<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2000
[ ] 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)
<TABLE>
<S> <C>
WASHINGTON 91-1600822
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
19910 North Creek Parkway, Bothell, Washington 98011-3008
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (425) 415-6847
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
As of July 24, 2000, 11,827,443 shares of the Company's common stock, no par
value, were outstanding.
1
<PAGE>
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheet at June 30, 2000 and December 31, 1999 3
Consolidated Statement of Operations for the three and six months ended
June 30, 2000 and 1999 4
Consolidated Statement of Comprehensive Loss for the three months and six
months ended June 30, 2000 and 1999 5
Consolidated Statement of Cash Flows for the six months ended
June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26
PART II
OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds 27
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 6 - Exhibits and Reports on Form 8-K 30
</TABLE>
2
<PAGE>
MICROVISION, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 13,277,200 $ 2,798,000
Investment securities available-for-sale 41,116,900 29,369,400
Accounts receivable, net of allowances of $78,000 and $60,000 886,800 1,024,500
Costs and estimated earnings in excess of billings on
uncompleted contracts 860,000 2,000,400
Current restricted investments 3,375,000 650,000
Other current assets 1,790,000 847,700
-------------- --------------
Total current assets 61,305,900 36,690,000
Long-term investment, at cost 623,600 623,600
Property and equipment, net 3,798,300 3,054,700
Restricted investments 951,000 1,100,000
Other assets 101,400 150,700
-------------- -------------
Total assets $ 66,780,200 $ 41,619,000
=================== ==================
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 820,500 $ 1,453,100
Accrued liabilities 2,286,300 2,000,100
Billings in excess of costs and estimated
earnings on uncompleted contracts 177,000 167,000
Current portion of capital lease obligations 326,600 220,800
Current portion of long-term debt 49,300 46,900
-------------- --------------
Total current liabilities 3,659,700 3,887,900
Capital lease obligations, net of current portion 293,000 279,400
Long-term debt, net of current portion 316,200 341,500
Deferred rent, net of current portion 233,900 214,800
-------------- --------------
Total liabilities 4,502,800 4,723,600
-------------- --------------
Commitments and contingencies - -
Mandatorily redeemable convertible preferred stock, no par value, 1,600 shares
authorized; 0 and 1,600 issued and outstanding - 1,536,000
-------------- --------------
Shareholders' Equity
Common stock, no par value, 31,250,000 shares authorized;
11,785,568 and 10,140,733 shares issued and outstanding 115,954,100 75,518,300
Deferred compensation (1,415,500) (213,100)
Subscriptions receivable from related parties (689,200) (349,100)
Accumulated other comprehensive loss (30,300) (60,600)
Accumulated deficit (51,541,700) (39,536,100)
-------------- --------------
Total shareholders' equity 62,277,400 35,359,400
-------------- --------------
Liabilities, mandatorily redeemable convertible preferred
stock and shareholders' equity $ 66,780,200 $ 41,619,000
=================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MICROVISION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Contract revenue $ 1,176,000 $ 1,392,900 $ 3,285,500 $ 3,694,500
Cost of revenue 883,900 1,539,500 2,351,400 3,249,100
---------------- --------------- ---------------- --------------
Gross margin 292,100 (146,600) 934,100 445,400
---------------- --------------- ---------------- --------------
Research and development
expense 4,524,900 2,590,900 8,124,300 3,472,700
Marketing, general and
administrative expense 3,512,100 2,513,700 6,003,000 4,235,400
---------------- --------------- ---------------- --------------
Total operating expenses 8,037,000 5,104,600 14,127,300 7,708,100
---------------- --------------- ---------------- --------------
Loss from operations (7,744,900) (5,251,200) (13,193,200) (7,262,700)
Interest income 843,800 142,500 1,295,700 188,900
Interest expense (31,300) (70,000) (108,100) (106,900)
---------------- --------------- ---------------- --------------
Net loss (6,932,400) (5,178,700) (12,005,600) (7,180,700)
Less: Preferred dividend - (73,400) - (73,400)
Noncash beneficial conversion
feature of Series B Preferred Stock - - - (1,148,000)
---------------- --------------- ---------------- --------------
Net loss available for common
shareholders $ (6,932,400) $ (5,252,100) $ (12,005,600) $ (8,402,100)
================= ================= ================== =================
Net loss per share available for common
shareholders - basic and diluted $ (0.60) $ (0.74) $ (1.09) $ (1.27)
================= ================= ================== =================
Weighted-average shares outstanding -
basic and diluted 11,530,800 7,073,800 11,000,000 6,596,400
================= ================= ================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
MICROVISION, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss $ (6,932,400) $ (5,178,700) $ (12,005,600) $ (7,180,700)
Other comprehensive income -
Unrealized gain on investment
securities available-for-sale 33,300 21,300 30,300 28,300
------------------ ----------------- ------------------- ------------------
Comprehensive loss $ (6,899,100) $ (5,157,400) $ (11,975,300) $ (7,152,400)
================== ================= =================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MICROVISION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (12,005,600) $ (7,180,700)
Adjustments to reconcile net loss to
net cash used in operations
Depreciation 515,800 277,100
Noncash expenses related to issuance of stock, warrants,
options and amortization of deferred compensation 669,600 126,900
Noncash deferred rent 19,100 -
Changes in:
Accounts receivable 137,700 89,100
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,140,400 (528,900)
Current restricted investments (2,725,000) (1,950,000)
Other current assets (942,300) (158,000)
Restricted investments 149,000 (1,100,000)
Other assets 49,300 11,400
Accounts payable (632,600) 170,300
Accrued liabilities 663,200 1,319,500
Reserve for project costs - 457,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 10,000 (505,300)
--------------- ---------------
Net cash used in operating activities (12,951,400) (8,971,600)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of investment securities 40,560,000 21,144,100
Purchases of investment securities (52,277,200) (23,393,100)
Purchases of property and equipment (1,013,900) (1,453,700)
--------------- ---------------
Net cash used in investing activities (12,731,100) (3,702,700)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases (126,100) (66,600)
Principal payments under long-term debt (22,900) (9,800)
Increase in long term-debt - 420,000
Payment of preferred dividend - (73,400)
Payments received on subscriptions receivable 56,500 -
Net proceeds from issuance of common stock 36,254,200 13,231,300
Net proceeds from issuance of preferred stock - 4,770,000
--------------- ---------------
Net cash provided by financing activities 36,161,700 18,271,500
--------------- ---------------
Net increase in cash and cash equivalents 10,479,200 5,597,200
Cash and cash equivalents at beginning of period 2,798,000 2,269,000
--------------- ---------------
Cash and cash equivalents at end of period $ 13,277,200 $ 7,866,200
================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
MICROVISION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
---- ----
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Cash paid for interest $ 108,100 $ 106,900
================== =================
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
<S> <C> <C>
Property and equipment acquired under capital leases $ 245,500 $ 75,000
================== =================
Beneficial conversion feature of Series B Preferred Stock $ - $ 1,148,000
================== =================
Conversion of preferred stock to common stock $ 1,536,000 $ 4,334,000
================== =================
Payment for exclusive license agreement by
issuance of common stock $ 377,000 $ -
================== =================
Exercise of stock options for subscriptions receivable $ 396,600 $ 167,600
================== =================
Deferred compensation - stock grants, warrants and options $ 1,872,000 $ 247,300
================== =================
Unrealized gain in investment securities available-for-sale $ 30,300 $ 28,300
================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
MICROVISION, INC.
Notes to Consolidated Financial Statements
June 30, 2000
Management's Statement
The Consolidated Balance Sheet as of June 30, 2000, the Consolidated Statements
of Operations and Comprehensive Loss for the three and six months ended June 30,
2000, and June 30, 1999, and the Consolidated Statement of Cash Flows for the
six months ended June 30, 2000 and June 30, 1999 have been prepared by
Microvision, Inc. (the Company) and have not been audited. In the opinion of
management, all adjustments necessary to present fairly the financial position,
results of operations and cash flows at June 30, 2000 and all periods presented,
have been made. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. You should read these
condensed financial statements in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31,1999. The results of operations for the three and
the six month periods ended June 30, 2000 are not necessarily indicative of the
operating results that may be attained for the entire fiscal year.
Principles of Consolidation
The consolidated financial statements include the accounts of Microvision, Inc.
and Lumera Corporation, its majority owned subsidiary. Lumera Corporation is
engaged in the research and development of technologies related to non-display
applications. All material intercompany accounts and transactions have been
eliminated in consolidation.
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 and the dilutive effect of all potential common stock
equivalents and convertible securities. Net loss per share assuming dilution for
the periods ended June 30, 2000 and June 30, 1999 is equal to basic net loss per
share since the effect of potential common stock equivalents outstanding during
the periods, including convertible preferred stock, options and warrants
computed using the treasury stock method, is anti-dilutive.
8
<PAGE>
The components of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTH ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Numerator:
Net loss available for common shareholders$ (6,932,400) $ (5,252,100) $ (12,005,600) $ (8,402,100)
=============== =============== =============== ==============
Denominator:
Basic and diluted weighted-average common
shares outstantding 11,530,800 7,073,800 11,000,000 6,596,400
=============== =============== =============== ==============
Basic and diluted net loss per share $ (.60) $ (.74) $ (1.09) $ (1.27)
=============== =============== =============== ==============
</TABLE>
As of June 30, 2000 the Company had outstanding options and warrants to purchase
3,373,000 shares of common stock.
Shareholders' Equity
In March 2000, the Company redeemed 1,600 shares of Series B-2 mandatorily
redeemable convertible preferred stock and issued 100,000 shares of common
stock to the holder thereof.
In April 2000, the Company raised $25.0 million from the issuance of
500,000 shares of common stock to Cree, Inc. and General Electric Pension Trust.
At the same time, the Company entered into a two year, $10.0 million extension
of an agreement with Cree, Inc. to continue development of semiconductor
light-emitting diodes and laser diodes for application with the Company's
proposed display and imaging products. The Company must pay $4.5 million during
the first year of the extension in four equal quarterly payments, the first of
which was made when the extension was signed. The Company has pledged
investments of $3.4 million as security for a letter of credit, which will be
used to fund the remaining payments under the first year of the extension.
During the second year of the extension, the Company is required to pay the
remaining $5.5 million in four equal quarterly payments.
In April 2000, the Company raised $7.5 million from the exercise by a
private investor of a warrant to purchase 418,848 shares of common stock at a
price of $17.91 per share.
In June 2000, the Company raised $1.9 million from the exercise by a
private investor who is also a director, of an option to purchase 100,000 shares
of common stock at a price of $19.20 per share.
9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The information set forth in this report in Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Item 3,
"Quantitative and Qualitative Disclosure about Market Risk," includes
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act for 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 below under the caption "Considerations Related to the
Company's Business. "
Overview
The Company began operations in May 1993 to develop and commercialize technology
for displaying images and information onto the retina of the eye. Retinal
scanning display 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 retinal scanning display 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.
In 1993, the Company acquired an exclusive license to the Virtual Retinal
Display, a specific type of retinal scanning display, from the University of
Washington and entered into a research agreement with the University of
Washington to further develop the Virtual Retinal Display technology. Since
completing its initial public offering in August 1996, the Company has
established and equipped in-house laboratories and transferred the research and
development relating to the Virtual Retinal Display from the University of
Washington to its in-house laboratories. The Company has continued to develop
the Virtual Retinal Display technology as part of its broader research and
development efforts relating to the retinal scanning display technology.
The Company currently has several prototype versions of the retinal scanning
displays, including monochromatic and color portable units and a full color
benchtop model. The Company expects to continue funding prototype and
demonstration versions of products incorporating its technology through at least
the end of this year.
10
<PAGE>
In conjunction with developing the retinal scanning display technology, the
Company is developing components that can be integrated into different product
offerings. The Company has defined the following key product offerings for
further development:
- High Performance - High fidelity displays for use in general
simulation avionics, medical and
entertainment applications
- Compact - Lightweight, see-through, wearable systems
for hands free applications in the
industrial, medical, and defense markets
- Microdisplay - Highly miniaturized display systems to be
incorporated into OEM products including
cellular telephones, personal digital
assistants, and digital camcorders/cameras
- Image Capture - Systems to capture data such as bar code
readers, scientific images and surgical
cameras
- Projection - Fixed systems to replace desktop computer
monitors or rear projector systems
In June 2000, the Company demonstrated its first miniature display utilizing
three microminiature light emitting diode lamps to create a full-color high
resolution video image.
During the six months ended June 30, 2000 the Company sold additional
engineering prototype units of its first commercial retinal scanning display
product. Sales of production version retinal scanning displays may not occur
however, until substantially later, if at all.
Plan of Operation
The Company plans to introduce a production version of the retinal scanning
display in 2001. To support the product introduction the Company has produced
engineering prototypes of the commercial product. The Company has sold five of
these units to customers for product testing and integration. Other units are
being used by our sales and marketing groups to demonstrate the technology to
future potential customers and to obtain customer feedback.
The Company also intends to continue entering into strategic relationships with
systems integrators and equipment manufacturers to pursue the development of
commercial products incorporating the retinal scanning display technology.
The Company also plans to continue to pursue, obtain and perform on development
contracts. The Company expects that such contracts will further the
development of the retinal scanning display technology and lead to commercial
products. The Company also plans to invest funds for ongoing innovation and
improvements to the retinal scanning display technology. These innovations
and improvements include developing component technology, building additional
prototypes, and designing components and products for manufacturability. The
Company intends to continue hiring qualified sales, marketing, technical and
other personnel and to continue investing in laboratory facilities and
equipment to achieve development and production objectives.
11
<PAGE>
Results of Operations
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1999
CONTRACT REVENUE. The Company earns revenue from performance on development
contracts and sales of engineering prototypes. Contract revenue in the three
months ended June 30, 2000 decreased by $217,000, or 16 %, to $1.2 million from
$1.4 million in the same period in 1999. For the three months ended June 30,
2000, 93% of revenue was derived from performance on development contracts.
During the three months ended June 30, 2000, the Company completed work on its
two largest development contracts. After completion of work on these contracts,
the Company received a contract modification for $7.8 million to perform
additional work on both contracts. The beginning and end of a contract term are
typically the low points of activity on a contract. The beginning of a contract
term is normally used for planning and subcontractor selection. The end of a
contract term is normally used for final demonstrations to the customer and
report writing. This lower level of activity during the three months ended June
30, 2000 was the primary reason for the decline in revenue from the same period
in 1999.
The backlog of development contracts at June 30, 2000 was $6.9 million, all of
which work is scheduled for completion during the next twelve months. The
Company's customers include both the United States government and commercial
enterprises.
COST OF REVENUE. Cost of revenue includes both the direct and indirect costs of
performing on development contracts. Indirect costs include staff and related
support costs associated with building the Company's technical capabilities and
capacity to perform on development contracts the Company expects to enter into
in the future.
Cost of revenue in the three months ended June 30, 2000 decreased by $656,000,
or 43%, to $884,000 from $1.5 million in the same period in 1999. The decrease
is attributable to lower direct cost and overhead cost allocation to cost of
revenue in the three months ended June 30, 2000 than in the same period in 1999.
The lower level of direct cost is attributable to the timing of the performance
on development contracts as discussed above. Research and development overhead
is allocated based on relative direct labor cost incurred in cost of revenue and
research and development expense.
The Company expects that the cost of revenue, on an absolute basis, will
increase in the future. This increase will likely result from additional
development contract work that the Company expects to perform. 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 higher levels of
development contract business.
12
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consists of:
- Compensation related costs of employees and contractors
engaged in internal research and product development
activities,
- Laboratory operations, outsourced development and processing
work,
- Fees and expenses related to patent applications, prosecution
and protection, and
- Other operating expenses.
Included in research and development expenses are costs incurred in acquiring
and maintaining licenses of technology from other companies. The Company has
charged all research and development costs to cost of revenue or research and
development expense.
Research and development expense in the three months ended June 30, 2000
increased by $1.9 million, or 75%, to $4.5 million from $2.6 million in the same
period in 1999. The increase reflects continued implementation of the Company's
operating plan, which calls for building technical staff and supporting
activities, establishing and equipping in-house laboratories, and developing and
maintaining intellectual property.
In April 2000, the Company entered into a $10.0 million extension of an
agreement with Cree, Inc. to continue development of semiconductor light
emitting diodes and laser diodes. The Company is required to pay $4.5 million
during the first year of the extension in four equal quarterly payments, the
first of which was made when the extension was signed. The Company has pledged
investments of $3.4 million as security for a letter of credit, which will be
used to fund the remaining payments under the first year of the extension.
During the second year of the extension, the Company is required to pay the
remaining $5.5 million in four equal quarterly payments.
The Company believes that a substantial level of continuing research and
development expense will be required to develop commercial products using the
retinal scanning display technology. Accordingly, the Company anticipates that a
high level of research and development spending will continue. These expenses
will be incurred as a result of:
- Hiring additional technical and support personnel,
- Expanding and equipping in-house laboratories,
- Acquiring rights to additional technologies,
- Subcontracting work to development partners, and
- Other operating expenses.
The Company expects that the rate of spending on research and product
development will continue to grow in future quarters as we:
- Prepare for the expected introduction of the Company's first
commercial product in mid 2001,
- Accelerate development of microdisplays to meet emerging
market opportunities,
- Expand the Company's investment in bar code reader
development,
- Continue development of the Company's retinal scanning
display technology, and
- Pursue other potential business opportunities.
13
<PAGE>
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative expenses include compensation and support costs for sales,
marketing, management and administrative staff, and for other general and
administrative costs, including legal and accounting, consultants, and other
operating expenses.
Marketing, general and administrative expenses in the three months ended June
30, 2000 increased by $1.0 million, or 40%, to $3.5 million from $2.5 million in
the same period in 1999. The increase includes increased compensation and
support costs for employees and contractors. 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, and
- Increases the level of corporate and administrative activity.
INTEREST INCOME AND EXPENSE. Interest income in the three months ended June 30,
2000 increased by $701,000, or 492%, to $844,000 from $143,000 in the same
period in 1999. This increase resulted primarily from higher average cash and
investment securities balances in the three months ended June 30, 2000 than the
average cash and investment securities balances in the same period of the prior
year.
Interest expense in the three months ended June 30, 2000 decreased by $39,000,
or 55%, to $31,000 from $70,000 in the same period in 1999. The decrease
resulted from a decrease in interest paid on the non-recourse receivables
assignment facility, which expired in September 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1999
CONTRACT REVENUE. The Company earns revenue from performance on development
contracts and sales of engineering prototypes. Contract revenue in the six
months ended June 30, 2000 decreased by $409,000, or 11%, to $3.3 million from
$3.7 million in the same period in 1999. For the six months ended June 30, 2000,
88 % of revenue was derived from performance on development contracts.
During the six months ended June 30, 2000, the Company completed work on its two
largest development contracts. After completion of work on these contracts, the
Company received a contract modification for $7.8 million to perform additional
work on both contracts. The
14
<PAGE>
beginning and end of a contract term are typically the low points of
activity on a contract. The beginning of a contract term is normally used for
planning and subcontractor selection. The end of a contract term is normally
used for final demonstrations to the customer and report writing. This lower
level of activity during the six months ended June 30, 2000 was the primary
reason for the decline in revenue from the same period in 1999.
COST OF REVENUE. Cost of revenue includes both the direct and indirect costs of
performing on development contracts. Indirect costs include staff and related
support costs associated with building the Company's technical capabilities and
capacity to perform on development contracts the Company expects to enter into
in the future.
Cost of revenue in the six months ended June 30, 2000 decreased by $898,000, or
28%, to $2.4 million from $3.2 million in the same period in 1999. The decrease
is attributable to lower direct cost and research and development overhead cost
allocation to cost of revenue in the six months ended June 30, 2000 than in the
same period in 1999. The lower level of direct cost is attributable to the
timing of the performance on development contracts discussed above. Research and
development overhead is allocated based on relative direct labor cost incurred
in cost of revenue and research and development expense.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense consists of:
- Compensation related costs of employees and contractors
engaged in internal research and product development
activities,
- Laboratory operations, outside development and processing
work,
- Fees and expenses related to patent applications, prosecution
and protection, and
- Other operating expenses.
Included in research and development expenses are costs incurred in acquiring
and maintaining licenses of technology from other companies. The Company has
expensed all research and development costs.
Research and development expense in the six months ended June 30, 2000 increased
by $4.6 million, or 134%, to $8.1 million from $3.5 million in the same period
in 1999. The increase reflects continued implementation of the Company's
operating plan, which calls for building technical staff and supporting
activities, establishing and equipping in-house laboratories, and developing and
maintaining intellectual property.
In April 2000, the Company entered into a $10.0 million extension of an
agreement with Cree, Inc. to continue development of semiconductor light
emitting diodes and laser diodes. The Company is required to pay $4.5 million
during the first year of the extension in four equal quarterly payments, the
first of which was made when the extension was signed. The Company has pledged
investments of $3.4 million as security for a letter of credit, which will be
used to fund the remaining payments under the first year of the extension.
During the second year of the extension, the Company is required to pay the
remaining $5.5 million in four equal quarterly payments.
15
<PAGE>
The Company believes that a substantial level of continuing research and
development expense will be required to develop commercial products using the
Retinal scanning display technology. Accordingly, the Company anticipates that a
high level of research and development spending will continue. These expenses
will be incurred as a result of:
- Hiring additional technical and support personnel,
- Expanding and equipping in-house laboratories,
- Acquiring rights to additional technologies, and
- Subcontracting development work to development partners.
The Company expects that the rate of spending on research and product
development will continue to grow in future quarters as we:
- Prepare for the expected introduction of the Company's first
commercial product in mid 2001,
- Accelerate development of microdisplays to meet emerging
market opportunities,
- Expand the Company's investment in bar code reader
development,
- Continue development of the Company's retinal scanning
display technology, and
- Pursue other potential business opportunities.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative expenses include compensation and support costs for sales,
marketing, management and administrative staff, and for other general and
administrative costs, including legal and accounting, consultants, and other
operating expenses.
Marketing, general and administrative expenses in the six months ended June 30,
2000 increased by $1.8 million, or 42%, to $6.0 million from $4.2 million in the
same period in 1999. The increase includes increased compensation and support
costs for employees and contractors. 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, and
- Increases the level of corporate and administrative activity.
INTEREST INCOME AND EXPENSE. Interest income in the six months ended June 30,
2000 increased by $1.1 million,or 586%,to $1.3 million from $189,000 in the same
period in 1999. This increase resulted from higher average cash and investment
securities balances in the six months ended June 30, 2000 than the average cash
and investment securities balances in the same period of the prior year.
Interest expense in the six months ended June 30, 2000 increased by $1,000, or
1%, to $108,100 from $107,000 in the same period in 1999. This increase resulted
from interest related to new long-term debt incurred for leasehold improvements
in the new facility and additional capital leases.
16
<PAGE>
Liquidity and Capital Resources
The Company has funded operations to date primarily through the sale of common
stock, convertible preferred stock and, to a lesser extent, contract revenue. At
June 30, 2000, the Company had $54.4 million in cash, cash equivalents and
investment securities balances.
Cash used in operating activities totaled $13.0 million during the six months
ended June 30, 2000 compared to $9.0 million during the same period in 1999.
Cash used in operating activities during the six months ended June 30, 2000
includes the additional use of restricted cash of $2.7 which will be used to
fund future payments to Cree, Inc. under the research agreement discussed
above. Cash used in operating activities for each period resulted primarily
from the net loss for the period.
Cash used in investing activities totaled $12.7 million during the six months
ended June 30, 2000, compared to $3.7 million during the same period of 1999.
The increase in cash used in investing activities resulted primarily from
investing the proceeds from financing activities during the same period. The
Company balances the maturity dates of the investment portfolio to its
expected cash requirements.
The Company used $1.0 million for capital expenditures during the six months
ended June 30, 2000 compared to $1.5 million during the same period in 1999.
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 growth. The Company
expects capital expenditures to continue to increase significantly as the
Company continues to expand operations. As of June 30, 2000 the Company had
commitments to purchase approximately $2.6 million in leasehold improvements and
additional laboratory equipment.
Cash provided by financing activities totaled $36.2 million during the six
months ended June 30, 2000, compared to $18.3 million during the same period in
1999. During the six months ended June 30, 2000 the Company raised $36.3
million, net of cost, from the issuance of common stock. The following is a
summary of the net proceeds from issuance of common stock during the six months
ended June 30, 2000:
- $24.0 million, net of issuance costs, from issuance of
500,000 shares of common stock to Cree, Inc. and General
Electric Pension Trust,
- $7.7 million from the exercise of warrants to purchase 437,824
shares of common stock,
- $1.8 million, net of issuance costs, from the exercise of an
option to purchase 100,000 shares of common stock, and
- $2.8 million from exercise of employee options to purchase
275,209 shares of common stock.
Future operating expenditures and capital requirements will depend on numerous
factors, including the following:
- The progress of research and development programs,
- The progress in commercialization activities and arrangements,
- The cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights,
17
<PAGE>
- Competing technological and market developments, and
- The Company's ability to establish cooperative development,
joint venture and licensing arrangements.
In order to maintain exclusive rights under the license agreement with the
University of Washington, the Company is obligated to make royalty payments to
the University of Washington. If the Company is successful in establishing OEM
co-development and joint venture arrangements, the Company expects that its
partners will fund a portion of non-recurring engineering costs for product
development. Nevertheless, the Company expects cash requirements to increase
significantly each year as the Company expands its activities and operations to
commercialize its technologies.
The Company believes that its cash, cash equivalents and investment securities
balances at June 30, 2000 will satisfy its budgeted cash requirements for at
least the next 12 months based on the current operating plan. Actual expenses,
however, may be higher than estimated and the Company may require additional
capital earlier than anticipated to:
- Accelerate the development of retinal scanning display
technology,
- Respond to competitive pressures, or
- Meet unanticipated development difficulties.
The Company's operating plan calls for the addition of technical and business
staff and the purchase of additional computer and laboratory equipment, and
leasehold improvements. The operating plan also provides for the development of
strategic relationships with systems and equipment manufacturers. There can be
no assurance that additional financing will be available to us or that, if
available, it will be available on acceptable terms 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 reduce operations
significantly. The Company's capital requirements will depend on many factors,
including, but not limited to, the rate at which the Company can, directly or
through arrangements with OEMs, introduce products incorporating the retinal
scanning display technology and the market acceptance and competitive position
of such products.
CONSIDERATIONS RELATING TO THE COMPANY'S BUSINESS
WE CANNOT BE CERTAIN THAT THE RETINAL SCANNING DISPLAY TECHNOLOGY OR PRODUCTS
INCORPORATING THIS TECHNOLOGY WILL ACHIEVE MARKET ACCEPTANCE. IF THE RETINAL
SCANNING DISPLAY TECHNOLOGY DOES NOT ACHIEVE MARKET ACCEPTANCE, OUR REVENUES MAY
NOT GROW.
Our success will depend in part on the commercial acceptance of the retinal
scanning display technology. The retinal scanning display technology may not be
accepted by manufacturers who use display technologies in their products or by
consumers of these products. To be accepted, the retinal scanning display
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 retinal
scanning display technology.
18
<PAGE>
OUR LACK OF THE FINANCIAL AND TECHNICAL RESOURCES RELATIVE TO OUR COMPETITORS
MAY REDUCE OUR REVENUES, POTENTIAL PROFITS, AND OVERALL MARKET SHARE.
The retinal scanning display and products that may incorporate this
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 retinal scanning display technology and to introduce new products and
features on a cost effective basis in a timely manner to meet 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 CAN NOT SUPPLY PRODUCTS IN COMMERCIAL QUANTITIES, 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 retinal scanning display 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
19
<PAGE>
which we could expect to profitably sell commercial versions of these
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
- 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 retinal scanning display technology could become
subject to new health and safety regulations that would reduce our ability to
commercialize the retinal scanning display technology. Compliance with any
such new regulations would likely increase our cost to develop and produce
products using the retinal scanning display 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 retinal scanning
display 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 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 retinal scanning display and related technologies.
Although our licensors have patented various aspects of the retinal scanning
display technology and we continue to file our own patent applications covering
retinal scanning display features and related technologies, we cannot be certain
as to the degree of protection offered by these patents or as to the likelihood
that patents will be issued from the pending patent applications. Moreover,
these patents may have limited commercial value or may lack sufficient breadth
to protect adequately the aspects of our technology to which the patents relate.
We cannot be certain that our competitors, many of which have substantially
greater resources than us and have made substantial investments in competing
technologies, will not apply for and obtain patents that will prevent, limit or
interfere with our ability to make and sell our products. 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.
20
<PAGE>
WE COULD FACE LAWSUITS RELATED TO OUR USE OF THE RETINAL SCANNING DISPLAY
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 retinal
scanning display 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
retinal scanning display 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 retinal scanning display technology, or to cease licensing the
retinal scanning display 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 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 VIRTUAL RETINAL DISPLAY TECHNOLOGY, OUR
BUSINESS OPERATIONS AND PROSPECTS WOULD BE ADVERSELY AFFECTED.
We acquired the exclusive rights to the Virtual Retinal Display technology
under an exclusive license agreement with the University. If the University
were to violate the terms of the license agreement by providing the Virtual
Retinal Display 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 Virtual Retinal Display
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
retinal scanning display technology and products incorporating the retinal
scanning display 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
21
<PAGE>
delays in introducing the retinal scanning display technology or find that the
development, manufacture or sale of products incorporating the retinal scanning
display 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.
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 retinal scanning display
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 may need additional funds in order to, among other requirements:
- further develop retinal scanning display 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 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.
22
<PAGE>
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 June 30, 2000, we had an accumulated deficit of $51.5
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, $16.7 million in 1999, and $12.0 million in the six
month period ended June 30, 2000.
Our revenues to date have been generated from development contracts and sales
of engineering prototype units. 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 retinal scanning display technology and
development of prototypes. We are unable to accurately estimate future
revenues and operating expenses based upon historical performance.
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 retinal scanning display 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 July 24, 2000, we had outstanding:
- 11,827,443 shares of common stock,
- options under our option plans to purchase an aggregate of
2,884,481 shares of common stock,
- privately placed warrants to purchase 259,045 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.
23
<PAGE>
OUR QUARTERLY PERFORMANCE MAY VARY SUBSTANTIALLY AND THIS VARIANCE MAY DECREASE
OUR STOCK PRICE.
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
- 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
24
<PAGE>
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 30% 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.
25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most 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 June 30, 2000, approximately $40.4
million, or 72%, of the Company's total investment portfolio matures within one
year. The Company's portfolio consists of only high-grade government agency
securities and commercial paper. Accordingly, the Company believes that its
interest rate risk is immaterial. In addition, substantially all of the
Company's development contract payments are made in U.S. dollars and,
consequently, the Company believes its foreign currency exchange rate risk is
immaterial. The Company does not have any derivative instruments and does not
engage in hedging transactions.
26
<PAGE>
Part II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 15, 2000, the Company issued 100,000 shares of common stock to Margaret
Elardi, a director of the Company, in exchange for and upon redemption of 1,600
shares of Series B-2 preferred stock held by Ms. Elardi. This transaction did
not involve a public offering and was exempt from registration under the
Securities Act pursuant to Section 4(2) therof.
On April 11, 2000, the Company issued 418,848 shares of common stock to Capital
Ventures International on exercise of a warrant. The Company received cash
consideration of $7.5 million in connection with the transaction. This
transaction did not involve a public offering and was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof.
On April 12, 2000 the Company sold 500,000 shares of common stock to Cree, Inc.
and General Electric Pension Trust. The Company received cash consideration of
$25.0 million in connection with the transaction. This transaction was exempt
from registration under the Securities Act pursuant to Section 4(2) thereof and
regulation D thereunder.
On April 13, 2000 the Company issued warrants to purchase 50,000 shares of
common stock to Burt Davis. The warrant was issued as consideration for
placement agent services rendered to the Company in connection with the sale of
common stock to Cree, Inc. and General Electric Pension Trust. The warrant
grants the holder the right to purchase up to 50,000 shares of common stock at a
price of $53.00 per share for a period of five years. This transaction was
exempt from registration under the Securities Act pursuant to Sections 4(2)
thereof.
On June 21, 2000 the Company issued 100,000 shares of common stock to
Margaret Elardi on exercise of an option to purchase 100,000 shares of common
stock at a price of $19.20 per share. The Company received cash consideration
of $1.9 million in connection with the transaction. This transaction did not
involve a public offering and was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
On June 21, 2000 the Company issued a common stock purchase warrant to purchase
6,250 shares of common stock to Stan Berk. The warrant was issued as partial
consideration for placement agent services rendered to the Company in connection
with the exercise of the option to purchase Common Stock by Margaret Elardi. The
warrant provides the holder the right to purchase up to 6,250 shares of Common
Stock at a price of $19.20 per share for a period of five
27
<PAGE>
years. This transaction did not involve a public offering and was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on June 22, 2000. The
following proposals were introduced and vote upon:
PROPOSAL NO 1 - Election of Directors
<TABLE>
<CAPTION>
Votes Votes
Name For Withheld
---------------- ------------------ ---------------------
<S> <C> <C>
Richard F. Rutkowski 10,586,249 134,825
Stephen R. Willey 10,633,390 87,684
Richard A. Raisig 10,481,023 240,051
Jacob Brouwer 10,399,588 321,486
Richard A. Cowell 10,634,405 86,669
Margaret Elardi 10,634,465 86,609
Walter J. Lack 10,633,249 87,825
William A. Owens 10,588,470 132,604
Robert A. Ratliffe 10,634,470 86,604
Dennis Reimer 10,634,400 86,674
</TABLE>
PROPOSAL NO. 2 - Proposal to amend the Company's 1996 Stock Option Plan to
increase the number of shares of Common Stock authorized for issuance upon
exercise of options.
<TABLE>
<S> <C>
FOR 4,052,728
AGAINST 1,576,410
ABSTAINED 65,636
BROKER NON-VOTES 5,026,300
</TABLE>
28
<PAGE>
PROPOSAL NO. 3 - Proposal to approve the Independent Director Stock Option Plan
and the initial grant of options thereunder to non-employee directors.
<TABLE>
<S> <C>
FOR 4,667,685
AGAINST 953,167
ABSTAINED 73,922
BROKER NON-VOTES 5,026,300
</TABLE>
PROPOSAL NO. 4 - Proposal to ratify the appointment of PricewaterhouseCoopers
LLP as independent auditors of the Company for the fiscal year ending December
31, 2000.
<TABLE>
<S> <C>
FOR 10,392,456
AGAINST 303,517
ABSTAINED 25,101
BROKER NON-VOTES 0
</TABLE>
29
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a.) EXHIBITS
10.1 Form of first amendment to the Employment Agreement for Richard F.
Rutkowski, dated April 18, 2000 between Microvision, Inc. and
Richard F. Rutkowski
10.2 Form of first amendment to the Employment Agreement for Stephen R.
Willey, dated April 18, 2000 between Microvision, Inc. and Stephen
R. Willey
10.3 Form of first amendment to the Employment Agreement for Richard A.
Raisig, dated April 18, 2000 between Microvision, Inc. and Richard
A. Raisig
10.4 Independent Director Stock Option Plan (1)
10.5 Stock Option Plan, as amended
27.0 Financial Data Schedule
---------
(1) Incorporated by reference to the Company's definitive proxy
statement for annual meeting of shareholders filed April 28, 2000.
--------------------------------------------------------------------------------
b.) Reports on Form 8-K
The Company filed no current reports on Form 8-K during the quarterly
period ended June 30, 2000
30
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICROVISION, INC.
Date: August 9, 2000 /s/ Richard F. Rutkowski
----------------------------------
Richard F. Rutkowski
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2000 /s/ Jeff Wilson
----------------------------------
Jeff Wilson
Controller
(Principal Accounting Officer)
31
<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.
EXHIBIT
NUMBER DESCRIPTION
10.1 Form of first amendment to the Employment Agreement for Richard F.
Rutkowski, dated April 18, 2000 between Microvision, Inc. and
Richard F. Rutkowski
10.2 Form of first amendment to the Employment Agreement for Stephen R.
Willey, dated April 18, 2000 between Microvision, Inc. and Stephen
R. Willey
10.3 Form of first amendment to the Employment Agreement for Richard A.
Raisig, dated April 18, 2000 between Microvision, Inc. and Richard
A. Raisig
10.4 Independent Director Stock Option Plan (1)
10.5 Stock Option Plan, as amended
27.0 Financial Data Schedule
---------
(1) Incorporated by reference to the Company's definitive proxy
statement for annual meeting of shareholders filed April 28, 2000.
--------------------------------------------------------------------------------
32
