Prospectus filed pursuant to Rule 424(b)(3),
Registration No. 333-5276-LA
PROSPECTUS
MICROVISION, INC.
2,301,250 SHARES
COMMON STOCK
The shares of Common Stock, no par value (the "Common Stock"), of
Microvision Inc. ("Microvision" or the "Company"), offered hereby will be
sold by the Company from time to time upon the exercise of 2,256,250
publicly traded warrants to purchase Common Stock (the "Public Warrants").
This Prospectus also covers 45,000 shares of Common Stock that may be sold
from time to time in the future by certain securityholders (the "Selling
Shareholders"). It is expected that such resales will be made from time to
time in the over-the-counter market or otherwise. Such resales are subject
to the prospectus delivery and other requirements of the Securities Act of
1933, as amended. The Company will not receive any proceeds from the market
sales of the Common Stock sold by the Selling Shareholders or the Common
Stock underlying the Public Warrants, although it will receive the proceeds
from the exercise of the Public Warrants. See "Selling Shareholders,"
"Capitalization," and "Description of Securities - Warrants." Each Public
Warrant initially entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $12.00 per share, subject to certain
adjustments. The Public Warrants are exercisable at any time, unless
previously redeemed, until August 27, 2001, subject to certain conditions.
The Company may redeem the outstanding Public Warrants, in whole or in
part, at any time upon at least 30 days prior written notice to the
registered holders thereof, at a price of $.25 per Public Warrant, provided
that the closing bid price of the Common Stock has been at least 200% of
the exercise price of the Public Warrants for each of the 20 consecutive
trading days immediately preceding the date of the notice of redemption.
The Common Stock and the Public Warrants are listed on the Nasdaq National
Market under the symbols "MVIS" and "MVISW," respectively. The last
reported sale price of the Common Stock and the Public Warrants on the
Nasdaq National Market on January 15, 1997 was $4.00 and $1.4375,
respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING AT PAGE 7.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
THE DATE OF THIS PROSPECTUS IS JANUARY 21, 1997.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial
statements and related notes thereto appearing elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus
assumes no exercise of the Public Warrants, the Representatives' Warrants,
or any private warrants issued by the Company. See "Description of
Securities."
THE COMPANY
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 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.
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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
technology. 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. See "Management - HIT Lab Personnel." 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"). Currently, the development of the VRD technology is taking
place at the HIT Lab pursuant to a research agreement between the
University and the Company (the "Research Agreement"). See "Business - UW
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.
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THE OFFERING
Securities offered by the Company.............. 2,256,250 shares of Common
Stock upon exercise of the
Public Warrants.
Securities offered by the Selling
Shareholders................................ 45,000 shares of Common Stock.
Common Stock to be outstanding after
this offering............................... 8,035,026 shares (1)
Use of proceeds................................ To fund research and product
development and for working
capital. See "Use of Proceeds."
Risk factors................................... The securities offered hereby
involve a high degree of risk
and should be considered only
by persons who can afford
the loss of their entire
investment. See "Risk Factors."
NASDAQ National Market
symbols..................................... Common Stock...............MVIS
Public Warrants............MVISW
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(1) Includes 5,778,776 shares of Common Stock outstanding as of December
20, 1996, and the 2,256,250 shares of Common Stock issuable upon
exercise of the Public Warrants. Excludes (i) 1,212,848 shares of
Common Stock issuable upon exercise of stock options and warrants
outstanding at November 30, 1996 at an approximate weighted average
exercise price of $5.28 per share; and (ii) 356,150 shares of Common
Stock issuable upon exercise of the certain warrants issued to Paulson
Investment Company, Inc. and marion bass securities corporation,
investment banking firms. See "Description of Securities -
Representatives' Warrants." An additional 489,689 shares of Common
Stock are reserved for issuance under the Company's 1996 Stock Option
Plan and 1996 Independent Director Stock Plan. See "Capitalization"
and "Management - Benefit Plans."
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SUMMARY FINANCIAL INFORMATION
The following table presents summary historical financial information
of the Company. The financial information as of and for the years ended
December 31, 1994 and 1995 has been derived from audited financial
statements. The audited balance sheets at December 31, 1994 and 1995 and
the related statements of operations, of cash flows and of changes in
shareholders' equity (deficit) for the two years ended December 31, 1995
and notes thereto (the "Audited Financial Statements") appear elsewhere in
this Prospectus. The financial information presented as of September 30,
1996, for the nine month periods ended September 30, 1995 and 1996, and for
the period cumulative from inception (May 1993) to September 30, 1996, has
been derived from unaudited financial statements of the Company (the
"Unaudited Financial Statements," and, together with the Audited Financial
Statements, the "Financial Statements"). In the opinion of management, the
Unaudited Financial Statements have been prepared on the same basis as the
Audited Financial Statements and include all adjustments, consisting only
of normal recurring adjustments, that management of the Company considers
necessary for a fair presentation of the results of operations and
financial position for such periods. The results for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may
be expected for any other interim period or for the full year. This summary
financial information should be read in conjunction with the Financial
Statements and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NINE MONTHS ENDED INCEPTION
-------------------------------- ----------------------------- (MAY 1993) TO
December 31, December 31, Sept. 30, Sept. 30, SEPTEMBER 30,
1994 1995 1995 1996 1996
----------- ----------- ----------- ---------- ----------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Contract revenue............. $ - $ 29 $ 29 $ 77 $ 107
Operating expenses:
Research and development.. 1,805 1,931 1,028 1,015 5,898
Marketing, general and
administrative......... 1,046 1,038 968 1,331 3,631
-------- -------- -------- -------- --------
Total expenses....... 2,851 2,969 1,996 2,346 9,529
Net loss..................... $ (2,812) $ (2,944) $ (1,961) $ (2,203) $ (9,310)
Pro forma net loss per
share (1)................. $ (0.63) $ (0.42) $ (0.43)
Shares used in pro forma net
loss per share calculations 4,677 4,654 5,090
AS OF DECEMBER 31, AS OF
--------------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- ------------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents........................... $ 68 $ 99 $16,447
Working capital..................................... (30) (376) 14,362
Total assets........................................ 138 179 16,709
Total shareholders' equity (deficit)................ (10) (365) 14,566
- -----------
<FN>
(1) Pro forma net loss per share for the year ended December 31, 1995 and
the nine months ended September 30, 1995, and September 30, 1996 is
computed after giving retroactive effect to the conversion of all
shares of Series A Preferred Stock into an equal number of shares of
Common Stock.
</FN>
</TABLE>
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RISK FACTORS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Use of Proceeds" and
"Business" and elsewhere in this Prospectus includes certain
forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Actual results could
differ materially from those projected in the forward-looking statements as
a result of certain of the risk factors set forth below and information
appearing elsewhere in this Prospectus. In addition to the other
information contained in this Prospectus, investors should carefully
consider the following risk factors:
Market Acceptance of New Technology. The Company's success will depend
on successful development and commercial acceptance of the VRD technology,
a new technology which 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 "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 "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 in the near future. As of
September 30, 1996, the Company had an accumulated deficit since inception
of $9,309,500, 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. Because the
Company has experienced significant losses from operations, the Company's
ability to continue as a going concern is uncertain. 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
operations to date have focused primarily on research and development of
the VRD technology and prototypes and the Company has only recently begun
to develop 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Loss of Exclusive License; Dependence on the University of Washington.
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. In addition, the University of Washington's HIT Lab
currently performs all of the Company's research and development activities
under the terms of the Research Agreement and the UW License Agreement. The
Company does not currently have all of the personnel or equipment desirable
in order
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to carry out research and development of the VRD technology on its own. 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 materially and adversely affected. In addition,
if the Company were to breach certain of the terms of the UW License
Agreement, the Company could lose the exclusivity of its license or, under
certain circumstances, all license rights to the VRD technology.
See "Business - UW License Agreement."
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 two U.S. patents relating to the
VRD technology. Patent No. 5467104 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. 5557444 issued in September 1996 has 37
claims relating to the MRS. The University also has received notice of
allowance from the U.S. Patent and Trademark Office with respect to certain
claims under a third U.S. patent application. 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, 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
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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 "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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business - Strategy."
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 "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 "Business - Strategy."
Capital Requirements. The Company believes that its current cash
balances will satisfy its budgeted capital and operating requirements for
the foreseeable future, 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
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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 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 "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
certain key management personnel, including Richard F. Rutkowski and
Stephen R. Willey, the loss of whose services could significantly delay the
achievement of the Company's planned development objectives. Achievement of
the Company's business objectives will require substantial additional
expertise in the areas of technology, finance, manufacturing and marketing.
The Company is actively seeking additional qualified full-time personnel.
Competition for qualified personnel is intense, and the loss of key
personnel, or the inability to attract and retain the additional highly
skilled personnel required for the expansion of the Company's activities,
could have a material adverse effect on the Company's business and results
of operations. See "Business - Employees" and "Management."
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
"Business - Human Factors and Safety."
Possible Illiquidity of Trading Market. There can be no assurance that
an active public market for the Common Stock or the Public Warrants will be
sustained. The Common Stock and 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.
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
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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 a company's securities, class action
lawsuits have been filed against the company. 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 November 30,
1996, the Company had outstanding 5,748,776 shares of Common Stock,
approximately 1,492,256 shares of which are subject to resale restrictions
pursuant to Rule 144 under the Securities Act, and 2,256,250 Public
Warrants to purchase 2,256,250 shares of Common Stock. In addition, as of
such date, the Company had granted options under its stock option plans to
purchase an aggregate of 994,886 shares of Common Stock and had granted
warrants to purchase an aggregate of 217,962 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. See "Management - Benefit Plans,"
"Description of Securities," and "Shares Eligible for Future Sale."
Redemption of Warrants. As described in greater detail elsewhere in
this Prospectus, the Public Warrants are subject to redemption at $0.25 per
Public Warrant on 30 days written notice provided that the closing bid
price of the Common Stock has been at least 200% of the exercise price of
the Public Warrants for each of the 20 consecutive trading days immediately
preceding the date of the notice of redemption. In the event the Company
exercises the right to redeem the Public Warrants, a holder will be forced
either to exercise the Public Warrant or accept the redemption price. See
"Description of Securities - Warrants."
Potential Effect of Anti-Takeover Provisions. The Company's Restated
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 Restated 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 Washington law could have the effect of delaying,
deterring or preventing a change in control of the Company. See
"Description of Capital Stock - Preferred Stock" and "- Washington
Anti-Takeover Statute."
Current Prospectus and State Blue Sky Registration Required to
Exercise the Public Warrants. Holders of Public Warrants will be able to
exercise the Public Warrants only if a current prospectus relating to the
Common Stock underlying such Public Warrants is then in effect, and only if
such Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws of the states in which such holders of the
Public Warrants reside. Although the Company has undertaken to maintain the
effectiveness of a current prospectus covering the Common Stock underlying
the Public
10
<PAGE>
Warrants, there can be no assurance that the Company will be able to do so.
The value of the Public Warrants may be impaired if a current prospectus
covering the Common Stock issuable upon exercise of the Public Warrants is
not kept effective, or if such Common Stock is not qualified or exempt from
qualification in the states in which the holders of Public Warrants reside.
11
<PAGE>
MARKET FOR THE COMPANY'S
EQUITY SECURITIES
The Company's Common Stock and Public Warrants are traded on the
Nasdaq National Market under the symbols MVIS and MVISW, respectively. On
December 20, 1996, there were 149 holders of record of the Common Stock and
13 holders of record of the Public Warrants. The Company has not paid cash
dividends on its Common Stock.
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:
Quarter Ended Common Stock Public Warrants
- --------------------- -------------- ---------------
High Low High Low
----- ----- ----- -------
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
On January 15, 1997, the closing sale price for the Common Stock was
$4.00 and the closing sale price for the Public Warrants was $1.4375.
USE OF PROCEEDS
The Company will not receive any proceeds from the market sales of the
Public Warrants or the underlying Common Stock or from any market sales of
Common Stock by the Selling Shareholders. If all of the Public Warrants are
exercised, the Company will receive approximately $27,061,000 in net
proceeds. There can be no assurance, however, that any of the Public
Warrants will be exercised.
The Company intends to use the net proceeds from any exercise of
Public Warrants to fund continuing research and product development and for
working capital. The amounts actually expended for each purpose may vary
significantly depending upon various factors, including the progress of the
Company's research and product development programs, determinations as to
the commercial potential of each of the Company's anticipated products, and
the Company's ability to attract third parties to co-fund the research and
development of, or to purchase, such products. Pending such use, the net
proceeds will be invested in short-term, investment grade, interest bearing
securities or interest bearing accounts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has not paid cash dividends since its inception. The
Company currently intends to retain all of its earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. The payment of dividends is subject to the discretion
of the Company's Board of Directors.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996. See Note 8 of Notes to the Financial Statements.
<TABLE>
<CAPTION>
September 30, 1996 (1)
----------------------
(in thousands)
<S> <C>
7% Convertible Subordinated Notes due 1997 (current)................................. $ 750,000
-----------
Shareholders' equity
Preferred Stock, no par value, 31,250,000 shares authorized, none
issued and outstanding......................................................... -
Common Stock, no par value, 31,250,000 shares authorized, 5,733,776
shares issued and outstanding (2).............................................. 23,949,100
Deferred compensation............................................................. (73,600)
Accumulated deficit............................................................... (9,309,500)
-----------
Total shareholders' equity..................................................... 14,566,000
-----------
Total capitalization.............................................................. $15,316,000
===========
- ----------------
<FN>
(1) Excludes (i) 1,212,848 of Common Stock issuable upon exercise of stock
options and warrants outstanding at November 30, 1996 at an
approximate weighted average exercise price of $5.28 per share; and
(ii) 356,150 shares of Common Stock issuable upon exercise of the
Representatives' Warrants. An additional 489,689 shares of Common
Stock are reserved for issuance under the Company's 1996 Stock Plans.
See "Management - Benefit Plans."
(2) If all of the Company's Public Warrants were exercised, the Company
would issue 2,256,250 shares of Common Stock and receive, after
offering expenses estimated at $14,000, approximately $27,061,000.
</FN>
</TABLE>
13
<PAGE>
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. 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 expects revenues to be derived from 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 or
through joint ventures. 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 expects to continue funding prototype and demonstration
versions of products incorporating the VRD technology throughout 1996 and
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 "Risk Factors."
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 as well as the design of subsystems and
products. The Company has been purchasing and is installing certain
laboratory equipment in its facilities in support of this work. The Company
also intends to continue to add to its technical and business staff in
pursuit of its technology development and marketing objectives and, in
particular, intends to augment substantially its engineering 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.
RESULTS OF OPERATIONS
The Company is in the development stage and has not generated any
significant revenues. As of September 30, 1996, the Company had an
accumulated deficit since inception of $9,309,500. The Company expects
continuing and increasing expenditures in research and development as it
focuses its efforts on further development and refinement of the VRD
technology and begins commercialization efforts for its anticipated future
products.
Contract Revenues. The Company has completed two research agreements
with Fujitsu Research Institute. These 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
14
<PAGE>
a military trade show in October 1996. Of the $74,980 purchase order,
$50,000 was recognized as revenue through September 30, 1996 on a
percentage of completion basis. Contract revenues were $29,300, $77,200 and
$106,500 for the year ended December 31, 1995, the nine months ended
September 30, 1996 and for the period cumulative from inception through
September 30, 1996, respectively.
Research and Development Expenses. Currently, research and development
expenses consist primarily of payments due 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, 1995, the nine
months ended September 30, 1996 and the period cumulative from inception
through September 30, 1996, were $1,931,200, $1,015,400 and $5,897,800,
respectively. The Company believes that a significant level of continuing
research and development expenses 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
marketing and promotional efforts, 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, 1995, the nine months ended
September 30, 1996 and the period cumulative from inception through
September 30, 1996, were approximately $1,037,700, $1,331,100 and
$3,631,400, respectively. The Company expects marketing, general and
administrative expenses to increase substantially in future periods as the
Company invests in marketing activities to promote and launch its VRD
technology and anticipated products and as it increases its number of
employees and level of corporate and administrative activity.
Income Taxes. At December 31, 1995, the Company had net operating loss
carry-forwards of approximately $2,812,000 for federal income tax reporting
purposes. The net operating loss carry-forwards will expire beginning in
2005 if not utilized. In addition, due to changes in ownership, as defined
by Section 382 of the Internal Revenue Code of 1986, as amended, resulting
from the sale of common stock and convertible preferred stock, the annual
deductibility of the net operating loss carry-forwards is limited to
approximately $761,000. A valuation allowance has been recorded against
total deferred tax assets of $2,346,000 because realization is primarily
dependent on generating sufficient taxable income prior to expiration of
net operating loss carry-forwards. See Note 7 of Notes to the Financial
Statements. The issuance of the Common Stock in the Company's August 1996
initial public offering and the issuance of Common Stock offered hereby may
further reduce the annual deductibility of the net operating loss
carry-forwards.
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 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
<PAGE>
$15,500,000 after deducting underwriting discounts and offering expenses.
At September 30, 1996, the Company had cash and cash equivalents of
$16,447,000.
Through September 30, 1996, the Company had incurred an accumulated
deficit of $9,309,500, of which $3,850,100 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 $1,182,100
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 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. Subsequent to November 25, 1996, the 7% Notes were redeemed in
full (plus accrued and unpaid interest) and 45,000 shares of Common Stock
were issued to the noteholders. See "Shares Eligible for Future Sale" and
"Selling Shareholders."
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 $962,500 and, thereafter, to make additional payments in
respect of royalties on the VRD. See "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 the foreseeable future, 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 "Business." There can be no
assurance that additional financing will be available to the 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 "Risk Factors -
Capital Requirements."
16
<PAGE>
BUSINESS
OVERVIEW
Microvision, through an exclusive license and research agreement with
the University of Washington, 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 VRD devices, including a portable monochrome version
and a table-top, full-color version, and is currently refining and
developing its VRD for commercial applications. The Company expects to
commercialize its technology through the development of products and as a
supplier of personal display technology to 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."
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 -
17
<PAGE>
high resolution, bright display, low power consumption - required for
state-of-the-art information systems.
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 enhance its ability to provide more fully
integrated solutions and support for the development of similar products by
manufacturers in high volume consumer markets.
18
<PAGE>
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 work with the University of Washington 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:
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
19
<PAGE>
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, healthcare, 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 o "Head-down" control
systems viewing of o Factory process
o Personnel patient vital control
status monitor signs o Sales
o Digital Land 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
20
<PAGE>
to work with certain of these manufacturers to develop or co-develop
specific products which the Company believes to be the most commercially
viable. The Company has identified specifications for several products
which it believes may address the particular needs of development programs
sponsored by the U.S. military and which can be priced competitively. These
products include a high performance, full-color helmet-mounted 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
To date the Company has developed only 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. A combination of reflective and
refractive optical elements are positioned around 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 perceives the image
superimposed on the viewer's natural field of vision. The second prototype
fits into a briefcase and is portable. It also connects to a personal
computer. At present the portable prototype generates only a monochromatic
image. The projection optics of the portable prototype together with the
vertical and horizontal scanner and the light source are packaged 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.
Significant 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 commercial 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 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
21
<PAGE>
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.
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 this
size 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. See "Management - HIT Lab Personnel." 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
22
<PAGE>
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. 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 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 may lose the exclusivity of its license if it fails to
satisfy certain requirements with respect to the commercialization of the
VRD, including, without limitation, having the VRD technology or VRD
applications available for commercial use, sale or licensing within two
years of the termination of the Research Agreement, failing to use its best
efforts to commercialize the VRD technology, failing to provide reports to
the University from time to time as provided in the License Agreement or
failing to respond to any infringement action within 90 days of learning of
such action. 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
"Management's Discussion and Analysis of Financial 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, 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. To date, Microvision
has paid $4,170,969 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 late 1997, but may be continued by agreement of the
parties. In an effort to match more closely the timing of the Company's
funding obligations under the Research
23
<PAGE>
Agreement with the research performed by the HIT Lab, the Company and the
University are currently discussing rescheduling payments under the
Research Agreement and extending the term of the Research Agreement. The
HIT Lab and the Company work together closely, and Stephen R. Willey, the
Company's Executive Vice President and Technical Liaison, acts as liaison
between the Company and each of the HIT Lab and the Washington Technology
Center. 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 two U.S. patents
related to the VRD technology. Patent No. 5467104 issued in November 1995
has 11 claims relating to the function, design, and application of the VRD
system, and including claims directed to the ability to superimpose images
on the user's field of vision. Patent No. 5557444 issued in September 1996
has 37 claims relating to the MRS, which is a key component for the
effective commercialization of the VRD system. The University also has
received a notice of allowance from the U.S. Patent and Trademark Office
for a fiber optic pixel source. A notice of allowance indicates that the
U.S. Patent and Trademark Office has completed its examination of the
application 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
24
<PAGE>
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.
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, laser exposure to
the retina would be approximately 100,000 times below the maximum
permissible exposure levels established 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. Although the
Company believes that its VRD
25
<PAGE>
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 $200,000 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.
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.
Subsequent to December 31, 1995, 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.
EMPLOYEES
As of November 30, 1996 Microvision had 13 full-time employees and one
part-time employee. Microvision is actively seeking additional qualified
full-time personnel where appropriate and had reached an agreement to hire
one new employee. The Company's employees are not subject to any collective
bargaining agreements and management regards its relations with employees
to be good. See "Risk Factors - Dependence on Key Personnel" and
"Management."
26
<PAGE>
FACILITIES
Microvision currently leases approximately 5,600 square feet of
combined use office and laboratory space at 2203 Airport Way South in
Seattle, Washington. 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 "- 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.
27
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ---------- --------------------------------------------------------
<S> <C> <C>
Richard F. Rutkowski (1) 40 Chief Executive Officer, President and Director
Stephen R. Willey 42 Executive Vice President, Technical Liaison
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) 71 Director
Richard A. Cowell 49 Director
- ---------------------------
<FN>
(1) Member of the Compensation and Finance Committees
(2) Member of the Audit Committee
</FN>
</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 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 line
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
28
<PAGE>
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 First Interstate
Bank of Canada and of Doman Industries, a forest products company.
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.
29
<PAGE>
SIGNIFICANT EMPLOYEES
Todd R. McIntyre joined the Company in January 1996 and currently
serves as Vice President of Business Development and Director of Marketing.
Mr. McIntyre is responsible for establishing relationships 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.
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 continued
advancement of the Company's core technology, and development and
protection of the intellectual property assets of the Company. 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, Mr. Bertolet was
employed by the HIT Lab as a Research Associate. Prior to joining the HIT
Lab in November 1994, Mr. Bertolet was a Research Associate with the
University of Washington, Department of Chemical Engineering, and as Senior
Processing Engineering
30
<PAGE>
with United Epitaxial Technologies, where he worked on the
commercialization of semiconductor technologies. Mr. Bertolet holds a B.S.
in Electrical Engineering and a Ph.D. in Electrical and Computer
Engineering from the University of Massachusetts.
HIT LAB PERSONNEL
Dr. Thomas A. Furness, III has served as Director of the HIT Lab and
as a professor of industrial engineering at the University of Washington
since 1989. Dr. Furness has substantial experience in visual imaging
systems, including 18 years as Chief of the Visual Display Systems Branch
of the Human Engineering Division of the U.S. Air Force's Armstrong
Aerospace Medical Research Laboratory. While with the Air Force, Dr.
Furness worked extensively on the Super Cockpit Program to develop and
evaluate visual imaging systems designed to deliver "heads-up" targeting,
navigation, threat and other information to pilots. Dr. Furness holds a
B.S. in Electrical Engineering from Duke University and a Ph.D. in
Engineering and Applied Science from the University of Southampton,
England.
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 ("Named
Executive"). No other officer of the Company received annual salary and
bonuses exceeding $100,000 in the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------------
NAME AND Fiscal Salary Bonus Other Annual Securities
PRINCIPAL POSITION Year ($) ($) Compensation ($)(1) Underlying Options
- ------------------ ---- --- --- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Richard F. Rutkowski (2)................ 1995 92,500 30,000 - -
Chief Executive Officer 1994 18,750 - 3,790 311,517
and President 1993 - - - -
- -------------------------
<FN>
(1) Represents payments in consideration of consulting services rendered
to the Company prior to Mr. Rutkowski's employment with the Company.
(2) 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, 1995, options with respect to 115,814 shares of Common
Stock had vested. Prior to his employment with the Company, Mr.
Rutkowski served as a consultant to the Company.
</FN>
</TABLE>
Option Grants. No stock options or other similar rights were granted
by the Company during 1995 to the Named Executive.
31
<PAGE>
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 1995 by the Named Executive 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, 1995 AT DECEMBER 31, 1995 (1)
---------------------------- ------------------------
Number of
Shares Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard F. - - 115,814 195,703 $833,861 $626,250
Rutkowski
- --------------------
<FN>
(1) Calculated based on the August 1996 initial offering price of $8.00
per Unit (each Unit consisting of one share of Common Stock and one
Public Warrant to purchase one share of Common Stock and attributing
no portion of the value of the Unit to the Public Warrant) less the
exercise price.
</FN>
</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, an
annual payment of $20,000 representing deferred compensation, and an annual
performance bonus in an amount to be determined by the Board of Directors.
In addition, Mr. Rutkowski 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 and vest
quarterly and will immediately vest and become exercisable upon the
occurrence of certain significant business events, including a sale of a
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
any termination by the Company without cause, 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.
Mr. Willey also is entitled to receive an annual payment of $20,000,
representing deferred compensation, and an annual performance bonus in an
amount determined by the Board of Directors. In addition, Mr. Willey has
received options to purchase an aggregate of 296,875 shares of Common Stock
for his services during the period 1995 through 1998. Upon any termination
by the Company without cause, 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, and
amended by the Board of Directors in November 1996, 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. As
32
<PAGE>
of November 30, 1996, an aggregate of 319,311 shares were issuable pursuant
to options granted under the 1996 Plan.
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 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, and
amended by the Board of Directors in November 1996. 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
33
<PAGE>
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. As of November 30, 1996, an aggregate of 16,000 shares had been
granted as Annual Awards under the Director Plan.
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 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 November 30, 1996, options to
purchase an aggregate of 675,575 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.
34
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of December 20, 1996 by (i)
each person known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; (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>
Richard F. Rutkowski (3) 215,540 3.6%
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
Stephen R. Willey (4) 191,666 3.2%
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
Walter J. Lack (5) 185,437 3.2%
10100 Santa Monica Blvd., 16th Floor
Los Angeles, CA 90067
Robert A. Ratliffe 10,250 *
2300 Carillon Point
Kirkland, WA 98033
Richard A. Raisig (6) 8,437 *
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
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) 619,330 10.0%
- -------------------
<FN>
* 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 December 20, 1996.
35
<PAGE>
Assumes no exercise of the Public Warrants, the Representatives'
Warrants, or any other outstanding options or warrants.
(3) Includes 213,665 shares of Common Stock issuable upon exercise of
options.
(4) Includes 183,281 shares of Common Stock issuable upon exercise of
options.
(5) Includes 15,000 shares of Common Stock issuable upon exercise of
Public Warrants beneficially owned by Mr. Lack.
(6) Includes 7,812 shares of Common Stock issuable upon exercise of
options.
</FN>
</TABLE>
36
<PAGE>
CERTAIN 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 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 9 of Notes to Financial Statements. The shares of Common
Stock issued upon the conversion of the 7% Notes are being registered for
resale pursuant to the Registration Statement of which this Prospectus is a
part.
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 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.
37
<PAGE>
CONSULTING AND EMPLOYMENT ARRANGEMENTS
In December 1993, the Company authorized a consulting agreement with
Walter J. Lack, a director of the Company, pursuant to which Mr. Lack
provided business consulting services to the Company. As compensation for
these services, the Company issued Mr. Lack warrants to purchase 3,125
shares of Common Stock at an exercise price of $3.52 per share. In June
1996, Mr. Lack received 2,667 shares of Common Stock upon the exercise of
such warrants. The consulting agreement between the Company and Mr. Lack
terminated on December 31, 1994.
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.
The Company has entered into employment agreements with Richard F.
Rutkowski, Chief Executive Officer and President and a director of the
Company, and Stephen R. Willey pursuant to which Messrs. Rutkowski and
Willey are entitled to a base salary, annual deferred compensation payments
and performance bonuses, stock options, and certain other benefits. See
"Management - Executive Compensation - Employment Agreements."
LOANS TO OFFICERS
During 1996, the Company made loans to Richard F. Rutkowski and
Stephen R. Willey, in the amounts of $82,400 and $69,000, respectively. The
loans are evidenced by promissory notes with maturities of one year and
bear interest at 8% per annum payable quarterly. The loans were made in
consideration of Messrs. Rutkowski and Willey agreeing to a change in the
terms of their employment agreements. The loan grants were approved by the
Board of Directors of the Company and repaid in full to the Company prior
to year end.
38
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 31,250,000
shares of Common Stock, no par value per share, and 31,250,000 shares of
Preferred Stock, no par value per share.
COMMON STOCK
As of December 20, 1996, there were 5,778,776 shares of Common Stock
outstanding held of record by 149 shareholders. Holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders and may not cumulate votes for the election of directors.
Holders of Common Stock also are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor, subject to preferences that may be applicable to any outstanding
Preferred Stock. In the event of the liquidation, dissolution or winding up
of the Company, holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities and the liquidation
preference of any outstanding Preferred Stock. Holders of Common Stock have
no preemptive, subscription, redemption or conversion rights. All the
outstanding shares of Common Stock are, and all shares of Common Stock to
be outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by
the shareholders, to issue up to 31,250,000 shares of Preferred Stock in
one or more series and to fix the powers, designations, preferences and
relative, participating, optional or other rights thereof, including
dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences, sinking fund terms and the number of shares
constituting any series. The issuance of Preferred Stock in certain
circumstances may have the effect of delaying, deferring or preventing a
change of control of the Company, may discourage bids for the Company's
Common Stock at a premium over the market price of the Common Stock, and
may adversely affect the market price of, and the voting and other rights
of the holders of, the Common Stock. At present, the Company has no plans
to issue any shares of Preferred Stock.
WARRANTS
Representatives' Warrants. In connection with the Company's initial
public offering in August 1996, the Company issued the Representatives'
Warrants to Paulson Investment Company, Inc. and marion bass securities
corporation and has reserved for issuance and registered for resale 356,150
shares of Common Stock issuable upon exercise of such warrants (including
the warrants issuable upon exercise of the Representatives' Warrants). The
Representatives' Warrants will entitle the holders to acquire 178,075
Units, each Unit consisting of one share of Common Stock and one warrant to
purchase one share of Common Stock, at an exercise price of $9.60 per Unit.
The Representatives' Warrants are exercisable at any time from August 27,
1997 until August 27, 2001. The Company has agreed that during such period
it will maintain an effective registration statement with respect to such
securities so as to permit their public resale without restriction. This
obligation could result in substantial future expense to the Company and
could adversely affect the Company's ability to complete future equity or
debt financings. Furthermore, the sale of Common Stock of the Company held
by or issuable to the Representatives or even the potential of such sales,
could have an adverse effect on the market price of the securities offered
hereby.
Public Warrants. Each Public Warrant entitles the holder to purchase
one share of Common Stock at a price of $12.00 per share, subject to
certain adjustments. The Public Warrants are, subject to
39
<PAGE>
certain conditions, exercisable at any time until August 27, 2001, unless
earlier redeemed. The outstanding Public Warrants are redeemable by the
Company, at $.25 per Public Warrant, upon at least 30 days prior written
notice to the registered holders, if the closing bid price (as defined in
the Warrant Agreement described below) per share of Common Stock for each
of the 20 consecutive trading days immediately preceding the date notice of
redemption is given equals or exceeds 200% of the exercise price of a
Public Warrant. If the Company gives notice of its intention to redeem, a
holder would be forced either to exercise his or her Public Warrants before
the date specified in the redemption notice or accept the redemption price.
The Public Warrants are issued in registered form under a Warrant
Agreement (the "Warrant Agreement") between the Company and American Stock
Transfer & Trust Company, as warrant agent (the "Warrant Agent"). The
shares of Common Stock underlying the Public Warrants, when issued upon
exercise of a Public Warrant, will be fully paid and nonassessable, and the
Company will pay any transfer tax incurred as a result of the issuance of
Common Stock to the holder upon its exercise.
The Public Warrants and the Representatives' Warrants contain
provisions that protect the holders against dilution by adjustment of the
exercise price. Such adjustment will occur in the event, among others, that
the Company makes certain distributions to holders of its Common Stock. The
Company is not required to issue fractional shares upon the exercise of a
Public Warrant or Representatives' Warrants. The holder of a Public Warrant
or Representatives' Warrant will not possess any rights as a shareholder of
the Company until such holder exercises the Public Warrant or
Representatives' Warrant.
A Public Warrant may be exercised upon surrender of the Warrant
Certificate on or before the expiration date of the Public Warrant at the
offices of the Warrant Agent, with the form of "Election To Purchase" on
the reverse side of the Warrant Certificate completed and executed as
indicated, accompanied by payment of the exercise price (by certified or
bank check payable to the order of the Company) for the number of shares
with respect to which the Public Warrant is being exercised.
For a holder to exercise the Public Warrants, there must be a current
registration statement in effect with the Commission and qualification in
effect under applicable state securities laws (or applicable exemptions
from state qualification requirements) with respect to the issuance of
shares or other securities underlying the Public Warrants. The Company has
agreed to use all commercially reasonable efforts to cause a registration
statement with respect to such securities to be filed under the Securities
Act and to become and remain effective in anticipation of and prior to the
exercise of the Public Warrants and to take such other actions under the
laws of various states as may be required to cause the sale of Common Stock
(or other securities) upon exercise of Public Warrants to be lawful. If a
current registration statement is not in effect at the time a Public
Warrant is exercised, the Company may at its option redeem the Public
Warrant by paying to the holder cash equal to the difference between the
market price of the Common Stock on the exercise date and the exercise
price of the Public Warrant. The Company will not be required to honor the
exercise of Public Warrants if, in the opinion of the Company's Board of
Directors upon advice of counsel, the sale of securities upon exercise
would be unlawful.
The foregoing discussion of certain terms and provisions of the Public
Warrants and Representatives' Warrants is qualified in its entirety by
reference to the detailed provisions of the Warrant Agreement and
Representatives' Warrants, the form of each of which has been filed as an
exhibit to the Company's Registration Statement on Form SB-2, Registration
Number 333-5276-LA.
For the life of the Public Warrants and Representatives' Warrants, the
holders thereof have the opportunity to profit from a rise in the market
price of the Common Stock without assuming the risk of ownership of the
shares of Common Stock issuable upon the exercise of the Public Warrants.
The Public
40
<PAGE>
Warrant holders may be expected to exercise their Public Warrants at a time
when the Company would, in all likelihood, be able to obtain any needed
capital by an offering of Common Stock on terms more favorable than those
provided for by the Public Warrants. Further, the terms on which the
Company could obtain additional capital during the life of the Public
Warrants may be adversely affected.
Other Warrants. As of November 30, 1996, the Company had outstanding
warrants to purchase 217,962 shares of Common Stock. Warrants to purchase
4,062 shares are immediately exercisable at an exercise price of $4.80 per
share and will expire in 2001. Warrants to purchase 163,118 shares are
immediately exercisable at an exercise price of $6.40 per share and will
expire in 2001. Warrants to purchase 45,572 shares are immediately
exercisable at an exercise price of $8.00 per share and will expire at
various times between 2001 and 2002.
STOCK OPTIONS
The Company has reserved 750,000 shares for issuance upon the exercise
of options granted under the 1996 Stock Option Plan. As of November 30,
1996, the Company had stock options outstanding to purchase an aggregate of
994,886 shares of Common Stock at exercise prices ranging from $0.80 to
$8.80 per share under the 1996 Stock Option Plan and under the Company's
prior option plans. See "Management - Benefit Plans - Prior Plans." As of
November 30, 1996, options to purchase 422,494 shares were exercisable, of
which options to purchase 21,349 shares will expire through December 31,
2000. The remaining outstanding options will vest, if at all, through 1999
and will expire during the period between December 31, 2001 and December
31, 2004.
WASHINGTON ANTI-TAKEOVER STATUTE
Washington's "Significant Business Transactions Statute" (Chapter
23B.19 of the Washington Business Corporation Act) applies to all
Washington corporations that have a class of voting shares registered
pursuant to section 12 or 15 of the Exchange Act. The Company plans to
register the Common Stock under the Exchange Act as of the effective date
of the Registration Statement of which this Prospectus is a part. Subject
to certain exceptions, the Washington statute prohibits a corporation from
entering into any "significant business transactions" with an "Acquiring
Person" (defined generally as a person or affiliated group that
beneficially owns 10% or more of the outstanding voting securities of a
corporation) for a period of five years after such person or affiliated
group becomes an Acquiring Person unless a majority of the target
corporation's directors approves, prior to the acquisition of shares that
establishes the purchaser as an Acquiring Person, the transaction or the
share acquisition. In addition, Chapter 23B.19 prohibits a corporation
subject thereto from entering into a significant business transaction with
an Acquiring Person unless the consideration to be received by the
corporation's shareholders in connection with such transaction satisfies
the statute's "fair price" provisions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's securities is
American Stock Transfer & Trust Company.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to August 1996, there was no public market for the Common Stock
or Public Warrants. No prediction can be made of the effect, if any, that
future market sales of shares of Common Stock or Public Warrants will have
on the prevailing market price of the Common Stock or Public Warrants. The
Company is unable to estimate the number of such shares that may be sold in
the public market, because such amount will depend on the trading volume
in, and the market price for, the Common Stock, the Public Warrants and
other factors. Nevertheless, sales of substantial amounts of such shares or
warrants in the open market following this offering could adversely affect
the prevailing market price of the Common Stock and the Public Warrants.
As of December 20, 1996, the Company had outstanding 5,778,776 shares
of Common Stock (assuming no exercise of the Public Warrants, the
Representatives' Warrants, any other outstanding options or warrants). The
2,256,250 shares of Common Stock issuable upon exercise of the Public
Warrants will be freely tradeable without restriction under the Securities
Act immediately upon exercise. The 45,000 shares of outstanding Common
Stock being registered on behalf of the Selling Shareholders will be
eligible for resale by the Selling Shareholders without restriction under
the Securities Act immediately after the date of this Prospectus. However,
any shares purchased by an "affiliate" of the Company (as that term is
defined in Rule 144 under the Securities Act), subject to certain
conditions, will be subject to the resale limitations of Rule 144.
4,319,853 shares are freely tradeable without restriction under the
Securities Act. The remaining 1,458,923 shares of Common Stock are
"restricted" shares subject to restrictions upon resale under Rule 144
under the Securities Act (the "Restricted Shares"). A total of 153,073
shares of Common Stock are subject to a lock-up agreement between Paulson
Investment Company, Inc. and marion bass securities corporation (the
"Underwriters") and certain shareholders pursuant to which such shares may
not be sold or otherwise disposed of until August 27, 1997.
In general under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least two years, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of
the then outstanding shares of the Company's Common Stock (approximately
57,788 shares immediately after this offering) or (ii) the average weekly
trading volume of the Company's Common Stock during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales pursuant to Rule 144 also are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person who
is not deemed to have been an affiliate of the Company at any time during
the three months immediately preceding the sale and whose Restricted Shares
have been fully paid for three years since the later of the date on which
they were acquired from the Company or from an affiliate of the Company may
sell such Restricted Shares under Rule 144(k) without regard to the
limitations and requirements described above.
Commencing August 27, 1997, up to 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.
42
<PAGE>
SELLING SHAREHOLDERS
45,000 shares of Common Stock have been registered, pursuant to the
Registration Statement of which this Prospectus forms a part, for sale by
certain shareholders (the "Selling Shareholders") who received such shares
upon redemption of the 7% Notes.
The Selling Shareholders and the maximum number of shares of Common
Stock that may be sold by such Shareholders are listed below:
SECURITY HOLDER Common Stock
- --------------- ------------
Walter Lack (1) 15,000
Generation Capital Associates 15,000
Sagax Fund II Ltd. 6,000
CF Stone 4,500
John and Marie Sultenfuss 3,000
Donald Scott 1,500
------
TOTAL 45,000
- -----------
(1) A director of the Company
There are no material relationships between any of the Selling
Shareholders and the Company other than those indicated in the table, nor
have any such material relationships existed within the past three years.
The sale of the Common Stock by the Selling Shareholders may be
effected from time to time in transactions (which may include block
transactions by or for the account of the Selling Shareholders) in the
over-the-counter market or in negotiated transactions, a combination of
such methods of sale or otherwise. Sales may be made at fixed prices which
may be changed, at market prices prevailing at the time of sale, or at
negotiated prices.
LEGAL MATTERS
The validity of the shares of Common Stock being offered by the
Company will be passed upon for the Company by Stoel Rives LLP, Seattle,
Washington. Stoel Rives LLP owns 6,250 shares of Common Stock and 6,250
Public Warrants.
EXPERTS
The financial statements of the Company as of December 31, 1994 and
1995 and for the years then ended and for the period from inception (May
1993) to December 31, 1995 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
43
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities
Act with respect to the securities offered hereby. This Prospectus, filed
as part of the Registration Statement, does not contain all the information
set forth in the Registration Statement and the exhibits and schedules
thereto, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made
to the Registration Statement and to the exhibits and schedules thereto,
which may be inspected at the Commission's offices without charge, or
copies of which may be obtained from the Commission upon payment of the
prescribed fees. Statements made in this Prospectus as to the contents of
any contract, agreement, or document referred to are not necessarily
complete, and in each instance, reference is made to the copy of such
contract or other document filed as an exhibit to the Registration
Statement, and each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits and schedules
thereto may be inspected without charge at the Commission's principal
office at Room 1024, Judiciary Plaza Building, 450 Fifth Street, N.W.,
Washington, D. C. 20549 and the regional offices of the Commission located
at 75 Park Place, 14th Floor, New York, New York 10007 and 500 West Madison
Street, 14th Floor, Chicago, Illinois 60661. Copies of such material may be
obtained at prescribed rates from the public Reference Section of the
Commission at Room 1024, Judiciary Plaza Building, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or from the Commission's Website at "www.sec.gov."
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants........................................... F-2
Balance Sheet as of December 31, 1994 and 1995 and as of
September 30, 1996 (unaudited)............................................ F-3
Statement of Operations for the years ended December 31,
1994 and 1995, for the period from inception (May 1993)
through December 31, 1995, for the nine-month periods
ended September 30, 1995 and 1996 (unaudited), and for
the period from inception (May 1993) through September 30,
1996 (unaudited)......................................................... F-4
Statement of Shareholders' Equity (Deficit) for the years
ended December 31, 1994 and 1995 and for the nine-month
period ended September 30, 1996 (unaudited).............................. F-5
Statement of Cash Flows for the years ended December 31, 1994
and 1995, for the period from inception (May 1993) through
December 31, 1995, for the nine-month periods ended
September 30, 1995 and 1996 (unaudited), and for the
period from inception (May 1993) through September 30,
1996 (unaudited)......................................................... F-7
Notes to the Financial Statements........................................... F-9
F-1
<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 present fairly, in all material respects, the financial position of
Microvision, Inc., a development stage enterprise, at December 31, 1994 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,
1995 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
July 10, 1996, except as to the reverse
stock split described in Note 8, which
is as of August 9, 1996, and except as
to the completed stock offering as
described in Note 1, which is as of
December 20, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
MICROVISION, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
ASSETS
September 30,
December 31, December 31, 1996
1994 1995 ------------
----------- ----------- (unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents........................................ $ 67,700 $ 98,500 $ 16,447,000
Accounts receivable.............................................. - - 50,000
Receivables from former employees................................ 50,000 69,400 2,800
Other current assets............................................. - - 5,300
----------- ----------- ------------
Total current assets.......................................... 117,700 167,900 16,505,100
Equipment, net...................................................... 11,700 9,100 102,500
Other assets........................................................ 8,400 2,000 101,300
----------- ----------- ------------
Total assets.................................................. $ 137,800 $ 179,000 $ 16,708,900
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable................................................. $ 147,500 $ 207,500 $ 920,500
Accrued liabilities.............................................. - 336,400 472,400
7% Convertible Subordinated Notes due 1997....................... - - 750,000
----------- ----------- ------------
Total current liabilities..................................... 147,500 543,900 2,142,900
Commitments and contingencies (Notes 5 and 6)
Shareholders' equity (deficit):
Preferred stock, no par value, 31,250,000 shares
authorized, none, 499,478, and none issued and
outstanding................................................... - 2,038,900 -
Common stock, no par value, 31,250,000 shares
authorized, 3,033,203, 3,098,828, and 5,733,776
(unaudited) shares issued and outstanding..................... 4,488,800 4,745,900 23,949,100
Deferred compensation............................................ (335,200) (42,800) (73,600)
Deficit accumulated during development stage..................... (4,163,300) (7,106,900) (9,309,500)
----------- ----------- ------------
Total shareholders' equity (deficit).......................... (9,700) (364,900) 14,566,000
----------- ----------- ------------
Total liabilities and shareholders' equity (deficit).......... $137,800 $179,000 $16,708,900
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
MICROVISION, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
Nine months Nine months Inception
Inception ended ended (May 1993) to
Year ended Year ended (May 1993) to September 30, September 30, September 30,
December 31, December 31, December 31, 1995 1996 1996
1994 1995 1995 ------------ ------------ ------------
----------- ----------- ----------- (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Contract revenue................ $ - $ 29,300 $ 29,300 $ 29,300 $ 77,200 $ 106,500
----------- ----------- ----------- ------------ ------------ ------------
Research and development
expense...................... 1,804,400 1,931,200 4,882,400 1,028,000 1,015,400 5,897,800
Marketing, general and
administrative expense....... 1,046,300 1,037,700 2,300,300 968,400 1,331,100 3,631,400
----------- ----------- ----------- ------------ ------------ ------------
Total expenses............... 2,850,700 2,968,900 7,182,700 1,996,400 2,346,500 9,529,200
----------- ----------- ----------- ------------ ------------ ------------
Loss from operations............ (2,850,700) (2,939,600) (7,153,400) (1,967,100) (2,269,300) (9,422,700)
----------- ----------- ----------- ------------ ------------ ------------
Interest income................. 39,000 31,800 82,300 21,400 79,400 161,700
Interest expense................ - 35,800 35,800 15,000 12,700 48,500
----------- ----------- ----------- ------------ ------------ ------------
Net loss........................ $(2,811,700) $(2,943,600) $(7,106,900) $ (1,960,700) $ (2,202,600) $ (9,309,500)
=========== =========== =========== ============ ============ ============
Pro forma net loss per share
(unaudited).................. $ (0.63) $ (0.42) $ (0.43)
=========== ============ ============
Pro forma weighted average
shares and share equivalents
outstanding (unaudited)...... 4,677,077 4,654,270 5,089,935
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
MICROVISION, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Deficit
accumulated
Preferred Stock Common Stock Deferred during
------------------- -------------------- compensa- Subscription development Shareholders'
Shares Amount Shares Amount tion receivable stage equity (deficit)
-------- ---------- --------- -------- -------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of founders' shares,
net........................ - - 1,893,750 $212,100 - - - $212,100
Issuance of stock in
exchange for Exclusive
License Agreement (at
$3.52/share)............... - - 187,500 660,000 - - - 660,000
Issuance of stock for cash (at
$3.52/share), net of costs. - - 937,500 3,077,400 - - - 3,077,400
Net loss for period ended
December 31, 1993.......... - - - - - - $(1,351,600) (1,351,600)
-------- ---------- --------- --------- -------- ------------ ----------- ----------------
Balance at December 31,
1993....................... - - 3,018,750 3,949,500 - - (1,351,600) 2,597,900
Issuance of stock for cash (at
$6.40/share)............... - - 14,453 92,500 - - - 92,500
Issuance of warrants and
options for common stock - - - 446,800 $(335,200) - - 111,600
Net loss for year ended
December 31, 1994.......... - - - - - - (2,811,700) (2,811,700)
-------- ---------- --------- --------- -------- ------------ ----------- ----------------
Balance at December 31,
1994....................... - - 3,033,203 4,488,800 (335,200) - (4,163,300) (9,700)
Issuance of stock upon
exercise of warrants....... - - 62,500 6,000 - - - 6,000
Issuance of stock to Board
members for services....... - - 3,125 11,000 - - - 11,000
Issuance of warrants and
options for common stock - - - 325,100 - - - 325,100
Issuance of preferred stock
for cash, net of costs (at
$4.80/share)............... 499,478 $2,038,900 - - - - - 2,038,900
Amortization of deferred
compensation, net.......... - - - - 220,150 - - 220,150
Cancellation of stock options - - - (85,000) 72,250 - - (12,750)
Net loss for year ended
December 31, 1995.......... - - - - - - (2,943,600) (2,943,600)
-------- ---------- --------- --------- -------- ------------ ----------- ----------------
Balance at December 31,
1995....................... 499,478 2,038,900 3,098,828 4,745,900 (42,800) - (7,106,900) (364,900)
Issuance of stock to Board
members for services
(unaudited)................ - - 22,250 110,000 (65,500) - - 44,500
Issuance of warrants and
options for common stock
(unaudited)................ - - - 23,400 - - - 23,400
Issuance of preferred stock
for cash, net of costs (at
$4.80/share) (unaudited) 360,298 1,493,900 - - - - - 1,493,900
Issuance of common stock
and warrants for services
(unaudited)................ - - 10,605 71,000 - - - 71,000
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Deficit
accumulated
Preferred Stock Common Stock Deferred during
------------------- --------------------- compensa- Subscription development Shareholders'
Shares Amount Shares Amount tion receivable stage equity (deficit)
-------- ---------- --------- --------- -------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
shareholders who had
originally purchased
common stock at
$6.40/share (unaudited).... - - 4,817 - - - - -
Exercise of warrants for
common stock (unaudited) - - 50,000 40,000 - $ (10,000) - 30,000
Cashless exercise of warrants
for common stock
(unaudited)................ - - 296,875 - - - - -
Cancellation of founder's
common stock (unaudited)... - - (859,375) (66,600) - - - (66,600)
Amortization of deferred
compensation (unaudited)... - - - - 34,700 - - 34,700
Sale of units
(unaudited)................ - - 2,250,000 15,492,600 - - - 15,492,600
Conversion of convertible
preferred stock
(unaudited)................ (859,776)(3,532,800) 859,776 3,532,800 - - - -
Receipt of subscription
receivable
(unaudited)................ - - - - - 10,000 10,000
Net loss for the nine months
ended September 30,
1996
(unaudited)................ - - - - - (2,202,600) (2,202,600)
-------- ---------- --------- ----------- -------- ------------ ----------- ----------------
Balance at September 30,
1996 (unaudited)........... - $ - 5,733,776 $23,949,100 $(73,600) $ - $(9,309,500) $(14,566,000)
======== ========== ========= =========== ======== ============ =========== ================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
MICROVISION, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
Inception
Year ended Year ended (May 1993) to Nine months Nine months Inception
December 31, December 31, December 31, ended Sept. 30, ended Sept. 30, (May 1993) to
1994 1995 1995 1995 1996 Sept. 30, 1996
------------ ------------ ------------ ------------ ------------ ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $(2,811,700) $(2,943,600) $(7,106,900) $(1,960,700) $(2,202,600) $(9,309,500)
Adjustments to reconcile net
loss to net cash used in
operations:
Amortization of deferred
compensation.......... - 207,400 207,400 72,300 49,200 256,600
Depreciation and
write-off of equipment 33,100 2,600 35,700 4,000 9,900 45,600
Non-cash expenses
related to issuance of
stock, warrants and
options............... 111,600 336,100 1,107,700 467,700 74,400 1,182,100
Change in:
Receivables - - - (45,900) (50,000) (50,000)
Receivables from former
employees............. (109,600) 47,200 (69,400) - - (2,800)
Allowance for doubtful
accounts.............. 66,600 (66,600) - - - -
Other current assets.... - - - (3,100) (5,300) (5,300)
Other assets............ (2,300) 6,400 (2,000) 7,300 (99,300) (101,300)
Accounts payable........ (39,500) 60,000 207,500 (40,600) 713,000 920,500
Accrued liabilities..... - 336,400 336,400 13,600 136,000 472,400
------------ ------------ ------------ ------------ ------------ ---------------
Net cash used in
operating activities (2,751,800) (2,014,100) (5,283,600) (1,485,400) (1,374,700) (6,591,700)
------------ ------------ ------------ ------------ ------------ ---------------
Cash flows from investing
activities:
Purchases of equipment..... (30,200) - (44,800) - (103,300) (148,100)
------------ ------------ ------------ ------------ ------------ ---------------
Net cash used in
investing activities (30,200) - (44,800) - (103,300) (148,100)
------------ ------------ ------------ ------------ ------------ ---------------
Cash flows from financing
activities:
Proceeds from issuance of
convertible subordinated
notes................... - - - - 750,000 750,000
Net proceeds from issuance
of common stock......... 92,500 6,000 3,388,000 - 15,582,600 22,436,800
Net proceeds from issuance
of preferred stock...... - 2,038,900 2,038,900 3,541,300 1,493,900 -
------------ ------------ ------------ ------------ ------------ ---------------
Net cash provided by
financing activities 92,500 2,044,900 5,426,900 3,541,300 17,826,500 23,186,800
------------ ------------ ------------ ------------ ------------ ---------------
Net increase (decrease) in cash
and cash equivalents....... (2,689,500) 30,800 98,500 2,055,900 16,348,500 16,447,000
Cash and cash equivalents at
beginning of period........ 2,757,200 67,700 - 67,700 98,500 -
------------ ------------ ------------ ------------ ------------ ---------------
Cash and cash equivalents at
end of period.............. $67,700 $98,500 $98,500 $2,123,600 $16,447,000 $16,447,000
F-7
<PAGE>
============ ============ ============ ============ ============ ===============
Cash paid for interest....... $ - $35,800 $35,800 $15,000 $12,700 $48,500
============ ============ ============ ============ ============ ===============
Supplemental disclosure of
non-cash transactions:
Units issued for services.. $50,000
============
Conversion of preferred
stock to common stock.... $3,532,800
============
Cancellation of Founders'
shares in exchange for
forgiveness of note...... $66,600
============
Capital lease of equipment.. $16,800
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-8
<PAGE>
MICROVISION, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE FINANCIAL STATEMENTS
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
closely with the University of Washington's Human Interface Technology Lab
to develop the VRD for potential defense, healthcare, business, industrial
and consumer applications.
On August 30, 1996, the Company completed its initial public offering
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
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less. The Company had no short-term investments at
December 31, 1994 or 1995.
Equipment
Equipment is stated at cost and depreciated over the estimated useful
lives of the assets (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.
Pro forma net loss per share (unaudited)
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 (Note 1), 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 offering price of $8.00 per share) issued between July 1,
1995 and August 30, 1996 have been included in the computations for all
periods presented.
F-9
<PAGE>
Historical net loss per share is not presented because such amounts are not
deemed meaningful due to the changes in capital structure that occurred in
connection with the IPO.
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.
Financial instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, receivables from former employees, accounts payable and
accrued compensation and related liabilities. These financial instruments
are stated at their respective carrying values in the December 31, 1995
financial statements, which approximates their fair values. The Company
places its cash in high credit quality financial institutions.
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.
Recent accounting pronouncements
In December 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (FAS 123). This pronouncement requires the
Company to elect to account for stock-based compensation on a fair value
based model or an intrinsic value based model. The intrinsic value based
model is currently used by the Company and is the accounting principle
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" (APB 25). Under this model, compensation cost is
the excess, if any, of the quoted market price of the stock at the date of
grant or other measurement date over the amount an employee must pay to
acquire the stock. The fair value based model prescribed by FAS 123 would
require the Company to value stock-based compensation using an accepted
valuation model. Compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period which is
usually the vesting period. The Company plans to continue to account for
stock-based compensation using APB 25 and is required to implement the
disclosure requirements of FAS 123 during the year ending December 31,
1996. Implementation will not have a significant impact on the financial
statements.
Unaudited interim financial statements
The information presented as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 has not been audited. In the
opinion of management, the unaudited interim financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the Company's financial position as of September 30, 1996
and the results of its operations and cash flows for the nine months ended
September 30, 1995 and 1996. The interim results of operations are not
necessarily indicative of results which may occur for the full fiscal year.
The data
F-10
<PAGE>
presented as of September 30, 1996 and for the nine months ended September
30, 1996 and 1995 is unaudited.
3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
------- -------
<S> <C> <C>
Receivables from former employees
Receivables.................................... $50,000 $ 2,800
Notes.......................................... 66,600 66,600
------- -------
116,600 69,400
Allowance for doubtful accounts................ (66,600) -
------- -------
$50,000 $69,400
======= =======
Equipment, net
Equipment...................................... $12,800 $12,800
Accumulated depreciation....................... (1,100) (3,700)
------- -------
$11,700 $9,100
======= =======
</TABLE>
4. SHAREHOLDERS' EQUITY (DEFICIT)
Common stock
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 1,893,750 and 625,000 shares were canceled
during 1994 and 1995, respectively.
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.
F-11
<PAGE>
Preferred stock
In November 1994, the Company authorized the issuance of 1,875,000
Series A Preferred Stock per share which has liquidation and dividend
preferences over common stock. Dividends accrue when and if declared by the
Board of Directors. The Series A Preferred Stock is convertible into an
equal number of shares of common stock. As of December 31, 1995, 499,478
shares had been issued, generating gross proceeds of $2,397,500.
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 subsequent to December 31, 1995.
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 of 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.
Subsequent to December 31, 1995, the exercise period was extended and the
number of common shares associated with these warrants was again reduced,
such that warrants to purchase 125,000 shares at $6.40 per share remain
outstanding and expire in June 2001.
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 with an 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 subsequent to December 31, 1995.
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. Subsequent to December 31, 1995, the exercise price of the
warrants was increased to $6.40 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 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. Subsequent to December 31, 1995, the exercise
price of the warrants was increased to $6.40 per share.
In December 1995, the Company granted a warrant to purchase 1,563
shares of common stock 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.
F-12
<PAGE>
Options
During 1993, the Company adopted the 1993 Stock Option Plan which
provided for granting incentive stock options (ISOs) and nonqualified
options 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.
During 1994, the Company adopted the 1994 Combined Incentive and
Nonqualified Stock Option Plan which provided for the granting of incentive
stock options 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.
In 1994, a consultant of the Company was granted warrants to purchase
31,250 shares of common stock at an exercise price of $.80 per share.
Research and development expense of $85,000 related to the fair value of
the warrant, as determined by the Company, was recorded during the year
ended December 31, 1994. During 1995, this consultant became the Executive
Vice President of the Company and these warrants were canceled and replaced
with options to purchase 296,875 shares of common stock. The options were
recorded at $237,500, the fair value as determined by the Company, and
compensation expense of $225,000 was recorded during the year ended
December 31, 1995. Options for 97,656 shares of common stock at an exercise
price of $.80-$3.20 per share were vested as of December 31, 1995. The
remainder vest in quarterly increments beginning January 1, 1996 at
exercise prices of $3.20-$7.20 per share. These options expire five years
from their vesting date.
In 1994, the Company granted options to purchase 241,845 shares of
common stock to the Chief Executive Officer of the Company in three
separate issuances. During 1995, the officer's employment agreement was
renegotiated and the number of options were increased. Under the employment
agreement, the Company granted options to purchase a total of 311,517
shares of common stock to the officer in three separate issuances. The
first issuance comprised options for 115,813 shares of common stock at an
exercise price of $.80. These options were fully vested at December 31,
1995. The second and third issuance each comprised options to purchase
97,852 shares of common stock at a price of $3.20 and $6.40, respectively,
and vest over one year in quarterly increments beginning March 31, 1996 and
March 31, 1997, respectively. The options expire five years from the grant.
The options were valued at $346,000 based upon the difference between the
exercise price and fair value of the underlying shares, as determined by
the Company, and compensation expense of $331,000 was recorded during the
year ended December 31, 1995.
In 1994, the Company granted to consultants acting in advisory
capacities options to purchase a total of 12,500 shares of common stock at
an exercise price of $6.40 per share. Compensation expense associated with
this grant was not material. Such options have vested and expire five years
from the date of issue.
In November 1995, the Company issued options to purchase 25,000 shares
of common stock at exercise prices ranging from $4.80 to $7.20 per share to
employees under the employees' compensation agreements. The options were
granted at no less than their estimated fair value as determined by the
Company. These options vest quarterly beginning in 1996 and expire five
years from the date of issue.
F-13
<PAGE>
Subsequent to December 31, 1995, the Company's Board of Directors
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 non qualified options (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 summarizes activity with respect to options and warrants
through December 31, 1995:
<TABLE>
<CAPTION>
WARRANTS OPTIONS
---------------------------------- ---------------------------
Exercise Exercise
Shares price Shares price
---------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Granted.................................................... 3,809,375 $.80-4.80 - -
---------------- ---------------
Outstanding at December 31, 1993........................... 3,809,375 .80-4.80 - -
Granted.................................................... 187,500 .10-3.52 254,345 $.80-6.40
Canceled/expired........................................... (1,893,750) .80-2.40 - -
---------------- --------------- ----------- --------------
Outstanding at December 31, 1994........................... 2,103,125 .10-4.80 254,345 .80-6.40
Granted.................................................... 64,063 4.80-6.40 391,547 .80-7.20
Exercised.................................................. (62,500) .10 - -
Canceled/expired........................................... (1,171,875) .80-4.80 - -
---------------- --------------- ----------- --------------
Outstanding at December 31, 1995........................... 932,813 $.80-6.40 645,892 $.80-7.20
================ =============== =========== ==============
Exercisable at December 31, 1995........................... 894,271 $.80-6.40 213,471 $.80-3.20
================ =============== =========== ==============
</TABLE>
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 UW. The research funding is 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 the
years ended December 31, 1994 and 1995 and the period from inception to
December 31, 1995 are $1,283,400, $1,283,400 and $2,887,600, respectively.
In an effort to match more closely the timing of the Company's funding
obligations under the Research Agreement with the actual research work
performed by the HIT Lab, the Company and UW are currently discussing
rescheduling payments and extending the term of the Research Agreement.
Future commitments under the Agreement in effect at December 31, 1995 are
as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
1996..................................................... $1,283,400
1997..................................................... 962,500
F-14
<PAGE>
---------------
$2,245,900
===============
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 $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.
Subsequent to December 31, 1995, 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.
6. LEASE COMMITMENTS
F-15
<PAGE>
During late 1995 and early 1996, the Company entered into leases for
its current office space and certain equipment under noncancelable capital
and operating leases with initial or remaining terms in excess of one year.
Under the operating lease for office space, the Company may elect to occupy
additional space at greater cost and has the option to make payment in the
form of preferred shares in lieu of paying cash through July 1996.
The Company has exercised this option and issued 7,693 preferred
shares and warrants to purchase 1,563 shares of common stock to the
landlord. Rent expense of approximately $36,900 will be recorded for the
share issuance and warrants granted in December 1995. Future minimum rental
commitments under capital and operating leases for years ending December 31
are as follows:
Capital Operating
leases leases
------- ---------
1996................................................ $5,600 $49,300
1997................................................ 5,600 59,600
1998................................................ 5,600 59,600
------- ---------
$16,800 $168,500
======= =========
7. INCOME TAXES
A current provision for income taxes has not been recorded for the
years ended December 31, 1994 or 1995 or the period inception to date due
to taxable losses incurred during such periods. 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, 1995, the Company had net operating loss
carry-forwards of approximately $2,812,000 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 will be
limited to approximately $761,000.
F-16
<PAGE>
Deferred tax assets are summarized as follows:
December 31, December 31,
1994 1995
----------- -----------
Net operating loss carry-forward................ $556,000 $956,000
Capitalized research and development............ 830,000 1,143,000
Other........................................... (30,000) 247,000
----------- -----------
1,356,000 2,346,000
Valuation allowance............................. (1,356,000) (2,346,000)
----------- -----------
Deferred taxes.................................. $ - $ -
=========== ===========
8. SUBSEQUENT EVENTS
The Company filed a Registration Statement for an initial public
offering (IPO) of 2,250,000 units (Note 1), each consisting of one share of
common stock and one warrant to purchase one share of common stock. 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 have been adjusted to give retroactive effect to the reverse split.
A nominal number of fractional shares was redeemed in connection with this
action. Upon completion of the IPO, the preferred stock converted to common
stock on a one-for-one basis.
On July 10, 1996, the Company issued 7% Convertible Subordinated Notes
in the amount of $750,000. The Notes bear interest at 7% payable in arrears
on December 15 and June 15 and are due July 10, 1997. The Notes are
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 may 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. Debt issuance costs
amounted to $42,500.
During the period from January 1, 1996 to August 9, 1996 the Company
issued options and warrants to purchase approximately 350,000 shares of
common stock at exercise prices ranging from $0.80 to $8.80 per share.
9. UNAUDITED SUBSEQUENT EVENT
In November and December 1996, the 7% Convertible Notes were redeemed
in full and 45,000 shares of Common Stock were issued to the noteholders.
F-17
<PAGE>
================================================================================
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION, OTHER THAN AS CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------
TABLE OF CONTENTS
PAGE
Prospectus Summary...........................................................2
Risk Factors................................................................ 6
Market for the Company's Equity Securities..................................12
Use of Proceeds.............................................................12
Dividend Policy.............................................................12
Capitalization..............................................................13
Management's Discussion and Analysis
of Financial Condition and Results of
Operations...............................................................14
Business....................................................................17
Management..................................................................28
Principal Shareholders......................................................35
Certain Transactions........................................................37
Description of Securities...................................................39
Shares Eligible for Future Sale.............................................42
Selling Shareholders........................................................43
Legal Matters...............................................................43
Experts.....................................................................43
Additional Information......................................................44
Index to Financial Statements..............................................F-1
---------
================================================================================
<PAGE>
MICROVISION, INC.
2,301,250 SHARES
COMMON STOCK
-----------
PROSPECTUS
-----------
JANUARY 21, 1997
================================================================================
