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:
--------------------------------------------------------------
None
Securities registered under Section 12(g) of the Exchange Act:
--------------------------------------------------------------
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. ____
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]
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
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
1
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
3
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
4
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
5
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."
6
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
7
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
8
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.
9
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
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
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.
- ----------------------------------------------------------------------------------------------------------------------
| | Defense & Public | | | | |
| | Safety | Healthcare | Business | Industrial | Consumer |
- ----------------------------------------------------------------------------------------------------------------------
| 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 | | | | |
- ----------------------------------------------------------------------------------------------------------------------
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
12
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.
13
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.
14
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
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
16
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
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
18
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
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:
Quarter Ended Common Stock Public Warrants
- --------------------------- -------------------- ---------------------
High Low High Low
------ ------ ------ ------
September 30, 1996 6 5/8 4 3/4 2 1/2 1 13/32
December 31, 1996 7 3/8 3 3/8 2 1/2 3/4
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)
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
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
21
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
22
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
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
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
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
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
Microvision, Inc.
Balance Sheet
- --------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
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.
28
Microvision, Inc.
Statement of Operations
- --------------------------------------------------------------------------------------------------------------
Year ended December 31,
1997 1996
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.
29
Microvision, Inc.
Statement of Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Page 1 of 2
Preferred stock Common stock Deferred Subscription
Shares Amount Shares Amount compensation receivable
-------- ------------ ---------- ------------ ------------ ------------
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.
30
Microvision, Inc.
Statement of Shareholders' Equity
- ---------------------------------------------------------------------------------------------
Page 2 of 2
Unrealized
holding
loss on
investment Accumulated Shareholders'
securities deficit equity
---------- ------------- -------------
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.
31
Microvision, Inc.
Statement of Cash Flows
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31,
1997 1996
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.
32
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
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
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:
December 31,
1997 1996
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
=============== ==============
5. Property and equipment, net
Property and equipment consist of the following:
December 31,
1997 1996
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
=============== ==============
35
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
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:
Warrants
-------------------------------
Exercise
Shares price
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
============= =============
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
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:
Weighted-
average
exercise
Shares price
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
=============
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
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
$ 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
========== ==========
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
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:
1997 1996
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)
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
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:
Capital Operating
leases lease
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
==========
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
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
Deferred tax assets are summarized as follows:
December 31,
1997 1996
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 $ - $ -
=============== ===============
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
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
43
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:
Name Age Position
- ------------------------ --- ------------------------------------
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
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
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
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
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
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 $100,000 in
the fiscal year ended December 31, 1997.
Long-Term
Annual Compensation Compensation
--------------------------------------- Awards
Name and Fiscal Salary Bonus Other Annual Securities
Principal Position Year ($) ($)(1) Compensation ($) Underlying Options
- ------------------------- ------ ------- --------- ---------------- ------------------
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."
48
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.
Number of Percent of Total
Securities Options Granted Exercise
Underlying to Employees Price
Name Options Granted in 1997 ($/Sh) Expiration Date
- --------------------------- --------------- ---------------- --------- ---------------
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
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:
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
- ---- ----------- -------- ----------- ------------- ----------- -------------
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.
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
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
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
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
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.
Percentage of
Name and Address of Beneficial Owner Number of Shares Common Stock (2)
- ------------------------------------ ----------------- -----------------
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
53
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%
- --------------
* 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
(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
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
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
- --------------
* 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
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
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.
Year ended December 31,
1997 1996
---------- -------
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)
============ ============
62