SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File No. 000-28520
n-VISION, INC.
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(Name of Registrant as specified in its Charter)
Delaware 54-1741313
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
7680 Old Springhouse Road, Madison Bldg., First Floor, McLean, Virginia 22102
(Address of principal executive office) (Zip Code)
Registrant's Telephone Number: (703) 506-8808
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
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Class A Warrants
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Issuer 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 in this Form 10-KSB, and no disclosure will be
contained, to the best of the Registrant's
<PAGE>
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.
( )
The Registrant's revenues for its most recent fiscal year (1996) were
$1,095,894.
As of February 28, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $1,405,475.
As of February 28, 1997, the Registrant had outstanding 5,312,625
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1996 (the "1996 Annual Report") is incorporated by reference into
Part II and Part III of this Form 10-KSB. Portions of the Proxy Statement for
the 1997 Annual Meeting of Stockholders (the "1997 Proxy Statement") are
incorporated by reference into Part III of this Form 10-KSB.
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PART I
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ITEM 1. BUSINESS
(a) General.
(1) n-Vision, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on September 16, 1994. The Company designs,
develops, manufactures and markets state-of-the-art, proprietary 3D immersive
displays for use in advanced visualization applications.
(2) No material changes have occurred in the Company's mode of
conducting business in the last three fiscal years.
(b) Description of Business.
n-Vision, Inc., a Delaware corporation, was established in 1988 as a
division of Advanced Technology Systems, Inc. (ATS), a McLean, Virginia
information technology company. The Company was incorporated on September 16,
1994, and acquired all rights, title and interest in the Virtual Reality (VR)
products and systems from ATS. The Company is a premier manufacturer of 3D
Immersion Displays for use in advanced visualization applications. The Company
registered the sale of its common stock and warrants to the public and became
subject to the filing requirements of the Securities and Exchange Commission on
May 28, 1996. Its corporate headquarters is located at 7680 Old Springhouse
Road, First Floor, McLean, Virginia 22102, and its telephone number is
703-506-8808.
The Company's products and systems are marketed worldwide, but
principally to customers in North America, Europe, and the Pacific Rim. At the
beginning of the 1996 fiscal year, the Company was focused on manufacturing and
marketing the Datavisor 10x, a high performance Head Mounted Display (HMD). The
Company completed and began marketing the second generation HMDs, the Datavisor
HiRes and the Datavisor VGA. The Datavisor HiRes is an opto mechanical concept
first used in the Datavisor 10x and offers additional features at a reduced
cost. The Datavisor VGA also includes the new features and utilizes special
electronics to address the lower resolution needs of the less powerful
workstations and personal computers that operate in the VGA environment. The
Company has also completed the development of the Virtual Binoculars, a
hand-held display device available in both a high resolution format and a VGA
format. This product appears to have a potential market in military and ship
training systems.
In the third quarter of 1996 the Company introduced the Datavisor 80,
which maintains high resolution capability but offers an expanded field of view,
up to 120 degrees. The first model was delivered to NASA in November 1996 and a
second unit was delivered in early
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January, 1997. The Company entered the under $10,000 market by announcing an
agreement with Virtuality plc of England to resell an LCD-based HMD, called
the Visette Pro, worldwide.
The Company currently has 14 full-time employees and no part-time
employees. The company is not unionized, and had one person depart the company
in the past year. The company feels relations with its employees are good.
The Company has developed its marketing in three areas. First, the
products have been marketed through its reseller program in the international
market. Division Ltd., Virtual Presence Ltd., both in England, and Virtual
Reality Technologies Gmbh of Germany, have been engaged as resellers. In Japan,
Solidray Co. Ltd. has been the company's representative and reseller. The
company has sought representation overseas to reduce demonstration expenses and
other marketing costs. Demonstrations are critical to success and maintaining
relationships with organizations in Europe and Japan have been important in
reaching these markets with timely responses. Each distributor is trained in the
use of the Company's products.
Second, the United States market has been characterized by direct
selling and sales of the company's products to integrators that are using the
products as a component of or in support of various programs. While corporate
and educational sales have tended to be direct sales after demonstration,
integrators often must have the products demonstrated or integrated for the
final customer. The final customer has often been the U.S. Government.
To execute the third marketing approach the company entered into an
agreement with Virtuality Ltd. to resell their LCD product with a distributor
mark-up, which performs modestly at a resolution of 640x480 pixels. The product
offers a low end entrance for customers shopping on a price driven budget. The
product sells for under $10,000, and all follow-up support is provided by the
manufacturer. The Company views these customers as potential trade-up customers
as their applications and products mature. The relationship also extends our
product line into the next lower tier market. At present, the agreement does not
transfer proprietary rights to the Company.
The major suppliers for the Company's products are: Rank Brimar Ltd.
of England, and Thomas Electronics Inc. for high resolution miniature
cathode ray tubes. The supply had been critical in early 1996 and threatened to
slow delivery of products, which led the Company to expand its sources of
supply. Another important supplier is Apex Precision, Inc., a local
company that supplies machined parts as required. The Company has excellent
relationships with this supplier and expects no change in the relationship.
The Company extends terms of net 30 days. Overseas sales are quoted in
U.S. Dollars to reduce currency risk. The Company grants distributors a right to
return products within limits. During the past fiscal year no products sold to
distributors have been returned. Federal sales often take longer to collect due
to the bureaucratic nature of the Federal Government and the extra approval
channels usually encountered. All receivables due from the Federal Government
have been collected.
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The Company's customers are diverse and none by itself is material to
the company. Even the Federal Government is internally diverse with sales to the
U.S. Navy, NASA, the Department of Energy, and the U.S. Air Force. The company
has no contracts subject to renegotiation with the Federal Government.
The Company is not required to obtain government approval for any of
its products, and there are no restricting regulations concerning the products.
The Company has entered the high-value immersive display market, which
is dominated by emerging commercial uses of head-mounted displays in large
corporations such as the automotive and aerospace industries and the U.S.
Government. The use of the products has moved swiftly in the automotive industry
as highly sophisticated ergonomic design models can be exercised using virtual
driving and viewing. The aerospace market is divided into the military and
civilian training applications for pilots and the design application market
developing now as the automotive market developed in 1995 and 1996. The military
services of Europe and the United States are experimenting with mission
rehearsal systems and other training applications. The medical market is a
high-value developing market, but embryonic. Inquiries are now being received as
awareness of potential applications is being stimulated by virtual reality
booths at medical conventions. Inquiries are being received now with explicit
thoughts and applications. This market has potential as high resolution and
quality are essential to success. Geographically, the markets in Europe and
Japan are developing and evolving, with the European market ahead of the rest of
the world. The Company has three distributors in Europe and two in Japan.
The Company's major competitor for the high-end federal systems and
military applications is Kaiser Electro-Optics, Inc. ("Kaiser"). Commercial
competitors include Fakespace, Inc. and Virtual Research Systems Inc.
In the Federal Government market, the Company can underprice Kaiser
when it competes head-to-head or when it has the opportunity to compete. The
size, history, and presence of Kaiser in the Federal Government market, and the
military market in particular, make it a major competitor as it uses superior
marketing resources to obtain long-term development and supply contracts. Kaiser
also has developed many specialized products for the military market. This
places the company at a disadvantage in this market, especially for custom
products. The company can and does compete well head-to-head for HMD business
and can dramatically undersell Kaiser for comparable quality. Federal employee
awareness of the Company and its products is limited, and needs continuing sales
and marketing emphasis.
The Company competes in the commercial market but has limited resources
to cover the market as direct sales through demonstration are usually needed due
to the complexity and nature of the products. The Company has found that it can
compete head-to-head successfully, offering superior quality at a competitive
price. On the lower end price may cause some purchasers to select a dramatically
less expensive product at half the price but with significant degradation in
viewing quality. The Company signed a distribution agreement with Virtuality
Inc. to market a low end display to cover this part of the market. The Company
believes these customers will be
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a source of trade-up business if their applications develop successfully.
This strategy is designed to shore up and address the customer base that is
cost-driven. It is an area of the market that is perceived by management as
being inadequately addressed. The Company's product warranty terms include a
full one-year warranty against all defects and failure under normal usage.
ITEM 2. DESCRIPTION OF PROPERTY
(a) The Company leases approximately 15,000 square feet for its
headquarters and operations in facilities located at 7680 Old Springhouse Road,
Madison Bldg., First Floor, McLean, Virginia 22102. The lease term is three (3)
years and will expire on February 29, 2000. The lease requires the Company to
pay certain customary property taxes and operating expenses. The Company pays
$9.00 per square foot for the leased space with a 3% rent increase per year.
The Company subleases approximately 40.5% (approximately 6,071 square
feet) of the space to two subtenants. The Company believes that its current and
anticipated facilities needs are suitably met with this space and that the space
is adequate for current operations and future growth.
(b) The Company has made no real estate investments during the 1996
fiscal year.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings and, to the best of
its information, knowledge and belief, none is contemplated or has been
threatened.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the
fourth quarter of the 1996 fiscal year.
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PART II
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ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
The company's Common Stock and Class A Warrants have traded on the
Nasdaq Stock Market Small Cap Market since May 29, 1996 under the symbols "NVSN"
and "NVSNW" respectively. Prior to an initial public offering of Common Stock
and Class A Warrants in May 1996, there had been no market for the company's
Common Stock or Class A Warrants. On December 31, 1996 the stock closed at
$0.8125 per share and the Warrants closed at $0.09375 per share. The table below
shows the high and low trading prices by quarter for the Common Stock and
Warrants during the 1996 fiscal year. On December 6, 1996, the Company's
investment banker and underwriter of the Company's public offering was barred
from the national exchanges and has since ceased making a market in the
Company's securities. This event has had, and may have, an adverse effect on the
Company's securities.
Common Common
Stock Stock Warrants Warrants
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HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter N/A N/A N/A N/A
Second Quarter 10.00 7-1/2 3-1/8 3/4
Third Quarter 7-7/8 3-1/16 3-1/2 1/2
Fourth Quarter 7-7/8 1/4 3-1/2 3/32
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
(b) Holders.
As of February 28, 1997, there are approximately 24 holders of record
of the Common Stock and 4 holders of record of the Warrants. Included in the
number of holders of record are approximately 678 beneficial securities holders.
(c) Dividends.
There was no dividend paid during the past two years. Holders of the
company's Common Stock are entitled to dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. The company does not
anticipate the declaration or payment
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of any dividends in the foreseeable future. The company intends to retain
earnings, if any, to finance the development and expansion of its business.
Future dividend policy will be subject to the discretion of the Board of
Directors and will be contingent upon future earnings, if any, the company's
financial condition, capital requirements, general business conditions, and
other factors. Therefore, there can be no assurance that any dividends of any
kind will ever be paid by the company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information required by this Item is incorporated by reference to
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's 1996 Annual Report.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is incorporated by reference to
pages 3 through 12 of the Company's 1996 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item is incorporated by reference to
the section captioned "Voting Securities and Principal Holders Thereof" and the
section captioned "Election of Directors" in the Company's 1997 Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the section captioned "Executive Compensation" in the Company's 1997 Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
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The information required by this Item is incorporated by reference to
the section captioned "Voting Securities and Principal Holders Thereof" in the
Company's 1997 Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the section captioned "Election of Directors" in the Company's 1997 Proxy
Statement.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
List of Exhibits.
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3(i) Certificate of Incorporation of the Company.
3(ii) Bylaws of the Company.
10 Material Contracts (listed in Exhibit Index)
11* Computation of per Share Earnings
13* Portions of 1996 Annual Report Incorporated By Reference
24* Consent of Grant Thornton
27* Financial Data Schedule
* Filed herewith.
(a) Exhibits.
All exhibits are listed in the Exhibit Index, which is incorporated
herein by reference.
(b) Reports on Form 8-K.
The Company has filed no Forms 8-K during the quarter ended December
31, 1996.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to the signed on
its behalf by the undersigned, thereunto duly authorized.
n-VISION, INC.
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(Registrant)
By: /s/______________________________ March 27, 1997
Delmar J. Lewis
Chairman of the Board
Chief Executive Officer
Dated: March 27 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
n-VISION, INC.
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(Registrant)
By: /s/________________________________ Dated: March 27, 1997
Claude H. Rumsey, Jr.
Director
By: /s/________________________________ Dated: March 27, 1997
Mao-Jin Chern, Ph.D.
Director
By: /s/_______________________________ Dated: March 27, 1997
Robert B. Hamilton, C.P.A.
Executive Vice President,
Chief Financial Officer and Secretary
Director
By: /s/_______________________________ Dated: March 27, 1997
Christopher J. Lewis
President and Chief Operating Officer
Director
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<PAGE>
By: /s/_______________________________ Dated: March 27, 1997
Delmar J. Lewis
Chairman of the Board
Chief Executive Officer
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EXHIBIT INDEX
n-VISION, INC.
EXHIBITS TO FORM 10-KSB
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Identification Numbered Page
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<S><C>
3(i) Certificate of Incorporation of the Company (incorporated by N.A.
reference to Exhibit 3.0 to the Registration Statement of the
Company on Form SB-2 filed on April 2, 1996, Registration No.
333-3098)
3(ii) By-Laws of the Company (incorporated by reference to Exhibit 3.2 N.A.
to the Registration Statement of the Company on Form SB-2 filed on
April 2, 1996, Registration No. 333-3098)
10(1) Employment Agreement, Delmar J. Lewis (incorporated by reference N.A.
to Exhibit 10.0 to Amendment No. 1 of the Registration Statement
of the Company on Form SB-2 filed on April 19, 1996, Registration
No. 333-3098)
10(2) Employment Agreement, Christopher J. Lewis (incorporated by N.A.
reference to Exhibit 10.1 to Amendment No. 1 of the Registration
Statement of the Company on Form SB-2 filed on April 19, 1996,
Registration No. 333-3098)
10(3) Employment Agreement, Robert B. Hamilton, C.P.A. (incorporated by N.A.
reference to Exhibit 10.2 to Amendment No. 1 of the Registration
Statement of the Company on Form SB-2 filed on April 19, 1996,
Registration No. 333-3098)
10(4) Asset Purchase Agreement, dated November 1, 1994 (incorporated by N.A.
reference to Exhibit 10.3 of the Registration Statement of the
Company on Form SB-2 filed on April 2, 1996, Registration No.
333-3098)
11.00 Statement re: Computation of earnings per share
13.00 Portions of 1996 Annual Report Incorporated By Reference
24.00 Consent of Grant Thornton LLP
27.00 Financial Data Schedule
</TABLE>
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EXHIBIT 11
Computation of per share earnings (loss)
Income (loss) per share of common stock is computed using weighted average
shares outstanding for each period, adjusted retroactively for stock splits.
Warrants and stock options have not been reflected in the computation of
weighted average shares because they are anti-dilutive.
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Exhibit 13
[n-Vision Logo] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Some statements in this Management's Discussion and Analysis contain
forward-looking information that involve a number of risks and uncertainties,
the possible realization of which could have material adverse effects on the
Company's operating results. Factors that may cause actual results to differ
materially include: development of new products and rapid change in technology
that may displace products sold by the Company; the highly competitive market in
which the Company operates; the Company's dependence upon a limited number of
suppliers for the availability of components used in its products; fluctuations
in the Company's quarterly results of operations and in the timing of orders
from customers; and other risk factors listed from time to time in the Company's
SEC filings including but not limited to the SB-2 Registration Statement dated
May 28, 1996.
General
n-Vision, Inc. ("Company"), a Delaware Corporation, designs, develops,
manufactures, and markets state-of-the-art, proprietary 3D immersive displays
for use in advanced visualization applications. The Company's products and
systems are marketed worldwide, but principally to customers in North America,
Europe, and the Pacific Rim, e.g., U.S. Air Force, NASA Langley Research Center,
Lockheed Martin, Silicon Graphics, Inc., UK Defense Research Establishment
(Farnborough), Volvo, Volkswagen, Daimler-Benz, Thomson CSF, KPMG Peat Marwick,
Rockwell international, The University of Illinois, and Raytheon among others.
At the beginning of the current fiscal year, the Company was focused on
manufacturing and marketing the Datavisor 10x, a high performance Head Mounted
Display (HMD). The Company completed and began marketing the second generation
HMD's, the Datavisor HiRes and the Datavisor VGA. The Datavisor HiRes is an opto
mechanical concept first used in the Datavisor 10x and offers additional
features at a reduced cost. The Datavisor VGA includes the new features and
utilizes special electronics to address the lower resolution needs of the less
powerful workstations and PC's that operate in the VGA environment. The product
was developed to maintain and expand the Company's position in the high end of
the commercial display market as well as to create an upward path for the
existing user base. The Company also completed development of the Virtual
Binoculars, a hand-held display device available in both a high resolution
format and a VGA format. This product appears to have a potential market in
military and ship training systems. A fourth product introduced during the third
quarter was the Datavisor 80. The Datavisor 80 maintains the high resolution
capability but offers an expanded field of view, up to 120(degree). The first
model was delivered to NASA in November 1996 and a second unit was delivered in
early January, 1997. In December 1996 the Company entered the under $10,000 end
of the market by announcing an agreement with Virtuality plc of England to
resell the Visette Pro, an LCD based head mounted display, worldwide.
Results of Operations
Year Ended December 1996 Compared to December 31, 1995
For the year ended December 31, 1996, the Company reported revenue of $1,095,894
from the sale of 24 units of its VR products and systems, a 75% increase from
the prior year where the Company reported revenue of $626,763 on the sale of 14
units. The increase in revenue was primarily the result of the introduction of
new products offering additional features at a reduced cost. The Company's
geographic revenue mix shifted toward domestic operations in 1996. Revenues from
international operations represented 26% of total revenues in 1996 versus 53% in
1995. The Company has initiated a reformulated distribution strategy for Europe
combined with a more diverse range of products. Management anticipates revenue
growth to continue as the Company markets its products both domestically and
internationally and product recognition is established. Backlog plus sales to
date as of March 14, 1997 totaled approximately $580,000.
The Company's gross margin on sales for the year ended December 31, 1996
increased to 43% compared to 38% for the same period in 1995. Management does
not necessarily believe that this increase constitutes a trend at the current
level of production and sales. Management fully expects the gross margin to
remain volatile on a quarter by quarter basis as reflected on the interim
financial statements for the year ended December 31, 1996. Gross margins vary
from a high of 62% in the first quarter of 1996 to a low of 12% in the fourth
quarter of 1996. This volatility could be seen in 1995 as well. At the current
level of sales and production, variances and inefficiencies may impact the gross
margin and may continue to do so until production levels increase and a full
scale assembly style production line is established. At such a time, it may be
that economies of scale can be established which could drive down the cost of
production thus increasing gross margins. Management can make no determination
at present at what level production costs will begin to stabilize or decrease.
Another factor contributing to changing margins is the product mix. During
the year, competitive factors influenced the Company's decision to lower the
price of the Datavisor HiRes, causing margins to slip in the second half of the
year. The introduction of the Datavisor 80, a high
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cost/margin product, may help to increase margins in the coming year, however,
this may be offset by increased sales of the Datavisor VGA, a low cost/margin
product. The Datavisor VGA and the Datavisor 80 were both introduced in the last
six months of 1996. Management can make no determination at present as to the
product mix in the future.
A third factor which may contribute to changing margins is the dependence on
resellers in the international market. Resellers are typically given a discount
of 15 to 30 percent, depending on volume, so as to encourage sales. During 1996,
new resellers were established in the European Community. The Company
anticipates establishing additional resellers in 1997 and 1998 so as to
further promote the products both domestically and internationally. Further
emphasis on resellers may contribute to decreasing margins in the future
but may be partially offset by an increase in productivity as production levels
increase.
General and administrative costs decreased to $753,200 in 1996 from $829,085 in
1995. This decrease was primarily due to an $81,000 charge incurred by the
Company for an uncollectible receivable from a distressed distributor in 1995.
Otherwise, general and administrative costs would have increased marginally
which is to be expected as the Company expands its operations. The Company
expects that such expenses will increase to support the growth and expansion of
the business.
Marketing and sales expenses increased to $287,694 in 1996 from $273,438 in
1995. The increase can be attributed to increased promotional activities related
to the introduction of new products during the last six months of the year. The
Company intends to increase its advertising and trade show budgets so as to
further promote the Company and its products within the industry. Management
believes that establishing a reputation of quality and performance is crucial
for the long-term success of the Company. This is especially important in the
early stages of the industry so as to prevent competitors with greater resources
from effectively entering and dominating the market. Management intends to
invest significantly in marketing so as to strategically position the Company
and its products in the near term.
Product development expenses increased to $592,799 in 1996 from $556,407 in
1995. The increase is attributable to increased investment in developing new
products such as the Datavisor VGA and the Datavisor 80 both introduced in 1996.
Other costs reflect customizing current commercial products for specific user
defined applications, specifically in the military training and simulation
markets. The Company expects to increase funding for new products and product
development so as to remain in a strong competitive position and to provide a
complete range of products for all price and performance levels. These costs may
be partially funded by customers requiring custom applications of the Company's
products and technology.
Non-Operating expenses increased to $3,462,925 in 1996 from $710,561 in 1995
and are not fully comparable from period to period because of certain one-time
financing charges during both periods. In March 1996, the Company borrowed
$250,000 from three nonaffiliated persons under three separate 8% convertible
promissory notes, convertible into 750,000 shares of the Company's common stock
at the option of the shareholders. In April 1996, the three shareholders elected
to convert their notes. Because of the conversion feature of the notes was
granted at a price substantially below the initial public offering price,
financing expense of $3,500,000 was accrued during the period from the date of
the notes payable and the date of the public offering with a corresponding
credit to paid-in capital. In 1995, the Company accrued $559,245 as an
unrealized offering expense from its first attempted but unsuccessful initial
public offering.
Adjusting for the one-time expenses in both years, the Company had a positive
net interest margin in 1996 of $37,075 compared to an interest expense of
$151,316 in 1995. Interest was earned on proceeds from the initial public
offering for approximately seven months in 1996 while no such revenue was
recognized in 1995. Furthermore, interest was accrued in 1995 and subsequently
paid in 1996 on three notes payable to Advanced Technology Systems. As of
December 31, 1996 the notes were either forgiven, converted into common stock,
or paid down significantly with the proceeds of the initial public offering.
(See NOTE F of Financial Statements for further information.) The Company
expects to continue to have a positive net interest margin during 1997.
In 1996, tax benefits associated with the Company's net operating loss were
fully reserved due to uncertainty of recoverability. The Company's provision for
income taxes in 1995 reflects a tax benefit derived primarily from the refund of
taxes paid in 1994 resulting from the carryback of a portion of the 1995 net
operating loss.
Liquidity and Capital Resources
Working capital totaled $4,232,653 as of December 31, 1996 compared to a
working capital deficit of $1,267,610 on December 31, 1995. The increase in
working capital is due primarily to an initial public offering of the Company's
common stock in May of 1996. Proceeds from the offering, net of expenses,
totaled $5,945,135 from which $825,461 in short term debt and accrued interest
was retired. The Company believes that the current level of working capital
should provide sufficient liquidity to fund its operations through the current
year which includes the previously described increase in the areas of product
development, marketing, and administration of the Company.
Longer term cash requirements, other than normal operating expenses are
anticipated for the development of new products, enhancement of existing
products, financing of anticipated growth, and the possible acquisitions of
related businesses and technologies. The Company believes that the current level
of working capital is sufficient to satisfy the anticipated cash requirements
through the end of 1998, barring a major acquisition. Should the Company expand
far in excess of anticipated
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growth, the conversion of 1,380,000 Class A warrants may provide a built
in financing mechanism, should the conversion requirements be met. The
warrants may be exercised during a four year period commencing May 29, 1997
unless redeemed by the Company. The Company, however, can make no assurances
that investors would elect to exercise the warrants or that the required
conversion price can be reached. Until operations improve and the Company
obtains additional underwriting support to replace Stratton Oakmont Inc., the
Company's ability to generate proceeds from the conversion may be affected.
Stratton Oakmon Inc., the principal market maker and underwriter of the
Company's securities, was barred from the exchange on December 6, 1996.
Additionally, the Company is in the process of negotiating a bank line of credit
with its primary financial institution.
Income Taxes
The Company is organized as a C Corporation and pays income taxes based upon
accrual based taxable income adjusted for differences in the timing of reporting
certain expenses for tax and financial statement purposes. The Company's income
taxes payable, if any, that may arise in the future may be offset by credits
available for certain research and development expenditures incurred.
As of December 31, 1996, the Company had a net operating loss carryforward
available to offset future taxable income of approximately $1,495,000 available
to offset future taxable income generated through 2010. In the event of a change
in control of the Company, the use of all or a portion of the net operating loss
may be limited.
Impact of Inflation
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past two years. Increases in supplies or other
operating costs may adversely affect the Company's operations.
Seasonality
Based on its limited experience to date, the Company believes that its future
operating results will not be subject to seasonal changes. Such effects, should
they occur, may be apparent in the Company's operating results during a period
of expansion. However, the Company can make no assurances that its business can
be significantly expanded.
[n-Vision Logo] REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
n-Vision, Inc.
We have audited the accompanying balance sheet of n-Vision, Inc., as of December
31, 1996, and the related statements of operations, stockholders' equity
(deficit) and cash flows for the two years in the period then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of n-Vision, Inc., as of December
31, 1996, and the results of its operations and its cash flows for the two years
in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Vienna, Virginia
February 18, 1997
11
<PAGE>
[n-Vision Logo] BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S><C>
Current Assets
Cash $ 2,422,839
Investments 1,250,000
Accounts receivable
Trade 194,910
Officer and employee travel advances 48,731
Income taxes receivable 17,389
Inventories 716,590
Prepaid expenses 1,943
- ----------------------------------------------------------------------------------------------------------------
Total Current Assets 4,652,402
Property and Equipment, net 302,745
Other Assets
Organization costs, net of amortization 40,585
- ----------------------------------------------------------------------------------------------------------------
$ 4,995,732
===========
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of note payable to Advanced Technology Systems, Inc. $ 120,000
Current portion of capital lease obligation 21,554
Accounts payable 52,131
Accrued salaries and vacation 81,950
Deferred revenue and accrued warranty costs 144,114
- ----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 419,749
Long-Term Liabilities
Note payable--Advanced Technology Systems, Inc. 480,000
Capital lease obligation--net of current portion 27,334
Commitments and Contingencies --
Stockholders' Equity
Common stock, $.01 par value; 25,000,000 shares authorized; 5,312,625 issued and outstanding 53,126
Common stock subscriptions and notes receivable (91,722)
Paid-in capital 10,529,492
Accumulated deficit (6,422,247)
- ----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 4,068,649
- ----------------------------------------------------------------------------------------------------------------
$ 4,995,732
===========
</TABLE>
The accompanying notes are an integral part of this statement.
12
<PAGE>
[n-Vision Logo] STATEMENTS OF OPERATIONS
Year ended December 31, 1996 1995
- ----------------------------------------------------------------------------
Sales $1,095,894 $ 626,763
Cost of Sales 621,142 390,466
- ----------------------------------------------------------------------------
Gross Margin 474,752 236,297
Operating Expenses
General and administrative 753,200 829,085
Marketing and sales 287,694 219,407
Product development 592,799 556,402
- ----------------------------------------------------------------------------
Loss from Operations (1,158,941) (1,368,597)
Non-Operating Income (Expense)
Interest income 156,244 -
Unrealized offering expenses - (559,245)
Interest expense--bridge financing (3,500,000) -
Interest expense--notes payable (119,169) (151,316)
- ----------------------------------------------------------------------------
Loss Before Income Taxes (4,621,866) (2,079,158)
Income Tax Benefit - 91,000
- ----------------------------------------------------------------------------
Net Loss $(4,621,866) $(1,988,158)
============ ===========
Weighted Average Shares Outstanding 4,698,856 3,191,368
============ ===========
Loss Per Share $ (.98) $ (.62)
============ ===========
The accompanying notes are an integral part of this statement.
13
<PAGE>
[n-Vision Logo] STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Years ended December 31, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------
Common
Stock
Subscriptions Paid-in Accumulated
Common and Notes Capital Earnings
Stock Receivable (Deficiency) (Deficit) Total
- ---------------------------------------------------------------------------------------------------------------
<S><C>
Balance, January 1, 1995 $ 28,487 $ (28,487) $ (1,008,664) $ 187,777 $ (820,887)
Forgiveness of Note Payable
to Advanced Technology Systems, Inc. - - 500,000 - 500,000
Issuance of Stock for Notes
Receivable and Related Interest 1,513 (671,877) 636,925 - (33,439)
Provision for Contributed
Stockholder/Officers Services - - 312,500 - 312,500
Net Loss - - - (1,988,158) (1,988,158)
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 30,000 (700,364) 440,761 (1,800,381) (2,029,984)
Cancellation of Shareholder
Notes Receivable in Exchange
for Common Stock (1,324) 612,413 (611,089) - -
Interest on Shareholder
Notes Receivable - (29,722) - - (29,722)
Conversion of Note Payable
to Advanced Technology Systems, Inc.,
to Common Stock 2,000 - 998,000 - 1,000,000
Conversion of Bridge Loans
Payable to Shares and Associated
Financing Expense 7,500 - 3,742,500 - 3,750,000
Issuance of Common
Stock and Warrants 14,950 - 5,930,185 - 5,945,135
Proceeds on Subscriptions
Receivable for Stock - 25,951 6,180 - 32,131
Provision for Contributed
Stockholder/Officer Services - - 22,955 - 22,955
Net Loss - - - (4,621,866) (4,621,866)
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 53,126 $ (91,722) $ 10,529,492 $(6,422,247) $ 4,068,649
======== ========= ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
14
<PAGE>
[n-Vision Logo] STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S><C>
Increase (Decrease) in Cash
Cash Flows from Operating Activities
Net loss $ (4,621,866) $(1,988,158)
- ---------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating activities
Interest expense associated with convertible notes payable 3,500,000 -
Provision for contributed stockholder/officers services 22,955 312,500
Accrued interest on shareholders' notes payable (29,722) -
Depreciation and amortization 63,735 69,151
Loss on disposal of fixed assets 1,636 -
Changes in assets and liabilities
(Increase) decrease in accounts receivable--trade (65,649) 474,039
Decrease (increase) in income tax receivable 83,974 (101,363)
Decrease (increase) in officer and employee advances 4,657 (788)
Increase in inventories (219,502) (235,543)
(Increase) decrease in prepaid expenses (43,436) 13,636
Decrease in deferred tax asset - 28,000
(Decrease) increase in accounts payable (257,132) 297,833
Increase in accrued salaries and vacation 40,897 4,450
Decrease in accrued income taxes - (119,000)
Increase in deferred revenue and accrued warranty costs 32,830 321,168
Decrease in accrued interest on stockholder notes (253,445) (49,019)
- ---------------------------------------------------------------------------------------------------------------
Total Adjustments 2,881,798 1,015,064
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (1,740,068) (973,094)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (243,262) (33,857)
Purchase of investments (1,250,000) -
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,493,262) (33,857)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net proceeds from issuance of common stock and warrants 5,945,135 -
(Payments to) proceeds from Advanced
Technology Systems, Inc. (491,613) 791,748
(Payments) borrowings on bank line of credit (67,237) 67,237
Proceeds from convertible note payable 250,000 -
Decrease in deferred initial public offering costs - 72,039
Payments on capital lease obligations (18,335) -
Proceeds from shareholder notes receivable 32,131 -
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 5,650,081 931,024
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 2,416,751 (75,927)
Cash at Beginning of Year 6,088 82,015
- ---------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 2,422,839 $ 6,088
============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
15
<PAGE>
[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: n-Vision, Inc. (the Company), a Delaware
corporation, was incorporated in 1994. The Company designs, develops,
manufactures and markets state-of-the-art, proprietary virtual (VR) products
and systems for a variety of commercial, industrial and military applications.
Revenue Recognition: Revenue from the sale of VR products is recognized when the
products are shipped. Related warranty costs are provided for at the time of
sale. The Company had sales to customers outside the United States (primarily
Europe) constituting $288,503 and $332,144 for the years ended December 31, 1996
and 1995, respectively.
Currently, the Company has non-exclusive distribution agreements with
companies in the United Kingdom, Europe and Japan. The Company performs ongoing
credit evaluations of its customers' financial condition and usually requires no
collateral. The Company's typical sales terms with distributors permit the
distributors to return products for credit against future purchases in certain
circumstances. For the year ended December 31, 1996, there were no returns of
products. Product returns amounted to $185,000 in 1995. As of December 31, 1996,
a reserve for potential returns was not recorded because distributors have sold
substantially all products to end-users.
For the years ended December 31, 1996 and 1995, aggregate revenue derived
from two and three customers amounted to approximately 31% and 37%,
respectively, of the Company's total revenue.
Inventories: Inventories are stated at lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) basis.
Property and Equipment: Property and equipment are stated at cost and are
depreciated using the straight-line method over estimated useful lives of three
to seven years.
Income (Loss) Per Share: Income (loss) per share of common stock is computed
using weighted average shares outstanding for each period, adjusted
retroactively for stock splits. Warrants and stock options have not been
reflected in the computation of weighted average shares because they are
anti-dilutive.
Income Taxes: The Company has provided for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under the liability method mandated by SFAS No. 109, a deferred
tax asset, net of a valuation allowance, or liability is recorded on the tax
effects of temporary differences between the tax basis and financial amounts of
assets and liabilities. Temporary differences arise from accrued warranty costs,
receivable and inventory reserves and the liability for paid leave.
Research and Development Costs: Research and development costs are expensed in
the period in which they are incurred.
Organization Costs: Organizational costs representing fees associated with the
incorporation of the Company in September 1994, are amortized over a useful life
of five years. Amortization expense for the years ended December 31, 1996 and
1995, was $13,393 and $12,236, respectively.
Use of Estimates in Preparing Financial Statements: In preparing financial
statements in conformity with generally accepted accounting principles,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments: The financial statements include various
estimated fair value information as of December 31, 1996, as required by
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About
Fair Value of Financial Instruments." Such information which pertains to the
Company's financial instruments (primarily cash, investments and borrowings) is
based on the requirements set forth in SFAS No. 107 and does not purport to
represent the aggregate fair value or the Company. Further, the fair value
estimates are based on various assumptions, methodologies and subjective
considerations, which vary widely among different entities and are subject to
change. Carrying value of financial instruments approximates market value.
16
<PAGE>
[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- INVESTMENT
Investments consist of debt securities with a coupon rate of 5.75% and a
maturity date of November 15, 1998. Investments are carried at market value and
are properly classified as available for sale. Market value approximated cost at
December 31, 1996.
NOTE C -- INVENTORIES
Inventories consist of the following at December 31, 1996:
Raw materials $ 298,529
Work in process 113,709
Finished goods 381,217
Reserve for inventory obsolescence (76,865)
- ------------------------------------------------------
$ 716,590
=========
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1996:
Furniture $ 18,757
Equipment 312,656
Demonstration equipment 43,517
Property under capitalized leases 67,223
- ------------------------------------------------------
442,153
Less accumulated depreciation 139,408
- ------------------------------------------------------
$ 302,745
=========
The net book value of property under capitalized leases at December 31, 1996,
was approximately $48,000.
NOTE E -- INCOME TAXES
Income tax expense (benefit) consists of the following for the year ended
December 31:
1996 1995
- --------------------------------------------------------------
Current (benefit) $ - $(119,000)
Deferred (benefit) (426,000) (178,500)
Valuation allowance 426,000 206,500
- --------------------------------------------------------------
$ - $ (91,000)
========= =========
Following is a reconciliation of the statutory federal income tax rate to
effective rates reflected in the statements of operations for the years ended
December 31:
1996 1995
- --------------------------------------------------------------------
Pretax loss $(4,621,866) $(2,079,158)
=========== ===========
Tax (benefit) at statutory rate $(1,571,434) $ (706,914)
State income tax benefit,
net of federal expense (184,875) (83,167)
Permanent differences 309 492,581
Non-deductible bridge financing cost 1,330,000 -
Change in valuation allowance 426,000 206,500
- --------------------------------------------------------------------
Income tax benefit $ - $ (91,000)
=========== ===========
Deferred tax assets are composed of the following at December 31, 1996:
Obsolescence reserve $ 29,209
Inventory write-downs 36,439
Organization costs (6,384)
Accrued warranty expense 8,463
Accrued vacation 12,650
Depreciation (2,107)
Net operating loss carryforward 554,504
- ------------------------------------------------------
632,774
Valuation allowance $ (632,774)
- ------------------------------------------------------
$ -
==========
The Company has a net operating loss carryforward as of December 31, 1996, of
approximately $1,459,000 available to offset future tax income generated through
2010. In the event of a change in control of the Company, the use of all or a
portion of the net operating loss may be limited.
17
<PAGE>
[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- CAPITAL LEASE OBLIGATION AND NOTES PAYABLE
Convertible Promissory Notes: In March 1996, the Company borrowed $250,000 from
three nonaffiliated persons under three separate 8% convertible promissory
notes, convertible into 750,000 shares of the Company's common stock at the
option of the shareholders. In April 1996, the three noteholders elected to
convert their notes to a total of 750,000 shares of the Company's common stock.
Because the conversion feature of the notes was granted at a price
substantially below the initial public offering price, financing expense of
$3,500,000 was accrued during the period from the date of the notes payable and
the date of the public offering with a corresponding credit to paid-in capital.
Notes Payable--Advanced Technology Systems: The Company is obligated under a
promissory note in the amount of $600,000 at December 31, 1996. The note payable
is unsecured and is due to Advanced Technology Systems, Inc. (ATS), a Company
principally owned and controlled by a stockholder and officer of the Company.
The principal balance on this note arose from a line-of-credit arrangement with
ATS, the borrowings on which amounted to $1,127,328 at December 31, 1995. The
balance due on the line of credit was partially curtailed in June 1996, using
the proceeds of the Company's initial public offering. Interest is due on
principal outstanding at 8% per annum. Principal payments of $60,000 are payable
twice each year in June and December and commence on June 30, 1997. Annual
maturities of this note for each of the next five years are $120,000 after which
the note will be paid in full. The fair value of the note payable is not
practicable to determine inasmuch as the note is between related parties and
market data for comparable instruments cannot be obtained.
In connection with the acquisition of the Company's business from ATS in
1994, the Company became obligated under a promissory note payable to ATS of
$1,020,590. The note was payable in semiannual installments of $80,000
commencing May 1, 1996, with interest at the prime rate plus 1.375% (10.375% at
December 31, 1995). In May 1996, this note was retired for cash of $20,590 and
the issuance of 200,000 shares of the Company's common stock.
In addition, a second note payable to ATS of $500,000 arising from the 1994
acquisition was forgiven in 1995, and the balance was credited to paid-in
capital in the financial statements to reflect the forgiveness of debt between
affiliates.
Capital Lease Obligation: The Company leases certain equipment under a lease
that has been capitalized. The lease commitment is for three years and expires
in January 1999. Following is a schedule of minimum lease payments under the
capital lease together with the present value of future minimum rentals as of
December 31, 1996:
Year ending December 31,
- ----------------------------------------------------------------
1997 $ 26,988
1998 26,988
1998 2,249
- ----------------------------------------------------------------
Total minimum lease payments 56,225
Amount representing interest (7,337)
Current portion of capital lease obligation (21,554)
- ----------------------------------------------------------------
Present value of long-term capital lease obligation $ 27,334
========
NOTE G -- COMMITMENTS
Employment Agreements: The Company has employment agreements with three
officers, effective as of June 1, 1996. Two of the agreements extend for a
period of two years and the third agreement extends for a period of three
years. The Company's commitment under the agreements is as follows:
Year ending December 31,
- ----------------------------------------------------------------
1997 $ 425,000
1998 250,000
1999 52,000
- ----------------------------------------------------------------
$ 727,000
=========
For the years ended December 31, 1996 and 1995, the Company recorded a provision
for compensation expense of $22,955 and $312,500, respectively, and a
corresponding credit to stockholders' equity for the value of services rendered
by the officers (who are also stockholders) based upon the difference between
the amount paid and the compensation called for in the above agreements.
18
<PAGE>
[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Operating Leases: The Company is obligated under certain noncancelable operating
leases for equipment. The following is a schedule of the approximate future
minimum rental payments required under operating leases with terms of one year
or more as of December 31, 1996, including a three-year lease for office and
manufacturing space executed in 1996, which commences in March 1997:
Year ending December 31,
- ----------------------------------------------------------------
1997 $ 147,641
1998 168,335
1999 145,194
2000 23,155
- ----------------------------------------------------------------
$ 484,325
=========
Total rent expense for the years ended December 31, 1996 and 1995, was $18,462
and $14,872, respectively.
NOTE H -- STOCKHOLDERS' EQUITY
Stock Split and Issuance: In March 1996, a 1.38:1 stock split was effected
whereby each shareholder's interest was increased pro rata such that the number
of shares of common stock outstanding after the split was 3,000,000. The effect
of the split has been reflected retroactively throughout the accompanying
financial statements.
In March 1995, the Company issued 151,300 shares of common stock to employees
of the Company in exchange for non-recourse promissory notes, collateralized by
the common stock issued. The value of the consideration was based upon the value
of the shares offered at the time in a proposed public offering. In 1996,
132,400 of such shares were returned to the Company in consideration for the
cancellation of the promissory note by all but one employee at a time when the
value of the shares equated to the principal and interest due on the promissory
note. Upon the return of the common stock, each employee was granted an option
to purchase stock at the fair value of the stock at the date of grant.
Initial Public Offering of Securities: In June 1996, the Company received
proceeds, net of expenses, of $5,945,135 from an initial public offering of
securities. The offering included the sale of 1,495,000 shares of common stock
at an offering price of $5.00 per share and 1,380,000 Class A warrants at $.15
per Class A warrant. The Class A warrants shall be exercisable commencing one
year after the date of the prospectus, entitling the holder to purchase one
share of common stock at $5.50 per share during the four-year period commencing
one year from the effective date of the offering. The warrants are also
redeemable upon certain conditions. The offering also included the sale of
750,000 shares of common stock acquired by certain stockholders upon the
conversion of certain promissory notes into common stock in April 1996 as
described in Note F.
Stock Option Plan: In 1996, the Company issued non-qualified stock options
accounted for under Accounting Principles Board Opinion No. 25. These options
vested immediately on the date of grant and become exercisable in 1998. The
exercise price is equal to the fair market value of the underlying shares at the
date of grant.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS No. 123, the
Company's net loss and loss per share would have been as follows:
As Reported Pro forma
- ------------------------------------------------------------
Net loss $ (4,621,666) $ (4,996,562)
Loss per share (.98) (1.06)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1996: expected volatility of
86.78%, calculated by averaging the Company's volatility with the mean
volatility of an appropriate peer group, risk-free interest rate of 5.86% and
expected lives of four years. The weighted-average fair value of options granted
during the year was $2.98.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
19
<PAGE>
[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's incentive stock option plan as of
December 31, 1996, and changes for the year then ended on those dates is
presented below:
1996 Weighted-
Average
Shares Exercise Price
- -----------------------------------------------------------------------------
Outstanding at beginning of year - $ -
Granted 149,906 3.62
Exercised - -
Forfeited - -
- -----------------------------------------------------------------------------
Outstanding at year-end 149,906 $3.62
======= =====
Options exercisable at year-end - $ -
======= =====
The following information applies to options outstanding at December 31,
1996:
Number outstanding 149,906
Range of exercise prices $1.75 to $3.84
Weighted-average exercise price $3.62
Weighted-average remaining contractual life 8.41
NOTE I -- RELATED PARTY TRANSACTIONS
During the years ended December 31, 1995, the Company paid approximately $85,000
to a consultant and stockholder of the Company for services rendered. During the
years ended December 31, 1996 and 1995, the Company paid $146,250 and $30,288,
respectively, to a company owned by one of its directors for research and
development and inventory.
During the year ended December 31, 1996, the Company had sales of
approximately $217,000 to a U.S. government customer via a contract held by
Advanced Technology Systems, Inc. (ATS). In addition, the Company was reimbursed
$28,088 by ATS in 1996 for administrative consulting services rendered by
employees of the Company on behalf of ATS.
For services rendered in connection with initial public offering described in
Note H, the Company paid $425,000 to an attorney who is also a stockholder of
the Company.
NOTE J -- EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) retirement plan (the Plan) that originated January
1, 1993, and is a defined contribution plan covering all full-time employees of
the Company who are at least 21 years of age and have three months of
continuous, full-time employment with the Company. The Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974. The Company
made no contributions to the Plan during fiscal years 1996 and 1995.
NOTE K -- CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk
consist of demand-deposits placed with financial institutions. Funds in excess
of the federal insurance limit for the years ended December 31, 1996 and 1995,
totaled $2,322,839 and $-0-, respectively.
NOTE L -- SUPPLEMENTAL CASH FLOWS INFORMATION
Supplemental Cash Flow Information: The Company paid the following amounts
for interest and income taxes during the year ended December 31:
1996 1995
- ------------------------------------------------------
Interest $ 372,614 $ 200,335
========= =========
Income taxes $ - $ -
========= =========
An income tax refund of $101,000 was received in 1996.
Supplemental Non-Cash Financing and Investing Activities: In 1996, a capital
lease obligation of $65,000 was incurred by the Company for equipment.
In 1995, 200,000 shares of common stock were issued to retire $1,000,000 of
the balance due under a promissory note.
20
EXHIBIT 24
We have issued our report dated February 18, 1997, accompanying the financial
statements incorporated by reference or included in the Annual Report of
n-Vision, Inc., on Form 10-KSB for the year ended December 31, 1996. We hereby
consent to the incorporation by reference of said reports in the Registration
Statements of n-Vision, Inc., on Forms SB-2 (dated May 28, 1996).
/s/ Grant Thornton LLP
Vienna, Virginia
March 26, 1997
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the form
10-KSB for the period ended December 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,422,839
<SECURITIES> 1,250,000
<RECEIVABLES> 261,030
<ALLOWANCES> 0
<INVENTORY> 716,590
<CURRENT-ASSETS> 4,652,402
<PP&E> 442,153
<DEPRECIATION> (139,408)
<TOTAL-ASSETS> 4,995,732
<CURRENT-LIABILITIES> 419,749
<BONDS> 0
0
0
<COMMON> 53,126
<OTHER-SE> 4,015,523
<TOTAL-LIABILITY-AND-EQUITY> 4,995,732
<SALES> 1,095,894
<TOTAL-REVENUES> 1,095,894
<CGS> 621,142
<TOTAL-COSTS> 621,142
<OTHER-EXPENSES> 1,633,693
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,462,925)
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