Item 1. BUSINESS.
General
The Company is in the business of identifying, developing, patenting,
supporting, manufacturing and marketing technical innovations in the electronic
display and information industry. The Company was formed to capitalize on, and
generate revenues and profits primarily from a) the manufacture and sale of
products based on its technology and b) the licensing of its proprietary
patents, inventions, systems and technologies to manufacturers. The Company's
first commercial video production system, its Digital Home Theater(TM) ("DHT"),
is currently in production. The DHT is a modular, large screen digital
entertainment system that can be used as either a 60-inch rear projection
television, a front projector capable of casting an image up to 20 feet diagonal
in size, or as an SVGA-compatible computer monitor. The Company believes that
the DHT uniquely positions the Company in the market because the DHT represents
the convergence of front projectors, rear projection televisions, and computer
monitors. The DHT incorporates a lightweight, removable projector that utilizes
digital technology developed by Texas Instruments called Digital Light
Processing ("DLP") in concert with the Company's proprietary dual-use front/rear
projection system.
Digital technology is beginning to gain prominence in the video display
industry, and has started to replace competing technologies, such as cathode ray
tube ("CRT") and liquid crystal display ("LCD"). DLP is currently the leading
new digital video technology, and Texas Instruments has demonstrated its
commitment to this emerging technology by continuing to upgrade and improve its
proprietary DLP technology. Texas Instruments' DLP system for projection display
is based on its Digital Mirror Device ("DMD") DMD microchip. As a consequence,
DLP, an innovative yet proven technology, is increasingly being adopted by
numerous projection and consumer electronic companies.
Video Products
The Company's technologies utilize both the new Texas Instruments Digital
Light Processing (DLP) light engines and liquid crystal displays (LCDs) as light
valves and high brightness light sources in concert with the Company's
proprietary electronic and optical processing systems. The new generation
technologies differ significantly from conventional cathode ray tube ("CRT")
technology, which has been used for the past fifty years in virtually all
television and video systems. The Company's technologies are capable of
producing giant screen displays that are bright and sharp, have rich color
saturation and high contrast. The Company is the owner of seven (7) United
States patents, covering its technologies, and nine (9) foreign patents around
the world. An additional thirteen (13) patent applications have been filed by
the Company in the United States with respect to the Company's proprietary
technologies. In addition, the Company has also filed forty-seven (47) patent
applications in various foreign countries for improvements to its technologies
and for protection of related technologies.
The Company has formed a non-exclusive strategic corporate alliance and entered
into an OEM Agreement with Texas Instruments with respect to the purchase of the
DMD, which is a component of the DLP that has been developed by Texas
Instruments. The Company has also entered into arrangements with third parties
for the manufacture and production of its video projection systems which
currently include the Projector and the proprietary Digital Home Theater
mechanical and electronics designs. The Company has entered into arrangements
with third parties for the marketing and distribution of its video projection
systems. The Company has also licensed, on a non-exclusive basis, its patented
"depixelization" micro-optics and brightness enhancement technologies, which are
applicable to a wide range of video projection systems, to Matsushita Electric
Industrial Co., a Japanese company that distributes consumer electronic products
in the U.S. under the Panasonic brand name, and to Samsung Electronics Co., a
Korean company that distributes products under the Samsung brand name. These
non-exclusive licenses offer consumer electronics manufacturers the right to use
certain of the Company's patented technologies. The Company is seeking to enter
into similar, non-exclusive patent license agreements for its depixelization and
other technologies with other parties in a variety of markets. In addition to
licensing its technologies for potential uses in the television market, the
Company also intends to offer licenses of its video projection technologies to
commercial and military users. Other potential markets for the Company's
technologies include medical imaging, laptop computers, CAD/CAE workstations,
computer monitor replacement, arcade games, video interactives, home shopping,
video teleconferencing, sports entertainment viewing, education, training and
advertising.
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The Video Display Industry
The video display industry encompasses numerous markets, and the Company
currently competes in three segments: (i) front projection systems, (ii) rear
projection television (big screen TVs) and (iii) computer monitors. Stanford
Resources, Inc., an industry research firm, estimates the revenue of these three
segments at approximately $27.2 billion in 1997. The projection display market,
which comprises primarily the front projection and rear projection television
markets, is expected to increase from 1.4 million units in 1996 to 3.1 million
units in 2002, representing an increase in revenues from $5.8 billion in 1996 to
$10.0 billion in 2002. The consumer television category captured the largest
share of projection display revenues in 1996 at 47.7% while business
applications were second with 30.5%. Education (9.4%), sports and entertainment
(6.2%), military/government (3.3%), and public information (2.6%) composed the
remainder of the projection display market.
Over the last decade, consumer interest in home theater systems and large
screen televisions has increased dramatically, fueled by decreasing equipment
prices and an ever-expanding universe of movies, sporting events and other
programming available via cable television, direct broadcast satellite,
laserdisc, VCRs, and most recently, digital video disc ("DVD"). One of the
fastest growing segments of the video display industry is the market for
direct-view televisions with diagonal screen sizes exceeding 30-inches, and
projection televisions, which have screen sizes exceeding 40-inches. Sales of
30-inch or greater direct view televisions and projection televisions increased
22% and 10%, respectively, in 1996. As screen sizes have increased, image
impairments, such as low resolution, artifacts and noise, have become more
readily apparent. Moreover, the better quality images produced by DVDs, digital
satellite transmission and high-resolution computer monitors have made viewers
more discriminating and have elevated image quality expectations. The Company
believes that this trend will accelerate with the advent of digital high
definition television ("HDTV"). The Federal Communications Commission recently
established standards for HDTV broadcasting in the U.S. and has targeted the
eventual phase-out of analog (NTSC) broadcasting by the year 2006.
Currently, one of the most significant trends in the consumer electronics
industry is that of "convergence," which refers to the merging of traditional
consumer electronics, such as audio, video and personal communications products,
with the digital world of the PC. Advances in microprocessors, the availability
of low cost memory and storage, high quality displays, sophisticated software
and the emergence of the World Wide Web have fueled the growth in multimedia
applications on the PC. In essence, the technologies of home entertainment (the
living room) and home information (the home office) are merging to create a new
product category. The advent of digital television and its convergence with the
PC, combined with the growing demand for home theater systems and projection
televisions, are effecting another convergence, that of the front projection,
projection television and, computer monitor markets. The Company believes that
it is uniquely positioned to capitalize on this convergence because the DHT,
with its front/rear projection and SVGA computer monitor capability, is the
first and currently the only product that addresses these three, heretofore
discrete, markets. These markets combined are expected to increase to $32.5
billion in revenue by 2002.
In 1996, North America represented 74.3%, or 1.18 million units, of the
global projection display market. Europe, Japan and the rest of the world each
account for less than 10% of total unit shipments. The wide gap between North
America and the other regions is caused by the tremendous difference in rear
projection television sales as well as the early adoption of multimedia
presentations in U.S. businesses and educational institutions. North America and
Europe represent 68.1% and 16.9%, respectively, of the total dollar volume of
the global projection display market in 1996, reflecting the relatively low
prices of big screen TVs in the U.S. and a higher-priced product mix in Europe.
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Front Projection
The front projection market, estimated at $2.5 billion in revenue in 1996,
comprises primarily commercial applications, including corporate presentations,
demonstrations and seminars, hotels and conference centers, bars and
restaurants, education and training, and video teleconferencing. To a lesser
extent, front projection displays are used in consumer applications, principally
customized large screen home theater systems. Front projector sales are expected
to increase to $5.8 billion by 2002 due to the rapid growth in the multimedia
business presentation market, as well as the growing popularity of home theater
systems, primarily in the U.S. Front projection systems based on liquid crystal
display ("LCD") technology currently dominate the front projection market with
approximately $1.8 billion in sales in 1996. LCD-based front projectors offer
lower prices, more compact designs, and equal or higher brightness as compared
to projectors based on cathode ray tube ("CRT") technology. As a result,
shipments of front CRT projectors, mostly for home theater applications, are
expected to peak in 1996 at $463 million in sales and decline to $213 million in
2002. New "chip-based" projectors, including those based on Texas Instruments'
digital micromirror device ("DMD") were introduced in 1996. Initially, the
business market has been the major revenue source for chip-based front
projectors. Front chip-based systems are expected to become a major player in
the commercial market due to superior picture performance and declining prices
resulting from significant cost reductions. Stanford Resources estimates that
sales of front chip-based systems will increase to over $900 million by 2002.
Projection Television (Rear Projection)
The rear projection television market, estimated at $3.0 billion in
revenue in 1996, principally consists of consumer big screen televisions. In
spite of all the new projection display technologies that have been developed,
displays based on CRT technology continue to dominate this market. While
projection televisions represent only 3.5% of the unit shipments in the overall
U.S. color television market, they account for over 20% of total revenues, which
were estimated at $8.6 billion in 1996. Growth in this category will be
propelled by lower prices, an increasing desire for bigger screens, rising
demand for replacement units, and the market penetration of digital video disc
("DVD"). Worldwide sales of rear projection televisions are expected to increase
from 975,000 units in 1996 to 1.6 million units in 2002, representing an
increase in market value from $3.0 billion in 1997 to $3.6 billion in 2002.
Developments in LCD and chip-based projectors are expected to dampen the growth
in CRT rear projectors. LCD-based rear projection systems have become successful
in some professional niche applications, and sales are expected to grow to $170
million by 2002. Chip-based systems, including the DMD, were introduced in 1997
and sales are expected to increase significantly as costs decline relative to
CRT-based systems.
Computer Monitors
The computer monitor market has widespread commercial and consumer
applications. The worldwide market for CRT display monitors is estimated at 84.2
million units and nearly $21 billion in revenues in 1997. This market is
estimated to increase to 113.5 million units and approximately $25 billion in
revenues by 2002. The continued growth of the personal computer ("PC") and
workstation market will drive the growth in computer monitors. The Company
expects that the trends toward larger computer screen sizes and enhanced picture
quality for multimedia applications will create demand for the DHT as a computer
monitor. Companies such as Compaq Computer Corp. and Gateway 2000, Inc. have
already introduced big screen PC/TV products, and the Company intends to explore
joint ventures with computer manufacturers to introduce similar PC/TV products
that incorporate the DHT.
CRT Technology
Most existing color televisions up to 35 inch screen size use CRT systems,
the basis of virtually all televisions produced since the 1940s. CRT technology
has certain inherent limitations for production of big screen picture displays,
including size, weight and vacuum. As a practical matter, CRT television is not
manufacturable in sizes in excess of 40 inches.
The cost of producing cathode ray tubes and other aspects of the CRT
technology used for big screen display is high. As a result, CRT-based big
screen television generally is disproportionately more expensive than small
screen size television.
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While some improvements in CRT big screen televisions continue to be made,
the Company's management believes it is unlikely that new CRT-based big screen
televisions will be produced competitive to the advantages of big or giant
screen LCD television technology.
The Company's Technologies
The Company's DMD and LCD projection technologies combine the Company's
patented optical and electronic processing systems with high brightness light
sources. Use of DMDs and LCDs eliminates the cathode ray tube, which in big
screen televisions is large, bulky, heavy and fragile. DMD panels and LCD
semiconductors do not pose the health hazards of CRTs and are smaller, more
compact, lighter and less fragile than cathode ray tubes. In reproducing images
in color, CRTs generate X-ray radiation that may be harmful to persons who view
the images at close range over long periods of time. Further, CRTs generate
electro-magnetic fields of considerable magnitude. The physiological effects of
these fields on persons who view the screens at close range is still under
study. The use of DMDs or LCDs in the Company's projection systems will not
result in the generation of X-rays or intense electro-magnetic fields.
LCD television technology was first developed approximately 19 years ago.
Unlike CRT technology, which is a mature technology that has been used for
approximately the past 50 years in virtually all television and video projection
systems, LCD technology is still being significantly refined and improved.
Management anticipates that LCDs, like other solid-state devices, ultimately
will be made more compact, durable, efficient and inexpensive. Like CRT-based
color televisions, LCD-based color televisions are capable of displaying 525
scanning lines and 330 lines of resolution using standard NTSC broadcast
signals. LCD projection technologies presently contain certain inherent image
quality limitations. The Company's patented technologies are designed to
overcome these limitations and produce an image offering continuous tone
photographic effect enabling substantially increased viewer perception of image
quality when compared with LCD televisions that do not utilize the Company's
depixalization system. The Company believes that its technologies overcome
limitations in current LCDs that might otherwise limit the use of LCDs for
standard NTSC and high definition television ("HDTV") displays and will improve
the ability to display images comparable in quality to those currently produced
by CRT-based projectors. Texas Instruments' DLP system for projection display is
based on its Digital Mirror Device ("DMD") DMD microchip, a highly integrated
semiconductor light switch. A DLP projector combines DMD microchips with digital
signal processing, memory, software, optical components, and an illumination
source to create extremely bright, high resolution (SVGA) display systems.
DLP is currently the leading digital video technology in the world, and
the Company believes this technology is superior to competing display
technologies, including cathode ray tube ("CRT") and liquid crystal display
("LCD"). The two-chip DLP light engine installed in the DHT produces a bright,
crisp picture without visible pixels or flicker. The DHT is lightweight and easy
to assemble, making it user-friendly for both consumers and retailers.
Furthermore, the DHT is fully digital, thus it can be upgraded to receive HDTV
broadcast signals.
The Company is aware of the development by other companies of innovative
flat panel and television systems. These technologies do not use CRT or
projection to produce an image, but instead rely on other technologies including
plasma, thin film electro-luminescence, solid-state lasers, light pipe systems,
vibrating mirror systems, cold cathode screens, PLZT, FED (field emission
display) and others. The Company believes that flat-panel displays using certain
of these technologies ultimately may be usable as HDTV receivers, and, if so
used, potentially, may be competitive with the Company's technologies.
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