SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21221
MICROVISION, INC.
(Name of small business issuer in its charter)
Washington 91-1600822
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2203 Airport Way South, Suite 100
Seattle, Washington 98134
(206) 623-7055
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
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None
Securities registered under Section 12(g) of the Exchange Act:
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Common Stock, no 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 Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB/A or any
amendment to this Form 10-KSB/A. [ ]
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State issuer's revenues for its most recent fiscal year: $102,200
State the aggregate market value of the voting stock held by non-affiliates,
based on the closing price for the registrant's Common Stock on the Nasdaq
National Market, as of March 19, 1997: approximately $37,246,800
State the number of shares outstanding of the issuer's Common Stock, as of March
19, 1997: 5,778,776
Transitional small business disclosure format: Yes No X
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TABLE OF CONTENTS
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Item of Form 10-KSB/A Page
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PART I
Item 1 - Description of Business............................................ 2
Item 2 - Description of Property............................................20
Item 3 - Legal Proceedings..................................................21
Item 4 - Submission of Matters to a Vote of Security Holders................21
PART II
Item 5 - Market for the Registrant's Common Stock
and Related Shareholder Matters....................................22
Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................23
Item 7 - Financial Statements...............................................28
Item 8 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................44
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................45
Item 10 - Executive Compensation.............................................49
Item 11 - Security Ownership of Certain Beneficial
Owners and Management..............................................53
Item 12 - Certain Relationships and Related
Transactions.......................................................55
Item 13 - Exhibits and Reports on Form 8-K...................................57
SIGNATURES....................................................................58
EXHIBIT INDEX.................................................................59
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PART I
Preliminary Note Regarding Forward-Looking Statements
The information set forth in this report in Item 1 - "Description of
Business" and in Item 6 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and is subject to the safe harbor created by those sections. Certain
factors that realistically could cause results to differ materially from those
projected in the forward-looking statements are set forth in Item 1 -
"Considerations Related to the Company's Business."
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Microvision, Inc. ("Microvision" or the "Company") is developing
information display technologies that allow electronically generated images and
information to be projected directly onto the retina of the viewer's eye. The
Company has developed prototype virtual retinal display ("VRD") devices,
including a portable monochrome version and a table-top, full-color version, and
is currently refining and developing its VRD technology for commercial
applications. The Company expects to commercialize its technology through the
development of products and as a supplier of personal display technology to
original equipment manufacturers ("OEMs"). The Company believes the VRD
technology will be useful in a variety of applications, including portable
communication devices, visual simulation and entertainment displays and devices
that superimpose images on the user's field of vision. The Company expects that
its technology will permit the use of highly miniaturized, lightweight,
battery-operated, viewing devices that can be comfortably held or worn as
"headphones for the eyes."
Information displays are the primary medium through which text and images
generated by computer and other electronic systems are delivered to end-users.
For decades, the cathode ray tube ("CRT") and, more recently, flat panel
displays have been the dominant display devices. In recent years, as the
computer and electronics industries have made substantial advances in
miniaturization, manufacturers have sought lightweight, low-power,
cost-effective displays to facilitate the development of more portable products.
Flat panel technologies have made meaningful advances in these areas, and liquid
crystal flat panel displays are now commonly used for laptop computers and other
electronic products. Both CRT and flat panel technologies, however, pose
difficult engineering and fabrication problems for more highly miniaturized
products, because of inherent constraints in size, weight and power consumption.
In addition, many products that use CRT and flat panel displays often become dim
and difficult to see in outdoor or other settings where the ambient light is
stronger than the light emitted from the screen. As display technologies attempt
to keep pace with miniaturization and other advances in information delivery
systems, the Company believes that CRT and flat
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panel technologies will experience increasing difficulty providing the full
range of performance characteristics - high resolution, bright display, low
power consumption required for state-of-the-art information systems.
Microvision's VRD is fundamentally different from previously commercialized
display technologies. By scanning a low power beam of colored light to "paint"
rows of pixels directly on the retina of the viewer's eye, the VRD creates a
high resolution, full-motion image without the use of screens or externally
projected images. In certain applications, the image appears in the viewer's
field of vision as if the viewer were only an arm's length away from a high
quality video screen. The VRD also can superimpose an image on the viewer's
field of vision, enabling the viewer to see data or other information projected
by the device in the context of his or her natural surroundings. In each case, a
high resolution, bright image is created.
The Company's objective is to be a leading provider of personal display
products and imaging technology in a broad range of professional and consumer
applications. The Company intends to achieve this objective and to generate
revenues through a combination of the following activities: technology licensing
to OEMs of consumer electronics products; provision of engineering services
associated with cooperative development arrangements and research contracts; and
the manufacture and sale of high-performance personal display products to
professional users, directly or through joint ventures.
The Company is in discussions with systems and equipment manufacturers in
the defense, wireless communications, computing and commercial and consumer
electronics industries. The Company intends to work with certain of these
manufacturers to develop or co-develop specific products that the Company
believes to be the most commercially viable. Even if the Company is successful
in arranging development or co-development projects, it does not expect
commercial sales of products until at least 1998, and commercial sales may not
occur until substantially later, if at all.
The Company's existing prototypes have demonstrated the technological
feasibility of the VRD and the Company's ability to miniaturize certain of its
key components. The Company has completed the development of a mechanical
resonant scanner ("MRS"), which the Company believes represents a breakthrough
in the miniaturization of scanning devices. The Company believes that the MRS
will permit high quality image displays using smaller devices produced at lower
cost than is possible with current alternative technologies. Additional work is
in progress to achieve full-color capability in miniaturized VRD devices, to
expand the "exit pupil" of the VRD (which defines the range within which the
viewer's eye can move and continue to see the image) and to design products for
specific applications.
The VRD was developed at the University of Washington's Human Interface
Technology Lab (the "HIT Lab") by a team of engineers and technicians under the
direction of Thomas A. Furness, III, a leader in the development of visual
systems. In 1993, the Company acquired the exclusive rights to the VRD
technology under a license agreement with the University of Washington (the "UW
License Agreement"). Additional development of
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the VRD technology has taken place in part at the HIT Lab pursuant to a research
agreement between the University and the Company (the "Research Agreement"). See
"Item 1 Description of Business - University of Washington License Agreement."
The University has received two patents on the VRD technology and the MRS and
has additional patent applications pending, all of the rights to which have been
exclusively licensed to the Company.
The Company was incorporated under the laws of the State of Washington in
May 1993. Its corporate offices are located at 2203 Airport Way South, Suite
100, Seattle, Washington 98134, and its telephone number at that address is
(206) 623-7055.
Considerations Related to the Company's Business
The following factors should be considered in evaluating the Company's
business and operations:
Market Acceptance of New Technology. The Company's success will depend on
successful development and commercial acceptance of the VRD technology, a new
technology that permits users to view images and data without the use of a
screen by projecting an image directly onto the retina of the viewer's eye. To
achieve commercial success, this technology and products incorporating this
technology must be accepted by OEMs and end-users, and must meet the
expectations of a continually changing marketplace. There can be no assurance
that the VRD technology will achieve any measure of market acceptance. See "Item
1 Description of Business."
Early Stage of Product Development. Although the Company has developed
prototype VRD displays, further research, development and testing is necessary
before any products will be available for commercial sale. There can be no
assurance that the Company will be successful in further refining the VRD
technology to produce marketable products. In addition, delays in the
development of products, or the inability of the Company to procure partners for
the development of products, may delay the introduction of, or prevent the
Company from introducing, products to the marketplace and adversely affect the
Company's competitive position, financial condition and results of operations.
See "Item 1 - Description of Business."
Development Stage Enterprise; Expectation of Losses; Negative Cash Flows.
The Company was founded in May 1993 and, as a development stage enterprise, has
not yet generated revenues from product sales. The Company does not expect to
generate significant revenues from product sales in the near future. As of
December 31, 1996, the Company had an accumulated deficit since inception of
$10,563,500, and the Company expects to continue to incur substantial losses and
negative cash flow at least through mid-1998 and possibly thereafter. There can
be no assurance that the Company will become profitable or cash flow positive at
any time in the future. The likelihood of the success of the Company must be
considered in light of the expenses, difficulties, and delays frequently
encountered by businesses formed to pursue development of new technologies. In
particular, the Company's
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operations to date have focused primarily on research and development of the VRD
technology and prototypes and the Company has only recently developed marketing
capabilities. It is not possible to estimate future operating expenses and
revenues based upon historical performance. Operating results will depend, in
part, on matters over which the Company has no control, including, without
limitation, general economic conditions, technological and other developments in
the electronics, computing, information display and imaging industries, and
competition. See "Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Patents and Protection of Proprietary Technology. The Company's ability to
compete effectively in the information display market will depend, in part, on
the ability of the Company and the University of Washington to maintain the
proprietary nature of the VRD technology. The University of Washington has been
awarded three U.S. patents relating to the VRD technology. Patent No. 5,467,104
issued in November 1995 has 11 claims, including claims directed to the ability
to superimpose images on the user's field of vision. Patent No. 5,557,444 issued
in September 1996 has 37 claims relating to the MRS. Patent No. 5,596,339 issued
in January 1997 has 32 claims relating to a VRD using optical fiber. The
University also has received notice of allowance from the U.S. Patent and
Trademark Office with respect to certain claims under a fourth U.S. patent
application for a VRD using incoherent color light sources. In addition, the
University has filed applications for several additional patents in the United
States and in certain foreign countries. There can be no assurance, however, as
to the degree of protection offered by these patents, or as to the likelihood
that patents will be issued from the pending patent applications. Moreover,
these patents may have limited commercial value or may lack sufficient breadth
to protect adequately the aspects of the Company's technology to which the
patents relate.
There can be no assurance that competitors, in the United States and in
foreign countries, many of which have substantially greater resources than the
Company and have made substantial investments in competing technologies, will
not apply for and obtain patents that will prevent, limit or interfere with the
Company's ability to make and sell its products. The Company is aware of several
patents held by third parties that relate to certain aspects of retinal scanning
devices. There is no assurance that these patents would not be used as a basis
to challenge the validity of the University's patent rights, to limit the scope
of the University's patent rights or to limit the University's ability to obtain
additional or broader patent rights. A successful challenge to the validity of
the University's patents may adversely affect the Company's competitive position
and could limit the Company's ability to commercialize the VRD technology.
Moreover, there can be no assurance that such patent holders or other third
parties will not claim infringement by the Company or by the University with
respect to current and future technology. Because U.S. patent applications are
held and examined in secrecy, it is also possible that presently pending U.S.
applications will eventually issue with claims that will be infringed by the
Company's products or the VRD technology. The defense and prosecution of patent
suits is costly and time-consuming, even if the outcome is favorable. This is
particularly true in foreign countries where the expenses associated with such
proceedings can be prohibitive. An adverse outcome in the defense of a patent
suit could subject the Company to significant liabilities to third parties,
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require the Company and others to cease selling products that incorporate VRD
technology or cease licensing the VRD technology, or require disputed rights to
be licensed from third parties. Such licenses may not be available on
satisfactory terms, or at all. Moreover, if claims of infringement are asserted
against future co-development partners or customers of the Company, those
partners or customers may seek indemnification from the Company for damages or
expenses they incur.
The Company also relies on unpatented proprietary technology. Third parties
could develop the same or similar technology or otherwise obtain access to the
Company's proprietary technology. To protect its rights in these areas, the
Company requires all employees and most consultants, advisors and collaborators
to enter into confidentiality and noncompetition agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's 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, the Company has had
no experience in enforcing such confidentiality agreements. In addition, the
University of Washington retains the right to publish information regarding the
VRD technology for academic purposes. See "Item 1 - Description of Business -
Intellectual Property and Proprietary Rights."
Dependence on Future Collaborations; Dependence on Third Parties. The
Company's strategy for the development, testing, manufacture and
commercialization of the VRD technology and products incorporating the VRD
technology includes entering into cooperative development, joint venture or
licensing arrangements with corporate partners, OEMs, licensors, licensees and
others. There can be no assurance that the Company will be able to negotiate
such arrangements on acceptable terms, if at all, or that such arrangements will
be successful in yielding commercially viable products. If the Company is not
able to establish such arrangements, it would require additional working capital
to undertake such activities at its own expense and would require extensive
manufacturing, marketing and sales expertise that it does not currently possess.
In addition, the Company could encounter significant delays in introducing the
VRD technology into certain markets or find that the development, manufacture or
sale of products incorporating the VRD technology in such markets would not be
feasible without, or would be adversely affected by the absence of, such
agreements. To the extent the Company enters into cooperative development or
other joint venture or licensing arrangements, the revenues received by the
Company will depend upon the efforts of third parties, and there can be no
assurance that such parties will put forth such efforts or that such efforts
will be successful. See "Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 1 - Description of
Business Strategy."
Loss of Exclusive License. The Company's success depends on technology that
it has licensed from the University of Washington. The Company relies on the
University of Washington to prepare, file and prosecute patent applications
relating to the VRD technology. If the University of Washington were to violate
the terms of the Research Agreement or the UW License Agreement, the Company's
operations and business prospects could be
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materially and adversely affected. In addition, Microvision could lose the
exclusivity under the UW License Agreement if the Company fails to use its best
efforts to commercialize the VRD technology, including having the VRD technology
or VRD applications available for sale or other commercial use no later than two
years following the termination of the Research Agreement (i.e., by October
1999), or if it fails to respond timely to claims of infringement with respect
to the VRD technology. The loss of exclusivity under the UW License Agreement
could have a materially adverse effect on the Company's business, operating
results, and financial condition. See "Business - UW License Agreement."
Competition and Technological Advances. The information display industry is
highly competitive. The Company's products and the VRD technology will be
competing with established manufacturers of miniaturized CRT and flat panel
display devices, including companies such as Sony Corporation and Texas
Instruments Incorporated, most of whom have substantially greater financial,
technical and other resources than the Company and many of whom are developing
alternative miniature display technologies. The Company also will compete with
other developers of miniaturized display devices. There can be no assurance that
the Company's competitors will not succeed in developing information display
technologies and products that would render the VRD technology or the Company's
proposed products obsolete. The electronic information display industry has been
characterized by rapid and significant technological advances. There can be no
assurance that the VRD technology or the Company's proposed products will remain
competitive with such advances or that the Company will have sufficient funds to
invest in new technologies or processes. See "Item 1 - Description of Business
- -Competition."
Lack of Manufacturing Experience. In order for the Company to be successful
as a product or component manufacturer, its products must be manufactured to
meet high quality standards in commercial quantities at competitive prices. The
Company currently has no capability to manufacture products in commercial
quantities. The Company has only produced prototypes for research, development
and demonstration purposes. Accordingly, the Company must obtain access through
partners or contract manufacturers to manufacturing capacity and processes for
the production of its future products, if any, in commercial quantities, which
will require extensive lead time. There can be no assurance that the Company
will successfully obtain access to these resources. See "Item 1 - Description of
Business Strategy."
Capital Requirements. The Company believes that its current cash balances
will satisfy its budgeted capital and operating requirements for at least the
next 12 months, based on the Company's current operating plan. Actual expenses,
however, may exceed the amount budgeted therefor and the Company may require
additional capital to fund long-term operations and business development. The
Company's capital requirements will depend on many factors, including, but not
limited to, the rate at which the Company can develop the VRD technology, its
ability to attract partners for product development and licensing arrangements,
and the market acceptance and competitive position of products that incorporate
the VRD technology. There can be no assurance that the Company will be able to
obtain financing, or that, if it is able to obtain financing, it will be able to
do so on satisfactory
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terms or on a timely basis. If additional funds are raised through the issuance
of equity, convertible debt or similar securities, shareholders may experience
additional dilution and such securities may have rights or preferences senior to
those of the Common Stock. Moreover, if adequate funds were not available to
satisfy the Company's short-term or long-term capital requirements, the Company
would be required to limit its operations significantly. See "Item 6 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Dependence on Key Personnel. The Company's success is dependent on its
officers and other key personnel and on the ability to attract and retain
qualified new personnel. Achievement of the Company's business objectives will
require substantial additional expertise in the areas of technology, finance,
manufacturing and marketing. Competition for qualified personnel in these fields
is intense, and the inability to attract and retain additional highly skilled
personnel, or the loss of key personnel, could have a material adverse effect on
the Company's business and results of operations. See "Item 1 - Description of
Business Employees" and "Item 9 - Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act."
Possibility of Future Regulation. The Company is not aware of any health or
safety regulations applicable to VRD products, other than regulations related to
labeling of devices that emit electro-magnetic radiation. There can be no
assurance, however, that new health and safety regulations will not be
promulgated that might materially and adversely affect the Company's ability to
commercialize the VRD technology. See "Human Factors and Safety."
Possible Illiquidity of Trading Market. The Common Stock and the publicly
traded common stock purchase warrants (the "Public Warrants") are listed on the
Nasdaq National Market. To maintain the listing of the Common Stock and the
Public Warrants on the Nasdaq National Market, the Company must continue to
satisfy certain maintenance standards. If the Company is unable to maintain the
standards for continued quotation on the Nasdaq National Market, the Common
Stock and the Public Warrants could be subject to removal from the Nasdaq
National Market. Trading, if any, in the Common Stock and the Public Warrants
would thereafter be conducted on the Nasdaq SmallCap market, if the Company
meets the listing criteria for that market, or if not, then in the
over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in what are
commonly referred to as the "pink sheets." As a result, an investor would find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of the Company's securities. In addition, depending on several factors,
including the future market price of the Common Stock and the Public Warrants,
the Company's securities could become subject to the so-called "penny stock"
rules that impose additional sales practice and market making requirements on
broker-dealers who sell or make a market in the Company's securities and
diminish the ability of the Company's shareholders to sell their securities in
the secondary market.
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Possible Volatility of Market Price. The trading price of the Company's
Common Stock and the Public Warrants could be subject to significant
fluctuations in response to such factors as, among others, variations in the
Company's anticipated or actual results of operations, announcements of products
utilizing the VRD technology or technological innovations by the Company or its
competitors. Moreover, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market prices for emerging growth companies and which often have been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock and the
Public Warrants. In the past, following periods of volatility in the market
price of an issuer's securities, class action lawsuits have been filed on
occasion against such issuers. There can be no assurance that such litigation
will not occur in the future with respect to the Company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business
and results of operations. Any adverse determination in such litigation also
could subject the Company to significant liabilities.
Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Common Stock or Public Warrants in the public market or the prospect
of such sales could materially and adversely affect the market price of the
Company's Common Stock and Public Warrants. As of December 31, 1996, the Company
had outstanding 5,778,776 shares of Common Stock, approximately 1,458,943 shares
of which were subject to resale restrictions pursuant to Rule 144 under the
Securities Act. As of April 29, 1997, 92,186 of these "restricted" shares will
no longer be subject to the resale restrictions under Rule 144, and will be
freely tradeable in the public market. In addition, as of December 31, 1996, the
Company had issued 2,256,250 Public Warrants to purchase 2,256,250 shares of
Common Stock and 217,963 private warrants to purchase an aggregate of 217,963
shares of Common Stock, and granted options under its stock option plans to
purchase an aggregate of 979,366 shares of Common Stock. All shares purchased
under the Company's stock option plans are available for sale in the public
market, subject in some cases to volume and other limitations. The Company also
had granted Paulson Investment Company, Inc. and marion bass securities
corporation, investment banking firms, the right to purchase 178,075 shares of
Common Stock and 178,075 warrants exercisable for 178,075 shares of Common Stock
(the "Representatives' Warrants"). Commencing on August 27, 1997, the 356,150
shares of Common Stock that are issuable upon exercise of the Representatives'
Warrants (including exercise of the warrants included therein) will be eligible
for resale without restriction under the Securities Act.
Potential Effect of Anti-Takeover Provisions. The Company's Restated
Articles of Incorporation (the "Articles of Incorporation") give the Company's
Board of Directors the authority to issue, and to fix the rights and preferences
of, shares of the Company's Preferred Stock, which may have the effect of
delaying, deterring or preventing a change in control of the Company without
action by the Company's shareholders. Furthermore, the Articles of Incorporation
provide that the written demand of at least 25% of the outstanding shares is
required to call a special meeting of the shareholders. In addition, certain
provisions of
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Washington law could have the effect of delaying, deterring or preventing a
change in control of the Company.
Industry Background
The ubiquitous nature of personal computing, electronic communication,
television and video products has created a worldwide market for display
technologies. Information displays are the primary medium through which text and
images generated by computer and other electronic systems are delivered to
end-users. While early computer systems were designed and used for tasks that
involved little interaction between the user and the computer, today's graphical
and multimedia information and computing environments require systems that
devote most of their resources to generating and updating visual displays. The
market for display technologies also has been stimulated by the increasing
popularity of portable pagers and cellular phones; interest in simulated
environments and augmented vision systems; and the recognition that better means
of connecting people and machines can improve productivity and enhance the
enjoyment of electronic entertainment and learning experiences.
For decades, the CRT has been the dominant display device. A CRT creates an
image by scanning a beam of electrons across a phosphor- coated screen, causing
the phosphors to emit visible light. The beam is generated by an electron gun
and is passed through a deflection system that scans the beam rapidly left to
right and top to bottom. A magnetic lens focuses the beam into a small glowing
dot on the phosphor screen. It is these rapidly moving spots of light ("pixels")
that "paint" the image on the surface of the viewing screen. The next generation
of imaging technology, flat panel displays, is now in widespread use in portable
computers, calculators, and other personal display devices. The most prevalent
flat panel technology is the liquid crystal display ("LCD"), which can consist
of hundreds of thousands of pixels, each of which is formed by a single
transistor acting on a crystalline material.
In recent years, as the computer and electronics industries have made
substantial advances in miniaturization, manufacturers have sought lightweight,
low power, cost-effective displays to enable the development of more portable
products. Flat panel technologies have made meaningful advances in these areas,
and liquid crystal flat panel displays are now commonly used for laptop
computers and other electronic products. Both CRT and flat panel technologies,
however, pose difficult engineering and fabrication problems for more highly
miniaturized products, because of inherent constraints in size, weight and power
consumption. In addition, many products that use CRT and flat panel displays
often become dim and difficult to see in outdoor or other settings where the
ambient light is stronger than the light emitted from the screen. The Company
believes that as display technologies attempt to keep pace with miniaturization
and other advances in information delivery systems, conventional CRT and flat
panel technologies will experience increasing difficulty providing the full
range of performance characteristics - high resolution, bright display, low
power consumption required for state-of-the-art information systems.
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Microvision's Retinal Display Technology
The Company's VRD is fundamentally different from previously commercialized
display technologies. The VRD creates an image directly on the retina like a
miniaturized video projector focused on the "projection screen" at the back of
the viewer's eye. In certain applications, the image appears in the viewer's
field of vision as if the viewer were only an arm's length away from a high
quality video screen. The VRD technology also can superimpose an image on the
viewer's field of vision, enabling the viewer to see data or other information
projected by the device in the context of his or her natural surroundings. In
each case, a high resolution, bright image is created.
By scanning a low-power beam of colored light to "paint" rows of pixels
directly on the retina of the viewer's eye, the VRD technology creates a high
resolution, full-motion image without the use of screens or externally projected
images. The light source acts on the retina in much the same way as other
natural light sources. The VRD is composed of four basic components: (1) drive
electronics; (2) photon sources; (3) horizontal and vertical scanners; and (4)
optics.
The drive electronics acquire and process signals from the image or data
source to control and synchronize the color mix, grey-level and placement of
pixels. Color pixels are generated by a modulated light source, which varies the
intensity of red, green and blue light to generate a complete palette of colors
and shades. The pixels are then arranged on the retina by a horizontal scanner
that rapidly sweeps the light beam to place the pixels into a row, and a
vertical scanner, which moves the light beam to the next line where another row
of pixels is drawn. Refractive and reflective optical elements direct the light
beam into the viewer's eye, projecting an image through the viewer's pupil onto
the retina.
Strategy
The Company's objective is to be a leading provider of personal display and
imaging technology in a broad range of professional and consumer applications.
Key elements of the Company's strategy to achieve this objective are:
Custom design, manufacture and sale of high performance products. The
Company anticipates providing high performance products to professional
end-users in markets with lower product volume requirements. The Company expects
that end-users in this category will include professionals in the defense, law
enforcement, industrial process controls and health care industries. As a result
of the potential for professionals in these industries to realize productivity
or performance gains and associated economic benefit from the use of personal
display products, the Company believes that customers in these industries will
be less sensitive to the cost of VRD products than customers in the consumer
electronics markets. The Company also believes that, because the unit volume
requirements for such end-users are generally lower, demand for such products
may be more predictable and the risks associated with production and inventory
more easily managed. Depending upon the circumstances, the Company may
manufacture these products, using standard component suppliers and contract
manufacturers as required, or may seek to form one or more joint ventures to
manufacture the products. The Company expects that early production of specially
designed products will
11
<PAGE>
enhance its ability to provide more fully integrated solutions and support for
the development of similar products by manufacturers in high volume consumer
markets.
Supply of display and imaging solutions and licensing of proprietary
technology to OEMs for volume manufacture of products. The Company believes that
in consumer markets the ability of personal display products to compete
effectively is largely driven by the ability to price aggressively for maximum
market penetration. Significant economies of scale in purchasing, volume
manufacturing and distribution are important factors in driving costs downward
to achieve pricing objectives and profitability. Additionally, certain types of
products, such as pagers or cellular phones, may require the integration of the
VRD with other unrelated electronic technologies. In markets requiring volume
production of personal display products, the Company intends to provide
components, subsystems and systems design technology to OEMs under licensing
agreements. Microvision's strategy will be to seek both initial license fees
from such arrangements as well as ongoing per unit royalties.
The Company expects such relationships may involve a period of
co-development during which engineering and marketing professionals from OEMs
would work with Microvision's technical staff to specify, design and develop a
product appropriate to the targeted market and application. Microvision intends
to charge fees to such OEMs to cover the costs of the engineering effort
allocated to such development projects. The nature of the relationships with
such OEMs may vary from partner to partner depending on the proposed application
for the VRD, the product to be developed, and the OEM's design, manufacturing
and distribution capabilities. The Company believes that by limiting its own
direct manufacturing obligations for consumer products it will reduce the
capital requirements and risks inherent in bringing the VRD to the consumer
market.
The Company believes that it can enhance its competitive position by
reducing the cost and improving the performance of its VRD technology and by
expanding its portfolio of intellectual property rights. A key part of the
Company's technology development strategy includes developing and protecting (i)
concepts relating to the function, design and application of the VRD system;
(ii) component technologies and integration techniques essential to the
commercialization of the VRD and which are expected to reduce the cost and
improve the performance of the system; and (iii) component technologies and
integration techniques that reduce technical requirements and accelerate the
pace of commercial development. The Company is continuing to develop a portfolio
of proprietary and patented technologies, processes and techniques that relate
directly to the functionality and to the commercial viability of the VRD
technology. See "- Technology Development" and " - Intellectual Property and
Proprietary Rights."
Applications, Markets and Products
Microvision has identified a variety of potential applications for its VRD,
including the following:
12
<PAGE>
Hand-held Communications Devices. Manufacturers of wireless and cellular
communications devices have identified a need for products that incorporate
personal display units for viewing fax, electronic mail and graphic images on
highly miniaturized devices. Existing display technologies have had difficulty
satisfying this demand fully because of the requirements that such devices be
highly miniaturized, full format, relatively low cost, and offer high resolution
and brightness without requiring high levels of power supply. Microvision
expects that the range of potential products in this category may include
cellular phones and pagers that project into view electronic mail messages,
faxes, or other images in a bright, sharp display.
Visual Simulation and Entertainment Displays. Manufacturers of interactive
media products have recognized that the visual experience offered by simulation
is enhanced by high resolution, three-dimensional displays projected over a wide
field of vision. Although simulated environments traditionally have been used as
a training tool for professional use, they are increasingly popular as a means
of entertainment, particularly in computer games. In a three-dimensional video
game, an inexpensive pair of VRD eyeglasses with a wide field of view could
provide a highly immersive visual experience.
Augmented Vision Displays. Augmented vision applications superimpose high
contrast, monochromatic (or color) images and information on the viewer's field
of vision as a means of enhancing the safety, precision and speed of the user's
performance of tasks. For example, a head-mounted display could superimpose
critical patient information such as vital signs, EKG traces, reference
materials, X-rays or MRI images in a surgeon's field of vision. For military
applications, troops could be equipped with eyeglasses that display high
definition imagery that could be viewed without blocking normal vision and could
assist in threat detection, reconnaissance and other activities.
Microvision has targeted various market segments for these potential
applications, including defense and public safety, health care, business,
industrial and consumer electronics. The following table identifies product
development opportunities within each of these markets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Defense and Public Healthcare Business Industrial Consumer
Safety
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hand-Held o Command and o Patient status o Fax Viewing o Maintenance o E-mail viewing
Communications control monitoring o E-mail viewing and field o Internet access
Devices o Tactical o Internet access service
Information
systems
o Portable
maintenance
o Public safety
o Law
enforcement
- -------------------------------------------------------------------------------------------------------------------------
Simulation and o Battlefield o Surgical o Architecture o Training o Gaming
Entertainment simulation training and interior o On-line
Displays o Aircraft o Endoscopic design shopping
simulation surgeries o Industrial o Virtual reality
design
simulation
- -------------------------------------------------------------------------------------------------------------------------
Augmented o Mine detection o Overlay of o Maintenance
Vision Displays o Tactical patient data o Inventory
information during surgeries control
systems o "Head-down" o Factory process
o Personnel status viewing of control
monitor patient vital o Sales
o Digital Land signs automation
Warrior system
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Microvision believes certain market segments will be early adopters of the
VRD technology, particularly those industries for which VRD in an early stage of
development can offer significant productivity or performance gains and
associated cost savings. The Company believes that military and industrial users
will place value on the ability of personal VRD devices to superimpose high
contrast images on the user's natural field of vision. Similarly, users of
wireless devices who have a need to receive critical or timely data through
electronic mail, Internet or facsimile transmission are expected to value the
performance characteristics that VRDs are expected to deliver.
Microvision is in discussions with systems and equipment manufacturers in
the defense, wireless communications, computing and commercial and consumer
electronics industries. The Company intends to work with certain of these
manufacturers to develop or co-develop specific products that the Company
believes to be the most commercially viable. The Company has identified
specifications for several products that it believes may address the particular
needs of development programs sponsored by the U.S. military and that can be
priced competitively. These products include a high performance, full-color
helmet-mounted
13
<PAGE>
display for use in interactive simulations, and a medium priced, helmet-mounted
augmented vision device that superimposes information in a monochromatic format
on the user's natural field of vision and can be worn by technicians and other
military personnel to provide easy access to real-time data. In addition, the
Company believes it may develop moderately priced eyeglasses or goggles that can
be fitted for augmented vision display and would be suitable for a variety of
uses. There can be no assurance that the Company will be successful in
developing these or other proposed products, with or without co-development
partners. Even if the Company is successful in arranging development or
co-development projects, it does not expect commercial sales of products until
at least 1998, and commercial sales may not occur until substantially later, if
at all.
Prototypes
The Company has developed two prototypes to demonstrate the feasibility of
the VRD technology. These prototypes are not incorporated into specific
commercial products or applications, but rather are demonstration models of the
technology. The first prototype developed was a table-top model that receives
output from a personal computer. This prototype generates a full color image.
Optical elements are positioned in front of the eye, but do not obscure the
user's field of vision, so that as the image is scanned onto the optics and
reflected onto the retina, the viewer sees the image superimposed on the
viewer's natural field of vision. The second prototype is a hand held device
that fits into a briefcase and is portable. For demonstration purposes, it also
connects to a personal computer. At present the portable prototype generates
only a monochromatic image. The projection optics of the portable prototype are
packaged together with the vertical and horizontal scanner and the light source
in a module, which can be hand-held or mounted to a stand. The electronics that
receive and condition the signal are packaged separately in the briefcase.
Additional work will be required in the area of drive electronics,
development of photon sources, scanning techniques and optics design to advance
the VRD from prototype to product stage. See "- Technology Development."
Technology Development
The Company's existing prototypes have demonstrated the technological
feasibility of the VRD and the Company's ability to miniaturize certain of its
key components. Additional work is in progress to continue miniaturization
advances necessary for large scale application, to achieve full color capability
in miniaturized versions, to expand the exit pupil of the VRD and to design for
specific applications.
Drive Electronics. The Company has identified four areas where additional
development of the drive electronics is necessary. The first involves further
miniaturization using integrated circuits and advanced packaging techniques. To
date, the Company has identified no technological barriers to the further
miniaturization of the drive electronics. The second area involves refining the
timing and nature of the signals driving the photon source and scanners to
improve display quality. The third and fourth areas of development relate to
14
<PAGE>
achieving and improving compatibility of the drive electronics with existing and
newly emerging video standards. The Company's existing prototypes are compatible
with current video format standards and the output from most personal computers.
In the future, the Company intends to develop the VRD to conform to a range of
interface standards, including emerging standards such as high definition
television. For interfaces with emerging video standards, additional development
of the drive electronics technology will likely be required.
Photon Sources. The photon generator is the source of the light beam that
creates the image on the retina. In a full-color VRD, red, green and blue photon
generators will be used, each with its own modulator, to generate a mix yielding
the desired color and brightness. Low- power solid state lasers, laser diodes
and light-emitting diodes ("LEDs") are suitable photon generators for the VRD.
Red, blue and green solid state lasers are currently available, but are useful
only for VRD applications where cost and size are not critical. Miniaturized
visible laser diodes are currently available only in red, although a number of
companies are developing laser diodes in green and blue. Miniaturized LEDs are
less expensive than laser diodes and the Company has developed a miniature red
LED, which appears to respond quickly enough to sustain a VGA display and is
expected to cost less to produce than equivalent wavelength laser diodes.
Microvision expects these LEDs will provide sufficient brightness for certain
applications, however, Microvision expects to use laser diodes for augmented
vision applications that require maximum brightness. The Company intends to rely
on others to complete development of the materials and processes necessary to
produce blue and green LEDs and laser diodes. This development is not expected
prior to the introduction of the Company's proposed initial products, and as a
result the Company's proposed initial full color VRD products are likely to use
solid state lasers.
Scanning. A pair of scanners, one horizontal and one vertical, is used to
direct the light beam that creates the image on the retina. In laser printers
and bar code readers, a spinning or oscillating mirror is used to scan a light
beam, but these mechanical scanners are typically too large and too slow for use
in miniaturized display settings. To solve this problem, the Company has
developed the MRS. In operation, the MRS resembles a very small tuning fork with
a mirrored surface. It is tuned to resonate at the exact scanning frequency
needed to generate the display, so that very little power is needed to keep it
oscillating. Directing the light beam at the vibrating mirror causes the light
beam to scan rapidly back and forth horizontally. The second vibrating mirror is
used to direct the horizontal beam vertically. The Company believes that its MRS
may have significant commercial value independent of the VRD.
Continued development of the scanning subsystem of the VRD will be required
in order to allow scanning capability for current standard video formats,
including high definition television, as well as new digital video standards.
Existing designs for scanner and scanner electronics may prove ineffective at
higher resolutions and may need to be replaced with alternative scanning
methods. As a result, achievement of future video standards may necessitate
additional development of both the scanner and the scanner electronics.
15
<PAGE>
Optics. For applications where the VRD device is to be worn, it is
desirable to have an exit pupil (the range within which the viewer's eye can
move and continue to see the image) of at least 10 millimeters. The Company has
recently developed an expanded exit pupil of approximately five millimeters and
the University of Washington has filed a U.S. patent application to seek to
protect this feature. Continued design and engineering of this expanded exit
pupil is required to develop commercial applications. The Company's ongoing
optics development is directed at the creation of optical systems that are
lightweight and cost-effective to manufacture.
University of Washington License Agreement
Microvision's technology was developed at the University of Washington's
HIT Lab by a team of technicians and engineers under the direction of Dr.
Furness. In 1993, Microvision secured the exclusive rights to the VRD technology
and associated intellectual property from the University of Washington pursuant
to the UW License Agreement. The scope of the license covers all possible
commercial uses of the VRD worldwide, including the right to grant sublicenses.
The license expires upon the expiration of the last of the University's patents
that relate to the VRD, unless sooner terminated by Microvision or the
University. In granting the license, the University retained limited
non-commercial rights with respect to the VRD, including the right to use the
technology for non-commercial research and for instructional purposes and the
right to comply with applicable laws regarding the non-exclusive use of the
technology by the United States government. The University also has the right to
consent to Microvision's sublicensing arrangements and to the prosecution and
settlement by Microvision of infringement disputes.
Microvision could lose the exclusivity under the UW License Agreement if
the Company fails to use its best efforts to commercialize the VRD technology,
including having the VRD technology or VRD applications available for sale or
other commercial use no later than two years following the termination of the
Research Agreement (i.e., by October 1999), or if it fails to respond to any
infringement action relating to the VRD technology within 90 days of learning of
such claim. In the event of the termination of Microvision's exclusivity,
Microvision would lose its rights to grant sublicenses and would no longer have
the first right to take action against any alleged infringement. In addition,
each of Microvision and the University of Washington has the right to terminate
the License Agreement in the event that the other party fails to cure a material
breach of the Agreement within 30 days of written notice of the breach.
Microvision may terminate the License Agreement at any time by serving 90 days
prior written notice on the University of Washington. In the event of any
termination of the License Agreement, the license granted to Microvision would
terminate.
Under the terms of the UW License Agreement, Microvision agreed to pay a
non-refundable fee of $5,133,500 (the "License Fee") and to issue to the
University and to the inventors of the VRD technology, including Dr. Furness,
shares of Microvision's Common Stock. In addition, the University of Washington
is entitled to receive certain ongoing royalties. See "Item 6 - Management's
Discussion and Analysis of Financial
16
<PAGE>
Condition and Results of Operations - Liquidity and Capital Resources." If
Microvision were to terminate the UW License Agreement, it believes that further
payments of the License Fee would not be required and, accordingly, has not
booked the balance of payments due as an accrued expense. However, the language
of the UW License Agreement is unclear on this point and a contrary
interpretation suggests that the Company may be obligated to pay any remaining
balance of the license fee. In any event, the Company considers the exclusive
license to be an essential element of its business plan and fully intends to pay
the balance of the License Fee, most probably through continued payments under
the Research Agreement.
At the same time it entered into the License Agreement, Microvision
contracted with the HIT Lab and the Washington Technology Center, an agency of
the State of Washington created to foster the development of the technology
industry within the state (the "WTC"), to fund the research and development of
the VRD technology pursuant to the Research Agreement. The VRD technology
research undertaken by the HIT Lab is under the direction of Dr. Furness. Any
intellectual property developed by the HIT Lab pursuant to this Agreement is
included in the exclusive license granted to Microvision under the UW License
Agreement. Microvision pays the University $320,844 per quarter for the research
performed by the HIT Lab. As of March 19, 1997, Microvision had paid $4,491,813
to the University of Washington under the Research Agreement. Payments made
pursuant to the Research Agreement are credited against the License Fee. See
Note 5 of Notes to the Financial Statements.
In the event that Microvision defaults in its obligations, including
payment obligations under the Research Agreement, the University may terminate
the License Agreement. The Research Agreement currently is scheduled to expire
in October 1997, but may be continued by agreement of the parties. Stephen R.
Willey, the Company's Executive Vice President, acts as liaison between the HIT
Lab, WTC and the Company. In addition, the HIT Lab provides the Company with
quarterly reports on each functional area of the research and development
activities it conducts, such as optics, mechanics, electronics and photonics,
and Microvision employees and personnel at the HIT Lab jointly determine the
direction of future research and development activities.
Intellectual Property and Proprietary Rights
The Company's ability to compete effectively in the information display
market will depend, in part, on the ability of the Company and the University of
Washington to maintain the proprietary nature of the VRD technology. The
University of Washington has been awarded three U.S. patents related to the VRD
technology. Patent No. 5,467,104 issued in November 1995 has 11 claims,
including claims directed to the ability to superimpose images on the user's
field of vision. Patent No. 5,557,444 issued in September 1996 has 37 claims
relating to the MRS. Patent No. 5,596,339 issued in January 1997 has 32 claims
relating to a VRD using optical fiber. The University also has received notice
of allowance from the U.S. Patent and Trademark Office with respect to certain
claims under a fourth U.S. patent application for a VRD using incoherent color
light sources. A notice of allowance indicates that the U.S. Patent and
Trademark Office has completed its examination of the application
17
<PAGE>
and determined that the application meets the statutory requirements for
patentability. Although a notice of allowance does not in itself afford patent
protection, once a notice of allowance is issued it is expected that a patent
will issue upon completion of the U.S. Patent and Trademark Office publication
formalities. In addition, the University has filed other applications for
patents in the United States and in certain foreign countries. The inventions
covered by such applications generally address and accommodate component
miniaturization, specific implementation of various system components and design
elements to facilitate mass production.
The Company considers protection of these key enabling technologies and
components to be a fundamental aspect of its strategy to penetrate diverse
markets with unique products. As such, it intends to continue to develop its
portfolio of proprietary and patented technologies, at the system, component,
and process levels. There can be no assurance, however, as to the degree of
protection offered by these patents, or as to the likelihood that patents will
be issued from the pending patent applications. Moreover, these patents may have
limited commercial value or may lack sufficient breadth to protect adequately
the aspects of the Company's technology to which the patents relate.
There also can be no assurance that competitors, in the United States and
in foreign countries, many of which have substantially greater resources than
the Company and have made substantial investments in competing technologies,
will not apply for and obtain patents that will prevent, limit or interfere with
the Company's ability to make and sell its products, or intentionally infringe
the University's patents. The Company is aware of several patents held by third
parties that relate to certain aspects of retinal scanning devices. There is no
assurance that these patents would not be used as a basis to challenge the
validity of the University's patent rights, to limit the scope of the
University's patent rights or to limit the University's ability to obtain
additional or broader patent rights. A successful challenge to the validity of
the Company's patents may adversely affect the Company's competitive position
and could limit the Company's ability to commercialize the VRD technology.
Moreover, there can be no assurance that such patent holders or other third
parties will not claim infringement by the Company or by the University with
respect to current and future technology. Because U.S. patent applications are
held and examined in secrecy, it is also possible that presently pending U.S.
patent applications will eventually issue with claims that will be infringed by
the Company's products or the VRD technology. The defense and prosecution of
patent suits is costly and time-consuming, even if the outcome is favorable.
This is particularly true in foreign countries where the expenses associated
with such proceedings can be prohibitive. An adverse outcome in the defense of a
patent suit could subject the Company to significant liabilities to third
parties, require the Company and others to cease selling products that
incorporate VRD technology or cease licensing the VRD technology, or require
disputed rights to be licensed from third parties. Such licenses may not be
available on satisfactory terms or at all. Moreover, if claims of infringement
are asserted against future co-development partners or customers of the Company,
those partners or customers may seek indemnification from the Company for
damages or expenses they incur.
18
<PAGE>
The Company also relies 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 the Company's proprietary technology.
To protect its rights in these areas, the Company requires all employees and
most consultants, advisors and collaborators to enter into confidentiality and
noncompetition agreements. There can be no assurance, however, that these
agreements will provide meaningful protection for the Company's 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. In addition, the University of Washington retains the
right to publish information regarding the VRD technology for academic purposes.
To date, the Company has had no experience in enforcing its confidentiality
agreements.
Human Factors and Safety
As part of its research and development activities, the Company conducts
ongoing research as to the cognitive, physiological and ergonomic factors that
must be addressed by products incorporating VRD technologies and the safety of
VRD technology, including such issues as the maximum permissible laser exposure
limits established by American National Standards Institute ("ANSI").
Researchers from the HIT Lab concluded that, assuming use of a VRD device for
eight continuous hours at brightness levels matching the brightest intensity of
a CRT, laser exposure to the retina would be between three and four orders of
magnitude below the calculated maximum permissible exposure level set by ANSI.
If the horizontal and vertical scanners were to fail such that the photon output
were continuous, a user would experience laser exposure approximately 1,000
times below the ANSI limits before the user would likely look away from the VRD
or avert his or her eyes. In the event that the user did not avert his or her
eyes from the VRD, the user would have to remain perfectly still and focus on
the VRD for several hours to reach the ANSI maximum permissible exposure level.
Competition
The information display industry is highly competitive. The Company's
products and the VRD technology will be competing with established manufacturers
of miniaturized CRT and flat panel display devices, including companies such as
Sony Corporation and Texas Instruments Incorporated, most of whom have
substantially greater financial, technical and other resources than the Company
and many of whom are developing alternative miniature display technologies. The
Company also will compete with other developers of miniaturized display devices.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that would render the VRD technology or the
Company's products obsolete and non-competitive.
The electronic information display industry has been characterized by rapid
and significant technological advances. There can be no assurance that the VRD
technology or the Company's proposed products will remain competitive with such
advances or that the Company will have sufficient funds to invest in new
technologies or products or processes.
19
<PAGE>
Although the Company believes that its VRD technology and proposed display
products should deliver images of a quality and resolution substantially better
than that of commercially available LCD and CRT-based display products, there is
no assurance that manufacturers of LCDs and CRTs will not develop further
improvements of screen display technology that would eliminate or diminish the
anticipated advantages of the Company's proposed products.
Other Technology Investment
The Company intends to pursue the acquisition and development of other
imaging and display technologies as opportunities to do so arise.
In March 1994, the Company entered into a second exclusive license
agreement with the University of Washington to commercialize imaging technology
unrelated to the VRD technology. This technology involves the projection of data
and information onto the inside of a dome that is placed over the viewer's head.
This imaging technology is referred to as HALO. The HALO license agreement
requires the Company to pay $175,000 to the University, and to issue 93,750
shares of Common Stock to the University and the inventors of the technology,
upon the achievement of certain milestones, including, among other things, the
receipt by the University of a patent covering the technology. See Note 5 of
Notes to the Financial Statements.
Employees
As of March 15, 1997, Microvision had 16 full-time employees and one
part-time employee. Microvision is actively seeking additional qualified
full-time personnel where appropriate. The Company's employees are not subject
to any collective bargaining agreements and management regards its relations
with employees to be good. See "Considerations Related to the Company's Business
- - Dependence on Key Personnel" and "Item 9 - Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
Management."
ITEM 2. DESCRIPTION OF PROPERTY
Microvision currently leases approximately 9,450 square feet of combined
use office and laboratory space at 2203 Airport Way South in Seattle,
Washington, and has a commitment to occupy an additional 2,400 square feet
beginning not later than July 1, 1997. In addition, the VRD research facility
occupies approximately 1,500 square feet of laboratory space at the HIT Lab
located on the University of Washington campus in Seattle, Washington. The
laboratory space is provided in connection with the research activities
performed by the HIT Lab. See "Item 1 - Description of Business - University of
Washington License Agreement." The Company believes that the current facilities
are adequate and anticipates that additional space will be available on
reasonable terms when needed.
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
During the period March 1994 through June 1995, warrants to purchase an
aggregate of 343,750 shares of Common Stock at prices ranging from $0.80 to
$6.40 per share were approved by the Company's Board of Directors for issuance
to a director. The director resigned his position in August 1995. During 1996,
the Board of Directors concluded that the grant of the warrants to the former
director had neither been properly authorized under the Washington Business
Corporation Act nor supported by adequate consideration. The former director
disputes the Company's view of the circumstances surrounding the approval of the
Warrants, has engaged counsel with respect to the matter and has informed the
Company that if settlement of the parties' differences with respect to the
warrants is not reached, he intends to commence legal action seeking damages for
breach of contract and a declaration that the warrants are in full force and
effect. Although the Company believes its position with respect to the warrants
is correct, if the former director were to commence legal action against the
Company, there is no assurance that he would not prevail on some or all of such
claims.
Dr. Thomas A. Furness has notified the Company that he believes he is
entitled to additional compensation for past services to the Company. Dr.
Furness has proposed that the Company award him warrants to purchase 156,250
shares of Common Stock. The Company believes that it has fulfilled all
obligations it had to Dr. Furness. Dr. Furness has retained counsel to represent
him in connection with his proposal to the Company and has informed the Company
that unless his proposal is accepted he intends to commence legal action against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
21
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
WARRANTS; RELATED SHAREHOLDER MATTERS.
Until August 27, 1996, there was no public market for the Company's Common
Stock or Warrants. Since that date, the Common Stock and Public Warrants have
been traded on the Nasdaq National Market under the symbols "MVIS" and "MVISW,"
respectively. As of March 19, 1997, there were 141 holders of record of
5,778,776 shares of Common Stock and 15 holders of record of 2,256,250 Public
Warrants. The Company has never declared or paid cash dividends on the Common
Stock. The Company currently anticipates that it will retain all future earnings
to fund the operation of its business and does not anticipate paying dividends
on the Common Stock in the foreseeable future.
The Company's Common Stock and Public Warrants began trading publicly on
August 27, 1996. The quarterly high and low sales prices since August 27, 1996
as reported by the Nasdaq National Market are as follows:
<TABLE>
<CAPTION>
Quarter Ended Common Stock Public Warrants
- ------------------------------ ------------------------ -------------------------
High Low High Low
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
September 30, 1996 6 5/8 4 3/4 2 1/2 1 13/32
December 31, 1996 7 3/8 3 3/8 2 1/2 3/4
March 31, 1997 7 11/16 3 1/2 2 11/16 15/16
(through March 19, 1997)
</TABLE>
On March 19, 1997, the closing sale price for the Common Stock was $6.688
and the closing sale price for the Warrants was $2.313.
22
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company commenced operations in May 1993 to develop and commercialize
technology for displaying images and information directly onto the retina of the
eye. Since its formation, the Company has been in the development stage, with
its principal activities consisting of assembling a qualified technical and
executive management team, working with the HIT Lab in the development of the
VRD technology and prototype products and raising capital. Since the completion
of its initial public offering in August 1996, the Company has hired qualified
sales, technical and other personnel. The Company also has established and
equipped its own in-house laboratory for the continuing development of the VRD
technology and has transferred the core research and development work from the
HIT Lab to the Company. The Company has generated no significant revenues and
has incurred substantial losses since its inception. The Company expects to
continue to incur significant operating losses over the next several years.
The Company's objective is to become a leading provider of personal display
products and imaging technology in a broad range of professional and consumer
applications. The Company expects to achieve this objective and to generate
revenues through a combination of the following activities: licensing its
technology to OEMs of consumer electronic products; providing engineering
services associated with cooperative development arrangements, including
research contracts; and the manufacturing and sale of high-performance personal
display products to certain professional users directly, through OEMs, or
through joint ventures. The Company currently is in discussions with systems and
equipment manufacturers in the defense and wireless communications, computing,
and electronics industries. The Company expects to work with certain of these
manufacturers to develop or co-develop specific products that the Company
believes to be the most commercially viable.
The Company does not expect to have any significant revenues until late
1997 at the earliest. Revenues in late 1997, if any, are expected to be derived
from cooperative development projects. Revenues from sales of products may not
occur until substantially later, if at all.
The Company currently has two prototype versions of the VRD: several
monochromatic portable units and a full color bench top model. The Company
expects to continue funding prototype and demonstration versions of products
incorporating the VRD technology throughout 1997. Future revenues, profits and
cash flow will depend on acceptance of the VRD technology by various industries
and OEMs, market acceptance of products incorporating the VRD technology and the
technical performance of such products. Additionally, the Company must be able
to attract, retain and motivate qualified technical and management personnel and
both anticipate and adapt to a rapidly changing, competitive market for
information display technologies. See "Item 1 - Description of Business
Considerations Related to the Company's Business."
23
<PAGE>
Plan of Operation
The Company intends to invest over the next year in ongoing innovation and
improvements to the VRD technology, including the development of component
technology and prototypes and the design of subsystems and products. The Company
has established, staffed, and equipped an in-house laboratory to support VRD
technology development and product development engineering associated with
future cooperative development projects. The Company also intends to continue
hiring technical and business personnel to achieve the Company's sales and
marketing, and technology development objectives. The Company also intends to
complete work under the Research Agreement with the University of Washington in
October 1997.
The Company intends to enter into strategic co-development relationships
with systems and equipment manufacturers to pursue development of commercial
products incorporating the VRD technology. The Company has recently hired a Vice
President of Sales and Marketing with experience in strategic sales of technical
products and intends to hire additional sales and marketing staff in furtherance
of this objective.
Results of Operations
The Company is in the development stage and has not generated significant
revenues. As of December 31, 1996, the Company had an accumulated deficit since
inception of $10,563,500. The Company expects continuing and increasing
expenditures in research and development and sales and marketing as it focuses
its efforts on further development and refinement of the VRD technology and
expands commercialization efforts for anticipated future products.
Contract Revenues. The Company has completed two research agreements with
Fujitsu Research Institute ("FRI"). The FRI agreements provided for the Company
to carry out research with respect to potential applications for the VRD. The
Company also completed the requirements under a purchase order from the Lockheed
Martin Corp. Information Systems Division for a prototype display model of the
VRD for a military trade show in October 1996. Contract revenues were $102,200,
$29,300, and $131,500 for the year ended December 31, 1996, the year ended
December 31, 1995, and for the period cumulative from inception through December
31, 1996, respectively.
Research and Development Expenses. Research and development expenses
consist primarily of payments made under the Research Agreement with the
University of Washington, as well as payroll and related costs of employees and
consultants engaged in development activities, and fees related to patent
applications. To date, the Company has expensed all such costs. See Note 2 of
Notes to the Financial Statements. Research and development expenses during the
year ended December 31, 1996, the year ended December 31, 1995 and the period
cumulative from inception through December 31, 1996, were $1,788,500,
$1,931,200, and $6,670,900, respectively. During 1996, the Company hired a
Director of Engineering to manage the Company's core technology and internal
product
24
<PAGE>
development programs and to manage product development work that the Company
expects to perform in connection with co-development agreements. The Company
also hired a Director of Research in 1996 to direct and manage the continuing
advancement of the Company's core technology and to develop further the
Company's intellectual property. The Company believes that a significant level
of continuing research and development expense will be required to commercialize
the VRD technology and to develop products incorporating VRD technology.
Accordingly, the Company anticipates that it will devote substantial resources
to research and development, including hiring additional personnel, and that
these costs will continue to increase in future periods.
Marketing, General and Administrative Expenses. Marketing, general and
administrative expenses include payroll and related costs for the Company's
administrative and executive personnel, costs related to the Company's sales and
marketing activities, office lease expenses and other overhead costs, including
legal and accounting costs and fees of consultants and professionals. In 1993
and 1994, the Company used consultants extensively to evaluate the potential for
commercialization of the VRD technology and to develop its business plan.
Marketing, general and administrative expenses during the year ended December
31, 1996, the year ended December 31, 1995 and the period cumulative from
inception through December 31, 1996, were approximately $1,849,800, $1,037,700,
and $4,150,100, respectively. The Company recently hired a Vice President for
Sales and Marketing to pursue strategic relationships with systems and equipment
manufacturers for the joint development of commercial products incorporationg
the VRD technology. The Company expects marketing, general and administrative
expenses to increase substantially in future periods as the Company makes
additional investments in sales and marketing activities to promote and launch
its VRD technology and anticipated products and as it increases the number of
employees and the level of corporate and administrative activity.
Income Taxes. At December 31, 1996, the Company has net operating loss
carry-forwards of approximately $4,943,000 for federal income tax reporting
purposes. The net operating losses will expire beginning in 2005 if not
previously utilized. In certain circumstances, as specified in the Internal
Revenue Code, a 50% or more ownership change by certain combinations of the
Company's stockholders during any three-year period would result in limitations
on the Company's ability to utilize its net operating loss carry-forwards. The
Company has determined that such a change occurred during 1995 and the annual
utilization of loss carry-forwards generated through the period of that change
will be limited to approximately $761,000.
Liquidity and Capital Resources
To date, the Company has financed its operations primarily through private
and public offerings of common stock and private placements of convertible
preferred stock and convertible notes. In August 1996, the Company completed an
initial public offering of 2,250,000 units, each unit consisting of one share of
Common Stock and one five-year
25
<PAGE>
redeemable Public Warrant to purchase one share of Common Stock at $12.00 per
share. The Company received net proceeds from the offering of approximately
$15,500,000 after deducting underwriting discounts and offering expenses. At
December 31, 1996, the Company had cash and cash equivalents of $14,265,800.
Through December 31, 1996, the Company had incurred an accumulated deficit
of $10,563,500, of which $4,171,000 represented payments made to the University
of Washington to fund the research and development of its VRD technology
pursuant to the terms of the Research Agreement, and $1,422,300 represented
non-cash expenses for compensation and services associated with the issuances of
stock, warrants and options.
In July 1996, the Company raised net proceeds of $707,500 in a private
placement of $750,000 in principal amount of its 7% Convertible Subordinated
Notes due 1997 (the "7% Notes"). From November 25, 1996, through March 15, 1997,
the 7% Notes were redeemable at the option of the noteholder at par (plus
accrued and unpaid interest) plus 6,000 shares of Common Stock for every
$100,000 principal so redeemed. In November and December 1996, the 7% Notes were
redeemed in full (plus accrued interest) and 45,000 shares of Common Stock were
issued to the noteholders.
The Company's future expenditures and capital requirements will depend on
numerous factors, including the progress of its research and development
program, the progress in commercialization activities and arrangements, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments
and the ability of the Company to establish cooperative development, joint
venture and licensing arrangements. In order to maintain its exclusive rights
under the UW License Agreement, the Company is obligated to make additional
quarterly research payments through August 1997 aggregating $641,700 and,
thereafter, to make additional payments in respect of royalties on the VRD. See
"Item 1 - Description of Business - University of Washington License Agreement."
If the Company is successful in establishing OEM co-development and joint
venture arrangements, it is expected that the Company's partners would fund
certain non-recurring engineering costs for product development. Nevertheless,
the Company expects its cash requirements to increase significantly each year as
it expands its activities and operations. There can be no assurance that the
Company will ever be able to generate revenues or achieve or sustain
profitability.
The Company believes that its current cash balances will satisfy its
budgeted cash requirements for at least the next 12 months based on the
Company's current operating plan. Actual expenses, however, may exceed the
amounts budgeted therefor and the Company may require additional capital earlier
to develop its products, to respond to competitive pressures or to meet
unanticipated development difficulties. The Company's operating plan calls for
the purchase and installation of certain laboratory equipment and facilities and
the addition of technical and business staff. The operating plan also provides
for the completion of the Research Agreement with the University of Washington
and the development of strategic relationships with systems and equipment
manufacturers. See "Item 1 - Description of Business." There can be no assurance
that additional financing will be available to the
26
<PAGE>
Company or that, if available, it will be available on terms acceptable to the
Company on a timely basis. If adequate funds are not available to satisfy either
short-term or long-term capital requirements, the Company may be required to
limit its operations significantly. The Company's capital requirements will
depend on many factors, including, but not limited to, the rate at which the
Company can, directly or through arrangements with OEMs, introduce products
incorporating the VRD technology and the market acceptance and competitive
position of such products. See "Item 1 - Description of Business -
Considerations Related to the Company's Business - Capital Requirements."
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants............................................ 29
Balance Sheet, December 31, 1996 and December 31, 1995....................... 30
Statement of Operations for the Years Ended December 31, 1996
and December 31, 1995, and from Inception (May 1993) to
December 31, 1996 ........................................................... 31
Statement of Shareholders' Equity (Deficit) from Inception
(May 1993) to December 31, 1996.............................................. 32
Statement of Cash Flows for the Years Ended December 31, 1996
and December 31, 1995, and from Inception (May 1993) to
December 31, 1996 ........................................................... 33
Notes to Financial Statements............................................. 34-43
28
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Shareholders of
Microvision, Inc.
In our opinion, the accompanying balance sheet and the related statement of
operations, of shareholders' equity (deficit) and of cash flows, after the
restatement described in Note 8, present fairly, in all material respects, the
financial position of Microvision, Inc., a development stage enterprise, at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended and for the period from inception (May 1993) to
December 31, 1996 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Seattle, Washington
May 23, 1997
29
<PAGE>
<TABLE>
<CAPTION>
Microvision, Inc.
(A Development Stage Enterprise)
Balance Sheet
- ----------------------------------------------------------------------------------------------------------
December 31,
1996 1995
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 14,265,800 $ 98,500
Accounts receivable 25,000
Other assets 86,500
Receivables from former employees 69,400
-------------- --------------
Total current assets 14,377,300 167,900
Equipment, net 157,800 9,100
Other assets 30,200 2,000
-------------- --------------
Total assets $ 14,565,300 $ 179,000
============== ==============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities
Accounts payable and other $ 388,600 $ 207,500
Accrued compensation and related liabilities 667,600 336,400
-------------- --------------
Total current liabilities 1,056,200 543,900
-------------- --------------
Commitments and contingencies (Notes 5 and 6)
Shareholders' equity (deficit)
Preferred stock, no par value, 31,250,000 shares
authorized, 0 and 499,478 issued and
outstanding 2,038,900
Common stock, no par value, 31,250,000 shares
authorized, 5,778,776 and 3,098,828 shares
issued and outstanding 24,116,200 4,745,900
Deferred compensation (43,600) (42,800)
Deficit accumulated during development stage (10,563,500) (7,106,900)
-------------- --------------
Total shareholders' equity (deficit) 13,509,100 (364,900)
-------------- --------------
Total liabilities and shareholders' equity (deficit) $ 14,565,300 $ 179,000
============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Microvision, Inc.
(A Development Stage Enterprise)
Statement of Operations
- ----------------------------------------------------------------------------------------------------------
Inception
Year ended Year ended (May 1993) to
December 31, December 31, December 31,
1996 1995 1996
Contract revenue $ 102,200 $ 29,300 $ 131,500
------------ ------------ ------------
<S> <C> <C> <C>
Research and development expense 1,788,500 1,931,200 6,670,900
Marketing, general and administrative
expense 1,849,800 1,037,700 4,150,100
------------ ------------ ------------
3,638,300 2,968,900 10,821,000
------------ ------------ ------------
Loss from operations (3,536,100) (2,939,600) (10,689,500)
------------ ------------ ------------
Interest income 280,000 31,800 362,300
Interest expense 200,500 35,800 236,300
------------ ------------ ------------
Net loss $ (3,456,600) $ (2,943,600) $(10,563,500)
============ ============ ============
Pro forma net loss per share (unaudited) $ (0.72) $ (0.63)
============ ============
Pro forma weighted average shares and
share equivalents outstanding (unaudited) 4,818,364 4,677,077
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Microvision, Inc.
(A Development Stage Enterprise)
Statement of Shareholders' Equity (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Page 1 of 2
Preferred stock Common stock Deferred Subscription
Shares Amount Shares Amount compensation receivable
<S> <C> <C> <C> <C> <C> <C>
Issuance of founder's shares, net 1,893,750 $ 212,100
Issuance of stock in exchange for Exclusive
License agreement (at $3.52/share) 187,500 660,000
Issuance of stock for cash (at $3.52/share),
net of costs 937,500 3,077,400
Net loss for period ended December 31, 1993
---------- ------------
Balance at December 31, 1993 3,018,750 3,949,500
Issuance of stock for cash (at $6.40/share) 14,453 92,500
Issuance of warrants and options for common stock 446,800 $ (335,200)
Net loss for year ended December 31, 1994
---------- ------------ ----------
Balance at December 31, 1994 3,033,203 4,488,800 (335,200)
Issuance of stock upon exercise of warrants 62,500 6,000
Issuance of stock to Board members for services 3,125 11,000
Issuance of warrants and options for common
stock 325,100
Issuance of preferred stock for cash, net of
costs (at $4.80/share) 499,478 $ 2,038,900
Amortization of deferred compensation, net 220,150
Cancellation of stock options (85,000) 72,250
Net loss for year ended December 31, 1995
-------- ----------- ---------- ------------ ----------
Balance at December 31, 1995 499,478 2,038,900 3,098,828 4,745,900 (42,800)
Issuance of stock to Board members for services 22,250 110,000 (65,500)
Issuance of warrants and options for common stock 23,400
Issuance of preferred stock for cash, net of costs
(at $4.80/share) 360,298 1,493,900
Issuance of common stock and warrants for
services 10,605 71,000
Exercise of warrants for common stock 50,000 40,000 $ (10,000)
Cashless exercise of warrants for common stock 296,875
Cancellation of founder's common stock (859,375) (66,000)
Amortization of deferred compensation, net 64,700
Issuance of common stock and warrants in IPO 2,250,000 15,482,900
Conversion of convertible preferred stock (859,776) (3,532,800) 859,776 3,532,800
Collection of subscription receivable 10,000
Issuance of stock relating to retirement of 7%
subordinated notes 45,000 176,200
Other 4,817
Net loss for the year ended December 31, 1996
-------- ----------- ---------- ------------ ---------- ----------
Balance at December 31, 1996 - $ - 5,778,776 $ 24,116,200 $ (43,600) $ -
======== =========== ========== ============ ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
32a
<PAGE>
<TABLE>
<CAPTION>
Microvision, Inc.
(A Development Stage Enterprise)
Statement of Shareholders' Equity (Deficit) (continued)
- ----------------------------------------------------------------------------------------
Page 2 of 2
Deficit accumulated Shareholders'
during equity
development stage (deficit)
<S> <C> <C>
Issuance of founder's shares, net $ 212,100
Issuance of stock in exchange for Exclusive
License agreement (at $3.52/share) 660,000
Issuance of stock for cash (at $3.52/share),
net of costs 3,077,400
Net loss for period ended December 31, 1993 $ (1,351,600) (1,351,600)
------------- ------------
Balance at December 31, 1993 (1,351,600) 2,597,900
Issuance of stock for cash (at $6.40/share) 92,500
Issuance of warrants and options for common stock 111,600
Net loss for year ended December 31, 1994 (2,811,700) (2,811,700)
------------- ------------
Balance at December 31, 1994 (4,163,300) (9,700)
Issuance of stock upon exercise of warrants 6,000
Issuance of stock to Board members for services 11,000
Issuance of warrants and options for common
stock 325,100
Issuance of preferred stock for cash, net of
costs (at $4.80/share) 2,038,900
Amortization of deferred compensation, net 220,150
Cancellation of stock options (12,750)
Net loss for year ended December 31, 1995 (2,943,600) (2,943,600)
------------- ------------
Balance at December 31, 1995 (7,106,900) (364,900)
Issuance of stock to Board members for services 44,500
Issuance of warrants and options for common stock 23,400
Issuance of preferred stock for cash, net of costs
(at $4.80/share) 1,493,900
Issuance of common stock and warrants for
services 71,000
Exercise of warrants for common stock 30,000
Cashless exercise of warrants for common stock
Cancellation of founder's common stock (66,000)
Amortization of deferred compensation, net 64,700
Issuance of common stock and warrants in IPO 15,482,900
Conversion of convertible preferred stock
Collection of subscription receivable 10,000
Issuance of stock relating to retirement of 7%
subordinated notes 176,200
Other
Net loss for the year ended December 31, 1996 (3,456,600) (3,456,600)
------------- ------------
Balance at December 31, 1996 $ (10,563,500) $ 13,509,100
============= ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
32b
<PAGE>
<TABLE>
<CAPTION>
Microvision, Inc.
(A Development Stage Enterprise)
Statement of Cash Flows
- -------------------------------------------------------------------------------------------------------------
Inception
Year ended Year ended (May 1993) to
December 31, December 31, December 31,
1996 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (3,456,600) $ (2,943,600) $ (10,563,500)
Adjustments to reconcile net loss to
net cash used in operations
Depreciation and write off of
equipment 44,000 2,600 79,700
Noncash expenses related to issuance
of stock, warrants and options and
amortization of deferred compensation 313,800 543,500 1,628,900
Change in:
Accounts receivable (25,000) (25,000)
Other assets (86,500) (86,500)
Receivables from former employees 69,400 47,200
Allowance for doubtful accounts (66,600)
Other assets (28,200) 6,400 (30,200)
Accounts payable and other 181,100 60,000 388,600
Accrued compensation and related
liabilities 331,200 336,400 667,600
--------------- --------------- ---------------
Net cash used in operating activities (2,656,800) (2,014,100) (7,940,400)
--------------- --------------- ---------------
Cash flows from investing activities
Purchases of equipment (192,700) - (237,500)
--------------- --------------- ---------------
Net cash used in investing activities (192,700) - (237,500)
--------------- --------------- ---------------
Cash flows from financing activities
Proceeds from 7% convertible
subordinated notes 750,000 - 750,000
Repayment of 7% convertible
subordinated notes (750,000) - (750,000)
Net proceeds from issuance of common
stock 15,522,900 6,000 18,910,900
Net proceeds from issuance of preferred
stock 1,493,900 2,038,900 3,532,800
--------------- --------------- ---------------
Net cash provided by financing
activities 17,016,800 2,044,900 22,443,700
--------------- --------------- ---------------
Net increase in cash and cash equivalents 14,167,300 30,800 14,265,800
Cash and cash equivalents at beginning
of period 98,500 67,700 -
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 14,265,800 $ 98,500 $ 14,265,800
=============== =============== ===============
Cash paid for interest $ 21,700 $ 35,800 $ 57,500
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
33
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
1. The Company
Microvision, Inc. (the Company), a Washington corporation, was incorporated
May 31, 1993. The Company was established to develop, manufacture and
market Virtual Retinal Display (VRD) technology, which projects images
directly onto the eye's retina. The Company is working to develop the VRD
for potential defense, healthcare, business, industrial and consumer
applications.
The Company is a development stage enterprise which has incurred
significant net losses since inception and has relied upon its ability to
obtain financing, which to date has been principally from the sale of
stock.
On August 30, 1996, the Company completed its initial public offering
(IPO) of 2,250,000 units each consisting of one share of common stock and
one five-year redeemable warrant to purchase one share of common stock at
$12.00 per share. The Company received net proceeds from the offering of
$15.5 million after deducting underwriting discounts and offering expenses.
2. Summary of significant accounting policies
Cash and cash equivalents
The Company places its excess cash investments in high quality, short-term
money market instruments with high credit quality financial institutions.
Equipment
Equipment is stated at cost and depreciated over the estimated useful lives
of the assets (three to five years) using the straight-line method.
Contract revenue
Contract revenue has been recorded on the completed contract method of
revenue recognition.
Income taxes
The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires that
provision be made for taxes currently due and for the expected future tax
effects of temporary differences between book and tax bases of assets and
liabilities.
Net loss per share
Net loss per share is computed using the weighted average number of common
and dilutive common stock equivalent shares outstanding during the period,
after applying the treasury stock method. For periods in which the Company
reports a net loss, common stock equivalents do not include stock options
and warrants as their effect would be anti-dilutive.
Pro forma net loss per share is computed on the basis of the weighted
average number of shares of common stock outstanding during the period
after giving retroactive adjustment for the conversion of all Series A
preferred stock into an equal number of shares of common stock, which
occurred upon completion of the IPO, and after consideration of the
dilutive effect, if any, of stock options and warrants. Pursuant to the
requirements of the Securities and Exchange Commission, common equivalent
shares relating to preferred stock and convertible debt (using the
if-converted method) and stock options (using the treasury stock method and
an initial public
34
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
offering price of $5.25 per share) issued subsequent to June 30, 1995 have
been included in the computations through the IPO date.
Research and development
Research and development costs, net of reimbursements, are expensed as
incurred. Research and development costs will be expensed until the net
realizable value of a related product or technology is assured.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to 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.
Stock-based compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which was effective for
the Company beginning in fiscal 1996. Under the provisions of this
statement, employee stock-based compensation expense is measured using
either the intrinsic-value method as prescribed by Accounting Principles
Board Opinion No. 25 or the fair value method described in Statement No.
123. Companies choosing the intrinsic-value method are required to disclose
the pro forma impact of the fair value method on net income and earnings
per share. The Company decided to implement the statement in fiscal 1996
using the intrinsic-value method for its employee stock-based compensation
plans. The Company is required to implement Statement No. 123 for
stock-based awards to other than employees. Accordingly, the Company has
recorded an expense of $270,600, $31,200 and $1,059,600 for the years
ended December 31, 1996 and 1995 and for the period from inception to
December 31, 1996 related to warrants and options issued to other than
employees.
3. Composition of certain financial statement captions
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Receivables from former employees
Receivable $ - $ 2,800
Notes 66,600
------------- -------------
$ - $ 69,400
============= =============
Equipment, net
Equipment $ 205,500 $ 12,800
Accumulated depreciation (47,700) (3,700)
------------- -------------
$ 157,800 $ 9,100
============= =============
</TABLE>
35
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
4. Shareholders' equity (deficit)
Common shares
In July 1993, the Company issued 1,893,750 initial shares of its common
stock to the founders for $212,100, net of issuance costs. Subscribers to
the initial offering received warrants to purchase an additional 1,893,750
shares of common stock at an exercise price of $.80 per share and warrants
to purchase an additional 946,875 common shares at an exercise price of
$2.40 per share. The warrants are exercisable through July 24, 2003.
Warrants for 96,875, 625,000 and 1,893,750 shares were canceled during
1996, 1995 and 1994, respectively. Warrants for 225,000 shares were
exercised during 1996.
In September 1993, the Company completed a private placement of common
stock in which 375,000 shares of common stock were issued for $3.52 per
share. A warrant for the purchase of an additional share for $4.80 was
issued with each share of common stock. All of the warrants expired,
unexercised, in April 1995.
In October 1993, the Company issued 187,500 shares of common stock valued
at $660,000 to acquire a technology license as described in Note 5.
In November 1993, the Company completed an additional private placement of
common stock in which 562,500 shares of common stock were issued for $3.52
per share.
In October 1994, the Company completed its third private placement of
common stock in which 14,453 shares of common stock were issued for $6.40
per share.
On July 10, 1996, the Company issued 7% Convertible Subordinated Notes in
the amount of $750,000. The Notes bore interest at 7% payable in arrears on
December 15 and June 15 and were due July 10, 1997. The Notes were
convertible at any time following 90 days after the effective date of a
public offering of the Company's common stock generating proceeds of at
least $5 million into 18,000 shares of common stock for each $100,000 in
outstanding principal amount of Notes. Additionally, at any time following
90 days after the effective date of such a public offering and prior to
March 15, 1997, the holder could redeem the unpaid principal amount of
Notes plus accrued interest and receive 6,000 shares of common stock of the
Company for each $100,000 in principal redeemed. In late 1996, the Company
repaid the Notes on demand by holders and issued 45,000 shares of common
stock to the holders. The aggregate fair value of the shares of common
stock issued of $176,200 was charged to interest expense.
In August 1996, the Company completed an initial public offering (IPO) of
2,250,000 units, each consisting of one share of common stock and one
warrant to purchase one share of common stock. The Company received net
proceeds from the offering of $15,482,900. In anticipation of the IPO, on
July 10, 1996, subject to shareholder approval, the Company's Board of
Directors approved a 1-for-3.2 reverse stock split of the Company's common
and preferred stock. The reverse stock split was approved by the
shareholders on August 9, 1996. All information in these financial
statements pertaining to shares of capital stock and per share amounts has
been adjusted
36
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
to give retroactive effect to the reverse split. In connection this action,
a nominal number of fractional shares were redeemed in cash.
Preferred shares
In November 1994, the Company authorized the issuance and sale of 1,875,000
shares of Series A Preferred Stock which had liquidation and dividend
preferences over common stock. Dividends accrued when and if declared by
the Board of Directors. The Series A Preferred Stock was convertible into
an equal number of shares of common stock. The Series A Preferred Stock was
converted into 859,776 shares of common stock in conjunction with the IPO.
Warrants
On December 1, 1993, warrants to purchase 125,000 shares of common stock of
the Company at an exercise price of $3.52 per share were issued to persons
who performed services relating to raising equity capital. These warrants
were exercised in 1996.
During 1993, warrants to purchase a total of 468,750 shares of common stock
were issued in two separate issuances to an investment banker who raised
capital for the Company. The first issuance was for warrants to purchase
156,250 common shares at an exercise price of $4.00 per share and the
second was for warrants to purchase 312,500 common shares at an exercise
price of $4.80 per share. During 1995, the Company extended the exercise
period and reduced the number of shares associated with the warrants issued
such that warrants to purchase 359,375 shares of common stock at an
exercise price of $4.80 per share remained outstanding. During 1996, the
exercise price was modified and the number of shares associated with these
warrants was again reduced, such that warrants to purchase 125,000 shares
of common stock at $6.40 per share remain outstanding and expire in
November 1998.
During 1994, two separate issuances of warrants were made to persons who
performed capital raising services. The first issuance was for warrants to
purchase 62,500 shares of common stock of the Company at an exercise price
of $.10 per share. The second issuance was for warrants to purchase 62,500
shares of common stock of the Company at an exercise price of $3.20 per
share and expiration date of March 31, 1999. Warrants granted under the
first issuance were exercised during 1995 for proceeds of $6,000. The
remaining warrants were exercised in 1996.
In September 1995, the Company granted warrants to purchase 31,250 shares
of common stock at an exercise price of $4.80 per share to a consultant who
performed capital raising services. The warrants were granted at their
estimated fair value as determined by the Company. The warrants vest
ratably over one year and expire five years following the date of issue. In
August 1996, the exercise price of the warrants was increased to $6.40 per
share. In August 1996, the exercise price of the warrants was further
increased to $8.00 per share.
In December 1995, the Company issued warrants to purchase 31,250 shares of
common stock at an exercise price of $4.80 per share to two consultants
involved in research and development and capital raising activities. The
warrants were granted at their estimated fair value as determined by the
Company. The warrants vest ratably over one year and expire five years
following the date of issue. In July 1996, the exercise price of the
warrants issued to one of the consultants was increased to $6.40 per
37
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
share. In August 1996, the exercise price of the warrants issued to the one
consultant was further increased to $8.00 per share.
In December 1995, the Company granted a warrant to purchase 1,563 shares of
common shares at an exercise price of $4.80 per share for rent expense to
be incurred in January 1996. These warrants vested in January 1996 and
expire five years from the date of issue.
In March 1996, the Company granted warrants to purchase 2,500 shares of
common stock at an exercise price of $4.80 per share to an organization
which provided professional services to the Company. The warrants were
valued at $4,200, the estimated fair value as determined by the Company.
The warrants expire five years following the date of issue.
In July 1996, the Company issued warrants to purchase 26,400 shares of
common stock at an exercise price of $6.40 per share to persons who
performed capital raising services. The warrants were granted at their
estimated fair values as determined by the Company. The warrants expire
five years following the date of issue.
The following summarizes activity with respect to warrants during 1995 and
1996:
<TABLE>
<CAPTION>
Warrants
Exercise
Shares price
<S> <C> <C>
Outstanding at December 31, 1994 2,103,125 $ .10-4.80
Granted 64,063 4.80-6.40
Exercised (62,500) .10
Canceled/expired (1,171,875) .80-4.80
------------- -------------
Outstanding at December 31, 1995 932,813 2.40-6.40
Granted 2,681,975 2.40-8.00
Exercised (412,500) 2.40-3.52
Canceled/expired (550,000) 2.40-6.40
------------- -------------
Outstanding at December 31, 1996 2,652,288 $ 4.80-8.00
============= =============
Exercisable at December 31, 1996 2,471,608 $ 4.80-8.00
============= =============
</TABLE>
Options
During 1993, the Company adopted the 1993 Stock Option Plan which provides
for granting incentive stock options (ISOs) and nonqualified options (NSOs)
to employees, directors, officers, and certain nonemployees of the Company
as determined by the Board of Directors, or its designated committee (Plan
Administrator), for the purchase of up to a total of 228,938 shares of the
Company's authorized but unissued common stock. The date of grant, option
price, vesting period and other terms specific to options granted under
such plan were determined by the Plan Administrator. In September 1995, an
additional 625,000 shares were reserved for issuance under the 1993 Stock
Option Plan.
38
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
During 1994, the Company adopted the 1994 Combined Incentive and
Nonqualified Stock Option Plan which provided for the granting of ISOs and
NSOs to employees, directors, officers, and certain nonemployees of the
Company as determined by the Plan Administrator for the purchase of common
shares not to exceed a total of 435,000 of the Company's authorized but
unissued shares of common stock, subject to adjustment by the Plan
Administrator. The date of grant, option price, vesting terms and other
terms specific to options granted under such plan were determined by the
Plan Administrator.
During 1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan)
and the 1996 Independent Director Stock Plan (the Director Plan). The 1996
Plan provides for granting ISOs and NSOs to employees, officers and agents
of the Company as determined by the Plan Administrator, for the purchase of
up to 750,000 shares of the Company's authorized but unissued common stock.
The terms and conditions of any options granted, including the exercise
price and vesting period are to be determined by the Plan Administrator.
The Director Plan provides for granting up to a total of 75,000 shares of
common stock to nonemployee directors of the Company as determined by the
Board of Directors or a committee thereof. The Company expects to terminate
the prior plans effective immediately following the issuance of the shares
of common stock subject to the outstanding grants thereunder.
The following table summarizes activity with respect to options for the two
years ended December 31, 1996:
<TABLE>
<CAPTION>
Weighted-
average
exercise
Shares price
<S> <C> <C>
Outstanding at December 31, 1994 254,345 $ 3.42
Granted 391,547 4.24
------------- -------------
Outstanding at December 31, 1995 645,892 3.91
Granted 387,124 6.86
Forfeited 53,650 7.59
------------- -------------
Outstanding at December 31, 1996 979,366 $ 4.88
============= =============
Weighted average fair value of options granted,
net of forfeitures, during 1996 $ 2.11
=============
</TABLE>
39
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Number Weighted- Number
outstanding average Weighted- exercisable Weighted-
at remaining average at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1996 life price 1996 price
<S> <C> <C> <C> <C> <C>
$ .80 193,940 4.46 $.80 193,940 $.80
3.20-4.80 221,287 5.49 3.51 209,228 3.45
5.25-8.80 564,139 6.68 6.81 73,425 6.20
------- --------
979,366 476,593
======= =======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its plans. Options issued to employees from inception to December 31,
1996 were recorded at $584,000 based upon the difference between the
exercise price and fair value of the underlying shares as determined by the
Company. However, no value was recorded related to the time value of the
options. Had compensation cost for the Plan been determined based upon the
fair value at the grant date for awards under the Plan consistent with the
methodology prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net loss As reported $ (3,456,600) $ (2,943,600)
Pro forma $ (3,760,600) $ (2,973,400)
Pro forma loss As reported $ (0.72) $ (0.63)
per share Pro forma $ (0.78) $ (0.64)
</TABLE>
The fair value of the options granted during 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1996 and 1995,
respectively: dividend yield of zero percent for all years, expected
volatility of 60% and 0%, risk-free interest rate of 6.55% and 5.95%,
assumed forfeiture rate of 5% for all years, and expected lives of 4 years
and 4.5 years.
5. Commitments and contingencies
In October 1993, the Company concurrently entered into a Research Agreement
and Exclusive License Agreement (License Agreement) with the University of
Washington (UW). The Research Agreement provides for the Company to pay
$5,133,500 to fund agreed-upon VRD research and development activities to
be carried out by the UW. The research funding is
40
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
required to be paid in sixteen quarterly instalments of $320,800 and is
payable at the beginning of each quarter. Should the Company determine that
for any reason it would not be beneficial to continue funding the Research
Agreement, the terms of the Research Agreement permit the Company to
terminate the agreement and discontinue future payments. Total payments
made for 1996 and 1995 and the period from inception to December 31, 1996
are $1,283,400, $1,283,400 and $4,171,000, respectively. The Company has
commitments under the agreement to pay an additional $962,500 in 1997.
The License Agreement grants the Company the rights to certain intellectual
property including the technology being developed under the Research
Agreement whereby the Company has an exclusive, royalty-bearing license to
make, use and sell or sublicense the licensed technology. In consideration
for the license, the Company agreed to pay a one-time nonrefundable license
issue fee of $5,133,500. Payments under the Research Agreement are credited
to the license fee. In the event the Research Agreement is terminated and
the Company elects to continue the License Agreement, the remaining license
fee becomes due and payable. If Microvision were to terminate the License
Agreement, it believes that further payments would not be required and,
accordingly, has not booked the balance of payments due as an accrued
expense.
Under the Research Agreement, the Company is required to pay certain costs
related to filing and processing of any patents and copyrights it chooses
to support or fund in accordance with the agreement.
During 1993, the Company issued 187,500 shares of common stock with a fair
value of $660,000, as estimated by the Company, to UW and certain
affiliates as additional consideration under the License Agreement.
Additionally, the Company will pay certain ongoing royalties.
In March 1994, the Company entered into an Exclusive License Agreement
(HALO Agreement) with UW. The HALO Agreement grants the Company the right
to receive certain technical information relating to HALO Display
technology and an exclusive right to market the technical information for
the purpose of commercial exploitation to unaffiliated entities. Under the
HALO Agreement the Company paid $25,000 in 1994 to fund research relating
to the development of certain technical information relating to HALO
Display technology. In addition to the initial payment, the Company has
committed to pay to UW the following:
Upon filing for first patent $75,000 and 31,250 common shares
Upon issuance of the first patent $100,000 and 62,500 common shares
In September 1995, the Company reserved 31,250 shares of common stock for
issuance upon exercise of options to be granted to members of the research
staff at UW. During July 1996, these options were granted with an exercise
price of $6.40 per share.
During the period March 1994 through June 1995, warrants to purchase an
aggregate of 343,750 shares of common stock at prices ranging from $.80 to
$6.40 per share were approved by the Company's Board of Directors for
issuance to a director. The director resigned his position in August 1995.
Subsequent to December 31, 1995, the Board of Directors concluded that the
grant
41
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
of the warrants to the former director had neither been properly authorized
under the Washington Business Corporation Act nor supported by adequate
consideration. The former director disputes the Company's view of the
circumstances surrounding the approval of the warrants, has engaged counsel
with respect to the matter and has informed the Company that if settlement
of the parties' differences with respect to the warrants is not reached, he
intends to commence legal action seeking damages for breach of contract and
a declaration that the warrants are in full force and effect. Although the
Company believes its position with respect to the warrants is correct, if
the former director were to commence legal action against the Company,
there is no assurance that he would not prevail on some or all of such
claims.
A consultant to the Company has notified the Company that he believes he is
entitled to additional compensation for past services to the Company. The
consultant has proposed that the Company award him warrants to purchase
156,250 shares of common stock. The Company believes that it has fulfilled
all obligations it had to the consultant. The consultant has retained
counsel to represent him in connection with his proposal to the Company and
has informed the Company that unless his proposal is accepted he intends to
commence legal action against the Company. Although the Company believes
its position with respect to the warrants is correct, if the consultant
were to commence legal action against the Company, there is no assurance
that he would not prevail on some or all of his claims.
6. Lease commitments
In early 1996, the Company entered into a noncancelable operating lease for
its current office space with an initial term in excess of one year. The
Company exercised an option to occupy additional space at greater cost and
issued 7,693 preferred shares and warrants to purchase 1,563 shares of
common stock to the landlord in lieu of paying cash through July 1996. Rent
expense of approximately $36,900 was recorded for the share issuance and
warrants granted in December 1995. In February 1997, the Company signed an
agreement to occupy additional space, a portion beginning immediately and a
portion beginning no later than July 1, 1997. Future minimum rental
commitments under the operating lease for years ending December 31 are as
follows:
Operating
lease
1997 $ 94,400
1998 109,600
1999 4,100
-------------
$ 208,100
Rent expense was $52,600, $18,700, and $132,400 for 1996 and 1995 and for
the period from inception to December 31, 1996.
7. Income taxes
A current provision for income taxes has not been recorded for 1996 or 1995
or the period inception to date due to taxable losses incurred during such
periods.
42
<PAGE>
Microvision, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
A valuation allowance has been recorded for deferred tax assets because
realization is primarily dependent on generating sufficient taxable income
prior to expiration of net operating loss carry-forwards.
At December 31, 1996, the Company has net operating loss carry-forwards of
approximately $4,943,000 for federal income tax reporting purposes. The net
operating losses will expire beginning in 2005 if not previously utilized.
In certain circumstances, as specified in the Internal Revenue Code, a 50%
or more ownership change by certain combinations of the Company's
stockholders during any three-year period would result in limitations on
the Company's ability to utilize its net operating loss carry-forwards. The
Company has determined that such a change occurred during 1995 and the
annual utilization of loss carry-forwards generated through the period of
that change will be limited to approximately $761,000.
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Net operating loss carry-forward $ 1,681,000 $ 956,000
Capitalized research and development 1,515,000 1,143,000
Other 374,000 247,000
------------- -------------
3,570,000 2,346,000
Valuation allowance (3,570,000) (2,346,000)
------------- -------------
Deferred taxes $ - $ -
============= =============
</TABLE>
8. The Company restated its financial statements for the year ended
December 31, 1996 to change the amount reported as pro forma net loss
per share for the year ended December 31, 1996. The original computation
excluded the effect of 859,375 shares of stock which were rescinded in
May 1996. There was no change to reported net income. The following
summarizes the restatement:
As Previously
Reported As Restated
Pro forma net loss per share (unaudited) $(0.66) $(0.72)
Pro forma weighted average shares and
share equivalents outstanding (unaudited) 5,204,635 4,818,364
43
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
44
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------- --- -------------------------------------------
<S> <C> <C>
Richard F. Rutkowski (1) 41 Chief Executive Officer, President and
Director
Stephen R. Willey 43 Executive Vice President and Director
Richard A. Raisig (1) 49 Chief Financial Officer and Vice President,
Operations and Director
Walter J. Lack (1)(2) 49 Director
Robert A. Ratliffe 36 Director
Jacob Brouwer (2) 70 Director
Richard A. Cowell 49 Director
- --------------
(1) Member of the Compensation and Finance Committees
(2) Member of the Audit Committee
</TABLE>
Richard F. Rutkowski served as Chief Operating Officer of the Company from
December 1994 until September 1995, Chief Executive Officer of the Company since
September 1995, as a director of the Company since August 1995, and was elected
President of the Company in July 1996. Between November 1992 and May 1994, Mr.
Rutkowski served as Executive Vice President of Medialink Technologies
Corporation (formerly Lone Wolf Corporation), a developer of high speed digital
networking technology for multimedia applications in audio-video computing,
consumer electronics and telecommunications. Between February 1990 and April
1995, Mr. Rutkowski was principal of Rutkowski, Erickson, Scott, a consulting
firm. Mr. Rutkowski also serves as a director of Digital Data Networks, Inc., a
developer of wireless communications systems and networked electronic display
media for the transit industry.
Stephen R. Willey has served as Executive Vice President of the Company
since October 1995 and as a director since June 1995. Mr. Willey also serves as
the Company's technical liaison to the University of Washington's HIT Lab.
Between January 1994 and April 1996, Mr. Willey served as an outside consultant
to the Company through DGI The Development Group, Inc. ("DGI"), a business and
technology consulting firm that Mr. Willey founded in 1982 and CSI Connection
Systems, Inc., also a business and technology
45
<PAGE>
consulting firm founded by Mr. Willey. As principal of DGI, Mr. Willey provided
technology consulting services to CREO Products, Inc., an electro-optics
equipment manufacturer, between June 1989 and December 1992. Mr. Willey also
co-founded PRO.NET Communications, Inc., an Internet services company. Mr.
Willey has served as a director of PRO. NET since 1994.
Richard A. Raisig has served as Chief Financial Officer and Vice President,
Operations of the Company since August 1996 and as a director of the Company
since March 1996. Mr. Raisig was Chief Financial Officer of Videx Equipment
Corporation, a manufacturer and rebuilder of wire processing equipment for the
cabling industry from June 1995, until August 1996. From July 1992 to May 1995,
Mr. Raisig was Chief Financial Officer and Senior Vice President-Finance for
Killion Extruders, Inc., a manufacturer of plastic extrusion equipment. From
February 1990 to July 1992, Mr. Raisig was Managing Director of Crimson Capital
Company, an investment banking firm. Prior to 1990, Mr. Raisig was a Senior Vice
President of Dean Witter Reynolds, Inc. Mr. Raisig is a Certified Public
Accountant.
Walter J. Lack has served as a director of the Company since August 1995.
Mr. Lack is a partner of Engstrom, Lipscomb & Lack, a Los Angeles, California
law firm that he founded in 1974. Mr. Lack has acted as a special arbitrator for
the Superior Court of the State of California since 1976 and for the American
Arbitration Association since 1979. Mr. Lack also serves as a director of HCCH
Insurance Holdings, Inc., a multinational insurance company listed on The New
York Stock Exchange. Mr. Lack has been involved in a number of start-up
companies, both as an investor and as a director.
Robert A. Ratliffe joined the Company as a director in July 1996. Mr.
Ratliffe has been Vice President and principal of Eagle River, Inc., an
investment company specializing in the telecommunications and technology
sectors, and Vice President of Communications for Nextel Communications, Inc., a
wireless telecommunications company, since early 1996. Between 1986 and 1996,
Mr. Ratliffe served as Senior Vice President, Communications, for AT&T Wireless
Services, Inc., and its predecessor, McCaw Cellular Communications, Inc., where
he also served as Vice President of External Affairs and as Vice President of
Acquisitions and Development. Prior to joining McCaw Cellular Communications,
Inc., Mr. Ratliffe was a Vice President with Seafirst Bank.
Jacob Brouwer joined the Company as a director in July 1996. Mr. Brouwer is
the Chairman and Chief Executive Officer of Brouwer Claims Canada & Co. Ltd., an
insurance adjusting company that he founded in 1956. Mr. Brouwer has served as a
director for numerous companies, including the Canadian National Railway
Company, The Insurance Corporation of British Columbia, Air B.C., Golden Tulip
Hotels Ltd., and Northwestel Inc. Mr. Brouwer is past President of the British
Columbia Adjusters Association, and former Chairman of the International
Financial Centre of British Columbia. Mr. Brouwer currently serves as a director
of Doman Industries, a forest products company.
46
<PAGE>
Richard A. Cowell joined the Company as a director in August 1996. Mr.
Cowell is a Senior Associate at Booz Allen & Hamilton involved in, among other
things, the incorporation of simulation and models into education and training
programs for Department of Defense contractors. Prior to joining Booz Allen in
March of 1996, Mr. Cowell served in the United States Army for 25 years.
Immediately prior to his retirement from the Army, Mr. Cowell served as Director
of the Louisiana Maneuvers Task Force reporting directly to the Chief of Staff,
Army. Mr. Cowell has authored a number of articles relating to the future of the
Army and received awards for his writing and producing of a film entitled
"America's Army" in 1994. Mr. Cowell retired from the Army holding the rank of
Colonel.
Directors of the Company hold office until the next annual meeting of
shareholders or until their successors have been elected and duly qualified.
Pursuant to the 1996 Independent Director Stock Plan, non-employee directors
receive an annual award of Common Stock. See "- Benefit Plans - 1996 Independent
Director Stock Plan." Non-employee directors receive no salary for their
services and receive no fee from the Company other than as described above for
their participation at Board meetings. All directors are reimbursed for
reasonable travel and other out-of-pocket expenses incurred in attending
meetings of the Board of Directors.
Executive officers are elected by the Board of Directors of the Company at
the first meeting after each annual meeting of shareholders and hold office
until their successors are elected and duly qualified.
Significant Employees
Todd R. McIntyre joined the Company in January 1996 and currently serves as
Vice President of Business Development. Mr. McIntyre is responsible for
establishing relationships with third parties for the development of products
incorporating the VRD technology. Over the past eight years, Mr. McIntyre has
held business development and marketing positions with several development stage
companies, including Southern Limited Partnership, a magazine and book
publisher; Sasquatch Publishing Company, Inc., a magazine and book publisher;
SPRY Inc., an Internet software products publisher; and Notable Technologies,
Inc., a wireless telecommunications products manufacturer.
Andrew Lee joined the Company in January 1997 as Vice President, Sales and
Marketing. Mr. Lee is responsible for developing and implementing the Company's
sales and product marketing efforts. Between January 1992 to January 1997, Mr.
Lee was Senior Director, National Systems Sales, for AEI Music Network, Inc.,
the largest audio-visual systems integrator in the United States. From January
1989 to December 1991, prior to joining AEI, Mr. Lee was Director, Sales and
Marketing, for ADB Industries Inc., a manufacturer of precision assemblies for
the defense and aerospace industries, where he was responsible for designing and
implementing marketing strategies for both commercial and military markets.
47
<PAGE>
Douglas A. Stoll joined the Company in October 1996 as Director of
Engineering with responsibility for managing the Company's core technology and
internal product development programs. Previously, Mr. Stoll spent 16 years with
the Space and Defense Sector of TRW, Inc. in various project management roles.
He managed several simulation and avionics design teams and was named the
program manager for all TRW activities on the B-2 program from 1990 through
1992. Prior to joining TRW, Mr. Stoll spent 10 years in the U.S. Air Force as a
B-52 pilot and as a scientific analyst at the Edwards Flight Test Center. He
currently holds the rank of Lieutenant Colonel in the Air Force Reserves. Mr.
Stoll earned an M.S. in Physics from Ohio State University, an M.S. in Systems
Management from the University of Southern California and an executive MBA from
UCLA.
John Lewis joined the Company in November 1996 as Director of Research with
primary responsibility for directing and managing the ongoing research in the
Company's core technology, and for developing and protecting the Company's
intellectual property assets. From 1978 to 1996, Mr. Lewis held various
technical and management positions at Polaroid Corporation. During his tenure at
Polaroid, Mr. Lewis headed several projects that involved using micro-optics in
the coupling of semiconductor light sources and using scanning mechanisms for
high quality imaging. From 1986 to 1994, Mr. Lewis managed the Department of
Physical Systems within Polaroid's Research Division. Mr. Lewis holds a B.S.
degree in physics from Massachusetts Institute of Technology and is named as
inventor on five patents and two patents pending.
Alexander J. Yarmie joined the Company in March 1996 as Marketing
Manager/Defense and Aerospace, and is responsible for developing and
implementing the Company's military products strategy. From July 1992 to March
1996, Mr. Yarmie was a principal of Janan International, a business consulting
and product representation firm that advised clients in the electronics,
environmental technologies, automotive, aerospace, and computer industries on
business development, sales and marketing strategies. Between August 1988 and
July 1992, Mr. Yarmie was a marketing and sales manager for Sundstrand
Aerospace, an aerospace avionics and electronics company. Mr. Yarmie currently
holds the rank of Major in the U.S. Army reserves, and is a Master Army Aviator
and a former military helicopter instructor.
David Melville joined the Company as Senior Research Engineer in September
1996. From December 1993 to September 1996, Mr. Melville was employed by the HIT
Lab, where he was involved in developing the VRD technology, and is the inventor
of the MRS. Prior to joining the HIT Lab in 1993, Mr. Melville spent 12 years in
engineering positions with California State University, Fresno, School of
Engineering. Mr. Melville has over 20 years of experience in electronics design
and development. Mr. Melville holds a B.S. in Physics from California State
University, Fresno.
Daniel C. Bertolet joined the Company as Senior Research Engineer in
September 1996. From November 1994 to September 1996, Dr. Bertolet was employed
by the HIT Lab as a Research Associate. Prior to joining the HIT Lab in November
1994, Dr. Bertolet was a Research Associate with the University of Washington,
Department of
48
<PAGE>
Chemical Engineering, and as Senior Processing Engineer with United Epitaxial
Technologies, where he worked on the commercialization of semiconductor
technologies. Dr. Bertolet holds a B.S. in Electrical Engineering and a Ph.D. in
Electrical and Computer Engineering from the University of Massachusetts.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of the copies of the forms provided to the Company
and written representations that no other filing of forms was required, the
Company believes that, during the fiscal year ended December 31, 1996, the
reporting persons subject to Section 16(a) of the Securities Exchange Act of
1934, as amended, complied with all filing requirements applicable thereto,
except that Walter J. Lack filed one late report, failed to timely report eight
transactions, and has failed to file one required report; Robert A. Ratliffe
filed one late report and failed to timely report three transactions; Richard A.
Raisig failed to timely report two transactions; and Jacob Brouwer and Richard
A. Cowell each failed to timely report one transaction.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services in
all capacities to the Company for the last three fiscal years by Richard F.
Rutkowski, the Company's Chief Executive Officer and President, and Stephen R.
Willey, Executive Vice President (the "Named Executives"). No other officer of
the Company received annual salary and bonuses exceeding $100,000 in the fiscal
year ended December 31, 1996.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation (1) Compensation
------------------------------------------- Awards
Name and Fiscal Salary Bonus Other Annual Securities
Principal Position Year ($) ($)(2) Compensation ($)(3) Underlying Options
- ------------------ ------ ------ ------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Richard F. Rutkowski (4)............... 1996 131,250 134,375 - -
Chief Executive Officer 1995 92,500 30,000 - -
and President 1994 18,750 - 3,790 311,517
Stephen R. Willey (5).................. 1996 78,333 115,400 36,667 -
Executive Vice President 1995 - - 67,500 296,875
1994 - - 35,000 -
- --------------
(1) Based on his annual salary rate, Richard A. Raisig, Chief Financial Officer
and Vice President of Operations, would have received annual compensation
in excess of $100,000 had he been employed by the Company through 1996.
(2) Bonus amounts for 1996 reflect amounts paid in 1997 for services performed
in 1996 and during the last three months of 1995.
(3) Represents (i) with respect to Mr. Rutkowski, payments in consideration of
consulting services rendered to the Company prior to Mr. Rutkowski's
employment with the Company and (ii) with respect to Mr. Willey, payments
49
<PAGE>
in consideration of consulting services rendered to the Company prior to
and concurrent with Mr. Willey's employment with the Company. See "Certain
Relationships and Related Transactions."
(4) Mr. Rutkowski joined the Company as an employee on October 1, 1994.
Pursuant to his Amended and Restated Employment Agreement with the Company,
Mr. Rutkowski was granted options to purchase up to an aggregate of 311,517
shares of Common Stock as partial compensation for calendar years 1995,
1996, and 1997. See "Employment Agreements." On December 31, 1996, options
with respect to 213,666 shares of Common Stock had vested. Prior to his
employment with the Company, Mr. Rutkowski served as a consultant to the
Company.
(5) Mr. Willey joined the Company as an employee on October 1, 1995. Pursuant
to his Employment Agreement with the Company, Mr. Willey was granted
options to purchase up to an aggregate of 296,875 shares of Common Stock as
partial compensation for years ending September 30, 1995, 1996, 1997, and
1998. See "- Employment Agreements." On December 31, 1996, options with
respect to 175,781 shares of Common Stock had vested. Prior to his
employment with the Company, Mr. Willey served as a consultant to the
Company.
</TABLE>
Option Grants. No stock options or other similar rights were granted by the
Company during 1996 to the Named Executives.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table sets forth information concerning exercise of stock
options during 1996 by the Named Executives and the fiscal year-end value of
unexercised options:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 1996 at December 31, 1996 (1)
---------------------------- ------------------------
Number of
Shares Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard F.
Rutkowski -- -- 213,666 97,851 $ 448,886 --
Stephen R. -- -- 175,781 121,094 $ 312,500 --
Willey
- --------------------
(1) Calculated based on a closing price of $4.00 per share on December 31,
1996.
</TABLE>
Employment Agreements. Pursuant to his Amended and Restated Employment
Agreement with the Company, Mr. Rutkowski receives an annual base salary of
$120,000, subject to increases as determined by the Board of Directors, and an
annual cash performance bonus in an amount to be determined by the Board of
Directors. In January 1997, Mr. Rutkowski's base salary was adjusted to $145,000
and he was awarded a bonus a $134,375 for services performed during 1996 and
during the last three months of 1995. In addition, Mr. Rutkowski has received
options to purchase up to an aggregate of 311,517 shares of Common Stock for his
service to the Company during the period 1995 through 1997. These options have
five-year terms, vest quarterly, and will immediately vest and become
exercisable upon the occurrence of certain significant business events,
including a sale of a
50
<PAGE>
majority of the Company's assets to a third party. Mr. Rutkowski is entitled to
all benefits offered generally to the Company's employees. Upon termination
without cause of Mr. Rutkowski's employment by the Company, certain of Mr.
Rutkowski's stock options will vest and Mr. Rutkowski will be entitled to a
severance payment. The Amended and Restated Employment Agreement expires, unless
previously terminated, on December 31, 1997.
The Company entered into an employment agreement with Stephen R. Willey,
the Company's Executive Vice President and a director of the Company, effective
May 1, 1996. Pursuant to this agreement, Mr. Willey receives an annual base
salary of $110,000, adjusted annually for the cost of living and subject to
increases as determined by the Board of Directors. In addition, Mr. Willey is
entitled to receive an annual cash performance bonus in an amount determined by
the Board of Directors, and has received options to purchase an aggregate of
296,875 shares of Common Stock for his services during the period 1995 through
1998. In January 1997, Mr. Willey's base salary was adjusted to $130,000 and he
was awarded a bonus of $115,400 for services performed in 1996 and during the
last three months of 1995. Upon termination without cause of Mr. Willey's
employment by the Company, certain of Mr. Willey's stock options will vest and
Mr. Willey will be entitled to a severance payment. Mr. Willey's employment
agreement expires, unless previously terminated, on September 30, 1998.
Benefit Plans
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan"), which was adopted and approved by the Company's Board of Directors and
the shareholders in July and August, 1996, respectively, provides for the grant
of options to acquire a maximum of 750,000 shares of Common Stock, subject to
adjustments in the event of certain changes in the Company's capitalization.
Unless sooner terminated by the Board of Directors, the 1996 Plan will terminate
ten years after its adoption by the Board of Directors of the Company.
The 1996 Plan permits the granting of incentive stock options ("ISOs") and
nonqualified stock options ("NSOs") at the discretion of a plan administrator
(the "Plan Administrator"). The Plan Administrator is comprised of
"disinterested directors" and "outside directors" for purposes of Rule 16b-3
under the Exchange Act and Section 162(m) of the Internal Revenue Code,
respectively. The Compensation Committee of the Board of Directors serves as
Plan Administrator except with respect to grants awarded to executive officers
of the Company, with respect to which the Board serves as Plan Administrator.
Subject to the terms of the 1996 Plan, the Plan Administrator determines the
terms and conditions of any options granted, including the exercise price.
Eligible optionees include any current or future employee, officer, or agent of
the Company or its subsidiaries. The 1996 Plan provides that the Plan
Administrator must establish an exercise price for ISOs that is not less than
the fair market value of the shares at the date of grant. If ISOs are granted to
persons owning more than 10% of the voting stock of the Company, however, the
1996 Plan provides that the exercise price must be not less than 110% of the
fair market value of the shares at the date of grant and that the term of the
ISOs may not exceed five years. The term
51
<PAGE>
of all other options granted under the 1996 Plan may not exceed ten years.
Although the Plan Administrator determines when options become exercisable,
options granted under the 1996 Plan generally become exercisable at a rate of
33% per year over a three-year period, so that options are fully vested after
three years. Options are not transferable other than by will or the laws of
descent and distribution, and each option is exercisable during the lifetime of
the optionee only by such optionee. In the event of a merger, consolidation or
plan of exchange to which the Company is a party or a sale of all or
substantially all of the Company's assets, the Board of Directors may elect one
of the following alternatives: (i) outstanding options remain in effect in
accordance with their terms; (ii) outstanding options may be converted into
options to purchase stock in the surviving or acquiring corporation in the
transaction; or (iii) outstanding options may be exercised with a 30-day period
prior to the consummation of the transaction, at which time they will
automatically expire, and the Board may accelerate the time frame for exercise
of all options in full. Shares subject to options granted under the 1996 Plan
that have lapsed or terminated may again be made subject to options granted
under the 1996 Plan. Following termination of employment by the Company other
than for cause, resignation, retirement, disability or death, an option holder
has three months within which to exercise his options before the options will
automatically expire.
1996 Independent Director Stock Plan. The 1996 Independent Director Stock
Plan (the "Director Plan") was adopted and approved by the Board of Directors
and the shareholders in July and August, 1996, respectively. A total of 75,000
shares of Common Stock have been reserved for issuance under the Director Plan.
The Director Plan provides for the grant of shares of Common Stock to
non-employee directors ("Independent Directors") of the Company. The Director
Plan is designed to work automatically without administration; however, to the
extent administration is necessary, it will be performed by the Board of
Directors or a committee thereof. The Director Plan is administered in
accordance with Rule 16b-3 adopted under the Exchange Act.
Each Independent Director is awarded shares of Common Stock (the "Annual
Award") on an annual basis each time he or she is elected to the Board (or, if
directors are elected to serve terms longer than one year, as of the date of
each annual shareholders' meeting during that term). The number of shares
awarded in the Annual Award is equivalent to the result of $20,000 divided by
the fair market value of a share on the date of the award, rounded to the
nearest 100 shares (or a fraction thereof if the Independent Director is elected
or appointed to the Board at any time other than at the annual meeting of
shareholders). If any share awarded under the Director Plan is forfeited, such
share will again be available for purposes of the Director Plan. Unless earlier
suspended or terminated by the Board, the Director Plan will continue in effect
until the earlier of: (i) ten years from the date on which it is adopted by the
Board and (ii) the date on which all shares available for issuance under the
Director Plan have been issued.
Prior Plans. The Company's 1993 Stock Option Plan, 1994 Combined Incentive
and Nonqualified Stock Option Plan, and 1995 Combined Incentive and Nonqualified
Stock Option Plan (the "Prior Plans"), provided for the award of ISOs to key
employees and the award of NSOs to employees and certain non-employees who have
important relationships
52
<PAGE>
with the Company. The Company reserved 228,938 and 435,000 authorized but
unissued shares for issuance under the 1993 and 1994 plans, respectively, upon
adoption of these plans, and in September 1995 reserved an additional 625,000
shares for issuance under the 1993 plan. As of December 31, 1996, options to
purchase an aggregate of 670,366 shares of Common Stock remained outstanding
under these plans. The Company granted no options under the 1995 plan. The
Company does not intend to grant any additional options to purchase shares of
Common Stock under the Prior Plans, and expects to terminate the Prior Plans
effective immediately following the issuance of the shares of Common Stock
subject to the outstanding grants thereunder.
Certain Tax Considerations Related to Executive Compensation
As a result of Section 162(m) of the Internal Revenue Code of 1986, as
amended, in the event that compensation paid by the Company to a "covered
employee" (the chief executive officer and the next four highest paid employees)
in a year were to exceed an aggregate of $1,000,000, the Company's deduction for
such compensation could be limited to $1,000,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 28, 1997 by (i) each person known
by the Company to own beneficially more than 5% of the Company's outstanding
Common Stock ("Principal Shareholder"); (ii) each of the Company's directors;
(iii) the Named Executive; and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Name and Address of Beneficial Owner Beneficial Ownership (1) Common Stock (2)
- ------------------------------------ ------------------------ ----------------
<S> <C> <C>
George M. Galpin (3) 305,750 5.1%
120 West Dayton, Suite D-5
Edmonds, WA 98020
Richard F. Rutkowski (4) 240,003 4.0%
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
Stephen R. Willey (5) 211,197 3.5%
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
Walter J. Lack (6) 205,437 3.5%
10100 Santa Monica Blvd., 16th Floor
Los Angeles, CA 90067
53
<PAGE>
Richard A. Raisig (7) 16,250 *
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
Robert A. Ratliffe 10,250 *
2300 Carillon Point
Kirkland, WA 98033
Jacob Brouwer 4,000 *
1200 West Pender Street, Suite 1200
Vancouver, B.C. VGE 259
Canada
Richard A. Cowell 4,000 *
c/o Booz, Allen & Hamilton
4301 N. Fairfax Drive, Suite 200
Arlington, VA 22203
-------- -----
All executive officers and directors as
a group (7 persons) 691,137 11.0%
- --------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days are treated as outstanding
for determining the amount and percentage of Common Stock owned by such
individual. To the Company's knowledge, each person has sole voting and
sole investment power with respect to the shares shown, subject to
community property laws, where applicable.
(2) Rounded to the nearest 1/10th of one percent, based on 5,778,776 shares of
Common Stock outstanding at February 28, 1997, assuming no exercise of the
Warrants, the Representatives' Warrants, or any other outstanding options
or warrants.
(3) Mr. Galpin filed a Schedule 13D reporting his beneficial ownership of more
than 5% of the Company's Common Stock on or about March 22, 1997.
(4) Includes options to purchase up to 238,128 shares of Common Stock.
(5) Includes options and Public Warrants to purchase up to 202,812 shares of
Common Stock.
(6) Includes Warrants to purchase up to 25,000 shares of Common Stock.
(7) Includes options to purchase 15,625 shares of Common Stock.
</TABLE>
54
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since inception of the Company, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
was or is to be a party in which the amount involved exceeds $60,000 and in
which any director or executive officer had or will have a direct or indirect
material interest other than the transactions described below.
Securities Issuances
From November 1995 through June 1996, the Company sold an aggregate of
859,776 shares of the Company's Series A Preferred Stock to 58 entities and
individuals for an aggregate purchase price of $4,127,000 in cash. In February
1996, Walter J. Lack, a director of the Company, purchased 15,625 shares of
Series A Preferred Stock for $75,000 in cash.
In June 1996, the Company issued 833 shares of common stock to Mr. Lack
upon the exercise of certain warrants issued thereto as compensation for
consulting services provided by Mr. Lack to the Company.
In early July 1996, the Company issued $750,000 in aggregate principal
amount of its 7% Notes to six investors raising net proceeds of $707,500 for the
Company's immediate operating requirements and for payment of certain expenses
incurred in connection with its initial public offering. The 7% Notes were
convertible or redeemable at the option of the holder at any time 90 days after
the date of the final prospectus issued in connection with the Company's initial
public offering. The 7% Notes bore interest at the rate of 7% per annum, payable
semiannually in arrears on December 15 and June 15, and were to mature on July
10, 1997. The 7% Notes were subordinate to all future senior indebtedness of the
Company. Walter J. Lack, a director of the Company, purchased $250,000 in
principal amount of the 7% Notes. In December 1996, Mr. Lack redeemed the 7%
notes in full and, pursuant to the terms of the 7% notes, was issued 15,000
shares of Common Stock. The remaining 7% Notes were redeemed in November and
December 1996. See Note 4 of Notes to Financial Statements.
Promoters' Transactions
The Company was founded and promoted by Times Holding Limited; Sisley
Enterprises S.A.; Yokohama Enterprises, Inc.; George Hatch; the Hunter Family
Trust No. 2; Caisey Harlingten; Ronetna Limited; and Dunbrody International,
Ltd. (each individually, a "Promoter" and all, collectively, the "Promoters").
In July 1993, an aggregate of 1,893,750 shares of Common Stock were issued by
the Company to the Promoters for an aggregate purchase price of $212,100. On May
28, 1996, the Company repurchased 859,375 shares of Common Stock from the
Promoters. Consideration for such purchase included the cancellation of
promissory notes from the Promoters in an aggregate principal amount of $66,600
and the reduction in the exercise price of warrants previously granted to them,
which
55
<PAGE>
were subsequently exercised, to purchase 96,875 shares of Common Stock from
$0.80 to zero.
Effective January 1, 1994, the Company entered into consulting agreements
with David L. Hunter and Caisey Harlingten, Promoters of the Company. Pursuant
to the agreements, Messrs. Hunter and Harlingten each provided business
development and strategic planning services to the Company, and assisted the
Company with its financing activities and provided general management,
marketing, development and investment assistance to the Company. Messrs. Hunter
and Harlingten were paid $90,018 and $88,000 under their respective agreements,
which terminated in November 1994 and February 1995, respectively.
Consulting Arrangements; Salary Payments to Affiliates
Between December 1993 and October 1995, two entities with which Stephen R.
Willey, Executive Vice President and a director of the Company, is affiliated
provided strategic planning and technical consulting services to the Company. As
compensation for these services, the Company paid an aggregate of $137,092 to
these entities. The consulting relationship between the Company and the
affiliates terminated in October 1995, at which time Mr. Willey became an
employee of the Company. Between October 1995 and April 1996, salary payable to
Mr. Willey in the aggregate amount of $36,667 was paid directly to one of these
affiliates
Loans to Officers
During 1996, the Company made loans to Richard F. Rutkowski, Chief
Executive Officer and President and a director of the Company, and Stephen R.
Willey, in the amounts of $82,400 and $69,000, respectively. The loans were
evidenced by promissory notes with maturities of one year and earned interest at
8% per annum payable quarterly. The loans were made in consideration of Messrs.
Rutkowski and Willey agreeing to a modification of their respective employment
agreements. The loan grants were approved by the Board of Directors of the
Company. The loans and all accrued interest thereon were repaid in full during
1996.
56
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Microvision, Inc., as
filed on August 14, 1996 with the Secretary of State of the State of
Washington*
3.2 Amended and Restated Bylaws of Microvision, Inc.*
4.1 Form of specimen certificate for Common Stock*
4.2 Form of Warrant for purchase of Common Stock*
4.3 Warrant Agreement*
4.4 Form of Representatives' Warrant for purchase of Units*
10.1 Project I Research Agreement between The University of Washington and
the Washington Technology Center and the H. Group, dated June 10, 1993*
10.2 Assignment of License and Other Rights between The University of
Washington and the Washington Technology Center and the H. Group, dated
July 25, 1993*
10.3 Project II Research Agreement between The University of Washington and
the Washington Technology Center and Microvision, Inc., dated October
28, 1993 *+
10.4 Exclusive License Agreement between The University of Washington and
Microvision, Inc., dated October 28, 1993 *+
10.5 Amended and Restated Employment Agreement between Microvision, Inc.,
and Richard F. Rutkowski, effective October 1, 1994*
10.6 Employment Agreement between Microvision, Inc., and Stephen R. Willey,
dated May 1, 1996*
10.7 1993 Stock Option Plan*
10.8 1994 Combined Incentive and Nonqualified Stock Option Plan*
10.9 1995 Combined Incentive and Nonqualified Stock Option Plan*
10.10 1996 Stock Option Plan, as amended**
10.11 1996 Independent Director Stock Plan, as amended**
10.12 Office Lease Agreement by and between David A. Sabey and Sandra L.
Sabey and Microvision, Inc., dated December 22, 1995, as amended on
January 26, 1996*
10.13 Form of Director Indemnification Agreement*
10.14 Exclusive License Agreement between the University of Washington and
Microvision, Inc. dated March 3, 1994*
10.15 Second Amendment of Office Lease Agreement between the City of Seattle
and Microvision, Inc., dated February 26, 1997***
11 Computation of Pro Forma Loss Per Share
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
- --------------
* Incorporated by reference to the Company's Form SB-2 Registration
Statement, Registration No. 333-5276-LA.
** Incorporated by reference to the Company's Post-Effective Amendment No. 2
on Form SB-2 Registration Statement, Registration No. 333-5276-LA.
*** Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
+ Subject to confidential treatment.
(b) Reports on Form 8-K.
Not applicable.
57
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MICROVISION, INC.
Date: May 28, 1997 By RICHARD F. RUTKOWSKI
--------------------------------------
Richard F. Rutkowski
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the following
capacities on May 28, 1997.
Signature Title
--------- -----
RICHARD F. RUTKOWSKI
- ---------------------------------- Chief Executive Officer, President, and
Richard F. Rutkowski Director (Principal Executive Officer)
STEPHEN R. WILLEY
- ---------------------------------- Executive Vice President and Director
Stephen R. Willey
RICHARD A. RAISIG
- ---------------------------------- Chief Financial Officer and Vice
Richard A. Raisig President - Operations and Director
(Principal Financial and
Accounting Officer)
- ---------------------------------- Director
Walter J. Lack
ROBERT A. RATLIFFE
- ---------------------------------- Director
Robert A. Ratliffe
- ---------------------------------- Director
Jacob Brouwer
- ---------------------------------- Director
Richard A. Cowell
58
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- --- -----------
3.1 Amended and Restated Articles of Incorporation of Microvision, Inc., as
filed on August 14, 1996 with the Secretary of State of the State of
Washington*
3.2 Amended and Restated Bylaws of Microvision, Inc.*
4.1 Form of specimen certificate for Common Stock*
4.2 Form of Warrant for purchase of Common Stock*
4.3 Warrant Agreement*
4.4 Form of Representatives' Warrant for purchase of Units*
10.1 Project I Research Agreement between The University of Washington and
the Washington Technology Center and the H. Group, dated June 10, 1993*
10.2 Assignment of License and Other Rights between The University of
Washington and the Washington Technology Center and the H. Group, dated
July 25, 1993*
10.3 Project II Research Agreement between The University of Washington and
the Washington Technology Center and Microvision, Inc., dated October
28, 1993 *+
10.4 Exclusive License Agreement between The University of Washington and
Microvision, Inc., dated October 28, 1993 *+
10.5 Amended and Restated Employment Agreement between Microvision, Inc.,
and Richard F. Rutkowski, effective October 1, 1994*
10.6 Employment Agreement between Microvision, Inc., and Stephen R. Willey,
dated May 1, 1996*
10.7 1993 Stock Option Plan*
10.8 1994 Combined Incentive and Nonqualified Stock Option Plan*
10.9 1995 Combined Incentive and Nonqualified Stock Option Plan*
10.10 1996 Stock Option Plan, as amended**
10.11 1996 Independent Director Stock Plan, as amended**
10.12 Office Lease Agreement by and between David A. Sabey and Sandra L.
Sabey and Microvision, Inc., dated December 22, 1995, as amended on
January 26, 1996*
10.13 Form of Director Indemnification Agreement*
10.14 Exclusive License Agreement between the University of Washington and
Microvision, Inc. dated March 3, 1994*
10.15 Second Amendment of Office Lease Agreement between the City of Seattle
and Microvision, Inc., dated February 26, 1997***
11 Computation of Pro Forma Loss Per Share
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
- --------------
* Incorporated by reference to the Company's Form SB-2 Registration
Statement, Registration No. 333-5276-LA.
** Incorporated by reference to the Company's Post-Effective Amendment No. 2
on Form SB-2 Registration Statement, Registration No. 333-5276-LA.
*** Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
+ Subject to confidential treatment.
Exhibit 11
Computation of Pro Forma Loss Per Share
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Net Loss ($3,456,600) ($2,943,600)
============== =================
Shares utilized in computing
pro forma loss per share:
Weighted average shares 4,063,108 3,621,248
outstanding
Common Stock equivalent 755,256 1,055,829
shares outstanding during the -------------- -----------------
period
4,818,364 4,677,077
============== =================
Pro forma net loss per share ($0.72) ($0.63)
============== =================
</TABLE>
59
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-19011) of Microvision, Inc. of our report dated
May 23, 1997 appearing on page 29 in this Annual Report on Form 10-KSB/A.
PRICE WATERHOUSE L.L.P.
Seattle, Washington
May 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the audited
financial statements of Microvision, Inc., for the year ended December 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,265,800
<SECURITIES> 0
<RECEIVABLES> 25,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,377,300
<PP&E> 205,500
<DEPRECIATION> 47,700
<TOTAL-ASSETS> 14,565,300
<CURRENT-LIABILITIES> 1,056,200
<BONDS> 0
0
0
<COMMON> (24,116,200)
<OTHER-SE> (10,607,100)
<TOTAL-LIABILITY-AND-EQUITY> 14,565,300
<SALES> 0
<TOTAL-REVENUES> 102,200
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,638,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200,500
<INCOME-PRETAX> (3,456,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,456,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,456,600)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> 0
</TABLE>
