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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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
incorporation or organization) Identification No.)
19910 North Creek Parkway
Bothell, Washington 98011
(425) 415-6847
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, no par value
(Title of Class)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 15, 2000 was approximately $517,536,000 (based on the
closing price for the registrant's Common Stock on the Nasdaq National Market
of $54.00 per share).
The number of shares of the registrant's Common Stock outstanding as of March
15, 2000 was 10,650,460.
Documents Incorporated by Reference: Portions of the registrant's definitive
Proxy Statement filed with the Commission pursuant to Regulation 14A in
connection with the Registrant's Annual Meeting of Shareholders to be held on
June 22, 2000 are incorporated herein by reference into Part III of this
report. The registrant's definitive proxy statement will be filed with the
Commission no later than 120 days after the registrant's fiscal year ended
December 31, 1999.
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FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX
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PART I PAGE
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Item 1 - Description of Business...............................................1
Item 2 - Description of Property...............................................23
Item 3 - Legal Proceedings.....................................................23
Item 4 - Submission of Matters to a Vote of Security Holders...................23
PART II
Item 5 - Market for the Registrant's Common Stock and Related Shareholder
Matters...............................................................24
Item 6 - Selected Financial Data...............................................25
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................26
Item 7A - Quantitative and Qualitative Disclosures About Market Risk............36
Item 8 - Financial Statements..................................................37
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................61
PART III
Item 10 - Directors and Executive Officers of the Registrant....................62
Item 11 - Executive Compensation ...............................................62
Item 12 - Security Ownership of Certain Beneficial Owners and Management .......62
Item 13 - Certain Relationships and Transactions ...............................62
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K...........................................................63
SIGNATURES ......................................................................65
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PART I
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
THE INFORMATION SET FORTH IN THIS REPORT IN ITEM 1 "DESCRIPTION OF BUSINESS"
AND IN ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
(THE "EXCHANGE ACT"), AND IS SUBJECT TO THE SAFE HARBOR CREATED BY THAT
SECTION. SUCH STATEMENTS MAY INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF
REVENUES, INCOME, OR LOSS, CAPITAL EXPENDITURES, PLANS FOR PRODUCT
DEVELOPMENT AND COOPERATIVE ARRANGEMENTS, FUTURE OPERATIONS, FINANCING NEEDS
OR PLANS OF THE COMPANY, AS WELL AS ASSUMPTIONS RELATING TO THE FOREGOING.
THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "ESTIMATE," "PROJECT," AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE THE STATEMENT WAS MADE. CERTAIN FACTORS THAT REALISTICALLY COULD
CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS ARE SET FORTH IN ITEM 1 "DESCRIPTION OF BUSINESS -
CONSIDERATIONS RELATED TO THE COMPANY'S BUSINESS."
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Microvision, Inc. ("Microvision" or the "Company"), incorporated in 1993,
develops information display and related technologies that allow
electronically generated images and information to be projected to a viewer's
eye. The Company has developed prototype Retinal Scanning Display ("RSD")
technology devices including portable color and monochrome versions and a
full color table-top version, and is currently refining and developing its
RSD technology for defense and commercial applications. The Company expects
to commercialize its technology through the development of products and as a
supplier of personal display technology to original equipment manufacturers
("OEMs"). The Company believes the RSD technology will be useful in a variety
of applications, including portable communications and visual simulation for
defense, medical, industrial and entertainment that include applications
requiring the superimposing of images on the user's field of vision. The
Company expects that its RSD technology will allow for the production of
highly miniaturized, lightweight, battery-operated displays that can be held
or worn comfortably. The Company's scanning technology may also be applied to
the capturing of images in such products as digital cameras or bar code
readers. The Company may expend funds in evaluating and developing solutions
for possible future products involving this application.
The Company's RSD technology includes certain proprietary technology
developed by the Company, certain technology licensed from other companies
and the Virtual Retinal Display-TM- (VRD-TM-) technology licensed from the
University of Washington ("see Intellectual Property and Proprietary Rights").
Information displays are the primary medium through which text and images
generated by computers and other electronic systems are delivered to
end-users. For decades, the cathode ray tube ("CRT") and, more recently, flat
panel displays have been the dominant display
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devices. In recent years, as the computer and electronics industries have
made substantial advances in miniaturization, manufacturers have sought
lightweight, low power, cost effective displays to develop more portable
products.
The Company's RSD technology is fundamentally different from previously
commercialized display technologies. RSD technology creates a high
resolution, full motion image by scanning a low power beam of colored light
to "paint" rows of pixels on the viewer's eye. In certain applications, the
image appears in the viewer's field of vision as if the viewer were only an
arm's length away from a high quality video screen. The RSD technology can
also be used to superimpose an image on the viewer's field of vision,
enabling the viewer to see data or images in the context of his or her
natural surroundings. In each case, a high resolution, bright image is
created.
The Company's objective is to be a leading provider of personal display
products and imaging technology in a broad range of professional and consumer
applications. The Company intends to achieve this objective and to generate
revenues through a combination of the following activities: the licensing of
technology to OEMs of products to a variety of markets; the provision of
engineering services associated with cooperative development arrangements and
research contracts; and the manufacture and sale of high-performance personal
display products to professional users, directly or through joint ventures.
The Company is in discussions with systems and equipment manufacturers in the
defense and aerospace, wireless communications, medical, industrial, and
commercial and consumer electronics industries to develop or co-develop
products that the Company believes to be the most commercially viable. During
the fourth quarter of 1999, the Company sold engineering prototypes of a
commercial RSD product. The Company plans to sell additional units of this
prototype RSD during the first half of 2000. The Company plans to introduce a
production version of the prototype RSD in 2001. Sales of production version
RSD's may not occur, however, until substantially later, if at all.
The Company's existing prototypes have demonstrated the technological
feasibility of the RSD technology and the Company's ability to miniaturize
certain of its key components. The Company has completed the development of a
mechanical resonant scanner ("MRS") that the Company believes represents a
breakthrough in the miniaturization of scanning devices. The Company believes
that the MRS will permit high quality displays using smaller components
produced at lower cost than is possible with current alternative
technologies. Additional work is in progress to achieve full color capability
in miniaturized RSD devices, to expand the "exit pupil" of the RSD system
(which defines the range within which the viewer's eye can move and continue
to see the image) and to design products for specific applications.
Fundamental to the Company's technology development strategy is the
development of standardized modules for each of the key components of an RSD
system. These standardized modules can then be used in various combinations
to create a small number of technology platforms. Each platform provides the
basis for an entire family of products that in turn might be used in a wide
array of applications in various market segments.
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CONSIDERATIONS RELATING TO THE COMPANY'S BUSINESS
WE CANNOT BE CERTAIN THAT THE RSD TECHNOLOGY OR PRODUCTS INCORPORATING THIS
TECHNOLOGY WILL ACHIEVE MARKET ACCEPTANCE. IF THE RSD TECHNOLOGY DOES NOT
ACHIEVE MARKET ACCEPTANCE, OUR REVENUES MAY NOT GROW.
Our success will depend in part on the commercial acceptance of the RSD
technology. The RSD technology may not be accepted by manufacturers who use
display technologies in their products or by consumers of these products. To
be accepted, the RSD technology must meet the expectations of our potential
customers in the defense, medical, industrial, and consumer markets. If our
technology fails to achieve market acceptance, we may not be able to continue
to develop the RSD technology.
OUR LACK OF THE FINANCIAL AND TECHNICAL RESOURCES RELATIVE TO OUR COMPETITORS
MAY REDUCE OUR REVENUES, POTENTIAL PROFITS, AND OVERALL MARKET SHARE.
Our products and the RSD technology will compete with established
manufacturers of miniaturized cathode ray tube and flat panel display
devices, many of which have substantially greater financial, technical and
other resources than us and many of which are also developing miniature
displays. Because of their greater resources, our competitors may develop
products or technologies that are superior to our own. The introduction of
superior competing products or technologies could result in reduced revenues,
lower margins or loss of market share, any of which could reduce the value of
our business.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE AND OUR
FINANCIAL RESULTS MAY SUFFER.
The electronic information display industry has been characterized by rapidly
changing technology, accelerated product obsolescence, and continuously
evolving industry standards. Our success will depend upon our ability to
further develop the RSD technology and to introduce new products and features
on a cost effective basis in a timely manner to meet
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evolving customer requirements and compete effectively with competitors'
product advances. We may not succeed in these efforts because of:
- - delays in product development;
- - lack of market acceptance for our products; or
- - lack of funds to invest in development.
The occurrence of any of the above factors could result in decreased revenues
and market share.
IF WE CANNOT EXPAND OUR MANUFACTURING CAPABILITY, WE WILL NOT ACHIEVE
COMMERCIAL SUCCESS.
We currently lack the capability to manufacture products in commercial
quantities. Our success depends in part on our ability to provide our
components and future products in commercial quantities at competitive
prices. Accordingly, we will be required to obtain access, through business
partners or contract manufacturers, to manufacturing capacity and processes
for the commercial production of our expected future products. We cannot be
certain that we will successfully obtain access to sufficient manufacturing
resources. Future manufacturing limitations of our suppliers could result in
a limitation on the number of products incorporating the RSD technology that
can be produced.
IF WE CANNOT MANUFACTURE PRODUCTS AT COMPETITIVE PRICES, OUR FINANCIAL
RESULTS WILL BE ADVERSELY AFFECTED.
To date, we have produced only prototype products for research, development,
and demonstration purposes. The cost per unit for these prototypes currently
exceeds the level at which we could expect to profitably resell such products
to customers. If we cannot lower our cost of production, we may face:
- - loss of profitability and loss of competitiveness for our products; and
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- - increased demands on our financial resources, possibly requiring
additional equity and/or debt financings to sustain our business
operations.
OUR PRODUCTS MAY BE SUBJECT TO FUTURE HEALTH AND SAFETY REGULATION THAT COULD
INCREASE OUR DEVELOPMENT AND PRODUCTION COSTS.
Products incorporating RSD technology could become subject to new health and
safety regulations that would reduce our ability to commercialize the RSD
technology. Compliance with any such new regulations would likely increase
our cost to develop and produce products using the RSD technology and
adversely affect our financial results.
IF WE EXPERIENCE DELAYS OR FAILURES IN DEVELOPING AND PRODUCING COMMERCIALLY
VIABLE PRODUCTS, WE MAY HAVE LOWER REVENUES.
Although we have developed prototype products incorporating the RSD
technology, we must undertake additional research, development and testing
before we are able to produce products for commercial sale. 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.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PATENTS AND OTHER PROPRIETARY
TECHNOLOGY, WE MAY BE UNABLE TO COMPETE WITH OTHER COMPANIES.
Our success will depend in part on our ability and the ability of the
University of Washington (the University) and our other licensors to maintain
the proprietary nature of the RSD and related technologies. Although our
licensors have patented various aspects of the RSD technology and we continue
to file our own patent applications covering RSD 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.
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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. 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.
WE COULD FACE LAWSUITS RELATED TO OUR USE OF THE RSD TECHNOLOGY. THESE SUITS
COULD BE COSTLY, TIME CONSUMING AND REDUCE OUR REVENUES.
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's patents, 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 RSD technology and, consequently, materially reduce our revenues.
Moreover, we cannot be certain that patent holders or other third parties
will not claim infringement by us 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 be issued with claims that will be infringed by
our products or the RSD 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 cost, require others and us to cease selling
products that incorporate RSD technology, or to cease licensing the RSD
technology, or to require disputed rights to be licensed from third parties.
Such licenses would increase our cost or may not be available at all.
Moreover, if claims of infringement are asserted against our future
co-development
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partners or customers, those partners or customers may seek indemnification
from us for damages or expenses they incur.
IF WE LOSE THE EXCLUSIVE USE OF THE VRD TECHNOLOGY, OUR BUSINESS OPERATIONS
AND PROSPECTS WOULD BE ADVERSELY AFFECTED.
We acquired the exclusive rights to the VRD technology under an exclusive
license agreement ("License Agreement") with the University. If the
University were to violate the terms of the License Agreement by providing
the VRD technology to another company, our business, operations, and
prospects would be adversely affected. In addition, we could lose the
exclusivity under the License Agreement if we fail to challenge within the
time limit claims that other companies are using the VRD technology in
violation of our License Agreement.
WE NEED TO COLLABORATE WITH THIRD PARTIES TO BE ABLE TO SUCCESSFULLY DEVELOP
PRODUCTS FOR SALE.
Our strategy for developing, testing, manufacturing and commercializing the
RSD technology and products incorporating the RSD technology includes
entering into cooperative development, 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 arrangements
on acceptable terms, if at all, or that these arrangements will be successful
in yielding commercially viable products. If we cannot establish these
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 and that may be
difficult to obtain. In addition, we could encounter significant delays in
introducing the RSD technology or find that the development, manufacture or
sale of products incorporating the RSD technology would not be feasible. 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.
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OUR REVENUES ARE HIGHLY SENSITIVE TO DEVELOPMENTS IN THE DEFENSE AND AEROSPACE
INDUSTRIES.
Our revenues to date have been derived principally from product development
research relating to defense applications of the RSD technology. We believe
that development programs and sales of potential products in this market will
represent a significant portion of our future revenues. Developments that
adversely affect the defense sector, including delays in government funding
and a general economic downturn, could cause our revenues to decline
substantially.
WE MAY REQUIRE ADDITIONAL CAPITAL TO CONTINUE IMPLEMENTING OUR BUSINESS PLAN.
THIS MAY LESSEN THE VALUE OF CURRENT STOCKHOLDERS' SHARES.
We believe that our current cash and investment securities balances will
satisfy our budgeted capital and operating requirements for at least the next
12 months, based on our current operating plan. However, we may need
additional funds in order to, among other requirements:
- - further develop RSD technology,
- - add manufacturing capacity,
- - add to our sales and marketing staff,
- - develop and protect our intellectual property rights, or
- - fund long-term business development opportunities.
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 at all. If
additional funds are raised through the issuance of equity, convertible debt
or similar securities, current shareholders will experience
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dilution and the securities issued to the new investors may have rights or
preferences senior to those of the shareholders of common stock. Moreover, if
adequate funds were not available to satisfy our short-term or long-term
financial needs, we would be required to limit our operations significantly.
LOSS OF ANY OF OUR KEY PERSONNEL COULD HAVE A NEGATIVE EFFECT ON THE
OPERATION OF OUR BUSINESS.
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, engineering 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 reduce our revenues and
adversely affect our business.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR SIGNIFICANT LOSSES
IN THE FUTURE.
We have had substantial losses since our inception and our operating losses
may increase in the future. Accordingly, we cannot assure you that we will
ever become or remain profitable.
- - As of December 31, 1999, we had an accumulated deficit of $39.5
million.
- - We incurred net losses of $7.1 million from inception through 1995,
$3.5 million in 1996, $4.9 million in 1997, $7.3 million in 1998 and
$16.7 million in 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 companies formed to develop and market
new technologies. In particular, our operations to date have focused
primarily on research and development of the RSD technology and
development of prototypes, and we have developed marketing capabilities
only during the past two years. We are unable to accurately estimate
future revenues and operating expenses based upon historical
performance.
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We cannot be certain that we will succeed in obtaining additional development
contracts or that we will be able to obtain customer orders for products
incorporating the RSD technology. In light of these factors, we expect to
continue to incur substantial losses and negative cash flow at least through
2001 and possibly thereafter. We cannot be certain that we will become
profitable or achieve positive cash flow at any time in the future.
A SUBSTANTIAL NUMBER OF OUR SHARES MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE, WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY.
As of March 15, 2000, we had outstanding:
- - 10,650,460 shares of common stock;
- - options under our option plans to purchase an aggregate of
2,350,495 shares of common stock;
- - privately placed warrants and options to purchase 786,313 shares of
common stock.
Almost all of our outstanding shares of common stock may be sold without
substantial restrictions. Sales in the public market of substantial amounts
of common stock, including sales of common stock issuable upon exercises of
stock options or warrants, could depress prevailing market prices for our
common stock. Even the perception that such sales could occur may adversely
impact the market price for our stock. A decrease in market price would
decrease the value of an investment in our common stock.
OUR QUARTERLY PERFORMANCE MAY VARY SUBSTANTIALLY AND THIS VARIANCE MAY
DECREASE OUR STOCK PRICE.
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Our revenues to date have been generated from a limited number of development
contracts with U.S. government entities and commercial partners. Our
quarterly operating results may vary significantly based on:
- - reductions or delays in funding of development programs involving new
information display technologies by the U.S. government or our current
or prospective commercial partners; or
- - the status of particular development programs and the timing of
performance under specific development agreements.
In one or more future quarters, our results of operations may fall below the
expectations of securities analysts and investors and the trading price of
our common stock may decline as a consequence.
OUR STOCK PRICE MAY BE VOLATILE AND THIS VOLATILITY COULD ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK.
The stock market is subject to price and volume fluctuations that
particularly affect the market prices of stock of small capitalization, high
technology companies. 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 our competitors;
- - general conditions in the information display and electronics
industries; and
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- - general economic conditions.
Frequent changes in the market price of our common stock will affect the
day-to-day value of an investment in our common stock.
WE MAY INVEST OUR CAPITAL IN WAYS THAT DO NOT RESULT IN A FAVORABLE RETURN.
THIS COULD LOWER OUR STOCK PRICE.
Our management has broad discretion to invest our capital in ways in which
our stockholders may not agree. The failure of our management to invest our
capital effectively could result in lower returns than expected. This could
lower the value of our stock.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE THE COMPANY AND THIS COULD
DEPRESS OUR STOCK PRICE.
Certain provisions of Washington law and our amended and restated articles of
incorporation and bylaws contain provisions that create burdens and delays
when someone attempts to purchase our company. As a result, these provisions
could limit the price that investors are willing to pay for our stock. These
provisions:
- - authorize our board of directors, without further shareholder approval,
to issue preferred stock that has rights superior to those of the
common stock. Potential purchasers may pay less for our company because
the preferred stockholders may use their rights to take value from the
Company; and
- - provide that written demand of at least 25% of the outstanding capital
shares is required to call a special meeting of the shareholders, which
may be needed to approve the sale of the Company. The delay that this
creates could deter a potential purchaser.
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INDUSTRY BACKGROUND
The popularity of personal computing, electronic communication, television
and video products has created a worldwide market for display technologies.
Information displays are the primary medium through which text and images
generated by computer and other electronic systems are delivered to
end-users. While early computer systems were designed and used for tasks that
involved little interaction between the user and the computer, today's
graphical and multimedia information and computing environments require
systems that devote most of their resources to generating and updating visual
displays. The market for display technologies has also been stimulated by the
increasing popularity of portable pagers and cellular phones; interest in
simulated environments and augmented vision systems; and the recognition that
improved means of connecting people and machines can increase productivity
and enhance the enjoyment of electronic entertainment and learning
experiences.
For decades, the CRT has been the dominant display device. A CRT creates an
image by scanning a beam of electrons across a phosphor-coated screen,
causing the phosphors to emit visible light. The beam is generated by an
electron gun and is passed through a deflection system that scans the beam
rapidly left to right and top to bottom. A magnetic lens focuses the beam to
create a small moving dot on the phosphor screen. It is these rapidly moving
spots of light ("pixels") that "paint" the image on the surface of the
viewing screen. The next generation of imaging technology, flat panel
displays, is now in widespread use in portable computers, calculators, and
other personal display devices. The flat panel display can consist of
hundreds of thousands of pixels, each of which is formed by a single
transistor acting on a crystalline material.
In recent years, as the computer and electronics industries have made
substantial advances in miniaturization, manufacturers have sought
lightweight, low power, cost effective displays to enable the development of
more portable products. Flat panel technologies have made meaningful advances
in these areas, and liquid crystal flat panel displays are now commonly used
for laptop computers and other electronic products. Both technologies,
however, pose difficult engineering and fabrication problems for more highly
miniaturized products, because of inherent constraints in size, weight and
power consumption. In addition, both CRT and flat panel displays often become
dim and difficult to see in outdoor or other settings where the ambient light
is stronger than the light emitted from the screen and display mobility is
limited by size. The Company believes that, as display technologies attempt
to keep pace with miniaturization and other advances in information delivery
systems, conventional CRT and flat panel technologies will no longer be able
to provide the full range of performance characteristics, including high
resolution, high level of brightness and low power consumption, required for
state-of-the-art information systems.
MICROVISION'S RETINAL SCANNING DISPLAY TECHNOLOGY
The Company's RSD technology is fundamentally different from previously
commercialized display technologies. RSD systems create an image on the
retina like a miniaturized video
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projector focused on the "projection screen" at the back of the viewer's eye.
By continuously scanning a low power beam of colored light to "scan" rows of
pixels to the retina of the viewer's eye, the RSD technology creates a high
resolution, full motion image. The light that is directed to the retina is
much the same as light that is reflected to the retina from our natural
environment.
The drive electronics of the RSD technology acquire and process signals from
the image or data source to control and synchronize the color mix and
placement. Color pixels are generated by modulated light sources, from which
the intensity of each of the red, green and blue lights is varied to generate
a complete palette of colors and shades. Optical elements direct the beam of
light through the pupil of the viewer's eye to create an image on the retina.
The pixels are arranged on the retina by a horizontal scanner that rapidly
sweeps the light beam to place the pixels into a row, and a vertical scanner
that moves the light beam downward where successive rows of pixels are drawn.
This process is continued until an entire field of rows has been placed and
a full image appears to the user.
STRATEGY
The Company's objective is to be a leading provider of personal display and
imaging technology in a broad range of professional and consumer
applications. Key elements of the Company's strategy to achieve this
objective include:
I. Strategic Partnering to Extend Marketing and Technical Reach
The Company's key technologies have applications in several markets and
products. The Company has contracted with and will continue to pursue
strategic partners who will provide resources and services that would take
substantial time and additional cost to the Company to obtain without these
partners. Strategic partners will be selected to provide support on the
specific requirements of markets and products. Examples of activities that
will benefit from strategic partnering are:
CUSTOM DESIGN, MANUFACTURE AND SALE OF HIGH PERFORMANCE PRODUCTS. The Company
anticipates providing high performance products to professional end-users in
markets with lower product volume requirements. The Company expects that
end-users in this category will include professionals in the defense, public
safety, industrial process control and health care industries. The Company
believes that, because the unit volume requirements for such end users are
generally lower, demand for such products may be more predictable and the
risks associated with production and inventory more easily managed. Depending
upon the circumstances, the Company may manufacture these products using
standard component suppliers and contract manufacturers as required, may
license to OEMs, or may seek to form one or more joint ventures to
manufacture the products.
SALE OF COMPONENTS OR "ENGINES" OF SCANNING TECHNOLOGY. Certain potential
applications of the RSD technology, such as pagers or cellular phones, could
require integration of the RSD technology with other unrelated technologies.
In markets requiring volume production of personal display components or
subsystems that can be integrated with non-display
14
<PAGE>
components, the Company may provide components, subsystems and systems design
technology to OEMs under licensing agreements.
LICENSING OF PROPRIETARY TECHNOLOGY TO OEMS FOR VOLUME MANUFACTURE OF
PRODUCTS. The Company believes that in consumer markets the ability of
personal display products to compete effectively is largely driven by the
ability to price aggressively for maximum market penetration. Significant
economies of scale in volume purchasing, manufacturing and distribution are
important factors in driving costs down to achieve pricing objectives and
profitability. The Company's strategy will be to seek both initial license
fees from such arrangements as well as ongoing per unit royalties.
The Company expects that such relationships generally will involve a period
of co-development during which engineering and marketing professionals from
OEMs would work with the Company's technical staff to specify, design and
develop a product appropriate to the targeted market and application. The
Company would charge fees to such OEMs to compensate for the costs of the
engineering effort incurred to such development projects. The nature of the
relationships with such OEMs may vary from partner to partner depending on
the proposed specifications for the RSD, the product to be developed, and the
OEM's design, manufacturing and distribution capabilities. The Company
believes that by limiting its own direct manufacturing investment for
consumer products, it will reduce the capital requirements and risks inherent
in taking the RSD technology to the consumer market.
II. Platform Model to Leverage Core Technologies
The Company is developing fundamental components of scanning
technology that will be incorporated into modular "engines" that, in turn, will
be integrated to create product offerings. Many of these product offerings
will share engines and subsystems. Product offerings can be customized by
utilizing interchangeable components. The Company has currently defined the
following key product offerings for further development:
- - High Performance
- - Compact Wearable
- - Microdisplay
- - Projection
- - Image Capture
III. Development of an Intellectual Property Portfolio
The Company believes that it can enhance its competitive position by reducing
the cost and improving the performance of its RSD technology and by expanding
its portfolio of intellectual property and proprietary rights. A key part of
the Company's technology development strategy includes developing and
protecting (i) concepts relating to the function, design and application of
the RSD system; (ii) component technologies and integration techniques
essential to the commercialization of the RSD technology and that are
expected to reduce the cost and improve the performance of the system; and
(iii) component technologies
15
<PAGE>
and integration techniques that reduce technical requirements and accelerate
the pace of commercial development. The Company is continuing to develop a
portfolio of patented technologies and proprietary processes and techniques
that relate directly to the functionality and to the commercial viability of
the RSD technology. See "- Technology Development" and "- Intellectual
Property and Proprietary Rights."
APPLICATIONS, MARKETS AND PRODUCTS
The Company has identified a variety of potential applications for its RSD
technology, including the following:
AUGMENTED VISION. Augmented vision applications superimpose high contrast,
monochromatic or color images and information on the user's view of the
surrounding environment as a means of enhancing the safety, precision or
speed of the user's performance of tasks. For example, a head-worn display
could superimpose critical patient information such as vital signs, EKG
traces, reference materials, X-rays or MRI images in a surgeon's field of
vision. For military applications, troops could be equipped with eyeglasses
that display high definition imagery that could be viewed without blocking
normal vision and could assist in threat detection, reconnaissance and other
activities.
SIMULATION AND ENTERTAINMENT DISPLAYS. Manufacturers of interactive media
products have recognized that the visual experience offered by simulation is
enhanced by high resolution, three-dimensional displays projected over a wide
field of vision. Although simulated environments traditionally have been used
as a training tool for professional use, they are becoming increasingly
popular as a means of entertainment, particularly in computer games.
HAND-HELD PERSONAL COMMUNICATIONS DEVICES. Manufacturers of wireless and
cellular communications devices have identified the need for products that
incorporate personal display units for viewing electronic mail, fax and
graphic images on highly miniaturized devices. Existing display technologies
have had difficulty satisfying this demand fully because of the requirements
that such devices be highly miniaturized, full format, relatively low cost,
and offer high resolution and brightness without requiring high levels of
battery power. The Company expects that the range of potential products in
this category may include displays for cellular phones, pagers, or personal
digital assistants that display electronic mail messages, faxes, or other
information as a bright, sharp image.
The Company has targeted various market segments for these potential
applications, including defense and public safety, health care, business,
industrial and consumer electronics. The following table identifies product
development opportunities within each of these markets.
16
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
POTENTIAL MARKETS
------------------ ------------------- --------------------- ------------------- ----------------
DEFENSE & PUBLIC
SAFETY HEALTHCARE PROFESSIONAL INDUSTRIAL CONSUMER
- ------------------------- ------------------ ------------------- --------------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C><C>
HAND-HELD - Command - Patient - Fax viewing - Maintenance - E-mail
POTENT COMMUNICATION and control status and field viewing
I DEVICES monitoring - E-mail service
A - Tactical viewing - Internet
L information access
systems - Internet
A access - E-Business
P - Portable
P maintenance - E-Business
L
I - Public
C safety
A
T - Law
I enforcement
O
N
S
- ------ ------------------ ------------------ ------------------- --------------------- ------------------- ----------------
- ------ ------------------ ------------------ ------------------- --------------------- ------------------- ----------------
SIMULATION AND - Battlefield - Surgical - Architecture - Training - Gaming
ENTERTAINMENT simulation training and interior
DISPLAYS design - On-line
- Aircraft - Endoscopic shopping
simulation surgeries - Industrial
design - Virtual
simulation reality
- ------ ------------------ ------------------ ------------------- --------------------- ------------------- ----------------
- ------ ------------------ ------------------ ------------------- --------------------- ------------------- ----------------
AUGMENTED - Pilot - Overlay - Multiple - Maintenance - Private
VISION information of patient screen viewing viewing
systems data during for securities - Inventory laptop
surgeries traders control systems
- Mine - "Head-down" - Factory
detection viewing of process
patient control
- Tactical vitals
warfare data - Sales
automation
- Personnel
status
monitor
- GENII
soldier
system
- ------ ------------------ ------------------ ------------------- --------------------- ------------------- ----------------
</TABLE>
The Company will target early adopters of the RSD technology who, even at an
earlier stage of development, would achieve significant productivity or
performance gains and associated cost savings. The Company believes that
military, healthcare, and industrial users will value the ability of personal
RSD based displays to superimpose high contrast images on the user's natural
field of vision. Similarly, users of wireless devices, who have a need to
receive critical or timely data through electronic mail, Internet or
facsimile transmission, are expected to value the performance characteristics
that RSD systems are expected to deliver.
PROTOTYPES
The Company has developed several prototypes to demonstrate the feasibility
of the RSD technology. These prototypes are not commercial products or
applications but rather are demonstration models of the technology. The first
prototype developed was a table-top model, which received output from a
personal computer and generated a full color image. The second and third
prototypes are portable devices. For demonstration purposes, they also
connect to a personal computer. The projection optics of the portable
prototypes is packaged together with the vertical and horizontal scanners.
One demonstrator is monochromatic and fits in an attache
17
<PAGE>
case, which also houses the electronics that receive and condition the
signal. The second demonstrator is a full color model with the electronics
that receive and condition the signal being housed in a separate case, which is
the size of an airline carry-on bag. In 1999, the Company continued to
develop prototypes, for Company use and for customers, that demonstrated
higher resolution, greater brightness, smaller size and lower power
consumption. The following four prototypes were delivered: an SVGA (480,000
pixels) color helmet-mounted RSD; a high luminance, SXGA (approximately
1,300,000 pixels) green monochrome helmet-mounted RSD; a high-luminance, SXGA
full color head-worn RSD; and a battery powered, head-wearable red monochrome
RSD. Currently under development is a "very high resolution" green monochrome
system.
TECHNOLOGY DEVELOPMENT
The Company's existing prototypes have demonstrated the technical feasibility
of the RSD system and the Company's ability to miniaturize certain of its key
components. Additional work is in progress to achieve advances necessary for
large-scale application, full-color capability in highly miniaturized
versions and design of new architectures for specific applications. Research
and development expenses for the fiscal years ended December 31, 1999, 1998
and 1997 were $10,232,700, $3,305,600 and $2,593,900, respectively.
Substantially all of the Company's revenue to date has been derived from
performance on development contracts to further develop the RSD technology to
meet customer specifications. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DRIVE ELECTRONICS. The Company has identified four areas where additional
development of the drive electronics is necessary. The first involves further
miniaturization using integrated circuits and advanced packaging techniques.
To date, the Company has identified no technological barriers to the further
miniaturization of the drive electronics. The second area involves refining
the timing and nature of the signals driving the photon sources and scanners
to improve display quality. The third area is the development of drive
circuitry for light-sources. The fourth area of development relates to
achieving and improving compatibility of the drive electronics with existing
and emerging video standards. The Company's existing prototypes are
compatible with current North American video format standards and the output
from most personal computers. In 2000, the Company intends to further develop
the RSD technology to conform to a broader range of interface standards,
including existing higher resolution standards.
PHOTON SOURCES. The photon source creates the light beam that paints the
image on the retina. In a full color RSD system, red, green and blue photon
sources are modulated and mixed to generate the desired color and brightness.
Low power solid state lasers, laser diodes and light-emitting diodes ("LEDs")
are suitable photon generators for the RSD system. Blue and green solid state
lasers are currently available but are useful only for RSD applications where
cost and size are not critical. Miniaturized visible laser diodes are
currently available only in red, although a number of other companies are
developing blue laser diodes in anticipation of high volume consumer
electronics applications. Miniaturized LEDs are less expensive than laser
diodes. The Company expects these LEDs will provide sufficient
18
<PAGE>
brightness for certain applications, however, the Company still expects to
use laser diodes for augmented vision applications that require maximum
brightness. The Company intends to rely on other companies independent work
or to contract with other companies to complete development of the materials
and processes necessary to produce specific configurations of green and blue
LEDs and laser diodes. An important milestone was achieved in 1998 when the
Company demonstrated custom green and blue LEDs as potential light sources
for certain low power, low cost applications. During 1999, the Company
entered into a strategic partnership alliance with Cree, Inc., a developer
and manufacturer of green and blue LED's for mass markets to further the
development of green and blue LED's to meet the Company's expected
requirement.
SCANNING. A pair of scanners, one horizontal and one vertical, is used to
direct the light beam that creates the image on the retina. In laser printers
and bar code readers, a spinning or oscillating mirror is used to scan a
light beam, but these polygonal mechanical scanners are typically too large
and too slow for use in miniaturized display applications. To solve this
problem, the Company uses its proprietary horizontal scan, mechanical
resonance scanner ("MRS"). In operation, the MRS resembles a very small
tuning fork with a mirrored surface. It is tuned to resonate at the exact
scanning frequency needed to generate the display, with very little power
being needed to keep it oscillating. Directing the light beam at the
vibrating mirror causes the light beam to scan rapidly back and forth
horizontally. A second vibrating mirror is used to direct the pixels
vertically down the retina. The Company believes that its MRS and its
vertical scanner counterpart may have significant commercial value
independent of RSD applications.
Continued development of the scanning subsystem for RSD devices will be
required in order to allow scanning capability for current standard video
formats, including high definition television, as well as new digital video
standards. Existing designs for scanner and scanner electronics may prove
ineffective at higher resolutions and may need to be replaced with
alternative scanning methods. In 1998, the Company demonstrated highly
miniaturized smaller "micro-electro-mechanical system (MEMS) versions of both
horizontal and vertical scanner systems. In 1999, the MEMS development
resources were augmented substantially with additional specialized staff, an
on-site clean room facility, and access to advanced fabrication and testing
facilities at the University. With the availability of both MRS and MEMS
scanning systems, the Company has achieved important flexibility from the
standpoint of developing optimal architectures for key resolution targets
including SVGA resolution.
OPTICS. For applications where the RSD device is to be worn, it is desirable
to have an exit pupil (the range within which the viewer's eye can move and
continue to see the image) of 10 to 15 millimeters. The Company has developed
an optic design that expands the exit pupil up to 15 millimeters. Additional
design and engineering of this expanded exit pupil is required to develop
commercial applications. In 1999, Company engineers refined optics designs
for both monocular (one-eye) and biocular (two-eye) prototypes. A full
"binocular" system, which incorporated two separate video channels (one for
each eye), was also developed to provide the user with full stereoscopic
viewing of 3-dimensional imagery. The Company's ongoing optics development is
directed at the creation of optical systems that exhibit lower distortion,
are ligher weight, and more cost-effective to manufacture.
19
<PAGE>
UNIVERSITY OF WASHINGTON LICENSE AGREEMENT
The VRD technology comprises a substantial part of the Company's RSD
technology. The VRD technology was originally developed at the University of
Washington's Human Interface Technology Lab (the "HIT Lab") by a team of
technicians and engineers. In 1993, the Company acquired the exclusive rights
to the VRD technology and associated intellectual property from the
University pursuant to the License Agreement. The scope of the license covers
all possible commercial uses of the VRD technology worldwide, including the
right to grant sublicenses. The license expires upon the expiration of the
last of the University's patents that relate to the VRD, unless sooner
terminated by the Company or the University. In granting the license, the
University retained limited, non-commercial rights with respect to the VRD
technology, including the right to use the technology for non-commercial
research and for instructional purposes, and the right to comply with
applicable laws regarding the non-exclusive use of the technology by the
United States government. The University also has the right to consent to the
Company 's sublicensing arrangements and to the prosecution and settlement by
the Company of infringement disputes. In addition, the University retains the
right to publish information regarding the VRD technology for academic
purposes.
The Company could lose the exclusivity under the License Agreement if the
Company fails to respond to any infringement action relating to the VRD
technology within 90 days of learning of such claim. In the event of the
termination of the Company's exclusivity, the Company would lose its rights
to grant sublicenses and would no longer have the first right to take action
against any alleged infringement. In addition, each of the Company and the
University has the right to terminate the License Agreement in the event that
the other party fails to cure a material breach within 30 days of written
notice. The Company may terminate the License Agreement at any time by
serving 90 days prior written notice on the University. In the event of any
termination of the License Agreement, the license granted to the Company
would terminate.
Under the terms of the License Agreement, the Company agreed to pay a
non-refundable fee of $5,133,500 (the "License Fee") and to issue to the
University shares of the Company's common stock. In addition, the University
is entitled to receive certain ongoing royalties. The Company also entered
into a research agreement with the University ("Research Agreement") to
further develop the VRD technology. In August 1997, the Company made the
final payment due under the Research Agreement, which resulted in the Company
having paid in full the License Fee due under the License Agreement. (see
"Intellectual Property and Proprietary Rights").
20
<PAGE>
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
In 1993, the Company acquired the exclusive rights to the VRD technology
under the License Agreement with the University of Washington. See " -
University of Washington License Agreement." Additional development of the
VRD technology took place at the HIT Lab pursuant to the Research Agreement.
The University has received thirteen patents on the VRD technology including
the MRS and has an additional nineteen U.S. patent applications pending in
the United States and in certain foreign countries, all of the rights to
which have been exclusively licensed to the Company.
The Company's ability to compete effectively in the information display
market will depend, in part, on the ability of the Company, the University
and other licensors to maintain the proprietary nature of the VRD technology
or other technologies, including claims related to the ability to superimpose
images on the user's field of view, a VRD using optical fibers; an expanded
exit pupils; and the MRS.
During 1998, the Company entered into a license agreement with a third party
whereby the Company acquired the exclusive license to certain intellectual
property related to the design and fabrication of a microminiature scanner
using semiconductor fabrication techniques. The licensor has received six
patents and has eight patent applications pending pertaining to use in the
Company's field of use.
The Company also generates intellectual property as a result of its ongoing
performance on development contracts and as a result of the Company's
internal research and development activities. The Company has filed sixteen
patent applications in its own name resulting from these activities. The
inventions covered by such applications generally relate to component
miniaturization, specific implementation of various system components and
design elements to facilitate mass production.
The Company considers protection of these key enabling technologies and
components to be a fundamental aspect of its strategy to penetrate diverse
markets with unique products. As such, it intends to continue to develop its
portfolio of proprietary and patented technologies at the system, component,
and process levels.
The Company also relies on unpatented proprietary technology. To protect its
rights in these areas, the Company requires all employees, and where
appropriate, contractors, consultants, advisors and collaborators to enter
into confidentiality and noncompetition agreements. There can be no
assurance, however, that these agreements will provide meaningful protection
for the Company's trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or disclosure of such
trade secrets, know-how or other proprietary information. The Company has
registered, with the United States Patent and Trademark Offices, the mark
"Microvision" with its associated "tri-curve" logo. The Company filed for
registration of the marks "Virtual Retinal Display" and "VRD" in the United
States Patent and Trademark Office. These marks were examined and entered
into the opposition phase, where an opposition was filed against the VRD
mark. The Company believes the opposition
21
<PAGE>
filing is without merit and that the Company should prevail in the
proceedings. Regardless of the outcome, the Company believes that it will be
entitled to continue to use the terms "Virtual Retinal Display" and "VRD."
HUMAN FACTORS, ERGONOMICS AND SAFETY
As part of its research and development activities, the Company conducts
ongoing research as to the cognitive, physiological and ergonomic factors
that must be addressed by products incorporating RSD technologies and the
safety of RSD technology, including such issues as the maximum permissible
laser exposure limits established by American National Standards Institute
("ANSI"). Researchers from the HIT Lab have concluded that laser exposure to
the retina under normal operating conditions would be below the calculated
maximum permissible exposure level set by ANSI.
COMPETITION
The information display industry is highly competitive. The Company's
products and the RSD technology will compete with established manufacturers
of miniaturized CRT and flat panel display devices, including companies such
as Sony Corporation and Texas Instruments Incorporated, most of which have
substantially greater financial, technical and other resources than the
Company and many of which are developing alternative miniature display
technologies. The Company also will compete with other developers of
miniaturized display devices. There can be no assurance that the Company's
competitors will not succeed in developing information display technologies
and products that could render the RSD technology or the Company's proposed
products commercially infeasible or technologically obsolete.
The electronic information display industry has been characterized by rapid
and significant technological advances. There can be no assurance that the
RSD technology or the Company's proposed products will remain competitive
with such advances or that the Company will have sufficient funds to invest
in new technologies products or processes. Although the Company believes that
its RSD technology and proposed display products could deliver images of a
quality and resolution substantially better than those of commercially
available miniaturized LCD and CRT-based display products, there is no
assurance that manufacturers of LCDs and CRTs will not develop further
improvements of screen display technology that would eliminate or diminish
the anticipated advantages of the Company's proposed products.
OTHER TECHNOLOGY INVESTMENT
The Company intends to pursue the acquisition and development of other
imaging and display technologies as opportunities arise.
In March 1994, the Company entered into a second exclusive license agreement
with the University to acquire certain imaging technology unrelated to the
RSD technology. This technology involves the projection of data and images
onto the inside of a dome that is placed over the viewer's head. This imaging
technology is referred to as HALO.
22
<PAGE>
The HALO license agreement requires the Company to make payments to the
University upon filing a patent application and the issuance of a patent. See
Note 7 of Notes to the Financial Statements.
EMPLOYEES
As of March 15, 2000, the Company has 117 employees and 14 contractors. The
Company's employees are not subject to any collective bargaining agreements
and management regards its relations with employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 67,400 square feet of combined use
office and laboratory space as its headquarters facility in Bothell,
Washington. The Company also has a commitment to lease between 25,000 and
34,000 additional square feet at this facility during the fourth and fifth
years of the seven-year lease. See
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property subject to, any material
pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
23
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "MVIS." As of March 15, 2000, there were 212 holders of record and
approximately 7,000 beneficial holders of 10,650,460 shares of Common Stock.
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings to
fund the operation of its business and does not anticipate paying dividends
on the Common Stock in the foreseeable future.
The Company's Common Stock began trading publicly on August 27, 1996. The
quarterly high and low sales prices of the Company's Common Stock for each
full quarterly period in the last two fiscal years and the year to date as
reported by the Nasdaq National Market are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED COMMON STOCK
- ------------------- -------------------------
HIGH LOW
-------------------------
<S> <C> <C>
March 31, 1998 16 3/8 12 1/2
June 30, 1998 14 7/8 8 5/8
September 30, 1998 11 15/16 6
December 31, 1998 13 1/2 4 9/16
March 31, 1999 16 3/4 11 3/8
June 30, 1999 30 3/8 14 3/8
September 30, 1999 26 7/16 12 3/4
December 31, 1999 31 1/2 12 1/2
January 1, 2000 to
March 15, 2000 68 1/16 25 3/8
</TABLE>
On March 15, 2000, the last sale price for the Common Stock was $54.00.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected financial data as of and for the five years ended
December 31, 1999 is set forth below:
SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Contract revenue $ 6,903 $ 7,074 $ 1,713 $102 $ 29
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Net loss available for common (16,700) (7,328) (4,945) (3,457) (2,944)
shareholders
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Basic and diluted net loss per share (2.04) (1.22) (.85) (.90) (.63)
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Weighted average shares
outstanding - basic and diluted 8,169 5,994 5,806 3,832 4,677
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Balance Sheet Data:
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Cash, cash equivalents and $ 32,167 $2,269 $ 8,841 $14,266 $ 99
investments available for
sale
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Working capital 32,802 1,358 8,441 13,321 (376)
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Total assets 41,619 6,362 10,741 14,565 179
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Long term obligations 836 282 92 -- --
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
Total shareholders' equity
(deficit) 35,359 2,589 9,164 13,509 (365)
- ------------------------------------------ ------------ ------------- ---------------- ------------ ---------------
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company commenced operations in May 1993 to develop and commercialize
technology for displaying images and information onto the retina of the eye.
In 1993, the Company acquired an exclusive license to the Virtual Retinal
Display technology from the University of Washington and entered into a
research agreement with the University of Washington to further develop the
VRD technology. The Company has continued to develop the VRD technology as
part of its broader research and development efforts relating to the RSD
technology.
Since the completion of its initial public offering in August 1996, the
Company has established and equipped its own in-house laboratory for the
continuing development of the RSD technology and has transferred the research
and development work on the VRD technology from the HIT Lab to the Company.
The Company has incurred substantial losses since its inception and expects
to continue to incur significant operating losses over the next several years.
The Company currently has several prototype versions of the RSD 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 RSD technology at least throughout 2000. 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 RSD technology by various industries and OEMs,
market acceptance of products incorporating the RSD technology and the
technical performance of such products. See "Description of Business -
Considerations Related to the Company's Business."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
CONTRACT REVENUE. Contract revenue decreased by approximately $171,000 or 2%
to $6.9 million in 1999 from $7.1 million in 1998. The decrease resulted from
a lower level of development contract business in 1999 than that performed in
1998 on contracts entered into in both 1999 and 1998. Delays in booking
development contracts and increases in certain development project budgets
contributed to the decline in revenue.
During 1999, the Company went through a reorganization 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 in 1999. Revenue in 1999 includes revenue for which precontract
costs were recognized in 1998.
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
26
<PAGE>
enterprises, which accounted for approximately 82% and 18%, respectively, of
total revenue during 1999 and 83% and 17%, respectively, of total revenue
during 1998. The Company expects its sources of revenue to fluctuate from
year to year.
During 1999, the Company entered into several development contracts with both
commercial and government entities for further development of the RSD
technology for meeting specific customer applications.
In the commercial business area, the Company entered into a multi-year
product development and licensing agreement with Carl Zeiss Inc. to develop a
range of products in ophthalmic diagnostics and surgical visualization.
In the defense business area, the Company entered into a $4.2 million
contract with the U.S. Army's Aircrew Integrated Systems Program Office to
further advance the form and functional development of the helmet-mounted
display. In March 1999, the Company entered into a $750,000 SBIR Phase II
Contract with U.S. Army's Aviation Applied Technology Directorate (AATD) for
the design of an advanced helmet-mounted display and imaging system to be
used in the Virtual Cockpit Optimization Program (VCOP). In September 1999,
the Company entered into a $1.5 million follow-on SBIR Phase III contract
with the AATD to continue development of the VCOP advanced head-worn display.
COST OF REVENUE. Cost of revenue includes both the direct and indirect costs
of performing on development contracts. Direct costs include 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 both by the
level of direct costs incurred on development contracts and by the level of
indirect costs incurred in managing and building the technical capabilities
and capacity of the Company. The cost of revenue can fluctuate substantially
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 decreased by approximately $1.5 million or 23% to $4.9
million in 1999 from $6.4 million in 1998. The decrease resulted from a
decrease in the direct costs associated with the Company's performance on
development contracts in 1999 from that in 1998. The lower level of expense
in 1999 as compared to 1998 also resulted from a higher level of investment
made by the Company in developing its technologies through work performed on
its own internal research and development projects, resulted in greater
overhead absorption by such research and development projects.
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
required for performance on such contracts. The cost of facilities is
expected to increase as a result of the Company's relocation of its
headquarters to larger
27
<PAGE>
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
laboratory operations, outside laboratory development and processing work;
fees and expenses related to patent applications, prosecution and protection;
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 RSD technology or
other technologies. To date, the Company has expensed all research and
development costs.
Research and development expense increased by approximately $6.9 million or
210% to $10.2 million in 1999 from $3.3 million 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, Inc. (Cree) 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 includes costs associated with the work performed by Cree
pursuant to the development agreement. In addition, during 1999, costs of
$452,000 related to the acquisition of an exclusive license were expensed by
the Company. See -- "Liquidity and Capital Resources" and -- "Note 8 of Notes
to Financial Statements."
The Company believes that a substantial level of continuing research and
development expense will be required to commercialize the RSD technology and
to develop products incorporating the RSD 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 increased by approximately
$2.5 million or 52% to $7.4 million in 1999 from $4.9 million in 1998. The
increase includes increased aggregate
28
<PAGE>
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 RSD technology and development
of anticipated products, and as it increases the level of corporate and
administrative activity.
INTEREST INCOME AND EXPENSE. Interest income increased by approximately
$856,000 to $1.2 million in 1999 from $307,000 in 1998. This increase
resulted from higher average cash and investment securities balances in 1999,
as a result of the financing activities of the Company, from the average cash
and investment securities balances in 1998.
Interest expense increased by approximately $91,000 or 111% to $172,000 in
1999 from $81,000 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 on long term debt entered into during 1999.
PREFERRED STOCK DIVIDENDS. The Company paid a cash dividend of $73,400 to the
holder of its Series B Convertible Preferred Stock in connection with the
redemption of its convertible preferred stock and issuance of Common Stock.
In October 1999, the Company amended the option to purchase convertible
preferred stock to extend the expiration date to June 30, 2000. This
extension was accounted for as a preferred stock dividend with a fair market
value $154,400. Additionally, during 1999, the Company recorded a charge of
$1,754,000 attributable to the beneficial conversion feature of convertible
preferred stock issued in 1999. See Note 7 of Notes to Financial Statements.
INCOME TAXES. No provision for income taxes has been recorded because the
Company has experienced net losses from inception through December 31, 1999.
At December 31, 1999, the Company had net operating loss carry-forwards of
approximately $34.2 million for federal income tax reporting purposes. The
net operating losses will expire beginning in 2005 if not previously
utilized. In certain circumstances, as specified in the Internal Revenue
Code, a 50% or more ownership change by certain combinations of the Company's
shareholders during any three-year period would result in a limitation on the
Company's ability to utilize its net operating loss carry-forwards. The
Company has determined that such a change of ownership occurred during 1995
and that annual utilization of loss carry-forwards generated through the
period of that change will be limited to approximately $761,000. An
additional change of ownership occurred in 1996; however, the amount of the
annual limitation is not material.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
CONTRACT REVENUE. Contract revenue increased by approximately $5.4 million to
$7. 1 million in 1998 from $1.7 million in 1997. The increase resulted from a
higher level of development contract business in 1998 over that performed in
1997 on contracts entered into in
29
<PAGE>
both 1998 and 1997. The Company's customers include both the United States
government and various commercial enterprises, representing approximately 83%
and 17%, respectively, of total revenue during 1998, and 37% and 63%,
respectively, of total revenue during 1997. The Company expects its sources
of revenue to fluctuate from year to year. See Note 2 of Notes to the
Financial Statements.
During 1998, the Company entered into several development contracts with both
commercial and government entities for further development of the RSD
technology directed toward meeting specific customer applications.
In the commercial business area in 1998, the Company entered into a contract
with the Wallace-Kettering Neuroscience Institute to collaborate on the
design and manufacture of an advanced head-wearable display for use in
neurosurgery. The display, which will provide "see-through" readability using
the Company's RSD technology, is designed to allow surgeons to conveniently
view anatomical images and other information during surgery. Also during
1998, the Company and Saab AB, in collaboration with Ericsson Saab Avionics
AB, agreed to extend and broaden the company's commercial development program
to develop the next generation high-resolution, helmet-mounted display
technology for use in advanced aircraft display systems. During 1998 the
Company delivered its second helmet-mounted display to Saab AB and Ericsson
Saab Avionics AB. The full-color, high-resolution system was designed to
deliver unprecedented image fidelity for fighter pilots.
In the defense business area in 1998, the Company entered into a $1 million
contract with the U.S. Army's Battle Command Battle Lab to build a head-worn
display with the objective of replacing the desktop monitor at a workstation
within its tactical operations center. The prototype will be a lightweight,
dual eye (biocular) head-worn device with full color and high resolution.
During 1998, the Company received a Phase II Small Business Innovation
Research (SBIR) contract for the development of a high fidelity head-wearable
display for use in flight simulators for training military pilots. The $1.1
million contract combines contributions from the Department of Defense, and
Saab Ericsson Avionics, the Company's commercial partner, in the project. In
June, the Company received a $583,000 Phase II SBIR from the U.S. Air Force
to develop a wide field of view head-wearable display system using the
Company's RSD technology. The display is designed to allow Command Control,
Communications, Computers and Intelligence personnel to view large amounts of
mission and situation critical data through a lightweight eyewear display
system, resembling glasses. Also in 1998, the Company announced that it had
entered into a contract to develop a lightweight, head-wearable display for
the U.S. Navy. The RSD enabled display, which features daylight "see-through"
readability, would be used on Navy vessels to provide enhanced user interface
to complex on-board information systems.
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 in preparation for performing additional contracts expected to
be entered into by the Company in 1999 and thereafter. Cost of revenue also
includes amounts invested by the Company in research and development
30
<PAGE>
activities undertaken in conjunction with work performed in fulfillment of
development contracts.
Cost of revenue increased by approximately $4.6 million to $6.4 million in
1998 from $1.8 million in 1997. The increase includes increases in both the
direct and indirect costs incurred in the performance of development
contracts resulting from a higher level of development contract business as
well as a higher level of expenses incurred for 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 1998 over 1997 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."
The Company expects that the cost of revenue on a dollar basis will increase
in the future. This increase likely will result from additional development
contact work that the Company will be performing 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 that the
cost of revenue will decline over time as the Company realizes economies of
scale associated with a 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; payments made under
the Research Agreement in 1997 and prior years; 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,
options or other rights to acquire or use intellectual property, either
related to the Company's RSD technology or otherwise. To date, the Company
has expensed all research and development costs. See Note 2 of Notes to the
Financial Statements.
Research and development expenses increased by approximately $700,000 to $3.3
million in 1998 from $2.6 million in 1997. In 1997 the Company made payments
totaling $962,500 to the University of Washington pursuant to the Research
Agreement. With the final payment on the Research Agreement having been made
in 1997, no such payments to the University of Washington were required or
made in 1998. The balance of the expenses of approximately $3.3 million and
$1.6 million in 1998 and 1997 respectively, were incurred directly by the
Company to further develop the RSD technology and to build the Company's
research and product development capabilities through the addition of staff
and equipment and related supporting costs. In addition, during 1998, the
Company acquired an exclusive license
31
<PAGE>
on patents and other intellectual property related to the design and
manufacture of a microminiature silicon scanner using microelectromechanical
technology. The costs and expenses related to this acquisition are included
in research and development expense in 1998.
The increase in research and development expenses of approximately $700,000
in 1998 over 1997 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 laboratories; and developing or acquiring 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 RSD
technology and to develop products incorporating the RSD technology.
Accordingly, the Company anticipates that it will continue to commit
substantial resources to research and development, including hiring
additional technical and support personnel, and that these costs will
continue to increase in future periods.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative 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 increased by approximately
$1.8 million to $4.9 million in 1998 from $3.1million in 1997. The increase
includes increased aggregate compensation and associated support costs for
employees and contractors, including those employed at December 31, 1997 and
those hired subsequent to that date, in sales and marketing and in executive
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 RSD
technology and development of anticipated products and as it increases the
level of corporate and administrative activity.
OTHER INCOME. Other income of $222,500 in 1997 resulted from the reduction of
an accrued liability for litigation upon settlement of the matter at a lesser
amount than the established reserve.
INTEREST INCOME AND EXPENSE. Interest income decreased by $307,700 to
$307,100 in 1998 from $614,800 in 1997. This decrease resulted from lower
average cash and investment balances in 1998, representing the remaining net
proceeds received by the Company from its initial public offering in August
1996.
Interest expense increased by $78,200 to $81,600 in 1998 from $3,400 in 1997.
This increase resulted from interest related to assignments of certain
accounts receivable under the Company's accounts receivables assignment
facility and increased interest expense related to capital lease obligations
entered into in 1998 and 1997.
32
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through the sale of
common stock and convertible preferred stock and, to a lesser extent,
contract revenue. At December 31, 1999 the Company had $32.2 million in cash,
cash equivalents and investment security balances.
Cash used in operating activities totaled approximately $16.6 million in 1999
compared to $6.1 million in 1998. Cash used in operating activities for each
period resulted primarily from the net loss for the period.
Cash used in investing activities totaled approximately $32.1 million in 1999
compared to cash provided by investing activities of $3.1 million 1998. The
increase in cash used in investing activities resulted primarily from
increases in the purchase of investment securities and property and equipment.
The Company used cash for capital expenditures of approximately $2.1 million
in 1999 compared to approximately $696,000 in 1998. Historically, capital
expenditures have been used to make leasehold improvements to leased office
space and to purchase computer hardware and software, laboratory equipment
and furniture and fixtures to support the Company's growth. Capital
expenditures are expected to continue to increase significantly as the
Company expands its operations. The Company currently has no material
commitments for capital expenditures.
Cash provided by financing activities totaled approximately $49.2 million in
1999 compared to $197,000 in 1998. The increase in cash provided by financing
activities resulted primarily from increases in the net proceeds from the
issuance of common and convertible preferred stock. See Note 7 of Notes to
Financial Statement.
SUBSEQUENT EVENT. In March 2000, the Company obtained a commitment from Cree
and General Electric Pension Trust to purchase in a private placement 500,000
shares of common stock for a total of $25.0 million. Terms of the transaction
include a provision that could result in a one time issuance of up to 55,556
additional shares if the market price 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 used in the initial sale
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
33
<PAGE>
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 technology. If the
Company is successful in establishing OEM co-development and joint venture
arrangements, the Company's expects its partners to fund certain
non-recurring engineering costs for technology development and/or 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 RSD technology and other
technologies.
The Company believes that its cash, cash equivalent, and investment
securities balances totaling $32.2 million, 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, for expenses associated with product
development, and to respond to competitive pressures or to meet unanticipated
development difficulties. In addition, the Company's operating plan calls for
the addition of sales, marketing, technical and other staff and the purchase
of additional laboratory and production equipment. The operating plan also
provides for the development of strategic relationships with systems and
equipment manufacturers that may require additional investments by the
Company. 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 substantially. 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 RSD technology and the market
acceptance and competitive position of such products.
Year 2000
During the first eleven weeks of calendar 2000, the Company did not encounter
any disruption to its business operations due to Year 2000 issues in its
internal systems. The Company is continuing to monitor both its internal
systems and transactions with customers and suppliers for any indication of
Year 2000 related problems.
As of December 31, 1999, the incremental cost related to the Company's Year
2000 readiness programs with respect to internal IT and non-IT systems and
third party providers was immaterial. With its Year 2000 readiness program
essentially complete, the Company does not anticipate incurring any further
costs. This estimate, however, does not include costs related to the
potential failure of key suppliers to timely address or correct their Year
2000 issues, potential costs related to any customer or other product
liability claims or the costs of internal software and hardware replaced in
the ordinary course of business. All estimates are based on currently known
circumstances and various assumptions regarding future events, and actual
costs could differ materially from the estimates.
34
<PAGE>
The Company believes that it has no obligation for any costs incurred by its
customers to address Year 2000 issues. The Company has not received any
notifications from customers of problems associated with Year 2000 in their
systems.
35
<PAGE>
ITEM 7A. 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. As of December 31, 1999, all
of the Company's cash equivalents and investment securities mature within one
year. Accordingly, the Company believes that the market risk arising from its
holdings of these financial instruments is immaterial. However, in the future
the Company may invest in securities with maturities of more than one year,
which may carry greater interest rate risk. Presently, all of the Company's
development contract payments are made in U.S. dollars and, consequently, the
Company believes it has no foreign currency exchange rate risk. However, in
the future the Company may enter into development contracts in foreign
currencies, which may subject the Company to foreign exchange rate risk. The
Company does not have any derivative instruments and does not presently engage
in hedging transactions.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants..............................................38
Balance Sheet as of December 31, 1999 and 1998.................................39
Statement of Operations for the years ended December 31, 1999, 1998 and 1997...40
Statement of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997...............................................41
Statement of Comprehensive Loss for the years ended December 31, 1999,
1998 and 1997..................................................................43
Statement of Cash Flows for the years ended December 31, 1999,
1998 and 1997..................................................................44
Notes to Financial Statements ................................................46
</TABLE>
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Microvision, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity, of comprehensive loss and of cash flows
present fairly, in all material respects, the financial position of
Microvision, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
March 20, 2000
38
<PAGE>
MICROVISION, INC.
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,798,000 $ 2,269,000
Investment securities available-for-sale 29,369,400 -
Accounts receivable, net of allowances of $60,000 and $24,000 1,024,500 1,538,800
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,000,400 758,500
Current restricted investments 650,000
Other current assets 847,700 282,800
------------------ -----------------
Total current assets 36,690,000 4,849,100
Long-term investment, at cost 623,600 -
Property and equipment, net 3,054,700 1,394,100
Restricted investments 1,100,000
Other assets 150,700 119,000
------------------ -----------------
Total assets $41,619,000 $ 6,362,200
================== =================
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,453,100 $ 1,327,700
Accrued liabilities 2,000,100 1,028,100
Allowance for estimated contract losses - 228,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 167,000 771,500
Current portion of capital lease obligations 220,800 136,100
Current portion of long term debt 46,900 -
------------------ -----------------
Total current liabilities 3,887,900 3,491,400
Capital lease obligations, net of current portion 279,400 281,800
Long term debt, net of current portion 341,500 -
Deferred rent, net of current portion 214,800 -
------------------ -----------------
Total liabilities 4,723,600 3,773,200
------------------ -----------------
Commitments and contingencies (Notes 8 and 9)
Mandatorily Redeemable Convertible Preferred Stock, no par
value, 1,600 shares authorized; 1,600 and 0 issued
and outstanding 1,536,000 -
------------------ -----------------
Shareholders' equity
Common stock, no par value, 31,250,000 shares
authorized; 10,140,733 and 6,064,626 shares issued
and outstanding 75,518,300 25,742,600
Deferred compensation (213,100) (238,700)
Subscriptions receivable from related parties (349,100) (78,900)
Accumulated other comprehensive loss (60,600) -
Accumulated deficit (39,536,100) (22,836,000)
------------------ -----------------
Total shareholders' equity 35,359,400 2,589,000
------------------ -----------------
Liabilities, Mandatorily Redeemable Convertible
Preferred Stock and Shareholders' Equity $41,619,000 $ 6,362,200
================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
MICROVISION, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Contract revenue $ 6,902,700 $7,074,100 $ 1,712,700
Cost of revenue 4,943,500 6,416,900 1,820,200
------------------ ---------------- -----------------
Gross margin 1,959,200 657,200 (107,500)
------------------ ---------------- -----------------
Research and development expense 10,232,700 3,305,600 2,593,900
Marketing, general and administrative expense 7,435,500 4,904,600 3,077,500
------------------ ---------------- -----------------
Total operating expenses 17,668,200 8,210,200 5,671,400
------------------ ---------------- -----------------
Loss from operations (15,709,000) (7,553,000) (5,778,900)
------------------ ---------------- -----------------
Other income 222,500
Interest income 1,163,200 307,100 614,800
Interest expense (172,200) (81,600) (3,400)
------------------ ---------------- -----------------
Net loss (14,718,000) (7,327,500) (4,945,000)
Less: Preferred dividend (227,800) - -
Non-cash beneficial conversion feature
of Series B Preferred Stock (1,754,300) - -
------------------ ---------------- -----------------
Net loss available for common shareholders $ (16,700,100) $ (7,327,500) $(4,945,000)
================== ================ =================
Net loss per share available for common shareholders -
basic and diluted $ (2.04) $ (1.22) $ (.85)
================== ================ =================
Weighted-average shares outstanding - basic and diluted 8,168,600 5,993,500 5,806,200
================== ================ =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
MICROVISION, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSCRIPTIONS
RECEIVABLE
COMMON STOCK DEFERRED FROM RELATED
SHARES AMOUNT COMPENSATION PARTIES
<S> <C> <C> <C> <C>
Balance at December 31, 1996 5,778,776 $ 24,116,200 $ (43,600) $ -
Issuance of stock to board
members for services 9,600 78,600 (78,600)
Exercise of warrants and options
for common stock 131,888 348,500
Issuance of options for services 37,200
Deferred compensation 785,000 (785,000)
Amortization of deferred compensation 206,000
Other comprehensive income
Other 9,800
Net loss
--------------- ------------------ ------------------ -----------------
Balance at December 31, 1997 5,920,264 25,375,300 (701,200) -
Issuance of stock to board
members for services 24,000 120,000 (120,000)
Exercise of warrants and options
for common stock 116,862 344,600 (78,900)
Issuance of stock and options for services 3,500 34,700
Deferred compensation 5,300 (5,300)
Forfeitures of options for common stock (137,300) 137,300
Amortization of deferred compensation 450,500
Other comprehensive income
Net loss
--------------- ------------------ ------------------ -----------------
Balance at December 31, 1998 6,064,626 25,742,600 (238,700) (78,900)
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
(LOSS) INCOME DEFICIT EQUITY
<S> <C> <C> <C>
Balance at December 31, 1996 $ - $ (10,563,500) $ 13,509,100
Issuance of stock to board
members for services -
Exercise of warrants and options
for common stock 348,500
Issuance of options for services 37,200
Deferred compensation
Amortization of deferred compensation 206,000
Other comprehensive income (1,200) (1,200)
Other 9,800
Net loss (4,945,000) (4,945,000)
----------------- -------------- -----------------
Balance at December 31, 1997 (1,200) (15,508,500) 9,164,400
Issuance of stock to board
members for services -
Exercise of warrants and options
for common stock 265,700
Issuance of stock and options for services 34,700
Deferred compensation -
Forfeitures of options for common stock -
Amortization of deferred compensation 450,500
Other comprehensive income 1,200 1,200
Net loss (7,327,500) (7,327,500)
----------------- -------------- -----------------
Balance at December 31, 1998 - (22,836,000) 2,589,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
MICROVISION, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Issuance of stock to board
members for services 5,400 149,400 (149,400)
Exercise of warrants and options
for common stock 2,961,214 33,556,500 (270,200)
Sales of common stock 709,493 9,738,100
Beneficial conversion feature of
mandatorily redeemable preferred
stock, net of cost 1,754,300
Conversion of preferred stock 400,000 4,334,000
Deferred compensation 197,000 (197,000)
Forfeitures of options for common stock (108,000) 108,000
Amortization of deferred compensation 264,000
Dividend on preferred stock 154,400
Other comprehensive income
Net loss
--------------- ------------------ ------------------ -----------------
Balance at December 31, 1999 10,140,733 $ 75,518,300 $ (213,100) $ (349,100)
=============== ================== ================== =================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Issuance of stock to board
members for services
Exercise of warrants and options
for common stock 33,286,300
Sales of common stock 9,738,100
Beneficial conversion feature of
mandatorily redeemable preferred
stock, net of cost (1,754,300)
Conversion of preferred stock 4,334,000
Deferred compensation
Forfeitures of options for common stock
Amortization of deferred compensation 264,000
Dividend on preferred stock (227,800) (73,400)
Other comprehensive income (60,600) (60,600)
Net loss (14,718,000) (14,718,000)
----------------- -------------- -----------------
Balance at December 31, 1999 $ (60,600) $(39,536,100) $ 35,359,400
================= ============== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
MICROVISION, INC.
STATEMENT OF COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Net loss $ (14,718,000) $(7,327,500) $(4,945,000)
Other comprehensive income - unrealized (loss) gain
on investment securities available-for-sale (60,600) 1,200 (1,200)
----------------- ---------------- ----------------
Comprehensive loss $ (14,778,600) $(7,326,300) $(4,946,200)
================= ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
MICROVISION, INC.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(14,718,000) $ (7,327,500) $(4,945,000)
Adjustments to reconcile net loss to net cash used
in operations
Depreciation and loss on disposal of equipment 675,600 468,900 146,200
Noncash expenses related to issuance of stock,
warrants and options and amortization of
deferred compensation 264,000 485,200 243,200
Noncash deferred rent 49,200
Allowance for estimated contract losses (228,000) 228,000 -
Change in
Accounts receivable 514,300 (1,388,800) (125,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,241,900) 85,300 (843,800)
Current restricted investments (650,000)
Other current assets (564,900) (169,700) (26,600)
Restricted investments (1,100,000)
Other assets (31,700) (99,000) 10,200
Accounts payable 125,400 559,500 379,600
Accrued liabilities 972,000 312,200 48,300
Billings in excess of costs and
estimated earnings on uncompleted contracts (604,500) 771,500 -
---------------- ---------------- ----------------
Net cash used in operating activities (16,538,500) (6,074,400) (5,112,900)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of investment securities 26,146,600 7,695,100 -
Purchases of investment securities (55,576,600) (3,901,900) (3,793,200)
Purchase of long term investment (623,600)
Purchases of property and equipment (2,090,500) (696,300) (666,600)
---------------- ---------------- ----------------
Net cash provided by (used in)
investing activities (32,144,100) 3,096,900 (4,459,800)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases (163,400) (68,400) (2,200)
Principal payments under long-term debt (31,600) - -
Increase in deferred rent 165,600
Increase in long-term debt 420,000 - -
Payment of preferred dividend (73,400) - -
Net proceeds from issuance of common stock 42,730,500 265,700 358,300
Net proceeds from issuance of preferred stock 6,163,900 - -
---------------- ---------------- ----------------
Net cash provided by financing activities 49,211,600 197,300 356,100
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 529,000 (2,780,200) (9,216,600)
Cash and cash equivalents at beginning of year 2,269,000 5,049,200 14,265,800
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 2,798,000 $2,269,000 $5,049,200
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
MICROVISION, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C> <C>
Cash paid for interest $ 172,200 $ 81,600 $ 3,400
================ ================ ================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired under capital leases $ 245,700 $ 394,000 $ 94,500
================ ================ ================
Beneficial conversion feature of Series B
Preferred Stock $ 1,754,300 $ - $ -
================ ================ ================
Non-cash dividend on Series B Preferred
Stock $ 154,400 $ - $ -
================ ================ ================
Conversion of preferred stock to common stock $ 4,334,000 $ - $ -
================ ================ ================
Exercise of stock options for subscriptions
receivable $ 270,200 $ 78,900 $ -
================ ================ ================
Deferred compensation for stock grants $ 238,400 $ 125,300 $ 78,600
================ ================ ================
Unrealized (loss) gain on investment securities
available-for -sale $ (60,600) $ 1,200 $ (1,200)
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. THE COMPANY
Microvision, Inc. (the Company), a Washington corporation, was
established to develop, manufacture and market Retinal Scanning Display
(RSD) technology, which projects images directly onto the retina. The
Company has entered into contracts with commercial and U.S. government
customers to develop applications using the RSD technology. As part of
these contracts, the Company has produced and delivered several
demonstrator units. The Company is working to commercialize the RSD
technology for potential defense, healthcare, industrial and consumer
applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
The Company considers all investments that mature within 90 days of
the date of purchase to be cash equivalents.
Short-term investment securities are primarily debt securities. The
Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are stated at fair
value with unrealized gains and losses included in other comprehensive
income. Dividend and interest income are recognized when earned.
Realized gains and losses are included in other income. The cost of
securities sold is based on the specific identification method.
RESTRICTED CASH
The current portion of restricted investments represents investments
available for sale held as collateral for a letter of credit issued to
Cree, Inc. ("Cree") to secure payment on a development contract.
The long-term portion of restricted investments represents investments
available for sale pledged as collateral for letters of credit
issued in connection with a lease agreement for the new corporate
headquarters. Most of the balance is required to be maintained for
the term of the lease.
LONG TERM INVESTMENT
In December 1999, the Company purchased 389,766 shares in Gemfire
Corporation (Gemfire) a privately held corporation. Gemfire is a
developer of components for display applications using diode lasers.
The Company accounts for the investment in Gemfire using the cost
method.
46
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the
estimated useful lives of the assets (three to five years) using the
straight-line method. Leasehold improvements are depreciated over the
shorter of their estimated useful life or the lease term.
REVENUE RECOGNITION
Revenue has primarily been generated from contracts for further
development of the RSD technology and to produce prototypes for
commercial enterprises and for the United States government. Revenue on
such contracts is recorded using the percentage-of-completion method
measured on a cost incurred basis.
Losses, if any, are recognized in full as soon as identified. Changes
in contract performance, contract conditions, and estimated
profitability, including those arising from contract penalty provision,
and final contract settlements, may result in revisions to costs and
revenues and are recognized in the period in which the revisions are
determined. Profit incentives are included in revenue when their
realization is assured.
CONCENTRATION OF CREDIT RISK AND SALES TO MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily, cash equivalents,
investments, and accounts receivable. The Company typically does not
require collateral from its customers. The Company has a cash
investment policy that generally restricts investments to ensure
preservation of principal and maintenance of liquidity.
The Company's customers include the United States government and
commercial enterprises, representing approximately 82% and 18%,
respectively, of total revenue during 1999. These customers represented
83% and 17%, respectively, of total revenue during 1998 and 37% and 63%
respectively of the total revenue during 1997. Three commercial
enterprises represented 16%, 17% and 63% of total revenues during 1999,
1998 and 1997, respectively.
INCOME TAXES
The Company provides for income taxes under the principles of Statement
of Financial Accounting Standards No. 109 (SFAS 109), which requires
that provision be made for taxes currently due and for the expected
future tax effects of temporary differences between book and tax bases
of assets and liabilities and for loss and credit carry forwards.
NET LOSS PER SHARE
Basic net loss per share is calculated on the basis of the
weighted-average number of common shares outstanding during the
periods. Net loss per share assuming dilution is calculated on the
basis of the weighted-average number of common shares outstanding
47
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
and the dilutive effect of all potential common stock equivalents and
convertible securities. Net loss per share assuming dilution for the
years ended December 31, 1999, 1998 and 1997 is equal to basic net loss
per share since the effect of common stock equivalents outstanding
during the periods, including convertible preferred stock, options and
warrants computed using the treasury stock method, is anti-dilutive.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
investment securities, accounts receivable, accounts payable, accrued
liabilities, long-term debt, and capital lease obligations. Except for
capital leases and long-term debt, the carrying amounts of financial
instruments approximates fair value due to their short maturities. The
carrying amount of capital leases and long-term debt at December 31,
1999 and 1998 was not materially different from the fair value based on
rates available for similar types of arrangements.
LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes
impairment of the carrying value of long-lived assets, if any, based on
the fair value of such assets.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and
related interpretations, and complies with the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for
equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force 96-18.
48
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The statement requires the recognition of all derivatives
as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the planned use of
the derivative and the resulting designation. Because the Company does
not currently hold any derivative instruments and does not engage in
hedging activities, the impact of the adoption of SFAS No. 133 is not
currently expected to have a material impact on financial position,
results of operations or cash flows. The Company will be required to
implement SFAS No. 133 in the first quarter of fiscal 2001.
In December 1999 the Securities and Exchange Commission ("SEC") issued
SEC Staff Accounting Bulletin No. 101 ("SAB 101"). This pronouncement
summarizes certain of the SEC's views on applying generally accepted
accounting principles to revenue recognition. The Company is required
to adopt SAB 101 for the year ending December 31, 2000 and does not
expect the adoption of SAB 101 to have a material impact on its results
of operations, financial position or cash flows.
3. INVESTMENTS AVAILABLE FOR SALE
The following table summarizes the composition of the Company's
available sale investments, which includes current and
noncurrent restricted investments of $650,000 and 1,100,000
respectively at December 31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
AMORTIZED AGGREGATE
COST BASIS FAIR VALUE
<S> <C> <C>
U.S. government agency debt securities $ 22,591,600 $ 22,526,900
U.S. corporate debt securities 8,588,400 8,592,500
---------------- ----------------
$ 31,180,000 $ 31,119,400
================ ================
</TABLE>
49
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Payroll and payroll taxes $ 435,000 $ 258,400
License 452,000 -
Professional fees 425,500 140,200
Bonus reserve 185,200 410,000
Compensated absences 158,200 115,400
Other 344,200 104,100
---------------- ----------------
$2,000,100 $1,028,100
================ ================
</TABLE>
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Office furniture and equipment $ 654,100 $ 283,000
Computer hardware and software 1,151,000 766,400
Lab equipment 1,273,900 897,100
Leasehold improvements 1,292,100 88,400
---------------- ----------------
4,371,100 2,034,900
LESS: Accumulated depreciation (1,316,400) (640,800)
---------------- ----------------
$3,054,700 $1,394,100
================ ================
</TABLE>
6. REVENUE AND RECEIVABLES
Cost and estimated earnings in excess of billings on uncompleted
contracts comprises amounts of revenue recognized on contracts that the
Company has not yet billed to a customer because the amounts were not
contractually billable at December 31, 1999 and 1998.
In 1998, the Company established a non-recourse receivables purchasing
facility (the "Facility") with a financial institution. The Facility
allowed the Company to assign accounts receivable to the financial
institution on a non-recourse basis for cash up to a maximum amount
of $2,500,000. The Facility, which carried an administration fee and
an interest discount, expired on September 24, 1999. As of
December 31, 1998, approximately
50
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
$696,800 of receivables were assigned under the Facility and were
recorded by the Company as a reduction of trade accounts receivable.
During 1999 and 1998, the Company recorded fees and interest expense of
$63,500 and $44,900 respectively under the Facility.
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK
In January 1999, the Company raised $5,000,000 (before issuance costs)
from the sale of 5,000 shares of Series B-1 convertible preferred stock
to a private investor in a private placement. The preferred stock was
immediately convertible into common stock at a rate of $12.50 in
preferred stock per common share and carried 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 an option to
purchase an additional 1,600 shares of Series B-2 convertible preferred
stock at an exercise price of $16.00 per share with a six-month
maturity and an option to purchase an additional 1,920 shares of
Series B-3 convertible preferred stock at an exercise price of $19.20
per share with a nine-month maturity from the closing date of the
transaction.
In May 1999, the Company redeemed the Series B-1 convertible preferred
stock and issued 400,000 shares of Common Stock. In addition, the
Company paid a cash dividend of $73,400 to the investor at the time of
the redemption.
In July 1999, the investor exercised the option to purchase 1,600
shares of Series B-2 Convertible Preferred Stock for $1,600,000 (before
issuance costs). The preferred stock is immediately convertible at a
rate of $16.00 of preferred stock per common 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 Series B-2 Convertible Preferred Stock
is subject to mandatory redemption at the election of the preferred
shareholder upon certain liquidation events (as defined). 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. Due to the mandatory redemption feature noted
above, the carrying value of the Series B-2 convertible preferred stock
is classified as temporary equity.
The conversion prices of the Series B-1 and Series B-2 convertible
preferred stock were less than the closing prices of the Company's
common stock on the dates of commitment to purchase the preferred
stock. This beneficial conversion feature was valued at $1,754,000.
This "discount" is treated as a preferred stock dividend and recorded
to accumulated deficit over the period between the date of sale and
the date on which the preferred stock first becomes convertible.
Because the preferred stock was immediately convertible, the entire
value of the beneficial conversion feature was recorded as a dividend
in 1999.
In October 1999, the Company amended the option to purchase 1,920
shares of the Series B-3 Convertible preferred stock to extend of the
expiration date of the
51
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
option to June 30, 2000. In consideration of the extension, the holder
waived the right to receive dividends on the outstanding Series B-2
convertible preferred stock. The terms of the option were also amended
to an option to purchase 100,000 shares of common stock at a conversion
price of $19.20. The amendment was accounted for a preferred stock
dividend with a fair market value of $154,400.
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 May 1999, the Company raised $4,500,000 (before issuance costs) from
the sale of 268,600 shares of common stock to 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 concurrently with the signing of the agreement. The
Company has pledged investments of $650,000 as of December 31, 1999 as
security for a letter of credit, which will be used to fund the
remaining payment under the agreement.
WARRANTS
In June 1999, the Company received $1,078,900 (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.
In July 1999, the Company raised $27.0 million from the exercise of
2,253,430 publicly traded redeemable common stock purchase warrants and
issuance of 2,253,430 shares of common stock. The remaining 20,496
warrants were redeemed for $5,100 in accordance with the terms of the
Warrant Agreement. The Company has delisted the warrants from trading
on the Nasdaq National Market.
In December 1999, the Company raised $1.9 million from the exercise of
87,887 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 175,774 shares of common stock.
52
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following summarizes activity with respect to warrants during the
three years ended December 31, 1999:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at December 31, 1996 2,830,363 $ 4.80-12.00
Exercised (140,625) 4.80-6.40
----------------
Outstanding at December 31, 1997 2,689,738 4.80-12.00
Granted 17,676 12.00
Exercised (31,684) 8.00-9.60
Canceled/expired (69,566) 8.00-9.60
----------------
Outstanding at December 31, 1998 2,606,164 4.80-12.00
Granted 652,688 8.00-20.32
Exercised (2,533,428) 4.80-12.00
Canceled/expired (21,734) 8.00-12.00
Outstanding at December 31, 1999 703,690 4.80-20.32
================
Exercisable at December 31, 1999 692,621 $ 4.80-20.32
================
</TABLE>
OPTIONS
During 1993, the Company adopted the 1993 Stock Option Plan (the 1993
Plan), which provides for granting incentive stock options (ISOs) and
nonqualified options (NSOs) to employees, directors, officers, and
certain nonemployees of the Company as determined by the Board of
Directors, or its designated committee (Plan Administrator), for the
purchase of up to a total of 228,938 shares of the Company's authorized
but unissued common stock. The date of grant, option price, vesting
period and other terms specific to options granted under such plan were
determined by the Plan Administrator. In September 1995, an additional
625,000 shares were reserved for issuance under the 1993 Plan. The
Company expects to terminate the 1993 Plan effective immediately
following the issuance of the shares of common stock subject to the
outstanding grants thereunder.
During 1994, the Company adopted the 1994 Combined Incentive and
Nonqualified Stock Option Plan (the 1994 Plan), which provides for the
granting of ISOs and NSOs to employees, directors, officers, and
certain nonemployees of the Company as determined by the Plan
Administrator for the purchase of common shares not to exceed a total
of 435,000 of the Company's authorized but unissued shares of common
stock. The date of grant, option price, vesting terms and other terms
specific to options granted under such plan were determined by the Plan
Administrator. The 1994 Plan was terminated in 1999 following the final
issuance of the shares of common stock for outstanding grants.
During 1996, the Company adopted the 1996 Stock Option Plan (the 1996
Plan) and the 1996 Independent Director Stock Plan (the Independent
Directors Plan). The 1996 Plan,
53
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
as amended, provides for granting ISOs and NSOs to employees, officers
and agents of the Company as determined by the Plan Administrator, for
the purchase of up to 3,000,000 shares of the Company's authorized but
unissued common stock. The terms and conditions of any options granted,
including date of grant, the exercise price and vesting period are to
be determined by the Plan Administrator. The Independent Directors Plan
provides for granting up to a total of 75,000 shares of common stock to
nonemployee directors of the Company.
Stock options issued under the 1993 Plan vest over three years and
expire five years after the date of vesting. Stock options issued under
the 1996 Plan vest over three to four years and typically expire after
ten years. Stock issued under the Independent Director Plan vests upon
the earlier of the day prior to the next regular Annual Shareholders
Meeting, or one year.
In 1999 and 1998, the three officers of the Company exercised a total
of 57,750 and 43,000 stock options respectively in exchange for full
recourse notes totaling $270,200 and $78,900 respectively. These notes
bear interest at 4.64% to 6.20% per annum. Each note is payable in full
upon the earliest of (1) a fixed date ranging from January 31, 2001 to
December 31, 2004 depending on the option; (2) the sale of all of the
shares acquired with the note; or (3) within 90 days of the officer's
termination of employment. Each note is also payable on a pro rata
basis upon the partial sale of shares acquired with the note. The notes
are included in shareholders' equity on the balance sheet.
54
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following table summarizes activity with respect to options for the three
years ended December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at December 31, 1996 979,366 $ 4.88
Granted:
Exercise price greater than fair value 791,526 17.72
Exercise price equal to fair value 161,800 14.66
Exercise price less than fair value 176,250 9.77
Exercised (40,795) 6.09
Forfeited (84,680) 8.10
----------------
Outstanding at December 31, 1997 1,983,467 11.07
Granted:
Exercise price greater than fair value 474,043 18.88
Exercise price equal to fair value 96,575 11.91
Exercise price less than fair value 5,000 7.88
Exercised (85,178) 4.05
Forfeited (108,756) 14.65
----------------
Outstanding at December 31, 1998 2,365,151 12.75
Granted:
Exercise price greater than fair value 326,444 25.90
Exercise price equal to fair value 380,123 21.33
Exercised (431,274) 7.45
Forfeited (178,755) 17.90
----------------
Outstanding at December 31, 1999 2,461,689 16.38
================
The following table summarizes information about the weighted-average fair
value of options granted:
YEAR ENDED DECEMBER 31,
1999 1998 1997
Exercise price greater than fair value $ 9.31 $4.71 $4.61
Exercise price equal to fair value 14.88 6.70 7.56
Exercise price less than fair value -- 5.28 9.03
</TABLE>
55
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCIABLE
----------------------------------------------- -----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
<S> <C> <C> <C> <C> <C>
$0.80 70,814 1.09 $0.80 70,814 $0.80
$3.20-$4.80 185,977 2.52 $3.27 185,977 $3.27
$5.25-$7.50 370,126 4.07 $6.70 364,457 $6.69
$8.00-$12.00 216,879 6.11 $9.59 130,424 $9.09
$12.13-$18.18 532,092 7.75 $15.64 356,592 $15.48
$18.21-$26.74 743,362 8.47 $22.32 80,849 $21.05
$27.11-$40.54 338,814 8.66 $29.55
$40.79-$50.68 3,625 9.50 $46.43
----------------- ---------------
2,461,689 1,189,113
================= ===============
</TABLE>
Deferred compensation of $5,300 and $785,000 was recorded during 1998
and 1997 respectively for stock options granted to employees at an
exercise prices below fair market value.
56
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Had compensation cost for the Plans been determined based upon the fair
value at the grant date for awards under the Plans consistent with the
methodology prescribed under SFAS 123, the Company's net loss and net
loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net loss available for
common shareholders As reported $ (16,700,100) $(7,327,500) $(4,945,000)
================== ================ ================
Pro forma $ (20,236,000) $(10,689,200) $(5,961,500)
================== ================ ================
Pro forma loss per share As reported $ (2.04) $ (1.22) $ (.85)
================== ================ ================
Pro forma $ (2.48) $ (1.78) $ (1.03)
================== ================ ================
</TABLE>
The fair value of the options granted was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997,
respectively: dividend yield of zero percent for all years; expected
volatility of 83%, 60%, and 60% for all years; risk-free interest rates
of 5.50%, 5.11%, and 6.09%; assumed forfeiture rate of 5% for all
years; and expected lives 5 years, 5 years and 4 years.
8. COMMITMENTS AND CONTINGENCIES
AGREEMENTS WITH UNIVERSITY OF WASHINGTON
In October 1993, the Company entered into a Research Agreement and an
Exclusive License Agreement (License Agreement) with the University of
Washington (UW). The License Agreement grants the Company the rights to
certain intellectual property, including the technology being developed
under the Research Agreement, whereby the Company has an exclusive,
royalty-bearing license to make, use and sell or sublicense the
licensed technology. In consideration for the license, the Company
agreed to pay a one-time nonrefundable license issue fee of $5,133,500.
Payments under the Research Agreement were credited to the license fee.
In addition to the nonrefundable fee, which has been paid in full, the
Company is required to pay certain ongoing royalties. In 1999, 1998 and
1997 these royalties were not material.
The Research Agreement provided for the Company to pay $5,133,500 to
fund agreed-upon VRD research and development activities to be carried
out by the UW. The research funding was required to be paid in sixteen
quarterly installments of $320,800 and was payable at the beginning of
each quarter. During 1997, the Company made its final payments under
the Research Agreement. Total payments made for 1997 and 1996 were
$962,500 and $1,283,400, respectively.
57
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Beginning in 2000, the Company is required to pay UW a nonrefundable
license maintenance fee of $10,000 per quarter, to be credited against
royalties due.
In March 1994, the Company entered into an Exclusive License Agreement
(HALO Agreement) with UW. The HALO Agreement grants the Company the
right to receive certain technical information relating to HALO Display
technology and an exclusive right to market the technical information
for the purpose of commercial exploitation to unaffiliated entities.
Under the agreement, the Company is obligated to pay to UW $75,000 and
31,250 common shares upon filing of the first patent and $100,000 and
62,500 common shares upon issuance of the first patent application. In
1999, the UW filed a patent application under the HALO Agreement. An
obligation of $452,000 based on the value of the common stock was
recorded as an accrued liability and an expense in 1999. A patent has
not yet been issued.
LITIGATION
The Company is subject to various claims and pending or threatened
lawsuits in the normal course of business. Management believes that the
outcome of any such lawsuits would not have a material adverse effect
on the Company's financial position, results of operations or cash
flows.
9 LEASE COMMITMENTS AND DEBT
The Company leases its office space and certain equipment under
noncancelable capital and operating leases with initial or remaining
terms in excess of one year. The Company entered into a new facility
lease that commenced in April 1999. This lease includes an extension
provision and rent escalation provisions over the term of the lease.
Rent expense is recognized on a straight-line basis over the lease
term.
The Company entered into a loan agreement with the lessor of the
Company's new corporate headquarters to finance $420,000 in tenant
improvements. The loan carries a fixed interest rate of 10% and is
repayable over the term of the lease and is secured by a letter of
credit.
58
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Future minimum rental commitments under capital and operating leases
for years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
2000 $ 274,500 $1,197,100
2001 190,700 1,129,900
2002 95,400 1,490,000
2003 26,700 1,708,000
2004 7,500 1,903,100
Thereafter 2,478,200
---------------- ----------------
Total minimum lease payments 594,800 $9,906,300
================
LESS: Amount representing interest (94,600)
----------------
Present value of capital lease obligations 500,200
LESS: Current portion (220,800)
----------------
Long-term obligation at December 31, 1999 $ 279,400
================
</TABLE>
The capital leases are collateralized by the related assets financed
and by security deposits held by the lessors under the lease
agreements. The cost and accumulated depreciation of equipment under
capital leases was $245,700 and $208,300, respectively, at December 31,
1999, and $506,100 and $82,600 respectively, at December 31, 1998.
Rent expense was $1,007,700, $294,000 and $147,100 for 1999, 1998 and
1997, respectively.
10. INCOME TAXES
A provision for income taxes has not been recorded for 1999, 1998 or
1997 due to taxable losses incurred during such periods. A valuation
allowance has been recorded for deferred tax assets because realization
is primarily dependent on generating sufficient taxable income prior to
expiration of net operating loss carry-forwards.
At December 31, 1999, the Company has net operating loss carry-forwards
of approximately $34.2 million for federal income tax reporting
purposes. The net operating losses will expire beginning in 2005 if not
previously utilized. In certain circumstances, as specified in the
Internal Revenue Code, a 50% or more ownership change by certain
combinations of the Company's stockholders during any three-year period
would result in limitations on the Company's ability to utilize its net
operating loss carry-forwards. The Company has determined that such a
change occurred during 1995 and the annual utilization of loss
carry-forwards generated through the period of that change will be
limited to approximately $761,000. An additional change occurred in
1996; however, the amount of the annual limitation is not material.
59
<PAGE>
MICROVISION, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
Net operating loss carry-forward $ 11,637,000 $6,081,000
Capitalized research and development 1,173,800 1,287,000
Expenses related to issuance of equity instruments 341,700 801,000
Other 231,500 98,000
---------------- ----------------
13,384,000 8,267,000
LESS: Valuation allowance (13,384,000) (8,267,000)
---------------- ----------------
Deferred tax assets $ - $ -
================ ================
</TABLE>
The difference between the zero provisions for income taxes in 1999,
1998 and 1997 and the expected amounts determined by applying the
federal statutory rate to losses before income taxes results primarily
from increases in the valuation allowance.
Certain net operating losses arise from the deductibility for tax
purposes of compensation under nonqualified stock options equal to the
difference between the fair value of the stock on the date of exercise
and the exercise price of the options. For financial reporting
purposes, the tax effect of this deduction when recognized will be
accounted for as a credit to shareholders' equity.
11. RETIREMENT SAVINGS PLAN
On January 1, 1998 the Company established a retirement savings plan
(the Plan) that qualifies under Internal Revenue Code Section 401(k).
The plan covers all qualified employees. Contributions to this plan by
the Company are made at the discretion of the Board of Directors. The
Company did not contribute to the Plan in 1999 or 1998.
In February 2000, the Board of Directors approved a plan amendment to
match 50% of employee contributions to the Plan up to 6% of the
employee's compensation, starting on April 1, 2000.
12. SUBSEQUENT EVENT (UNAUDITED)
In March 2000, the Company obtained a commitment from two investors to
purchase in a private placement 500,000 shares of common stock for a
total of $25.0 million.
60
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants in
accounting or financial disclosure matters during the Company's fiscal
years ended December 31, 1999 and 1998.
61
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT
Information regarding directors and executive officers is incorporated by
reference to the section entitled "Election of Directors" in the Microvision,
Inc., definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the next Annual Meeting of Shareholders to be
held on June 22, 2000 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Documents filed as part of the report:
(1) Financial Statements
Balance Sheet as of December 31, 1999 and 1998
Statement of Operations for the years ended December 31, 1999,
1998 and 1997
Statement of Shareholders' Equity for the years ended December 31,
1999, 1998 and 1997
Statement of Comprehensive Loss for the years ended December 31,
1999, 1998 and 1997
Statement of Cash Flows for the years ended December 31, 1999, 1998
and 1997
(2) Financial Statement Schedules
None.
(3) Exhibits
3.1 Amended and Restated Articles of Incorporation of Microvision, Inc., as
filed on August 14, 1996 with the Secretary of State of the State of
Washington(1)
3.1.1 Articles of Amendment of Articles of Incorporation Containing the
Statement of Rights and Preferences of the Series B Convertible
Preferred Stock of Microvision, Inc., dated January 13, 1999(2)
3.2 Amended and Restated Bylaws of Microvision, Inc.(3)
4.1 Form of specimen certificate for Common Stock(1)
4.3 Form of specimen certificate for the Series B-2 Stock(5)
4.4 Form of specimen certificate for the Series B-3 Stock(5)
4.5 Microvision, Inc. Series 1 Stock Purchase Warrant, dated April 1, 1999
issued to Capital Ventures International(6)
4.6 Microvision, Inc. Series 2 Stock Purchase Warrant, dated April 1, 1999
issued to Capital Ventures International(6)
10.1 Assignment of License and Other Rights between The University of
Washington and the Washington Technology Center and the H. Group, dated
July 25, 1993(1)
10.2 Project II Research Agreement between The University of Washington and
the Washington Technology Center and Microvision, Inc., dated October
28, 1993(1)+
10.3 Exclusive License Agreement between The University of Washington and
Microvision, Inc., dated October 28, 1993(1)+
10.4 Employment Agreement between Microvision, Inc., and Richard F.
Rutkowski, effective October 1, 1997(5)
10.5 Employment Agreement between Microvision, Inc., and Stephen R. Willey,
effective October 1, 1998(6)
10.6 1993 Stock Option Plan(1)
10.7 1996 Stock Option Plan, as amended(4)
10.8 1996 Independent Director Stock Plan, as amended(5)
10.9 Exclusive License Agreement between the University of Washington and
Microvision, Inc. dated March 3, 1994(1)
10.10 Form of Executive Stock Loan Agreement(3)
10.11 Employment Agreement between Microvision, Inc., and Richard A. Raisig,
effective October 1, 1997(5)
10.12 Lease between S/I Northcreek II, LLC and Microvision, Inc., dated
October 27, 1998(5)
10.12.1 Lease Amendment No. 1 to Lease between S/I Northcreek II, LLC and
Microvision Inc., dated July 12, 1999
10.12.2 Lease Amendment No. 2 to Lease between S/I Northcreek II, LLC and
Microvision, Inc., dated February 14, 2000
10.13 Series B Convertible Preferred Stock Purchase Agreement, dated as of
January 14, 1999, between Microvision, Inc. and Margaret Elardi(5)
10.13.1 First Amendment to Series B Convertible Preferred Stock Purchase
Agreement, dated October 14, 1999
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
- -----------------------------
63
<PAGE>
(1) Incorporated by reference to the Company's Form SB-2 Registration
Statement, Registration No. 333-5276-LA.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed on January 28, 1999.
(3) Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended June 30, 1998.
(4) Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended September 30, 1998.
(5) Incorporated by reference to the Company's Annual Report on form 10-K
for the year ended December 31, 1997, Registration No. 0-21221.
(6) Incorporated by reference to the Company's Annual Report on form 10-K
for the year ended December 31, 1998.
+ Subject to confidential treatment.
(b) REPORTS ON FORM 8-K.
Microvision filed no reports on Form 8-K during the last quarter of the
fiscal year ended December 31, 1999.
64
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MICROVISION, INC.
Date: March 28, 2000 By RICHARD F. RUTKOWSKI
---------------------------------------
Richard F. Rutkowski
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the following capacities
on March 28, 2000.
SIGNATURE TITLE
RICHARD F. RUTKOWSKI Chief Executive Officer, President and Director
- ----------------------- (Principal Executive Officer)
Richard F. Rutkowski
STEPHEN R. WILLEY Executive Vice President and Director
- -----------------------
Stephen R. Willey
RICHARD A. RAISIG Chief Financial Officer and Vice President,
- ----------------------- Operations and Director (Principal Financial
Richard A. Raisig Officer)
JEFF WILSON Chief Accounting Officer
- ----------------------- (Principal Accounting Officer)
Jeff Wilson
JACOB BROUWER Director
- -----------------------
Jacob Brouwer
RICHARD A. COWELL Director
- -----------------------
Richard A. Cowell
MARGARET ELARDI Director
- -----------------------
Margaret Elardi
WALTER J. LACK Director
- -----------------------
Walter J. Lack
WILLIAM A. OWENS Director
- -----------------------
William A. Owens
ROBERT A. RATLIFFE Director
- -----------------------
Robert A. Ratliffe
DENNIS J. REIMER Director
- -----------------------
DENNIS J. REIMER
65
<PAGE>
EXHIBIT INDEX
The following documents are filed herewith or have been included as exhibits
to previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.
3.1 Amended and Restated Articles of Incorporation of Microvision, Inc., as
filed on August 14, 1996 with the Secretary of State of the State of
Washington(1)
3.1.1 Articles of Amendment of Articles of Incorporation Containing the
Statement of Rights and Preferences of the Series B Convertible
Preferred Stock of Microvision, Inc., dated January 13, 1999(6)
3.2 Amended and Restated Bylaws of Microvision, Inc.(3)
4.1 Form of specimen certificate for Common Stock(1)
4.3 Form of specimen certificate for the Series B-2 Stock(5)
4.4 Form of specimen certificate for the Series B-3 Stock(5)
4.5 Microvision, Inc. Series 1 Stock Purchase Warrant, dated April 1, 1999
issued to Capital Ventures International(6)
4.6 Microvision, Inc. Series 2 Stock Purchase Warrant, dated April 1, 1999
issued to Capital Ventures International(6)
10.1 Assignment of License and Other Rights between The University of
Washington and the Washington Technology Center and the H. Group, dated
July 25, 1993(1)
10.2 Project II Research Agreement between The University of Washington and
the Washington Technology Center and Microvision, Inc., dated October
28, 1993(1)+
10.3 Exclusive License Agreement between The University of Washington and
Microvision, Inc., dated October 28, 1993(1)+
10.4 Employment Agreement between Microvision, Inc., and Richard F.
Rutkowski, effective October 1, 1997(5)
10.5 Employment Agreement between Microvision, Inc., and Stephen R. Willey,
effective October 1, 1998(6)
10.6 1993 Stock Option Plan(1)
10.7 1996 Stock Option Plan, as amended(4)
10.8 1996 Independent Director Stock Plan, as amended(5)
10.9 Exclusive License Agreement between the University of Washington and
Microvision, Inc. dated March 3, 1994(1)
10.10 Form of Executive Stock Loan Agreement(3)
66
<PAGE>
10.11 Employment Agreement between Microvision, Inc., and Richard A. Raisig,
effective October 1, 1997(5)
10.12 Lease between S/I Northcreek II, LLC and Microvision, Inc., dated
October 27, 1998(5)
10.12.1 Lease Amendment No. 1 to Lease between S/I Northcreek II, LLC and
Microvision Inc., dated July 12, 1999
10.12.2 Lease Amendment No. 2 to Lease between S/I Northcreek II, LLC and
Microvision, Inc., dated February 14, 2000
10.13 Series B Convertible Preferred Stock Purchase Agreement, dated as of
January 14, 1999, between Microvision, Inc. and Margaret Elardi(5)
10.13.1 First Amendment to Series B Convertible Preferred Stock Purchase
Agreement
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
- -----------------------------
(1) Incorporated by reference to the Company's Form SB-2 Registration
Statement, Registration No. 333-5276-LA.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed on January 28, 1999.
(3) Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended June 30, 1998.
(4) Incorporated by reference to the Company's Form 10-QSB for the
quarterly period ended September 30, 1998.
(5) Incorporated by reference to the Company's Annual Report on form 10-K
for the year ended December 31, 1997, Registration No. 0-21221.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
+ Subject to confidential treatment.
67
<PAGE>
LEASE AMENDMENT NO. 1
This LEASE AMENDMENT NO. 1 (this "Amendment") is entered into as of this
12th of July, 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 27,
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: /s/ Dan Ivanoff
-----------------------------
Its: Managing Member
------------------------
TENANT
MICROVISION, INC., a
Washington corporation
By: /s/ Richard Raisig
----------------------------
Its: CFO/VP Operations
----------------------
2
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgement is the person whose true
signature appears on this document.
On this 12 day of July, 1999, before me personally appeared Dan
Ivanoff, to me known to be a member of S/I NORTHCREEK II, LLC, the limited
liability company that executed the within and foregoing instrument, and
acknowledged the said instrument to be the free and voluntary act and deed of
said limited liability company, for the uses and purposes therein mentioned,
and on oath stated that he was authorized to execute said instrument.
WITNESS my hand and official seal hereto affixed the day and year first
above written.
/s/ Pamela A. Elliott
--------------------------------
Notary Public in and for the
State of Washington, residing at
Bellevue
[SEAL] --------------------------------
My commission expires: 8/11/01
----------
Pamela A. Elliott
--------------------------------
[Type or Print Notary Name]
(Use This Space for
Notarial Seal Stamp)
3
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgement is the person whose true
signature appears on this document.
On this 24 day of June, 1999, before me personally appeared Richard A.
Raisig, to me known to be the CFO of MICROVISION, INC., the corporation that
executed the within and foregoing instruments, and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation, for
the uses and purposes therein mentioned, and on oath stated that he was
authorized to execute said instrument and that the seal affixed, if any, is
the corporate seal of said corporation.
WITNESS my hand and official seal hereto affixed the day and year first
above written.
/s/ Gayle Brook
--------------------------------
Notary Public in and for the
State of Washington, residing at
5215 143rd St. S.E.
Everett, WA 98200
[SEAL] --------------------------------
My commission expires: 11/4/01
----------
Gayle L. Brook
--------------------------------
[Type or Print Notary Name]
(Use This Space for
Notarial Seal Stamp)
4
<PAGE>
LEASE AMENDMENT NO. 2
THIS FIRST AMENDMENT OF LEASE (this "Amendment ") is dated for reference
purposes the 14th day of February, 2000, and is 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 27, 1999 (the "Lease"), for the lease of certain premises located at
19910 North Creek Parkway, Bothell, Washington. Unless otherwise defined in
this Amendment, capitalized terms used herein shall have the same meaning as
they are given in the Lease.
B. Landlord and Tenant desire to amend the Lease in certain respect,
all as set forth below.
NOW, THEREFORE, the parties agree as follows:
1. CONFIRMATION OF PREMISES AREA. Landlord and Tenant confirm that,
effective as of November 1, 1999, the total area of the improved and occupied
portion of the Premises is 51,534 rentable square feet, which consists of the
initial improved Premises together with a portion of the Premises excluded
pursuant to Section 2.03 of the Lease which has been improved and occupied by
Tenant as of November 1, 1999.
2. BASE RENT. Commencing on November 1, 1999, the Base Rent payable
for the entire Premises shall be as follows:
Month 8 - Month 12: $86,844.29 per month
Month 13-42: $90,597.50 per month
Month 43-84: $98,964.50 per month
3. PAYMENT BY TENANT FOR TENANT IMPROVEMENTS IN EXCESS OF TENANT
IMPROVEMENT ALLOWANCE. Simultaneously with execution of this Amendment,
Tenant shall pay Landlord the sum of $28,495.00 as a reconciliation of sums
payable by Tenant in excess of the Tenant Improvement Allowance for and with
respect to the portion of the Premises which has been improved as of
November 1, 1999.
4. RATIFICATION. Except as expressly set forth herein, the terms and
conditions of the Lease shall remain in full force and effect and are hereby
ratified.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
LANDLORD:
S/I NORTH CREEK II, LLC
By: /s/ Dan Ivanoff
-----------------------------------
Its: Managing Member
-----------------------------------
TENANT:
MICROVISION, INC.
By: /s/ Richard Raisig
-----------------------------------
Its: Vice President and CFO
-----------------------------------
2
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that the persons
appearing before me and making this acknowledgment are the persons whose true
signatures appear on this document.
On this 14th day of February, 2000, before me personally appeared DAN
IVANOFF, to me known to be the Managing Member of S/I NORTHCREEK II, LLC, the
company that executed the within and foregoing instrument, and acknowledged
the said instrument to be the free and voluntary act and deed of said
company, for the uses and purposes therein mentioned, and on oath stated that
they were authorized to execute said instrument.
WITNESS my hand and official seal hereto affixed the day and year first
above written.
/s/ Pamela Elliott
--------------------------------------------------
Notary Public in and for the State of Washington,
residing at Bellevue
[SEAL] My commission expires: 8/11/01
Pamela Elliott
--------------------------------------------------
[Type or Print Notary Name]
(Use This Space for Notarial
Seal Stamp)
<PAGE>
STATE OF )
) ss.
COUNTY OF KING )
I certify that I have satisfactory evidence that the person appearing
before me and making this acknowledgment the person is whose true signatures
appear on this document.
On this 25th day of January, 2000, before me personally appeared Richard
A. Raisig, to me known to be the CFO and Vice President of MICROVISION, INC.,
the corporation that executed the within and foregoing instrument, and
acknowledged the said instrument to be the free and voluntary act and deed of
said corporation, for the uses and purposes therein mentioned, and on oath
stated that they were authorized to execute said instrument.
WITNESS my hand and official seal hereto affixed the day and year first
above written.
/s/ GAYLE BROOKS
--------------------------------------------------
Notary Public in and for the State of Washington,
residing at 5215 143rd St. SE, Everett, WA 98200
[SEAL] My commission expires: 11-04-01
Gayle Brooks
--------------------------------------------------
[Type or Print Notary Name]
(Use This Space for Notarial
Seal Stamp)
<PAGE>
FIRST AMENDMENT TO
SERIES B CONVERTIBLE PREFERRED
STOCK PURCHASE AGREEMENT
This First Amendment to Series B Convertible Preferred Stock Purchase
Agreement (this "First Amendment") is made as of October 14,1999, by and
between Microvision, Inc. (the "Company") and Margaret Elardi (the
"Purchaser"). All capitalized terms not herein defined shall have the
meanings ascribed to them in the Series B Convertible Preferred Stock
Purchase Agreement (the "Agreement") dated as of January 14, 1999, by and
between the Company and the Purchaser.
WHEREAS, the Company and the Purchaser entered into the Agreement,
pursuant to which the Company, among other things, issued an option to
purchase 1,920 shares of its Series B Convertible Preferred Stock, Class 3
(the "Option") to the Purchaser; and
WHEREAS, the Company and the Purchaser now desire to amend the terms of
the Option by amending the Agreement, in accordance with Section 6.1 thereof;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. AMENDMENT TO SECTION 2.3. Section 2.3 "Option to Purchase Series
B-3 Stock" shall be replaced in its entirety with the following:
"2.3 Option to Purchase Common Stock. At any time through June 30, 2000,
Purchaser shall have the option to purchase up to 100,000 shares of
Common Stock at a purchase price of nineteen and 20/100ths dollars
($19.20) per share, for an aggregate purchase price of one million
nine hundred twenty thousand dollars ($1,920,000).
2. WAIVER OF RIGHT TO DIVIDENDS ON SERIES B-2 STOCK. In consideration of
the foregoing amendment to the Option, Purchaser hereby waives any and all
rights and claims in and to dividends payable by reason of her ownership
of any Series B-2 Stock.
3. NO OTHER AMENDMENTS. The Agreement, as amended by the First Amendment,
shall remain in full force and effect except as herein amended.
IN WITNESS WHEREOF, the Company and the Purchaser have caused this First
Amendment to be executed effective as of the date first written above.
- ------------------------------------------------------------------------------
MICROVISION, INC. MARGARET ELARDI
By: /s/ Richard A. Raisig Margaret Elardi
------------------------- ---------------
Name: Richard A. Raisig
-----------------------
Its: Chief Financial Officer
-----------------------
- ------------------------------------------------------------------------------
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-19011 and No. 333-71373) of Microvision, Inc.
of our report dated March 20, 2000 appearing in this Form 10-K.
PricewaterhouseCoopers LLP
Seattle, Washington
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF MICROVISION, INC. FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,798,000
<SECURITIES> 29,369,400
<RECEIVABLES> 1,084,500
<ALLOWANCES> 60,000
<INVENTORY> 0
<CURRENT-ASSETS> 36,690,000
<PP&E> 4,371,100
<DEPRECIATION> 1,316,400
<TOTAL-ASSETS> 41,619,000
<CURRENT-LIABILITIES> 3,887,900
<BONDS> 0
1,536,000
0
<COMMON> 75,518,300
<OTHER-SE> (40,158,900)
<TOTAL-LIABILITY-AND-EQUITY> 41,619,000
<SALES> 0
<TOTAL-REVENUES> 6,902,700
<CGS> 0
<TOTAL-COSTS> 4,943,500
<OTHER-EXPENSES> 17,608,200
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 1,163,200
<INCOME-PRETAX> (16,700,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,700,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,700,100
<EPS-BASIC> (2.04)
<EPS-DILUTED> (2.04)
</TABLE>
