As filed with the Securities and Exchange Commission on May 30, 2003
An Exhibit List can be found on page II-__.
Registration No.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
-----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
eMagin Corporation
(Name of small business issuer in its charter)
Delaware 3674 56-1764501
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
2070 Route 52
Hopewell Junction, New York 12533
(845) 892-1900 (Address and telephone number of
principal executive
offices and principal place of business)
Gary W. Jones, President
eMagin Corporation
2070 Route 52
Hopewell Junction, New York 12533
(845) 892-1900
(Name, address and telephone number of agent for service)
Copies to:
Richard A. Friedman, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- ------------------ --------------------
Title of each class of Amount to be Proposed Proposed Amount of
securities to be registered registered (1) maximum maximum registration fee
offering aggregate
price per offering price
share (2)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $.001 par value 18,440,483 $0.72 $13,277,147.76 $1,221,50
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 16,610,904 $0.72 $11,959,850.88 $1,100.30
value issuable upon
conversion of notes
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 14,311,288 $0.72 $10,304,127.36 $947.97
value issuable upon exercise
of Warrants
------------------------------- -------------------- ---------------- ------------------ --------------------
Total $35,541,126.00 $3,269.77
------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes and the exercise of warrants held
by the selling stockholders.
In addition to the shares set forth in the table, the amount to be registered
includes an indeterminate number of shares issuable upon conversion of the notes
and exercise of the warrants, as such number may be adjusted as a result of
stock splits, stock dividends and similar transactions in accordance with Rule
416.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the last sale price as reported on the American Stock
Exchange on May 28, 2003, which was $0.72 per share.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY __, 2003
eMagin Corporation
49,362,675 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up
to 49,362,675 shares of our common stock, including up to 16,610,904 shares of
common stock underlying convertible notes and up to 14,311,288 issuable upon the
exercise of common stock purchase warrants. The selling stockholders may sell
common stock from time to time in the principal market on which the stock is
traded at the prevailing market price or in negotiated transactions. The selling
stockholders may be deemed underwriters of the shares of common stock, which
they are offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the American Stock Exchange under the
symbol "EMA". The last reported sales price per share of our common stock as
reported by the American Stock Exchange on May 28, 2003, was $0.72.
Investing in these securities involves significant risks. See "Risk Factors"
beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______, 2003.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
eMagin Corporation, with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
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PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
eMagin Corporation
eMagin Corporation designs, develops, and markets OLED (organic light
emitting diode)-on-silicon microdisplays and related information technology
solutions. We integrate OLED technology with silicon chips to produce
high-resolution microdisplays smaller than one-inch diagonally which, when
viewed through a magnifier, create a virtual image that appears comparable to
that of a computer monitor or a large-screen television. We shipped initial
samples of our first commercial microdisplay product in March 2001. We are now
accepting orders and shipping initial production quantities of our first two
commercial microdisplay products. These products are being applied or considered
for near-eye and headset applications in products such as entertainment and
gaming headsets, handheld Internet and telecommunication appliances,
viewfinders, and wearable computers to be manufactured by original equipment
manufacturer (OEM) customers.
Our principal offices are located at 2070 Route 52, Hopewell Junction,
New York 12533, and our telephone number is (845) 892-1900. We are a Delaware
corporation.
The Offering
Common stock offered by selling stockholders............ Up to 49,362,675 shares,including
up to 16,610,904 shares of common stock
underlying convertible notes and up to
14,311,288 shares issuable upon the exercise
of common stock purchase warrants, assuming
full conversion of the convertible notes and
the full exercise of the warrants. This
number represents 71.77% of the total number
shares to be outstanding following this
offering assuming the conversion and/or
exercise of all securities being registered.
Common stock to be outstanding after the offering........ Up to 68,781,255 shares
Use of proceeds.......................................... We will not receive any proceeds from the sale
of the common stock. However, we will receive
the sale price of any common stock we sell to
the selling stockholder upon exercise of the
warrants. We expect to use the proceeds
received from the exercise of the
warrants, if any, for general working capital
purposes. We have received gross proceeds
$2,850,000 from the sale of the convertible notes.
The proceeds received from the sale of the
convertible notes will be used for
business development purposes and general working
capital needs.
American Stock Exchange Symbol........................... EMA
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The above information regarding common stock to be outstanding after
the offering is based on 37,859,063 shares of common stock outstanding as of May
20, 2003 and assumes the subsequent conversion of our issued convertible notes,
with interest, and exercise of warrants by our selling stockholders.
To obtain funding for our ongoing operations, on April 25, 2003, we
entered into a global restructuring and secured note purchase agreement with a
group of several accredited institutional and individual investors whereby the
investors agreed to lend us $6,000,000 in exchange for (i) the issuance of
$6,000,000 principal amount of 9.00% secured convertible promissory notes due on
November 1, 2005 and (ii) warrants to purchase an aggregate of 7,749,921 shares
of common stock of eMagin (subject to certain customary anti-dilution
adjustments), which Warrants are exercisable for a period of three (3) years.
This prospectus relates to the resale of the common stock underlying
these notes and warrants. The investors are obligated to provide us with an
aggregate of $6,000,000 as follows:
o $1,800,000 was disbursed on April 25, 2003;
o $525,000 was disbursed on April 30, 2003;
o $525,000 was disbursed on May 15, 2003;
o $525,000 will be disbursed on June 15, 2003;
o $525,000 will be disbursed on June 25, 2003;
o $525,000 will be disbursed on July 15, 2003;
o $525,000 will be disbursed on August 15, 2003;
o $525,000 will be disbursed on September 15, 2003; and
o $525,000 will be disbursed on October 15, 2003.
Notwithstanding the foregoing, the purchasers of the Notes agreed that the
purchase of the Notes in each closings pursuant to the schedule set forth above
shall in no event take place later than 5 days after the effectiveness of this
registration statement.
Accordingly, we have received a total of $2,850,000 pursuant to the
Securities Purchase Agreement.
Interest is payable on the notes at a rate of 9% per annum and, at our
option, may be paid through the delivery of shares of our common stock
registered under the Securities Act in lieu of cash interest payments. Subject
to certain limitations, the notes may be converted, at the option of the holder,
in whole or in part, into common shares with a conversion price equal to
$0.7742, an amount equal to 105% of the volume weighted average of the closing
price of our common shares as reported on The American Stock Exchange by the
Wall Street Journal, New York City edition, for the five (5) trading days
immediately preceding April 25, 2003, the closing date of the $6,000,000
financing.
The exercise price of the warrants on a per share basis is $.8110, an
amount equal to 110% of the volume weighted average of the closing price of our
common shares as reported on The American Stock Exchange by the Wall Street
Journal, New York City edition, for the five (5) trading days immediately
preceding April 25, 2003, the closing date of the $6,000,000 financing.
6
As part of the April 2003 transaction, the existing holders of an aggregate
of $1,625,000 principal amount of secured notes that were purchased pursuant to
a secured note purchase agreement entered into as of November 27, 2001 and
amended as of January 14, 2002, and the holder of a $200,000 principal amount
secured note that was purchased pursuant to a secured note purchase agreement
entered into as of June 20, 2002, agreed to (a) amend their respective notes
issued to them, (b) terminate the respective security agreements dated November
20, 2001 and June 20, 2002 that were entered into in connection with the
purchase of their notes and allow the new investors to enter into a new security
agreement with them on a pari passu basis in order for eMagin to continue its
operations as a developer of virtual imaging technology, and (c) simultaneously
participate in this new round of financing (subject to the terms and conditions
set forth in the secured note purchase agreement). The amendments to the notes
included (i) amending the note issued on June 20, 2002 so as to provide that the
note shall be convertible and will have the same conversion price as the notes
issued pursuant to the April 2003 secured note purchase agreement, (ii)
extending the maturity dates of the notes from June 30, 2003 to November 1,
2005, and (iii) revising and clarifying certain of the other terms and
conditions of the notes, including provisions relating to interest payments,
conversions, default and assignments of the notes.
In connection with the completion of the transactions under the securities
purchase agreement, we also entered into a security agreement with the investors
dated as of April 25, 2003, and a registration rights agreement dated as of
April 25, 2003 providing the investors with certain registration rights under
the Securities Act of 1933, as amended, with respect to our common stock issued
or issuable in lieu of cash interest payments on the notes, upon conversion of
the notes and/or exercise of the warrants.
In addition to the foregoing, as a condition to and simultaneously with the
closing of the transaction pursuant to the secured note purchase agreement,
certain holders of our convertible notes agreed to convert approximately $4.9
million of notes and accrued interest into shares of our common stock, subject
to a "lock up" arrangement allowing only limited sales through private
transactions for their remaining shares through December 31, 2003. Specifically,
The Travelers Insurance Company agreed to convert their $1 million convertible
note plus related interest into our common stock at a conversion price of
approximately $0.53 per share, and SK Corporation has agreed to convert its $3
million convertible note and accrued interest into our common stock at an
approximate conversion price of approximately $1.28 per share. As further
conditions to the closing of the transaction pursuant to the secured note
purchase agreement, we have also entered into settlement or restructuring
agreements with certain of our other creditors to whom we owed approximately
$5.2 million of current payables, pursuant to which the creditors have agreed to
accept shares of our common stock in full or partial satisfaction of the amount
owed to them, or which allow us to either make discounted payments to them or to
make payments under more favorable payment terms than previously were in place.
Certain of the selling stockholders have contractually agreed to restrict
their ability to convert or exercise their warrants and receive shares of our
common stock such that the number of shares of common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of common stock. See the "Selling
Stockholders" and "Risk Factors" sections for a complete description of the
convertible Notes.
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RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Related To Our Financial Results
If we cannot operate as a going concern, our stock price will decline and
you may lose your entire investment. Our auditors included an explanatory
paragraph in their report on our financial statements for the year ended
December 31, 2002 which states that, due to recurring losses from operations
since our inception, there is substantial doubt about our ability to continue as
a going concern. Our financial statements for the three months ended March 31,
2003 do not include any adjustments that might result from our inability to
continue as a going concern. These adjustments could include additional
liabilities and the impairment of certain assets. If we had adjusted our
financial statements for these uncertainties, our operating results and
financial condition would have been materially and adversely affected.
We may not be able to execute our business plan and may not achieve
profitability. In the event that cash flow from operations is less than
anticipated and we are unable to secure additional funding to cover these added
losses, in order to preserve cash, we would be required to further reduce
expenditures and effect further reductions in our corporate infrastructure,
either of which could have a material adverse effect on our ability to continue
our current level of operations. To the extent that operating expenses increase,
sales or shipments are delayed, 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 to fund our current operations,
either from operations or through additional financing, we may be forced to
significantly reduce or curtail our current level of operations or to cease our
operations entirely. 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.
The financing commitments provided in April 2003 substantially improves our
probability of success, but there is no guarantee that any additional expenses
or delays may not adversely effect our cash requirements beyond that provided by
the recent financing. Any significant delay in revenue or increased expense
could result in the default of the secured note agreement, which could result in
a significant or total loss of any unsecured investments in eMagin.
We may not be able to satisfy The American Stock Exchange's continued
listing requirements. To maintain the listing of our common stock on the AMEX,
we are required to meet certain continued listing requirements, including, but
not limited to, the requirement that our common stock not sell for a substantial
period of time at a low price per share, the requirement that we maintain a
minimum of $2 million in shareholder equity. In its review of whether a share
price is too low or whether a reverse split is appropriate, the AMEX 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 AMEX 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
de-listed from the AMEX. De-listing 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. If the AMEX were to determine that we were failing to satisfy
the minimum shareholder equity standards, then we may be required to establish a
plan to increase the shareholder equity to over $2 million. The financing that
we completed in April 2003 was debt based, and did not directly increase
shareholder equity. Shareholder equity has improved through the related
conversion of other debt to stock and through negotiated write downs of debt
8
that are expected to be completed before June 30, 2003. Nevertheless, there will
still be a substantial gap remaining that may increase in subsequent quarters
before it begins to improve. If this additional equity cannot be accomplished
through operations, then it may be done through the sale of equity, which could
result in additional dilution to existing shareholders. The failure to satisfy
any AMEX concerns regarding the minimum equity standards could result in a
de-listing of our common stock from the AMEX. We currently have no outstanding
communications from regulatory agencies concerning noncompliance with or
deficiencies in financial reporting or other practices, other than requirement
for the 2001 annual meeting delay that is currently planned for July 2, 2003 in
conjunction with the 2002 annual meeting. Other as yet unidentified issues may
arise that could adversely affect the financial or the potential listing status
of the company.
We have a history of losses since our inception and expect to incur losses
for the foreseeable future. Accumulated losses excluding non-cash transactions
as of March 31, 2003, were $32.1 million and acquisition related non-cash
transactions were $101.9 million, which resulted in an accumulated net loss of
$134 million, the majority of which was related to the March 2000 merger and its
subsequent write-down of its goodwill. The non-cash losses were dominated by the
amortization and write-down of goodwill and purchased intangibles and write-down
of acquired in process research and development related to the March 2000
acquisition, and also included some non-cash stock-based compensation. We have
not yet achieved profitability and we can give no assurances that we will
achieve profitability within the foreseeable future as we fund operating and
capital expenditures in areas such as establishment and expansion of markets,
sales and marketing, operating equipment and research and development. We cannot
assure investors that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future.
We were previously primarily dependent on U.S. government contracts. The
majority of our revenues to date have been derived from research and development
contracts with the U.S. federal government. We cannot continue to rely on such
contracts for revenue. We plan to submit proposals for additional development
contract funding; however, funding is subject to legislative authorization and
even if funds are appropriated such funds may be withdrawn based on changes in
government priorities. No assurances can be given that we will be successful in
obtaining new government contracts. Our inability to obtain revenues from
government contracts could have a material adverse effect on our results of
long-term operations, unless substantial product or non-government contract
revenue offsets any lack of government contract revenue, unless substantial
product or non-government contract revenue offsets any lack of government
contract revenue
Risks Related To Our Intellectual Property
We rely on our license agreement with Eastman Kodak for the development of
our products, and the termination of this license, Eastman Kodak's licensing of
its OLED technology to others for microdisplay applications, or the sublicensing
by Eastman Kodak of our OLED technology to third parties, could have a material
adverse impact on our business. Our principal products under development utilize
OLED technology that we license from Eastman Kodak. We rely upon Eastman Kodak
to protect and enforce key patents held by Eastman Kodak, relating to OLED
display technology. Eastman Kodak's patents expire at various times in the
future. Our license with Eastman Kodak could terminate if we fail to perform any
material term or covenant under the license agreement. Since our license from
Eastman Kodak is non-exclusive, Eastman Kodak could also elect to become a
competitor itself or to license OLED technology for microdisplay applications to
others who have the potential to compete with us. The occurrence of any of these
events could have a material adverse impact on our business.
We may not be successful in protecting our intellectual property and
proprietary rights. We rely on a combination of patents, trade secret
protection, licensing agreements and other arrangements to establish and protect
our proprietary technologies. If we fail to successfully enforce our
intellectual property rights, our competitive position could suffer, which could
harm our operating results. Patents may not be issued for our current patent
applications, third parties may challenge, invalidate or circumvent any patent
issued to us, unauthorized parties could obtain and use information that we
regard as proprietary despite our efforts to protect our proprietary rights,
rights granted under patents issued to us may not afford us any competitive
9
advantage, others may independently develop similar technology or design around
our patents, our technology may be available to licensees of Eastman Kodak, and
protection of our intellectual property rights may be limited in certain foreign
countries. We may be required to expend significant resources to monitor and
police our intellectual property rights. Any future infringement or other claims
or prosecutions related to our intellectual property could have a material
adverse effect on our business. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Protection of intellectual
property has historically been a large yearly expense for eMagin. We have not
been in a financial position to properly protect all of our intellectual
property, and may not be in a position to properly protect our position or stay
ahead of competition in new research and the protecting of the resulting
intellectual property.
Risks Related To the Microdisplay Industry
The commercial success of the microdisplay industry depends on the
widespread market acceptance of microdisplay systems products. The market for
microdisplays is emerging. Our success will depend on consumer acceptance of
microdisplays as well as the success of the commercialization of the
microdisplay market. As an OEM supplier, our customer's products must also be
well accepted. At present, it is difficult to assess or predict with any
assurance the potential size, timing and viability of market opportunities for
our technology in this market. The viewfinder microdisplay market sector is well
established with entrenched competitors who we must displace.
The microdisplay systems business is intensely competitive. We do business
in intensely competitive markets that are characterized by rapid technological
change, changes in market requirements and competition from both other suppliers
and our potential OEM customers. Such markets are typically characterized by
price erosion. This intense competition could result in pricing pressures, lower
sales, reduced margins, and lower market share. Our ability to compete
successfully will depend on a number of factors, both within and outside our
control. We expect these factors to include the following: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and product or technology introductions by our competitors. Our
competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
The display industry is cyclical. The display industry is characterized by
fabrication facilities that require large capital expenditures and long lead
times go construct leading to frequent mismatches between supply and demand. The
OLED microdisplay sector may experience overcapacity if and when all of the
facilities presently in the planning stage come on line leading to a difficult
market in which to sell our products.
Competing products may get to market sooner than ours. Our competitors are
investing substantial resources in the development and manufacture of
microdisplay systems using alternative technologies such as reflective liquid
crystal displays, or LCDs, LCD-on-Silicon microdisplays, active matrix
electroluminescence and scanning image systems, and transmissive active matrix
LCDs. Color LCD-on-Silicon displays are currently in initial production, and may
be in higher volume production a year or more earlier than our microdisplays,
which could have a significant detrimental effect on our market opportunity.
Our competitors have many advantages over us. As the microdisplay market
develops, we expect to experience intense competition from numerous domestic and
foreign companies including well-established corporations possessing worldwide
manufacturing and production facilities, greater name recognition, larger retail
bases and significantly greater financial, technical, and marketing resources
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.
10
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 the
markets in which we expect to compete, prices of established products tend to
decline significantly over time. In order to maintain our profit margins over
the long term, we believe that we will need to continuously develop product
enhancements and new technologies that will either slow price declines of our
products or reduce the cost of producing and delivering our products. While we
anticipate many opportunities to reduce production costs over time, there can be
no assurance that these cost reduction plans will be successful. We may also
attempt to offset the anticipated decrease in our average selling price by
introducing new products, increasing our sales volumes or adjusting our product
mix. If we fail to do so, our results of operations would be materially and
adversely affected
Risks Related To Manufacturing
We expect to depend on semiconductor contract manufacturers to supply our
silicon integrated circuits and other suppliers of key components, materials and
services. We do not manufacture our silicon integrated circuits on which we
incorporate the OLED. 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, other electronics, materials and chemicals, and
equipment support. Our inability to obtain sufficient quantities of high quality
silicon integrated circuits or other necessary components, materials or services
on a timely basis could result in manufacturing delays, increased costs and
ultimately in reduced or delayed sales or lost orders which could materially and
adversely affect our operating results.
The manufacture of OLED-on-silicon is new and OLED microdisplays have not
been produced in significant quantities. We recently began commercial production
and we expect to go into high volume production later in 2003 or in 2004 to meet
anticipated demand for our products. If we are unable to produce our products in
sufficient quantity, we will be unable to attract customers. In addition, we
cannot assure you that once we commence volume production we will attain yields
at high throughput that will result in profitable gross margins or that we will
not experience manufacturing problems which could result in delays in delivery
of orders or product introductions.
We are dependent on a single manufacturing line. We initially expect to
manufacture our products on a single manufacturing line. If we experience any
significant disruption in the operation of our manufacturing facility or a
serious failure of a critical piece of equipment, we may be unable to supply
microdisplays to our customers. For this reason, some OEMs may also be reluctant
to commit a broad line of products to our microdisplays without a second
production facility in place. Interruptions in our manufacturing could be caused
by manufacturing equipment problems, the introduction of new equipment into the
manufacturing process or delays in the delivery of new manufacturing equipment.
Lead-time for delivery of manufacturing equipment can be extensive. No assurance
can be given that we will not lose potential sales or be unable to meet
production orders due to production interruptions in our manufacturing line. In
order to meet the requirements of certain OEMs for multiple manufacturing sites,
we will have to expend capital to secure additional sites and may not be able to
manage multiple sites successfully.
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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 including Gary W. Jones, our Chief Executive Officer. This is
especially an issue while the company staffing is small. We will also need to
recruit additional management in order to expand according to our business plan.
The failure to attract and retain additional management or personnel could have
a material adverse effect on our operating results and financial performance.
Attracting and retaining management and key staff may require significant option
grants and other compensation that may result in shareholder dilution or further
constrain the Company's cash position.
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, shareholder dilution, and our
operating results. In addition, difficulties in hiring and retaining technical
personnel could delay the implementation of our business plan.
Our business depends on new products and technologies. The market for our
products is characterized by rapid changes in product, design and manufacturing
process technologies. Our success depends to a large extent on our ability to
develop and manufacture new products and technologies to match the varying
requirements of different customers in order to establish a competitive position
and become profitable. Furthermore, we must adopt our products and processes to
technological changes and emerging industry standards and practices on a
cost-effective and timely basis. Our failure to accomplish any of the above
could harm our business and operating results.
We generally do not have long-term contracts with our customers. Our
business is operated on the basis of short-term purchase orders and we cannot
guarantee that we will be able to obtain long-term contracts for some time. Our
current purchase agreements can be cancelled or revised without penalty or a
minimal penalty, depending on the circumstances. In the absence of a backlog of
orders that can only be canceled with penalty, we plan production on the basis
of internally generated forecasts of demand, which makes it difficult to
accurately forecast revenues. If we fail to accurately forecast operating
results, out business may suffer and the value of your investment in the Company
may decline.
Our business strategy may fail if we cannot continue to form strategic
relationships with companies that manufacture and use products that could
incorporate our OLED-on-silicon technology. Our prospects will be significantly
affected by our ability to develop strategic alliances with OEMs for
incorporation of our OLED-on-silicon technology into their products. While we
intend to continue to establish strategic relationships with manufacturers of
electronic consumer products, personal computers, chipmakers, lens makers,
equipment makers, material suppliers and/or systems assemblers, there is no
assurance that we will be able to continue to establish and maintain strategic
relationships on commercially acceptable terms, or that the alliances we do
enter in to will realize their objectives. Failure to do so would have a
material adverse effect on our business.
We may 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 such 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.
12
Our business depends to some extent on international transactions. We
purchase needed materials from companies located abroad and may be adversely
affected by political and currency risk, as well as the additional costs of
doing business with a foreign entity. Some customers in other countries have
longer receivable periods or warranty periods. In addition, many of the OEMs
that are the most likely long-term purchasers of our microdisplays are located
abroad exposing us to additional political and currency risk. We may find it
necessary to locate manufacturing facilities abroad to be closer to our
customers which could give expose us to various risks including management of a
multi-national organization, the complexities of complying with foreign law and
custom, political instability and the complexities of taxation in multiple
jurisdictions.
Our business may expose us to product liability claims. Our business
exposes us to potential product liability claims. Although no such claim has
been brought against us to date, and to our knowledge no such claim is
threatened or likely, we may face liability to product users for damages
resulting from the faulty design or manufacture of our products. While we plan
to maintain product liability insurance coverage, there can be no assurance that
product liability claims will not exceed coverage limits, fall outside the scope
of such coverage, or that such insurance will continue to be available at
commercially reasonable rates, if at all.
Our business is subject to environmental regulations and possible liability
arising from potential employee claims of exposure to harmful substances used in
the development and manufacture of our products. We are subject to various
governmental regulations related to toxic, volatile, experimental and other
hazardous chemicals used in our design and manufacturing process. Our failure to
comply with these regulations could result in the imposition of fines or in the
suspension or cessation of our operations. Compliance with these regulations
could require us to acquire costly equipment or to incur other significant
expenses. We develop, evaluate and utilize new chemical compounds in the
manufacture of our products. While we attempt to ensure that our employees are
protected from exposure to hazardous materials we cannot assure you that
potentially harmful exposure will not occur or that we will not be liable to
employees as a result.
Risks Related To Our Stock
The substantial number of shares that are or will be eligible for sale
could cause our common stock price to decline even if the Company is successful.
Sales of significant amounts of common stock in the public market, or the
perception that such sales may occur, could materially affect the market price
of our common stock. These sales might also make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate. As of May 20, 2003, ,we have outstanding options to
purchase 5,811,681 shares. There are also outstanding warrants to purchase
14,552,649 shares of common stock. The company also has currently outstanding $
4,675,000 of convertible secured notes Conversion of the secured notes is not
certain, even if the share price increases substantially. If the secured notes
were to convert, they would result in additional outstanding common shares. The
company has submitted a proposal in its proxy statement requesting authorization
from shareholders to increase the number of authorized common shares to 200
million which, if issued, could result in significant dilution of our current
common stock.
We have a staggered Board of Directors and other anti-takeover provisions,
which could inhibit potential investors or delay or prevent a change of control
that may favor you. Our Board of Directors is divided into three classes and our
Board members are elected for terms that are staggered. This could discourage
the efforts by others to obtain control of the company. Some of the provisions
of our certificate of incorporation, our bylaws and Delaware law could, together
or separately, discourage potential acquisition proposals or delay or prevent a
change in control. In particular, our board of directors is authorized to issue
up to 10,000,000 shares of preferred stock (less any outstanding shares of
preferred stock) with rights and privileges that might be senior to our common
stock, without the consent of the holders of the common stock.
13
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. In addition, we have received gross proceeds $2,850,000 from the sale
of the convertible notes in April 2003 and the investors are obligated to
provide the remaining $3,150,000 to the company pursuant to a funding schedule
set forth in the April 2003 note purchase agreement, provided that all funding
will be completed within five business days of this prospectus being declared
effective. The proceeds received from the sale of the convertible notes was used
for business development purposes and general working capital needs
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the American Stock Exchange under the
symbol "EMA" since March 17, 2000. From November 18, 1997 to March 16, 2000 our
common stock had been quoted on the OTC Bulletin Board under our prior name
"Fashion Dynamics Corp." under the symbol "FSHD." Prior to January 2000, there
had been no public trading of FSHD. The table below sets forth, for the periods
indicated, the high and low closing prices per share of the common stock as
reported on the American Stock Exchange.
High Low
---- ---
2003
First Quarter 1.00 0.55
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 May 20, 2003, there were 37,859,063 shares of common stock
outstanding.
As of May 20, 2003, there were approximately 447 stockholders of record of
our common stock, respectively. This does not reflect those shares held
beneficially or those shares held in "street" name.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
14
Equity Compensation Plan Information
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance
outstanding options, warrants and rights
warrants and rights
(a) (b) (c)
Equity compensation plans approved 5,811,681 0.73 88,319
by security holders
Equity compensation plans not 6,940,504 0.42 2,327,554
approved by security holders
Total 12,752,185 0.56 2,415,873
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
Overview
We design and manufacture miniature display modules, which we refer to as
OLED-on-silicon-microdisplays, primarily for incorporation into the products of
other manufacturers. Microdisplays are typically smaller than a postage stamp,
but when viewed through a magnifier they can contain all of the information
appearing on a high-resolution personal computer screen. Our microdisplays use
organic light emitting diodes, or OLEDs, which emit light themselves when a
current is passed through them. Our technology permits OLEDs to be coated onto
silicon chips to produce high resolution OLED-on-silicon microdisplays.
We believe that our OLED-on-silicon microdisplays offer a number of
advantages in near to the eye applications over other current microdisplay
technologies, including lower power requirements, less weight, fast video speed
without flicker, and wider viewing angles. In addition, many computer and video
electronic system functions can be built directly into the OLED-on-silicon
microdisplay, resulting in compact systems with lower expected overall system
costs relative to alternate microdisplay technologies.
Since our inception in 1996, we derived substantially all of our revenues
from fees paid to us under research and development contracts, primarily with
the U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. As of March 31, 2003, we had
recognized approximately $2.6 million from sales of our products, and have a
backlog of more than $27 million in products ordered for delivery through 2004.
These products are being applied or considered for near-eye and headset
applications in products such as entertainment and gaming headsets, handheld
Internet and telecommunication appliances, viewfinders, and wearable computers
to be manufactured by original equipment manufacturer (OEM) customers. We have
also shipped a limited number of prototypes of our eGlass II Head-wearable
Display systems. In addition to marketing OLED-on-silicon microdisplays as
components, we also offer microdisplays as an integrated package, which we call
Microviewer, that includes a compact lens for viewing the microdisplay and
electronic interfaces to convert the signal from our customer's product into a
viewable image on the microdisplay. Through our wholly owned subsidiary, Virtual
Vision, Inc., we are also developing head-wearable displays that incorporate our
Microviewer.
We license our core OLED technology from Eastman Kodak and we have
developed our own technology to create high performance OLED-on-silicon
microdisplays and related optical systems. We believe our technology licensing
agreement with Eastman Kodak, coupled with our own intellectual property
portfolio, gives us a leadership position in OLED and OLED-on-silicon
microdisplay technology. We are the only company to demonstrate publicly and
market full-color OLED-on-silicon microdisplays.
16
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.
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 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. As of January 1,
2003, we are no longer a development stage Company. We have transitioned to
manufacturing our product and intend to significantly increase our marketing,
sales, and research and development efforts, and expand our operating
infrastructure. Most of our operating expenses are fixed in the near term. If we
are unable to generate significant revenues, our net losses in any given period
could be greater than expected.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission 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.
17
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
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 on
January 1, 2002 the Company adopted 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.
18
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues
Revenues for the three months ended March 31, 2003 were $0.5 million, as
compared to $0.2 million for the three months ended March 31, 2002. Current year
revenues consisted totally of product sales and increased by $0.3 million for
the three months ended March 31, 2003, as compared to the three months ended
March 31, 2002. We ended the first quarter with a backlog of over $27 million
sales orders primarily for delivery through 2004. Government R&D contract
revenues decreased by $14 thousand, from $14,000 to $0 for the three months
ended March 31, 2003, as compared to the three months ended March 31, 2002.
Government R&D contract revenues will remain significantly lower in 2003 as the
company focuses on product revenues rather than performing Government R&D
contracts, although product revenues include sales to government contractors
which are funded by Government development or procurement contracts.
Costs and Expenses
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs associated with
production, inventory loss and outside commissions. Cost of goods sold for the
three months ended March 31, 2003 was $1.1 million. We were not in full
production in 2002 and had no cost of goods sold to compare against. Gross
profit (loss) was ($.7) million for the three months ended March 31, 2003 due
primarily to line stoppages resulting from lack of production materials as well
as machinery downtime.
Research and Development
Research and development expenses for previous years include salaries,
development materials, equipment leases and depreciation expenses, electronics,
rent, utilities and costs associated with operating the Company's manufacturing
facility. In 2003, research and development expenses included salaries,
development materials and other costs specifically allocated to the development
of new products. Gross research and development expenses for the three months
ended March 31, 2003 were $22 thousand. For the same period in 2002, the
Company's gross research and development expenses were $2.2 million. Of these
amounts, the Company received $0 and $27 thousand, respectively, in cost sharing
from the U.S. Government. The $2.2 million decrease in gross expenses for the
three months ended March 31, 2003, as compared to the three months ended March
31, 2002, reflects reduction in staffing and reduction in expenditures related
to the company's difficult cash position.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of
salaries and fees for professional services, legal fees incurred in connection
with patent filings and related matters, amortization, as well as other
marketing and administrative expenses. Selling, general and administrative
expenses, for the three months ended March 31, 2003 were $1.4 million as
compared to $3.5 million for the three months ended March 31, 2002. The $2.1
million decrease was primarily due to decreases in marketing activity, personnel
costs, and patent filings resulting from an overall management effort to reduce
costs. We expect marketing, general and administrative expenses to increase in
future periods as we add to our sales staff and make additional investments in
marketing activities. Included in selling, general and administrative expenses
are non-cash expenses related to stock-based compensation amortization. Non-cash
stock-based compensation expense for the three months ending March 31, 2003 was
$0.1 million as compared to $1.3 million for the three months ended March 31,
2002. The non-cash stock-based compensation expense for the three months ending
March 31, 2003 decreased by $1.2 million. Non-cash stock-based compensation
costs are the result of amortization of the intrinsic value ascribed for the
issuance of stock options at below fair market values. The amortization is done
over the vesting period of such options.
19
Amortization of Purchased Intangibles
Amortization and write down of purchased intangibles expense for the three
months ending March 31, 2003 was $0.3 million as compared to $0.6 million for
the three months ended March 31, 2002. The decrease of $0.3 million in these
non-cash charges is the result of the purchased intangibles being fully
amortized.
Other Income (Expense)
Other expenses for the three months ending March 31, 2003 were $0.2 million
as compared to $1.0 million for the three months ended March 31, 2002. The
decrease of $0.8 million in expense for this non-cash charge was due primarily
to the decrease in debt discount from the beneficial conversion of a bridge loan
entered into by the company in and interest expense and penalties on additional
debt in 2002 that was not repeated in 2003.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues
Revenues decreased to $2.1 million for the year ended December 31, 2002
from $5.8 million for the year ended December 31, 2001, representing a decrease
of 64%. This decrease was due primarily to the expiration of Government
contracts and the concentration of the company on transitioning from research
and development to product manufacturing and sales.
Research and Development Expenses
Gross research and development expenses decreased to $7.3 million for the
year ended December 31, 2002 from $12.7 million for the year ended December 31,
2001, representing a 43% decrease. Of these amounts, we received $0.3 million in
cost sharing from the U.S. government for the year ended December 31, 2002, and
$1.6 million for the year ended December 31, 2001. The $5.4 million decrease in
gross expenses for the year ended December 31, 2002 reflects reduction in
staffing and reduction in expenditures related to the company's difficult cash
position.
Amortization and Write-Down of Intangibles
Amortization and write down of goodwill and purchased intangibles expense
decreased to $1.3 million for the year ended December 31, 2002 from $50 million
for the year ended December 31, 2001. The $48.7 million decrease is primarily
the result of the goodwill impairment charge recorded in 2001.
Selling, General and Administrative Expenses
General and administrative expenses decreased to $4.5 million for the year
ended December 31, 2002 from $7.4 million for the year ended December 31, 2001.
The decrease of $2.9 million in selling, general and administrative expenses was
due primarily to changes in personnel costs, patent filings, and legal fees. We
expect marketing, general and administrative expense to increase in future
periods as we add to our sales staff and make additional investments in
marketing activities. In addition, non-cash stock-based compensation expense was
$1.6 million for the year ended December 31, 2002 versus $2.8 million for the
year ended December 31, 2001. The activity, for the years ended December 31,
2002 and 2001, reflects the amortization of deferred compensation costs related
to the issuance of stock options, warrants issued and re-priced warrants and
options at below fair market values in the first quarter of 2000.
Other Income (Expense)
Other expenses increased to $2.3 million for the year ended December 31,
2002 from $1.4 million for the year ended December 31, 2001. The increase of
$0.9 million was due primarily to increased interest expense. Interest expense
increase was primarily due to the beneficial conversion of debt totaling
approximately $888,000. Net Loss/Net Loss Per Common Share
20
Liquidity & Capital Resources
Current Financial Position and Need for Additional Financing
In April 2003, the Company closed on a $6 million financing (see Changes in
Securities and Use of Proceeds, Part II Item - 2). We estimate $6 million to be
the minimum required to support us until we begin realizing profits from
production in sufficient amount to become profitable through production alone,
No assurance can be given that our estimates will prove to be correct, or that
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.
eMagin has been negotiating with certain creditors regarding operating
leases and certain payables where eMagin is in default on payments. During April
2003, eMagin reached agreements with certain creditors and these agreements were
primarily conditioned upon actions to be taken and installment payments to be
made by eMagin through June 30, 2003. Although eMagin will make every effort to
comply with the requirements, unforeseen events may make it impossible to
comply. Serious financial consequences could occur should we default on the
agreements.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future and that our
operating expenses will be the principal use of our cash. In particular, we
expect that salaries for employees engaged in production operations, purchase of
inventory and expenses of increased sales and marketing efforts would be the
principle uses of cash. We expect that our cash requirements over the next 12
months will be met by a combination of additional equity or debt financing, and
revenues generated by sales. We expect to continue to devote substantial
resources to manufacturing, marketing and selling our products.
eMagin has experienced a net loss applicable to common stockholders of
$14.9 million and $2.4 during the year ending December 31, 2002 and the three
months ending March 31, 2003. eMagin had negative cash flows from operations for
the year ending December 31, 2002 of $5.6 million and $54,000 for the three
months ending March 31, 2003As of April 11, 2003 eMagin was in default of its
loan and equity agreements due to our failure to register shares, was unable to
obtain replacement financing, and was not in compliance with several financial
covenants under the credit agreement. We subsequently closed on a $6 million
financing on April 25, 2003 and are registering the shares per our agreements.
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.
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.
Substantially all of our revenues to date have been derived from research
and development contracts with the U.S. federal government. We received revenues
from government contracts of $0 for the three months ended March 31, 2003 as
compared to $14 thousand for the three months ended March 31, 2002. These
figures do not include our government contracts in which we provided a
cost-share. We anticipate that our total revenues from government contracts in
2003 will be substantially lower than in previous years. We currently have no
contracts that we are actively engaged on. We plan to submit proposals for
additional development contract funding; however, funding is subject to
legislative authorization and even if funds are appropriated, they may be
withdrawn based on changes in government priorities.
21
We have received purchase agreements for our products to be delivered now
through 2004 and into early 2005. Management believes that the prospects for
growth of product revenue remain high.
Our customer schedules have been necessarily pushed out due to our
financing issues, but these shipments are being renegotiated now that the
funding is committed. We do not currently anticipate any significant loss of
business as a result of our prior financing related product ramp delays, other
than the shift in out of delivery schedules. We must ramp our supplies and
staffing quickly and efficiently to meet the anticipated shipping schedules. A
significant level of effort will be required.
Orders for supplies were placed during the 2-3 weeks after the financing. A
3-month supply delivery schedule and one month in house production cycle is
anticipated before shipments can begin ramping. Some earmarked supplies are
already in hand for customers that provided prepayments for supplies in late
2002 and for small quantity deliveries. Initial supply orders will be modest
until we insure our supplier quality is high after a long stagnant period of
time. Continuous monthly orders of wafers, Circuit Boards, and other supplies
are planned to insure a continuing product flow to customers, after the supplier
re-qualification cycle.
We are in the early phases of production, although our progress has been
impeded by our prior cash position. Anticipated increased shipments in the first
quarter were delayed, primarily due to our inability to purchase raw materials.
Based on the planned schedule, we should have resolved our supplier issues and
be able to product quantities in the late third Quarter.
Our cash requirements depend on numerous factors, including completion of
our product development activities, ability to commercialize our products,
timely market acceptance of our products and our customer's product, and other
factors. We expect to carefully devote capital resources to continue our
development programs directed at commercializing our products in our target
markets, hire and train additional staff, expand our research and development
activities, develop and expand our manufacturing capacity and begin production
activities. Any delays could change the cash requirements of the company. While
we believe that we are in position to handle a significant production increase,
there can be no assurance that we will not experience some issues relating to
yield and throughput risk that could result in production delays.
To obtain funding for our ongoing operations, on April 25, 2003, we entered
into a global restructuring and secured note purchase agreement with a group of
several accredited institutional and individual investors whereby the investors
agreed to lend us $6,000,000 in exchange for (i) the issuance of $6,000,000
principal amount of 9.00% secured convertible promissory notes due on November
1, 2005 and (ii) warrants to purchase an aggregate of 7,749,921 shares of common
stock of eMagin (subject to certain customary anti-dilution adjustments), which
Warrants are exercisable for a period of three (3) years.
This prospectus relates to the resale of the common stock underlying these
notes and warrants. The investors are obligated to provide us with an aggregate
of $6,000,000 as follows:
o $1,800,000 was disbursed on April 25, 2003;
o $525,000 was disbursed on April 30, 2003;
o $525,000 was disbursed on May 15, 2003;
o $525,000 will be disbursed on June 15, 2003;
o $525,000 will be disbursed on June 25, 2003;
o $525,000 will be disbursed on July 15, 2003;
o $525,000 will be disbursed on August 15, 2003;
o $525,000 will be disbursed on September 15, 2003; and
22
o $525,000 will be disbursed on October 15, 2003.
Notwithstanding the foregoing, the purchasers of the Notes agreed that the
purchase of the Notes in each closings pursuant to the schedule set forth above
shall in no event take place later than 5 days after the effectiveness of this
registration statement.
Accordingly, we have received a total of $2,850,000 pursuant to the Securities
Purchase Agreement. These funds from the sale of the convertible notes will be
used for business development purposes, working capital needs, and legal
settlements.
The notes bear interest at 9% per annum, mature on November 1, 2005, and
are convertible into our common stock, at a price of $07742, which represents an
amount equal to 105% of the volume weighted average of the closing price of our
common shares as reported on The American Stock Exchange by the Wall Street
Journal, New York City edition, for the five (5) trading days immediately
preceding April 25, 2003, the closing date of the $6,000,000 financing.. The
full principal amount of the convertible debentures is due upon default under
the terms of convertible debentures. The warrants are exercisable until five
years from the date of issuance at a purchase price of $.8110, which represents
an amount equal to 110% of the volume weighted average of the closing price of
our common shares as reported on The American Stock Exchange by the Wall Street
Journal, New York City edition, for the five (5) trading days immediately
preceding April 25, 2003, the closing date of the $6,000,000 financing.. In
addition, we have granted the investors a security interest in substantially all
of our assets and intellectual property and registration rights.
As part of the April 2003 transactions, the existing the holders of an
aggregate of $1,625,000 principal amount of secured notes that were purchased
pursuant to a secured note purchase agreement entered into as of November 27,
2001 and amended as of January 14, 2002,and the holder of a $200,000 principal
amount secured note that was purchased pursuant to a secured note purchase
agreement entered into as of June 20, 2002, agreed to (a) amend their respective
notes issued to them, (b) terminate the respective security agreements dated
November 20, 2001 and June 20, 2002 that were entered into in connection with
the purchase of their notes and allow the new investors to enter into a new
security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in this new round of financing (subject to the terms
and conditions set forth in the secured note purchase agreement). The amendments
to the notes included (i) amending the note issued on June 20, 2002 so as to
provide that the note shall be convertible and will have the same conversion
price as the notes issued pursuant to the April 2003 secured note purchase
agreement, (ii) extending the maturity dates of the notes from June 30, 2003 to
November 1, 2005, and (iii) revising and clarifying certain of the other terms
and conditions of the notes, including provisions relating to interest payments,
conversions, default and assignments of the notes.
In connection with the completion of the transactions under the securities
purchase agreement, we also entered into a security agreement with the investors
dated as of April 25, 2003, and a registration rights agreement dated as of
April 25, 2003 providing the investors with certain registration rights under
the Securities Act of 1933, as amended, with respect to our common stock issued
or issuable in lieu of cash interest payments on the notes, upon conversion of
the notes and/or exercise of the warrants.
In addition to the foregoing, as a condition to and simultaneously with the
closing of the transaction pursuant to the secured note purchase agreement,
certain holders of our convertible notes agreed to convert approximately $4.9
million of notes and accrued interest into shares of our common stock, subject
to a "lock up" arrangement allowing only limited sales through private
transactions for their remaining shares through December 31, 2003. Specifically,
The Travelers Insurance Company agreed to convert their $1 million convertible
note plus related interest into our common stock at a conversion price of
approximately $0.53 per share, and SK Corporation has agreed to convert its $3
million convertible note and accrued interest into our common stock at an
approximate conversion price of approximately $1.28 per share. As further
conditions to the closing of the transaction pursuant to the secured note
purchase agreement, we have also entered into settlement or restructuring
agreements with certain of our other creditors to whom we owed approximately
$5.2 million of current payables, pursuant to which the creditors have agreed to
accept shares of our common stock in full or partial satisfaction of the amount
owed to them, or which allow us to either make discounted payments to them or to
make payments under more favorable payment terms than previously were in place.
23
Certain of the selling stockholders have contractually agreed to restrict
their ability to convert or exercise their warrants and receive shares of our
common stock such that the number of shares of common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of common stock. See the "Selling
Stockholders" and "Risk Factors" sections for a complete description of the
convertible Notes.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB, issued SFAS, No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
This statement provides that companies should recognize the asset retirement
cost at its fair value as part of the cost of the asset and classify the accrued
amount as a liability. The asset retirement liability is then accreted to the
ultimate payout as interest expense. The initial measurement of the liability
would be subsequently updated for revised estimates of the discounted cash
outflows. The Statement will be effective for fiscal years beginning after June
15, 2002. On January 31, 2003, eMagin adopted SFAS No. 143. The adoption of this
standard did not have a significant impact on eMagin's consolidated financial
position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the requirement under SFAS 4 to
aggregate and classify all gains and losses from extinguishment of debt as an
extraordinary item, net of related income tax effect. This statement also amends
SFAS 13 to require that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS No. 145 requires reclassification
of gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishment that do not meet the criteria for
extraordinary item in Accounting Principles Board Opinion ("APB") 30. The
statement is effective for fiscal years beginning after May 15, 2002 with early
adoption encouraged. The Company adopted SFAS No. 145 on January 1, 2003, the
adoption had no effect on the financial results of the Company..
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
eMagin adopted SFAS No. 146 as of January 1, 2003. Upon adoption of SFAS 146,
there was no effect on its financial position, cash flows or results of
operations.
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF
00-21"), "Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how
to account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both that are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are separate units of accounting. The guidance can affect the
timing of revenue recognition for such arrangements, even though it does not
change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus will be
applicable to agreements entered into in fiscal years beginning after June 15,
2003 with early adoption permitted. Additionally, companies will be permitted to
apply the consensus guidance to all existing arrangements as the cumulative
effect of a change in accounting principle in accordance with APB Opinion No.
20, "Accounting Changes." The Company is assessing, but at this point does not
believe the adoption of EIFT 00-21 will have a material impact on its financial
position, cash flows or results of operations.
24
On April 30, 2003, the FASB issued Statement No. 149 ("SFAS No. 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement No. 133, and
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003 and is to be applied prospectively.
The Company has not yet completed its analysis of SFAS No. 149 and, therefore,
the effect on the Company's combined financial statements of the implementation
of SFAS No. 149, when effective, has not yet been determined.
On May 15, 2003, the FASB issued Statement No. 150 ("FAS No. 150"),
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. FAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). FAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments.
o mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets
o instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets; includes put options and
forward purchase contracts
o obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuers'
shares.
FAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. Most of the guidance in FAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company has not yet completed its analysis of
SFAS No. 150 and, therefore, the effect on the Company's combined financial
statements of the implementation of SFAS 150, when effective, has not yet been
determined.
25
BUSINESS
Introduction
eMagin Corporation designs, develops, and markets OLED's, or organic light
emitting diodes, -on-silicon microdisplays and related information technology
solutions. We integrate OLED technology with silicon chips to produce
high-resolution microdisplays smaller than one-inch diagonally which, when
viewed through a magnifier, create a virtual image that appears comparable to
that of a computer monitor or a large-screen television. Our products enable our
original equipment manufacturer, or OEM, customers to develop and market
improved or new electronic products. Our first commercial product, the SVGA+, or
Super Video Graphics Array, plus 52 added columns of data, OLED microdisplay was
first offered for sampling in 2001, and our first SVGA-3D, the Super Video
Graphics Array plus built-in stereovision capability, OLED microdisplay was
first shipped in February 2002. We are now accepting conditional purchase
agreements for larger quantities of our first two commercial microdisplay
products. These products are being applied or considered for near-eye and
headset applications in products such as entertainment and gaming headsets,
handheld Internet and telecommunication appliances, viewfinders, and wearable
computers to be manufactured by OEM customers for military, medical, industrial,
and consumer applications. We market our products in North American, Europe, and
Asia.
Our OLED-on-silicon microdisplays offer a number of advantages over current
liquid crystal microdisplays, including increased brightness, lower power
requirements, less weight and wider viewing angles. Using our active matrix OLED
technology, many computer and video electronic system functions can be built
directly into the OLED-on-silicon microdisplay, resulting in compact systems
with expected lower overall system costs relative to alternate microdisplay
technologies. We license fundamental OLED technology from Eastman Kodak and we
have developed our own technology to create high performance OLED-on-silicon
microdisplays and related optical systems. The worldwide market for OLED
displays amounted to $91 million in 2002, will reach $215 million in 2003 and
will grow to $3.1 billion in 2009, for a compound annual growth rate of 56
percent from 2003 to 2009, according to iSuppli/Stanford Resources research
reported in April 2003.
As the first to exploit OLED technology for microdisplays, and with our
partners and intellectual property, we believe that we enjoy a significant
advantage in the commercialization of this display technology. We are the only
company to announce, publicly show and sell full-color OLED-on-silicon
microdisplays.
Our wholly owned subsidiary, Virtual Vision, Inc., provides added value
services to our customers by providing non-recurring engineering support for
virtual imaging subsystem design and prototyping, as well as by creating
standardized optic and electronics interfaces to our displays to accelerate the
time to market of our new potential customers.
Industry Overview
The overall flat panel display industry is predicted to grow to over $69
billion in 2005, according to market research by DisplaySearch. Within the flat
panel industry there are various sizes and applications of flat panel displays,
ranging from wall size signage to calculator and viewfinder displays. Displays
are sold as independent products (such as flat TVs) or as components of other
systems (such as laptop computers). Our products target one segment of the flat
panel industry - near-eye microdisplays.
Near-eye microdisplays are used in small optically magnified devices such
as video headsets, camcorders, viewfinders and other portable devices.
Microdisplays are typically of such high resolution that they are only
practically viewed with magnifying optics. Although the displays are typically
physically smaller than a postage stamp, they can provide a magnified viewing
area similar to that of a full size computer screen. For example, when magnified
through a lens, a high-resolution 0.5-inch to 0.75-inch diagonal display can
appear comparable to a 19 to 21-inch diagonal computer screen at about 2 feet
from the viewer or a 60-inch TV screen at about 6 feet. One version of our
optics recreates the viewing and sound experience of sitting in the middle seat
of a typical movie theater.
26
The microdisplay market, according to McLaughlin Consulting Group in a
report issued in November 2002, is expected to grow on a unit basis at 20% per
year, from a base of less than $1 billion in 2002 to more than $1.4 billion by
2006. Another leading industry market research organization, DisplaySearch,
projects that the overall microdisplay market is expected to grow to $3.1
billion by 2005.
We believe that the most significant driver of the microdisplay market is
growing consumer demand for mobile access to larger volumes of information and
entertainment in smaller packages. This desire for mobility has resulted in the
development of microdisplay products in two categories: (i) near-eye
microdisplays incorporated in products such as viewfinders, digital cameras,
video cameras and personal viewers for cell phones and (ii) headset-application
platforms which include mobile devices such as notebook and sub-notebook
computers, wearable computers, portable DVD systems, games and other
entertainment.
Until now, microdisplay technologies have not simultaneously met all of the
requirements for high resolution, full color, low power consumption, brightness,
lifetime, size and cost which are required for successful commercialization in
OEM consumer products. We believe that our new OLED-on-silicon microdisplay
product line meets these requirements better than alternate products and will
help to enable virtual imaging to emerge as an important display industry
segment.
Our Approach: OLED-on-Silicon Microdisplays and Optics
There are two basic classes of organic light emitting diode, or OLED,
technology, dubbed molecular and polymer. Our microdisplays are currently based
upon active matrix molecular OLED technology, which we call OLED-on-silicon
because we build the displays directly on silicon chips. Our OLED-on-silicon
technology uniquely permits millions of individual low-voltage light sources to
be built on low-cost, silicon computer chips to produce single color, white, or
full-color display arrays. OLED-on-silicon microdisplays offer a number of
advantages over current liquid crystal microdisplays, including increased
brightness, lower power requirements, less weight and wider viewing angles.
Using our OLED technology, many computer and video electronic system functions
can be built directly into the silicon chip, under the OLED film, resulting in
very compact, integrated systems with lowered overall system costs relative to
alternate technologies.
We have developed our own proprietary technology to create high performance
OLED-on-silicon microdisplays and related optical systems and we license
fundamental OLED technology from Eastman Kodak. (See "Intellectual Property" and
"Strategic Relationships") We expect that the integration of our OLED-on-silicon
microdisplays into mobile electronic products will result in lower overall
system costs to our original equipment manufacturer customers.
We believe that our OLED-on-silicon microdisplays represent a new
generation of microdisplay technology. Because our microdisplays generate and
emit light, they have a wider viewing angle than competing liquid crystal
microdisplays, and because they have the same high brightness at all forward
viewing angles, our microdisplays permit a large field-of-view and superior
optical image. The wider viewing angle of our display results in the following
superior optical characteristics:
o the user does not need to as accurately position the head-wearable
display to the eye;
o the image will change minimally with eye movement and appear more
natural; and
o the display can be placed further from the eye and not cut off part of
the image.
In addition, our OLED-on-silicon microdisplays offer faster response times
and use less power than competitive liquid crystal microdisplay systems. We
expect that our integrated electronics and unique OLED characteristics, coupled
with our lenses, will result in lower overall system costs for OEMs.
Our OLED microdisplay stores, until refreshed, all the color and luminance
value information at each of the more than 1.5 million picture elements, or
pixels, in the display array, eliminating the flicker or color breakup seen by
most other high-resolution microdisplay technologies. Even power efficient frame
rates as low 30 Hz can usually be used effectively. Power consumption at the
system level is expected to be the lowest of any full-color, full-video SVGA
resolution range, large view microdisplay on the market. The OLED's ability to
emit light at wide angles allows customers to create large field of view
27
(approx. 40 degrees), wide image capture range images from very compact,
low-cost, one-piece optical systems. The display contains the majority of the
electronics required for connection to the RGB (red, green, blue signal) port of
a portable computer imbedded in its silicon chip backplane, thereby eliminating
many other components required by other display technologies such as D-A
converters, application-specific integrated circuits (ASICs), light sources,
multiple optical elements, and other components. We believe that these features
enable our new class of microdisplay to potentially be the most compact, highest
image quality, and lowest cost solution for high resolution near-eye
applications, once in full production.
We have commercialized two products, our SVGA+ resolution microdisplay ,
which contains 1.53 million picture elements, and our stereovision-capable
SVGA-3D microdisplay, which contains 1.44 million picture elements. We are
currently developing a military and industrial oriented ultra-high-luminance
monochrome SXGA integrated circuit, which contains 1280x1024 picture elements,
that is due for completion in late 2003 or 2004. We sell our OLED-on-silicon
microdisplays for use as components by customers who prefer to design and build
their own lenses or coupled with our own optics. We also plan to offer OLED
processing on our customers' integrated circuits to some OEMs who design their
own integrated circuits. We provide Developer Kits, which include a color SVGA+
resolution microdisplay and associated electronics required for OEMs to build
and test new products. This developer kit provides OEMs with the first
opportunity for evaluation of an OLED-on-silicon microdisplay.
Our Products
We offer our products to Original Equipment Manufacturers and other large
volume buyers as both separate components and integrated bundles in a
three-tiered platform:
(1) OLED-on-silicon microdisplays for integration into OEM products for
consumer, industrial, and military markets;
(2) Microviewer(TM) modules that incorporate our OLED-on-silicon
microdisplays with compact lenses and electronic interfaces for integration into
OEM products for consumer, industrial, and military markets. These products have
been prototyped and are planned;
(3) Head-wearable display systems that will incorporate our
Microviewers(TM) for consumer and industrial markets. These products have been
prototyped and are planned.
We also plan to offer engineering support, enabling customers to quickly
integrate our products into their own product development programs.
(1) OLED Microdisplay Products
We serve as a component manufacturer by supplying our OLED-on-silicon
microdisplays for those customers who have their own lenses or integrated
circuits. Our first commercial microdisplay products include:
0.62-inch Diagonal SVGA+ (Super Video Graphics Array plus 52 added columns
of data) for Consumer OEMs. This display has a resolution of 852 x 3 x 600
pixels, and was dubbed "SVGA+" because it has 52 more display columns than a
standard SVGA display. The design permits users to run either (1) standard SVGA
(800 x 600 pixels) to interface to the analog output of many portable computers
or (2) 852 x 480, using all the data available from a DVD player in a 16:9 wide
screen entertainment format. The SVGA+ can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as games, video/data head-wearable displays, digital cameras, video cameras
and other portable electronics applications. The display also has an internal
NTSC monochrome video decoder for low power night vision systems. This product
is designed to interface with most portable personal computers.
0.59-inch Diagonal SVGA-3D (Super Video Graphics Array plus built-in
stereovision capability) for Consumer OEMs. This display has a resolution of 800
x 3 x 600 pixels. The SVGA-3D can be made as a full-color or monochrome
microdisplay primarily for high-performance and large-view consumer OEM products
such as personal computer games and video/data head-wearable displays, but is
also designed to be applicable for digital cameras, video cameras and other
portable electronics applications since the 3D feature is optional. A built-in
28
circuit provides compatibility with single channel frame sequential stereoscopic
vision without additional external components. In high volumes, the SVGA-3D is
priced lower than the SVGA+, so it is likely to be selected whenever the OEM
customer does not need monochrome NTSC or the extra columns of resolution.
0.98-inch Diagonal SXGA (Super Extended Video Graphics Array) for
Industrial, Medical and Military Applications. We are developing an introductory
SXGA microdisplay product as a personal computer-compatible headset display for
military, medical, high-end commercial, and industrial applications. This
product will have 1280 x 1024 monochrome pixels and will be adaptable to color
VGA resolution. The display will have a capability for very high luminance. We
expect that this display will be able provide over 30,000 Cd/m2 luminance. For
reference, a typical notebook computer operates at 80 Cd/m2 peak luminance. This
digital video and data interface product is being designed to exhibit a wide
dimming range and high luminance for special military applications. We
anticipate that the performance features of the SXGA, such as high-speed digital
video and 256 gray levels, have the potential to serve as a catalyst for the
development of new applications.
(2) Microviewer(TM) Products Incorporating Lenses
By providing an integrated solution of a complete microdisplay and lens
assembly to integrate into OEM customers' end product design, OEM customers can
avoid incurring expensive optics design and tooling costs. Different lens and
microdisplay specifications can be mixed and matched to be adapted to many end
products.
We have developed advanced lens technology for several applications and
hold key patents on low cost, high performance lens technology for microdisplay
applications. Our lens technology permits our OLED-on-silicon microdisplays to
provide large field of view images that can be viewed for extended periods with
reduced eye-fatigue.
We intend to sell Microviewer(TM) modules to OEMs for integration with
their branded products, or incorporated into eGlass(TM) Personal Viewer(TM)
head-wearable displays to be supplied by our subsidiary, Virtual Vision, Inc.
Some of our potential customers have stated a preference for Microviewers(TM)
over microdisplays since Microviewers(TM) incorporate lenses which save OEMs a
step in their manufacturing process and can save them the long time required to
develop a high performance lens system.
(3) eGlass(TM) Personal Viewer(TM) Head-Wearable Systems
Personal Viewer(TM) head-wearable systems, such as our eGlass(TM) Personal
Viewer(TM), give users the ability to work with their hands while simultaneously
viewing information or video on the display. Our head-wearable displays enable
more versatile portable computing, capable of delivering an image that appears
comparable to that of a 19-inch monitor at 22 to 24 inches from the eye using a
0.59-inch diagonal microdisplay (SVGA-3D). We believe that Personal Viewer
head-wearable displays will fill the increasing demand for instant data
accessibility in mobile workplaces. We expect to sell the head-wearable displays
primarily to OEM systems and equipment customers through direct sales and our
e-commerce website which is under development.
We believe that our strategy of offering our products both as separate
components and as integrated bundles that include microdisplays and lenses will
allow us to address the needs of the largest number of potential customers.
Prior Product and Technology Awards
o Dual Use Technology Achievement Award
March 2002. eMagin and the US Air Force Armstrong Laboratory received first
place for the US Air Force and was recognized as one of the best dual use
technologies in 2001 recognition across all branches of the Armed Services for
the Second Annual Dual Use Science and Technology Achievement Award awarded by
the Deputy Under Secretary for Defense, Charles J. Holland. The award recognizes
the best dual use programs and honors those responsible for developing and
implementing technology beneficial to both military and commercial sectors.
29
o 2001 Product of the Year
January 17, 2001. eMagin received a 2001 Product-of-the-Year Award from
Electronic Products Magazine, honoring eMagin for the development of its
first-of-class high-resolution active matrix OLED-on-silicon microdisplay, based
on significant advances in technology.
o 2001 U.S. Army Phase II Quality Award
August 21, 2001. eMagin received a 2001 US Army SBIR (Small Business
Innovation Research) Phase II Quality Award for the development of
high-resolution active matrix OLED microdisplays for incorporation into military
head-mounted displays. The annual Quality Awards Program recognizes top quality
Army Phase II projects for their technical achievement, contribution to the Army
and potential for commercial use. Selected by a distinguished panel of Army and
industry experts, eMagin's project was among only five selected to receive a
2001 U.S. Army SBIR Phase II Quality Award through the rigorous Quality Awards
competition.
o Display of the Year 2000 Gold Award
June 6, 2001. eMagin was honored by The Information Display Magazine and
Society Information Display with the Display of the Year Gold Award for its
OLED-on-Silicon microdisplay. The Display of the Year Award was established in
1995 to recognize outstanding products chosen for their innovation and potential
impact on current and future display markets. An international committee of
distinguished display technologists and leading editors in a four-month process
of nominations and voting made the selection.
Our Market Opportunity
The growth potential of our selected target market segments have been
investigated using information gathered from key industry market research firms,
including Display Search, Frost and Sullivan, Fuji-Chimera, International Data
Corporation, Nikkei, SEMI, Stanford Resources-iSuppli and others. Such data was
obtained using published reports and data obtained at industry symposia. We have
also relied substantially on market projections obtained privately from industry
leaders, industry analysts, and potential customers.
We believe that the consumer oriented, virtual-imaging market is
characterized by about 20 large OEMs that, collectively, dominate 90% of the
market. The non-consumer market consists of niches - industrial, medical,
military, arcade games, 3-D CAD/Virtual Reality, and wearable computers. Within
each of these market sectors, we believe that our microdisplays, when combined
with compact optic lenses, will become a key component for a number of mobile
electronic products. We are targeting the following applications:
(1) Near-Eye Viewers for Digital Cameras, Camcorders and Hand-held Internet and
Telecommunications Appliances
We believe that our microdisplays will enhance near-eye applications in the
following groups of products:
o Digital cameras and camcorders, which typically use direct view
displays at low resolution, offer a small visual image, and are
difficult to see on sunny days. According to Display Search, 41
million digital cameras and 13 million camcorders are expected to be
sold in 2005. Some of these products may incorporate microdisplays as
high-resolution viewfinders which would permit individuals to see
enlarged, high-resolution proofs immediately upon taking the picture,
giving them the opportunity to retake a poor shot.
o Mobile phones and other hand-held Internet and telecommunications
appliances which will enable users to access full web and fax pages,
data lists and maps in a pocket-sized device. According to the Fuji
Chimera Research Institute, an industry market research organization,
by 2005 the cellular phone and handheld portable digital assistant
markets will grow to 655 million units and 20 million units,
respectively. Some of these products may eventually incorporate our
microdisplays. In order for the high-resolution wireless
telecommunications market to develop, Generation 3 (G3) high-speed
data transmission must become widely available. The current cost and
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limited availability of broadband services has impeded the development
of this market, but several telecommunication companies have prototype
programs in progress which incorporate our microdisplay products.
For each of these applications, we anticipate that our microdisplays,
combined with compact optic lenses, will offer higher resolution, lower power
and system cost and achieve larger images than are currently available in the
consumer market. As a result, we believe that we can obtain a sizeable share of
the market for the display components of these mobile electronic products.
(2) Head-wearable Display Platforms
Head-wearable displays incorporate microdisplays mounted in or on
eyeglasses, goggles, simple headbands, helmets, or hardhats, and are often
referred to as HMDs or headsets. Head-wearable displays may block out
surroundings for a fully immersive experience, or be designed as "see-through"
or "see-around" to the user's surroundings. They may contain one (monocular) or
two (binocular) displays. Some of the increased current interest is due to
accelerating the timetable to adapt such systems to military applications such
as night vision and fire and rescue applications. These have military,
commercial, and consumer applications.
Military
Military demand for head-wearable displays is currently being met with
microdisplay technologies that we believe to be inferior to our OLED-on-silicon
products. The new generation of soldiers will be highly mobile, and will often
need to carry highly computerized communications and surveillance equipment. To
enable interaction with the digital battlespace, rugged, yet lightweight and
energy efficient technology is required. Currently available microdisplay
technologies do not meet the requirements for low power, hands-free, day and
night-viewable displays. Our OLED microdisplays demonstrate performance
characteristics important to military and other demanding commercial and
industrial applications including high brightness and resolution, wide dimming
range, wider temperature operating ranges, shock and vibration resistance and
insensitivity to high G-forces. The image does not suffer from flicker or color
breakup in vibrating environments, and the microdisplay's wide viewing angle
allows ease of viewing for long periods of time. The OLED's very low power
consumption reduces battery weight and increases allowed mission length.
Properly implemented, we believe that head-mounted systems incorporating our
microdisplays will increase effectiveness by allowing hands-free operation and
increasing situational awareness with enough brightness to be used in daylight,
yet controllable for nighttime light security. The OLED's wide temperature range
is especially of interest for military applications because the display can turn
on instantly at temperatures far below freezing and can operate at very high
temperatures in desert conditions.
Our OLED microdisplays were selected for several aircraft vehicles and
soldier applications, including the US Army Land Warrior 1.0 and 2.0 programs
and the US Air Force Joint Strike Fighter, among others. Land Warrior, a core
program in the Army's drive to digitize the battlefield, is an integrated
digital system that incorporates computerized communication, navigation,
targeting and protection systems for use by the twenty-first century infantry
soldier. Kaiser Electro-Optics, a Rockwell Collins company and the principal
contractor for the US Army's Land Warrior HMD system, and eMagin will apply
their respective expertise in HMD and imaging technology to develop rugged, yet
lightweight and energy efficient products meeting the requirements of tomorrow's
soldier. The US Army expects to initially equip more than 40,000 soldiers with
the Land Warrior system. The current overall redesign of the Land Warrior system
has delayed increased volume use of displays in that program until 2004. Our
display is also used in Kaiser Electro-Optics, Inc.'s commercially available
ProView S035 Monocular HMD. The US Air Force has selected our OLED microdisplay
technology for incorporation into the Strike Helmet 21 system that uses
Integrated Panoramic Night Vision Goggles in avionics helmets. The Strike Helmet
21 system is targeted for integration into F-15E aircraft in the 2003-2004 time
period. Similar systems are of interest for other military applications as well
as for related operations such as fire and rescue.
Commercial Industrial, and Medical
We believe that a wide variety of commercial and industrial markets offer
significant opportunities due to increasing demand for instant data
accessibility in mobile workplaces. Some examples of microdisplay applications
include: immediate access to inventory such as parts, tools and equipment
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availability; instant accessibility to maintenance or construction manuals;
routine quality assurance inspection; and real-time viewing of images and data.
Commercial products in these sectors include Sage Technologies, Ltd.'s Helmet
Vue (TM) Thermal Imaging System and an upcoming accessory to Antelope
Technolgies' MCC Wearable Computing system, which incorporates IBM's wearable PC
technology.
Consumer
We believe that our head-wearable display products will enhance the
following consumer products:
o Entertainment and gaming video headset systems, which permit
individuals to view television, including HDTV, video CDs, DVDs and
video games on virtual large screens or stereovision in private
without disturbing others. Even though entertainment and gaming
headsets represent an emerging product class, we are seeing demand
from OEMs. Headset game systems for portable computers with head
tracking and/or stereovision appears to be our predominant high
quantity near term market opportunity, with several customers
indicating an interest in large production quantities of our displays.
Our current SVGA-3D display was designed specifically for this market.
We believe that these new headset game systems can provide a game or
telepresence experience not otherwise practical using conventional
direct view display technology. We expect low cost to be important for
success in this field, and expect our product cost to decrease in high
quantity production.
o Notebook computers, which can use head-wearable devices to reduce
power as well as expand the apparent screen size and increase privacy.
Current notebook computers do not use microdisplays. Our products can
apply not only to new models of notebook computers, but also as
aftermarket attachments to older notebooks still in use. We expect to
market our head-wearable displays to be used as plug-in peripherals to
be compatible with most notebook computers. We believe that the
SVGA-3D microdisplay is well suited for most portable PC headsets. Our
microdisplays can be operated using the USB power source of most
portable computers. This eliminates added power supplies, batteries,
and rechargers and reduces system complexity and cost.
o Handheld personal computers, whose small, direct view screens are
often limitations, but which are now capable of running software
applications that would benefit from a larger display. Microdisplays
can be built into handheld computers to display more information
content on virtual screens without forfeiting portability or adding
the cost a larger direct view screen. Microdisplays are not currently
used in this market. We believe that GPS viewers and other novel
products are likely to develop as our displays become more available.
o Highly compact wearable computers and personal digital assistants, or
PDAs using video headsets as screens can be made possible by
high-resolution microdisplays. A lightweight pocketsize computer that
is under one pound can potentially be created with a foldout keyboard,
compact input device, or voice actuation and a headset that provides a
near-desktop personal computer experience.
The combination of power efficiency, high resolution, low systems cost,
brightness and compact size offered by our OLED-on-silicon microdisplays has not
been made available to makers and integrators of existing entertainment and
gaming video headset systems, notebook computers and handheld computers. We
believe that our microdisplays will catalyze the growth of new products and
applications such as lightweight wearable computer systems.
Selected Applications by Market Sector
----------------------------------- ----------------------------------------------------------------------
Sector Representative Applications
----------------------------------- ----------------------------------------------------------------------
Portable Computer Peripheral |X| Notebook and SuperSubnotebook computer headsets
|X| Miniature data viewers
----------------------------------- ----------------------------------------------------------------------
Entertainment |X| Games
|X| Headset Television/DVDs
----------------------------------- ----------------------------------------------------------------------
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Industrial, Medical, & |X| Surgery and Dentistry
Administration |X| Industrial Control and Safety
|X| Emergency Services
|X| Inventory and Retail
|X| Institutional Control
|X| Maintenance (Industry & Consumer)
|X| Communications
|X| Finance
|X| Education and Training
----------------------------------- ----------------------------------------------------------------------
Military |X| Communications
|X| Targeting and Enhanced Vision
|X| Handheld & Headmount Equipment
|X| Body worn displays
|X| Avionics (Helmet mount)
|X| Ground and Water Vehicles
|X| Maintenance & Training
|X| Special Applications
----------------------------------- ----------------------------------------------------------------------
Telecommunications, Handheld, and |X| Cell Phones/Headset phones
Small Instruments |X| Handheld & Portable Internet Viewers
|X| Smart Appliances & Instruments
----------------------------------- ----------------------------------------------------------------------
Advanced Computer |X| CAD/CAM
Applications |X| Virtual Reality and Simulations
|X| Ultra-High Resolution
----------------------------------- ----------------------------------------------------------------------
Our Strategy
Our strategy is to establish and maintain a leadership position as a
worldwide supplier of microdisplays and virtual imaging technology solutions for
applications in high growth segments of the electronics industry by capitalizing
on our leadership in both OLED-on-silicon technology and microdisplay lens
technology. We aim to provide microdisplay and complimentary accessories to
enable OEM customers to develop and manufacture new and enhanced electronic
products. Some key elements of our strategy to achieve these objectives include
the following:
Leverage our superior technology to establish a leading market position. As
the first to exploit OLED-on-silicon microdisplays, we believe that we enjoy a
significant advantage in bringing this technology to market.
Develop products for large consumer markets via key relationships with
OEMs. Our relationships with OEMs whose products use microdisplays have allowed
us to identify initial microdisplay products to be produced for entertainment,
industrial, and military headsets, to be followed by other applications such as
digital cameras, camcorders and hand-held Internet and telecommunications
appliances. We target markets which we believe to have long-term growth
potential.
Reduce production costs. We intend to reduce our production costs by
lowering our fixed costs and improving our manufacturing yields.
Optimize manufacturing efficiencies by outsourcing while protecting
proprietary processes. We intend to outsource certain capital-intensive portions
of microdisplay production, such as chip fabrication, to minimize both our costs
and time to market. We intend to retain the OLED application and OLED sealing
processes in-house. We believe that these areas are where we have a core
competency and manufacturing expertise. We also believe that by keeping these
processes under tight control we can better protect our proprietary technology
and process know-how. This strategy will also enhance our ability to continue to
optimize and customize processes and devices to meet customer needs. By
performing the processes in-house we can continue to directly make improvements
in the processes which will improve device performance. We also retain the
ability to customize certain aspects such as color balance, which is known as
chromaticity, as well as specialized boards or interfaces, and to adjust other
parameters at the customer's request. In the area of lenses and head-wearable
displays, we intend to focus on design and development, while working with third
parties for the manufacture and distribution of finished products. We intend to
prototype new optical systems, provide customization of optical systems, and
manufacture limited volumes at our subsidiary, Virtual Vision, but intend to
outsource high volume manufacturing operations. There are numerous potential
plastics, PC Board, and assembly service companies globally that provide these
outsource services.
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Build and maintain strong internal design capabilities. As more circuitry
is added to OLED-on-silicon devices, the cost of the end product using the
display can be decreased; therefore integrated circuit design capability will
become increasingly important to us. To meet these requirements, we intend to
develop in-house design capabilities. Building and maintaining this capacity
will allow us to reduce engineering costs, accelerate the design process and
enhance design accuracy to respond to our customers' needs as new markets
develop. In addition, we intend to maintain a product design staff capable of
rapidly developing prototype products for our customers and strategic partners.
Contracting third party design support to meet demand and for specialized design
skills will also remain a part of our overall long term strategy.
Our Strategic Relationships
Strategic relationships have been an important part of our research and
development efforts to date and are an integral part of our plans for commercial
product launch. We have forged strategic relationships with major OEMs and
strategic suppliers. We believe that strategic relationships allow us to better
determine the demands of the marketplace and, as a result, allow us to focus our
future research and development activities to better meet our customer's
requirements. Moreover, we expect to provide microdisplays and Microviewers(TM)
to some of these partners, thereby taking advantage of established distribution
channels for our products.
Eastman Kodak is a technology partner in OLED development, OLED materials,
and a potential future customer for both specialty market display systems and
consumer market microdisplays. We license Eastman Kodak's OLED and optics
technology portfolio. We have a nonexclusive, perpetual, worldwide license to
use Eastman Kodak patented OLED technology and associated intellectual property
in the development, use, manufacture, import and sale of microdisplays. The
license covers emissive active matrix microdisplays with a diagonal size of less
than 2 inches for all OLED display technology previously developed by Kodak. An
annual minimum royalty is paid at the beginning of each calendar year and is
fully creditable against the royalties we are obligated to pay based on net
sales throughout the year. Eastman Kodak and eMagin have engaged in numerous
discussions regarding potential product applications for eMagin's microdisplays
by Eastman Kodak.
We are working in cooperation with the US Air Force, Ball Aerospace, ITT,
and Kaiser Electro-optics, a subsidiary of Rockwell Collins, to complete
development and characterization of our high brightness SXGA microdisplay.
We have recently announced the execution of an agreement with a major
manufacturing partner to develop two new products: an enhanced version of our
SVGA-3D microdisplay with new imbedded features for consumer head-mounted
displays and high resolution games, and a new QVGA and/or VGA viewfinder
microdisplay for camcorder and digital cameras, web phones, and low end games.
We are a member of the United States Display Consortium, a cooperative
agency of display and related technology manufacturers whose charter is to
support continued progress of the display industry. We intend to continue to
establish additional strategic relationships in the future.
Our Technology Platforms
OLED-on-Silicon Technology
Scientists working at Eastman Kodak invented OLEDs in the early 1980s.
OLEDs are thin films of stable organic materials that emit light of various
colors when a voltage is impressed across them. OLEDs are emissive devices,
which means they create their own light, as opposed to liquid crystal displays,
which require a separate light source. As a result, OLED devices use less power
and can be capable of higher brightness and fuller color than liquid crystal
microdisplays. Because the light they emit is Lambertian, which means that it
appears equally bright from most forward directions, a moderate movement in the
eye does not change the image brightness or color as it does in existing
technologies. OLED films may be coated on computer chips, permitting millions of
34
individual low-voltage light sources to be built on silicon integrated circuits
to produce single color, white, or full-color display arrays. Many computer and
video electronic system functions can be built directly into a silicon
integrated circuit as part of the OLED display, resulting in an ultra-compact
system. We believe these features, together with the well-established silicon
integrated circuit fabrication technology of the semiconductor industry, make
our OLED-on-silicon microdisplays attractive for numerous applications.
We believe our technology licensing agreement with Eastman Kodak, coupled
with our own intellectual property portfolio, gives us a leadership position in
OLED and OLED-on-silicon microdisplay technology. Eastman Kodak provides OLED
technology and we provide additional technology advancements that have enabled
us to coat the silicon integrated circuits with OLEDs.
We have developed numerous and significant enhancements to OLED technology
as well as key silicon circuit designs to effectively incorporate the OLED film
on a silicon integrated circuit. For example, we have developed a unique,
up-emitting structure for our OLED-on-silicon devices that enables OLED displays
to be built on opaque silicon integrated circuits rather than only on glass. Our
OLED devices can emit full visible spectrum light that can be isolated with
color filters to create full color images. Our microdisplay prototypes have a
brightness that can be greater than that of a typical notebook computer and can
have a potential useful life of over 50,000 operating hours, in certain
applications. New materials and device improvements in development offer future
potential for even better performance for brightness, efficiency, and lifespan.
Additionally, we have invested considerable work over several years to develop
unique electronics control and drive designs for OLED-on-silicon microdisplays.
In addition to our OLED-on-silicon technology, we have developed compact
optic and lens enhancements which, when coupled with the microdisplay, provide
the high quality large screen appearance that we believe a large proportion of
the marketplace demands.
Advantages of OLED Technology
We believe that our OLED-on-silicon technology provides significant
advantages over existing solutions in our targeted microdisplay markets. We
believe these key advantages will include:
o Low manufacturing cost;
o Low cost system solutions;
o Wide angle light emission resulting in large apparent screen size;
o Low power consumption for improved battery life and longer system
life;
o High brightness for improved viewing;
o High-speed performance resulting in clear video images;
o Wide operating temperature range; and
o Good environmental stability (vibration and humidity).
Low manufacturing cost. Many OLED-on-silicon microdisplays can be built on
an 8-inch silicon wafer using existing automated OLED and color filter
processing tools. The level of automation used lowers labor costs. Only a minute
amount of OLED material is used in each OLED-on-silicon microdisplay so that
material costs, other than the integrated circuit itself, are small. The number
of displays per silicon wafer may be higher on OLEDs than on liquid crystal
displays, or LCDs, because OLEDs do not require a space-wasting perimeter seal
band.
Low cost systems solutions. In general, an OEM using OLED-on-silicon
microdisplays will not need to purchase and incorporate lighting assemblies,
color converter related Applications Specific Integrated Circuits, or ASICs, or
beam splitter lenses as is the case in liquid crystal microdisplays, which also
require illumination. Many important display-related system functions can be
incorporated into an OLED-on-silicon microdisplay, reducing the size and cost of
the system. Non-polarized light from OLEDs permit lenses for many
OLED-on-silicon applications that are made of a single piece of molded plastic,
35
which reduces size, weight and assembly cost when compared to the multipiece
lens systems used for liquid crystal microdisplays. System cost relative to
liquid crystal and liquid crystal on silicon, or LCOS competitive products is
thus reduced. Because our displays are power efficient, they typically require
less power at the system level than other display technologies at a given
display size and brightness.
Wide-angle light emission simplifies optics for large apparent screen size.
OLEDs emit light at most forward directions from each pixel. This permits the
display to be placed close to the lens in compact optical systems. It also
provides the added benefit of less angular dependence on the image quality
relative to pupil and eye position when showing a large field of view, unlike
reflective LCOS microdisplays. This results in less eye fatigue and makes it
relatively easy to Low power consumption for improved battery life and longer
system life. OLEDs emit light rather than transmitting it, so no power-consuming
backlight or frontlight, as required for liquid crystal displays, is required.
OLEDs can be energy efficient because of their high efficiency light generation.
Furthermore, OLEDs conserve power by powering only those pixels that are on
while liquid crystal on silicon requires light at all pixels all the time. Most
optical systems used for our OLEDs are highly efficient, permitting over 80% of
the light to reach the eye, whereas reflective technologies such as liquid
crystal on silicon require multiple beam splitters to get light to the display,
and then into the optical system. This results in typically less than 25% light
throughput efficiency in reflective microdisplay systems. Most important, we do
not need a power-hungry video frame buffer, as required in liquid crystal
frame-sequential color systems. Battery life can therefore be long.
High brightness for improved viewing. This feature can be of great value to
military applications, where there is a need to see the computer image overlaid
onto brightly lit real-life backgrounds such as desert sand, water reflections
or sunlit clouds. The OLED can be operated over a large luminance range without
loss of gray level control, permitting the displays to be used in a range of
dark environments to very bright ambient applications. Since military simulation
and situation awareness applications, including night vision, typically require
large fields of view, the OLED's Lambertian optical characteristics make it an
excellent choice.
High-speed performance resulting in clear video images. The OLEDs switch
much more rapidly than liquid crystals or most cathode ray tubes, or CRTs. This
results in smear-free video rate imagery and provides improved image quality for
DVD playback applications. This eliminates visible image smear and makes
practicable three-dimensional stereo imaging using a split frame rate. This
advantage of our OLED-on-silicon is very important for 3-D stereovision gaming
applications.
Flicker-free; no color breakup. Because the OLED-on-silicon stores
brightness and color information at each pixel, the display can be run with no
noticeable flicker and no color sequential breakup, even at low refresh rates. A
lower refresh rate not only helps reduce power, it also facilitates system
integration. Color sequential breakup occurs in systems such as liquid crystal
on silicon and some liquid crystal display microdisplays when red, green and
blue frames are sequentially imaged in time for the eye to combine. Since the
different color screens occur at different times, movement of the eye due to
vibration or just fast pupil movement can create color bands at each dark-light
edge, making the image unpleasant to view and making text difficult to read. For
example, the liquid crystal on silicon display needs to run at least three times
the "normal" frame rate or speed to produce color sequential images, which
wastes power and makes for a difficult technological challenge as display
resolutions increase.
Wide operating temperature range. Our OLEDs offer much less temperature
sensitivity at both high and low temperatures than LCDs. LCDs are sluggish or
non-operative much below freezing unless heaters are added and lose contrast
above 50 degrees Celsius, while our OLEDs turn on instantly and can operate
between -55 degrees Celsius and 130 degrees Celsius. We specify a smaller range
on most products to accommodate low cost packaging. This is an important
characteristic for many portable products that may be used outdoors in many
varying environmental conditions. It is especially important for military
customers. Insensitivity to vibration, shock, and pressure are also important
environmental control attributes.
Complementary Lens and System Technology
We have developed a wide range of technologies which complement our core
OLED and lens technologies and which will enhance our competitive position in
the microdisplay and head-wearable display markets. These include:
36
Lens technology: We have developed advanced lens technology for
microdisplays and head-wearable display systems and hold key patents in these
areas. Our lens technology permits our OLED-on-silicon microdisplays to provide
large field of view images that can be viewed for extended periods with reduced
eye-fatigue. During 2003, we plan to outsource manufacturing of our lenses in
order to provide them in larger quantities to our customers, assuming the final
version of the production lens becomes available and moves into production by
our manufacturing partner.
We believe that the key advantages of our lens technology include:
o Can be very low cost, with minimal assembly. A one piece, molded
plastic optic attached to the microdisplay can serve many consumer
end-product markets. Since our process is plastic molding, our per
unit production costs are low;
o Allows a compact and lightweight lens system that can greatly magnify
a microdisplay to produce a large field of view;
o Can use single-piece molded microdisplay lenses to permit high light
throughput making the display image brighter or permitting the use of
less power for an acceptable brightness;
o Can be designed to provide focusing to enable users with various
eyesight qualities to view images clearly; and
o Can optionally provide focal plane adjustment for simultaneous
focusing of computer images and real world objects. For example, this
characteristic is beneficial for word processing or spreadsheet
applications where a person is typing data in from reference material.
This feature can make it easier for people with moderately poor
accommodation to use a head-wearable display as a portable
computer-viewing accessory.
Head-wearable display technology. We have developed ergonomic technologies
that make head-wearable displays easier to use in a wide variety of
applications. For example, the use of our patented rotatable Eyeblocker(TM)
provides a sharp image without requiring most users to squint. The Eyeblocker
can also be moved to create an effective see-through appearance. To our
knowledge, we have made the lightest weight, high-resolution head-wearable
display with an over 35(Degree) diagonal field of view ever publicly
demonstrated.
Wireless video technology. We have developed power efficient, miniature,
video and stereo sound, radio frequency transmitter-receiver technology as part
of a government program. This could allow consumers to watch wireless high
quality video from most locations in their home using existing entertainment,
such as DVD or cable/satellite systems, or data systems. If commercialized, we
expect this capability to greatly increase the available market and demand for
video and data head-wearable displays and we are considering this technology for
use in low cost consumer applications. Commercialization of this technology will
be considered in the future.
Sales and Marketing
Current Status
We are now shipping monochrome and full color versions of our first two
commercial microdisplay products. Our SVGA+ resolution OLED microdisplay, which
contains 1.53 million picture elements, was specifically designed to meet the
needs of several military, industrial, and medical customers based on marketing
information obtained prior to the design phase of the display and was first
offered for sampling in April 2001. Our stereovision-capable SVGA-3D
microdisplay, which contains 1.44 million picture elements, was designed with
the input of multiple customers to principally target the mobile personal
computer and PC games markets, and was first shipped in February 2002. We are
currently developing a military and industrial oriented ultra-high-luminance
SXGA resolution integrated circuit, which contains 3.9 million picture elements,
that is due for completion in 2003, and we have shipped limited quantities of
prototypes of our eGlass headsets.
Near term sales efforts have been focused on our military, industrial, and
medical customers. Our primary production orders and design wins to date have
37
been for the SVGA+ display. To date, we have shipped products and evaluation
kits to more than 70 OEM customers. OEM evaluation and product design cycles may
take from 6 months to 24 months. Some of our initial customers have completed
their initial evaluation cycle and we are now receiving follow-on orders and
notification of product purchase decisions. Several customers have indicated
their intent to incorporate potentially high volumes of our microdisplays into
consumer products during 2002 through 2004. We have also received notification
that our microdisplays will be used as components in versions 1.0 and 2.0 of the
US Army Land Warrior program and in the US Air Force Joint Strike Fighter
program, among other programs.
General Sales and Marketing Effort
We primarily provide display components and Microviewer(TM) display-optic
modules for OEMs to incorporate into their branded products and sell through
their well-established distribution channels. In addition, we market
head-wearable displays directly to various vertical market channels, such as
medical, industrial, and government customers. A typical buyer is a manufacturer
of a product requiring a specific resolution of visual display or viewfinder for
insertion into a product such as a portable DVD headset, a PC-gaming headset, or
an instrument.
As a market-driven company, we assess customer needs both quantitatively
and qualitatively, through market research and direct communications. Because
our microdisplays are the main functional component that defines many of our
customers' end products, we work closely with potential customers to define our
products to optimize the final design, typically on a senior
engineer-to-engineer basis.
We identify companies with end products and applications for which we
believe that our products will provide a system level solution and for which our
products can be a key differentiator. We target both market leaders and select
early adopter companies; their acceptance validates our technology and approach
in the market. We believe successful marketing will require relationships with
recognized consumer brand companies.
OEMs develop designs to enable them to develop products for their own
target markets. An OEM design cycle typically requires between 6 and 24 months,
depending on the uniqueness of the market and the complexity of the end product.
New product development may require several design iterations prior to
commercialization.
Customers
The Company sells products to a large number of customers, which are
primarily in the United States. The Company's customer base includes 2 customers
who account for 32% and 6% of sales in fiscal 2002 and 2001, respectively. One
customer represented 18% and 6% and the other customer represented 14% and 0% of
sales in fiscal 2002 and 2001. Although the Company is directly affected by the
well-being of these customers, management does not believe significant credit
risk exists.
Backlog
As of March 31, 2003 we had a backlog of purchase agreements of
approximately $27 million. Our backlog consists of both purchase agreements for
delivery over the next 24 months and short-term purchase orders for delivery
within 3-6 months. Most orders are subject to cancellation by the customer with
no or limited penalties. Because of the possibility of customer changes in
delivery schedules or cancellations and potential delays in product shipment,
our backlog as of a particular date may not be indicative of net revenue for any
specific succeeding period. Lack of working capital has delayed our ability to
ship the full quantity of purchase agreements and purchase orders on hand, and
has required negotiations with customers for delays in product launch schedules.
Research and Development
OLED technology is a relatively new technology that has considerable room
for substantial improvements in luminance, life, power efficiency, voltage
swing, design compactness, and many other parameters. We also anticipate that
achieving reductions in manufacturing costs will require new technology
developments. We anticipate that improving the performance, capability and cost
of our products will provide an important competitive advantage in our fast
38
moving, high technology marketplace. Past and current research activities
include development of improved OLED and display device structures, developing
and/or evaluating new materials (including the synthesis of new organic
molecules), manufacturing equipment and process development, electronics design
methodologies and new circuits and the development of new lenses and related
systems. During 2002 we focused primarily on near-term product development
projects related to our transition from research to manufacturing. For example
we developed a glass cover plate to ruggedize our displays to facilitate easier
handling by our OEM customers. We also developed a new high luminance, high
efficiency yellow monochrome OLED and adapted to our SVGA+ display for
see-through optic applications and began sampling the yellow monochrome product
in early 2003. However, in order to improve customer satisfaction and
simultaneously maximize our margins, as well as to maintain competitive
technology advantages, we believe that it is important to continue to engage in
long-term research and development. During the past four years, we have spent,
net of U.S. government funding, approximately $32.8 million on research and
development. In 2001, we spent approximately $12.7 million, and in 2002 we spent
approximately $7.3 million on research and development. During the same
four-year period, we received $3.6 million in funding from US government under
research and development cost sharing arrangements.
External relationships play an important role in our research and
development efforts. Suppliers, equipment vendors, government organizations,
contract research groups, external design companies, customer and corporate
partners, consortia, and university relationships all enhance the overall
research and development effort and bring us new ideas (See "Strategic
Relationships").
Manufacturing Facilities
We are located at IBM's Microelectronics Division facility, known as the
Hudson Valley Research Park, located about 70 miles north of New York City in
Hopewell Junction, New York. We lease approximately 45,000 square feet of space
housing our own equipment for OLED microdisplay fabrication, and for research
and development plus additional space for assembly and administrative offices.
We believe that our lease agreement with IBM for a 16,300 square foot class 10
clean room space, along with additional, lower level clean room space, and the
associated acquisition of substantial amounts of advanced manufacturing
equipment is at a favorable cost, represents a substantial asset and competitive
advantage. On or about April 21, 2003, eMagin and IBM entered into a Stipulation
in order to settle an eviction proceeding originally commenced by IBM against
eMagin on or about April 9, 2003. Thereafter, in accordance with the
Stipulation, on April 23, 2003 the Stipulation was presented to, and approved
by, the court, and a Judgment was issued in favor of IBM. Pursuant to the
Judgment and Stipulation, (i) eMagin paid IBM all rent due and owing to IBM, and
(ii) IBM was awarded possession of the leased premises, was issued a warrant to
remove eMagin from possession of the leased premises, and obtained a monetary
judgment for rent arrears in the sum of Eight Hundred Thirteen Thousand Fifty
Five and 65/100 ($813,055.65) Dollars, which sum is to be paid in equal monthly
installments during the period commencing May 1, 2003 and ending on March 1,
2004.
Such Judgment is being held in escrow by IBM's attorney and the warrant of
eviction is being stayed, so long as the Company continues to timely pay make
the installment payments during the next 12 months and any additional rent
and/or other sums due under the Lease.
Facilities services provided by IBM include our cleanroom, pure gases, high
purity de-ionized water, compressed air, chilled water systems, and waste
disposal support. This infrastructure provided by our lease with IBM provides us
with many of the resources of a larger corporation without the added overhead
costs. It further allows us to focus our resources more efficiently on our
product development and manufacturing goals. We believe that our facility is
capable of producing over 50,000 SVGA+ or SVGA-3D displays per month once we are
manufacturing around the clock on a 24 hours a day, 7 days per week basis, with
a fully loaded manufacturing line.
We lease additional non-cleanroom facilities for chemical mixing, cleaning,
chemical systems, and glass/silicon cutting. OLED chemicals can be purified in
our facility with our equipment, permitting the company to evaluate new
chemicals in pilot production that are not yet available in suitable purity for
OLED applications on the market.
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.
39
Our manufacturing process for OLED-on-silicon microdisplays has three main
components: organic film deposition, organic film encapsulation (also known as
sealing), and color filter processing. All steps are performed in
semi-automated, hands-free environment suitable for high volume throughput. An
automated cluster tool provides all OLED deposition steps in a highly controlled
environment that is the centerpiece of our OLED fabrication. After wafer
processing, each part is inspected using an automated inspection system, prior
to shipment. We have electrical and optical instrumentation required to
characterize the performance of our displays including photometric and color
coordinate analysis. We are also equipped for integrated circuit and electronics
design and display testing
Our system development effort at Virtual Vision operates out of a leased
facility in Redmond, Washington. The facilities are well suited for designing
and building limited volume prototypes and industrial or government products. We
plan to outsource high volume head-wearable display production to low cost
plastics, lenses, and assembly manufacturers, including manufacturers in Asia.
We believe that manufacturing efficiency is an important factor for success
in the consumer markets. We believe that high yield and maximum utilization of
our equipment set will be key for profitability. We believe that all of the main
components for manufacturing success are in place, but we require additional
capital to: (1) staff and train employees for round the clock operation, (2)
build suitable inventory of integrated circuits and other raw materials, and (3)
properly maintain and continue to upgrade the equipment set. The equipment
required for initial profitable production is in place. Some equipment will be
added when our production volume increases or as needed. We will ramp production
primarily by adding multi-shift staff and increasing inventory.
We intend to outsource certain capital-intensive portions of microdisplay
production to minimize both our costs and time to market. Joint ventures are
being considered for higher quantity OLED production off shore. We currently
outsource integrated circuit fabrication while retaining the OLED application
and OLED sealing processes in-house.
Intellectual Property
We have developed a significant intellectual property portfolio of patents,
trade secrets and know-how, supported by our license from Eastman Kodak and our
current patent portfolio.
Our license from Eastman Kodak gives us the right to use in miniature
displays a portfolio in organic light emitting diode and optics technology, some
of which are fundamental. Our agreement with Eastman Kodak provides for
perpetual access to the OLED technology for our OLED-on-silicon applications,
provided we remain active in the field and meet our contractual requirements to
Eastman Kodak. We also generate intellectual property as a result of our
internal research and development activities.
Our patents and patent applications cover a wide range of materials, device
structures, processes, and fabrication techniques, such as methods of
fabricating full color OLEDs. We believe that our patent applications relating
to up-emitting structures on opaque substrates such as silicon wafers, which are
critical for OLED microdisplays, and applications relating to the hermetic
sealing of such structures are particularly important.
Our patents are concentrated in the following areas:
o OLED Materials, Structures, and Processes
o Display Color Processing and Sealing
o Active Matrix Circuit Methodologies and Designs
o Field Emission and General Display Technologies
o Lenses and Tracking (Eye and Head)
o Ergonomics and Industrial Design
o Wearable Computer Interface Methodology
We also rely on proprietary technology, trade secrets, and know-how, which
are not patented. To protect our rights in these areas, we require all
employees, and where appropriate, contractors, consultants, advisors and
collaborators to enter into confidentiality and noncompetition agreements. There
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.
40
We believe that our intellectual property portfolio, coupled with our
strategic relationships and accumulated experience in the OLED field gives us an
advantage over potential competitors.
Competition
We may face competition in the OLED and microdisplay industry from a
variety of companies and technologies. We believe that our key competition will
come from liquid crystal on silicon microdisplays, or LCOS, also known as
reflective liquid crystal displays. While we believe that OLED-on-silicon
provides comparatively lower optics cost, larger apparent image size, reduced
electronics cost and complexity, enhanced color, and improved power efficiency
advantages over liquid crystal on silicon microdisplays, there is no assurance
that these benefits will be realized or that liquid crystal on silicon
manufacturers will not suitably improve these parameters. Companies pursuing
liquid crystal on silicon technology include Microdisplay Corporation and
Three-Five Systems, among others, although most of the companies are primarily
focusing on projection microdisplays, which do not compete directly with the
company. In certain markets, we may also face competition from developers of
transmissive liquid crystal displays, such as those developed by Kopin, or laser
scanning systems, such as those developed by Microvision Corporation.
To our knowledge, the only other company that has publicly stated plans to
develop OLED microdisplays for near-eye applications is MicroEmissive Displays
in Britain. We may also compete with potential licensees of Universal Display
Corporation, Cambridge Display Corporation, and Uniax Corporation, each of which
license OLED technology portfolios. Even though we could potentially license
technology from these developers, potential competitors could also obtain
licenses and may do so at more favorable royalty rates. However, should they
decide to embark on developing microdisplays on silicon, we believe that our
progress to date in this area gives us a substantial head start.
Our microdisplays and head-wearable display systems may face competition on
a price and performance basis from major manufacturers such as Sony and Seiko
Epson. However, these companies use first generation liquid crystal on
polysilicon technology and therefore, we believe that they may incorporate our
technology into their products when it becomes available.
Employees
As of March 31, 2003, we had a total of 18 full time, part time, and
temporary staff plus 4 employees at Virtual Vision. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
DESCRIPTION OF PROPERTIES
Our principal executive offices are located at: 2070 Route 52, Hopewell
Junction, New York 12533. We lease approximately 45,000 square feet of space
from IBM, all of which is located in the same industrial park. Approximately
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 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.
LEGAL PROCEEDINGS
On or about April 21, 2003, eMagin and IBM entered into a Stipulation in
order to settle an eviction proceeding originally commenced by IBM against
eMagin on or about April 9, 2003. Thereafter, in accordance with the
Stipulation, on April 23, 2003 the Stipulation was presented to, and approved
by, the court, and a Judgment was issued in favor of IBM. Pursuant to the
Judgment and Stipulation, (i) eMagin paid IBM all rent due and owing to IBM, and
(ii) IBM was awarded possession of the leased premises, was issued a warrant to
remove eMagin from possession of the leased premises, and obtained a monetary
judgment for rent arrears in the sum of Eight Hundred Thirteen Thousand Fifty
Five and 65/100 ($813,055.65) Dollars, which sum is to be paid in equal monthly
installments during the period commencing May 1, 2003 and ending on March 1,
2004.
41
Such Judgment is being held in escrow by IBM's attorney and the warrant of
eviction is being stayed, so long as the Company continues to timely pay make
the installment payments during the next 12 months and any additional rent
and/or other sums due under the Lease.
In addition to the foregoing, as of May 20, 2003, we had liabilities of
approximately $14.6 million for unpaid bills, contracts, and other liabilities.
As a result of the recent financing described in "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Financing," $4.9 million of these liabilities were converted into common
stock of eMagin. Furthermore, we have entered into debt restructuring agreements
with the holders of a large portion of the balance of our liabilities, which
agreements provide for partial payment, write-off and/or conversion of liability
to equity and are expected to be completed between now and June 30, 2003. We
intend to make any required partial payments from the additional funds to be
received from our recent financing. Should any of these payments not be made in
a timely manner or at all, we may be required to pay the balance of the
liabilities.
42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and directors, and their ages and positions are:
Name Age Position
Gary W. Jones (1).............................. 47 Chairman, Chief Executive Officer, President
K. C. Park..................................... 66 President, Virtual Vision, Inc.
Susan K. Jones................................. 51 Chief Marketing and Strategy Officer, Secretary
Claude Charles (2) ............................ 66 Director
Jacob (Jack) Goldman........................... 81 Director
Jack Rivkin (1) (2) (3)........................ 62 Director
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
Gary W. Jones has served as our Chairman, Chief Executive Officer, and
President since 1992. Mr. Jones has over 25 years of experience in both public
and private companies in the areas of business development, high volume
manufacturing, product development, research, and marketing. Previously, Mr.
Jones managed both semiconductor manufacturing and research and development
programs at Texas Instruments. Mr. Jones is a director, a member of the
Executive Committee of the Board, and Chairman of the Technology Committee of
the United States Display Consortium. Mr. Jones received a B.S. in electrical
engineering and physics from Purdue University.
Dr. K.C. Park was named President of our wholly owned subsidiary, Virtual
Vision, Inc., in 2002 after serving as our Executive Vice President of
International Operations since 1998. During his twenty-seven year tenure with
IBM he managed flat panel display and semiconductor programs at the IBM Watson
Research Center, directed the corporate display programs at the IBM Corporate
Headquarters, and established Technical Operations in IBM Korea and served as
Senior Managing Director. Dr. Park joined LG Electronics in 1993 as Executive
Vice President and initiated and led corporate-wide efforts to shift the major
emphasis of the corporation into multimedia. Dr. Park holds a B.S. from the
University of Minnesota, an M.S. from MIT, and a Ph.D. in Solid State Chemistry
from the University of Minnesota and an MBA from New York University.
Susan K. Jones has served as Executive Vice President and Secretary since
1992, and assumed responsibility of Chief Marketing and Strategy Officer in
2001. Ms. Jones has 25 years of industrial experience, including senior
research, management, and marketing assignments at Texas Instruments and Merck,
Sharp, & Dohme Pharmaceuticals. Ms. Jones serves on the boards or chairs
committees for industry organizations including IEEE, SPIE, and SID. Ms. Jones
served as a director of eMagin Corporation from 1993 to 2000 and is a director
of Virtual Vision, Inc. Ms. Jones graduated from Lamar University with a B.S. in
chemistry and biology, holds more than a dozen patents, and has authored more
than 100 papers and talks.
Claude Charles has served as a director since April of 2000. Mr. Charles
has served as President of Great Tangley Corporation since 1999. From 1996 to
1998 Mr. Charles was Chairman of Equinox Group Holdings in Singapore. Mr.
Charles has also served as a director and in senior executive positions at SG
Warburg and Co. Ltd., Peregrine Investment Holdings, Trident International
Finance Ltd., and Dow Banking Corporation. Mr. Charles holds a B.S. in economics
from the Wharton School at the University of Pennsylvania and a M.S. in
international finance from Columbia University.
Dr. Jack Goldman joined our board of directors in February of 2003. Dr.
Goldman is the retired senior vice-president for R&D and chief technical officer
of the Xerox Corporation. While at Xerox, he founded and directed the celebrated
Xerox PARC laboratory. Prior to joining Xerox, Dr. Goldman was Director of Ford
Motor Company's Scientific Research Laboratory. He also served as Visiting Edwin
Webster Professor at MIT. Dr. Goldman presently serves on the Boards of
Directors of Umbanet Inc. and Medis Technologies Inc., and he has served on the
43
Boards of Xerox, General Instrument Corp., United Brands, Intermagnetics
General, GAF and Bank Leumi USA. He has also been active in government and
professional advisory roles including service on the US Dept. of Commerce
Technical Advisory Board, chairman of Statutory Visiting Committee of The
National Bureau of Standards (National Institute of Standards and Technology),
vice-president of the American Association for the Advancement of Science and
president of the Connecticut Academy of Science and Engineering.
Jack Rivkin has served as a director since June of 1996. Mr. Rivkin is
Executive Vice President and Chief Investment Officer of Neuberger Berman, LLC.
He previously served as Executive Vice President of Citigroup Investments Inc.,
through which the Travelers Group investments in the Company were managed. He
also served as Vice Chairman and a director of Smith Barney, and held positions
at Procter and Gamble, Mitchell Hutchins, Paine Webber and Lehman Brothers. Mr.
Rivkin holds an engineering degree in metallurgy from the Colorado School of
Mines and an MBA from Harvard University.
General Information Concerning the Board of Directors
The Board of Directors of eMagin is classified into three classes: Class A,
Class B and Class C. Each Class A director will hold office until the 2002
Annual Meeting of our stockholders. Currently, Mr. Gary Jones and Mr. Jack
Rivkin are the Class A directors. The former Class B directors have resigned .
The board has nominated one new Class B director. Class C directors will hold
office until the 2004 Annual Meeting of our stockholders. Currently, Mr. Claude
Charles and Dr. Jacob Goldman are the Class C directors. In each case, each
director will hold office until his successor is duly elected or appointed and
qualified in the manner provided in eMagin's Amended and Restated Certificate of
Incorporation and our Amended and Restated Bylaws, or as otherwise provided by
applicable law.
At our upcoming annual meeting, which is anticipated to take place in July
2003, the Company has proposed the election of Paul Cronson as a Class B
Director. Mr. Cronson, 46, is Managing Director of Larkspur Capital Corporation,
which he founded in 1992. Larkspur is a broker dealer that is a member of the
National Association of Securities Dealers and advises companies seeking private
equity or debt. Mr. Cronson's career in finance began in 1979 at Laidlaw, Adams
Peck where he worked in asset management and corporate finance. From 1983 to
1985, Mr. Cronson worked with Samuel Montagu Co., Inc. in London, where he
marketed eurobond issuers and structured transactions. Subsequently from 1985 to
1987, he was employed by Chase Investment Bank Ltd., where he structured
international debt securities and he developed "synthetic asset" products using
derivatives. Returning to the U.S., he joined Peter Sharp Co., where he managed
a real estate portfolio, structured financings and assisted with capital market
investments from until 1992. Mr. Cronson received his BA from Columbia College
in 1979, and his MBA from Columbia University School of Business Administration
in 1982. He is on the Board of Umbanet, in New York City, a private company
specializing in email based distributed applications and secure messaging.
The Board of Directors held 19 meetings during 2002. Each incumbent
director attended at least 75% of the aggregate of all meetings of the Board of
Directors during the period for which he was a director and the meetings of the
committees on which he or she served. The Board of Directors has established an
Executive Committee, an Audit Committee and a Compensation Committee.
During 2002, the Company's directors received compensation for service to
the Company as directors. (See "Executive Compensation- Compensation of
Directors".) Directors also received reimbursement of ordinary expenses incurred
in connection with attendance at such meetings.
Executive Officers of the Company
Officers are appointed to serve at the discretion of the Board of
Directors. Except for Mr. Gary Jones, who is the spouse of Ms. Susan Jones, the
Company's Executive Vice President and Secretary, none of the executive officers
or directors of the Company has a family relationship with any other executive
officer or director of the Company.
Committees of the Board of Directors
The Audit Committee is responsible for (i) determining the adequacy of the
Company's internal accounting and financial controls, (ii) reviewing the results
of the audit of the Company performed by the independent public accountants, and
(iii) recommending the selection of independent public accountants. Messrs.
44
Charles, Rivkin and Khan, prior to his resignation in 2003, were members of the
Audit Committee during 2002. During the year, the Board examined the composition
of the Audit Committee in light of the adoption by The American Stock Exchange,
Inc. (the "Amex") of new rules governing audit committees. Based upon this
examination, the Board confirmed that all members of the Audit Committee are
"independent" within the meaning of the Amex's new rules. The Audit Committee
met four times during 2002.
The Compensation Committee determines matters pertaining to the
compensation of certain executive officers of the Company and administers the
Company's stock option, incentive compensation, and employee stock purchase
plans. Mr. Rivkin was the sole member of the Compensation Committee during 2002.
The Compensation Committee met once during 2002.
The Executive Committee has authority to act for the Board on most matters
during intervals between Board meetings, subject to Board approval. Messrs.
Jones, Rivkin and Khan, prior to his resignation in April 2003, were members of
the Executive Committee during 2002. The Executive Committee met twice during
2002.
The Company has adopted its Code of Ethics and Business Conduct for
Officers, Directors and Employees that applies to all of the officers, directors
and employees of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on the Company's review of copies of all disclosure reports filed by
directors and executive officers of the Company pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, the Company believes that there was
compliance with all filing requirements of Section 16(a) applicable to directors
and executive officers of the Company during 2002, except that Mr. Ajmal Khan
failed to file once.
45
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and
each of our most highly compensated executive officers whose total annual salary
and bonus for the fiscal year ending December 31, 2002, 2001 and 2000 exceeded
$100,000. Prior to establishment of the Compensation Committee, the Chief
Executive Officer and Board elected not to cash pay bonuses as part of executive
compensation during the development stage years of the company, and the officers
have not accepted cash bonuses to date. The Compensation Committee plans to
allocate a bonus in stock options to officers and directors for the fiscal year
2002 during 2003.
Long-Term
Compensation
Other Annual Awards (Securities
Name and Positions Year Salary Bonus Compensation Underlying Options)
=================================================================================================================
Gary W. Jones President, Chief 2002 136,050 0 (1) 0 1,589,827
Executive Officer
Acting Chief Financial 2001 234,393 0 (1) 0 0
Officer
Chairman Director 2000 227,863 0 0 0
Susan K. Jones Executive Vice President, 2002 143,683 0 (2) 0 1,293,368
Chief Strategy and 2001 189,207 0 (2) 0 0
Marketing
Officer, and Secretary 2000 183,837 0 0 0
K.C. Park President, Virtual Vision 2002 109,797 0 (3) 0 438,310
2001 171,877 0 0 0
2000 168,623 0 0 0
Andrew P. Savadelis Former Executive Vice 2002 17,389 0 (4) 0 0
President and Chief 2001 255,769 112,500 (4) 0 0
Financial Officer 2000 91,667 37,500 (4) 0 0
(1) In 2002 Mr. Jones deferred pay in the amount of $166,522. In January
2002 Mr. Jones was granted a bonus of 750,000 shares awarded for the years 2000
and 2001. Also in January all staff received options based on salary. Mr. Jones
received 45,900 options. In July, all officers were granted options for regular
pay they agreed to defer. Mr. Jones was granted 444,344 options for deferring
pay from January through July 15, 2002. In October Mr. Jones was granted 349,583
options for deferring pay from July 16 through October 8, 2002 until a later
undetermined time.
(2) In 2002 Mrs. Jones deferred pay in the amount of $127,740. In January
2002 Mrs. Jones was granted a bonus of 350,000 shares awarded for the years 2000
and 2001. Also in January all staff received options based on salary. Mrs. Jones
received 37,000 options. In April, Mrs. Jones was awarded 300,000 options in
recognition of additional duties as Chief Strategy Officer, Chief Marketing
Officer, and Secretary. In July, all officers were granted options for regular
pay for agreeing to defer their regular pay. Mrs. Jones was granted 324,572
options for deferring pay from January through July 15, 2002. In October Mrs.
Jones was granted 281,796 options for deferring pay from July 16 through October
8, 2002 until a later undetermined time.
(3) In 2002 Dr. Park deferred pay in the amount of $65,735. In January all
staff received options based on salary. Dr. Park received 33,600 options. In
April, Dr. Park was awarded 100,000 options as compensation for additional
duties as President of Virtual Vision. In July, all officers were granted
46
options for agreeing to defer their regular pay. Dr. Park was granted 112,210
options for deferring pay from January through July 15, 2002 until a later
undetermined time. In October Dr. Park was granted 192,500 options for deferring
pay from July 16 through October 8, 2002.
(4) Mr. Savadelis was employed for less than a full year in 2000. As such,
his salary amount for that year represents salary earned from his start date
through the end of the fiscal year. Mr. Savadelis' compensation included an
annual salary of $250,000 and a non- milestone-driven bonus of $150,000 to be
paid quarterly in the period from September 11, 2000 to September 10, 2001.
$37,500 of the non-milestone-driven bonus was paid to Mr. Savadelis during 2000.
In addition, the Company paid relocation assistance in the amount of $50,000 in
October, 2000. Mr. Savadelis ceased to be employed by the Company in January
2002. In 2003 the Company reached a settlement with Mr. Savadelis in which he
received $100,000 for all claims related to his employment agreement.
Options/SARs Grants During Last Fiscal Year
The following table provides information related to options granted to our
named executive officers during the fiscal year ended December 31, 2002.
The following table provides information related to options granted to our
named executive officers during the fiscal year ended December 31, 2002.
---------------------- ---------------- -------------- --------------- ------------- --------------------------
Number of % of Total Exercise Expiration Value at Assumed Annual
Securities Options Price Per Date (3) Rates of Stock Price
Underlying Granted in Share Appreciation for Option
Options Granted Fiscal 2002 Term
(2)
Name
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
5% 10%
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Gary W. Jones (1) 750,000 15.7% $ 0.42 1/2/07 82,884 183,153
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Gary W. Jones (4) 45,900 1.0% $ 0.42 1/2/07 5,073 11,209
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Gary W. Jones (7) 444,344 9.3% $ 0.32 7/14/05 49,106 108,511
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Gary W. Jones (8) 349,583 7.3% $ 0.18 10/8/05 38,633 85,370
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Susan K Jones (1) 350,000 7.3% $ 0.42 1/2/07 38,679 85,471
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Susan K Jones (4) 37,000 0.8% $ 0.45 1/14/07 4,089 9,036
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Susan K Jones (6) 300,000 6.3% $ 0.83 4/30/05 33,154 73,261
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Susan K Jones (7) 324,572 6.8% $ 0.32 7/14/05 35,869 79,262
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
Susan K Jones (8) 281,796 5.9% $ 0.18 10/8/05 31,142 68,816
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
K.C. Park (4) 33,600 0.7% $ 0.42 1/2/07 3,713 8,205
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
K.C. Park (5) 100,000 2.1% $ 0.83 4/30/05 11,051 24,420
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
K.C. Park (7) 112,210 2.3% $ 0.32 7/14/05 12,401 27,402
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
K.C. Park (8) 192,500 4.0% $ 0.18 10/8/05 21,274 47,009
---------------------- ---------------- -------------- --------------- ------------- ----------- --------------
(1) Gary W Jones and Susan K Jones were awarded an additional grant of
options during fiscal year 2002 in recognition of their respective contributions
to the Company during fiscal years 2001 and 2002.
47
(2) All options issued in 2002 vested immediately
(3) The exercise price of the stock options was based on the fair market
value of the stock on the day of the grant.
(4) Options issued to retain key employees based on a percentage of salary.
(5) Dr. Park was awarded an additional grant of options during fiscal year
2002 as compensation for additional duties as President of Virtual Vision, Inc.
(6) Mrs. Jones was awarded an additional grant of options during fiscal
year 2002 in recognition of additional duties as Chief Strategy Officer, Chief
Marketing Officer, and Secretary.
(7) Options issued to compensate employees for deferred salary Jan-July 15,
2002.
(8) Options issued to compensate employees for deferred salary July 16-Oct
8, 2002.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
The following table provides information regarding the aggregate number of
options exercised during the fiscal year ended December 31, 2002 by each of the
named executive officers and the number of shares subject to both exercisable
and unexercisable stock options as of December 31, 2002. The common stock price
at December 31, 2002 was $0.40 per share.
------------------- -------------- -------------- -------------- ---------------- -------------- ----------------
# of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Shares Options at Options at
Acquired on Value FY-End FY-End
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------ -------------- -------------- -------------- ---------------- -------------- ----------------
Gary Jones - - 941,110 874,472 214,002 0
------------------- -------------- -------------- -------------- ---------------- -------------- ----------------
Susan K. Jones - - 1,071,362 749,274 161,078 0
------------------- -------------- -------------- -------------- ---------------- -------------- ----------------
K.C. Park - - 419,570 152,571 72,801 0
------------------- -------------- -------------- -------------- ---------------- -------------- ----------------
In October 2002, the Board allocated options that were not issued due to
the unavailability of shares in the 2000 Stock Option Plan. Of the options
allocated, the Board allocated 2,000,000 options to Mr. Jones, 1,000,000 options
to Mrs. Jones and 500,000 options to Dr. Park. These options may or may not be
granted in whole or in part in 2003. These were incentive options to retain the
management and staff through a very difficult period
Compliance with internal Revenue Code Section 162(m) disallows a tax
deduction to publicly held companies for compensation paid to certain of their
executive officers to the extent that such compensation exceeds $1.0 million per
covered officer in any fiscal year. The limitation applies only to compensation
that is not qualified performance based compensation under the IRS code.
Compensation of Directors
Non-management directors receive options under the 2000 Stock Option Plan.
Under the 2000 Plan, a grant of options to purchase 40,000 shares of common
stock will automatically be granted on the date a director is first elected or
otherwise validly appointed to the Board with an exercise price per share equal
to 100% of the market value of one share on the date of grant. Such options
48
granted will expire ten years after the date of grant and will become
exercisable in four equal installments commencing on the date of grant and
annually thereafter. In addition to the 40,000 shares of common stock
automatically granted upon joining the Board, Directors thereafter receive an
annual grant of options to purchase 10,000 shares of common stock at the fair
market value as determined on the date of grant, which options will vest on
December 31 in the year granted. In addition, each non-management director is
reimbursed for ordinary expenses incurred in connection with attendance at such
meetings.
Executive Employment Agreements
We currently have no Employment Agreements in place with any officers of
the company. The Company had Employment Agreements with Gary Jones and Susan
Jones that expired on March 16, 2002.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into a consulting agreement dated as of March 16, 2000 with
Verus International Ltd., of which Mr. Ajmal Khan is Chief Executive Officer and
Mr. Jack Rivkin served as Non-Executive Chairman until he resigned that position
in early 2002 upon retirement from Citigroup. Mr. Khan was a member of our Board
of Directors, but resigned from such position effective as of April 25, 2003.
Mr. Rivkin is a member of our Board of Directors. Terms of the agreement
included monthly payments of $15,000 by us to Verus International Ltd. for
consulting services rendered during 2001. The term of the agreement expired on
March 16, 2002.
On November 27, 2001, eMagin Corporation entered into a Secured Note
Purchase Agreement whereby five accredited initial investors agreed to lend us
an aggregate of $875,000 in exchange for (i) 9.00% per annum Secured Convertible
Promissory Notes in an aggregate principal amount of $875,000, and (ii)
three-year warrants to purchase up to an aggregate of 359,589 shares of our
common stock. Messrs. Rivkin and Solomon, who at the time of the transaction
were each members of our Board of Directors, participated as investors in the
transaction and each invested $125,000 in the Company. In return for such
investment, Messrs. Rivkin and Solomon collectively received (i) Secured
Convertible Promissory Notes in an aggregate principal amount of $250,000, and
(ii) warrants exercisable for 102,740 of our common shares. Sovereign Bancorp
Ltd. also invested $100,000 under the transaction and received (i) a Secured
Convertible Promissory Note in an aggregate principal amount of $100,000, and
(ii) warrants exercisable for 41,096 of our common shares. The brother of Mr.
Khan, a former director of the Company, is an officer of Sovereign Bancorp Ltd.
In addition, Mr. Mortimer D.A. Sackler invested $200,000 under the transaction
and collectively received (i) Secured Convertible Promissory Notes in an
aggregate principal amount of $200,000, and (ii) warrants exercisable for 82,192
of our common shares. As of January 14, 2002, the Secured Note Purchase
Agreement was amended to increase (i) the aggregate principal amount of the
Secured Convertible Promissory Notes issued thereunder to $1,625,000, and (ii)
the number of shares issuable pursuant to the warrants issued thereunder to
1,954,944. Pursuant to these amendments, Mr. Mortimer D.A. Sackler invested an
additional $1,000,000 under the Secured Note Purchase Agreement and received (i)
additional Secured Convertible Promissory Notes with an aggregate principal
amount of $1,000,000, and (ii) additional warrants exercisable for 1,285,589
shares of our common stock. Rainbow Gate Corporation, pursuant to the November
27, 2001 transaction and the January 14, 2002 amendment, invested $300,000 under
the transaction and collectively received (i) Secured Convertible Promissory
Notes in an aggregate principal amount of $300,000, and (ii) warrants
exercisable for 341,945 of our common shares. After the close of the January 14,
2002 amended transaction, Dr. Mortimer D. Sackler purchased from Rainbow Gate
Corporation the Secured Convertible Promissory Notes in an aggregate principal
amount of $300,000, and (ii) warrants exercisable for 341,945 of our common
shares, and subsequently sold such note and warrants to Ginola Limited. At the
time of the amendment, the Company also redeemed $250,000 in aggregate principal
amount of the then outstanding notes held by three of the initial investors
under the agreement. Pursuant to this redemption, the notes held by Mr. Solomon,
(who at the time of the redemption was no longer a member of our Board of
Directors) and by Sovereign Bancorp Ltd. were redeemed.
In April 2003, we completed a financing pursuant to a global restructuring
and secured note purchase agreement. In connection with such financing, the
investors agreed, to (a) amend the secured note issued to them, (b) terminate
the security agreement dated November 20, 2001 that was entered into in
connection with the purchase of the original secured notes and allow the new
investors to enter into a new security agreement with them on a pari passu basis
49
in order for eMagin to continue its operations as a developer of virtual imaging
technology, and (c) simultaneously participate in the new financing. The
amendments to the notes included (i) extending the maturity dates of the note
from June 30, 2003 to November 1, 2005, and (ii) revising and clarifying certain
of the other terms and conditions of the note, including provisions relating to
interest payments, conversions, default and assignment of the note.
On February 27, 2002, eMagin Corporation and a group of several accredited
institutional and individual investors entered into a Securities Purchase
Agreement providing for the issuance and sale to the investors of (i) an
aggregate of approximately 3.6 million shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years from the Closing Date for
an aggregate of approximately 1.4 million shares of our common stock (subject to
certain customary anti-dilution adjustments). Rainbow Gate Corporation invested
$500,000 in the Company under the agreement and received pursuant to such
investment (i) 723,275 shares of our common stock, and (ii) warrants exercisable
for 289,310 shares of our common stock.
On June 20, 2002, the Company entered into a $0.2 million Secured Note
Purchase Agreement with an investor (the "Bridge Note"). The secured note
accrues interest at 11% per annum and was due to mature on November 1, 2005 as a
result of a financing we completed in April 2003. The Company also granted
warrants, exercisable for a period of five years, to purchase 300,000 shares of
common stock with an exercise price of $0.4257 per share to the investor;
provided, however, this warrant may not be exercised by the investor so long as
the investor is the beneficial owner, directly or indirectly, of more than ten
percent (10%) of the common stock of eMagin for purposes of Section 16 of the
Securities Exchange Act 1934. The fair value of the warrants issued to this
Investor, which approximated $84,000, has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the period of
the debt. Pursuant to the April 2003 financing described below, the investor
agreed, to (a) amend the secured note issued to them, (b) terminate the security
agreement dated June 20, 2002 that was entered into in connection with the
purchase of the original secured notes and allow the new investors to enter into
a new security agreement with him on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the note
included (i) amending the note issued on June 20, 2002 so as to provide that the
note shall be convertible and will have the same conversion price as the notes
issued pursuant to the April 2003 secured note purchase agreement, (ii)
extending the maturity dates of the note from June 30, 2003 to November 1, 2005,
and (iii) revising and clarifying certain of the other terms and conditions of
the note, including provisions relating to interest payments, conversions,
default and assignment of the note.
On April 25, 2003, eMagin Corporation and a group of several accredited
institutional and individual investors (collectively, the "Investors") entered
into a Global Restructuring and Secured Note Purchase Agreement (the "Secured
Note Purchase Agreement") dated as of April 25, 2003 (the "Closing Date")
whereby Investors agreed to lend eMagin $6,000,000 in exchange for (i) the
issuance of $6,000,000 principal amount of 9.00% Secured Convertible Promissory
Notes due on November 1, 2005 (the "Secured Notes") and (ii) Warrants (the
"Warrants") to purchase an aggregate of 7,749,921 shares of common stock of
eMagin (subject to certain customary anti-dilution adjustments), which Warrants
are exercisable for a period of three (3) years. Mr. Rivkin, who at the time of
the transaction was a member of our Board of Directors, participated as an
investor in the transaction and invested $125,000 in the Company. In return for
such investment, Mr. Rivkin received (i) a Secured Convertible Promissory Note
in an aggregate principal amount of $125,000, and (ii) warrants exercisable for
161,456 of our common shares. In addition, Stillwater LLC, an entity controlled
by Mr. Mortimer D.A. Sackler, agreed to invest an aggregate of $2,600,000 under
the transaction and will receive (i) Secured Convertible Promissory Notes in an
aggregate principal amount of $2,600,000, and (ii) warrants exercisable for
3,358,300 of our common shares. As part of the transactions, Messrs. Sackler and
Rivkin, who were the holders of an aggregate of $1,325,000 principal amount of
secured notes that were purchased pursuant to a secured note purchase agreement
entered into as of November 27, 2001 (collectively, the "Original Secured
Notes"), and Mr. Sackler, who additionally was the holder of a $200,000
principal Bridge Note, agreed to (a) amend their respective Original Secured
Notes and Bridge Note issued to them, (b) terminate the Security Agreement dated
November 20, 2001 that was entered into in connection with the purchase of the
50
Original Secured Notes and the Security Agreements dated June 20, 2002 that were
entered into in connection with the purchase of the Bridge Note and allow the
new investors to enter into a New Security Agreement (as defined below) with
them on a pari passu basis in order for the Company to continue its operations
as a developer of virtual imaging technology. The amendments to the Original
Secured Notes and Bridge Note included (i) amending the Bridge Note so as to
provide that the Bridge Note shall be convertible and will have the same
conversion price as the Notes issued pursuant to the Secured Note Purchase
Agreement, (ii) extending the maturity dates of the Original Secured Notes and
Bridge Note from June 30, 2003 to November 1, 2005, and (iii) revising and
clarifying certain of the other terms and conditions of the Original Secured
Notes and Bridge Note, including provisions relating to interest payments,
conversions, default and assignments of the Original Secured Notes and Bridge
Note. On April 25, 2003, Mr. Sackler transferred all of his holdings in the
Company to Stillwater LLC, a limited liability company in which Mr. Sackler is
the sole member.
The Company believes that the transactions described above were made on
terms no less favorable than could have been obtained from third parties. All
transactions were negotiated at arm's length.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of May 20, 2003
o by each person who is known by us to beneficially own more than 5% of
our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
Unless otherwise indicated, the shareholders listed in the table have sole
voting and investment power with respect to the shares indicated.
------------------------------------------------------------ ------------------------- ----------------------
Common Stock Percentage of
Name of Beneficial Owner Beneficially Owned Common Stock**
------------------------------------------------------------ ------------------------- ----------------------
Stillwater LLC (1) 13,906,589 28.4%
------------------------------------------------------------ ------------------------- ----------------------
Travelers Insurance Company (2) 9,583,852 24.2%
------------------------------------------------------------ ------------------------- ----------------------
Ginola Limited (3) 5,970,926 14.3%
------------------------------------------------------------ ------------------------- ----------------------
Gary W. Jones (4) 4,977,225 11.9%
------------------------------------------------------------ ------------------------- ----------------------
Susan K Jones (4) 4,977,225 11.9%
------------------------------------------------------------ ------------------------- ----------------------
SK Corporation (5) 2,700,792 7.1%
------------------------------------------------------------ ------------------------- ----------------------
Jack Rivkin (7) 956,184 2.5%
------------------------------------------------------------ ------------------------- ----------------------
K.C. Park (6) 664,082 1.7%
------------------------------------------------------------ ------------------------- ----------------------
Claude Charles (8) 130,000 *
------------------------------------------------------------ ------------------------- ----------------------
All Directors and Executive Officers as a Group (9) 6,727,491 16.4%
------------------------------------------------------------ ------------------------- ----------------------
* 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 May 20, 2003 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 37,859,063 shares of common stock outstanding on May 20,
2003, and the shares issuable upon the exercise of options and warrants
exercisable on or within 60 days of May 20, 2003, as described below.
(1) This figure represents:
(i) 1,053,022 shares owned by Stillwater LLC, which includes 961,597
shares owned by Rainbow Gate Corporation, in which Mr. Sackler is
the investment manager of the corporation;
(ii) warrants held by Stillwater LLC to purchase 5,223,966 shares,
which includes
(a) a warrant to purchase 300,000 shares that may not be
exercised by Stillwater LLC so long as Stillwater LLC is the
beneficial owner, directly or indirectly, of more than ten
percent (10%) of the common stock of eMagin for purposes of
Section 16 of the Securities Exchange Act of 1934, and
51
(b) a warrant to purchase 289,310 shares held by Rainbow Gate
Corporation, in which Mr. Sackler is the investment manager
of the corporation;
(iii) options held by Stillwater LLC to purchase 1,733,335 shares held
by Travelers and its affiliates TRAL and Citicorp; and
(iv) convertible notes held by Stillwater LLC to purchase 5,896,266
shares.
(2) Shares are owned by Travelers and its affiliates TRAL and Citicorp.
This figure includes warrants held by Travelers and Citicorp to purchase
1,655,845 and 127,292 shares of common stock respectively. [Address: Citigroup
Inc. 399 Park Avenue, New York, NY 10043].
(3) This figure represents:
(i) 1,476,936 shares owned by Ginola Limited, which includes 119,116
shares owned by Ogier Trustee Limited and 396,223 shares owned by
Crestflower Corporation.. Ginola Limited disclaims beneficial
ownership of the shares owned by Crestflower Corporation and
Ogier Trustee Limited;
(ii) warrants held by Ginola Limited to purchase 1,965,764, which
includes a warrant to purchase 42,858 shares held by Techalpha
LLC, as to which Ginola Limited disclaims beneficial ownership;
(iii)options held by Ginola Limited to purchase 666,667 shares held
by Travelers and its affiliates TRAL and Citicorp; and
(iv) convertible notes held by Ginola Limited to purchase 1,861,559
shares.
(4) This figure represents shares owned by Gary Jones and Susan Jones who
are married to each other, including (i) 1,967,094 shares of common stock
issuable upon exercise of stock options held by Gary Jones and (ii) 1,959,066
shares of common stock issuable upon exercise of stock options held by Susan
Jones. Does not include (i) 2,460,168 shares of common stock issuable upon
exercise of stock options held by Gary Jones that are not presently exercisable
and are not exercisable within 60 days of April 28, 2003, and (ii) 1,357,954
shares of common stock issuable upon exercise of stock options held by Susan
Jones that are not presently exercisable and are not exercisable within 60 days
of April 28, 2003.
(5) These shares are owned by SK Corp. This figure includes warrants held
by SK Corp. to purchase 205,479 shares of common stock.
(6) This figure represents shares owned by K.C. Park. This figure includes
663,910 common stock shares issuable upon exercise of stock options. Does not
include 703,471 shares of common stock issuable upon exercise of stock options
that are not presently exercisable and are not exercisable within 60 days of
April 28, 2003.
(7) These shares are owned by Jack Rivkin. This figure includes warrants
held by Mr. Rivkin to purchase 303,933 shares of common stock and 253,333 common
stock shares issuable upon exercise of stock options.
(8) This figure represents 130,000 common stock shares issuable upon
exercise of stock options.
(9) This figure includes (i) warrants to purchase 303,933 shares of common
stock, (ii) 4,973,403 shares of common stock issuable upon exercise of stock
options, and (iii) a convertible note to purchase 398,918 shares.
52
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 100,000,000 shares of Common Stock, par
value $.001. As of May 20, 2003, there were 37,859,063 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Computershare Trust Company of New York, as independent
transfer agent and registrar.
PREFERRED STOCK
The shares of preferred stock may be issued in series, and shall have such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issuance of such
stock adopted from time to time by the board of directors. The board of
directors is expressly vested with the authority to determine and fix in the
resolution or resolutions providing for the issuances of preferred stock the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent now
or hereafter permitted by the laws of the State of Delaware.
WARRANTS
In connection with a global restructuring and secured note purchase
agreement dated April 25, 2003, we have issued warrants to purchase an aggregate
of 7,749,921 shares of common stock of eMagin (subject to certain customary
anti-dilution adjustments), which warrants are exercisable for a period of three
(3) years. The exercise price of the warrants on a per share basis is $.8110, an
amount equal to 110% of the volume weighted average of the closing price of our
common shares as reported on the American Stock Exchange by the Wall Street
Journal, New York City edition, for the five (5) trading days immediately
preceding April 25, 2003, the closing date of the financing. In addition, at May
20, 2003, we had issued, outstanding and exercisable warrants to purchase an
aggregate of 6,802,728 shares of common stock, which warrants are at exercise
prices ranging from $0.43 to $26.25.
CONVERTIBLE SECURITIES
To obtain funding for our ongoing operations, on April 25, 2003, we entered
into a global restructuring and secured note purchase agreement with a group of
several accredited institutional and individual investors whereby the investors
agreed to lend us $6,000,000 in exchange for (i) the issuance of $6,000,000
principal amount of 9.00% secured convertible promissory notes due on November
1, 2005 and (ii) warrants to purchase an aggregate of 7,749,921 shares of common
stock of eMagin (subject to certain customary anti-dilution adjustments), which
Warrants are exercisable for a period of three (3) years.
This prospectus relates to the resale of the common stock underlying these
notes and warrants. The investors are obligated to provide us with an aggregate
of $6,000,000 as follows:
o $1,800,000 was disbursed on April 25, 2003;
o $525,000 was disbursed on April 30, 2003;
o $525,000 will be disbursed on May 15, 2003;
53
o $525,000 will be disbursed on June 15, 2003;
o $525,000 will be disbursed on June 25, 2003;
o $525,000 will be disbursed on July 15, 2003;
o $525,000 will be disbursed on August 15, 2003;
o $525,000 will be disbursed on September 15, 2003; and
o $525,000 will be disbursed on October 15, 2003.
Notwithstanding the foregoing, the purchasers of the Notes agreed that the
purchase of the Notes in each closings pursuant to the schedule set forth above
shall in no event take place later than 5 days after the effectiveness of this
registration statement.
Accordingly, we have received a total of $2,850,000 pursuant to the
Securities Purchase Agreement.
Interest is payable on the notes at a rate of 9% per annum and, at our
option, may be paid through the delivery of shares of our common stock
registered under the Securities Act in lieu of cash interest payments. Subject
to certain limitations, the notes may be converted, at the option of the holder,
in whole or in part, into common shares with a conversion price equal to
$0.7742, an amount equal to 105% of the volume weighted average of the closing
price of our common shares as reported on The American Stock Exchange by the
Wall Street Journal, New York City edition, for the five (5) trading days
immediately preceding April 25, 2003, the closing date of the $6,000,000
financing.
The exercise price of the warrants on a per share basis is $.8110, an
amount equal to 110% of the volume weighted average of the closing price of our
common shares as reported on The American Stock Exchange by the Wall Street
Journal, New York City edition, for the five (5) trading days immediately
preceding April 25, 2003, the closing date of the $6,000,000 financing.
As part of the April 2003 transactions, the existing the holders of an
aggregate of $1,625,000 principal amount of secured notes that were purchased
pursuant to a secured note purchase agreement entered into as of November 27,
2001, as amended as of January 14, 2002, and the holder of a $200,000 principal
amount secured note that was purchased pursuant to a secured note purchase
agreement entered into as of June 20, 2002, agreed to (a) amend their respective
notes issued to them, (b) terminate the respective security agreements dated
November 20, 2001 and June 20, 2002 that were entered into in connection with
the purchase of their notes and allow the new investors to enter into a new
security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in this new round of financing (subject to the terms
and conditions set forth in the secured note purchase agreement). The amendments
to the notes included (i) amending the note issued on June 20, 2002 so as to
provide that the note shall be convertible and will have the same conversion
price as the notes issued pursuant to the April 2003 secured note purchase
agreement, (ii) extending the maturity dates of the notes from June 30, 2003 to
November 1, 2005, and (iii) revising and clarifying certain of the other terms
and conditions of the notes, including provisions relating to interest payments,
conversions, default and assignments of the notes.
In connection with the completion of the transactions under the securities
purchase agreement, we also entered into a security agreement with the investors
dated as of April 25, 2003, and a registration rights agreement dated as of
April 25, 2003 providing the investors with certain registration rights under
the Securities Act of 1933, as amended, with respect to our common stock issued
or issuable in lieu of cash interest payments on the notes, upon conversion of
the notes and/or exercise of the warrants.
In addition to the foregoing, as a condition to and simultaneously with the
closing of the transaction pursuant to the secured note purchase agreement,
certain holders of our convertible notes agreed to convert approximately $4.9
million of notes and accrued interest into shares of our common stock, subject
to a "lock up" arrangement allowing only limited sales through private
54
transactions for their remaining shares through December 31, 2003. Specifically,
The Travelers Insurance Company agreed to convert their $1 million convertible
note plus related interest into our common stock at a conversion price of
approximately $0.53 per share, and SK Corporation has agreed to convert its $3
million convertible note and accrued interest into our common stock at an
approximate conversion price of approximately $1.28 per share. As further
conditions to the closing of the transaction pursuant to the secured note
purchase agreement, we have also entered into settlement or restructuring
agreements with certain of our other creditors to whom we owed approximately
$5.2 million of current payables, pursuant to which the creditors have agreed to
accept shares of our common stock in full or partial satisfaction of the amount
owed to them, or which allow us to either make discounted payments to them or to
make payments under more favorable payment terms than previously were in place.
Certain of the selling stockholders have contractually agreed to restrict
their ability to convert or exercise their warrants and receive shares of our
common stock such that the number of shares of common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
then issued and outstanding shares of common stock. See the "Selling
Stockholders" and "Risk Factors" sections for a complete description of the
convertible Notes.
A complete copy of the Securities Purchase Agreement and related documents
were filed with the SEC as exhibits to our Form 8-K filed on April 28, 2003.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended and restated, provide to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, that our directors or officers shall not be personally liable
to us or our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize the
company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any
state or the United States;
55
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
56
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
57
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
58
Shares Owned Shares Owned
Prior to the Offering After the Offering (3)
-------------------------------- ---------------------------------
Total
Name Number(1) Percent Shares Registered Number Percent
---- --------- ------- ----------------- ------ -------
Stillwater LLC (4) 12,366,262 28.9% 15,606,251(2) - -
Travelers Insurance Company (5) 9,579,850 24.2% 9,579,850 - -
Ginola Limited (6) 4,161,828 10.4% 4,831,991(2) - -
SK Corporation (7) 2,701,312 7.1% 2,701,312 - -
Triton West Group, Inc. (8) 2,010,561 5.3% 1,510,561 - -
George Haywood (9) 1,988,388 4.9% 1,988,388 (2) - -
Rohm Corporation (10) 1,973,068 4.9% 1,973,068 - -
Rainbow Gate Corporation (11) 1,250,907 3.3% 1,250,907 - -
Finova Capital Corporation (12) 1,053,684 2.8% 1,053,684 - -
Newington Invest Limited (13) 1,012,585 2.7% 1,012,585 - -
Vertical Ventures Investments, LLC (14) 1,012,585 2.7% 1,012,585 - -
Jack Rivkin (15) 956,184 2.5% 1,008,689 (2) - -
ASM Lithography (16) 844,156 2.2% 844,156 - -
Farmers Insurance Company (17) 750,333 1.9% 750,333 - -
Mid-Century Insurance (18) 750,333 1.9% 750,333 - -
Ben Johnson (19) 382,956 1.0% 589,310 - -
Emerald Venture (20) 374,580 * 442,005 (2) - -
Larkspur Capital(21) 387,496 * 387,496 - -
Crestflower Corporation (22) 396,223 * 396,223 - -
Eric Friedland (23) 230,819 * 230,819 - -
Verus (24) 192,493 * 192,493 - -
David Zierk (25) 184,655 * 184,655 - -
Robert N. Verratti (26) 129,165 * 152,415 - -
Andrea Della Valle (27) 127,652 * 127,652 - -
Emerald Advantage (28) 103,332 * 121,932 (2) - -
Emerald Advantage Offshore (29) 103,332 * 121,932 (2) - -
Ogier Trustee Limited, as Trustee (30) 119,116 * 119,116 - -
under settlement 10/14/88
Northwind Associates (31) 80,000 * 80,000 - -
Xybernaut Corp. (32) 36,164 * 36,164 - -
E-Pin (33) 10,000 * 10,000 - -
Amalkamar Ghosh (34) 2,113 * 2,113 - -
Walter Johnstone 12 * 12 - -
Martin Solomon (35) 51,370 * 51,370 - -
Ajmal Khan (35) 41,096 * 41,096 - -
James Arkoosh (35) 10,274 * 10,274 - -
* Less than one percent.
------------------------------------------------------------------------------------------------------------------------------------
59
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rule, beneficial ownership includes any shares as
to which the selling stockholders has sole or shared voting power or
investment power and also any shares, which the selling stockholders has
the right to acquire within 60 days.
(2) Includes shares of common stock underlying the interest for the convertible
debentures.
(3) Assumes that all securities registered will be sold.
(4) Includes (i) 6,668,291 shares underlying warrants that are currently
exercisable at a exercise prices between $0.53 and $0.811 per share; and
(ii) 8,039,596 shares underlying convertible debentures, with interest.
Mortimer D.A. Sackler is the sole member and is the control person of the
shares owned by such entity.
(5) Includes 1,779,135 shares underlying warrants.
(6) Includes (i) 2,300,263 shares underlying warrants that are currently
exercisable at a exercise prices between $0.53 and $0.811 per share; and
(ii) 2,531,728 shares underlying convertible debentures. Dr. Mortimer
Sackler is the sole shareholder and control person of the shares owned by
such entity.
(7) Includes 205,479 shares underlying warrants.
(8) Includes 288,732 shares underlying warrants.
(9) Includes (i) 666,667 shares underlying warrants that are currently
exercisable at an exercise price of $0.811 per share; and (ii) 3,513,304
shares underlying convertible debentures .
(10) Includes (i) 512,820 shares underlying warrants that are currently
exercisable at an exercise price of $0.85 per share.
(11) Includes (i) 289,310 shares underlying warrants that are currently
exercisable at an exercise price of $0.742 per share. Dr. Mortimer Sackler
is the sole shareholder of this entity.
(12) Represents shares of common stock.
(13) Includes 289,310 shares underlying warrants that are currently exercisable
at an exercise price of $0.7542 per share.
(14) Includes 289,310 shares underlying warrants that are currently exercisable
at an exercise price of $0.7542 per share.
(15) Includes (i) 466,159 shares underlying warrants that are currently
exercisable at exercise prices of $0.5469 and $0.811 per share; and (ii)
542,530 shares underlying convertible debentures .
(16) Represents shares of common stock.
(17) Includes 750,333 shares underlying convertible debentures.
(18) Includes 750,333 shares underlying convertible debentures.
(19) Includes 82,956 shares underlying warrants that are currently exercisable
at an exercise price of $0.7542 per share.
(20) Includes (i) 187,290 shares underlying warrants that are currently
exercisable at an exercise price of $0.811 per share; and (ii) 254,715
shares underlying convertible debentures.
60
(21) Represents 387,496 shares underlying warrants that are currently
exercisable at an exercise price of $0.9290 per share.
(22) Dr. Mortimer Sackler controls the shares owned by this entity.
(23) Includes 50,000 shares underlying warrants that are currently exercisable
at an exercise price of $0.7542 per share.
(24) Represents shares of common stock.
(25) Includes (i) 40,000 shares underlying warrants that are currently
exercisable at an exercise price of $0.7542 per share.
(26) Includes (i) 64,582 shares underlying warrants that are currently
exercisable at an exercise price of $0.811 per share; and (ii) 87,833
shares underlying convertible debentures.
(27) Includes 27,652 shares underlying warrants that are currently exercisable
at an exercise price of $0.7542 per share.
(28) Includes (i) 51,666 shares underlying warrants that are currently
exercisable at an exercise price of $0.811 per share; and (ii) 70,266
shares underlying convertible debentures.
(29) Includes (i) 51,666 shares underlying warrants that are currently
exercisable at an exercise price of $0.811 per share; and (ii) 70,266
shares underlying convertible debentures.
(30) Dr. Mortimer Sackler controls the shares owned by this entity.
(31) Represents shares of common stock.
(32) Represents 36,164 shares underlying warrants.
(33) Represents shares of common stock.
(34) Represents shares of common stock.
(35) Represents shares of common stock underlying warrants.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Grant Thornton LLP, Independent Certified Public Accountants, have audited,
as set forth in their report thereon appearing elsewhere herein, our financial
statements at December 31, 2002, and for the year then ended that appear in the
prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the auditors' opinion based on their expertise in
accounting and auditing.
In September 2002, eMagin announced that it had appointed Grant Thornton as
its independent auditor for fiscal year 2002, replacing Arthur Andersen LLP.
Section 11(a) of the Securities Act of 1933, as amended, provides that if
any part of a registration statement at the time it becomes effective contains
an untrue statement of a material fact or an omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, any person acquiring a security pursuant to the registration
statement (unless it is proved that at the time of the acquisition the person
knew of the untruth or omission) may sue, among others, every accountant who has
consented to be named as having prepared or certified any part of the
registration statement or as having prepared or certified any report or
valuation which is used in connection with the registration statement with
respect to the statement in the registration statement, report or valuation
which purports to have been prepared or certified by the accountant.
61
Prior to the date of this registration statement, the Arthur Andersen
partners who reviewed our most recent audited financial statements, as of
December 31, 2001 and 2000 resigned from Arthur Andersen LLP. As a result, after
reasonable efforts, we have been unable to obtain Arthur Andersen's written
consent to the incorporation by reference into this registration statement of
its audit reports with respect to our financial statements.
Under these circumstances, Rule 437(a) under the Securities Act of 1933
permits the filing of this registration statement without including herein a
written consent from Arthur Andersen . Accordingly, Arthur Andersen will not be
liable under Section 11(a) of the Securities Act of 1933 because it has not
consented to being named as an expert in the registration statement.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of eMagin Corporation, filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 that require us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
62
FINANCIAL STATEMENT INDEX
Page
FINANCIAL STATEMENTS FOR eMAGIN CORPORATION
For the Three Months Ended March 31, 2003 and March 31, 2002
Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002 F-2
Condensed Consolidated Statements of Operations for the Three-Months ended March 31, 2003 and 2002 F-3
(unaudited)
Condensed Consolidated Statements of Cash Flows for the Three-Months ended March 31, 2003 and 2002 F-4
(unaudited)
Condensed Consolidated Statement of Changes in Stockholder Equity (Unaudited) F-5
Selected Notes to Condensed Consolidated Financial Statements (Unaudited) F-6
Report of Independent Certified Public Accountants F-15
Report of Independent Public Accountants F-16
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-17
Consolidated Statements of Operations for the years ended December 31, 2002 and 2001 and From
Inception to Date F-18
Statement of Changes in Stockholders' Equity from Inception to Date F-19
Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001 and From
Inception to Date F-21
Notes to the Consolidated Financial Statements F-22
F-1
eMAGIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2003 December 31, 2002
-----------------------------------
CURRENT ASSETS: (unaudited) (Restated)
Cash and cash equivalents ...................................................... $ 65,254 $ 82,951
Trade receivables, net of allowance for doubtful accounts of $36,144 and $36,144 350,664 240,136
at March 31, 2003 and December 31, 2002, respectively
Unbilled costs and estimated profits on contracts in progress .................. 75,359 125,359
Inventory ...................................................................... 375,839 250,998
Prepaid expenses and other current assets ...................................... 113,240 113,849
-----------------------------------
Total current assets ........................................................ 980,356 813,293
EQUIPMENT AND LEASEHOLE IMPROVEMENTS: ............................................. 2,232,002 2,230,674
Less: Accumulated Depreciation ................................................... (1,721,944) (1,596,142)
-----------------------------------
Total equipment and leasehold improvements, net ................................... 510,058 634,532
Intangible Assets ................................................................. 18,020,000 18,020,000
Less: Accumulated Amortization .................................................... (18,020,000) (17,688,558)
-----------------------------------
Total intangible assets, net ...................................................... -- 331,442
Other long-term assets ............................................................ 47,873 55,117
-----------------------------------
Total assets ................................................................ $ 1,538,287 $ 1,834,384
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 7,350,964 $ 6,381,036
Accrued payroll and benefits ................................................... 1,249,387 1,031,958
Other accrued expenses ......................................................... 1,723,693 1,207,693
Current portion of long-term debt .............................................. 51,426 49,275
Deferred Revenue ............................................................... 500 30,400
Other short term debt .......................................................... 5,710,889 5,690,889
Other current liabilities ...................................................... 2,274 23,505
-----------------------------------
Total current liabilities ................................................... 16,089,133 14,414,756
-----------------------------------
LONG-TERM DEBT .................................................................... 227,577 227,742
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 31,285,838 and 30,854,980 ................... 31,286 30,855
Additional paid-in capital ..................................................... 119,544,643 119,221,277
Deferred compensation .......................................................... (351,598) (462,983)
Accumulated deficit ............................................................ (134,002,754) (131,597,263)
-----------------------------------
Total shareholders' equity .................................................. (14,778,423) (12,808,114)
-----------------------------------
-----------------------------------
Total liabilities and shareholders' equity .................................. 1,538,287 1,834,384
===================================
See selected notes to financial statements
F-2
eMAGIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2002
----------------------------------
REVENUE:
Contract revenue $ - $ 14,108
Product revenue, net of returns 465,379 143,919
----------------------------------
Total Revenue 465,379 158,027
----------------------------------
Cost of Goods Sold:
Production Costs 1,134,868 -
Sales Commissions 15,000 -
----------------------------------
Total Cost of Goods Sold 1,149,868 -
----------------------------------
Gross Profit (loss) (684,489) 158,027
COSTS AND EXPENSES:
Research and development, net of funding 21,848 2,144,766
Amortization of purchased intangibles 331,442 552,415
Selling, general and administrative 1,116,732 2,971,974
----------------------------------
Total costs and expenses, net 1,470,022 5,669,155
----------------------------------
OTHER INCOME (EXPENSE):
Interest expense (250,980) (936,132)
Interest income - (42,254)
----------------------------------
Other income (expense) (250,980) (978,386)
----------------------------------
Loss before provision for income taxes (2,405,491) (6,489,514)
----------------------------------
PROVISION FOR INCOME TAXES - -
Net loss $ (2,405,491) $ (6,489,514)
==================================
Basic and diluted loss per common share $ (0.08) $ (0.24)
Weighted average common shares outstanding 30,731,934 26,669,919
See selected notes to financial statements.
F-3
eMAGIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
ended ended
March 31, 2003 March 31, 2002
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,405,491) ($6,489,514)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 124,474 663,440
Amortization of intangibles 331,442 -
Non-cash charge for stock based compensation 111,385 1,336,926
Non-cash interest related charges 245,962 936,132
Non-cash charge for services received 163,134 307,657
Proceeds from sale of equipment, net 139,095
Changes in operationg assets and liabilities, net of acquisition:
Trade receivables 110,528 318,705
Unbilled costs and estimated profits on contracts in progress (50,000) 191,953
Inventory 124,841 -
Prepaid expenses and other current assets (609) (217,538)
Other long-term assets (7,244) 4,226
Advanced payment on contracts to be completed - (13,583)
Deferred Revenue (29,900) -
Accounts payable, accrued expenses and accrued payroll 1,109,701 757,605
Other current liabilities (21,231) -
------------------------------------------
Net cash used in operating activities (53,913) (2,203,991)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases/Sales of equipment - (84,745)
Net cash used in investing activities - (84,745)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs - 2,465,517
Proceeds from exercise of stock options and warrants 50,000 887
Proceeds from long and short term debt - 1,000,000
Payments of long term debt and capital leases (13,692) (250,000)
------------------------------------------
Net cash provided by financing activities 36,308 3,216,404
------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENT'S (17,606) 927,668
CASH AND CASH EQUIVALENTS, beginning of period 82,951 738,342
------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 65,345 $ 1,666,010
==========================================
See selected notes to financial statements
F-4
eMAGIN CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Common Stock Deferred paid-in Accumulated
Shares Compensation Capital Deficit Total
Balance, December 31, 2002 30,854,980 $ 30,855 $ (462,923) $ 119,221,276 $ (131,597,263) $(12,808,115)
================ =============== ================= =============== ================= ==============
Stock warrants exercised 91,425 91 49,909 50,000
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for
services 339,433 340 273,457 273,796
-----------------------------------------------------------------------------------------------------------------------------------
Amortization of deferred
compensation 111,385 111,385
-----------------------------------------------------------------------------------------------------------------------------------
Net loss for period (2,405,491) (2,405,491)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 $ 31,285,838 $ 31,286 $ (351,598) $ 119,544,643 $ (134,002,754) $(14,778,425)
================ =============== ================= =============== ================= ==============
The accompanying notes are an integral part of these financial statements.
F-5
eMAGIN CORPORATION
Selected Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 - BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The results of operations for the
period ended March 31, 2003 are not necessarily indicative of the results to be
expected for the full year.
Note 2 - NATURE OF BUSINESS
Fashion Dynamics Corporation (FDC) was organized January 23, 1996, under the
laws of the State of Nevada. FDC had no active business operations other than to
acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the Merger). The merged company changed its name to eMagin
Corporation (the "Company" or "eMagin") (Note 3). eMagin is a developer and
manufacturer of optical systems and microdisplays for use in the electronics
industry. eMagin's wholly-owned subsidiary, Virtual Vision Inc., develops and
markets microdisplay systems and optics technology for commercial, industrial
and military applications. Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
As of January 1, 2003 the Company has completed its development stage, as
defined by Statement of Financial Accounting Standards ("SFAS") No. 7,
Accounting and Reporting by Development Stage Enterprises". The financial
statements results as of December 31, 2002 and the period ended March 31, 2002
have been restated to reflect the current status. The Company expects its
product revenues to increase as we concentrate on trade revenue, once additional
supplies begin to arrive and shipments of finished product again begin to ship.
The effects on accounting for 2003 will be substantial. The majority of sales
before 2003 were Contract Revenue in which our costs were treated as overall
company losses. In 2002 we started minimal production. We initially shipped only
developer kits and sample quantities of our SVGA+ OLED microdisplay product. We
expanded the product line with a SVGA 3D product. We now provide both color and
several variations of monochrome versions of these products. Our customers
generally spend six to over twelve months evaluating and testing our product and
developing their own end product, which uses our display before committing to
larger orders. We expect the quantities of products shipped to increase as we
receive the materials and supplies we ordered after our recent financing and we
hire additional staff to increase our manufacturing capacity, enabling us to
begin shipping products to fulfill our backlog of orders as well as ship new
orders.
The cost of the products we sold in 2002 were predominately recorded in R&D and
Direct Contracts as we modified our product to create commercial products. In
the third quarter of 2002, we developed a glass cover that improved the
robustness of our products.. In the fourth quarter of 2002, we purchased a
machine that allowed us to produce the products in production quantities. In the
first quarter of 2003, the machine came on-line.
F-6
In 2003 we will keep track of costs of production, classifying direct and
indirect costs to costs of goods sold and tracking our gross profit. Although
R&D is no longer our primary focus, we have a few employees that will work on
projects to create new products and enhance existing products. We are working to
secure new, R&D contracts to help create the next generation of lower cost
and/or higher resolution products, as well as to develop other performance and
life-luminance product enhancements. Contract R&D is expected to continue in
2003, but at proportionately much smaller levels than in prior years.
There can be no assurance that the Company will generate sufficient revenues to
provide positive cash flows from operations. These and other factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result should the Company be unable to continue in
existence.
Note 3 - FED ACQUISITION
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock and approximately 3.9 million options and warrants to purchase
common stock to FED shareholders. The total preliminary 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 the
simultaneous private placement transaction of similar securities), $20.9 million
of value relating to the options and warrants exchanged, $0.3 million of
acquisition costs 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.
Note 4 - REVENUE AND COST RECOGNITION
The Company has historically earned revenues from certain of its research and
development activities under both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contract. Revenues relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues on
cost-plus-fee contracts include costs incurred plus a portion of estimated fees
or profits based on the relationship of costs incurred to total estimated costs.
Contract costs include all direct material and labor costs and an allocation of
allowable indirect costs as defined by each contract, as periodically adjusted
to reflect revised agreed upon rates. These rates are subject to audit by the
other party. Amounts can be billed on a bi-monthly basis. Billing is based on
subjective cost investment factors. At present eMagin has no current research
and development contracts.
In addition, the Company has product sales, which are recognized when
merchandise is shipped and such revenue is recorded net of estimated sales
returns based upon past experience. Adjustments to such returns are made as new
information becomes available.
In 2003 we will keep track of costs of production, classifying direct and
indirect costs to cost of goods sold and tracking our gross profit. Although R&D
as our primary focus will end, we have a few employees that will occasionally
work on projects to create new products and enhance existing products. At
present, we have no direct contracts we are billing to, but we may at times be
asked to work on a completed contract. Although we will not have any income from
that work, it may provide a foundation for future contracts and we will record
those costs in Direct Contracts.
F-7
Note 5 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. To date, activities of
the Company (and its predecessor) have included the performance of research and
development under cooperative agreements with United States Government agencies.
Funding from such research and development contracts is recognized as a
reduction in operating expenses during the period in which the services are
performed and related direct expenses are incurred.
Note 6 - NET LOSS PER COMMON SHARE
In accordance with SFAS No. 128, net loss per common share amounts ("basic EPS")
were computed by dividing net loss by the weighted average number of common
shares outstanding and excluding any potential dilution. Net loss per common
share assuming dilution ("diluted EPS") was computed by reflecting potential
dilution from the exercise of stock options and warrants. Common equivalent
shares totaling 39,686,573 have been excluded from the computation of diluted
EPS for the three months ended March 31, 2003.
Note 7 - DEBT
On January 14, 2002, the Company entered into a $1.0 million bridge loan
arrangement with a private investor in connection with a secured note purchase
agreement executed by the Company on November 27, 2001. This transaction
increased the total amount of the secured convertible loan outstanding under
this arrangement to $1,625,000, including amounts previously made available to
the Company in connection with the November 27, 2001 secured note arrangement,
net of repayments of $250,000 to certain investors who elected not to reinvest.
The secured convertible notes accrue interest at a rate of 9.00% per annum and
mature on November 1, 2005 as a result of a financing we completed in April
2003. Terms of the notes issued on January 14, 2002 also included a fixed
conversion rate of $0.5264 per share. The Company also granted warrants
purchasing 921,161 shares of common stock with an exercise price of $0.5468 per
share to the Investor. Such warrants are exercisable through January 2005.
Certain investors (the Investors") of the November 27, 2001 financing who
elected to remain in the new bridge loan arrangement received reset provisions
of the previous conversion rate and warrant exercise prices issued in November
2001 equivalent to the terms granted to the investors in January 2002.
The total of the intrinsic value of the warrants issued to the new Investor and
the incremental intrinsic value of the repriced warrants of certain existing
investors of approximately $480,000 has been recorded as original issue
discount, resulting in a reduction in the carrying value of this debt. The
original issue discount was amortized into interest expense over the original
period of the debt.
In addition, based on the terms of the bridge loan arrangement, the conversion
terms of the debt provide for a beneficial conversion feature. The total value
of the beneficial feature of the new debt and the incremental value of the reset
conversion feature of the existing debt of approximately $780,000 was recorded
at January 14, 2002 as non-cash interest expense in the accompanying unaudited
consolidated statements of operations.
In April 2003, we completed a financing pursuant to a global restructuring and
secured note purchase agreement. In connection with such financing, the Investor
agreed, to (a) amend the secured note issued to them, (b) terminate the security
agreement dated November 20, 2001 that was entered into in connection with the
purchase of the original secured notes and allow the new investors to enter into
a new security agreement with them on a pari passu basis in order for eMagin to
continue its operations as a developer of virtual imaging technology, and (c)
simultaneously participate in the new financing. The amendments to the notes
included (i) extending the maturity dates of the note from June 30, 2003 to
November 1, 2005, and (ii) revising and clarifying certain of the other terms
and conditions of the note, including provisions relating to interest payments,
conversions, default and assignment of the note.
F-8
On June 20, 2002, the Company entered into a $0.2 million Secured Note Purchase
Agreement with an Investor. The secured note accrues interest at 11% per annum
and was due to mature on November 1, 2005 as a result of a financing we
completed in April 2003. The Company also granted warrants, exercisable for a
period of five years, to purchase 300,000 shares of common stock with an
exercise price of $0.4257 per share to the investor; provided, however, this
warrant may not be exercised by the investor so long as the investor is the
beneficial owner, directly or indirectly, of more than ten percent (10%) of the
common stock of eMagin for purposes of Section 16 of the Securities Exchange Act
1934. The fair value of the warrants issued to this Investor, which approximated
$84,000, has been recorded as original issue discount, resulting in a reduction
in the carrying value of this debt. The original issue discount was amortized
into interest expense over the period of the debt. Pursuant to the April 2003
financing described above, the investor agreed, to (a) amend the secured note
issued to them, (b) terminate the security agreement dated June 20, 2002 that
was entered into in connection with the purchase of the original secured notes
and allow the new investors to enter into a new security agreement with them on
a pari passu basis in order for eMagin to continue its operations as a developer
of virtual imaging technology, and (c) simultaneously participate in the new
financing. The amendments to the note included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the April 2003 secured
note purchase agreement, (ii) extending the maturity dates of the note from June
30, 2003 to November 1, 2005, and (iii) revising and clarifying certain of the
other terms and conditions of the note, including provisions relating to
interest payments, conversions, default and assignment of the note.
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.
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.
As of March 31, 2003, the Company was not in compliance with a certain debt
covenant 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 March 31,
2003, 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. In April 2003, the Company entered into an agreement to convert
the principal and accrued interest to Common Stock at $1.28 per share, for a
total of 2,495,833 shares. This transaction includes the original $3,000,000 net
of approximately $114,000 original issue discount as well as approximately
$43,000 in financing costs not amortized as of March 31, 2003.
The company has completed negotiations with various creditors. We have been
mostly successful in obtaining lower negotiated payment requirements from our
larger creditors. The company has begun to make negotiated payments on its debt,
and expects to complete the negotiated payment amounts by June 30, 2003 as funds
from the April 2003 financing arrive.
Note 8 - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 100,000,000 shares with a
par value of $0.001 per share.
F-9
Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million was 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.
On March 16, 2000 FDC acquired all of the outstanding stock of FED. Under the
terms of the agreement, FDC issued approximately 10.5 million shares of its
common stock to FED 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 the simultaneous private placement transaction of similar
securities), $20.9 million of value relating to the options and warrants
exchanged, based on the difference between the fair value and the exercise price
of said equity instruments and $3.8 million of assumed liabilities. The
transaction was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the fair value of assets
acquired and liabilities assumed.
In January 2002, the Company negotiated settlement of amounts due to a related
party for services previously rendered via issuance of 192,493 shares of common
stock. As such, the Company recorded the fair value of the services received of
approximately $135,000 in selling, general and administrative expenses in the
accompanying unaudited consolidated statement of operations for the three months
ended March 31, 2002.
On February 27, 2002, the Company completed a private placement of securities
with several institutional and individual investors of 3,617,128 shares of
common stock at a price per share of $0.6913, generating gross proceeds of
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.
exercisable through February 2005.
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 March 2003, the Company negotiated settlement of amounts due and amounts for
future services to related parties for services rendered via issuance of 339,433
shares of common stock. As such, the Company recorded the fair value of the
services received of approximately $273,796 in selling, general and
administrative expenses, prepaid expenses and reduction of accounts payable in
the accompanying audited consolidated statement of operations for the three
months ended March 31, 2002. Also in March, we received $50,000 for the exercise
of 91,415 warrants in exchange for shares of common stock used for general
operating expenses.
Note 9 - STOCK COMPENSATION
As of March 31, 2003, we have outstanding options to purchase 5,811,681 shares.
On October 9, 2002 the Company granted ten-year options to certain employees,
officers and directors, as an incentive, to purchase an aggregate of 5,185,000
shares of common stock of the Company at an exercise price of $0.21 per share,
as follows: (i) option grants to three officers of the Company and its
subsidiaries to purchase an aggregate of 3,500,000 shares, exercisable
commencing October 9, 2004; (ii) option grant to other employees, to purchase an
aggregate of 1,425,000 shares, exercisable commencing October 9, 2004; (iii)
option grant to two outside directors of the Company to purchase 200,000 shares,
exercisable commencing October 9, 2004. The options have not been issued,
F-10
pending the future availability of common shares for the options under the
company's qualified option plan, or the approval of the 2003 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 March 31, 2003, there
were only approximately 100,000 shares available within the 2002 plan. The
number of shares actually granted may be prorated to a much smaller number.
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB No. 25,
when the exercise price of employee stock options equals the market price of the
underlying stock on the date of grant no compensation expense is recorded. The
Company discloses information relating to the fair value of stock-based
compensation awards in accordance with Statement of Financial Accounting
Standards No.123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
The following table illustrates the effect on net loss and loss per share as if
the Company had applied the fair value recognition provision of SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in the first quarter of 2003 and 2002, respectively: (1) average expected
volatility of 162% and 150%, (2) average risk-free interest rates of 3.64% and
6.00%, and (3) expected lives of five and ten years for the period ended March
31, 2003 and expected lives of five and eight years for year ended December 31,
2002.
The pro forma amounts that are disclosed in accordance with SFAS No. 123 reflect
the portion of the estimated fair value of awards that were earned for the three
months ended March 31, 2003 and 2002.
----------------------------------------------- --------------------- ---------------------
For the three months ended March 31, (In 2003 2002
thousands, except per share
amounts)
----------------------------------------------- --------------------- ---------------------
Net loss applicable to common stockholders', $ (2,405,491) $ (6,489,514)
as reported
----------------------------------------------- --------------------- ---------------------
Adjust: Stock-based employee compensation
expense determined under fair value method (1,441,445) (3,116,892)
----------------------------------------------- --------------------- ---------------------
Pro forma net loss. $ (3,846,836) $ (9,606,406)
----------------------------------------------- --------------------- ---------------------
Net loss per share applicable to common stockholders':
----------------------------------------------- --------------------- ---------------------
Basic and diluted , as reported $ (0.08) $ (0.24)
----------------------------------------------- --------------------- ---------------------
Basic and diluted, pro forma $ (0.13) $ (0.36)
----------------------------------------------- --------------------- ---------------------
Note 10 - EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB, issued SFAS, No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
This statement provides that companies should recognize the asset retirement
cost at its fair value as part of the cost of the asset and classify the accrued
amount as a liability. The asset retirement liability is then accreted to the
ultimate payout as interest expense. The initial measurement of the liability
would be subsequently updated for revised estimates of the discounted cash
outflows. The Statement will be effective for fiscal years beginning after June
15, 2002. On January 31, 2003, eMagin adopted SFAS No. 143. The adoption of this
standard did not have a significant impact on eMagin's consolidated financial
position, results of operations or cash flows.
F-11
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the requirement under SFAS 4 to aggregate and classify
all gains and losses from extinguishment of debt as an extraordinary item, net
of related income tax effect. This statement also amends SFAS 13 to require that
certain lease modifications with economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
In addition, SFAS No. 145 requires reclassification of gains and losses in all
prior periods presented in comparative financial statements related to debt
extinguishment that do not meet the criteria for extraordinary item in
Accounting Principles Board Opinion ("APB") 30. The statement is effective for
fiscal years beginning after May 15, 2002 with early adoption encouraged. The
Company adopted SFAS No. 145 on January 1, 2003, the adoption had no effect on
the financial results of the Company..
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. eMagin adopted
SFAS No. 146 as of January 1, 2003. Upon adoption of SFAS 146, there was no
effect on its financial position, cash flows or results of operations.
In November 2002, the EITF reached a consensus on Issue 00-21 ("EITF 00-21"),
"Multiple-Deliverable Revenue Arrangements." EITF 00-21 addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services, and/or rights to use assets. The consensus mandates how to
identify whether goods or services or both that are to be delivered separately
in a bundled sales arrangement should be accounted for separately because they
are separate units of accounting. The guidance can affect the timing of revenue
recognition for such arrangements, even though it does not change rules
governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into in fiscal years beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." The Company is assessing, but at this point does not believe the
adoption of EIFT 00-21 will have a material impact on its financial position,
cash flows or results of operations.
On April 30, 2003, the FASB issued Statement No. 149 ("SFAS No. 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in Statement No. 133, and
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003 and is to be applied prospectively.
The Company has not yet completed its analysis of SFAS No. 149 and, therefore,
the effect on the Company's combined financial statements of the implementation
of SFAS No. 149, when effective, has not yet been determined. On May 15, 2003,
the FASB issued Statement No. 150 ("FAS No. 150"), Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. FAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). FAS No. 150 affects the
issuer's accounting for three types of freestanding financial instruments.
F-12
o mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets
o instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets; includes put options and
forward purchase contracts
o obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuers'
shares.
FAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. Most of the guidance in FAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company has not yet completed its analysis of
SFAS No. 150 and, therefore, the effect on the Company's combined financial
statements of the implementation of SFAS 150, when effective, has not yet been
determined.
Note 11 - RECLASSIFICATIONS
Certain amounts in the March 31, 2002 financial statements have been
reclassified to conform to the March 2003 classification. As of January 1, 2003
the Company has completed its development stage, as defined by Statement of
Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by
Development Stage Enterprises". The financial statements results as of December
31, 2002 and the period ended March 31, 2002 have been restated to reflect the
current status.
NOTE 12 - SUBSEQUENT EVENTS
On April 25, 2003, we entered into a global restructuring and secured note
purchase agreement with a group of several accredited institutional and
individual investors whereby the Investors agreed to lend us $6,000,000 in
exchange for (i) the issuance of $6,000,000 principal amount of 9.00% secured
convertible promissory notes due on November 1, 2005 and (ii) warrants to
purchase an aggregate of 7,749,921 shares of common stock of eMagin (subject to
certain customary anti-dilution adjustments), such warrants are exercisable for
a period of three (3) years.
Interest is payable on the notes at a rate of 9% per annum and, at our option,
may be paid through the delivery of shares of our common stock (registered
pursuant to the registration rights agreement referred to below) in lieu of cash
interest payments. Subject to certain limitations, the notes may be converted,
at the option of the holder, in whole or in part, into common shares with a
conversion price equal to 105% of the volume weighted average of the closing
price of our common shares as reported on The American Stock Exchange by the
Wall Street Journal, New York City edition, for the five (5) trading days
immediately preceding the closing date.
The exercise price of the warrants on a per share basis is $.8110, an amount
equal to 110% of the volume weighted average of the closing price of our common
shares as reported on The American Stock Exchange by the Wall Street Journal,
New York City edition, for the five (5) trading days immediately preceding the
closing date.
As part of the transactions, the existing the holders of an aggregate of
$1,625,000 principal amount of secured notes that were purchased pursuant to a
secured note purchase agreement entered into as of November 27, 2001, and the
holder of a $200,000 principal amount secured note that was purchased pursuant
to a secured note purchase agreement entered into as of June 20, 2002, agreed to
(a) amend their respective notes issued to them, (b) terminate the respective
security agreements dated November 20, 2001 and June 20, 2002 that were entered
into in connection with the purchase of their notes and allow the new investors
to enter into a new security agreement with them on a pari passu basis in order
F-13
for eMagin to continue its operations as a developer of virtual imaging
technology, and (c) simultaneously participate in this new round of financing
(subject to the terms and conditions set forth in the secured note purchase
agreement). The amendments to the notes included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the secured note
purchase agreement, (ii) extending the maturity dates of the notes from June 30,
2003 to November 1, 2005, and (iii) revising and clarifying certain of the other
terms and conditions of the notes, including provisions relating to interest
payments, conversions, default and assignments of the notes.
In connection with the completion of the transactions under the securities
purchase agreement, we also entered into a security agreement with the Investors
dated as of April 25, 2003, and a registration rights agreement dated as of
April 25, 2003 providing the investors with certain registration rights under
the Securities Act of 1933, as amended, with respect to our common stock issued
or issuable in lieu of cash interest payments on the notes, upon conversion of
the notes and/or exercise of the warrants.
In addition to the foregoing, as a condition to and simultaneously with the
closing of the transaction pursuant to the secured note purchase agreement,
certain holders of our convertible notes agreed to convert approximately $4.9
million of notes and accrued interest into shares of our common stock, subject
to a "lock up" arrangement allowing only limited sales through private
transactions for their remaining shares through December 31, 2003. Specifically,
The Travelers Insurance Company agreed to convert their $1 million convertible
note plus related interest into our common stock at a conversion price of
approximately $0.53 per share, and SK Corporation has agreed to convert its $3
million convertible note and accrued interest into our common stock at an
approximate conversion price of approximately $1.28 per share. As further
conditions to the closing of the transaction pursuant to the secured note
purchase agreement, we have also entered into settlement or restructuring
agreements with certain of our other creditors to whom we owed approximately
$5.2 million of current payables, pursuant to which the creditors have agreed to
accept shares of our common stock in full or partial satisfaction of the amount
owed to them, or which allow us to either make discounted payments to them or to
make payments under more favorable payment terms than previously were in place.
The company is currently assessing the impact of these transactions. We estimate
that approximately $3.6 million accounts payable will be written down and/or
reclassed to short and long term debt, as well as approximately $5.7 of short
term debt will be reclassed to long term debt.
F-14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of eMagin Corporation:
We have audited the accompanying balance sheet of eMagin Corporation (a
Delaware corporation in the development stage; see Note 1) and subsidiaries as
of December 31, 2002 and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the year then ended and the
2002 amounts included in the cumulative period from inception (January 23, 1996)
to December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of eMagin Corporation as of December 31, 2001 and for the year then ended and
from inception to December 31, 2001 were audited by other auditors who have
ceased operations and who's report dated March 13, 2002 included an explanatory
paragraph that described uncertainties regarding the Company's ability to
continue as a going concern.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eMagin Corporation and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended, and the 2002 amounts included in the
cumulative period from inception (January 23, 1996) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations since inception and the working capital deficit raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Grant Thornton LLP
New York, New York
April 11, 2003
F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of eMagin Corporation:
We have audited the accompanying consolidated balance sheets of eMagin
Corporation (a Delaware corporation in the development stage; see Note 1) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the period from inception
(January 23, 1996) to December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We have not audited
the financial statements of the Company from inception to December 31, 1999.
These financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
period from inception to December 31, 1999, is based solely on the report of
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of eMagin Corporation and subsidiaries as of December 31,
2001 and 2000, and the results of their operations and their cash flows for the
years then ended, and for the period from inception to December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations since inception and the working capital deficit raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Arthur Anderson LLP
New York, New York
March 13, 2002
Note: Reprinted above is a copy of the report previously expressed by such
firm which has ceased operations. The reprinting of this report is not
equivalent to a current re-issuance of such report as would be required if such
firm was still operating. The consolidated operations, shareholders' equity
(deficit) and cash flows for the two years then ended and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the period from inception (January 23, 1996) to December 31, 2001
referred to in this report have been included in the accompanying financial
statements. Because such firm has not consented to the inclusion of this report
in this Form SB-2, the reader's ability to make a claim against such firm may be
limited or prohibited.
F-16
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS 2002 2001
-------------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents $ 82,951 $ 738,342
Contract receivables 240,136
485,021
Unbilled costs and estimated profits on contracts in progress
125,359 293,273
Inventory 250,998 90,720
Prepaid expenses and other current assets 113,849 388,344
-------------------- --------------------
Total current assets 813,293 1,995,700
Equipment and leasehold improvements 634,532 1,166,509
Patents 331,442 1,657,238
Other long-term assets 55,117 94,367
-------------------- --------------------
Total assets $ 1,834,384 $ 4,913,814
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 49,275 $ 693,197
Other short term debt 5,690,889 1,875,000
Accounts payable 6,381,036 3,116,558
Accrued expenses 1,207,693 615,418
Accrued payroll and benefits 1,031,958 788,302
Deferred Revenue 30,400 289,538
Other current liabilities 23,505 108,805
-------------------- --------------------
Total current liabilities
14,414,756 7,486,818
-------------------- --------------------
LONG-TERM DEBT
227,742 2,305,184
SHAREHOLDERS' EQUITY (DEFICIT):
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 30,854,980 and 25,171,183
30,855 25,171
Additional paid-in capital
119,221,277 114,058,560
Deferred compensation
(462,983) (2,277,367)
Deficit accumulated during the development stage
(131,597,263) (116,684,552)
-------------------- --------------------
Total shareholders' equity (deficit)
(12,808,114) (4,878,188)
-------------------- --------------------
Total liabilities and shareholders' equity (deficit) $ 1,834,384 $ 4,913,814
==================== ====================
The accompanying notes are an integral part of these financial statements
F-17
eMAGIN CORPORATION
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001
and for the period from inception (January 23, 1996) through December 31, 2002
Period from inception
January 6, 1996
2002 2001 to December 31, 2002
CONTRACT REVENUE:
CONTRACT REVENUE:
Contract revenue $ 840,658 $ 5,005,657 $ 8,403,902
Product revenue
1,287,002 841,713 2,128,715
---------------- ------------------------------------------
Total revenue 2,127,660 5,847,370 10,532,617
---------------- ------------------------------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$331,956, $1,555,811,
$3,608,325 respectively 7,254,996 12,724,161 29,614,105
Amortization of purchased intangibles
1,325,796 17,886,838 40,144,954
Acquired In Process Research & Development
- 12,820,000
Writedown of Goodwill and purchased
intangibles - 32,145,863 32,145,863
Selling, general and administrative
6,153,238 10,226,710 24,100,289
---------------- ------------------------------------------
Total costs and expenses, net
14,734,030 72,983,572 138,825,211
---------------- ------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense
(2,329,452) (1,411,668) (3,232,742)
Other income (expense), net
23,111 61,135 (71,928)
---------------- ------------------------------------------
Other income (expense)
(2,306,341) (1,350,533) (3,304,670)
---------------- ------------------------------------------
Loss before provision for income taxes $ (14,912,711) $ (68,486,735) $ (131,597,263)
---------------- ------------------------------------------
PROVISION FOR INCOME TAXES
- -
---------------- ------------------------------------------
Net loss $ (14,912,711) $ (68,486,735) $ (131,597,263)
================ ==========================================
Basic and diluted loss per common share
(0.51) (2.73)
Weighted average outstanding common stock
29,416,838 25,100,211
The accompanying notes are an integral part of the financial statements.
F-18
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)
---------------------------------------------================================================================================
F-19
eMAGIN CORPORATION
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------------------
Additional
-------------------------------------------------------------------------------------------------------------------------------
Common Stock Deferred paid-in Accumulated
-------------------------------------------------------------------------------------------------------------------------------
Shares $ Compensation Capital Deficit Total
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 25,171,183 $ 25,171 $ (2,277,367) $ 114,058,560 $ (116,684,552) $(4,878,188)
-------------------------------================-==============--================-===============-================-=============
-------------------------------------------------------------------------------------------------------------------------------
Sale of common stock in
private placement 4,899,179 4,899 3,475,619 3,480,518
-------------------------------------------------------------------------------------------------------------------------------
Issuance of warrants in debt 140,387 140,387
financing
-------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock
related to debt financing 80,000 80 55,570 55,650
-------------------------------------------------------------------------------------------------------------------------------
Buyout of debt financing 500,000 500 89,632 90,132
-------------------------------------------------------------------------------------------------------------------------------
Value related to original
issue discount features of 672,682 672,682
debt financing
-------------------------------------------------------------------------------------------------------------------------------
Amortization of deferred
compensation 739,191 35,329 774,520
-------------------------------------------------------------------------------------------------------------------------------
Stock Options Exercised 2,125 2 885 887
-------------------------------------------------------------------------------------------------------------------------------
Reversal and deferred
compensation balance for 1,075,193 (1,075,193) -
forfeited options
-------------------------------------------------------------------------------------------------------------------------------
Non-Cash Comp Expenses for
Options 872,399 872,399
-------------------------------------------------------------------------------------------------------------------------------
Value related to beneficial
conversion features of debt 783,691 783,691
financing
-------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for 202,493 202 111,716 111,918
services
-------------------------------------------------------------------------------------------------------------------------------
Net Loss for Period (14,912,711) (14,912,711)
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 30,854,980 $ 30,855 $ (462,983) $ 119,221,276 $ (131,597,263) $(12,808,115)
-------------------------------================-==============--================-===============-================-=============
-------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-20
eMAGIN CORPORATION (a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001 and for the period from inception (January 23, 1996) to
December 31, 2002
Period from
inception
January 23 1996
2002 2001 December 31, 2002
--------------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($14,912,711)($68,486,735) ($131,597,263)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization
1,842,480 18,453,461 41,785,462
Write-down of goodwill and purchased intangibles
32,145,863 32,145,863
Loss on disposal of assets
97,713
Non-cash charge for stock based compensation
1,646,917 2,841,003 7,027,748
Non-cash interest related charges
1,446,654 1,222,562 2,669,216
Non-cash related to issuance of warrants
140,387 140,387
Non-cash charge for services received
25,050 116,151 141,201
Non-cash charge due to beneficial conversion
783,691 783,691
Acquired in-process research and development
12,820,000
Changes in operating assets and liabilities, net of
acquisition:
Trade receivables
593,300 340,606 240,136
Interest receivable
Unbilled costs and estimated profits on contracts in
progress 125,359 125,359
Costs and estimated profits in excess of billings on
contracts (326,291) 334,074
Inventory 341,718 (90,720) 250,998
Prepaid expenses and other current assets 196,371 276,984 113,849
Other long-term assets 139,033 11,027 55,117
Advanced payment on contracts to be completed (398,343) 86,531
Deferred Revenue 30,400 30,400
Accounts payable, accrued expenses and accrued
payroll 2,738,847 1,932,619 4,722,505
Other current liabilities
-----------------------------------------------
Net cash used in operating activities (5,587,137) (10,816,574) (28,447,617)
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (84,745) (464,829) (1,352,607)
Net proceeds from acquisition 1,239,162
-----------------------------------------------
Net cash used in investing activities (84,745) (464,829) (113,445)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance
costs 3,475,621 24,756,621
Proceeds from exercise of stock options and warrants 141,272 27,609 168,881
Proceeds from long and short term debt (net) 1,443,478 4,875,000 6,318,478
Payments of long term debt and capital leases (43,880) (250,121) (2,599,967)
-----------------------------------------------
Net cash provided by financing activities 5,016,491 4,652,488 28,644,013
-----------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (655,391) (6,628,915) 82,951
CASH AND CASH EQUIVALENTS, beginning of period 738,342 7,367,257
-----------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 82,951 $ 738,342 $ 82,951
===============================================
The accompanying notes are an integral part of these financial statements
F-21
eMAGIN CORPORATION
(a development stage company)
Notes to the Consolidated Financial Statements
Note 1 - NATURE OF BUSINESS AND DEVELOPMENT STAGE RISKS
Fashion Dynamics Corporation ("FDC") was organized January 23, 1996, under
the laws of the State of Nevada. FDC had no active business operations other
than to acquire an interest in a business. On March 16, 2000, FDC acquired FED
Corporation ("FED") (the "Merger"). FED was a developer and manufacturer of
optical systems and micro displays for use in the electronics industry. FED's
wholly owned subsidiary, Virtual Vision, develops and markets micro display
systems and optics technology for commercial, industrial and military
applications. The merged company changed its name to eMagin Corporation (the
"Company" or "eMagin"). Following the Merger, the business conducted by the
Company is the business conducted by FED prior to the Merger.
The Company continues to be a development stage company, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises," as it continues to devote
substantially all of its efforts to establishing a new business, and it has not
yet commenced its planned principal operations. Revenues earned by the Company
to date are primarily related to research and development type contracts and
sales of its first two commercial organic light emitting diode ("OLED") micro
display products.
Through December 31, 2002 we have incurred accumulated losses of
approximately $131.6million since our inception and we anticipate incurring
significant losses as we fund our growth. Since inception we have financed our
operations through private placements of equity securities, research and
development contracts and borrowings. As of December 31, 2002, we had $83
thousand in cash and cash equivalents, and a working capital deficit of
$13.6million. We are in default of our note agreements (see Note 5) and we are
delinquent in our lease obligation to IBM in the amount of approximately
$150,000. We may be denied access to the premises although the company has
entered into negotiations with IBM to settle the amount due in April 2003.
The Company's ability to continue as a going concern and its future success
is dependent upon its ability to raise capital in the near future to continue:
(1) its research and development efforts, (2) hiring and retaining key
employees, (3) satisfaction of its commitments and (4) the successful
development, marketing and production of its products.
The Company believes that it will be able to secure financing in the near
term and that the proceeds from such financings, and its remaining cash
resources at December 31, 2002, will be sufficient to fund the Company's
operations into the first quarter of 2004 and beyond. However, there can be no
assurance that sufficient capital will be available, when required, to permit
the Company to realize its plan, or even if such capital is available, that it
will be at terms favorable to the Company. Additionally, there can be no
assurance that the Company's efforts to produce a profitable product will be
successful or that the Company will generate sufficient revenues to provide
positive cash flows from operations. These and other factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result should the Company be unable to continue in existence.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements of eMagin Corporation
include the assets, liabilities, revenues and expenses of all majority-owned
subsidiaries over which the Company exercises control. Inter-company
transactions and balances are eliminated in consolidation.
F-22
Revenue and Cost Recognition
The Company has historically earned revenues from certain of its research
and development activities under both firm fixed-price contracts and cost-type
contracts, including some cost-plus-fee contracts. Revenues relating to firm
fixed-price contracts are generally recognized on the percentage-of-completion
method of accounting as costs are incurred (cost-to-cost basis). Revenues on
cost-plus-fee contracts include costs incurred plus a portion of estimated fees
or profits based on the relationship of costs incurred to total estimated costs.
Contract costs include all direct material and labor costs and an allocation of
allowable indirect costs as defined by each contract, as periodically adjusted
to reflect revised agreed upon rates.
Product revenue is recorded when products are shipped to customers, at
which time, title passes to the customer net of estimated returns. The Company
provides a limited warranty that its products meet the formal specifications at
the time of shipment. Customers are typically provided an ability to return
products with out of specification initial manufacturing defects up to 1 year
after shipment, depending on the arrangements made. Longer limited warrants may
be made. The company does not provide any warranty other than the potential
replacement of our own specific product.
As of December 31, 2002 and 2001, the Company had received advanced
payments on contracts to be completed of $0 and $275,000, respectively. These
amounts, classified as deferred revenues in the accompanying consolidated
balance sheets, represent that portion of amounts billed by the Company, or cash
collected by the Company, for which services have not yet been provided or
products have not yet been delivered.
Costs and Estimated Profits in Excess of Billings on Contracts in Progress
The Company records costs and estimated profits in excess of billings on
contracts in progress as an asset on its balance sheet to the extent such costs,
and related profits, if any, have been incurred under outstanding contracts and
are expected to be collected.
The components of costs and estimated profits in excess of billings on
contracts in progress as of December 31, 2002 and 2001 were as follows:
2002 2001
Total costs incurred and estimated profits $ 840,658 $ 21,414,000
Less amounts billed 840,658 21,121,000
Costs and estimated profits in excess of billings on contracts
in progress $ 0 $ 293,000
============== ===============
Research and Development/Cost-Sharing Arrangements
The Company has entered into three cost-sharing arrangements with an agency
of the U.S. Government and one commercial customer. To date, activities of the
Company include the performance of research and development under cooperative
agreements. Current industry practices provide that costs and related funding
under such agreements be accounted for as incurred and earned. The Company is
reimbursed for expenses plus government rates for research and development costs
and general and administrative costs.
The Company has incurred research and development costs and earned funding
under these agreements as of December 31, 2002 and 2001 as follows:
2002 2001
Unfunded research and development $ 7,244,820 $ 11,442,000
Research and development costs 331,956 2,838,000
Funding received (331,956) (1,556,000)
------------ ---------------
$ 7,244,820 $ 12,724,000
============ ===============
F-23
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
Accounts Receivable
The majority of the Company's commercial accounts receivable are due from
OEM manufacturers. Credit is extended based on evaluation of a customers'
financial condition and, generally, collateral is not required. Accounts
receivable are payable in U.S. dollars, are due within 30 days and are stated at
amounts due from customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable when they become
uncollectable, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in first-out method. The Company reviews the value of its
inventory and reduces the inventory value to its estimated market value based
upon current market prices and contracts for future sales.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation on
equipment is calculated using the straight-line method of depreciation over
their estimated useful lives. Amortization of leasehold improvements is
calculated by using the straight-line method over the shorter of their estimated
useful lives or lease terms. Expenditures for maintenance and repairs are
charged to expense as incurred.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. In accordance with this standard, eMagin performs
impairment tests on its long-lived assets, excluding goodwill and other
intangible assets, when circumstances indicate that their carrying amounts may
not be recoverable. If required, recoverability is tested by comparing the
estimated future undiscounted cash flows of the asset or asset group to its
carrying value. If the carrying value is not recoverable, the asset or asset
group is written down to market value.
Goodwill and Other Intangible Assets
Identifiable intangible assets resulting from the acquisition of FED and
the excess purchase price over net assets acquired ("goodwill") are being
amortized on a straight-line basis over their respective estimated useful lives
of approximately three years. The Company's ability to realize its goodwill is
dependent upon its ability to raise sufficient financing in order to expand the
rollout and commercialization of its products. In the third quarter of 2001, the
Company was able to secure a limited amount of additional financing to fund its
operations, however, such financing was not in the amount the Company expected
to be able to secure, nor was it enough to rollout commercialization of its
product on a wide scale basis, as had been contemplated by its business plan.
Based on these factors, among others, the Company revised its future business
plan and evaluated the carrying value of the identifiable intangible assets and
goodwill. Based on this evaluation, the Company determined that the assets were
impaired, and, accordingly, during the quarter ended September 30, 2001, the
Company recorded an impairment write-down of its goodwill and other identifiable
intangible assets of approximately $32.1 based on the estimated discounted net
F-24
cash flow to be generated over the remaining life of the assets. The impairment
charge is included in the accompanying consolidated statement of operations for
the year ended December 31, 2001. Inclusive of this impairment write-down,
amortization of identified intangibles expense for the year ended December 31,
2001 was approximately $50.0 million and amortization of purchased intangibles
expense for the year ended December 31, 2002 was approximately $1.3 million.
As of December 31, 2002 and 2001, intangible assets was comprised of the
patents as follows (in millions):
2002 2001
Patents .......................................... $ 18.0 $ 18.0
Less: Accumulated amortization ................... (17.7) (16.3)
-------- --------
Patents, net ..................................... $ 0.3 $ 1.7
======== ========
Income Taxes
Deferred income taxes are recorded by applying enacted statutory tax rates
to temporary differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. At December 31, 2002 and 2001,
the Company has net deferred tax assets of approximately $29.5 million and $24.4
million respectively, primarily resulting from the future tax benefit of net
operating loss carry forwards discussed below. Such net deferred tax assets are
fully offset by valuation allowances due to the uncertainty as to their
realizability.
At December 31, 2002, the Company has net operating loss carry forwards
totaling approximately $ 72.7 million, inclusive of the net operating losses
acquired as part of the acquisition of FED, which expire through 2021, available
to offset future Federal taxable income. Pursuant to Section 382 of the Internal
Revenue Code, the usage of a portion of these net operating loss carry forwards
is limited due to changes in ownership that have occurred.
Loss per Common Share
In accordance with SFAS No. 128, "Earnings Per Share," net loss per common
share amounts ("basic EPS") were computed by dividing net loss by the weighted
average number of common shares outstanding and excluding any potential
dilution. Net loss per common share amounts assuming dilution ("diluted EPS")
were computed by reflecting potential dilution from the exercise of stock
options and warrants. Common equivalent shares have been excluded from the
computation of diluted EPS for all periods presented as their effect is
antidilutive.
Comprehensive Income (Loss)
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distributions to owners, for the period in which they are recognized.
Comprehensive income (loss) is the total of net income (loss) and all other
non-owner changes in equity (or other comprehensive income (loss)) such as
unrealized gains or losses on securities classified as available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive income (loss) must be reported on the face of the
annual financial statements. The Company's operations did not give rise to any
material items includable in comprehensive income (loss), which were not already
in net income (loss) for the years ended December 31, 2002, 2001 and 2000.
Accordingly, the Company's comprehensive income (loss) is the same as its net
income (loss) for all periods presented.
Stock-Based Compensation
Accounting for Stock-Based Compensation: eMagin applies Accounting
Principals Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock-based
compensation plans. Accordingly, eMagin records expense for employee stock
F-25
compensation plans equal to the excess of the market price of the underlying
eMagin shares at the date of grant over the exercise price, which equals the
market price of the underlying shares at the grant date and therefore, no
compensation expense is recorded. The following table summarizes the pro forma
operating results of eMagin had compensation cost for stock options granted (See
Note 8) been determined in accordance with the fair value based method
prescribed by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123). eMagin has presented the following
disclosures in accordance with SFAS 148 "Accounting for Stock-Based
Compensation-Transition and Disclosures."
----------------------------------------------- --------------------- ---------------------
For the year ended December 31, 2002 2001
----------------------------------------------- --------------------- ---------------------
(In thousands, except per share
amounts)
----------------------------------------------- --------------------- ---------------------
Net loss applicable to common stockholders',
as reported $ (14,912,711) $(68,486,735)
----------------------------------------------- --------------------- ---------------------
Adjust: Stock-based employee compensation
expense determined under fair value method (1,225,884) (992,265)
----------------------------------------------- --------------------- ---------------------
Pro forma net loss. $ (16,138,595) $ (69,479,000)
----------------------------------------------- --------------------- ---------------------
Net loss per share applicable to common
stockholders':
----------------------------------------------- --------------------- ---------------------
Basic and diluted , as reported $ (0.51) $ (2.73)
----------------------------------------------- --------------------- ---------------------
Basic and diluted, pro forma $ (0.55) $ (2.77)
----------------------------------------------- --------------------- ---------------------
The pro forma amounts that are disclosed in accordance with SFAS No. 123
reflect the portion of the estimated fair value of awards that were earned for
the years ended December 31, 2002, 2001 and 2000.
The fair value of stock option grants is estimated using the Black-Scholes
option-pricing model with the following assumptions:
------------------------------------------- --------------- ---------------
For the year ended December 31, 2002 2001
------------------------------------------- --------------- ---------------
Term (years) 5 3
------------------------------------------- --------------- ---------------
Volatility 150% 128%
------------------------------------------- --------------- ---------------
Risk-free interest rate 6.00% 5.41%
------------------------------------------- --------------- ---------------
Dividend yield 0 % 0 %
------------------------------------------- --------------- ---------------
Weighted -average fair value per $ 0.35 $ 2.72
option
------------------------------------------- --------------- ---------------
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash, cash equivalents, trade receivables, contract
receivables and costs and estimate profits in excess of billings on contracts in
progress.
The Company maintains cash and cash equivalents with various major
financial institutions. The Company limits the amount of credit exposure with
any one financial institution and believes that no significant concentration of
credit risk exists with respect to cash investments.
Contract receivables and costs and estimated profits in excess of billings
on contracts in progress subject the Company to the potential for credit risk
with customers, primarily government contractors. The Company establishes its
credit polices based on an ongoing evaluation of its customers' creditworthiness
and competitive market conditions and does not require collateral.
The Company sells products to a large number of customers which are
primarily in the United States. The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no collateral
from its customers. The Company's customer base includes 2 customers who account
for 32%, 6% and 0% of sales in fiscal 2002, 2001 and 2000, respectively. One
customer represented 18%, 6% and 0% and the other customer represented 14%, 0%
and 0% of sales in fiscal 2002, 2001 and 2000. These same two customers
represented $0% and $23% of accounts receivable at December 31, 2002 and 4% and
0% of accounts receivable at December 31, 2001. Although the Company is directly
affected by the well- being of these customers, management does not believe
significant credit risk exists at December 31, 2002.
F-26
Fair Value of Financial Instruments
The Company has various financial instruments, including cash, cash
equivalents, accounts receivable, accounts payable and short and long-term debt.
The Company believes the carrying values of its financial instruments
approximate their fair values.
Use of Estimates
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. These
estimates and assumptions relate to recording net revenue, collectibility of
accounts receivable, and the realizability of other intangible assets, accruals,
income taxes, inventory realization and other factors. Management has exercised
reasonable judgment in deriving these estimates; however, actual results could
differ from these estimates. Consequently, change in conditions could affect
eMagin's estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
New Accounting Pronouncements: In August 2001, the FASB, issued SFAS, No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets." SFAS No. 143 addresses financial accounting and reporting for the
retirement obligation of an asset. This statement provides that companies should
recognize the asset retirement cost at its fair value as part of the cost of the
asset and classify the accrued amount as a liability. The asset retirement
liability is then accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently updated for revised
estimates of the discounted cash outflows. The Statement will be effective for
fiscal years beginning after June 30, 2002. eMagin has not yet determined the
effect that SFAS No. 143 will have on its consolidated financial position,
results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the requirement under SFAS 4 to
aggregate and classify all gains and losses from extinguishment of debt as an
extraordinary item, net of related income tax effect. This statement also amends
SFAS 13 to require that certain lease modifications with economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS No. 145 requires reclassification
of gains and losses in all prior periods presented in comparative financial
statements related to debt extinguishment that do not meet the criteria for
extraordinary item in Accounting Principles Board Opinion ("APB") 30. The
statement is effective for fiscal years beginning after May 15, 2002 with early
adoption encouraged. eMagin does not believe the standard will have a material
effect on its financial statements.
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. eMagin is currently evaluating the requirements and
impact of this statement on our consolidated results of operations and financial
position.
F-27
In November 2002, the FASB issued interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires certain
guarantees to be recorded at fair value, which is different from current
practice, which is generally to record a liability only when a loss is probable
and reasonably estimable. FIN No. 45 also requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. The disclosure provisions of FIN No. 45 are
effective for financial statements of interim or annual periods after December
15, 2002. eMagin has adopted the recognition and measurement provisions of FIN
No. 45 on a prospective basis with respect to guarantees issued or modified
after December 31, 2002. eMagin has adopted the recognition and measurement
provisions of FIN 45 on a prospective basis with respect to guarantees issued or
modified after December 31, 2002. The adoption of the disclosure provisions has
been reflected in the December 31, 2002 financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. eMagin has not determined the effect of adoption of EITF
00-21 on its financial statements or the method of adoption it will use.
In November 2002 the Emerging Issues Task Force reached a consensus opinion
on EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized either as revenue or a
reduction of a specific cost incurred. The consensus should be applied
prospectively to new or modified arrangements entered into after December 31,
2002. eMagin has not yet determined the effects of EITF 02-16 on its financial
statements
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
method of accounting for stock-based employee compensation. In addition, it also
amends the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income, including per share amounts, of an
entity's accounting policy decisions with respect to stock-based employee
compensation in annual and interim financial statements. SFAS No. 148 does not
amend SFAS No. 123 to require companies to account for their stock-based
employee compensation using the fair value method. The disclosure provisions of
SFAS No. 123 were effective immediately in 2002. SFAS 148 is effective for
fiscal years ending after December 15, 2002. The transition provisions for a
change to the fair value based method may be early adopted, provided that
financial statements for the 2002 fiscal year have not been issued as of
December 31, 2002. As of December 31, 2002, the eMagin does not have any
immediate plans to change its method of accounting for stock-based employee
compensation to the fair value method. Included in the 2002 financial statements
are the required disclosures of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an Interpretation of ARB No. 51 ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. eMagin does not expect this new interpretation to
have a material effect on its future results of operations or cash flows.
F-28
Note 3 - Receivables
Receivables consist of the following:
December 31,
2002 2001
---- ----
Trade receivables $ 203,928 $165,946
Contracts:
Billed:
Contracts completed and in progress 72,352 319,181
Unbilled 125,359 293,273
Other 0 (106)
----------- ----------
Total $ 401,639 $778,294
Less allowance for doubtful receivables (36,144) 0
----------- ----------
Net receivables $365,495 $778,294
=========== ==========
Note 4 - INVENTORY
The components of inventories as of December 31, 2002 and 2001 are as follows:
2002 2001
---- ----
Raw Materials $106,800 $60,800
Work In Process 48,831 29,920
Finished Goods 95,367 0
-------- -------
$250,998 $90,720
======== =======
Note 5 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and their estimated lives are as
follows at December 31, 2002 and 2001:
Useful
Lives 2002 2001
Computer equipment and software 3 $ 158,922 $ 260,000
Lab and factory equipment 3 1,630,419 1,551,000
Furniture, fixtures and office equipment 10 111,594 154,000
Leasehold improvements Life of lease 329,739 325,000
------------- ------------
2,230,674 2,290,000
Less- Accumulated depreciation and amortization 1,596,142 1,123,000
------------- ------------
$ 634,532 $ 1,167,000
============= ============
Depreciation and amortization expense of equipment and leasehold
improvements for the years ended December 31, 2002 and 2001 was approximately
$473,142 and $567,000, respectively. Cost of fixed assets acquired under a
capital lease included above totals $66,075 as of December 31, 2002 with
accumulated depreciation of $16,519.
Additionally, from time to time, the Company makes deposits on certain
equipment that may ultimately be purchased by a financing company and leased to
the Company. Amounts paid by the Company for such deposits totaled approximately
$225,000 for the year ended December 31, 2001.
F-29
Note 6 - DEBT
Debt is comprised of the following:
2002 2001
Notes payable (1) $ 65,000 $ 168,000
Capital leases (1) 59,000 32,000
Convertible Debenture (3) 3,069,000 0
SK Loan (4) 3,000,000 2,798,000
-------------- ----------------
6,193,000 2,998,000
Less-Debt Discount ($ 228,000) ($ 693,000)
-------------- ----------------
$ 5,965,000 $ 2,305,000
-------------- ----------------
Current 5,737,000 693,000
Long-Term 228,000 2,998,000
-------------- ----------------
$ 5,965,000 $ 2,305,000
============== ================
1. 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,
F-30
the value of the beneficial conversion feature of approximately $244,000 was
recognized immediately as interest expense and is included in "Other expense,
net" in the accompanying consolidated statement of operations for the year ended
December 31, 2001.
On November 30, 2001, the Company was not in compliance with a certain debt
covenant, as defined, and consequently defaulted on the secured notes, causing
the maturity date of the notes to accelerate and become immediately due (the
"default"). The Investors elected not to demand payment immediately. Certain
investors elected to reinvest their respective funds in a subsequent financing
(see below 2002 Bridge Loan), while certain other investors elected for
repayment of their respective funds. The repayments to those investors occurred
in January 2002. The loans have been extended through June 30, 2003 and as of
December 31, 2002 $625,000 of the loans are still outstanding.
b) Bridge Loan 2002
On January 14, 2002, the Company entered into a $1.0 million bridge loan
arrangement convertible into our common stock at a rate of $0.5264 per share.
All of the outstanding warrants issued under the Secured Note Purchase
Agreement, including those issued pursuant to the January 2002 transactions, are
exercisable for an aggregate of up to 1,954,944 shares of our common stock at an
exercise price of $0.5468 per share. The loan had an original maturity date of
August 30, 2002 which has been extended through June 30, 2003. Such warrants are
exercisable through January 2005. Certain investors of the November 27, 2001
financing who elected to remain in the new bridge loan arrangement received
reset provisions of the previous conversion rate and warrant exercise prices to
be equivalent to the terms granted to the new Investor.
The company repriced the warrants issued to the original investors to
$0.5468 per share. The total of the intrinsic value of the warrants issued to
the new Investor and the incremental intrinsic value of the repriced warrants of
certain existing investors of approximately $480,000 has been recorded as
original issue discount . The original issue discount will be amortized into
interest expense over the period of the debt. In the event the debt is converted
prior to maturity, the remaining discount will be amortized into interest
expense at the conversion date. As of December 31, 2002 the entire $480,000 has
been amortized and is included in non-cash interest expense in the accompanying
consolidated statements of operations.
In addition, based on the terms of the bridge loan arrangement, the
conversion terms of the debt provide for a beneficial conversion feature. The
total value of the beneficial feature of the new debt and the incremental value
of the reset conversion feature of the existing debt of approximately $780,000
was recorded at January 14, 2002 as non-cash interest expense in the
accompanying consolidated statements of operations for year ended December 31,
2002
c) Travelers
On August 20, 2001, the Company entered into a $1.0 million bridge loan
arrangement with The Travelers Insurance Company ("Travelers"). The loan accrues
interest at an annual rate of 9.25%. Additionally, for each week the loan is
outstanding following the closing date of the arrangement (August 20, 2001), the
Company is required to issue $50,000 worth of warrants to Travelers, as defined.
Total warrants issuable to Travelers, per the agreement, are not to exceed an
amount such that the exercise of all related warrants would provide Travelers
greater than 19.9% ownership of the outstanding common stock of the Company This
agreement has been extended to June 30, 2003.
Through December 31, 2002, the Company has issued an aggregate of 451,852
warrants to Travelers at exercise prices ranging from $1.28 to $1.93 per share
in connection with this arrangement. Such warrants are exercisable through
November 2004. Terms of a the 2002 bridge loan arrangement entered into by the
Company and certain private investors (see Note 10) included a cap on the
maximum number of warrants issuable to Travelers under the Travelers bridge loan
arrangement at 451,842 warrants. Travelers agreed to the aforementioned
amendment
d) Series B Convertible Debentures
On August 21, 2002, the Company issued two Series B Convertible Debentures
in the amount of $121,739 each. The debentures bear interest at the rate of 8%
per annum and are due August 21, 2004. The Debenture also includes a fixed
conversion rate of $0.18 per share. Based on the terms of the loan arrangement,
the conversion terms of the debt provide for a beneficial conversion feature.
F-31
Due to the fact that the note holder had the option to convert the note
immediately upon execution of the agreement, the value of the beneficial
conversion feature of approximately $108,000 was recognized immediately as
interest expense and is included in "Other expense, net" in the accompanying
statement of operations for the nine months ended December 31, 2002.
e) $0.2 million Secured Note Purchase Agreement
On June 20, 2002, the Company entered into a $0.2 million Secured Note
Purchase Agreement with an Investor. The secured note accrues interest at 11%
per annum and matures on June 30, 2003. The Company also granted warrants,
exercisable for a period of three years, to purchase 300,000 shares of common
stock with an exercise price of $0.4419 per share to the investor. The fair
value warrants issued to this Investor approximated $84,000 has been recorded as
original issue discount, resulting in a reduction in the carrying value of this
debt. The original issue discount has been fully amortized. Related interest
expense of approximately $12,000 has been recognized in "Other expense, net" in
the accompanying consolidated statement of operations for the year ended
December 31, 2002
4. SK Loan
On September 18, 2001 (the "closing date") the Company entered into a $3.0
million convertible debt arrangement with SK Corporation ("SK loan"). The SK
loan accrues interest at an annual rate of 4.00% and matures on September 18,
2004. In connection with the debt arrangement, the Company issued warrants for
the purchase of 205,479 shares of the Company's common stock at an exercise
price of $1.46 per share. Such warrants are exercisable through September 2004.
The fair value of the warrants in the amount of $240,000 has been recorded as
original issue discount, resulting in a reduction in the carrying value of the
debt. The fair value of the warrants was calculated using the Black-Scholes
option-pricing model. The original issue discount is being amortized into
interest expense over the three-year life of the debt using the effective
interest method. In the event the debt is converted prior to maturity, the
remaining discount will be amortized into interest expense at the conversion
date. The SK loan is convertible into common stock at any time at a fixed
conversion price of $1.28 per share. Such conversion terms of the debt provide
for a beneficial conversion feature. Due to the fact that the note holder had
the option to convert the note immediately upon execution of the agreement, the
value of the beneficial conversion feature of approximately $287,000 was
recognized immediately as interest expense and is included in "Other expense,
net" in the accompanying statement of operations for the year ended December 31,
2001.
Additionally, the terms of the debt arrangement provide for a put option,
exercisable at the option of SK Corporation, to redeem up to 25% of the face
value of the debt each 90-day period beginning on September 19, 2002.
Accordingly, 25% of the face value of the debt and the proportionate share of
the original issue discount had been classified as short-term debt and was
included in "Current portion of long-term liabilities" in the accompanying
consolidated balance sheet for December 31, 2001. The remaining 75% of
principal, original issue discount and accrued interest was classified as other
long-term debt in the accompanying consolidated balance sheet for December 31,
2001. As of December 31, 2002, the Company was not in compliance on its
$3,000,000 debt payable to SK Corporation, as defined, and consequently
defaulted on the note, causing the maturity date of the notes to accelerate and
become immediately due (the "default"). Accordingly, at December 31, 2002, the
original liability of the notes of $3,000,000, plus accrued but unpaid interest,
is included in current liabilities in the accompanying consolidated balance
sheet.
Maturity of debt for years ending December 31 is as follows:
2003 $5,737,000
2004 191,743
2005- Thereafter 36,257
----------
Total $5,965,000
F-32
Note 7 INCOME TAXES
Significant components of eMagin's deferred tax assets are as follows:
December 31,
2002 2001
---- ----
Net operating losses $ 29,114,272 $ 24,207,988
Bad debt reserve 14,458 0
Deferred payroll 261,370 11,400
Accrued vacation pay 108,811 183,277
Total $ 29,498,911 $ 24,402,665
------------ ------------
Valuation allowance (29,498,911) (24,402,665)
Net Deferred Tax Asset $ -- $ --
============ =============
As of December 31, 2002, eMagin has Federal and state net operating loss
carryforwards of approximately $72.7 million that will be available to offset
future taxable income, if any, through December 2021. The utilization of net
operating losses is subject to a substantial limitation due to the change of
ownership provisions under Section 382 of the Internal Revenue Code and similar
state provisions. Such limitation may result in the expiration of the net
operating losses before their utilization. A valuation allowance has been
established to reserve for the deferred tax assets arising from the net
operating losses and other temporary differences due to the uncertainty that
their benefit will be realized in the future.
Note 8- SHAREHOLDERS' EQUITY (DEFICIT)
On July 16, 2001, the shareholders approved an increase in the number of
authorized shares of common stock of the Company to 100,000,000 shares with a
par value of $0.001 per share.
In October 2001, the Company entered into an agreement with a third-party
whereby the Company issued 86,038 shares of common stock in lieu of cash payment
for services rendered on behalf of the Company. The Company recorded an expense
in the amount of approximately $116,000, the fair value of the shares granted
based on the market value of the stock on the date of grant. The expense is
included in "General and administrative" expense in the accompanying
consolidated statement of operations for the year ended December 31, 2001.
Additionally, the issuance of the shares is reflected in the consolidated
statement of shareholders' equity(deficit) for the year ended December 31, 2001.
In connection with the stock agreement, the Company also entered into a supply
agreement with the third-party for future purchases of supplies. (see Note 10)
In June 2001, The Travelers Insurance Company exercised warrants to
purchase 16,002 shares of common stock of the Company at an exercise price of
$1.72 per share.
On December 31, 1999 the Company forward split its common stock 3.054:1,
increasing the number of issued and outstanding common stock from 6,600,000 to
20,156,400.
On March 30, 1998 the Company forward split its common stock 6:1 increasing
the number of issued and outstanding common shares from 1,100,000 to 6,600,000.
Prior to the Merger on March 16, 2000, net proceeds of approximately $23.3
million were raised through the private placement issuance of approximately 3.5
million shares of common stock. Additionally, approximately 9.4 million shares
of common stock held by FDC's principal shareholders were cancelled at the time
of the Merger.
In October 2001, the Company entered into an agreement with a third-party
whereby the Company issued 86,038 shares of common stock in lieu of cash payment
for services rendered on behalf of the Company. In connection with the stock
agreement, the Company also entered into a supply agreement with the third-party
for future purchases of supplies. In May of 2002, the Company issued 10,000
shares in exchange for supplies valued at $11,000.
In January 2002, the Company negotiated settlement of amounts due to a
related party for services previously rendered via issuance of 192,493 shares of
common stock. As such, the Company recorded the fair value of the shares of
approximately $135,000 in selling, general and administrative expenses in the
accompanying consolidated statement of operations.
F-33
On February 27, 2002, the Company completed a private placement of
securities with several institutional and individual investors of 3,617,128
shares of common stock at a price per share of $0.6913, generating gross
proceeds of approximately $2,500,000, less issuance costs of approximately
$35,000. In connection with the financing arrangement, the Company issued to the
investors warrants to purchase 1,446,852 shares of common stock of the Company
at an exercise price of $0.7542 per share. Also, the Company issued to an
institution warrants to purchase 36,164 shares of common stock in connection
with a finder fee arrangement entered into between the two parties. Such
warrants are exercisable through February 2005. We entered into a registration
rights agreement providing for the registration of shares to be issued pursuant
to a conversion of the Secured Convertible Promissory Notes and the shares to be
issued pursuant to the exercise of the warrants issued thereunder. We are
currently in default of this filing requirement. As a result of the default, the
Company has accrued $87,362 in interest and penalties.
On March 4, 2002, the Company entered into an equity line of credit
agreement with a private equity fund (the "Fund") whereby the Company has the
option, but not the obligation, to sell shares of common stock to the Fund for a
three-year period at a price per share, as defined. The agreement provides for
certain minimum and maximum monthly amounts up to a maximum of $15 million and,
in certain circumstances, up to $20 million.
On March 4, 2002 the Company and the Fund entered into an agreement whereby
the Company issued 50,000 shares and the Fund agreed to extend the agreement.
This agreement was terminated in December whereby the Investor, retained it's
warrants, the Company agreed to issue 500,000 shares of common stock and to pay
the sum of $25,000 upon the completion of specific financing.
In connection with the equity line of credit, the Company issued 30,000
shares of common stock to the Fund as compensation for certain services rendered
in connection with the closing of the line of credit. As such, the Company
recorded the fair value of the shares of approximately $31,000 in selling,
general and administrative expenses for the three months ended March 31, 2002.
Also, the Company granted warrants purchasing up to 150,000 shares of common
stock of the Company at an exercise price of $0.8731 per share. Such warrants
are exercisable through September 2005. The intrinsic value of said warrants of
approximately$140,000 is included in selling, general and administrative
expenses in the first quarter of 2002.
In April 2002, the Company announced a strategic investment from ROHM
Company LTD. ROHM purchased 1,282,051 shares of eMagin Common Stock at $0.78 per
share as well as warrants to purchase an additional 512,820 shares of Common
Stock at a conversion price of $0.85 per share for an investment of $1,000,000.
The fair value of each warrant was estimated on the date of grant using the
Black-Scholes option-pricing model. Such warrants are exercisable through April
2005.
In 2002 the Company issued a third party 192,493 shares for consulting fees
in lieu of cash.
Note 9- STOCK-BASED COMPENSATION PLANS
Stock Option Plans
In 1994, eMagin established the 1994 Stock Plan (the "1994 Plan"), which
has been assumed by the Company. The plan provided for the granting of options
to purchase an aggregate of 1,286,000 shares of the Common Stock to employees
and consultants of FED Corporation.
In 2000, eMagin established the 2000 Stock Option Plan (the "2000 Plan"),
which has been assumed by the Company. On July 16, 2001, the shareholders
approved an increase in the aggregate number of shares of the Company's common
stock reserved for issuance under the 2000 Plan from 3,900,000 to 5,900,000
shares. The Plan permits the granting of options and stock purchase rights to
employees and consultants of the Company. The 2000 Plan allows for the grant of
incentive stock options meeting the requirements of Section 422 of the Internal
Revenue Code of 1986 (the "Code") or non-qualified stock options which are not
intended to meet the requirements Section 422 of the Code.
In May 2001, the Company's Board of Directors adopted the eMagin
Corporation Employee Stock Purchase Plan (the "Stock Purchase Plan"), under
which a total of 750,000 shares of its common stock have been reserved for
F-34
issuance, subject to the approval of the shareholders of the Company. The
shareholders approved the Stock Purchase Plan on July 16, 2001. The Purchase
Plan, which is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Code, provides for consecutive, overlapping
24-month offering periods. Each offering period contains four six-month purchase
periods. Each participant will be granted an option to purchase the Company's
common stock on the first day of each of the six-month purchase periods and such
option will be automatically exercised on the last day of each such purchase
period. The purchase price of each share of common stock under the Purchase Plan
will be equal to 85% of the lesser of the fair market value per share of common
stock on the starting date of that offering period or on the date of the
purchase. Offering periods begin on the first trading day on or after January 1
and July 1 of each year and terminate 24-months later. The first offering
period, however, began on July 16, 2001 and will end on June 30, 2003.
Employees are eligible to participate in the Stock Purchase Plan if they
are employed by the Company, or a subsidiary of the Company designated by the
Board of Directors, for at least 20 hours per week and for more than five months
in any calendar year. The Stock Purchase Plan permits eligible employees to
purchase common stock through payroll deductions, which may not exceed 15% of an
employee's compensation, subject to certain limitations. Employees may modify or
end their participation in the offering at any time during the offering period
or on the date of purchase, subject to certain limitations. Participation ends
automatically on termination of employment with the Company. The Company's Board
of Directors may amend, suspend or terminate the Stock Purchase Plan at any
time, except that certain amendments may be made only with the approval of the
stockholders of eMagin.
Vesting terms of the options range from immediate vesting to a ratable
vesting period of 5-1/2 years. Option activity for the years ended December 31,
2002 and 2001 is summarized as follows:
Weighted
Average
Exercise Price
Shares
Outstanding at December 31, 2000 3,390,190 2.72
Options granted 1,078,594 1.05
Options exercised --
Options canceled (924,063) 2.17
-----------
Outstanding at December 31, 2001 3,544,721 2.41
4,788,722 0.40
Options granted --
Options exercised (2,440,358) 2.11
-----------
Options cancelled
Outstanding at December 31, 2002 5,893,085
============
At December 31, 2002, there were 6,915 shares available for grant under the
2000 Plan and the 1994 Plan. Incentive options for 5,185,000 Common Shares at
$0.21 per share were approved by the eMagin Board of Directors on October 9,
2002 for issue to employees, directors, and officers. The options were not yet
granted, pending the future availability of Common shares for the options under
the company's qualified option plan. Upon availability, the company may issue
these options at which time the strike price will remain $0.21 and the
difference between the strike price and the fair market value, if the strike
price is under the fair market value at the date of issue, will be recognized as
compensation expense. As December 31, 2002, there were only 100,000 shares
available within the plan. The number of shares actually granted may be prorated
to a much small number.
F-35
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
Number Weighted Number Weighted Average
Outstanding at Weighted Average Average Exercisable at Exercisable Price
Range of Exercise December 31, 2002 Remaining Exercise December 31, 2002
Prices Contractual Life Price
(In Years)
$ 0.18 - $1.02 4,739,369 8.45 $ 0.41 4,525,619 $ 0.39
$ 1.72 - $1.72 929,716 7.11 1.72 750,034 1.72
$ 2.25 - $11.06 224,000 7.58 4.08 156,652 4.47
--------- ---------
5,893,085 7.92 $ 0.75 5,432,305 $ 0.69
========= ==== ====== ========= ======
Options granted at greater or lesser fair market value on date of grant for
shares outstanding as of December 31, 2002
2002 Weighted Average Weighted Average
Fair Market Value Strike Price
Options granted above fair market value 450,000 $0.81 $0.83
Options granted at fair market value 2,751,216 $0.61 $ 0.61
Options granted below fair market value 2,691,869 $2.99 $ 0.87
Total Options Granted 5,893,085
Deferred Compensation
Non-cash stock-based compensation expense represents expenses associated
with stock option grants to our officers and employees at below fair market
value as additional compensation for their services and to induce them to
lock-up their options for a longer time than would normally be specified under
the Company's standard option grant. Deferred compensation is amortized over the
remaining vesting period of the underlying options. The expense also represents
warrant grants with exercise prices below fair market value to security holders
of eMagin for a reduced number of warrants to induce them to lock-up prior to
the merger.
In March 2000, eMagin repriced approximately 325,000 common stock options
issued to employees. The repricing resulted in a non-cash compensation expense
of approximately $2.7 million for the period ended March 15, 2000.
In addition, in March 2000 eMagin repriced approximately 108,000 warrants
issued to outside consultants and organizations that provided bridge loans and
funding commitments to the Company. The repricing resulted in a non-cash charge
of approximately $1.2 million, which is included in the accompanying
consolidated statement of operations for the Company.
In March 2000, eMagin issued options to purchase common stock to employees
at an exercise price below the fair market value on the date of grant of $7.00.
These options vest over a period of 1 - 60 months with a minimum lockup period
of 18 months. As a result, the Company recorded deferred compensation expense in
the amount of approximately $12.5 million, which will be amortized over the
vesting period of the options.
eMagin also issued warrants to shareholders at an exercise price below the
fair market value on the date of grant. As a result, eMagin recorded a one-time
compensation expense of approximately $2.5 million for the period ended March
15, 2000.
The recipients of the repriced options and warrants were required to
execute lock-up agreements that prohibit disposition of the underlying shares
for a period of 18 months following the Merger. Thereafter the recipients may
transfer no more that 20% of the underlying shares in the 6 months following the
end of the 18-month period, and the balance of the underlying shares may be
transferred 24-27 months after the Merger.
F-36
Warrants
At December 31, 2002, 6,894,153 warrants to purchase shares of common stock
are issued, outstanding and exercisable at exercise prices ranging from $0.43 to
$26.25.
Note 10 - COMMITMENTS AND CONTINGENCIES
Royalty Payments
The Company is obligated to make minimum annual royalty payments to a
corporation commencing January 1, 2001. The minimum royalty of $31,500 per year
due under this agreement commences in the first year of the agreement, and
increases to minimum royalty payment of $125,000 per year starting in the sixth
year of the agreement. Under this agreement, the Company must pay to the
corporation a certain percentage of net sales of certain products, which
percentages are defined in the agreement with the corporation. The percentages
are on a sliding scale depending on the amount of sales generated. Any minimum
royalties paid may be credited against the amounts due based on the percentage
of sales.
For the year ended December 31, 2002, approximately $61,000 is included in
general and administrative expense in the accompanying consolidated statement of
operations.
License and Technology Agreement
eMagin has a technology development agreement with a large Asian
corporation to permit potential commercialization of small-format OLED displays.
The primary objective of this program is to design a small format, low cost QVGA
display. Other aspects of the effort involve the potential creation of a new
version of eMagin's SVGA-3D display and potentially additional display product
lines. There is no assurance that any such effort(s) will be successful
Supply Agreement
The Company has, and may again in the future, enter into supply agreements
whereby stock is issued in lieu of cash.
Operating Leases
The Company leases certain office facilities and office, lab and factory
equipment under operating leases expiring through 2007. Certain leases provide
for payments of monthly operating expenses. The approximate future minimum lease
payments through 2007 are as follows:
Year ending December 31:
2003 $ 1,708,000
2004 595,000
2005 575,000
2006 23,000
2007 5,000
-------------
Total $ 2,906,000
=============
Rent expense for the years ended December 31, 2002 and 2001 was
approximately $1,107,000 and $1,999,000, respectively. Our lease with IBM
expires in 2004. We have the option to renew for five years, in yearly
increments. Our lease with Redson Building Partners has been paid in advance
through December 2003.
F-37
EMPLOYMENT BENEFIT PLANS
eMagin has a defined contribution plan (the Plan) under Section 401(k) of
the Internal Revenue Code, which is available to all employees who meet
established eligibility requirements. Employee contributions are generally
limited to 15% of the employee's compensation. Under the provisions of the Plan,
eMagin may match a portion of the participating employees' contributions. There
was no matching to the plan for the years ended December 31, 2002, 2001 and
2000.
LITIGATION
eMagin provides accruals for all direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has incurred and the amount of such liability can be reasonably
estimated.
Note 11 - Related Party Transactions
The Company entered into a consulting agreement dated March 16, 2000 with
Verus International Ltd., of which Mr. Ajmal Khan is Chief Executive Officer and
Mr. Rivkin is the Non-Executive Chairman. Mr. Khan and Mr. Rivkin are also
members of our Board of Directors. Terms of the agreement included monthly
payments of $15,000 by us to Verus International Ltd. for consulting services
rendered. The term of the agreement expired on March 16, 2002.
On November 27, 2001, eMagin Corporation entered into a Secured Note
Purchase Agreement whereby five accredited initial investors agreed to lend us
an aggregate of $875,000 in exchange for (i) 9.00% per annum Secured Convertible
Promissory Notes in an aggregate principal amount of $875,000, and (ii)
three-year warrants to purchase up to an aggregate of 359,589 shares of our
common stock. Mr. Rivkin, who at the time of the transaction was a member of our
Board of Directors, participated as an investor in the transaction and invested
$125,000 in the company. In return for this investment, Mr. Rivkin received (i)
Secured Convertible Promissory Notes in an aggregate principal amount of
$125,000, and (ii) warrants exercisable for 51,370 of our common shares, which
represent a comparable transaction to the outside investors in the bridge loan.
Sovereign Bancorp Ltd also invested $100,000 under the transaction and
received (i) a Secured Convertible Promissory Note in an aggregate principal
amount of $100,000, and (ii) warrants exercisable for 41,096 of our common
shares. The brother of Mr. Khan, a director of the company, is an officer of
Sovereign Bancorp Ltd. This note has since been redeemed.
The Company believes that the transactions described above were made on
terms no less favorable than could have been obtained from third parties. All
transactions were negotiated at arm's length.
Note 12 Quarterly Information (Unaudited)
Year ended December 31, 2002
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $ 158,027 $ 268,127 $ 497,851 $ 1,203,654
Net loss $(6,489,514) $(4,001,043) $(2,754,638) $ (1,667,516)
Net loss per share
Basic and diluted $ (0.24) $(0.13) $(0.09) $(0.05)
F-38
Year ended December 31, 2001
First Quarter Second Quarter Third Quarter Fourth Quarter
Revenues $2,030,201 $1,616,005 $1,176,628 $1,024,536
Net loss (9,708,435) (10,832,756) (42,377,769) (5,567,775)
Net loss per share
Basic and diluted $(0.39) $(0.43) $(1.69) $(0.22)
During the fourth quarter of 2002, the Company reclassified amounts
recorded as expense recovery to revenues, representing amounts earned on
shipment of products to a former cost recovery contract customer.
The effect on the quarterly financial statements is as follows:
September 30, 2002
As originally reported As adjusted
Contract revenue $ 176 $ 391,966
Product revenue 497,675 497,675
Cost and expenses 2,844,479 3,236,269
Other income (expense) (408,010) (408,010)
Net Loss $ (2,754,638) $ (2,754,638)
Note 13 - SUBSEQUENT EVENTS
On March 20, 2003, we auctioned off unused leased equipment. The equipment
had zero value on the books. The equipment that sold brought $187,440 in gross
proceeds. Of that amount, Comdisco (lessor) received $81,106. which completes
all of our lease obligations with Comdisco. We paid $23,867. to miscellaneous
vendors involved in the auction and the auctioneer received a 10% commission of
the gross proceeds totaling $18,744 plus auction expenses. The auction expenses
cannot exceed $54,000. If this total is reached, it would mean a net to the
company of $9,721.
F-39
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended and restated, provide to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, that our directors or officers shall not be personally liable
to us or our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize
the company to indemnify our employees or agents, and to advance the reasonable
expenses of such persons, to the same extent, following the same determinations
and upon the same conditions as are required for the indemnification of and
advancement of expenses to our directors and officers. As of the date of this
Registration Statement, the Board of Directors has not extended indemnification
rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 3,269.77
Accounting fees and expenses 10,000.00*
Legal fees and expenses 35,000.00*
Miscellaneous 1,730.23
-----------
TOTAL $*50,000.00
===========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On January 14, 2002, we entered into additional agreements to
facilitate: (i) an additional funding of $1,000,000 to eMagin by a private
investor under the Secured Note Purchase Agreement, (ii) the repayment (the
"Repayment") in full using the proceeds of the additional funding of three
secured convertible notes held by certain initial investors under the Secured
Note Purchase Agreement with an aggregate principal amount of $250,000 (such
notes then in default pursuant to a monthly expenditure requirement contained
therein), and (iii) a repricing of both the conversion rate of all of the
outstanding Secured Convertible Notes issued under the Secured Note Purchase
Agreement into our common stock and the exercise price of the warrants held by
certain initial investors not subject to the Repayment (the "Continuing
Investors") and the issuance of certain additional warrants to the Continuing
Investors in return for their consent to certain amendments and waivers. In
return for the additional funding of $1,000,000, the private investor received
two additional Secured Convertible Promissory Notes, with an aggregate principal
amount of $300,000 and $700,000, respectively, and related warrants, each issued
pursuant to the terms of the Secured Note Purchase Agreement. The full amount of
the outstanding secured convertible notes issued under the Secured Note Purchase
Agreement, after giving effect to the January 2002 transactions, had an
aggregate principal amount of $1,625,000, and were all secured by a general
security interest in the assets of the Company.
The outstanding Secured Convertible Promissory Notes were due June 30,
2003 and bear interest at 9% per annum (payable at maturity or on the effective
date of an early termination). Pursuant to the January 2002 transactions, the
conversion terms of the outstanding secured notes were adjusted so that the
notes are convertible into our common stock at a rate of $0.5264 per share. The
conversion of the notes into eMagin common stock is mandatory upon certain
conditions including the completion of a next round of financing by the Company
of convertible debt securities or equity securities in a minimum amount of $10
million. The holders of the notes may also convert, at their option, the notes
and accrued interest into our common stock. Upon a change of control event, we
may also call and purchase the notes at a purchase price equal to 250% of the
principal amount plus accrued interest. If we do not exercise this call right,
in the event of a change of control, the holders may put the notes to the
Company at the 250% of the principal amount pricing. Pursuant to the terms of
the January 2002 transactions, the exercise price of the outstanding three year
warrants held by the Continuing Investors was adjusted to $0.5469 per share. The
Initial Investors whose secured convertible notes were cancelled pursuant to the
Repayment retained the three-year warrants previously issued to them under the
Purchase Agreement, which have an exercise price of $1.67 per share. All of the
outstanding warrants issued under the Secured Note Purchase Agreement, including
those issued pursuant to the January 2002 transactions described above, are
exercisable for an aggregate of up to 1,954,944 shares of our common stock. 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.
As described below, the Investor agreed, in connection with the
financing that we completed as of April 25, 2003, to (a) amend the secured notes
issued to them, (b) terminate the security agreement dated November 20, 2001
that was entered into in connection with the purchase of the original secured
notes and allow the new investors to enter into a new security agreement with
them on a pari passu basis in order for eMagin to continue its operations as a
developer of virtual imaging technology, and (c) simultaneously participate in
the new financing.
Pursuant to the issuance of the notes and warrants under the Secured
Note Purchase Agreement, we also entered into a registration rights agreement
providing for the registration of shares to be issued pursuant to a conversion
of the Secured Convertible Promissory Notes and the shares to be issued pursuant
to the exercise of the warrants issued thereunder. The registration rights
agreement required us to file a registration statement no later than 90 days
after the issuance of the notes and warrants at the initial closing. We are
currently in default of this filing requirement. However management has been
advised that the holders of such rights are amenable to waiving and extending
the time period for the filing of the registration statement. Pursuant to a
failure by us to use our reasonable best efforts to cause the registration
statement to be declared effective by the Commission within six months of the
date of the issuance of the Secured Convertible Promissory Notes and warrants,
the registration rights agreement provides for the payment of liquidated damages
at a rate of one percent (1%) per month (calculated to the nearest calendar day)
of the value of the registrable securities not so declared effective until such
registrable securities shall be declared effective. Some of these securities
have already been sold by investors under 144 rules.
II-2
We entered into a Securities Purchase Agreement dated as of February
27, 2002 providing for the issuance and sale to eight accredited investors of an
aggregate of (i) 3,617,128 restricted shares of our common stock, and (ii)
warrants exercisable for a period of three (3) years for an aggregate of
1,446,852 shares of our common stock. The warrants have an exercise price of
$0.7542. For the issuance of the shares and warrants, we received an aggregate
gross proceeds of $2,500,519., with each share purchased at a purchase price of
$.6913, equal to 110% of the daily volume weighted average closing price per
share of our common stock on the American Stock Exchange for a prescribed five
trading day period. In connection with the sale of the shares and warrants, we
also entered into a registration rights agreement with the investors to register
for resale the shares the investors bought in the transaction and the shares to
be issued pursuant to an exercise of the warrants. We are currently in default
of this agreement due to the fact that we have not register the shares. As a
result we are required to pay to each investor an amount equal to one percent
(1%) per month of (A) the purchase price paid by such investor for the purchased
securities, and (B) the value of any outstanding warrants held by such investor
until such registration default no longer exists. As of December 31, 2002 the
Company has accrued $392,000 in penalties under this agreement. The accrued
penalties payable for a registration default under the registration rights
agreement may be paid in our common shares provided such shares are registered
under the Securities Act. 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 had the right receive in periodic draw
downs at our option and subject to the terms and conditions of the agreement, up
to $15,000,000 in equity financing (the "Equity Line") over a three year period.
The aggregate amount of the Equity Line could have increased to $20,000,000
provided certain additional conditions regarding our share price, trading volume
and market capitalization were met. The initial closing of the agreement
occurred on Friday, March 22, 2002. Our right to draw down on the Equity Line
was subject to our registering for resale (and the continuing effectiveness of
such registration) with the Commission the shares of eMagin common stock
issuable pursuant to the Equity Line and was also subject to certain other
significant conditions, including limits as to the maximum and minimum draw down
amounts as specified in the common stock purchase agreement. The maximum
investment amount for any draw down was the lesser of (i) $5,000,000, and (ii)
15% of the volume weighted average price for our common stock (as reported by
the American Stock Exchange) for the 30 trading days immediately prior to the
applicable commencement date for such draw down multiplied by the total
aggregate trading volume in respect of our common stock for such period.
Pursuant to a draw down, the Investor agreed to purchase our shares at a
discount to the price of our common shares on the American Stock Exchange. More
specifically, the discounted purchase price to be paid by the Investor under the
Equity Line was generally equal to (i) 88% of the daily volume weighted average
price of our common stock on the American Stock Exchange for a prescribed 10
trading day period provided that the such stock price was less than $4.00 per
share at the time of determination, (ii) 90% if such stock price at the time of
determination exceeded $4.00 per share, and (iii) 92% if such stock price at the
time of determination exceeded $6.00 per share. The discounted purchase price
could have been reduced by an additional 3% pursuant to certain special
conditions as set forth in the agreement. The amount of our shares issued
pursuant to draw downs on the Equity Line was also limited to 19.9% of the
issued and outstanding common stock (unless stockholder approval of any excess
amount is received) and no draw down could have been made to the extent that it
would have resulted in the Investor and its affiliates beneficially owning more
than 9.9% of our outstanding common stock. The agreement also limited our
ability to enter into any other equity line type of financing during the term of
the agreement and provides to the Investor a right of first refusal for
subsequent sales by the Company of its securities.
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.
II-3
In connection with the Equity Line, we also entered into a registration
rights agreement dated as of March 4, 2002 with the Investor that required the
Company to file, obtain and maintain the effectiveness of a registration
statement on an appropriate form with the Commission in order to register the
sale and public resale of shares of the common stock acquired by the Investor
under the agreement and upon the exercise of the warrants. Under the terms of
the registration rights agreement, the Company was required to file such
registration statement within sixty days of the date of the agreement. This
agreement was terminated in December 2002 whereby the Investor, retained it
warrants and eMagin agreed to pay the sum of $25,000 upon the completion of
specific financing.
On June 20, 2002, we entered into a secured note purchase agreement
with an investor whereby the Investor agreed to lend eMagin $200,000 in exchange
for (i) $200,000 11.00% per annum secured promissory note due on August 30,
2002, and (ii) warrants exercisable for a period of five (5) years to purchase
300,000 shares of common stock of eMagin. Such warrant may not be exercised by
the holder so long as the holder is the beneficial owner, directly or
indirectly, of more than ten percent (10%) of our common stock for purposes of
Section 16 of the Securities Exchange Act of 1934. We received the proceeds from
the secured note on June 28, 2002.
Interest was payable on the secured note at a rate of 11% per annum and
was payable at maturity or on the effective date of an early termination. The
full amount of the secured note was secured by (i) a first priority general
security interest in the assets of Virtual Vision, Inc., our wholly owned
subsidiary, pursuant to a security agreement dated June 20, 2002 by and between
Virtual Vision, Inc., Alligator Holdings, Inc. and the Investor; and (ii) a
second priority general security interest in our assets pursuant to a
subordinated security agreement dated June 20, 2002, by and between eMagin
Corporation, Alligator and the Investor. Upon a change in control event, we had
the right to call the secured note and purchase all of the aggregate principal
amount of the secured note at a price equal to 250% of the principal amount plus
accrued and unpaid interest. If we did not call the secured note within thirty
(30) days of the event of a change in control, the Investor had the right to put
the secured note to us at a price equal to 250% of the aggregate principal
amount for a period of thirty days following the call period.
As described below, the Investor agreed, in connection with the
financing that we completed as of April 25, 2003, to (a) amend the secured note
issued to them, (b) terminate the security agreements dated June 20, 2002 that
was entered into in connection with the purchase of the secured note and allow
the new investors to enter into a new security agreement with them on a pari
passu basis in order for eMagin to continue its operations as a developer of
virtual imaging technology, and (c) simultaneously participate in the new
financing.
In connection with the issuance of the warrants, we entered into a
registration rights agreement dated June 20, 2002, with the Investor, providing
the Investor with certain registration rights under the Securities Act of 1933,
as amended, to register for resale the shares to be issued pursuant to an
exercise of the warrants.
On April 25, 2003, we entered into a global restructuring and secured
note purchase agreement with a group of several accredited institutional and
individual investors whereby the Investors agreed to lend us $6,000,000 in
exchange for (i) the issuance of $6,000,000 principal amount of 9.00% secured
convertible promissory notes due on November 1, 2005 and (ii) warrants to
purchase an aggregate of 7,749,921 shares of common stock of eMagin (subject to
certain customary anti-dilution adjustments), which Warrants are exercisable for
a period of three (3) years.
Interest is payable on the notes at a rate of 9% per annum and, at our
option, may be paid through the delivery of shares of our common stock
(registered pursuant to the registration rights agreement referred to below) in
lieu of cash interest payments. Subject to certain limitations, the notes may be
converted, at the option of the holder, in whole or in part, into common shares
with a conversion price equal to 105% of the volume weighted average of the
closing price of our common shares as reported on The American Stock Exchange by
the Wall Street Journal, New York City edition, for the five (5) trading days
immediately preceding the closing date.
The exercise price of the warrants on a per share basis is $.8110, an
amount equal to 110% of the volume weighted average of the closing price of our
common shares as reported on The American Stock Exchange by the Wall Street
Journal, New York City edition, for the five (5) trading days immediately
preceding the closing date.
II-4
As part of the transactions, the existing the holders of an aggregate
of $1,625,000 principal amount of secured notes that were purchased pursuant to
a secured note purchase agreement entered into as of November 27, 2001, and the
holder of a $200,000 principal amount secured note that was purchased pursuant
to a secured note purchase agreement entered into as of June 20, 2002, agreed to
(a) amend their respective notes issued to them, (b) terminate the respective
security agreements dated November 20, 2001 and June 20, 2002 that were entered
into in connection with the purchase of their notes and allow the new investors
to enter into a new security agreement with them on a pari passu basis in order
for eMagin to continue its operations as a developer of virtual imaging
technology, and (c) simultaneously participate in this new round of financing
(subject to the terms and conditions set forth in the secured note purchase
agreement). The amendments to the notes included (i) amending the note issued on
June 20, 2002 so as to provide that the note shall be convertible and will have
the same conversion price as the notes issued pursuant to the secured note
purchase agreement, (ii) extending the maturity dates of the notes from June 30,
2003 to November 1, 2005, and (iii) revising and clarifying certain of the other
terms and conditions of the notes, including provisions relating to interest
payments, conversions, default and assignments of the notes.
In connection with the completion of the transactions under the
securities purchase agreement, we also entered into a security agreement with
the Investors dated as of April 25, 2003, and a registration rights agreement
dated as of April 25, 2003 providing the investors with certain registration
rights under the Securities Act of 1933, as amended, with respect to our common
stock issued or issuable in lieu of cash interest payments on the notes, upon
conversion of the notes and/or exercise of the warrants.
In addition to the foregoing, as a condition to and simultaneously with
the closing of the transaction pursuant to the secured note purchase agreement,
certain holders of our convertible notes agreed to convert approximately $4.9
million of notes and accrued interest into shares of our common stock, subject
to a "lock up" arrangement allowing only limited sales through private
transactions for their remaining shares through December 31, 2003. Specifically,
The Travelers Insurance Company agreed to convert their $1 million convertible
note plus related interest into our common stock at a conversion price of
approximately $0.53 per share, and SK Corporation has agreed to convert its $3
million convertible note and accrued interest into our common stock at an
approximate conversion price of approximately $1.28 per share. As further
conditions to the closing of the transaction pursuant to the secured note
purchase agreement, we have also entered into settlement or restructuring
agreements with certain of our other creditors to whom we owed approximately
$5.2 million of current payables, pursuant to which the creditors have agreed to
accept shares of our common stock in full or partial satisfaction of the amount
owed to them, or which allow us to either make discounted payments to them or to
make payments under more favorable payment terms than previously were in place.
Between March 31, 2003 and May 20, 2003, the Company issued an
aggregate of 2,399,656 shares of common stock in consideration of services
rendered by consultants and the satisfaction of certain liabilities.
* All of the above offerings and sales were deemed to be exempt under
rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of eMagin or
executive officers of eMagin, and transfer was restricted by eMagin in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
II-5
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
References to "the Company" in this Exhibit List mean eMagin Corporation, a
Delaware corporation.
2.1 Agreement and Plan of Merger between Fashion Dynamics Corp., FED
Capital Acquisition Corporation and FED Corporation dated March
13, 2000, as filed in the Registrant's Form 8-K/A Report (file
no. 001-15751) incorporated herein by reference.
3.1 Articles of Incorporation filed January 23, 1996, as filed in the
Registrant's Form 10-SB (file no. 000-24757) incorporated herein
by reference.
3.2 Bylaws, as filed in the Registrant's Form 10-SB (file no.
000-24757) incorporated herein by reference.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining rights of the
holders of common stock of the Registrant herein by reference.
4.2 Form of Secured Convertible Promissory Note dated as of April 25,
2003 filed April 28, 2003, as filed in the Registrant's Form 8-K
incorporated herein by reference.
4.3 Form of Amended and Restated Secured Convertible Promissory Note
dated as of April 25, 2003 filed April 28, 2003, as filed in the
Registrant's Form 8-K incorporated herein by reference.
4.4 Form of Warrant dated as of April 25, 2003 filed April 28, 2003,
as filed in the Registrant's Form 8-K incorporated herein by
reference.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (to be
filed by amendment)
10.1 2000 Stock Option Plan, as filed in the Registrant's Form S-8
(file no. 333-32474) incorporated herein by reference.
10.2 Consulting Agreement between eMagin Corporation and Verus
International Ltd., dated March 16, 2000, as filed in the
Registrant's Form 10-K/A for the year ended December 31, 2000
incorporated by reference herein.
10.3 Employment Agreement with Gary W. Jones, dated March 16, 2000, as
filed in the Registrant's Form 10-K/Afor the year ended December
31, 2000 incorporated by reference herein.
10.4 Employment Agreement with Susan K. Jones, dated March 16, 2000,
as filed in the Registrant's Form 10-K/A for
the year ended December 31, 2000 incorporated by reference
herein.
10.5 Nonexclusive Field of Use License Agreement relating to OLED
Technology for miniature, high resolution displays between the
Eastman Kodak Company and FED Corporation dated March 29, 1999,
as filed in the Registrant's Form 10-K/A for the year ended
December 31, 2000 incorporated by reference herein.
10.6 Amendment Number 1 to the Nonexclusive Field of Use License
Agreement relating to the OLED Technology for miniature, high
resolution displays between the Eastman Kodak Company and FED
Corporation dated March 16, 2000, as filed in the Registrant's
Form 10-K/A for the year ended December 31, 2000 incorporated by
reference herein.
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10.7 Amendment Number 1 to the Lease between International business
Machines Corporation and FED Corporation dated July 9, 1999, as
filed in the Registrant's Form 10-K/A for the year ended December
31, 2000 incorporated by reference herein.
10.8 Lease between International Business Machines Corporation and FED
Corporation dated May 28, 1999, as filed in the Registrant's Form
10-K/A for the year ended December 31, 2000 incorporated by
reference herein.
10.9 Amendment Number 2 to the Lease between International Business
Machines Corporation and FED Corporation dated January 29, 2001,
as filed in the Registrant's Form 10-K/A for the year ended
December 31, 2000 incorporated by reference herein.
10.10 Virtual Vision lease between Redson Building Partnership and
Vision Newco dated December 15, 1995, as filed in the
Registrant's Form 10-K/A for the year ended December 31, 2000
incorporated by reference herein.
10.11 Securities Purchase Agreement dated as of September 18, 2001 by
and between eMagin Corporation and SK Corporation, as filed in
the Registrant's Form 8-K dated September 26, 2001 incorporated
herein by reference.
10.12 Registration Rights Agreement dated as of September 19, 2001 by
and between eMagin Corporation and SK
Corporation, as filed in the Registrant's Form 8-K dated
September 26, 2001 incorporated herein by reference.
10.13 Note Purchase Agreement entered into as of August 20, 2001, by
and among eMagin Corporation and The Travelers Insurance Company,
as filed in the Registrant's Form 8-K dated September 4, 2001
incorporated herein by reference.
10.14 Secured Note Purchase Agreement entered into as of November 27,
2001, by and among eMagin Corporation and certain investors named
therein, as filed in the Registrant's Form 8-K dated December 18,
2001 incorporated herein by reference.
10.15 Registration Rights Agreement dated November 27, 2001 by and
between eMagin Corporation and certain investors named therein,
as filed in the Registrant's Form 8-K dated December 18, 2001
incorporated herein by reference.
10.16 Security Agreement dated as of November 20, 2001, by and between
eMagin Corporation, Verus International Ltd. and certain
investors named therein, as filed in the Registrant's Form 8-K
dated December 18, 2001 incorporated herein by reference.
10.17 Securities Purchase Agreement dated as of April 25, 2003 by and
among eMagin and the investors identified on the signature pages
thereto, filed April 28, 2003, as filed in the Registrant's Form
8-K incorporated herein by reference.
10.18 Security Agreement dated as of April 25, 2003 by and among
eMagin and certain initial investors identified on the signature
pages thereto filed April 28, 2003, as filed in the Registrant's
Form 8-K incorporated herein by reference.
10.19 Registration Rights Agreement dated as of April 25, 2003 by and
among eMagin and certain initial investors identified on the
signature pages thereto filed April 28, 2003, as filed in the
Registrant's Form 8-K incorporated herein by reference.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Certified Public Accountant.
23.3 Consent of legal counsel (see Exhibit 5.1).
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ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Hopewell
Junction, State of New York, on May 30, 2003.
EMAGIN CORPORATION
BY: /s/ Gary Jones
Gary Jones
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND ACTING CHIEF
FINANCIAL OFFICER
In accordance with the requirements of the Securities Act of
1933, this registration statement was signed by the following persons
in the capacities and on the dates stated.
NAME TITLE DATE
---- ----- ----
/s/ Gary Jones President, Chief Executive Officer, and May 30, 2003
--------------------------- Acting Chief Financial Officer and Director
Gary Jones (Principal Executive Officer)
/s/ Claude Charles Director May 30, 2003
---------------------------
Claude Charles
/s/ Jack Goldman Director May 30, 2003
---------------------------
Dr. Jacob E Goldman
/s/ Jack Rivkin Director May 30, 2003
---------------------------
Jack Rivkin
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