SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 2003.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
Commission File Number: 000-19828
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SPATIALIGHT, INC.
(Exact name of registrant as specified in its Charter)
NEW YORK 16-1363082
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Five Hamilton Landing, Suite 100, Novato, California 94949
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(Address of principal executive offices)
(415) 883-1693
--------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None Securities registered under Section 12(g) of the Exchange Act:
Common Shares, $.01 par value
-----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days: Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value for the Issuer's voting Shares held by
non-affiliates of the Issuer, based upon the $ 4.25 per share closing sale price
of the Common Shares on March 26, 2004, as reported on the Nasdaq SmallCap
Market, was approximately $ 127,281,631. Common Shares held by each officer and
director and by each person who owns 5% or more of the outstanding Common Shares
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 29, 2004, Registrant had 34,495,062 Common Shares outstanding.
1
SPATIALIGHT, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
ITEM 1 Description of Business........................................................... 3
ITEM 2 Description of Property........................................................... 8
ITEM 3 Legal Proceedings................................................................. 8
ITEM 4 Submission of Matters to a Vote
Of Security Holders............................................................... 8
PART II
ITEM 5 Market for Common Equity and Related Shareholder Matters.......................... 8
ITEM 6 Selected Consolidated Financial Data.............................................. 11
ITEM 7 Management's Discussion and Analysis of Financial Condition
And Results of Operation.......................................................... 12
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ....................... 25
ITEM 8 Consolidated Financial Statements and Supplementary Data.......................... 25
ITEM 9 Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure............................................ 53
ITEM 9A Controls and Procedures .......................................................... 53
PART III
ITEM 10 Directors and Executive Officers.................................................. 54
ITEM 11 Executive Compensation............................................................ 56
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters................................................... 59
ITEM 13 Certain Relationships and Related Transactions.................................... 60
ITEM 14 Principal Accountant Fees and Services ........................................... 62
PART IV
ITEM 15 Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K...... 63
2
PART I
This annual report on Form 10-K contains certain forward-looking statements
within the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended, and is subject to the Safe Harbor provisions created by that statute.
In this report, the words "anticipates," "believes," "expects," "future",
"intends," and similar expressions identify forward-looking statements. Such
statements are subject to risks and uncertainties, including, but not limited
to, those discussed herein which are specific to the Company's business, and in
particular, those contained in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Risk Factors,"
that could cause actual results to differ materially from those projected. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. We undertake no obligation to publicly
update or revise these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events and thus you should not assume that silence by management
over time means that actual events are bearing out as estimated in such
forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
We manufacture microdisplays that provide high resolution images suitable
for applications including high definition television, rear projection computer
monitors and video projectors, and potential applications such as those used in
wireless communication devices, portable games and digital assistants. Our
microdisplays, are designed for use in end products of original equipment
manufacturers, and therefore we work closely with customers and prospective
customers to incorporate our microdisplays into their final products. We lease
clean room space where we currently manufacture our SpatiaLight imagEngine(TM)
microdisplays. In addition, in January 2004, we leased an additional clean room
at the same location as the existing clean room to address current and
anticipated increased manufacturing demand. We believe these facilities are
suitable to meet our current and immediate future needs. We also believe that
these current arrangements provide us with strong quality controls and
effectively protect our proprietary technology in our products. Internal
manufacturing is subject to certain risks described under "Risk Factors" in Item
7 herein. We have patents covering parts of our designs; however, the key
designs of the circuitry in the silicon, drive electronics and liquid crystal
assembly techniques are proprietary and not covered by patents.
Our microdisplays are high-resolution liquid crystal displays. They are
constructed with a silicon chip, a layer of liquid crystals and a glass cover
plate in contrast to the more common construction of liquid crystals sandwiched
between two glass plates. These displays are also known as and commonly referred
to as liquid crystal on silicon (LCoS), liquid crystal displays (LCD), active
matrix liquid crystal displays and spatial light modulators.
The image on a microdisplay can be projected onto a screen or other
surface for individual or group viewing or used in a portable application that
is viewed through a magnifying device similar to a viewfinder. Potential
microdisplay applications include:
o large-screen rear-projection television systems, in both high
definition television format and standard television formats;
o large-screen rear-projection computer monitors in a variety of
resolutions;
o video projectors for applications such as presentations;
o head-mounted displays which are used for virtual reality systems,
defense, aerospace and gaming applications; and
o other potential applications such as point of purchase displays,
optical computing and data storage.
3
Our technology uses liquid crystals and silicon chips. An advantage of
these materials is that processes for working with them are already known and
they may be produced more quickly than competing technologies offering
comparable quality. By using existing manufacturing processes, we believe we
will be able to obtain economies of scale.
From 2001 through 2003, we entered into agreements or memoranda of
understanding with original equipment manufacturers (OEMs) in China and the
Republic of South Korea for testing of our microdisplay products in
contemplation of definitive purchase order agreements. Fuji Photo Optical Co.,
Ltd. (Fuji) is our current manufacturer of light engines being used with our
microdisplay products to be sold to our current and prospective customers.
In late January 2003, we announced that we signed a purchase order
agreement with Skyworth Display, one of the Chinese OEMs with which we had an
agreement to test prototypes of our microdisplay products, for the purchase by
Skyworth of 14,100 SpatiaLight display units during a one year delivery period.
The purchase order originally provided for 200 units to be delivered in February
and an additional 200 units in each of March and April 2003. Skyworth and we
subsequently agreed to delay the first delivery of units. To date, we have
completed shipment of 100 of the 200 units originally scheduled for delivery in
the first month. Skyworth has recently advised us that it has decided to change
the screen size format of the LCoS televisions that it intends to manufacture
using our display units. As a result, Skyworth is making necessary changes to
certain of its internally developed electronics components, which Skyworth has
advised us will occur in the future. We expect to ship the remainder of the
first 200 units after Skyworth completes these changes. Following the initial
delivery provisions of 200 units per month for the first three months, we are
scheduled to deliver 1,500 units per month until the order is completed. The
purchase order is cancelable by Skyworth on a quarterly basis and is subject to
pricing contingencies and other customary terms and conditions.
In September 2003, we announced that we signed a purchase order agreement
with China Electronics Corporation (CEC), another of the Chinese OEMs with which
we had an agreement to test prototypes of our microdisplay products, for the
purchase by CEC of 2,000 display units from us. The agreement provides for an
initial delivery of ten display units, which was completed in September, with a
second delivery of 100 units to follow in the immediate future. Additional
shipments will be made periodically according to a schedule to be determined by
CEC and us. Pursuant to the terms of the purchase order, the current obligations
of CEC are backed by letters of credit in our favor. The purchase order is
cancelable by CEC after delivery of 110 units and is subject to other customary
terms and conditions.
In October 2003, we announced that we had signed a purchase order
agreement with Nanjing Panda Electronics Co. (Panda), a third Chinese OEM with
which we had an agreement to test prototypes of our microdisplay products, for
the purchase of 2610 display units by Panda. The agreement provides for an
initial television box integration phase, which Panda recently completed,
utilizing a prototype SpatiaLight display unit. The agreement then provides for
delivery of ten display units to Panda, which we expect to occur in the
immediate future, with a second delivery of 100 display units to follow.
Subsequent shipments under the purchase order will be made periodically
according to a schedule to be determined by the parties. Pursuant to the terms
of the purchase order, the obligations of Panda will be backed by letters of
credit in our favor. The purchase order is cancelable by Panda after delivery of
ten display units and is subject to other customary terms and conditions.
In December 2003, we signed a purchase order agreement with SCT Optronics
Company Ltd. (SCT), a Chinese OEM, for the purchase of 2,020 display units from
SpatiaLight. The initial shipment of ten display units provided for under the
agreement was completed in December 2003. Future shipments are scheduled to be
made periodically according to a schedule to be finally determined by the
parties. The purchase order is cancelable by SCT after delivery of ten display
units and is subject to other customary terms and conditions.
In December 2003, we signed a purchase order agreement with Shanghai China
Display Co., Ltd. (China Display), another Chinese OEM with which we had an
agreement to test prototypes of our microdisplay products. The agreement
provides for the purchase by China Display of 1,000 sets of three SpatiaLight
imagEngine(TM) microdisplays. Pursuant to the purchase order, we completed an
initial delivery of 100 microdisplay sets to China Display in December 2003. A
second delivery of 300 sets and a third delivery of 600 sets are to follow. The
entire order is scheduled to be completed within a three-month period. We may
mutually agree with China Display to revise the delivery schedule. Pursuant to
the terms of the purchase order, the obligations of China Display will be backed
by three letters of credit, the first of which was issued and paid to us. The
purchase order is not cancelable by China Display, according to the terms of the
purchase order, because the delivered microdisplay sets met China Display's
specifications. The purchase order is subject to other customary terms and
conditions.
4
In December 2003, we signed a purchase order agreement with Global Display
Limited, a Chinese OEM, for the purchase of 2,000 display units from
SpatiaLight. Shipments are scheduled to be made periodically according to a
schedule to be finally determined by the parties. The purchase order is
cancelable by Global Display after the initial delivery of ten display units
provided for under the agreement and is subject to other customary terms and
conditions.
We are also currently negotiating the terms of purchase orders for our
products with certain other prospective customers, primarily in China and South
Korea, some of whom are parties to the agreements or memoranda of understanding
described in this Item 1. There are significant open issues with respect to
these prospective purchase orders that have to be finally negotiated, including
prices and quantities of our products. We cannot assure whether we will receive
any purchase orders binding on any of these companies for their purchase of our
microdisplay products in the near future. Even assuming that we receive purchase
orders that are binding on the prospective customers, these orders and our sales
to these customers are subject to certain contingencies described under "Risk
Factors" in Item 7 herein.
We were incorporated under the laws of the State of New York in 1989. Our
executive offices are located at Five Hamilton Landing, Suite 100, Novato,
California 94949.
TECHNOLOGY AND PRODUCTS UNDER DEVELOPMENT
A typical liquid crystal display, as might be found in a notebook
computer, basically consists (along with other associated materials and
processes) of liquid crystal material sandwiched between two pieces of glass,
polarizers, color filters, a data signal and a light source. As the data signal
is applied across the sandwich of the liquid crystals, the electric field
created by this data signal causes the liquid crystals to tilt. This tilting,
combined with the polarizers, makes each pixel change from opaque to
transparent, thereby controlling either the transmission or reflection of light
from each pixel.
Departing from typical liquid crystal displays utilizing circuitry on two
pieces of glass, we design integrated circuits that control individual
reflective pixels on a silicon substrate. This silicon substrate is manufactured
using a conventional complimentary metal oxide semiconductor (CMOS) process.
This processed silicon substrate, also known as a silicon backplane, then has
the liquid crystal material and a cover glass applied to it. When the data
signal is sent to the circuitry in the silicon, the liquid crystals again tilt
from opaque to transparent states. When polarizers are added and light is
reflected from the pixels on the silicon, images can be viewed directly or,
using standard optical techniques, projected into larger images on a screen.
As is common with all LCDs, the images produced are inherently black and
white. The varying of the electrical signal to each pixel produces gray scaling
(various shades of gray going from black to white). Utilizing this gray scaling,
there are three basic techniques for achieving color displays: (1) optically
combining different colors of light, (2) sequential color systems and (3) color
filters. We believe our displays can be adapted for use in all of these types of
color display processes.
The display industry has undergone and continues to undergo rapid and
significant technological change. We expect display technologies to continue to
develop rapidly, and our success will depend significantly on our ability to
attain and maintain a competitive position. Rapid technological development may
result in actual and proposed displays, products or processes becoming obsolete
before we recoup a significant portion of related research and development,
acquisition and commercialization costs.
5
Our ability to compete will depend in part upon many factors including the
quality of the display, delivery, pricing and technical specifications. In
addition there will be factors within and outside of our control, including
customer support and the success and timing of product introduction and
distribution by our customers. Our competitors may succeed in developing
technologies and products that are equally or more efficient than any which are
being developed by us which will render our technology, displays and other
products obsolete and non-competitive.
Our continued existence is dependent upon our ability to successfully
develop, manufacture, market and sell our products. To date, we have received
purchase orders from seven Chinese OEMs. We are currently offering two types of
products to our customers and prospective customers primarily in China and South
Korea. One product is sets of three of our proprietary SpatiaLight
imagEngine(TM) LCoS microdisplays. Our other product, the display unit, is
comprised of three of our LCoS microdisplays fitted onto a light engine designed
by SpatiaLight and Fuji and manufactured by Fuji. Our current microdisplay sets
and display units each utilize more than 3.6 million pixels and are designed to
be incorporated into High Definition televisions, rear projection monitors, home
theater projection systems, video projectors and other display applications.
MARKETING, SALES AND DISTRIBUTION
Application and Markets
We are currently working with a number of OEMs, primarily in China and
South Korea, to use our microdisplay products in their end product applications.
We do not believe that designing, selling and distributing end products for
these diverse markets is in our own best interests. We are establishing
relationships with OEMs and considering possibilities with respect to jointly
developing end products that could be marketed and sold into those markets. We
are also continuing to establish relationships with OEMs to incorporate our
microdisplays into their end products. In high volume applications, we currently
are and expect to continue custom designing our microdisplay products to fit a
specific manufacturer's need for a specific product. We will also consider
licensing our microdisplay products to large manufacturers who have the ability
and desire to manufacture our displays for use in their final products. Our
SpatiaLight imagEngine(TM) microdisplays can be incorporated into a wide variety
of products such as High Definition televisions, rear-projection computer
monitors, video projectors and head mounted displays.
Our strategy is to focus our abilities on original equipment design (OED)
of LCoS microdisplays and to work closely with OEMs to market end products
utilizing our microdisplays. We are therefore dependent upon these OEMs for the
manufacturing, marketing and selling of end products.
Manufacturing and Supply
We lease clean room space in California where we currently manufacture our
SpatiaLight imagEngine(TM) microdisplays. In addition, in January 2004, we
leased an additional clean room at the same location as the existing clean room
to address current and anticipated increased manufacturing demand. We believe
that these current arrangements provide us with strong quality controls and
effectively protect our proprietary technology in our products. Internal
manufacturing is subject to certain risks described under "Risk Factors." We
perform product testing of our microdisplays, analyze the results and take
actions to refine the manufacturing process and enhance product design. We have
developed statistical quality control procedures for our manufacturing process.
We currently obtain silicon backplanes, a vital component in our
microdisplays, from the Far East. The supply of silicon backplanes from
suppliers does fluctuate and we may be subject to problems of availability.
Since January 2003, we have entered into seven purchase order agreements,
the terms and status of which are more fully described under the heading
"Introduction" in this Item 1 and Note 1 and Note 8 in Item 8. Fuji Photo
Optical Co., Ltd. (Fuji) is our current manufacturer of light engines being used
with our microdisplay products to be sold to our current and prospective
customers.
6
Any termination of a manufacturing or supply contract could have a
material adverse effect on our ability to meet our anticipated commitments to
customers while we identify and qualify replacement manufacturers. We could
become dependent on a manufacturer and any termination or cancellation of our
agreement with the manufacturer could adversely affect our ability to
manufacture our products.
COMPETITION
Microdisplays are a subset of the display market (including television and
video display). This display market subset consists of (1) reflective
microdisplays produced on silicon backplanes, (2) transmissive microdisplays and
(3) emissive microdisplays. Companies competing in the reflective microdisplay
market include Aurora, Brillian, eLCOS, Hitachi, Hughes/JVC, Intel, Philips, and
Sony. These companies are all producing different forms of a liquid crystal
display on a silicon backplane. A competitor in the reflective microdisplay
market, although not using liquid crystals in the display, is Texas Instruments,
which is producing a micro-mechanical structure of moving mirrors on a silicon
backplane.
Rapid and significant technological advances have characterized the
microdisplay market. There can be no assurance that our displays will be
representative of such advances or that we will have sufficient funds to invest
in new technologies or products or processes. Although we believe that our
displays have specifications and capabilities which equal or exceed that of
commercially available LCD and Cathode Ray Tube (CRT) based display products,
the manufacturers of these products may develop further improvements of their
existing technology that would eliminate or diminish our anticipated advantage.
In addition, numerous competitors have substantially greater financial,
technical, marketing, distribution and other resources than we have. We may also
face an aggressive, well-financed competitive response that may include
misappropriation of our intellectual property or predatory pricing.
PATENTS AND INTELLECTUAL PROPERTY
Our ability to compete effectively with other companies will depend, in
part, on our ability to maintain the proprietary nature of our technologies.
SpatiaLight has been awarded six U.S. patents and we have other U.S. and
international patent applications pending. There can be no assurance as to the
degree of protection offered by these patents or as to the likelihood that
pending patents will be issued. Our competitors, in both the United States and
foreign countries, many of which have substantially greater resources and have
made substantial investments in competing technologies, may seek to apply for
and obtain patents that will prevent, limit or interfere with our ability to
make and sell our products or intentionally infringe upon our patents.
The defense and prosecution of patent suits is both costly and
time-consuming, even if the outcome is favorable to us. This can be particularly
true in foreign countries. In addition, there is an inherent unpredictability
regarding obtaining and enforcing patents in foreign countries. An adverse
outcome in the defense of a patent suit could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or require us to cease selling our products.
We also rely on unpatented proprietary technology and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to our proprietary technology. To protect
our rights in these areas, we require all employees and technology consultants,
advisors and collaborators to enter into confidentiality agreements. However,
these agreements may not provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. To date, we have no experience in enforcing our
confidentiality agreements.
7
RESEARCH AND DEVELOPMENT
We incurred research and development expenses of approximately $2,681,000
million in 2003 and $3,639,000 in 2002. Research and development expenses are
those costs incurred for personnel and experimental materials for the design and
development of new products, including approximately $800,000 in pre-production
tooling costs for test designs in 2002. We believe that the development of new
products will be required to allow us to compete effectively and to achieve
future revenues. We currently have 11 full-time employees whose duties include
research and development and seven full-time employees whose duties include
manufacturing. We intend to continue our product development programs, focusing
on increasing the display specifications including resolution, color and
manufacturing processes. We believe that such developments will be required to
exploit future markets.
EMPLOYEES
As of December 31, 2003, the Company had 28 full-time employees and three
part-time engineering contractors. Full-time employment is divided among three
functional areas with 11 in research and development, seven in manufacturing and
10 in management/finance/administration. In July 2003, we hired a Chief
Financial Officer and an Executive Vice President of Strategic Planning, both of
whom serve as executive officers. Employees are not represented by any
collective bargaining organizations. We consider our relations with our
employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters are located at Five Hamilton Landing, Suite 100, Novato,
California. Our premises, which were designed and built-out to our
specifications, encompass our corporate offices, quality assurance and testing
facilities and optics laboratories. The facility aggregates 14,000 square feet
and the lease continues through August 2009. We also lease clean room space in
California where we currently manufacture our SpatiaLight imagEngine(TM)
microdisplays. In addition, in January 2004, we leased an additional clean room
at the same location as the existing clean room to address current and
anticipated increased manufacturing demand. We believe these facilities are
suitable to meet our current and immediate future needs.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings. The
Company is subject to routine claims and lawsuits from time to time in the
ordinary course of business. While the outcome of such ordinary course
proceedings cannot be predicted with certainty, we believe that the resolution
of any future ordinary course matters individually or in the aggregate will not
have a material adverse effect on our business, financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during
the fourth quarter of fiscal 2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDERS MATTERS
Trading in our Common Shares has been conducted on the Nasdaq SmallCap
Market since May 24, 2000 under the symbol "HDTV." Because we are traded on the
SmallCap Market, our securities may be less liquid, receive less coverage by
security analysts and news media and generate lower prices than might otherwise
be obtained.
8
The following table sets forth, for the calendar quarters indicated, the
range of high and low quotations for our Common Shares, as reported by Commodity
Systems, Inc.
HDTV COMMON SHARES
Fiscal 2003
High Low
---- ---
First Quarter 3.95 2.03
Second Quarter 3.05 1.89
Third Quarter 5.00 2.40
Fourth Quarter 6.39 4.29
Fiscal 2002
High Low
---- ---
First Quarter 8.15 3.18
Second Quarter 5.24 2.95
Third Quarter 3.95 2.05
Fourth Quarter 4.25 1.79
The quotations listed above reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not represent actual transactions.
As of March 16, 2004, there were approximately 489 holders of record of
our Common Shares and the closing price per share was $4.32 as reported on the
Nasdaq SmallCap Market. The Common Shares represent the only class of securities
outstanding as of this filing.
In June 2003 the shareholders approved an amendment to the Corporation's
Restated Certificate of Incorporation, as amended, to increase the number of
authorized Common Shares, par value $0.01, from 40,000,000 to 50,000,000.
To date, we have not paid a dividend on our Common Shares. The payment of
future dividends is subject to our earnings and financial position and such
other factors, including contractual restrictions, as the Board of Directors may
deem relevant. It is unlikely that dividends will be paid in the foreseeable
future.
Sales of Unregistered Securities
In October 2003, the Company issued 31,250 Common Shares upon the exercise
of a warrant. The purchase price was $3.50 per share and total cash received was
$109,375.
In August 2003, the Company issued 1,212,061 Common Shares and 303,015
fully vested warrants with a strike price of $3.29 for net proceeds of
$2,538,851.
In May 2003, the Company issued 2,796,325 Common Shares at $1.84 per share
and 669,080 fully vested warrants with a purchase price of $2.65. Net proceeds
received were $4,974,935.
On December 31, 2002, the Company issued 50,000 Common Shares upon the
exercise of a warrant. The shares were purchased at $2.42; total cash received
was $121,000.
During 2001, the Company sold 391,036 Common Shares under private stock
purchase agreements. The purchase prices range from $1.75 to $2.40; total cash
received was $785,146.
On October 1, 2001, the Company sold 100,000 Common Shares under a private
stock purchase agreement. The stock was sold at $1.75 per share and was due in
four equal installments. The entire amount was paid on December 31, 2001.
9
On May 15, 2001, the Company sold 600,000 Common Shares under a private
stock purchase agreement. The stock was sold at a price of $1.75 per share. Cash
received was $262,500. The balance of $787,500 was to be paid in three equal
quarterly installments of $262,500. An escrow agent is holding the certificates
for the shares being purchased until all three installments have been paid in
full. At December 31, 2003 the remaining balance is $127,500.
On October 5, 2001, the Company sold 1,346,268 shares of common stock
under a private stock purchase agreement. The stock was sold at a price of $1.75
per share. The balance of $2,517,521 was received in the form of a non-interest
bearing stock subscription receivable, to be paid in four equal quarterly
installments. At December 31, 2001 the remaining balance was $2,504,058. During
the first quarter of 2002, the purchaser defaulted under the second agreement,
resulting in the cancellation of the stock purchase agreement. The 1,346,268
shares have been restored to the status of authorized but unissued shares. The
cancellation had no impact on the Company's results of operations.
None of the above securities transactions involved any underwriters.
All of the purchasers of the Company's securities in the above-described
securities transactions were "Accredited Investors" within the meaning of Rule
501 under Regulation D of the Securities Act of 1933, as amended (the 1933 Act)
and, accordingly, all of these transactions were exempt from registration under
the 1933 Act by reason of Section 4(2) thereof.
We have used proceeds from the above-described securities transactions to
reduce our liabilities, for working capital purposes and for other general
corporate purposes.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2003 regarding
compensation plans (including individual compensation arrangements) under which
equity securities are authorized for issuance.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON EQUITY COMPENSATION PLANS
EXERICSE OF OUTSTANDING WEIGHTED-AVERAGE EXERCISE (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY OPTIONS PRICE OF OUTSTANDING OPTIONS IN COLUMN (A)
- ---------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
--------------------------------------------------------------------------------------------
Equity Compensation Plans
(1999 Stock Option Plan)
Approved by Security Holders 3,252,333 $2.60 415,417
Equity Compensation Plans
(Outside the 1999 Stock
Option Plan) Not Approved
by Security Holders 1,700,000 $4.51 -
* For more information see Note 6 to the Consolidated Financial Statements.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data as of, and for the periods ended, December 31,
2003, 2002, 2001, 2000 and 1999 presented below have been derived from the
audited consolidated financial statements of SpatiaLight. The selected financial
data should be read in conjunction with our consolidated financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein, in order to
fully understand factors that may affect the comparability of the financial data
presented below.
STATEMENT OF OPERATIONS:
Year Ended December 31,
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Sales $ 221,252 $ - $ - $ 65,650 $ 62,000
Cost of Goods Sold (708,320) (286,000) - (16,625) (10,945)
------------ ------------ ------------ ------------ ------------
Gross Margin (deficit) (487,068) (286,000) - 49,025 51,055
Operating expenses 6,322,750 6,001,881 4,907,032 6,130,284 4,039,443
Stock-based general and administrative expenses 1,985,720 713,001 2,938,062 1,162,902 1,935,504
Total operating expenses 8,308,470 6,714,882 7,845,094 7,293,186 5,974,947
------------ ------------ ------------ ------------ ------------
Operating loss (8,795,538) (7,000,882) (7,845,094) (7,244,161) (5,923,892)
------------ ------------ ------------ ------------ ------------
Other income (expenses):
Net interest and other expense (137,167) (245,659) (234,536) (26,762) (94,009)
Stock-based interest expense (583,672) (1,779,147) (1,824,864) (561,346) (1,389,585)
------------ ------------ ------------ ------------ ------------
Total other income (expenses) (720,839) (2,024,806) (2,059,400) (588,108) (1,483,594)
Income tax expense - 2,225 7,233 1,600 3,375
------------ ------------ ------------ ------------ ------------
Net loss $ (9,516,377) $ (9,027,913) $ (9,911,727) $ (7,833,869) $ (7,410,861)
============ ============ ============ ============ ============
Net loss per share - basic and diluted $ (0.34) $ (0.37) $ (0.46) $ (0.41) $ (0.57)
============ ============ ============ ============ ============
Weighted average shares used in computing
net loss per share- basic and diluted 28,173,770 24,578,226 21,469,960 19,178,639 12,964,597
============ ============ ============ ============ ============
BALANCE SHEET DATA: December 31,
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents $ 6,359,969 $ 575,663 $ 2,728,134 $ 1,035,957 $ 1,236,609
Inventory 779,617 275,959 - - 5,036
Working capital (deficit) 6,228,782 (807,891) (868,056) (2,061,234) 319,331
Total assets 8,349,696 2,058,454 3,488,002 1,800,530 1,679,585
Convertible notes 1,155,000 4,207,232 3,137,284 2,782,453 1,216,337
Total stockholders' equity (deficit) 5,813,275 (4,373,806) (213,346) (1,463,178) (562,088)
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the financial
statements and related notes appearing elsewhere in this report. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including but not limited to, customer's reception of our products,
intensity of competition, quality control during manufacturing and those set
forth under "Risk Factors."
OVERVIEW
We manufacture microdisplays that provide high-resolution images suitable
for applications such as high definition television, rear projection computer
monitors and video projectors, and potential applications such as use in
wireless communication devices, portable games and digital assistants. Our
revenues through December 31, 2003 have been derived from the sales of a limited
quantity of our commercial microdisplay products.
From 2001 through 2003, we entered into agreements or memoranda of
understanding with original equipment manufacturers (OEMs) in China and the
Republic of South Korea contemplating the purchase by these prospective
customers of our display units and/or SpatiaLight imagEngine(TM) microdisplays
for use in certain of their products. All of these agreements generally require
that we supply prototypes of our display units and/or SpatiaLight imagEngine(TM)
microdisplays and that they meet technical criteria satisfactory to each of such
prospective customers.
In late January 2003, we announced that we signed a purchase order
agreement with Skyworth Display, one of the Chinese OEMs with which we had an
agreement to test prototypes of our microdisplay products, for the purchase by
Skyworth of 14,100 SpatiaLight display units during a one year delivery period.
The purchase order originally provided for 200 units to be delivered in February
and an additional 200 units in each of March and April 2003. Skyworth and we
subsequently agreed to delay the first delivery of units. To date, we have
completed shipment of 100 of the 200 units originally scheduled for delivery in
the first month. Skyworth has recently advised us that it has decided to change
the screen size format of the LCoS televisions that it intends to manufacture
using our display units. As a result, Skyworth is making necessary changes to
certain of its internally developed electronics components, which Skyworth has
advised us will occur in the immediate future. We expect to ship the remainder
of the first 200 units after Skyworth completes these changes. Following the
initial delivery provisions of 200 units per month for the first three months,
we are scheduled to deliver 1,500 units per month until the order is completed.
The purchase order is cancelable by Skyworth on a quarterly basis and is subject
to pricing contingencies and other customary terms and conditions.
In September 2003, we announced that we signed a purchase order agreement
with China Electronics Corporation (CEC), another of the Chinese OEMs with which
we had an agreement to test prototypes of our microdisplay products, for the
purchase by CEC of 2,000 display units from us. The agreement provides for an
initial delivery of ten display units, which was completed in September, with a
second delivery of 100 units to follow in the future. Additional shipments will
be made periodically according to a schedule to be determined by CEC and us.
Pursuant to the terms of the purchase order, the current obligations of CEC are
backed by letters of credit in our favor. The purchase order is cancelable by
CEC after delivery of 110 units and is subject to other customary terms and
conditions.
In October 2003, we announced that we had signed a purchase order
agreement with Nanjing Panda Electronics Co. (Panda), a third Chinese OEM with
which we had an agreement to test prototypes of our microdisplay products, for
the purchase of 2,610 display units by Panda. The agreement provides for an
initial television box integration phase, which was recently completed. The
agreement then provides for delivery of ten display units to Panda, which we
expect to occur in the immediate future, with a second delivery of 100 display
units to follow. Subsequent shipments under the purchase order will be made
periodically according to a schedule to be determined by the parties. Pursuant
to the terms of the purchase order, the obligations of Panda will be backed by
letters of credit in our favor. The purchase order is cancelable by Panda after
delivery of ten display units and is subject to other customary terms and
conditions.
12
In December 2003, we signed a purchase order agreement with SCT Optronics
Company Ltd. (SCT), a Chinese OEM, for the purchase of 2,020 display units from
SpatiaLight. The initial shipment of ten display units provided for under the
agreement was completed in December 2003. Future shipments are scheduled to be
made periodically according to a schedule to be finally determined by SCT and
us. The purchase order is cancelable by SCT after delivery of ten display units
and is subject to other customary terms and conditions.
In December 2003, we signed a purchase order agreement with Shanghai China
Display Co., Ltd. (China Display), another Chinese OEM with which we had an
agreement to test prototypes of our microdisplay products. The agreement
provides for the purchase by China Display of 1,000 sets of three SpatiaLight
imagEngine(TM) microdisplays. Pursuant to the purchase order, we completed an
initial delivery of 100 microdisplay sets to China Display in December 2003. A
second delivery of 300 sets and a third delivery of 600 sets are to follow. The
entire order is scheduled to be completed within a three-month period. We may
mutually agree with China Display to revise the delivery schedule. Pursuant to
the terms of the purchase order, the obligations of China Display will be backed
by three letters of credit, the first of which was issued and paid to us. The
purchase order is not cancelable by China Display, according to the terms of the
purchase order, because the delivered microdisplay sets met China Display's
specifications. The purchase order is subject to other customary terms and
conditions.
In December 2003, we signed a purchase order agreement with Global Display
Limited, a Chinese OEM, for the purchase of 2000 display units from SpatiaLight.
Shipments are scheduled to be made periodically according to a schedule to be
finally determined by the parties. The purchase order is cancelable by Global
Display after the initial delivery of ten display units provided for under the
agreement and is subject to other customary terms and conditions.
We are also currently negotiating the terms of purchase orders for our
products with certain other prospective customers, primarily in China and South
Korea, some of whom are parties to the agreements or memoranda of understanding
described in this Item 7. One of these parties is a large electronics
manufacturer in South Korea that we signed a development agreement with
contemplating the purchase of sets of SpatiaLight imagEngine(TM) microdisplays.
With respect to prospective purchase orders, there are significant open issues
that have to be finally negotiated, including prices and quantities of our
products. We cannot assure whether we will receive any purchase orders binding
on any of these companies for their purchase of our microdisplay products in the
near future. Even assuming that we receive purchase orders that are binding on
the prospective customers, these orders and our sales to these customers are
subject to certain contingencies described under "Risk Factors" in this Item 7.
We are no longer working with Daewoo Electronics, with which we had an MOU.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 2003, we have sustained recurring net losses from
operations and, at December 31, 2003, we had net equity of approximately
$5,813,000. During 2003, we experienced negative cash flows from operating
activities of approximately $7,563,000 and a net loss of approximately
$9,516,000. Our operations were funded in 2003 by the exercise of warrants and
options of approximately $850,000, from the private placements of $12.5 million
of equity securities, including the sale to certain private purchasers, in late
December 2003, of $5.0 million of equity securities that had been included in a
"Shelf" Registration Statement, and approximately $221,000 of revenues generated
from the commercial sale of a limited quantity of our microdisplay products.
As of December 31, 2003, the Company had approximately $6,360,000 in cash
and cash equivalents, an increase of approximately $5,784,000 from the December
31, 2002 amount of $576,000. Our net working capital at December 31, 2003, was
approximately $6,229,000, compared to a net working capital deficit of
approximately $808,000 at December 31, 2002.
13
Net cash used by operating activities totaled approximately $7,563,000 and
$5,059,000 in 2003 and 2002, respectively. The increase was due to an increase
in inventory for production needs in 2004 and a reduction in accounts payable to
vendors. Net cash provided by financing activities was approximately $13,872,000
and $3,188,000 in 2003 and 2002, respectively, resulting from net proceeds of
$12,500,000 raised in three separate equity private placement transactions in
2003.
As of December 31, 2003, we had an accumulated deficit of approximately
$58,274,000. We have realized significant losses in the past and expect that
these losses will continue until we start to receive significant revenues from
the sale of our products. We generated revenues of $221,000 from operations
during 2003. The ramp up in manufacturing and commercialization of our
microdisplays will require substantial expenditures during 2004. Although we are
expecting to generate revenues from purchase orders in 2004, we may continue to
operate at a loss during 2004. There can be no assurance that our business will
operate on a profitable basis thereafter.
We anticipate that our cash expenditures during 2004 will approximate
$500,000 per month, or $6.0 million for the year, without regard to any revenues
in 2004. We expect to meet our cash needs with our existing cash balances and
collections from stock subscription receivable of approximately $1,097,000 and
from the exercise of warrants held by existing investors. In addition, we expect
to fund working capital requirements by receiving payments from our customers in
connection with signed purchase orders and by considering opportunities to
obtain debt financing. There can be no assurances that we will be able to obtain
such debt financing or that existing investors will exercise their warrants.
OFF BALANCE SHEET ARRANGEMENTS
None.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
We have long-term contractual obligations and commitments primarily with
regards to payment of debt and lease arrangements.
The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2003:
PAYMENTS DUE BY PERIOD
2008 and
Contractual obligations 2004 2005 2006 2007 beyond Total
- ---------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Employment Agreements $ 520,000 $ 180,000 $ - $ - $ - $ 700,000
Long-term convertible debt - 1,188,000 - - - 1,188,000
Operating lease commitments 520,305 458,996 446,853 459,040 792,419 2,677,613
Purchase Commitments 978,450 - - - - 978,450
----------- ----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $ 2,018,755 $ 1,826,996 $ 446,853 $ 459,040 $ 792,419 $ 5,544,063
=========== =========== =========== =========== =========== ===========
RESULTS OF OPERATIONS
Revenues. The Company recognized revenues of $221,000 for the year ended
December 31, 2003. Revenues were related to initial shipments against purchase
orders signed in 2003. No revenues were recognized in 2002 and 2001.
14
Cost of Goods Sold. Cost of goods sold was $708,320, $286,000 and $0 in
2003, 2002 and 2001, respectively. In 2003, cost of goods sold consisted of
product costs of $192,000, lower of cost or market adjustment of $311,000 as our
initial inventory components were at a cost higher than we expect to incur for
future purchase, and an inventory write-down of $205,000 resulting from a
physical count as we moved from preproduction to production. In 2002, cost of
sales consisted of an inventory adjustment to lower of cost of market of
$286,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses were approximately $3,641,000, $2,363,000 and 2,260,000
in 2003, 2002 and 2001, respectively, and include professional services,
salaries and related taxes and benefits, rent, depreciation, travel, insurance,
and office expenses. Salaries and related taxes and benefits increased
approximately $889,000 in 2003 over 2002 as a result of the reassignment of
employees from research and development to general and administrative and the
increase in the number of general and administrative staff, which was due to the
transition toward commercial manufacturing of our microdisplay products. An
additional increase is due to fees of $250,000 reimbursed to Robert A. Olins,
our Acting Chief Executive Officer, for fees incurred in conjunction with the
May 2003 private placement (see Note 2 to the Consolidated Financial Statements
under Item 8 of this Report) and an increase in rent expense of $137,000. The
increase in expenses for 2002 over 2001 are due to an increase of $160,000 in
legal fees pertaining to normal business and an increase in recruiting expenses
related to a Chief Operating Officer search of $70,000. These increases were off
set by a $146,000 decrease in insurance expense resulting from a change in
carrier, a decrease in coverage and an increase in employee contribution for
medical expenses.
Stock-based general and administrative expenses. Stock-based general and
administrative expenses were approximately $1,986,000, $713,000 and $2,938,000
in 2003, 2002 and 2001, respectively. The amounts incurred in 2003, 2002 and
2001 relate to Common Shares, options to purchase Common Shares and warrants
issued in exchange for services. The increase in 2003 when compared to 2002,
relates primarily to stock-based expense of approximately $1,300,000 associated
with the May 2003 private placement. Of this amount, $959,000 related to the
deemed beneficial pricing of shares and warrants purchased by Robert A. Olins,
Acting Chief Executive Officer. The decrease in 2002 when compared to 2001,
relates primarily to expenses incurred in 2001 related to stock options granted
as compensation to directors valued at $1,655,000, as well as the issuance of
200,000 Common Shares granted as employee compensation valued at $740,000, the
market value of the stock at the date of issuance. The 200,000 Common Shares
referred to above in December 2001 were issued to our former Director of
Corporate Development (DCD). In 2002, 60,000 Common Shares were issued as
compensation valued at $220,000, the market value of the stock at the date of
issuance. The shares were issued in consideration of services rendered by the
DCD with respect to assisting the Company in negotiating the contractual
relationships with its existing prospective customers. See Note 2 to the
Consolidated Financial Statements under Item 8 of this Report.
Research and development expenses. Research and development expenses were
approximately $2,681,000 at December 31, 2003, $3,639,000 at December 31, 2002
and $2,647,000 at December 31, 2001. The increase from 2001 when compared to
2002, and subsequent decrease in 2003 is due to costs of approximately $800,000,
expensed in 2002, related to test units and the purchase of prototype engines
for testing purposes. Additional decrease in 2003 over 2002 is due to
reassignment of existing employees to general and administrative, offset by
hiring of new employees.
Interest income. Interest income was approximately $72,000, $16,000, and
$21,000 in 2003, 2002, and 2001, respectively. The increase in interest income
in 2003 was due to interest earned on a stock subscription receivable from a
shareholder. See Note 2 to the Consolidated Financial Statements under Item 8 of
this Report.
Interest expense. Interest expense was approximately $213,000, $261,000,
and $269,000 in 2003, 2002, and 2001, respectively. These amounts are consistent
with the balances in notes payable.
Stock-based interest expense. Stock-based interest expense of $584,000,
$1,779,000 and $1,825,000 in 2003, 2002 and 2001, respectively, relates to the
valuation of the beneficial conversion feature of interest converted and
convertible into equity on the notes payable to Argyle Capital Management
Corporation a company wholly owned by Robert A. Olins, Acting Chief Executive
Officer of the Company based on the intrinsic value of the conversion feature.
The beneficial conversion interest represents the excess value of the shares
received or receivable at current market prices over the $0.50 per share
conversion price. The notes were extended until June 2005 resulting in a lower
monthly amortization of the beneficial conversion in 2003. In addition,
amortization of discounts on the Argyle and Alabama Group notes is included in
stock-based interest expense.
15
Loss before income taxes. Losses before income taxes were $9,516,000,
$9,026,000, and $9,905,000 in 2003, 2002 and 2001, respectively. This increase
from 2002 to 2003 is due primarily to increases of approximately $1,272,000 of
stock-based general and administrative expenses, an increase of $1,278,000 in
general and administrative in 2003 compared to 2002, offset by a decrease of
approximately $958,000 in research and development expenses incurred as a
result of pre-production tooling costs and purchase of prototype engines of
approximately $800,000 and a decrease in stock-based interest expense of
approximately $1,195,000, due to decrease in monthly amortization of
beneficial conversion feature on notes payable. The decrease from 2001 to 2002
is due primarily to a decrease of approximately $2,225,000 of stock-based
general and administrative expenses in 2002 compared to 2001. This decrease was
offset by an increase of approximately $992,000 in research and development
expenses incurred as a result of pre-production tooling costs of approximately
$800,000 and the purchase of prototype light engines for testing purposes.
Income taxes. Income taxes consist primarily of minimum state tax
requirements. See Note 5 to the Consolidated Financial Statements under Item 8
of this Report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our results of operations and
liquidity and capital resources are based on our consolidated financial
statements. To prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America, we
must make estimates and assumptions that affect the amounts reported in the
consolidated financial statements. We regularly evaluate these estimates and
assumptions, particularly in areas we consider to be critical accounting
estimates, where changes in the estimates and assumptions could have a material
impact on our results of operations, financial position and, generally to a
lesser extent, cash flows. Senior management and the Audit Committee of the
Board of Directors have reviewed the disclosures included herein about our
critical accounting estimates, and have reviewed the processes to determine
those estimates.
Revenue Recognition - We enter into commercial transactions to sell our
products. We evaluate revenue recognition for these transactions using the
following criteria (collectively called the Revenue Recognition Criteria):
o Evidence of an arrangement: Before revenue is recognized, we must have
evidence of an agreement with the customer reflecting the terms and
conditions to deliver our products.
o Delivery: For products, delivery is considered to occur when title and
risk of loss have been transferred.
o Fixed or determinable fee: We consider a fee to be fixed or determinable
if the fee is not subject to refund or adjustment. If a portion of the
arrangement fee is not fixed or determinable, we recognize that amount as
revenue when the amount becomes fixed or determinable. We do not consider
a fee to be fixed and determinable if any amount is due more than 180 days
from the delivery date. Payment terms of less than 180 days are evaluated
based upon the country in which the arrangement is entered into to assess
whether the fee is fixed and determinable.
o Collection is deemed reasonably assured: Collection is deemed reasonably
assured if we expect the customer to be able to pay amounts under the
arrangement as those amounts become due. If we determine that collection
is not reasonably assured, we recognize revenue when collection becomes
reasonably assured (generally upon cash collection).
16
Inventory valuation - We value inventories at the lower of cost (based on
the first-in, first-out method) or market value. We include materials, labor and
manufacturing overhead in the cost of inventories. In determining inventory
market values, we give substantial consideration to the expected selling price
of the product based on historical recovery rates. If we assess the market value
of our inventory to be less than costs we write it down to its replacement cost
or its net realizable value. Our estimates may differ from actual results due to
the quantity and quality and mix of products in inventory, consumer and retailer
preferences and economic conditions.
Research and Development - Our research and development costs are charged
to expense when incurred.
Income tax assets and liabilities - In establishing our deferred income
tax assets and liabilities, we make judgments and interpretations based on the
enacted tax laws and published tax guidance that are applicable to our
operations. We record deferred tax assets and liabilities and evaluate the need
for valuation allowances to reduce the deferred tax assets to realizable
amounts. The likelihood of a material change in our expected realization of
these assets is dependent on future taxable income, our ability to use foreign
tax credit carryforwards and carrybacks, final U.S. and foreign tax settlements,
and the effectiveness of our tax planning strategies in the various relevant
jurisdictions. Due to our lack of profitable operating history, potential
limitations on usage of operating losses and general uncertainty, we provided
for a 100% valuation allowance against our deferred tax assets. We are also
subject to examination of our income tax returns for multiple years by the
Internal Revenue Service and other tax authorities. We periodically assess the
likelihood of adverse outcomes resulting from these examinations to determine
the adequacy of our provision for income taxes. Changes to our income tax
provision or the valuation of the deferred tax assets and liabilities may affect
our annual effective income tax rate.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities.
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. Severance pay under SFAS 146, in many cases, would be recognized over
time rather than up front. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of this Statement did not have a material impact on the Company's
financial condition or results of operations, but may affect any exit or
disposal activities entered into in the future.
In December 2002, the FASB issued (SFAS) 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which provides alternative methods of
transition for a voluntary change to fair value based method of accounting for
stock-based employee compensation as prescribed in SFAS 123, "Accounting for
Stock-Based Compensation." Additionally, SFAS 148 requires more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. The provisions of this Statement are effective for
fiscal years ending after December 15, 2002, with early application permitted in
certain circumstances. Adoption of this Statement did not have a material impact
on the Company's financial condition or results of operation, as we are not
currently planning to make a voluntary change to the fair value method of
accounting for stock-based employee compensation. We did, however adopt the new
disclosure provisions.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45.
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires a guarantor
to recognize, at the inception of a qualified guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 is
effective on a prospective basis for qualified guarantees issued or modified
after December 31, 2002. Adoption of this Interpretation did not have a material
impact on the Company's financial condition or results of operations. We did,
however adopt the new disclosure provisions.
17
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires an investor with a
majority of the variable interests in a variable interest entity to consolidate
the entity and also requires majority and significant variable interest
investors to provide certain disclosures. A variable interest entity is an
entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. The Company does not have any variable interest entities
that must be consolidated.
In May 2003, FASB issued "Accounting For Certain Financial Instruments
with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. The adoption of
SFAS No. 150 in 2003 did not have a material impact on the Company's results of
operation or financial position.
RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND MAY INCUR LOSSES IN THE FUTURE AND THEREFORE
CANNOT ASSURE YOU THAT WE WILL ACHIEVE PROFITABILITY.
We have incurred losses to date and have experienced cash shortages. In 2003 and
2002, we incurred net losses of approximately $9,516,000 and $9,028,000,
respectively. In addition, we had an accumulated deficit of $58.3 million as of
December 31, 2003. We expect additional losses as we continue spending for
production and other business activities as well as further research and
development of our products. As a result, we will need to generate substantial
sales to support our costs of doing business before we can begin to recoup our
operating losses and accumulated deficit and achieve profitability.
IF WE ARE UNABLE TO OBTAIN FURTHER FINANCING OR GENERATE REQUIRED WORKING
CAPITAL, OUR ABILITY TO OPERATE COULD SUFFER OR CEASE.
Our operations to date have consumed substantial amounts of cash and will
continue to require substantial amounts of capital in the future. In order to
remain competitive, we must continue to make significant investments essential
to our ability to operate profitably, including investments in further research
and development, equipment, facilities and production activities. Although our
financial condition and liquidity have been assisted through the exercises of
warrants and public and private purchases of our Common Shares, including the
approximately $12.5 million raised by us in 2003 equity financings and $850,000
raised through exercises of stock options and warrants, we may still require
additional financing to satisfy our increasing working capital requirements.
Reliance for financing upon exercise of warrants, private equity purchase
agreements and public offerings entails the additional risks of non-exercise of
such warrants because of the prevailing market prices of our underlying Common
Shares, default by purchasers under these agreements or inability to sell
publicly registered shares. In the event that we are unable to obtain further
financing, if any, on satisfactory terms, or we are unable to generate sales
sufficient to offset our costs, or if our costs of development and operations
are greater than we anticipate, we may be unable to grow our business at the
rate desired or may be required to delay, reduce, or cease certain of our
operations, any of which could materially harm our business and financial
results.
WE ARE SUBJECT TO LENGTHY DEVELOPMENT PERIODS AND PRODUCT ACCEPTANCE CYCLES,
WHICH MAY SIGNIFICANTLY HARM OUR BUSINESS.
Our business model requires us to develop microdisplays that perform
better than existing technologies, contract with one or more third-party
manufacturers to manufacture our display units in bulk, and sell the resulting
display units to original equipment manufacturers that will then incorporate
them into their products. Original equipment manufacturers make the
determination during their product development programs whether or not to
incorporate our SpatiaLight imagEngine(TM) microdisplays and/or display units in
their products. This requires us to invest significant amounts of time and
capital in designing our SpatiaLight imagEngine(TM) microdisplays and/or display
units before we can be assured that we will generate any significant sales to
our customers or even recover our investment. If we fail to recover our
investment in the SpatiaLight imagEngine(TM) microdisplays and/or display units,
it could seriously harm our financial condition. In addition, the length of time
that our products may be successfully received by our customers could be limited
by the acceptance of new technologies developed by our competitors.
WE INCUR SUBSTANTIAL RESEARCH AND DEVELOPMENT COSTS IN CONNECTION WITH
TECHNOLOGIES THAT MAY NOT BE SUCCESSFUL.
We currently have eleven full-time engineering and seven full-time
manufacturing personnel based in California working on microdisplays. This
staffing creates significant research and development costs that may not be
recouped. Even if our current microdisplays become accepted or successful, due
to the rapid technological changes in our industry, we must continue to use, and
may increase in number, our engineering and manufacturing personnel to develop
future generations of our microdisplays. As a result, we expect to continue
incurring significant research and development costs.
18
WE ARE CURRENTLY MANUFACTURING AND SHIPPING OUR MICRODISPLAYS, BUT UNANTICIPATED
DIFFICULTIES IN MANUFACTURING OUR MICRODISPLAYS MAY MAKE IT DIFFICULT TO MEET
CUSTOMER DEMANDS FROM TIME TO TIME AND OUR OPERATING RESULTS COULD BE
SIGNIFICANTLY HARMED BY SUCH DIFFICULTIES.
We need to work closely with our manufacturing sources to assure
production of our current microdisplays. Problems in production or lower than
expected manufacturing yields could significantly harm our business because we
will have already incurred the costs for the materials used in the microdisplay
manufacturing process. These problems could cause delays that might lead our
potential customers to seek other sources.
We currently obtain silicon backplanes, a vital component in our
microdisplays, from the Far East. Some Asian countries are subject to
earthquakes, typhoons and political instability. Unless we obtain an alternative
source, any disruption or termination of our silicon manufacturing source's
operation in Taiwan or air transportation with the Far East could significantly
harm our operations.
Our microdisplays are assembled by combining the silicon backplanes with
electronic components. The design and manufacture of liquid crystal displays and
display units are highly complex processes that are sensitive to a wide variety
of factors, including the level of contaminants in the manufacturing
environment, impurities in the materials used, and the performance of personnel
and equipment. We lease clean room space in California where we currently
manufacture our SpatiaLight imagEngine(TM) microdisplays. In addition, in
January 2004, we leased an additional clean room at the same location as the
existing clean room to address current and anticipated increased manufacturing
demand. We believe that these current arrangements provide us with strong
quality controls and effectively protect our proprietary technology in our
products, but the risks discussed above associated with the highly complex
processes of manufacturing these liquid crystal microdisplays remain applicable.
We continue to have working arrangements with the manufacturer of the
light engines and lamps required in the assembly of our display units. We have
entered into an agreement for the supply of prisms and filters which are also
required for the assembly of such units. We do not have other such written
agreements which are binding upon the manufacturers of the other components and
no such manufacturer is bound to furnish us with any specific quantities of
their products at previously specified prices. At this date, we are not aware
that any of our component manufacturers have known shortages of critical
material.
Because the manufacture of our SpatiaLight imagEngine(TM) microdisplays
involves highly complex processes and technical problems may arise, we, in our
capacity as manufacturing our liquid crystal microdisplays, which are an
integral part of the display units, cannot assure the manufacturing yields of
our products. Current purchase orders and future purchase orders, as to which we
cannot give any assurance, will require us to produce greater quantities of our
microdisplay products than we have produced in the past. Problems in production,
including problems associated with increasing our production output or lower
than expected manufacturing yields could significantly harm our business and
operating results. In addition, the complexity of our manufacturing processes
will increase as the sophistication of our microdisplays and display units
increases, and such complexities may lend to similar difficulties that could
harm our business and operating results.
IF MARKETS FOR OUR PRODUCTS DO NOT CONTINUE TO DEVELOP, OUR BUSINESS WILL LIKELY
BE SIGNIFICANTLY HARMED.
Various target markets for our microdisplays, including high-definition
televisions, projectors, monitors, and portable microdisplays, are uncertain and
may be slow to develop. In addition, companies in those markets could utilize
competing technologies. High-definition television has only recently become
available to consumers, and widespread market acceptance, although anticipated,
is uncertain. In addition, the commercial success of the portable microdisplay
market is uncertain. The acceptance of our display units and/or SpatiaLight
imagEngine(TM) microdisplays will be dependent upon the pricing, quality,
reliability and useful life of these units compared to competing technologies,
as to which there can be no assurance. In order for us to succeed, not only must
we offer end-product manufacturers better and less expensive microdisplays than
our competitors, but the manufacturers themselves must also develop commercially
successful products using our microdisplays. SpatiaLight's marketing efforts are
focused on developing strategic customer and governmental relationships in China
and the Republic of South Korea. Our failure to sell our microdisplays to such
manufacturers or the failure of the ultimate target markets to develop as we
expect will negatively effect our anticipated growth.
19
IF OUR MICRODISPLAYS DO NOT BECOME WIDELY ACCEPTED BY OUR CUSTOMERS OR THE
END-USERS, OUR BUSINESS COULD BE SIGNIFICANTLY HARMED.
Our microdisplays may not be accepted by a widespread market. Even if we
successfully obtain customer orders, our customers may determine not to
introduce or may terminate products utilizing the technology for a variety of
reasons, including the following:
o superior technologies developed by our competitors;
o price considerations; and
o lack of anticipated or actual market demand for the products.
We currently have purchase order agreements with a limited number of
customers. Despite our reasonable efforts to retain these customers, and obtain
new customers we may not be successful in either of these regards. The loss of
any one or more of these customers or a failure to obtain new customers could
materially harm our business and financial condition.
WE CANNOT ASSURE YOU THAT WE WILL OBTAIN ADDITIONAL PURCHASE ORDERS FROM OUR
CURRENT OR PROSPECTIVE CUSTOMERS, OR, IF WE DO, THAT SUCH ORDERS WILL GENERATE
SIGNIFICANT REVENUES.
From 2001 through 2003, we entered into agreements or memoranda of
understanding (MOU) with original equipment manufacturers (OEMs) in China and
the Republic of South Korea for testing of our microdisplay products in
contemplation of definitive purchase order agreements. All of these agreements
generally require that we supply prototypes of our display units and/or
SpatiaLight imagEngine(TM) microdisplays and that they meet technical criteria
satisfactory to each of such prospective customers. To date, we have received
purchase orders from seven Chinese OEMs. Certain other prospective customers
have advised us that they are satisfied with the results of the testing of the
prototypes under their agreements or MOUs with the Company and we are currently
negotiating terms of purchase orders for our display units and/or SpatiaLight
imagEngine(TM) microdisplays with each of them. There are significant open
issues with respect to these prospective purchase orders that have to be finally
negotiated, including prices and quantities of our products. We cannot offer
assurance that we will receive, in the future, binding purchase orders from any
of these companies for their purchase of our microdisplay products.
In addition, even if we receive purchase orders from our current or
prospective customers for our microdisplay products, we may have problems
implementing volume production of such microdisplay products. Furthermore, sales
to manufacturers in the electronics industry are subject to severe competitive
pressures, rapid technological change, and product obsolescence. Manufacturers
may, at any time, cancel purchase orders or commitments or reduce or delay
orders, thereby increasing our inventory and overhead risks. Therefore, even if
we obtain purchase orders from several current or prospective customers, we
cannot assure you that these agreements will result in significant revenues to
us.
IF OUR CUSTOMERS' PRODUCTS ARE NOT SUCCESSFUL, OUR BUSINESS WOULD BE MATERIALLY
HARMED.
We do not currently sell any products to end-users. Instead, we design and
manufacture various product solutions that our customers (i.e., OEMs) may
incorporate into their products. As a result, our success depends almost
entirely upon the widespread market acceptance of our customers' products. Any
significant slowdown in the demand for our customers' products would materially
harm our business.
20
Our dependence on the success of the products of our customers exposes us
to a variety of risks, including our need to do the following:
o maintain customer satisfaction with our design and manufacturing services;
o match our design and manufacturing capacity with customer demand and
maintain satisfactory delivery schedules;
o anticipate customer order patterns, changes in order mix, and the level
and timing of orders that we can meet; and
o adjust to the cyclical nature of the industries and markets we serve.
Our failure to address these risks may cause us to lose sales or for sales
to decline.
THE ELECTRONICS INDUSTRY IS HIGHLY COMPETITIVE, WHICH MAY RESULT IN LOST SALES
OR LOWER GROSS MARGINS.
We serve highly competitive industries that are characterized by price
erosion, rapid technological change and competition from major domestic and
international companies. This intense competition could result in pricing
pressures, lower sales, reduced margins and lower market share. Some of our
competitors have greater market recognition, larger customer bases, and
substantially greater financial, technical, marketing, distribution and other
resources than we possess. As a result, they may be able to introduce new
products and respond to customer requirements more quickly and effectively than
we can.
Our competitive position could suffer if one or more of our customers
decide to design and manufacture their own microdisplay products, to contract
with our competitors, or to use alternative technologies. In addition, our
customers typically develop a second source. Second source suppliers may win an
increasing share of a program. Our ability to compete successfully depends on a
number of factors, both within and outside our control. These factors include
the following:
o our success in designing and manufacturing new display technologies;
o our ability to address the needs of customers;
o the quality, performance, reliability, features, ease of use, pricing, and
diversity of our display products;
o foreign currency fluctuations, which may cause a foreign competitor's
products to be priced significantly lower than our displays;
o the quality of our customer services;
o the efficiency of our production sources;
o the rate at which customers incorporate our displays into their own
products; and
o products or technologies introduced by our competitors.
OUR BUSINESS IS SIGNIFICANTLY AFFECTED BY CONDITIONS OR EVENTS OCCURRING IN THE
ELECTRONICS INDUSTRY GENERALLY.
The electronics industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices, and production over-capacity. Since the electronics
industry is cyclical in nature, we may experience substantial period-to-period
fluctuations in future operating results because of general industry conditions
or events occurring in the general economy.
21
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
Our results of operations have varied significantly from quarter to
quarter in the past and are likely to vary significantly in the future, which
makes it difficult to predict our future operating results. Accordingly, we
believe that quarter-to-quarter comparisons of our operating results are not
meaningful and should not be relied upon as an indicator of our future
performance. Some of the factors that cause our operating results to fluctuate
include the following:
o introductions of displays and market acceptance of new generations of
displays;
o timing of expenditures in anticipation of future orders;
o changes in our cost structure;
o availability of labor and components;
o pricing and availability of competitive products and services;
o the timing of orders;
o the volume of orders relative to the capacity we can contract to produce;
o evolution in the life cycles of customers' products; and
o changes or anticipated changes in economic conditions.
THE MARKET PRICE OF OUR COMMON SHARES IS HIGHLY VOLATILE.
The market price of our Common Shares has been highly volatile, reflecting
reported losses and receipt of additional financing. Other companies have found
similar volatility correlates with class action securities lawsuits although to
date we have not been a defendant in any such lawsuit. The trading price of our
Common Shares in the future could continue to be subject to wide fluctuations in
response to various factors, including the following:
o quarterly variations in our operating results;
o actual or anticipated announcements of technical innovations or new
product developments by us or our competitors;
o public announcements regarding our business developments;
o changes in analysts' estimates of our financial performance;
o sales of large numbers of our Common Shares by our shareholders;
o general conditions in the electronics industry; and
o worldwide economic and financial conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many
high-technology companies and that often have been unrelated to the operating
performance of these companies. These broad market fluctuations and other
factors may adversely affect the market price of our Common Shares.
22
BY FURTHER INCREASING THE NUMBER OF OUR COMMON SHARES THAT MAY BE SOLD INTO THE
MARKET, ADDITIONAL OFFERINGS OF OUR EQUITY SECURITIES COULD CAUSE THE MARKET
PRICE OF OUR COMMON SHARES TO DECREASE SIGNIFICANTLY, EVEN IF OUR BUSINESS
OPERATIONS ARE PERFORMING WELL.
The total number of our Common Shares and warrants to purchase our Common
Shares, sold in two private financings and one public financing completed in
2003 represents approximately 14.52% of the total number of our Common Shares
that are issued and outstanding as of March 16, 2004. Sales of these shares,
into and within the public market, or the perception that future sales of these
Common Shares could occur, might adversely affect the prevailing market price of
our Common Shares in the near future.
OUR COMMON SHARES MAY NOT BE LIQUID.
Our Common Shares are currently traded on The NASDAQ SmallCap Market. Our
shareholders may find that it is more difficult to sell our Common Shares than
shares that are listed on The NASDAQ National Market, American Stock Exchange or
New York Stock Exchange. The trading volume of our Common Shares may be
adversely affected due to the limited marketability of our Common Shares. Any
substantial sales of our Common Shares may result in a material reduction in
price because relatively few buyers may be available to purchase our Common
Shares.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR ABILITY TO COMPETE COULD BE HARMED.
Our development and operations depend substantially on the efforts and
abilities of our senior management and qualified technical personnel. Our
products require sophisticated production, research and development and
technical support. The competition for qualified management and technical
personnel is intense. The loss of services of one or more of our key employees
or the inability to add key personnel could have a material adverse affect on
us; particularly since currently we do not have any insurance policies in place
to cover that contingency. Our success will depend upon our ability to attract
and retain highly qualified scientific, marketing, manufacturing, financial and
other key management personnel. We face intense competition for the limited
number of people available with the necessary technical skills and understanding
of our products and technology. We cannot assure you that we will be able to
attract or retain such personnel or not incur significant costs in order to do
so. If we are unable to protect our intellectual property from use by third
parties, our ability to compete in the industry will be harmed.
We believe that our success depends in part on protecting our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality and assignment of inventions agreements
from our employees, consultants and advisors and other contractual provisions,
to establish and protect our intellectual property rights. Policing unauthorized
use of our products and technology is difficult, however. Despite our efforts to
protect our proprietary rights, we face the following risks:
o pending patent applications may not be issued;
o patents issued to us may be challenged, invalidated, or circumvented;
o unauthorized parties may obtain and use information that we regard as
proprietary despite our efforts to protect our proprietary rights;
o others may independently develop similar technology or design around any
patents issued to us;
o breach of confidentiality agreements;
o intellectual property laws may not protect our intellectual property; and
o effective protection of intellectual property rights may be limited or
unavailable in some foreign countries, such as China, in which we may
operate. Specifically, although we consider the following unlikely because
of the complex technological structure of our products, one or more of our
current or prospective Chinese or Korean customers, or their respective
employees or other persons including our competitors, that have or gain
access to our products for testing purposes, may seek to misappropriate or
improperly convert to their own use our intellectual property and a lack
of adequate remedies and impartiality under the Chinese and Korean legal
systems may adversely impact our ability to protect our intellectual
property.
23
There can be no assurance that we will have adequate remedies in the event
any of the foregoing materializes. Failure to protect our intellectual property
would limit our ability to produce and market our products in the future, which
would materially adversely affect our revenues generated by the sale of such
products. In addition, third parties could assert that our products and
technology infringe their patents or other intellectual property rights. As a
result, we may become subject to future patent infringement claims or
litigation, the defense of which is costly, time-consuming and diverts the
attention of management and other personnel.
POLITICAL, ECONOMIC AND REGULATORY RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS MAY LIMIT OUR ABILITY TO DO BUSINESS ABROAD.
A substantial number of our manufacturers, customers and suppliers are
located outside of the United States, principally in the Far East. Our
international operations are subject to political and economic conditions
abroad, and protectionist trade legislation in either the United States or
foreign countries, such as a change in the current tariff structures, export or
import compliance laws, or other trade policies, any of which could adversely
affect our ability to manufacture or sell displays in foreign markets and to
purchase materials or equipment from foreign suppliers. All of our current
agreements with customers are governed by foreign law and therefore, are subject
to uncertainty with regard to their enforceability.
RISKS RELATED TO DOING BUSINESS IN CHINA MAY NEGATIVELY AFFECT OUR BUSINESS.
Our business is subject to significant political and economic
uncertainties and may be adversely affected by political, economic and social
developments in China. Over the past several years, the Chinese government has
pursued economic reform policies including the encouragement of private economic
activity and greater economic decentralization. The Chinese government may not
continue to pursue these policies or may significantly alter them to our
detriment from time to time with little, if any, prior notice.
A lack of adequate remedies and impartiality under the Chinese legal
system may adversely impact our ability to do business in China and to enforce
the agreements or purchase orders to which we are, or may become, a party.
At various times during recent years, the United States and China have had
significant disagreements over political, economic and social issues.
Controversies may arise in the future between these two countries. Any political
or trade controversies between the United States and China, whether or not
directly related to our business, could adversely affect our ability to do
business in China.
WE DO NOT PAY CASH DIVIDENDS.
We have never paid any cash dividends on our Common Shares and do not
anticipate that we will pay cash dividends in the near future. Instead, we
intend to apply any future earnings to the expansion and development of our
business.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We place all of our excess cash and cash equivalents in a checking account
or money market account in the United States with a nationally reputable bank.
We do not expect any material losses from the Company's placement of such cash
balances and we believe that our interest rate exposure is modest. As of
December 31, 2003, our cash and cash equivalents totaled $6,359,969.
We do not have any immediate foreign currency exposure as nearly all of
the Company's business is transacted in United States currency.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SpatiaLight, Inc.
Novato, California
We have audited the accompanying consolidated balance sheets of SpatiaLight,
Inc. as of December 31, 2003 and 2002 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on those financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SpatiaLight, Inc. at
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
San Francisco, California
March 5, 2004
25
SPATIALIGHT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 6,359,969 $ 575,663
Accounts receivable 117,530 -
Inventory 779,617 275,959
Prepaids and other current assets 353,087 565,515
------------- -------------
Total current assets 7,610,203 1,417,137
Property and equipment, net 638,430 506,968
Other assets 101,063 134,349
------------- -------------
Total assets $ 8,349,696 $ 2,058,454
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 863,284 $ 2,018,230
Accrued expenses and other current liabilities 518,137 206,798
------------- -------------
Total current liabilities 1,381,421 2,225,028
Noncurrent liabilities
Convertible notes 1,155,000 4,207,232
------------- -------------
Total liabilities 2,536,421 6,432,260
------------- -------------
Commitments
Stockholders' equity (deficit):
Common stock, $.01 par value:
50,000,000 shares authorized; 33,229,191 and 26,018,658
shares issued and outstanding at 2003 and 2002 332,292 260,187
Additional paid-in capital 61,046,425 45,550,830
Notes and stock subscription receivable (1,096,926) (1,426,999)
Common Stock Issuable 3,805,685 -
Accumulated deficit (58,274,201) (48,757,824)
------------- -------------
Total stockholders' equity (deficit) 5,813,275 (4,373,806)
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 8,349,696 $ 2,058,454
============= =============
See accompanying notes to consolidated financial statements.
26
SPATIALIGHT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
2003 2002 2001
------------- ------------- -------------
Sales 221,252 - -
Cost of Goods Sold (708,320) (286,000) -
------------- ------------- -------------
Gross Margin (487,068) (286,000) -
Selling, general and administrative expenses:
Selling, general and administrative expenses 3,641,422 2,362,865 2,259,942
Stock-based general and administrative expenses 1,985,720 713,001 2,938,062
------------- ------------- -------------
Total selling, general and administrative expenses 5,627,142 3,075,866 5,198,004
Research and development expenses 2,681,328 3,639,016 2,647,090
------------- ------------- -------------
Total operating expenses 8,308,470 6,714,882 7,845,094
------------- ------------- -------------
Operating loss (8,795,538) (7,000,882) (7,845,094)
------------- ------------- -------------
Other income (expenses):
Interest expense:
Interest expense (213,362) (261,314) (268,905)
Stock-based interest expense (583,672) (1,779,147) (1,824,864)
------------- ------------- -------------
Total interest expense (797,034) (2,040,461) (2,093,769)
Interest and other income 76,195 15,655 34,369
------------- ------------- -------------
Total other income (expenses) (720,839) (2,024,806) (2,059,400)
------------- ------------- -------------
Loss before income taxes (9,516,377) (9,025,688) (9,904,494)
Income tax expense - 2,225 7,233
------------- ------------- -------------
Net loss $ (9,516,377) $ (9,027,913) $ (9,911,727)
============= ============= =============
Net loss per share - basic and diluted $ (0.34) $ (0.37) $ (0.46)
============= ============= =============
Weighted average shares used in computing
net loss per share- basic and diluted 28,173,770 24,578,226 21,469,960
============= ============= =============
See accompanying notes to consolidated financial statements
27
SPATIALIGHT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
COMMON STOCK ADDITIONAL NOTES
SHARES AMOUNT PAID-IN CAPITAL RECEIVABLE
------------ ------------ ------------ ------------
Balance January 1, 2001 20,273,229 $ 202,732 $ 28,152,273 $ -
Sale of common stock under private stock purchase
agreements 2,437,304 24,374 4,503,292 (3,480,021)
Conversion of notes and accrued interest 275,120 2,751 527,635 -
Discount on notes payable - - 1,443,000 -
Issuance of stock, stock options and
warrants for services 21,889 219 402,508 -
Issuance of stock and options to employees and
directors 200,000 2,000 2,533,335 -
Exercise of stock options and warrants 2,604,244 26,042 4,349,836 (492,708)
Payments on notes receivable - - - 1,319,295
Net loss - - - -
------------ ------------ ------------ ------------
Balance, December 31, 2001 25,811,786 $ 258,118 $ 41,911,879 $ (2,653,434)
Exercise of stock options and warrants, net of
costs of $132,610 1,355,854 13,559 3,619,035 (1,747,347)
Payments on notes receivable - - - 982,443
Reversal of notes receivable (197,005) (1,970) (614,765) 643,416
Repricing of warrants - - 49,283 143,362
Installment note for shares not yet issued, net of
related payments - - 1,492,536 (1,292,536)
Accrued interest on notes receivable from stockholders - - - (6,962)
Issuance of stock, stock options and
warrants for services 92,799 928 396,162 -
Issuance of stock and options to employees and
directors 60,000 600 315,311 -
Conversion of notes and accrued interest 241,492 2,415 813,985 -
Discount on notes payable - - 58,000 -
Rescission of stock purchase agreement (1,346,268) (13,463) (2,490,596) 2,504,059
Net loss
------------ ------------ ------------ ------------
Balance, December 31, 2002 26,018,658 $ 260,187 $ 45,550,830 $ (1,426,999)
Exercise of stock options and warrants 365,624 3,657 541,124 -
Payments on notes receivable from stockholders - - - 402,500
Accrued interest on notes receivable from stockholders - - - (72,427)
Issuance of stock, stock options,
and warrants for services 79,000 790 569,937 -
Issuance of options to employees and directors - - 195,387 -
Conversion of debt and accrued interest 1,580,820 15,807 3,929,439 -
Warrants issued in lieu of interest
on short term borrowings - - 6,647 -
Shares issued on exercise of warrant
under 2002 installment note 746,268 7,463 (7,463) -
May Private placement, net of issuance cost of $175,065 2,796,325 27,963 4,946,972 -
Issuance of shares to third party for finder's
fee in conjunction with May Private placement 130,435 1,304 375,653 -
August Private placement net of issuance cost of $224,648 1,212,061 12,121 2,526,731 -
December private placement,
300,000 issued, 700,000 issuable in January 300,000 3,000 1,452,255 -
Beneficial pricing on stock and warrants acquired in
private placement - - 958,913 -
Net loss -
------------ ------------ ------------ ------------
Balance, December 31, 2003 33,229,191 $ 332,292 $ 61,046,425 $ (1,096,926)
============ ============ ============ ============
See accompanying notes to consolidated financial statements
TOTAL
ACCUMULATED COMMON STOCK STOCKHOLDERS'
DEFICIT ISSUABLE EQUITY (DEFICIT)
------------ ------------ ------------
Balance January 1, 2001 $ (29,818,184) $ - $ (1,463,179)
Sale of common stock under private stock purchase
agreements - - 1,047,645
Conversion of notes and accrued interest - - 530,386
Discount on notes payable - - 1,443,000
Issuance of stock, stock options and
warrants for services - - 402,727
Issuance of stock and options to employees and
directors - - 2,535,335
Exercise of stock options and warrants - - 3,883,170
Payments on notes receivable - - 1,319,295
Net loss (9,911,727) - (9,911,727)
------------ ------------ ------------
Balance, December 31, 2001 $ (39,729,911) $ - $ (213,348)
Exercise of stock options and warrants, net of
costs of $132,610 - - 1,885,247
Payments on notes receivable - - 982,443
Reversal of notes receivable - - 26,681
Repricing of warrants - - 192,645
Installment note for shares not yet issued, net of
related payments - - 200,000
Accrued interest on notes receivable from stockholders - - (6,962)
Issuance of stock, stock options and
warrants for services - - 397,090
Issuance of stock and options to employees and
directors - - 315,911
Conversion of notes and accrued interest - - 816,400
Discount on notes payable - - 58,000
Rescission of stock purchase agreement
Net loss (9,027,913) - (9,027,913)
------------ ------------ ------------
Balance, December 31, 2002 $ (48,757,824) $ - $ (4,373,806)
Exercise of stock options and warrants - 305,685 850,466
Payments on notes receivable from stockholders - - 402,500
Accrued interest on notes receivable from stockholders - - (72,427)
Issuance of stock, stock options,
and warrants for services - - 570,727
Issuance of options to employees and directors - - 195,387
Conversion of debt and accrued interest - - 3,945,246
Warrants issued in lieu of interest
on short term borrowings - - 6,647
Shares issued on exercise of warrant
under 2002 installment note - - -
May Private placement, net of issuance cost of $175,065 - - 4,974,935
Issuance of shares to third party for finder's
fee in conjunction with May Private placement - - 376,957
August Private placement net of issuance cost of $224,648 - - 2,538,852
December private placement,
300,000 issued, 700,000 issuable in January - 3,500,000 4,955,255
Beneficial pricing on stock and warrants acquired in
private placement - - 958,913
Net loss (9,516,377) - (9,516,377)
Balance, December 31, 2003 $ (58,274,201) $ 3,805,685 $ 5,813,275
See accompanying notes to financial statements
28
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2003 AND 2002
Cash flows from operating activities: 2003 2002 2001
------------- ------------- -------------
Net loss $ (9,516,377) $ (9,027,913) $(9,911,727)
Adjustments to reconcile net loss to
net cash used by operating activities:
Inventory adjustment 516,382 286,000 -
Depreciation and amortization 393,302 381,916 290,293
Stock-based general and administrative expense 1,985,720 713,001 2,938,062
Stock-based interest expense 583,672 1,779,147 1,824,864
Accrued interest on notes receivble from shareholder (72,427) - -
Changes in operating assets and liabilities:
Accounts receivable (117,530) - -
Inventories (1,020,040) (561,959) -
Prepaid and other current assets 212,428 (406,895) 56,876
Accounts payable (1,154,946) 1,624,202 46,924
Accrued expenses and other current liabilities 470,799 240,345 294,359
Other assets 156,079 (86,704) (15,690)
------------- ------------- -------------
Net cash used in operating activities (7,562,938) (5,058,860) (4,476,039)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (524,764) (281,818) (326,774)
------------- ------------- -------------
Net cash used in investing activities (524,764) (281,818) (326,774)
------------- ------------- -------------
Cash flows from financing actitivies:
Payments on capital lease obligations - (4,483) (5,121)
Proceeds from issuance of short-term notes 792,500 125,000 250,000
Payment on short-term notes (542,500) - -
Payments from stock subscriptions
and notes receivable from shareholders 402,500 1,182,443 1,319,295
Payments on convertible notes (100,000) - -
Stock issuance costs - (132,610) -
Proceeds from sales of common shares and warrants 12,469,042 - 1,047,646
Proceeds from exercise of warrants and options 850,466 2,017,857 3,883,170
------------- ------------- -------------
Net cash provided by financing activities 13,872,008 3,188,207 6,494,990
------------- ------------- -------------
Net increase (decrease) in cash 5,784,306 (2,152,471) 1,692,177
Cash at beginning of period 575,663 2,728,134 1,035,957
------------- ------------- -------------
Cash at end of period $ 6,359,969 $ 575,663 $ 2,728,134
============= ============= =============
Supplemental disclosure of cash flow information:
Income taxes paid during the period $ - $ 2,225 $ 7,233
------------- ------------- -------------
Interest paid during the period $ 45,319 $ 348 $ 15,551
------------- ------------- -------------
Non cash financing activities:
Common stock issued upon conversion of notes $ 3,945,246 $ 861,400 $ 530,386
------------- ------------- -------------
Sale of stock for stock subscription $ - $ - $ 3,567,521
------------- ------------- -------------
Exercise of warrants in exchange for notes receivable $ - $ 1,392,536 $ 492,708
------------- ------------- -------------
Discount on convertible notes
due to beneficial conversion feature $ - $ 58,000 $ 1,443,000
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - SpatiaLight, Inc. (SpatiaLight or the Company)
is in the business of manufacturing high-resolution microdisplays for
applications such as high definition television, computer monitors, video
projectors and other applications. From 2001 through 2003, the Company entered
into agreements or memoranda of understanding with original equipment
manufacturers (OEMs) in China and the Republic of South Korea contemplating the
purchase by these prospective customers of the Company's display units and/or
SpatiaLight imagEngine(TM) microdisplays for use in certain of their products.
All of these agreements generally require that SpatiaLight supply prototypes of
its display units and/or SpatiaLight imagEngine(TM) microdisplays and that they
meet technical criteria satisfactory to each of such prospective customers.
In late January 2003, SpatiaLight announced that it signed a purchase
order agreement with Skyworth Display, one of the Chinese OEMs with which the
Company had an agreement to test prototypes of its microdisplay products, for
the purchase by Skyworth of 14,100 SpatiaLight display units during a one year
delivery period. The purchase order originally provided for 200 units to be
delivered in February and an additional 200 units in each of March and April
2003. Skyworth and SpatiaLight subsequently agreed to delay the first delivery
of units. To date, SpatiaLight has completed shipment of 100 of the 200 units
originally scheduled for delivery in the first month. Skyworth has recently
advised the Company that it has determined to change the screen size format of
the LCoS televisions that it intends to manufacture using SpatiaLight's display
units. As a result, Skyworth is making necessary changes to certain of its
internally developed electronics components, which Skyworth has advised the
Company will occur in the immediate future. SpatiaLight expects to ship the
remainder of the first 200 units after Skyworth completes these changes.
Following the initial delivery provisions of 200 units per month for the first
three months, the Company is scheduled to deliver 1,500 units per month until
the order is completed. Pursuant to the terms of the purchase order, the
obligations of Skyworth are required to be backed by letters of credit in
SpatiaLight's favor. The purchase order is cancelable by Skyworth on a quarterly
basis and is subject to pricing contingencies and other customary terms and
conditions.
In September 2003, SpatiaLight announced that it signed a purchase order
agreement with China Electronics Corporation (CEC), another of the Chinese OEMs
with which the Company had an agreement to test prototypes of its microdisplay
products, for the purchase by CEC of 2,000 display units from the Company. The
agreement provides for an initial delivery of ten display units, which was
completed in September, with a second delivery of 100 units to follow in the
immediate future. Additional shipments will be made periodically according to a
schedule to be determined by CEC and SpatiaLight. Pursuant to the terms of the
purchase order, the current obligations of CEC are backed by letters of credit
in the Company's favor. The purchase order is cancelable by CEC after delivery
of 110 units and is subject to other customary terms and conditions.
In October 2003, SpatiaLight announced that it had signed a purchase order
agreement with Nanjing Panda Electronics Co. (Panda), a third Chinese OEM with
which the Company had an agreement to test prototypes of its microdisplay
products, for the purchase of 2610 display units by Panda. The agreement
provides for an initial television box integration phase, which was recently
completed. The agreement then provides for delivery of ten display units to
Panda, which the Company expects to occur in the immediate future, with a second
delivery of 100 display units to follow. Subsequent shipments under the purchase
order will be made periodically according to a schedule to be determined by the
parties. Pursuant to the terms of the purchase order, the obligations of Panda
will be backed by letters of credit in SpatiaLight's favor. The purchase order
is cancelable by Panda after delivery of ten display units and is subject to
other customary terms and conditions.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
In December 2003, SpatiaLight signed a purchase order agreement with SCT
Optronics Company Ltd. (SCT), a Chinese OEM, for the purchase of 2020 display
units from the Company. The initial shipment of ten display units provided for
under the agreement was completed in December 2003. Future shipments are
scheduled to be made periodically according to a schedule to be finally
determined by the parties. The purchase order is cancelable by SCT after
delivery of ten display units and is subject to other customary terms and
conditions.
In December 2003, SpatiaLight signed a purchase order agreement with
Shanghai China Display Co., Ltd. (China Display), another Chinese OEM with which
the Company had an agreement to test prototypes of its microdisplay products.
The agreement provides for the purchase by China Display of 1,000 sets of three
SpatiaLight imagEngine(TM) microdisplays. Pursuant to the purchase order,
SpatiaLight completed an initial delivery of 100 microdisplay sets to China
Display in December 2003. A second delivery of 300 sets and a third delivery of
600 sets are to follow. The entire order is scheduled to be completed within a
three-month period. SpatiaLight may mutually agree with China Display to revise
the delivery schedule. Pursuant to the terms of the purchase order, the
obligations of China Display will be backed by three letters of credit, the
first of which was issued and paid to SpatiaLight. The purchase order is not
cancelable by China Display, according to the terms of the purchase order,
because the delivered microdisplay sets met China Display's specifications. The
purchase order is subject to other customary terms and conditions.
In December 2003, SpatiaLight signed a purchase order agreement with
Global Display Limited, a Chinese OEM, for the purchase of 2000 display units
from the Company. Shipments are scheduled to be made periodically according to a
schedule to be finally determined by the parties. The purchase order is
cancelable by Global Display after the initial delivery of ten display units
provided for under the agreement and is subject to other customary terms and
conditions.
The Company's principal executive offices are located in Novato,
California. The Company was organized under the laws of the State of New York in
1989.
Basis of Consolidation - The consolidated financial statements incorporate
the accounts of SpatiaLight, Inc. and its wholly owned subsidiary, SpatiaLight
Technologies, Inc., an inactive subsidiary formed in 2003. All significant
intercompany business and transactions have been eliminated in consolidation.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires that management make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include those related to inventory reserves and write-downs, which can
be affected by a change in the market value and replacement cost of materials or
a change in market price of products.
Cash Equivalents - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. At December 31, 2003 and 2002, $6,360,000 and $576,000,
respectively, of money market securities, the fair value of which approximates
cost, are included in cash and cash equivalents. The Company deposits cash and
cash equivalents with high credit quality financial institutions.
Accounts Receivable - Accounts receivable are customer obligations due
under normal trade terms. Although the Company generally does not require
collateral, letters of credit may be required from the Company's customers in
certain circumstances. Senior management reviews accounts receivable on a
monthly basis to determine if any receivables will potentially be uncollectible.
Were any accounts receivable balances determined to be uncollectible, the
Company would provide for such balances in its allowance for doubtful accounts.
If all attempts to collect a receivable failed, the receivable would be written
off against the allowance. Based on the information available to the Company and
its limited volume of sales, the Company has not established an allowance for
doubtful accounts as of December 31, 2003.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
Inventory. Inventories are valued at the lower of cost (based on the
first-in, first-out method) or market value. Materials, labor and manufacturing
overhead are included in the cost of inventories. In determining inventory
market values, substantial consideration is given to the expected selling price
of the product based on historical recovery rates. If the market value of
inventory is assessed to be less than cost, it is written down to its
replacement cost or its net realizable value. Estimates may differ from actual
results due to the quantity and quality and mix of products in inventory,
consumer and retailer preferences and economic conditions. The adjustment to
adjust inventory to lower of cost or market value was $311,000, $286,000 and $0
in 2003, 2002 and 2001, respectively. Our initial inventory components were at a
cost higher than we expect to incur for future purchase. Also, in 2003, we
conducted a physical count for the first time as we moved from a preproduction
phase to a production phase, which resulted in an additional inventory
write-down of $205,000. The total inventory adjustment in 2003 was $516,000.
Property and Equipment - Property and equipment are recorded at cost while
repairs and maintenance costs are expensed in the period incurred. Depreciation
and amortization of property and equipment is calculated on a straight-line
basis over the estimated useful lives of the assets, generally three years for
computer equipment and building improvements and seven years for office
furniture and equipment.
Revenue Recognition - The Company recognizes revenue when there is
persuasive evidence of an arrangement, the product has been delivered, the sales
price is fixed or determinable, and collectibility is reasonably assured. The
product is considered delivered to the customer once it has been shipped, and
title and risk of loss have transferred. The Company reduces product revenue for
estimated customer returns and sales allowances.
Shipping and Handling Costs - The Company generally structures its
purchase order agreements to provide that its customers shall be responsible for
shipping and handling costs. In the event that shipping and handling costs,
which are comprised of outbound freight and associated direct labor costs, are
borne by the Company, such costs are recorded in general and administrative
expense. To the extent that such costs are recouped from the customers, they are
included in revenue.
Income Taxes - The Company utilizes the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded to reduce deferred tax assets to an amount whose realization is more
likely than not. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
Research and Development - Research and development costs, including the
costs of prototype and pre-production display units provided to prospective
customers in China, are charged to expense when incurred.
Financial Instruments - The Company's financial instruments include cash
and cash equivalents and debt. At December 31, 2003 and 2002 the fair values of
cash and cash equivalents and debt issued without equity components approximated
their financial statement carrying amounts. For certain debt issued with equity
instruments attached, little or no value has been assigned to the debt and the
fair value of the debt on a stand-alone basis is not easily determinable.
Stock-Based Compensation - The Company accounts for its stock-based
compensation arrangements for employees, contractors and directors using the
intrinsic value method pursuant to Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees," as clarified by Financial
Accounting Standards Board (FASB) Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation." As such, compensation expense is
recorded when, on the date of grant, the fair value
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
of the underlying common stock exceeds the exercise price for stock options or
the purchase price for issuances or sales of common stock. Pursuant to Statement
of Financial Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based
Compensation", the Company discloses the proforma effects of using the fair
value method of accounting for stock-based compensation arrangements and records
compensation expense for the fair value of options granted to non-employees.
If the Company had elected the fair value method of accounting for
stock-based compensation, compensation cost would be accrued at the estimated
fair value of stock option grants over the service period, regardless of later
changes in stock prices and price volatility. The fair values at date of grant
for options granted have been estimated based on a modified Black-Scholes
pricing model with the following weighted average assumptions:
2003 2002 2001
------------ ------------ ------------
Dividend yield -- -- --
Expected volatility 82% 100% 114%
Risk-free interest rates 2% 5% 6%
Expected lives 24 months 24 months 24 months
The table below shows net income per share as if the Company had elected the fair value method
of accounting for stock options
2003 2002 2001
------------ ------------ ------------
Net loss as reported $ (9,516,377) $ (9,027,913) $ (9,911,727)
Add: stock-based employee compensation included
in reported net loss, net of any applicable related tax effects 130,750 38,951 1,795,323
Deduct: total stock-based employee compensation
determined under fair value method for all awards,
net of any applicable related tax effects (2,628,486) (3,610,346) (3,369,151)
------------ ------------ ------------
Proforma net loss, as adjusted $(12,014,113) $(12,599,308) $(11,485,555)
Loss per share:
Basic and diluted, as reported $ (0.34) $ (0.37) $ (0.46)
Basic, as adjusted $ (0.43) $ (0.51) $ (0.53)
Impairment of Long-lived Assets and Long-lived Assets to be Disposed of -
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell.
Loss per Common Share - Basic loss per common share excludes dilution and
is computed by dividing loss attributable to common stockholders by the
weighted-average number of Common Shares outstanding for the period. Diluted
loss per common share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Common
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
share equivalents are excluded from the computation in loss periods, as their
effect would be antidilutive.
Reclassifications. Certain prior year amounts have been reclassified in
order to conform to current year presentation.
Recently Issued Accounting Standards
In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
which addresses financial accounting and reporting for costs associated with
exit or disposal activities. Statement of Financial Accounting Standards (SFAS)
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This Statement also
establishes that fair value is the objective for initial measurement of the
liability. Severance pay under SFAS No. 146, in many cases, would be recognized
over time rather than up front. The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31, 2002.
Adoption of this Statement did not have a material impact on the Company's
financial condition or results of operations; however it may affect any exit or
disposal activities in the future.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which provides alternative
methods of transition for a voluntary change to fair value based method of
accounting for stock-based employee compensation as prescribed in SFAS No. 123,
"Accounting for Stock-Based Compensation." Additionally, SFAS No. 148 requires
more prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The provisions of this Statement are
effective for fiscal years ending after December 15, 2002, with early
application permitted in certain circumstances. Adoption of this Statement did
not have a material impact on the Company's financial condition or results of
operation; however the Company has provided the enhanced disclosures as
required.
In November 2002, the FASB Issued FASB interpretation (FIN) No. 45.
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires a guarantor
to recognize, at the inception of a qualified guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 is
effective on a prospective basis for qualified guarantees issued or modified
after December 31, 2002. Adoption of this Interpretation did not have a material
impact on the Company's financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires an investor with a
majority of the variable interests in a variable interest entity to consolidate
the entity and also requires majority and significant variable interest
investors to provide certain disclosures. A variable interest entity is an
entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. The Company does not have any variable interest entities
that must be consolidated.
In May 2003, FASB issued "Accounting For Certain Financial Instruments
with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. The adoption of
SFAS No. 150 in 2003 did not have a material impact on the Company's results of
operation or financial position..
2. ISSUANCE OF SECURITIES
Issuance of Shares in 2003
On December 31, 2003, the Company issued 93,633 Common Shares upon the
conversion of a short-term convertible note with an outstanding balance of
$250,000. The conversion price was $2.67 per share.
During 2003, the Company issued 142,360 Common Shares upon the conversion
of interest of $354,476 (See note 3).
During 2003, the Company issued 1,344,827 Common Shares upon the
conversion of notes payable of $2,775,000 and of accrued interest of $565,770
(See note 3).
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
In December, 2003, the Company completed a private placement of 1,000,000
Common Shares that were registered with the SEC in a "Shelf" Registration
Statement at a price of $5.00 per share for net proceeds of $4,955,255 received
in December 2003. 300,000 of these shares were issued prior to December 31,
2003, and the remaining shares are reflected in Common Shares issueable at
December 31, 2003 and issued in January 2004.
In August 2003, in a private financing transaction, the Company issued
1,212,061 Common Shares at $2.28 per share and 303,015 fully vested warrants,
with a strike price of $3.29, and a term of five years in exchange for net
proceeds of $2,538,852, with six purchasers, none of who is an affiliate of the
Company. In addition, warrants to purchase 48,482 Shares were granted to the
placement agent for the financing. There was no earnings impact for these
warrants.
In May 2003, in a private financing transaction, the Company issued
2,796,325 Common Shares at $1.84 per share and 699,080 fully vested warrants
with a strike price of $2.65 in exchange for net proceeds of $4,974,935. Of this
amount, 1,357,441 shares and 339,360 warrants were purchased by Robert A. Olins,
Acting Chief Executive Officer and a director of the Company. Consequently, the
Company recognized non-cash expense of $958,913 related to the deemed beneficial
pricing Mr. Olins received; the expense consists of two components. First, an
expense of $538,106, representing the fair value of the warrant issued to Mr.
Olins was recognized in stock-based general and administrative expense using a
Black-Scholes option pricing model and the following assumptions: stock price
$2.15, historical volatility 105%, risk free rate of 2.27%, dividend rate of 0,
and a contractual term of five years. Second, since the market price on the day
of closing of $2.15 was higher than the issuance price of $1.84, a charge of
$420,807 was recognized in stock-based general and administrative expenses for
the 1,357,441 shares purchased by Mr. Olins.
In order to complete this equity financing, the outside investors required
significant participation from Robert A. Olins. To achieve this, Mr. Olins
borrowed funds to purchase his share of the financing. The Company's board of
directors unanimously (except for Mr. Olins, who did not vote on this matter)
approved reimbursements of $250,000 for certain expenses incurred in connection
with the personal loan to Mr. Olins made by an unaffiliated bank, and $300,000,
payable through the issuance of 130,435 Common Shares, for a finder's fee that
Mr. Olins was obligated to pay to an unaffiliated third party. Another
shareholder of the Company, to whom the Company subsequently issued the 130,435
Shares, undertook Mr. Olins' obligations to the finder. The $376,957 fair value
of the 130,435 shares is included in stock-based general and administrative
expense.
Additionally, warrants in the aggregate of 77,126 shares were issued to
the placement agent handling the financing. There was no earnings impact for
these warrants.
The Company became aware that the current interpretations of the NASDAQ
rules by the NASDAQ staff require shareholder approval of the sale by the
Company to Mr. Olins of 1,357,441 shares at the same discount received by the
other investors in that transaction. Upon review, the Company determined that it
will seek shareholder ratification of the sale to Mr. Olins at the Company's
2004 annual meeting of shareholders. Mr. Olins informed the Company that in the
interim he will not dispose of, nor vote, these shares until such ratification
is obtained. In the event that such ratification is not obtained, Mr. Olins and
the Company have agreed that the matter will be addressed consistent with the
rules and regulations of the NASDAQ.
Issuance of Stock and Warrants for Interest in 2003
On January 3, 2003, the Company issued 142,360 Common Shares with a fair
value of $354,476 as a prepayment of interest. Prepaid interest was computed
using the closing price of the Common Shares on December 31, 2002 of $2.49, and
was amortized through December 31, 2003. (See also Note 3).
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
In May 2003, the Company issued a fully vested warrant to purchase 10,000
Common Shares in lieu of interest on a short-term note. A value of $6,647 was
assigned to this warrant using a Black-Scholes option pricing model and the
following assumptions: stock price $2.15, historical volatility 79%, risk free
rate of 1.01%, dividend yield of 0, and a contractual term of 1 year. The value
of this warrant was recorded in non-cash interest expense.
Exercise of Stock Options and Warrants in 2003
During 2003, the Company issued 215,874 and 149,750 Common Shares upon the
exercise of warrants and employee and director stock options, respectively.
Total cash received was $376,542 and $168,239, respectively. Included in the
warrant exercise are 69,547 Shares issued upon the cashless exercise of 250,000
warrants. Additionally, proceeds of $305,685 were received prior to December 31,
2003, for the exercise of warrants. At December 31, 2003, these proceeds were
included in common stock issueable and 120,082 Common Shares were issued in
January 2004 for these warrants.
Issuance of Stock, Stock Options and Warrants for services in 2003
In October 2002, the Company issued a fully vested warrant for consulting
services rendered in 2002 and 2003. An expense of $91,000 was recognized for the
portion of the services rendered in 2003. The warrant to purchase 250,000 Common
Shares had an exercise price of $3.50. The following assumptions were used in
determining the value: stock price $1.84, historical volatility 100%, risk free
rate 5%, a dividend yield of 0, and a contractual term of two years, and is
reflected in the statement of operations as stock-based general and
administrative expense.
In March 2003, the Company issued a fully vested warrant to purchase
200,000 Common Shares in exchange for consulting services. A value of $85,400
was assigned to the warrant using the Black-Scholes option pricing model and the
following assumptions: stock price $2.43, historical volatility 100%, risk free
rate 5%, a dividend yield of 0, and a contractual term of five months. The value
of the warrant is included in stock-based general and administrative expense in
the first quarter of 2003.
In March 2003, the Company issued 47,000 Common Shares in exchange for
consulting services provided in 2002 totaling $116,250. The expense associated
with these services was recorded in 2002.
In May 2003, the Company issued a fully vested option to purchase 25,000
Common Shares in exchange for services rendered. A value of $49,734 was assigned
to this option using a Black-Scholes option pricing model and the following
assumptions: stock price $2.14, historical volatility 112%, risk free rate of
3.33%, a dividend yield of 0, and a contractual term of 10 years. The value of
this option was recorded in stock-based general and administrative expense in
the second quarter.
In May 2003, the Company issued a fully vested warrant to purchase 125,000
Common Shares in exchange for consulting services. A value of $56,994 was
assigned to the warrant using a Black-Scholes option pricing model and the
following assumptions: stock price $2.05, historical volatility 79%, risk free
rate of 1.01%, dividend yield of 0, and a contractual term of 18 months.
In May 2003, the Company issued 32,000 Common Shares to an outside
consultant. The shares were issued in consideration of services rendered by the
consultant in 2003. These shares were valued at $68,800, the market value of the
shares on the date of grant.
In October 2003, the Company issued a fully vested option to purchase
5,000 Common Shares in exchange for services rendered in 2003. A value of
$22,003 was assigned to this option using a Black-Scholes option pricing model
and the following assumptions: stock price $4.69, historical volatility 112%,
risk free rate of 4.27%, dividend yield of 0 and contractual life of 10 years.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
In October 2003, the Company issued a fully vested warrant to purchase
50,000 Common Shares to a consultant in exchange for services rendered in 2003.
A value of $80,546 was assigned to the warrant using a Black-Scholes option
pricing model and the following assumptions: stock price $4.68, exercise price
$3.50, historical volatility 63%, risk free rate of 1%, a dividend yield of 0
and contractual life of nine months.
During 2003, the Company recognized an expense for options in accordance
with a TARSAP agreement between the Company and one of its executives. The total
expense recognized in 2003 under this agreement was $86,750 included in stock
based general and administrative expense.
Other expenses in 2003 related to the valuation of options granted to
directors for additional services and employee options issued with an exercise
price lower than market price totaled $108,637 and are included in stock-based
general and administrative expense.
Issuance of Shares Under Installment Note
In November 2002, a warrant to purchase 746,268 Common Shares was
exercised at $2.00 per share under a warrant installment agreement totaling
$1,492,536. Payments of $200,000 were made in 2002. An additional $402,500 was
received in 2003. Interest accrues at 6% per annum and is due with the final
payment. As of December 31, 2003, approximately $79,000 of accrued interest has
been recorded, including interest of approximately $72,000 in 2003. The shares
were issued in 2003, but are held in escrow by the Company pending receipt of
the remaining balance of $969,426, which is included in the notes and stock
subscriptions receivable balance as of December 31, 2003.
On May 15, 2001, the Company sold 600,000 Common Shares under a private
stock purchase agreement. The stock was sold at a price of $1.75 per share. Cash
received was $262,500. The balance of $787,500 was to be paid in three equal
quarterly installments of $262,500. An escrow agent is holding the certificates
for the shares being purchased until all three installments have been paid in
full. At December 31, 2003 the remaining balance is $127,500.
Exercise of Stock Options and Warrants in 2002
During 2002, the Company issued 646,354 and 9,500 shares of Common Shares
upon the exercise of warrants and employee stock options, respectively. Total
cash received was $1,568,500 and $5,713, respectively. Included in the warrant
exercises are 16,354 shares issued upon the cashless exercise of 171,429
warrants by investors associated with the Alabama Group (described below).
On June 28, 2002, warrants to purchase 329,355 Common Shares were
exercised by a group of investors (the "Alabama Group"), which includes a trust
for the benefit of Steven F. Tripp, a director of the Company as of December 31,
2003 (see Note 9). Mr. Tripp is not the trustee of this trust and has no power
to vote or dispose of the Common Shares of the Company or any other securities
held by that trust. Marcia K. Tripp, Steven F. Tripp's mother, is the trustee of
this trust and directs and is responsible for all of the investment decisions of
this trust. In the opinion of the Company, no other investor in the Alabama
Group is an affiliate of the Company and Mr. Tripp is not an affiliate of any
other investor in the Alabama Group. On the same day, warrants to purchase
370,645 Common Shares were reassigned for no consideration and exercised by
other investors, none of whom are affiliates of the Company or of any of its
directors. When originally granted, all of the warrants had an exercise price of
$3.50 and an expiration date of June 30, 2002. To induce the holders to
exercise, the exercise price was reduced to $3.13, the average closing price for
the previous four days, a price slightly below the closing price on the
commitment date. The warrants were exercised under warrant installment
agreements totaling $1,747,347 with initial payments totaling $443,644.
Share issuance costs associated with the above transactions totaled
$132,610 and have been recorded as a reduction in additional paid-in capital.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
Payments totaling $960,568 were made under the warrant installment
agreements, as well as $21,875 relating to notes receivable from shareholders
that were outstanding as of December 31, 2001. The exercise price for each
installment was marked to market based on the closing price the day prior to the
due date. The resulting intrinsic value of $210,042, based on the change in
exercise price, was recorded as stock-based interest expense of $156,825, and
additional paid in capital of $53,217. Of the 700,000 shares held in escrow,
197,005 were restored to the status of authorized but unissued shares in
exchange for the reversal in 2002 of notes receivable totaling $643,416.
In connection with the above warrant exercises and note reversals,
including repricing for certain warrantholders who are also debt holders, a
total of $219,325 in pricing concessions has been charged as additional
stock-based interest expense (see Note 3 to the Consolidated Financial
Statements), including the marked-to-market charge described above.
In November 2002, a warrant to purchase 746,268 Common Shares was
exercised. When originally issued, the warrant had an exercise price of $2.81
and an expiration date of November 14, 2002. On October 14, 2002, to induce the
holder to exercise, the exercise price was reduced to $2.00.
The closing market price of the common stock on that date was $1.84. The
warrant was exercised under a warrant installment agreement totaling $1,392,536
with an initial payment of $100,000. As of December 31, 2002, installment
payments totaling $200,000 had been made under this agreement. Interest accrues
at 6% per annum and is due with the final payment. As of December 31, 2002
approximately $7,000 of accrued interest receivable has been recorded.
Issuance of Shares, Stock Options and Warrants in 2002
On October 14, 2002 the Company issued a fully vested warrant expiring in
October 2003 to purchase 31,250 shares of common stock at an exercise price of
$3.50 in exchange for consulting services rendered in the fourth quarter. A
value of $12,337 was assigned to the warrants using the Black-Scholes option
pricing model and the following assumptions: stock price $1.84, historical
volatility 100%, risk free rate 5%, a dividend yield of 0, and a contractual
term of one year. The value of the warrant is reflected in the statement of
operations as stock-based general and administrative expense.
On October 14, 2002 the Company issued a fully vested warrant to purchase
250,000 Common Shares at an exercise price of $3.50 in exchange for consulting
services rendered over a 6-month period. A value of $88,192 was assigned to the
warrants for the portion of the services rendered in 2002 using the
Black-Scholes option pricing model and the following assumptions: stock price
$1.84, historical volatility 100%, risk free rate 5%, a dividend yield of 0, and
a contractual term of two years. The portion of the value of the warrant earned
in 2002 is reflected in the statement of operations as stock-based general and
administrative expense.
On August 19, 2002, the Company issued a fully vested warrant to purchase
50,000 Common Shares at an exercise price of $3.13, expiring in December 2002.
The warrant was issued in consideration for consulting services. The warrant was
valued at $24,000 using the Black-Scholes option pricing model and the following
assumptions: share price $2.70, historical volatility 100%, risk-free rate 5%, a
dividend yield of zero, and a contractual term of four months. The value of the
warrant is reflected in the statement of operations as a component of
stock-based general and administrative expense.
On January 23, 2002, the Company issued a warrant to purchase 30,000
Common Shares at an exercise price of $3.00, expiring in April 2002. The warrant
was issued to an investor in consideration of the failure of the Company to file
a registration statement with the Securities and Exchange Commission with
respect to the shares underlying a prior issuance of warrants by an earlier
agreed upon outside date. The warrant was valued at $37,111 using the
Black-Scholes option pricing model and the following assumptions:
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001 (Continued)
share price $3.73, historical volatility 114%, risk-free rate 5%, a dividend
yield of zero, and a contractual term of 103 days. The value of the warrant is
reflected in the statement of operations as a component of stock-based general
and administrative expense.
During 2002, 92,799 Common Shares and 12,500 fully vested consultant
options expiring in 2012 to purchase common stock at prices ranging from $1.99
to $3.67 were issued in exchange for services valued at $235,450.
In March 2002, the Company issued 60,000 Common Shares to its Director of
Corporate Development. The shares were issued in consideration of services
rendered by the employee with respect to assisting the Company in negotiating
the contractual relationships with its existing prospective customers. These
shares were valued at $220,200, the market value of the shares on the date of
grant. Other expenses related to the valuation of options granted to directors
for additional services totaled $95,711, included in stock-based general and
administrative expenses in the accompanying statements of operations.
Note and Interest Conversions in 2002
During 2002, the Company issued 62,500 Common Shares upon the conversion
of a $125,000 convertible note.
During 2002, the Company issued 178,992 Common Shares upon the conversion
of accrued interest of $691,400 under certain convertible notes, which includes
additional deemed interest of $491,877 in 2002 and $128,241 in 2001 due to
beneficial conversion features of the interest on the underlying notes. See also
Note 3 for additional note discounts of $58,000 related to extension of these
notes.
Rescission of Stock Purchase Agreement in 2002
During the first quarter of 2002 a stock purchase agreement was cancelled
as a result of a default by the purchaser. The stock purchase agreement was
entered into in October 2001 and called for four equal installments due
quarterly beginning January 5, 2002. A check for the $626,014 payment due in
January was received and deposited at the end of March 2002, but was
subsequently not honored by the purchaser's bank. As a result, the stock
purchase agreement, by its terms, was cancelled and the 1,346,268 shares have
been restored to the status of authorized but unissued shares. The initial
payment of $13,463 was forfeited by the purchaser and was transferred from
common stock par value to additional paid in capital. The subscription
receivable of $2,504,059 and the related additional paid in capital have been
eliminated from the balance sheet. The cancellation of the stock purchase
agreement did not have any effect on results of operations.
Issuance and Exercise of Stock Options, Warrants and Stock in 2001
During 2001, the Company issued 629,300 and 1,367,801 shares of common
stock upon the exercise of employee stock options and warrants, respectively.
Total cash received was $440,878 and $2,872,500, respectively.
On April 18, 2001 the Company issued warrants to purchase 607,143 shares
of common stock at an exercise price of $1.75 to a group of investors, which
includes a trust for the benefit of Steven F. Tripp, a director of the Company.
Mr. Tripp is not the trustee of this trust and has no power to vote or dispose
of the Common Shares of the Company or any other securities held by that trust.
Marcia K. Tripp, Steven F. Tripp's mother, is the trustee of this trust and
directs and is responsible for all of the investment decisions of this trust. In
the opinion of the Company, no other investor in the Alabama Group is an
affiliate of the Company and Mr. Tripp is not an affiliate of any other investor
in the Alabama Group. The warrants were issued in exchange for the warrant
holders' offer to assist the Company by augmenting its working capital through
the purchase of Common Shares. The warrants were valued at $68,852 using the
Black-Scholes option pricing model and the following assumptions: stock price
$1.75, historical volatility 114%, risk free rate 6%, a
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
dividend yield of zero, and a contractual term of 7 days. The value of these
warrants is reflected in the statement of operations as a component of
stock-based general and administrative expense.
During the seven days following their issuance, the warrants referred to
above were exercised. Total proceeds were $1,062,500. Of this amount, cash
totaling $525,000 was received in exchange for the issuance of 300,000 shares of
common stock. The remaining 307,143 warrants were exercised under warrant
installment notes totaling $492,708 with a payment of $44,792 made on the date
of exercise. The notes, including accrued interest, are paid in full and the
shares were released from escrow.
On October 22, 2001 the Company issued a warrant to purchase 100,000
shares of common stock at an exercise price of $2.20 in exchange for consulting
services rendered over the previous year. A value of $132,089 was assigned to
the warrants using the Black-Scholes option pricing model and the following
assumptions: stock price $2.20, historical volatility 114%, risk free rate 6%, a
dividend yield of 0, and a contractual term of 2 years. The value of the warrant
is reflected in the statement of operations as stock-based general and
administrative expense.
During 2001, 21,889 shares of common stock and 10,000 consultant options
to purchase common stock at $2.02 were issued in exchange for services valued at
$60,181. In addition, expenses related to the repricing of certain warrants
previously issued to purchase 120,000 shares of common stock from $2.00 to $1.75
per share, and 600,000 shares from $3.50 to $2.50 per share, totaled $141,605.
The repriced warrants were exercised, and are included in warrant exercises
above.
On October 18, 2000 the Board of Directors approved a grant of stock
options to purchase 150,000 shares of common stock at an exercise price of $1.50
to Steven F. Tripp, a director of the Company. The options were issued outside
of the employee stock option plan and were subject to shareholder approval at
the annual meeting of shareholders in June 2001. The options were issued in
exchange for consulting services provided by Mr. Tripp and were ratified by the
shareholders at the annual shareholders' meeting on June 8, 2001. The options
were valued at $440,172 using the Black-Scholes option pricing model and the
following assumptions: stock price $3.12, historical volatility 100%, risk free
rate 4.75%, a dividend yield of zero, and a contractual term of 10 years. The
value of these options is reflected in the statement of operations as a
component of stock-based general and administrative expense.
On October 18, 2000 the Board of Directors approved a grant of stock
options to purchase 750,000 shares of common stock at an exercise price of $1.50
to Robert A. Olins, Acting Chief Executive Officer. The options were issued
outside of the employee stock option plan subject to shareholder approval and
were ratified by the shareholders at the annual shareholders' meeting on June 8,
2001. The intrinsic value of $1,215,000 was recorded in stock-based general and
administrative expenses. The recording of that intrinsic value was required for
financial statement reporting purposes because these stock options could only be
valued as of the date of their approval by Shareholders on June 8, 2001 rather
than the date of their grant to Mr. Olins on October 18, 2000.
In December 2001, the Company issued 200,000 shares of common stock to its
Director of Corporate Development. The shares were issued in consideration of
services rendered by the employee with respect to assisting the Company in
negotiating the contractual relationships with its existing prospective
customers. These shares were valued at $740,000, the market value of such shares
on the date of grant. Other expenses related to the extension of certain
employee stock options and the valuation of other employee and director options
totaled $140,163, included in stock-based general and administrative expenses in
the accompanying statements of operations. Of this amount, $49,360 related to
employee related charges and $90,803 related to officer and director related
charges.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
Sales of Stock Under Private Stock Purchase Agreements in 2001
During 2001, the Company sold 391,036 shares of common stock under private
stock purchase agreements. The purchase prices range from $1.75 to $2.40; total
cash received was $785,146.
On October 1, 2001, the Company sold 100,000 shares of common stock under
a private stock purchase agreement. The stock was sold at $1.75 per share and
was due in four equal installments. The entire amount was paid on December 31,
2001.
On May 15, 2001, the Company sold 600,000 shares of common stock under a
private stock purchase agreement. The stock was sold at a price of $1.75 per
share. Cash received was $262,500. The balance of $787,500 was to be paid in
three equal quarterly installments of $262,500. An escrow agent is holding the
certificates for the shares being purchased until all three installments have
been paid in full. At December 31, 2003 the remaining balance is $127,500.
On May 15, 2001, the Company sold 1,346,268 shares of common stock under a
private stock purchase agreement. The stock was sold at a price of $1.75 per
share. Cash received was $13,462. The balance of $2,342,507 was received in the
form of a non-interest bearing stock subscription receivable, to be paid in four
equal quarterly installments of $585,626. The purchaser was unable to make the
first installment payment of $585,626 for reasons unrelated to the Company or
its performance under the agreement, thereby defaulting under the agreement. On
October 5, 2001, the Company entered into a new agreement with the purchaser,
under which the purchaser agreed to forfeit the initial payment made under the
prior agreement and pay a price per share of $1.87, or $2,517,521 in total. The
remaining terms of the agreement did not change. At December 31, 2001 the
remaining balance was $2,504,058. The stock purchase agreement was rescinded in
March 2002 as described above.
Note and Interest Conversions in 2001
During 2001, the Company issued 142,857 shares upon the conversion of a
$250,000 convertible note.
During 2001, the Company issued 132,264 shares of common stock upon the
conversion of accrued interest of $280,386 under certain convertible notes,
which includes additional deemed interest of $208,165 due to beneficial
conversion features of the interest on the underlying notes.
Stock-based general and administrative expenses discussed above is as follows:
Year-end December 31,
2003 2002 2001
------------- ------------- -------------
Warrants issued to investors $ - $ 28,435 $ 68,852
Stock and options granted to employees and directors 108,637 276,960 2,444,532
Common stock and warrants expensed for services 385,663 368,655 192,270
Stock issued in connection with May stock purchase 376,957 - -
Beneficial pricing on sale of stock and warrants to officers 958,913 - -
Expense recognized under TARSAP 86,750 - -
Repricing to induce exercise of warrants - - 141,605
Other 68,800 38,951 90,803
------------- ------------- -------------
$ 1,985,720 $ 713,001 $ 2,938,062
============= ============= =============
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
3. NOTES PAYABLE
Convertible notes at December 31, 2003 consist of the following:
Argyle Notes:
In 1998, the Company received $1,188,000 in cash in exchange for notes in
that amount to Argyle Capital Management Corporation (Argyle), a company owned
and controlled by Robert A. Olins, Acting Chief Executive Officer, Secretary,
Treasurer, and a Director of the Company. The notes accrue interest at a
contractual rate of 6% per annum, and are secured by substantially all the
assets of the Company. Both principal and interest are convertible into the
Company's Common Shares at $0.50 per share. On May 23, 2001, the due date of the
notes was extended until December 31, 2002. On the extension date, the
beneficial conversion effect representing the excess aggregate value of the
Common Shares receivable upon conversion of the notes based on the then current
market price of $1.90 per share, over the aggregate conversion price for such
Common Shares (limited to the original proceeds of $1,188,000), was recorded as
additional paid-in capital. The resulting $1,188,000 discount to the debt
arising from the beneficial conversion feature was originally being amortized
through December 31, 2002. The effective interest rate for financial statement
purposes due to this discount differs from the actual contractual interest
received or receivable in cash or shares by Argyle. This discount, along with
the contractual 6% interest rate, resulted in a new effective interest rate of
72% per annum as of the May 23, 2001 extension date when compared to the
outstanding principal balances. The effective rate prior to extension had been
the 6% per annum contractual rate.
On September 20, 2002, the due date was extended until March 31, 2004.
Accordingly, the remaining unamortized discount at the extension date of
$198,000 is being amortized through March 31, 2004, resulting in a new effective
interest rate of 17% per annum when compared to the outstanding principle
balances. On December 31, 2003, the due date was extended until June 30, 2005;
accordingly, the remaining unamortized discount of $33,000 at the extension date
is being amortized through June 30, 2005, resulting in a new effective interest
rate of 8% per annum when compared to the outstanding principle balances.
In 2002, the Company issued 178,992 Common Shares upon the conversion of
interest. Of these shares, 36,432 were issued upon the conversion of accrued
interest of $128,243 for the fourth quarter of 2001. The remaining 142,560
shares were issued in exchange for interest of $563,157 which includes
additional stock-based interest expense of $491,877 recorded due to the
beneficial conversion feature of the accrued interest, based on average prices
during the periods, over the conversion price for such shares. On January 3,
2003, the Company issued 142,360 Common Shares upon the conversion of prepaid
interest of $354,477. Prepaid interest was computed using the closing price of
the Common Shares on December 31, 2003. Additional stock-based interest expense
of approximately $283,200 was recorded due to the beneficial conversion feature
of the prepaid interest, representing the excess of the Common Shares received
upon conversion of the prepaid interest. At December 31, 2003, the carrying
value of the Argyle notes totals $1,155,000, which includes the $1,188,000
principle balance net of unamortized discount of $33,000.
Alabama Group Notes:
In December 1999, the Company received $1,437,500 in cash and issued notes
in that amount to a group of investors (the Alabama Group), which includes a
trust for the benefit of Steven F. Tripp, a director of the Company until
February 2004 (See Note 10). Mr. Tripp was not the trustee of this trust and had
no power to vote or dispose of the Common Shares of the Company or any other
securities held by that trust. Marcia K. Tripp, Steven F. Tripp's mother, was
the trustee of this trust and directed and was responsible for all of the
investment decisions of this trust. In the opinion of the Company, no other
investor in the Alabama Group is an affiliate of the Company and Mr. Tripp is
not an affiliate of any other investor in the Alabama Group. The notes accrue
interest at a contractual rate of 6% per annum, and are secured by substantially
all the assets of the Company. This portion of the notes is convertible into
shares of the Company's common stock at $3.50 per share. Upon issuance of the
notes, the Company also issued warrants to purchase 821,429 shares of common
stock. The warrants were exercised on June 28, 2002 at $3.50 per share. The
warrants
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
were valued using the Black-Scholes option-pricing model and the following
assumptions: contractual life 2.5 years; volatility 114%; risk-free interest
rate 6%; and dividend yield of $0. The total cash received from the issuance of
this tranche of notes of $1,437,500 was less than the calculated value
associated with the warrants. Therefore, the value assigned to the warrants was
limited to the original proceeds of $1,437,500, and was recorded as a discount
on the notes. The effective interest rate for financial statement purposes due
to this discount differs from the actual contractual interest received or
receivable in cash by the holders of the Alabama Group Notes. This discount,
along with the contractual 6% per annum interest rate, resulted in an effective
interest rate of 70% per annum when compared to the outstanding principal
balances.
The proceeds of the second tranche of notes, also totaling $1,437,500 and
carrying interest at 6% per annum, were originally to be received by the Company
upon the achievement of certain performance targets. The proceeds were received
in November 2000, prior to reaching those targets, in exchange for reducing the
conversion price of the notes to the then-market price of $2.25 per share. No
warrants were issued with the second tranche of notes. The remaining unamortized
discount for the first tranche, along with the contractual interest on both
tranches, resulted in a combined effective interest rate of 87% per annum as of
the issuance date for the second tranche when compared to the outstanding
principal balances.
On June 15, 2001 the due date of both tranches was extended until December
31, 2002. On the extension date, the excess $255,000 aggregate value of the
Common Shares receivable upon conversion of the notes based on the then current
market price of $2.65 per share, over the aggregate conversion price for the
notes convertible at $2.25 per share, was recorded as additional paid-in
capital. The resulting $255,000 discount to the debt, along with the remaining
unamortized discount for the first tranche, was being amortized through December
31, 2002. The effective interest rate for financial statement purposes due to
these discounts differs from the actual contractual interest received or
receivable by the holders of the Alabama Group Notes. These discounts, along
with the contractual 6% per annum interest rate, resulted in a new effective
interest rate upon extension of 25% per annum as of the extension date when
compared to the outstanding principal balances.
On September 20, 2002, the due date of both tranches was extended until
March 31, 2004. On the extension date, the excess $58,000 aggregate value of the
Common Shares receivable upon conversion of the notes based on the then current
market price of $2.34 per share over the aggregate conversion price for the
notes convertible at $2.25 per share was recorded as additional paid-in-capital.
Accordingly, the remaining unamortized discount at the extension date of
$194,195 including the new discount of $58,000 is being amortized through March
31, 2004 resulting in a new effective interest rate of 10.5% per annum when
compared with the outstanding principal balances.
During 2003, the Company repaid principal balance of $100,000 against
these notes. In October and November 2003, pursuant to the terms of the notes,
all of the remaining investors included in the Alabama Group converted the
$2,775,000 principal amount of the notes plus accrued interest of $565,770 in
exchange for the issuance by the Company of a total of 1,344,827 Common Shares.
Other Short Term Notes
During 2003, the Company received proceeds of $917,500 from borrowings
under short term notes. Of this amount, $667,500 was retired. The remaining
balance was converted into 93,633 of the Company's Common Shares at a conversion
price of $2.67, which approximated the stock price on the date of issuance. A
warrant to purchase 10,000 shares of the Company's Common Shares was issued in
lieu of interest on a $100,000 short-term note. Interest expense of $6,647 was
recorded during the second quarter using a Black-Scholes option-pricing model.
The note was repaid during 2003.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
Activity in convertible notes payable for 2003 and 2002 is as follows:
BALANCE AT (PAYMENT) OR BALANCE AT
DECEMBER 31, ADDITION OR DISCOUNT CONVERSION DECEMBER 31,
DEBT PRINCIPAL: 2002 NEW DISCOUNT AMORTIZATION TO EQUITY 2003
----------- ----------- ----------- ----------- -----------
Argyle $ 1,188,000 $ -- $ -- $ -- $ 1,188,000
Argyle discount (165,000) -- 132,000 -- (33,000)
Alabama Group 2,875,000 -- (100,000) (2,775,000) --
Alabama Group discount (161,829) -- 161,829 -- --
Convertible notes-Other 917,500 (667,500) (250,000) --
----------- ----------- ----------- ----------- -----------
Total 3,736,171 917,500 (473,671) (3,025,000) 1,155,000
----------- ----------- ----------- -----------
INTEREST:
Accrued Argyle 6% -- 71,280 -- (71,280) --
Accrued Alabama 6% 471,061 94,709 -- (565,770) --
Beneficial interest -- 283,196 -- (283,196) --
Convertible notes-Other -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total 471,061 449,185 -- (920,246) --
----------- ----------- ----------- ----------- -----------
TOTAL CONVERTIBLE NOTES $ 4,207,232 $ 1,366,685 $ (473,671) $(3,945,246) $ 1,155,000
=========== =========== =========== =========== ===========
DEBT PRINCIPAL: BALANCE AT (PAYMENT) OR BALANCE AT
DECEMBER 31, ADDITION OR DISCOUNT CONVERSION DECEMBER 31,
2001 NEW DISCOUNT AMORTIZATION TO EQUITY 2002
----------- ----------- ----------- ----------- -----------
Argyle $ 1,188,000 $ -- $ -- $ -- $ 1,188,000
Argyle discount (792,000) -- 627,000 -- (165,000)
Alabama Group 2,875,000 -- -- -- 2,875,000
Alabama Group discount (544,774) (58,000) 440,945 -- (161,829)
Convertible notes-Other -- 125,000 -- (125,000) --
----------- ----------- ----------- ----------- -----------
Total 2,726,226 67,000 1,067,945 (125,000) 3,736,171
----------- ----------- ----------- ----------- -----------
Interest:
Accrued Argyle 6% 18,216 71,280 -- (89,496) --
Accrued Alabama 6% 282,815 188,246 -- -- 471,061
Beneficial interest 110,027 491,877 -- (601,904) --
Convertible notes-Other -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total 411,058 751,403 -- (691,400) 471,061
----------- ----------- ----------- ----------- -----------
TOTAL CONVERTIBLE NOTES $ 3,137,284 $ 818,403 $ 1,067,945 $ (816,400) $ 4,207,232
=========== =========== =========== =========== ===========
Stock-based interest expense:
2003 2002 2001
------------- ------------- -------------
Amortization of Alabama Group discount $ 161,829 $ 440,945 $ 1,144,111
Amortization of Argyle discount 132,000 627,000 396,000
Effect of beneficial conversion privileges of interest on Argyle convertible debt 283,196 491,877 284,753
Repricing of warrants (See Note 2) - 219,325 -
Other (See Note 2) 6,647 - -
------------- ------------- -------------
$ 583,672 $1,779,147 $ 1,824,864
============= ============= =============
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
4. BALANCE SHEET COMPONENTS
Inventory as of December 31, consists of the following:
Inventory as of December 31, consists of the following:
2003 2002
-------- ---------
Raw materials 171,812 561,959
Work-in-progress 665,842 -
Finished goods 151,963 -
-------- ---------
989,617 561,959
Inventory adjustment (210,000)(286,000)
-------- ---------
779,617 275,959
======== =========
Property and equipment as of December 31, consists of the following:
2003 2002
------------ ------------
Office furniture and fixtures $ 522,718 $ 254,073
Machinery and equipment 1,658,424 1,405,793
Building improvements 35,803 32,315
------------ ------------
2,216,945 1,692,181
Less accumulated depreciation 1,578,515 1,185,213
------------ ------------
$ 638,430 $ 506,968
============ ============
Accrued expenses and other current liabilities as of December 31, consist
of the following:
2003 2002
---------- ---------
Deferred rent $ 243,604 $ 66,577
Accrued compensation 206,936 62,243
Other 67,597 77,976
---------- ---------
$ 518,137 $206,796
========== =========
The Company incurred depreciation expense of $393,302, $412,833 and
$290,293 for the years ended December 31, 2003, 2002 and 2001, respectively.
Included in fixed assets at December 31, 2003, 2002 and 2001 is fully
depreciated equipment acquired under capital leases totaling $133,640.
Rent expense related to operating leases for 2003, 2002 and 2001 was
$523,995, $387,357 and $314,402, respectively.
The Company leases its office space under a non-cancelable operating
lease. The lease expires in August 2009 and is subject to escalations in rent.
Rent expense is recorded evenly over the lease. Deferred rent of $243,604 is
recorded as of December 31, 2003.
SPATIALIGHT INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
Future lease obligations under non-cancelable operating leases as of
December 31, 2003 are as follows:
YEAR $ AMOUNT
---------------- ----------------
2004 520,305
2005 458,996
2006 446,853
2007 459,040
2008 471,768
thereafter 320,651
----------------
TOTAL $ 2,677,613
================
5. INCOME TAXES
Income taxes consist primarily of state minimum taxes. Income tax expense
(benefit) differed from the amounts computed by applying the U.S. federal income
tax rate of 34% to pretax losses from operations as a result of the following:
2003 2002 2001
------------- -------------- --------------
Computed tax benefit at federal statutory rate $ (3,236,000) $ (3,069,500) $ (3,369,900)
Federal research and development credit (103,000) (190,500) (133,600)
Permanent differences, primarily nondeductible interest 207,000 611,625 813,800
Changes in valuation allowances 3,339,000 4,209,200 3,529,800
State tax benefit, net of effect on federal income taxes (586,000) (1,004,300) (552,967)
Other, net 379,000 (554,300) (279,900)
------------- -------------- --------------
Total tax expense $ - $ 2,225 $ 7,233
============= ============== ==============
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
is presented below
2003 2002
------------ ------------
Deferred tax assets:
Federal net operating loss carryforwards $ 16,849,000 $ 14,380,300
State income tax effects and credits 3,876,000 3,289,800
Accrued expenses 21,000 16,000
Federal research and development credits 885,000 849,100
Options and warrants 1,060,000 790,000
Other 130,000 155,900
------------ ------------
Gross deferred tax assets 22,821,000 19,481,100
Valuation allowance (22,821,000) (19,481,100)
------------ ------------
Net deferred tax assets $ - $ -
=========================
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
The net change in the total valuation allowance was $3,339,900, $4,112,500 and
$3,529,800 in 2003, 2002 and 2001, respectively. As of December 31, 2003, the
Company had net operating loss carryforwards of approximately $49.6 million for
federal and $46.2 million for state tax purposes, respectively, which expire in
varying amounts from 2005 for federal purposes, and have already begun to expire
for state purposes. In addition, as of December 31, 2003, the Company had
research and development carryforwards of approximately $885,000 for federal tax
purposes, which will begin to expire in 2008 and $981,000 for state tax
purposes, which will begin to expire in 2009.
Under the provisions of the Internal Revenue Code, should substantial
changes in the Company's ownership occur, the utilization of net operating loss
carryforwards might be limited.
Deferred tax assets resulting from net operating losses attributable to
certain stock option exercises and warrant issuances could result in a
cumulative $700,000 credit to additional paid-in capital instead of reducing
income tax expense if realized.
6. STOCKHOLDERS' EQUITY
Stock Option Plans - In 1999 the Shareholders approved the 1999 Stock
Option Plan, which replaced the Company's 1993 Non-Statutory Employee Stock
Option Plan, the 1993 Non-Statutory Director Stock Option Plan, and the 1991
Stock Option Plan. The Plan authorizes the issuance of options to purchase up to
4,000,000 shares of the Company's Common Shares. The Plan provides for options
which may be issued as nonqualified or qualified incentive stock options under
Section 422A of the Internal Revenue Code of 1986, as amended.
In June 2002, the Shareholders approved an amendment to the Stock Option
Plan to increase the maximum number of shares that can be issued pursuant to
award grants made under the Plan by 1,000,000 Common Shares, raising the total
number of Common Shares reserved for issuance thereunder to 5,000,000.
Under the Plan, the Company may grant options to employees at prices not
less than 85% of fair market value for non-statutory stock options, and to
directors at the fair market value at the date of grant.
Options under the Plan are granted at the discretion of the Board of
Directors/Compensation Committee. Options expire 10 years from the date of grant
and, in general, vest and become exercisable 50% at the end of year one and 50%
at the end of year two. Changes to the vesting period may be made at the
discretion of the Board of Directors/Compensation Committee.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
The following is a status of the options under the Plan and outside of the
Plan and a summary of the changes in options outstanding during 2003, 2002 and
2001:
WEIGHTED
AVERAGE
NUMBER OF SHARES PRICE
---------- ---------
Outstanding January 1, 2001 2,016,300 $ 1.84
Options granted under the plan 655,000 2.20
Options granted outside the plan 2,875,000 3.77
Options exercised (629,300) 0.70
Options cancelled (292,500) 2.68
----------
Outstanding December 31, 2001 4,624,500 3.20
Options granted under the plan
Options granted outside the plan 1,057,500 3.20
Options exercised (9,500) 0.60
Options cancelled (111,667) 4.81
----------
Outstanding December 31, 2002 5,560,833 3.17
Options granted under the plan 728,750 2.59
Options granted outside the plan 800,000 7.89
Options exercised (149,750) 1.12
Options cancelled (1,987,500) 4.79
----------
Outstanding December 31, 2003 4,952,333 $ 3.26
==========
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
At December 31, 2003, 1,700,000 of the options outstanding were granted
outside of the plan. Options exercisable as of December 31, 2003 and 2002
totaled 3,276,458 and 2,672,708 options, respectively, at a weighted average
exercise price of $2.19 and $2.05 per share, respectively. Of the options
exercisable as of December 31, 2003, 1,025,000 options were issued outside of
the Plan at a weighted average exercise price of $1.62.
The weighted average fair value of options granted during 2003 and 2002:
2003 2002 2001
--------- --------- --------
Exercise price equals market price $ 2.49 $ 1.75 $ 1.53
Exercise price is less than market price 4.07 - 2.20
Exercise price is more than market price 2.42 - -
Additional information regarding options outstanding as of December 31,
2003 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted Average
Remaining
Range of Outstanding at Contractual Life Weighted Average Number Weighted Average
Exercise Prices December 31, 2003 (Yrs.) Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------
$6.01 - 12.50 510,000 9.5 $10.19 10,000 $7.00
$5.01 - 6.00 418,333 7.7 $5.38 225,833 $5.70
$4.01 - 5.00 95,000 8.3 $4.57 51,875 $4.55
$3.01 - 4.00 581,250 8.1 $3.57 290,000 $3.60
$2.01 - 3.00 1,772,500 8.7 $2.40 1,095,000 $2.37
$1.01 - 2.00 1,050,250 7.0 $1.50 1,078,750 $1.49
$0.25 - 1.00 525,000 4.4 $0.66 525,000 $0.66
------------------ --------------
4,952,333 7.8 $3.26 3,276,458 $2.19
================== ==============
At December 31, 2003, 415,417 options were available for future grants
under the Plan.
Diluted net loss per share
Diluted net loss per share does not include the effect of the following
potential Common Shares at December 31,
2003 2002 2001
--------- --------- ---------
Shares issueable under stock options 5,102,333 5,560,833 4,624,500
Shares issueable pursuant to warrants
to purchase common shares 1,297,626 531,250 2,588,512
Shares of convertible notes and accrued
interest on an "as if converted" basis 2,376,000 3,425,603 3,462,035
The weighted average exercise price of stock options outstanding was
$3.26, $3.17 and $3.20 as of December 31, 2003, 2002, and 2001 respectively. The
weighted average exercise price of warrants was $2.92, $3.40 and $3.37 per share
as of December 31, 2003, 2002 and 2001, respectively.
SPATIALIGHT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001(Continued)
7. SEGMENT INFORMATION
The Company's chief operating decision-makers are the Acting
Chief Executive Officer and Chief Financial Officer. The chief operating
decision-makers review only financial information prepared on a basis
substantially consistent with the accompanying financial statements of
operations. Therefore, the Company has determined that it operates in a single
business segment. All assets of the Company are located at its facilities in the
United States except for approximately $673,000 of inventory components held for
production by Fuji Photo Optical Co. Ltd. at its facilities in Japan, and
$141,000 of inventory in the Company's Hong Kong warehouse. The Company's
revenue in 2003 was derived from the sale of its microdisplay products to
customers located in China, with 51% and 34% of the Company's revenue derived
from two customers for the year ended December 31, 2003. Such customers made up
50% and 49%, respectively, of the accounts receivable balance at December 31,
2003.
8. QUARTERLY RESULTS (UNAUDITED)
Summarized unaudited results of operations for each quarter of the years ended
December 31, 2003 and December 31, 2002
Fiscal Year Ended First Quarter Second Quarter Third Quarter Fourth Quarter
December 31, 2003 ------------- -------------- ------------- --------------
Revenue $ - $ - $ 82,152 $ 139,100
Gross Profit (loss) $ - $ (100,690) $ 8,277 $ (394,655)
Net Loss $ 1,544,539 $ 3,329,395 $1,824,942 $ 2,817,501
Basic and Diluted Loss per share
$ 0.06 $ 0.13 $ 0.06 $ 0.09
Fiscal Year Ended
December 31, 2002
Gross Profit (loss) $ - $ - $ - $ (286,000)
Net Loss $ 2,103,170 1,803,116 $2,232,198 $ 2,889,429
Basic and Diluted Loss per share
$ 0.09 0.07 $ 0.09 $ 0.12
9. VALUATION ACCOUNTS
Deductions -
Balance at Additions - and Writeoffs Balance at
Beginning of Charged to Charged to End of
Period Expense Reserves Period
--------- -------- ------- -------
Year ended December 31, 2003
Inventory allowance 286,000 311,000 387,000 210,000
Year ended December 31, 2002
Inventory allowance - 286,000 - 286,000
10. SUBSEQUENT EVENTS
Resignation and Replacement of Director
In February 2004, SpatiaLight's Board of Directors accepted Steven F.
Tripp's resignation as a director and chairman of the audit committee and the
Board appointed Robert C. Munro as a director of the Company to replace Mr.
Tripp. Mr. Munro will serve as a director and chairman of the audit committee
for the current term of the Board and intends to stand for election at the next
annual meeting of shareholders. The Company granted Mr. Munro 25,000 stock
options for services as a director.
Purchase Order Agreement
In March 2004, SpatiaLight signed a purchase order agreement with SVA
Information Industry Co., Ltd. (SVA), a Chinese OEM with which the Company had
an agreement to test prototypes of its microdisplay products, for the purchase
of 2,205 display units by SVA. The purchase order provides for initial
integration, certification and product introduction phases followed by
deliveries of display units for commercial sale purposes. Pursuant to the terms
of the purchase order, the obligations of SVA will be backed by letters of
credit in SpatiaLight's favor. The purchase order is cancelable by SVA and is
subject to other customary terms and conditions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Quarterly and annual evaluation of the Company's Disclosure Controls and
Internal Controls. As of December 31, 2003, we evaluated the effectiveness of
the design and operation of our "disclosure controls and procedures" (Disclosure
Controls), and our "internal controls and procedures for financial reporting"
(Internal Controls). This evaluation (the Controls Evaluation) was done under
the supervision and with the participation of our principal executive officer
(CEO) and principal financial officer (CFO).
Limitations on the Effectiveness of Controls. Our CEO and CFO do not expect that
our Disclosure Controls or our internal control over financial reporting will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. We have only had limited
revenue derived from the sale of our microdisplay products in the current
reporting period. While the Controls Evaluation has accounted for such limited
sales and revenue, new or additional controls may or may not be required once we
begin selling our microdisplay products in increased volume in the ordinary
course of business. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or honest
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more persons, or by management override of
the controls. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, specific controls may or may not become
inadequate (e.g., when we commence to sell our products in increased volume in
the ordinary course of business) because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. During 2004, we were
advised by our independent public accountants of a "reportable condition" in our
system of Internal Controls pertaining to consistency of procedures and
documentation applied to certain personnel-related expenditures. Management of
the Company is currently addressing this condition through its ongoing
evaluation of Internal Controls.
Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded
that, subject to the limitations mentioned in Limitations on Effectiveness of
Controls above, our Disclosure Controls are effective to ensure that material
information relating to the Company is made known to the CEO and CFO,
particularly during the period when our periodic reports are being prepared.
There have been no significant changes in the Company's internal control over
financial reporting that occurred during the quarter covered by this report that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION(S)
---- --- -----------
Robert A. Olins 47 Director, Acting Chief Executive Officer
Timothy V. Descamps 51 Chief Financial Officer, Principal Financial Officer
David F. Hakala 52 Chief Operating Officer
Theodore H. Banzhaf 39 Executive Vice President of Strategic Planning
Lawrence J. Matteson 64 Director
Claude Piaget 62 Director
Robert C. Munro 76 Director
Steven F. Tripp 35 Director*
- -------------------------
* In February 2004, SpatiaLight's Board of Directors accepted Steven F.
Tripp's resignation as a director and chairman of the audit committee and
the Board appointed Robert C. Munro as a director of the Company to
replace Mr. Tripp.
All Directors serve for terms of one year and until their
successors are duly elected.
Theodore H. Banzhaf, Executive Vice President of Strategic
Planning, has an employment agreement, which is in effect until July 7, 2005.
ROBERT A. OLINS, Director since February 1998, Acting Chief
Executive Officer, Secretary and Treasurer since June 2000. Mr. Olins has served
as President of Argyle Capital Management Corporation during the past nineteen
years. Argyle Capital Management Corporation is a private investment advisory
company.
TIMOTHY V. DESCAMPS, Chief Financial Officer since July 2003.
From 2002, Mr. Descamps has been a consultant with David Powell, Inc, a human
resource and financial consulting firm. From 1999 to 2002, Mr. Descamps served
as Chief Financial Officer and Chief Operating Officer of Lumedx Corp. During
1999, Mr. Descamps was a consultant for David Powell, Inc. Mr. Descamps has also
previously served as Chief Financial Officer for several other companies. He
began his career with PricewaterhouseCoopers. Mr. Descamps received a Bachelor
of Science in management from Northeastern University in Boston, Massachusetts.
DAVID F. HAKALA, Chief Operating Officer since September 2002.
During the course of his career, Dr. Hakala has been directly responsible for
the manufacturing startup and ramp-up of numerous products, and their associated
manufacturing facilities, including several models of HDTV and of HDTV-ready
televisions, the DTC-100 HD TV/DBS decoder box, the decoder box for the DirecTV
DBS satellite system as well as 31" and 35" Very Large Screen (VLS) direct view
CRTs. Prior to joining SpatiaLight, from 1994 to 2001, Dr. Hakala served in
various senior management positions with Thomson Multimedia, including Vice
President of Manufacturing Operations, and most recently as Vice President,
Product Development, Americas, in which he was responsible for the design and
development of television and video systems including digital television with
integrated HDTV decoders, projection systems and other advanced display systems,
including the Thomson RCA L50000 LCoS project.
THEODORE H. BANZHAF, Executive Vice President of Strategic
Planning, and President and CEO of SpatiaLight Technologies, Inc., a wholly
owned subsidiary of SpatiaLight, Inc., since July 2003. Before joining
SpatiaLight, Mr. Banzhaf worked in the institutional equities groups as a Senior
Vice President at C. E. Unterberg, Towbin, an investment bank, from 2002 to 2003
and as a Senior Vice President at Friedman, Billings Ramsey, an investment bank,
in 2002. Mr. Banzhaf served as a Managing Director and Managing Member of
Fulcrum Global Partners, a hedge fund, from 2000 to 2002. Mr. Banzhaf was a
Senior Vice
President at Raymond James & Associates in the capital markets group from
1995-2000. Mr. Banzhaf received an MBA from Southern Methodist University in
Dallas, Texas, and a Bachelor of Arts from Miami University in Oxford, Ohio.
LAWRENCE J. MATTESON, Chairman of the Board since April 2001, has
served as Director since 1991, and previously served as the Chairman of the
Board from 1995 through 1997. He has served as an executive professor of
business policy at the William E. Simon Graduate School of Business
Administration, University of Rochester since 1992. Mr. Matteson was Senior Vice
President and General Manager, Electronic Imaging for Kodak until December 1991.
Mr. Matteson began his career with Kodak in 1965 as a research engineer and
worked at Kodak in various positions continuously from that date until December
1991. He holds degrees in engineering and an MBA from the University Of
Rochester Graduate School Of Business.
CLAUDE PIAGET, Director since June 2001, served as Chief
Executive Officer and Senior Vice President, International Relations of Digital
Video Broadcasting, a global consortium involved in the promotion of unified
worldwide standards for digital television. Dr. Piaget's broad industry
experience includes several executive positions with Philips Electronics,
including market development manager from 1995 to 1997, company strategy expert
from 1994 to 1995 and development manager from 1986 to 1994. Previously he was
involved in studying semiconductor physics, components, devices and systems. He
has participated in the development of information and communication
technologies and consortiums in Europe, Asia Pacific and Latin America. He holds
a Masters degree in Physics Engineering and a Ph.D. in Physics from University
of Paris.
ROBERT C. MUNRO, Director since February 2004, has served as a
private business consultant in the finance, banking and retail industries in the
United States, the United Kingdom and throughout Europe since 1985. He currently
sits on the board of directors of UNET 2 Corporation, a privately held
electronic publishing company based in New York. Mr. Munro is a Fellow of the
Institute of Directors in the United Kingdom. He has extensive global business
experience in the banking, real estate and shipping industries. Mr. Munro
received a master's degree from Edinburgh University in Scotland.
STEVEN F. TRIPP, Director from June 1999 to February 2004, has
been President and Chief Executive Officer of KnoWare, Inc. since 1998. KnoWare
is a privately held software development company focused on internet based check
image and check fraud detection software for financial institutions. Mr. Tripp
was Owner and Vice President of Document Solutions from 1990 to 1998. Mr. Tripp
has worked in the software development industry for 11 years with a primary
focus on digital imaging.
Audit Committee Financial Expert
The Company does not currently have a financial expert serving on
the audit committee of the Board of Directors. We are actively searching for an
additional director who qualifies as a financial expert under applicable
Securities and Exchange Commission rules and regulations to serve on our audit
committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors, executive officers and persons who beneficially own more
than 10% of our Common Stock to file with the SEC initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company. Executive officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish us with copies of all Section 16(a)
reports they file. To our knowledge, based solely on a review of the copies of
such reports furnished to us for fiscal 2003, the Company believes that all
executive officers, directors and greater than 10% shareholders filed the
required Section 16(a) reports in a timely manner.
CODE OF ETHICS
We are in the process of preparing a written code of business
conduct and ethics, which will apply to our principal executive officer,
principal financial officer and principal accounting officer. We expect to
formally adopt such code in the near future. Executive officers at SpatiaLight
are committed to conducting SpatiaLight's business in accordance with all
applicable laws, rules and regulations and the highest ethical standards, and
all employees, directors and consultants we retain are expected to do the same.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the
Company for the fiscal year ended December 31, 2001 to 2003, to the Company's
Chief Executive Officer and other executive officers of the Company who received
total salary and bonuses in excess of $100,000 during fiscal 2003.
SUMMARY COMPENSATION TABLE
ALL OTHER
SECURITIES UNDERLYING COMPENSATION
NAME & PRINCIPAL POSITION YEAR SALARY($) OPTIONS/SARS (#) ($)
Robert A. Olins, Acting CEO, Treasurer Secretary 2003 $ - 500,000 $ - (6)
2002 $ - 500,000 $ -
2001 $ - 1,275,000 $ -
Timothy V. Descamps, Chief Financial Officer 2003 $ 43,838 (1) 0 $ -
2002 N/A 0 $ -
2001 N/A 0 $ -
David F. Hakala, Chief Operating Officer 2003 $240,000 0 $ -
2002 $ 68,308 (2) 360,000 (3) $ -
2001 N/A N/A $ -
Theodore H. Banzhaf 2003 $103,385 (4) 800,000 (5) $ -
2002 N/A N/A $ -
2001 N/A N/A $ -
(1) Paid to consulting firm, which employs Mr. Descamps. Mr. Descamps commenced
serving as CFO in capacity as a consultant on July 1, 2003.
(2) Employment commenced on September 3, 2002.
(3) This stock option granted September 2002 vests over a three-year period.
(4) Employment commenced on July 7, 2003.
(5) This stock option granted pursuant to the Time Accelerated Restricted Stock
Award Paln ("TARSAP") dated as of July 7, 2003, between Mr. Banzhaf and
SpatiaLight, Inc. The TARSAP granted to Mr. Banzhaf Options to purchase
800,000 Common Shares, in the aggregate, of SpatiaLight, Inc. in the
following manner: (i) 125,000 Options which vested as of July 7, 2003 and
which Options expire on July 7, 2006 (exercise price of $2.55) and (ii)
675,000 Options which vest upon the achievement of certain performance tests
within two years after the date of the grant and which expire three years
after such Options vest and become exercisable (175,000 of such Options have
an exercise price of $5.00, 225,000 of such Options have an exercise price
of $7.50 and 275,000 of such Options have an exercise price of $12.50).
(6) As disclosed in Item 13 herein, under the heading "May 2003 Financing," the
Company's board of directors unanimously (except for Mr. Olins, who did not
vote on this matter) approved reimbursements for certain expenses that Mr.
Olins incurred and a finders fee that he was obligated to pay in connection
with that financing transaction. Management of the Company does not believe
that such reimbursements constitute compensation to Mr. Olins.
STOCK OPTION GRANTS
The following table sets forth certain information for the year ended December
31, 2003 with respect to stock options granted to the individuals named in the
Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e) (f) (g)
NUMBER OF SHARES
UNDERLYING % OF TOTAL
OPTIONS/SARS OPTIONS/SARS POTENTIAL REALIZABLE VALUE
GRANTED (#) GRANED TO EXERCISE OR BASE PRICE AT ASSUMED ANNUAL RATES
EMPLOYEES IN ($/SH) EXPIRATION OF STOCK PRICE APPRECIATION
NAME FISCAL YEAR DATE FOR OPTION TERM
- ----------------------------------------------------------------------------------------------------------------------------------
5%($) 10%($)
Robert A. Olins 300,000 20% $2.49 01/01/13 $469,784 $1,190,526
200,000 13% $2.10 05/23/13 $264,136 $669,372
David F. Hakala 0 - - - - -
Theodore H. Banzhaf 125,000 8% $2.55 07/07/05 $200,460 $508,005
175,000 11% $5.00 01/27/07 $ - $282,458
225,000 15% $7.50 - $ - $ -
275,000 18% $12.50 - $ - $ -
OPTION EXERCISES AND FISCAL 2003 YEAR END VALUES
The following table sets forth information with respect to
options to purchase Common Shares granted to the Corporation's named executive
officers including: (i) the number of Common Shares purchased upon exercise of
options in the fiscal year ended December 31, 2003; (ii) the net value realized
upon such exercise; (iii) the number of unexercised options outstanding at
December 31, 2003; and (iv) the value of such unexercised options at December
31, 2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
DECEMBER 31, 2003 OPTION VALUES
VALUE OF UNEXERCISED IN-
THE-MONEY OPTIONS AT
SHARES NUMBER OF UNEXERCISED DEC 31, 2003
ACQUIRED ON OPTIONS A DEC. 31, 2003 (#) EXERCISABLE /
NAME EXERCISE (#) VALUE REALIZED ($) EXERCISABLE / UNEXERCISABLE UNEXERCISABLE
---- ------------ ------------------ ---------------------------- ------------------------
Robert A. Olins 0 $0 2,275,000/0 $7,043,500/$0
David F. Hakala 0 $0 120,000/240,000 $325,200/$650,400
Theodore H. Banzhaf 0 $0 125,000/675,000 $352,500/$64,750
COMPENSATION OF DIRECTORS
In fiscal 2003, all Directors waived their non-management
Director's fee of $500 per board meeting. In fiscal 2003, 500,000 options were
granted to Robert A. Olins in consideration for services rendered as Acting
Chief Executive Officer, Secretary, Treasurer and Director during calendar year
2003. In fiscal 2003, 25,000 options were granted to Steven F. Tripp for his
services as a director. In addition, Mr. Tripp was granted 25,000 options in
consideration for chairing the Audit Committee. In fiscal 2003, 25,000 options
were granted to Claude Piaget for his services as a director. In fiscal 2003,
25,000 options were granted to Lawrence Matteson for his services as a director.
EMPLOYMENT CONTRACTS
The Company is party to an employment agreement dated July 7, 2003, with
Theodore H. Banzhaf to serve as Executive Vice President of Strategic Planning,
which is in effect through July 7, 2005. As currently in effect, the agreement
provides for an annual salary of $360,000. The Company agreed to grant Mr.
Banzhaf equity incentive compensation in the form of Stock Options to purchase
an aggregate of 800,000 Common Shares, $.01 par value, of the Company pursuant
to the provisions of a Time Accelerated Restricted Stock Award Agreement
(TARSAP). The options under this plan are not granted under the Company's 1999
Stock Option Plan or any other stock option plan of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board recommending
compensation for executive officers during 2003 consisted of Steven F. Tripp and
Robert A. Olins.
Mr. Olins served as the Acting CEO, Secretary and Treasurer of the Company
in 2003.
Argyle Capital Management Corporation, which is wholly owned by Mr. Olins,
entered into various transactions with the Company in 1998. Mr. Olins was one of
several private investors that entered into an equity financing transaction with
the Company in May 2003. For more information regarding these transactions,
refer to "Certain Relationships and Related Transactions" in Item 13 herein.
In 1999, a group of investors which includes the Steven F. Tripp Trust
purchased convertible notes of the Corporation and was issued warrants to
purchase Common Shares. Mr. Tripp is the beneficiary of the Steven F. Tripp
Trust but he is not the trustee. For more information regarding these
transactions, refer to the section captioned "Certain Relationships and Related
Transactions" in Item 13 herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock, as of March 16, 2004, based
upon a total of 34,495,062 shares outstanding, (i) by each person who is known
by the Company to own beneficially more than 5% of the Company's capital stock,
(ii) by each of the executive officers mentioned in the table under "Executive
Compensation" and by each of the Company's directors, and (iii) by all officers
and directors as a group.
AMOUNT AND NATURE OF
NAME AND ADDRESS BENEFICIAL OWNER BENEFICIAL OWNER PERCENTEOF CLASS
Argyle Capital Management Corporation 7,689,461 (1) 19.3%
Robert A. Olins
Five Hamilton Landing, Suite 100
Novato, CA 94949
Estate of Isidore A. Becker Harvey Krauss, Esq., 3,725,846 (2) 10.4%
Snow Becker Krauss P.C.
605 Third Avenue
New York, NY 10158-0125
Lawrence J. Matteson 275,000 (3) *
Five Hamilton Landing, Suite 100
Novato, CA 94949
Claude Piaget 125,000 (4) *
Five Hamilton Landing, Suite 100
Novato, CA 94949
Robert C. Munro 25,000 (5) *
Five Hamilton Landing, Suite 100
Novato, CA 94949
Timothy Descamps
Five Hamilton Landing, Suite 100
Novato, CA 94949
David F. Hakala 360,000 (6) *
Five Hamilton Landing, Suite 100
Novato, CA 94949
Theodore H. Banzhaf 800,000 (7) 2.3%
Five Hamilton La2.3%g, Suite 100
Novato, CA 94949
Steven F. Tripp (8) 284,000 (9) *
Five Hamilton Landing, Suite 100
Novato, CA 94949
All directors and officers as a group (7 persons) 9,274,461 22.4%
*Less than 1%
(1) Includes 2,376,000 shares beneficially owned subject to conversion of
principal and interest of convertible notes held by Argyle Capital
Management Corporation, of which Mr. Olins is President and over which Mr.
Olins exercises voting control. Also includes 2,275,000 shares subject to
outstanding stock options held by Mr. Olins that are exercisable as of
March 16, 2004, and 500,000 shares subject to options not exercisable
within 60 days.
(2) Based solely upon information filed in a Schedule 13G by named
shareholder.
(3) Includes 237,500 shares subject to options exercisable as of March 16,
2004 and 37,500 shares subject to options not exercisable within 60 days.
(4) Includes 87,500 shares subject to options exercisable as of March 16, 2004
and 37,500 shares subject to options not exercisable within 60 days.
(5) Includes 25,000 shares subject to options not exercisable as of March 16,
2004.
(6) Includes 120,000 shares subject to outstanding stock options held by Dr.
Hakala that are exercisable as of March 16, 2004 and 240,000 shares
subject to options not exercisable within 60 days.
(7) Includes 300,000 shares subject to options exercisable as of March 16,
2004 and 500,000 shares subject to options not exercisable within 60 days.
(8) In February 2004, SpatiaLight's Board of Directors accepted Steven F.
Tripp's resignation as a director and chairman of the audit committee and
the Board appointed Robert C. Munro as a director of the Company to
replace Mr. Tripp. Therefore, Mr. Tripp is not included in "All directors
and officers as a group" in this table.
(9) Includes 200,000 shares subject to outstanding stock options held by Mr.
Tripp that are exercisable as of March 16, 2004.
CHANGES IN CONTROL
The Company pledged substantially all of its assets to Argyle Capital
Management Corporation, a company owned and controlled by Robert A. Olins,
Acting Chief Executive Officer, Secretary, Treasurer and a director of the
Company, in a transaction which is more fully described under the heading
"Argyle Notes" in Item 13 herein. This pledge of assets could result in a change
of control of the Company in the future.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Argyle Notes:
In 1998, the Company received $1,188,000 in cash in exchange for notes in
that amount to Argyle Capital Management Corporation (Argyle), a company owned
and controlled by Robert A. Olins, Acting Chief Executive Officer, Secretary,
Treasurer, and a Director of the Company. The notes accrue interest at a
contractual rate of 6% per annum, and are secured by substantially all the
assets of the Company. Both principal and interest are convertible into the
Company's Common Shares at $0.50 per share. On May 23, 2001, the due date of the
notes was extended until December 31, 2002. On the extension date, the
beneficial conversion effect representing the excess aggregate value of the
Common Shares receivable upon conversion of the notes based on the then current
market price of $1.90 per share, over the aggregate conversion price for such
Common Shares (limited to the original proceeds of $1,188,000), was recorded as
additional paid-in capital. The resulting $1,188,000 discount to the debt
arising from the beneficial conversion feature was originally being amortized
through December 31, 2002. The effective interest rate for financial statement
purposes due to this discount differs from the actual contractual interest
received or receivable in cash or shares by Argyle. This discount, along with
the contractual 6% interest rate, resulted in a new effective interest rate of
72% per annum as of the May 23, 2001 extension date when compared to the
outstanding principal balances. The effective rate prior to extension had been
the 6% per annum contractual rate.
On September 20, 2002, the due date was extended until March 31, 2004.
Accordingly, the remaining unamortized discount at the extension date of
$198,000 was being amortized through March 31, 2004, resulting in a new
effective interest rate of 17% per annum when compared to the outstanding
principle balances. On December 31, 2003, the due date was extended until June
30, 2005, accordingly, the remaining unamortized discount of $33,000 at the
extension date is being amortized through June 30, 2005, resulting in a new
effective interest rate of 8% per annum when compared to the outstanding
principle balances. The notes have been reclassified as long term.
In 2002, the Company issued 178,992 Common Shares upon the conversion of
interest. Of these shares, 36,432 were issued upon the conversion of accrued
interest of $128,243 for the fourth quarter of 2001. The remaining 142,560
shares were issued in exchange for interest of $563,157 which includes
additional stock-based interest expense of $491,877 recorded due to the
beneficial conversion feature of the accrued interest, based on average prices
during the periods, over the conversion price for such shares. On January 3,
2003, the Company issued 142,360 Common Shares upon the conversion of prepaid
interest of 354,477. Prepaid interest was computed using the closing price of
the Common Shares on December 31, 2003 additional stock-based interest expense
of approximately $283,200 was recorded due to the beneficial conversion feature
of the prepaid interest, representing the excess of the Common Shares received
upon conversion of the prepaid interest. At December 31, 2003, the carrying
value of the Argyle notes totals $1,155,000, which includes the $1,188,000
principal balance net of unamortized discount of $33,000.
Alabama Group Notes:
In December 1999, the Company received $1,437,500 in cash and issued notes
in that amount to the Alabama Group. The notes accrue interest at a contractual
rate of 6% per annum, and were secured by
substantially all the assets of the Company. This portion of the notes was
convertible into shares of the Company's common stock at $3.50 per share. Upon
issuance of the notes, the Company also issued warrants to purchase 821,429
shares of common stock. The warrants were exercised on June 28, 2002 at $3.50
per share. The warrants were valued using the Black-Scholes option-pricing model
and the following assumptions: contractual life 2.5 years; volatility 114%;
risk-free interest rate 6%; and dividend yield of $0. The total cash received
from the issuance of this tranche of notes of $1,437,500 was less than the
calculated value associated with the warrants. Therefore, the value assigned to
the warrants was limited to the original proceeds of $1,437,500, and was
recorded as a discount on the notes. The effective interest rate for financial
statement purposes due to this discount differs from the actual contractual
interest received or receivable in cash by the holders of the Alabama Group
Notes. This discount, along with the contractual 6% per annum interest rate,
resulted in an effective interest rate of 70% per annum when compared to the
outstanding principal balances.
The proceeds of the second tranche of notes, also totaling $1,437,500 and
carrying interest at 6% per annum, were originally to be received by the Company
upon the achievement of certain performance targets. The proceeds were received
in November 2000, prior to reaching those targets, in exchange for reducing the
conversion price of the notes to the then-market price of $2.25 per share. No
warrants were issued with the second tranche of notes. The remaining unamortized
discount for the first tranche, along with the contractual interest on both
tranches, resulted in a combined effective interest rate of 87% per annum as of
the issuance date for the second tranche when compared to the outstanding
principal balances.
On June 15, 2001 the due date of both tranches was extended until December
31, 2002. On the extension date, the excess $255,000 aggregate value of the
Common Shares receivable upon conversion of the notes based on the then current
market price of $2.65 per share, over the aggregate conversion price for the
notes convertible at $2.25 per share, was recorded as additional paid-in
capital. The resulting $255,000 discount to the debt, along with the remaining
unamortized discount for the first tranche, was being amortized through December
31, 2002. The effective interest rate for financial statement purposes due to
these discounts differs from the actual contractual interest received or
receivable by the holders of the Alabama Group Notes. These discounts, along
with the contractual 6% per annum interest rate, resulted in a new effective
interest rate upon extension of 25% per annum as of the extension date when
compared to the outstanding principal balances.
On September 20, 2002, the due date of both tranches was extended until
March 31, 2004. On the extension date, the excess $58,000 aggregate value of the
Common Shares receivable upon conversion of the notes based on the then current
market price of $2.34 per share over the aggregate conversion price for the
notes convertible at $2.25 per share was recorded as additional paid-in-capital.
Accordingly, the remaining unamortized discount at the extension date of
$194,195 including the new discount of $58,000 is being amortized through March
31, 2004 resulting in a new effective interest rate of 10.5% per annum when
compared with the outstanding principal balances.
During 2003, the Company repaid principal balance of $100,000. In October
and November 2003, pursuant to the terms of the notes, all of the remaining
investors included in the Alabama Group converted the $2,775,000 principal
amount of the notes plus accrued interest of $565,770 in exchange for the
issuance by the Company of a total of 1,344,827 Common Shares.
May 2003 Financing:
In May 2003, the Company issued 2,796,325 Common Shares at $1.84 per share
and 699,080 fully vested warrants with a strike price of $2.65 in exchange for
net proceeds of $4,974,935. Of this amount 1,357,441 shares and 339,360 warrants
were purchased by Robert A. Olins, Acting Chief Executive Officer and a
director. Consequently, the Company recognized non-cash expense of $958,913
related to the deemed beneficial pricing Robert A. Olins received; the expense
consists of two components. First, an expense of $538,106, representing the fair
value of the warrant issued to Robert A. Olins was recognized in stock-based
general and administrative expense in the second quarter, using a Black-Scholes
option pricing model and the following assumptions: stock price $2.15,
historical volatility 105%, risk free rate of 2.27%, dividend rate of 0, and a
contractual term of five years. Second, since the market price on the day of
closing of $2.15 was higher than the issuance price of $1.84 a charge of
$420,807 was recognized in stock-based general and administrative expenses for
the 1,357,441 shares purchased by Robert A. Olins.
In order to complete this stock financing, the outside investors required
significant participation from Robert A. Olins. To achieve this, Mr. Olins
borrowed funds to purchase his share of the stock financing. The Company's board
of directors unanimously (except for Mr. Olins, who did not vote on this matter)
approved reimbursements for certain expenses incurred in connection with the
personal loan to Mr. Olins made by an unaffiliated bank, and $300,000, payable
through the issuance of 130,435 Common Shares, for a finder's fee that Mr. Olins
was obligated to pay to an unaffiliated third party. Another shareholder of the
Company, to whom the Company subsequently issued 130,435 Shares, undertook Mr.
Olins' obligations to the finder. The $376,957 fair value of the 130,435 shares
is included in stock-based general and administrative expense.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following represents the fees billed to SpatiaLight, Inc. for the last
two fiscal years by BDO Seidman, LLP, the Company's principal public accountant
for 2003 and 2002.
SpatiaLight, Inc.
2003 2002
-------- --------
Audit Fees (1) $166,500 $158,000
Audit-Related Fees (2) 12,000 --
Tax Fees 17,000 8,250
All Other Fees N/A N/A
(1) Includes services performed in connection with annual audits, quarterly
reviews, and review of registration statements.
(2) Includes accounting consultations.
SpatiaLight's Audit Committee adopted a policy for engaging its independent
auditor, BDO Seidman, LLP, for audit and non-audit services that includes
requirements for the Audit Committee to pre-approve audit and non-audit services
provided by the independent auditor. All of the audit services provided by BDO
Seidman, LLP in the fiscal year 2003 (described in the footnotes to the table
above) and related fees were approved in advance by SpatiaLight's Audit
Committee.
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
1. CONSOLIDATED FINANCIAL STATEMENTS
The following documents are filed as part of this Report under Item 8
herein:
(a) Financial Statements
Page
Report of Independent Ceritified Public Accountants................................
Balance Sheets at December 31, 2003 and 2002.......................................
Statement of Operations for years ended December 31, 2003, 2002 and 2001...........
Statements of Stockholders' Equity (Deficit) for years ended
December 31, 2003, 2002 and 2001.................................................
Statements of Cash Flows for years ended December 31, 2003 and 2002................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................................
Quarterly Results (unaudited)......................................................
(b) Consolidated Financial Statement Schedules
All schedules are omitted because the required information is
inapplicable or the information is presented in the Consolidated Financial
Statements and/or the Notes thereto in Item 8 herein.
2. EXHIBITS
EXHIBIT # DESCRIPTION
--------- -----------
3.1 Certificate of Incorporation, as amended (Amendments to document
filed as Exhibit 3.1 to the Company's Amendment No. 1 to Form S-3
Registration Statement filed November 18, 1999).
3.2 Bylaws (incorporated by reference to Exhibit B to the Company's
Form 8-K filed February 7, 1995).
10.1 1999 Stock Option Plan (incorporated by reference to Exhibit 10.4
to the Company's Amendment No. 1 to Form S-3 Registration
Statement filed on November 18, 1999).
10.2 Employment Agreement between the Company and Theodore H. Banzhaf
dated July 7, 2003 (incorporated by reference to Exhibit 10.3 to
the Company's Form 10Q filed on August 18, 2003). Time Accelerated
Restricted Stock Award Plan (TARSAP) between SpatiaLight, Inc. and
Theodore Banzhaf, dated as of July 7, 2003
10.3 (incorporated by reference to Exhibit 10.4 to the Company's Form
10Q/A filed on February 13, 2004). Consulting Agreement between
the Company and David Powell for consulting services provided to
the Company by Timothy V. Descamps. Amendment to Lease Agreement
between the Company and Hamilton Marin, LLC, dated May 17, 2002
(Lease Agreement filed as exhibit 10.18 in
10.4 Form 10-QSB filed on August 14, 2002).
10.5 Amendment to Lease Agreement between the Company and Hamilton
Marin, LLC, dated May 17, 2002 (Lease Agreement filed as exhibit
10.18 in Form 10-QSB filed on August 14, 2002).
16.1 Letter from KPMG LLP pursuant to Item 304(a)(3) of Regulation S-B
(incorporated by reference to Exhibit 1 of the Company's Form 8-K
filed April 9, 2001).
21.1 Principal subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
31.1 Certification of Acting Chief Executive Officer Pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
amended. Certification of Chief Financial Officer and Principal
Accounting Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as amended.
31.2 Certification of Acting Chief Executive Officer and Chief
Financial Officer and Principal Accounting Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Acting Chief Executive Officer and Chief
Financial Officer and Principal Accounting Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
3. REPORTS ON FORM 8-K.
The Company has not filed any reports on Form 8-K during the last quarter
of the fiscal year ended December 31, 2003.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March 2004.
SPATIALIGHT, INC.
By: /s/ ROBERT A. OLINS
--------------------------------
Robert A. Olins
Acting Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/LAWRENCE J. MATTESON Director March 30, 2004
- -----------------------
Lawrence J. Matteson
/s/ROBERT A. OLINS Director, Acting Chief Executive March 30, 2004
- ----------------------- Officer
Robert A. Olins
/s/CLAUDE PIAGET Director March 30, 2004
- -----------------------
Claude Piaget
/s/ROBERT C. MUNRO Director March 30, 2004
- -----------------------
Robert C. Munro
/s/TIMOTHY V. DESCAMPS Chief Financial Officer and March 30, 2004
- ----------------------- Principal Financial and
Timothy V. Descamps Accounting Officer