models of notebook computers, but also as aftermarket
attachments to older notebooks still in use. We expect to market our
head-wearable displays to be used as plug-in peripherals to be compatible
with most notebook computers. We believe that the SVGA-3D microdisplay is
well suited for most portable PC headsets. Our microdisplays can be
operated using the USB power source of most portable computers. This
eliminates added power supplies, batteries, and rechargers and reduces
system complexity and cost.
o Handheld personal computers, whose small, direct view screens are
often limitations, but which are now capable of running software
applications that would benefit from a larger display. Microdisplays can be
built into handheld computers to display more information content on
virtual screens without forfeiting portability or adding the cost a larger
direct view screen. Microdisplays are not currently used in this market. We
believe that GPS viewers and other novel products are likely to develop as
our displays become more available.
o Highly compact wearable computers and personal digital assistants
(PDAs) using video headsets as screens can be made possible by
high-resolution microdisplays. A lightweight (under one pound) pocketsize
computer can potentially be created with a foldout keyboard, compact input
device, or voice actuation and a headset that provides a near-desktop
personal computer experience.
| · | Notebook computers, which can use head-wearable devices to reduce power requirements 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. |
| · | 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. |
| · | 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 catalyzepropel 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 SuperSubnotebookSuperSub notebook computer headsets
|X| |
| | Miniature data viewers
----------------------------------- ----------------------------------------------------------------------
|
Entertainment |X| | | |
| | Games
|X| |
| | Headset Television/DVDs
----------------------------------- ----------------------------------------------------------------------
|
| | Video iPod |
Industrial, Medical, & |X| Administration | | |
| | Surgery and Dentistry
Administration |X| |
| | Industrial Control and Safety
|X| |
| | Emergency Services
|X| |
| | Inventory and Retail
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|X| |
| | Institutional Control
|X| |
| | Maintenance (Industry & Consumer)
|X| |
| | Communications
|X| |
| | Finance
|X| |
| | Education and Training
----------------------------------- ----------------------------------------------------------------------
|
Military |X| | | |
| | Communications
|X| |
| | Targeting and Enhanced Vision
|X| |
| | Night Vision |
| | Handheld & Headmount Equipment
|X| |
| | Body worn displays
|X| |
| | Avionics (Helmet mount)
|X| |
| | Ground and Water Vehicles
|X| |
| | Maintenance & Training
|X| |
| | Special Applications
----------------------------------- ----------------------------------------------------------------------
|
Telecommunications, Handheld, and |X| Small Instruments | | |
| | Cell Phones/Headset phones
Small Instruments |X| |
| | Handheld & Portable Internet Viewers
|X| |
| | Smart Appliances & Instruments
----------------------------------- ----------------------------------------------------------------------
|
Advanced Computer |X| Applications | | |
| | CAD/CAM
Applications |X| |
| | Virtual Reality and Simulations
|X| |
| | Ultra-High Resolution
----------------------------------- ----------------------------------------------------------------------
|
| | 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:
Leverage our superior technology to establish a leading market position. As
the first to exploit OLED-on-silicon microdisplays, we believe that we enjoy a
significant advantage in bringing this technology to market.
Develop products for large consumer markets via key relationships with
OEMs. Our relationships with OEMs whose products use microdisplays have allowed
us to identify initial microdisplay products to be produced for entertainment,
industrial, and military headsets, to be followed by other applications such as
digital cameras, camcorders and hand-held Internet and telecommunications
appliances. We target markets which we believe to have long-term growth
potential.
Reduce production costs. We intend to reduce our production costs by
lowering our fixed costs and improving our manufacturing yields.
Optimize manufacturing efficiencies by outsourcing while protecting
proprietary processes. We intend to outsource certain capital-intensive portions
of microdisplay production, such as chip fabrication, to minimize both our costs
and time to market. We intend to retain the OLED application and OLED sealing
processes in-house. We believe that these areas are where we have a core
competency and manufacturing expertise. We also believe that by keeping these
processes under tight control we can better protect our proprietary technology
and process know-how. This strategy will also enhance our ability to continue to
optimize and customize processes and devices to meet customer needs. By
performing the processes in-house we can continue to directly make improvements
in the processes which will improve device performance. We also retain the
ability to customize certain aspects such as chromaticity (color balance),
specialized boards or interfaces, and adjust other parameters at the customer's
request. In the area of lenses and head-wearable displays, we intend to focus on
design and development, while working with third parties for the manufacture and
distribution of finished products. We intend to prototype new optical systems,
provide customization of optical systems, and manufacture limited volumes at our
subsidiary, Virtual Vision, but intend to outsource high volume manufacturing
operations. There are numerous potential plastics, PC Board, and assembly
service companies globally that provide these outsource services.
12
Build and maintain strong internal design capabilities. As more circuitry
is added to OLED-on-silicon devices, the cost of the end product using the
display can be decreased; therefore integrated circuit design capability will
become increasingly important to us. To meet these requirements, we intend to
develop in-house design capabilities. Building and maintaining this capacity
will allow us to reduce engineering costs, accelerate the design process and
enhance design accuracy to respond to our customers' needs as new markets
develop. In addition, we intend to maintain a product design staff capable of
rapidly developing prototype products for our customers and strategic partners.
Contracting third party design support to meet demand and for specialized design
skills will also remain a part of our overall long term strategy.
| · | Leverage our superior technology to establish a leading market position. As the first to exploit OLED-on-silicon microdisplays, we believe that we enjoy a significant advantage in bringing this technology to market. |
| · | Develop products for large consumer markets via key relationships with OEMs. Our relationships with OEMs whose products use microdisplays have allowed us to identify initial microdisplay products to be produced for entertainment, industrial, and military headsets, to be followed by other applications such as digital cameras, camcorders and hand-held Internet and telecommunications appliances. We target markets which we believe to have long-term growth potential. |
| · | 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, but we intend to outsource high volume manufacturing operations. There are numerous companies that provide these outsource services. |
| · | Build and maintain strong internal design capabilities. As more circuitry is added to OLED-on-silicon devices, the cost of the end product using the display can be decreased; therefore integrated circuit design capability will become increasingly important to us. To meet these requirements, we intend to develop in-house design capabilities. Building and maintaining this capacity will allow us to reduce engineering costs, accelerate the design process and enhance design accuracy to respond to our customers' needs as new markets develop. In addition, we intend to maintain a product design staff capable of rapidly developing prototype products for our customers and strategic partners. Contracting third party design support to meet demand and for specialized design skills will also remain a part of our overall long term strategy. |
Our Strategic Relationships
Strategic relationships have been an important part of our research and development efforts to date and are an integral part of our plans for commercial product launch. We have forged strategic relationships with major OEMs and strategic suppliers. We believe that strategic relationships allow us to better determine the demands of the marketplace and, as a result, allow us to focus our future research and development activities to better meet our customer's requirements. Moreover, we expect to provide microdisplays and Microviewers(TM) to some of these partners, thereby taking advantage of established distribution channels for our products.
Eastman Kodak is a technology partner in OLED development, OLED materials, and a potential future customer for both specialty market display systems and consumer market microdisplays. We license Eastman Kodak's OLED and optics technology portfolio. We have a nonexclusive,nonexclusive; perpetual, worldwide license to use Eastman Kodak patented OLED technology and associated intellectual property in the development, use, manufacture, import and sale of microdisplays. The license covers emissive active matrix microdisplays with a diagonal size of less than 2 inches for all OLED display technology previously developed by Kodak. An annual minimum royalty is paid at the beginning of each calendar year and is fully creditable against the royalties we are obligated to pay based on net sales throughout the year. Eastman Kodak and eMagin have engaged in numerous discussions regarding potential product applications for eMagin's microdisplays by Eastman Kodak.
We are working in cooperationcooperatively with the US Air Force, Ball Aerospace, ITT,Army and Kaiser Electro-optics (a subsidiary of Rockwell Collins)with several military system integrators to complete
development and characterizationfurther characterize operation of our high brightness SXGA microdisplay.
We have recently announced the execution of an agreement with a major
manufacturing partner to develop two new products: an enhanced version of our
SVGA-3D microdisplay with new imbedded features for consumer head-mounted
displays and high resolution games, and a new QVGA and/or VGA viewfinder
microdisplay for camcorder and digital cameras, web phones, and low end games.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 are currently partnering with the University of Michigan to develop advanced display process via a government-sponsored research program. 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
meansmean they create their own light, as opposed to liquid crystal displays, which require a separate light source. As a result, OLED devices use less power and can be capable of higher brightness and fuller color than liquid crystal microdisplays. Because the light they emit is Lambertian, which means that it appears equally bright from most forward directions, a moderate movement in the eye does not change the image brightness or color as it does in existing
13
technologies. OLED films may be coated on computer chips, permitting millions of individual low-voltage light sources to be built on silicon integrated circuits to produce single color, white or full-color display arrays. Many computer and video electronic system functions can be built directly into a silicon integrated circuit as part of the OLED display, resulting in an ultra-compact system. We believe these features, together with the well-established silicon integrated circuit fabrication technology of the semiconductor industry, make our OLED-on-silicon microdisplays attractive for numerous applications.
We believe our technology licensing agreement with Eastman Kodak, coupled with our own intellectual property portfolio, gives us a leadership position in OLED and OLED-on-silicon microdisplay technology. Eastman Kodak provides OLED technology and we provide additional technology advancements that have enabled us to coat the silicon integrated circuits with OLEDs.
We have developed numerous and significant enhancements to OLED technology as well as key silicon circuit designs to effectively incorporate the OLED film on a silicon integrated circuit. For example, we have developed a unique, up-emittingtop-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; |
| · | Low cost system solutions; |
| · | Wide angle light emission resulting in large apparent screen size; |
| · | Low power consumption for improved battery life and longer system life; |
| · | High brightness for improved viewing; |
| · | High-speed performance resulting in clear video images; |
| · | Wide operating temperature range; and |
| · | Good environmental stability (vibration and humidity). |
Low manufacturing cost. Many OLED-on-silicon microdisplays can be built on an 8-inch silicon wafer using existing automated OLED and color filter processing tools. The level of automation used lowers labor costs. Only a minute amount of OLED material is used in each OLED-on-silicon microdisplay so that material costs, other than the integrated circuit itself, are small. The number of displays per silicon wafer may be higher on OLEDs than on liquid crystal displays, (LCDs)or LCDs, because OLEDs do not require a space-wasting perimeter seal band. Expensive transparent wafers with CMOS silicon laminated onto quartz are not required for OLED microdisplays, as standard CMOS ICs may be used as backplanes.
Low cost systems solutions. In general, an OEM using OLED-on-silicon microdisplays will not need to purchase and incorporate lighting assemblies, color converter related Applications Specific Integrated Circuits, (ASICs),or ASICs, or beam splitter lenses as is the case in liquid crystal microdisplays, which also require illumination. Many important display-related system functions can be
14
incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of the system. Non-polarized light from OLEDs permit lenses for many OLED-on-silicon applications that are made of a single piece of molded plastic, which reduces size, weight and assembly cost when compared to the multipiece lens systems used for liquid crystal microdisplays. System cost relative to liquid crystal and liquid crystal on silicon, (LCOS)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 Lowlow power consumption for improved battery life and longer system life. OLEDs emit light rather than transmitting it, so no power-consuming backlight or frontlight,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.
extended.
High brightness for improved viewing. This feature can be of great value to military applications, where there is a need to see the computer image overlaid onto brightly lit real-life backgrounds such as desert sand, water reflections or sunlit clouds. The OLED can be operated over a large luminance range without loss of gray level control, permitting the displays to be used in a range of dark environments to very bright ambient applications. Since military simulation and situation awareness applications, including night vision, typically require large fields of view, the OLED's Lambertian optical characteristics make it an excellent choice.
High-speed performance resulting in clear video images. The image. OLEDs switch much more rapidly than liquid crystals or most cathode ray tubes, (CRTs).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;
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 (degree)C,degrees Celsius, while our OLEDs turn on instantly and can operate between - -55 (degree)Cdegrees Celsius and 130 (degree)C.degrees Celsius. We specify a smaller temperature range on most consumer products to accommodate lowlower cost packaging. This is an important characteristic for many portable products that may be used outdoors in many varying environmental conditions. It is especially important for military customers. Insensitivity to vibration, shock, and pressure are also important environmental control attributes.
15
Complementary Lenslens and System Technologysystem technologies. We have developed a wide range of technologies which complement our core OLED and lens technologies and which will enhance our competitive position in the microdisplay and head-wearable display markets. These include:
Lens technology: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 personal head-wearable display systems and hold key patents in these areas. Our lens technology permits our OLED-on-silicon microdisplays to provide large field of view images that can be viewed for extended periods with reduced eye-fatigue. During 2003, we planWe have engaged a firm to outsource manufacturing ofmanufacture our lenses in order to provide them in larger quantities to our customers.
customers and are using them in our own personal display systems.
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
| · | Can be very low cost, with minimal assembly. A one piece, molded plastic optic attached to the microdisplay has been introduced and may potentially serve consumer end-product markets. Since our process is plastic molding, our per unit production costs are low; |
| · | Allows a compact and lightweight lens system that can greatly magnify a microdisplay to produce a large field of view. For example, our WF05 prism lens, in combination with our SVGA OLED microdisplay, provides a virtual view equivalent to that of a 105-inch diagonal display viewed at 12 feet; |
| · | 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; |
| · | Can be designed to provide focusing to enable users with various eyesight qualities to view images clearly; and |
| · | 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. |
Personal display 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.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)35 degree diagonal field of view ever publicly demonstrated. Wireless video technology. We have developed power efficient, miniature,
video and stereo sound, radio frequency transmitter-receiver technology as part
of a government program. This could allow consumers to watch wireless high
quality video from most locations in their home using existing entertainment
(e.g., DVD or cable/satellite systems) or data systems. If commercialized, we
expect this capability to greatly increase the available market and demand for
video and data head-wearable displays and we are considering this technology for
use in low cost consumer applications. Commercialization of this technology will
be considered in the future.
Sales and Marketing
Current Status
We are now shipping monochrome and full color versions of our first two
commercial microdisplay products. Our SVGA+ resolution OLED microdisplay (1.53
million picture elements) was specifically designed to meet the needs of several
military, industrial, and medical customers based on marketing information
obtained prior to the design phase of the display and was first offered for
sampling in April 2001. Our stereovision-capable SVGA-3D microdisplay (1.44
million picture elements) was designed with the input of multiple customers to
16
principally target the mobile personal computer (PC) and PC games markets, and
was first shipped in February 2002. We are currently developing a military and
industrial oriented ultra-high-luminance SXGA resolution integrated circuit (3.9
million picture elements) that is due for completion in 2003, and we have
shipped limited quantities of prototypes of our eGlass headsets. (See "Our
Products")
Near term sales efforts have been focused on our military, industrial, and
medical customers. Our primary production orders and design wins to date have
been for the SVGA+ display. To date, we have shipped products and evaluation
kits to more than 70 OEM customers. OEM evaluation and product design cycles may
take from 6 months to 24 months. Some of our initial customers have completed
their initial evaluation cycle and we are now receiving follow-on orders and
notification of product purchase decisions. Several customers have indicated
their intent to incorporate potentially high volumes of our microdisplays into
consumer products during 2002 through 2004. We have also received notification
that our microdisplays will be used as components in versions 1.0incorporated low cost, small size, high speed headtrackers to further enhance game and 2.0 of the
US Army Land Warrior program and in the US Air Force Joint Strike Fighter
program, among other programs.
General telepresence applications.
Sales and Marketing Effort
We primarily provide display components and Microviewer(TM) display-optic modules for OEMs to incorporate into their branded products and sell through their 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 in North America, Asia, and Europe primarily through direct technical sales from our headquarters. Regular purchase orders are processed by our customer service coordinators and technical questions related to product purchases or product applications are processed by our technical support team. Additional direct sales are generated through our website www.3dvisor.com. Our personal display systems are also sold through select resellers and online via amazon.com, pcmall.com, and skymall.com. We expect to add additional resellers in 2006.
As a market-driven company, we assess customer needs both quantitatively and qualitatively, through market research and direct communications. Because our microdisplays are the main functional component that defines many of our customers' end products, we work closely with potential customers to define our products to optimize the final design, typically on a senior engineer-to-engineer basis.
We identify companies with end products and applications for which we believe that our products will provide a system level solution and for which our products can be a key differentiator. We target both market leaders and select early adopter companies; their acceptance validates our technology and approach in the market. We believe successful marketing will require relationships with recognized consumer brand companies.
OEMs develop designs
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 enable themmeet the needs of several military, industrial, and medical customers based on marketing information obtained prior to developthe 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 began to ship first quantities of our Z800 3D Visor personal viewer in the second half of 2005. We expect to add the X800 3DVisor, and Eyebud personal viewer, and SVGA 3Dshrink to our product portfolio during 2006. Near term sales efforts for OLED microdisplays 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 for their own
target markets.and evaluation kits to more than 170 OEM customers. An OEM design cycle typically requires between 6 and 2436 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, 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. (See "Our Market Opportunity: Military; Commercial, Industrial, and Medical; and Consumer")
Customers
Customers The Company sellsfor 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 2005, 49% of our net revenue was to a large number of customers, which are
primarilyfirms based in the United States. The Company'sStates and 51% was to international firms, compared to 78% domestic revenue and 22% international revenue during 2004. In 2005, we had no customers that accounted for more than 10% of our total revenue. In 2004, we had two customers that individually accounted for more than 10% of our total net revenue; one customer base includes 2 customers
who accountaccounted for 32%, 6% and 0%17% of sales in fiscal 2002, 2001 and 2000,
respectively. One customer represented 18%, 6% and 0%total net revenue and the other customer
represented 14%, 0% and 0%accounted for 15%.
Backlog
The majority of
sales in fiscal 2002, 2001 and 2000. Although the
Company is directly affected by the well-being of these customers, management
does not believe significant credit risk exists at December 31, 2002.
Backlog
As of December 31, 2002 we had a backlog of purchase agreements of
approximately $10 million and by March 31, 2003 the number had grown to
approximately $27 million. Ourour backlog consists of
both purchase agreements for delivery over the next
24 months and short-term purchase orders for delivery
within 3-636 months. Most
purchase orders are subject to
rescheduling or cancellation by the customer with
17
no or limited penalties. Because of the possibility of customer changes in delivery schedules or cancellations and potential delays in product shipment,shipments, our backlog as of a particular date may not be indicative of net revenuesales for any specific succeeding period. LackSome 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.
As of working capital has delayed our ability to
shipMarch 17, 2006, we had a backlog of purchase agreements of approximately $28.3 million for purchases through 2008 from 3 OEMs who are all in the full quantityprocess of completing their own design work. This backlog consists of purchase agreements and purchase orders on hand, and
has required negotiations with customers for delays in product launch schedules.
does not include expected military revenue or short term OEM customer orders.
Research and Development
Near-to-the-eye virtual imaging and OLED technology is aare relatively new technologytechnologies that hashave 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 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 fournine years, we have spent, net of U.S. government funding, approximately $32.8$35 million on research and development. In 2001,2005, we spent approximately $12.7 million, and in 2002 we spent approximately $7.3$4.0 million on research and development. DuringIn 2005 we continued to research more efficient materials and processes. We also completed the same four-year period, we received $3.6
million in funding from US government under researchprimary development of our new smaller display the SVGA 3D shrink and development cost
sharing arrangements.
our new visor products the X800 3DVisor and the Eyebud 800.
External relationships play an important role in our research and development efforts. Suppliers, equipment vendors, government organizations, contract research groups, external design companies, customer and corporate partners, consortia, and university relationships all enhance the overall research and development effort and bring us new ideas (See "Strategic Relationships").
Manufacturing Facilities
We are located at IBM's Microelectronics Division facility, known as the Hudson Valley Research Park, located about 70 miles north of New York City in Hopewell Junction, New York. We lease approximately 45,00040,000 square feet of space housing our own equipment for OLED microdisplay fabrication and for research and development plus additional space for assembly and administrative offices. We believe that ouralso 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, and the
associated acquisition of substantial amounts of advanced manufacturing
equipment is at a favorable cost, represents a substantial asset and competitive
advantage. At this time, we owe to IBM previously unpaid lease payments which
must be paid in order to maintain our lease. Our lease runs until 2004 and we
have the option to then renew it on the same terms for five additional one-year
terms.
space.
Facilities services provided by IBM include our cleanroom,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 (24 hour/7-days per week) with a fully loaded
manufacturing line.
We lease additional non-cleanroomnon-clean room facilities for chemical mixing, cleaning, chemical systems, and glass/silicon cutting. OLED chemicals can be purified in our facility with our own equipment, permitting the company to evaluate new chemicals in pilot production that are not yet available in suitable purity for OLED applications on the market.
Our display fabrication process starts with the silicon wafer, which is manufactured by a semiconductor foundry using conventional CMOS process. After a device is designed by a combination of internal and external designers with customer participation, we outsource wafer fabrication.
18
Our manufacturing process for OLED-on-silicon microdisplays has three main components: organic film deposition, organic film encapsulation (also known as sealing), and color filter processing. All steps are performed in semi-automated, hands-free environment suitable for high volume throughput. An automated cluster tool provides all OLED deposition steps in a highly controlled environment that is the centerpiece of our OLED fabrication. After wafer processing, each part is inspected using an automated inspection system, prior to shipment. We have electrical and optical instrumentation required to characterize the performance of our displays including photometric and color coordinate analysis. We are also equipped for integrated circuit and electronics design and display testing
Ourtesting.
We also lease a facility in Bellevue, Washington where we operate our system development effort at Virtual Vision operates outand business development activities. The lease for this facility expires in August of a leased
facility in Redmond, Washington.2009. 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 head-wearable displaysubsystem production to low cost plastics, lenses, and assembly manufacturers. We are currently using domestic and international outside manufacturers including manufacturers in Asia.
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 require additional
capital to: (1) staff and train employees for round the clock operation, (2)
build suitable inventory of integrated circuits and other raw materials, and (3)
properly maintain and continue to upgrade the equipment set. The equipment required for initial profitable production is in place. Some equipment will be added when our production volume increases or as needed. We will ramp production
primarily by adding multi-shift staff and increasing inventory.
We intend to outsource certain capital-intensive portions of microdisplay
production to minimize both our costs and time to market. Joint ventures are
being considered for higher quantity OLED production off shore. We currently
outsource integrated circuit fabrication while retaining the OLED application
and OLED sealing processes in-house.
Intellectual Property
We have developed a significant intellectual property portfolio of patents, trade secrets and know-how, supported by our license from Eastman Kodak and our current patent portfolio.
Our license from Eastman Kodak gives us the right to use in miniature displays a portfolio in organic light emitting diode and optics technology, some of which are fundamental. Our agreement with Eastman Kodak provides for perpetual access to the OLED technology for our OLED-on-silicon applications, provided we remain active in the field and meet our contractual requirements to Eastman Kodak. We also generate intellectual property as a result of our internal research and development activities.
Our patents and patent applications cover a wide range of materials, device structures, processes, and fabrication techniques, such as methods of fabricating full color OLEDs. We believe that our patent applications relating to up-emitting structures on opaque substrates such as silicon wafers, which are critical for OLED microdisplays, and applications relating to the hermetic sealing of such structures are particularly important.
Our patents are concentrated in the following areas:
o OLED Materials, Structures, and Processes
o Display Color Processing and Sealing
o Active Matrix Circuit Methodologies and Designs
o Field Emission and General Display Technologies
o Lenses and Tracking (Eye and Head)
o Ergonomics and Industrial Design
o Wearable Computer Interface Methodology
| · | OLED Materials, Structures, and Processes; |
| · | Display Color Processing and Sealing; |
| · | Active Matrix Circuit Methodologies and Designs; |
| · | Field Emission and General Display Technologies; |
| · | Lenses and Tracking (Eye and Head); |
| · | Ergonomics and Industrial Design; and |
| · | 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
noncompetitionnon-competition agreements. There
19
can be no assurance, however, that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.
We believe that our intellectual property portfolio, coupled with our strategic relationships and accumulated experience in the OLED field, gives us an advantage over potential competitors.
Competition
We may face competition in the OLED and microdisplay industry from a variety of companies and technologies. We believe that our key competition will come from liquid crystal on silicon microdisplays, (LCOS),or LCOS, also known as reflective liquid crystal displays. While we believe that OLED-on-silicon provides comparatively lower optics cost, larger apparent image size, reduced electronics cost and complexity, enhanced color, and improved power efficiency advantages over liquid crystal on silicon microdisplays, there is no assurance that these benefits will be realized or that liquid crystal on silicon manufacturers will not suitably improve these parameters. Companies pursuing liquid crystal on silicon technology include Microdisplay Corporation and Three-Five Systems,Syntax/Brillian Corporation, among others, although most of the companies are primarily focusing on projection microdisplays, which do not compete directly with the
company.us. In certain markets, we may also face competition from developers of transmissive liquid crystal displays, such as those developed by Kopin, or laser scanning systems, such as those developed by Microvision Corporation.
To our knowledge, the only other company that has publicly stated plans to develop OLED microdisplays for near-eye applications is MicroEmissive Displays (Britain).in Britain. We may also compete with potential licensees of Universal Display Corporation and Cambridge Display Corporation, and Uniax Corporation, each of which license OLED technology portfolios. Even though we could potentially license technology from these developers, potential competitors could also obtain such licenses and may do so at more favorable royalty rates. However, should they decide to embark on developing microdisplays on silicon, we believe that our progress to date in this area gives us a substantial head start.
Our microdisplays and head-wearablepersonal display systems may face competition on a price and performance basis from major manufacturers such as Sony and Seiko
Epson.Samsung as the market develops. However, these companies use first generation liquid crystal on
polysilicon technology and therefore, we believe that they may incorporatealso intend to supply manufacturers such as those with our technology into their products when it becomes available.
OLED microdisplay.
Employees
As of March 31, 2003,17, 2006, we had a total of 1898 full time and part time and
temporary staff plus 4 employees at Virtual Vision.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.
ITEM 2: PROPERTIES
Our principal executive offices are located at: 2070 Route 52, Hopewell
Junction, New York 12533. We lease approximately 45,000 square feet of space,
all of which is located in1A. RISK FACTORS
You should carefully consider the
same industrial park. Approximately 30,000 square
feet of space houses our own equipment for OLED microdisplay fabrication, and
for research and development plus additional space for assembly operations and
storage. There are space reductions planned as we look to improve efficiency and
costs. Approximately 10,000 square feet of space is used for administrative
offices. Our lease runs until 2004 and we have the option to then renew it on
the same terms for an additional five, one-year terms.
Our lenses and system development operation at Virtual Vision lease
approximately 7,000 square feet of space in Redmond, Washington. The lease for
this facility runs until December 2003.
eMagin Corporation's telephone number is (845) 892-1900. Our website
address is www.eMagin.com.
20
ITEM 3: Legal Proceedings
None.
Potential Liabilities: We have liabilities for approximately $14.6 million
for unpaid bills, contracts, and other liabilities. We believe that some of
these liabilities are valid and payable, and others may be negotiated. It is
possible that we may be required to pay this entire amount along with additional
legal and defense costs or penalties.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of the Fiscal Year covered by this Report.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the American Stock Exchange under the
symbol "EMA" since March 17, 2000. From November 18, 1997 to March 16, 2000 our
common stock had been quoted on the OTC Bulletin Board under our prior name
"Fashion Dynamics Corp." under the symbol "FSHD." Prior to January 2000, there
had been no public trading of FSHD. The table below sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the American Stock Exchangefollowing risk factors and the OTC Bulletin Board. With respect
to OTC Bulletin Board quotes, these prices reflect inter-dealer prices, without
retail mark-up, markdown or commissionsother information included herein as well as the information included in other reports and may not represent actual
transactions.
- ----------------------------------------------------------------------------------------- ----------------- ----------
High Low
- ----------------------------------------------------------------------------------------- ----------------- ----------
2003
- ----------------------------------------------------------------------------------------- ----------------- ----------
First Quarter 1.00 0.55
- ----------------------------------------------------------------------------------------- ----------------- ----------
2002
- ----------------------------------------------------------------------------------------- ----------------- ----------
First Quarter 1.75 0.42
- ----------------------------------------------------------------------------------------- ----------------- ----------
Second Quarter 0.89 0.20
- ----------------------------------------------------------------------------------------- ----------------- ----------
Third Quarter 0.54 0.20
- ----------------------------------------------------------------------------------------- ----------------- ----------
Fourth Quarter 0.40 0.17
- ----------------------------------------------------------------------------------------- ----------------- ----------
As of December 31, 2002, there were 30,854,980 shares of common stock outstanding.
- ----------------------------------------------------------------------------------------- ----------------- ----------
High Low
- ----------------------------------------------------------------------------------------- ----------------- ----------
2001
- ----------------------------------------------------------------------------------------- ----------------- ----------
First Quarter 7.98 2.50
- ----------------------------------------------------------------------------------------- ----------------- ----------
Second Quarter 4.45 2.10
- ----------------------------------------------------------------------------------------- ----------------- ----------
Third Quarter 2.60 1.10
- ----------------------------------------------------------------------------------------- ----------------- ----------
Fourth Quarter 1.65 0.27
- ----------------------------------------------------------------------------------------- ----------------- ----------
As of December 31, 2001, there were 25,171,183 shares of common stock outstanding.
As of December 31, 2002 and December 31, 2001, there were approximately 445
and 425 stockholders of record of our common stock, respectively. This does not
reflect those shares held beneficially or those shares heldfilings made with the SEC before investing in "street" name.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
21
Recent Issuances of Unregistered Securities.
On January 14, 2002, we entered into additional agreements to facilitate:
(i) an additional funding of $1,000,000 to eMagin by a private investor under
the Secured Note Purchase Agreement, (ii) the repayment (the "Repayment") in
full using the proceeds of the additional funding of three secured convertible
notes held by certain initial investors under the Secured Note Purchase
Agreement with an aggregate principal amount of $250,000 (such notes then in
default pursuant to a monthly expenditure requirement contained therein), and
(iii) a repricing of both the conversion rate of all of the outstanding Secured
Convertible Notes issued under the Secured Note Purchase Agreement into our
common stock and the exercise price of the warrants held by certain initial
investors not subject to the Repayment (the "Continuing Investors") and the
issuance of certain additional warrants to the Continuing Investors in return
for their consent to certain amendments and waivers. In return for the
additional funding of $1,000,000, the private investor received two additional
Secured Convertible Promissory Notes, with an aggregate principal amount of
$300,000 and $700,000, respectively, and related warrants, each issued pursuant
to the terms of the Secured Note Purchase Agreement. The full amount of the
outstanding secured convertible notes issued under the Secured Note Purchase
Agreement, after giving effect to the January 2002 transactions, have an
aggregate principal amount of $1,625,000, and are all secured by a general
security interest in the assets of the Company.
The outstanding Secured Convertible Promissory Notes are due June 30, 2003
and bear interest at 9% per annum (payable at maturity or on the effective date
of an early termination). Pursuant to the January 2002 transactions, the
conversion terms of the outstanding secured notes were adjusted so that the
notes are convertible into our common stock at a rate of $0.5264 per share. The
conversion of the notes into eMagin common stock is mandatory upon certain
conditions including the completion of a next round of financing by the Company
of convertible debt securities or equity securities in a minimum amount of $10
million. The holders of the notes may also convert, at their option, the notes
and accrued interest into our common stock. Upon a change of control event, we
may also call and purchase the notes at a purchase price equal to 250%If any of the principal amount plus accrued interest. If we do not exercise this call right,
in the eventfollowing risks actually occurs, our business, financial condition or results of a change of control, the holders may put the notes to the
Company at the 250% of the principal amount pricing. Pursuant to the terms of
the January 2002 transactions, the exercise price of the outstanding three year
warrants held by the Continuing Investors was adjusted to $0.5469 per share.operations could be harmed. The Initial Investors whose secured convertible notes were cancelled pursuant to the
Repayment retained the three-year warrants previously issued to them under the
Purchase Agreement, which have an exercise price of $1.67 per share. All of the
outstanding warrants issued under the Secured Note Purchase Agreement, including
those issued pursuant to the January 2002 transactions described above, are
exercisable for an aggregate of up to 1,954,944 shares of our common stock. We
relied on Section 4(2) of the Securities Act and on Rule 506 of Regulation D in
issuing the securities without registering the offering under the Securities
Act.
Pursuant to the issuance of the notes and warrants under the Secured Note
Purchase Agreement, we also entered into a registration rights agreement
providing for the registration of shares to be issued pursuant to a conversion
of the Secured Convertible Promissory Notes and the shares to be issued pursuant
to the exercise of the warrants issued thereunder. The registration rights
agreement required us to file a registration statement no later than 90 days
after the issuance of the notes and warrants at the initial closing. We are
currently in default of this filing requirement. However management has been
advised that the holders of such rights are amenable to waiving and extending
the time period for the filing of the registration statement. Pursuant to a
failure by us to use our reasonable best efforts to cause the registration
statement to be declared effective by the Commission within six months of the
date of the issuance of the Secured Convertible Promissory Notes and warrants,
the registration rights agreement provides for the payment of liquidated damages
at a rate of one percent (1%) per month (calculated to the nearest calendar day)
of the value of the registrable securities not so declared effective until such
registrable securities shall be declared effective. Some of these securities
have already been sold by investors under 144 rules.
We entered into a Securities Purchase Agreement dated as of February 27,
2002 providing for the issuance and sale to eight accredited investors of an
aggregate of (i) 3,617,128 restricted shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years for an aggregate of
1,446,852 shares of our common stock. The warrants have an exercise price of
$0.7542. For the issuance of the shares and warrants, we received an aggregate
gross proceeds of $2,500,519., with each share purchased at a purchase price of
$.6913, equal to 110% of the daily volume weighted average closing price per
share of our common stock on the American Stock Exchange for a prescribed five
trading day period. In connection with the sale of the shares and warrants, we
also entered into a registration rights agreement with the investors to register
for resale the shares the investors bought in the transaction and the shares to
be issued pursuant to an exercise of the warrants. We are currently in default
22
of this agreement due to the fact that we have not register the shares. As a
result we are required to pay to each investor an amount equal to one percent
(1%) per month of (A) the purchase price paid by such investor for the purchased
securities, and (B) the value of any outstanding warrants held by such investor
until such registration default no longer exists. As of December 31, 2002 the
Company has accrued $392,000 in penalties under this agreement. The accrued
penalties payable for a registration default under the registration rights
agreement may be paid in our common shares provided such shares are registered
under the Securities Act. The issuance of the shares and the warrants was exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) of such Securities Act and Regulation D promulgated thereunder.
On March 4, 2002, we entered into a common stock purchase agreement and
related documents with Northwind Associates, Inc., a Cayman Islands corporation
(the "Investor"), pursuant to which we may receive in periodic draw downs at our
option and subject to the terms and conditions of the agreement, up to
$15,000,000 in equity financing (the "Equity Line") over a three year period.
The aggregate amount of the Equity Line may increase to $20,000,000 provided
certain additional conditions regarding our share price, trading volume and
market capitalization are met. The initial closing of the agreement occurred on
Friday, March 22, 2002. Our right to draw down on the Equity Line is subject to
our registering for resale (and the continuing effectiveness of such
registration) with the Commission the shares of eMagin common stock issuable
pursuant to the Equity Line and is also subject to certain other significant
conditions, including limits as to the maximum and minimum draw down amounts as
specified in the common stock purchase agreement. The maximum investment amount
for any draw down is the lesser of (i) $5,000,000, and (ii) 15% of the volume
weighted average price for our common stock (as reported by the American Stock
Exchange) for the 30 trading days immediately prior to the applicable
commencement date for such draw down multiplied by the total aggregate trading
volume in respect of our common stock for such period. Pursuant to a draw down,
the Investor will purchase our shares at a discount to the price of our common
shares on the American Stock Exchange. More specifically, the discounted
purchase price to be paid by the Investor under the Equity Line will generally
equal (i) 88% of the daily volume weighted average price of our common stock on
the American Stock Exchange for a prescribed 10 trading day period provided that
the such stock price is less than $4.00 per share at the time of determination,
(ii) 90% should such stock price at the time of determination exceed $4.00 per
share, and (iii) 92% should such stock price at the time of determination exceed
$6.00 per share. The discounted purchase price may be reduced by an additional
3% pursuant to certain special conditions as set forth in the agreement. The
amount of our shares issued pursuant to draw downs on the Equity Line is also
limited to 19.9% of the issued and outstanding common stock (unless stockholder
approval of any excess amount is received) and no draw down shall be made to the
extent that it would result in the Investor and its affiliates beneficially
owning more than 9.9% of our outstanding common stock. The agreement also
limited our ability to enter into any other equity line type of financing during
the term of the agreement and provides to the Investor a right of first refusal
for subsequent sales by the Company of its securities.
Additionally, in consideration for the Investor's purchase commitment under
the Equity Line and certain costs associated therewith, we issued to the
Investor 30,000 unregistered shares of eMagin's common stock and warrants to
purchase up to 150,000 shares of our common stock at an exercise price equal to
115% of the daily volume weighted average price of the common stock for the
fifteen trading days preceding the date of the delivery of the warrant by the
Company or $0.8731. Each warrant is exercisable for a period of three years
commencing six months from the date of their delivery by the Company. The
issuance of the shares and the warrants was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of such Securities
Act and Regulation D promulgated thereunder.
In connection with the Equity Line, we also entered into a registration
rights agreement dated as of March 4, 2002 with the Investor that requires the
Company to file, obtain and maintain the effectiveness of a registration
statement on an appropriate form with the Commission in order to register the
sale and public resale of shares of the common stock acquired by the Investor
under the agreement and upon the exercise of the warrants. Under the terms of
the registration rights agreement, the Company must file such registration
statement within sixty days of the date of the agreement. This agreement was
terminated in December 2002 whereby the Investor, retained it warrants and
eMagin agreed to pay the sum of $25,000 upon the completion of specific
financing.
For information on eMagin's equity compensation plans see Note 9 to Item 8
(Financial Statements and Supplemental Data).
23
ITEM 6: SELECTED FINANCIAL DATA
You should read the following selected financial data together with Item 7
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements including accompanying
notes, and other financial information, all of which are included elsewhere in
this report. The selected financial data for the fiscal years ended December 31,
1998, 1999, 2000, 2001 and 2002 are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP and Grant Thornton
LLP, independent auditors. The historical results are not necessarily indicative
of results to be expected for any future period.
Prior to the acquisition of FED Corporation, Fashion Dynamics Corporation
had no active business operations. Management believes that the comparison of
eMagin's financial results to that of the operating entity (FED Corporation)
provides the most meaningful comparative information to the reader. Accordingly,
the comparative information that follows reflects the operating results of FED
Corporation for all periods prior to the merger and it should be read in
conjunction with the consolidated financial statements and notes thereto of this
Form 10-K.
Fiscal Year Ended December 31,
1998 1999 2000(1) 2001 2002
-------- --------- ---------- --------- ---------
Statement of Operations Data: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Net Contract Revenues..............$6,154 $ 1,895 $ 3,126 $5,005 $841
Product Sales 842 1,287
-------- --------- ---------- --------- ---------
Total revenue................6,154 1,895 3,126 5,847 $2,128
Costs and Expenses:
Research and Development (net
of funding under cost sharing
arrangements) 10,250 10,171 11,815 12,724 7,255
Non-cash expense for
conversion of debt to common
stock .............................. 1,917 -- -- --
--
Non-cash stock-based
compensation........................ -- -- 10,319 2,841 1,647
Amortization of purchase
intangibles......................... -- -- 20,932 17,887 1,326
Write-down of goodwill and
purchased intangibles -- -- -- 32,146 --
Acquired in-process research
and development ....................
-- -- 12,820 -- --
General and Administrative..........
3,514 5,203 6,145 7,385 4,507
-------- --------- ---------- --------- ---------
Loss from operations.................(7,610) (15,396) (58,905) (67,136) (12,607)
-------- --------- ---------- --------- ---------
Other income (expense)................ (122) (404) (2,616) (1,351) (2,306)
-------- --------- ---------- --------- ---------
Net loss........................... $(7,732) $(15,800) $(61,521) $(68,487) $(14,913)
-------- --------- ---------- --------- ---------
- ---------------------------------
Basic and diluted net $(1.42) $ (6.04) $ (2.78) $ (2.73) $ (0.51)
loss per share........................
Weighted average shares
outstanding used in basic and
diluted per-share calculation
5,450,293 2,614,743 22,144,904 25,100,211 29,416,838
24
(1) The summary financial data for the year ended December 31, 2000
represent a pro forma presentation of the results for this period, containing
the operating results of eMagin Corporation for the year ended December 31,
2000, with the operating results of FED Corporation for the period from January
1, 2000 through March 15, 2000, in order to present operating results for the
year period for comparative purposes.
As of December 31
1998 1999 2000 2001 2002
-------- --------- ---------- --------- ---------
Balance Sheet Data: (IN THOUSANDS)
Working capital (deficit).....................$ 3,371 $(3,295) $ 6,243 $(5,491) $(13,601)
Total assets...................................11,163 5,038 62,549 4,914 1,834
Current maturities of long-term debt........... 62 269 313 693 49
Short-term debt................................ -- 2,127 -- 1,875 5,691
Total shareholders' equity (deficit)...........$ 4,693 $ 60 $59,184 $ (4,878) $(12,808)
25
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion should be read together with our financial
statements and the notes to those statements and other financial information
appearing elsewhere in this report. Our fiscal year ends December 31.
Overview
eMagin Corporation designs, develops, and markets OLED (organic light
emitting diode)-on-silicon microdisplays and related information technology
solutions. We integrate OLED technology with silicon chips to produce
high-resolution microdisplays smaller than one-inch diagonally which, when
viewed through a magnifier, create a virtual image that appears comparable to
that of a computer monitor or a large-screen television. We shipped initial
samples of our first commercial microdisplay product in March 2001. We are now
accepting orders and shipping larger quantities of our first two commercial
microdisplay products. These products are being applied or considered for
near-eye and headset applications in products such as entertainment and gaming
headsets, handheld Internet and telecommunication appliances, viewfinders, and
wearable computers to be manufactured by original equipment manufacturer (OEM)
customers.
Company History
eMagin Corporation was originally incorporated as Fashion Dynamics
Corporation on January 23, 1996 under the laws of the State of Nevada. For the
three years prior its acquisition of FED Corporation, Fashion Dynamics
Corporation had no active business operations, and sought to acquire an interest
in a business with long-term growth potential. On March 16, 2000, Fashion
Dynamics Corporation acquired FED Corporation (derived from field emissive
device), subsequently changed its name to eMagin Corporation (derived from
"electronic imaging") and listed its common stock on the American Stock Exchange
under the "EMA" trading symbol.
Under the terms of the merger agreement that facilitated our acquisition of
FED Corporation, Fashion Dynamics Corporation issued approximately 10.5 million
shares of its common stock to FED Corporation shareholders and issued
approximately 3.9 million options and warrants in exchange for existing FED
options and warrants. The total purchase price of the transaction was
approximately $98.5 million, including $73.4 million of value relating to the
shares issued (at a fair value of $7 per share, the value of a simultaneous
private placement transaction of similar securities), $20.9 million of value
relating to the options and warrants exchanged and $3.8 million of assumed
liabilities. The transaction was accounted for using the purchase method of
accounting. Under the purchase method of accounting, the assets and liabilities
were recorded based upon their fair values at the date of acquisition as
determined by an independent appraisal.
Since for the three-year period prior to the acquisition of FED
Corporation, Fashion Dynamics Corporation had no active business operations,
management believes that the comparison of eMagin's financial results to that of
the operating entity (FED Corporation) provides the most meaningful comparative
information to the reader. Accordingly, the following comparative information
reflects the operating results of FED Corporation for all periods prior to the
merger and it should be read in conjunction with the consolidated financial
statements and notes thereto. The comparison of financial information below for
the period ended December 31, 2000 reflects pro forma results of eMagin for the
period January 1, 2000 through December 31, 2000 and its predecessor FED
Corporation for the period January 1, 2000 to March 15, 2000, on a combined
basis, such that the amounts presented and discussed reflect the full year of
operations for each period. Reference is made to our consolidated financial
statements included herein for further detail on the results of eMagin and FED
Corporation for their respective periods of ownership.
At our annual meeting of stockholders held on July 16, 2001, the
stockholders approved the reincorporation of eMagin Corporation as a Delaware
corporation. The reincorporation became effective on July 16, 2001 by merging
eMagin Corporation, a Nevada corporation ("eMagin-Nevada"), into its then wholly
owned subsidiary, eMagin Corporation, a Delaware corporation (formerly known as
FED Corporation as described above) ("eMagin-Delaware"). Upon completion of this
merger, eMagin-Nevada ceased to exist as a corporate entity and eMagin-Delaware
succeeded to the assets and liabilities of eMagin-Nevada. Under the merger
agreement for the reincorporation, each outstanding share of eMagin-Nevada
common stock was automatically converted into one share of eMagin-Delaware
26
common stock at the time the merger became effective. There has been no
interruption in the trading of our common stock as a result of the
reincorporation. The reincorporation also resulted in the implementation of a
new certificate of incorporation and by-laws for the Company, as the existing
certificate of incorporation and by-laws of eMagin-Delaware continues as the
certificate of incorporation and by-laws of the Company and has replaced the
articles of association and by-laws of eMagin-Nevada. No change in the corporate
name, board members, business, management, fiscal year, assets, liabilities,
employee benefit plans or location of principal facilities of eMagin occurred as
a result of the reincorporation.
Our history has been as a developmental stage company. We are now
transitioning to manufacturing and intend to significantly increase our
marketing, sales, and research and development efforts, and expand our operating
infrastructure. Most of our operating expenses are fixed in the near term. If we
are unable to generate significant revenues, our net losses in any given period
could be greater than expected.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Not all of the accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, the following policies
could be deemed to be critical within the SEC definition.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, such as when a purchase order or contract is received from
the customer, the price is fixed, title to the goods has changed and there is a
reasonable assurance of collection of the sales proceeds. We obtain written
purchase authorizations from our customers for a specified amount of product at
a specified price and consider delivery to have occurred at the time of
shipment. Revenue is recognized at shipment and we record a reserve for
estimated sales returns, which is reflected as a reduction of revenue at the
time of revenue recognition.
Revenues from research and development activities relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues from
research and development activities relating to cost-plus-fee contracts include
costs incurred plus a portion of estimated fees or profits based on the
relationship of costs incurred to total estimated costs. Contract costs include
all direct material and labor costs and an allocation of allowable indirect
costs as defined by each contract, as periodically adjusted to reflect revised
agreed upon rates. These rates are subject to audit by the other party. Amounts
can be billed on a bi-monthly basis. Billing is based on subjective cost
investment factors
Research and development cost
Amounts incurred in connection with research and development activities are
expensed as incurred.
STATEMENT OF OPERATIONS
The following are descriptions of the revenue and expense components of our
statement of operations:
Total revenues currently represent revenues mostly from contracts funded by
U.S. government programs. We have historically earned revenues from certain of
our research and development activities under both fixed-price contracts and
cost-type contracts, including some cost-plus-fee contracts. Revenues relating
to fixed-price contracts are generally recognized on the
27
percentage-of-completion method of accounting as costs are incurred
(cost-to-cost basis). Revenues on cost-plus-fee contracts include costs incurred
plus a portion of estimated fees or profit based on the relationship of costs
and the allocation of allowable indirect costs as defined by each contract. The
amount of revenues earned is dependent upon the execution of new government
contracts, which may not be predictable or consistent from period to period
because of variations in government funds allocated to research and development
in our field of technology.
Research and development expenses represent salaries, development
materials, external contracts, equipment lease and depreciation expense,
electronics, rent, utilities and costs associated with operating our
manufacturing facility. These costs are expensed as incurred. We have received
cost sharing awards from certain U.S. government agencies to fund certain
research and development. Funding from this type of contract is recognized as a
reduction in research and development operating expenses during the period in
which the services are performed and related direct expenses are incurred. As of
December 31, 2002, we have no remaining amounts in cost sharing contracts to
either incur or bill.
Non-cash stock-based compensation expense represents expenses associated
with stock option grants to our officers and employees at below fair market
value as additional compensation for their services and to induce them to
lock-up their options for a longer time than would normally be specified under
the Company's standard option grant. Deferred compensation is amortized over the
remaining vesting period of the underlying options. The expense also represents
warrant grants with exercise prices below fair market value to security holders
of eMagin for a reduced number of warrants to induce them to lock-up prior to
the merger.
Amortization of purchased intangibles represents the cost of amortization
of the value of other acquired intangible assets. The purchased intangibles are
amortized over their expected useful lives of three years on a straight-line
basis. In 2001, the Company adopted SFAS No 141 "Business Combinations" and SFAS
No 142 "Goodwill and Other Intangible Assets. After an evaluation, the Company
recorded an impairment write-down of its goodwill in 2001.
Selling, general and administrative expenses principally represent the cost
of salaries and fees for professional services, legal fees incurred in
connection with patent filings and related matters, depreciation and
amortization, and other administrative expenses as well as expenses associated
with marketing.
Basic and diluted net loss per common share is computed by using the
weighted average number of shares of common stock outstanding during the period,
restated for the effect of the merger upon the number of shares outstanding in
the current year, and for the presentation of the net loss per share for the
predecessor, a stock split effected during 1999. No common stock equivalents
have been included in the computation of weighted average shares outstanding, as
their effect would be anti-dilutive.
Results of Operations
Comparison of our financial results for the years ended December 31, 2000,
2001 and 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues
Revenues decreased to $2.1 million for the year ended December 31, 2002
from $5.8 million for the year ended December 31, 2001, representing an decrease
of 64%. This decrease was due primarily to the expiration of Government
contracts and the concentration of the company on transitioning from research
and development to product manufacturing and sales.
Research and Development Expenses
Gross research and development expenses decreased to $7.3 million for the
year ended December 31, 2002 from $12.7 million for the year ended December 31,
2001, representing a 43% decrease. Of these amounts, we received $0.3 million in
cost sharing from the U.S. government for the year ended December 31, 2002, and
28
$1.6 million for the year ended December 31, 2001. The $5.4 million decrease in
gross expenses for the year ended December 31, 2002 reflects reduction in
staffing and reduction in expenditures related to the company's difficult cash
position.
Amortization and Write-Down of Intangibles
Amortization and write down of goodwill and purchased intangibles expense
decreased to $1.3 million for the year ended December 31, 2002 from $50 million
for the year ended December 31, 2001. The $48.7 million decrease is primarily
the result of the goodwill impairment charge recorded in 2001.
Selling, General and Administrative Expenses
General and administrative expenses decreased to $4.5 million for the year
ended December 31, 2002 from $7.4 million for the year ended December 31, 2001.
The decrease of $2.9 million in selling, general and administrative expenses was
due primarily to changes in personnel costs, patent filings, and legal fees. We
expect marketing, general and administrative expense to increase in future
periods as we add to our sales staff and make additional investments in
marketing activities. In addition, non-cash stock-based compensation expense was
$1.6 million for the year ended December 31, 2002 versus $2.8 million for the
year ended December 31, 2001. The activity, for the years ended December 31,
2002 and 2001, reflects the amortization of deferred compensation costs related
to the issuance of stock options, warrants issued and re-priced warrants and
options at below fair market values in the first quarter of 2000.
Other Income (Expense)
Other expenses increased to $2.3 million for the year ended December 31,
2002 from $1.4 million for the year ended December 31, 2001. The increase of
$0.9 million was due primarily to increased interest expense. Interest expense
increase was primarilydecline due to the beneficial conversion of debt totaling
approximately $888,000. Net Loss/Net Loss Per Common Share
The following provides a reconciliation of information used in calculating
the per share amounts for the year ended December 31, 2002 2001 and 2000.
2002 2001 2000
Loss attributable to common shareholders
Net loss $(14,912,711) $(68,486,735) $(61,521,866)
Loss attributable to common shareholders $(14,912,711) $(68,486,735) $(61,521,866)
Weighted average shares outstanding 29,416,838 25,100,211 22,144,904
Basic and diluted loss per common share $ (0.51) $ (2.73) $ (2.78)
29
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Revenues increased to $5.8 million for the year ended December 31, 2001
from $3.1 million for the year ended December 31, 2000, representing an increase
of 87%. This increase was due primarily to the recognition of revenue from
certain government contracts relating to head-wearable displays.
Research and Development Expenses
Gross research and development expenses increased to $14.3 million for the
year ended December 31, 2001 from $13.3 million for the year ended December 31,
2000, representing a 7.5% increase. Of these amounts, we received $1.6 million
in cost sharing from the U.S. government for the year ended December 31, 2001,
and $1.5 million for the year ended December 31, 2000. The $1.0 million increase
in gross expenses for the year ended December 31, 2001 reflects the additional
costs associated with personnel costs, equipment leases, depreciation, and
material costs resulting from increased research and development activities and
equipment additions at our manufacturing facility.
Amortization and Write-Down of Goodwill and Purchased Intangibles
Amortization and write down of goodwill and purchased intangibles expense
increased to $50.0 million for the year ended December 31, 2001 from $20.9
million for the year ended December 31, 2000. The $29.1 million increase in
amortization and impairment write-down of its goodwill is primarily the result
of the impairment charge recorded in 2001.
Acquired In-Process Research and Development
In connection with the merger in March 2000, we allocated $12.8 million of
the purchase price to acquired in-process research and development expense.
Accordingly, these costs were expensed during the year ended December 31, 2000
upon finalization of a third party appraisal. No costs were expensed during the
year ended December 31, 2001.
Selling, General and Administrative Expenses
General and administrative expenses increased to $7.4 million for the year
ended December 31, 2001 from $6.1 million for the year ended December 31, 2000,
representing a 1.3% increase. The increase in selling, general and
administrative expenses was due primarily to increases in marketing activity,
personnel costs, travel and patent filings. In addition, non-cash stock-based
compensation expense was $2.8 million for the year ended December 31, 2001
versus $10.3 million for the year ended December 31, 2000. The activity, for the
years ended December 31, 2001 and 2000, reflects the amortization of deferred
compensation costs related to the issuance of stock options, warrants issued and
re-priced warrants and options at below fair market values in the first quarter
of 2000.
Other Income (Expense)
Other expenses increased to $1.4 million for the year ended December 31,
2001 from $(0.4) million in income for the year ended December 31, 2000. The
increase of $1.8 million was due primarily to the decrease in amortization of
the debt discount from the beneficial conversion of a bridge loan entered into
by the company.
Liquidity and Capital Resources
Our cash requirements depend on numerous factors, including completion of
our product development activities, ability to commercialize our products,
market acceptance of our products and other factors. We expect to devote
substantial capital resources to continue our development programs directed at
commercializing our products in our target markets, hire and train additional
30
staff, expand our research and development activities, develop and expand our
manufacturing capacity and begin production activities. Through December 31,
2002 we have incurred accumulated losses of approximately $131.6 million since
our inception and we anticipate incurring significant losses as we fund our
growth. Since inception we have financed our operations through private
placements of equity securities, research and development contracts and
borrowings. As of December 31, 2002, we had $83,000 in cash and cash
equivalents, and a working capital deficit of $13.6 million.
Net cash used in operating activities was $5.6 million for the year ended
December 31, 2002. Cash used in operating activities resulted primarily from our
net loss partially offset by non-cash charges. Cash used in operating activities
for 2001 was $10.8 million and $12.0 million in 2000 resulting primarily from
operating losses.
Net cash used by investing activities was $84,000 for the year ended
December 31, 2002. Net cash used by investing activities in 2001 was $0.5
million used for capital expenditures. Net cash flows from investing activities
in 2000 was $0.4 million with $1.2 million net proceeds from acquisition less
$0.8 million used for capital expenditures.
Net cash provided by financing activities was $5.0 million for the year
ended December 31, 2002, and consisted primarily of proceeds from the sales of
common stock and issuance of debt. Net cash provided by financing activities was
$4.7 million for the year ended December 31, 2001, and consisted primarily of
proceeds from the issuance of debt. Net cash provided by financing activities
was $18.9 million for the year ended December 31, 2000, and consisted primarily
of proceeds from the sales of common stock and issuance of debt. We currently
anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
will be a material use of our cash resources. eMagin's recurring losses from
operations since inception raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are described in
Note 1 to the Item 8 (Financial Statements and Supplementary Data).
Pursuant to a Registration Rights Agreement dated November 27, 2001 by and
between the Company and investors named therein, we may be forced to pay certain
liquidated cash damages in the near future if we fail to use our reasonable best
efforts to cause the registration statement thereunder to be declared effective
by the Commission by June 30, 2003.
We have liabilities for approximately $14.6 million for unpaid bills, rent
and operating leases that are in default, contracts, and other liabilities. As
of April 11, 2003, we are delinquent in our lease obligation to IBM in the
amount of approximately $500,000. We may be denied access to the premises
although the company has entered into negotiations with IBM to settle the amount
due in April 2003.These items could materially affect our liquidity, if we are
not successful in negotiating acceptable settlements or reasonable repayment
terms. It is possible that we may be required to pay this entire amount along
with additional legal and defense costs or penalties. We need to raise
substantial additional equity or debt financing in the near future in order to
continue our development growth and commercialization of our products. There can
be no assurance that additional equity or debt financing will be available on
acceptable terms or at all. If we are unable to obtain additional capital, we
may be required to reduce the scope of our planned product development, selling
and marketing activities and expansion of our manufacturing facilities, which
would have a material adverse effect on our business, financial condition and
operating results and our ability to continue as a going concern. In the event
that we raise additional equity financing, further dilution to investors could
result. Section 7A below, under "Risks Related To Our Financial Results,"
provides a more detailed description.
eMagin has experienced a net loss applicable to common stockholders of
$14.9 million during the year ending December 31, 2002. eMagin had negative cash
flows from operations for the year ending December 31, 2002 of $5.6 million.
eMagin is in default of its loan and equity agreements due to our failure to
register shares. As of April 11, 2003 eMagin was unable to obtain replacement
financing and was not in compliance with several financial covenants under the
credit agreement.
Management has undertaken certain actions in an attempt to improve the
Company's liquidity and return the company to profitability. These actions
included significant overhead reductions instituted in 2002. Management is also
in discussions with several other lenders and investors. We may not be able to
secure a financing or any other replacement financing.
As a result of its liquidity restrictions, eMagin has been unable to meet
certain of vendor payable obligations, and has been forced to extend the terms
of such payments.
31
eMagin's ability to obtain both replacement and additional financing
depends on many factors beyond its control, including the state of the capital
markets, the market price of eMagin's common stock, its customers' willingness
to substantially prepay for product, the prospects of the business. The
necessary additional financing may not be available to eMagin or may be
available only on terms that would result in further dilution to the current
owners of eMagin's common stock. Failure to obtain commitments for interim and
longer term financing would have a material adverse effect on the business,
results of operations and financial condition, which may include ceasing
eMagin's operations . If the financing eMagin requires to sustain its working
capital needs is unavailable or insufficient, eMagin may be unable to continue
as a going concern.
Contractual Obligations at December 31, 2002
Less than One-Three Four-Five Over 5
Contractual Obligations 1 year years years years
Long Term Debt $ - $ 243,478 $ - $ -
Short Term Debt
5,825,000
Operating Leases
1,457,061 1,069,390
Capital Leases
251,249 101,046 27,558
Royalty Commitment
62,500 187,500 250,000
Total per Period $ 7,595,810 $ 1,601,414 $ 277,558 $ -
Quarterly Results of Operations for the Years Ended December 31, 2002 and 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $ 158,027 $ 268,127 $ 497,851 $ 1,203,654
Net loss $(6,489,514) $(4,001,043) $(2,754,638) $ (1,667,516)
Net loss per share
Basic and diluted $ (0.24) $(0.13) $(0.09) $(0.05)
Year ended December 31, 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $2,030,201 $1,616,005 $1,176,628 $1,024,536
Net loss (9,708,435) (10,832,756) (42,377,769) (5,567,775)
Net loss per share
Basic and diluted $(0.39) $(0.43) $(1.69) $(0.22)
32
Recent Accounting Pronouncements
In August 2001, the FASB, issued SFAS, No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
This statement provides that companies should recognize the asset retirement
cost at its fair value as part of the cost of the asset and classify the accrued
amount as a liability. The asset retirement liability is then accreted to the
ultimate payout as interest expense. The initial measurement of the liability
would be subsequently updated for revised estimates of the discounted cash
outflows. The Statement will be effective for fiscal years beginning after June
30, 2002. eMagin has not yet determined the effect that SFAS No. 143 will have
on its consolidated financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the requirement under SFAS 4 to
aggregate and classify all gains and losses from extinguishment of debt as an
extraordinary item, net of related income tax effect. This statement also amends
SFAS 13 to require that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS No. 145 requires reclassification
of gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishment that do not meet the criteria for
extraordinary item in Accounting Principles Board Opinion ("APB") 30. The
statement is effective for fiscal years beginning after May 15, 2002 with early
adoption encouraged. eMagin does not believe the standard will have a material
effect on its financial statements.
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. eMagin is currently evaluating the requirements and
impact of this statement on our consolidated results of operations and financial
position.
In November 2002, the FASB issued interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires certain
guarantees to be recorded at fair value, which is different from current
practice, which is generally to record a liability only when a loss is probable
and reasonably estimable. FIN No. 45 also requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. The disclosure provisions of FIN No. 45 are
effective for financial statements of interim or annual periods after December
15, 2002. eMagin has adopted the recognition and measurement provisions of FIN
No. 45 on a prospective basis with respect to guarantees issued or modified
after December 31, 2002. eMagin has adopted the recognition and measurement
provisions of FIN 45 on a prospective basis with respect to guarantees issued or
modified after December 31, 2002. The adoption of the disclosure provisions has
been reflected in the December 31, 2002 financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
33
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. eMagin has not determined the effect of adoption of EITF
00-21 on its financial statements or the method of adoption it will use.
In November 2002 the Emerging Issues Task Force reached a consensus opinion
on EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized either as revenue or a
reduction of a specific cost incurred. The consensus should be applied
prospectively to new or modified arrangements entered into after December 31,
2002. eMagin has not yet determined the effects of EITF 02-16 on its financial
statements
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based employee compensation. In addition, it also
amends the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income, including per share amounts, of an
entity's accounting policy decisions with respect to stock-based employee
compensation in annual and interim financial statements. SFAS No. 148 does not
amend SFAS No. 123 to require companies to account for their stock-based
employee compensation using the fair value method. The disclosure provisions of
SFAS No. 123 were effective immediately in 2002. SFAS 148 is effective for
fiscal years ending after December 15, 2002. The transition provisions for a
change to the fair value based method may be early adopted, provided that
financial statements for the 2002 fiscal year have not been issued as of
December 31, 2002. As of December 31, 2002, the eMagin does not have any
immediate plans to change its method of accounting for stock-based employee
compensation to the fair value method. Included in the 2002 financial statements
are the required disclosures of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an Interpretation of ARB No. 51 ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. eMagin does not expect this new interpretation to
have a material effect on its future results of operations or cash flows.
ITEM 7A: QUALITATIVE AND QUANTITATIVE Disclosures About Market Risk
This Form 10-K report contains forward-looking statements within the
meaning of the securities laws that are based on current expectations,
estimates, forecasts and projections about the industries in which eMagin
operates, management's beliefs, and assumptions made by management. In addition,
other written or oral statements which constitute forward-looking statements may
be made by or on behalf of eMagin. Words such as "expects", "anticipates",
"intends", "plans", "believes", "could", "seeks", "estimates", variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that could cause
or contribute to such differences in outcomes and results, include, but are not
limited to, those discussed below.
34
Interest Rate Risk
Substantially all of the Company's cash equivalents are at fixed interest
rates, and as such, the fair market value of these instruments is affected by
changes in market interest rates. As of December 31, 2002, all of the Company's
cash equivalents mature within one year. Accordingly, we believe that the market
risk arising from our holdings of these financial instruments is immaterial.
However, in the future, we may invest in securities with maturities of more than
one year, which may carry greater interest rate risk. The Company's outstanding
debt requires a penalty interest rate pegged to the prime rate in the event of a
default. A 1% change in interest rate would increase our interest expense on
debt and penalties approximately $73,000.
Foreign Currency Exchange Risk
Presently, 100%of the Company's customer and supplier payments are made in
U. S. dollars and, consequently, we believe we have no direct foreign currency
exchange rate risk. However, in the future, we may enter into contracts in
foreign currencies, which may subject the Company to foreign exchange rate risk.
We do not have any derivative instruments and do not presently engage in hedging
transactions.
Risk Factors
In evaluating our business, prospective investors and shareholders should
carefully consider the following risks, in addition to the other information in
this 10-K or in the documents referred to in this 10-K. Any of the following
risks could have a material adverse impact on our business, operating results
and financial condition and result in a complete loss of your investment.
Risks Related To Our Financial Results
If we cannot operate as a going concern, our stock price will decline and you may lose part or all of your entire investment. Our auditors have included an explanatory
paragraph in their report on our financial statements for the year ended
December 31, 2002 which states that, due to recurring losses from operations
since inception of the Company, there is substantial doubt about our ability to
continue as a going concern. Our financial statements for the year ended
December 31, 2002 do not include any adjustments that might result from our
inability to continue as a going concern. These adjustments could include
additional liabilities and the impairment of certain assets. If we had adjusted
our financial statements for these uncertainties, our operating results and
financial condition would have been materially and adversely affected.
If we do not obtain additional cash to operate our business, we may not be
able to execute our business plan and may not achieve profitability. In the
event that cash flow from operations is less than anticipated, if the costs are
higher than anticipated, or we are unable to secure additional funding or
sufficient product or service prepayments, in order to preserve cash, we would
be required to further reduce expenditures and effect further reductions in our
corporate infrastructure, either of which could have a material adverse effect
on our ability to continue our current level of operations. Even if we obtain
additional working capital in the near future, to the extent that operating
expenses increase or we need additional funds to make acquisitions, develop new
technologies or acquire strategic assets, the need for additional funding may be
accelerated and there can be no assurances that any such additional funding can
be obtained on terms acceptable to us, if at all. If we are not able to generate
sufficient capital, either from operations or through additional financing, to
fund our current operations, we may not be able to continue as a going concern.
If we are unable to continue as a going concern, we may be forced to
significantly reduce or cease our current operations. This could significantly
reduce the value of our securities, which could result in our de-listing from
the American Stock Exchange and cause investment losses for our shareholders.
We may not maintain The American Stock Exchange (the "Exchange") listing
requirements. To maintain the listing of our common stock on the Exchange, we
are required to meet certain listing requirements, including, in the case of our
common stock selling for a substantial period of time at a low price per share,
effecting a reverse split of such shares within a reasonable time after being
notified by the Exchange that such action is appropriate under all the
circumstances. In its review of whether a share price is too low or whether a
35
reverse split is appropriate, the Exchange will consider all pertinent factors,
including market conditions in general, the number of shares outstanding, plans
which may have been formulated by management, applicable regulations of the
state of incorporation or of any governmental agency having jurisdiction over
eMagin, and the relationship to other Exchange policies regarding continued
listing. If the Exchange were to determine that our share price is too low and
that we should reverse split our shares but we were unable to comply for any
reason, our common stock may be delisted from the Exchange. Other rules
regarding timely filing of reports, payments of fees, and other criteria also
could be at issue. For instance, eMagin did not hold an annual meeting in 2001,
which could have been determined to be a listing issue. The 2001 and 2002
meetings are currently planned to be combined and held in 2003. Delisting of our
common stock could materially adversely affect the market price, the market
liquidity of our common stock and our ability to raise necessary capital.
Moreover, it would likely be more difficult to trade in or to obtain accurate
quotations as to the market price of our common stock.
RISKS RELATED TO OUR FINANCIAL RESULTS
We have a history of losses since our inception and expect tomay incur losses for the foreseeable future. future.
Accumulated losses excluding non-cash transactions as of December 31, 2002,2005, were $28.4$64 million and acquisition related non-cash transactions were $102 million, which resulted in an accumulated net loss of $166 million. Prior non-cash losses were
dominated by the amortization and write-down of goodwill and purchased
intangibles and write-down of acquired in process research and development
related to the March 2000 acquisition, and also included some non-cash
stock-based compensation. We have not yet achieved profitability and we can give no assurances that we will achieve profitability within the foreseeable future as we fund operating and capital expenditures in areas such as establishment and expansion of markets, sales and marketing, operating equipment and research and development. We cannot assure investors that we will ever achieve or sustain profitability or that our operating losses will not increase in the future.
We have been dependent on U.S. government contracts. may not be able to execute our business plan and may not generate cash from operations.
In past years, the majority of our revenues to date have been derivedevent that cash flow from direct research and
development contracts with the U.S. federal government. As we transition from
research and development, some of our key purchase orders relate to their own
procurement or development contracts with the federal government. The government
at its discretion may modify or terminate our or our customers' government
contracts. Our customersoperations is less than anticipated and we planare unable to submit proposals forsecure additional development contractfunding to cover our expenses, in order to preserve cash, we would be required to reduce expenditures and product procurement funding; however, funding is
subject to legislative authorization and even if funds are appropriated such
funds may be withdrawn based on changeseffect reductions in government priorities. No assurances
can be given that our or our customers' existing contracts will continue, that
we or our customers will be successful in obtaining new government contracts, or
that programs throughcorporate infrastructure, either of which our contracts are funded will continue to be funded
beyond the current fiscal year. Our or our customers' inability to obtain
revenues from government contracts could have a material adverse effect on our resultsability to continue our current level of operations. Risks Related 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.
Our Intellectual Property
independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing
Our consolidated financial statements as of December 31, 2005 have been prepared under the assumption that we will continue as a going concern for the year ending December 31, 2006. Our independent registered public accounting firm has issued a report dated March 15, 2006 that included an explanatory paragraph expressing substancial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is likely dependant upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 maintain and attract new 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 currently 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. However, we try to maintain product inventory to fill the requirements under such circumstances. 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 could experience manufacturing interruptions, delays, or inefficiencies if we are unable to timely and reliably procure components from single-sourced suppliers.
We maintain several single-source supplier relationships, either because alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity, or price considerations. If the supply of a critical single-source material or component is delayed or curtailed, we may not be able to ship the related product in desired quantities and in a timely manner. Even where alternative sources of supply are available, qualification of the alternative suppliers and establishment of reliable supplies could result in delays and a possible loss of sales, which could harm operating results.
We expect to depend on semiconductor contract manufacturers to supply our silicon integrated circuits and other suppliers of key components, materials and services.
We do not manufacture the silicon integrated circuits on which we incorporate our OLED technology. Instead, we expect to provide the design layouts to semiconductor contract manufacturers who will manufacture the integrated circuits on silicon wafers. We also expect to depend on suppliers of a variety of other components and services, including circuit boards, graphic integrated circuits, passive components, materials and chemicals, and equipment support. Our inability to obtain sufficient quantities of high quality silicon integrated circuits or other necessary components, materials or services on a timely basis could result in manufacturing delays, increased costs and ultimately in reduced or delayed sales or lost orders which could materially and adversely affect our operating results.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
We rely on our license agreement with Eastman Kodak for the development of certain aspectsour products.
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 over a range of years from 2003 to 2020.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,
36
rights granted under patents issued to us may not afford us any competitive advantage, others may independently develop similar technology or design around our patents, our technology may be available to licensees of Eastman Kodak, and protection of our intellectual property rights may be limited in certain foreign countries. We may be required to expend significant resources to monitor and police our intellectual property rights. Any future infringement or other claims or prosecutions related to our intellectual property could have a material adverse effect on our business. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. Protection of intellectual property has historically been a large yearly expense for eMagin. We have not recently beenin a financial position to file for patents on a worldwide basisproperly protect all of our intellectual property, and may not be in a position to do so for some time. We continue to make an
effort toproperly protect our position or stay ahead of competition in new research and the protecting of the resulting intellectual property and trade secrets as is practical in
the current difficult situation.
Risks Related To the Microdisplay Industry
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 whowith whom we must displace.
compete.
The microdisplay systems business is intensely competitive.
We do business in intensely competitive markets that are characterized by rapid technological change, changes in market requirements and competition from both other suppliers and our potential OEM customers. Such markets are typically characterized by price erosion. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Our ability to compete successfully will depend on a number of factors, both within and outside our control. We expect these factors to include the following: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and product or technology introductions by our competitors.
| · | our success in designing, manufacturing and delivering expected new products, including those implementing new technologies on a timely basis; |
| · | our ability to address the needs of our customers and the quality of our customer services; |
| · | the quality, performance, reliability, features, ease of use and pricing of our products; |
| · | successful expansion of our manufacturing capabilities; |
| · | our efficiency of production, and ability to manufacture and ship products on time; |
| · | the rate at which original equipment manufacturing customers incorporate our product solutions into their own products; |
| · | the market acceptance of our customers' products; and |
| · | product or technology introductions by our competitors. |
Our competitive position could be damaged if one or more potential OEM customers decide to manufacture their own microdisplays, using OLED or alternate technologies. In addition, our customers may be reluctant to rely on a relatively small company such as eMagin for a critical component. We cannot assure you that we will be able to compete successfully against current and future competition, and the failure to do so would have a materially adverse effect upon our business, operating results and financial condition.
The display industry is cyclical. cyclical.
The display industry is characterized by fabrication facilities that require large capital expenditures and long lead times go constructfor 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 high volume productionmarket sooner than ours.
Our competitors are investing substantial resources in the development and manufacture of microdisplay systems using alternative technologies such as reflective liquid crystal displays (LCDs), LCD-on-Silicon ("LCOS") microdisplays, active matrix electroluminescence and scanning image systems, and transmissive active matrix LCDs. Color LCOS displays went into in initial
production several years aheadOur competitive position could be damaged if one or more of eMagin's OLED display introduction, and may be
in higher volume productionour competitors’ products get to the market sooner than our microdisplays, which couldproducts. We cannot assure you that our product will get to market ahead of our competitors or that we will be able to compete successfully against current and future competition. The failure to do so would have a significant detrimentalmaterially adverse effect onupon our market opportunity.
business, operating results and financial condition.
Our competitors have many advantages over us.
As the microdisplay market develops, we expect to experience intense competition from numerous domestic and foreign companies including well-established corporations possessing worldwide manufacturing and production facilities, greater name recognition, larger retail bases and significantly greater financial, technical, and marketing resources
37
than us, as well as from emerging companies attempting to obtain a share of the various markets in which our microdisplay products have the potential to compete. The Company has been constrained for over 2 years by serious capital
deficiencies,We cannot assure you that we will be able to compete successfully against current and could continuefuture competition, and the failure to be undercapitalized relative to its
competitors even afterdo so would have a modest financing.
materially adverse effect upon our business, operating results and financial condition.
Our products are subject to lengthy OEM development periods.
We plan to sell most of our microdisplays to OEMs who will incorporate them into products they sell. OEMs determine during their product development phase whether they will incorporate our products. The time elapsed between initial sampling of our products by OEMs, the custom design of our products to meet specific OEM product requirements, and the ultimate incorporation of our products into OEM consumer products is significant. If our products fail to meet our OEM customers' cost, performance or technical requirements or if unexpected technical challenges arise in the integration of our products into OEM consumer products, our operating results could be significantly and adversely affected. Long delays in achieving customer qualification and incorporation of our products could adversely affect our business.
Our products will likely experience rapidly declining unit prices.
In
several of the markets in which we expect to compete, prices of established products tend to decline significantly over time. In order to maintain our profit margins over the long term, we believe that we will need to continuously develop product enhancements and new technologies that will either slow price declines of our products or reduce the cost of producing and delivering our products. While we anticipate many opportunities to reduce production costs over time, there can be no assurance that these cost reduction plans will be
successful.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 Manufacturing
We expect to depend on semiconductor contract manufacturers to supply our
silicon integrated circuits and other suppliers of key components, materials and
services. We do not manufacture our silicon integrated circuits on which we
incorporate the OLED or printed circuit boards. Instead, we expect to provide
the design layouts to semiconductor contract manufacturers who will manufacture
the integrated circuits on silicon wafers. We also expect to depend on suppliers
of a variety of other components and services, including circuit boards, graphic
integrated circuits, passive components, materials and chemicals, and equipment
support. Our inability to obtain sufficient quantities of high quality silicon
integrated circuits or other necessary components, materials or services on a
timely basis could result in manufacturing delays, increased costs and
ultimately in reduced or delayed sales or lost orders which could materially and
adversely affect our operating results.
38
We have not manufactured OLED-on-silicon products in large commercial
quantities and we do not know if our manufacturing yields or throughput will be
commercially viable. In order for us to be successful as a product or component
manufacturer, our products must be manufactured to meet high quality standards
in commercial quantities at competitive prices. We are not staffed adequately to
achieve our full available capacity for high quantity production. The
manufacture of OLED-on-silicon is new and OLED microdisplays have not been
produced in significant volumes. If we are unable to produce our products in
sufficient quantity, we will be unable to attract or retain customers. In
addition, we cannot assure you that once we commence higher volume production we
will attain yields at high throughput that will result in profitable gross
margins or that we will not experience manufacturing problems which could result
in delays in delivery of orders or product introductions.
We are dependent on a single manufacturing line. We initially expect to
manufacture our products on a single manufacturing line. If we experience any
significant disruption in the operation of our manufacturing facility we may be
unable to supply microdisplays to our customers. For this reason, some OEMs may
also be reluctant to commit a broad line of products to our microdisplays
without a second production facility in place. Interruptions in our
manufacturing could be caused by manufacturing equipment problems, the
introduction of new equipment into the manufacturing process or delays in the
delivery of new manufacturing equipment. Lead-time for delivery of manufacturing
equipment can be extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders due to production
interruptions in our manufacturing line. In order to meet the requirements of
certain OEMs for multiple manufacturing sites, we will have to expend capital to
secure additional sites and may not be able to manage multiple sites
successfully or outsource production to other manufacturers.
Risks Related To Our Business
Our success depends in a large part on the continuing service of key
personnel. Changes in management could have an adverse effect on our business.
We are dependent upon the active participation of several key management
personnel. We also need to recruit additional management in order to expand
according to our business plan. The failure to attract and retain additional
management or personnel could have a material adverse effect on our operating
results and financial performance.
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.
Our microdisplay business may not be successful. The market for
microdisplays may develop later than anticipated by us may therefore limit our
sales potential for the foreseeable future. Customers may be slow to ramp their
products using our products or pursue other interests
We generally do not have long termlong-term contracts with our customers.
Our business has
historicallyprimarily operated on the basis of
shortshort-term purchase orders. We are now receiving longer term purchase
ordersagreements, such as those which comprise our $28 million backlog, and
procurement contracts, but we cannot guarantee that
our long termwe will continue to do so. Our current purchase agreements
will result incan be cancelled or revised without penalty, depending on the
desired sales since the penalties for cancellation are small or
non-existent. In the absence of a backlog of orders that can only be canceled
with penalty, wecircumstances. 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,
outour business may suffer and the value of your investment in the Company may decline.
39
Our business strategy may fail if we cannot continue to form strategic relationships with companies that manufacture and use products that could incorporate our OLED-on-silicon technology.
Our prospects will be significantly affected by our ability to develop strategic alliances with OEMs for incorporation of our OLED-on-silicon technology into their products. While we intend to continue to establish strategic relationships with manufacturers of electronic consumer products, personal computers, chipmakers, lens makers, equipment makers, material suppliers and/or systems assemblers, there is no assurance that we will be able to continue to establish and maintain strategic relationships on commercially acceptable terms, or that the alliances we do enter in to will realize their objectives. Failure to do so would have a material adverse effect on our business.
We will need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow or continue existing
operations may be limited. Our future liquidity and capital requirements are
difficult to predict because they depend on numerous factors, including our
success in completing the development of our products, manufacturing and
marketing our products and competing technological and market developments. We
may not be able to generate sufficient cash from our operations to meet
additional working capital requirements, support additional capital expenditures
or take advantage of acquisition opportunities. In addition, substantial
additional capital may be required in the future to fund product development and
product launches. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to our shareholders or us. To the extent we raise additional capital
by issuing equity or securities convertible into equity, our current
shareholders will suffer dilution in ownership. If needed capital is
unavailable, our ability to continue to operate and grow our business could be
adversely affected. Even if capital is available at acceptable cost, we might
not be able to manage growth effectively.
Our business depends to some extent on international transactions.
We purchase needed materials from companies located abroad and may be adversely affected by political and currency risk, as well as the additional costs of doing business with a foreign entity. Some customers in other countries have longer receivable periods or warranty periods. In addition, many of the OEMs whichthat are the most likely long termlong-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 lawlaws and custom,customs, political instability and the complexities of taxation in multiple jurisdictions.
Our business may expose us to product liability claims.
Our business exposesmay expose us to potential product liability claims. Although no such claim hasclaims 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
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 Companycompany is successful.
Sales of significant amounts of common stock in the public market, or the perception that such sales may occur, could materially affect the market price of our common stock. These sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. As of
December 31, 2002,March 17, 2006, we have outstanding
(i) options to purchase
5,893,085 shares. There are also outstanding18,052,636 shares and (ii) warrants to purchase
40
6,894,15326,197,247 shares of common stock. Incentive options for 5,185,000 Common Shares
at $0.21 per share were approved by the eMagin Board of Directors on October 9,
2002 for issue to employees, directors, and officers. The options were not yet
granted, pending the future availability of Common shares for the options under
the company's qualified option plan. Upon availability, the company may issue
these options at which time the strike price will remain $0.21 and the
difference between the strike price and the fair market value, if the strike
price is under the fair market value at the date of issue, will be recognized as
compensation expense. As of December 31, 2002, there were only approximately
100,000 shares available within the plan. The number of shares actually granted
may be prorated to a much small number.
We do not intend to pay dividends; you will not receive funds without
selling shares; and you may lose the entire amount of your investment. We have
not paid any dividends on our common stock and we do not plan to pay cash
dividends in the foreseeable future. We intend to retain our earnings, if any,
for use in our business. We further cannot assure you that you will receive a
return on your investment when you sell your shares or that you will not lose
the entire amount of your investment.
We have a staggered Boardboard of Directorsdirectors and other anti-takeover provisions, which could inhibit potential investors or delay or prevent a change of control that may favor you.
Our Board of Directors is divided into three classes and our Board members are elected for terms that are staggered. This could discourage the efforts by others to obtain control of the company. Some of the provisions of our certificate of incorporation, our bylaws and Delaware law could, together or separately, discourage potential acquisition proposals or delay or prevent a change in control. In particular, our board of directors is authorized to issue up to 10,000,000 shares of preferred stock (less any outstanding shares of preferred stock) with rights and privileges that might be senior to our common stock, without the consent of the holders of the common stock.
We cannot forecast
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our corporate offices are located in Bellevue, Washington. Our Washington location includes administrative, finance, operations, research and development and sales and marketing functions and consists of leased space of approximately 19,000 square feet. The lease expires in 2009. Our manufacturing facility is located in Hopewell Junction, New York, where we lease approximately 40,000 square feet from IBM. The NY facility houses our future performance. We cannot accurately forecast
our revenues because of our limited commercial operating history and because theequipment for OLED microdisplay market is only beginningfabrication, assembly operations, research and development, and administrative functions. The lease expires in 2009. We believe our facilities are adequate for our current and near-term needs. See Note 12 to emerge. We may experience
significant fluctuationsour Consolidated Financial Statement for more information about our lease commitments.
On December 6, 2005, New York State Urban Development Corporation commenced action in the Supreme Court of the State of New York, County of New York against eMagin, asserting breach of contract and seeking to recover a $150,000 grant which was made to eMagin based on goals set forth in the agreement for recruitment of employees. On March 30, 2006, eMagin filed an answer denying the material allegations of the Complaint and asserted a number of affirmative defenses. eMagin and New York State Urban Development Corporation are in on-going negotiations in order to resolve this matter.
Our Annual Meeting of Stockholders was held on September 30, 2005 and we disclosed the results of the matters voted on in our quarterly operating results due to many factors
which are outside our control. These factors include: fluctuation in demand and
orders for our products; timing or cost of future supply or equipment
deliveries; manufacturing capacity and yields; variations in product and process
development costs; expenses or operational disruptions resulting from
acquisitions; activities of our competitors; adequate working capital; and
general economic conditions. Due to these factors, we cannot anticipate with any
degree of certainty what our revenues, if any, will be in future periods. You
have limited historical financial data and operating results with which to
evaluate our business and our prospects. As a result, you should consider our
prospects in light of the expense, difficulties and delays frequently
encountered by early stage companies formed to pursue development of new
technologies.
Quarterly Report on Form 10-Q filed on November 14, 2005.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our share price is likely to be highly volatile which may result in
substantial losses for investors. Share price volatility may subject us to
securities class action litigation. Prices and trading volume for technology
related stock has been highly volatile. Accordingly, our stock prices are likely
to also be highly volatile. Shareholders may experience a decrease in the value
of their common stock regardlessis traded on the American Stock Exchange under the symbol "EMA". The following table sets forth the range of our operating performance or prospects. In
addition, the trading pricehigh and low prices per share of our common stock couldfor each period indicated.
| | | 2004 | | 2005 | |
| | | High | | Low | | High | | Low | |
| | | | | | | | | | |
| First quarter | | $ | 3.15 | | $ | 1.40 | | $ | 1.30 | | $ | 0.84 | |
| Second quarter | | $ | 3.80 | | $ | 1.57 | | $ | 1.04 | | $ | 0.70 | |
| Third quarter | | $ | 1.73 | | $ | 0.75 | | $ | 1.03 | | $ | 0.53 | |
| Fourth quarter | | $ | 1.50 | | $ | 0.90 | | $ | 0.90 | | $ | 0.54 | |
As of March 17, 2006, there were 479 holders of record of our common stock. Because brokers and other institutions hold many of the shares on behalf of shareholders, we are unable to determine the actual number of shareholders represented by these record holders.
Dividends
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.
Recent Issuances of Unregistered Stock
On September 30, and October 3, 2005, we issued an aggregate of 497,500 options that have common shares underlying to 6 of our directors as compensation for additional services performed on our behalf in response to Sarbanes-Oxley requirements in each of their capacities as directors of our company.
*All of the above issuances and sales were deemed to be exempt under Rule 506 of Regulation D and Section (2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of eMagin or executive officers of eMagin, and transfer was restricted by eMagin in accordance with the requirement of the Securities Act of 1933. In addition to representations by the above-reference persons, we have made independent determinations that 11 of the above-referenced person were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The statements of operations data for the years ended December 31, 2005, 2004 and 2003 and the balance sheet data at December 31, 2005 and 2004 are derived from our audited financial statements which are included elsewhere in this Form 10-K. The statement of operations data for the year ended December 31, 2002 and 2001 and the balance sheet data at December 31, 2003, 2002 and 2001 are derived from our audited financial statements which are not included in this Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods. The following information is presented in thousands, except per share data.
Consolidated Statements of Operations Data:
| | | For the Year Ended December 31, | |
| | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| | | (In thousands, except per share data) | |
| | | | | | | | | | | | |
| Revenue | | $ | 3,745 | | $ | 3,593 | | $ | 2,578 | | $ | 2,128 | | $ | 5,848 | |
| Cost of goods sold | | | 10,219 | | | 5,966 | | | 5,141 | | | — | | | — | |
| Gross profit (loss) | | | (6,474 | ) | | (2.373 | ) | | (2,563 | ) | | 2,128 | | | 5,848 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Research and development | | | 4,020 | | | 898 | | | 19 | | | 7,255 | | | 12,724 | |
| Stock based compensation | | | — | | | 88 | | | 2,183 | | | 1,647 | | | — | |
| Amortization of purchased intangible assets | | | — | | | — | | | — | | | — | | | 17,887 | |
| Impairment of goodwill and purchased intangible assets | | | — | | | — | | | — | | | — | | | 32,146 | |
| Selling, general and administrative | | | 6,316 | | | 4,340 | | | 3,529 | | | 5,832 | | | 10,227 | |
| Total operating expenses | | | 10,336 | | | 5,326 | | | 5,731 | | | 14,734 | | | 72,984 | |
| Loss from operations | | | (16,810 | ) | | (7,699 | ) | | (8,294 | ) | | (12,606 | ) | | (67,136 | ) |
| Other income (expense), net | | | 282 | | | (5,012 | ) | | 3,571 | | | (2,306 | ) | | (1,351 | ) |
| Net loss | | $ | (16,528 | ) | $ | (12,711 | ) | $ | (4,723 | ) | $ | (14,912 | ) | $ | (68,487 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted loss per share | | $ | (0.19 | ) | $ | (0.20 | ) | $ | (0.13 | ) | $ | (0.51 | ) | $ | (2.73 | ) |
| | | | | | | | | | | | | | | | | |
| Shares used in calculation of loss per share: | | | | | | | | | | | | | | | | |
| Basic and diluted | | | 85,407 | | | 64,278 | | | 35,998 | | | 29,417 | | | 25,100 | |
| | | | | | | | | | | | | | | | | |
Consolidated Balance Sheet Data:
| | | December 31, | |
| | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| Cash, cash equivalents | | $ | 6,847 | | $ | 13,457 | | $ | 1,054 | | $ | 83 | | $ | 738 | |
| Working capital | | $ | 8,868 | | $ | 14,925 | | $ | 106 | | $ | (13,602 | ) | $ | (5,491 | ) |
| Total assets | | $ | 14,142 | | $ | 18,436 | | $ | 3,749 | | $ | 1,834 | | $ | 4,913 | |
| Long-term obligations | | $ | 56 | | $ | 22 | | $ | 6,161 | | $ | 228 | | $ | 2,305 | |
| Total Shareholders’ equity | | $ | 10,401 | | $ | 16,447 | | $ | (4,767 | ) | $ | (12,808 | ) | $ | (4,878 | ) |
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 Part I, Item 1A, "Risk Factors "). These forward-looking statements are based largely on our current expectations and are subject to wide
fluctuationsa number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in response to: our perceived prospects; quarter to quarter
variationsevaluating such forward-looking statements include (i) changes in external factors or in our operating results;internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in earnings estimatesour business strategy or recommendationsan 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 through 2004, 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. From inception to December 31, 2005, we have recognized an aggregate of approximately $11.5 million from sales of our products, and as of December 31, 2005, we have a backlog of $28.3 million in products ordered for delivery through 2009. 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 securities analystsoriginal equipment manufacturer (OEM) customers. We have also shipped a limited number of our Z800 3DVisor personal 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 believe that we are the only company to demonstrate publicly and market perceptionsfull-color small molecule OLED-on-silicon microdisplays.
Company History
Historically, we have been 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. Currently, most of our operating expenses are fixed. 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. Products sold directly to consumers have a thirty day right of return. Revenue on consumer products is deferred until the right of return has expired.
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 generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectibility of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization and other factors. Management has exercised reasonable judgment in relationderiving these estimates. Consequently, a change in conditions could affect these estimates.
Fair value of financial instruments
eMagin’s cash, cash equivalents, accounts receivable and accounts payable are stated at cost which appropriates fair value due to those estimatesthe short-term nature of these instruments.
Results of Operations
The following table presents certain financial data as a percentage of total revenue for the periods indicated. Our historical operating results are not necessarily indicative of the results for any future period.
| | As a Percentage of Total Revenue Year Ended December 31, | |
| | | 2005 | | 2004 | | 2003 | |
Consolidated Statements of Operations Data: | | | | | | | | | | |
| | | | | | | | | | | |
| Revenue | | | 100 | % | | 100 | % | | 100 | % |
| Cost of goods sold | | | 273 | | | 166 | | | 199 | |
| Gross loss | | | (173 | ) | | (66 | ) | | (99 | ) |
| Operating expenses: | | | | | | | | | | |
| Research and development | | | 107 | | | 25 | | | 1 | |
| Stock based compensation | | | ---- | | | 2 | | | 85 | |
| Selling, general and administrative | | | 169 | | | 121 | | | 137 | |
| Total operating expenses | | | 276 | | | 148 | | | 222 | |
| Loss from operations | | | (449 | ) | | (214 | ) | | (322 | ) |
| Other income (expense) | | | 8 | | | (140 | ) | | 139 | |
| Net loss | | | (441 | )% | | (354 | )% | | (183 | )% |
| | | | | | | | | | | |
Revenues
Revenues increased by $152 thousand to a total of $3.7 million for the year ended December 31, 2005 from $3.6 million for the year ended December 31, 2004, representing an increase of 4%. This increase was due primarily to the broadening of our product offerings with the Z800 product and incremental revenue generated by these sales. Our contract revenue decreased approximately $72 thousand while our product revenue increased approximately $217 thousand. Average price per unit for microdisplays was $372 in 2005 and 2004. Our current expectation is that revenue will continue to grow in 2006 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, 2005 we recorded approximately $10.2 million in cost of goods sold which resulted in a gross loss of $6.5 million as compared to approximately $6.0 million in costs of goods sold resulting in a gross loss of $2.4 million in the year ended December 31, 2004. The production expenses for 2005 include labor costs related to operating two full eight hour shifts and a partial third shift as compared to a single shift in 2004. To accommodate longer operating hours and expected higher product output in 2005 we initiated modifications to our production process that resulted in less than 10% of our expected capacity while underway. Stabilization of these modifications initially was expected to be completed early in 2005, but took until the first quarter of 2006 to achieve. As a result gross margins in 2005 declined as compared to 2004 due to the higher labor costs. We expect that gross margins will improve in 2006 as a result of the higher output resulting from the production line modifications and an increase in volume.
Research and Development Expenses
Gross research and development expenses increased by $3.1 million to a total of $4.0 million for the year ended December 31, 2005 from $0.9 million for the year ended December 31, 2004. The $3.1 million increase in R&D expenses for the year ended December 31, 2005 reflects efforts to develop two new microdisplays and three visor products. We expect research and development expenses to increase in the coming year as we move forward with the completion of the X800 3DVisor, the Eyebud personal viewer and the new SVGA Shrink microdisplays.
Selling, General and Administrative Expenses
General and administrative expenses increased by $2.0 million to a total of $6.3 million for the year ended December 31, 2005 from $4.3 million for the year ended December 31, 2004. 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.
Other Income (Expense)
Other income, net, for 2005 was $282 thousand and was comprised of net interest income of $207 thousand; a gain on miscellaneous equipment sales of $38 thousand; and a gain on foreign exchange of $37 thousand. Other expense, net, for 2004 was $5.0 million and was comprised of $3.2 million of non-cash charges related to the value of the warrants issued to induce the holders of the $7.8 million in notes to agree to an early conversion of the notes into common stock; $1.6 million in non-cash charges related to the remaining unamortized debt discount and beneficial conversion feature associated with aforementioned notes; and $75 thousand in non-cash charges related to the write-off of the remaining unamortized deferred financing costs.
Off-Balance Sheet Arrangements
We had no off-balance sheetarrangements as of December 31, 2005 and 2004.
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 several of our customers reaching commercial and pre-commercial stages with their systems. Our contract revenue decreased approximately $300 thousand 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.
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.
Research and Development Expenses
Gross research and development expenses increased by $879 thousand to a total of $898 thousand for the year ended December 31, 2004 from $19 thousand for the year ended December 31, 2003. The $879 thousand increase in R&D expenses for the year ended December 31, 2004 reflects initial new product development expenses related to new display and visor products, our renewed ability to invest in product improvement and new product lines.
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.
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) $3.2 million of non-cash charges related to the value of the warrants issued to induce the holders of the $7.8 million in Notes to agree to an early conversion of the Notes into common stock, (2) $1.6 million in non-cash charges related to the remaining unamortized debt discount and beneficial conversion feature associated with the aforementioned Notes, and (3) $75 thousand in non-cash charges related to the write-off of the remaining unamortized deferred financing costs.
Off-Balance Sheet Arrangements
We had no off-balance sheetarrangements as of December 31, 2004 and 2003
At December 31, 2005, our principal source of liquidity was cash of $6.8 million. Our working capital was $8.9 million compared to $14.9 million at December 31, 2004.
For the year ended December 31, 2005, net cash used by operating activities was $15.7 million, primarily attributable to our net loss of $16.5 million. For the year ended December 31, 2004, net cash used by operating activities was $8.3 million, primarily attributable to our net loss of $12.7 million principally offset by non-cash activities of a $5.1 non-cash interest related charge (see Note 7).
For the year ended December 31, 2005, net cash used by investing activities was $1.0 million primarily related to purchases of equipment. Net cash used by investing activities for the year ended December 31, 2004 was $0.8 million primarily related to equipment purchases.
Net cash provided by financing activities during the year ended December 31, 2005 was $10.1 million and was comprised primarily of $8.4 million in proceeds from the sale of common stock and $1.6 million from the exercise of stock options and warrants. Net cash provided by financing activities the year ended December 31, 2004 was $21.5 million and was comprised primarily of $16.4 million in proceeds from the sale of common stock and $5.1 million from the exercise of stock options and warrants.
Our consolidated financial statements as of December 31, 2005 have been prepared under the assumption that we will continue as a going concern for the year ending December 31, 2006. Our independent registered public accounting firm has issued a report dated March 15, 2006 that included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is likely dependant upon our ability to obtain additional equity or recommendations;debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Based on our current business plans we expect to take one of two courses of action in order to insure that we have sufficient cash to meet our requirements over the next 12 months. We currently expect that our business will experience significant revenue growth during 2006 which will result in higher accounts receivable levels and higher inventory levels. To fund these requirements as well as other operating or investing cash requirements, we intend to use debt collateralized by our assets and to a lesser extent the sale of equity. Though we have a proven history of successfully raising capital there is no guarantee that we will be successful with our current efforts. If we are not successful, we will reduce the size of our organization and will rely on our current cash and raw materials to support a reduced operating plan that should still support modest growth in our business, but may have a material impact in our ability to sustain growth and therefore achieve profitability. Based on these options, we believe that we will have to raise capital in order to have sufficient cash to meet our requirements over the next 12 months.
Contractual Obligations
The following chart describes the outstanding contractual obligations of the Company as of December 31, 2005:
| | | Payments due by period | |
| | | Total | | 1 Year | | 2-3 Years | | 4-5 Years | |
| Capital lease obligations (a) | | $ | 24 | | $ | 18 | | $ | 6 | | $ | ----- | |
| Operating lease obligations | | | 4,989 | | | 1,437 | | | 2,923 | | | 629 | |
| Purchase obligations (b) | | | 631 | | | 631 | | | ----- | | | ----- | |
| Other long-term liabilities (c) | | | 625 | | | 125 | | | 250 | | | 250 | |
| Total | | $ | 6,269 | | $ | 2,211 | | $ | 3,179 | | $ | 879 | |
(a) Capital lease obligation includes interest not shown on the balance sheet.
(b) The majority of purchase orders outstanding contain no cancellation fees except for minor re-stocking fees.
(c) This amount represents the obligation for royalty payments.
Effect of Recently Issued Accounting Pronouncements
See Note 11 of the Consolidated Financial Statements in Item 8 for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market rate risk
We are exposed to market risk related to changes in market
valuationinterest rates and foreign currency exchanges rates.
Interest rate risk
We hold our assets in cash and cash equivalents. We do not hold derivative financial instruments or equity securities.
Foreign currency exchange rate risk
Our revenue and expenses are denominated in U.S. dollars. We have conducted some transactions in foreign currencies and expect to continue to do so; we do not anticipate that foreign exchange gains or losses will be significant. We have not engaged in foreign currency hedging to date.
Our international business is subject to risks typical of
companiesinternational activity, including, but not limited to, differing economic conditions; change in
the microdisplay systems industry; announcements of
technological innovations or new productspolitical climates; differing tax structures; and other regulations and restrictions. Accordingly, our future results could be impacted by
us or our competitors; economic,
political, and issues associated with our customers, suppliers, partners,
accountants, governmental agencieschanges in
the USA and elsewhere,these or other
parties;
sales of shares by other shareholders; and general conditions in the personal
products industries or stock market conditions. In the past, securities class
action litigation has often been instituted against companies following periods
of volatility in their share price. Those companies, like us, that are involved
in rapidly changing technology markets are particularly subject to this risk.
This type of litigation, if instituted against us, could result in substantial
costs and divert our management's attention and resources, which could cause
serious harm to our business.
41
factors.
ITEM 8:8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT INDEX
Financial Statement Index
| |
| Page
FINANCIAL STATEMENTS FOR eMAGIN CORPORATION
|
| |
Report of Independent CertifiedRegistered Public Accountants................................... 43
Report of Independent Public Accountants ........................................................... 44
Accounting Firm | 32 |
Consolidated Balance Sheets as of December 31, 20022005 and December 31, 2001 .......................... 45
2004 | 33 |
Consolidated Statements of Operations for the years ended December 31, 2002, 20012005, 2004 and 2000 and for the
period from inception (January 23, 1996) through December 31, 2002 ................................. 46
2003 | 34 |
Consolidated Statements of Shareholders'Changes in Shareholders’ Equity for the period from inception to December 31, 1996 and each of
the six years ended December 31, 2002.............................................. 47
2005, 2004 and 2003 | 35 |
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 20012005, 2004 and 2000 and for the
period from inception (January 23, 1996) through December 31, 2002 ................................. 49
2003 | 36 |
Notes to the Consolidated Financial Statements............................................................. 50
Statements | 37 |
42
REPORT OF INDEPENDENT CERTIFIEDREGISTERED PUBLIC ACCOUNTANTS
To the ShareholdersACCOUNTING FIRM
Board of Directors and Stockholders
eMagin Corporation:
Corporation
We have audited the accompanying consolidated balance sheets of eMagin Corporation
(a Delaware corporation in the development stage; see Note 1) and
subsidiariessubsidiary (the "Company") as of December 31,
20022005 and 2004, and the related consolidated statements of operations,
shareholders'stockholders' equity
(deficit) and cash flows for
each of the
year then
ended and the 2002 amounts includedthree years in the
cumulative period
from inception
(January 23, 1996) toended December 31,
2002.2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our
audit. The consolidated
financial statements of eMagin Corporation as of December 31, 2001 and for the
year then ended and from inception to December 31, 2001 were audited by other
auditors who have ceased operations and who's report dated March 13, 2002
included an explanatory paragraph that described uncertainties regarding the
Company's ability to continue as a going concern.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eMagin Corporation and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended, and the 2002 amounts included in the
cumulative period from inception (January 23, 1996) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations since inception and the working capital deficit raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Grant Thornton LLP
New York, New York
April 11, 2003
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of eMagin Corporation:
We have audited the accompanying consolidated balance sheets of eMagin
Corporation (a Delaware corporation in the development stage; see Note 1) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the period from inception
(January 23, 1996) to December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We have not audited
the financial statements of the Company from inception to December 31, 1999.
These financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
period from inception to December 31, 1999, is based solely on the report of
other auditors.
We conducted our audits in accordance with auditingthe standards generally
accepted inof the United States.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, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of eMagin Corporation and subsidiariessubsidiary as of December 31, 20012005 and 2000,2004 and the consolidated results of their operations and their consolidated cash flows for each of the three years then ended, and forin the period from inception toended December 31, 2001,2005 in conformity with accounting principles generally accepted in the United States.
States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12 to the consolidated financial statements, the Company'sCompany has had recurring losses from operations since inception and the working capital deficitwhich it believes will continue through 2006. These factors raise substantial doubt about itsthe Company’s ability to continue as a going concern. Management'sManagement’s plans concerningin regard to these matters are also describeddiscussed in Note 1.2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Arthur Anderson
/s/ Eisner LLP
Eisner LLP
New York, New York
March
13, 2002
Note: Reprinted above is a copy of the report previously expressed by such
firm which has ceased operations. The reprinting of this report is not
equivalent to a current re-issuance of such report as would be required if such
firm was still operating. The consolidated operations, shareholders' equity
(deficit) and cash flows for the two years then ended and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the period from inception (January 23, 1996) to December 31, 2001
referred to in this report have been included in the accompanying financial
statements. Because such firm has not consented to the inclusion of this report
in this Form 10-K, the reader's ability to make a claim against such firm may be
limited or prohibited.
44
15, 2006
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS 2002 2001
-------------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents $ 82,951 $ 738,342
Contract receivables 240,136
485,021
Unbilled costs and estimated profits on contracts in progress
125,359 293,273
Inventory 250,998 90,720
Prepaid expenses and other current assets 113,849 388,344
-------------------- --------------------
Total current assets 813,293 1,995,700
Equipment and leasehold improvements 634,532 1,166,509
Patents 331,442 1,657,238
Other long-term assets 55,117 94,367
-------------------- --------------------
Total assets $ 1,834,384 $ 4,913,814
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 49,275 $ 693,197
Other short term debt 5,690,889 1,875,000
Accounts payable 6,381,036 3,116,558
Accrued expenses 1,207,693 615,418
Accrued payroll and benefits 1,031,958 788,302
Deferred Revenue 30,400 289,538
Other current liabilities 23,505 108,805
-------------------- --------------------
Total current liabilities
14,414,756 7,486,818
-------------------- --------------------
LONG-TERM DEBT
227,742 2,305,184
SHAREHOLDERS' EQUITY (DEFICIT):
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 30,854,980 and 25,171,183
30,855 25,171
Additional paid-in capital
119,221,277 114,058,560
Deferred compensation
(462,983) (2,277,367)
Deficit accumulated during the development stage
(131,597,263) (116,684,552)
-------------------- --------------------
Total shareholders' equity (deficit)
(12,808,114) (4,878,188)
-------------------- --------------------
Total liabilities and shareholders' equity (deficit) $ 1,834,384 $ 4,913,814
==================== ====================
The accompanying
| | | December 31, | |
| | | 2005 | | 2004 | |
| | | (In thousands, except share and per share amounts) | |
ASSETS | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | | $ | 6,727 | | $ | 13,457 | |
| Investments - held to maturity | | | 120 | | | — | |
| Accounts receivable, net | | | 822 | | | 536 | |
| Inventory | | | 3,839 | | | 2,018 | |
| Prepaid expenses and other current assets | | | 1,045 | | | 880 | |
| Total current assets | | | 12,553 | | | 16,891 | |
| Equipment, furniture and leasehold improvements, net | | | 1,299 | | | 1,305 | |
| Intangible assets, net | | | 57 | | | 54 | |
| Other assets | | | 233 | | | 186 | |
| Total assets | | $ | 14,142 | | $ | 18,436 | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 562 | | $ | 822 | |
| Accrued compensation | | | 1,010 | | | 674 | |
| Other accrued expenses | | | 1,894 | | | 357 | |
| Advanced payments | | | 60 | | | 64 | |
| Deferred revenue | | | 96 | | | — | |
| Current portion of capitalized lease obligations | | | 16 | | | 14 | |
| Other current liabilities | | | 47 | | | 35 | |
| Total current liabilities | | | 3,685 | | | 1,966 | |
| | | | | | | | |
| Capitalized lease obligations | | | 6 | | | 22 | |
| Other long-term liabilities | | | 50 | | | — | |
| Total liabilities | | | 3,741 | | | 1,988 | |
| | | | | | | | |
| Commitments and contingencies | | | | | | | |
| | | | | | | | |
| Shareholders’ equity: | | | | | | | |
| Preferred stock, $.001 par value: authorized 10,000,000 shares; no shares issued and outstanding | | | — | | | — | |
| Common stock, $.001 par value: authorized 200,000,000 shares, issued and outstanding, 99,972,458 shares in 2005 and 79,638,817 shares in 2004 | | | 100 | | | 80 | |
| Additional paid in capital | | | 175,860 | | | 165,399 | |
| Accumulated deficit | | | (165,559 | ) | | (149,031 | ) |
| Total shareholders’ equity | | | 10,401 | | | 16,448 | |
| Total liabilities and shareholders’ equity | | $ | 14,142 | | $ | 18,436 | |
| | | | | | | | |
See notes
are an integral part of these financial statements
45
to Consolidated Financial Statements.
eMAGIN CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, 2000
and for the period from inception (January 23, 1996) through December 31, 2002
Period from inception
January 6, 1996
2002 2001 2000 to December 31, 2002
---------------- -------------------------------------------------------
CONTRACT REVENUE:
Contract revenue $ 840,658 $ 5,005,657 $ 2,557,587 $ 8,403,902
Product revenue
1,287,002 841,713 - 2,128,715
---------------- -------------------------------------------------------
Total revenue 2,127,660 5,847,370 2,557,587 10,532,617
---------------- -------------------------------------------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$331,956, $1,555,811, $1,328,121,
$3,608,325 respectively 7,254,996 12,724,161 9,634,948 29,614,105
Amortization of purchased intangibles
1,325,796 17,886,838 20,932,320 40,144,954
Acquired In Process Research & Development
- 12,820,000 12,820,000
Writedown of Goodwill and purchased
intangibles - 32,145,863 - 32,145,863
Selling, general and administrative
6,153,238 10,226,710 7,689,341 24,100,289
---------------- -------------------------------------------------------
Total costs and expenses, net
14,734,030 72,983,572 51,076,609 138,825,211
---------------- -------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense
(2,329,452) (1,411,668) (210,542) (3,232,742)
Other income (expense), net
23,111 61,135 562,747 (71,928)
---------------- -------------------------------------------------------
Other income (expense)
(2,306,341) (1,350,533) 352,205 (3,304,670)
---------------- -------------------------------------------------------
Loss before provision for income taxes $ (14,912,711) $ (68,486,735) $(48,166,817) $ (131,597,263)
---------------- -------------------------------------------------------
PROVISION FOR INCOME TAXES
- -
---------------- -------------------------------------------------------
Net loss $ (14,912,711) $ (68,486,735) $(48,166,817) $ (131,597,263)
================ =======================================================
Basic and diluted loss per common share
(0.51) (2.73) (2.18)
Weighted average outstanding common stock
29,416,838 25,100,211 22,144,904
The accompanying
| | | For the Year Ended December 31, | |
| | | 2005 | | 2004 | | 2003 | |
| | | (In thousands, except share data) | |
| Revenue: | | | | | | | |
| Product revenue | | $ | 3,719 | | $ | 3,502 | | $ | 2,213 | |
| Contract revenue | | | 36 | | | 108 | | | 365 | |
| Sales returns and allowance | | | (10 | ) | | (17 | ) | | — | |
| Total revenue, net | | | 3,745 | | | 3,593 | | | 2,578 | |
| | | | | | | | | | | |
| Cost of goods sold | | | 10,219 | | | 5,966 | | | 5,141 | |
| | | | | | | | | | | |
| Gross loss | | | (6,474 | ) | | (2,373 | ) | | (2,563 | ) |
| Operating expenses: | | | | | | | | | | |
| Research and development | | | 4,020 | | | 898 | | | 19 | |
| Selling, general and administrative | | | 6,316 | | | 4,340 | | | 3,529 | |
| Stock based compensations | | | ---- | | | 88 | | | 2,183 | |
| Total operating expenses | | | 10,336 | | | 5,326 | | | 5,731 | |
| Loss from operations | | | (16,810 | ) | | (7,699 | ) | | (8,294 | ) |
| Other income (expense): | | | | | | | | | | |
| Gain on debt settlement | | | — | | | — | | | 4,638 | |
| Interest expense | | | (4 | ) | | (5,087 | ) | | (1,283 | ) |
| Other income, net | | | 286 | | | 75 | | | 216 | |
| Total other income (expense), net | | | 282 | | | (5,012 | ) | | 3,571 | |
| Net loss | | $ | (16,528 | ) | $ | (12,711 | ) | $ | (4,723 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Loss per share, basic and diluted | | $ | (0.19 | ) | $ | (0.20 | ) | $ | (0.13 | ) |
| Weighted average number of shares outstanding: | | | | | | | | | | |
| Basic and diluted | | | 85,407 | | | 64,278 | | | 35,998 | |
| | | | | | | | | | | |
See notes
are an integral part of the financial statements.
46
to Consolidated Financial Statements.
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JANUARY 23, 1996) through DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Deferral Additional Accumulated
- -----------------------------------------------------------------------------------------------------------------------------
Shares $ Compensation Paid-In Capital Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance, February 6, 1996 600,000 $ 600 $ 5,400 $ 6,000
- -----------------------------------------------------------------------------------------------------------------------------
Net loss for period $ (3,803) (3,803)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 600,000 600 - 5,400 (3,803) 2,197
- ---------------------------------------------================================================================================
Issuance of common stock for cash 500,000 500 24,500 25,000
- -----------------------------------------------------------------------------------------------------------------------------
Net loss for period (5,268) (5,268)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,100,000 1,100 - 29,900 (9,071) 21,929
- ---------------------------------------------================================================================================
Effect of stock split 5,500,000 5,500 (5,500) -
- -----------------------------------------------------------------------------------------------------------------------------
Net loss for period (3,477) (3,477)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,600 - 24,400 (12,548) 18,452
6,600,000
- ---------------------------------------------================================================================================
Effect of stock split 13,556,400 13,556 (13,556) -
- -----------------------------------------------------------------------------------------------------------------------------
Net loss for period (18,452) (18,452)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 20,156,400 20,156 - 10,844 (31,000) -
- ---------------------------------------------================================================================================
Sale of common stock in private placement 3,464,547 3,465 23,246,535 23,250,000
- -----------------------------------------------------------------------------------------------------------------------------
Common stock, options and warrants issued
in connection with FED acquisition 10,486,386 10,486 92,354,461 92,364,947
- -----------------------------------------------------------------------------------------------------------------------------
Cancellation of existing shareholders (9,356,018) (9,356) 9,356 -
common stock
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock related to 1,080 1 1,835 1,836
exercise of warrant
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for services 316,748 317 2,216,919 2,217,236
- -----------------------------------------------------------------------------------------------------------------------------
Deferred compensation $(13,023,364) (13,023,364)
- -----------------------------------------------------------------------------------------------------------------------------
Amortization of deferred compensation 2,539,828 2,539,828
- -----------------------------------------------------------------------------------------------------------------------------
To book forfeited stock options 1,217,139 (1,217,139) -
- -----------------------------------------------------------------------------------------------------------------------------
Net loss for period (48,166,817)(48,166,817)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 25,069,143 25,069 (9,266,397) 116,622,811 (48,197,817) 59,183,666
- ---------------------------------------------================================================================================
Sale of warrants 16,002 16 27,507 27,523
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for services 86,038 86 116,151 116,237
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock related to debt 408,068 408,068
financing
- -----------------------------------------------------------------------------------------------------------------------------
Beneficial conversion of debt financings 530,473 530,473
- -----------------------------------------------------------------------------------------------------------------------------
OID for debt financings 501,577 501,577
- -----------------------------------------------------------------------------------------------------------------------------
Amortization of deferred compensation 2,841,003 2,841,003
- -----------------------------------------------------------------------------------------------------------------------------
To book forfeited stock options 4,148,027 (4,148,027) -
- -----------------------------------------------------------------------------------------------------------------------------
Net loss for period (68,486,735) (68,486,735)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 25,171,183 $ 25,171 $ (2,277,367) $114,058,560 $(116,684,552) $(4,878,188)
- ---------------------------------------------================================================================================
47
eMAGIN CORPORATION
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS'SHAREHOLDERS’ EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
Additional
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock Deferred paid-in Accumulated
- -------------------------------------------------------------------------------------------------------------------------------
Shares $ Compensation Capital Deficit Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 25,171,183 $ 25,171 $ (2,277,367) $ 114,058,560 $ (116,684,552) $(4,878,188)
- -------------------------------================-==============--================-===============-================-=============
- -------------------------------------------------------------------------------------------------------------------------------
Sale of common stock in
private placement 4,899,179 4,899 3,475,619 3,480,518
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of warrants in debt 140,387 140,387
financing
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
related to debt financing 80,000 80 55,570 55,650
- -------------------------------------------------------------------------------------------------------------------------------
Buyout of debt financing 500,000 500 89,632 90,132
- -------------------------------------------------------------------------------------------------------------------------------
Value related to original
issue discount features of 672,682 672,682
debt financing
- -------------------------------------------------------------------------------------------------------------------------------
Amortization of deferred
compensation 739,191 35,329 774,520
- -------------------------------------------------------------------------------------------------------------------------------
Stock Options Exercised 2,125 2 885 887
- -------------------------------------------------------------------------------------------------------------------------------
Reversal and deferred
compensation balance for 1,075,193 (1,075,193) -
forfeited options
- -------------------------------------------------------------------------------------------------------------------------------
Non-Cash Comp Expenses for
Options 872,399 872,399
- -------------------------------------------------------------------------------------------------------------------------------
Value related to beneficial
conversion features of debt 783,691 783,691
financing
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for 202,493 202 111,716 111,918
services
- -------------------------------------------------------------------------------------------------------------------------------
Net Loss for Period (14,912,711) (14,912,711)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 30,854,980 $ 30,855 $ (462,983) $ 119,221,276 $ (131,597,263) $(12,808,115)
- -------------------------------================-==============--================-===============-================-=============
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying
| | | | | | | Additional | | | | Total | |
| | | Common Stock | | Deferred | | Paid-In | | Accumulated | | Shareholders’ | |
| | | Shares | | Amount | | Compensation | | Capital | | Deficit | | Equity | |
| | | (In thousands, except share amounts) | |
| | | | | | | | | | | | | | |
| Balance, December 31, 2002 | | | 30,854,980 | | $ | 31 | | $ | (463 | ) | $ | 119,221 | | $ | (131,597 | ) | $ | (12,808 | ) |
| | | | | | | | | | | | | | | | | | | | |
Debt to equity conversion | | | 6,101,972 | | | 6 | | | ----- | | | 4,448 | | | ----- | | | 4,454 | |
| Settlement of debt | | | 1,997,840 | | | 2 | | | ----- | | | 1,410 | | | ----- | | | 1,412 | |
| Exercise of warrants | | | 1,479,900 | | | 1 | | | ----- | | | 1,137 | | | ----- | | | 1,138 | |
| Cashless exercise of warrants | | | 270,910 | | | ----- | | | ----- | | | ----- | | | ----- | | | ----- | |
| Original issue discount on financing | | | ----- | | | ----- | | | ----- | | | 1,383 | | | ----- | | | 1,383 | |
| Beneficial conversion on financing | | | ----- | | | ----- | | | ----- | | | 617 | | | ----- | | | 617 | |
| Issuance of common stock for services | | | 656,435 | | | 1 | | | ----- | | | 561 | | | ----- | | | 562 | |
| Exercise of options | | | 846,793 | | | 1 | | | ----- | | | 279 | | | ----- | | | 280 | |
| Issuance of equity for interest and penalties | | | 486,582 | | | 1 | | | ----- | | | 735 | | | ----- | | | 736 | |
| Amortization of deferred stock compensation | | | ----- | | | ----- | | | 375 | | | | | | ----- | | | 375 | |
| Stock option compensation | | | ----- | | | ----- | | | ----- | | | 1,808 | | | ----- | | | 1,808 | |
| Net loss | | | ----- | | | ----- | | | ----- | | | ----- | | | (4,723 | ) | | (4,723 | ) |
| Balance, December 31, 2003 | | | 42,695,412 | | | 43 | | | (88 | ) | | 131,599 | | | (136,320 | ) | | (4,766 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Sale of common stock, net of issuance costs | | | 16,408,364 | | | 17 | | | ----- | | | 16,368 | | | ----- | | | 16,385 | |
| Debt to equity conversion | | | 11,394,621 | | | 11 | | | ----- | | | 8,556 | | | ----- | | | 8,567 | |
| Issuance of warrants for early conversion of debt to equity | | | | | | | | | ----- | | | 3,180 | | | ----- | | | 3,180 | |
| Exercise of common stock warrants | | | 3,533,348 | | | 4 | | | ----- | | | 3,786 | | | ----- | | | 3,790 | |
| Stock options exercised | | | 5,221,052 | | | 5 | | | ----- | | | 1,379 | | | ----- | | | 1,384 | |
| Issuance of common stock for services | | | 386,020 | | | ----- | | | ----- | | | 531 | | | ----- | | | 531 | |
| Amortization of deferred stock compensation | | | ----- | | | ----- | | | 88 | | | ----- | | | ----- | | | 88 | |
| Net loss | | | ----- | | | ----- | | | ----- | | | ----- | | | (12,711 | ) | | (12,711 | ) |
| Balance, December 31, 2004 | | | 79,638,817 | | | 80 | | | ----- | | | 165,399 | | | (149,031 | ) | | 16,448 | |
| | | | | | | | | | | | | | | | | | | | |
| Sale of common stock, net of issuance costs | | | 16,619,056 | | | 17 | | | ----- | | | 8,383 | | | ----- | | | 8,400 | |
| Stock options exercised | | | 110,594 | | | ----- | | | ----- | | | 37 | | | ----- | | | 37 | |
| Exercise of common stock warrants | | | 3,060,578 | | | 3 | | | ----- | | | 1,581 | | | ----- | | | 1,584 | |
| Issuance of common stock for services | | | 543,413 | | | ----- | | | ----- | | | 460 | | | ----- | | | 460 | |
| Net loss | | | ----- | | | ----- | | | ----- | | | ----- | | | (16,528 | ) | | (16,528 | ) |
| Balance, December 31, 2005 | | | 99,972,458 | | $ | 100 | | $ | ----- | | $ | 175,860 | | $ | (165,559 | ) | $ | 10,401 | |
See notes
are an integral part of these financial statements
48
to Consolidated Financial Statements.
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000 and for the period from inception (January 23, 1996)
| | | Year Ended December 31, | |
| | | 2005 | | 2004 | | 2003 | |
| | | (In thousands) | |
| Cash flows from operating activities: | | | | | | | | | | |
| Net loss | | $ | (16,528 | ) | $ | (12,711 | ) | $ | (4,723 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 908 | | | 620 | | | 884 | |
| Amortization of financing fees | | | --- | | | 8 | | | 37 | |
| Provision for sales returns and doubtful accounts | | | (284 | ) | | 467 | | | --- | |
| Non-cash stock based compensation | | | --- | | | 88 | | | 2,183 | |
| Non-cash interest related charges | | | --- | | | 5,094 | | | 1,256 | |
| Gain on debt settlement | | | --- | | | --- | | | (4,638 | ) |
| Issuance of common stock for services | | | 470 | | | 531 | | | 562 | |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Trade receivables | | | (2 | ) | | (235 | ) | | (528 | ) |
| Unbilled costs and estimated profits on contracts in progress | | | --- | | | 75 | | | 50 | |
| Inventory | | | (1,821 | ) | | (1,742 | ) | | (24 | ) |
| Prepaid expenses and other current assets | | | (175 | ) | | (400 | ) | | (276 | ) |
| Advanced payments | | | (4 | ) | | (58 | ) | | 122 | |
| Deferred revenue | | | 96 | | | --- | | | (30 | ) |
| Accounts payable, accrued compensation, and accrued expenses | | | 1,613 | | | (51 | ) | | (186 | ) |
| Other current liabilities | | | 14 | | | 17 | | | (5 | ) |
| Net cash used in operating activities | | | (15,713 | ) | | (8,297 | ) | | (5,316 | ) |
| Cash flows from investing activities: | | | | | | | | | | |
| Purchase of equipment | | | (898 | ) | | (721 | ) | | (1,120 | ) |
| Purchase of other assets | | | (54 | ) | | (99 | ) | | 112 | |
| Net cash used by investing activities | | | (952 | ) | | (820 | ) | | (1,008 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from sale of common stock, net of issuance costs | | | 8,400 | | | 16,385 | | | --- | |
| Proceeds from exercise of stock options and warrants | | | 1,621 | | | 5,173 | | | 1,418 | |
| Proceeds from long-term debt | | | 50 | | | --- | | | 6,000 | |
| Payments of capitalized lease obligations | | | (16 | ) | | (38 | ) | | (123 | ) |
| Net cash provided by financing activities | | | 10,055 | | | 21,520 | | | 7,295 | |
| Net (decrease) increase in cash and cash equivalents | | | (6,610 | ) | | 12,403 | | | 971 | |
| Cash and cash equivalents, beginning of year | | | 13,457 | | | 1,054 | | | 83 | |
| Cash and cash equivalents, end of year | | $ | 6,847 | | $ | 13,457 | | $ | 1,054 | |
| | | | | | | | | | | |
| Cash paid for interest | | $ | 4 | | $ | 8 | | $ | 16 | |
| | | | | | | | | | | |
| Non-cash transactions: | | | | | | | | | | |
| Conversion of debt to equity | | $ | --- | | $ | 8,567 | | $ | 4,454 | |
| Issuance of equity for penalties on interest | | $ | --- | | $ | --- | | $ | 735 | |
| Issuance of equity for settlement of accounts payable | | $ | --- | | $ | --- | | $ | 1,412 | |
| | | | | | | | | | | |
See notes to
December 31, 2002
Period from
inception
January 23 1996
2002 2001 2000 December 31, 2002
----------------------------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($14,912,711)($68,486,735) ($48,166,817) ($131,597,263)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 21,488,686
1,842,480 18,453,461 41,785,462
Write-down of goodwill and purchased intangibles
32,145,863 32,145,863
Loss on disposal of assets
98,548 97,713
Non-cash charge for stock based compensation
1,646,917 2,841,003 2,539,828 7,027,748
Non-cash interest related charges
1,446,654 1,222,562 2,669,216
Non-cash related to issuance of warrants
140,387 140,387
Non-cash charge for services received
25,050 116,151 141,201
Non-cash charge due to beneficial conversion
783,691 783,691
Acquired in-process research and development
12,820,000 12,820,000
Changes in operating assets and liabilities, net of
acquisition:
Trade receivables
593,300 340,606 (693,770) 240,136
Interest receivable
Unbilled costs and estimated profits on contracts in
progress 125,359 125,359
Costs and estimated profits in excess of billings on
contracts (326,291) 334,074 (7,783)
Inventory 341,718 (90,720) 250,998
Prepaid expenses and other current assets 196,371 276,984 (359,506) 113,849
Other long-term assets 139,033 11,027 (94,943) 55,117
Advanced payment on contracts to be completed (398,343) 86,531 311,812
Deferred Revenue 30,400 30,400
Accounts payable, accrued expenses and accrued
payroll 2,738,847 1,932,619 51,039 4,722,505
Other current liabilities
-------------------------------------------------------------
Net cash used in operating activities (5,587,137) (10,816,574) (12,012,906) (28,447,617)
-------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (84,745) (464,829) (803,033) (1,352,607)
Net proceeds from acquisition 1,239,162 1,239,162
-------------------------------------------------------------
Net cash used in investing activities (84,745) (464,829) 436,129 (113,445)
-------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance
costs 3,475,621 21,250,000 24,756,621
Proceeds from exercise of stock options and warrants 141,272 27,609 168,881
Proceeds from long and short term debt (net) 1,443,478 4,875,000 6,318,478
Payments of long term debt and capital leases (43,880) (250,121) (2,305,966) (2,599,967)
-------------------------------------------------------------
Net cash provided by financing activities 5,016,491 4,652,488 18,944,034 28,644,013
-------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (655,391) (6,628,915) 7,367,257 82,951
CASH AND CASH EQUIVALENTS, beginning of period 738,342 7,367,257
-------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 82,951 $ 738,342 $ 7,367,257 $ 82,951
=============================================================
The accompanying notes are an integral part of these financial statements
49
eMAGIN CORPORATION
(a development stage company)
Notes to the Consolidated Financial Statements
Statements.
eMAGIN CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
Note 1 - NATURE OF BUSINESS AND DEVELOPMENT STAGE RISKS
Fashion Dynamics
eMagin Corporation ("FDC") was organized January 23, 1996, under
the laws of the State of Nevada. FDC had no active business operations other
than to acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the "Merger"). FED was a developer and manufacturer of
optical systems and micro displays for use in the electronics industry. FED'sits wholly owned subsidiary Virtual Vision,(the “Company”) designs, develops, manufactures, and markets micro display
systems and optics technologyvirtual imaging products for consumer, commercial, industrial and military applications. The merged company changed its name toCompany’s products are sold mainly in North America, Asia, and Europe,
Principles of consolidation
The accompanying audited consolidated financial statements include the accounts of eMagin Corporation (the
"Company" or "eMagin"). Followingand its wholly owned subsidiary. All intercompany transactions have been eliminated in consolidation.
These statements reflect all normal recurring adjustments, which, in the Merger,opinion of management, are necessary for a fair presentation of the business conducted byfinancial position and results of operations for the periods presented.
Basis of presentation
The consolidated financial statements have been prepared assuming that the Company is the business conducted by FED prior to the Merger.will continue as a going concern. The Company continues to be a development stage company, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises," ashas had recurring losses from operations which it continues to devote
substantially all of its efforts to establishing a new business, and it has not
yet commenced its planned principal operations. Revenues earned bybelieves will continue through 2006. These factors raise substantial doubt regarding the Company
to date are primarily related to research and development type contracts and
sales of its first two commercial organic light emitting diode ("OLED") micro
display products.
Through December 31, 2002 we have incurred accumulated losses of
approximately $131.6million since our inception and we anticipate incurring
significant losses as we fund our growth. Since inception we have financed our
operations through private placements of equity securities, research and
development contracts and borrowings. As of December 31, 2002, we had $83
thousand in cash and cash equivalents, and a working capital deficit of
$13.6million. We are in default of our note agreements (see Note 5) and we are
delinquent in our lease obligation to IBM in the amount of approximately
$150,000. We may be denied access to the premises although the company has
entered into negotiations with IBM to settle the amount due in April 2003.
The Company'sCompany’s ability to continue as a going concern without obtaining additional funding. Management is currently negotiating establishment of a standby debt facility with existing investors and or the placement of debt with new investors to address this funding requirement. If management is unsuccessful in its future success
is dependent uponefforts to obtain additional funding, the Company will reduce its operating plan which may have an impact on its ability to raise capital in the near future to continue:
(1) its research and development efforts, (2) hiring and retaining key
employees, (3) satisfaction of its commitments and (4) the successful
development, marketing and production of its products.
The Company believes that it will be able to secure financing in the near
term and that the proceeds from such financings, and its remaining cash
resources at December 31, 2002, will be sufficient to fund the Company's
operations into the first quarter of 2004 and beyond. However, there can be no
assurance that sufficient capital will be available, when required, to permit
the Company to realize its plan, or even if such capital is available, that it
will be at terms favorable to the Company. Additionally, there can be no
assurance that the Company's efforts to produce a profitable product will be
successful or that the Company will generate sufficient revenues to provide
positive cash flows from operations. These and other factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanyingachieve profitability.The consolidated financial statements do not include any adjustments that might result shouldfrom the Company be unable to continueoutcome of this uncertainty.
Use of estimates
In accordance with accounting principles generally accepted in existence.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
Principlesthe United States of Consolidation
The accompanying consolidatedAmerica, management utilizes certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements of eMagin Corporation
includeand the assets, liabilities,reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of all majority-owned
subsidiaries over which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Revenue and cost recognition
Revenue is recognized when products are shipped to customers, net of allowances for anticipated returns. The Company’s revenue-earning activities generally involve delivering products and revenues are considered to be earned when the Company
exercises control. Inter-company
transactionshas completed the process by which it is entitled to such revenues. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed or determinable and
balances are eliminated in consolidation.
50
Revenue and Cost Recognitioncollection is reasonably assured. The Company has historically earneddefers revenue recognition on products sold directly to the consumer with a thirty day right of return. Revenue is recognized upon the expiration of the right of return.
The Company also earns revenues from certain of
its research
and developmenteMagin's R&D activities under both firm fixed-price contracts and cost-type contracts, including some cost-plus-fee contracts. Revenues relating to firm fixed-price contracts are generally recognized on the percentage-of-completion method of accounting as costs are incurred (cost-to-cost basis). Revenues on cost-plus-fee contracts include costs incurred plus a portion of estimated fees or profits based on the relationship of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and an allocation of allowable indirect costs as defined by each contract, as periodically adjusted to reflect revised agreed upon rates.
Product revenue is recorded when productsThese rates are
shippedsubject to
customers, at
which time, title passes to the customer net of estimated returns. The Company
provides a limited warranty that its products meet the formal specifications at
the time of shipment. Customers are typically provided an ability to return
products with out of specification initial manufacturing defects up to 1 year
after shipment, depending on the arrangements made. Longer limited warrants may
be made. The company does not provide any warranty other than the potential
replacement of our own specific product.
As of December 31, 2002 and 2001, the Company had received advanced
payments on contracts to be completed of $0 and $275,000, respectively. These
amounts, classified as deferred revenues in the accompanying consolidated
balance sheets, represent that portion of amounts billedaudit by the
Company, or cash
collected by the Company, for which services have not yet been provided or
products have not yet been delivered.
Costs and Estimated Profits in Excess of Billingsother party. Amounts can be billed on
Contracts in Progress
The Company records costs and estimated profits in excess of billings on
contracts in progress as an asset on its balance sheet to the extent such costs,
and related profits, if any, have been incurred under outstanding contracts and
are expected to be collected.
The components of costs and estimated profits in excess of billings on
contracts in progress as of December 31, 2002 and 2001 were as follows:
2002 2001
Total costs incurred and estimated profits $ 840,658 $ 21,414,000
Less amounts billed 840,658 21,121,000
Costs and estimated profits in excess of billings on contracts
in progress $ 0 $ 293,000
============== ===============
a bi-monthly basis.
Research and Development/Cost-Sharing Arrangements
The Company has entered into three cost-sharing arrangements with an agency
of the U.S. Government and one commercial customer. To date, activities of the
Company include the performance of research and development under cooperative
agreements. Current industry practices provide that costs and related funding
under such agreements be accounted for as incurred and earned. The Company is
reimbursed for expenses plus government rates for research
Research and development costs
and general and administrative costs.
The Company has incurred research and development costs and earned funding
under these agreementsare expensed as
of December 31, 2002, 2001 and 2000 as follows:
2002 2001 2000
Unfunded research and development $ 7,244,820 $ 11,442,000 $ 9,634,948
Research and development costs 331,956 2,838,000 0
Funding received (331,956) (1,556,000) 0
------------ --------------- -----------
$ 7,244,820 $ 12,724,000 $ 9,634,948
============ =============== -----------
51
incurred.
Cash and Cash Equivalents
The Company considers allcash 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.
Investments-held to maturity
Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost on the balance sheet.
Accounts Receivable
receivable
The majority of the Company'sCompany’s commercial accounts receivable areis due from OEM manufacturers.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 3030-90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. AccountsAny account outstanding longer than the contractual payment terms areis considered past due.
Allowance for doubtful account
The Company determines its allowance by consideringfor doubtful accounts reflects an estimate of probable losses inherent in the accounts receivable balance. The allowance is determined based on a numbervariety of factors, including the length of time trade accounts receivablereceivables are past due, the
Company's previous loss history,historical experience, the customer's current ability to pay its obligation, to the Company, and the condition of the general economy and the industry as a whole. The Company writes-offwill record a specific reserve for individual accounts receivable when they become
uncollectable, and payments subsequently received onthe Company becomes aware of a customer's inability to meet its financial obligations, such receivables are
creditedas in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to customers change, the allowance for doubtful accounts.
Company would further adjust estimates of the recoverability of receivables.
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, of its
inventory and reduceswe reduce the inventory value to its estimated market value based
upon current market pricesa new cost basis.
Equipment, furniture and contracts for future sales.
leasehold improvements
Equipment, and Leasehold Improvements
Equipmentfurniture and leasehold improvements are stated at cost. Depreciation on equipment is calculated using the straight-line method of depreciation over theirits estimated useful lives.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.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS")
In accordance with SFAS No. 144, Accounting"Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance with this standard, eMaginAssets," the Company performs impairment tests on its long-lived assets, excluding goodwill and other
intangible assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. IfImpairment losses, if any, are recognized based on the excess of the assets' carrying value is not recoverable, the asset or asset
group is written down to market value.
Goodwill and Other amounts over their estimated fair values.
Intangible Assets
Identifiable
The Company’s intangible assets
resulting from the acquisitionconsist of
FED and
the excess purchase pricepatents that are amortized over
net assets acquired ("goodwill") are being
amortized on a straight-line basis over their
respective estimated useful lives of
fifteen years using the straight line method. Total intangible amortization expense was approximately
three years. The Company's ability to realize its goodwill is
dependent upon its ability to raise sufficient financing in order to expand the
rollout$4 thousand, $2 thousand and
commercialization of its products. In the third quarter of 2001, the
Company was able to secure a limited amount of additional financing to fund its
operations, however, such financing was not in the amount the Company expected
to be able to secure, nor was it enough to rollout commercialization of its
product on a wide scale basis, as had been contemplated by its business plan.
Based on these factors, among others, the Company revised its future business
plan and evaluated the carrying value of the identifiable intangible assets and
goodwill. Based on this evaluation, the Company determined that the assets were
impaired, and, accordingly, during the quarter ended September 30, 2001, the
Company recorded an impairment write-down of its goodwill and other identifiable
intangible assets of approximately $32.1 based on the estimated discounted net
52
cash flow to be generated over the remaining life of the assets. The impairment
charge is included in the accompanying consolidated statement of operations$0 for the yearyears ended December 31, 2001. Inclusive of this impairment write-down,
amortization of identified intangibles expense for the year ended December 31,
2001 was approximately $50.0 million2005, 2004, and amortization of purchased intangibles
expense for the year ended December 31, 2002 was approximately $1.3 million.
As of December 31, 2002 and 2001, intangible assets was comprised of the
patents as follows (in millions):
2002 2001
Patents .......................................... $ 18.0 $ 18.0
Less: Accumulated amortization ................... (17.7) (16.3)
-------- --------
Patents, net ..................................... $ 0.3 $ 1.7
======== ========
2003, respectively.
Income Taxes
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, 20022005 and 2001,2004, the Company has netgross deferred tax assets of approximately $29.5$73 million, and $24.4$59 million, respectively, primarily resulting from the future tax benefit of net operating loss carry forwards discussed below.carryforwards and temporary differences relating to amortization of intangible assets. Such net deferred tax assets are fully offset by a valuation allowancesallowance due to the uncertainty as to their realizability.
At December 31, 2002, the Company has net operating loss carry forwards
totaling approximately $ 72.7 million, inclusive of the net operating losses
acquired as part of the acquisition of FED, which expire through 2021, available
to offset future Federal taxable income. Pursuant to Section 382 of the Internal
Revenue Code, the usage of a portion of these net operating loss carry forwards
is limited due to changes in ownership that have occurred.
Loss per Common Share
common share
In accordance with SFAS No. 128, "Earnings"Basic Earnings Per Share,"Share", net loss per common share amounts ("basic EPS") wereis computed by dividing net loss by the weighted average number of common shares outstanding and excluding any potential dilution. Net loss per common share amounts assuming dilution ("diluted EPS") were computed by reflectingreflects the potential dilution from the exercise of stock options and warrants. CommonThese 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, 2005, 2004, and 2003 do not include options and warrants to purchase 44,249,883; 35,177,391; and 24,498,059 respectively, of common equivalent shares, as their effect would be antidilutive.
Comprehensive Income (Loss)
The Company complies with the provisions of income (loss)
SFAS No. 130, "Reporting Comprehensive Income," whichIncome", requires companies to report all changes in equity during a period, except those resulting from investment by owners and distributions to owners, for the period in which they are recognized. Comprehensive income (loss) is the total of net income (loss) and all other
non-owner changes in equity (or other comprehensive income (loss)) items, such as unrealized gains or losses on securities classified as available-for-sale and foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive income (loss) must be reported on the face of the annual financial statements. The Company's operations did not give rise to any material items includable in comprehensive income (loss), which were not already in net income (loss)loss for the years ended December 31, 2002, 20012005, 2004, and 2000.2003. Accordingly, the Company's comprehensive income (loss)loss is the same as its net income (loss) for allthe periods presented.
Stock-Based Compensation
Accounting for Stock-Based Compensation: eMagin applies
Stock-based compensation
The Company has elected to apply Accounting Principals Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees,"Employees", and related
Interpretationsinterpretations in accounting for its stock-based compensation plans. Accordingly,
eMaginthe Company records expense for employee stock
53
compensation plans equal to the excess of the market price of the underlying eMagin shares at the date of grant over the exercise price.
As of December 31, 2005, the Company has outstanding options to purchase 18,052,636 shares. Under APB No. 25, when the exercise price
whichof employee stock options equals the market price of the underlying
shares atstock on the
grant date
and therefore,of grant no compensation expense is recorded. The
following table summarizesCompany discloses information relating to the
pro forma
operating resultsfair value of
eMagin hadstock-based compensation
cost for stock options granted (See
Note 8) been determinedawards in accordance with
the fair value based method
prescribed by Statement of Financial Accounting Standards
No.123 ("SFAS No.
123,123"), "Accounting for Stock-Based Compensation"
(SFAS. The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provision of SFAS No.
123). eMagin has presented123. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following
disclosuresassumptions used for grants in
accordance with SFAS 148 "Accounting for Stock-Based
Compensation-Transition2005, 2004 and
Disclosures."
----------------------------------------------- --------------------- --------------------- -------------------
For the year ended December 31, 2002 2001 2000
----------------------------------------------- --------------------- --------------------- -------------------
(In thousands, except per share
amounts)
----------------------------------------------- --------------------- --------------------- -------------------
Net loss applicable to common stockholders',
as reported $ (14,912,711) $(68,486,735) $ (48,166,817)
----------------------------------------------- --------------------- --------------------- -------------------
Adjust: Stock-based employee compensation
expense determined under fair value method (1,225,884) (992,265) (1,303,183)
----------------------------------------------- --------------------- --------------------- -------------------
Pro forma net loss. $ (16,138,595) $ (69,479,000) $ (49,470,000)
----------------------------------------------- --------------------- --------------------- -------------------
Net loss per share applicable to common
stockholders':
----------------------------------------------- --------------------- --------------------- -------------------
Basic and diluted , as reported $ (0.51) $ (2.73) $( 2.18 )
----------------------------------------------- --------------------- --------------------- -------------------
Basic and diluted, pro forma $ (0.55) $ (2.77) $ (2.23)
----------------------------------------------- --------------------- --------------------- -------------------
2003, respectively:
| | | For the years ended December 31, | |
| | | 2005 | | 2004 | | 2003 | |
Expected life in years | | | 5 | | | 5 | | | 5 | |
| Stock volatility | | | 126 | % | | 139 | % | | 152 | % |
| Risk free interest rates | | | 4.4 | % | | 3.6 | % | | 2.8 | % |
| Dividends during expected terms | | | None | | | None | | | None | |
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect the portion of the estimated fair valuevalues of awards that were earned forduring the years ended December 31, 2002, 20012005, 2004 and 2000.2003. The weighted average fair value per option was $0.96, $1.60, $0.42 for options granted in 2005, 2004 and 2003, respectively.
| | | For the years ended December 31, | |
| | | 2005 | | 2004 | | 2003 | |
| Net loss applicable to common stockholders, as reported | | $ | (16,528 | ) | $ | (12,711 | ) | $ | (4,723 | ) |
| Add: Stock-based employee compensation expense included in reported net loss | | | ---- | | | 88 | | | 2,183 | |
| Deduct: Stock-based employee compensation expense determined under fair value method | | | (3,035 | ) | | (1,743 | ) | | (3,748 | ) |
| Pro forma net loss | | $ | (19,563 | ) | $ | (14,366 | ) | $ | (6,288 | ) |
| Net loss per share: | | | | | | | | | | |
| Basic and diluted, as reported | | $ | (0.19 | ) | $ | (0.20 | ) | $ | (0.13 | ) |
Basic and diluted, pro forma | | $ | (0.23 | ) | $ | (0.22 | ) | $ | (0.17 | ) |
| | | | | | | | | | | |
At December 31, 2005, the Company's cash, cash equivalents, accounts receivable and accounts payable are shown at cost which appropriates fair value due to the short-term nature of these instruments.
Reclassifications
Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation.
Note 3- RECEIVABLES
Receivables consisted of the following (in thousands):
| | | December 31, | |
| | | 2005 | | 2004 | |
| Trade receivables | | $ | 1,309 | | $ | 1,282 | |
| Contract receivables | | | --- | | | 25 | |
| Total | | | 1,309 | | | 1,307 | |
| Less allowance for doubtful accounts | | | (487 | ) | | (771 | ) |
| Net receivables | | $ | 822 | | $ | 536 | |
The components of inventories were as follows (in thousands):
| | | December 31, | |
| | | 2005 | | 2004 | |
| Raw materials | | $ | 2,353 | | $ | 1,420 | |
| Work in process | | | 107 | | | 169 | |
| Finished goods | | | 1,379 | | | 429 | |
| Total Inventory | | $ | 3,839 | | $ | 2,018 | |
Equipment, furniture and leasehold improvements consist of the following (in thousands):
| | | December 31, | |
| | | 2005 | | 2004 | |
| Computer hardware and software | | $ | 893 | | $ | 583 | |
| Lab and factory equipment | | | 3,182 | | | 2,730 | |
| Furniture, fixtures, and office equipment | | | 256 | | | 146 | |
| Capital leases | | | 66 | | | 66 | |
| Leasehold improvements | | | 473 | | | 473 | |
| Construction in progress | | | 100 | | | 74 | |
| Total equipment, furniture and leasehold improvements | | | 4,970 | | | 4,072 | |
| Less: accumulated depreciation | | | (3,671 | ) | | (2,767 | ) |
| Equipment, furniture and leasehold improvements, net | | $ | 1,299 | | $ | 1,305 | |
Debt is as follows (in thousands):
| | | | December 31, |
| | | | 2005 | | | 2004 |
| Current portion of capitalized lease obligations | | $ | 16 | | $ | 14 |
| Long-term portion of capitalized lease obligations | | | 6 | | | 22 |
| Long-term debt | | | 50 | | | 0 |
| Total debt | | $ | 72 | | $ | 36 |
Note 7 - 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 to make payments under more favorable payment terms than previously were in place. As a result of the above transactions, the Company recorded $4.6 million as a gain on settlement of debt for the year ended December 31, 2003. No such settlements were made in the years ended December 31, 2005 and 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 $7.8 million principal amount of the Notes, together with the $.742 million 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 $1.6 million in interest expense related to the unamortized debt discount and beneficial conversion feature and $75 thousand in interest expense related to the write-off of deferred financing costs.
In consideration of the Noteholders agreeing to the early conversion of the Notes, eMagin issued the Noteholders warrants to purchase an aggregate of 2.5 million shares of common stock (the "Warrants"), which Warrants are exercisable at a price of $2.76 per share. 1.5 million of the Warrants, "D warrants", were 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
stock option grants isthe warrants was estimated
at $2.30 using the Black-Scholes option-pricing model with the following
assumptions:
------------------------------------------- --------------- --------------- ----------------
For the year ended December 31, 2002 2001 2000
------------------------------------------- --------------- --------------- ----------------
Term (years) 5 3 1.6
------------------------------------------- --------------- --------------- ----------------
Volatility 150% 128% 75%
------------------------------------------- --------------- --------------- ----------------
Risk-free interest rate 6.00% 5.41% 4.48%
------------------------------------------- --------------- --------------- ----------------
Dividend yield 0 % 0 % 0%
------------------------------------------- --------------- --------------- ----------------
Weighted -average fair value per $ 0.35 $ 2.72 $ 0.76
option
------------------------------------------- --------------- --------------- ----------------
Concentrationassumptions for the two sets of
Credit Risk
Financial instruments which potentially subjectwarrants: (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
Company to credit risk
consist primarily of cash, cash equivalents, trade receivables, contract
receivablesD warrants and
costs and estimate profits in excess of billings1,460 for the E warrants.
The difference between the statutory federal income tax rate on
contracts in
progress.
The Company maintains cash and cash equivalents with various major
financial institutions. The Company limits the
amount of credit exposure with
any one financial institution and believes that no significant concentration of
credit risk exists with respect to cash investments.
Contract receivables and costs and estimated profits in excess of billings
on contracts in progress subject the Company to the potential for credit risk
with customers, primarily government contractors. The Company establishes its
credit polices based on an ongoing evaluation of its customers' creditworthiness
and competitive market conditions and does not require collateral.
The Company sells products to a large number of customers which are
primarily in the United States. The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no collateral
from its customers. The Company's
customer base includes 2 customers who account
for 32%, 6% and 0% of sales in fiscal 2002, 2001 and 2000, respectively. One
customer represented 18%, 6% and 0%pre-tax income and the
other customer represented 14%, 0%
and 0% of sales in fiscal 2002, 2001 and 2000. These same two customers
represented $0% and $23% of accounts receivable at December 31, 2002 and 4% and
0% of accounts receivable at December 31, 2001. Although the Company is directly
affected by the well- being of these customers, management does not believe
significant credit risk exists at December 31, 2002.
54
Fair Value of Financial Instruments
The Company has various financial instruments, including cash, cash
equivalents, accounts receivable, accounts payable and short and long-term debt.
The Company believes the carrying values of its financial instruments
approximate their fair values.
Use of Estimates
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. These
estimates and assumptions relate to recording net revenue, collectibility of
accounts receivable, and the realizability of other intangible assets, accruals,
income taxes, inventory realization and other factors. Management has exercised
reasonable judgment in deriving these estimates; however, actual results could
differ from these estimates. Consequently, change in conditions could affect
eMagin's estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
New Accounting Pronouncements: In August 2001, the FASB, issued SFAS, No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets." SFAS No. 143 addresses financial accounting and reporting for the
retirement obligation of an asset. This statement provides that companies should
recognize the asset retirement cost at its fair value as part of the cost of the
asset and classify the accrued amount as a liability. The asset retirement
liability is then accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently updated for revised
estimates of the discounted cash outflows. The Statement will beCompany's effective for
fiscal years beginning after June 30, 2002. eMagin has not yet determined the
effect that SFAS No. 143 will have on its consolidated financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the requirement under SFAS 4 to
aggregate and classify all gains and losses from extinguishment of debt as an
extraordinary item, net of related income tax effect. This statement also amends
SFAS 13 to require that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same mannerrate is summarized as sale-leaseback transactions. In addition, SFAS No. 145 requires reclassification
of gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishment that do not meet the criteria for
extraordinary item in Accounting Principles Board Opinion ("APB") 30. The
statement is effective for fiscal years beginning after May 15, 2002 with early
adoption encouraged. eMagin does not believe the standard will have a material
effect on its financial statements.
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. eMagin is currently evaluating the requirements and
impact of this statement on our consolidated results of operations and financial
position.
55
In November 2002, the FASB issued interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires certain
guarantees to be recorded at fair value, which is different from current
practice, which is generally to record a liability only when a loss is probable
and reasonably estimable. FIN No. 45 also requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. The disclosure provisions of FIN No. 45 are
effective for financial statements of interim or annual periods after December
15, 2002. eMagin has adopted the recognition and measurement provisions of FIN
No. 45 on a prospective basis with respect to guarantees issued or modified
after December 31, 2002. eMagin has adopted the recognition and measurement
provisions of FIN 45 on a prospective basis with respect to guarantees issued or
modified after December 31, 2002. The adoption of the disclosure provisions has
been reflected in the December 31, 2002 financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. eMagin has not determined the effect of adoption of EITF
00-21 on its financial statements or the method of adoption it will use.
In November 2002 the Emerging Issues Task Force reached a consensus opinion
on EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized either as revenue or a
reduction of a specific cost incurred. The consensus should be applied
prospectively to new or modified arrangements entered into after December 31,
2002. eMagin has not yet determined the effects of EITF 02-16 on its financial
statements
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based employee compensation. In addition, it also
amends the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income, including per share amounts, of an
entity's accounting policy decisions with respect to stock-based employee
compensation in annual and interim financial statements. SFAS No. 148 does not
amend SFAS No. 123 to require companies to account for their stock-based
employee compensation using the fair value method. The disclosure provisions of
SFAS No. 123 were effective immediately in 2002. SFAS 148 is effective for
fiscal years ending after December 15, 2002. The transition provisions for a
change to the fair value based method may be early adopted, provided that
financial statements for the 2002 fiscal year have not been issued as of
December 31, 2002. As of December 31, 2002, the eMagin does not have any
immediate plans to change its method of accounting for stock-based employee
compensation to the fair value method. Included in the 2002 financial statements
are the required disclosures of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an Interpretation of ARB No. 51 ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. eMagin does not expect this new interpretation to
have a material effect on its future results of operations or cash flows.
56
Note 3 - Receivables
Receivables consist of the following:
2002 2001
Trade receivables $ 203,928 $165,946
Contracts:
Billed:
Contracts completed and in progress 72,352 319,181
Unbilled 125,359 293,273
Other 0 (106)
----------- ----------
Total $ 401,639 $778,294
Less allowance for doubtful receivables (36,144) 0
----------- ----------
Net receivables $365,495 $778,294
=========== ==========
Note 4 - INVENTORY
The components of inventories as of December 31, 2002 and 2001 are as follows:
- ---------------------------------------- -------------------------------------- --------------------------------------
2002 2001
- ---------------------------------------- -------------------------------------- --------------------------------------
- ------ ------
- ---------------------------------------- -------------------------------------- --------------------------------------
Raw Materials $106,800 $ 60,800
- ---------------------------------------- -------------------------------------- --------------------------------------
Work In 48,831 29,920
Process.
- ---------------------------------------- -------------------------------------- --------------------------------------
Finished
Goods -95,367 0
- ---------------------------------------- -------------------------------------- --------------------------------------
$ 250,998 $ 90,720
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
Note 5 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as
follows at December 31, 2002 and 2001:
Useful
Lives 2002 2001
Computer equipment and software 3 $ 158,922 $ 260,000
Lab and factory equipment 3 1,630,419 1,551,000
Furniture, fixtures and office equipment 10 111,594 154,000
Leasehold improvements Life of lease 329,739 325,000
------------- ------------
2,230,674 2,290,000
Less- Accumulated depreciation and amortization 1,596,142 1,123,000
------------- ------------
$ 634,532 $ 1,167,000
============= ============
Depreciation and amortization expense of equipment and leasehold
improvements for the years ended December 31, 2002 and 2001 was approximately
$473,142 and $567,000, respectively. Cost of fixed assets acquired under a
capital lease included above totals $66,075 as of December 31, 2002 with
accumulated depreciation of $16,519.
Additionally, from time to time, the Company makes deposits on certain
equipment that may ultimately be purchased by a financing company and leased to
the Company. Amounts paid by the Company for such deposits totaled approximately
$225,000 for the year ended December 31, 2001.
57
Note 6 - DEBT
Debt is comprised of the following:
2002 2001
Notes payable (1) $ 65,000 $ 168,000
Capital leases (1) 59,000 32,000
Convertible Debenture (3) 3,069,000 0
SK Loan (4) 3,000,000 2,798,000
-------------- ----------------
6,193,000 2,998,000
Less-Debt Discount ($ 228,000) ($ 693,000)
-------------- ----------------
$ 5,965,000 $ 2,305,000
-------------- ----------------
Current 5,737,000 693,000
Long-Term 228,000 2,998,000
-------------- ----------------
$ 5,965,000 $ 2,305,000
============== ================
1. Note Payable
In June 1999, eMagin entered into a $155,000 five-year uncollateralized
loan agreement. The proceeds were used to finance a leasehold improvement. The
principal balance is $64,653 at December 31, 2002 with payments due through 2004
at an interest rate of 18%.
2. Capital Leases
The Company is party to a capital lease for certain equipment with
aggregate remaining principal balance totaling $59,063 at December 31, 2002,
excluding interest, due through 2007 at an interest rate of 7.27%.
3. Convertible Debentures
a) 2001 Bridge Loan
On November 27, 2001, the Company entered into a secured convertible note
purchase agreement (the "note agreement") with an investor group (the
"Investors") whereby the Company could issue up to $1.5 million of secured
convertible notes to the Investors, as defined. Concurrent with the note
agreement, the Company issued secured promissory notes to the Investors in the
amount of $875,000 (the "secured notes"). The secured notes accrue interest at
an annual rate of 9.00% per annum and mature on August 30, 2002. The Company is
also required to meet certain debt covenants, as defined. In addition, the
Company granted a total of 359,589 warrants to the Investors in connection with
the secured notes at an exercise price of $1.67 per share. Such warrants are
exercisable through November 2004. The fair value of the warrants in the amount
of approximately $262,000 was recorded as original issue discount, resulting in
a reduction in the carrying value of the debt. The fair value of the warrants
was calculated using the Black-Scholes option-pricing model.
The original issue discount was being amortized into interest expense over
the life of the debt. Due to a default on the secured notes which occurred on
November 30, 2001, as discussed below, the remaining value of the original issue
discount as of the date of default was amortized into interest expense.
Accordingly, the related interest expense in the amount of $262,000 is included
in "Other expense, net" in the accompanying consolidated statement of operations
for the year ended December 31, 2001. The secured notes were convertible into
common stock at any time at a conversion price of $1.46 per share. Such
conversion terms provided for a beneficial conversion feature. As the Investors
had the option to convert the notes immediately upon execution of the agreement,
58
the value of the beneficial conversion feature of approximately $244,000 was
recognized immediately as interest expense and is included in "Other expense,
net" in the accompanying consolidated statement of operations for the year ended
December 31, 2001.
On November 30, 2001, the Company was not in compliance with a certain debt
covenant, as defined, and consequently defaulted on the secured notes, causing
the maturity date of the notes to accelerate and become immediately due (the
"default"). The Investors elected not to demand payment immediately. Certain
investors elected to reinvest their respective funds in a subsequent financing
(see below 2002 Bridge Loan), while certain other investors elected for
repayment of their respective funds. The repayments to those investors occurred
in January 2002. The loans have been extended through June 30, 2003 and as of
December 31, 2002 $625,000 of the loans are still outstanding.
b) Bridge Loan 2002
On January 14, 2002, the Company entered into a $1.0 million bridge loan
arrangement convertible into our common stock at a rate of $0.5264 per share.
All of the outstanding warrants issued under the Secured Note Purchase
Agreement, including those issued pursuant to the January 2002 transactions, are
exercisable for an aggregate of up to 1,954,944 shares of our common stock at an
exercise price of $0.5468 per share. The loan had an original maturity date of
August 30, 2002 which has been extended through June 30, 2003. Such warrants are
exercisable through January 2005. Certain investors of the November 27, 2001
financing who elected to remain in the new bridge loan arrangement received
reset provisions of the previous conversion rate and warrant exercise prices to
be equivalent to the terms granted to the new Investor.
The company repriced the warrants issued to the original investors to
$0.5468 per share. The total of the intrinsic value of the warrants issued to
the new Investor and the incremental intrinsic value of the repriced warrants of
certain existing investors of approximately $480,000 has been recorded as
original issue discount . The original issue discount will be amortized into
interest expense over the period of the debt. In the event the debt is converted
prior to maturity, the remaining discount will be amortized into interest
expense at the conversion date. As of December 31, 2002 the entire $480,000 has
been amortized and is included in non-cash interest expense in the accompanying
consolidated statements of operations.
In addition, based on the terms of the bridge loan arrangement, the
conversion terms of the debt provide for a beneficial conversion feature. The
total value of the beneficial feature of the new debt and the incremental value
of the reset conversion feature of the existing debt of approximately $780,000
was recorded at January 14, 2002 as non-cash interest expense in the
accompanying consolidated statements of operations for year ended December 31,
2002
c) Travelers
On August 20, 2001, the Company entered into a $1.0 million bridge loan
arrangement with The Travelers Insurance Company ("Travelers"). The loan accrues
interest at an annual rate of 9.25%. Additionally, for each week the loan is
outstanding following the closing date of the arrangement (August 20, 2001), the
Company is required to issue $50,000 worth of warrants to Travelers, as defined.
Total warrants issuable to Travelers, per the agreement, are not to exceed an
amount such that the exercise of all related warrants would provide Travelers
greater than 19.9% ownership of the outstanding common stock of the Company This
agreement has been extended to June 30, 2003.
Through December 31, 2002, the Company has issued an aggregate of 451,852
warrants to Travelers at exercise prices ranging from $1.28 to $1.93 per share
in connection with this arrangement. Such warrants are exercisable through
November 2004. Terms of a the 2002 bridge loan arrangement entered into by the
Company and certain private investors (see Note 10) included a cap on the
maximum number of warrants issuable to Travelers under the Travelers bridge loan
arrangement at 451,842 warrants. Travelers agreed to the aforementioned
amendment
d) Series B Convertible Debentures
On August 21, 2002, the Company issued two Series B Convertible Debentures
in the amount of $121,739 each. The debentures bear interest at the rate of 8%
per annum and are due August 21, 2004. The Debenture also includes a fixed
conversion rate of $0.18 per share. Based on the terms of the loan arrangement,
the conversion terms of the debt provide for a beneficial conversion feature.
59
Due to the fact that the note holder had the option to convert the note
immediately upon execution of the agreement, the value of the beneficial
conversion feature of approximately $108,000 was recognized immediately as
interest expense and is included in "Other expense, net" in the accompanying
statement of operations for the nine months ended December 31, 2002.
e) $0.2 million Secured Note Purchase Agreement
On June 20, 2002, the Company entered into a $0.2 million Secured Note
Purchase Agreement with an Investor. The secured note accrues interest at 11%
per annum and matures on June 30, 2003. The Company also granted warrants,
exercisable for a period of three years, to purchase 300,000 shares of common
stock with an exercise price of $0.4419 per share to the investor. The fair
value warrants issued to this Investor approximated $84,000 has been recorded as
original issue discount, resulting in a reduction in the carrying value of this
debt. The original issue discount has been fully amortized. Related interest
expense of approximately $12,000 has been recognized in "Other expense, net" in
the accompanying consolidated statement of operations for the year ended
December 31, 2002
4. SK Loan
On September 18, 2001 (the "closing date") the Company entered into a $3.0
million convertible debt arrangement with SK Corporation ("SK loan"). The SK
loan accrues interest at an annual rate of 4.00% and matures on September 18,
2004. In connection with the debt arrangement, the Company issued warrants for
the purchase of 205,479 shares of the Company's common stock at an exercise
price of $1.46 per share. Such warrants are exercisable through September 2004.
The fair value of the warrants in the amount of $240,000 has been recorded as
original issue discount, resulting in a reduction in the carrying value of the
debt. The fair value of the warrants was calculated using the Black-Scholes
option-pricing model. The original issue discount is being amortized into
interest expense over the three-year life of the debt using the effective
interest method. In the event the debt is converted prior to maturity, the
remaining discount will be amortized into interest expense at the conversion
date. The SK loan is convertible into common stock at any time at a fixed
conversion price of $1.28 per share. Such conversion terms of the debt provide
for a beneficial conversion feature. Due to the fact that the note holder had
the option to convert the note immediately upon execution of the agreement, the
value of the beneficial conversion feature of approximately $287,000 was
recognized immediately as interest expense and is included in "Other expense,
net" in the accompanying statement of operations for the year ended December 31,
2001.
Additionally, the terms of the debt arrangement provide for a put option,
exercisable at the option of SK Corporation, to redeem up to 25% of the face
value of the debt each 90-day period beginning on September 19, 2002.
Accordingly, 25% of the face value of the debt and the proportionate share of
the original issue discount had been classified as short-term debt and was
included in "Current portion of long-term liabilities" in the accompanying
consolidated balance sheet for December 31, 2001. The remaining 75% of
principal, original issue discount and accrued interest was classified as other
long-term debt in the accompanying consolidated balance sheet for December 31,
2001. As of December 31, 2002, the Company was not in compliance on its
$3,000,000 debt payable to SK Corporation, as defined, and consequently
defaulted on the note, causing the maturity date of the notes to accelerate and
become immediately due (the "default"). Accordingly, at December 31, 2002, the
original liability of the notes of $3,000,000, plus accrued but unpaid interest,
is included in current liabilities in the accompanying consolidated balance
sheet.
Maturity of debt for years ending December 31 is as follows:
2003 5,737,000
2004 191,743
2005- Thereafter 36,257
----------
Total $5,965,000
60
Note 6 INCOME TAXES
| | | For the years ended December 31, | |
| | | | 2005 | | | 2004 | | | 2003 | |
| U.S. Federal income tax provision (benefit) at federal statutory rate | | | (35) | % | | (35) | % | | (35) | % |
| Change in valuation allowance | | | 35 | % | | 35 | % | | 35 | % |
| | | | 0 | % | | 0 | % | | 0 | % |
| | | | | | | | | | | |
Significant components of eMagin's deferred tax assets
and liabilities are as
follows:
December 31,
- --------------------------------------- ---------------------------- ---------------------------
2002 2001
- --------------------------------------- ---------------------------- ---------------------------
Net operating losses $ 29,114,272 $ 24,207,988
- --------------------------------------- ---------------------------- ---------------------------
Bad debt reserve 14,458 0
- --------------------------------------- ---------------------------- ---------------------------
Deferred payroll 261,370 11,400
- --------------------------------------- ---------------------------- ---------------------------
Accrued vacation pay 108,811 183,277
- --------------------------------------- ---------------------------- ---------------------------
- --------------------------------------- ---------------------------- ---------------------------
Total $ 29,498,911 $ 24,402,675
- --------------------------------------- ---------------------------- ---------------------------
Valuation allowance (29,498,911) (24,402,675)
- --------------------------------------- ---------------------------- ---------------------------
Net Deferred Tax Asset $ - $ -
- --------------------------------------- ---------------------------- ---------------------------
follows (numbers are in thousands):
| | | For the years ended December 31, | |
| | | 2005 | | 2004 | | 2003 | |
| Net operating losses | | $ | 54,607 | | $ | 39,262 | | $ | 34,580 | |
| Goodwill and other intangibles | | | 17,957 | | | 19,894 | | | 21,700 | |
| Allowance for doubtful accounts | | | 195 | | | 274 | | | 122 | |
| Deferred payroll | | | 18 | | | 25 | | | 195 | |
| Accrued vacation payable | | | 142 | | | 81 | | | 70 | |
| Depreciation | | | (120 | ) | | ---- | | | ---- | |
| Total | | | 72,799 | | | 59,536 | | | 56,667 | |
| Less valuation allowance | | | (72,799 | ) | | (59,536 | ) | | (56,667 | ) |
| Net deferred tax asset | | $ | 0 | | $ | 0 | | $ | 0 | |
In 2003, in connection with the restructuring of its indebtedness (see Note 8-7), the Company realized income of $4.6 million. 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 $4.6 million 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 9 - SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock
2005
On July 16, 2001,October 20, 2005, the Company entered into a Securities Purchase Agreement, pursuant to which the Company sold and issued 16,619,056 shares of common stock, par value $0.001 per share, at a price of $.55 per share and warrants to purchase up to 9,971,427 shares of common stock for an aggregate purchase price of approximately $9.14 million. The net proceeds received after expenses were approximately $8.4 million.
The warrants are exercisable at a price of $1.00 per share and expire on April 20, 2011. Of the 9,971,427 warrants, 6,647,623 of the warrants are exercisable on or after May 20, 2006. The remaining 3,323,804 are exercisable after March 31, 2007, however these warrants will be cancelled if the Company’s net revenue for fiscal year 2006 exceeds $20 million or if the investor has sold more than 25% of the shares purchased under the securities purchase agreement prior to December 31, 2006.
As a result of the above transaction, the outstanding 1,213,352 Series A Common Stock Purchase Warrants, that were issued to participants of the Securities Purchase Agreement dated January 9, 2004, were re-priced from $1.05 to $0.55 and the outstanding 6,500,000 Series F Common Stock Purchase Warrants, that were issued to participants of the Securities Purchase Agreement dated October 25, 2004, were re-priced from $1.21 to $1.09.
A registration rights agreement was entered into in connection with the private placement which requires the Company to file a registration statement for the resale of the common stock and the shares underlying the warrants. The Company must use its best efforts to have the registration statement declared effective by the end of a specified grace period and also maintain the effectiveness of the registration statement until all common stock have been sold or may be sold without volume restrictions pursuant to Rule 144(k) of the Securities Act. If the Company fails to have the registration statement declared effective within the grace period or fails to maintain the effectiveness, the agreement requires the Company to pay each investor cash payments equal to 2.0% of the aggregate purchase price monthly until the failure is cured. If the Company fails to pay the liquidated damages, interest at 15.0% will accrue until the liquidated damages are paid in full. The registration statement was filed and declared effective within the specified grace period. As of March 31, 2006, the registration statement remains effective.
The Company accounts for the registration rights agreement as a separate freestanding instrument and accounts for the liquidated damages provision as a derivative liability subject to SFAS 133. The estimated fair value of the liability is based on an estimate of the probability and costs of cash penalties being incurred. The Company determined that the fair value of the liability was immaterial and it is not recorded in accrued liabilities. The Company will revalue the potential liability at each balance sheet date.
In 2005, the Company received approximately $1.6 million for the exercise of approximately 111,000 options and 3.1 million warrants. The Company also issued approximately 543,000 shares of common stock for the payment of $460,000 of services rendered and to be rendered in the future. The fair value of the services was measured at market value of the common stock at the time of payment. 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, 2005.
The 2004 Non-Employee Compensation Plan (the “2004 Plan”) was established to help the Company retain consultants, professionals and service providers. The Board of Directors will select the recipient of the awards, the nature of the awards and the amount. At the 2005 Annual Shareholder meeting, the shareholders approved an increase in the number of authorized shares of common stock usable from 1 million to 2 million. This number is subject to adjustment in the event of the Company to 100,000,000a recapitalization, reorganization or similar event. The maximum number of shares with a
par value of $0.001 per share.
In October 2001, the Companyawarded in any one year is 500,000 shares.
2004
On January 9, 2004, we entered into a Securities Purchase Agreement with several accredited institutional and private investors whereby such investors purchased an agreement with a third-party
whereby the Company issued 86,038aggregate of 3,333,363 shares of common stock and 4,312,212 warrant shares for an aggregate purchase price of approximately $4.2 millions.
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.
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. A registration rights agreement was entered into in lieuconnection with the private placement which requires the Company to file a registration statement for the resale of the common stock and the shares underlying the warrants. The Company must use its best efforts to have the registration statement declared effective by the end of a specified grace period and also maintain the effectiveness of the registration statement until all common stock have been sold or may be sold without volume restrictions pursuant to Rule 144(k) of the Securities Act. If the Company fails to have the registration statement declared effective within the grace period or fails to maintain the effectiveness, the agreement requires the Company to pay each investor cash payments equal to 2.0% of the aggregate purchase price monthly until the failure is cured. If the Company fails to pay the liquidated damages, interest at 15.0% will accrue until the liquidated damages are paid in full. The registration statement was filed and declared effective within the specified grace period. As of March 31, 2006, the registration statement remains effective.
The Company accounts for the registration rights agreement as a separate freestanding instrument and accounts for the liquidated damages provision as a derivative liability subject o SFAS 133. The estimated fair value of the liability is based on an estimate of the probability and costs of cash payment
for services rendered on behalf of the Company.penalties being incurred. The Company recorded an expense
in the amount of approximately $116,000,determined that the fair value of the shares granted
basedliability was immaterial and it is not recorded in accrued liabilities. The Company will revalue the potential liability at each balance sheet date.
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 marketNotes, 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 June 10, 2008. 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.
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 of 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 grant.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 expense is
includedcommon 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 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 "Generalconnection 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 administrative" expense93,255 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. The fair value of the services was measured at market value of the common stock at the time of payment. 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, 2001.
Additionally,2004.
2003
In April of 2003, the issuanceCompany 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 7).
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 7).
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 shares is reflected inCompany's common stock at a conversion price from the consolidated
statementoriginal note purchase agreement of shareholders' equity(deficit)$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 year ended December 31, 2001.
In connection with the stock agreement, the Company also entered into a supply
agreement with the third-party for future purchasesexercise of supplies. (see Note 10)
In June 2001, The Travelers Insurance Company exercised1,479,900 warrants to purchase 16,002 shares of common stock of the Company at an exercise price of
$1.72 per share.
On December 31, 1999 the Company forward split its common stock 3.054:1,
increasing the number of issued and outstanding common stock from 6,600,000 to
20,156,400.
On March 30, 1998 the Company forward split its common stock 6:1 increasing
the number of issued and outstanding common shares from 1,100,000 to 6,600,000.
Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million were raised through the private placement issuance of approximately 3.5
million shares of common stock. Additionally, approximately 9.4 million shares
of common stock held by FDC's principal shareholders were cancelled at the time
of the Merger.
In October 2001, the Company entered into an agreement with a third-party
whereby the Company issued 86,038 shares of common stock in lieu of cash payment
for services rendered on behalf of the Company. In connection with the stock
agreement, theThe Company also entered into a supply agreement with the third-party
for future purchasesissued 270,910 common shares in cashless exercises of supplies. In May of 2002, the Company issued 10,000
shareswarrants in exchange for supplies valued at $11,000.
579,329 warrant shares.
In
January 2002,2003, the Company negotiated
settlementsettlements of amounts due
to a
related partyand amounts for
future services,
previously rendered via issuance of
192,493656,435 shares of common stock. As such, the Company recorded the fair value of the
sharesservices received and receivable in the future of
approximately $135,000$561,958 in selling, general and administrative expenses,
in the
accompanying consolidated statementprepaid expenses and reduction of
operations.
61
On February 27, 2002,accounts payable.
During 2003, the Company completedreceived $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 private placementregistration statement with the Securities and Exchange Commission no later than 30 calendar days after the closing of securitiesthe 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 several institutional and individual investorsthe 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 3,617,128the Company's directors is the managing director.
Note 10 - STOCK COMPENSATION
Employee stock purchase plan
In 2005, the stockholders approved the 2005 Employee Stock Purchase Plan (“ESPP”). The ESPP provides the Company’s employees with the opportunity to purchase common stock through payroll deductions. Employees purchase stock semi-annually at a price that is 85% of the fair market value at certain plan-defined dates. At December 31, 2005, the number of shares of common stock at a price per share of $0.6913, generating gross
proceeds of approximately $2,500,000, lessavailable for issuance costs of approximately
$35,000. In connection with the financing arrangement, the Company issued to the
investors warrants to purchase 1,446,852 shares of common stock of the Company
at an exercise price of $0.7542 per share. Also, the Company issued to an
institution warrants to purchase 36,164 shares of common stock in connection
with a finder fee arrangement entered into between the two parties. Such
warrants are exercisable through February 2005. We entered into a registration
rights agreement providing for the registration of shares to be issued pursuant
to a conversion of the Secured Convertible Promissory Noteswas 750,000 and the plan will automatically increase 750,000 shares to be
issued pursuant toon January 1 of each year for a period of three years starting January 1, 2006. As of December 31, 2005, the exercise of the warrants issued thereunder. We are
currently in default of this filing requirement. As a result of the default,plan had not been implemented.
Incentive compensation plans
In 1994, the Company has accrued $87,362 in interest and penalties.
On March 4, 2002, the Company entered into an equity line of credit
agreement with a private equity fund (the "Fund") whereby the Company has the
option, but not the obligation, to sell shares of common stock to the Fund for a
three-year period at a price per share, as defined. The agreement provides for
certain minimum and maximum monthly amounts up to a maximum of $15 million and,
in certain circumstances, up to $20 million.
On March 4, 2002 the Company and the Fund entered into an agreement whereby
the Company issued 50,000 shares and the Fund agreed to extend the agreement.
This agreement was terminated in December whereby the Investor, retained it's
warrants, the Company agreed to issue 500,000 shares of common stock and to pay
the sum of $25,000 upon the completion of specific financing.
In connection with the equity line of credit, the Company issued 30,000
shares of common stock to the Fund as compensation for certain services rendered
in connection with the closing of the line of credit. As such, the Company
recorded the fair value of the shares of approximately $31,000 in selling,
general and administrative expenses for the three months ended March 31, 2002.
Also, the Company granted warrants purchasing up to 150,000 shares of common
stock of the Company at an exercise price of $0.8731 per share. Such warrants
are exercisable through September 2005. The intrinsic value of said warrants of
approximately$140,000 is included in selling, general and administrative
expenses in the first quarter of 2002.
In April 2002, the Company announced a strategic investment from ROHM
Company LTD. ROHM purchased 1,282,051 shares of eMagin Common Stock at $0.78 per
share as well as warrants to purchase an additional 512,820 shares of Common
Stock at a conversion price of $0.85 per share for an investment of $1,000,000.
The fair value of each warrant was estimated on the date of grant using the
Black-Scholes option-pricing model. Such warrants are exercisable through April
2005.
In 2002 the Company issued a third party 192,493 shares for consulting fees
in lieu of cash.
Note 9- STOCK-BASED COMPENSATION PLANS
Stock Option Plans
In 1994, eMagin established the 1994 Stock Plan (the "1994 Plan"), which has been assumed by the Company.eMagin. The plan provided for the granting of options to purchase an aggregate of 1,286,000 shares of the Common Stockcommon stock to employees and consultants of FED Corporation.
FED. This Plan expired in 2004.
In 2000, eMaginthe Company established the 2000 Stock Option Plan (the "2000 Plan"),
which has been assumed by the Company. On July 16, 2001, the shareholders
approved an increase in the aggregate number of shares of the Company's common
stock reserved for issuance under the 2000 Plan from 3,900,000 to 5,900,000
shares.. The Plan permits the granting of options and stock purchase rights to employees and consultants of the Company. The 2000 Plan allows for the grant of incentive stock options meeting the requirements of Section 422 of the Internal Revenue Code of 1986 (the "Code") or non-qualified stock options which are not intended to meet such requirements.
In 2003, eMagin established the
requirements Section 4222003 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
Code.
In May 2001, the Company's Board of Directors adopted the eMagin
Corporation Employee Stock Purchase Plan (the "Stock Purchase Plan"), under
which a total of 750,000 shares of its common stock
have been reserved for
62
issuance, subject to employees and consultants. On July 2, 2003, the approval of the shareholders of the Company. The shareholders approved the Stock Purchaseplan and the 2003 Plan on July 16, 2001. The Purchase
Plan, which is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Code, provides for consecutive, overlapping
24-month offering periods. Each offering period contains four six-month purchase
periods. Each participant will be granted an option to purchase the Company's
common stock on the first day of each of the six-month purchase periods and such
option will be automatically exercised on the last day of each such purchase
period. The purchase price of each share of common stock under the Purchase Plan
will be equal to 85% of the lesser of the fair market value per share of common
stock on the starting date of that offering period or on the date of the
purchase. Offering periods begin on the first trading day on or after January 1
and July 1 of each year and terminate 24-months later. The first offering
period, however, began on July 16, 2001 and will end on June 30, 2003.
Employees are eligible to participate in the Stock Purchase Plan if they
are employed by the Company, or a subsidiary of the Company designatedwas subsequently amended by the Board of Directors on July 2, 2003 to reduce the number of additional shares that may be provided for at least 20 hours per weekissuance 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 more than five monthsa period of nine (9) years commencing on January 1, 2005 of 3% of the diluted shares outstanding. The shareholders approved an amendment to the 2003 Plan to provide grants of shares of common stock in any calendar year. The Stock Purchase Plan permits eligible employeesaddition to options to purchase shares of common stock through payroll deductions, which may not exceed 15% of an
employee's compensation, subjectstock. In 2005, approximately 2.4 million shares were added to certain limitations. Employees may modify or
end their participation in the offering at any time during the offering period
or on the date of purchase, subject to certain limitations. Participation ends
automatically on termination of employment with the Company. The Company's Board
of Directors may amend, suspend or terminate the Stock Purchase Plan at any
time, except that certain amendments may be made only with the approval of the
stockholders of eMagin.
plan. Vesting terms of the options range from immediate vesting to a ratable vesting period of
5-1/25 years. Option activity for the years ended December 31,
2002, 20012005, 2004 and
20002003 is summarized as follows:
Weighted
Average
Exercise Price
Shares
Outstanding at December 31, 1999 -- $ --
Options assumed 3,342,832 2.01
Options granted, post-merger 329,200 9.30
Options exercised -- --
Options canceled (281,842) 1.77
-----------
Outstanding at December 31, 2000 3,390,190 2.72
Options granted 1,078,594 1.05
Options exercised --
Options canceled (924,063) 2.17
-----------
Outstanding at December 31, 2001 3,544,721 2.41
4,788,722 0.40
Options granted --
Options exercised (2,440,358) 2.11
-----------
Options cancelled
Outstanding at December 31, 2002 5,893,085
============
| | | Outstanding Options | |
| | | Shares | | Weighted Average Exercise Price | |
| Balances at December 31, 2002 | | | 5,893,085 | | $ | 0.75 | |
| Options granted | | | 7,528,676 | | | 0.42 | |
| Options exercised | | | (846,793 | ) | | 0.33 | |
| Options cancelled | | | (413,198 | ) | | 2.14 | |
| Balances at December 31, 2003 | | | 12,161,770 | | | 0.53 | |
| Options granted | | | 6,779,900 | | | 1.60 | |
| Options exercised | | | (5,221,052 | ) | | 0.27 | |
| Options cancelled | | | (161,456 | ) | | 1.12 | |
| Balances at December 31, 2004 | | | 13,559,162 | | | 1.14 | |
| Options granted | | | 5,824,000 | | | 0.96 | |
| Options exercised | | | (110,594 | ) | | 0.34 | |
| Options cancelled | | | (1,219,932 | ) | | 1.39 | |
| Balances at December 31, 2005 | | | 18,052,636 | | $ | 1.09 | |
| | | | | | | | |
At December 31, 2002,2005, there were 6,91543,346 shares available for grant under the 20002003 Plan and the 19942000 Plan. Incentive options for 5,185,000 Common Shares at
$0.21 per share were approved by the eMagin Board of Directors on October 9,
2002 for issue to employees, directors, and officers. The options were not yet
granted, pending the future availability of Common shares for the options under
the company's qualified option plan. Upon availability, the company may issue
these options at which time the strike price will remain $0.21 and the
difference between the strike price and the fair market value, if the strike
price is under the fair market value at the date of issue, will be recognized as
compensation expense. As December 31, 2002, there were only 100,000 shares
available within the plan. The number of shares actually granted may be prorated
to a much small number.
63
The following table summarizes information about stock options outstanding at December 31,
2002:
Options Outstanding Options Exercisable
Number Weighted Number Weighted Average
Outstanding at Weighted Average Average Exercisable at Exercisable Price
Range of Exercise December 31, 2002 Remaining Exercise December 31, 2002
Prices Contractual Life Price
(In Years)
$ 0.18 - $1.02 4,739,369 8.45 $ 0.41 4,525,619 $ 0.39
$ 1.72 - $1.72 929,716 7.11 1.72 750,034 1.72
$ 2.25 - $11.06 224,000 7.58 4.08 156,652 4.47
--------- ---------
5,893,085 7.92 $ 0.75 5,432,305 $ 0.69
========= ==== ====== ========= ======
Options granted at greater or lesser fair market value on date of grant for
shares outstanding as of December 31, 2002
- ------------------------------------------------- ---------------- ------------------ ------------------
2002 Weighted Average Weighted Average
Fair Market Value Strike Price
- ------------------------------------------------- ---------------- ------------------ ------------------
Options granted above fair market value 450,000 $0.81 $0.83
- ------------------------------------------------- ---------------- ------------------ ------------------
Options granted at fair market value 2,751,216 $0.61 $ 0.61
- ------------------------------------------------- ---------------- ------------------ ------------------
Options granted below fair market value 2,691,869 $2.99 $ 0.87
- ------------------------------------------------- ---------------- ------------------ ------------------
Total Options Granted 5,893,085
- ------------------------------------------------- ---------------- ------------------ ------------------
Deferred Compensation
2005:| | | Options Outstanding | | Options Exercisable | |
| | | Number Outstanding | | Weighted Average Remaining Contractual Life (In Years) | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercisable Price | |
| $0.21 - $0.85 | | | 7,298,758 | | | 4.12 | | $ | 0.48 | | | 4,820,700 | | $ | 0.44 | |
| $1.00 - $1.50 | | | 5,508,914 | | | 5.95 | | | 1.16 | | | 1,071,781 | | | 1.15 | |
| $1.52 - $6.30 | | | 5,244,964 | | | 4.13 | | | 1.82 | | | 2,941,914 | | | 1.81 | |
| | | | 18,052,636 | | | | | $ | 1.09 | | | 8,834,395 | | $ | 1.02 | |
| | | | | | | | | | | | | | | | | |
Stock based compensation
Non-cash stock-based compensation expense represents expenses associated with stock option grants to
ourthe 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.
The expense also represents
warrant grants with exercise prices below fair market value to security holders
of eMagin for a reduced number of warrants to induce them to lock-up prior to
the merger.
In March 2000, eMagin repriced approximately 325,000 common stock options
issued to employees. The repricing resulted in a non-cash compensation expense
of approximately $2.7 million for the period ended March 15, 2000.
In addition, in March 2000 eMagin repriced approximately 108,000 warrants
issued to outside consultants and organizations that provided bridge loans and
funding commitments to the Company. The repricing resulted in a non-cash charge
of approximately $1.2 million, which is included in the accompanying
consolidated statement of operations for the Company.
In March 2000, eMagin issued options to purchase common stock to employees
at an exercise price below the fair market value on the date of grant of $7.00.
These options vest over a period of 1 - 60 months with a minimum lockup period
of 18 months. As a result, the Company recorded deferred compensation expense in
the amount of approximately $12.5 million, which will be amortized over the
vesting period of the options.
eMagin also issued warrants to shareholders at an exercise price below the
fair market value on the date of grant. As a result, eMagin recorded a one-time
compensation expense of approximately $2.5 million for the period ended March
15, 2000.
The recipients of the repriced options and warrants were required to
execute lock-up agreements that prohibit disposition of the underlying shares
for a period of 18 months following the Merger. Thereafter the recipients may
transfer no more that 20% of the underlying shares in the 6 months following the
end of the 18-month period, and the balance of the underlying shares may be
transferred 24-27 months after the Merger.
64
Warrants
At December 31, 2002, 6,894,1532005, 26,197,247 warrants to purchase shares of common stock are issued, outstanding and exercisable at exercise prices ranging from $0.43 to $26.25.
$2.76 and expiration dates ranging from April 25, 2006 to February 27, 2012.
| | | Outstanding Warrants | |
| | | Shares | | Weighted Average Exercise Price | |
| Balances at December 31, 2002 | | | 6,894,153 | | $ | 0.93 | |
| Warrants granted | | | 8,137,417 | | | 0.82 | |
| Warrants exercised | | | (2,059,229 | ) | | 0.78 | |
| Warrants cancelled | | | (636,052 | ) | | 2.75 | |
| Balances at December 31, 2003 | | | 12,336,289 | | | 0.80 | |
| Warrants granted | | | 13,355,866 | | | 1.69 | |
| Warrants exercised | | | (3,533,348 | ) | | 1.52 | |
| Warrants cancelled | | | (540,578 | ) | | 1.12 | |
| Balances at December 31, 2004 | | | 21,618,229 | | | 1.14 | |
| Warrants granted | | | 9,971,427 | | | 1.00 | |
| Warrants exercised* | | | (3,708,197 | ) | | 0.61 | |
| Warrants cancelled | | | (1,684,212 | ) | | 2.67 | |
| Balances at December 31, 2005 | | | 26,197,247 | | $ | 1.02 | |
| *Cashless exercise - 647,619 warrants | | | | | | | |
Note 1011 - RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -An amendment of ARB No. 43, Chapter 4" which clarifies 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. SFAS no. 151 is effective for fiscal years beginning after June 15, 2005 with early adoption permitted. The Company is currently evaluating the requirements and impact of SFAS 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 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".
Under SFAS 123R, the pro forma disclosures previously permitted no longer will be an alternative to financial statement recognition. The Company will apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will then be amortized on a straight-line basis over the requisite service period. The Company will apply the modified prospective method, which requires that compensation expense be recorded for all unvested stock options and restricted stock upon adoption of SFAS 123R. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R for the quarter ending March 31, 2006 will have a material impact on its financial statements and result of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"), which replaces APB Opinion No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements—An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is currently evaluating the effect that the adoption of SFAS 154 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.
Note 12 - COMMITMENTS AND CONTINGENCIES
Royalty Payments
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 original 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 payment of $125,000was $31,500 per year startingand it increased to a $125,000 in the sixth
year of the agreement.2005 and beyond. Under this agreement, the Company must pay to the
corporation a certain percentage of net sales of certain products, which percentages are defined in the agreement with the corporation.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 yearyears ended December 31, 2002,2005, 2004 and 2003, royalty expense of approximately $61,000$191,000, $194,000 and $115,000, respectively, is included in general and administrative expense in the accompanying consolidated statementcost of operations.
License and Technology Agreement
eMagin has a technology development agreement with a large Asian
corporation to permit potential commercialization of small-format OLED displays.
The primary objective of this program is to design a small format, low cost QVGA
display. Other aspects of the effort involve the potential creation of a new
version of eMagin's SVGA-3D display and potentially additional display product
lines. There is no assurance that any such effort(s) will be successful
Supply Agreement
The Company has, and may again in the future, enter into supply agreements
whereby stock is issued in lieu of cash.
goods sold.
Operating Leases
leases
The Company leases certain office facilities and office, lab and factory equipment under operating leases expiring through 2007. Certain leases provide2009. The Company currently has lease commitments for paymentsspace in Hopewell Junction, New York and Bellevue, Washington.
Our manufacturing facilities are leased from IBM in New York. We lease approximately 40,000 square feet to house our own equipment for OLED microdisplay fabrication and for research and development, an assembly area and administrative offices. In 2004, we entered into an agreement to extend the term of monthly operating expenses.the lease until 2009.
In July 2005, we signed a sub-lease agreement for approximately 19,000 square feet in Bellevue Washington. The approximateleased space is used as the Company’s corporate headquarters. This lease will expire in 2009. The Company’s lease at the Redmond Washington location expired in August and was not renewed.
The future minimum lease payments through
20072009 are as follows:
Year ending December 31:
2003 $ 1,708,000
2004 595,000
2005 575,000
2006 23,000
2007 5,000
-------------
Total $ 2,906,000
=============
| | | | |
| 2006 | | $ | 1,437 | |
| 2007 | | | 1,457 | |
| 2008 | | | 1,466 | |
| 2009 | | | 627 | |
| | | $ | 4,987 | |
| | | | | |
Rent expense for the years ended December 31,
20022005, 2004 and
20012003 was approximately
$1,107,000$1.0 million, $0.8 million and
$1,999,000,$0.8 million, respectively.
OurThe Redmond lease
with IBM
expires in 2004. We have the option to renew for five years, in yearly
increments. Our lease with Redson Building Partners has beenwas paid in
advance
through December 2003.
65
EMPLOYMENT BENEFIT PLANS
common stock valued at $42,000 and $48,000 for the 2005 and 2004 rent periods, respectively.
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 plan401(k) Plan for the years ended December 31, 2002, 20012005, 2004 and 2000.
LITIGATION
eMagin provides accruals2003.
Legal proceedings
On December 6, 2005, New York State Urban Development Corporation (“Plaintiff”) commenced action in the Supreme Court of the State of New York, County of New York against the Company. Plaintiff asserts a cause of action for all direct costs associatedbreach of contract in which Plaintiff seeks to recover a $150,000 grant which was made to the Company based upon the Company’s alleged failure to meet the goals set forth in the agreement for the recruitment and retention of employees. On March 30, 2006, the Company filed an answer denying the material allegations of the Complaint and asserted a number of affirmative defenses. The Company intends on vigorously defending this matter.
Note 13 - RELATED PARTY TRANSACTIONS
2005
On October 20, 2005, we entered into a Securities Purchase Agreement to sell to certain qualified institutional buyers and accredited investors an aggregate of 16,619,056 shares of our common stock, par value $0.001 per share (the “Shares”), and warrants to purchase an additional 9,971,427 shares of common stock, for an aggregate purchase price of approximately $9.1 million. The purchase price of the common stock and corresponding warrant was $0.55 per share.
The warrants are exercisable at a price of $1.00 per share and expire on October 20, 2010. Of the 9,971,427 warrants, 6,647,623 of the warrants are exercisable on or after May 20, 2006. The remaining 3,323,804 are exercisable after March 31, 2007, however these warrants will be cancelled if the Company’s net revenue for fiscal year 2006 exceeds $20 million or if the investor has sold more than 25% of the shares purchased under the Securities Purchase Agreement prior to December 31, 2006.
Both Stillwater and Ginola are beneficial owners of more than 5% of the Company’s common stock.
Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater LLC and its controlling shareholder is the same as Ginola Limited, participated in the sale of equity pursuant to the Securities Purchase Agreement by investing $500 thousand. Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow Gate Corporation.
Chelsea Trust Company, as trustee of a trust with the estimated
resolutionsame directors and/or controlling shareholders as Ginola Limited, participated in the sale of contingenciesequity pursuant to the Securities Purchase Agreement by investing $250, thousand. Ginola Limited disclaims beneficial ownership of shares owned by Chelsea Trust Company.
In connection with the issuance of the Shares and the warrants pursuant to the Securities Purchase Agreement, the Company was required to lower the exercise prices of existing Series A and F warrants from $1.05 and $1.21, respectively, to $.55 and $1.09 per share, respectively, pursuant to the anti-dilution provisions of the Series A and F warrants.
Mary Cronson, the mother of an outside director of eMagin, Paul Cronson, is the holder of a Series A warrant to purchase an aggregate of 42,857 shares of common stock. Accordingly, the exercise price of Mrs. Cronson’s Series A warrant was reduced from $1.05 to $0.55 per share. Mrs. Cronson received the same considerations as all other holders of the Company’s Series A warrants which were re-priced.
2004
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. Approximately $284 thousand and 43,651 common stock purchase warrants exercisable at $2.41 per share which expire in January 2009, were paid under the earliest date at which it is deemed probable
thatterms of the agreement. Paul Cronson was engaged as an advisor in connection with the sale of securities sold in October 2004 and received a liability has incurred andfee of $136 thousand.
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 such$90 thousand.
Stillwater LLC, a limited liability can be reasonably
estimated.
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 thousand 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.
Note 1114 - Related Party Transactions
The CompanyEMPLOYMENT AGREEMENTS
On January 24, 2006, pursuant to actions taken by the Compensation Committee of the Board of Directors of eMagin Corporation (the “Company”), Mr. Gary W. Jones entered into a consultingrevised executive employment agreement, dated March 16, 2000to conform to the recently established Sarbanes-Oxley requirements, in connection with Verus International Ltd., of which Mr. Ajmal Khan ishis service as Chief Executive Officer and Mr. Rivkin is the Non-Executive Chairman. Mr. Khan and Mr. Rivkin are also
members of our Board of Directors. TermsPresident of the Company. Mr. Jones also serves as Chairman of the Company. Additionally, Ms. Susan K. Jones entered into a revised executive employment agreement, included monthly
paymentsto conform to the recently established Sarbanes-Oxley requirements, in connection with her service as the Company’s Chief Marketing and Strategy Officer, Executive Vice President and Corporate Secretary.
Key terms of $15,000the executive employment agreements are described herein. Each agreement is effective for an initial term of three years, effective January 1, 2006. The agreement provides for an annual salary, benefits made available by usthe Company to Verus International Ltd.its employees and eligibility for consulting services
rendered.an incentive bonus pursuant to one or more incentive compensation plans established by the Company from time to time. The Company may terminate the employment of Executive at any time with or without notice and with or without cause (as such term is defined in the agreement). If the Executive’s employment is terminated without cause, or if Executive resigns with good reason (as such term is defined in the agreement), or if Executive’s position is terminated or significantly changed as result of change of control (as such term is defined in the agreement), Executive shall be entitled to receive salary until the end of the agreement’s full term or twelve months, whichever is greater, payment for accrued vacation, and bonuses which would have been accrued during the term of the agreement expiredagreement. If Executive voluntarily terminates employment with the Company, other than for good reason or is terminated with cause (as such term is defined in the agreement), Executive shall cease to accrue salary, vacation, benefits, and other compensation on March 16, 2002.
the date of the voluntary or with cause termination. The Executive Employment Agreement includes other conventional terms and also contains invention assignment, non-competition, non-solicitation and non-disclosure provisions.
On November 27, 2001, eMagin CorporationApril 17, 2006, the parties entered into a Secured Note
Purchase Agreement whereby five accredited initial investorsamendments to the employment agreements pursuant to which the parties clarified that the Company has agreed to lend us
an aggregatepay for health benefits equivalent to medical and dental benefits provided during the executive’s full time employment until the end of $875,000 in exchangethe agreement’s full term or twenty-four (24) months, whichever is greater.
Note 15 - CONCENTRATIONS
In 2005 we had no customers that individually accounted for (i) 9.00% per annum Secured Convertible
Promissory Notes in an aggregate principal amount of $875,000, and (ii)
three-year warrants to purchase up to an aggregate of 359,589 sharesmore than 10% of our common stock. Mr. Rivkin, who attotal sales as compared to 2004 where 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 timeother accounted for 15%. In 2003 one customer represented approximately 21% of net revenues.
For the year ended December 31, 2005, approximately 49% of the transaction was a member of our
Board of Directors, participated as an investorCompany's net revenues were made to customers in the transactionUnited States and invested
$125,000approximately 51% of the Company's net revenues were made to international customers. For the year ended December 31, 2004, approximately 78% of the Company's net revenues were made to customers in the company. In return for this investment, Mr. Rivkin received (i)
Secured Convertible Promissory Notes in an aggregate principal amountUnited States and approximately 22% of $125,000, and (ii) warrants exercisable for 51,370the Company's net revenues were made to international customers. For the year ended December 31, 2003, approximately 70% of our common shares, which
represent a comparable transactionthe Company’s net revenues were made to the outside investorscustomers in the bridge loan.
Sovereign Bancorp Ltd also invested $100,000 under the transactionUnited States and received (i) a Secured Convertible Promissory Note in an aggregate principal
amount of $100,000, and (ii) warrants exercisable for 41,096 of our common
shares. The brother of Mr. Khan, a directorapproximately 30% of the company, is an officerCompany’s net revenues were to international customers.
At December 31, 2005, there were 2 customers which comprised 31% of Sovereign Bancorp Ltd. This note has since been redeemed.
the outstanding accounts receivable. At December 31, 2004, there were 3 customers which comprised 50% of the outstanding accounts receivable.
The Company believes that the transactions described above were made on
terms no less favorable than could have been obtainedpurchases principally all of its silicon wafers from third parties. All
transactions were negotiated at arm's length.
a single supplier located in Taiwan.
Note 12 Quarterly Information (Unaudited)
Year ended December 31, 2002
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $ 158,027 $ 268,127 $ 497,851 $ 1,203,654
Net loss $(6,489,514) $(4,001,043) $(2,754,638) $ (1,667,516)
Net loss per share
Basic and diluted $ (0.24) $(0.13) $(0.09) $(0.05)
66
Year ended December 31, 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $2,030,201 $1,616,005 $1,176,628 $1,024,536
Net loss (9,708,435) (10,832,756) (42,377,769) (5,567,775)
Net loss per share
Basic and diluted $(0.39) $(0.43) $(1.69) $(0.22)
During the fourth quarter of 2002, the Company reclassified amounts
recorded as expense recovery to revenues, representing amounts earned on
shipment of products to a former cost recovery contract customer.
The effect on the16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial
statements isinformation for 2005 and 2004 are as
follows:
- --------------------------------------------- -------------------------------------------
September 30, 2002
- --------------------------------------------- ------------------------- -----------------
As originally reported As adjusted
- --------------------------------------------- ------------------------- -----------------
Contract revenue $ 176 $ 391,966
- --------------------------------------------- ------------------------- -----------------
Product revenue 497,675 497,675
- --------------------------------------------- ------------------------- -----------------
Cost and expenses 2,844,479 3,236,269
- --------------------------------------------- ------------------------- -----------------
Other income (expense) (408,010) (408,010)
- --------------------------------------------- ------------------------- -----------------
Net Loss $ (2,754,638) $ (2,754,638)
- --------------------------------------------- ------------------------- -----------------
Note 13 - SUBSEQUENT EVENTS
On March 20, 2003, we auctioned off unused leased equipment. The equipment
had zero value on the books. The equipment that sold brought $187,440 in gross
proceeds. Of that amount, Comdisco (lessor) received $81,106. which completes
all of our lease obligations with Comdisco. We paid $23,867. to miscellaneous
vendors involved in the auction and the auctioneer received a 10% commission of
the gross proceeds totaling $18,744 plus auction expenses. The auction expenses
cannot exceed $54,000. If this total is reached, it would mean a net to the
company of $9,721.
follows (in thousands except per share data): | | | Quarters Ended | |
| | | March 31, 2005 | | June 30, 2005 | | September 30, 2005 | | December 31, 2005 | |
| Revenues | | $ | 690 | | $ | $652 | | $ | $1,131 | | $ | $1,272 | |
| Gross loss | | $ | (1,267 | ) | $ | (1,737 | ) | $ | (1,555 | ) | $ | (1,915 | ) |
| Net loss | | $ | (3,469 | ) | $ | (4,498 | ) | $ | (3,763 | ) | $ | (4,798 | ) |
| Net loss per share - basic and diluted | | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.05 | ) |
| Shares used in per share calculation - basic and diluted | | | 81,432 | | | 82,445 | | | 83,036 | | | 94,756 | |
| | | | | | | | | | | | | | |
| | | Quarters Ended |
| | | March 31, 2004 | | | June 30, 2004 | | | September 30, 2004 | | | December 31, 2004 | |
| Revenues | | $ | 540 | | $ | 1,446 | | $ | 1,089 | | $ | 518 | |
| Gross loss | | $ | (823 | ) | $ | (91 | ) | $ | (519 | ) | $ | (940 | ) |
| Net loss | | $ | (6,606 | ) | $ | (1,399 | ) | $ | (1,755 | ) | $ | (2,951 | ) |
| Net loss per share - basic and diluted | | $ | (0.13 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
| Shares used in per share calculation - basic and diluted | | | 51,940 | | | 63,578 | | | 65,260 | | | 76,193 | |
ITEM 9:9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 29, 2002, eMagin Corporation was notified by the Security
None.
(a) Evaluation of Disclosure Controls and Exchange Commission that Arthur Andersen LLP ("Arthur Andersen") had notified it
that Arthur Andersen was unable to perform future audit services for eMagin as a
resultProcedures
As of the wind-down of Arthur Andersen's business, effectively terminating
eMagin's relationship with Arthur Andersen. On September 23, 2002, eMagin, upon
recommendationend of the Audit Committeeperiod covered by this report, we conducted an evaluation, under the supervision and with the participation of its Boardour chief executive officer and chief financial officer of Directors, engaged Grant
Thornton LLP ("Grant Thornton") to serve as the Company's independent certified
public accountants.
Part III
Item 10. Directorsour disclosure controls and Executive Officersprocedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Registrant
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.
(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.
None.
PART III
Our executive officers and directors, and their ages and positions are:
Name | Age | | Position |
| | | |
Gary W. Jones (1).............................. 47 | 50 | | Chairman, Chief Executive Officer, President
K. C. Park..................................... 66 President, Virtual Vision, Inc.
|
| John Atherly | 47 | | Chief Financial Officer |
Susan K. Jones................................. 51 Jones | 54 | | Chief Marketing and Strategy Officer, Secretary |
| Claude Charles (1) | 68 | | Director |
| Paul Cronson | 48 | | Director |
| Jacob (Jack) Goldman (2*) (3) | 83 | | Director |
Rear Admiral Thomas Paulsen, USN (Ret.) (1)(2) ............................ 65 (3*) | 69 | | Director
Ajmal Khan (1,2)............................... 41 |
| Dr. Jill Wittels (2) | 56 | | Director
Jack Rivkin |
Irwin Engelman (1) (2) (3)........................ 62 | 71 | | Director |
| Brig. General Stephen Seay (Ret.) | 60 | | Director |
67
(1) Audit Committee
(2) Governance and Nominating Committee
(3) Compensation Committee
(*) Committee Chairman
Gary W. Jones has served as our Chairman, Chief Executive Officer, and President of eMagin since 1992.1992 and as Acting Chief Financial Officer from August 2002 to June 2004. Mr. Jones has over 2520 years of experience in both public and private companies in the areas of business development, high volume manufacturing, product development, research, and marketing. Previously,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 is a director, a member of the
Executive Committee of the Board, and Chairman of the Technology Committee of
the United States Display Consortium. Mr. Jones received a B.S. in electrical engineering and physics from Purdue University. K.C. Park was named PresidentMr. Jones has served as a member of our wholly owned subsidiary, Virtual
Vision,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., in 2002 after serving as our Executivea NASDAQ listed enterprise Software Company from 1990 to 2004. He held the positions of Vice President of International Operations since 1998.Finance and CFO for approximately 8 years and prior to that held the positions of Director of Finance and Controller. During his twenty-seven year tenure14 years with IBM heClick2learn Mr. Atherly managed flat panel displaythe firm's finance and semiconductor programsadministration, 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 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. Parksoftware industry. Mr. Atherly holds a B.S.BA in Business Administration 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.
Washington.
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 2000.2000 and was 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.
Directors
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.Holdings. Prior to 1996, 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.
Ajmal Khan
Paul Cronson has served as a director since MarchJuly of 2000.2003. Mr. KhanCronson is PresidentManaging 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 CEO of Verus International Group Limited, an investment firm,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 has served as its Presidentcorporate finance. From 1983 to 1985, Mr. Cronson worked with Samuel Montagu Co., Inc. in London, where he marketed eurobond issuers and Chief Executive Officer since its inceptionstructured 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 1998.
Jack Rivkin has served as a director since June of 1996. Mr. Rivkin is
Executive Vice President1979, and Chief Investment Officer of Neuberger Berman, LLC.
He previously served as Executive Vice President of Citigroup Investments Inc.,
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 metallurgyhis MBA from the ColoradoColumbia University School of Mines and an MBA
from Harvard University.
Information concerning Gary W. Jones, also a Director ofBusiness Administration in 1982. He is on the Company and
the Chairman of our Board, is provided above with his officer profile.
On February 18, 2003, we announced the election of Dr. Jacob E. (Jack)
Goldman to our Board of Directors.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.
68
(a) Directors. Additional information
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 of 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.
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 respectBAE 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.
Irwin Engelman has served as a director since May of 2005. Irwin Engelman has been a director of New Plan Excel Realty Trust, Inc., a publicly-traded company that is one of the nation's largest owners and managers of community and neighborhood shopping centers, since 2003. He is currently a consultant to directors required by
this itemvarious industrial companies. He is incorporated herein by referencecurrently a director of Sanford Bernstein Mutual Funds, a publicly-traded company, and a member of its audit committee. From November 1999 until April 2002, he served as Executive Vice President and Chief Financial Officer of YouthStream Media Networks, Inc., a media and retailing company serving high school and college markets. From 1992 until April 1999, he served as Executive Vice President and Chief Financial Officer of MacAndrews and Forbes Holdings, Inc., a privately-held financial holding company. From November 1998 until April 1999, he also served as Vice Chairman, Chief Administrative Officer and a director of Revlon, Inc., a publicly-traded consumer products company. From 1978 until 1992, he served as an executive officer of various public companies including International Specialty Products, Inc. (a subsidiary of GAF Holdings Inc.), CitiTrust Bancorporation, General Foods Corporation and The Singer Company. Mr. Engelman received a BBA in Accounting from our Proxy Statement relatingBaruch College in 1955 and a Juris Doctorate from Brooklyn Law School in 1961. He was admitted practice law in the State of New York in 1962. In addition, he was licensed as a CPA in the State of New York in 1966.
General Stephen Seay was elected to ourthe Board of Directors in January 2006. In his 33-year Army career, General Stephen Seay held a wide variety of command and staff positions, most importantly as a soldier's soldier volunteering for his final assignment with his troops in Iraq. Most recently he was Program Executive Officer for Simulation, Training and Instrumentation, and Commanding General, Joint Contracting Command-Iraq/Head of Contracting Authority, Operation Iraqi Freedom. He has also served as Program Manager for a joint system, headed the Joint Target Oversight Council and was Commanding General, Simulation, Training and Instrumentation Command (STRICOM), Army Materiel Command. Earlier, as a Field Artillery officer, he commanded at all levels, rising to corps artillery commander. He served as Chief of Staff, United States Army, Europe (Forward) and National Security Element, Taszar, Hungary, during Operation Joint Endeavor. He held resource management, operations research, and acquisition positions during three tours on Department of the Army staff. Stephen Seay holds a Bachelor of Science degree from the University of New Hampshire and a Master of Science degree from North Carolina State University.
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 2008 Annual Meeting of Shareholdersour stockholders. Currently, Gary Jones and Irwin Engelman are the Class A directors. Paul Cronson, Admiral Thomas Paulsen, and General Stephen Seay are Class B directors and will hold office until the 2006 Annual Meeting. Currently, Claude Charles, Dr. Jill Wittels and Dr. Jacob Goldman are the Class C directors and will hold office until the 2007 Annual Meeting. In each case, each director will hold office until his successor is duly elected or appointed and qualified in the manner provided in our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws, or as otherwise provided by applicable law.
Compensation of Directors
Non-management directors receive options under the 2003 Stock Option Plan. Under the 2003 Plan, a grant of options to purchase 60,000 shares of common stock will automatically be granted on the date a director is first elected or otherwise validly appointed to the Board with an exercise price per share equal to 100% of the market value of one share on the date of grant. Such options granted will expire ten years after the date of grant and will become exercisable in four equal installments commencing on the date of grant and annually thereafter. In addition to the options to purchase 60,000 shares of common stock automatically granted upon joining the Board, each Director thereafter will receive an annual grant of options to purchase 10,000 shares of common stock at the fair market value as determined on the date of grant, which options will vest on December 31 in the year granted. Directors receive an additional 5,000 upon re-election. Directors are also granted options based on committee assignments consisting of options to purchase 5,000 shares per year for members of the compensation committee, 10,000 shares for the governance committee in 2005, and 15,000 shares for the audit committee. Each committee chair will receive 2,500 additional shares. In addition, each non-management director is reimbursed for ordinary expenses incurred in connection with attendance at such meetings.
Audit Committee. The Audit Committee is responsible for determining the adequacy of our internal accounting and financial controls, reviewing the results of our audit performed by the independent public accountants, and recommending the selection of independent public accountants. During the year, the Board examined the composition of the Audit Committee in light of the adoption by The American Stock Exchange, Inc. (the "Proxy Statement"“Amex”) of new rules governing audit committees. Based upon this examination, Board has determined that each of the members of the Audit Committee is unrelated, an outside member with no other affiliation with us and is independent as defined by the American Stock Exchange. The Board has determined that Mr. Engelman is an “audit committee financial expert” as defined by the SEC. During 2005, the Audit Committee held 5 meetings.
Compensation Committee. (b) Executive Officers. Additional information with respectThe Compensation Committee determines matters pertaining to the compensation and expense reporting of certain of our executive officers, and administers our stock option, incentive compensation, and employee stock purchase plans. During 2005, the Compensation Committee held 2 meetings.
Governance and Nominating Committee. The Governance and Nominating Committee is responsible for nominating directors and for all other purposes outlined in the Governance and Nominating Committee Charter. The Board has determined that each of the members of the Governance and Nominating Committee is unrelated, an outside member with no other affiliation with us and is independent as defined by the American Stock Exchange. During 2005, the Governance and Nominating Committee held 3 meetings.
Nomination of Directors
As provided in its charter and our company’s corporate governance principles, the Governance and Nominating Committee is responsible for identifying individuals qualified to become directors. The Governance and Nominating Committee seeks to identify director candidates based on input provided by a number of sources, including (1) the Governance and Nominating Committee members, (2) our other directors, (3) our stockholders, (4) our Chief Executive Officer or Chairman, and (5) third parties such as professional search firms. In evaluating potential candidates for director, the Nominating and Corporate Governance Committee considers the entirety of each candidate’s credentials.
Qualifications for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition of the Board of Directors. However, at a minimum, candidates for director must possess:
high personal and professional ethics and integrity;
the ability to exercise sound judgment;
the ability to make independent analytical inquiries;
a willingness and ability to devote adequate time and resources to diligently perform Board and committee duties; and
the appropriate and relevant business experience and acumen.
In addition to these minimum qualifications, the Governance and Nominating Committee also takes into account when considering whether to nominate a potential director candidate the following factors:
whether the person possesses specific industry expertise and familiarity with general issues affecting our business;
whether the person’s nomination and election would enable the Board to have a member that qualifies as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission (the “SEC”) in Item 401 of Regulation S-K;
whether the person would qualify as an “independent” director under the listing standards of the American Stock Exchange;
the importance of continuity of the existing composition of the Board of Directors to provide long term stability and experienced oversight; and
the importance of diversified Board membership, in terms of both the individuals involved and their various experiences and areas of expertise.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and American Stock Exchange. Officers, directors and greater than ten percent stockholders are required by this item is set forth in Part ISEC regulation to furnish us with copies of this Report and is
incorporated herein by reference fromall Section 16(a) forms they file.
To our knowledge, the
Proxy Statement.
(c) Reports of Beneficial Ownership. The information with respectfollowing persons have failed to
file, on a timely basis, the identified reports
of beneficial ownership required by
this item is incorporated herein by
reference fromSection 16(a) of the
Proxy Statement.
69
Exchange Act during the most recent fiscal year:
Name and Relationship | Number of late reports | Transaction not timely reported | Known failures to file a required form |
| Ginola Limited (Beneficial owner) | 2 | 2 | 0 |
| Stillwater LLC (Beneficial owner) | 2 | 2 | 0 |
Code of Ethics
The Company has
We have adopted itsa Code of Ethics and Business Conduct for
Officers, Directors and EmployeesEthics that applies to all of theour directors, officers directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is 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 Company.
ItemAmerican Stock Exchange, by filing a Current Report on Form 8-K with the SEC, disclosing such information.
ITEM 11. Executive CompensationEXECUTIVE COMPENSATION
Summary compensation table for named executive officers The following table provides information containedabout the total compensation for services in all capacities to the 2003 Proxy Statement under the heading
"Compensation and Other Transactions with Directors and Executive Officers" is
incorporated herein by reference in response to this item. During 2002, options
were granted as an incentive for five members of senior management to defer
payment of allCompany or part of their salaries for an undefined period and to continue
support the company.
Long-Term
Compensation
Other Annual Awards (Securities
Name and Positions Year Salary Bonus Compensation Underlying Options)
=================================================================================================================
Gary W. Jones President, CEO, 2002 136,050 (3) 1,589,827
Director and 2001 234,393 (1)
Acting Chief Financial 2000 227,863
Officer
Andrew P. Savadelis Former Executive Vice 2002 17,389 (2) -
President and Chief 2001 255,769 112,500 (2)
Financial Officer 2000 91,667 37,500 (2)
Susan K. Jones Executive Vice President, 2002 143,683 (4) 1,293,368
Chief Strategy Officer, 2001 189,207 (1)
and
Secretary 2000 183,837
K.C. Park President, Virtual Vision 2002 109,797 (5) 438,310
2001 171,877
2000 168,623
Webster E. Howard Chief Technology Officer 2002 87,048 (6) 34,000
2001 173,923
2000 171,046
Edward V. Flynn Chief Financial Officer 2002 80,673 (7) 126,600
and Treasurer 2001 133,000
2000 129,893
(1) The Compensation Committee has allocated a bonus of 750,000 stock
options to Gary W Jones and 350,000 stock options to Susan K Jonesits subsidiary for the last three fiscal years 2001 during 2002. Theseof those persons who at December 31, 2005, were issued in 2002.
(2) Mr. Savadelis was employed for less than a full year in 2000. As such,
his salary amount for that year represents salary earned from his start date
through(i) the endChief Executive Officer of the fiscal year. Mr. Savadelis' compensation included anCompany and (ii) the other most highly compensated executive officers of the Company whose total annual salary of $250,000 and a non-milestone-driven bonus of $150,000 to be
paid quarterly inexceeded $100,000 (collectively, the period from September 11, 2000 to September 10, 2001.
$37,500 of the non-milestone-driven bonus"named executive officers").
Name | | Position | | Year | | Salary | | Bonus | | | | Other Annual Compensation | | Long-term Compensation Awards (Securities Underlying Options | |
| | | | | | | | | | | | | | | | |
| Gary W. Jones | | | Chairman; President; Chief Executive Officer | | | 2005 | | $ | 320,313 | | | | | | (1) | | $ | 147,420 | | | 530,000 | |
| | | | | | | 2004 | | | 305,090 | | | | | | (1) | | | 46,636 | | | 1,200,000 | |
| | | | | | | 2003 | | | 305,090 | | | | | | | | | | | | 516,260 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| John Atherly | | | Chief Financial Officer | | | 2005 | | $ | 221,406 | | | | | | (2) | | | | | | 430,000 | |
| | | | | | | 2004 | | | 105,000 | | | | | | (2) | | | | | | 750,000 | |
| | | | | | | 2003 | | | N/A | | | | | | | | | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Susan K. Jones | | | Executive Vice President, Chief Strategy and Marketing Officer; Secretary | | | 2005 | | | 259,568 | | $ | 26,049 | | | (3) | | | | | | 359,400 | |
| | | | | | | 2004 | | | 245,933 | | | | | | (3) | | | | | | 750,000 | |
| | | | | | | 2003 | | | 245,933 | | | | | | | | | | | | 403,825 | |
(1) In 2005, Mr. Jones was paid to Mr. Savadelis during 2000.a base salary of $320,313. In addition, he received $147,420 for reimbursement of relocation expenses. In addition, he was granted 530,000 shares. In 2004, Mr. Jones was paid a base salary $305,090, the Company paid relocation assistancebalance of deferred pay in the amount of $50,000 in
October, 2000.$140,798, as well as a reimbursement for relocation expenses of $46,636. Mr. Savadelis ceasedJones was paid the balance of his deferred pay through the application of these amounts to be employed by the Company in January
2002.
(3)exercise of options. In JanuaryMay 2004, Mr. Jones was granted 1,200,000 shares as part of a company-wide bonus program.
(2) In 2005, Mr. Atherly was paid a base salary of $221,406. He was granted 430,000 shares. In 2004, Mr. Atherly's base salary was $210,000. He joined eMagin Corporation in June 2004 and was paid a salary of $105,000 for the portion of the year he was employed by eMagin. He was granted 750,000 shares awarded in 2001.
Also in January all staff receivedas 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 salary. Mr.successful completion of four consecutive EBITA positive quarters.
(3) In 2005, Ms. Jones was paid a base salary of $259,568. She also received 45,900a bonus that was paid 45% in cash, $12,144 and 55% in a stock grant, $24,395. In 2004, Ms. Jones was paid a base salary of $245,933 and the balance of deferred pay in the amount of $110,134. Ms. Jones was paid the balance of her deferred pay through the application of these amounts to the exercise of options. In July, all officers were granted options for regular pay they
deferred. Mr.May 2004, Ms. Jones was granted 444,344750,000 shares as part of a company-wide bonus program.
The following table provides information related to options for deferred pay from January
through July 15, 2002. In October Mr. Jones was granted 349,583to our named executive officers during the fiscal year ended December 31, 2005.
Name | | Number of Securities Underlying Options Granted | | % of Total Options Granted in Fiscal 2005 | | Exercise Price ($/Share) | | Expiration Date | |
| Gary Jones (1) | | | 350,000 | | | 6% | | $ | 1.02 | | | 3/17/12 | |
| | | | 180,000 | | | 3% | | $ | 0.58 | | | 11/30/12 | |
| | | | | | | | | | | | | | |
| John Atherly (1) | | | 250,000 | | | 4% | | $ | 1.02 | | | 3/17/12 | |
| | | | 180,000 | | | 3% | | $ | 0.58 | | | 11/30/12 | |
| | | | | | | | | | | | | | |
| Susan Jones (1) | | | 255,000 | | | 4% | | $ | 1.02 | | | 3/17/12 | |
| | | | 104,400 | | | 3% | | $ | 0.58 | | | 11/30/12 | |
(1) Options awarded as part of a company-wide bonus program.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
The following table provides information regarding the aggregate number of options
for
deferred pay from July 16 through October 8, 2002.
(4) In January Mrs. Jones was grantedexercised during the
350,000fiscal year ended December 31, 2005 by each of the named executive officers and the number of shares
awarded in 2001.
Also in January all staff received options based on salary. Mrs. Jones received
37,000 options. In April, Mrs. Jones was awarded 300,000 optionssubject to
replace
approximately 500,000 vested forfeited options In July, all officers were
granted options for regular pay they deferred. Mrs. Jones was granted 324,572
options for deferred pay from January through July 15, 2002. In October Mrs.
Jones was granted 281,796 options for deferred pay from July 16 through October
8, 2002.
(5) In January all staff received options based on salary. Mr. Park
received 33,600 options. In April, Mr. Park was awarded 100,000both exercisable and unexercisable stock options as
compensation for additional duties as President of
Virtual Vision. In July, all
officers were granted options for regular pay they deferred. Mr. ParkDecember 31, 2005. The common stock price at December 31, 2005 was
granted 112,210 options for deferred pay from January through July 15, 2002. In
October Mr. Park was granted 192,500 options for defer red pay from July 16
through October 8, 2002.
70
(6) In January all staff received options based on salary. Mr. Howard
received 34,000 options. Mr. Howard retired in 2002. Mr. Howard did not exercise
his options and they expired.
(7) In January all staff received options based on salary. Mr. Flynn
received 26,000 options. Also in January Mr. Flynn was awarded 100,000 options
as compensation for his new responsibilities as Chief Financial Officer. Mr.
Flynn ceased to be employed by the Company in 2002. Mr. Flynn did not exercise
his options and they expired.
In October the Board allocated options that were not issued due to the
unavailability of shares in the 2000 Stock Option Plan. Of the options
allocated, the Board allocated 2,000,000 options to Mr. Jones, 1,000,000 options
to Mrs. Jones and 500,000 options to Dr. Park. These options may or may not be
granted in whole or in part in 2003.
$0.57 per share.
| | | | | | | # of Securities Underlying Unexercised Options as of 12/31/05 | | Value of Unexercised In-the-money Options as of 12/31/05 | |
Name | | Shares Acquired on Exercise | | Value Realized | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | |
| | | | | | | | | | | | | | |
| Gary W. Jones | | | ---- | | | ---- | | | 2,093,937 | | | 1,096,667 | | $ | 177,199 | | $ | ---- | |
| | | | | | | | | | | | | | | | | | | | |
| John Atherly | | | ---- | | | ---- | | | 150,000 | | | 1,030,000 | | $ | ---- | | $ | ---- | |
| | | | | | | | | | | | | | | | | | | | |
| Susan K. Jones | | | ---- | | | ---- | | | 1,968,208 | | | 784,167 | | $ | 94,092 | | $ | ---- | |
Compliance with internalInternal 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.
Item 12. Security Ownership
On January 24, 2006, pursuant to actions taken by the Compensation Committee of Certain Beneficial Ownersour Board of Directors, Mr. Gary W. Jones entered into a revised executive employment agreement, to conform to the recently established Sarbanes-Oxley requirements, in connection with his service as Chief Executive Officer and ManagementPresident of the Company. Mr. Jones also serves as Chairman of the Company. Additionally, Ms. Susan K. Jones entered into a revised executive employment agreement, to conform to the recently established Sarbanes-Oxley requirements, in connection with her service as the Company’s Chief Marketing and Strategy Officer, Executive Vice President and Corporate Secretary.
Each agreement is effective for an initial term of three years, effective January 1, 2006. The information containedagreements provides for an annual salary, benefits made available by the Company to its employees and eligibility for an incentive bonus pursuant to one or more incentive compensation plans established by the Company from time to time. The Company may terminate the employment of Mr. Jones and Mrs. Jones at any time with or without notice and with or without cause (as such term is defined in the 2003 Proxy Statementagreements). If the Mr. Jones’ and Mrs. Jones’ employment is terminated without cause, or if Mr. Jones and Mrs. Jones resign with good reason (as such term is defined in the agreements), or if Mr. Jones’ and Mrs. Jones’ respective positions are terminated or significantly changed as result of change of control (as such term is defined in the agreements), Mr. Jones and Mrs. Jones shall be entitled to receive salary until the end of the agreement’s full term or twelve months, whichever is greater, payment for accrued vacation, and bonuses which would have been accrued during the term of the agreements. If Mr. Jones and Mrs. Jones voluntarily terminates employment with the Company, other than for good reason or is terminated with cause (as such term is defined in the agreement), Mr. Jones and Mrs. Jones shall cease to accrue salary, vacation, benefits, and other compensation on the date of the voluntary or with cause termination. The Executive Employment Agreements include other conventional terms and also contains invention assignment, non-competition, non-solicitation and non-disclosure provisions.
On April 17, 2006, the parties entered into amendments to the employment agreements pursuant to which the parties clarified that the Company has agreed to pay for health benefits equivalent to medical and dental benefits provided during the executive’s full time employment until the end of the agreement’s full term or twenty-four (24) months, whichever is greater.
Our 2005 Employee Stock Purchase Plan
At our 2005 Annual Meeting of Stockholders, the Company's stockholders approved the 2005 Employee Stock Purchase Plan. The purpose of the 2005 Employee Stock Purchase Plan is to give employees of eMagin and its participating subsidiary an opportunity to purchase common stock on favorable terms through payroll deductions thereby increasing their proprietary interest in the success of eMagin. The number of shares of common stock available for issuance under the heading
"Principal Stockholders" and "Stock Ownership2005 Employee Stock Purchase Plan is 750,000 shares, subject to adjustment for certain changes in eMagin's capital, as described below. This number of Directors and Management" is
incorporated herein by reference in response to this item.
Item 13: Certain Relationships and Related Transactions
The information contained in the 2003 Proxy Statementshares available under the heading
"Compensationplan will be automatically increased on each of January 1, 2006, January 1, 2007, and Other Transactions with Directors and Executive Officers"January 1, 2008, by 750,000 shares. The 2005 Employee Stock Purchase Plan is incorporated hereinintended to qualify as an employee stock purchase plan under Section 423 of the Code so that eMagin's participating employees may enjoy certain tax advantages, as described below. The 2005 Employee Stock Purchase Plan will be administered by reference in response to this item.
ITEM 14. CONTROLS AND PROCEDURESthe Compensation Committee. As of December 31, 2002,2005 Employee Stock Purchase Plan was not implemented.
In general, any person who has been an evaluationemployee prior to a given offering period (generally each February 15 and August 15) who is scheduled to work more than five months per calendar year and more than 20 hours per week on a regular basis is eligible to participate in the 2005 Employee Stock Purchase Plan. Common stock will be purchased for each participant in the 2005 Employee Stock Purchase Plan as of the last day of each accumulation period (generally August 14 and February 14) within an offering period with the money deducted from their paychecks during the accumulation period. Offering periods under the 2005 Employee Stock Purchase Plan will begin on February 15 and August 15 of each calendar year while the 2005 Employee Stock Purchase Plan is in effect, and each offering period is 24 months in length, unless the Compensation Committee determines otherwise. The purchase price per share of common stock will be the lesser of (a) 85% of the fair market value (i.e. the last transaction or closing price, as applicable) of a share of common stock on the last trading day of the accumulation period or (b) 85% of the fair market value of a share of common stock on the last trading day prior to the beginning of the Offering Period.
A participant may elect to have payroll deductions made under the 2005 Employee Stock Purchase Plan for the purchase of common stock in an amount not to exceed 15% of the participant's compensation.
Compensation for purposes of the 2005 Employee Stock Purchase Plan generally means total cash compensation, inclusive of overtime, bonuses, or shift premiums or, plus the participants pre-tax contributions under any Internal Revenue Code Section 401(k) or 125 plan of the company or its subsidiaries. Contributions to the 2005 Employee Stock Purchase Plan will be on an after-tax basis. A participant may terminate his or her payroll deductions at any time.
A stock purchase bookkeeping account will be established for each participant in the 2005 Employee Stock Purchase Plan. Amounts deducted from participants' paychecks will be credited to their bookkeeping accounts. No interest will accrue with respect to any amounts credited to the bookkeeping accounts. As of the last day of each Accumulation Period, the amount credited to a participant's stock purchase account will be used to purchase the largest number of whole shares of common stock possible at the price determined as described above. In general, however, a participant will not be permitted to purchase in any calendar year under the 2005 Employee Stock Purchase Plan common stock with a fair market value in excess of $25,000, determined as of the beginning of the applicable offering period. Participants also will not be permitted to purchase more than 25,000 shares of common stock during any accumulation period. The common stock will be purchased directly from eMagin. No brokerage or other fees will be charged to participants. Any balance remaining in the participant's account will be returned to the participant; however, any excess balance attributable to the inability to purchase a fractional share will be retained in the participant's account for subsequent purchases under the 2005 Employee Stock Purchase Plan or may be withdrawn by the participant.
A participant may withdraw from participation in the 2005 Employee Stock Purchase Plan at any time during an offering period by written notice to eMagin. Upon withdrawal, a participant's bookkeeping account balance will be distributed in cash as soon as practicable and no shares of common stock will be purchased during the accumulation period. If a participant terminates employment with eMagin, that participant will be considered withdrawn from the plan. Rights to purchase shares of common stock under the 2005 Employee Stock Purchase Plan are exercisable only by the participant and are not transferable.
In the event of certain changes in number of outstanding shares of the common stock, such as a stock dividend or other change in the number of shares effected without receipt or payment of consideration by eMagin, the aggregate number of shares of common stock offered under the 2005 Employee Stock Purchase Plan, the 25,000 share limit on shares that can be purchased by a single participant during any accumulation period and the price of shares under any outstanding participant elections will be proportionately adjusted by the Compensation Committee. Immediately prior to a corporate reorganization, as defined in the 2005 Employee Stock Purchase Plan, the offering period and accumulation period then in progress will terminate, and shares will be purchased using amounts then outstanding in the participants' bookkeeping accounts under the 2005 Employee Stock Purchase Plan, unless the 2005 Employee Stock Purchase Plan is assumed or continued by the surviving corporation or its parent corporation.
The Board of Directors of eMagin may amend, suspend, or terminate the 2005 Employee Stock Purchase Plan at any time, except that certain amendments may be made only with the approval of the stockholders of eMagin.
New plan benefits
Participation in the 2005 Employee Stock Purchase Plan is voluntary. Accordingly, at this time eMagin cannot determine the amount of shares of common stock that will be acquired by participants or the dollar value of any such participation. As of March 17, 2006 there are approximately 98 employees (representing all of the employees of the Company and its subsidiaries) who would be eligible to participate in the 2005 Employee Stock Purchase Plan if the plan had been in effect on that date.
Our 2004 Non-Employee Compensation Plan
The purpose of the 2004 Non-Employee Compensation Plan is to help us retain consultants, professionals, and service providers who provide services to the Company in connection with, among other things, the Company's obligations as a publicly-held reporting company. In addition, we expect to benefit from the added interest that the awardees will have in our welfare as a result of their ownership or increased ownership of our common stock. The Board of Directors will select who will receive awards and the amount and nature of such awards.
Over the last two years, we have been able to engage consultants, professionals, and service providers by compensating them through the issuance of shares of our common stock. This afforded us the ability to utilize our cash, at a time when we were seeking out financing and working with our creditors with respect to restructuring outstanding obligations, for the more immediate needs that we had related to the acquisition of the products and inventory needed to further our manufacturing process so as to be able to deliver finished goods to our customers pursuant to outstanding orders. As we continue to have a significant backlog of orders, we believe that, for the foreseeable future, it is in our best interests to be able to continue to engage and compensate such persons through the payment of our shares of common stock. In addition, Section 711 of the AMEX Company Guide, which was performedamended in October 2003, now requires that such compensation arrangements be approved by the Company's shareholders.
Awards authorized under the 2004 Non-Employee Compensation Plan shall consist of shares of our common stock. Such awards may be subject to forfeiture in the event of premature termination of engagement, failure to meet certain performance objectives, or other conditions, as may be determined by the Board of Directors.
The 2004 Non-Employee Compensation Plan is administered by the Board of Directors (provided however, that the Board may delegate such administration to the Compensation Committee). Subject to the express terms and conditions of the 2004 Non-Employee Compensation Plan, the Board of Directors has full power to make Awards, to construe or interpret the 2004 Non-Employee Compensation Plan, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for its administration. Except as otherwise provided in the 2004 Non-Employee Compensation Plan, the Board of Directors may also determine which persons shall be granted Awards, the nature of the Awards granted, the number of shares subject to Awards and the time at which Awards shall be made. Such determinations will be final and binding.
The only class of stock subject to an Award is Common Stock. At our 2005 Annual Meeting of Stockholders, the Company's stockholders approved an amendment to the 2004 Non-Employee Compensation Plan to approve an increase in the number of authorized shares of common stock issuable pursuant to the 2004 Non-Employee Compensation Plan from 1,000,000 to 2,000,000 shares; however, this number is subject to adjustment in the event of a recapitalization, reorganization or similar event. The maximum number of shares of Common Stock with respect to which Awards may be granted to any participant in any year under the 2004 Non-Employee Compensation Plan is 500,000 shares.
Shares shall consist, in whole or in part, of authorized and unissued shares or treasury shares. Any shares represented by Awards that are cancelled, forfeited, terminated or expired will again be available for grants and issuance under the 2004 Non-Employee Compensation Plan.
In the event that our outstanding shares of Common Stock are increased, decreased or changed or converted into other securities by reason of merger, reorganization, consolidation, recapitalization, stock dividend, extraordinary cash dividend or other change in our corporate structure affecting the stock, the number of shares that may be delivered under the 2004 Non-Employee Compensation Plan and the number and/or the purchase price of shares subject to outstanding Awards under the 2004 Non-Employee Compensation Plan may be adjusted at the sole discretion of the Board of Directors to the extent that the Board of Directors determines to be appropriate, provided, however, that the number of shares subject to any Awards will always be a whole number.
The 2004 Non-Employee Compensation Plan will expire on May 17, 2014, but the Board of Directors may terminate the 2004 Non-Employee Compensation Plan at any time prior to that date and Awards granted prior to such termination may extend beyond such date. Termination of the 2004 Non-Employee Compensation Plan will not alter or impair, without the consent of the Awardee, any of the rights or obligations of any Award made under the 2004 Non-Employee Compensation Plan.
The Board may from time to time alter, amend, suspend or discontinue the 2004 Non-Employee Compensation Plan. However, no such action of the Board may alter the provisions of the 2004 Non-Employee Compensation Plan so as to alter any outstanding Awards to the detriment of the Awardee or participant without such participant's or Awardees consent, and no amendment to the 2004 Non-Employee Compensation Plan may be made without stockholder approval if such amendment would materially increase the benefits to the Awardees or the participants in the 2004 Non-Employee Compensation Plan, materially increase the number of shares issuable under the 2004 Non-Employee Compensation Plan, extend the terms of the 2004 Non-Employee Compensation Plan or the period during which Awards may be granted or exercised or materially modify requirements as to eligibility to participate in the 2004 Non-Employee Compensation Plan.
Grant. The Board of Directors may, at its discretion, award shares of common stock to a recipient (the "Stock Awards"). The Stock Awards will be issued pursuant to an agreement between the Company and the Awardee. Each recipient of a Stock Award will be a stockholder and have all the rights of a stockholder with respect to such shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such shares.
If the recipient of an Award ceases to be a consultant, professional or service provider for any reason, then the Award may be subject to forfeiture, as provided in the particular agreement, unless such forfeiture is waived by the Board of Directors when it, in its discretion, determines that such waiver is in our best interests.
In the event of a participant's retirement, permanent disability or death, or in cases of special circumstances, the Board of Directors may waive any or all of the remaining restrictions and limitations imposed under the 2004 Non-Employee Compensation Plan with respect to any Awards.
Restrictions on Transferability. These Shares of stock may not be sold, exchanged, transferred, pledged, hypothecated, or otherwise disposed of until such time as any stated restrictions lapse. The Board of Directors, in its absolute discretion, may impose such restrictions on the transferability of the Awards granted in this 2004 Non-Employee Compensation Plan as it deems appropriate. Any such restrictions shall be set forth in the Agreement with respect to such Awards and may be referred to on the certificates evidencing shares issued pursuant to any such Award. Shares of restricted stock will be evidenced by a certificate that bears a restrictive legend.
Our 2003 Employee Stock Option Plan
At our 2005 Annual Meeting of Stockholders, the Company's stockholders approved an amendment to the 2003 Employee Stock Option Plan to provide for grants of shares of common stock in addition to options to purchase shares of common stock.
The primary purpose of the 2003 Option Plan is to attract and retain the best available personnel for the Company in order to promote the success of the Company's business and to facilitate the ownership of the Company's stock by employees. The 2003 Option Plan and the right of participants to make purchases thereunder are intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The 2003 Option Plan is not a qualified deferred compensation plan under Section 401(a) of the Internal Revenue Code and is not subject to the provisions of the Employee Retirement Income Security Act of 1974.
We have reserved a total of 9,200,000 shares of our common stock for issuance under the 2003 Option Plan. On January 1, 2004, the share reserve was automatically increased by 2,000,000 shares. On January 1 of each year for a period of nine (9) years, commencing on January 1, 2005, the aggregate number of shares of Common Stock that is available for issuance under the 2003 Option Plan shall automatically be increased by three percent (3%) of the diluted shares outstanding; provided, however, that the Board, from time to time, may provide for a lesser increase in the aggregate number of shares of Common Stock that is available for issuance under the Plan.
However, the automatic increase is subject to reduction by the board. If the recipient of an option grant or stock award does not purchase the shares subject to the option grant or stock award before it expires or terminates, the shares that are not purchased again become available for issuance under the 2003 Option Plan.
The 2003 Option Plan is administered by the Company's Board of Directors as the Board of Directors may be composed from time to time. The Board determines all questions of interpretation of the 2003 Option Plan, and its decisions are final and binding upon all participants. Any determination by a majority of the members of the Board of Directors at any meeting, or by written consent in lieu of a meeting, shall be deemed to have been made by the whole Board of Directors.
Notwithstanding the foregoing, the Board of Directors may at any time, or from time to time, appoint a committee (the "Committee") of at least three members of the Board of Directors, and delegate to the Committee the authority of the Board of Directors to administer the Plan. Upon such appointment and delegation, the Committee shall have all the powers, privileges and duties of the Board of Directors, and shall be substituted for the Board of Directors, in the administration of the Plan, subject to certain limitations.
Members of the Board of Directors who are eligible employees are permitted to participate in the 2003 Option Plan, provided that any such eligible member may not vote on any matter affecting the administration of the 2003 Option Plan or the grant of any option or stock award pursuant to it, or serve on a committee appointed to administer the 2003 Option Plan. In the event that any member of the Board of Directors is at any time not a "disinterested person", as defined in Rule 16b-3(c) (3) (i) promulgated pursuant to the Securities Exchange Act of 1934, the Plan shall not be administered by the Board of Directors, and may only by administered by a Committee, all the members of which are disinterested persons, as so defined.
Under the 2003 Option Plan, options and/or stock awards may be granted to key employees, officers, directors or consultants of the Company, as provided in the 2003 Option Plan (in the case of a grant of options, the participant is referred to herein as an “Optionee” and in the case of a grant of a stock award, the participant is referred to herein as a “Grantee”).
The term of each Option or stock award granted under the Plan shall be contained in a stock option or stock award agreement between the Optionee or Grantee and the Company and such terms shall be determined by the Board of Directors consistent with the provisions of the Plan, including the following:
(a)Purchase Price. The purchase price of the Common Shares subject to each ISO shall not be less than the fair market value (as set forth in the 2003 Option Plan), or in the case of the grant of an ISO to a Principal Stockholder, not less that 100% of fair market value of such Common Shares at the time such Option is granted. The purchase price of the Common Shares subject to each Non-ISO shall be determined at the time such Option is granted, but in no case less than 85% of the fair market value of such Common Shares at the time such Option is granted.
(b)Vesting. The dates on which each Option or stock award (or portion thereof) shall be exercisable or shall vest and the conditions precedent to such exercise or vesting, if any, shall be fixed by the Board of Directors, in its discretion, at the time such Option or stock award is granted.
(c)Expiration. The Board of Directors, in its discretion, shall fix the expiration of each Option or stock award, at the time such Option or stock award is granted; however, unless otherwise determined by the Board of Directors at the time such Option or stock award is granted, an Option or stock award shall be exercisable for ten (10) years after the date on which it was granted (the "Grant Date"). Each Option or stock award shall be subject to earlier termination as expressly provided in the 2003 Option Plan or as determined by the Board of Directors, in its discretion, at the time such Option or stock award is granted.
(d)Transferability. No Option or stock award shall be transferable, except by will or the laws of descent and distribution, and any Option or stock award may be exercised during the lifetime of the Optionee or Grantee only by him. No Option or stock award granted under the Plan shall be subject to execution, attachment or other process.
(e)Option Adjustments. The aggregate number and class of shares as to which Options or stock award may be granted under the 2003 Option Plan, the number and class shares covered by each outstanding Option or stock award and the exercise price or purchase per share thereof (but not the total price), and all such Options or stock awards, shall each be proportionately adjusted for any increase decrease in the number of issued Common Stock resulting from split-up spin-off or consolidation of shares, additional issuance of shares, or any like capital adjustment or the payment of any stock dividend. The total number of shares approved in the 2003 Option Plan would not decrease as a result of the exercising of options or the purchase of common stock pursuant to a stock award.
Except as otherwise provided in the 2003 Option Plan, any Option or stock award granted shall terminate in the event of a merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation of the Company. However, the Optionee or Grantee shall have the right immediately prior to any such transaction to exercise his Option or purchase shares of common stock in whole or in part notwithstanding any otherwise applicable vesting requirements.
(f)Termination, Modification and Amendment. The 2003 Option Plan (but not Options or stock awards previously granted under the Plan) shall terminate ten (10) years from the earlier of the date of its adoption by the Board of Directors or the date on which the Plan is approved by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon, and no Option or stock award shall be granted after termination of the Plan. Subject to certain restrictions, the Plan may at any time be terminated and from time to time be modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the State of Delaware.
Equity Compensation Plan Information
| | | | | | | | |
Plan category As of December 31, 2005 | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance | |
| Equity compensation plans approved by security holders | | | 12,960,636 | | $ | 0.98 | | | 43,346 | |
| | | | | | | | | | | |
| Equity compensation plans not approved by security holders | | | --- | | | --- | | | --- | |
| | | | | | | | | | | |
| Total | | | 12,960,636 | | $ | 0.98 | | | 43,346 | |
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, 2005 are to purchase an aggregate total of 5,092,000 shares, vesting over five years at per share prices ranging from $1.01 to $2.58.
ITEM 12. 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 March 17, 2006, unless otherwise noted. Unless otherwise indicated, the stockholders listed in the table have sole voting and investment power with respect to the shares indicated.
Name of Beneficial Owner | | Common Stock Beneficially Owned | | Percentage of Common Stock |
| | | | | |
| Stillwater LLC (1) | | 14,345,078 | | 11.0% |
| George Haywood (2) | | 9,798,026 | | 7.6% |
| Gary W. Jones (3) | | 9,451,956 | | 7.2% |
| Susan K Jones (3) | | 9,451,956 | | 7.2% |
| Ginola Limited(4) | | 9,223,191 | | 7.1% |
| Rainbow Gate (5) | | 833,888 | | 2.0% |
| Ogier Trustee (Jersey) Limited (6) | | 976,200 | | * |
| Jack Rivkin(7) | | 833,888 | | * |
| Paul Cronson (8) | | 507,657 | | * |
| Claude Charles (9) | | 315,000 | | * |
| John Atherly (10) | | 107,500 | | * |
| Chelsea Trust Company Limited | | 119,161 | | * |
| Jack Goldman(11) | | 229,160 | | * |
| Adm. Thomas Paulsen (12) | | 85,000 | | * |
| Dr. Jill Wittels (13) | | 85,000 | | * |
| All executive officers and directors as a group (consisting of 10 individuals) (14) | | 10,781,273 | | 8.2% |
*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 March 17, 2006 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 100,049,382 shares of common stock outstanding on March 17, 2006, and the shares issuable upon the exercise of options and warrants exercisable on or within 60 days of March 17, 2006, 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 5,018,933 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 842,873 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 3,214,738 common shares underlying warrants.
(3) This figure represents shares owned by Gary Jones and Susan Jones who are married to each other, including (i) 2,330,604 shares of common stock issuable upon exercise of stock options held by Gary Jones and (ii) 2,122,375 shares of common stock issuable upon exercise of stock options held by Susan Jones. This does not include (i) 180,000 shares underlying options owned by Gary Jones which are not exercisable within 60 days of March 17, 2006; and (ii) 180,000 shares underlying options owned by Susan Jones which are not exercisable within 60 days of March 17, 2006.
(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 3,196,593 common shares, which includes warrants to purchase 842,873 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 842,873 shares underlying warrants.
(6) This figure includes 325,400 shares underlying warrants.
(7) This figure represents 639,093 shares owned by Mr. Rivkin and warrants held by Mr. Rivkin to purchase 194,795 shares of common stock. Mr. Rivkin retired as a director at the Annual Meeting held in September 2005.
(8) This figure represents 191,984 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.
(9) This figure represents shares underlying options.
(10) This figure represents shares underlying options.
(11) This figure represents shares underlying options.
(12) This figure represents shares underlying options.
(13) This figure represents shares underlying options.
(14) This figure includes (i) warrants to purchase 410,468 shares of common stock, and (ii) 5,370,479 shares of common stock issuable upon exercise of stock options.
On October 20, 2005, we entered into a Securities Purchase Agreement to sell to certain qualified institutional buyers and accredited investors an aggregate of 16,619,056 shares of our common stock, par value $0.001 per share, and warrants to purchase an additional 9,971,427 shares of common stock, for an aggregate purchase price of approximately $9.14 million. The purchase price of the common stock and corresponding warrant was $0.55 per share.
The warrants are exercisable at a price of $1.00 per share and expire on October 20, 2010. Of the 9,971,427 warrants, 6,647,623 of the warrants are exercisable on or after May 20, 2006. The remaining 3,323,810 are exercisable after March 31, 2007, however these warrants will be cancelled if the Company’s net revenue for fiscal year 2006 exceeds $20 million or if the investor has sold more than 25% of the shares purchased under the Securities Purchase Agreement prior to December 31, 2006.
Both Stillwater and Ginola are beneficial owners of more than 5% of the Company’s common stock.
Rainbow Gate Corporation, a corporation in which its investment manager is the sole member of Stillwater LLC and its controlling shareholder is the same as Ginola Limited, participated in the sale of equity pursuant to the Securities Purchase Agreement by investing approximately $500 thousand. Stillwater LLC disclaims beneficial ownership of shares owned by Rainbow Gate Corporation.
Chelsea Trust Company, as trustee of a trust with the same directors and/or controlling shareholders as Ginola Limited, participated in the sale of equity pursuant to the Securities Purchase Agreement by investing approximately $250 thousand. Ginola Limited disclaims beneficial ownership of shares owned by Chelsea Trust Company.
In connection with the issuance of the Shares and the warrants pursuant to the Securities Purchase Agreement, the Company was required to lower the exercise prices of existing Series A and F warrants from $1.05 and $1.21, respectively, to $.55 and $1.09 per share, respectively, pursuant to the anti-dilution provisions of the Series A and F warrants.
Mary Cronson, the mother of an outside director of eMagin, Paul Cronson, is the holder of a Series A warrant to purchase an aggregate of 42,857 shares of common stock. Accordingly, the exercise price of Mrs. Cronson’s Series A warrant was reduced from $1.05 to $0.55 per share. Mrs. Cronson received the same considerations as all other holders of the Company’s Series A warrants which were re-priced.
On January 24, 2006, pursuant to actions taken by the Compensation Committee of our Board of Directors, Mr. Gary W. Jones entered into a revised executive employment agreement, to conform to the recently established Sarbanes-Oxley requirements, in connection with his service as Chief Executive Officer and Acting Chief Financial Officer,President of the effectivenessCompany. Mr. Jones also serves as Chairman of the designCompany. Additionally, Ms. Susan K. Jones entered into a revised executive employment agreement, to conform to the recently established Sarbanes-Oxley requirements, in connection with her service as the Company’s Chief Marketing and operationStrategy Officer, Executive Vice President and Corporate Secretary.
Each agreement is effective for an initial term of our disclosure controlsthree years, effective January 1, 2006. The agreements provides for an annual salary, benefits made available by the Company to its employees and procedures. Basedeligibility for an incentive bonus pursuant to one or more incentive compensation plans established by the Company from time to time. The Company may terminate the employment of Mr. Jones and Mrs. Jones at any time with or without notice and with or without cause (as such term is defined in the agreements). If the Mr. Jones’ and Mrs. Jones’ employment is terminated without cause, or if Mr. Jones and Mrs. Jones resign with good reason (as such term is defined in the agreements), or if Mr. Jones’ and Mrs. Jones’ respective positions are terminated or significantly changed as result of change of control (as such term is defined in the agreements), Mr. Jones and Mrs. Jones shall be entitled to receive salary until the end of the agreement’s full term or twelve months, whichever is greater, payment for accrued vacation, and bonuses which would have been accrued during the term of the agreements. If Mr. Jones and Mrs. Jones voluntarily terminates employment with the Company, other than for good reason or is terminated with cause (as such term is defined in the agreement), Mr. Jones and Mrs. Jones shall cease to accrue salary, vacation, benefits, and other compensation on that
evaluation, Our Chiefthe date of the voluntary or with cause termination. The Executive OfficerEmployment Agreements include other conventional terms and Acting Chief Accounting Officer,
concluded that our disclosure controlsalso contains invention assignment, non-competition, non-solicitation and procedures were effective as ofnon-disclosure provisions.
For the years ended December 31, 2002. 2005 and 2004, the aggregate fees payable to Eisner LLP for professional services rendered for the audit of the annual financial statements, review of quarterly financial statements and services normally provided in connection with statutory and regulatory filings or engagements were approximately $151 thousand and $136 thousand, respectively.
There were no other fees billed for services rendered to the Company by Eisner LLP, other than fees for audit and audit-related, for the years 2005 and 2004.
The Audit Committee pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be paid in connection with such services in order to assure that the provision of such services does not impair the auditor’s independence.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules
1. Financial Statements
The following consolidated financial statements are filed as part of this report under Item 8 of Part II “Financial Statements and Supplementary Data.:
| A. | Consolidated Balance Sheets at December 31, 2005 and 2004. |
| B. | Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003. |
| C. | Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003. |
| D. | Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003. |
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this report:
| A. | Schedule II - Valuation and Qualifying Accounts |
Financial statement schedules not included herein have been no significant changesomitted because they are either not required, not applicable, or the information is otherwise included herein.
(b) Exhibits
The exhibits listed in our internal
controlsthe accompanying Index to Exhibits on pages 66 to 69 are filed or in other factors that could significantly affect internal controls
subsequent to December 31, 2002.
Item 15: Exhibits, Financial Statement Schedules and Reportsincorporated by reference as part of this Annual Report on Form 8-K
(a) Exhibit List
Exhibit
Number Description
10-K.
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 17th day of April, 2006.
| | |
| eMAGIN CORPORATION |
|
|
|
| By: | /s/ Gary W. Jones |
|
Gary W. Jones |
| Chief Executive Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons on April 17th, 2006, on behalf of the registrant and in the capacities Indicated.
Signature | Title |
| |
| /s/ Gary W. Jones | President, Chief Executive Officer, and Director |
| Gary W. Jones | (Principal Executive Officer) |
| |
| /s/ John Atherly | Chief Financial Officer |
| John Atherly | (Principal Financial and Accounting Officer) |
| |
| /s/ Claude Charles | Director |
| Claude Charles | |
| |
| /s/ Paul Cronson | Director |
| Paul Cronson | |
| |
| /s/ Irwin Engelman | Director |
| Irwin Engelman | |
| |
| /s/ Dr. Jacob E. Goldman | Director |
| Dr. Jacob E. Goldman | |
| |
| /s/ Adm. Thomas Paulsen | Director |
| Adm. Thomas Paulsen | |
| |
| /s/ Brig. Gen. Stephen Seay | Director |
| Brig. Gen. Stephen Seay | |
| |
| /s/ Dr. Jill Wittels | Director |
| Dr. Jill Wittels | |
eMAGIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts
Year Ended | | Balance at Beginning of Period | | | | Charged to Expenses | | Amounts Written Off | | Balance at End of Year | |
| | | | | | | (In thousands) | | | | | |
| | | | | | | | | | | | |
| December 31, 2003 | | $ | (36 | ) | | | $ | (287 | ) | $ | 19 | | $ | (304 | ) |
| December 31, 2004 | | | (304 | ) | | | | (488 | ) | | 21 | | | (771 | ) |
| December 31, 2005 | | | (771 | ) | | | | 164 | | | 120 | | | (487 | ) |
eMAGIN CORPORATION
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).* |
| 4.7 | | Form of Series F Warrant (incorporated by reference to exhibit 4.1 to the Registrant's current report on Form 8-K filed on October 26, 2004). |
| 4.8 | | Form of Common Stock Purchase Warrant dated October 20, 2005, filed October 31, 2005, as filed in the Registrant's Form 8-K/A Report (file no. 001-15751)8-K incorporated herein by reference.
3.1 Articles of Incorporation filed January 23, 1996, as filed in the Registrant's Form 10-SB
(file no. 000-24757) incorporated herein by reference.
3.2 Bylaws, as filed in the Registrant's Form 10-SB (file no. 000-24757) incorporated herein by
reference.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws of the
Registrant defining rights of the holders of common stock of the Registrant herein by
reference.
10.1 2000 Stock Option Plan, as filed in the Registrant's Form S-8 (file no. 333-32474)
incorporated herein by reference.
71
10.2 Consulting Agreement between eMagin Corporation and Verus International Ltd., dated March
16, 2000, as filed in the Registrant's Form 10-K/A for the year ended December 31, 2000
incorporated by reference herein.
|
10.3 Employment Agreement with Gary W. Jones, dated March 16, 2000, as filed in the Registrant's
Form for the year ended December 31, 2000 incorporated by reference herein.
10.4 Employment Agreement with Susan K. Jones, dated March 16, 2000, as filed in the Registrant's
Form 10-K/A for the year ended December 31, 2000 incorporated by reference herein.
10.5 | | Nonexclusive Field of Use License Agreement relating to OLED Technology for miniature, high resolution displays between the Eastman Kodak Company and FED Corporation dated March 29, 1999 as filed in(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 incorporated by reference herein.
10.6 filed on April 30, 2001). |
| 10.4 | | Amendment Number 1 to the Nonexclusive Field of Use License Agreement relating to the OLEDLED Technology for miniature, high resolution displays between the Eastman Kodak Company and FED Corporation dated March 16, 2000 as filed in(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 incorporatedfiled on April 30, 2001). |
| 10.5 | | Lease between International Business Machines Corporation and FED Corporation dated May 28, 1999 (incorporated by reference herein.
10.7 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 businessBusiness Machines Corporation and FED Corporation dated July 9, 1999 as filed in(incorporated by reference to exhibit 10.8 to the Registrant's Annual Report on Form 10-K/A10-K for the year ended December 31, 2000 incorporatedfiled 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 herein.
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.
10.9 |
| 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.
10.10 Virtual Vision lease between Redson Building Partnership and Vision Newco dated December 15,
1995, as filed in the Registrant's Form 10-K/A for the year ended December 31, 2000
incorporated by reference herein.
10.11 Securities Purchase Agreement dated as of September 18, 2001 by and between eMagin
Corporation and SK Corporation, as filed in the Registrant's Form 8-K dated September 26,
2001 incorporated herein by reference.
10.12 Registration Rights Agreement dated as of September 19, 2001 by and between eMagin
Corporation and SK Corporation, as filed in the Registrant's Form 8-K dated September 26,
2001 incorporated herein by reference.
10.13 Note Purchase Agreement entered into as of August 20, 2001, by and among eMagin Corporation
and The Travelers Insurance Company, as filed in the Registrant's Form 8-K dated September
4, 2001 incorporated herein by reference.
10.14 |
| 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.
10.15 Registration Rights |
| 10.19 | | Securities Purchase Agreement dated November 27, 2001as of April 25, 2003 by and betweenamong eMagin Corporation and certainthe investors named therein,identified on the signature pages thereto, filed April 28, 2003, as filed in the Registrant's Form 8-K dated December 18,
2001 incorporated herein by reference.
72
10.16 Security |
| 10.20 | | Registration Rights Agreement dated as of November 20, 2001,April 25, 2003 by and betweenamong eMagin Corporation, Verus
International Ltd. and certain initial investors named therein,identified on the signature pages thereto filed April 28, 2003, as filed in the Registrant's Form 8-K dated December 18, 2001 incorporated herein by reference.
21.1 Subsidiaries |
| 10.21 | | Securities Purchase Agreement dated as of January 9, 2004 by and among eMagin and the Registrant.
99.1 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 of theby Chief Executive Officer pursuant to Sarbanes OxleySection 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. |
| 10.26 | | 2004 Non-Employee Compensation Plan, filed July 7, 2004, as filed in the Registrant’s Form S-8, incorporated herein by reference.* |
| 10.27 | | Form of Letter Agreement by and Actingamong eMagin and the holders of the Class A, Class B and Class C common stock purchase warrants, filed August 9, 2004, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.28 | | Securities Purchase Agreement dated as of October 21, 2004 by and among eMagin and the purchasers listed on the signature pages thereto, filed October 26, 2004, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.29 | | Placement Agency Agreement dated as of October 21, 2004 by and among eMagin and W.R. Hambrecht & Co., LLC, filed October 26, 2004, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.30 | | Agreement, dated as of June 29, 2004, by and between eMagin and Larkspur Capital Corporation, filed October 26, 2004, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.31 | | Amendment No. 4 to Lease by and between eMagin and International Business Machines Corporation, filed December 20, 2004, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.32 | | Sublease Agreement dated as of July 14, 2005 by and between eMagin and Capgemini U.S., LLC, filed August 2, 2005, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.33 | | Amended and Restated 2003 Stock Option Plan, filed September 1, 2005, as filed in the Registrant’s Definitive Proxy Statement, incorporated herein by reference.* |
| 10.34 | | Amended and Restated 2004 Non-Employee Compensation Plan, filed September 1, 2005, as filed in the Registrant’s Definitive Proxy Statement, incorporated herein by reference.* |
| 10.35 | | 2005 Employee Stock Purchase Plan, filed September 1, 2005, as filed in the Registrant’s Definitive Proxy Statement, incorporated herein by reference.* |
| 10.36 | | Securities Purchase Agreement dated as of October 20, 2005, by and among eMagin and the purchasers listed on the signature pages thereto, filed October 31, 2005, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.37 | | Registration Rights Agreement dated as of October 20, 2005, by and among eMagin and the purchasers listed on the signature pages thereto, filed October 31, 2005, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.38 | | Employment Agreement effective as of January 1, 2006 by and between eMagin and Gary Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.39 | | Employment Agreement effective as of January 1, 2006 by and between eMagin and Susan Jones, filed January 27, 2006, as filed in the Registrant's Form 8-K incorporated herein by reference. |
| 10.40 | | Amendment to Employment Agreement as of April 17, 2006 by and between eMagin and Gary Jones |
| 10.41 | | Amendment to Employment Agreement as of April 17, 2006 by and between eMagin and Susan Jones |
| 31.1 | | Certification by Chief AccountingExecutive Officer Pursuantpursuant to Sarbanes OxleySection 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, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Code of Ethics and Business Conduct of Officers, Directors and Employees
|
(b) Financial Statement Schedules
None
(c) Reports on Form 8-K
The Company filed twenty-six reports on form 8-K during the year ended
December 31, 2002. Information regarding the items reported on is as follows:
DATE OF REPORT ITEM REPORTED ON
January 28,2002 eMagin Corporation entered into a series of transaction documents to
facilitate additional funding of $1,000,000 of eMagin1350.| 32.2 | | Certification by a private
investor.
March 20, 2002 eMagin Corporation and a group of several accredited institutional and
individual investors entered into a Securities Purchase Agreement
providing for the issuance and sale to the Investors of an aggregate of
approximately 3.6 million shares of common stock, par value $.001 of
eMagin and warrants exercisable for a period of three years from the
Closing Date for an aggregate of approximately 1.4 million shares of
Common Stock.
March 26, 2002 eMagin Corporation entered into a common stock purchase agreement and
related documents with Northwind Associates, Inc., a Cayman Islands
corporation, pursuant to which the Company may receive in periodic draw
downs at its option, subject to the terms and conditions of the
Transaction Agreements, up to $15,000,000 inequity financing over a three
year period.
May 21, 2002 eMagin Corporation and The Travelers Insurance Company entered into an
amendment agreement to extend the maturity date of the Convertible
Promissory Note.
June 3, 2002 eMagin Corporation and The Travelers Insurance Company entered into a
second amendment agreement to amend and extend the maturity date of the
Convertible Promissory Note.
June 06, 2002 eMagin Corporation and The Travelers Insurance Company entered into a
third amendment agreement to amend and extend the maturity date of the
Convertible Promissory Note.
June 10, 2002 eMagin Corporation and The Travelers Insurance Company entered into a
fourth amendment agreement to amend and extend the maturity date of the
Convertible Promissory Note.
73
June 17, 2002 eMagin Corporation and The Travelers Insurance Company entered into a
fifth amendment agreement to amend and extend the maturity date of the
Convertible Promissory Note.
June 18, 2002 eMagin Corporation and The Travelers Insurance Company entered into
memorandum of understanding to amend and extend the maturity date of the
Convertible Promissory Note.
June 24, 2002 eMagin Corporation and The Travelers Insurance Company entered into a
sixth amendment agreement to amend and extend the maturity date of the
Convertible Promissory Note.
July 3, 2002
eMagin Corporation and an Investor entered into a Secured Note
Purchase Agreement whereby Investors agreed to lend eMagin $200,000 in
exchange for $200,000 11.00% per annum Secured Promissory Note and
Warrants exercisable for a period of three years to purchase 300,000
shares of common stock of eMagin.
August 06, 2002 Change in registrant's Certifying Accountant, Arthur Andersen will no
longer serve as eMagin's independent auditor.
September 3, 2002 eMagin Corporation issued to each of two Investors 8% Series B Convertible
Debentures whereby each of the Investors agreed to lend eMagin $121,739
for a total of $243,478. Interest is payable on the Debentures at a rate
of 8% per annum.
September 24, 2002 eMagin Corporation engaged Grant Thornton LLP to serve as the company's
Independent auditors upon the recommendation of its audit committee and
Board of Directors.
October 04, 2002 eMagin Corporation and The Travelers Insurance Company entered into an
eighth amendment agreement to amend and extend the maturity date of the
Convertible Promissory Note.
eMagin and Mr. Mortimer D.A. Sackler entered into second amendment
agreement to amend and extend the maturity date of the Secured
Promissory Note and to amend and extend the maturity date of the Secured
Convertible Promissory Notes.
eMagin and Ginola Limited, an assignee of Rainbow Gate Corporation,
entered into a second amendment agreement to amend and extend the
maturity date of the Secured Convertible Promissory.
eMagin and Mr. Jack Rivkin entered into a second amendment
agreement to amend and extend the maturity date of the Secured
Convertible Promissory.
November 01, 2002 eMagin Corporation and The Travelers Insurance Company entered into a
ninth amendment agreement to amend and extend the maturity date of the
Convertible Promissory Note.
eMagin and Mr. Mortimer D.A. Sackler entered into a third amendment
agreement to amend and extend the maturity date of the Secured Promissory
Note and to amendment agreement to extend the maturity date of the
Secured Convertible Promissory Notes.
74
eMagin and Ginola Limited an assignee of Rainbow ate Corporation, entered
into a third amendment agreement to amend and extend the maturity date
of the Secured Convertible Promissory Note.
eMagin and Mr. Jack Rivkin entered into a third amendment agreement
to amend and extend the maturity date of the Secured Convertible
Promissory.
December 04, 2002 eMagin Corporation and The Travelers Insurance Company entered into a
tenth amendment agreement to amend and extend the maturity date of the
Convertible Promissory Note.
eMagin and Mr. Mortimer D.A. Sackler entered into a fourth amendment
agreement to amend and extend the maturity date of the Secured Promissory
Note. As well, eMagin and Sackler entered into a fourth amendment
agreement to amend and extend the maturity date of the Secured Convertible
Promissory Notes.
eMagin and Ginola Limited, an assignee of Rainbow Gate Corporation,
entered into a fourth amendment agreement to amend and extend the maturity
date of the Secured Convertible Promissory Note.
eMagin and Mr. Jack Rivkin entered into a fourth amendment agreement to
amend and extend the maturity date of the Secured Convertible Promissory
Note.
|
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 15th day of
April 2003.
EMAGIN CORPORATION
BY: /s/ Gary Jones
Gary Jones
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND ACTING CHIEF
FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
NAME TITLE DATE
- --------------------------- --------------------------- ---------------
/s/ Gary Jones President, Chief Executive Officer, and April 15, 2003
- --------------------------- Acting Chief Financial Officer and Director
(Principal Executive Officer)
Gary Jones
/s/ Claude Charles Director April 15, 2003
- ---------------------------
Claude Charles
/s/ Jack Goldman Director April 15, 2003
- ---------------------------
Dr. Jacob E Goldman
/s/ Ajmal Khan Director April 15, 2003
- ---------------------------
Ajmal Khan
/s/ Jack Rivkin Director April 15, 2003
- ---------------------------
Jack Rivkin
pursuant to 18 U.S.C. Section 1350. |
| * Each of the Exhibits noted by an asterisk is a management compensatory plan or arrangement. |
CERTIFICATION
I, Gary W. Jones, CEO and Acting CFO, certify that:
1. I have reviewed this annual report on Form 10-K of EMagin Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
April 15, 2003
/s/ Gary W. Jones
Chief Executive Officer