<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
/ / 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.
(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-1600822
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
19910 North Creek Parkway, Bothell, Washington 98011-3008
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (425) 415-6847
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of March 31, 1999, 6,159,399 shares of the Company's common stock, no par
value, were outstanding.
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PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1 - Financial Statements
Balance Sheet at March 31, 1999 and December 31, 1998 3
Statement of Operations for the three months ended 4
March 31, 1999 and 1998
Statement of Cash Flows for the three months ended 5
March 31, 1999 and 1998
Statement of Comprehensive Loss for the three months 6
ended March 31, 1999 and 1998
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 16
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
</TABLE>
2
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MICROVISION, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,946,500 $ 2,269,000
Investment securities available for sale 507,000 -
Accounts receivable, net 288,600 1,538,800
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,134,900 758,500
Other current assets 370,300 282,800
----------- -----------
Total current assets 6,247,300 4,849,100
Property & equipment, net 1,820,400 1,394,100
Other assets 1,170,900 119,000
----------- -----------
Total assets $ 9,238,600 $ 6,362,200
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 988,200 $ 1,327,700
Accrued liabilities 1,037,000 1,028,100
Allowance for estimated contract losses 360,000 228,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 515,100 771,500
Current portion of capital lease obligations 140,600 136,100
------------ ------------
Total liabilities 3,040,900 3,491,400
------------ ------------
Capital lease obligations, net of current portion 245,400 281,800
------------ ------------
Shareholders' Equity
Preferred stock 4,770,000 -
Common stock 27,571,500 25,742,600
Deferred compensation (165,700) (238,700)
Subscriptions receivable (244,500) (78,900)
Unrealized holding gain on investment securities 7,000 -
Accumulated deficit (25,986,000) (22,836,000)
------------ ------------
Total shareholders' equity 5,952,300 2,589,000
------------ ------------
Total liabilities and shareholders' equity $ 9,238,600 $ 6,362,200
------------ ------------
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</TABLE>
See accompanying notes to financial statements.
3
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MICROVISION, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Contract revenue $ 2,301,600 $ 1,708,200
Cost of revenue 1,709,600 1,139,800
----------- -----------
Gross margin 592,000 568,400
----------- -----------
Research and development
expense 881,800 719,500
Marketing, general and
administrative expense 1,721,700 1,168,800
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Total expenses 2,603,500 1,888,300
----------- -----------
Loss from operations (2,011,500) (1,319,900)
Interest income 46,400 107,400
Interest expense (36,900) (4,000)
----------- -----------
Net loss (2,002,000) (1,216,500)
Less: Non-cash beneficial conversion
feature of Series B Preferred Stock (1,148,000) -
----------- -----------
Net loss available for common
shareholders $(3,150,000) $ (1,216,500)
------------ ------------
------------ ------------
Basic and diluted net loss per share $ (0.51) $ (0.20)
------------ ------------
------------ ------------
Weighted average shares outstanding 6,119,000 5,945,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
4
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MICROVISION, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $ (2,002,000) $ (1,216,500)
Adjustments to net cash used in operations:
Depreciation 125,400 84,900
Non-cash expenses related to issuance of stock,
warrants and options and deferred compensation 82,200 159,200
Changes in:
Accounts receivable 1,250,200 (2,512,900)
Costs and estimated earnings in excess of billings (376,400) 570,300
Other current assets (87,500) 12,200
Other assets (1,051,900) -
Accounts payable (339,500) 60,200
Accrued liabilities 8,900 (5,100)
Reserve for project costs 132,000 -
Billings in excess of costs and estimated earnings (256,400) 690,400
------------ -------------
Net cash used in operating activities (2,515,000) (2,157,300)
------------ -------------
Cash flows from investing activities
Purchases of investment securities (500,000) (49,100)
Purchases of property and equipment (551,700) (265,800)
------------ -------------
Net cash used in investing activities (1,051,700) (314,900)
------------ -------------
Cash flows from financing activities
Principal payments under capital leases (31,900) (4,400)
Net proceeds from issuance of preferred stock 4,770,000 -
Net proceeds from issuance of common stock 506,100 125,900
------------ -------------
Net cash provided by financing activities 5,244,200 121,500
------------ -------------
Net increase (decrease) in cash and cash equivalents 1,677,500 (2,350,700)
Cash and cash equivalents at beginning of period 2,269,000 5,049,200
------------ -------------
Cash and cash equivalents at end of period $ 3,946,500 $ 2,698,500
------------ -------------
------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 36,900 $ 4,000
------------ -------------
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchased under capital leases $ - $ 81,100
------------ -------------
------------ -------------
Beneficial conversion feature of Series B Preferred Stock $ 1,148,000 $ -
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
5
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MICROVISION, INC.
STATEMENT OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Net loss $(2,002,000) $(1,216,500)
Other comprehensive income:
Unrealized gain (loss) in investment
securities available-for-sale 7,000 (3,400)
------------ ------------
Comprehensive loss $(1,995,000) $(1,219,900)
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
6
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MICROVISION, INC.
Notes to Financial Statements
March 31, 1999
Management's Statement
The accompanying unaudited financial statements of Microvision, Inc. (the
"Company") at March 31, 1999 and for the three month periods ended March 31,
1999 and March 31, 1998 have been prepared in accordance with generally accepted
accounting principles for interim financial information on a basis consistent
with the audited financial statements of the Company for the twelve month period
ended December 31, 1998. These statements include all adjustments (consisting
only of normal recurring accruals) that, in the opinion of the Company's
management, are necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented. The interim
results are not necessarily indicative of results that may be expected for a
full year and should be read in conjunction with MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS set forth herein and
with the Company's audited financial statements for the year ended December 31,
1998, which are included in the Company's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission.
Computation of Net Loss Per Share
Net loss per share and net loss per share assuming dilution
information is computed using the weighted average number of shares of common
stock outstanding during each period in which the Company reports a loss.
Common equivalent shares issuable upon the exercise of outstanding options
and warrants to purchase shares of the Company's common stock (using the
treasury stock method) and upon conversion of the Company's preferred stock
(using the if - converted method) are not included in the calculation of the
net loss per share and net loss per share assuming dilution because the
effect of their inclusion is anti-dilutive.
Sale of Series B Convertible Preferred Stock
In January 1999, the Company raised $5,000,000 (before issuance
costs) from the sale of convertible preferred stock to a private investor in
a private placement. The preferred stock is immediately convertible at a rate
of $12.50 per share. Unless converted sooner at the election of the investor,
the convertible preferred stock will automatically convert into 400,000
shares of common stock at the end of its five year term. The convertible
preferred stock carries a cumulative dividend of 4% per annum, payable in
cash or additional convertible preferred stock at the election of the
Company. The investor also acquired two options to purchase additional
convertible preferred stock, one with a six-month maturity and one with a
nine-month maturity from the closing date of the transaction. Terms of the
transaction include certain rights for the investor to have the common stock
issuable upon conversion of the preferred stock registered under the
Securities Act of 1933 (the "Securities Act") for resale by the holders
thereof.
The conversion price of the convertible preferred stock was less
than the closing price of the Company's common stock on the date of sale of
the preferred stock. This beneficial conversion feature was valued at $1.1
million and was accounted for as a reduction of the price paid for the
preferred stock and an increase in common stock. This "discount" is treated
as a preferred stock dividend to be recorded to retained earnings over the
period between the date of sale and the date on which the preferred stock
first becomes convertible. Since the preferred stock is immediately
convertible, the entire value of the conversion feature has been recorded as
a dividend during the three months ended March 31, 1999.
Subsequent Events
In April 1999, the Company raised $6,000,000 (before issuance costs)
from the sale of 440,893 shares of common stock to a private investor in a
private placement. The investor also acquired two warrants to purchase
additional common stock, one with a five year term and the other with a
one year term. Under the terms of the transaction documents, the Company will
register for resale under the Securities Act the shares issued
7
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in the initial sale and underlying the two warrants. Terms of the transaction
include a provision that could result in a one-time issuance of additional
shares, up to a fixed maximum, if the market price, as defined in the
purchase agreement, of the Company's common stock on the date of
effectiveness of the registration statement is less than the market price of
the common stock on the closing date of the initial sale.
In May 1999, the Company raised $4,500,000 (before issuance costs)
from the sale of 268,600 shares of common stock to Cree Research, Inc.
("Cree") in a private placement. Under the terms of the agreement, within 90
days of the closing of the transaction the Company will register for resale
under the Securities Act the shares issued to Cree. Concurrently with the
sale of the stock, the Company entered into a one year $2.6 million
development contract with Cree to accelerate development of semi-conductor
light-emitting diodes and laser diodes for application with the Company's
proposed display and imaging products. The agreement calls for payment of the
$2.6 million cost of the project in four equal quarterly payments, the first
of which was made concurrently with the signing of the agreement. The Company
has pledged the balance of the payments due of $1,950,000 as security for a
letter of credit.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
The information set forth below includes "forward looking
statements" within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, 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 Company's forward-looking statements
are set forth under the caption "Description of Business--Considerations
Relating to the Company's Business" in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission.
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 ("VRD") from the University of Washington and entered into a
research agreement with the University of Washington to further develop the VRD
technology. The Company was in the development stage through 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
to develop and market the VRD technology. Since the completion of its initial
public offering in August 1996, the Company also has established and equipped
its own in-house laboratories for the continuing development of the VRD
technology and has transferred the research and development work from the
University of Washington 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 currently has several prototype versions of the VRD
including monochromatic and color portable units and a full color table-top
model. The Company expects to continue funding prototype and demonstration
versions of products incorporating the VRD technology at least through 1999.
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.
Plan of Operation
The Company intends to continue entering into strategic co-development
relationships with systems and equipment manufacturers to pursue the development
of commercial products incorporating the VRD technology. In 1997, the Company
hired a Vice President, Sales with experience in technical product sales to
pursue development contracts as well as strategic relationships with systems
integrators and equipment manufacturers for the joint development of commercial
products incorporating the VRD technology. In March 1999 the Company hired a
Vice President, Marketing to identify and assess the various market and product
opportunities
9
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available to the Company for the 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 plans to continue to pursue, obtain and perform on
development contracts, with the expectation that such contracts will lead to
products incorporating the Company's VRD technology as well as to further the
development of 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 potential products. In March 1999, the Company hired a Vice
President, Research & Development with experience in product development and
technology commercialization to lead the Company's research and product
development efforts, manage the performance of revenue contracts, and to direct
the Company's internal research and product development activities. The Company
has established, staffed, and equipped in-house laboratories to support its
performance on development contracts as well as product development and VRD
technology development. The Company intends to continue hiring qualified
technical personnel and to continue investing in laboratory facilities and
equipment to achieve the Company's technology development objectives.
Results of Operations
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1998.
CONTRACT REVENUE. Contract revenue in the three months ended March
31, 1999 increased by $593,400 or 35% to $2,301,600 from $1,708,200 in the
comparable period in 1998. The increase resulted from a larger amount of
revenue in development contracts recognized in the three months ended March
31, 1999 than recognized in the comparable period in the prior year on
contracts entered into in 1999 and 1998, respectively. Revenue in both the
three months ended March 31, 1999 and 1998, includes revenue for which
precontract costs were recognized in the prior quarter. The Company's
customers have included both the United States Government and commercial
enterprises.
COST OF REVENUE. Cost of revenue includes both the direct and indirect
costs of performing on revenue contracts, as well as the additional staff and
related support costs associated with building the Company's technical
capabilities and capacity to perform on expected future development contracts.
Cost of revenue also includes amounts invested by the Company in research and
development activities undertaken in conjunction with work performed in
fulfillment of development contracts.
Cost of revenue in the three months ended March 31, 1999 increased
by $569,800 or 50% to $1,709,600 from $1,139,800 in the comparable period of
1998. The increase includes increases in both the direct and indirect costs
of performing on revenue contracts as well as the additional staff and
related support costs associated with building the Company's technical
capabilities and capacity to perform on expected future development
contracts. The higher level of expense in the three months ended March 31,
1999 over the comparable period in 1998 also reflects a higher level of
investment made by the Company in developing its technology through work
performed on development contracts, in addition to costs incurred on its own
internal research and development projects. See "--Research and Development
Expense".
10
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The Company expects that the cost of revenue on an absolute dollar
basis will increase in the future. This increase likely will result from
additional development contract work that the Company expects to perform and the
commensurate growth in the Company's personnel and technical capacity. The cost
of facilities is also expected to increase as a result of the Company's
relocation of its headquarters to larger facilities in April 1999. See
"--Liquidity and Capital Resources." As a percentage of contract revenue, the
Company expects the cost of revenue to decline over time as the Company realizes
economies of scale associated with an anticipated higher level of development
contract business and as the Company's expenditures incurred to increase its
technical capabilities and capacity become less as a percentage of a higher
level of revenues.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
consists of compensation and related support costs of employees and contractors
engaged in internal research and development activities; payments made for lab
operations, outside development and processing work; fees and expenses related
to patent applications and patent prosecution; and other expenses incurred in
support of the Company's on-going internal research and development activities.
Included in research and development expenses are costs incurred in acquiring
and maintaining licenses of technology from other companies and options or other
rights to acquire or use intellectual property, either related to the Company's
VRD technology or otherwise. To date, the Company has expensed all research and
development costs.
Research and development expenses in the three months ended March
31, 1999 increased by $162,300 or 23% to $881,800 from $719,500 in the
comparable period in 1998. The increase reflects continued implementation of
the Company's operating plan, which calls for building its technical staff
and supporting activities to further develop the Company's technology;
establishing and equipping its own in-house laboratories; and developing
intellectual property related to the Company's business.
The Company believes that a substantial level of continuing research
and development expense will be required to further 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 expanding and equipping its in-house laboratories, and
that these costs will continue to increase in future periods.
In May 1999, the Company entered into a $2.6 million one year
development contract with Cree Research, Inc. to accelerate development of
semi-conductive light-emitting diodes and laser diodes for application in the
Company's proposed display and imaging products. See "--Liquidity and Capital
Resources," and Notes to Financial Statements.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative expenses include compensation and support costs for the Company's
sales, marketing, management and administrative staff and their related
activities, and for other general and administrative costs, including legal and
accounting costs, costs of consultants and professionals and other expenses.
Marketing, general and administrative expenses in the three months
ended March 31, 1999 increased by $552,900 or 47% to $1,721,700 from
$1,168,800 in the comparable period in 1998. The increase includes increased
aggregate compensation and associated support costs
11
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for employees and contractors, including those employed at December 31, 1998
and those hired subsequent to that date, in sales and marketing and in
management and administrative areas. The Company expects marketing, general and
administrative expenses to increase substantially in future periods as the
Company adds to its sales and marketing staff, makes additional investments in
sales and marketing activities to support commercialization of its VRD
technology and development of anticipated products, and as it increases the
level of corporate and administrative activity.
INTEREST INCOME AND EXPENSE. Interest income in the three months
ended March 31, 1999 decreased by $61,000 to $46,400 from $107,400 in the
comparable period in 1998. This decrease resulted from lower average cash and
investment securities balances in the three months ended March 31, 1999 than
the average cash and investment securities balances in the comparable period
of the prior year.
Interest expense in the three months ended March 31, 1999 increased
by $32,900 to $36,900 from $4,000 in the comparable period in 1998. This
increase resulted from interest related to assignment of certain accounts
receivable under the Company's accounts receivables assignment facility and
to increased interest expense related to capital lease obligations.
NON-CASH BENEFICIAL CONVERSION FEATURE. In January 1999, the
Company raised $5 million in a private placement of Series B Convertible
Preferred Stock, which is immediately convertible into 400,000 shares of
common stock of the Company. The conversion price of the convertible
preferred stock was less than the closing price of the Company's common stock
on the date of sale of the preferred stock. This beneficial conversion
feature was valued at $1.1 million and was accounted for as a reduction of
the price paid for the preferred stock and an increase in common stock. This
"discount" is treated as a preferred stock dividend to be recorded to
retained earnings over the period between the date of sale and the date on
which the preferred stock first becomes convertible. Since the preferred
stock is immediately convertible, the entire value of the conversion feature
has been recorded as a dividend during the three months ended March 31, 1999.
See "Notes to Financial Statements."
Liquidity and Capital Resources
Since our inception through March 31, 1999, our principal sources of
liquidity have been net proceeds from the sale of debt and equity totaling
$29.1 million and development contracts totaling $10.3 million. At March 31,
1999, the Company's total cash, cash equivalents and investment securities
balance was $4.5 million. The Company has no bank line of credit.
In 1998, the Company established a non-recourse receivables assignment
facility (the "Facility") with a financial institution. The Facility allows the
Company to assign accounts receivable to the financial institution on a
non-recourse basis for cash. The maximum amount of assigned but uncollected
receivables at any one time is $2,500,000
During the three months ended March 31, 1999, the Company used
approximately $2.5 million of cash in operating activities, an increase of
approximately $.3 million from the approximately $2.2 million that the
Company used in the first quarter of 1998. This increased use of cash
resulted primarily from an increase in the net loss of $785,500 for the
period ended March 31, 1999 over the loss for the comparable period of the
prior year, which was offset in part by net cash provided by other operating
sources. During 1999, the Company's operating
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expenses will depend primarily upon the nature of the contracts that the
Company performs during the year and on the extent to which it grows in
anticipation of expected future development contracts.
During the three months ended March 31, 1999, the Company's
investing activities consisted of purchases of investment securities of
approximately $500,000 and additions to property and equipment of approximately
$552,000, primarily for tenant improvements associated with the Company's new
headquarters building.
In January 1999, the Company raised $5,000,000 in cash (before
issuance costs) from the sale of convertible preferred stock to a private
investor in a private placement. The Company raised an additional $7.9
million in net proceeds (before issuance costs) from the sale of securities
subsequent to March 31, 1999. See "Notes to Financial Statements."
In October 1998, the Company entered into a lease for office space to
house the Company's operations over the longer term by providing space to
accommodate planned growth in staff, lab and production space requirements.
Under the terms of the lease, the Company will lease between 92,000 square feet
and 101,000 square feet over the first four years of the seven-year term of the
lease. Based on the initial commitment of approximately 67,500 square feet, the
base rent expense during the first year of occupancy is approximately $861,000,
increasing to approximately $931,000 in the second year. The lease is a triple
net lease, which requires the Company to pay operating expenses in addition to
the base rent. The lease terms include an option for the Company to extend the
initial lease term for one period of five years, a second option to extend for
an additional period of two years, and other options to acquire additional space
during the initial seven-year term should the need arise. The terms of the lease
require the Company to provide the landlord with a lease bond in the amount of
$1,150,000 as credit enhancement for the lease. As of December 31, 1998,
$400,000 of the required lease bond had been issued, with the remaining $750,000
issued in January 1999. The Company was required to secure one-half of the
lease bond with a letter of credit and was required to secure the full amount of
the letter of credit with cash. The requirement to maintain the lease bond
terminates when the Company meets certain financial criteria as described in the
lease. In January 1999, the Company exercised its option to finance $420,000 of
tenant improvements through the landlord and provided a letter of credit to
support the borrowing. The Company was required to secure the entire amount of
the letter of credit with cash. The amount of the letter of credit required is
reduced over the term of the borrowing based on repayments made. Repayment of
the borrowing will be included in the Company's rent. The Company completed its
relocation into this facility in April 1999.
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 Company's license agreement with the University of Washington, the
Company is obligated to make royalty payments to the University of Washington
with respect to the VRD. If the Company is successful in establishing OEM
co-development and joint venture arrangements, it is
13
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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 with the objective of commercializing the VRD
technology.
The Company believes that its cash, cash equivalents, and investment
securities balances of $4.5 million, together with the $7.9 million in net
proceeds received subsequent to March 31, 1999 from the sale of common stock,
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 further the development of its technology and for expenses
associated with product development, and to respond to competitive pressures
or to meet unanticipated development difficulties. The Company's operating
plan calls for the addition of technical and business staff and the purchase
of additional laboratory equipment. The operating plan also provides for the
development of strategic relationships with systems and equipment
manufacturers. 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.
Year 2000 Compliance Strategy
The Company has developed and is implementing a comprehensive strategy
for updating its information technology ("IT") and non-IT systems for Year 2000
("Y2K") compliance. These systems include PC-based hardware, embedded systems,
enterprise software (available Company-wide) and individual software (available
on a user-by-user basis). The Company's strategy for achieving Y2K compliance
includes evaluating its current systems and software for Y2K compliance,
purchasing new systems and software where necessary and developing contingency
plans for those systems that the Company cannot control.
Essentially all of the Company's IT systems have been purchased within
the last three years. During that period, Y2K compliance has been a
consideration in the purchase of all of the Company's primary IT and non-IT
systems. The Company believes that it has currently reached the following levels
of compliance:
<TABLE>
<CAPTION>
Current Level
Technology of Compliance
---------- -------------
<S> <C>
PC-based hardware 90%
Embedded systems 25%
Enterprise software 70%
Individual software 50%
</TABLE>
14
<PAGE>
In April 1999, the Company moved its headquarters and commenced a new
lease. See "-- Liquidity and Capital Resources." Pursuant to the terms of the
lease, the landlord is responsible for making the systems serving the facility
"Year 2000 Compliant."
The Company's strategy includes identifying third parties whose failure
to be Y2K compliant could have a material adverse impact on the Company's
operations or financial condition. This process includes examining the Company's
interaction with other IT systems including those of vendors and parties with
which it communicates via e-mail and other information systems. The Company has
requested a statement from significant vendors and third parties reporting their
Y2K compliance status. If such vendors or other third parties raise Y2K
compliance concerns, the Company plans to utilize alternative vendors that are
Y2K compliant. In addition, the Company is requesting a statement from its
customers regarding their levels of Y2K compliance.
The Company presently expects its overall Y2K assessment to be
completed in the third quarter of 1999. There is no assurance, however, that
taking the steps described within the proposed timeframe will ensure complete
Y2K compliance.
To date, the cost of the Company's Y2K compliance strategy has been
immaterial. In connection with its assessment of its Y2K exposure, the Company
is developing a budget of potential expenditures relating to its Y2K compliance
strategy.
The effect on the Company of an internal Y2K failure, a third party Y2K
failure or a combination of internal and external Y2K failures could range from
a minor disruption in the Company purchases to an extended interruption in the
IT and non-IT systems of third-parties whose operations materially impact the
Company's operations. Such an interruption could result in a material adverse
effect on the Company's operating results and financial position. In addition,
if the Company has a production product by the year 2000, the potential for a
material adverse effect on the Company would increase. There can be no assurance
that such a scenario, or part of such a scenario, will not occur.
The Company's contingency plans for a Y2K disruption of its operations
include making additional purchase from vendors for a reasonable period
beginning January 1, 2000 in order to ensure the availability of components and
materials needed for the Company to perform on its contractual obligations. The
Company is also in the process of developing backup plans that will enable it to
continue operations with the least amount of downtime and expense. There is no
assurance, however, that such backup plans will enable the Company to avoid a
materially adverse impact on its results of operations in the event of a Y2K
disruption.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's cash equivalents and investment
securities are at fixed interest rates and, as such, the fair value of these
instruments is affected by changes in market interest rates. However, all of the
Company's cash equivalents and investment securities mature within one year. As
a result, the Company believes that the market risk arising from its holdings of
these financial instruments is minimal. In addition, substantially all of the
Company's development contract payments are made in U.S. dollars and,
consequently, the Company believes its foreign currency exchange rate risk is
immaterial. The Company does not have any derivative instruments and does not
engage in hedging transactions.
16
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to, nor is its property subject to, any
material pending legal proceeding.
Item 2. Changes In Securities and Use of Proceeds
On January 14, 1999, the Company raised $5,000,000 (before issuance
costs) through the sale of 5,000 shares of its Series B Convertible
Preferred Stock (the "Series B Stock") to Margaret Elardi, an
accredited investor. The Series B Stock is convertible from time to
time into shares of common stock at an initial conversion price of
$12.50 per share, subject to adjustment under certain conditions.
The Company also granted Mrs. Elardi certain options to purchase
additional shares of Series B Stock. For a complete description of
this transaction, see our Current Report on Form 8-K for the event
of January 14, 1999, as filed with the SEC on January 28, 1999.
This transaction was exempt from registration under the Securities
Act pursuant to Sections 4(2) and 4(6) of that Act, and Regulation
D promulgated thereunder.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. EXHIBITS
10.1 Form of Amendment to lease between S/I Northcreek II, LLC
and Microvision, Inc. dated October 27, 1998
11. Computation of Net Loss Per Share and Net Loss Per Share
Assuming Dilution
27. Financial Data Schedule
b. REPORTS ON FORM 8-K
On January 28, 1999, the Company filed a Current Report on Form
8-K for the event of January 14, 1999.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICROVISION, INC.
Date: May 17, 1999 RICHARD F. RUTKOWSKI
--------------------------------------------
Richard F. Rutkowski
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 RICHARD A. RAISIG
--------------------------------------------
Richard A. Raisig
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Form of Amendment to lease between S/I Northcreek II, LLC and
Microvision, Inc. dated October 27, 1998
11. Computation of Net Loss Per Share and Net Loss Per Share
Assuming Dilution
27. Financial Data Schedule
</TABLE>
19
<PAGE>
LEASE AMENDMENT NO. 1
This LEASE AMENDMENT NO. 1 (the "Amendment") is entered into as of this
___ of _____, 1999, by and between S/I NORTHCREEK II, LLC, A WASHINGTON
LIMITED LIABILITY COMPANY ("Landlord"), and MICROVISION, INC., A WASHINGTON
CORPORATION ("Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Lease dated October
28, 1998 (the "Lease"). The Lease covers those certain premises (the
"Premises") consisting of approximately 67,471 rentable square feet in
Building F, as located in the North Creek Technology Campus I, Bothell, King
County, Washington, which Premises are more particularly described in the
Lease.
B. Landlord and Tenant now desire to amend the Lease on the terms and
conditions contained in this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
1. TERMS. Capitalized terms used in this Amendment and not defined
herein shall have the meaning given to them in the Lease.
2. SECTION 3.01(d)(2)(bb). Section 3.01(d)(2)(bb) is hereby amended to
include, in addition to Landlord's payment of the sum of $25.00 per square
foot of the Building F Premises, Landlord's payment of an additional tenant
improvement allowance in the sum of $30,000.00 to be used for construction of
the Building F Tenant Improvements pursuant to the Tenant Improvement Plans
for Building F.
3. SECTION 1.01(a). Pursuant to Section 3.01(d)(2)(cc) and Tenant's
written election made thereunder, the Base Rent for the Building F Premises
is increased by $6,972.50 per month for each month of the initial Lease Term,
which amount is agreed by the parties to amortize the $420,000.00 portion of
the total amount of excess costs for the Building F Tenant Improvements paid
by Landlord over the initial Term of this Lease at a 10.47% effective annual
amortization rate.
4. RATIFICATION. Except as expressly set forth in this Amendment, the
terms and provisions of the Lease shall remain in full force and effect and
are hereby ratified by the parties.
<PAGE>
5. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as
of the date first written above.
LANDLORD:
S/I NORTHCREEK II, LLC, a
Washington limited liability company
By:
--------------------------------
Its:
----------------------------
TENANT:
MICROVISION, INC., a
Washington corporation
By:
--------------------------------
Its:
----------------------------
2
<PAGE>
Exhibit 11
Microvision, Inc.
Computation of Net Loss Per Share and
Net Loss Per Share Assuming Dilution
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net loss $(2,002,000) $(1,216,500)
Less: Non-cash beneficial conversion
feature of Series B Convertible
Preferred Stock (1,148,000) --
------------ ------------
Net loss available for common shareholders $(3,150,000) $(1,216,000)
------------ ------------
------------ ------------
Shares used in computing net loss per share
and net loss per share assuming dilution:
Weighted average shares outstanding 6,119,000 5,945,000
------------ ------------
------------ ------------
Net loss per share and per share
assuming dilution $ (0.51) $ (0.20)
------------ ------------
------------ ------------
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,946,500
<SECURITIES> 507,000
<RECEIVABLES> 321,600
<ALLOWANCES> (33,000)
<INVENTORY> 0
<CURRENT-ASSETS> 6,247,300
<PP&E> 2,586,600
<DEPRECIATION> (766,200)
<TOTAL-ASSETS> 9,238,600
<CURRENT-LIABILITIES> 3,040,900
<BONDS> 245,400
0
4,770,000
<COMMON> 27,571,500
<OTHER-SE> (26,389,200)
<TOTAL-LIABILITY-AND-EQUITY> 9,238,600
<SALES> 0
<TOTAL-REVENUES> 2,301,600
<CGS> 0
<TOTAL-COSTS> 1,709,600
<OTHER-EXPENSES> 2,594,500
<LOSS-PROVISION> 9,000
<INTEREST-EXPENSE> (36,900)
<INCOME-PRETAX> (2,002,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,002,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,002,000)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
</TABLE>
