U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2002
[ ] Transition report pursuant section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ______________
eMAGIN CORPORATION
(Exact name of small business issuer as specified in its charter)
Commission file number: 000-24757
DELAWARE 56-1764501
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2070 Route 52
Hopewell Junction, New York 12533
(Address of principal executive offices)
(845) 892-1900
(Issuer's telephone number)
-------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Not applicable
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of February 3, 2002 the Registrant
had 30,979,939 shares of Common Stock outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
Index Page Number
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 2002 3
and December 31, 2001
Consolidated Statements of Operations For the Three-Months 4
ended September 30, 2002 and September 30, 2001
Consolidated Statements of Operations For the Nine-Months ended
September 30, 2002 and September 30, 2001 and for the period
from inception (January 23, 1996) to September 30, 2002 5
Consolidated Statements of Cash Flows for the Nine-Months ended
September 30, 2002 and September 30, 2001 and for the period
from inception (January 23, 1996) to September 30, 2002 6
Selected Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K b 28
SIGNATURE 29
Exhibit 99.1 Certification of CEO 30
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS Sept 30, 2002 Dec 31, 2001
------------------------- -------------------------
Restated - Note 2
CURRENT ASSETS:
Cash and cash equivalents 93,259 738,342
Contract receivables 160,636 485,021
Unbilled costs and estimated profits on contracts in progress 391,790 293,273
Inventory 160,032 90,720
Prepaid expenses and other current assets 330,573 388,344
------------------------- -------------------------
Total current assets 1,136,290 1,995,700
Equipment and leasehold improvements,
net of accumulated depreciation
of $1,506,652 and $1,122,989, respectively 782,409 1,166,509
Goodwill, net of accumulated amortization of
$54,602,258 and $54,602,258, respectively - -
Purchased intangibles, net of accumulated
amortization of $17,357,110 and $16,362,762, respectively 662,891 1,657,238
Other long-term assets 63,046 94,367
------------------------- -------------------------
Total assets 2,644,636 4,913,814
========================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt 41,163 693,197
Other short term debt 5,644,177 1,875,000
Accounts payable 6,251,413 3,116,558
Accrued expenses 1,048,452 615,418
Accrued payroll and benefits 1,016,635 788,302
Deferred Revenue 23,571
Advance payments on contracts to be completed 0 289,538
Other current liabilities 13,446 108,805
------------------------- -------------------------
Total current liabilities 14,038,857 7,486,818
------------------------- -------------------------
LONG-TERM DEBT 253,022 2,305,184
SHAREHOLDERS' EQUITY:
Common Stock, par value $0.001 per share
Shares authorized - 100,000,000
Shares issued and outstanding - 30,294,980 and 25,171,183 30,294 25,171
Additional paid-in capital 119,898,818 114,058,560
Deferred compensation (1,646,608) (2,277,367)
Deficit accumulated during the development stage (129,929,747) (116,684,552)
------------------------- -------------------------
Total shareholders' equity (11,647,243) (4,878,188)
------------------------- -------------------------
Total liabilities and shareholders' equity 2,644,636 4,913,814
========================= =========================
See selected notes to financial statements
3
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Three-Months
ended ended
September 30, 2002 September 30, 2001
------------------------------- --------------------------------
Restated - Note 2
CONTRACT REVENUE:
Contract revenue $176 $898,755
Product sales 497,675 277,873
-----------------------------------------------------------------
Total revenue $497,851 $1,176,628
-----------------------------------------------------------------
COSTS AND EXPENSES:
Research and development, net of funding
under cost sharing arrangements of
$346,449and $846,734 respectively $947,653 $2,692,869
Amortization and write-down of purchased intangibles 331,449 37,997,868
Selling, general and administrative 1,565,377 2,615,668
------------------------------- --------------------------------
Total costs and expenses, net $2,844,479 $43,306,405
------------------------------- --------------------------------
OTHER (EXPENSE)/ INCOME (408,010) (247,992)
------------------------------- --------------------------------
Loss before provision for income taxes (2,754,638) (42,377,769)
PROVISION FOR INCOME TAXES 0 0
------------------------------- --------------------------------
Net loss ($2,754,638) ($42,377,769)
=============================== ================================
Basic and diluted net loss per common share ($.09) ($1.69)
=============================== ================================
Basic and diluted weighted average common
shares outstanding 30,294,980 25,085,145
=============================== ================================
See selected notes to financial statements.
4
eMagin Corporation
(a development Stage Corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
Nine-Months Nine-Months Period From Inception
Ended Ended (January 23, 1996)
September 30, 2002 September 30, 2001 to September 30, 2002
Restated - Note 2 Restated - Note 2
CONTRACT REVENUE
Contract revenue $14,284 $4,332,233 $7,577,528
Product revenue 909,721 490,601 1,751,434
------------------------------------------------------------------------------
Total Revenue $924,005 $4,822,834 $9,328,962
COST AND EXPENSES
Research and Development, net of
funding under cost of sharing arrangements
of $356,798, $1,205,107 and
$3,258,210 respectively $6,435,467 $9,901,465 $28,794,576
Amortization and write-down of goodwill and
purchased intangibles 994,347 49,701,252 71,959,368
Acquired in-process research and development - 12,820,000
Selling, general, and administrative expense 4,916,824 7,922,118 22,863,875
------------------------------------------------------------------------------
Total costs and expenses $12,346,638 $67,524,835 $136,437,818
------------------------------------------------------------------------------
OTHER (EXPENSE)/INCOME (1,822,562) (216,959) (2,820,890)
------------------------------------------------------------------------------
Loss before provision for income taxes ($13,245,195) ($20,541,191) ($129,929,747)
------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 0 0 0
------------------------------------------------------------------------------
Net Loss ($13,245,195) ($62,918,960) ($129,929,747)
==============================================================================
Basic and diluted net loss per common share ($.44) ($2.51)
=================================================
Basic and diluted weighted average common shares
Outstanding 30,294,980 25,076,294
=================================================
See selected notes to financial statements.
5
eMAGIN CORPORATION
(a development stage corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
Nine Months Nine Months inception
ended ended January 23 1996
Sept 30, 2002 Sept 30, 2001 Sept 30, 2002
----------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($13,245,195) ($62,918,960) ($129,929,747)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 1,378,010 50,161,423 41,320,992
Write-down of goodwill and purchased intangibles - 32,145,863
Loss on disposal of assets 437 44,191 98,150
Non-cash charge for stock based compensation 1,265,702 2,189,361 6,646,533
Non-cash interest related charges 1,946,148 3,168,710
Non-cash related to issuance of warrants 189,508
Non-cash charge for services received - 116,151
Non-cash charge due to beneficial conversion - 2,922 -
Acquired in-process research and development - - 12,820,000
Changes in operationg assets and liabilities,
net of acquisition: -
Contract receivables (324,385) 166,684 (677,549)
Interest receivable (106) (106)
Unbilled costs and estimated profits on
contracts in progress 98,517 256,063 98,517
Costs and estimated profits in excess of
billings on contracts 326,291
Inventory 69,312 (41,600) (21,408)
Prepaid expenses and other current assets (57,665) 329,504 (140,187)
Other long-term assets (21,691) (89,808) (105,607)
Advanced payment on contracts to be completed - 275,000 398,343
Deferred Revenue 23,571 (190,490) 23,571
Accounts payable, accrued expenses and accrued payroll 3,411,732 1,761,766 5,395,390
Other current liabilities (101,766) -
----------------------------------------------------------------------
Net cash used in operating activities (5,455,613) (7,966,202) (28,316,093)
----------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (84,745) (470,910) (1,352,607)
Net proceeds from acquisition - - 1,239,162
----------------------------------------------------------------------
Net cash used in investing activities (84,745) (470,910) (113,445)
----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net of issuance costs 3,475,621 - 24,756,620
Proceeds from exercise of stock options and warrants 885 27,523 28,494
Proceeds from long and short term debt 1,443,478 4,000,000 6,318,478
Payments of long term debt and capital leases (24,709) (193,244) (2,580,796)
----------------------------------------------------------------------
Net cash provided by financing activities 4,895,275 3,834,279 28,522,796
----------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENT'S (645,083) (4,602,833) 93,259
CASH AND CASH EQUIVALENTS, beginning of period 738,342 7,367,257 0
----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period 93,259 2,764,424 93,259
======================================================================
See selected notes to financial statements.
6
eMAGIN CORPORATION
Selected Notes to Consolidated Financial Statements
Note 1 - BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. The results of operations for the
period ended September 30, 2002 are not necessarily indicative of the results to
be expected for the full year.
Note 2 - RESTATEMENT
As a result of a subsequent review of the September 30, 2002 quarterly financial
statements by our independent auditor we noted the following material
restatements occurred:
Previously
Financial Statement Line Reported As Restated Comment
-----------------------------------------------------------------------------------------------------------
Unbilled Costs $101,320 $391,720 Reclassification of amounts billed
-----------------------------------------------------------------------------------------------------------
Inventory 65,600 160,032 To correct inventory valuation
-----------------------------------------------------------------------------------------------------------
To recognize depreciation on completed
Equipment and Leasehold projects previously classified as being
Improvements 890,069 782,409 Construction in Progress
-----------------------------------------------------------------------------------------------------------
Purchased Intangibles 994,340 662,891 Correct amortization on intellectual property
-----------------------------------------------------------------------------------------------------------
Accounts Payable and Accrued Accrued amounts to be in agreement with vendor
Expense 6,667,999 7,299,865 balances.
-----------------------------------------------------------------------------------------------------------
Accrued Payroll To true up benefits to adjust for staff
884,828 1,016,635 layoffs
-----------------------------------------------------------------------------------------------------------
Current portion of LTD 673,902 41,163 Correct original issue discount amortization
-----------------------------------------------------------------------------------------------------------
Reclass of long-term debt to short-term debt
Other Short-term Debt 2,825,000 5,644,177 due to default
-----------------------------------------------------------------------------------------------------------
Reclass of long-term debt to short-term debt
Long-term Debt 2,342,483 253,022 due to default
-----------------------------------------------------------------------------------------------------------
To correct deferred compensation amortization
for correction of vesting of options and
recording of warrants issued in connection
Additional paid in capital 120,538,131 119,898,818 with debt financing
-----------------------------------------------------------------------------------------------------------
Correction of vesting of options and write-off
Deferred Compensation (841,513) (1,646,608) of forfeited options
-----------------------------------------------------------------------------------------------------------
Accrued amounts to be in agreement with vendor
Inception to Date balances and proper classification from
Research and Development 27,435,527 28,794,576 selling, general and administrative expense
-----------------------------------------------------------------------------------------------------------
Accrued amounts to be in agreement with vendor
balances, correction of vesting of options
Inception to Date for deferred compensation amortization, and
Selling, General & proper classification of expenses to research
Administrative 25,618,706 22,863,875 and development.
-----------------------------------------------------------------------------------------------------------
Inception to Date Amortization of Original Issue Discount on
Other (expense) income (2,091,944) (2,820,890) long-term debt.
-----------------------------------------------------------------------------------------------------------
7
The following table illustrates the above material restatements impact on the
three and nine months ended September 30, 2002 respectively:
Financial Three months ended Three Months ended Nine months ended Nine months ended
Statement Line September 30, 2002 September 30, 2002 As September 30, 2002 September 30, 2002
Previously Reported Restated Previously Reported As Restated
-----------------------------------------------------------------------------------------------------
Research and
Development $1,362,118 $947,653 $5,076,418 $6,435,467
-----------------------------------------------------------------------------------------------------
Amortization of
purchased
intangibles 331,449 662,898 994,347
-----------------------------------------------------------------------------------------------------
Selling General
&
Administrative 2,598,821 1,565,376 $7,671,655 4,916,824
-----------------------------------------------------------------------------------------------------
Other (expense)
income (578,577) (408,010) (1,672,193) (1,822,562)
-----------------------------------------------------------------------------------------------------
Net Loss $(4,048,765) $(2,754,638) $(14,130,835) $(13,245,195)
-----------------------------------------------------------------------------------------------------
Net Loss per
common share $(0.13) $(0.09) $(0.49) $(0.44)
-----------------------------------------------------------------------------------------------------
The company's management and its independent accountants recommended the above
adjustments after analysis of the accounts. Management believes it has taken the
necessary steps to analyze its accounts on a timely basis and in a manner as
recommended by our new independent accountants in the future. In addition the
footnotes to the September 30, 2002 financial statements and the Management's
Discussion and Analysis have been updated to conform to the results presented in
the amended September 30, 2002 quarterly financial statements.
..
Note 3 - 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.
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 are not related
to the Company's planned principal operations of commercialization of products
using organic light emitting diode (OLED) technology.
8
Through September 30, 2002, the company had incurred development stage losses
totaling approximately $130 million. Prior to the acquisition of FED by FDC, FED
incurred developmental stage losses totaling approximately $52.5 million. At
September 30, 2002, the Company had approximately $0.3 million of cash, cash
equivalents and contract receivables to fund short-term working capital
requirements and approximately $11.5 million of working capital deficiency. 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) marketing and production of its
products.
The Company believes that it has a reasonable probability of securing financing
and that the proceeds from such financings, and its remaining cash resources at
September 30, 2002 and subsequent cash flow from business operations, will be
sufficient to fund the Company's operations into the first quarter of 2003.
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
commercially viable 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. (Also see Liquidity and Capital Resources section on Item
7 Management's Discussion and Analysis of Financial Conditions and Results of
Operation and Risks Related to Our Financial Results section of Item 7A
Qualitative and Quantitive Disclosures About Market Risk.)
Note 4 - 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 5 - 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.
In addition, the Company has product sales which are recognized when merchandise
is shipped and such revenue is recorded net of estimated sales returns,
discounts and allowances.
9
Note 6 - 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 7 - 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 11,732,954 have been excluded from the computation of diluted
EPS for the three and nine months ended September 30, 2002.
Note 8 - DEBT
On January 14, 2002, the Company entered into a $1.0 million bridge loan
arrangement with a private investor (the "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 August 30, 2002. Terms of the notes also include 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 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 loans have been extended through November 30,
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 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. For the
three and nine months ended September 30, 2002, approximately $143,000 and
$480,000, respectively has been amortized and is included in non-cash interest
expense in the accompanying unaudited 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 unaudited
consolidated statements of operations.
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 August 30, 2002. 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 will be amortized into interest expense over the period
of the debt. For the three and nine months ended September 30, 2002,
approximately $143,000 and $480,000, respectively, has been amortized, and is
included in non-cash interest expense in the accompanying unaudited consolidated
statements of operations
10
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 and is included in "Other expense, net" in the accompanying
statement of operations for the nine months ended September 30, 2002.
As of September 30, 2002, 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 September
30, 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.
The company has negotiations in process with various creditors. We have been
mostly successful during this quarter in obtaining extensions and the management
continues to work toward mutually beneficial resolutions with all of its
creditors. The company has not made any payments on its debt which has become
due, the company is negotiating with its various creditors to work toward
mutually beneficial resolutions. There is no guarantee that eMagin will continue
to obtain forbearance or obtain acceptable resolutions to issues with its
creditors.
Note 9 - STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 100,000,000 shares with a
par value of $0.001 per share.
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 shares 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.
11
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.
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.
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 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.
NOTE 10 - EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved the issuance of
SFAS No. 141 "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". The new standards require that all business combinations
initiated after June 30, 2001 must be accounted for under the purchase method.
In addition, all intangible assets acquired that are obtained through
contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged shall be recognized as an asset apart
from goodwill. Goodwill and intangibles with indefinite lives will no longer be
subject to amortization, but will be subject to at least an annual assessment
for impairment by applying a fair value based test. eMagin adopted SFAS No. 142
on January 1, 2002. In connection with adopting this standard, eMagin considered
the measurement of transitional impairment. eMagin anticipates completing the
SFAS No. 142 valuation by the end of fiscal 2002. At this time, eMagin is not
able to determine if impairment of its purchased intangibles has incurred. As it
relates to goodwill, the initial adoption had no effect on eMagin's financial
statements since as of December 31, 2001, eMagin had written off the goodwill
balance.
eMagin adopted SFAS No. 142 on January 1, 2002. In connection with adopting this
standard, eMagin considered the measurement of transitional impairment. Initial
adoption had no effect on eMagin's financial statements since as of December 31,
2001, eMagin had written off the goodwill balance.
12
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. 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. The
Company will adopt SFAS No. 145 effective January 1, 2003. eMagin does not
believe the adoption of SFAS 145 will impact its financial position.
On July 30, 2002, The FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. eMagin is currently evaluating the requirements and impact of this
statement on our consolidated results of operations and financial position.
In November 2002, the 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 December 31, 2002, the Financial Accounting Standards Board issued Statement
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure
(SFAS 148). SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition to SFAS 123's fair value method of
accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The adoption of SFAS 148disclosure
requirements will not have an effect on the Company's Consolidated Financial
Statements. The Company does not intend to adopt the fair value method of
accounting for stock-based employee compensation.
13
NOTE 11 - Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial
commitments at September 30, 2002:
Four-
Less than One-Three Five After 5
Contractual Obligations 1 year years years years
------------------------------------
Long Term Debt 141,278
Short Term Debt 5,644,177
Operating leases 5,467,850 7,482,757
Capital leases 1,455,109 250,695
Employment leases - - - -
------------------------------------
Tota Contractual Cash
Obligations
------------------------------------
NOTE 12 - RECLASSIFICATIONS
Certain amounts in the September 30, 2001 financial statements have been
reclassified to conform to the September 2002 classification.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Statement of Forward-Looking Information
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms, or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those in the
forward-looking statements as a result of various important factors. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, such should not be regarded as a representation by the Company, or
any other person, that such forward-looking statements will be achieved. The
business and operations of the Company are subject to substantial risks, which
increase the uncertainty inherent in the forward-looking statements contained in
this release.
We undertake no duty to update any of the forward-looking statements, whether as
a result of new information, future events or otherwise. Readers are cautioned
not to place undue reliance on the forward-looking statements contained in this
report.
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.
14
Since our inception in 1996, we derived substantially all of our revenues from
fees paid to us under research and development contracts, primarily with the
U.S. federal government. We have devoted significant resources to the
development and commercial launch of our products. We commenced limited initial
sales of our SVGA+ microdisplay in May 2001 and commenced shipping samples of
our SVGA-3D microdisplay in February 2002. As of September 30, 2002, we had
recognized over $1.2 million from sales of our products, and have a backlog of
more than $10 million in products ordered for delivery through 2003. We have an
additional $10 million in letters of intent for purchases. These products are
being applied or considered for near-eye and headset applications in products
such as entertainment and gaming headsets, handheld Internet and
telecommunication appliances, viewfinders, and wearable computers to be
manufactured by original equipment manufacturer (OEM) customers. We have also
shipped a limited number of prototypes of our eGlass II Head-wearable Display
systems. In addition to marketing OLED-on-silicon microdisplays as components,
we also offer microdisplays as an integrated package, which we call Microviewer,
that includes a compact lens for viewing the microdisplay and electronic
interfaces to convert the signal from our customer's product into a viewable
image on the microdisplay. Through our wholly owned subsidiary, Virtual Vision,
Inc., we are also developing head-wearable displays that incorporate our
Microviewer.
We license our core OLED technology from Eastman Kodak and we have developed our
own technology to create high performance OLED-on-silicon microdisplays and
related optical systems. We believe our technology licensing agreement with
Eastman Kodak, coupled with our own intellectual property portfolio, gives us a
leadership position in OLED and OLED-on-silicon microdisplay technology. We are
the only company to demonstrate publicly and market full-color OLED-on-silicon
microdisplays.
Company History
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.
15
Our history has been as a developmental stage company. We are now transitioning
to manufacturing and intend to significantly increase our marketing, sales, and
research and development efforts, and expand our operating infrastructure. Most
of our operating expenses are fixed in the near term. If we are unable to
generate significant revenues, our net losses in any given period could be
greater than expected.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Not all of the accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, the following policies
could be deemed to be critical within the SEC definition.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, such as when a purchase order or contract is received from
the customer, the price is fixed, title to the goods has changed and there is a
reasonable assurance of collection of the sales proceeds. We obtain written
purchase authorizations from our customers for a specified amount of product at
a specified price and consider delivery to have occurred at the time of
shipment. Revenue is recognized at shipment and we record a reserve for
estimated sales returns, which is reflected as a reduction of revenue at the
time of revenue recognition.
Revenues from research and development activities relating to firm fixed-price
contracts are generally recognized on the percentage-of-completion method of
accounting as costs are incurred (cost-to-cost basis). Revenues from research
and development activities relating to cost-plus-fee contracts include costs
incurred plus a portion of estimated fees or profits based on the relationship
of costs incurred to total estimated costs. Contract costs include all direct
material and labor costs and an allocation of allowable indirect costs as
defined by each contract, as periodically adjusted to reflect revised agreed
upon rates. These rates are subject to audit by the other party. Amounts can be
billed on a bi-monthly basis. Billing is based on subjective cost investment
factors.
Results of Operations
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues
Revenues for the three months and nine months ended September 30, 2002 were $0.5
million and $1.0 million, respectively, as compared to $1.2 million and
$4.8million respectively, for the three months and nine months ended September
30, 2001. Current year revenues consist primarily of product sales and increased
by $0.2 million and $0.4 million for the three months and nine months ended
September 30, 2002, respectively, as compared to the three months and nine
months ended September 30, 2001. We ended the third quarter with a backlog of
over $1 million in short term sales orders. Government R&D contract revenues
decreased by $.9 million and $4.3 million for the three months and nine months
ended September 30, 2002, respectively, as compared to the three months and nine
months ended September 30, 2001. Government R&D contract revenues will remain
significantly lower in 2002 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.
16
Costs and Expenses
Research and Development. Research and development expenses include salaries,
development materials, equipment lease and depreciation expenses, electronics,
rent, utilities and costs associated with operating the Company's manufacturing
facility. Gross research and development expenses for the three months and nine
months ended September 30, 2002 were $1 million and $6.4 million, respectively.
For the same period in 2001, the Company's gross research and development
expenses were $3.6 million and $11.1 million, respectively. The $2.6 million and
$4.7 million decrease in gross expenses for the three months and nine months
ended September 30, 2002, as compared to the three months and nine months ended
September 30, 2001 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 and nine months ended
September 30, 2002 were $1.6 million and $4.9 million, respectively, as compared
to $2.6 million and $7.9 million for the three months and for the nine months
ended September 30, 2001. The decrease of $1.0 million and $3.0 million in
selling, general and administrative expenses was primarily due to changes in
personnel costs, patent filings, and legal fees. 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 is non-cash expense related to
stock-based compensation amortization. Non-cash stock-based compensation expense
for the three and nine months ending September 30, 2002 were $0.3 million and
$1.3 million, respectively, as compared to $0.7 million and $2.2 million for the
three months and nine months ended September 30, 2001. The non-cash stock-based
compensation expense for the three and nine months ending September 30, 2002
decreased by $0.4 million and $0.9 million, respectively. 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.
Amortization of Purchased Intangibles. Amortization and write down of purchased
intangibles expense for the three months and nine months ending September 30,
2002 was $0.3 million and $1.0 million respectively as compared to $38 million
and $50 million for the three months and nine months ended September 30, 2001.
The decrease of $38 million and $49 million in these non-cash charges, is the
result of the prior year's write-down of the balance in purchased intangibles
and goodwill and its impact on future years' amortization.
Other Income (Expense). Other income (expenses) for the three months and nine
months ending September 30, 2002 was ($0.4) million and ($1,8) million expense.
The increase of $0.2 million and $1.4 million in expense for this non-cash
charge was due primarily to the increase in debt discount from the beneficial
conversion of a bridge loan entered into by the company and interest expense and
penalties on additional debt.
Liquidity and Capital Resources
Current Financial Position and Need for Additional Financing
We need immediately to raise additional equity or debt financing in order to
continue as a going concern and need to raise substantial additional equity or
debt financing in the very near future to fund our growth and the
commercialization of our products. In the event that we raise additional funds
through equity financing, substantial equity dilution to investors will result.
17
Operating leases and certain creditors where eMagin is in default on payments
are in the process of being negotiated with the respective creditors. There is
no guarantee a positive resolution will be reached with any or all of the
creditors. Some of these existing agreements involve potential accelerated
liability, depending on the nature of the resolution with the creditors. A
conservative version of the possible outcome of the negotiations is assumed in
the revised reports.
We had cash and cash equivalents of $1.7 million as of March 31, 2002, $0.1
million as of June 30, 2002 and $0.1 million as of September 30, 2002. Our
monthly operating expenses normally are approximately $1.0 million. In addition,
$2.8 million of outstanding indebtedness plus accrued interest is due on
November 30, 2002. We cannot assure you that our lenders will agree to
reschedule or renegotiate the terms of this indebtedness before it becomes due.
As of September 30, 2002, another significant portion of our working capital
deficit consisted of approximately $7.1 million in accounts payable and accrued
expenses. A substantial portion of this amount is past due and owed to leasing
companies and law firms. We are currently engaged in discussions regarding
rescheduling payment terms and renegotiating balances due with our major
creditors.
Subject to available funding, 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 manufacturing
operations, purchase of inventory and expenses of increased sales and marketing
efforts will be the principle uses of additional cash that we raise during the
remainder of 2002. Until we raise sufficient funding to manufacture our products
and until our inventory procurement and our manufacturing processes are
stabilized, which we expect will take approximately three to nine months after
any funding, we may experience difficulties in making timely product shipments
to all of our customers. After our urgent cash needs are addressed, 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 the sales. We
expect to continue to devote substantial resources to manufacturing, marketing
and selling our products.
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 $14,000 for the nine months ended September 30,
2002, $5.0 million for the year ended December 31, 2001, and $2.6 million for
the year ended December 31, 2000. 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 2002 will be substantially lower than in
previous years. The government may terminate our contracts at its discretion. 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.
We have received increased orders for our products during the third quarter of
2002, and we believe that customer interest remains high. The company ended the
third quarter with a backlog of over $1 million in short term orders. Provided
that we can obtain adequate financing and successfully negotiate debt
restructuring, management believes that the prospects for growth of product
revenue remain high. We have received more than $10 million in purchase
agreements and are in discussion for additional orders. We are in the early
phases of production, although our progress has been impeded by our current cash
position. Anticipated increased shipments in the second quarter were delayed,
primarily due to certain supply delays, even though base displays were prepared.
These components were received behind schedule in July, and shipments resumed.
However, our cash position has resulted in reductions in manufacturing staff
availability.
Our cash requirements depend on numerous factors, including completion of our
product development activities, ability to commercialize our products, market
acceptance of our products and other factors. We expect to devote substantial
capital resources to continue our development programs directed at
commercializing our products in our target markets, hire and train additional
staff, expand our research and development activities, develop and expand our
manufacturing capacity and begin production activities. Through September 30,
2002 we have incurred accumulated losses of approximately $130 million since our
inception and we anticipate incurring significant losses as we fund our growth.
Since inception we have financed our operations through private placements of
equity securities, research and development contracts and borrowings. As of
September 30, 2002, we had $0.1 million in cash and cash equivalents and have a
working capital deficit of $11.6 million. In December 2001 and July 2002, we
took certain actions to reduce our workforce due to our difficult working
capital constraints.
18
Net cash used in operating activities was $5.5 million for the nine months ended
September 30, 2002. Cash used in operating activities resulted primarily from
our net loss partially offset by increases from non-cash charges. Net cash used
in operating activities for the nine months ended September 30, 2001 was $8.0
million resulting primarily from operating losses.
Net cash used by investing activities was $0.0 million for the nine months ended
September 30, 2002, all of which was used for capital expenditures. Net cash
used by investing activities for the nine months ended September. 30, 2001 was
$0.5 million, which was used for capital expenditures.
Net cash provided by financing activities was $4.9 million for the nine months
ended September 30, 2002, and consisted primarily of proceeds from sale of
equity and the issuance of debt. Net cash provided by financing activities was
$3.8 million for the nine months ended September 30, 2001 year, and consisted
primarily of proceeds from the issuance of debt
Factors Which May Affect Future Results
In evaluating our business, prospective investors and shareholders should
carefully consider the following risks. Any of the following risks could have a
material adverse impact on our business, operating results and financial
condition and result in a complete loss of your investment.
Risks Related To Our Financial Results
If we cannot operate as a going concern, our stock price will decline and you
may lose your entire investment. Our prior auditors had included an explanatory
paragraph in their report on our financial statements for the year ended
December 31, 2001 which states that, due to recurring losses from operations
since inception of the Company, there is substantial doubt about our ability to
continue as a going concern. Our financial statements for the nine months ended
September 30, 2002 do not include any adjustments that might result from our
inability to continue as a going concern. These adjustments could include
additional liabilities and the impairment of certain assets. If we had adjusted
our financial statements for these uncertainties, our operating results and
financial condition would have been materially and adversely affected.
If we do not obtain additional cash to operate our business, we may not be able
to execute our business plan and may not achieve profitability. In the event
that cash flow from operations is less than anticipated and we are unable to
secure additional funding, in order to preserve cash, we would be required to
further reduce expenditures and effect further reductions in our corporate
infrastructure, either of which could have a material adverse effect on our
ability to continue our current level of operations. Even if we obtain
additional working capital in the near future, to the extent that operating
expenses increase or we need additional funds to make acquisitions, develop new
technologies or acquire strategic assets, the need for additional funding may be
accelerated and there can be no assurances that any such additional funding can
be obtained on terms acceptable to us, if at all. If we are not able to generate
sufficient capital, either from operations or through additional financing, to
fund our current operations, we may not be able to continue as a going concern.
If we are unable to continue as a going concern, we may be forced to
significantly reduce or cease our current operations. This could significantly
reduce the value of our securities, which could result in our de-listing from
the American Stock Exchange and cause investment losses for our shareholders.
19
We may not maintain The American Stock Exchange (the "Exchange") listing
requirements. To maintain the listing of our common stock on the Exchange, we
are required to meet certain listing requirements, in the case of our common
stock selling for a substantial period of time at a low price per share. In its
review of whether a share price is too low or whether a reverse split is
appropriate, the Exchange will consider all pertinent factors, including market
conditions in general, the number of shares outstanding, plans which may have
been formulated by management, applicable regulations of the state of
incorporation or of any governmental agency having jurisdiction over eMagin, and
the relationship to other Exchange policies regarding continued listing. If the
Exchange were to determine that our share price is too low and that we should
reverse split our shares but we were unable to comply for any reason, our common
stock may be delisted from the Exchange. In addition, the financial statements
set forth in this Quarterly Report on Form 10-Q have not been reviewed by
independent public accountants as required by Item 10-01(d) of Regulation S-X
promulgated under the Securities Exchange Act of 1934, as amended. As result,
this report is not in compliance with the rules and regulations of the
Securities and Exchange Commission. Delisting of our common stock could
materially adversely affect the market price, the market liquidity of our common
stock and our ability to raise necessary capital. Moreover, it would likely be
more difficult to trade in or to obtain accurate quotations as to the market
price of our common stock. There have been no communications from regulatory
agencies concerning noncompliance with or deficiencies in financial reporting
practices, other than requirement for the filing of 2nd and 3rd 2002 quarter
financial statements reviewed by independent public accountants as required by
SAS#71 and the SEC regulations and the 2001 annual meeting delay that is
currently planned for mid-2003 in conjunction with the 2002 annual meeting.
Certain fees and taxes are due to Delaware, The State of Washington, and the
American Stock Exchange.
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
September 30, 2002, were $28.1 million and acquisition related non-cash
transactions were $101.9 million, which resulted in an accumulated net loss of
$130. 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 are presently 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 may continue to rely on such contracts for
revenue until volume commercial sales commence. The government at its discretion
may terminate our government contracts. 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 our existing contracts will continue, that we will be successful in
obtaining new government contracts, or that programs through which our contracts
are funded will continue to be funded beyond the current fiscal year. Our
inability to obtain revenues from government contracts could have a material
adverse effect on our results of operations.
20
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 over a range of years from
2002 to 2020. Our license with Eastman Kodak could terminate if we fail to
perform any material term or covenant under the license agreement. Since our
license from Eastman Kodak is non-exclusive, Eastman Kodak could also elect to
become a competitor itself or to license OLED technology for microdisplay
applications to others who have the potential to compete with us. The occurrence
of any of these events could have a material adverse impact on our business.
We may not be successful in protecting our intellectual property and proprietary
rights. We rely on a combination of patents, trade secret protection, licensing
agreements and other arrangements to establish and protect our proprietary
technologies. If we fail to successfully enforce our intellectual property
rights, our competitive position could suffer, which could harm our operating
results. Patents may not be issued for our current patent applications, third
parties may challenge, invalidate or circumvent any patent issued to us,
unauthorized parties could obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights, rights
granted under patents issued to us may not afford us any competitive advantage,
others may independently develop similar technology or design around our
patents, our technology may be available to licensees of Eastman Kodak, and
protection of our intellectual property rights may be limited in certain foreign
countries. We may be required to expend significant resources to monitor and
police our intellectual property rights. Any future infringement or other claims
or prosecutions related to our intellectual property could have a material
adverse effect on our business. Any such claims, with or without merit, could be
time consuming to defend, result in costly litigation, divert management's
attention and resources, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Protection of intellectual
property has historically been a large yearly expense for eMagin. We have not
been in a financial position to properly protect all of our intellectual
property, and may not be in a position to do so for some time even if sufficient
funding is available for the production and a sales ramp
Risks Related To the Microdisplay Industry
The commercial success of the microdisplay industry depends on the widespread
market acceptance of microdisplay systems products. The market for microdisplays
is emerging. Our success will depend on consumer acceptance of microdisplays as
well as the success of the commercialization of the microdisplay market. At
present, it is difficult to assess or predict with any assurance the potential
size, timing and viability of market opportunities for our technology in this
market. The viewfinder microdisplay market sector is well established with
entrenched competitors who we must displace.
The microdisplay systems business is intensely competitive. We do business in
intensely competitive markets that are characterized by rapid technological
change, changes in market requirements and competition from both other suppliers
and our potential OEM customers. Such markets are typically characterized by
price erosion. This intense competition could result in pricing pressures, lower
sales, reduced margins, and lower market share. Our ability to compete
successfully will depend on a number of factors, both within and outside our
control. We expect these factors to include the following: our success in
designing, manufacturing and delivering expected new products, including those
implementing new technologies on a timely basis; our ability to address the
needs of our customers and the quality of our customer services; the quality,
performance, reliability, features, ease of use and pricing of our products;
successful expansion of our manufacturing capabilities; our efficiency of
production, and ability to manufacture and ship products on time; the rate at
which original equipment manufacturing customers incorporate our product
solutions into their own products; the market acceptance of our customers'
products; and product or technology introductions by our competitors. Our
competitive position could be damaged if one or more potential OEM customers
decide to manufacture their own microdisplays, using OLED or alternate
technologies. In addition, our customers may be reluctant to rely on a
relatively small company such as eMagin for a critical component. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.
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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 (LCDs), LCD-on-Silicon ("LCOS") microdisplays, active matrix
electroluminescence and scanning image systems, and transmissive active matrix
LCDs. Color LCOS 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.
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, 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.
22
The manufacture of OLED-on-silicon is new and OLED microdisplays have not been
produced in significant volumes. We expect to begin commercial production during
2002 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 we may be
unable to supply microdisplays to our customers. For this reason, some OEMs may
also be reluctant to commit a broad line of products to our microdisplays
without a second production facility in place. Interruptions in our
manufacturing could be caused by manufacturing equipment problems, the
introduction of new equipment into the manufacturing process or delays in the
delivery of new manufacturing equipment. Lead-time for delivery of manufacturing
equipment can be extensive. No assurance can be given that we will not lose
potential sales or be unable to meet production orders due to production
interruptions in our manufacturing line. In order to meet the requirements of
certain OEMs for multiple manufacturing sites, we will have to expend capital to
secure additional sites and may not be able to manage multiple sites
successfully.
Risks Related To Our Business
Our success depends in a large part on the continuing service of key personnel.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of several key management personnel
including Gary W. Jones, our Chief Executive Officer. We also need to recruit
additional management in order to expand according to our business plan. The
failure to attract and retain additional management or personnel could have a
material adverse effect on our operating results and financial performance.
Our success depends on attracting and retaining highly skilled and qualified
technical and consulting personnel. We must hire highly skilled technical
personnel as employees and as independent contractors in order to develop our
products. The competition for skilled technical employees is intense and we may
not be able to retain or recruit such personnel. We must compete with companies
that possess greater financial and other resources than we do, and that may be
more attractive to potential employees and contractors. To be competitive, we
may have to increase the compensation, bonuses, stock options and other fringe
benefits offered to employees in order to attract and retain such personnel. The
costs of retaining or attracting new personnel may have a materially adverse
affect on our business and our operating results. In addition, difficulties in
hiring and retaining technical personnel could delay the implementation of our
business plan.
Our business depends on new products and technologies. The market for our
products is characterized by rapid changes in product, design and manufacturing
process technologies. Our success depends to a large extent on our ability to
develop and manufacture new products and technologies to match the varying
requirements of different customers in order to establish a competitive position
and become profitable. Furthermore, we must adopt our products and processes to
technological changes and emerging industry standards and practices on a
cost-effective and timely basis. Our failure to accomplish any of the above
could harm our business and operating results.
Our microdisplay business may not be successful. The market for microdisplays
may develop later than anticipated by us may therefore limit our sales potential
for the foreseeable future.
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. 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.
23
Our business strategy may fail if we cannot continue to form strategic
relationships with companies that manufacture and use products that could
incorporate our OLED-on-silicon technology. Our prospects will be significantly
affected by our ability to develop strategic alliances with OEMs for
incorporation of our OLED-on-silicon technology into their products. While we
intend to continue to establish strategic relationships with manufacturers of
electronic consumer products, personal computers, chipmakers, lens makers,
equipment makers, material suppliers and/or systems assemblers, there is no
assurance that we will be able to continue to establish and maintain strategic
relationships on commercially acceptable terms, or that the alliances we do
enter in to will realize their objectives. Failure to do so would have a
material adverse effect on our business.
We will need to obtain additional financing, which may not be available on
suitable terms, and as a result our ability to grow or continue existing
operations may be limited. Our future liquidity and capital requirements are
difficult to predict because they depend on numerous factors, including our
success in completing the development of our products, manufacturing and
marketing our products and competing technological and market developments. We
may not be able to generate sufficient cash from our operations to meet
additional working capital requirements, support additional capital expenditures
or take advantage of acquisition opportunities. In addition, substantial
additional capital may be required in the future to fund product development and
product launches. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to our shareholders or us. To the extent we raise additional capital
by issuing equity or securities convertible into equity, our current
shareholders will suffer dilution in ownership. If needed capital is
unavailable, our ability to continue to operate and grow our business could be
adversely affected. Even if capital is available at acceptable cost, we might
not be able to manage growth effectively.
Our business depends to some extent on international transactions. We purchase
needed materials from companies located abroad and may be adversely affected by
political and currency risk, as well as the additional costs of doing business
with a foreign entity. In addition, many of the OEMs 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 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.
24
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 September, 2002, we have outstanding options to purchase
6,529,225 shares; some are currently locked-up due to contractual restrictions.
The restrictions on the sale of the remaining shares will lapse between February
1, 2002 and January 7, 2003. There are also outstanding warrants to purchase
6,924,153 shares of common stock.
We do not intend to pay dividends; you will not receive funds without selling
shares; and you may lose the entire amount of your investment. We have not paid
any dividends on our common stock and we do not plan to pay cash dividends in
the foreseeable future. We intend to retain our earnings, if any, for use in our
business. We further cannot assure you that you will receive a return on your
investment when you sell your shares or that you will not lose the entire amount
of your investment.
Our principal stockholders, officers and directors will own a significant voting
interest in our voting stock. Current directors and officers of eMagin
Corporation or their affiliates beneficially own a large percentage of our
outstanding common stock. If these shareholders were to vote together, they
could significantly influence the outcome of items that are submitted to a vote
of the shareholders including the election of our directors.
We have a staggered Board of Directors and other anti-takeover provisions, which
could inhibit potential investors or delay or prevent a change of control that
may favor you. Our Board of Directors is divided into three classes and our
Board members are elected for terms that are staggered. This could discourage
the efforts by others to obtain control of the company. Some of the provisions
of our certificate of incorporation, our bylaws and Delaware law could, together
or separately, discourage potential acquisition proposals or delay or prevent a
change in control. In particular, our board of directors is authorized to issue
up to 10,000,000 shares of preferred stock (less any outstanding shares of
preferred stock) with rights and privileges that might be senior to our common
stock, without the consent of the holders of the common stock.
We cannot forecast our future performance. We cannot accurately forecast our
revenues because of our limited commercial operating history and because the
OLED microdisplay market is only beginning to emerge. We may experience
significant fluctuations in our quarterly operating results due to many factors,
which are outside our control. These factors include: fluctuation in demand and
orders for our products; timing or cost of future supply or equipment
deliveries; manufacturing capacity and yields; variations in product and process
development costs; expenses or operational disruptions resulting from
acquisitions; activities of our competitors; adequate working capital; and
general economic conditions. Due to these factors, we cannot anticipate with any
degree of certainty what our revenues, if any, will be in future periods. You
have limited historical financial data and operating results with which to
evaluate our business and our prospects. As a result, you should consider our
prospects in light of the expense, difficulties and delays frequently
encountered by early stage companies formed to pursue development of new
technologies.
Our share price is likely to be highly volatile which may result in substantial
losses for investors. Share price volatility may subject us to securities class
action litigation. Prices and trading volume for technology related stock has
been highly volatile. Accordingly, our stock prices are likely to also be highly
volatile. Shareholders may experience a decrease in the value of their common
stock regardless of our operating performance or prospects. In addition, the
trading price of our common stock could be subject to wide fluctuations in
response to: our perceived prospects; quarter to quarter variations in our
operating results; changes in earnings estimates or recommendations by
securities analysts and market perceptions of our operating results in relation
to those estimates or recommendations; changes in market valuation of companies
in the microdisplay systems industry; announcements of technological innovations
or new products by us or our competitors; economic, political, and issues
associated with our customers, suppliers, partners, accountants, governmental
agencies in the USA and elsewhere, or other parties; sales of shares by other
shareholders; and general conditions in the personal products industries or
stock market conditions. In the past, securities class action litigation has
often been instituted against companies following periods of volatility in their
share price. Those companies, like us, that are involved in rapidly changing
technology markets are particularly subject to this risk. This type of
litigation, if instituted against us, could result in substantial costs and
divert our management's attention and resources, which could cause serious harm
to our business.
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ITEM 3: QUALITATIVE AND QUANTITATIVE Disclosures About Market Risk
This Form 10-Q report contains forward-looking statements within the
meaning of the securities laws that are based on current expectations,
estimates, forecasts and projections about the industries in which eMagin
operates, management's beliefs, and assumptions made by management. In addition,
other written or oral statements, which constitute forward-looking statements,
may be made by or on behalf of eMagin. Words such as "expects", "anticipates",
"intends", "plans", "believes", "could", "seeks", "estimates", variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions, which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that could cause
or contribute to such differences in outcomes and results, include, but are not
limited to, those discussed below.
Interest Rate Risk
Substantially all of the Company's cash equivalents and investment securities
are at fixed interest rates, and as such, the fair market value of these
instruments is affected by changes in market interest rates. As of September 30,
2002, all of the Company's cash equivalents and investment securities mature
within one year. Accordingly, we believe that the market risk arising from our
holdings of these financial instruments is immaterial. However, in the future,
we may invest in securities with maturities of more than one year, which may
carry greater interest rate risk.
Foreign Currency Exchange Risk
Presently, all of the Company's research and development contract payments are
made in U. S. dollars and, consequently, we believe we have no direct foreign
currency exchange rate risk. However, in the future, we may enter into contracts
in foreign currencies, which may subject the Company to foreign exchange rate
risk. We do not have any derivative instruments and do not presently engage in
hedging transactions.
26
PART II--OTHER INFORMATION
Item 5. Other Information
On April 3, 2002, the Company announced that it had received 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 US $1,000,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits List
EXHIBIT
NUMBER DESCRIPTION
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 issued by the Chief Executive Officer.
(b) Reports on Form 8-K
The Company filed seven reports on form 8-K during the quarter ended September
30, 2002. Information regarding the items reported on is as follows:
DATE OF REPORT ITEM REPORTED ON
July 29, 2002 It was disclosed that eMagin Crop. Was notified
by the Securities and Exchange Commission that
Arthur Anderson was unable to perform future
audit services.
August 21, 2002 Disclosed that eMagin Corp. issued to two
investors 8% series B Convertible Debentures due
August 21, 2004 whereby each investor agreed to
lend EMagin Corp. $121,739 for a total of
$243,478.
Disclosed that Travelers and eMagin agreed to
extend the maturity date of the Convertible
Promissory Note from August 30, 2002 to
September 30, 2002.
Disclosed that eMagin and Mr. Mortimer D.A.
Sackler agreed to extend the maturity date of
the Secured Convertible Note from August 30, 2002
to September 30, 2002.
Disclosed that eMagin and Ginola Limited agreed to
extend the maturity date of the Secured
Convertible Note from August 30, 2002 to
September 30, 2002.
Disclosed that eMagin and Jack Rivkin agreed
to extend the maturity date of the Secured
Convertible Note from August 30, 2002 to
September 30, 2002.
27
September 23, 2002 Disclosed upon recommendation of the Audit
Committee and of it's Board Of Directors, engaged
Grant Thornton LLP to serve as the company's
Independent auditors.
September 30, 2002 Disclosed that Travelers and eMagin agreed to
extend the maturity date of the Convertible
Promissory Note from August 30, 2002 to
September 30, 2002.
Disclosed that eMagin and Mr. Mortimer D.A.
Sackler agreed to extend the maturity date of the
Secured Convertible Note from September 30, 2002
to October 31, 2002.
Disclosed that eMagin and Ginola Limited agreed to
extend the maturity date of the Secured
Convertible Note from September 30, 2002 to
October 31, 2002.
Disclosed that eMagin and Jack Rivkin agreed to
extend the maturity date of the Secured
Convertible Note from September 30, 2002 to
October 31, 2002.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eMAGIN CORPORATION
Dated: February 7, 2003 By: /s/ Gary W. Jones
-----------------------------------------
Gary W. Jones
Chief Executive Officer
28
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the 10Q of eMagin Corporation (the "Company") for
the quarter period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Edward V. Flynn, Chief
Financial Officer of the Company, certify, pursuant to 18 U. S. C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
undersigned's knowledge:
1) the Report fully complies with the requirements of Section 13 (a)
or 15 (d) of the Securities Exchange Act of 1934, as amended; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of the operations of the
Company.
Certification of Principal Executive Officer
I, Gary W. Jones, Chief Executive Officer of eMagin Corporation,
certify that:
I have reviewed this quarterly report on Form 10-Q of eMagin
Corporation;
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
29
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 7, 2003
/s/ Gary W. Jones
------------------------------
Name: Gary W. Jones
Title: Chief Executive Officer
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