<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 June 30, 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
Incorporation or organization) Identification No.)
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. [X] Yes [ ] No
At July 31, 1999, the Company had 9,850,905 shares of common stock, no par
value, outstanding.
1
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PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - Financial Statements
Balance Sheet at June 30, 1999 and December 31, 1998 3
Statement of Operations for the three and six months ended 4
June 30, 1999 and 1998
Statement of Cash Flows for the six months ended 5
June 30, 1999 and 1998
Statement of Comprehensive Loss for the three and six 6
months ended June 30, 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 Dislosures About Market Risk 16
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings 27
Item 2 - Changes in Securities and Use of Proceeds 27
Item 3 - Defaults Upon Senior Securities 28
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 29
</TABLE>
2
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MICROVISION, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 7,866,200 $ 2,269,000
Investment securities available for sale 2,277,300 -
Accounts receivable, net 1,449,700 1,538,800
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,287,400 758,500
Other current assets 440,800 282,800
------------- -----------
Total current assets 13,321,400 4,849,100
Property & equipment, net 2,645,700 1,394,100
Other assets 3,157,600 119,000
------------ -----------
Total assets $ 19,124,700 $ 6,362,200
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,498,000 $ 1,327,700
Accrued liabilities 2,347,600 1,028,100
Allowance for estimated contract losses 685,000 228,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 266,200 771,500
Current portion of capital lease obligations 203,200 136,100
Current portion of long term debt 83,700 -
------------- -----------
Total current liabilities 5,083,700 3,491,400
Capital lease obligations, net of current portion 223,100 281,800
Long term debt, net of current portion 326,500 -
------------- -----------
Total liabilities 5,633,300 3,773,200
------------- -----------
Commitments and contingencies - -
Shareholders' Equity
Preferred stock 436,000 -
Common stock 44,870,800 25,742,600
Deferred compensation (359,100) (238,700)
Subscriptions receivable (246,500) (78,900)
Unrealized holding gain on investment securities 28,300 -
Accumulated deficit (31,238,100) (22,836,000)
------------- -----------
Total shareholders' equity 13,491,400 2,589,000
------------ -----------
Total liabilities and shareholders' equity $ 19,124,700 $ 6,362,200
============ ===========
</TABLE>
See accompanying notes to financial statements.
3.
<PAGE>
MICROVISION, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Contract revenue $ 1,392,900 $ 2,055,900 $ 3,694,500 $ 3,764,100
Cost of revenue 1,539,500 1,514,800 3,249,100 2,654,600
------------ ------------ ------------ ------------
Gross margin (146,600) 541,100 445,400 1,109,500
------------ ------------ ------------ ------------
Research and development
expense 2,590,900 1,411,700 3,472,700 2,131,200
Marketing, general and
administrative expense 2,513,700 1,345,800 4,235,400 2,514,600
------------ ------------ ------------ ------------
Total expenses 5,104,600 2,757,500 7,708,100 4,645,800
------------ ------------ ------------ ------------
Loss from operations (5,251,200) (2,216,400) (7,262,700) (3,536,300)
Interest income 142,500 82,100 188,900 189,500
Interest expense (70,000) (8,900) (106,900) (12,900)
------------ ------------ ------------ ------------
Net loss (5,178,700) (2,143,200) (7,180,700) (3,359,700)
Less: Preferred dividend (73,400) - (73,400)
Non-cash beneficial conversion
feature of Series B Preferred Stock - - (1,148,000) -
------------ ------------ ------------ ------------
Net loss available for common
shareholders $(5,252,100) $(2,143,200) $(8,402,100) $(3,359,700)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.74) $ (0.36) $ (1.27) $ (0.56)
============ ============ ============ ============
Weighted average shares outstanding 7,073,800 5,964,700 6,596,400 5,954,900
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4.
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MICROVISION, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $ (7,180,700) $(3,359,700)
Adjustments to net cash used in operations:
Depreciation 277,100 207,200
Non-cash expenses related to issuance of stock,
warrants and options and deferred compensation 126,900 317,700
Changes in:
Accounts receivable 89,100 (1,180,900)
Costs and estimated earnings in excess of billings (528,900) 109,500
Other current assets (158,000) 32,500
Other assets (3,038,600) (24,100)
Accounts payable 170,300 467,100
Accrued liabilities 1,319,500 589,600
Reserve for project costs 457,000 -
Billings in excess of costs and estimated earnings (505,300) 251,900
----------- ----------
Net cash used in operating activities (8,971,600) (2,589,200)
----------- -----------
Cash flows from investing activities
(Purchases) Sales of investment securities (2,249,000) 1,993,200
Purchases of property and equipment (1,453,700) (525,100)
----------- -----------
Net cash (used in) provided by investing activities (3,702,700) 1,468,100
----------- -----------
Cash flows from financing activities
Principal payments under capital leases (66,600) (19,500)
Principal payments under long term debt (9,800) -
Increase in long term debt 420,000 -
Payment of preferred dividend (73,400) -
Net proceeds from issuance of preferred stock 4,770,000 -
Net proceeds from issuance of common stock 13,231,300 177,200
----------- -----------
Net cash provided by financing activities 18,271,500 157,700
----------- -----------
Net increase (decrease) in cash and cash equivalents 5,597,200 (963,400)
Cash and cash equivalents at beginning of period 2,269,000 5,049,200
----------- ------------
Cash and cash equivalents at end of period $ 7,866,200 $ 4,085,800
============= ============
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Cash paid for interest $ 106,900 $ 12,900
============= ============
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
<S> <C> <C>
Property and equipment purchased under capital leases $ 75,000 $ 268,400
============= ============
Beneficial conversion feature of Series B Preferred Stock $ 1,148,000 $ -
============= ============
Redemption of preferred stock $ 4,334,000 $ -
============= ============
Exercise of stock options for subscriptions receivable $ 167,600 $ -
============= ============
Deferred compensation for stock grants $ 247,300 $ -
============= ============
</TABLE>
See accompanying notes to financial statements.
5.
<PAGE>
MICROVISION, INC.
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss $ (5,178,700) $ (2,143,200) (7,180,700) (3,359,700)
Other comprehensive income:
Unrealized gain (loss) in investment
securities available-for-sale 21,300 (100) 28,300 (3,500)
------------- ------------- ----------- -----------
Comprehensive loss $ (5,157,400) $ (2,143,300) (7,152,400) (3,363,200)
============= ============= =========== ===========
</TABLE>
See accompanying notes to financial statements.
6.
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MICROVISION, INC.
Notes to Financial Statements
June 30, 1999
Management's Statement
The accompanying unaudited financial statements of Microvision, Inc. (the
"Company") at June 30, 1999 and for the three month periods ended June 30, 1999
and June 30, 1998 and for the six month periods ended June 30, 1999 and June
30, 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 closing date of the
transaction. This beneficial conversion feature was valued at $1.1 million and
was accounted for as a reduction of the price paid for the
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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. Because 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.
In May 1999, the Company redeemed the convertible preferred stock and,
in connection therewith, issued 400,000 shares of Common Stock as consideration
to the investor. In addition, the Company paid a cash dividend of $73,400 to the
investor at the time of the redemption.
Sales of Common Stock
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. In April 1999 the Company filed a registration statement to register for
resale by the investors the shares of common stock and warrants sold in the
transaction. In June 1999, the registration statement was declared effective by
the SEC.
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. 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 in connection 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, which will be used to fund
the remaining payments under the agreement. In August, the Company filed a
registration statement to register for resale by the investor the shares of
common stock sold in transaction.
In June 1999, the Company received $1,078,920 (before issuance costs)
from the exercise of 49,950 warrants to purchase units, consisting of one share
of common stock and one warrant to purchase common stock, and from the exercise
of the underlying common stock purchase warrants, which resulted in the issuance
by the Company of a total of 99,900 shares of common stock.
Subsequent Events
The Company announced in June 1999 that it would redeem its outstanding
publicly traded redeemable common stock purchase warrants on July 19, 1999.
Following the announcement and beginning in July 1999, 2,253,430 warrants were
exercised with the Company receiving $27,041,200 in gross proceeds and issuing
2,253,430 shares of Common Stock. The remaining warrants will be redeemed in
accordance with the terms of the Warrant Agreement. The Company has delisted the
Warrants from trading on the Nasdaq National Market.
8
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In July 1999, the holder of an option to purchase Convertible
Preferred Stock Series B-1 exercised the option and purchased 1,600 shares of
Series B-1 Convertible Preferred Stock for $1,600,000 (before issuance costs).
The preferred stock is immediately convertible at a rate of $16.00 per share.
Unless converted sooner at the election of the investor, the convertible
preferred stock will automatically convert into 100,000 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. Terms of the preferred stock
include certain rights for the investor to have the common stock issuable upon
conversion of the preferred stock registered under the Securities Act for
resale by the holders thereof.
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 "--Considerations Relating to the Company's Business" beginning on page
19.
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.
9
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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 March 1999 the
Company hired a Vice President, Marketing to identify and assess the various
market and product opportunities 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 of 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 JUNE 30, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998.
CONTRACT REVENUE. Contract revenue in the three months ended June 30,
1999 decreased by $663,000 or 32% to $1,392,900 from $2,055,900 in the
comparable period in 1998. Several factors contributed to the decrease. During
the three months ended June 30, 1999, the Company went through a reorientation
of its Research and Product Development Department to more directly focus its
technical capabilities on product development and production. Because the
Company recognizes revenue on a percentage of completion basis, the resulting
loss of direct labor hours worked on development projects and the related
decrease in other direct costs charged to projects resulted in lower revenue
generation for the period. Delays in booking expected development contracts and
increases in certain development project budgets also contributed to the
decrease. To date, substantially all of the Company's revenue has been generated
from development contracts. The Company's customers have included the United
State Government and commercial enterprises.
COST OF REVENUE. Cost of revenue includes both the direct and indirect
costs of performing on revenue contracts. Direct costs include direct labor,
materials and other costs incurred directly in the performance of specific
projects. Indirect costs include labor and other costs associated with operating
the Research and Product Development Department and building
10
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the technical capabilities of the Company. The cost of revenue is determined in
part by the level of direct costs incurred on development contracts and in part
by the level of indirect costs incurred in managing and building the technical
capabilities and capacity of the Company. Accordingly, the cost of revenue can
fluctuate significantly from period to period depending on the level of both
the direct costs incurred in the performance of projects and the level of
indirect costs incurred.
Cost of revenue in the three months ended June 30, 1999 increased by
$24,700 or 2% to $1,539,500 from $1,514,800 in the comparable period of 1998.
The direct costs associated with project performance decreased in the three
months ended June 30, 1999 from the costs incurred in the same period of 1998,
reflecting a lower level of work performed on development contracts in the three
months ended June 30, 1999. The indirect costs incurred in building and managing
the Company's technical capabilities and capacity increased during the three
months ended June 30, 1999 over that incurred in the same period of the prior
year as the Company continued to build capacity and capabilities in preparation
for expected future development contracts. The increase in these indirect costs,
including those associated with the reorientation of the Research and Product
Development Department, more than offset the decrease in direct costs associated
with a lower level of performance on development contracts. The result was an
overall increase in costs of revenue for the three months ended June 30, 1999
compared with the same period in the prior year.
The Company expects that the cost of revenue on an absolute dollar
basis generally will increase in the future. This increase is expected to result
from additional development contract work that the Company expects to perform
and the commensurate growth in the Company's personnel and technical capacity
required for performance on such contracts. As a percentage of contract revenue,
the Company expects the cost of revenue to decline in future years 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 ongoing 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 other technologies. To date, the Company has expensed all
research and development costs.
Research and development expense in the three months ended June 30,
1999 increased by $1,179,200 or 84% to $2,590,900 from $1,411,700 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. In May 1999, the Company entered
into a $2.6 million one year development contract with Cree Research, Inc. to
accelerate development of
11
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semi-conductor light-emitting diodes and laser diodes for application in the
Company's proposed display and imaging products. The increase includes costs
associated with the work performed by Cree Research pursuant to the development
agreement. In addition, the Company has expensed the costs associated with the
acquisition of certain intellectual property. See "--Liquidity and Capital
Resources" and "Financial Statement--Notes to Financial Statements."
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.
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 June 30, 1999 increased by $1,167,900 or 87% to $2,513,700 from $1,345,800
in the comparable period in 1998. The increase includes increased aggregate
compensation and associated support costs 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
June 30, 1999 increased by $60,400 to $142,500 from $82,100 in the comparable
period in 1998. This increase resulted from higher average cash and investment
securities balances in the three months ended June 30, 1999 than the average
cash and investment securities balances in the comparable period of the prior
year.
Interest expense in the three months ended June 30, 1999 increased by
$61,100 to $70,000 from $8,900 in the comparable period in 1998. This increase
resulted from interest related to assignment of certain accounts receivable
under the Company's accounts receivable assignment facility, to increased
interest expense on capital lease obligations, and to interest expense on long
term debt entered into during the three month period ended June 30, 1999.
During the three months ended June 30, 1999, the Company paid a cash
dividend of $73,400 to the holder of its Series B Preferred Stock in connection
with the redemption of the Convertible Preferred Stock and issuance of Common
Stock. See "Financial Statements--Notes to Financial Statements."
12
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SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1998.
CONTRACT REVENUE. Contract revenue in the six months ended June 30,
1999 decreased by $69,600 or 2% to $3,694,500 from $3,764,100 in the comparable
period in 1998. Contract revenue in the three months ended March 31, 1999 had
increased by $593,400 over contract revenue in the comparable period of 1998.
However, this increase was more than offset by the decrease in revenue for the
three months ended June 30, 1999, resulting in a decrease in revenue for the six
months ended June 30, 1999 compared to the same period in the prior year.
Several factors contributed to the decrease in revenue during the three months
ended June 30, 1999 compared to the same period in 1998. During the three months
ended June 30, 1999, the Company went through a reorientation of its Research
and Product Development Department to more directly focus its technical
capabilities on product development and production. Because the Company
recognizes revenue on a percentage of completion basis, the resulting loss of
direct labor hours worked on development contracts resulted in lower revenue
generation for the period. Delays in booking expected development contracts and
increases in certain development project budgets also contributed to lower
revenue generation for the three and six month periods ended June 30, 1999 as
compared to the same periods in the prior year. To date, substantially all of
the Company's revenue has been generated from development contracts. 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. Direct costs include direct labor,
materials and other costs incurred directly in the performance of specific
projects. Indirect costs include labor and other costs associated with operating
the Research and Product Development Department and building the technical
capabilities of the Company. The cost of revenue is determined in part by the
level of direct costs incurred on development contracts and in part by the level
of indirect costs incurred in managing and building the technical capabilities
and capacity of the Company. Accordingly, the cost of revenue can fluctuate
significantly from period to period depending on the level of both the direct
costs incurred in the performance of projects and the level of indirect costs
incurred.
Cost of revenue in the six months ended June 30, 1999 increased by
$594,500 or 22% to $3,249,100 from $2,654,600 in the comparable period of 1998.
During the six months ended June 30, 1999, the increase over the comparable
period of the prior year in the indirect costs associated building operating
capacity and technical capabilities of the Company more than offset a decrease
in the direct costs associated with lower level of performance on development
contracts during the six months ending June 30, 1999 from that of the same
period in the prior year. The result was an net increase in the cost of revenue
for the three months ended June 30, 1999 compared with the same period in the
prior year.
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
13
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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 ongoing 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 other technologies. To date, the Company has expensed all
research and development costs.
Research and development expense in the six months ended June 30, 1999
increased by $1,341,500 or 63% to $3,472,700 from $2,131,200 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. In May 1999, the Company entered into a $2.6
million one year development contract with Cree Research, Inc. to accelerate
development of semi-conductor light-emitting diodes and laser diodes for
application in the Company's proposed display and imaging products. The increase
in research and development costs also includes costs associated with the work
performed by Cree Research pursuant to the agreement. In addition, during the
six months ended June 30, 1999, costs related to the acquisition of an exclusive
license were expensed by the Company. See "- Liquidity and Capital Resources"
and "- Notes to Financial Statements."
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.
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 six months ended
June 30, 1999 increased by $1,720,800 or 68% to $4,235,400 from $2,514,600 in
the comparable period in 1998. The increase includes increased aggregate
compensation and associated support costs 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
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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 six months ended
June 30, 1999 decreased by $600 to $188,900 from $189,500 in the comparable
period in 1998. This decrease resulted from lower average cash and investment
securities balances in the six months ended June 30, 1999 than the average cash
and investment securities balances in the comparable period of the prior year.
Interest expense in the six months ended June 30, 1999 increased by
$94,000 to $106,900 from $12,900 in the comparable period in 1998. This increase
resulted from interest related to assignment of certain accounts receivable
under the Company's accounts receivable assignment facility, to increased
interest expense related on capital lease obligations and to interest on long
term debt entered into during the three months ended June 30, 1999.
During the three months ended June 30, 1999, the Company paid a cash
dividend of $73,400 to the holder of its Series B Convertible Preferred Stock in
connection with redemption of the Convertible Preferred Stock and issuance of
Common Stock. See "Financial Statements - Notes to Financial Statements."
Liquidity and Capital Resources
Since our inception through June 30, 1999, our principal sources of
liquidity have been net proceeds from the sale of debt and equity totaling $42.2
million and development contracts totaling $12.6 million. At June 30, 1999, the
Company's total available cash, cash equivalents and investment securities
balance was $10.1 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. At June 30, 1999, the Company had
receivables totaling $1,434,000 assigned under this agreement, which amount the
Company repurchased during July 1999.
During the six months ended June 30, 1999, the Company used
approximately $9.0 million of cash in operating activities, an increase of
approximately $6.4 million from the approximately $2.6 million that the Company
used in the first six months of 1998. This increased use of cash resulted
primarily from an increase in the net loss of $3.8 million for the six months
ended June 30, 1999 over the loss of 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 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.
15
<PAGE>
During the six months ended June 30, 1999, the Company's investing
activities consisted of net purchases of investment securities of approximately
$2,249,000 and additions to property and equipment of approximately $1,453,700,
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. In April 1999, the Company raised an additional $6,000,000 in
cash (before issuance costs) from the sale of common stock and warrants to
purchase common stock to a private investor in a private placement. In May 1999,
the Company raised an additional $4,500,000 in cash (before issuance cossts)
from the sale of common stock to Cree Research, Inc. and simultaneously entered
into a development agreement with Cree. In May 1999, the Company redeemed 5,000
shares of its Convertible Preferred Stock and issued 400,000 shares of Common
Stock to the holder of the preferred stock In June 1999, the Company received
$1,078,960 from the exercise of representatives warrants and issued 99,900
shares of Common Stock. See "Financial Statements -- Notes to Financial
Statements."
In June 1999, the Company announced that it would redeem its
outstanding redeemable common stock purchase warrants on July 19, 1999.
Subsequent to the announcement and beginning in July 1999, 2,253,430 warrants
were exercised with the Company receiving $27,041,200 in proceeds (before
issuance costs) and issuing 2,253,430 shares of Common Stock. The remaining
warrants will be redeemed in accordance with the terms of the Warrant Agreement.
The Company has delisted the Warrants from trading on the Nasdaq National
Market.
In July 1999, the holder of an option to purchase Convertible Preferred
Stock Series B-1 exercised the option and purchased 1,600 shares of Series B-1
Convertible Preferred Stock for $1,600,000 (before issuance costs). The
preferred stock is immediately convertible at a rate of $16.00 per share. Unless
converted sooner at the election of the investor, the convertible preferred
stock will automatically convert into 100,000 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. Terms of the preferred stock include
certain rights for the investor to have the common stock issuable upon
conversion of the preferred stock registered under the Securities Act for resale
by the holders thereof.
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
16
<PAGE>
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 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 equivalent, and investment
securities balances of $10.1 million, together with the $28.6 million in net
proceeds received subsequent to June 30, 1999 from the sale of preferred and
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
17
<PAGE>
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>
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
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<PAGE>
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 purchases 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.
Considerations Relating to the Company's Business
OUR TECHNOLOGY MAY NOT BE COMMERCIALLY ACCEPTABLE. Our success will
depend on the successful development and commercial acceptance of the VRD
technology. To achieve commercial success, this technology and products
incorporating this technology must be accepted by original equipment
manufacturers and end users, and must meet the expectations of our potential
customer base. We cannot be certain that the VRD technology or products
incorporating this technology will achieve market acceptance.
WE HAVE NOT COMPLETED DEVELOPMENT OF A COMMERCIAL PRODUCT. Although we
have developed prototype VRD displays, we must undertake significant additional
research, development and testing before we are able to produce any products for
commercial sale. We cannot be certain that we will be successful in further
refining the VRD technology to produce marketable products. In addition, product
development delays or the inability to enter into relationships with potential
product development partners may delay the introduction of, or prevent us from
introducing, commercial products. Any delay in developing and producing, or the
failure to develop and produce, commercially viable products would have a
material adverse effect on our business, operating results, and financial
condition.
WE HAVE EXPERIENCED NET LOSSES IN EACH YEAR OF OPERATIONS AND DO NOT
EXPECT TO HAVE EARNINGS AT LEAST THROUGH 2000. We have experienced net losses in
each year of operations and, as of June 30, 1999, had an accumulated deficit
since inception of $31.2 million. We incurred net losses of $3.5 million in
1996, $4.9 million in 1997, $7.3 million in 1998 and $7.2 million in the six
months ended June 30, 1999. Our revenues to date have been generated from
development contracts. We do not expect to generate significant revenues from
product sales in the near future. The likelihood of our success must be
considered in light of the expenses, difficulties, and delays frequently
encountered by businesses formed to develop new technologies. In particular, our
operations to date have focused primarily on research and development of the VRD
technology and prototypes, and we have developed marketing capabilities only
during the past year. We are unable to estimate future operating expenses and
revenues based upon historical performance. Our operating results will depend,
in part, on matters over which we have no control, including, without
limitation:
19
<PAGE>
- our ability to achieve market acceptance of the VRD technology
and products incorporating that technology;
- our ability to develop and manufacture commercially viable
products incorporating the VRD technology;
- the level of contract revenues in any given period;
- our expense levels and manufacturing costs; and
- technological and other developments in the electronics,
computing, information display and imaging industries.
We cannot be certain that we will be successful in obtaining additional
development contracts, or that we will be able to generate purchase orders for
products incorporating the VRD technology. In light of these factors, we expect
to continue to incur substantial losses and negative cash flow at least through
2000 and possibly thereafter. We cannot be certain that the Company will become
profitable or cash flow positive at any time in the future.
WE RELY ON OUR PATENTS AND OTHER PROPRIETARY TECHNOLOGY AND MAY BE
UNABLE TO PROTECT THEM ADEQUATELY. Our success will depend in part on the
ability of the Company, the University of Washington, and the Company's other
licensors to maintain the proprietary nature of the VRD and related
technologies. Although our licensors have patented various aspects of the VRD
technology and we continue to file our own patent applications covering VRD
features and related technologies, we cannot be certain 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 our technology to which the patents relate.
We cannot be certain that our competitors, many of which have
substantially greater resources than us and have made substantial investments in
competing technologies, will not apply for and obtain patents that will prevent,
limit or interfere with our ability to make and sell our products. In addition,
we are aware of several patents held by third parties that relate to certain
aspects of retinal scanning devices. These patents could 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 could limit our ability to commercialize
the VRD technology and, consequently, materially and adversely effect our
business, operating results, and financial condition.
Moreover, we cannot be certain 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 a
patent suit would be costly and time-consuming, even if the outcome were
ultimately favorable to us. An adverse outcome in the defense of a patent suit
could subject us to significant
20
<PAGE>
liabilities, 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 us for
damages or expenses they incur.
We also rely on unpatented proprietary technology. Third parties could
develop the same or similar technology or otherwise obtain access to our
proprietary technology. We cannot be certain that we will be able to adequately
protect our trade secrets, know-how or other proprietary information or to
prevent the unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information.
OUR RIGHTS TO THE VRD TECHNOLOGY ARE SUBJECT TO OUR LICENSE AGREEMENT
WITH THE UNIVERSITY OF WASHINGTON. Our success depends on technology that we
have licensed from the University of Washington. If the University of Washington
were to violate the terms of our license agreement, our business, operations,
and prospects could be materially and adversely affected. In addition, we could
lose the exclusivity under the UW License Agreement if we fail 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.
OUR FUTURE SUCCESS DEPENDS ON COLLABORATION WITH THIRD PARTIES. Our
strategy for developing, testing, manufacturing and commercializing the VRD
technology and products incorporating the VRD technology includes entering into
cooperative development and sales and marketing arrangements with corporate
partners, original equipment manufacturers, and other third parties. We cannot
be certain that we 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 we are unable to establish such arrangements,
we would require additional working capital to undertake such activities on our
own and would require extensive manufacturing, sales and marketing expertise
that we do not currently possess. In addition, we 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 arrangements. To the extent that we enter into cooperative
development, sales and marketing or other joint venture arrangements, our
revenues will depend upon the efforts of third parties. We cannot be certain
that any such arrangements will be successful.
THE INFORMATION DISPLAY INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT
BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE. Our products and the VRD
technology will compete with established manufacturers of miniaturized CRT and
flat panel display devices, many of which have substantially greater financial,
technical and other resources than us and many of which are developing
alternative miniature display technologies. We also will compete with other
developers of miniaturized display devices.
The electronic information display industry has been characterized by
rapidly changing technology, accelerated product obsolescence, and continuously
evolving industry standards.
21
<PAGE>
Our success will depend upon our ability to further develop the VRD
technology and to introduce new products and features in a timely manner to
meet evolving customer requirements. We may not succeed in these efforts. Our
business and results of operations will be materially and adversely affected
if we incur delays in developing our products or if such products do not gain
broad market acceptance. In addition, our competitors may develop information
display technologies and products that would render the VRD technology or our
proposed products commercially infeasible or technologically obsolete. We
cannot be certain that the VRD technology or our proposed products will
remain competitive with such advances or that we will have sufficient funds
to invest in new technologies or processes.
WE LACK MANUFACTURING CAPABILITY. Our success depends in part on our
ability to manufacture our components and future products to meet high
quality standards in commercial quantities at competitive prices. To date, we
only have produced prototype products for research, development and
demonstration purposes, and currently lack the capability to manufacture
products in commercial quantities. Accordingly, we will be required to obtain
access through our partners or contract manufacturers to manufacturing
capacity and processes for the commercial production of our future products.
We cannot be certain that the Company will successfully obtain access to
these manufacturing resources or, if it does, that these resources will be
able to manufacture components to our design and quality specifications.
Future manufacturing difficulties or limitations of our suppliers could
result in:
- - a limitation on the number of products incorporating the VRD
technology that can be produced;
- - unacceptably high prices for components, with a resulting loss
of profitability and loss of competitiveness for our products; and
- - increased demands on our financial resources, possibly requiring
additional equity and/or debt financings to sustain our business operations.
WE ARE SUBSTANTIALLY DEPENDENT ON PARTNERS IN THE DEFENSE AND
AEROSPACE INDUSTRIES. Our revenues to date have been derived principally from
product development research relating to defense and aerospace applications
of the VRD technology. The Company believes that development programs and
sales of potential products in these markets will represent a significant
portion of our future revenues. Developments that adversely affect the
defense and aerospace sectors, including delays in government funding and a
general economic downturn, could, in turn, materially and adversely affect
the Company's business and operating results.
WE MAY REQUIRE ADDITIONAL CAPITAL TO CONTINUE IMPLEMENTING OUR
BUSINESS PLAN. The Company believes that its current cash and investment
balances will satisfy its budgeted capital and operating requirements for at
least the next 12 months, based on our current operating plan. Actual
expenses, however, may exceed budgeted amounts and we may require additional
capital to fund long-term operations and business development. Our capital
requirements will depend on many factors, including, but not limited to, the
rate at which we can develop the VRD technology, our ability to attract
partners for product development and licensing arrangements, and the market
acceptance and competitive position of products that incorporate the VRD
22
<PAGE>
technology. We cannot be certain that we will be able to obtain financing
when needed or that we will be able to obtain financing on satisfactory
terms. 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 our short-term or long-term capital requirements, we would be
required to limit our operations significantly.
A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND
COULD DEPRESS MARKET PRICES. The sale of a substantial number of shares of
our common stock in the public market or the prospect of such sales could
materially and adversely affect the market price of the common stock. As of
July 31, 1999, we had outstanding:
- - 9,850,905 shares of common stock;
- - 1,600 shares of Series B Convertible Preferred Stock convertible into
100,000 shares of common stock, subject to adjustment for stock splits,
stock dividends, recapitalizations, reclassifications, and similar events,
and excluding unpaid and accrued dividends payable in shares of common
stock;
- - privately placed warrants to purchase 688,813 shares of common
stock; and
- - "representative's warrants" to purchase 186,250 shares of
common stock.
Almost all of our outstanding shares of common stock may be sold without
substantial restrictions. In addition, as of July 31, 1999, we had granted
options under our option plans to purchase an aggregate of 2,301,197 shares
of common stock. All of the shares purchased under the option plans are
available for sale in the public market, subject in some cases to volume and
other limitations. We also have granted the holder of our Series B Stock
options to purchase 1,920 additional shares of Series B Stock convertible
into 100,000 shares of common stock.
Sales in the public market of substantial amounts of common stock,
including sales of common stock issuable upon conversion of the Series B
Stock or the exercise of outstanding warrants and options, could depress
prevailing market prices for the common stock. Even the perception that such
sales could occur may adversely impact market prices.
CONTINUED DEVELOPMENT FUNDING IS UNCERTAIN; OUR QUARTERLY
PERFORMANCE MAY VARY SIGNIFICANTLY. Our revenues to date have been generated
from a limited number of development contracts with U.S. government agencies
and commercial partners. If the U.S. government or our current and
prospective commercial partners were to reduce or delay funding of
development programs involving new information display technologies, our
business, operating results, and financial condition could be materially and
adversely affected. In addition, our quarterly operating results may vary
significantly based on the status of particular development programs and the
timing of deliverables under specific development agreements. Because of
these factors, revenue, net income or loss and cash flow may fluctuate
significantly from quarter to quarter.
23
<PAGE>
WE RELY ON OUR KEY PERSONNEL. Our success depends on our officers
and other key personnel and on the ability to attract and retain qualified
new personnel. Achievement of our business objectives will require
substantial additional expertise in the areas of sales and marketing,
technology and product development, and manufacturing. 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 our business, operating results and
financial condition.
WE FACE POTENTIAL YEAR 2000-RELATED RISKS. 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 our
purchases to an extended interruption in the information technology ("IT")
and non-IT systems of third parties whose operations materially impact our
operations. Such an interruption could result in a material adverse effect on
the Company's business, operating results, and financial position.
OUR PRODUCTS MAY BE SUBJECT TO FUTURE HEALTH AND SAFETY REGULATION.
Except for regulations related to the labeling of devices that emit
electro-magnetic radiation, we are not aware of any health or safety
regulations applicable to products incorporating the VRD technology. We
cannot be certain, 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. Any such regulation could have a
material and adverse effect on our business, operating results, and financial
condition.
OUR STOCK PRICE MAY BE VOLATILE. The trading price of our common
stock could be subject to significant fluctuations in response to, among
other factors:
- - variations in quarterly operating results;
- - changes in analysts' estimates;
- - announcements of technological innovations by us or our
competitors; and
- - general conditions in the information display and electronics
industries.
In addition, the stock market is subject to price and volume fluctuations
that particularly affect the market prices for small capitalization, high
technology companies. These fluctuations are often unrelated to the operating
performance of these companies.
CERTAIN PROVISIONS OF OUR ARTICLES COULD MAKE A PROPOSED ACQUISITION
THAT IS NOT APPROVED BY OUR BOARD OF DIRECTORS MORE DIFFICULT. Our Amended
and Restated Articles of Incorporation give our Board of Directors the
authority to issue, and to fix the rights and preferences of, shares of our
preferred stock without shareholder action, which may have the effect of
delaying, deterring or preventing a change in control of the Company.
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
24
<PAGE>
Washington law could have the effect of delaying, deterring or preventing a
change in control of the Company.
WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have not previously
paid any dividends on our common stock and for the foreseeable future expect
to retain any earnings to finance the development and expansion of our
business.
25
<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 immaterial. 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.
26
<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 April 1, 1999, the Company sold 440,893 shares of common stock
to Capital Ventures International 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. The Series 1 Warrant gives the holder the right to purchase
up to 145,495 shares of common stock at a price of $19.05225 per
share until April 1, 2004. The Series 2 Warrant gives the holder
the right to purchase up to 418,848 shares of common stock at a
price of $17.90625 per share on April 1, 2000. The Company
received cash consideration of $6,000,000 in connection with the
transaction and paid a cash fee of $460,000 plus a warrant to
purchase 32,695 shares of common stock to a placement agent. This
transaction was exempt from registration under the Securities Act
pursuant to Sections 4(2) and 4(6) of that Act. In April 1999, the
Company filed a registration statement to register the shares of
common stock and warrants sold in the transaction. In June 1999,
the registration statement was declared effective without any
additional shares being issued by the Company.
On April 1, 1999, the Company issued to Josephthal & Co. a common
stock purchase warrant to purchase 32,695 shares of common stock.
The warrant was issued as partial consideration for placement
agent services rendered to the Company in connection with the sale
of common stock and warrants to Capital Ventures International.
The warrant provides the holder the right to purchase up to 32,695
shares of common stock at $20.32 per share for a period of five
years. This transaction was exempt from registration under the
Securities Act pursuant to Sections 4(2) of that Act.
On May 1, 1999, the Company sold 268,600 shares of common stock
to Cree Research, Inc. ("Cree") in a private placement. The
Company received cash consideration of $4,500,000 and paid a cash
placement agent fee of $200,000. This transaction was exempt from
registration under the Securities Act pursuant to Sections 4(2) of
that Act. In July 1999, the Company filed a registration statement
to register for resale under the Securities Act the shares issued
to Cree.
On May 11, 1999, the Company issued 400,000 shares of common stock
to Margaret Elardi in redemption of Series B Convertible Preferred
Stock held by Mrs. Elardi. This transaction was exempt from
registration under the Securities Act pursuant to
27
<PAGE>
Section 3 (a)(9) of that Act . Pursuant to the terms of the
convertible preferred stock, the Company also paid Mrs. Elardi a
cash dividend of $73,400.
On May 6, 1999, the Company issued a common stock purchase warrant
to Burt Davis to purchase 20,000 shares of common stock. The
warrant was issued as consideration for consulting services
pursuant to a consulting agreement between the Company and Mr.
Davis. The warrants vest pro rata over the twelve month period
following the grant and give the holder the right to purchase
common stock at $18.00 per share for a period of five years. This
transaction was exempt from registration under the Securities Act
pursuant to Sections 4(2) of that Act.
On June 14, 1999, the Company issued 2,762 shares of common stock
to Mark Yount pursuant to the cashless exercise of a warrant to
purchase 4,000 shares of common stock at $8.00 per share. This
transaction was exempt from registration under the Securities Act
pursuant to Sections 3(a)(9) of that Act.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on June
10, 1999.
Jacob Brouwer, Richard A. Cowell, Margaret Elardi, Walter J. Lack,
William A. Owens, Richard A. Raisig, Robert A. Ratliffe, Richard
F. Rutkowski, Douglas Trumbull and Stephen R. Willey were elected
as directors for one year terms expiring at the next annual
meeting of shareholders.
The appointment of PricewaterhouseCoopers LLP as independent
auditors of the Company for the year ending December 31, 1999 was
approved
Shareholders cast their votes as follows:
<TABLE>
<CAPTION>
Nominee/Proposal For Against Abstain/
Withheld
<S> <C> <C> <C>
Brouwer 5,807,669 8,527 --
Cowell 5,807,669 8,527 --
Elardi 5,807,669 8,527 --
Lack 5,806,569 9,627 --
Owens 5,807,669 8,527 --
Raisig 5,806,569 9,627 --
Ratliffe 5,807,669 8,527 --
Rutkowski 5,807,669 8,527 --
Trumbull 5,807,669 8,527 --
Willey 5,807,669 8,527 --
Appointment of
PricewaterhouseCoopers LLP 5,806,920 2,226 7,050
</TABLE>
28
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
a. Exhibits
--------
<C> <S>
4.1 Series 1 Stock Purchase Warrant issuable to Capital
Ventures International (1)
4.2 Series 2 Stock Purchase Warrant issuable to Capital
Ventures International (1)
10.1 Stock Purchase Agreement dated May 5, 1999, by and
between the Company and Cree Research, Inc. (2)
10.2 Registration Rights Agreement dated May 5, 1999, by
and between the Company and Cree Research, Inc. (2)
10.3 Securities Purchase Agreement dated April 1, 1999,
by and between the Company and Capital Ventures
International (1)
10.4 Registration Rights Agreement dated April 1, 1999,
by and between the Company and Capital Ventures
International (1)
11 Computation of Net Loss Per Share and Net Loss Per
Share Assuming Dilution
27 Financial Data Schedule
</TABLE>
-----------------------------------------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-3, Registration No. 333-76395
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3, Registration No. 333-84587
b. Reports on Form 8-K
-------------------
No current reports on Form 8-K were filed by the Company
during the quarterly period ended June 30, 1999.
29
<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: August 20, 1999 RICHARD F. RUTKOWSKI
------------------------------------
Richard F. Rutkowski
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 20, 1999 RICHARD A. RAISIG
------------------------------------
Richard A. Raisig
Chief Financial Officer
(Principal Financial and Accounting Officer)
30
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
4.1 Series 1 Stock Purchase Warrant issuable to Capital
Ventures International (1)
4.2 Series 2 Stock Purchase Warrant issuable to Capital
Ventures International (1)
10.1 Stock Purchase Agreement dated May 5, 1999, by and
between the Company and Cree Research, Inc. (2)
10.2 Registration Rights Agreement dated May 5, 1999, by
and between the Company and Cree Research, Inc. (2)
10.3 Securities Purchase Agreement dated April 1, 1999,
by and between the Company and Capital Ventures
International (1)
10.4 Registration Rights Agreement dated April 1, 1999,
by and between the Company and Capital Ventures
International (1)
11 Computation of Net Loss Per Share and Net Loss per
Share Assuming Dilution
27 Financial Data Schedule
</TABLE>
-----------------------------------------------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-3, Registration No. 333-76395
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3, Registration No. 333-84587
31
<PAGE>
Exhibit 11
Microvision, Inc.
Computation of Net Loss Per Share and
Net Loss Per Share Assuming Dilution
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Loss $(5,178,700) $(2,143,200) $(7,180,700) $(3,359,700)
Less: Preferred Dividend (73,400) (73,400)
Non-Cash beneficial conversion feature of (1,148,000)
Series B Convertible Preferred Stock
------------ ------------ ------------ ------------
Net Loss available for common shareholders $(5,252,100) $(2,143,200) $(8,402,100) $(3,359,700)
============ ============ ============ ============
Shares used in computing net loss per
share and net loss per share assuming
dilution:
Weighted average shares outstanding
7,073,800 5,964,700 6,596,400 5,954,900
============ ============ ============ ============
Net loss per share and per share assuming
dilution $(0.74) $(0.36) $(1.27) $(0.56)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF MICROVISION, INC., FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,866,200
<SECURITIES> 2,277,300
<RECEIVABLES> 1,491,700
<ALLOWANCES> (42,000)
<INVENTORY> 0
<CURRENT-ASSETS> 13,321,400
<PP&E> 3,563,600
<DEPRECIATION> (917,900)
<TOTAL-ASSETS> 19,124,700
<CURRENT-LIABILITIES> 5,083,700
<BONDS> 549,600
0
436,000
<COMMON> 44,870,800
<OTHER-SE> (31,815,400)
<TOTAL-LIABILITY-AND-EQUITY> 19,124,700
<SALES> 0
<TOTAL-REVENUES> 3,694,500
<CGS> 0
<TOTAL-COSTS> 3,249,100
<OTHER-EXPENSES> 7,690,100
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> (106,900)
<INCOME-PRETAX> (7,180,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,180,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,180,700)
<EPS-BASIC> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
