SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________
Commission file number 0-21221
MICROVISION, INC.
(Name of small business issuer in its charter)
Washington 91-1600822
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2203 Airport Way South, Suite 100
Seattle, Washington 98134
(206) 623-7055
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
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None
Securities registered under Section 12(g) of the Exchange Act:
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Common Stock, no par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section13
or 15(d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ____
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State issuer's revenues for its most recent fiscal year: $1,712,700
State the aggregate market value of the common stock held by non-affiliates,
based on the closing price for the registrant's Common Stock on the Nasdaq
National Market, as of March 20, 1998: approximately $83,000,000.
State the number of shares outstanding of the issuer's Common Stock, as of March
20, 1998: 5,952,631
Transitional small business disclosure format: Yes [ ] No [X]
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TABLE OF CONTENTS
Item of Form 10-KSB Page
Item 1 - Description of Business....................................... 1
Item 2 - Description of Property.......................................19
Item 3 - Legal Proceedings.............................................19
Item 4 - Submission of Matters to a Vote of Security Holders...........19
PART II
Item 5 - Market for the Registrant's Common Stock and Related
Shareholder Matters...........................................20
Item 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.................20
Item 7 - Financial Statements..........................................26
Item 8 - Changes in the Disagreements with
Accountants on Accounting and Financial Disclosure............43
Part III
Item 9 - Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act....44
Item 10 - Executive Compensation........................................48
Item 11 - Security Ownership of Certain Beneficial
Owners and Management.........................................53
Item 12 - Certain Relationships and Related
Transactions..................................................55
Item 13 - Exhibits and Reports on Form 8-K..............................57
SIGNATURES ..............................................................59
EXHIBIT INDEX
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PART I
Preliminary Note Regarding Forward-Looking Statements
The information set forth in this report in Item 1 "Description of
Business" and in Item 6 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and is subject to the safe harbor created by that
section. Certain factors that realistically could cause results to differ
materially from those projected in the forward-looking statements are set forth
in Item 1 "Considerations Related to the Company's Business."
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Microvision, Inc. ("Microvision" or the "Company") is developing
information display technologies that allow electronically generated images and
information to be projected directly onto the retina of the viewer's eye. The
Company has developed prototype Virtual Retinal Display(TM) ("VRD(TM)") devices,
including portable color and monochrome versions and a full-color table-top
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 for medical, industrial, and
entertainment equipment 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
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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 technology is fundamentally different from previously
commercialized display technologies. By scanning a low power beam of colored
light to "paint" rows of pixels on the retina of the viewer's eye, the VRD
creates a high resolution, full-motion image. In certain applications, the image
appears in the viewer's field of vision as if the viewer were only an arm's
length away from a high quality video screen. The VRD also can superimpose an
image on the viewer's field of vision, enabling the viewer to see data or other
information projected by the device in the context of his or her natural
surroundings. In each case, a high resolution, bright image is created.
The Company's objective is to be a leading provider of personal display
products and imaging technology in a broad range of professional and consumer
applications. The Company intends to achieve this objective and to generate
revenues through a combination of the following activities: technology licensing
to OEMs of consumer electronics products; provision of engineering services
associated with cooperative development arrangements and research contracts; and
the manufacture and sale of high-performance personal display products to
professional users, directly or through joint ventures.
The Company is in discussions with systems and equipment manufacturers in
the defense and aerospace, health care, wireless communications, computing and
commercial and consumer electronics industries. The Company intends to work with
manufacturers in these sectors to develop or co-develop
specific products that the Company believes to be the most commercially viable.
Although the Company is entering into and performing on development and
co-development projects, it does not expect commercial sales of products until
at least late 1998, and commercial sales may not occur until substantially
later, if at all.
The Company's existing prototypes have demonstrated the technological
feasibility of the VRD and the Company's ability to miniaturize certain of its
key components. The Company has completed the development of a mechanical
resonant scanner ("MRS"), which the Company believes represents a breakthrough
in the miniaturization of scanning devices. The Company believes that the MRS
will permit high quality image displays using smaller devices produced at lower
cost than is possible with current alternative technologies. Additional work is
in progress to achieve full-color capability in miniaturized VRD devices, to
expand the "exit pupil" of the VRD (which defines the range within which the
viewer's eye can move and continue to see the image) and to design products for
specific applications.
The VRD was developed at the University of Washington's Human Interface
Technology Lab (the "HIT Lab") by a team of engineers and technicians under the
direction of Thomas A. Furness, III, a leader in the development of visual
systems. In 1993, the Company
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acquired the exclusive rights to the VRD technology under a license agreement
with the University of Washington (the "UW License Agreement"). Additional
development of the VRD technology has taken place at the HIT Lab pursuant to a
research agreement between the University and the Company (the "Research
Agreement"). See "- University of Washington License Agreement." The University
has received six patents on the VRD technology and the MRS and has an additional
ten patent applications pending, all of the rights to which have been
exclusively licensed to the Company.
Considerations Related to the Company's Business
The following factors should be considered in evaluating the Company's
business and operations:
Market Acceptance of New Technology. The Company's success will depend on
successful development and commercial acceptance of the VRD technology. 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 " -
Strategy," "- Applications Markets and Products."
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 "- Applications, Markets and Products."
Expectation of Losses; Negative Cash Flows. The Company's revenues to date
have been generated from development contracts. The Company does not expect to
generate significant revenues from product sales in the near future. As of
December 31, 1997, the Company had an accumulated deficit since inception of
$15,508,500, and the Company expects to continue to incur substantial losses and
negative cash flow at least through 1998 and possibly thereafter. There can be
no assurance that the Company will become profitable or cash flow positive at
any time in the future. The likelihood of the success of the Company must be
considered in light of the expenses, difficulties, and delays frequently
encountered by businesses formed to pursue development of new technologies. In
particular, the Company's operations to date have focused primarily on research
and development of the VRD technology and prototypes and the Company has only
during the past year developed marketing capabilities. It is not possible to
estimate future operating expenses and revenues based upon historical
performance. Operating results will depend, in part, on matters over which the
Company has no control, including, without limitation, general economic
conditions, technological and other developments in the electronics, computing,
information display and
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imaging industries, and competition. See "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Patents and Protection of Proprietary Technology. The Company's ability to
compete effectively in the information display market will depend, in part, on
the ability of the Company and the University of Washington to maintain the
proprietary nature of the VRD technology. The University of Washington has been
awarded six U.S. patents relating to the VRD technology, including claims
related to the ability to superimpose images on the user's field of view; a VRD
using optical fiber; an expanded exit pupil; and to the mechanical resonant
scanner. In addition, the University has filed applications for ten 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. In addition, 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 of Washington'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 ultimately favorable to the Company. 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
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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.
See "- 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 "- Strategy" and "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Loss of Exclusive License. The Company's success depends on technology that
it has licensed from the University of Washington. The Company relies on the
University of Washington to prepare, file and prosecute patent applications
relating to the VRD technology. If the University of Washington were to violate
the terms of the Research Agreement or the UW License Agreement, the Company's
operations and business prospects could be materially and adversely affected. In
addition, Microvision could lose the exclusivity under the UW License Agreement
if the Company fails to use its best efforts to commercialize the VRD
technology, including having the VRD technology or VRD applications available
for sale or other commercial use no later than two years following the
termination of the Research Agreement (i.e., by March 2000), or if it fails to
respond timely to claims of infringement with respect to the VRD technology. The
loss of exclusivity under the UW License Agreement could have a materially
adverse effect on the Company's business, operating results, and financial
condition. See "Business- UW License Agreement."
Competition and Technological Advances. The information display industry is
highly competitive. The Company's products and the VRD technology will compete
with established manufacturers of miniaturized CRT and flat panel display
devices, including companies such as Sony Corporation and Texas Instruments
Incorporated, most of which have substantially greater financial, technical and
other resources than the Company and many of which are developing alternative
miniature display technologies. The Company also will compete with
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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 "- 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 "- Strategy."
Capital Requirements. The Company believes that its current cash balances
will satisfy its budgeted capital and operating requirements for at least the
next 12 months, based on the Company's current operating plan. Actual expenses,
however, may exceed the amount budgeted therefor and the Company may require
additional capital to fund long-term operations and business development. The
Company's capital requirements will depend on many factors, including, but not
limited to, the rate at which the Company can develop the VRD technology, its
ability to attract partners for product development and licensing arrangements,
and the market acceptance and competitive position of products that incorporate
the VRD technology. There can be no assurance that the Company will be able to
obtain financing, or that, if it is able to obtain financing, it will be able to
do so on satisfactory terms or on a timely basis. If additional funds are raised
through the issuance of equity, convertible debt or similar securities,
shareholders may experience additional dilution and such securities may have
rights or preferences senior to those of the Common Stock. Moreover, if adequate
funds were not available to satisfy the Company's short-term or long-term
capital requirements, the Company would be required to limit its operations
significantly. See "Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Dependence on Key Personnel. The Company's success is dependent on its
officers and other key personnel and on the ability to attract and retain
qualified new personnel. Achievement of the Company's business objectives will
require substantial additional expertise in the areas of technology, finance,
manufacturing and marketing. Competition for qualified personnel in these fields
is intense, and the inability to attract and retain additional highly skilled
personnel, or the loss of key personnel, could have a material adverse effect on
the Company's business and results of operations. See "- Employees" and "Item 9
- - Directors and Executive Officers; Compliance with Section 16(a) of the
Exchange Act."
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Possibility of Future Regulation. The Company is not aware of any
health or safety regulations applicable to VRD products, other than regulations
related to labeling of devices that emit electro-magnetic radiation. There can
be no assurance, however, that new health and safety regulations will not be
promulgated that might materially and adversely affect the Company's ability to
commercialize the VRD technology. See "- Human Factors and Safety."
Possible Illiquidity of Trading Market. The Common Stock and the publicly
traded common stock purchase warrants (the "Public Warrants") are listed on the
Nasdaq National Market. To maintain the listing of the Common Stock and the
Public Warrants on the Nasdaq National Market, the Company must continue to
satisfy certain maintenance standards. If the Company is unable to maintain the
standards for continued quotation on the Nasdaq National Market, the Common
Stock and the Public Warrants could be subject to removal from the Nasdaq
National Market. Trading, if any, in the Common Stock and the Public Warrants
would thereafter be conducted 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 unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock and the
Public Warrants. In the past, following periods of volatility in the market
price of an issuer's securities, class action lawsuits have been filed on
occasion against such issuers. There can be no assurance that such litigation
will not occur in the future with respect to the Company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business
and results of operations. Any adverse determination in such litigation also
could subject the Company to significant liabilities.
Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Common Stock or Public Warrants in the public market or the prospect
of such sales could materially and adversely affect the market price of the
Company's Common Stock and Public Warrants. As of December 31, 1997, the Company
had outstanding 5,920,264 shares of Common Stock; 2,256,250 Public Warrants
to purchase 2,256,250 shares of Common Stock; and 77,338 private warrants to
purchase an aggregate of 77,338 shares of Common Stock. As
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of that date, the Company had granted under its stock option plans options to
purchase an aggregate of 1,983,467 shares of Common Stock. Almost all of the
Company's outstanding shares of Common Stock may be sold without substantial
restriction. All shares issued upon exercise of options granted 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"). The 356,150 shares of Common Stock that are
issuable upon exercise of the Representatives' Warrants (including exercise of
the warrants included therein) will be eligible for resale without restriction
under the Securities Act.
Potential Effect of Anti-Takeover Provisions. The Company's Restated
Articles of Incorporation (the "Articles of Incorporation") give the Company's
Board of Directors the authority to issue, and to fix the rights and preferences
of, shares of the Company's Preferred Stock, which may have the effect of
delaying, deterring or preventing a change in control of the Company without
action by the Company's shareholders. Furthermore, the Articles of Incorporation
provide that the written demand of at least 25% of the outstanding shares is
required to call a special meeting of the shareholders. In addition, certain
provisions of Washington law could have the effect of delaying, deterring or
preventing a change in control of the Company.
Industry Background
The ubiquitous nature of personal computing, electronic communication,
television and video products has created a worldwide market for display
technologies. Information displays are the primary medium through which text and
images generated by computer and other electronic systems are delivered to
end-users. While early computer systems were designed and used for tasks that
involved little interaction between the user and the computer, today's graphical
and multimedia information and computing environments require systems that
devote most of their resources to generating and updating visual displays. The
market for display technologies also has been stimulated by the increasing
popularity of portable pagers and cellular phones; interest in simulated
environments and augmented vision systems; and the recognition that better means
of connecting people and machines can improve productivity and enhance the
enjoyment of electronic entertainment and learning experiences.
For decades, the CRT has been the dominant display device. A CRT creates an
image by scanning a beam of electrons across a phosphor- coated screen, causing
the phosphors to emit visible light. The beam is generated by an electron gun
and is passed through a deflection system that scans the beam rapidly left to
right and top to bottom. A magnetic lens focuses the beam into a small glowing
dot on the phosphor screen. It is these rapidly moving spots of light ("pixels")
that "paint" the image on the surface of the viewing screen. The next generation
of imaging technology, flat panel displays, is now in widespread use in portable
computers, calculators, and other personal display devices. The most prevalent
flat panel technology is the
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liquid crystal display ("LCD"), which can consist of hundreds of thousands of
pixels, each of which is formed by a single transistor acting on a crystalline
material.
In recent years, as the computer and electronics industries have made
substantial advances in miniaturization, manufacturers have sought lightweight,
low power, cost-effective displays to enable the development of more portable
products. Flat panel technologies have made meaningful advances in these areas,
and liquid crystal flat panel displays are now commonly used for laptop
computers and other electronic products. Both CRT and flat panel technologies,
however, pose difficult engineering and fabrication problems for more highly
miniaturized products, because of inherent constraints in size, weight and power
consumption. In addition, many products that use CRT and flat panel displays
often become dim and difficult to see in outdoor or other settings where the
ambient light is stronger than the light emitted from the screen. The Company
believes that as display technologies attempt to keep pace with miniaturization
and other advances in information delivery systems, conventional CRT and flat
panel technologies will experience increasing difficulty providing the full
range of performance characteristics - high resolution, bright display, low
power consumption - required for state-of-the-art information systems.
Microvision's Retinal Display Technology
The Company's VRD is fundamentally different from previously commercialized
display technologies. The VRD can create an image 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 on
the retina of the viewer's eye, the VRD technology creates a high resolution,
full-motion image. 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. Optical elements direct the light beam into the viewer's
eye, projecting an image through the viewer's pupil onto the retina.
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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.
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. Microvision's strategy will be
to seek both initial license fees from such arrangements as well as ongoing per
unit royalties.
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.
The Company expects such relationships generally will 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 charges
fees to such OEMs to compensate for 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
10
<PAGE>
manufacturing obligations for consumer products it will reduce the capital
requirements and risks inherent in bringing the VRD to the consumer market.
The Company believes that it can enhance its competitive position by
reducing the cost and improving the performance of its VRD technology and by
expanding its portfolio of intellectual property rights. A key part of the
Company's technology development strategy includes developing and protecting (i)
concepts relating to the function, design and application of the VRD system;
(ii) component technologies and integration techniques essential to the
commercialization of the VRD and which are expected to reduce the cost and
improve the performance of the system; and (iii) component technologies and
integration techniques that reduce technical requirements and accelerate the
pace of commercial development. The Company is continuing to develop a portfolio
of proprietary and patented technologies, processes and techniques that relate
directly to the functionality and to the commercial viability of the VRD
technology. See "-Technology Development" and " - Intellectual Property and
Proprietary Rights."
Applications, Markets and Products
Microvision has identified a variety of potential applications for its VRD,
including the following:
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 for Medical, Industrial and Entertainment Applications.
Manufacturers of interactive media products have recognized that the visual
experience offered by simulation is enhanced by high resolution,
three-dimensional displays projected over a wide field of vision. Although
simulated environments traditionally have been used as a training tool for
professional use, they are increasingly popular as a means of entertainment,
particularly in computer games. In a three-dimensional video game, an
inexpensive pair of VRD eyeglasses with a wide field of view could provide a
highly immersive visual experience.
Augmented Vision Displays. Augmented vision applications superimpose high
contrast, monochromatic (or color) images and information on the viewer's field
of vision as a means of enhancing the safety, precision and speed of the user's
performance of tasks. For example, a head-mounted display could superimpose
critical patient information such as vital signs, EKG traces, reference
materials, X-rays or MRI images in a surgeon's field of vision. For military
applications, troops could be equipped with eyeglasses that display high
definition imagery that
11
<PAGE>
could be viewed without blocking normal vision and could assist in threat
detection, reconnaissance and other activities.
Microvision has targeted various market segments for these potential
applications, including defense and public safety, health care, business,
industrial and consumer electronics. The following table identifies product
development opportunities within each of these markets.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
| | Defense & Public | | | | |
| | Safety | Healthcare | Business | Industrial | Consumer |
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
| Hand-held | o Command and | o Patient status | o Fax Viewing | o Maintenance | o E-mail |
| Communication | control | monitoring | o E-mail | and field | viewing |
| Devices | o Tactical | | viewing | service | o Internet |
| | information | | o Internet | | access |
| | systems | | access | | |
| | 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 |
| | | | design | | reality |
| | | | simulation | | |
- ----------------------------------------------------------------------------------------------------------------------
| Augmented | o Pilot | o Overlay of | o Multiple | o Maintenance | o Private |
| Vision | information | patient data | screen | o Inventory | viewing |
| | systems | during | viewing | control | laptop |
| | o Mine detection | surgeries | for | o Factory | systems |
| | o Tactical | o "Head-down" | securities | process | |
| | warfare data | viewing of | traders | control | |
| | o Personnel | patient | | o Sales | |
| | status | vitals | | automation | |
| | monitor | | | | |
| | o GENII soldier | | | | |
| | 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
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<PAGE>
Company intends to work with certain of these manufacturers to develop or
co-develop specific products that the Company believes to be the most
commercially viable. The Company has identified specifications for several
products that it believes may address the particular needs of development
programs sponsored by the U.S. military and that can be priced competitively.
These products include a high performance, full-color helmet-mounted 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 late
1998, and commercial sales may not occur until substantially later, if at all.
Prototypes
The Company has developed several prototypes to demonstrate the feasibility
of the VRD technology. These prototypes are not incorporated into specific
commercial products or applications, but rather are demonstration models of the
technology. The first prototype developed was a table-top model that receives
output from a personal computer. This prototype generates a full color image.
Optical elements are positioned in front of the eye, but do not obscure the
user's field of vision, so that as the image is scanned onto the optics and
reflected onto the retina, the viewer sees the image superimposed on the
viewer's natural field of vision. The second and third prototypes are hand held
devices that are portable. For demonstration purposes, they also connect to a
personal computer. One fits in an attache case and is monochromatic, while the
other is full-color and the size of carry-on luggage. The projection optics of
the portable prototypes are packaged together with the vertical and horizontal
scanner and the light source in a module, which can be hand-held or mounted to a
stand. The electronics that receive and condition the signal are packaged
separately in the related case.
Research and development efforts are being continued in the area of drive
electronics, development of photon sources, scanning techniques and optics
design to advance the VRD from prototype to product stage. Laboratory test beds
are being assembled, which will provide research and engineering capabilities to
integrate and evaluate improved systems such as higher resolution electronics or
newer light sources. See "Technology Development."
Technology Development
The Company's existing prototypes have demonstrated the technological
feasibility of the VRD and the Company's ability to miniaturize certain of its
key components. Additional work is in progress to continue miniaturization
advances necessary for large scale application, to achieve full color capability
in miniaturized versions, to expand the exit pupil of the VRD and to design for
specific applications.
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<PAGE>
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 broader
range of interface standards, including existing higher resolution standards and
emerging standards such as high definition television. For interfaces with
emerging video standards, additional development of the drive electronics
technology will likely be required.
Photon Sources. The photon generator is the source of the light beam that
creates the image on the retina. In a full-color VRD, red, green and blue photon
generators will be used, each with its own modulator, to generate a mix yielding
the desired color and brightness. Low- power solid state lasers, laser diodes
and light-emitting diodes ("LEDs") are suitable photon generators for the VRD.
Red, blue and green solid state lasers are currently available, but are useful
only for VRD applications where cost and size are not critical. Miniaturized
visible laser diodes are currently available only in red, although a number of
companies are developing laser diodes in green and blue. Miniaturized LEDs are
less expensive than laser diodes. 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 uses its
mechanical resonance scanner ("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.
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<PAGE>
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. In the
future, the Company plans to develop smaller versions of both horizontal and
vertical scanners and to integrate them into a complete scanning unit.
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 10 to 15 millimeters. The Company has
recently developed an expanded exit pupil of approximately 15 millimeters, which
is suitable to a full-color system. 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
The VRD technology was originally developed at the University of
Washington's HIT Lab by a team of technicians and engineers under the direction
of Dr. Furness. In 1993, Microvision secured the exclusive rights to the VRD
technology and associated intellectual property from the University of
Washington pursuant to the UW License Agreement. The scope of the license covers
all possible commercial uses of the VRD worldwide, including the right to grant
sublicenses. The license expires upon the expiration of the last of the
University's patents that relate to the VRD, unless sooner terminated by
Microvision or the University. In granting the license, the University retained
limited non-commercial rights with respect to the VRD, including the right to
use the technology for non-commercial research and for instructional purposes
and the right to comply with applicable laws regarding the non-exclusive use of
the technology by the United States government. The University also has the
right to consent to Microvision's sublicensing arrangements and to the
prosecution and settlement by Microvision of infringement disputes.
Microvision could lose the exclusivity under the UW License Agreement if
the Company fails to use its best efforts to commercialize the VRD technology,
including having the VRD technology or VRD applications available for sale or
other commercial use no later than two years following the termination of the
Research Agreement (i.e., by March 2000), or if it fails to respond to any
infringement action relating to the VRD technology within 90 days of learning of
such claim. In the event of the termination of Microvision's exclusivity,
Microvision would lose its rights to grant sublicenses and would no longer have
the first right to take action against any alleged infringement. In addition,
each of Microvision and the University of Washington has the right to terminate
the License Agreement in the event that the other party fails to cure a material
breach of the Agreement within 30 days of written notice of the breach.
Microvision may terminate the License Agreement at any time by serving 90 days
15
<PAGE>
prior written notice on the University of Washington. In the event of any
termination of the License Agreement, the license granted to Microvision would
terminate.
Under the terms of the UW License Agreement, Microvision agreed to pay a
non-refundable fee of $5,133,500 (the "License Fee") and to issue to the
University and to the inventors of the VRD technology, including Dr. Furness,
shares of Microvision's Common Stock. In addition, the University of Washington
is entitled to receive certain ongoing royalties. See "Item 6 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." In August 1997, the Company made the final
payment due under its Research Agreement with the University of Washington,
which resulted in the Company now having paid in full the $5,133,500 license fee
due under its License Agreement for the VRD technology. In the event the Company
defaults on its obligations, including royalty obligation, the University of
Washington may terminate the License Agreement.
At the same time it entered into the License Agreement, Microvision
contracted with the HIT Lab and the Washington Technology Center (the "WTC"), an
agency of the State of Washington created to foster the development of the
technology industry within the state, to fund further research and development
of the VRD technology pursuant to the Research Agreement. The Research Agreement
called for the Company to pay $5,133,500 to the University of Washington over a
four year term. Payments made pursuant to the Research Agreement were credited
against the License Fee. Any intellectual property developed by the HIT Lab
pursuant to the Research Agreement is included in the exclusive license granted
to Microvision under the UW License Agreement. In October 1997, the Company and
the University of Washington agreed to extend the term of the Research Agreement
from October 31, 1997 to March 31, 1998, at no additional cost to the Company.
The extension is expected to enable the University of Washington to complete
performance of certain research activities under the Research Agreement. In
August 1997, the Company made the final payment due under the Research
Agreement. See Note 7 of Notes to the Financial Statements.
The Research Agreement currently is scheduled to expire on March 31, 1998,
but may be continued by agreement of the parties. Stephen R. Willey, the
Company's Executive Vice President, acts as liaison between the HIT Lab, WTC and
the Company. In addition, the HIT Lab provides the Company with quarterly
reports on each functional area of the research and development activities it
conducts, such as optics, mechanics, electronics and photonics, and Microvision
employees and personnel at the HIT Lab jointly determine the direction of future
research and development activities.
Intellectual Property and Proprietary Rights
The Company's ability to compete effectively in the information display
market will depend, in part, on the ability of the Company and the University of
Washington to maintain the proprietary nature of the VRD technology. The
University of Washington has been awarded six U.S. patents related to the VRD
technology. Patent No.5,467,104 issued in November 1995 has 11 claims, including
claims directed to the ability to superimpose images on the user's field
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<PAGE>
of vision. Patent No. 5,557,444 issued in September 1996 has 37 claims relating
to the MRS. Patent No. 5,596,339 issued in January 1997 has 32 claims relating
to a VRD using optical fiber. Patent No 5,694,237 issued in December 1997 has
nine claims relating to a mechanical resonant scanner. Patent No. 5,659,327
issued in August 1997 has 12 claims that are a continuation of U.S. Patent No.
5,467,104. Patent No. 5,701,132 also issued in December 1997 has 21 claims
relating to the VRD and an expanded exit pupil through which a users views an
image. In addition, the University has filed ten 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. See "-
Considerations Related to the Company's Business - Patents and Protection of
Proprietary Technology."
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.
Microvision has filed for registration of the marks "Virtual Retinal
Display" and "VRD" in the United States Patent and Trademark Office. The marks
were examined and entered into the opposition phase, where an opposition was
filed. The Company believes the opposition filing is without merit, and that the
Company should prevail in the proceedings. Regardless of the outcome, the
Company believes that it will be entitled to continue to use the terms "Virtual
Retinal Display" and "VRD."
17
<PAGE>
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 have concluded that laser exposure to the retina
under normal VRD operating conditions would be below the calculated maximum
permissible exposure level set by ANSI.
Competition
The information display industry is highly competitive. The Company's
products and the VRD technology will compete with established manufacturers of
miniaturized CRT and flat panel display devices, including companies such as
Sony Corporation and Texas Instruments Incorporated, most of which have
substantially greater financial, technical and other resources than the Company
and many of which 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 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
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<PAGE>
technology. This technology involves the projection of data and information onto
the inside of a dome that is placed over the viewer's head. This imaging
technology is referred to as HALO. The HALO license agreement requires the
Company to pay $175,000 to the University, and to issue 93,750 shares of Common
Stock to the University and the inventors of the technology, upon the
achievement of certain milestones, including, among other things, the receipt by
the University of a patent covering the technology. See Note 7 of Notes to the
Financial Statements.
Employees
As of March 20, 1998, Microvision had 60 full-time employees and one
part-time employee. Microvision is actively seeking additional qualified
full-time personnel where appropriate. The Company's employees are not subject
to any collective bargaining agreements and management regards its relations
with employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
Microvision currently leases approximately 18,000 square feet of combined
use office and laboratory space at 2203 Airport Way South in Seattle,
Washington. 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 used in connection with
the research activities performed by the HIT Lab. See "Item 1 - Description of
Business - University of Washington License Agreement." The Company believes
that the current facilities are adequate for its foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property subject to, any material
pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1997.
19
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND WARRANTS; RELATED
SHAREHOLDER MATTERS.
The Company's Common Stock and Public Warrants are traded on the Nasdaq
National Market under the symbols "MVIS" and "MVISW," respectively. As of March
20, 1998, there were 124 holders of record of 5,952,631 shares of Common Stock
and 6 holders of record of 2,268,739 Public Warrants. The Company has never
declared or paid cash dividends on the Common Stock. The Company currently
anticipates that it will retain all future earnings to fund the operation of its
business and does not anticipate paying dividends on the Common Stock in the
foreseeable future.
The Company's Common Stock and Public Warrants began trading publicly on
August 27, 1996. The quarterly high and low sales prices since August 27, 1996
as reported by the Nasdaq National Market are as follows:
<TABLE>
<CAPTION>
Quarter Ended Common Stock Public Warrants
- --------------------------- -------------------- ---------------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
September 30, 1996 6 5/8 4 3/4 2 1/2 1 13/32
December 31, 1996 7 3/8 3 3/8 2 1/2 3/4
March 31, 1997 7 11/16 3 1/2 2 11/16 15/16
June 30, 1997 6 7/8 5 3/16 2 7/8 1 1/2
September 30, 1997 18 3/4 5 1/4 8 3/8 1 1/2
December 31, 1997 19 1/4 11 3/8 9 5/8 5 3/8
March 31, 1998 16 3/8 12 1/2 7 3/4 5 1/4
(through March 20, 1998)
</TABLE>
On March 20, 1998, the closing sale price for the Common Stock was $14.625
and the closing sale price for the Public Warrants was $7.25.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company commenced operations in May 1993 to develop and commercialize
technology for displaying images and information onto the retina of the eye. In
1993, the Company acquired an exclusive license to the Virtual Retinal Display
from the University of Washington and entered into a research agreement with the
University of Washington to further
20
<PAGE>
develop the VRD technology. The Company was in the development stage as of and
for the period ended December 31, 1996. In connection with its development
activities, the Company incurred costs to incorporate and establish its business
activities as well as develop and market VRD technology. As of December 31,
1997, the Company is no longer considered a development stage enterprise. Since
the completion of its initial public offering in August 1996, the Company also
has established and equipped its own in-house laboratory for the continuing
development of the VRD technology and has transferred the core research and
development work from the HIT Lab to the Company. The Company has incurred
substantial losses since its inception and expects to continue to incur
significant operating losses over the next several years.
The Company's objective is to become a leading provider of personal display
products and imaging technology in a broad range of professional and consumer
applications. The Company expects to achieve this objective and to generate
revenues through a combination of the following activities: licensing its
technology to original equipment manufacturers ("OEMs") of consumer electronic
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 certain professional users
directly, through OEMs, or through joint ventures. The Company currently is in
discussions with systems and equipment manufacturers in the defense and wireless
communications, computing, and commercial and consumer electronics industries.
The Company expects to work with certain of these manufacturers to develop or
co-develop specific products that the Company believes to be the most
commercially viable.
The Company currently has several prototype versions of the VRD including
monochromatic and color portable units and a full-color bench top model. The
Company expects to continue funding prototype and demonstration versions of
products incorporating the VRD technology throughout 1998. Future revenues,
profits and cash flow and the Company's ability to achieve its strategic
objectives as described herein will depend on a number of factors including
acceptance of the VRD technology by various industries and OEMs, market
acceptance of products incorporating the VRD technology and the technical
performance of such products. Additionally, the Company must be able to attract,
retain and motivate qualified technical and management personnel and both
anticipate and adapt to a rapidly changing, competitive market for information
display technologies. See "Item 1 - Description of Business - Considerations
Related to the Company's Business."
Plan of Operation
The Company intends to continue entering into strategic co-development
relationships with systems and equipment manufacturers to pursue development of
commercial products incorporating the VRD technology. In 1997, the Company hired
a Vice President of Sales with experience in technical products sales to pursue
strategic relationships with systems and equipment manufacturers for the joint
development of commercial products incorporating the VRD technology. Also in
1997, the Company hired a Vice President of Marketing to identify and assess the
various market and product opportunities available to the Company for the
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<PAGE>
commercialization of the VRD technology and to identify and evaluate potential
co-development partners. The Company plans to continue to expand its sales and
marketing staff in support of its objective of commercializing the VRD
technology.
The Company also plans to continue investing in ongoing innovation and
improvements to the VRD technology, including the development of component
technology and additional prototypes, as well as design of subsystems and
products. The Company has established, staffed, and equipped an in-house
laboratory to support VRD technology development and product development
engineering associated with cooperative development projects. The Company also
intends to continue hiring technical personnel to achieve the Company's
technology development objectives. The Company also intends for the University
of Washington to complete its work under the Research Agreement.
Results of Operations
Contract Revenues. Revenue increased by $1,610,500 to $1,712,700 in 1997
from $102,200 in 1996. The increase resulted from the Company recognizing
revenue from various contracts entered into in 1997, which exceeded the
recognition of contract revenue in 1996. Contract revenue has been recognized
using both the percentage-of-completion method and the cost plus fee method. See
Note 2 of Notes to the Financial Statements.
During 1997, the Company entered into several development contracts with
both commercial and government entities for further development of the VRD
technology directed toward meeting specific customer applications.
In the commercial segment, the Company entered into a contract with Saab
AB, in collaboration with Ericsson Saab Avionics AB. to explore the
possibilities of advanced visual display systems incorporating the VRD
technology. The Company was also contracted by The Boeing Company to build a
technology demonstration system incorporating the VRD technology. The Company
delivered the demonstrator to the Boeing Company in August 1997, which was the
Company's first full-color VRD system to be delivered to any customer. Also
during 1997, the Company entered into a third commercial development
contract to incorporate its VRD technology into advanced helmet-mounted display
systems for fixed wing military aircraft.
In the defense segment, the Company was awarded a multi-million dollar
contract to build a helmet mounted display system based on the VRD technology
for the Army's ACIS Comanche Compatible Common Helmet Program. The phase one
contract, exceeding $4 million, calls for the Company to provide the U.S. Army
with a prototype display system that incorporates an alternative to commercial
helmet mounted technologies.
The defense segment also included two Small Business Innovation Research
(SBIR) contracts with the United States Air Force. One SBIR is to initiate the
development of a full-color, high definition, head mounted display for pilot
training applications. The second SBIR is to explore the development of very
wide field of view, immersive display systems for
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<PAGE>
command, control, communications, and computer information systems. The Company
was awarded its third SBIR from the United States Army to initiate the
development of a full color, high-definition, head-mounted display to present
visual imagery to helicopter pilots in an operation flight simulator.
Research and Development Expense. Research and development expense consist
of payroll and related support costs of employees, consultants and contractors
engaged in research and development activities; costs incurred in the
performance of the Company's co-development and other contracts; payments made
under the Research Agreement; fees and expenses related to patent applications
and patent prosecution; and lab materials and other expenses incurred in support
of the Company's on-going research and development activities. To date, the
Company has expensed all such costs. See Note 2 of Notes to the Financial
Statements.
Research and development expenses increased by $2,625,600 to $4,414,100 in
1997 from $1,788,500 in 1996. The Company made payments totaling $962,500 and
$1,283,400 in 1997 and 1996 respectively to the University of Washington
pursuant to the Research Agreement. The balance of the expenses of $3,451,600
and $505,100 in 1997 and 1996 respectively, were incurred directly by the
Company in the performance of contracts and to further develop the VRD
technology.
The increase in research and development expenses of $2,625,600 in 1997
over 1996 reflects implementation of the Company's operating plan, which calls
for building its technical staff supporting activities to further develop the
Company's technology; establishing and equipping its own laboratory; and
performing work in support of the Company's sales and marketing activities
related to the commercialization of the VRD technology. The increase also
includes increased costs incurred in the performance of contracts.
The Company believes that a significant level of continuing research and
development expense will be required to commercialize the VRD technology and to
develop products incorporating the VRD technology. Accordingly, the Company
anticipates that it will continue to commit substantial resources to research
and development, including hiring additional technical and support personnel,
and that these costs will continue to increase in future periods.
Marketing, General and Administrative Expense. Marketing, general and
administrative expense include payroll and related costs for the Company's
executive and administrative personnel, costs related to the Company's sales and
marketing activities, office lease expenses and other overhead costs, including
legal and accounting costs and fees of consultants and professionals.
Marketing, general and administrative expenses increased by $1,227,700 to
$3,077,500 in 1997 from $1,849,800 in 1996. The increase includes increased
aggregate compensation and associated support costs for employees, including
those employed at December 31, 1996 and those hired subsequent to that date, in
sales and marketing and in administration. The Company expects marketing,
general and administrative expenses to increase substantially in future
23
<PAGE>
periods as the Company adds to its sales and marketing and administrative staff
and makes additional investments in sales and marketing activities to support
commercialization of its VRD technology and anticipated products and as it
increases the level of corporate and administrative activity.
Other Income. Other income of $222,500 in 1997 resulted from the reduction
of an accrued liability for litigation upon settlement of the matter at a lesser
amount than the established reserve.
Interest Income and Expense. Interest income increased by $334,800 to
$614,800 in 1997 from $280,000 in 1996. This increase resulted from higher
average cash balances in 1997, representing the remaining net proceeds received
by the Company from its initial public offering in August 1996.
Interest expense decreased by $197,100 to $3,400 in 1997 from $200,500 in
1996. This decrease resulted from the repayment in November and December 1996 of
the Company's 7% Convertible Subordinated Notes and related interest.
Income Taxes. At December 31, 1997, the Company has net operating loss
carry-forwards of approximately $8,847,000 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 1996 and the annual
utilization of loss carry-forwards generated through the period of that change
will be limited to approximately $761,000. An additional change occurred in
1996; however, the actual amount of the annual limitation is not significant.
Liquidity and Capital Resources
From inception through July 1996, the Company financed its operations
primarily through private offerings of common stock and convertible preferred
stock and convertible subordinated 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 $15,500,000 after deducting underwriting
discounts and offering expenses.
Through December 31, 1997, the Company had incurred an accumulated deficit
of $15,508,500, of which $5,133,500 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 $1,872,100 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 $750,000 in principal amount of its 7% Convertible Subordinated
Notes due 1997 (the "7%
24
<PAGE>
Notes"). From November 25, 1996, through March 15, 1997, the 7% Notes were
redeemable at the option of the noteholder at par (plus accrued and unpaid
interest) plus 6,000 shares of Common Stock for every $100,000 principal so
redeemed. In November and December 1996, the 7% Notes were redeemed in full
(plus accrued interest) and 45,000 shares of Common Stock were issued to the
noteholders.
The Company's future expenditures and capital requirements will depend on
numerous factors, including the progress of its research and development
program, the progress in commercialization activities and arrangements, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments
and the ability of the Company to establish cooperative development, joint
venture and licensing arrangements. In order to maintain its exclusive rights
under the UW License Agreement, the Company is obligated to make payments with
respect to royalties on the VRD. See "Item 1 - Description of Business-
University of Washington License Agreement." If the Company is successful in
establishing OEM co-development and joint venture arrangements, it is expected
that the Company's partners would fund certain non-recurring engineering costs
for product development. Nevertheless, the Company expects its cash requirements
to increase significantly each year as it expands its activities and operations.
At December 31, 1997, the Company's total cash, cash equivalents and
short-term investment securities balance was $8,841,200. The Company believes
that balance will satisfy its budgeted cash requirements for at least the next
12 months based on the Company's current operating plan. Actual expenses,
however, may exceed the amounts budgeted therefor and the Company may require
additional capital earlier to develop its products, to respond to competitive
pressures or to meet unanticipated development difficulties. The Company's
operating plan calls for the purchase and installation of certain laboratory
equipment and facilities and the addition of technical and business staff. The
operating plan also provides for the completion of the Research Agreement with
the University of Washington and the development of strategic relationships with
systems and equipment manufacturers. See "Item 1 - Description of Business."
There can be no assurance that additional financing will be available to the
Company or that, if available, it will be available on terms acceptable to the
Company on a timely basis. If adequate funds are not available to satisfy either
short-term or long-term capital requirements, the Company may be required to
limit its operations significantly. The Company's capital requirements will
depend on many factors, including, but not limited to, the rate at which the
Company can, directly or through arrangements with OEMs, introduce products
incorporating the VRD technology and the market acceptance and competitive
position of such products. See "Item 1 - Description of Business -
Considerations Related to the Company's Business - Capital Requirements."
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants.............................................27
Balance Sheet as of December 31, 1997 and December 31, 1996...................28
Statement of Operations for the years ended December 31, 1997 and
December 31, 1996.............................................................29
Statement of Shareholders' Equity for the years ended December 31,
1997 and December 31, 1996....................................................30
Statement of Cash Flows for the years ended December 31, 1997
and December 31, 1996.........................................................32
Notes to Financial Statements.................................................33
26
<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 statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Microvision, Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for the
years then ended 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
March 27, 1998
27
<PAGE>
Microvision, Inc.
<TABLE>
<CAPTION>
Balance Sheet
- --------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 5,049,200 $ 14,265,800
Investment securities available for sale 3,792,000
Accounts receivable 150,000 25,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 843,800
Other current assets 113,100 86,500
--------------- --------------
Total current assets 9,948,100 14,377,300
Property and equipment, net 772,700 157,800
Other assets 20,000 30,200
--------------- --------------
Total assets $ 10,740,800 $ 14,565,300
=============== ==============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 768,200 $ 388,600
Accrued liabilities 715,900 667,600
Current portion of capital lease obligations 22,700
--------------- --------------
Total current liabilities 1,506,800 1,056,200
--------------- --------------
Capital lease obligations, net of current portion 69,600
---------------
Commitments and contingencies (Notes 7 and 8)
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, 5,920,264 and 5,778,776 shares
issued and outstanding 25,375,300 24,116,200
Deferred compensation (701,200) (43,600)
Unrealized holding loss on investment securities (1,200)
Accumulated deficit (15,508,500) (10,563,500)
--------------- --------------
Total shareholders' equity 9,164,400 13,509,100
--------------- --------------
Total liabilities and shareholders' equity $ 10,740,800 $ 14,565,300
=============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
28
<PAGE>
Microvision, Inc.
<TABLE>
<CAPTION>
Statement of Operations
- --------------------------------------------------------------------------------------------------------------
Year ended December 31,
1997 1996
<S> <C> <C>
Contract revenue $ 1,712,700 $ 102,200
--------------- --------------
Research and development expense 4,414,100 1,788,500
Marketing, general and administrative
expense 3,077,500 1,849,800
--------------- --------------
7,491,600 3,638,300
--------------- --------------
Loss from operations (5,778,900) (3,536,100)
Other income 222,500
Interest income 614,800 280,000
Interest expense (3,400) (200,500)
--------------- --------------
Net loss $ (4,945,000) $ (3,456,600)
=============== ==============
Net loss per share $ (0.85) $ (0.90)
=============== ==============
Weighted-average shares outstanding 5,806,200 3,832,000
=============== ==============
Net loss per share assuming dilution $ (0.85) $ (0.90)
=============== ==============
Weighted-average shares outstanding assuming dilution 5,806,200 3,832,000
=============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
29
<PAGE>
Microvision, Inc.
<TABLE>
<CAPTION>
Statement of Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Page 1 of 2
Preferred stock Common stock Deferred Subscription
Shares Amount Shares Amount compensation receivable
-------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 499,478 $ 2,038,900 3,098,828 $ 4,745,900 $ (42,800)
Issuance of stock to board members for
services 22,250 110,000 (65,500)
Issuance of warrants and options for common
stock 23,400
Issuance of preferred stock for cash, net of
costs (at $4.80/share) 360,298 1,493,900
Issuance of common stock and warrants
for services 10,605 71,000
Exercise of warrants for common stock 50,000 40,000 $ (10,000)
Cashless exercise of warrants for common
stock 296,875
Cancellation of founder's common stock (859,375) (66,000)
Amortization of deferred compensation, net 64,700
Sale of common stock and warrants in IPO 2,250,000 15,482,900
Conversion of convertible preferred stock (859,776) (3,532,800) 859,776 3,532,800
Collection of subscription receivable 10,000
Issuance of stock relating to retirement
of 7% subordinated notes 45,000 176,200
Other 4,817
Net loss for the year ended December 31,
1996
-------- ------------ ---------- ------------ ------------ ------------
Balance at December 31, 1996 - - 5,778,776 24,116,200 (43,600) -
Issuance of stock to board members for
services 9,600 78,600 (78,600)
Exercise of warrants and options for
common stock 56,420 348,500
Cashless exercise of warrants for common
stock 75,468
Issuance of options for services 37,200
Issuance of options for common stock 785,000 (785,000)
Amortization of deferred compensation 206,000
Unrealized holding loss on
investment securities
Other 9,800
Net loss for the year ended December, 31,
1997
-------- ------------ ---------- ------------ ------------ ------------
Balance at December 31, 1997 - $ - 5,920,264 $ 25,375,300 $ (701,200) $ -
======== ============ ========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
30
<PAGE>
Microvision, Inc.
<TABLE>
<CAPTION>
Statement of Shareholders' Equity
- ---------------------------------------------------------------------------------------------
Page 2 of 2
Unrealized
holding
loss on
investment Accumulated Shareholders'
securities deficit equity
---------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ (7,106,900) $ (364,900)
Issuance of stock to board members for
services 44,500
Issuance of warrants and options for common
stock 23,400
Issuance of preferred stock for cash, net of
costs (at $4.80/share) 1,493,900
Issuance of common stock and warrants
for services 71,000
Exercise of warrants for common stock 30,000
Cashless exercise of warrants for common
stock
Cancellation of founder's common stock (66,000)
Amortization of deferred compensation, net 64,700
Sale of common stock and warrants in IPO 15,482,900
Conversion of convertible preferred stock
Collection of subscription receivable 10,000
Issuance of stock relating to retirement
of 7% subordinated notes 176,200
Other
Net loss for the year ended December 31,
1996 (3,456,600) (3,456,600)
---------- ------------- -------------
Balance at December 31, 1996 (10,563,500) 13,509,100
Issuance of stock to board members for
services
Exercise of warrants and options for
common stock 348,500
Cashless exercise of warrants for common
stock
Issuance of options for services 37,200
Issuance of options for common stock
Amortization of deferred compensation 206,000
Unrealized holding loss on short-term
investment securities $ (1,200) (1,200)
Other 9,800
Net loss for the year ended December, 31,
1997 (4,945,000) (4,945,000)
---------- ------------- -------------
Balance at December 31, 1997 $ (1,200) $ (15,508,500) $ 9,164,400
========== ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
31
<PAGE>
Microvision, Inc.
<TABLE>
<CAPTION>
Statement of Cash Flows
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities
Net loss $ (4,945,000) $ (3,456,600)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and loss on disposal of equipment 146,200 44,000
Noncash expenses related to issuance of stock, warrants
and options and amortization of deferred compensation 243,200 313,800
Unrealized holding loss on investment securities (1,200)
Change in:
Accounts receivable (125,000) (25,000)
Costs and estimated earnings in excess of billings on
uncompleted contracts (843,800)
Other current assets (26,600) (86,500)
Receivables from former employees 69,400
Other assets 10,200 (28,200)
Accounts payable and other 379,600 181,100
Accrued liabilities 48,300 331,200
--------------- --------------
Net cash used in operating activities (5,114,100) (2,656,800)
--------------- --------------
Cash flows from investing activities
Purchases of investment securities (3,792,000)
Purchases of property and equipment (666,600) (192,700)
--------------- --------------
Net cash used in investing activities (4,458,600) (192,700)
--------------- --------------
Cash flows from financing activities
Principal payments under capital leases (2,200)
Proceeds from 7% convertible subordinated notes 750,000
Repayment of 7% convertible subordinated notes (750,000)
Net proceeds from issuance of common stock 358,300 15,522,900
Net proceeds from issuance of preferred stock 1,493,900
--------------- --------------
Net cash provided by financing activities 356,100 17,016,800
--------------- --------------
Net (decrease) increase in cash and cash equivalents (9,216,600) 14,167,300
Cash and cash equivalents at beginning of year 14,265,800 98,500
--------------- --------------
Cash and cash equivalents at end of year $ 5,049,200 $ 14,265,800
=============== ==============
Supplemental disclosure of cash flow information
Cash paid for interest $ 3,400 $ 21,700
=============== ==============
Supplemental schedule of noncash investing and financing activities
The Company entered into capital lease obligations of $94,500 for the purchase
of new equipment in 1997.
The accompanying notes are an integral part of these financial statements.
</TABLE>
32
<PAGE>
Notes to Financial Statements
December 31, 1997 and 1996
1. The Company
Microvision, Inc. (the Company), a Washington corporation, was incorporated
May 28, 1993. The Company was established to develop, manufacture and
market Virtual Retinal Display (VRD) technology, which projects images
directly onto the eye's retina. The Company is working to commercialize the
VRD for potential defense, healthcare, business, industrial and consumer
applications.
The Company was in the development stage as of and for the period ended
December 31, 1996. In connection with its development activities the
Company incurred costs to incorporate and establish its business activities
as well as develop and market VRD technology. As of December 31, 1997, the
Company is no longer considered a development stage enterprise.
On August 30, 1996, the Company completed its initial public offering (IPO)
of 2,250,000 units each consisting of one share of common stock and one
five-year redeemable warrant to purchase one share of common stock at
$12.00 per share. The Company received net proceeds from the offering of
$15.5 million after deducting underwriting discounts and offering expenses.
2. Summary of significant accounting policies
Cash, cash equivalents and investment securities
The Company considers all investments with original maturities of three
months or less to be cash equivalents.
Short-term investment securities at December 31, 1997 are primarily debt
securities of the U.S. Government and its agencies. The Company has
classified its entire investment portfolio as available-for-sale. Under
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, available-for-sale securities
are stated at fair value with unrealized gains and losses included in
shareholders' equity. Dividend and interest income are recognized when
earned. Realized gains and losses are included in other income (expense).
The cost of securities sold is based on the specific identification method.
Property and equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (three to five years) using the straight-line
method. Leasehold improvements are depreciated over the shorter of their
estimated useful life or the lease term.
Revenue Recognition
Revenue has primarily been generated from contracts for further development
of the VRD technology and to produce prototypes for commercial enterprises
and the United States government. Revenue on such contracts is generally
recorded using the percentage-of-completion method measured on a cost
incurred basis. With respect to cost-plus-fixed-fee contracts with the
United States Government, the Company recognizes revenue based on costs
incurred plus fee. Revenues recognized in excess of amounts billed are
included in "costs and estimated earnings in excess of billings on
uncompleted contracts".
33
<PAGE>
Losses, if any, are recognized in full as soon as identified. Changes in
contract performance, contract conditions and estimated profitability,
including those arising from contract penalty provisions, and final
contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Profit
incentives are included in revenues when their realization is reasonably
assured.
During 1997, the Company had contract revenues related to two customers
that aggregated 37% and 32%, respectively. Costs and estimated earnings in
excess of revenues earned related to these two customers were 68% and 28%,
respectively.
Income taxes
The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires that
provision be made for taxes currently due and for the expected future tax
effects of temporary differences between book and tax bases of assets and
liabilities.
Net loss per share
Statement of Financial Accounting Standards No. 128 (SFAS 128) was issued
in February 1997. This pronouncement modifies the calculation and
disclosure of net loss per share and was adopted by the Company during
1997. Under the provisions of SFAS 128, net loss per share is calculated on
the basis of the weighted-average number of common shares outstanding
during the periods. Net loss per share assuming dilution is calculated on
the basis of the weighted-average number of common shares outstanding and
the dilutive effect of all common stock equivalents and convertible
securities. Net loss per share assuming dilution for the years ended
December 31, 1997 and 1996 is equal to net loss per share due to the fact
that the effect of common stock equivalents outstanding during the periods,
including options and warrants computed using the treasury stock method, is
anti-dilutive. All net loss per share amounts from prior periods have been
restated to reflect the adoption of SFAS 128.
Research and development
Research and development costs are expensed as incurred. Research and
development costs will be expensed until the net realizable value of a
related product or technology is assured.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock-based compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 123), which was
effective for the Company beginning in fiscal 1996. Under the provisions of
this statement, employee stock-based compensation expense is measured using
either the intrinsic-value method as prescribed by Accounting Principles
Board Opinion No. 25 (APB 25) or the fair value method described in SFAS
123. Companies choosing the intrinsic-value method are required to disclose
the pro forma impact of the fair value method on net income and earnings
per share. The Company decided to implement the statement in fiscal 1996
using the intrinsic-value method for its employee stock-based compensation
plans. The Company is required to implement Statement No. 123 for
stock-based awards to other than employees. Accordingly, during 1997 and
1996, the Company valued shares of the Company's common stock, warrants and
options issued to other than employees at $115,800 and $380,600,
respectively.
3. Investment securities
34
<PAGE>
At December 31, 1997, the Company has classified all investments as
available-for-sale. The amortized cost was $3,793,200, gross unrealized
holding gains were $1,300, gross unrealized holding losses were $2,500 and
fair value of the available-for-sale securities was $3,792,000 at December
31, 1997. The debt securities held at December 31, 1997 have maturities
ranging from September 1998 to May 1999.
4. Accrued liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Bonuses $ 414,300 $ 316,000
Vacation 103,000 20,000
Professional fees 155,500 322,500
Other 43,100 9,100
--------------- --------------
$ 715,900 $ 667,600
=============== ==============
</TABLE>
5. Property and equipment, net
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Office furniture and equipment $ 185,700 $ 63,200
Lab equipment 270,900 28,500
Computer hardware and software 433,000 113,800
Leasehold improvements 55,000
--------------- --------------
944,600 205,500
Less: Accumulated depreciation (171,900) (47,700)
--------------- --------------
$ 772,700 $ 157,800
=============== ==============
</TABLE>
35
<PAGE>
6. Shareholders' equity
Common shares
On July 10, 1996, the Company issued 7% Convertible Subordinated Notes in
the amount of $750,000. The Notes bore interest at 7% payable in arrears on
December 15 and June 15 and were due July 10, 1997. The Notes were
convertible at any time following 90 days after the effective date of a
public offering of the Company's common stock generating proceeds of at
least $5 million into 18,000 shares of common stock for each $100,000 in
outstanding principal amount of Notes. Additionally, at any time following
90 days after the effective date of such a public offering and prior to
March 15, 1997, the holder could redeem the unpaid principal amount of
Notes plus accrued interest and receive 6,000 shares of common stock of the
Company for each $100,000 in principal redeemed. In late 1996, the Company
repaid the Notes on demand by holders and issued 45,000 shares of common
stock to the holders. The aggregate fair value of the shares of common
stock issued of $176,200 was charged to interest expense.
In August 1996, the Company completed an initial public offering (IPO) of
2,250,000 units, each consisting of one share of common stock and one
warrant to purchase one share of common stock. The Company received net
proceeds from the offering of $15,482,900. In anticipation of the IPO, on
July 10, 1996, the Company's Board of Directors approved a 1-for-3.2
reverse stock split of the Company's common and preferred stock. All
information in these financial statements pertaining to shares of capital
stock and per share amounts has been adjusted to give retroactive effect to
the reverse split. In connection with this action, a nominal number of
fractional shares were redeemed in cash.
Preferred shares
In November 1994, the Company authorized the issuance and sale of 1,875,000
shares of Series A Preferred Stock which had liquidation and dividend
preferences over common stock. Dividends accrued when and if declared by
the Board of Directors. The Series A Preferred Stock was convertible into
an equal number of shares of common stock. The Series A Preferred Stock was
converted into 859,776 shares of common stock in conjunction with the IPO.
36
<PAGE>
Warrants
In addition to the warrants issued in conjunction with the IPO (Public
Warrants), during 1996 the Company issued warrants for various services.
The following summarizes activity with respect to warrants during 1996 and
1997:
<TABLE>
<CAPTION>
Warrants
-------------------------------
Exercise
Shares price
<S> <C> <C>
Outstanding at December 31, 1995 932,813 $ 2.40-6.40
Granted 2,860,050 2.40-12.00
Exercised (412,500) 2.40-3.52
Canceled/expired (550,000) 2.40-6.40
------------- -------------
Outstanding at December 31, 1996 2,830,363 4.80-12.00
Exercised (140,625) 4.80-6.40
------------- -------------
Outstanding at December 31, 1997 2,689,738 $ 4.80-12.00
============= =============
Exercisable at December 31, 1997 2,689,738 $ 6.40-12.00
============= =============
</TABLE>
Options
During 1993, the Company adopted the 1993 Stock Option Plan which provides
for granting incentive stock options (ISOs) and nonqualified options (NSOs)
to employees, directors, officers, and certain nonemployees of the Company
as determined by the Board of Directors, or its designated committee (Plan
Administrator), for the purchase of up to a total of 228,938 shares of the
Company's authorized but unissued common stock. The date of grant, option
price, vesting period and other terms specific to options granted under
such plan were determined by the Plan Administrator. In September 1995, an
additional 625,000 shares were reserved for issuance under the 1993 Stock
Option Plan.
During 1994, the Company adopted the 1994 Combined Incentive and
Nonqualified Stock Option Plan which provided for the granting of ISOs and
NSOs to employees, directors, officers, and certain nonemployees of the
Company as determined by the Plan Administrator for the purchase of common
shares not to exceed a total of 435,000 of the Company's authorized but
unissued shares of common stock. The date of grant, option price, vesting
terms and other terms specific to options granted under such plan were
determined by the Plan Administrator.
During 1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan)
and the 1996 Independent Director Stock Plan (the Director Plan). The 1996
Plan provides for granting ISOs and NSOs to employees, officers and agents
of the Company as determined by the Plan Administrator, for the purchase of
up to 750,000 shares of the Company's authorized but unissued common stock.
The terms and conditions of any options granted, including the exercise
price and vesting period are to be determined by the Plan Administrator.
The Director Plan provides for granting up to a total of 75,000 shares of
common stock to nonemployee directors of the Company as determined by the
Board of Directors or a committee thereof. The Company expects to terminate
the prior plans effective immediately following the issuance of the shares
of common stock subject to the outstanding grants thereunder.
37
<PAGE>
In January, 1997, options to purchase 6,624 shares of the Company's common
stock at an exercise price of $8.00 per share were issued to consultants in
lieu of cash compensation. The options were vested in 1997 and expire five
years following the date of issue. The Company recognized an expense of
$37,200 related to the issuance of the options.
The following table summarizes activity with respect to options for the two
years ended December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
average
exercise
Shares price
<S> <C> <C>
Outstanding at December 31, 1995 645,892 $ 3.91
Granted 387,124 6.86
Forfeited (53,650) 7.59
------------- -------------
Outstanding at December 31, 1996 979,366 4.88
Granted 1,129,576 16.04
Exercised (40,795) 6.09
Forfeited (84,680) 8.10
------------- -------------
Outstanding at December 31, 1997 1,983,467 $ 11.07
============= =============
Weighted-average fair value of options granted,
net of forfeitures, during 1997 $ 5.76
=============
Weighted-average fair value of options granted, net of
forfeitures, during 1996 $ 2.11
=============
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Number Weighted- Number
outstanding average Weighted- exercisable Weighted-
at remaining average at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1997 life price 1997 price
<S> <C> <C> <C> <C> <C>
$ 0.80 193,939 3.46 $ 0.80 193,939 $ 0.80
3.20-4.80 211,289 4.51 3.45 211,289 3.45
5.25-7.20 562,476 5.75 6.65 344,178 6.32
8.00-12.00 310,411 7.33 9.53 6,624 8.00
14.00-21.88 518,402 8.82 17.98 28,950 14.07
22.19-34.18 186,950 9.02 27.07
---------- ----------
1,983,467 784,980
========== ==========
</TABLE>
The Company applies APB 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its plans. Options issued to
employees were recorded at $785,000 during the year ended December 31, 1997
based upon the difference between the exercise price and fair value of the
underlying shares on the date of grant. However, no value was recorded
related to the time value of the options. Had compensation cost for the
Plan been determined based upon the fair value at the grant
38
<PAGE>
date for awards under the Plan consistent with the methodology prescribed
under SFAS 123, the Company's net loss would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net loss As reported $ (4,945,000) $ (3,456,600)
Pro forma $ (5,961,500) $ (3,760,600)
Pro forma loss As reported $ (0.85) $ (0.90)
per share Pro forma $ (1.03) $ (0.98)
</TABLE>
The fair value of the options granted during 1997 and 1996 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997 and 1996,
respectively: dividend yield of zero percent for all years, expected
volatility of 60% for all years, risk-free interest rate of 6.09% and
6.55%, assumed forfeiture rate of 5% for all years, and expected lives of 4
years.
7. 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 provided for the Company to pay
$5,133,500 to fund agreed-upon VRD research and development activities to
be carried out by the UW. The research funding was required to be paid in
sixteen quarterly instalments of $320,800 and was payable at the beginning
of each quarter. During 1997, the Company made its final payments under the
Research Agreement. Total payments made for 1997 and 1996 were $962,500 and
$1,283,400, respectively.
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 were
credited to the license fee. In addition to the nonrefundable fee, which
has been paid in full, the Company is required to pay certain ongoing
royalties. In 1997 and 1996, these royalties were not material.
Beginning in 2000, the Company is required to pay the University of
Washington a nonrefundable license maintenance fee of $10,000 per quarter,
to be credited against royalties due.
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
agreement, the Company has committed to pay to UW $75,000 and 31,250 upon
filing of the first patent and $100,000 and 62,500 common shares upon
issuance of the first patent.
The Board of Directors has approved a bonus plan as an incentive to senior
management to achieve the exercise of the Public Warrants. Pursuant to this
plan, the Company may distribute an aggregate of $250,000 to senior
management upon the successful completion of the exercise of the Public
Warrants.
The Company is subject to various claims and pending or threatened lawsuits
in the normal course of business. Management believes that the outcome of
any such suits
39
<PAGE>
would not have a material adverse effect on the Company's financial
position or results of operations.
8. Lease commitments
During 1997 and 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. In
1996, the Company exercised an option to occupy additional office space at
greater cost and issued 7,693 preferred shares and warrants to purchase
1,563 shares of common stock to the landlord in lieu of paying cash through
July 1996. Rent expense of approximately $36,900 was recorded for the share
issuance and warrants granted in December 1995. In 1997, the Company signed
agreements to occupy additional space, and in February 1998 further
increased its office space by signing an additional agreement.
Future minimum rental commitments under capital and operating leases for
years ending December 31 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases lease
<S> <C> <C>
1998 $ 34,100 $ 198,800
1999 34,100 8,400
2000 32,000
2001 9,400
2002 7,800
---------- ----------
Total minimum lease payments 117,400 $ 207,200
==========
Less: Amount representing interest (25,100)
----------
Present value of capital lease obligations 92,300
Less: Current portion (22,700)
----------
Long-term obligation at December 31, 1997 $ 69,600
==========
</TABLE>
The capital leases are secured by the related assets financed and by
security deposits held by the lessors under the lease agreements. The cost
and accumulated depreciation of equipment under capital leases was $94,500
and $2,800, respectively, at December 31, 1997.
Rent expense was $147,100 and $52,600 for 1997 and 1996, respectively.
9. Income taxes
A current provision for income taxes has not been recorded for 1997 or 1996
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, 1997, the Company has net operating loss carry-forwards of
approximately $8,847,000 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
40
<PAGE>
Company has determined that such a change occurred during 1995 and the
annual utilization of loss carry-forwards generated through the period of
that change will be limited to approximately $761,000. An additional change
occurred in 1996, however, the amount of the annual limitation is not
significant.
41
<PAGE>
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Net operating loss carry-forward $ 3,008,100 $ 1,681,000
Capitalized research and development 1,718,000 1,515,000
Expenses related to issuance of equity instruments 636,500 -
Other 254,000 374,000
--------------- ---------------
(5,616,600) 3,570,000
Less: Valuation allowance (5,616,600) (3,570,000)
--------------- ---------------
Deferred tax assets $ - $ -
=============== ===============
</TABLE>
Certain net operating losses arise from the deductibility for tax purposes
of compensation under nonqualified stock options equal to the difference
between the fair value of the stock on the date of exercise and the
exercise price of the options. For financial reporting purposes, the tax
effect of this deduction when recognized will be accounted for as a credit
to shareholders' equity.
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
43
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- ------------------------------------
<S> <C> <C>
Richard F. Rutkowski (1) 42 Chief Executive Officer, President
and Director
Stephen R. Willey 44 Executive Vice President and
Director
Richard A. Raisig (1) 50 Chief Financial Officer and Vice
President, Operations and Director
Walter J. Lack (1)(2) 50 Director
Robert A. Ratliffe 37 Director
Jacob Brouwer (2) 71 Director
Richard A. Cowell 50 Director
- --------------
(1) Member of the Compensation and Finance Committees
(2) Member of the Audit Committee
</TABLE>
Richard F. Rutkowski served as Chief Operating Officer of the Company from
December 1994 until September 1995, Chief Executive Officer of the Company since
September 1995, as a director of the Company since August 1995, and was elected
President of the Company since 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
44
<PAGE>
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 processing equipment for the
cabling industry from June 1995, until August 1996. From July 1992 to May 1995,
Mr. Raisig was Chief Financial Officer and Senior Vice President-Finance for
Killion Extruders, Inc., a manufacturer of plastic extrusion equipment. From
February 1990 to July 1992, Mr. Raisig was Managing Director of Crimson Capital
Company, an investment banking firm. Prior to 1990, Mr. Raisig was a Senior Vice
President of Dean Witter Reynolds, Inc. Mr. Raisig is a Certified Public
Accountant.
Walter J. Lack has served as a director of the Company since August 1995.
Mr. Lack is a partner of Engstrom, Lipscomb & Lack, a Los Angeles, California
law firm that he founded in 1974. Mr. Lack has acted as a special arbitrator for
the Superior Court of the State of California since 1976 and for the American
Arbitration Association since 1979. Mr. Lack also serves as a director of HCCH
Insurance Holdings, Inc., a multinational insurance company listed on The New
York Stock Exchange. Mr. Lack has been involved in a number of start-up
companies, both as an investor and as a director.
Robert A. Ratliffe has served as a director of the Company since 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 has served as a director of the Company since July 1996. Mr.
Brouwer is the Chairman and Chief Executive Officer of Brouwer Claims Canada &
Co. Ltd., an insurance adjusting company that he founded in 1956. Mr. Brouwer
has served as a director for numerous companies, including the Canadian National
Railway Company, The Insurance Corporation of British Columbia, Air B.C., Golden
Tulip Hotels Ltd., and Northwestel Inc. Mr. Brouwer is past President of the
British Columbia Adjusters Association, and former Chairman of the International
Financial Centre of British Columbia. Mr. Brouwer currently serves as a director
of Doman Industries, a forest products company.
45
<PAGE>
Richard A. Cowell has served as a director of the Company since August
1996. Mr. Cowell is a Senior Associate at Booz Allen & Hamilton involved in,
among other things, the incorporation of simulation and models into education
and training programs for Department of Defense contractors. Prior to joining
Booz Allen in March of 1996, Mr. Cowell served in the United States Army for 25
years. Immediately prior to his retirement from the Army, Mr. Cowell served as
Director of the Louisiana Maneuvers Task Force reporting directly to the Chief
of Staff, Army. Mr. Cowell has authored a number of articles relating to the
future of the Army and received awards for his writing and producing of a film
entitled "America's Army" in 1994. Mr. Cowell retired from the Army holding the
rank of Colonel.
Directors of the Company hold office until the next annual meeting of
shareholders or until their successors have been elected and duly qualified.
Pursuant to the 1996 Independent Director Stock Plan, non-employee directors
receive an annual award of Common Stock. See "- Benefit Plans - 1996 Independent
Director Stock Plan." Non-employee directors receive no salary for their
services and receive no fee from the Company other than as described above for
their participation at Board meetings. All directors are reimbursed for
reasonable travel and other out-of-pocket expenses incurred in attending
meetings of the Board of Directors.
Executive officers are elected by the Board of Directors of the Company at
the first meeting after each annual meeting of shareholders and hold office
until their successors are elected and duly qualified.
Significant Employees
Todd R. McIntyre has served as Vice President, Business Development since
January 1996. Mr. McIntyre is responsible for establishing relationships with
third parties for the development of products incorporating the VRD technology.
Prior to 1996, Mr. McIntyre held business development and marketing positions
with several development stage companies, including Southern Limited
Partnership, a magazine and book publisher; Sasquatch Publishing Company, Inc.,
a magazine and book publisher; SPRY Inc., an Internet software products
publisher; and Notable Technologies, Inc., a wireless telecommunications
products manufacturer.
Andrew Lee served as Vice President, Sales and Marketing from January 1997
to September 1997 and has served as Vice President, Sales since September 1997.
Mr. Lee is responsible for developing and implementing the Company's sales and
product marketing efforts. From January 1992 to January 1997, Mr. Lee was Senior
Director, National Systems Sales, for AEI Music Network, Inc., the largest
audio-visual systems integrator in the United States. From January 1989 to
December 1991, Mr. Lee was Director, Sales and Marketing, for ADB Industries
Inc., a manufacturer of precision assemblies for the defense and aerospace
industries, where he was responsible for
46
<PAGE>
designing and implementing marketing strategies for both commercial and military
markets.
Douglas A. Stoll has served as Director of Engineering since October 1996.
Mr. Stoll has 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 has served as Director of Research since November 1996. Mr.
Lewis has primary responsibility for directing and managing the ongoing research
on the Company's core technology and for developing the Company's intellectual
property assets. From 1978 to 1996, Mr. Lewis held various technical and
management positions at Polaroid Corporation. During his tenure at Polaroid, Mr.
Lewis headed several projects that involved using micro-optics in the coupling
of semiconductor light sources and using scanning mechanisms for high quality
imaging. From 1986 to 1994, Mr. Lewis managed the Department of Physical Systems
within Polaroid's Research Division. Mr. Lewis holds a B.S. degree in physics
from Massachusetts Institute of Technology and is named as inventor on five
patents and two patents pending.
Thomas M. Lippert, Ph.D., has served as Principal Scientist since August
1997. From 1992 to 1997, Dr. Lippert was Head of Display Technology at the David
Sarnoff Research Center, where he was responsible for new business development
and product management on both commerical and government contracts. From 1987 to
1992, Dr. Lippert was a Senior Principal Development Engineer with the Military
Avionics Division of Honeywell, where he had technical responsibility for
research related to advanced electronic and optic technologies applicable to
helmet-mounted sight and display systems.
Casey T. Tegreene, Esq., has served as Intellectual Property Counsel since
July 1997. From 1992 to 1997, Mr. Tegreene was affiliated with the law firm of
Seed and Berry where he specialized in electrical and mechanical patent matters
including litigation. From 1989 to 1992 Mr. Tegreene was affiliated with
Cravath, Swaine & Moore, where he specialized in corporate transactions and
securities work. Prior to pursing his legal career, Mr. Tegreene worked with
Motorola's Government Electronics Group as a research and design engineer
focusing on optical and microwave systems and components.
47
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of the copies of the forms provided to the Company
and written representations that no other filing of forms was required, the
Company believes that, during the fiscal year ended December 31, 1997, the
reporting persons subject to Section 16(a) of the Exchange Act, as amended,
complied with all filing requirements applicable thereto, except that Stephen R.
Willey filed one late report.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services in
all capacities to the Company for the last three fiscal years by Richard F.
Rutkowski, the Company's Chief Executive Officer and President; Stephen R.
Willey, its Executive Vice President; and Richard A. Raisig, its Chief Financial
Officer and Vice President, Operations (the "Named Executives"). No other
officer of the Company received annual salary and bonuses exceeding $100,000 in
the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------- Awards
Name and Fiscal Salary Bonus Other Annual Securities
Principal Position Year ($) ($)(1) Compensation ($) Underlying Options
- ------------------------- ------ ------- --------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Richard F. Rutkowski 1997 126,250 100,000 - 340,000
Chief Executive Officer 1996 92,500 134,375 - -
and President 1995 30,000 - 69,671
Stephen R. Willey 1997 130,000 85,000 - -
Executive Vice President 1996 78,333 115,400 36,667 (2) -
1995 - - 67,500 (2) 296,875
Richard A. Raisig 1997 118,750 75,000 - 136,000
Chief Financial Officer 1996 40,729 15,000 - 100,000
and Vice President of 1995 - - - -
Operations
- --------------
(1) Bonus amounts for 1997 include amounts paid in 1998 for services performed
in 1997. Mr. Raisig's bonus included a portion related to the four month
period ended December 31, 1996.
(2) Represents payments in consideration of consulting services rendered to the
Company by Mr. Willey prior to and concurrent with Mr. Willey's employment
with the Company. See "Certain Relationships and Related Transactions."
</TABLE>
48
<PAGE>
Option Grants.
The following table sets forth the grants of options to purchase common
stock during the last fiscal year to Richard F. Rutkowski, President and Chief
Executive Officer and to Richard A. Raisig, Chief Financial Officer and Vice
President, Operations.
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options Granted Exercise
Underlying to Employees Price
Name Options Granted in 1997 ($/Sh) Expiration Date
- --------------------------- --------------- ---------------- --------- ---------------
<S> <C> <C> <C> <C>
Richard F. Rutkowski 80,000 7.16 14.00 10/1/07
80,000 7.16 17.50 10/1/07
80,000 7.16 21.88 10/1/07
80,000 7.16 27.34 10/1/07
20,000 1.79 34.18 10/1/07
Stephen R. Willey - - - -
Richard A. Raisig 28,000 2.51 14.00 10/1/07
28,000 2.51 17.50 10/1/07
65,000 5.82 21.88 10/1/07
15,000 1.34 27.34 10/1/07
</TABLE>
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 1997 by the Named Executives and the fiscal year-end value of
unexercised options:
<TABLE>
<CAPTION>
Number of Securities Value of
Number of Underlying Unexercised Unexercised In-the-Money
Shares Options at December 31, 1997 Options at December 31, 1997
Acquired Value ---------------------------- ----------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard F.
Rutkowski - - 331,517 320,000 $3,329,214 $ 0
Stephen R
Willey - - 250,000 46,875 $2,575,000 $318,750
Richard A.
Raisig - - 46,453 189,547 $ 329,218 $354,220
- --------------
(1) Calculated based on a closing price of $14.00 per share on December 31,
1997.
</TABLE>
Employment Agreements. Pursuant to his employment agreement with the
Company effective October 1, 1997, Mr. Rutkowski receives an annual base salary
of $145,000, subject to increases as determined by the Board of Directors, and
an annual cash performance bonus in an amount to be determined by the Board of
Directors. In January 1998, Mr. Rutkowski's base salary was adjusted to $175,000
and he was awarded a bonus of $100,000 for services performed during 1997. In
addition, Mr. Rutkowski
49
<PAGE>
received options to purchase up to an aggregate of 340,000 shares of Common
Stock for service to the Company during the period October 1, 1997 through
December 31, 2001. These options have ten-year terms, vest quarterly, and will
immediately vest and become exercisable upon the occurrence of certain events
following a change in control. Mr. Rutkowski is entitled to all benefits offered
generally to the Company's employees. Upon termination without cause of Mr.
Rutkowski's employment by the Company, Mr. Rutkowski's stock options will
continue to vest and Mr. Rutkowski will be entitled to a severance payment. The
Employment Agreement expires, unless previously terminated, on December 31,
2001.
The Company entered into an employment agreement with Stephen R. Willey,
the Company's Executive Vice President and a director of the Company, effective
May 1, 1996. Pursuant to this agreement, Mr. Willey receives an annual base
salary of $110,000, adjusted annually for the cost of living and subject to
increases as determined by the Board of Directors. In addition, Mr. Willey is
entitled to receive an annual cash performance bonus in an amount determined by
the Board of Directors. In addition, Mr. Willey received options to purchase an
aggregate of 296,875 shares of Common Stock for his services during the period
1995 through 1998. In January 1998, Mr. Willey's base salary was adjusted to
$150,000 and he was awarded a bonus of $85,000 for services performed in 1997.
Upon termination without cause of Mr. Willey's employment by the Company,
certain of Mr. Willey's stock options will vest and Mr. Willey will be entitled
to a severance payment. Mr. Willey is entitled to all benefits offered generally
to the Company's employees. Mr. Willey's employment agreement expires, unless
previously terminated, on September 30, 1998.
Pursuant to his employment agreement with the Company, effective October 1,
1997, Mr. Raisig receives an annual base salary of $130,000, subject to
increases as determined by the Board of Directors, and an annual cash
performance bonus in an amount to be determined by the Board of Directors. In
January 1998, Mr. Raisig was awarded a bonus of $75,000 for services performed
during 1997 and four months in 1996. In addition, Mr. Raisig received options to
purchase up to an aggregate of 136,000 shares of Common Stock for service to the
Company during the period October 1, 1997 through December 31, 2000. These
options have ten-year terms, vest quarterly, and will immediately vest and
become exercisable upon the occurrence of certain events following a change in
control. Mr. Raisig is entitled to all benefits offered generally to the
Company's employees. Upon termination without cause of Mr. Raisig's employment
by the Company, Mr. Raisig's stock options will continue to vest and Mr. Raisig
will be entitled to a severance payment. The employment agreement expires,
unless previously terminated, on December 31, 2000.
Benefit Plans
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan"), which was adopted and approved by the Company's Board of Directors and
the shareholders in July and August, 1996, respectively, provides for the grant
of options to
50
<PAGE>
acquire a maximum of 750,000 shares of the Company's authorized but unissued
Common Stock, subject to adjustments in the event of certain changes in the
Company's capitalization. The Board of Directors of the Company has authorized,
subject to shareholder approval at the 1998 annual meeting of shareholders, an
additional 1,750,000 shares of Common Stock to be reserved for issuance upon
exercise of options granted under the 1996 Plan. Unless sooner terminated by the
Board of Directors, the 1996 Plan will terminate ten years after its adoption by
the Board of Directors of the Company.
The 1996 Plan permits the granting of incentive stock options ("ISOs") and
nonqualified stock options ("NSOs") at the discretion of a plan administrator
(the "Plan Administrator"). The Plan Administrator is comprised of
"disinterested directors" and "outside directors" for purposes of Rule 16b-3
under the Exchange Act and Section 162(m) of the Internal Revenue Code,
respectively. The Compensation Committee of the Board of Directors serves as
Plan Administrator except with respect to grants awarded to executive officers
of the Company, with respect to which the Board serves as Plan Administrator.
Subject to the terms of the 1996 Plan, the Plan Administrator determines the
terms and conditions of any options granted, including the exercise price.
Eligible optionees include any current or future employee, officer, or agent of
the Company or its subsidiaries. The 1996 Plan provides that the Plan
Administrator must establish an exercise price for ISOs that is not less than
the fair market value of the shares at the date of grant. If ISOs are granted to
persons owning more than 10% of the voting stock of the Company, however, the
1996 Plan provides that the exercise price must be not less than 110% of the
fair market value of the shares at the date of grant and that the term of the
ISOs may not exceed five years. The term of all other options granted under the
1996 Plan may not exceed ten years. The Plan Administrator determines when
options become exercisable. Options are not transferable other than by will or
the laws of descent and distribution, and each option is exercisable during the
lifetime of the optionee only by such optionee. In the event of a merger,
consolidation or plan of exchange to which the Company is a party or a sale of
all or substantially all of the Company's assets, the Board of Directors may
elect one of the following alternatives: (i) outstanding options remain in
effect in accordance with their terms; (ii) outstanding options may be converted
into options to purchase stock in the surviving or acquiring corporation in the
transaction; or (iii) outstanding options may be exercised with a 30-day period
prior to the consummation of the transaction, at which time they will
automatically expire, and the Board may accelerate the time frame for exercise
of all options in full. Shares subject to options granted under the 1996 Plan
that have lapsed or terminated may again be made subject to options granted
under the 1996 Plan. Following termination of employment by the Company other
than for cause, resignation, retirement, disability or death, an option holder
has three months within which to exercise his options before the options will
automatically expire.
1996 Independent Director Stock Plan. The 1996 Independent Director Stock
Plan (the "Director Plan") was adopted and approved by the Board of Directors
and the shareholders in July and August, 1996, respectively. A total of 75,000
shares of Common Stock have been reserved for issuance under the Director Plan.
The Director
51
<PAGE>
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). Shares issued pursuant to an Annual Award vest in full on the day
prior to the next annual meeting of shareholders subsequent to the date on which
the Annual Award was granted. If any share awarded under the Director Plan is
forfeited, such share will again be available for purposes of the Director Plan.
Unless earlier suspended or terminated by the Board, the Director Plan will
continue in effect until the earlier of: (i) ten years from the date on which it
is adopted by the Board and (ii) the date on which all shares available for
issuance under the Director Plan have been issued.
Prior Plans. The Company's 1993 Stock Option Plan, 1994 Combined Incentive
and Nonqualified Stock Option Plan, and 1995 Combined Incentive and Nonqualified
Stock Option Plan (the "Prior Plans"), provided for the award of ISOs to key
employees and the award of NSOs to employees and certain non-employees who have
important relationships with the Company. The Company reserved 228,938 and
435,000 authorized but unissued shares for issuance under the 1993 and 1994
plans, respectively, upon adoption of these plans, and in September 1995
reserved an additional 625,000 shares for issuance under the 1993 plan. As of
December 31, 1997, options to purchase an aggregate of 625,264 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.
Warrant Exercise Bonus Plan. The Board of Directors has approved a bonus
plan as an incentive to senior management to achieve the exercise of the Public
Warrants. Pursuant to this plan, the Company may distribute an aggregate of
$250,000 to senior management upon the successful completion of the exercise of
the Public Warrants. See "Item 5 - Market for Registrant's Common Stock and
Related Shareholder Matters" and Note 7 of Notes to Financial Statements.
52
<PAGE>
Certain Tax Considerations Related to Executive Compensation
As a result of Section 162(m) of the Internal Revenue Code of 1986, as
amended, in the event that compensation paid by the Company to a "covered
employee" (the chief executive officer and the next four highest paid employees)
in a year were to exceed an aggregate of $1,000,000, the Company's deduction for
such compensation could be limited to $1,000,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 20, 1998 by (i) each person known by
the Company to own beneficially more than five percent of the Company's
outstanding Common Stock ("Principal Shareholder"); (ii) each of the Company's
directors; (iii) the Named Executives; and (iv) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Percentage of
Name and Address of Beneficial Owner Number of Shares Common Stock (2)
- ------------------------------------ ----------------- -----------------
<S> <C> <C>
Mellon Bank Corporation (3) 685,250 11.5%
One Mellon Bank Center
Pittsburgh, PA 15258
Richard F. Rutkowski (4) 351,992 5.6%
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
George M. Galpin (5) 305,750 5.0%
20 West Dayton, Suite D-5
Edmonds, WA 98020
Stephen R. Willey (6) 281,510 4.6%
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
Walter J. Lack 213,537 3.6%
10100 Santa Monica Blvd., 16th Floor
Los Angeles, CA 90067
Richard A. Raisig (7) 62,821 1.0%
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Robert A. Ratliffe 12,650 *
2300 Carillon Point
Kirkland, WA 98033
Jacob Brouwer 6,400 *
1200 West Pender Street, Suite 1200
Vancouver, B.C. VGE 259
Canada
Richard A. Cowell 6,400 *
c/o Booz, Allen & Hamilton
4301 N. Fairfax Drive, Suite 200
Arlington, VA 22203
All executive officers and
directors as a group (7 persons) 939,770 14.2%
</TABLE>
- --------------
* 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, except as noted, 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 5,949,256 shares of
Common Stock outstanding at February 28, 1998, assuming no exercise of the
Public Warrants, the Representatives' Warrants, or any other outstanding
options or warrants.
(3) Mellon Bank filed a Schedule 13G reporting beneficial ownership of more
than 5% of the Company's stock on or about December 10, 1997. According to
the filing, Mellon Bank had sole dispositive power over 695,000 shares and
shared dispositive power over 250 shares of Common Stock.
(4) Includes 351,517 shares issuable upon exercise of options.
(5) Mr. Galpin filed a Schedule 13D reporting his beneficial ownership of more
than 5% of the Company's Common Stock on or about March 22, 1997. According
to the filing, Mr. Galpin had sole voting power over 236,500 share
(including 187,000 shares underlying Public Warrants); shared voting power
over 43,250 shares; sole dispositive power over 236,500 share (including
187,000 shares underlying Public Warrants); and shared dispositive power
over 69,250 shares (including 14,500 shares underlying warrants).
54
<PAGE>
(6) Includes 278,125 shares issuable upon exercise of options and Public
Warrants.
(7) Includes 61,656 shares issuable upon exercise of options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since inception of the Company, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
was or is to be a party in which the amount involved exceeds $60,000 and in
which any director or executive officer had or will have a direct or indirect
material interest other than the transactions described below.
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.
Between October 1995 and April 1996, salary payable to Stephen R. Willey,
Executive Vice President and a Director of the Company, in the aggregate amount
of $36,667 was paid directly to an affiliate of Mr. Willey.
55
<PAGE>
In February 1996, Walter J. Lack, a director of the Company, purchased
15,625 shares of the Company's Series A Preferred Stock for $75,000 in cash. In
June 1996, the Company issued 833 shares of common stock to Mr. Lack upon the
exercise of certain warrants issued thereto as compensation for consulting
services provided by Mr. Lack to the Company.
In early July 1996, the Company issued $750,000 in aggregate principal
amount of its 7% Notes to six investors raising net proceeds of $707,500 for the
Company's immediate operating requirements and for payment of certain expenses
incurred in connection with its initial public offering. The 7% Notes were
convertible or redeemable at the option of the holder at any time 90 days after
the date of the final prospectus issued in connection with the Company's initial
public offering. The 7% Notes bore interest at the rate of 7% per annum, payable
semiannually in arrears on December 15 and June15, 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 6 of Notes to Financial Statements.
During 1996, the Company made loans to Richard F. Rutkowski, Chief
Executive Officer and President and a director of the Company, and Stephen R.
Willey, in the amounts of $82,400 and $69,000, respectively. The loans were
evidenced by promissory notes with maturities of one year and earned interest at
8% per annum payable quarterly. The loans were made in consideration of Messrs.
Rutkowski and Willey agreeing to a modification of their respective employment
agreements. The loan grants were approved by the Board of Directors of the
Company. The loans and all accrued interest thereon were repaid in full during
1996.
56
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Microvision, Inc., as
filed on August 14, 1996 with the Secretary of State of the State of
Washington*
3.2 Amended and Restated Bylaws of Microvision, Inc.*
4.1 Form of specimen certificate for Common Stock*
4.2 Form of Warrant for purchase of Common Stock*
4.3 Warrant Agreement*
4.4 Form of Representatives' Warrant for purchase of Units*
10.1 Project I Research Agreement between The University of Washington and the
Washington Technology Center and the H. Group, dated June 10, 1993*
10.2 Assignment of License and Other Rights between The University of
Washington and the Washington Technology Center and the H. Group, dated
July 25, 1993*
10.3 Project II Research Agreement between The University of Washington and
the Washington Technology Center and Microvision, Inc., dated October 28,
1993 *+
10.4 Exclusive License Agreement between The University of Washington and
Microvision, Inc., dated October 28, 1993 *+
10.5 Employment Agreement between Microvision, Inc., and Richard F. Rutkowski,
effective October 1, 1997
10.6 Employment Agreement between Microvision, Inc., and Stephen R. Willey,
dated May 1, 1996*
10.7 1993 Stock Option Plan*
10.8 1994 Combined Incentive and Nonqualified Stock Option Plan*
10.9 1995 Combined Incentive and Nonqualified Stock Option Plan*
10.10 1996 Stock Option Plan, as amended**
10.11 1996 Independent Director Stock Plan, as amended
10.12 Office Lease Agreement by and between David A. Sabey and Sandra L. Sabey
and Microvision, Inc., dated December 22, 1995, as amended on January 26,
1996*
10.13 Form of Director Indemnification Agreement*
10.14 Exclusive License Agreement between the University of Washington and
Microvision, Inc. dated March 3, 1994*
10.15 Second Amendment of Office Lease Agreement between the City of Seattle
and Microvision, Inc., dated February 26, 1997***
10.16 Third Amendment of Office Lease Agreement between the City of Seattle and
Microvision, Inc., dated November 13, 1997
10.17 Form of Office Lease between the City of Seattle and Microvision, Inc.,
dated December 1, 1997, relating to Suites 110 and 205 of office building
located at 2203 Airport Way South, Seattle, Washington
10.18 Employment Agreement between Microvision, Inc., and Richard A. Raisig,
effective October 1, 1997
11 Computation of Pro Forma Loss Per Share
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
57
<PAGE>
- --------------
* Incorporated by reference to the Company's Form SB-2 Registration
Statement, Registration No. 333-5276-LA.
** Incorporated by reference to the Company's Post-Effective Amendment No. 2
on Form SB-2 Registration Statement, Registration No. 333-5276-LA.
*** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996, Registration No. 0-21221.
+ Subject to confidential treatment.
(b) Reports on Form 8-K.
Not applicable.
58
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MICROVISION, INC.
Date: March 31, 1998 By RICHARD F. RUTKOWSKI
-------------------------------------------
Richard F. Rutkowski
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the following
capacities on March 31, 1998.
Signature Title
- --------- -----
RICHARD F. RUTKOWSKI Chief Executive Officer, President and Director
- ----------------------------- (Principal Executive Officer)
Richard F. Rutkowski
STEPHEN R. WILLEY Executive Vice President and Director
- -----------------------------
Stephen R. Willey
RICHARD A. RAISIG Chief Financial Officer and Vice President,
- ----------------------------- Operations and Director
Richard A. Raisig (Principal Financial and Accounting Officer)
Director
- -----------------------------
Walter J. Lack
ROBERT A. RATLIFFE Director
- -----------------------------
Robert A. Ratliffe
JACOB BROUWER Director
- -----------------------------
Jacob Brouwer
Director
- -----------------------------
Richard A. Cowell
59
<PAGE>
Exhibit 11
Computation of net loss per share
In February 1997, Statement of Financial Accounting Standards No. 128, Earnings
per Share (SFAS 128) was issued. This pronouncement modifies the calculation and
disclosure of earnings (loss) per share (EPS) and was adopted by the Company in
its financial statements for the year ended December 31, 1997. The following
discloses the loss per share calculations in accordance with the provisions of
SFAS 128.
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
---------- -------
<S> <C> <C>
Weighted-average number of shares outstanding for
use in computing loss per share 5,806,200 3,832,000
========= ===========
Weighted-average number of shares outstanding for
use in computing loss per share assuming dilution 5,806,200 3,832,000
========= ============
Net loss $(4,945,000) $(3,456,600)
============ ============
Net loss per common share $(0.85) $ (0.90)
============ ============
Net loss per common share assuming dilution $(0.85) $ (0.90)
============ ============
</TABLE>
62
EMPLOYMENT AGREEMENT
FOR
RICHARD F. RUTKOWSKI
AGREEMENT, effective as of October 1, 1997 by and between MICROVISION,
INC., a Company of the State of Washington, having its principal place of
business at 2203 Airport Way South, Suite 100, Seattle Washington 98134,
hereinafter referred to as the "Company") and Richard F. Rutkowski, (hereinafter
called "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to continue to retain the services of the
Executive to work for the Company as its President and Chief Executive Officer
(herein referred to as the "Position") upon the terms and conditions hereinafter
set forth; and
WHEREAS, in consideration for continued service in the Position, the
Executive has agreed to enter into and be bound by the terms of this Agreement.
NOW THEREFORE, in consideration of the foregoing and mutual covenants
herein contained, the parties agree as follows:
1. EMPLOYMENT
1.1 The Company hereby employs Executive to serve in the Position and
Executive hereby accepts such employment as of the effective date of
this Agreement.
1.2 Executive will devote his best efforts and full time and attention to
performing all duties assigned or delegated to him by the Board of
Directors of the Company consistent with the Position.
1.3 The term of employment shall end on December 31, 2001, unless this
Agreement is extended by the parties.
2. COMPENSATION - SALARY AND BENEFITS
2.1 For his services hereunder, Executive shall receive an annual salary
of $145,000, payable in regular installments under the payroll of the
Company.
2.2 The level of Executive's salary shall be reviewed by the Board of
Directors on an annual basis and upon such review, may remain the same
or be increased in such amount as the Board of Directors, in its
discretion, based upon merit, determines, provided that there shall be
no decrease in the salary of the Executive without his consent.
2.3 In addition to the salary to which Executive is entitled under Section
2.1, Executive shall be entitled to participate in benefit plans, if
any, that the Company may offer or establish from time to time for
Executives of equal or lesser rank.
Page 1 of 9
<PAGE>
Participation in benefit plans for the Executive shall terminate if
the Company terminates similar benefits for Executives of equal or
lessor rank.
2.4 If at any time the Company does not maintain medical and dental
insurance coverage for all Executives, the Company shall reimburse the
Executive for securing private coverage during the term of this
Agreement.
2.5 All salary and benefits, if any, shall be subject to the customary
withholding of taxes as required by law. Except as otherwise provided
in Section 8 hereof, Executive's salary and benefits end immediately
upon the termination of employment.
3. INCENTIVE COMPENSATION
3.1 If the Company maintains a formal cash incentive plan for senior
management, the Executive shall be eligible to participate in such
plan with a target incentive opportunity at least equal to the highest
percentage opportunity provided to any other Executive covered under
such plan.
3.2 If such a formal plan is not maintained by the Company, the Executive
shall be eligible for consideration to receive an annual cash
incentive payment from the Company. Executive's eligibility for such a
discretionary incentive payment ends upon termination of employment.
This amount shall be determined annually in the sole and complete
discretion of the Board of Directors, which may take into account in
its decision, among other items, such items as:
3.2.1 The financial performance of the Company, including, but not
limited to revenues, operating income, and net income, if any;
3.2.2 The individual accomplishments of the Executive;
3.2.3 Other company achievements, including, but not limited to,
product research, development and introduction; market offerings
and the arrangement of strategic alliances; and
3.2.4 Competitive practice for executives in similar situations.
4. STOCK OPTIONS
The Executive shall receive options to purchase common stock of the
Company in the amounts set forth below. All such options shall be
granted in accordance with the stock option plan maintained by the
Company and shall be subject to the terms and conditions set forth
therein and in the stock option grant letter issued by the Company to
Executive thereunder. If there are insufficient shares available under
the stock option plan in existence at the time of this Agreement, such
shares shall be granted subject to the approval of shareholders at the
next annual meeting subsequent to the execution of this Agreement. The
options shall be exercisable for ten years from the date of grant, and
shall vest in quarterly installments as noted below.
Page 2 of 9
<PAGE>
4.1 An option to purchase up to 80,000 shares at a price of $14.00. These
options shall vest in four equal quarterly installments, commencing on
October 1, 1997.
4.2 An option to purchase up to 80,000 shares at a price of $17.50. These
options shall vest in four equal quarterly installments commencing on
October 1, 1998.
4.3 An option to purchase up to 80,000 shares at a price of $21.88. These
options shall vest in four equal quarterly installments commencing on
October 1, 1999.
4.4 An option to purchase up to 80,000 shares at a price of $27.34. These
options shall vest in four equal quarterly installments commencing on
October 1, 2000.
4.5 An option to purchase up to 20,000 shares at a price of $34.18. These
options shall vest in one quarterly installment commencing on October
1, 2001.
5. BUSINESS EXPENSES
5.1 The parties acknowledge that Executive may incur, from time to time,
for the benefit of the Company and in furtherance of the Company's
business, various expenses such as travel, entertainment and
promotional expenses. The Company agrees that it shall either pay such
expenses directly, advance sums to Executive to be used for payment of
such expenses, or reimburse Executive for such expenses incurred by
him.
5.2 The Company agrees to pay such expenses, in accordance with its
written policies covering the payment of business expenses and to the
extent that these expenses do not exceed limits contained in such
policies or applicable law. Executive agrees to submit to the Company
such documentation as may be necessary to substantiate that all
expenses paid or reimbursed pursuant to this Section 5 were reasonable
and necessary for the performance of his duties under this Agreement.
6. PERFORMANCE OF EMPLOYMENT
6.1 Executive will observe and comply with such reasonable rules,
regulations and policies as may from time to time be established by
the Board of Directors of the Company, either orally or in writing.
6.2 Executive specifically agrees that he will comply with the
confidentiality and security rules established by the Board of
Directors with respect to confidential and financial information of
the Company.
Page 3 of 9
<PAGE>
7. EMPLOYMENT CONDUCT AND CONFIDENTIAL INFORMATION
7.1 Executive shall, at all times during the term of this Agreement,
observe and conform to all laws regulating the business of the
Company.
7.2 Executive acknowledges and recognizes that during the term of this
Agreement, he will necessarily become privy to certain confidential
and proprietary information of the Company and customers of the
Company (hereinafter referred to as "Confidential Data"). Confidential
Data shall shall include but not be limited to all information
concerning the identity of the Company's customers and suppliers,
technical, financial and business activities, plans, operations,
proprietary software, systems, procedures or know-how of the Company
and any information regarding customers of the Company and their
business affairs or endeavors. Executive agrees that he will hold all
Confidential Data in the strictest confidence and that he will not
disclose to any person or entity for any reason nor use any
Confidential Data in any way other than on behalf of the Company or as
the Company may otherwise direct.
7.3 Executive agrees that all business records and files, including but
not limited to memoranda, notes, client lists, and proposals
pertaining to the business, services or processes of the Company,
shall be the sole property of the Company and he shall not retain,
remove or copy such materials during the term of this Agreement or
upon its termination or expiration, without the prior unanimous
written consent of the Board of Directors of the Company. Upon the
termination of this Agreement, or at any other time upon the request
of the Board of Directors of the Company, Executive shall deliver all
such materials to the Company.
7.4 The foregoing obligations of Executive shall survive the termination
or expiration of this Agreement.
8. SEVERANCE PAYMENTS
8.1 If the Executive terminates the Agreement for any reason other than
Constructive Termination (as defined in Section 8.3.5), or if the
Company terminates the Agreement for Cause, no severance payment of
any kind shall be made.
8.2 If the Company terminates this Agreement for reasons other than Cause,
or if the Executive is Constructively Terminated prior to a Change in
Control, the Company shall:
8.2.1 Pay to the Executive a lump sum equal to the Executive's salary
of record for a period equal to the greater of one (1) year or
the remaining period of this Agreement.
8.2.2 Continue to provide medical and dental insurance to the
Executive for the greater of a period of one (1) year or the
remainder of the term of this Agreement on the same terms as if
the Executive were an active Executive of the Company.
Page 4 of 9
<PAGE>
8.3 If the Executive is terminated or Constructively Terminated by the
Company following a Change of Control, the Company shall:
8.3.1 Pay to the Executive a lump sum equal to the Executive's salary
of record for a period of three (3) years;
8.3.2 Pay to the Executive a lump sum equal to three (3) times the
average of the Executive's cash bonuses received in the three
(3) preceding calendar years;
8.3.3 Continue to provide medical and dental insurance to the
Executive for a period of one (1) year on the same terms as if
the Executive were an active Executive of the Company.
8.3.4 For purposes of this Agreement, a Change of Control shall be
deemed to occur on any of the following events:
8.3.4.1 Any "person", including a "group" as determined in
accordance with Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, is, or becomes, the
beneficial owner of securities of the Company
representing more than thirty percent (30%) of the
combined voting power of the Company's then outstanding
securities;
8.3.4.2 As a result of, or in connection with, any tender offer
or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination
of the foregoing transactions (a "Transaction"), the
persons who constituted the Board of Directors the
Company prior to the Transaction cease to constitute a
majority of the Board of Directors of the Company or any
successor to the Company;
8.3.4.3 The Company is merged or consolidated with another
Company and as a result of the merger or consolidation,
less than fifty percent (50%) of the outstanding voting
securities of the surviving or resulting Company shall
then be owned in the aggregate by the former
stockholders of the Company;
8.3.4.4 A tender offer or exchange offer is made and consummated
for the ownership of securities of the Company
representing more than thirty percent (30%) of the
combined voting power of the Company's then outstanding
voting securities; or
8.3.4.5 The Company transfers substantially all of its assets to
another Company of which the Company owns less than
fifty percent (50%) of the outstanding voting
securities.
8.3.5 For purposes of this Agreement, Constructive Termination means:
Page 5 of 9
<PAGE>
8.3.5.1 The reduction of the Executive's salary or target
incentive;
8.3.5.2 The demotion or reduction in duties of the Executive;
8.3.5.3 The relocation of the Executive's place of employment
more than 50 miles from the existing place of
employment; or
8.3.5.4 Breach by the Company or its successor of any material
provision of this Agreement.
8.4 For purposes of this Agreement, "Cause" shall be defined as any of the
following:
8.4.1 Repeated failure or refusal of the Executive to carry out the
reasonable directions of the Board of Directors of the Company
consistent with the duties and obligations of the Executive;
8.4.2 Willful violation of state or federal law involving the
commission of a crime against the Company or a felony adversely
affecting the Company; or
8.4.3 Any material breach of this Agreement or of any covenant herein
or the falsification of any material representation or warranty
not corrected as provided in Section 8.5 hereof.
8.5 If a breach of this Agreement by either party is relied upon as a
justification for any action taken by a party pursuant to any
provision of this Agreement, before such action is taken, the party
asserting the breach shall give the other party written notice of the
existence and nature of the breach and the opportunity to correct such
breach during the thirty (30) day period following the delivery of
such notice.
9. RESTRICTIVE COVENANT AND INJUNCTIVE RELIEF. During the term of this
agreement and for a period of twenty-four (24) months after the termination
of this Agreement for any reason:
9.1 While this Agreement is in effect, Executive shall not, directly or
indirectly, as an individual or representative of any other person
and/or entity, deal with or solicit for business purposes that are in
competition with any product or service offered by the Company, any
current customer of the Company or any person and/or entity that is,
or has commenced negotiations to become, a customer of the Company.
9.2 Executive shall not, directly or indirectly, solicit, raid, entice, or
induce any other Executive of the Company to become employed by or
associated with any other person or entity.
9.3 Executive shall not, directly or indirectly, as an Executive,
consultant, agent, partner, principal, stockholder (other than as a
holder of less than one percent (1%) of the shares of a publicly or
privately held company), officer, director, or in any other individual
or representative capacity, engage in any business activity that is
competitive with any products or services offered by the Company at
the time of the Executive's termination.
Page 6 of 9
<PAGE>
9.4 The parties hereto acknowledge that the Executive's services,
knowledge and experience are unique and of special value to the
Company, and that, in the event of a breach or threatened breach by
Executive of any of his obligations under this Agreement, including
but not limited to those set forth in this Section 9, the Company will
not have an adequate remedy at law. Accordingly, in the event of any
breach or threatened breach of any provision of this Agreement by
Executive, the Company shall be entitled to such equitable and
injunctive relief as may be available to restrain Executive and any
other individual or entity participating in breach or threatened
breach, from violating the provisions of this Agreement. Nothing
herein shall be construed as prohibiting the Company from pursuing any
other remedies available at law for such breach or threatened breach,
including the recovery of damages and the immediate termination of
Executive's employment hereunder.
10. INVENTIONS, CREATIONS AND DISCOVERIES
10.1 Executive acknowledges that during the course of his employment he
may, either alone or in conjunction with others, be involved with the
creation, authorship or development of inventions, materials or
property, including but not limited to the field of laser or LED-based
scanning display technologies, computer software, computer software
and hardware applications (hereinafter referred to as "Materials").
Executive agrees that he will disclose all such Materials to the Board
of Directors of the Company. Executive acknowledges that all such
Materials shall be the property of the Company whether or not patent
or copyright applications are filed with respect thereto from the date
of their conception. If an assignment is necessary to transfer
ownership thereof to the Company, Executive agrees that this
Agreement, without more, shall constitute such an assignment. At the
Company's request, Executive shall be required to make or assist in
the filing of letters of patent, copyright applications or the like
with respect to such Materials. In connection therewith, Executive
agrees to execute all documents necessary or beneficial to establish
or maintain the Company's rights in such property, applications or the
like. All such filings shall be made, if possible, in the name of the
Company, at its expense. If made during the term of his employment,
Executive shall receive no additional compensation therefor. If such
filings are required after the termination of the Executive's
employment by the Company, he shall receive reasonable compensation
for his assistance.
Pursuant to RCW 49.44.140, the Company has no rights under Section 10
of this Agreement to any invention for which no equipment, supplies,
facilities, or trade secret information of the Company was used and
which was developed entirely on Executive's own time, unless: (a) the
invention relates (i) directly to the business of the Company or (ii)
to the Company's actual or demonstratably anticipated research or
development; or (b) the invention results from any work performed by
Executive for the Company.
10.2 The foregoing obligations of Executive shall survive the termination
or expiration of this Agreement.
Page 7 of 9
<PAGE>
11. ASSIGNMENT. The rights of either party shall not be assigned or transferred
without the other party's consent, nor shall the duties of either party be
delegated in whole or in part without the other party's consent. Any
unauthorized assignment, transfer or other delegation shall be of no force
or effect.
12. AMENDMENTS. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties.
13. GOVERNING LAW. This Agreement shall be governed in all respects by the laws
of the State of Washington.
14. BINDING ARBITRATION. Any disagreement, dispute, controversy or claim
arising out of or in any way related to this Agreement, the subject matter
hereof or the interpretation hereof or any arrangements relating hereto or
contemplated herein or the breach, termination or invalidity hereof or the
provision or failure to provide for any other benefits pursuant to any
other bonus or compensation plans, stock option plan, life insurance or
benefit plan or similar plan or agreement with the Company shall be settled
exclusively and finally by binding arbitration. If this Section 14
conflicts with any provision in any such plan or agreement, this provision
requiring arbitration shall control.
14.1 The arbitration shall be conducted through Judicial Arbitration and
Mediation Services/Endispute (henceforth referred to as "JAMS") to be
held before such arbitrator as the parties may agree, or if they are
unable to agree, to be selected by obtaining five proposed arbitrators
from JAMS and alternately striking names until one name remains.
14.2 The arbitration shall be conducted in accordance with the Judicial
Arbitration and Mediation Services Rules of Practice and Procedure as
are then in effect, except as modified by the agreement of the
parties.
14.3 Either party may initiate a claim by contacting JAMS.
14.4 The decision of the arbitrator shall be final and binding on all
parties and the parties waive their right to trial de novo or appeal,
except and only for the purpose of enforcing the decision of the
arbitrator, for which purpose the parties hereby agree that the
Superior Court of King Country Washington shall have jurisdiction.
14.5 The prevailing party shall be entitled to recover reasonable
attorneys' fees and the costs of bringing or defending the arbitration
and any action for enforcement, the amount of the awards being
determined by the arbitrator.
15. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are
included solely for convenience and shall not affect or be used in
connection with the interpretation of this Agreement.
16. WAIVER, MODIFICATION, CANCELLATION. Any waiver, alteration or modification
of any of the provisions of this Agreement or cancellation or replacement
of this Agreement shall not be valid unless in writing and signed by all of
the parties hereto.
Page 8 of 9
<PAGE>
17. HEIRS AND SUCCESSORS. This Agreement shall be binding upon the Company,
Executive and their successors, heirs, personal representatives and
transferees.
18. WAIVER. The waiver by either party of a breach of any provision contained
herein must be in writing and shall in no way be construed as a waiver of
any succeeding breach of such provision or the waiver of the provision
itself.
19. NOTICE. Whenever under the provisions of this Agreement notice is required
to be given, it shall be in writing and shall be deemed given when hand
delivered or mailed, postage prepaid by registered or certified mail,
return receipt requested, addressed to the Executive or the Company at the
following addresses:
Executive: Richard F. Rutkowski
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
Company: Microvision, Inc.
2203 Airport Way South Suite 100
Seattle, WA 98134
Attn: Secretary
Either party hereto may change his or its address for purposes of this
Agreement by notification to the other party in accordance with this
Section.
20. SEVERABILITY. If any provision of this Agreement is held invalid, illegal
or unenforceable, the validity, legality and enforceability of the
remaining provisions will not in any way be affected or impaired thereby.
21. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties regarding the subject matter hereof and supersedes all prior
agreements, understandings and negotiations regarding the same.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MICROVISION, INC.
by -------------------------/------ -----------------------------------
Date Witness
EXECUTIVE
- ----------------------------/------ -----------------------------------
Date Witness
Page 9 of 9
MICROVISION INC.
1996 INDEPENDENT DIRECTOR STOCK PLAN, AS AMENDED
1. Purpose. The purposes of this 1996 Independent Director Stock Plan, as
amended, are to attract, reward, and retain the best available personnel to
serve as directors of Microvision, Inc., a Washington corporation (the
"Company"), and to provide added incentive to non- employee directors of the
Company to serve as directors by increasing their ownership interest in the
Company.
2. Definitions. As used herein, the following definitions shall apply:
2.1 "Board" means the Board of Directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as amended.
2.3 "Common Stock" means the common stock of the Company, no par value per
Share.
2.4 "Company" means Microvision, Inc., a Washington corporation.
2.5 "Director" means a member of the Board.
2.6 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.7 "Fair Market Value" means the value of a Share determined as follows:
(a) if the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the National Market
system of the National Association of Securities Dealers, Inc., Automated
Quotation System ("Nasdaq"), the closing sales price for such stock (or the
closing bid, if no sales were reported, then as quoted on such exchange or
system (or the exchange with the greatest volume of trading in Common Stock) on
the last market trading day before the day of determination) as reported in The
Wall Street Journal or such other source as the Board deems reliable;
(b) if the Common Stock is quoted on the Nasdaq (but not on the
National Market thereof) or regularly quoted by a recognized securities dealer
but selling prices are not reported, then the mean between the high and low
asked prices for the Common Stock on the last market trading day before the date
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable; or
(c) in the absence of an established market for the Common Stock,
then as determined in good faith by the Board.
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<PAGE>
2.8 "Independent Director" means a director who is not an employee of
the Company or any Parent or Subsidiary thereof. The payment of a director' fee
by the Company shall not be sufficient in and of itself to constitute employment
by the Company.
2.9 "Parent" means a parent corporation, whether now or hereafter
existing, as defined in Section 425(e) of the Code.
2.10 "Plan" means this 1996 Independent Director Stock Plan, as
amended.
2.11 "Plan Administrator" means the administrator of this Plan as
described in Section 4.1.
2.12 "Share" means a share of Common Stock.
2.13 "Subsidiary" means a subsidiary corporation, whether now or
hereafter existing, as defined in Section 425(f) of the Code.
3. Shares Subject to this Plan. Subject to Section 8 of this Plan, the total
number of Shares that may be awarded under this Plan shall not exceed 75,000
Shares, as such Shares were constituted on the date on which this Plan was
amended by the Board as set forth on the last page hereof. If any Shares awarded
under this Plan are forfeited pursuant to Section 6.1 or 6.2, such Shares shall
again be available for purposes of this Plan.
4. Administration of this Plan.
4.1 Administration. Except as otherwise required herein, this Plan shall
be administered by the Board or, if the Board shall authorize a committee to
administer this Plan, by such committee to the extent so authorized; provided,
however, that only the Board may suspend, amend or terminate this Plan as
provided in Section 9. No Director shall vote on any action by the Board with
respect to any matter relating to an award held by such Director.
4.2 Powers of the Plan Administrator. Subject to the specific provisions
of this Plan, the Plan Administrator shall have the authority, in its
discretion: (i) to determine, on review of relevant information and in
accordance with Section 2.7 of this Plan, the Fair Market Value of the Common
Stock; (ii) to interpret this Plan; (iii) to prescribe, amend, and rescind rules
and regulations relating to this Plan; (iv) to authorize any person to execute
on behalf of the Company any instrument required to effectuate the award of
Shares previously granted hereunder; and (v) to make all other determinations
deemed necessary or advisable to administer this Plan. The interpretation and
construction by the Plan Administrator of any terms or provisions of this Plan,
any Shares awarded hereunder, or of any rule or regulation promulgated in
connection herewith, and all actions taken by the Plan Administrator, shall be
conclusive and binding on all interested parties.
-2-
<PAGE>
4.3 Limited Liability. No member of the Board or the Plan Administrator or
officer of the Company shall be liable for any action or inaction of the entity
or body, or another person or, except in circumstances involving bad faith, of
himself or herself.
4.4 Exchange Act. At any time that the Company has a class of securities
registered pursuant to Section 12 of the Exchange Act, the Board and the Plan
Administrator shall administer this Plan in accordance with Rule 16b-3 adopted
under the Exchange Act, as such rule may be amended from time to time, and
Shares awarded to Independent Directors shall be subject to the applicable
provisions of Rule 16b-3 or any successor thereto and to such additional
conditions or restrictions as may be required to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to Plan transactions.
5. Award of Shares.
5.1 Eligibility. Shares may be awarded pursuant to this Plan only to
Independent Directors. All awards hereunder shall be made automatically in
accordance with the terms set forth in this Section 5. No person shall have any
discretion to select which Independent Directors shall be awarded Shares or to
determine the number of Shares to be awarded to Independent Directors. Employee
directors who cease to be employees of the Company or any Parent or Subsidiary
of the Company but who continue as directors shall become eligible for awards
pursuant to this Plan, as if they were newly elected directors, as of the date
they cease to be employees.
5.2 Shareholder Approval of Plan. No awards may be made under this Plan
unless and until shareholder approval of this Plan has been obtained in
accordance with Section 11 hereof.
5.3 Annual Award. Each Independent Director shall be awarded Shares (the
"Annual Award"), in an amount determined in accordance with the formula set
forth below, 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 shall be equivalent to the result of $20,000
divided by the Fair Market Value of a Share on the date of the Annual Award (the
"Award Date"), rounded to the nearest 100 Shares. Notwithstanding the foregoing,
the Annual Award made to any Independent Director elected or appointed to the
Board at any time other than at the annual meeting of shareholders shall be made
on the date of such election or appointment, and shall be equivalent to the
product of such result (before rounding) multiplied by a fraction whose
numerator is the number of days between the date of election or appointment to
the Board and the next annual meeting of shareholders, and whose denominator is
365, which product shall be rounded to the nearest 100 Shares.
5.4 Other Fees. The Plan Administrator also may authorize the issuance of
Shares under this Plan in lieu of any cash payment of fees payable to
Independent Directors, under directors'compensation programs adopted by the
Board with respect to services provided by Independent Directors on Board
committees or as chairs of committees; provided that such
-3-
<PAGE>
issuance would not impede the purposes of this Plan or the qualification of the
Plan for the maximum exemption from Section 16 of the Exchange Act. The number
of Shares issued pursuant to this Section 5.4, if any, in lieu of any
particular fee shall be the cash amount of the fee divided by the Fair Market
Value of a Share on the date the fee is earned.
5.5 Limitations. If any award granted under this Plan would cause the
number of Shares issued pursuant to this Plan to exceed the maximum aggregate
number permitted hereunder, then each such automatic award shall be for that
number of Shares determined by dividing the total number of Shares remaining
available for issuance by the number of Independent Directors eligible for grant
of an award on the Award Date. Thereafter, no further Awards shall be made until
such time, if any, as additional Shares become available under this Plan through
action of the shareholders to increase the number of Shares that may be issued
under this Plan or through forfeiture of Shares previously awarded hereunder.
6. Vesting and Forfeiture.
6.1 Vesting. Shares awarded pursuant to an Annual Award shall vest in full
on the day prior to the date of the regular annual meeting of the shareholders
next following such Annual Award (the "Vesting Date") if the Independent
Director has attended at least 75% of the regularly scheduled meetings of the
Board, in person or by telephone, during that period. If an Independent Director
does not attend at least 75% of the regularly scheduled meetings of the Board
between the Award Date and Vesting Date, the Shares awarded pursuant to that
Annual Award shall be forfeited without having vested.
6.2 Termination of Status as a Director. If a Director ceases to be an
Independent Director for any reason other than death or disability before his or
her last Annual Award vests, the Shares awarded pursuant to that Annual Award
shall be forfeited.
6.3 Disability of Director. Notwithstanding Sections 6.1 or 6.2 above, if
an Independent Director is unable to continue his service as a Director as a
result of his or her permanent and total disability (as defined in
Section 22(e)(3) of the Code), unvested Shares awarded pursuant to an Annual
Award to such Independent Director shall become immediately vested.
6.4 Death of Director. In the event of the death of an Independent
Director, unvested shares of such Independent Director shall become vested as of
the date of death.
6.5 Certificates. As soon as practicable after each Award Date, the
Company shall instruct its stock transfer agent to issue and deliver one or more
certificates in the name of each recipient of an Annual Award representing the
Shares awarded pursuant thereto on that Award Date. Each recipient of an Annual
Award shall deposit with the Plan Administrator its designee blank stock powers,
duly executed and otherwise in form satisfactory to the Plan Administrator, for
such Independent Director's certificate. The Plan Administrator shall hold the
certificates representing unvested Shares and the stock powers related thereto
until the Shares have been vested in accordance with this Section 6. Any
certificates representing Annual Awards that fail
-4-
<PAGE>
to vest shall be returned to the Company's stock transfer agent for
cancellation, and the affected recipient of the Award shall execute any
documents reasonably necessary to facilitate the cancellation. Any certificates
representing vested Shares shall be delivered to the relevant Independent
Director as soon as practicable after the Shares vest. Any Certificates
representing Shares held by the Plan Administrator for an Independent Director
who has died shall be delivered as soon as practicable to the decedent's
beneficiary previously designated to the Plan Administrator in writing by such
Independent Director, or if no such designation exists, to his or her estate.
6.6 Status Before Vesting.
(a) Each recipient of an Annual Award shall be a shareholder of
record with respect to all Shares awarded, whether or not vested, and shall be
entitled to all of the rights of such a holder, except that the Share
certificates for Annual Awards shall be held by the Plan Administrator until
delivered in accordance with Section 6.5.
(b) Any dividend checks or communications to shareholders received by
the Plan Administrator with respect to a certificate held by the Plan
Administrator shall promptly be transmitted to the Independent Director whose
name is on the certificate.
(c) No Independent Director may transfer any interest in unvested
shares to any person other than the Company.
7. Effect of Merger, Sale of Assets, Liquidation or Dissolution. In the event
of a merger, consolidation or plan of exchange to which the Company is a party
and in which the Company is not the survivor, or a sale of all or substantially
all of the Company's assets, any unvested Shares shall vest automatically upon
the closing of such transaction.
8. Securities Regulations.
Shares shall not be issued under this Plan unless the issuance and delivery
of such Shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable laws of foreign countries and other
jurisdictions and the requirements of any quotation service or stock exchange on
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance, including
the availability of an exemption from registration for the issuance and sale of
any Shares hereunder. The inability of the Company to obtain, from any
regulatory body having jurisdiction, the authority deemed by the Company's
counsel to be necessary for the lawful issuance and sale of any Shares hereunder
or the unavailability of an exemption from registration for the issuance and
sale of any Shares hereunder shall relieve the Company of any liability with
respect of the nonissuance or sale of such Shares as to which such requisite
authority shall not have been obtained.
-5-
<PAGE>
In connection with the issuance of Shares under this Plan, the Company may
require recipients to represent and warrant at the time of issuance that the
Shares are being purchased only for investment and without any present intention
to sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any relevant provision of the
aforementioned laws. The Company may place a stop-transfer order against any
Shares on the official stock books and records of the Company, and a legend may
be stamped on stock certificates to the effect that the Shares may not be
pledged, sold or otherwise transferred unless an opinion of counsel is provided
(concurred in by counsel for the Company) stating that such transfer is not in
violation of any applicable law or regulation. The Company also may require such
other action or agreement by award recipients as may from time to time be
necessary to comply with federal and state securities laws. THIS PROVISION SHALL
NOT OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF SHARES ISSUED PURSUANT TO
THIS PLAN.
9. Amendment and Termination.
9.1 Plan. The Board may at any time suspend, amend or terminate this Plan,
provided that the approval of the Company's shareholders is necessary within
twelve months before or after the adoption by the Board of Directors of any
amendment that will:
(a) increase the number of Shares that are to be reserved for
issuance under this Plan;
(b) permit awards to a class of persons other than those now
permitted to receive awards under this Plan; or
(c) require shareholder approval under applicable law, including
Section 16(b) of the Exchange Act.
9.2 Limitations. Notwithstanding the foregoing, the provisions set forth
in Sections 2 and 5 of this Plan (and any additional Sections of this Plan that
affect terms required to be specified in this Plan by Rule 16b-3) shall not be
amended more than once every six months, other than to comport with changes in
the Code, the Employee Retirement Income Security Act, or the rules thereunder.
9.3 Automatic Termination. Unless sooner terminated by the Board, this
Plan shall terminate ten years from the date on which this Plan is first adopted
by the Board. No award may be made after such termination or during any
suspension of this Plan. The amendment or termination of this Plan shall not,
without the consent of any Independent Director who then has unvested Shares,
alter or impair any rights or obligations with respect to such Shares
theretofore granted under this Plan.
-6-
<PAGE>
10. Miscellaneous.
10.1 Status as a Director. Nothing in this Plan or in any award granted
pursuant to this Plan shall confer on any person any right to continue as a
Director of the Company or to interfere in any way with the right of the Company
to terminate his or her relationship with the Company at any time.
10.2 Reservation of Shares. The Company, during the term of this Plan, at
all times will reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of this Plan.
11. Effectiveness of This Plan. This Plan shall become effective on the date on
which it is adopted by the Company's Board of Directors (the "Effective Date").
No award may be granted under this Plan to any director of the Company until the
Plan is approved by the shareholders, and any Award made before such approval
shall be conditioned on and is subject to such approval.
Adopted by the Board of Directors on July 10, 1996, and approved by the
shareholders on August 9, 1996.
Amended by the Board of Directors on November 8, 1996.
Amended by the Board of Directors on October 29, 1997.
-7-
THIS AMENDMENT is made and entered into this 13th day of November 1997 by
and between City of Seattle, a Washington municipal corporation ("Landlord"),
and Microvision, Inc., a Washington corporation ("Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant entered into a written Office Lease Agreement
dated December 22, 1995, First Amendment of Office Lease Agreement dated January
26, 1996, and Second Amendment of Office Lease Agreement dated February 26, 1997
and Third Amendment of Lease Agreement dated September 24, 1997 (the "Lease"),
in which Landlord leased to Tenant and Tenant leased from Landlord Premises
located in Building A of Park 90/5, the address of which is 2203 Airport Way
South, Seattle, Washington 98134; and
WHEREAS, This Third Amendment of Office Lease Agreement cancels and
supersedes that certain Third Amendment of Office Lease Agreement dated
September 24, 1997 executed by the parties.
WHEREAS, Landlord and Tenant desire to further amend the Lease to increase
the number of rentable square feet of space in the Premises, to adjust Tenant's
Share of the Building and Tenant's Share of the Property, to adjust the Base
Rent, and to increase the number of parking stalls allotted to Tenant.
NOW, THEREFORE, Landlord and Tenant hereby agree as follows:
1. The following Subsections are hereby added to and shall become a part of
Section 1.3 "Premises":
1.3.1 Effective October 1, 1997, the square footage of the Premises shall
be increased from approximately 11,851 rentable square feet to approximately
14,189 rentable square feet by adding Suite 115 (approximately 2,338 rentable
square feet). Suite 115 is outlined in yellow on the floor plan attached as
Exhibit B.
2. The following Subsections are hereby added to and shall become a part of
Section 1.4 "Tenant's Share":
1.4.1 Effective October 1, 1997, Tenant's Share of the Building shall be
increased from 12.18 percent to 14.58 percent and Tenant's Share of the Property
shall be increased from 4.16 percent to 4.98 percent.
3. The following Subsections are hereby added to and shall become a part of
Section 1.9 "Base Rent":
1.9.1 Effective November 1, 1997, the Base Rent shall be increased from
$9,135.15 per month to $10,937.36 per month.
4. The following sentence shall be added to Section 1.13 Parking:
Effective October 1, 1997, subject to Section 31 of the Lease, Landlord
shall provide Tenant an additional five (5) unassigned parking stalls in the
parking area(s) servicing the Building so that the total number of unassigned
parking stalls allotted to Tenant shall be thirty (28) stalls. All of said
parking stalls are provided to Tenant free of charge.
5. The floor plan attached as Exhibit B to the Second Amendment of Office Lease
Agreement is hereby deleted in its entirety and replaced with the Exhibit B
attached to this Third Amendment of Office Lease Agreement.
6. Section 2.4 "Tenant's Right of First Refusal" has been exercised by Tenant
and is therefore deleted in its entirety and of no further force and effect.
<PAGE>
7. Improvements. Tenant hereby accepts the Premises, which include Suite 115, in
"AS IS" condition. The provisions of the Lease pertaining to improvements to the
Premises have been fulfilled, and Landlord shall not be required to make
additional improvements to the Premises.
8. Agency Disclosure. Martin Smith Inc hereby discloses that it represents the
Landlord in this transaction.
6. Effectiveness of Lease. The parties confirm, ratify and agree that, except as
set forth in this Third Amendment of Lease, all the terms and provisions of the
Lease shall remain unchanged and in full force and effect.
Dated the date first above written.
Landlord: Tenant:
The City of Seattle, a Washington Microvision, Inc., a Washington
municipal corporation corporatioN
By: By:
----------------------------------- ----------------------------------
Dwight D. Dively
Executive Services Director Its:
----------------------------------
By:
----------------------------------
Its:
----------------------------------
<PAGE>
STATE OF )
) ss.
COUNTY OF )
I certify that I know or have satisfactory evidence that
_________________________________ is the person who appeared before me, and said
person acknowledged that he/she signed this instrument, on oath stated that
he/she was authorized to execute the instrument, and acknowledged it as the
(title)______________________ of (entity)_______________________________________
a ____________________________________ to be the free and voluntary act
of such party for the uses and purposes mentioned in the instrument.
Witness my hand and official seal this _____ day of __________________ 19___.
_____________________________________________
Notary Public
(Print Name)
Residing at
My Commission Expires:
STATE OF )
) ss.
COUNTY OF )
I certify that I know or have satisfactory evidence that
_________________________________ is the person who appeared before me, and said
person acknowledged that he/she signed this instrument, on oath stated that
he/she was authorized to execute the instrument, and acknowledged it as the
(title)______________________ of (entity)_______________________________________
a ____________________________________ to be the free and voluntary act
of such party for the uses and purposes mentioned in the instrument.
Witness my hand and official seal this _____ day of __________________ 19___.
_____________________________________________
Notary Public
(Print Name)
Residing at
My Commission Expires:
STATE OF )
) ss.
COUNTY OF )
I certify that I know or have satisfactory evidence that
_________________________________ is the person who appeared before me, and said
person acknowledged that he/she signed this instrument, on oath stated that
he/she was authorized to execute the instrument, and acknowledged it as the
(title)______________________ of (entity)_______________________________________
a ____________________________________ to be the free and voluntary act
of such party for the uses and purposes mentioned in the instrument.
Witness my hand and official seal this _____ day of __________________ 19___.
_____________________________________________
Notary Public
(Print Name)
Residing at
My Commission Expires:
<PAGE>
LEGAL DESCRIPTION
ALL OF BLOCK 242, INCLUDING ALL OF VACATED ALLEY IN SAID
BLOCK, EXCEPT THAT PORTION OF THE EAST 170 FEET THEREOF
LYING SOUTHERLY OF THE SOUTHERLY LINE OF THE SPURTRACK RIGHT
OF WAY GRANTED TO NORTHERN PACIFIC RAILWAY COMPANY BY
INSTRUMENT RECORDED MARCH 28, 1950, UNDER RECORDING NUMBER
3998467, AS A LIMITED BOUNDARY LINE;
LOTS 12 TO 22, INCLUSIVE, BLOCK 251;
ALL OF VACATED 8TH AVENUE SOUTH LYING BETWEEN SAID BLOCK 242
AND 251;
LOTS 1 THROUGH 11, INCLUSIVE, BLOCK 251, EXCEPT THE WEST 285
FEET THEREOF;
ALL IN SEATTLE TIDELANDS, IN KING COUNTY, WASHINGTON, AS
SHOWN ON THE OFFICIAL MAPS ON FILE IN THE OFFICE OF THE
COMMISSIONER OF PUBLIC LANDS AT OLYMPIA, WASHINGTON; AND
EXCEPT ALL THOSE PARTS OF LOTS 1, 2 AND 3, BLOCK 251,
SEATTLE TIDELANDS, IN KING COUNTY, WASHINGTON, AS SHOWN ON
THE OFFICIAL MAPS ON FILE IN THE OFFICE OF THE COMMISSIONER
OF PUBLIC LANDS AT OLYMPIA, WASHINGTON, DESCRIBED AS
FOLLOWS:
BEGINNING AT A POINT IN THE NORTH LINE OF SAID BLOCK 251,
285 FEET EAST AS MEASURED ALONG SAID NORTH LINE FROM THE
NORTHWEST CORNER OF SAID BLOCK, SAID POINT BEING IN THE EAST
LINE OF THE PROPERTY CONVEYED TO THE GREAT NORTHERN RAILWAY
COMPANY BY SEATTLE UNION STOCKYARDS BY WARRANTY DEED DATED
JUNE 30, 1926, AND RECORDED MARCH 07, 1927, IN VOLUME 1346
OF DEEDS, PAGE 192; THENCE SOUTH ALONG SAID EAST PROPERTY
LINE, BEING PARALLEL WITH AND DISTANT 285 FEET EAST FROM THE
WEST LINE OF SAID BLOCK 251, A DISTANCE OF 160 FEET; THENCE
NORTHEASTERLY IN A STRAIGHT LINE 164.92 FEET, MORE OR LESS,
TO A POINT IN SAID NORTH LINE OF BLOCK 251, DISTANT 40 FEET
EAST AS MEASURED ALONG SAID NORTH LINE, FROM THE POINT OF
BEGINNING; THENCE WEST ALONG SAID NORTH LINE 40 FEET TO THE
POINT OF BEGINNING.,
Initials:____________
____________
____________
____________
MARTIN SMITH INC
500 WATERMARK TOWER OFFICE LEASE
1109 FIRST AVENUE
SEATTLE, WA 98101-2988 PARK 90/5
TEL 682-3300 FAX 340-1283
This Lease is made this 1st day of December 1997 by and between
The City of Seattle, a Washington municipal corporation ("Landlord"),
and Microvision, Inc., a Washington corporation ("Tenant"), who agree
as follows:
Fundamental Terms. As used in this Lease, the following capitalized terms shall
have the following meanings:
"Land" means the land on which the Building is located, situated
in the City of Seattle, County of King, State of Washington, which is
described on Exhibit A.
"Project" means that project in which the Building is located,
commonly known as Park 90/5, Buildings A, B, C, D, and E, the street
address of each of which is 2203 Airport Way South, Seattle,
Washington.
"Building" means the building in which the Premises are located, commonly
known as Building A, the street address of which is 2203 Airport Way South,
Seattle, Washington 98134.
"Premises" means that certain space outlined in red in Exhibit B and
located on the first floor of the Building designated as Suite ___.
"Agreed Areas" means the agreed amount of rentable square feet of space in
the Project, Building and the Premises. Landlord and Tenant stipulate and agree
for all purposes under this Lease that the Project contains approximately
285,079 rentable square feet of space (the "Project Area"), that the Building
contains approximately 97,300 rentable square feet of space (the "Building
Area") and that the Premises contain approximately _______ rentable square feet
of space (the "Premises Area"). Landlord and Tenant further agree that the
Building Area may exclude portions of the Building which are used for other than
office purposes, such as areas used for retail purposes or for storage purposes.
"Tenant's Share" means "Tenant's Share of the Building" or "Tenant's Share
of the Project", as applicable. Tenant's Share of the Building means the
Premises Area divided by the Building Area, expressed as a percentage, which is
two and thirty-seven one-hundredths percent (2.37%). Tenants Share of the
Project means the Premises Area divided by the Project Area, expressed as a
percentage, which is eighty-one one-hundredths (.81%) Notwithstanding the
foregoing, if one or more of the facilities, services and utilities the costs of
which are included within the definition of Operating Costs is not furnished to
one or more tenants or to particular types of tenants, then in connection with
the calculation of Tenant's Share of each of such costs the Building Area shall
be reduced by the number of rentable square feet of space occupied by such
tenants and Tenant's Share shall be separately computed as to each of such
costs.
If a portion of the Building is damaged or condemned, or any other event
occurs which alters the number of rentable square feet of space in the Premises,
the Building, or the Project, then Landlord shall adjust Tenant's Share to equal
the number of rentable square feet of space then existing in the Premises (as
altered by such event) divided by the number of rentable square feet of space
then existing in the Building (as altered by such event).
"Commencement Date" means December 1, 1997.
"Expiration Date" means January 14, 1999.
"Term" means the period of time commencing on the Commencement Date and
ending on the Expiration Date, unless sooner terminated pursuant to this Lease.
"Minimum Monthly Rent" means Two Thousand Ninety-nine and
thirty-seven/100ths Dollars ($2,099.37) per month during the Term of this Lease.
"Permitted Use" means use for purposes of general business office and
related administrative purposes.
"Base Year" means the calendar year 1995.
"Prepaid Rent" means Zero Dollars ($0.00).
"Security Deposit" means Zero Dollars ($0.00).
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"Parking stalls" means three (3) unreserved parking stalls in the Building
parking area, subject to the provisions of Section 36 captioned "Parking".
"Landlord's Address for Notice" means Park 90/5, c/o Martin Smith Inc, 1109
First Avenue, Suite 500, Seattle, Washington 98101-2988.
"Landlord's Address for Payment of Rent" means Park 90/5 Building, c/o
Martin Smith Inc, 1109 First Avenue, Suite 500, Seattle, Washington 98101-2988.
"Tenant's Address for Notice" means Microvision, Inc., 2203 Airport Way
South, Suite 100, Seattle, Washington 98134.
"Landlord's Agent" means Martin Smith Inc or such other agent as Landlord
may appoint from time to time.
"Broker(s)" means Martin Smith Inc representing the Landlord.
"Exhibits" means the following Exhibits to this Lease:
Exhibit A - Legal Description of the Property
Exhibit B - Outline Drawing of the Premises
Exhibit C - Work Letter
Exhibit D - Rules and Regulations
"Rider" means the following Rider which is attached hereto: Rider dated
December 1, 1997 by and between The City of Seattle, a Washington municipal
corporation ("Landlord"), and Microvision, Inc., a Washington corporation
("Tenant").
"Definitions" means the words and phrases defined in Section 37 captioned
"Definitions".
Premises. Landlord leases to Tenant and Tenant leases from Landlord the Premises
for the Term.
Appurtenances. Tenant, and its authorized representatives, shall have the right
to use, in common with others and subject to the Rules and Regulations, the
Common Areas of the Building. Landlord shall have the right, in Landlord's sole
discretion, from time to time to (i) make changes to the Building interior and
exterior and Common Areas, including without limitation, changes in the
location, size, shape, number and appearance thereof, (ii) to close temporarily
any of the Common Areas for maintenance purposes so long as reasonable access to
the Premises remains available, and (iii) to use the Common Areas while engaged
in making additional improvements, repairs or alterations to the Building. All
of the windows and exterior walls of the Premises and any space in the Premises
used for shafts, stacks, pipes, conduits, ducts, electrical equipment or other
utilities or Building facilities are reserved solely to Landlord and Landlord
shall have rights of access through the Premises for the purpose of operating,
maintaining and repairing the same, provided, however, that such changes shall
not materially affect Tenant's access to, or use and occupancy of, the Premises.
Term. This Lease shall become legally binding as of the earlier of the
Commencement Date or the date Tenant enters onto the Premises with Landlord's
consent, and shall remain in full force and effect thereafter until the
expiration of the Term, unless sooner terminated pursuant to this Lease. The
Term shall commence on the Commencement Date and expire on the Expiration Date.
The Commencement Date shall be the date specified in Section 1.
Minimum Monthly Rent; Late Charge.
Minimum Monthly Rent. Tenant shall pay to Landlord the Minimum Monthly Rent
without deduction, offset, prior notice or demand, in advance on the first day
of each month during the Term. Minimum Monthly Rent for any partial month shall
be prorated at the rate of 1/30th of the Minimum Monthly Rent per day. Minimum
Monthly Rent is exclusive of any sales, franchise, business or occupation or
other tax based on rents (other than Landlord's general income taxes) and should
such taxes apply during the Term, the Minimum Monthly Rent shall be increased by
the amount of such taxes. All Rent shall be paid to Landlord at Landlord's
Address for Payment of Rent or at such other address as Landlord may specify by
notice to Tenant.
Late Charge. Tenant acknowledges that the late payment by Tenant of any
Rent will cause Landlord to incur administrative, collection, processing and
accounting costs and expenses not contemplated under this Lease, the exact
amount of which are extremely difficult or impracticable to fix. Therefore, if
any Rent is not received by Landlord from Tenant by the fifth (5th) calendar day
after such Rent is due, Tenant shall immediately pay to Landlord a late charge
equal to five percent (5%) of the amount of such Rent or Seventy-five and
No/100th Dollars ($75.00), whichever is greater. Landlord and Tenant agree that
this late charge represents a reasonable estimate of such costs and expenses and
is fair compensation to Landlord for its loss caused by Tenant's nonpayment.
Should Tenant pay said late charge but fail to pay contemporaneously therewith
all unpaid amounts of Rent, Landlord's acceptance of this late charge shall not
constitute a waiver of Tenant's default with respect to Tenant's nonpayment nor
prevent Landlord from exercising all other rights and remedies available to
Landlord under this Lease or under law.
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Prepaid Rent and Security Deposit. On execution of this Lease, Tenant shall
deposit with Landlord the Prepaid Rent, as monthly rent for the first full month
of the Term for which Rent is payable, and the Security Deposit, as a Security
Deposit for the performance by Tenant of the provisions of this Lease. If Tenant
is in default, Landlord may use the Security Deposit, or any portion of it, to
cure the default, including without limitation, paying for the cost of any work
necessary to restore the Premises, the Tenant improvements and any alterations
to good condition or to compensate Landlord for all damage sustained by Landlord
resulting from Tenant's default. Tenant shall within five (5) days of demand pay
to Landlord a sum equal to the portion of the Security Deposit expended or
applied by Landlord as provided in this Section so as to maintain the Security
Deposit in the sum initially deposited with Landlord. If Tenant is not in
default as of the expiration or termination of the Term, including without
limitation, in default in payment of the Rent for the last month of the Term,
then Landlord shall return the Security Deposit, without interest, to Tenant
within a reasonable period of time after the expiration or termination of the
Term. Landlord's obligations with respect to the Security Deposit are those of a
debtor and not a trustee. Landlord may commingle the Security Deposit with
Landlord's general and other funds.
Real Property Taxes.
Payment of Tenant's Share of Increases in Real Property Taxes. Tenant shall
pay to Landlord, as Additional Rent, monthly, in advance on the first day of
each month during the Term, an amount equal to one-twelfth (1/12th) of Tenant's
Share of all increases in Real Property Taxes, or such other taxes required by
the State of Washington for government-owned property, that are or will be
levied or assessed against the Property during each calendar year during the
Term over and above the Real Property Taxes that are levied or assessed against
the Property during the Base Year as reasonably estimated by Landlord. Such
Additional Rent is exclusive of any sales, franchise, business or occupation or
other tax based on rents and should such taxes apply during the Term, such
Additional Rent shall be increased by the amount of such taxes. Within one
hundred twenty (120) days after the end of each calendar year during the Term or
within such longer period of time as may be reasonably necessary, Landlord shall
furnish to Tenant a statement of the Real Property Taxes for the preceding
calendar year and Tenant's Share of the increase in Real Property Taxes. If
Tenant's Share of the increase in such Real Property Taxes for that calendar
year over such Real Property Taxes for the Base Year exceeds the monthly
payments made by Tenant, then Tenant shall pay Landlord the deficiency within
thirty (30) days after receipt of the statement. If Tenant's payments made
during that calendar year exceed Tenant's Share of the increase in such Real
Property Taxes for that calendar year over such Real Property Taxes for the Base
Year, then, at Landlord's option, either Landlord shall pay Tenant the excess at
the time Landlord furnishes the statement to Tenant, or Tenant shall be entitled
to offset the excess against the next installment(s) of Minimum Monthly Rent and
Additional Rent, provided, however, that at the end of the Term Landlord shall
pay Tenant the excess at the time Landlord furnishes the statement to Tenant.
General and Special Assessments. With respect to any general or special
assessments which may be levied against or upon the Property, or which under the
laws then in force may be evidenced by improvement or other bonds or may be paid
in annual installments, only the amount of such annual installment, and interest
due thereon, shall be included in the computation of Real Property Taxes.
Proration. Tenant's Share of Real Property Taxes shall be prorated on the
basis of a 360-day year to account for any fractional portion of a tax year
included in the Term at its commencement and expiration.
No Effect on Minimum Monthly Rent. Notwithstanding anything to the contrary
in this Section, the Minimum Monthly Rent payable by Tenant shall in no event be
less than the Minimum Monthly Rent specified in Section 1.
Personal Property Taxes. Tenant shall pay prior to delinquency all personal
property taxes assessed against and levied upon trade fixtures, furnishings,
equipment and all other personal property of Tenant contained in the Premises or
elsewhere. If possible, Tenant shall cause such trade fixtures, furnishings,
equipment and all other personal property of Tenant to be assessed and billed
separately from the Property.
Operating Costs.
Payment of Tenant's Share of Increases in Operating Costs. Tenant shall pay
to Landlord, as Additional Rent, monthly, in advance on the first day of each
month during the Term, an amount equal to one-twelfth (1/12th) of Tenant's Share
of the increase in the Operating Costs of the Property for each calendar year
during the Term over the Operating Costs for the Base Year as reasonably
estimated by Landlord. The Property is part of the Project. Those Operating
Costs attributable to the Project shall be appropriately apportioned by Landlord
to the Building based on the ratio of the Building Area to the Project Area
unless in Landlord's reasonable judgment any such Operating Costs should be
apportioned to the Building on another basis. If any tenant or occupant of space
in the Building or Project provides or pays separately for one or more if its
utilities and services, then Landlord shall have the right to increase the
Operating Costs of the Building or Project, as the case may be, by an amount
equal to the costs that Landlord would have incurred if it had provided and paid
for such utilities and services. Landlord shall reasonably estimate the
Operating Costs for the Base Year and for each calendar year during the Term
based on the Operating Costs that would have been incurred if the Building had
been 95% occupied during the Base Year or each such calendar year, as the case
may be, taking into account historical operating costs for the Building. Such
Additional Rent is exclusive of any sales, franchise, business or occupation or
other tax based on rents and should such taxes apply during the Term, such
Additional Rent shall be increased by the amount of such taxes. Within one
hundred twenty (120) days after the end of each calendar year during the Term or
within such longer period of time as may be reasonably necessary, Landlord shall
furnish to Tenant a statement of the Operating Costs for the preceding calendar
year and Tenant's Share of the increase in the Operating Costs. If Tenant's
Share of the increase in the Operating Costs for that calendar year over the
Operating Costs for the Base Year exceeds the monthly payments made by Tenant,
then Tenant shall pay Landlord the deficiency within thirty (30) days after
receipt of the statement. If
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Tenant's payments made during that calendar year exceed Tenant's Share of the
increase in the Operating Costs for that calendar year over the Operating Costs
for the Base Year, then, at Landlord's option, either Landlord shall pay Tenant
the excess at the time Landlord furnishes the statement to Tenant, or Tenant
shall be entitled to offset the excess against the next installment(s) of
Minimum Monthly Rent and Additional Rent, provided, however, that at the end of
the Term Landlord shall pay Tenant the excess at the time Landlord furnishes the
statement to Tenant.
Proration. Tenant's Share of Operating Costs shall be prorated on the basis
of a 360 day year to account for any fractional portion of a year included in
the Term at its commencement and expiration.
No Effect on Minimum Monthly Rent. Notwithstanding anything to the contrary
in this Section, the Minimum Monthly Rent payable by Tenant shall in no event be
less than the Minimum Monthly Rent specified in Section 1.
Use. Tenant shall use the Premises for the Permitted Use and for no other use
without Landlord's prior consent. Tenant agrees that it has determined to its
satisfaction that the Premises can be used for the Permitted Use. Tenant waives
any right to terminate this Lease if the Premises cannot be used for the
Permitted Use during the Term unless the prohibition on use is the result of
actions taken by Landlord. Tenant's use of the Premises shall be in accordance
with the following:
Insurance. Tenant shall not do, bring, or keep anything in or about the
Premises or the Property that will cause a cancellation of any insurance
covering the Property. If the rate of any insurance carried by Landlord on the
Property as published by the Washington Survey and Rating Bureau, or any
successor rating bureau or agency, is increased as a result of Tenant's use,
then Tenant shall pay to Landlord not less than ten (10) days before the date
Landlord is obligated to pay a premium on the insurance, a sum equal to the
difference between the original premium and the increased premium.
Compliance with Laws. Tenant shall comply with all Laws concerning the
Premises and Tenant's use of the Premises.
Waste, Nuisance and Improper Use. Tenant shall not use the Premises in any
manner that will constitute waste, nuisance or unreasonable annoyance to other
tenants in the Building, including without limitation, (i) the use of
loudspeakers or sound or light apparatus that can be heard or seen outside the
Premises, (ii) for cooking or other activities that cause odors that can be
detected outside the Premises, or (iii) for lodging or sleeping rooms.
Damage to Property. Tenant shall not do anything in, on or about the
Premises that will cause damage to the Property.
Rules and Regulations. Tenant and its authorized representatives shall
comply with the Rules and Regulations set forth on Exhibit D attached hereto.
Landlord shall have the right to amend the Rules and Regulations from time to
time. In the event of a conflict between this Lease and the Rules and
Regulations, as amended, this Lease shall control. Landlord shall have the right
to enforce the Rules and Regulations. Landlord shall have no liability or
responsibility whatsoever with respect to the noncompliance by other tenants or
their authorized representatives with any of such Rules and Regulations.
Hazardous Substances. Tenant shall not dispose of or otherwise allow the release
of any Hazardous Substances in, on or under the Premises, or the Property, or in
any tenant improvements or alterations placed on the Premises by Tenant. Tenant
represents and warrants to Landlord that Tenant's intended use of the Premises
does not involve the use, production, disposal or bringing on to the Premises of
any Hazardous Substances, except for products normally used in general business
offices which constitute Hazardous Substances, provided that such products are
used, stored and disposed of in accordance with applicable laws and
manufacturer's and supplier's guidelines. Tenant shall promptly comply with all
laws and with all orders, decrees or judgments of governmental authorities or
courts having jurisdiction, relating to the use, collection, treatment,
disposal, storage, control, removal or cleanup of Hazardous Substances, on or
under the Premises or the Property, or incorporated in any tenant improvements
or alterations, at Tenant's expense.
Compliance; Notification. After notice to Tenant and a reasonable
opportunity for Tenant to effect such compliance, Landlord may, but is not
obligated to, enter upon the Premises and take such actions and incur such costs
and expenses to effect such compliance as it deems advisable to protect its
interest in the Premises and the Property, provided, however that Landlord shall
not be obligated to give Tenant notice and an opportunity to effect such
compliance if (i) such delay might result in material adverse harm to the
Premises, or the Property, or (ii) an emergency exists. Tenant shall reimburse
Landlord for the full amount of all costs and expenses incurred by Landlord in
connection with such compliance activities, and such obligation shall continue
even after expiration or termination of the Term. Tenant shall notify Landlord
immediately of any release of any Hazardous Substances on the Premises or the
Property.
Indemnity by Tenant. Tenant agrees to hold Landlord harmless from and
against any and all damages, charges, cleanup costs, remedial actions, costs and
expenses, which may be imposed on, incurred or paid by, or asserted against
Landlord, the Premises or the Property by reason of, or in connection with (1)
any misrepresentation, breach of warranty or other default by Tenant under this
Lease, or (2) the acts or omissions of Tenant, its authorized representatives,
or any subtenant or other person for whom Tenant would otherwise be liable,
resulting in the release of any Hazardous Substances on the Premises or the
Property.
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Acknowledgment as to Hazardous Substances. Tenant acknowledges that the
Premises may contain Hazardous Substances, and Tenant accepts the Premises and
the Building notwithstanding such Hazardous Substances. If Landlord is required
by any law to take any action to remove or abate any Hazardous Substances, or if
Landlord deems it necessary to conduct special maintenance or testing procedures
with regard to any Hazardous Substances, or to remove or abate any Hazardous
Substances, Landlord may take such action or conduct such procedures at times
and in a manner that Landlord deems appropriate under the circumstances, and
Tenant shall permit the same.
Survival. The provisions of this Section shall survive the expiration or
sooner termination of the Term. No subsequent modification or termination of
this Lease by agreement of the parties or otherwise shall be construed to waive
or to modify any provisions of this Section unless the termination or
modification agreement or other document expressly so states in writing.
Landlord's Maintenance; Inclusion in Operating Costs.
Landlord's Maintenance. Except as provided in Section 13 captioned
"Tenant's Maintenance; Remedies", Section 18 captioned "Destruction" and Section
19 captioned "Condemnation" and except for damage caused by any negligent or
intentional act or omission of Tenant or its authorized representatives,
Landlord shall maintain in good condition and repair the following:(i) the
structural parts of the Building, which structural parts include only the
foundations, bearing and exterior walls (excluding glass and doors), subflooring
and roof, (ii) the building standard lighting fixtures, window coverings and
ceiling tiles and the unexposed electrical, plumbing and sewage systems,
including without limitation, those portions lying outside the Premises, (iii)
the heating, ventilating and air-conditioning system, if any, servicing the
Building, (iv) the lobbies, corridors, elevators, public or common restrooms and
other common areas of the Building, and (v) the sidewalks, grounds, landscaping,
parking and loading areas, if any, and other common areas of the Property.
Inclusion in Operating Costs. The cost of maintaining, repairing, replacing
or servicing the portions of the Building that Landlord is required to maintain
pursuant to this Section shall be included in Operating Costs to the extent
provided in Section 9 captioned "Operating Costs".
Tenant's Maintenance; Remedies.
Tenant's Maintenance. Except as provided in Section 12 captioned
"Landlord's Maintenance; Inclusion in Operating Costs", Section 18 captioned
"Destruction" and Section 19 captioned "Condemnation" and except for damage
caused by any grossly negligent or intentional act or omission of Landlord or
its authorized representatives, Tenant, at its cost, shall maintain in good
condition and repair the Premises, including without limitation, all of the
Tenant Improvements (except for latent defects), Tenant's alterations, Tenant's
trade fixtures, Tenant's personal property, signs, walls, interior partitions,
wall coverings, windows, non-building standard window coverings, glass, doors,
carpeting and resilient flooring, non-building standard ceiling tiles, plumbing
fixtures and non-building standard lighting fixtures. Tenant shall be liable for
any damage to the Premises and the Building resulting from the acts or omissions
of Tenant or its authorized representatives.
Landlord's Remedies. If Tenant fails to maintain the Premises in good
condition and repair as required by Subsection 13(a) and if such failure is not
cured within thirty (30) days after notice of such failure is given by Landlord
to Tenant, then Landlord may, at its option, cause the Premises to be maintained
in good condition and repair and Tenant shall promptly reimburse Landlord for
all costs incurred by Landlord in performance of Tenant's obligation to maintain
the Premises.
Tenant Improvements and Alterations; Trade Fixtures.
Tenant Improvements and Alterations. Tenant accepts the Premises in "AS IS"
condition without any obligations for the performance of improvements or other
work by Landlord. Tenant shall install and pay for the improvements and
alterations as set forth in the Work Letter attached hereto as Exhibit C. Tenant
shall not make any other improvements or alterations to the Premises without
Landlord's prior consent. Any improvements and alterations made by either party
shall remain on and be surrendered with the Premises on expiration or
termination of the Term, except that Landlord can elect by giving notice to
Tenant within thirty (30) days before the expiration of the Term, or within
thirty (30) days after termination of the Term, to require Tenant to remove any
improvements and alterations that Tenant has made to the Premises. If Landlord
so elects, Tenant, at its cost, shall restore the Premises to the condition
designated by Landlord in its election, before the last day of the Term, or
within thirty (30) days after notice of election is given, whichever is later.
Any improvements and alterations that remain on the Premises on expiration or
termination of the Term shall automatically become the property of Landlord and
title to such improvements and alterations shall automatically pass to Landlord
at such time without any payment therefor by Landlord to Tenant. If Tenant or
its authorized representatives make any improvements or alterations to the
Premises as provided in this Section, then such improvements and alterations (i)
shall be made in a first class manner in conformity with then building standard
improvements, (ii) shall be made utilizing then building standard materials,
(iii) shall be made in compliance with the Rules and Regulations and the
reasonable directions of Landlord, (iv) shall be made pursuant to a valid
building permit to be obtained by Tenant, at its cost, (v) shall be made in
conformity with then applicable Laws, including without limitation, building
codes, and (vi) shall not be commenced until five (5) days after Landlord has
received notice from Tenant stating the date the installation of such
improvements and alterations is to commence so that Landlord can post and record
an appropriate notice of nonresponsibility.
Trade Fixtures. Tenant shall not install any trade fixtures in or on the
Premises without Landlord's prior consent.
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Mechanics' Liens. Tenant shall pay, or cause to be paid, all costs of labor,
services and/or materials supplied in connection with any Work. Tenant shall
keep the Property free and clear of all mechanics' liens and other liens
resulting from any Work. Prior to the commencement of any Work or the supply or
furnishing of any labor, services and/or materials in connection with any Work,
Tenant shall provide Landlord with a labor and material payment bond in an
amount equal to one hundred percent (100%) of the aggregate price of all
contracts therefor, with release of the bond conditioned on Tenant's payment in
full of all claims of lien claimants for such labor, services and/or materials
supplied in the prosecution of the Work. Said payment bond shall name Landlord
as a primary obligee, shall be given by a surety which is satisfactory to
Landlord, and shall be in such form as Landlord shall approve in its sole
discretion. Tenant shall have the right to contest the correctness or validity
of any such lien if, immediately on demand by Landlord, it procures and records
a lien release bond issued by a responsible corporate surety in an amount
sufficient to satisfy statutory requirements therefor in the State of
Washington. Tenant shall promptly pay or cause to be paid all sums awarded to
the claimant on its suit, and, in any event, before any execution is issued with
respect to any judgment obtained by the claimant in its suit or before such
judgment becomes a lien on the Premises, whichever is earlier. If Tenant shall
be in default under this Section, by failing to provide security for or
satisfaction of any mechanic's or other liens, then Landlord may (but shall not
be obligated to), in addition to any other rights or remedies it may have,
discharge said lien by (i) paying the claimant an amount sufficient to settle
and discharge the claim, (ii) procuring and recording a lien release bond, or
(iii) taking such other action as Landlord shall deem necessary or advisable,
and, in any such event, Tenant shall pay as Additional Rent, on Landlord's
demand, all costs (including reasonable attorney fees) incurred by Landlord in
settling and discharging such lien together with interest thereon in accordance
with Section 34 captioned "Interest on Unpaid Rent" from the date of Landlord's
payment of said costs. Landlord's payment of such costs shall not waive any
default of Tenant under this Section.
Utilities and Services.
Utilities and Services Furnished by Landlord. Landlord shall furnish the
Premises with:
Electricity for lighting and power suitable for the use of the Premises for
ordinary general office purposes; provided, however, that Tenant shall not at
any time have a connected electrical load for lighting purposes in excess of the
wattage per square foot of Premises Area required for building standard amounts
of lighting, or a connected load for all other power requirements in excess of
four (4) watts per square foot of Premises Area as determined by Landlord, and
the electricity so provided for lighting and power shall not exceed such limits,
subject to any lower limits set by any governmental authority with respect
thereto;
Subject to the reasonable limitations of the existing building systems,
heating, ventilating and air-conditioning, if the Building has an
air-conditioning system, to maintain a temperature range in the Premises which
is customary for similar office space in the Seattle, Washington area (but in
compliance with any applicable governmental regulations with respect thereto).
Tenant agrees to keep closed, when necessary, blinds, draperies and windows
which must be closed to provide for the efficient operation of the heating and
air conditioning systems, if any, and Tenant agrees to cooperate with Landlord
and to abide by the regulations and requirements which Landlord may prescribe
for the proper functioning and protection of the heating, ventilating and
air-conditioning system, if any. If Tenant requires heating, ventilating and air
conditioning to the Premises other than during normal business hours from 7:30
A.M. to 6:00 P.M. daily, except Saturdays, Sundays and those legal holidays
generally observed in the State of Washington, Landlord shall, upon Tenant's
request made not less than 24 hours before the time Tenant requires the after
hour service, and not later than Noon on the Friday before any Saturday or
Sunday on which Tenant requires such service, and not later than Noon of the day
before any holiday on which Tenant requires such service (except as otherwise
provided in the Rules and Regulations), furnish such heating, ventilating and
air conditioning. If Tenant receives such services, then Tenant shall pay, upon
demand, an amount equal to Tenant's proportionate share of the actual direct
cost to Landlord in providing the heating, ventilating and air conditioning
outside of normal business hours;
Water for restroom and drinking purposes and access to restroom facilities;
Elevator service for general office pedestrian usage if the Building is
serviced by elevators;
Relamping of building-standard light fixtures;
Washing of interior and exterior surfaces of exterior windows with
reasonable frequency; and
Janitorial service five (5) times per week, except holidays.
Payment for Excess Utilities and Services. All services and utilities for
the Premises not required to be furnished by Landlord pursuant to Section 16(a)
shall be paid for by Tenant. If Tenant requires, on a regular basis, water,
heat, air conditioning, electric current, elevator or janitorial service in
excess of that provided for in Section 16(a), then Tenant shall first obtain the
consent of Landlord which consent may be withheld in Landlord's sole discretion.
If Landlord consents to such excess use, Landlord may install an electric
current or water meter (including, without limitation, any additional wiring,
conduit or panel required therefor) to measure the excess electric current or
water consumed by Tenant or may cause the excess usage to be measured by other
reasonable methods (e.g. by temporary "check" meters or by survey). Tenant shall
pay to Landlord upon demand (i) the cost of any and all water, heat, air
conditioning, electric current, janitorial, elevator or other services or
utilities required to be furnished to Tenant in excess of the services and
utilities required to be furnished by Landlord as provided in Section 16(a);
(ii) the cost of installation, maintenance and repair of any meter installed in
the Premises; (iii) the cost of all electricity and water consumed by Tenant in
connection with any dedicated heating, ventilating and/or air conditioning,
computer power and/or air conditioning, telecommunications or other special
systems of Tenant, including any power usage other than through existing
standard 110-volt AC outlets; and (iv) any cost incurred by Landlord in keeping
account of or determining such
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excess utilities or services furnished to Tenant. Landlord's failure to bill
Tenant for any such excess utilities or services shall not waive Landlord's
right to bill Tenant for the excess at a later time.
Temperature Balance. Landlord makes no representation to Tenant regarding
the adequacy or fitness of the heating, ventilating and air-conditioning
systems, if any, in the Building to maintain temperatures that may be required
for, or because of, any of Tenant's equipment which uses other than the
fractional horsepower normally required for office equipment, and Landlord shall
have no liability for loss or damage suffered by Tenant or others in connection
therewith. If the temperature otherwise maintained in any portion of the
Premises by the heating, air conditioning or ventilation system is affected as a
result of (i) any lights, machines or equipment (including without limitation
electronic data processing machines) used by Tenant in the Premises, (ii) the
occupancy of the Premises by more than one person per two hundred (200) square
feet of rentable area therein, (iii) an electrical load for lighting or power in
excess of the limits per square foot of rentable area of the Premises specified
in Section 16(a), or (iv) any rearrangement of partitioning or other
improvements, Landlord may install any equipment, or modify any existing
equipment (including the standard air conditioning equipment) Landlord deems
necessary to restore the temperature balance. The cost of any such equipment,
including without limitation, the cost of design and installation thereof, and
the cost of operating, metering, maintaining or repairing the same, shall be
paid by Tenant to Landlord upon demand. Tenant shall not install or operate
window-mounted heating or air-conditioning units.
Special Electrical or Water Connections; Electricity Use. Tenant will not,
without the prior consent of Landlord, which Landlord in its sole discretion may
refuse, connect or use any apparatus or device in the Premises (i) using current
in excess of 110 volts or (ii) which will cause the amount of electricity,
water, heating, air conditioning or ventilation furnished to the Premises to
exceed the amount required for use of the Premises for ordinary general office
purposes, as determined by Landlord, during normal business hours or (iii) which
would cause Tenant's connected load to exceed any limits established in Section
16(a). Tenant shall not connect with electric current except through existing
outlets in the Premises and shall not connect with water pipes except through
existing plumbing fixtures in the Premises. In no event shall Tenant's use of
electricity exceed the capacity of existing feeders to the Building or the
risers or wiring installation, and Landlord may prohibit the use of any
electrical equipment which in Landlord's opinion will overload such wiring or
interfere with the use thereof by other tenants in the Building. If Landlord
consents to the use of equipment requiring such changes, Tenant shall pay the
cost of installing any additional risers, panels or other facilities that may be
necessary to furnish energy to the Premises.
Landlord will not permit additional coring of the floor of the Premises in
order to install new electric outlets in the Premises unless Tenant furnishes
Landlord with X-ray scans of the floor area where the Tenant wishes to place
additional electrical outlets and Landlord, in its absolute discretion, is
satisfied, on the basis of such X-ray scans and other information obtained by
Landlord, that coring of the floor in order to install such additional outlets
will not weaken the structure of the floor.
Landlord's Duties. Landlord shall not be in default under this Lease or
liable for any damages resulting from, or incidental to, any of the following,
nor shall any of the following be an actual or constructive eviction of Tenant,
nor shall the Rent be abated by reason of: (i) failure to furnish or delay in
furnishing any of the services described in this Section when such failure or
delay is caused by accident or any condition beyond the reasonable control of
Landlord, including the making of necessary repairs or improvements to the
Premises or to the Building, (ii) any electrical surges or spikes, or (iii)
failure to make any repair or to perform any maintenance, unless such failure
shall persist for an unreasonable time after notice of the need for such repair
or maintenance is given to Landlord by Tenant. Landlord shall use reasonable
efforts to remedy any interruption in the furnishing of such services.
Governmental Regulations. Any other provisions of this Section
notwithstanding, if any governmental authority or utility supplier imposes any
laws, controls, conditions, or other restrictions upon Landlord, Tenant, or the
Building, relating to the use or conservation of energy or utilities, mandated
changes in temperatures to be maintained in the Premises or the Building or the
reduction of automobile or other emissions (collectively, the "Controls"), or in
the event Landlord is required or elects to make alterations to the Building in
order to comply with the Controls, Landlord may, in its sole discretion, comply
and may require Tenant to comply with the Controls or make such alterations to
the Building in order to comply with the Controls. Such compliance and the
making of such alterations shall not constitute an actual or constructive
eviction of Tenant, impose on Landlord any liability whatsoever, or entitle
Tenant to any abatement of Rent.
Insurance. Prior to the commencement of use of this Lease, Tenant shall secure
and maintain, at no expense to Landlord, a policy or policies of insurance as
set forth below. Evidence of such insurance shall be delivered to the address
set forth below-. Said policy(ies) (1) shall be subject to approval by the
Landlord's Risk Manager as to Company, Form and Coverage, (2) be primary to all
other insurance the Landlord may secure, and (3) must protect Landlord from any
and all claims and risks in connection with any activity performed by virtue of
this Lease or any use and occupancy of the Premises authorized by this Lease.
Said insurance policy(ies) and subsequent renewals must be maintained in full
force and effect, at no expense to the Landlord, throughout the entire Term of
this Lease.
Commercial General Liability Insurance. A policy of Commercial General
Liability Insurance written on an insurance industry standard occurrence form
(CG 00 01) or equivalent, including all the usual coverages known as:
Premises/Operations Liability
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Products/Completed Operations
Personal/Advertising Injury
Contractual Liability
Independent Contractors Liability
Stop Gap/Employers Contingent Liability
Liquor Liability/Host Liquor Liability (as applicable)
Fire Damage Legal Liability
Such policy(ies) must provide the following minimum limits:
Bodily Injury and Property Damage
$ 2,000,000 General Aggregate
$ 2,000,000 Products and Completed Operations Aggregate
$ 1,000,000 Personal and Advertising Injury
$ 1,000,000 Each Occurrence
$ 100,000 Fire Damage
Stop Gap Employers Liability
$ 1,000,000 Each Accident
$ 1,000,000 Disease - Policy Limit
$ 1,000,000 Disease - Each Employee
Any deductible or self-insured retention must be disclosed and is subject
to approval by the Landlord's Risk Manager. The cost of any claim payments
falling within the deductible shall be the responsibility of the Tenant.
Business Automobile Liability Insurance. A policy of Business Automobile
Liability Insurance, including coverage for owned, non-owned, leased or hired
vehicles written on an insurance industry standard form (CA 00 01) or
equivalent. Such policy(ies) must provide the following minimum limit:
Bodily Injury and Property Damage $ 1,000,000 per accident
Such insurance, as provided under items (a) and (b) above, shall be
endorsed to include the Landlord, its officers, elected officials, employees,
agents and volunteers as additional insured, and shall not be reduced or
canceled without forty-five (45) days prior written notice to the Landlord. In
addition, Tenant's insurance shall be primary as respects the Landlord, and any
other insurance maintained by the Landlord shall be excess and not contributing
insurance with the Tenant's insurance.
Worker's Compensation Insurance. A policy of Worker's Compensation
Insurance. As respects Workers' Compensation insurance in the State of
Washington, the Tenant shall secure its liability for industrial injury to its
employees in accordance with the provisions of Title 51 of the Revised Code of
Washington. If the Tenant is qualified as a self-insurer in accordance with
Chapter 51.14 of the Revised Code of Washington, Tenant shall so certify by a
letter signed by a corporate officer setting forth the limits of any policy of
excess insurance covering its employees.
Property Insurance. A policy of Property Insurance covering its furniture,
fixtures, equipment and inventory and all improvements which it makes to the
Premises in an amount equal to replacement cost thereof, against (i) loss from
the perils of fire, and other risks of direct physical loss, not less broad than
provided by the insurance industry standard "Causes of Loss - Special Form (CP
10 30)", (ii) Loss or damage from water damage, or sprinkler systems now or
hereafter installed in on the premises; (iii) Loss or damage by explosion of
steam boilers, pressure vessels, oil or gasoline storage; and (iv) Business
Interruption or Extra Expense, with sufficient coverage to provide for the
payment of Rent and other fixed costs during any interruption of Tenant's
business because of fire or other cause.
Coverage and/or Limits. Coverage and/or limits may be altered or increased
as necessary, to reflect type of or exposure to risk. Landlord shall have the
right to periodically review the appropriateness of such limits in view of
inflation and/or changing industry conditions and to require an increase in such
limits upon ninety (90) days prior written notice.
Evidence of Insurance. The following documents must be provided as evidence
of insurance coverage:
A copy of the policy's declarations pages, showing the Insuring Company,
policy effective dates, limits of liability, and the Schedule of Forms and
Endorsements.
A copy of the endorsement naming the Landlord as an Additional Insured,
showing the policy number, and signed by an authorized representative of the
insurance company on Form CG2026 (ISO) or equivalent.
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A copy of the "Endorsements Form List" to the policy or policies showing
endorsements issued on the policy, and including any company-specific or
manuscript endorsements.
A copy of an endorsement stating that the coverages provided by this policy
to the Landlord or any other named insured shall not be terminated, reduced or
otherwise materially changed without providing at least forty-five (45) days
prior written notice to the Landlord.
A copy of a "Separation of Insureds" or "Severability of Interests" clause,
indicating essentially that - except with respect to the limits of insurance,
and any rights or duties specifically assigned to the first named insured, this
insurance applies as if each named insured were the only named insured, and
separately to each insured against whom claim is made or suit is brought
(Commercial General Liability and Business Automobile Liability Insurance).
All policies shall be subject to approval by the Landlord's Risk Manager as
to company (must be rated A-VII or higher in the A.M. Best's Key Rating Guide
and licensed to do business in the State of Washington or issued as a surplus
line by a Washington Surplus lines broker), form and coverage, and primary to
all other insurance.
Maintain Insurance. If Tenant fails to maintain such insurance, Landlord
may do so, and Tenant shall reimburse Landlord for the full expense thereof upon
demand. Tenant shall not keep or use in or about the Premises any article which
is prohibited by Landlord's insurance policy. Tenant shall pay immediately any
increase in Landlord's premiums for insurance during the term of this Lease
which results from Tenant's use of the Premises.
Waiver of Subrogation. Either Landlord nor Tenant shall be liable to the
other party or to any insurance company (by way of subrogation or otherwise)
insuring the other party for any loss or damage to any building, structure or
tangible personal property of the other occurring in or about the Premises or
Building, even though such loss or damage might have been occasioned by the
negligence of such party, its' agents or employees, if such loss or damage is
covered by insurance benefiting the party suffering such loss or damage or was
required under the terms of this Lease to be covered by insurance procured by
the party suffering the loss.
Destruction.
Insured Damage. If during the Term the Premises or the Building are
partially or totally destroyed by any casualty that is covered by any insurance
carried by Landlord covering the Building, rendering the Premises partially or
totally inaccessible or unusable, Landlord shall restore the Premises or the
Building to substantially the same condition as they were in immediately before
such destruction, if (i) the insurance proceeds available to Landlord equal or
exceed the cost of such restoration, (ii) in the opinion of a registered
architect or engineer appointed by Landlord such restoration can be completed
within one hundred eighty (180) days after the date on which Landlord obtains
all permits necessary for such restoration, and (iii) such restoration is
permitted under then existing laws to be done in such a manner as to return the
Premises, or the Building, as the case may be, to substantially the same
condition as they were in immediately before such destruction. To the extent
that the insurance proceeds must be paid to a mortgagee under, or must be
applied to reduce any debt secured by, a mortgage covering the Property, the
insurance proceeds shall be deemed not to be available to Landlord unless such
mortgagee permits Landlord to use the insurance proceeds for such restoration.
Such destruction shall not terminate this Lease.
Major or Uninsured Damage. If during the Term the Premises or the Building
are partially or totally destroyed by any casualty and Landlord is not obligated
under Section 18(a) captioned "Insured Damage" to restore the Premises or the
Building, as the case may be, then Landlord may, at its election, either (i)
restore the Premises or the Building to substantially the same condition as they
were in immediately before such destruction, or (ii) terminate this Lease
effective as of the date of such destruction. If Landlord does not give Tenant
notice within sixty (60) days after the date of such destruction of its election
to restore the Premises or the Building, as the case may be, Landlord shall be
deemed to have elected to terminate this Lease. If Landlord elects to restore
the Premises or the Building, as the case may be, Landlord shall use
commercially reasonable efforts to complete such restoration within one hundred
eighty (180) days after the date on which Landlord obtains all permits necessary
for such restoration, provided, however, that such one hundred eighty (180) day
period shall be extended by a period equal to any delays caused by Force
Majeure, and such destruction shall not terminate this Lease.
Damage to the Building. If during the Term the Building is partially
destroyed by any casualty and if in the opinion of Landlord the Building should
be restored in such a way as to materially alter the Premises, then Landlord
may, at Landlord's election, terminate this Lease by giving notice to Tenant of
Landlord's election to do so within sixty (60) days after the date of such
destruction.
Extent of Landlord's Obligation to Restore. If Landlord is required or
elects to restore the Premises as provided in this Section, Landlord shall not
be required to restore alterations made by Tenant, Tenant's trade fixtures and
Tenant's personal property, such excluded items being the sole responsibility of
Tenant to restore.
Abatement or Reduction of Rent. In case of damage to, or destruction of,
the Premises or the Building the Minimum Monthly Rent shall be abated or
reduced, between the date of destruction and the date of completion of
restoration, by an amount that is in the same ratio to the Minimum Monthly Rent
as the total number of square feet of the Premises that are so damaged or
destroyed bears to the total number of square feet in the Premises.
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Condemnation. If during the Term there is any taking of part or all of the
Premises or the Building by condemnation, then the rights and obligations of the
parties shall be as follows:
Minor Taking. If there is a taking of less than ten percent (10%) of the
Premises, this Lease shall remain in full force and effect.
Major Taking. If there is a taking of ten percent (10%) or more of the
Premises and if the remaining portion of the Premises is of such size or
configuration that Tenant is unable to conduct its business in the Premises,
then the Term shall terminate as of the date of taking.
Taking of Part of the Building. If there is a taking of a part of the
Building other than the Premises and if in the opinion of Landlord the Building
should be restored in such a way as to materially alter the Premises, then
Landlord may terminate the Term by giving notice to such effect to Tenant within
sixty (60) days after the date of vesting of title in the condemnor and the Term
shall terminate as of the date specified in such notice, which date shall not be
less than sixty (60) days after the giving of such notice.
Award. The entire award for the Premises, the Building and the Property,
shall belong to and be paid to Landlord, Tenant hereby assigning to Landlord
Tenant's interest therein, if any, provided, however, that Tenant shall have the
right to claim and recover from the condemnor compensation for the loss of any
alterations made by Tenant, Tenant's trade fixtures, Tenant's personal property,
moving expenses and business interruption.
Abatement of Rent. If any part of the Premises is taken by condemnation and
this Lease remains in full force and effect, on the date of taking the Minimum
Monthly Rent shall be reduced by an amount that is in the same ratio to the
Minimum Monthly Rent as the total number of square feet in the Premises taken
bears to the total number of square feet in the Premises immediately before the
date of taking.
Assignment and Subletting.
Landlord's Consent; Definitions. Tenant acknowledges that the Building is a
multi-tenant office building, occupied by tenants specifically selected by
Landlord, and that Landlord has a legitimate interest in the type and quality of
such tenants, the location of tenants in the Building and in controlling the
leasing of space in the Building so that Landlord can better meet the particular
needs of its tenants and protect and enhance the relative image, position and
value of the Building in the office building market. Tenant further acknowledges
that the rental value of the Premises may fluctuate during the Term in
accordance with market conditions, and, as a result, the Rent paid by Tenant
under the Lease at any particular time may be higher or lower than the then
market rental value of the Premises. Landlord and Tenant agree, and the
provisions of this Section are intended to so provide, that, if Tenant
voluntarily assigns its interest in this Lease or in the Premises or subleases
any part or all of the Premises, a portion of the profits from any increase in
the market rental value of the Premises shall belong solely to Landlord. Tenant
acknowledges that, if Tenant voluntarily assigns this Lease or subleases any
part or all of the Premises, Tenant's investment in the subject portion of the
Premises (specifically including, but not limited to, tenant improvements, good
will or other assets) may be lost or reduced as a result of such action.
Consent Required. Tenant shall not voluntarily assign or encumber its
interest in this Lease or in the Premises, or sublease any part or all of the
Premises, without Landlord's prior consent, which consent shall not be
unreasonably withheld. Any assignment, encumbrance or sublease without
Landlord's consent shall be voidable and, at Landlord's election, shall
constitute a default by Tenant under this Lease. In determining whether to
approve a proposed assignment or sublease, Landlord shall place primary emphasis
on the proposed transferee's reputation and creditworthiness, the character of
the business to be conducted by the proposed transferee at the Premises and the
affect of such assignment or subletting on the tenant mix in the Building. In
addition, Landlord shall have the right to approve the specific form of any
assignment or sublease agreement. In no event shall Landlord be obligated to
consent to any assignment or subletting which increases (i) the Operating Costs,
(ii) the burden on the Building services, or (iii) the foot traffic, elevator
usage or security concerns in the Building, or creates an increased probability
of the comfort and/or safety of the Landlord and other tenants in the Building
being unreasonably compromised or reduced (for example, but not exclusively,
Landlord may deny consent to an assignment or subletting where the space will be
used for a school or training facility, an entertainment, sports or recreation
facility, retail sales to the public (unless Tenant's permitted use is retail
sales), a personnel or employment agency, a medical office, or an embassy or
consulate or similar office. Landlord shall not be obligated to approve an
assignment or subletting to (x) a current tenant of the Building or (y) a
prospective tenant of the Building with whom Landlord is then negotiating.
Landlord's foregoing rights and options shall continue throughout the entire
term of this Lease. No consent to any assignment, encumbrance or sublease shall
constitute a waiver of the provisions of this Section and no other or subsequent
assignment, encumbrance or sublease shall be made without Landlord's prior
consent. Neither an assignment or subletting nor the collection of Rent by
Landlord from any person other than Tenant, nor the application of any such Rent
as provided in this Section shall be deemed a waiver of any of the provisions of
this Section or release Tenant from its obligation to comply with the terms and
provisions of this Lease and Tenant shall remain fully and primarily liable for
all of Tenant's obligations under this Lease, including the obligation to pay
Rent under this Lease. Any personal guarantee(s) of Tenant's obligations under
this Lease shall remain in full force and effect following any such assignment
or subletting. Landlord may condition approval of an assignment or subletting
hereunder on an increase in the amount of the Security Deposit or on receipt of
personal guarantees of the assignee's or sublessee's obligations under this
Lease. If Landlord approves of an assignment or subletting hereunder and this
Lease contains any renewal options, expansion options, rights of first refusal,
rights of first negotiation or any other rights or options pertaining to
additional space in the Building, such rights and/or options shall not run to
the assignee or subtenant, it being agreed by the parties hereto that any such
rights and options are personal to Tenant named herein and may not be
transferred.
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Conditions to Assignment or Sublease. Tenant agrees that any instrument by
which Tenant assigns or sublets all or any portion of the Premises shall
expressly provide that the assignee or subtenant may not further assign or
sublet the assigned or sublet space without Landlord's prior consent (which
consent shall not, subject to Landlord's rights under Section 20(b), be
unreasonably withheld or delayed), and that the assignee or subtenant will
comply with all of the provisions of this Lease and that Landlord may enforce
the Lease provisions directly against such assignee or subtenant. If this Lease
is assigned, whether or not in violation of the terms and provisions of this
Lease, Landlord may collect Rent from the assignee. If the Premises, or any part
thereof, is sublet, Landlord may, upon a default under this Lease, collect rent
from the subtenant. In either event, Landlord may apply the amount collected
from the assignee or subtenant to Tenant's obligation to pay Rent under this
Lease.
Events Constituting an Assignment or Sublease. For purposes of this
Section, the following events shall be deemed an assignment or sublease, as
appropriate:(i) the issuance of equity interests (whether stock, partnership
interests or otherwise) in Tenant, or any assignee or subtenant, if applicable,
or any entity controlling any of them, to any person or group of related
persons, in a single transaction or a series of related or unrelated
transactions, such that, following such issuance, such person or group shall
have Control (as defined below) of Tenant, or any assignee or subtenant, if
applicable; or (ii) a transfer of Control of Tenant, or any assignee or
subtenant, if applicable, or any entity controlling any of them, in a single
transaction or a series of related or unrelated transactions (including, without
limitation, by consolidation, merger, acquisition or reorganization), except
that the transfer of outstanding capital stock or other listed equity interests
by persons or parties other than "insiders" within the meaning of the Securities
Exchange Act of 1934, as amended, through the "over-the-counter" market or any
recognized national or international securities exchange, shall not be included
in determining whether Control has been transferred. "Control" shall mean direct
or indirect ownership of fifty percent (50%) or more of all the legal and
equitable interest in any business entity.
Processing Expenses. Tenant shall pay to Landlord the amount of Landlord's
cost of processing each proposed assignment or subletting, including without
limitation, attorneys' and other professional fees, and the cost of Landlord's
administrative, accounting and clerical time (collectively, "Processing Costs"),
and the amount of all direct and indirect expense incurred by Landlord arising
from the assignee or sublessee taking occupancy of the subject space, including
without limitation, costs of freight elevator operation for moving of
furnishings and trade fixtures, security service, janitorial and cleaning
service, rubbish removal service, costs of changing signage, and costs of
changing locks and making new keys (collectively, "Occupancy Costs").
Notwithstanding anything to the contrary herein, Landlord shall not be required
to process any request for Landlord's consent to an assignment or subletting
until Tenant has paid to Landlord the amount of Landlord's estimate of the
Processing Costs and the Occupancy Costs.
Consideration to Landlord. In the event of any assignment or sublease,
whether or not requiring Landlord's consent, Landlord shall be entitled to
receive, as Additional Rent, one-half (1/2) of any consideration, including
without limitation, payment for leasehold improvements owned by Landlord, paid
by the assignee or subtenant for the assignment or sublease and, in the case of
sublease, the excess of the amount of rent paid for the sublet space by the
subtenant over the total amount of Minimum Monthly Rent under Section 5 and
Additional Rent under Sections 7 and 9. Upon Landlord's request, Tenant shall
assign to Landlord all amounts to be paid to Tenant by the assignee or subtenant
and shall direct such assignee or subtenant to pay the same directly to
Landlord. If there is more than one sublease under this Lease, the amounts (if
any) to be paid by Tenant to Landlord pursuant to the preceding sentence shall
be separately calculated for each sublease and amounts due Landlord with regard
to any one sublease may not be offset against rental and other consideration
pertaining due under any other sublease.
With regard to an approved assignment or subletting, Tenant acknowledges
that Landlord's agreement to deal directly with the assignee or subtenant with
regard to such party's occupancy of the Premises and the administration of the
Lease, without requiring Tenant to monitor or become directly involved in such
matters, constitutes appropriate and acceptable consideration for the capture by
Landlord of any rent or consideration paid by the assignee or subtenant in
excess of that required to be paid by Tenant under the Lease.
Procedures. If Tenant desires to assign this Lease or any interest therein
or sublet all or part of the Premises, Tenant shall give Landlord written notice
thereof designating the space proposed to be sublet and the terms proposed.
Landlord shall have the prior right and option (to be exercised by written
notice to Tenant given within fifteen (15) days after receipt of Tenant's
notice) (i) to sublet from Tenant any portion of the Premises proposed by Tenant
to be sublet, for the term for which such portion is proposed to be sublet, but
at the same Rent (including Additional Rent as provided for in Sections 7 and 9)
as Tenant is required to pay to Landlord under this Lease for the same space,
computed on a pro rata square footage basis, and during the term of such
sublease Tenant shall be released of its obligations under the Lease with regard
to the subject space, (ii) if the term of the sublease (including any renewal
terms) will expire during the final eighteen (18) months of the Term (or if
Tenant has exercised a renewal option, if any, then during the final eighteen
(18) months of the subject renewal period), to terminate this Lease as it
pertains to the portion of the Premises so proposed by Tenant to be sublet, or
(iii) to approve Tenant's proposal to sublet conditional upon Landlord's
subsequent written approval of the specific sublease obtained by Tenant and the
specific subtenant named therein. If Landlord exercises its option in (i) above,
then Landlord may, at Landlord's sole cost, construct improvements in the
subject space and, so long as the improvements are suitable for general office
purposes, Landlord shall have no obligation to restore the subject space to its
original condition following the termination of the sublease. If Landlord
exercises its option described in (iii) above, Tenant shall submit to Landlord
for Landlord's written approval Tenant's proposed sublease agreement (in which
the proposed subtenant shall be named) together with a current reviewed or
audited financial statement prepared by a certified public accountant for such
proposed subtenant and a credit report on such proposed subtenant prepared by a
recognized credit reporting agency. If Landlord fails to exercise any aforesaid
option to sublet or to terminate, this shall not be construed as or constitute a
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waiver of any of the provisions of this Section. If Landlord exercises any such
option to sublet or to terminate, Landlord shall not have any liability for any
real estate brokerage commission(s) or with respect to any of the costs and
expenses that Tenant may have incurred in connection with its proposed
subletting, and Tenant agrees to hold Landlord harmless from and against any and
all claims (including, without limitation, claims for commissions) arising from
such proposed subletting. Landlord's foregoing rights and options shall continue
throughout the Term. For purposes of this Section, a proposed assignment of this
Lease in whole or in part shall be deemed a proposed subletting of such space.
Documentation. No permitted subletting by Tenant shall be effective until
there has been delivered to Landlord a counterpart of the sublease in which the
subtenant agrees to be and remain jointly and severally liable with Tenant for
the payment of Rent pertaining to the sublet space and for the performance of
all of the terms and provisions of this Lease; provided, however, that the
subtenant shall be liable to Landlord for rent only in the amount set forth in
the sublease. No permitted assignment shall be effective unless and until there
has been delivered to Landlord a counterpart of the assignment in which the
assignee assumes all of Tenant's obligations under this Lease arising on or
after the date of the assignment. The failure or refusal of a subtenant or
assignee to execute any such instrument shall not release or discharge the
subtenant or assignee from its liability as set forth above.
No Merger. Without limiting any of the provisions of this Section, if
Tenant has entered into any subleases of any portion of the Premises, the
voluntary or other surrender of this Lease by Tenant, or a mutual cancellation
by Landlord and Tenant, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or, at the
option of Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies.
Default. The occurrence of any of the following shall constitute a default by
Tenant under this Lease:
Failure to Pay Rent. Failure to pay Rent when due, if the failure continues
for a period of three (3) days after notice of such default has been given by
Landlord to Tenant.
Failure to Comply with Rules and Regulations. Failure to comply with the
Rules and Regulations, if the failure continues for a period of twenty-four (24)
hours after notice of such default is given by Landlord to Tenant. If the
failure to comply cannot reasonably be cured within twenty-four (24) hours, then
Tenant shall not be in default under this Lease if Tenant commences to cure the
failure to comply within twenty-four (24) hours and diligently and in good faith
continues to cure the failure to comply.
Other Defaults. Failure to perform any other provision of this Lease, if
the failure to perform is not cured within thirty (30) days after notice of such
default has been given by Landlord to Tenant. If the default cannot reasonably
be cured within thirty (30) days, then Tenant shall not be in default under this
Lease if Tenant commences to cure the default within thirty (30) days and
diligently and in good faith continues to cure the default.
Appointment of Trustee or Receiver. The appointment of a trustee or
receiver to take possession of substantially all of the Tenant's assets located
at the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within sixty (60) days; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets located at the Premises
or of Tenant's interest in this Lease, where such seizure is not discharged
within sixty (60) days.
Remedies. If Tenant commits a default, Landlord shall have the following
alternative remedies, which are in addition to any remedies now or later allowed
by law:
Maintain Lease in Force. Maintain this Lease in full force and effect and
recover the Rent and other monetary charges as they become due, without
terminating Tenant's right to possession, irrespective of whether Tenant shall
have abandoned the Premises. If Landlord elects to not terminate the Lease,
Landlord shall have the right to attempt to re-let the Premises at such rent and
upon such conditions and for such a term, and to do all acts necessary to
maintain or preserve the Premises as Landlord deems reasonable and necessary
without being deemed to have elected to terminate the Lease including removal of
all persons and property from the Premises; such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for the account of
Tenant. In the event any such re-letting occurs, this Lease shall terminate
automatically upon the new Tenant taking possession of the Premises.
Notwithstanding that Landlord fails to elect to terminate the Lease initially,
Landlord at any time during the term of this Lease may elect to terminate this
Lease by virtue of such previous default of Tenant.
Terminate Lease. Terminate Tenant's right to possession by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Premises to Landlord. In such event Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default including without limitation thereto, the following: (i) The
worth at the time of award of any unpaid Rent which had been earned at the time
of such termination; plus (ii) the worth at the time of award of the amount by
which the unpaid Rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus (iii) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the Term after the time of
award exceeds the amount of such rental loss that is proved could be reasonably
avoided; plus (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including without limitation, any costs or expenses incurred
by Landlord in (A) retaking possession of the Premises, including reasonable
attorney fees therefor, (B) maintaining or preserving the Premises after such
default, (C) preparing the Premises for reletting to a new tenant, including
repairs or necessary alterations to the Premises for such reletting, (D) leasing
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commissions, and (E) any other costs necessary or appropriate to relet the
Premises; plus (v) at Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
state law. Upon any such re-entry Landlord shall have the right to make any
reasonable repairs, alterations or modifications to the Premises, which Landlord
in its sole discretion deems reasonable and necessary. As used in Subsection
22(b)(i) the "worth at the time of award" is computed by allowing interest at
the rate of eighteen percent (18%) per year from the date of default. As used in
Subsections 22(b)(ii) and 22(b)(iii) the "worth at the time of award" is
computed by discounting such amounts at the discount rate of eight percent (8%)
per year.
Bankruptcy.
Assumption of Lease. If Tenant becomes a Debtor under Chapter 7 of the
Bankruptcy Code ("Code") or a petition for reorganization or adjustment of debts
is filed concerning Tenant under Chapters 11 or 13 of the Code, or a proceeding
is filed under Chapter 7 of the Code and is transferred to Chapters 11 or 13 of
the Code, the Trustee or Tenant, as Debtor and as Debtor-In-Possession, may not
elect to assume this Lease unless, at the time of such assumption, the Trustee
or Tenant has:
Cured all defaults under the Lease and paid all sums due and owing under
the Lease or provided Landlord with "Adequate Assurance" (as defined below)
that:(i) within ten (10) days from the date of such assumption, the Trustee or
Tenant will completely pay all sums due and owing under this Lease and
compensate Landlord for any actual pecuniary loss resulting from any existing
default or breach of this Lease, including without limitation, Landlord's
reasonable costs, expenses, accrued interest, and attorneys' fees incurred as a
result of the default or breach; (ii) within twenty (20) days from the date of
such assumption, the Trustee or Tenant will cure all non-monetary defaults and
breaches under this Lease, or, if the nature of such non-monetary defaults is
such that more than twenty (20) days are reasonably required for such cure, that
the Trustee or Tenant will commence to cure such non-monetary defaults within
twenty (20) days and thereafter diligently prosecute such cure to completion;
and (iii) the assumption will be subject to all of the provisions of this Lease.
For purposes of this Section, Landlord and Tenant acknowledge that, in the
context of a bankruptcy proceeding involving Tenant, at a minimum, "Adequate
Assurance" shall mean:(i) the Trustee or Tenant has and will continue to have
sufficient unencumbered assets after the payment of all secured obligations and
administrative expenses to assure Landlord that the Trustee or Tenant will have
sufficient funds to fulfill the obligations of Tenant under this Lease; (ii) the
Bankruptcy Court shall have entered an Order segregating sufficient cash payable
to Landlord and/or the Trustee or Tenant shall have granted a valid and
perfected first lien and security interest and/or mortgage in or on property of
Trustee or Tenant acceptable as to value and kind to Landlord, to secure to
Landlord the obligation of the Trustee or Tenant to cure the monetary and/or
non-monetary defaults and breaches under this Lease within the time periods set
forth above; and (iii) the Trustee or Tenant, at the very minimum, shall deposit
a sum equal to two (2) month's Minimum Monthly Rent to be held by Landlord
(without any allowance for interest thereon) to secure Tenant's future
performance under the Lease.
Assignment of Lease. If the Trustee or Tenant has assumed the Lease
pursuant to the provisions of this Section for the purpose of assigning Tenant's
interest hereunder to any other person or entity, such interest may be assigned
only after the Trustee, Tenant or the proposed assignee have complied with all
of the terms, covenants and conditions of this Lease, including, without
limitation, those with respect to Additional Rent. Landlord and Tenant
acknowledge that such terms, covenants and conditions are commercially
reasonable in the context of a bankruptcy proceeding of Tenant. Any person or
entity to which this Lease is assigned pursuant to the provisions of the Code
shall be deemed without further act or deed to have assumed all of the
obligations arising under this Lease on and after the date of such assignment.
Any such assignee shall upon request execute and deliver to Landlord an
instrument confirming such assignment.
Adequate Protection. Upon the filing of a petition by or against Tenant
under the Code, Tenant, as Debtor and as Debtor-In-Possession, and any Trustee
who may be appointed agree to adequately protect Landlord as follows:(i) to
perform each and every obligation of Tenant under this Lease until such time as
this Lease is either rejected or assumed by Order of the Bankruptcy Court; (ii)
to pay all monetary obligations required under this Lease, including without
limitation, the payment of Minimum Monthly Rent, Tenant's Share of Real Property
Taxes, Tenant's Share of Operating Costs and any other sums payable by Tenant to
Landlord under this Lease which is considered reasonable compensation for the
use and occupancy of the Premises; (iii) provide Landlord a minimum of thirty
(30) days prior written notice, unless a shorter period is agreed to in writing
by the parties, of any proceeding relating to any assumption of this Lease or
any intent to abandon the Premises, which abandonment shall be deemed a
rejection of this Lease; and (iv) to perform to the benefit of Landlord as
otherwise required under the Code. The failure of Tenant to comply with the
above shall result in an automatic rejection of this Lease.
Limitation of Actions. Any claim, demand, right or defense of any kind by Tenant
which is based upon or arises in connection with this Lease or the negotiations
prior to its execution, shall be barred unless Tenant commences an action
thereon, or interposes in a legal proceeding a defense by reason thereof, within
one (1) year after the date of the act or omission on which such claim, demand,
right or defense is based.
Limitation on Landlord's Liability. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of Landlord are made and intended not as personal covenants, undertakings and
agreements or for the purpose of binding Landlord personally or the assets of
Landlord except Landlord's interest in the Property, but are made and intended
for the purpose of binding only the Landlord's interest in the Property. No
personal liability or personal responsibility is assumed by, nor shall at any
time be asserted or enforceable against Landlord or its partners and their
respective heirs, legal representatives, successors and assigns on account of
this Lease or on account of any covenant, undertaking or agreement of Landlord
contained in this Lease.
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Signs. Tenant shall not have the right to place, construct or maintain any sign,
advertisement, awning, banner or other exterior decoration without Landlord's
consent. Any sign that Tenant has Landlord's consent to place, construct and
maintain shall comply with all laws, and Tenant shall obtain any approval
required by such laws. Landlord makes no representation with respect to Tenant's
ability to obtain such approval.
Landlord's Right to Enter the Premises. Landlord and its authorized
representatives shall have the right to enter the Premises at reasonable times
and upon reasonable prior notice (except in an emergency when no such notice
shall be required) for any of the following purposes:(i) to determine whether
the Premises are in good condition and whether Tenant is complying with its
obligations under this Lease, (ii) to do any maintenance; to make any
restoration to the Premises or the Building that Landlord has the right or the
obligation to perform, and to make any improvements to the Premises or the
Building that Landlord deems necessary, (iii) to serve, post or keep posted any
notices required or allowed under the provisions of this Lease, (iv) to post any
ordinary "For Sale" signs at any time during the Term and to post any ordinary
"For Lease" signs during the last ninety (90) days of the Term, and (v) to show
the Premises to prospective brokers, agents, purchasers, tenants or lenders, at
any time during the Term.
Landlord shall not be liable in any manner for any inconvenience,
annoyance, disturbance, loss of business, nuisance, or other damage arising out
of Landlord's entry on the Premises as provided in this Section, except damage
resulting from the grossly negligent or willful acts of Landlord or its
authorized representatives. Tenant shall not be entitled to an abatement or
reduction of Rent if Landlord exercises any right reserved in this Section.
Landlord shall conduct its activities on the Premises as allowed in this Section
in a reasonable manner so as to cause minimal inconvenience, annoyance or
disturbance to Tenant.
Subordination. This Lease is and shall be prior to any mortgage recorded after
the date of this Lease affecting the Property. If, however, a lender requires
that this Lease be subordinate to any mortgage, this Lease shall be subordinate
to that mortgage if Landlord first obtains from the lender a written agreement
that provides substantially the following:
"As long as Tenant performs its obligations under
this Lease, no foreclosure of, deed given in lieu
of foreclosure of, or sale under the mortgage, and
no steps or procedures taken under the mortgage,
shall affect Tenant's rights under this Lease. "
Tenant shall attorn to any purchaser at any foreclosure
sale, or to any grantee or transferee designated in any deed
given in lieu of foreclosure. Tenant shall execute the
written agreement and any other documents required by the
lender to accomplish the purposes of this Section.
Right to Estoppel Certificates. Tenant, within ten (10) days after notice from
Landlord, shall execute and deliver to Landlord, in recordable form, a
certificate stating that this Lease is unmodified and in full force and effect,
or in full force and effect as modified and stating the modifications. The
certificate shall also state the amount of Minimum Monthly Rent, the dates to
which Rent has been paid in advance, and the amount of any Prepaid Rent or
Security Deposit and such other matters as Landlord may reasonably request.
Failure to deliver the certificate within such ten (10) day period shall be
conclusive upon Tenant for the benefit of Landlord and any successor to
Landlord, that this Lease is in full force and effect and has not been modified
except as may be represented by Landlord requesting the certificate.
Transfer of Landlord's Interest. If Landlord sells or transfers the Property,
Landlord, on consummation of the sale or transfer, shall be released from any
liability thereafter accruing under this Lease if Landlord's successor has
assumed in writing, for the benefit of Tenant, Landlord's obligations under this
Lease. If any Security Deposit or Prepaid Rent has been paid by Tenant, Landlord
shall transfer such Security Deposit or Prepaid Rent to Landlord's successor and
on such transfer Landlord shall be discharged from any further liability with
respect to such Security Deposit or Prepaid Rent.
Attorneys' Fees. If either party shall bring any action for relief against the
other party, declaratory or otherwise, arising out of this Lease, including any
action by Landlord for the recovery of Rent or possession of the Premises, the
losing party shall pay the successful party a reasonable sum for attorneys' fees
which shall be deemed to have accrued on the commencement of such action and
shall be paid whether or not such action is prosecuted to judgment.
Surrender; Holding Over.
Surrender. On expiration or ten (10) days after termination of the Term,
Tenant shall surrender the Premises and all Tenant's improvements and
alterations to Landlord broom clean and in good condition. Tenant shall remove
all of its trade fixtures and personal property within the time period stated in
this Section. Tenant, at its cost, shall perform all restoration made necessary
by, and repair any damage to the Premises caused by, the removal of its trade
fixtures, personal property and signs to Landlord's reasonable satisfaction
within the time period stated in this Section. Landlord may, at its election,
retain or dispose of in any manner any of Tenant's trade fixtures or personal
property that Tenant does not remove from the Premises on expiration or within
ten (10) days after termination of the Term as allowed or required by the
provisions of this Lease by giving ten (10) days notice to Tenant. Title to any
such trade fixtures and personal property that Landlord elects to retain or
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dispose of on expiration of such ten (10) day period shall vest in Landlord.
Tenant waives all claims against Landlord for any damage to Tenant resulting
from Landlord's retention or disposition of any such trade fixtures and personal
property. Tenant shall be liable to Landlord for Landlord's costs for storing,
removing and disposing of Tenant's trade fixtures and personal property. If
Tenant fails to surrender the Premises to Landlord on expiration or ten (10)
days after termination of the Term as required by this Section, Tenant shall pay
Landlord Rent in an amount equal to twice the Minimum Monthly Rent applicable
for the month immediately prior to the expiration or termination of the Term for
the entire time Tenant thus remains in possession and Tenant shall hold Landlord
harmless from all damages resulting from Tenant's failure to timely surrender
the Premises, including without limitation, (i) any Rent payable by, or any
damages claimed by, any prospective tenant of any part or all of the Premises,
and (ii) Landlord's damages resulting from such prospective tenant rescinding or
refusing to enter into the prospective lease of part or all of the Premises by
reason of Tenant's failure to timely surrender the Premises. If Tenant, without
Landlord's prior consent, remains in possession of the Premises after expiration
or termination of the Term, or after the date in any notice given by Landlord to
Tenant terminating this Lease, such possession by Tenant shall be deemed to be a
tenancy at sufferance terminable at any time by either party.
Holding Over with Landlord's Consent. If Tenant, with Landlord's prior
consent, remains in possession of the Premises after expiration or termination
of the Term, or after the date in any notice given by Landlord to Tenant
terminating this Lease, such possession by Tenant shall be deemed to be a
month-to-month tenancy terminable by Landlord by a notice given to Tenant at
least twenty (20) days prior to the end of any such monthly period or by Tenant
by a notice given to Landlord at least thirty (30) days prior to the end of any
such monthly period. During such month-to-month tenancy, Tenant shall pay Rent
in the amount then agreed to in writing by Landlord and Tenant. All provisions
of this Lease, except those pertaining to term, shall apply to the
month-to-month tenancy.
Agency Disclosure; Broker.
Agency Disclosure. Martin Smith Inc hereby discloses that it represents the
Landlord in this transaction.
Broker. Landlord and Tenant each represent to the other that neither is
represented by any broker, agent or finder with respect to this Lease in any
manner, except the Broker(s). The commission due to the Broker(s) shall be paid
by Landlord pursuant to a separate agreement. Each party agrees to indemnify and
hold the other party harmless from and against any and all liability, costs,
damages, causes of action or other proceedings instituted by any broker, agent
or finder, licensed or otherwise, claiming through, under or by reason of the
conduct of the indemnifying party in any manner whatsoever in connection with
this Lease. If Tenant engages a broker, agent or finder to represent Tenant in
connection with any renewal of this Lease, then the commission or any fee of
such broker, agent or finder shall be paid by Tenant.
Interest on Unpaid Rent. In addition to the Late Charge as provided in Section
5(b), Rent not paid when due shall bear interest from the date due until paid at
the rate of eighteen percent (18%) per year, or the maximum legal rate of
interest, whichever is less.
Consent. Whenever the consent of either Landlord or Tenant is required under
this Lease, such consent shall not be effective unless given in writing and
shall not be unreasonably withheld or delayed, provided, however, that such
consent may be conditioned as provided in this Lease.
Parking. Landlord grants Tenant the right to use the number of parking stalls
provided for in Section 1 of this Lease. Each parking stall provided to Tenant
shall be unassigned, except as may be expressly provided otherwise in Section 1
of this Lease. Tenant's parking privilege under this Lease shall be subject to
such rules and regulations as Landlord and/or Landlord's parking operator may
adopt from time to time. Landlord retains the right to alter such rules and
regulations and to relocate within a reasonable distance, or to reconfigure, the
parking area in which Tenants parking stall(s) are located, with reasonable
notice to Tenant, but Landlord shall at all times continue to provide the
designated number of parking stall(s) to Tenant. Tenant shall pay, upon demand
by Landlord, Landlord's costs incurred to stencil any reserved parking stall(s)
provided to Tenant under this Lease.
Definitions. As used in this Lease, the following words and phrases, whether or
not capitalized, shall have the following meanings:
"Additional Rent" means pass-throughs of increases in Operating Costs and
Taxes, as defined in this Lease, and other monetary sums to be paid by Tenant to
Landlord under the provisions of this Lease.
"Alteration" means any addition or change to, or modification of, the
Premises made by Tenant, including without limitation, fixtures, but excluding
trade fixtures as defined in this Section.
"Authorized representatives" means any officer, agent, employee,
independent contractor or invitee of either party.
"Award" means all compensation, sums or anything of value awarded, paid or
received on a total or partial condemnation.
"Common Areas" means all areas outside the Premises and within the Building
or on the Land that are provided and designated by Landlord from time to time
for the general, non-exclusive use of Landlord, Tenant and other tenants of the
Building and their authorized representatives, including without limitation,
common
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entrances, lobbies, corridors, stairways and stairwells, elevators,
escalators, public restrooms and other public portions of the Building.
"Condemnation" means the exercise of any governmental power, whether by
legal proceedings or otherwise, by a condemnor and a voluntary sale or transfer
by Landlord to any condemnor, either under threat of condemnation or while legal
proceedings for condemnation are pending.
"Condemnor" means any public or quasi-public authority or entity having the
power of condemnation.
"Damage" means any injury, deterioration, or loss to a person, property,
the Premises or the Building caused by another person's acts or omissions or by
Acts of God. Damage includes death.
"Damages" means a monetary compensation or indemnity that can be recovered
in the courts by any person who has suffered damage to his person, property or
rights through another's acts or omissions.
"Date of taking" means the date the condemnor has the right to possession
of the property being condemned.
"Encumbrance" means any mortgage, deed of trust or other written security
device or agreement affecting the Premises, and the note or other obligation
secured by it, that constitutes security for the payment of a debt or
performance of an obligation.
"Expiration" means the coming to an end of the time specified in the Lease
as its duration, including any extension of the Term.
"Force majeure" means strikes, lockouts, labor disputes, shortages of labor
or materials, fire or other casualty, Acts of God or any other cause beyond the
reasonable control of a party.
"Good condition" means the good physical condition of the Premises and each
portion of the Premises, including without limitation, all of the Tenant
Improvements, Tenant's alterations, Tenant's trade fixtures, Tenant's Personal
Property, all as defined in this Section, signs, walls, interior partitions,
windows, window coverings, glass, doors, carpeting and resilient flooring,
ceiling tiles, plumbing fixtures and lighting fixtures, all of which shall be in
conformity with building standard finishes, ordinary wear and tear, damage by
fire or other casualty and taking by condemnation excepted.
"Hazardous substances" means any industrial waste, toxic waste, chemical
contaminant or other substance considered hazardous, toxic or lethal to persons
or property or designated as hazardous, toxic or lethal to persons or property
under any laws, including without limitation, asbestos material or materials
containing asbestos.
"Hold harmless" means to defend and indemnify from all liability, losses,
penalties, damages as defined in this Section, costs, expenses (including
without limitation, attorneys' fees), causes of action, claims or judgments
arising out of or related to any damage, as defined in this Section, to any
person or property.
"Law" means any constitution, statute, ordinance, regulation, rule,
resolution, judicial decision, administrative order or other requirement of any
federal, state, county, municipal or other governmental agency or authority
having jurisdiction over the parties or the Property, or both, in effect either
at the time of execution of this Lease or at any time during the Term, including
without limitation, any regulation or order of a quasi-official entity or body
(e.g., board of fire examiners or public utilities) and any legally effective
conditions, covenants or restrictions affecting the Property.
"Lender" means the mortgagee, beneficiary, secured party or other holder of
an encumbrance, as defined in this Section.
"Lien" means a charge imposed on the Premises by someone other than
Landlord, by which the Premises are made security for the performance of an act.
"Maintenance" means repairs, replacement, repainting and cleaning.
"Mortgage" means any deed of trust, mortgage or other written security
device or agreement affecting the Premises, and the note or other obligation
secured by it, that constitutes security for the payment of a debt or
performance of an obligation.
"Mortgagee" means the beneficiary under a deed of trust or mortgagee under
a mortgage.
"Mortgagor" means the grantor or trustor under a deed of trust or mortgagor
under a mortgage.
"Operating Costs" means all costs of any kind incurred by Landlord in
operating, cleaning, equipping, protecting, lighting, repairing, replacing,
heating, air-conditioning, maintaining and insuring the Property. Operating
Costs shall include, without limitation, the following costs:(i) salaries,
wages, bonuses and other compensation (including hospitalization, medical,
surgical, retirement plan, pension plan, union dues, life insurance, including
group life insurance, welfare and other fringe benefits, and vacation, holidays
and other paid absence benefits) relating to employees of Landlord or its agents
directly engaged in the operation, repair, or maintenance of the Property; (ii)
payroll, social security, workers' compensation, unemployment and similar
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taxes with respect to such employees of Landlord or its authorized
representatives, and the cost of providing disability or other benefits imposed
by law or otherwise, with respect to such employees; (iii) uniforms (including
the cleaning, replacement and pressing thereof) provided to such employees; (iv)
premiums and other charges incurred by Landlord with respect to fire,
earthquake, other casualty, all risk, rent loss and liability insurance, any
other insurance as is deemed necessary or advisable in the reasonable judgment
of Landlord and, after the Base Year, costs of repairing an insured casualty to
the extent of the deductible amount under the applicable insurance policy; (v)
water charges and sewer rents or fees; (vi) license, permit and inspection fees;
(vii) sales, use and excise taxes on goods and services purchased by Landlord in
connection with the operation, maintenance or repair of the Property and
Building systems and equipment; (viii) telephone, facsimile, messenger, express
delivery service, postage, stationery supplies and other expenses incurred in
connection with the operation, management, maintenance, or repair of the
Property; (ix) property management fees and expenses; (x) repairs to and
physical maintenance of the Property, including building systems and
appurtenances thereto and normal repair and replacement of worn-out equipment,
facilities and installations, but excluding the replacement of major building
systems (except to the extent provided in (xvi) and (xvii) below); (xi)
janitorial, window cleaning, security, extermination, water treatment, rubbish
removal, plumbing and other services and inspection or service contracts for
elevator, electrical, HVAC, mechanical and other building equipment and systems
or as may otherwise be necessary or proper for the operation or maintenance of
the Property; (xii) supplies, tools, materials, and equipment used in connection
with the operation, maintenance or repair of the Property; (xiii) accounting,
legal and other professional fees and expenses; (xiv) painting the exterior or
the public or common areas of the Building and the cost of maintaining the
sidewalks, landscaping and other common areas of the Property; (xv) all costs
and expenses for electricity, chilled water, air conditioning, water for
heating, gas, fuel, steam, heat, lights, power and other energy related
utilities required in connection with the operation, maintenance and repair of
the Property; (xvi) the cost of any improvements which Landlord elects to
capitalize made by Landlord to the Property during the Term in compliance with
the requirements of any laws or regulation or insurance requirement with which
the Property was not required to comply during the Base Year, as reasonably
amortized by Landlord, with interest on the unamortized balance at the rate of
twelve percent (12%) per year, or the maximum legal rate of interest, whichever
is less; (xvii) the cost of any improvements which Landlord elects to capitalize
made by Landlord to the Property during the term of this Lease for the
protection of the health and safety of the occupants of the Property or that are
intended to reduce other Operating Costs, as reasonably amortized by Landlord,
with interest on the unamortized balance at the rate of twelve percent (12%) per
year, or the maximum legal rate of interest, whichever is less; (xviii) a
reasonable reserve for repair or replacement of equipment used in the
maintenance or operation of the Property; (xix) the cost of furniture,
draperies, carpeting, landscaping and other customary and ordinary items of
personal property (excluding paintings, sculptures and other works of art)
provided by Landlord for use in common areas of the Building or in the Building
office (to the extent that such Building office is dedicated to the operation
and management of the Property), such costs to be amortized over the useful life
thereof; (xx) any such expenses and costs resulting from substitution of work,
labor, material or services in lieu of any of the above itemizations, or for any
such additional work, labor, services or material resulting from compliance with
any laws or orders applicable to the Property; (xxi) Building office rent or
rental value; and (xxii) all other costs which, in accordance with generally
accepted accounting principles used by Landlord, as applied to the maintenance
and operation of office and/or retail buildings, are properly chargeable to the
operation and maintenance of the Property.
Operating Costs shall not include the following:(i) depreciation on the
Building; (ii) debt service; (iii) capital improvements, except as otherwise
provided in clauses (xvi) and (xvii) above, (iv) rental under any ground or
underlying leases; (v) Real Property Taxes, (vi) attorneys' fees and expenses
incurred in connection with lease negotiations with prospective tenants; (vii)
the cost of tenant improvements; (viii) advertising expenses; or (ix) real
estate broker's or other leasing commissions.
"Parties" means Landlord and Tenant.
"Party" means Landlord or Tenant.
"Person" means one or more human beings, or legal entities or other
artificial persons, including without limitation, partnerships, corporations,
trusts, estates, associations and any combination of human beings and legal
entities.
"Property" means the Premises, Building, Project, and Land.
"Provision" means any term, agreement, covenant, condition, clause,
qualification, restriction, reservation, or other stipulation in the Lease that
defines or otherwise controls, establishes, or limits the performance required
or permitted by either party.
"Real Property Taxes" means any form of tax, assessment, general
assessment, special assessment, lien, levy, bond obligation, license fee,
license tax, tax or excise on rent, or any other levy, charge or expense,
together with any statutory interest thereon, (individually and collectively,
the "Impositions"), now or hereafter imposed or required by any authority having
the direct or indirect power to tax, including any federal, state, county or
city government or any school, agricultural, lighting, drainage or other
improvement or special assessment district thereof, (individually and
collectively, the "Governmental Agencies") on any interest of Landlord or Tenant
or both (including any legal or equitable interest of Landlord or its mortgagee,
if any) in the Premises or the Property, including without limitation:
any Impositions upon, allocable to or measured by the area of the Premises
or the Property, or the rental payable hereunder, including without limitation,
any gross income tax or excise tax levied by any Governmental Agencies with
respect to the receipt of such rental; or
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any Impositions upon or with respect to the possession, leasing, operation,
management, maintenance, alteration, repair or use or occupancy by Tenant of the
Premises or any portion thereof; or
any Impositions upon or with respect to the building equipment and personal
property used in connection with the operation and maintenance of the Property
or upon or with respect to the furniture, fixtures and decorations in the common
areas of the Property.
any Impositions upon this Lease or this transaction or any document to
which Tenant is a party creating or transferring an interest or an estate in the
Premises; or
any Impositions by Governmental Agencies (whether or not such Impositions
constitute tax receipts) in substitution, partially or totally, of any
impositions now or previously included within the definition of real property
taxes, including those calculated to increase tax increments to Governmental
Agencies and to pay for such services as fire protection, water drainage,
street, sidewalk and road maintenance, refuse removal or other governmental
services formerly provided without charge to property owners or occupants; or
any and all costs, including without limitation, the fees of attorneys, tax
consultants and experts, incurred by Landlord should Landlord elect to negotiate
or contest the amount of such real property taxes in formal or informal
proceedings before the Governmental Agency imposing such real property taxes;
provided, however, that real property taxes shall in no event include Landlord's
general income, inheritance, estate, gift or franchise taxes.
"Rent" means Minimum Monthly Rent, as adjusted from time to time under this
Lease, Additional Rent, Prepaid Rent, Security Deposit, all as defined in this
Section, payments of Tenant's Share of increases in Real Property Taxes and
Operating Costs, insurance, utilities and other charges payable by Tenant to
Landlord.
"Rentable square feet of space" as to the Premises or the Building, as the
case may be, means the number of usable square feet of space times the
applicable R/U Ratio(s) as defined in this Section.
"Restoration" means the reconstruction, rebuilding, rehabilitation and
repairs that are necessary to return damaged portions of the Premises and the
Building to substantially the same physical condition as they were in
immediately before the damage.
"R/U Ratio" means the rentable area of a floor of the Building divided by
the usable area of such floor, both of which shall be computed in accordance
with American National Standard Z65.1-1996 Method of Measuring Floor Space in
Office Buildings as published by the Building Owners and Managers Association,
as amended from time to time.
"Substantially complete" or "substantially completed" or "substantial
completion" means the completion of Landlord's construction obligation, subject
to completion or correction of "punch list" items, that is, minor items of
incomplete or defective work or materials or mechanical maladjustments that are
of such a nature that they do not materially interfere with or impair Tenant's
use of the Premises for the Permitted Use.
"Successor" means assignee, transferee, personal representative, heir, or
other person or entity succeeding lawfully, and pursuant to the provisions of
this Lease, to the rights or obligations of either party.
"Tenant Improvements" means (i) the improvements and alterations set forth
in Exhibit C, (ii) window coverings, lighting fixtures, plumbing fixtures,
cabinetry and other fixtures installed by either Landlord or Tenant at any time
during the Term, and (iii) any improvements and alterations of the Premises made
for Tenant by Landlord at any time during the Term.
"Tenant's personal property" means Tenant's equipment, furniture, and
movable property placed in the Premises by Tenant.
"Tenant's trade fixtures" means any property attached to the Premises by
Tenant.
"Termination" means the ending of the Term for any reason before
expiration, as defined in this Section.
"Work" means the construction of any improvements or alterations or the
performance of any repairs done by Tenant or caused to be done by Tenant on the
Premises as permitted by this Lease.
Miscellaneous Provisions.
Entire Agreement. This Lease sets forth the entire agreement of the parties
as to the subject matter hereof and supersedes all prior discussions and
understandings between them. This Lease may not be amended or rescinded in any
manner except by an instrument in writing signed by a duly authorized officer or
representative of each party hereto.
Governing Law. This Lease shall be governed by, and construed and enforced
in accordance with, the laws of the State of Washington.
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Severability. Should any of the provisions of this Lease be found to be
invalid, illegal or unenforceable by any court of competent jurisdiction, such
provision shall be stricken and the remainder of this Lease shall nonetheless
remain in full force and effect unless striking such provision shall materially
alter the intention of the parties.
Jurisdiction. In the event any action is brought to enforce any of the
provisions of this Lease, the parties agree to be subject to exclusive in
personam jurisdiction in the Superior Court, King County, for the State of
Washington or in the United States District Court for the Western District of
Washington and agree that in any such action venue shall lie exclusively at
Seattle, Washington.
Waiver. No waiver of any right under this Lease shall be effective unless
contained in a writing signed by a duly authorized officer or representative of
the party sought to be charged with the waiver and no waiver of any right
arising from any breach or failure to perform shall be deemed to be a waiver of
any future right or of any other right arising under this Lease.
Captions. Section captions contained in this Lease are included for
convenience only and form no part of the agreement between the parties.
Notices. All notices or requests required or permitted under this Lease
shall be in writing. If given by Landlord such notices or requests may be
personally delivered or sent by certified mail, return receipt requested,
postage prepaid. If given by Tenant such notices or requests shall be sent by
certified mail, return receipt requested, postage prepaid. Such notices or
requests shall be deemed given when so delivered or mailed, irrespective of
whether such notice or request is actually received by the addressee. All
notices or requests to Landlord shall be sent to Landlord at Landlord's Address
for Notice and all notices or requests to Tenant shall be sent to Tenant at
Tenant's Address for Notice. Either party may change the address to which
notices shall be sent by notice to the other party.
Binding Effect. Subject to the provisions of Section 20 captioned
"Assignment and Subletting", this Lease shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns. No
permitted assignment of this Lease or Tenant's rights hereunder shall be
effective against Landlord unless and until an executed counterpart of the
instrument of assignment shall have been delivered to Landlord and Landlord
shall have been furnished with the name and address of the assignee. The term
"Tenant" shall be deemed to include the assignee under any such permitted
assignment.
Effectiveness. This Lease shall not be binding or effective until properly
executed and delivered by Landlord and Tenant.
Gender and Number. As used in this Lease, the masculine shall include the
feminine and neuter, the feminine shall include the masculine and neuter, the
neuter shall include the masculine and feminine, the singular shall include the
plural and the plural shall include the singular, as the context may require.
Time of the Essence. Time is of the essence in the performance of all
covenants and conditions in this Lease for which time is a factor.
Dated the date first above written.
Landlord: Tenant:
The City of Seattle, a Washington Microvision, Inc., a Washington
municipal corporation corporation
By__________________________________ By_____________________________________
Dwight D. Dively
Director Its____________________________________
Executive Services Department
By_____________________________________
Its____________________________________
This Lease has been prepared for submission to you and your attorney. Martin
Smith Inc is not authorized to give legal or tax advice. Neither Landlord nor
Martin Smith Inc makes any representations or recommendations as to the legal
sufficiency, legal effect or tax consequences of this document or any
transaction relating thereto. These are questions for your attorney with whom
you should consult before signing the document to determine whether your legal
rights are adequately protected.
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EXHIBIT A
LEGAL DESCRIPTION
[Omitted]
20
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EXHIBIT B
FLOOR PLAN
[Omitted]
21
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EXHIBIT C
WORK LETTER
This Work Letter is made and entered into this 1st day of December 1997 by
and between The City of Seattle, a Washington municipal corporation
("Landlord"), and Microvision, Inc., a Washington corporation ("Tenant").
RECITALS: Landlord and Tenant have entered into a Lease dated of even date
herewith covering certain Premises designated as Suite 110 in Building A of the
Park 90/5 complex located in Seattle, Washington (the "Lease"). The Lease
contemplates the construction by Tenant of certain improvements to the Premises.
Landlord and Tenant desire to set forth their agreement as to construction of
such improvements in writing and hereby agree as follows:
The Work. Under the Lease, Tenant has agreed to accept the Premises "AS IS,"
without any obligations for the performance of improvements or other work by
Landlord, and Tenant desires to perform certain improvements thereto (the
"Work"). Such Work shall be in accordance with the provisions of this Work
Letter, and to the extent not expressly inconsistent herewith, in accordance
with the provisions of the Lease. Performance of the Work shall not serve to
abate or extend the time for the commencement of Rent under the Lease, except to
the extent Landlord delays approvals beyond the times permitted.
Cost of the Work. Except as provided hereinafter, Tenant shall pay all costs
(the "Cost of the Work") associated with the Work whatsoever, including without
limitation, all permits, inspection fees, fees of space planners, architects,
engineers, and contractors, utility connections, the cost of all labor and
materials, bonds, insurance, and any structural or mechanical work, additional
HVAC equipment or sprinkler heads, or modifications to any building mechanical,
electrical, plumbing or other systems and equipment or relocation of any
existing sprinkler heads, either within or outside the Premises required as a
result of the layout, design, or construction of the Work.
Space Plan and Working Drawings. Tenant shall submit a "Space Plan and Working
Drawings" to Landlord for review and approval prior to commencement of the Work.
Change Orders. No changes, modifications, alterations or additions to the
approved Space Plan or Working Drawings may be made without the prior written
consent of the Landlord after written request therefor by Tenant. In the event
that the Premises are not constructed in accordance with said approved Space
Plan and Working Drawings, then Tenant shall not be permitted to occupy the
Premises until the Premises reasonably comply in all respects with said approved
Space Plan and Working Drawings; in such case, the Rent shall nevertheless
commence to accrue and be payable as otherwise provided in the Lease.
Compliance. Tenant's Work shall comply in all respects with the following: (a)
the Building Code of the City and State in which the Building is located and
State, County, City or other laws, codes, ordinances and regulations, as each
may apply according to the rulings of the controlling public official, agent or
other such person, (b) applicable standards of the National Board of Fire
Underwriters and National Electrical Code, and (c) building material
manufacturer's specifications.
Performance.
Tenant's Work shall be performed in a thoroughly safe, first-class and
workmanlike manner in conformity with the approved Space Plan and Working
Drawings, and shall be in good and usable condition at the date of completion.
Tenant shall be required to obtain and pay for all necessary permits and/or
fees with respect to Tenant's Work, and the same shall be shown to Landlord
prior to commencement of the Work.
Landlord shall have the right to require Tenant to furnish bonds or other
security in form and amount reasonably satisfactory to Landlord for the prompt
and faithful performance and payment for Tenant's Work.
If contemplated or permitted under the statutes of the State in which the
Property is located, within ten (10) days after completion of construction of
Tenant's Work, Tenant shall execute and file a Notice of Completion with respect
thereto and furnish a copy thereof to Landlord upon recordation, failing which,
Landlord may itself execute and file the same on behalf of Tenant as Tenant's
agent for such purpose.
Copies of "as built" drawings shall be provided to Landlord no later than
thirty (30) days after completion of the Work.
Landlord's approval of Tenant's plans and specifications, and Landlord's
recommendations or approvals concerning contractors, subcontractors, space
planners, engineers or architects, shall not be deemed a warranty as to the
quality or adequacy of the Work, or the design thereof, or of its compliance
with Laws, codes and other legal requirements.
Landlord shall not be responsible for any disturbance or deficiency created
in the air conditioning or other mechanical, electrical or structural facilities
within the Property or Premises as a result of the Work.
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If such disturbances or deficiencies result, Tenant shall correct the same and
restore the services to Landlord's reasonable satisfaction, within a reasonable
time.
If performance of the Work shall require that additional services or
facilities (including without limitation, extra or after-hours elevator usage or
cleaning services) be provided, Tenant shall pay Landlord's reasonable charges
therefor.
Tenant's contractors shall comply with the rules of the Property and
Landlord's requirements respecting the hours of availability of elevators and
manner of handling materials, equipment and debris. Demolition must be performed
after 6:00 p.m. Monday through Friday or on weekends. Delivery of materials,
equipment and removal of debris must be arranged to avoid any inconvenience or
annoyance to other occupants. The Work and all cleaning in the Premises must be
controlled to prevent dirt, dust or other matter from infiltrating into adjacent
tenant or mechanical areas.
Insurance. All contractors and sub-contractors shall carry Worker's Compensation
Insurance covering all of their respective employees in the statutory amounts,
Employer's Liability Insurance in the amount of at least $500,000 per
occurrence, and comprehensive general liability insurance of at least $3,000,000
combined single limit for bodily injury, death, or property damage: and the
policies therefor shall cover Landlord and Tenant, as additional insureds, as
well as the contractor or subcontractor. Tenant shall carry builder's risk
insurance coverage respecting the construction and improvements to be made by
Tenant, in the amount of the anticipated cost of construction of the Work (or
any guaranteed maximum price). All insurance carriers hereunder shall be rated
at least A and X in Best's Insurance Guide. Certificates for all such insurance
shall be delivered to Landlord before the construction is commenced or
contractor's equipment is moved onto the Property. All policies of insurance
must require that the carrier give Landlord twenty (20) days' advance written
notice of any cancellation or reduction in the amounts of insurance. In the
event that during the course of Tenant's Work any damage shall occur to the
construction and improvements being made by Tenant, then Tenant shall repair the
same at Tenant's cost.
Asbestos. If the Property was constructed at a time when asbestos was commonly
used in construction, Tenant acknowledges that asbestos-containing materials
("ACM") may be present at the Property, and that airborne asbestos fibers may
involve a potential health hazard unless proper procedures are followed. In such
case, before commencing the Work, Tenant and its contractor shall consult with
Landlord and Landlord's asbestos consultant concerning appropriate procedures to
be followed. Landlord shall, at Tenant's expense, undertake any necessary
initial asbestos-related work, before Tenant commences the Work. During
performance of the Work, Tenant shall require that its contractor comply with
all laws, rules, regulations and other governmental requirements, as well as all
directives of Landlord's asbestos consultant, respecting ACM. Tenant hereby
irrevocably appoints Landlord and Landlord's asbestos consultant as Tenant's
attorney-in-fact for purposes of supervising and directing any asbestos-related
aspects of the Work (but such appointment shall not relieve Tenant from its
obligations hereunder, nor impose any affirmative requirement on Landlord to
provide such supervision or direction).
Liens. Tenant shall pay, or cause to be paid, all costs of labor, services
and/or materials supplied in connection with any Work. Tenant shall keep the
Property free and clear of all mechanics' liens and other liens resulting from
any Work. Tenant shall have the right to contest the correctness or validity of
any such lien if, immediately on demand by Landlord, it procures and records a
lien release bond issued by a responsible corporate surety in an amount equal to
one and one-half times the amount of the claim of lien or furnishes other
security for payment of such lien satisfactory to Landlord. Tenant shall
promptly pay or cause to be paid all sums awarded to the claimant on its suit,
and, in any event, before any execution is issued with respect to any judgment
obtained by the claimant in its suit or before such judgment becomes a lien on
the Property, whichever is earlier. If Tenant shall be in default under this
Section, by failing to provide security for or satisfaction of any mechanic's or
other liens, then Landlord may (but shall not be obligated to), in addition to
any other rights or remedies it may have, discharge said lien by (i) paying the
claimant an amount sufficient to settle and discharge the claim, (ii) procuring
and recording a lien release bond, or (iii) taking such other action as Landlord
shall deem necessary or advisable, and, in any such event, Tenant shall pay as
Additional Rent, on Landlord's demand, all costs (including reasonable attorney
fees) incurred by Landlord in settling and discharging such lien together with
interest thereon in accordance with Section 39 of the Lease, from the date of
Landlord's payment of said costs. Landlord's payment of such costs shall not
waive any default of Tenant under this Section. Nothing contained herein shall
authorize Tenant to do any act which shall subject Landlord's title to the
Property or Premises to any liens or encumbrances whether claimed by operation
of law or express or implied contract. Any claim to a lien or encumbrance upon
the Property or Premises arising in connection with the Work shall be null and
void, or, at Landlord's option, shall attach only against Tenant's interest in
the Premises and shall in all respects be subordinate to Landlord's title to the
Property and Premises.
Indemnity. Tenant shall indemnify, defend and hold harmless Landlord (and
Landlord's principals, partners, agents, trustees, beneficiaries. officers,
employees and affiliates) from and against any claims, demands, losses, damages,
injuries, liabilities, expenses, judgments, liens, encumbrances, orders, and
awards, together with attorneys' fees and litigation expenses arising out of or
in connection with the Work, or Tenant's failure to comply with the provisions
hereof, or any failure by Tenant's contractors, subcontractors or their
employees to comply with the provisions hereof, except to the extent caused by
Landlord's intentional or negligent acts.
Taxes. Tenant shall pay prior to delinquency all taxes, charges or other
governmental impositions (including without limitation, any real estate taxes or
assessments, sales tax or value added tax)
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assessed against or levied upon Tenant's fixtures, furnishings, equipment and
personal property located in the Premises and the Work to the Premises under
this Agreement. Whenever possible, Tenant shall cause all such items to be
assessed and billed separately from the property of Landlord. In the event any
such items shall be assessed and billed with the property of Landlord, Tenant
shall pay its share of such taxes, charges or other governmental impositions to
Landlord within thirty (30) days after Landlord delivers a statement and a copy
of the assessment or other documentation showing the amount of such impositions
applicable to Tenant.
INCORPORATED INTO LEASE; DEFAULT. THE PARTIES AGREE THAT THE PROVISIONS OF THIS
Work Letter ARE HEREBY INCORPORATED BY THIS REFERENCE INTO THE LEASE FULLY AS
THOUGH SET FORTH THEREIN. In the event of any express inconsistencies between
the Lease and this Work Letter, the latter shall govern and control. If Tenant
shall default under this Work Letter, Landlord may order that all Work being
performed in the Premises be stopped immediately, and that no further deliveries
to the Premises be made, until such default is cured, without limitation as to
Landlord's other remedies. Any amounts payable by Tenant to Landlord hereunder
shall be paid as Additional Rent under the Lease. Any default by the other party
hereunder shall constitute a default under the Lease and shall be subject to the
remedies and other provisions applicable thereto under the Lease.
Dated the date first above written.
Landlord: Tenant:
The City of Seattle, a Washington Microvision, Inc., a Washington
municipal corporation corporation
By________________________________________ By_________________________________
Dwight D. Dively
Director Its________________________________
Executive Services Department
By_________________________________
Its_______________________________
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RIDER
This Rider is part of that certain Lease dated December 1, 1997 (the "Lease") by
and between The City of Seattle, a Washington municipal corporation
("Landlord"), and Microvision, Inc., a Washington corporation ("Tenant"),
covering certain Premises designated as Suite 110 in Building A of the Park 90/5
complex located in Seattle, Washington. Landlord and Tenant further agree as
follows:
39. Option to Extend. Landlord hereby grants to Tenant the right, at its option,
to extend the Term for one (1) period of two (2) years commencing January 15,
1999 and ending January 14, 2001 (the "Extended Term") upon each and all of the
following terms and conditions:
(a) Tenant gives to Landlord, and Landlord actually receives, on or before
August 14, 1998, a written notice of the exercise of the option to extend the
Term (the "Notice of Exercise"), time being of the essence. If the Notice of
Exercise is not so given and received, this option shall automatically expire
and be of no further force and effect.
(b) Tenant is not in default under this Lease either at the time the Notice
of Exercise is given and received or as of the date that the Extended Term would
commence.
(c) All the terms and conditions of this Lease shall apply, except where
specifically modified by this option.
(d) Tenant shall provide Landlord, simultaneously with the Notice of
Exercise, Tenant's most recent audited and monthly unaudited financial
statements, bank references, Dun & Bradstreet report, and a balance sheet
certified as being true by Tenant's chief financial officer. If, in Landlord's
reasonable discretion, Landlord determines from any of the foregoing material
that the creditworthiness of Tenant is materially less than the creditworthiness
of Tenant as of the date of execution of this Lease, Landlord may reject
Tenant's exercise of this Option to Extend by written notice to Tenant, and upon
such rejection this Option to Extend shall become null and void and be of no
further force or effect, and this Lease shall expire on January 14, 1999.
(e) The monthly Base Rent payable during the Extended Term shall be
mutually agreed upon between Landlord and Tenant based on the then prevailing
market rate rental for comparable space and term in the Building or other
comparable buildings located in the area of the Property for present commitments
to lease space at the time the Extended Term would commence, within sixty (60)
days after Tenant gives the Notice of Exercise, and, if not agreed upon within
such period, as it may be extended by mutual agreement of the parties. In no
event, however, shall the monthly Base Rent be less than the Base Rent paid
during the last year of the initial Lease Term. In the event Landlord and Tenant
are unable to negotiate a mutually acceptable market rental rate for the
Extended Term within such sixty (60) day period, this Option to Extend shall
become null and void and be of no further force or effect, and this Lease shall
expire on January 14, 1999.
(f) Tenant agrees that the amount of the Security Deposit payable by Tenant
for the Extended Term shall be increased to an amount equal to the first monthly
installment of Base Rent payable by Tenant in the first month of the Extended
Term.
40. Nondiscrimination and Affirmative Action. Tenant shall comply with all
federal, state, and local laws and ordinances prohibiting discrimination with
regard to race, color, national origin, ancestry, creed, religion, political
ideology, sex, sexual orientation, marital status, or the presence of any
sensory, mental or physical handicap.
Dated the date first above written.
Landlord: Tenant:
The City of Seattle, a Washington Microvision, Inc., a Washington
municipal corporation corporation
By:____________________________________ By:________________________________
Dwight D. Dively
Director, Its:_______________________________
Executive Services Department
By:________________________________
Its:_______________________________
25
EMPLOYMENT AGREEMENT
FOR
RICHARD A. RAISIG
AGREEMENT, effective as of October 1, 1997 by and between MICROVISION,
INC., a Company of the State of Washington, having its principal place of
business at 2203 Airport Way South, Suite 100, Seattle Washington 98134,
hereinafter referred to as the "Company") and Richard A. Raisig (hereinafter
called "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to continue to retain the services of the
Executive to work for the Company as its Chief Financial Officer and Vice
President, Operations (herein referred to as the "Position") upon the terms and
conditions hereinafter set forth; and
WHEREAS, in consideration for continued service in the Position, the
Executive has agreed to enter into and be bound by the terms of this Agreement.
NOW THEREFORE, in consideration of the foregoing and mutual covenants
herein contained, the parties agree as follows:
1. EMPLOYMENT
1.1 The Company hereby employs Executive to serve in the Position and
Executive hereby accepts such employment as of the effective date of
this Agreement.
1.2 Executive will devote his best efforts and full time and attention to
performing all duties assigned or delegated to him by the Board of
Directors of the Company consistent with the Position.
1.3 The term of employment shall end on December 31, 2000, unless this
Agreement is extended by the parties.
2. COMPENSATION - SALARY AND BENEFITS
2.1 For his services hereunder, Executive shall receive an annual salary
of $130,000, payable in regular installments under the payroll of the
Company.
2.2 The level of Executive's salary shall be reviewed by the Board of
Directors on an annual basis and upon such review, may remain the same
or be increased in such amount as the Board of Directors, in its
discretion, based upon merit, determines, provided that there shall be
no decrease in the salary of the Executive without his consent.
2.3 In addition to the salary to which Executive is entitled under Section
2.1, Executive shall be entitled to participate in benefit plans, if
any, that the Company may offer or establish from time to time for
Executives of equal or lesser rank.
Page 1 of 9
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Participation in benefit plans for the Executive shall terminate if
the Company terminates similar benefits for Executives of equal or
lessor rank.
2.4 If at any time the Company does not maintain medical and dental
insurance coverage for all Executives, the Company shall reimburse the
Executive for securing private coverage during the term of this
Agreement.
2.5 All salary and benefits, if any, shall be subject to the customary
withholding of taxes as required by law. Except as otherwise provided
in Section 8 hereof, Executive's salary and benefits end immediately
upon the termination of employment.
3. INCENTIVE COMPENSATION
3.1 If the Company maintains a formal cash incentive plan for senior
management, the Executive shall be eligible to participate in such
plan with a target incentive opportunity at least equal to the highest
percentage opportunity provided to any other Executive of comparable
position covered under such plan.
3.2 If such a formal plan is not maintained by the Company, the Executive
shall be eligible for consideration to receive an annual cash
incentive payment from the Company. Executive's eligibility for such a
discretionary incentive payment ends upon termination of employment.
This amount shall be determined annually in the sole and complete
discretion of the Board of Directors, which may take into account in
its decision, among other items, such items as:
3.2.1 The financial performance of the Company, including, but not
limited to revenues, operating income, and net income, if any;
3.2.2 The individual accomplishments of the Executive;
3.2.3 Other company achievements, including, but not limited to,
product research, development and introduction; market offerings
and the arrangement of strategic alliances; and
3.2.4 Competitive practice for executives in similar situations.
4. STOCK OPTIONS
The Executive shall receive options to purchase common stock of the
Company in the amounts set forth below. All such options shall be
granted in accordance with the stock option plan maintained by the
Company and shall be subject to the terms and conditions set forth
therein and in the stock option grant letter issued by the Company to
Executive thereunder. If there are insufficient shares available under
the stock option plan in existence at the time of this Agreement, such
shares shall be granted subject to the approval of shareholders at the
next annual meeting subsequent to the execution of this Agreement. The
options shall be exercisable for ten years from the date of grant, and
shall vest in quarterly installments as noted below.
Page 2 of 9
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4.1 An option to purchase up to 28,000 shares at a price of $14.00. These
options shall vest in four equal quarterly installments, commencing on
September 1, 1997.
4.2 An option to purchase up to 28,000 shares at a price of $17.50. These
options shall vest in four equal quarterly installments commencing on
September 1, 1998.
4.3 An option to purchase up to 20,000 shares at a price of $21.88. These
options shall vest in one four month installment commencing on
September 1, 1999.
4.4 An option to purchase up to 45,000 shares at a price of $21.88. These
options shall vest in three equal quarterly installments commencing on
January 1, 2000.
4.5 An option to purchase up to 15,000 shares at a price of $27.34. These
options shall vest in one quarterly installment commencing on October
1, 2000.
5. BUSINESS EXPENSES
5.1 The parties acknowledge that Executive may incur, from time to time,
for the benefit of the Company and in furtherance of the Company's
business, various expenses such as travel, entertainment and
promotional expenses. The Company agrees that it shall either pay such
expenses directly, advance sums to Executive to be used for payment of
such expenses, or reimburse Executive for such expenses incurred by
him.
5.2 The Company agrees to pay such expenses, in accordance with its
written policies covering the payment of business expenses and to the
extent that these expenses do not exceed limits contained in such
policies or applicable law. Executive agrees to submit to the Company
such documentation as may be necessary to substantiate that all
expenses paid or reimbursed pursuant to this Section 5 were reasonable
and necessary for the performance of his duties under this Agreement.
6. PERFORMANCE OF EMPLOYMENT
6.1 Executive will observe and comply with such reasonable rules,
regulations and policies as may from time to time be established by
the Board of Directors of the Company, either orally or in writing.
6.2 Executive specifically agrees that he will comply with the
confidentiality and security rules established by the Board of
Directors with respect to confidential and financial information of
the Company.
Page 3 of 9
<PAGE>
7. EMPLOYMENT CONDUCT AND CONFIDENTIAL INFORMATION
7.1 Executive shall, at all times during the term of this Agreement,
observe and conform to all laws regulating the business of the
Company.
7.2 Executive acknowledges and recognizes that during the term of this
Agreement, he will necessarily become privy to certain confidential
and proprietary information of the Company and customers of the
Company (hereinafter referred to as "Confidential Data"). Confidential
Data shall shall include but not be limited to all information
concerning the identity of the Company's customers and suppliers,
technical, financial and business activities, plans, operations,
proprietary software, systems, procedures or know-how of the Company
and any information regarding customers of the Company and their
business affairs or endeavors. Executive agrees that he will hold all
Confidential Data in the strictest confidence and that he will not
disclose to any person or entity for any reason nor use any
Confidential Data in any way other than on behalf of the Company or as
the Company may otherwise direct.
7.3 Executive agrees that all business records and files, including but
not limited to memoranda, notes, client lists, and proposals
pertaining to the business, services or processes of the Company,
shall be the sole property of the Company and he shall not retain,
remove or copy such materials during the term of this Agreement or
upon its termination or expiration, without the prior unanimous
written consent of the Board of Directors of the Company. Upon the
termination of this Agreement, or at any other time upon the request
of the Board of Directors of the Company, Executive shall deliver all
such materials to the Company.
7.4 The foregoing obligations of Executive shall survive the termination
or expiration of this Agreement.
8. SEVERANCE PAYMENTS
8.1 If the Executive terminates the Agreement for any reason other than
Constructive Termination (as defined in Section 8.3.5), or if the
Company terminates the Agreement for Cause, no severance payment of
any kind shall be made.
8.2 If the Company terminates this Agreement for reasons other than Cause,
or if the Executive is Constructively Terminated prior to a Change in
Control, the Company shall:
8.2.1 Pay to the Executive a lump sum equal to the Executive's salary
of record for a period equal to the greater of one (1) year or
the remaining period of this Agreement.
8.2.2 Continue to provide medical and dental insurance to the
Executive for the greater of a period of one (1) year or the
remainder of the term of this Agreement on the same terms as if
the Executive were an active Executive of the Company.
Page 4 of 9
<PAGE>
8.3 If the Executive is terminated or Constructively Terminated by the
Company following a Change of Control, the Company shall:
8.3.1 Pay to the Executive a lump sum equal to the Executive's salary
of record for a period of three (3) years;
8.3.2 Pay to the Executive a lump sum equal to three (3) times the
average of the Executive's cash bonuses received in the three
(3) preceding calendar years;
8.3.3 Continue to provide medical and dental insurance to the
Executive for a period of one (1) year on the same terms as if
the Executive were an active Executive of the Company.
8.3.4 For purposes of this Agreement, a Change of Control shall be
deemed to occur on any of the following events:
8.3.4.1 Any "person", including a "group" as determined in
accordance with Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, is, or becomes, the
beneficial owner of securities of the Company
representing more than thirty percent (30%) of the
combined voting power of the Company's then outstanding
securities;
8.3.4.2 As a result of, or in connection with, any tender offer
or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination
of the foregoing transactions (a "Transaction"), the
persons who constituted the Board of Directors the
Company prior to the Transaction cease to constitute a
majority of the Board of Directors of the Company or any
successor to the Company;
8.3.4.3 The Company is merged or consolidated with another
Company and as a result of the merger or consolidation,
less than fifty percent (50%) of the outstanding voting
securities of the surviving or resulting Company shall
then be owned in the aggregate by the former
stockholders of the Company;
8.3.4.4 A tender offer or exchange offer is made and consummated
for the ownership of securities of the Company
representing more than thirty percent (30%) of the
combined voting power of the Company's then outstanding
voting securities; or
8.3.4.5 The Company transfers substantially all of its assets to
another Company of which the Company owns less than
fifty percent (50%) of the outstanding voting
securities.
8.3.5 For purposes of this Agreement, Constructive Termination means:
Page 5 of 9
<PAGE>
8.3.5.1 The reduction of the Executive's salary or target
incentive;
8.3.5.2 The demotion or reduction in duties of the Executive;
8.3.5.3 The relocation of the Executive's place of employment
more than 50 miles from the existing place of
employment; or
8.3.5.4 Breach by the Company or its successor of any material
provision of this Agreement.
8.4 For purposes of this Agreement, "Cause" shall be defined as any of the
following:
8.4.1 Repeated failure or refusal of the Executive to carry out the
reasonable directions of the Board of Directors of the Company
consistent with the duties and obligations of the Executive;
8.4.2 Willful violation of state or federal law involving the
commission of a crime against the Company or a felony adversely
affecting the Company; or
8.4.3 Any material breach of this Agreement or of any covenant herein
or the falsification of any material representation or warranty
not corrected as provided in Section 8.5 hereof.
8.5 If a breach of this Agreement by either party is relied upon as a
justification for any action taken by a party pursuant to any
provision of this Agreement, before such action is taken, the party
asserting the breach shall give the other party written notice of the
existence and nature of the breach and the opportunity to correct such
breach during the thirty (30) day period following the delivery of
such notice.
9. RESTRICTIVE COVENANT AND INJUNCTIVE RELIEF. During the term of this
agreement and for a period of twenty-four (24) months after the termination
of this Agreement for any reason:
9.1 While this Agreement is in effect, Executive shall not, directly or
indirectly, as an individual or representative of any other person
and/or entity, deal with or solicit for business purposes that are in
competition with any product or service offered by the Company, any
current customer of the Company or any person and/or entity that is,
or has commenced negotiations to become, a customer of the Company.
9.2 Executive shall not, directly or indirectly, solicit, raid, entice, or
induce any other Executive of the Company to become employed by or
associated with any other person or entity.
9.3 Executive shall not, directly or indirectly, as an Executive,
consultant, agent, partner, principal, stockholder (other than as a
holder of less than one percent (1%) of the shares of a publicly or
privately held company), officer, director, or in any other individual
or representative capacity, engage in any business activity that is
competitive with any products or services offered by the Company at
the time of the Executive's termination.
Page 6 of 9
<PAGE>
9.4 The parties hereto acknowledge that the Executive's services,
knowledge and experience are unique and of special value to the
Company, and that, in the event of a breach or threatened breach by
Executive of any of his obligations under this Agreement, including
but not limited to those set forth in this Section 9, the Company will
not have an adequate remedy at law. Accordingly, in the event of any
breach or threatened breach of any provision of this Agreement by
Executive, the Company shall be entitled to such equitable and
injunctive relief as may be available to restrain Executive and any
other individual or entity participating in breach or threatened
breach, from violating the provisions of this Agreement. Nothing
herein shall be construed as prohibiting the Company from pursuing any
other remedies available at law for such breach or threatened breach,
including the recovery of damages and the immediate termination of
Executive's employment hereunder.
10. INVENTIONS, CREATIONS AND DISCOVERIES
10.1 Executive acknowledges that during the course of his employment he
may, either alone or in conjunction with others, be involved with the
creation, authorship or development of inventions, materials or
property, including but not limited to the field of laser or LED-based
scanning display technologies, computer software, computer software
and hardware applications (hereinafter referred to as "Materials").
Executive agrees that he will disclose all such Materials to the Board
of Directors of the Company. Executive acknowledges that all such
Materials shall be the property of the Company whether or not patent
or copyright applications are filed with respect thereto from the date
of their conception. If an assignment is necessary to transfer
ownership thereof to the Company, Executive agrees that this
Agreement, without more, shall constitute such an assignment. At the
Company's request, Executive shall be required to make or assist in
the filing of letters of patent, copyright applications or the like
with respect to such Materials. In connection therewith, Executive
agrees to execute all documents necessary or beneficial to establish
or maintain the Company's rights in such property, applications or the
like. All such filings shall be made, if possible, in the name of the
Company, at its expense. If made during the term of his employment,
Executive shall receive no additional compensation therefor. If such
filings are required after the termination of the Executive's
employment by the Company, he shall receive reasonable compensation
for his assistance.
Pursuant to RCW 49.44.140, the Company has no rights under Section 10
of this Agreement to any invention for which no equipment, supplies,
facilities, or trade secret information of the Company was used and
which was developed entirely on Executive's own time, unless: (a) the
invention relates (i) directly to the business of the Company or (ii)
to the Company's actual or demonstratably anticipated research or
development; or (b) the invention results from any work performed by
Executive for the Company.
10.2 The foregoing obligations of Executive shall survive the termination
or expiration of this Agreement.
Page 7 of 9
<PAGE>
11. ASSIGNMENT. The rights of either party shall not be assigned or transferred
without the other party's consent, nor shall the duties of either party be
delegated in whole or in part without the other party's consent. Any
unauthorized assignment, transfer or other delegation shall be of no force
or effect.
12. AMENDMENTS. No amendments or additions to this Agreement shall be binding
unless in writing and signed by both parties.
13. GOVERNING LAW. This Agreement shall be governed in all respects by the laws
of the State of Washington.
14. BINDING ARBITRATION. Any disagreement, dispute, controversy or claim
arising out of or in any way related to this Agreement, the subject matter
hereof or the interpretation hereof or any arrangements relating hereto or
contemplated herein or the breach, termination or invalidity hereof or the
provision or failure to provide for any other benefits pursuant to any
other bonus or compensation plans, stock option plan, life insurance or
benefit plan or similar plan or agreement with the Company shall be settled
exclusively and finally by binding arbitration. If this Section 14
conflicts with any provision in any such plan or agreement, this provision
requiring arbitration shall control.
14.1 The arbitration shall be conducted through Judicial Arbitration and
Mediation Services/Endispute (henceforth referred to as "JAMS") to be
held before such arbitrator as the parties may agree, or if they are
unable to agree, to be selected by obtaining five proposed arbitrators
from JAMS and alternately striking names until one name remains.
14.2 The arbitration shall be conducted in accordance with the Judicial
Arbitration and Mediation Services Rules of Practice and Procedure as
are then in effect, except as modified by the agreement of the
parties.
14.3 Either party may initiate a claim by contacting JAMS.
14.4 The decision of the arbitrator shall be final and binding on all
parties and the parties waive their right to trial de novo or appeal,
except and only for the purpose of enforcing the decision of the
arbitrator, for which purpose the parties hereby agree that the
Superior Court of King Country Washington shall have jurisdiction.
14.5 The prevailing party shall be entitled to recover reasonable
attorneys' fees and the costs of bringing or defending the arbitration
and any action for enforcement, the amount of the awards being
determined by the arbitrator.
15. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are
included solely for convenience and shall not affect or be used in
connection with the interpretation of this Agreement.
16. WAIVER, MODIFICATION, CANCELLATION. Any waiver, alteration or modification
of any of the provisions of this Agreement or cancellation or replacement
of this Agreement shall not be valid unless in writing and signed by all of
the parties hereto.
Page 8 of 9
<PAGE>
17. HEIRS AND SUCCESSORS. This Agreement shall be binding upon the Company,
Executive and their successors, heirs, personal representatives and
transferees.
18. WAIVER. The waiver by either party of a breach of any provision contained
herein must be in writing and shall in no way be construed as a waiver of
any succeeding breach of such provision or the waiver of the provision
itself.
19. NOTICE. Whenever under the provisions of this Agreement notice is required
to be given, it shall be in writing and shall be deemed given when hand
delivered or mailed, postage prepaid by registered or certified mail,
return receipt requested, addressed to the Executive or the Company at the
following addresses:
Executive: Richard A. Raisig
c/o Microvision, Inc.
2203 Airport Way South, Suite 100
Seattle, WA 98134
Company: Microvision, Inc.
2203 Airport Way South Suite 100
Seattle, WA 98134
Attn: Secretary
Either party hereto may change his or its address for purposes of this
Agreement by notification to the other party in accordance with this
Section.
20. SEVERABILITY. If any provision of this Agreement is held invalid, illegal
or unenforceable, the validity, legality and enforceability of the
remaining provisions will not in any way be affected or impaired thereby.
21. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties regarding the subject matter hereof and supersedes all prior
agreements, understandings and negotiations regarding the same.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MICROVISION, INC.
by -------------------------/------ -----------------------------------
Date Witness
EXECUTIVE
by -------------------------/------ -----------------------------------
Date Witness
Page 9 of 9
Exhibit 11
Computation of net loss per share
In February 1997, Statement of Financial Accounting Standards No. 128, Earnings
per Share (SFAS 128) was issued. This pronouncement modifies the calculation and
disclosure of earnings (loss) per share (EPS) and was adopted by the Company in
its financial statements for the year ended December 31, 1997. The following
discloses the loss per share calculations in accordance with the provisions of
SFAS 128.
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
------------- -------------
<S> <C> <C>
Weighted-average number of shares outstanding
for use in computing loss per share 5,806,200 3,832,000
============= =============
Weighted-average number of shares outstanding
for use in computing loss per share assuming
dilution 5,806,200 3,832,000
============= =============
Net loss $ (4,945,000) $ (3,456,600)
============= =============
Net loss per common share $ (0.85) $ (0.90)
============= =============
Net loss per common share assuming dilution $ (0.85) $ (0.90)
============= =============
</TABLE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-19011) of Microvision, Inc. of our report dated
March 27, 1998 appearing in this Annual Report on Form 10-KSB.
PRICE WATERHOUSE LLP
Seattle, Washington
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the audited
financial statements of Microvision, Inc., for the year ended December 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,049,200
<SECURITIES> 3,792,000
<RECEIVABLES> 150,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,948,100
<PP&E> 944,600
<DEPRECIATION> 171,900
<TOTAL-ASSETS> 10,740,800
<CURRENT-LIABILITIES> 1,506,800
<BONDS> 0
0
0
<COMMON> 25,375,300
<OTHER-SE> (16,210,900)
<TOTAL-LIABILITY-AND-EQUITY> 10,740,800
<SALES> 0
<TOTAL-REVENUES> 1,712,700
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,491,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,400
<INCOME-PRETAX> (4,945,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,945,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,945,000)
<EPS-PRIMARY> (.85)
<EPS-DILUTED> (.85)
</TABLE>
