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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, 1998
[ ] 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)
Common Stock Purchase Warrants
(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 31, 1999 was approximately $96,756,700 (based on the
closing price for the registrant's Common Stock on the Nasdaq National Market of
$16.625 per share).
The number of shares of the registrant's Common Stock outstanding as of March
31, 1999 was 6,159,399.
Documents Incorporated by Reference: Portions of the Proxy Statement to be
delivered to shareholders in connection with the Registrant's Annual Meeting of
Shareholders to be held on June 10, 1999 are incorporated by reference into Part
III of this report.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX
Page
PART I
Item 1 - Description of Business........................................ 1
Item 2 - Description of Property........................................17
Item 3 - Legal Proceedings..............................................17
Item 4 - Submission of Matters to a Vote of Security Holders............18
PART II
Item 5 - Market for the Registrant's Common Stock and Related
Shareholder Matters............................................19
Item 6 - Selected Financial Data........................................20
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..................21
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.....33
Item 8 - Financial Statements...........................................34
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................54
PART III
Items 10 - 13 Directors and Executive Officers of the Registrant.............55
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................56
SIGNATURES ...............................................................58
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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. With respect to the
discussion below under "Year 2000 Compliance," factors that could affect the
actual results include the possibility that remediation programs will not
operate as intended, the Company's failure to timely or completely identify all
software or hardware applications requiring remediation, unexpected costs, and
the uncertainty associated with the impact of year 2000 issues on the Company's
customers, vendors and others with whom it does business. 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 technologies that allow electronically generated
images and information to be projected to the retina of the viewer's eye. The
Company has developed prototype Virtual Retinal Display(TM) ("VRD(TM)") devices,
including portable color and monochrome versions and is currently refining and
developing its VRD technology for commercial applications. The Company expects
to commercialize its technology through the development of products and as a
supplier of personal display technology to original equipment manufacturers
("OEMs"). The Company believes the VRD technology will be useful in a variety of
applications, including portable communications and visual simulation for
defense, medical, industrial and entertainment that may include superimposing
images on the user's field of vision. The Company expects that its 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
possible applications as a digital camera or a bar code reader. The Company may
expend funds in evaluating and developing solutions for possible future products
involving this application.
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
1
ray tube ("CRT") and, more recently, flat panel displays have been the dominant
display devices. In recent years, as the computer and electronics industries
have made substantial advances in miniaturization, manufacturers have sought
lightweight, low power, cost effective displays to develop more portable
products.
The Company's VRD technology is fundamentally different from previously
commercialized display technologies. By scanning a low power beam of colored
light to "paint" rows of pixels on the retina of the viewer's eye, the VRD
creates a high resolution, full motion image. In certain applications, the image
appears in the viewer's field of vision as if the viewer were only an arm's
length away from a high quality video screen. The VRD also can superimpose an
image on the viewer's field of vision, enabling the viewer to see data or other
information projected by the device in the context of his or her natural
surroundings. In each case, a high resolution, bright image is created.
The Company's objective is to be a leading provider of scanned display
products and image capture products 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 consumer electronics products; 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, health care, wireless communications, medical and
industrial, and consumer electronics industries to develop or co-develop
products that the Company believes to be the most commercially viable. Although
the Company is engaged in development and co-development projects, it does not
expect commercial sales of products until at least 2000, and commercial sales
may not occur until substantially later, if at all.
The Company's existing prototypes have demonstrated the technical
feasibility of the VRD 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"), which the Company believes represents a
breakthrough in the miniaturization of scanning devices. The Company believes
that the MRS will permit the development of 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 VRD devices, to expand the "exit pupil" of the VRD 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 a VRD
system. These standardized modules can then be used in unique combinations to
create a small number of technology platforms. Each platform is a complete VRD
system that can be extended to meet the individual features for an entire family
of products for a wide array of applications for various markets.
2
Considerations Relating to the Company's Business
The following factors should be considered in evaluating the Company's
business and operations:
Market Acceptance of New Technology. The Company's success will depend on
successful development and commercial acceptance of the VRD technology. To
achieve commercial success, this technology and products incorporating this
technology must be accepted by OEMs and end-users, and must meet the
expectations of the Company's potential customer base. There can be no assurance
that the VRD technology will achieve market acceptance. See " - Strategy," "-
Applications Markets and Products."
Early Stage of Product Development. Although the Company has developed
prototype VRD displays, further research, development and testing are necessary
before any products will be available for commercial sale. There can be no
assurance that the Company will be successful in further refining the VRD
technology to produce marketable products. In addition, delays in the
development of products, or the inability of the Company to procure partners for
the development of products, may delay the introduction of, or prevent the
Company from introducing, products to the marketplace and adversely affect the
Company's competitive position, results of operations and financial condition.
See "- Applications, Markets and Products."
Expectation of Losses; Negative Cash Flows. The Company's revenues to date
have been generated from development contracts. The Company does not expect to
generate significant revenues from product sales in the near future. As of
December 31, 1998, the Company had an accumulated deficit since inception of
$22,836,000, and the Company expects to continue to incur substantial losses and
negative cash flow at least through 2000 and possibly thereafter. There can be
no assurance that the Company will become profitable or cash flow positive at
any time in the future. The likelihood of the success of the Company must be
considered in light of the expenses, difficulties, and delays frequently
encountered by businesses formed to pursue development of new technologies. In
particular, the Company's operations to date have focused primarily on research
and development of the VRD technology and prototypes, and the Company has only
during the past year developed marketing capabilities. It is not possible to
estimate future operating expenses and revenues based upon historical
performance. Operating results will depend, in part, on matters over which the
Company has no control, including, without limitation, general economic
conditions, technological and other developments in the electronics, computing,
information display and imaging industries, and competition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Patents and Protection of Proprietary Technology. The Company's ability to
compete effectively in the information display market will depend, in part, on
the ability of the Company, the University of Washington and the Company's other
licensors to maintain the proprietary nature of the VRD and related
technologies. Although the Company's licensors
3
have patented various aspects of the VRD technology, and the Company continues
to file its own patent applications, there can be no assurance as to the degree
of protection offered by these patents or as to the likelihood that patents will
be issued from the pending patent applications. Moreover, these patents may have
limited commercial value or may lack sufficient breadth to protect adequately
the aspects of the Company's technology to which the patents relate.
There can be no assurance that competitors in the United States and in
foreign countries, many of which have substantially greater resources than the
Company and have made substantial investments in competing technologies, will
not apply for and obtain patents that will prevent, limit or interfere with the
Company's ability to make and sell its products. In addition, the Company is
aware of several patents held by third parties that relate to certain aspects of
retinal scanning devices. There is no assurance that these patents would not be
used as a basis to challenge the validity of the University of Washington's
patent rights, to limit the scope of the University's patent rights or to limit
the University's ability to obtain additional or broader patent rights. A
successful challenge to the validity of the University's patents may adversely
affect the Company's competitive position and could limit the Company's ability
to commercialize the VRD technology. Moreover, there can be no assurance that
such patent holders or other third parties will not claim infringement by the
Company or by the University with respect to current and future technology.
Because U.S. patent applications are held and examined in secrecy, it is also
possible that presently pending U.S. applications will eventually issue with
claims that will be infringed by the Company's products or the VRD technology.
The defense and prosecution of patent suits is costly and time-consuming, even
if the outcome is ultimately favorable to the Company. This is particularly true
in foreign countries where the expenses associated with such proceedings can be
prohibitive. An adverse outcome in the defense of a patent suit could subject
the Company to significant liabilities to third parties, require the Company and
others to cease selling products that incorporate VRD technology or cease
licensing the VRD technology, or require disputed rights to be licensed from
third parties. Such licenses may not be available on satisfactory terms, or at
all. Moreover, if claims of infringement are asserted against future
co-development partners or customers of the Company, those partners or customers
may seek indemnification from the Company for damages or expenses they incur.
The Company also relies on unpatented proprietary technology. Third parties
could develop the same or similar technology or otherwise obtain access to the
Company's proprietary technology. There can be no assurance that the Company
will be able to meaningfully protect its 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. See
"- Intellectual Property and Proprietary Rights."
Dependence on Future Collaborations; Dependence on Third Parties. The
Company's strategy for the development, testing, manufacture and
commercialization of the VRD technology and products incorporating the VRD
technology includes entering into cooperative development, joint venture or
licensing arrangements with corporate partners, OEMs and other third parties.
There can be no assurance that the Company will be able to negotiate such
4
arrangements on acceptable terms, if at all, or that such arrangements will be
successful in yielding commercially viable products. If the Company is not able
to establish such arrangements, it would require additional working capital to
undertake such activities at its own expense and would require extensive sales,
marketing and manufacturing expertise that it does not currently possess. In
addition, the Company could encounter significant delays in introducing the VRD
technology into certain markets or find that the development, manufacture or
sale of products incorporating the VRD technology in such markets would not be
feasible without, or would be adversely affected by the absence of, such
agreements. To the extent the Company enters into cooperative development or
other joint venture or licensing arrangements, the revenues received by the
Company will depend upon the efforts of third parties, and there can be no
assurance that such parties will put forth such efforts or that such efforts
will be successful. See "- Strategy" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
Loss of Exclusive License. The Company's success depends on technology that
it has licensed from the University of Washington. In 1993, the Company acquired
the exclusive rights to the VRD technology under a license agreement with the
University of Washington (the "UW License Agreement"). The Company relies on the
University of Washington to prepare, file and prosecute patent applications
relating to the VRD technology. If the University of Washington were to violate
the terms of the UW License Agreement, the Company's operations and business
prospects could be materially and adversely affected. In addition, the Company
could lose the exclusivity under the UW License Agreement if it fails to respond
timely to claims of infringement with respect to the VRD technology. The loss of
exclusivity under the UW License Agreement could have a material adverse effect
on the Company's business, operating results, and financial condition. See
"Business- UW License Agreement."
Competition and Technological Advances. The information display industry is
highly competitive. The Company's products and the VRD technology will compete
with established manufacturers of miniaturized CRT and flat panel display
devices, including companies such as Sony Corporation and Texas Instruments
Incorporated, most of which have substantially greater financial, technical and
other resources than the Company and many of which are developing alternative
miniature display technologies. The Company also will compete with other
developers of miniaturized display devices. There can be no assurance that the
Company's competitors will not succeed in developing information display
technologies and products that would render the VRD technology or the Company's
proposed products commercially infeasible or technologically obsolete. Rapid and
significant technological advances have characterized the electronic information
display industry. There can be no assurance that the VRD technology or the
Company's proposed products will remain competitive with such advances or that
the Company will have sufficient funds to invest in new technologies or
processes. See "- Competition."
Year 2000 Compliance. The effect on the Company of an internal Y2K failure,
a third party Y2K failure or a combination of internal and external Y2K failures
could range from a minor disruption in the Company purchases to an extended
interruption in the information technology ("IT") and non-IT systems of third
parties whose operations materially impact the Company's operations. Such an
interruption could result in a material adverse effect on the
5
Company's business, operating results and financial position. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000 Compliance Strategy."
Lack of Manufacturing Experience. The Company's success depends in part on
its ability to manufacture its products and components to meet high quality
standards in commercial quantities at competitive prices. The Company currently
has no capability to manufacture products in commercial quantities. The Company
has only produced prototypes for research, development and demonstration
purposes. Accordingly, the Company must obtain access through partners or
contract manufacturers to manufacturing capacity and processes for the
production of its future products, if any, in commercial quantities, which will
require extensive lead time. There can be no assurance that the Company will
successfully obtain access to these resources or, if it does, that these
resources will meet quality standards. See "- Strategy."
Capital Requirements. The Company believes that its current cash balances
will satisfy its budgeted capital and operating requirements for at least the
next 12 months, based on the Company's current operating plan. Actual expenses,
however, may exceed the amount budgeted therefor and the Company may require
additional capital to fund long-term operations and business development. The
Company's capital requirements will depend on many factors, including, but not
limited to, the rate at which the Company can develop the VRD technology, its
ability to attract partners for product development and licensing arrangements,
and the market acceptance and competitive position of products that incorporate
the VRD technology. There can be no assurance that the Company will be able to
obtain financing, or that, if it is able to obtain financing, it will be able to
do so on satisfactory terms or on a timely basis. If additional funds are raised
through the issuance of equity, convertible debt or similar securities,
shareholders may experience additional dilution and such securities may have
rights or preferences senior to those of the Common Stock. Moreover, if adequate
funds were not available to satisfy the Company's short-term or long-term
capital requirements, the Company would be required to limit its operations
significantly. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
Dependence on Key Personnel. The Company's success is dependent on its
officers and other key personnel and on the ability to attract and retain
qualified new personnel. Achievement of the Company's business objectives will
require substantial additional expertise in the areas of sales and marketing,
technology and product development, and manufacturing. Competition for qualified
personnel in these fields is intense, and the inability to attract and retain
additional highly skilled personnel, or the loss of key personnel, could have a
material adverse effect on the Company's business and results of operations. See
"- Employees."
Possibility of Future Regulation. The Company is not aware of any health or
safety regulations applicable to VRD products, other than regulations related to
labeling of devices that emit electro-magnetic radiation. There can be no
assurance, however, that new health and safety regulations will not be
promulgated that might materially and adversely affect the Company's ability to
commercialize the VRD technology. See "Human Factors and Safety."
6
Shares Eligible for Future Sale. The sale of a substantial number of shares
of the Company's Common Stock or Public Warrants in the public market or the
prospect of such sales could materially and adversely affect the market price of
the Common Stock and the Public Warrants. As of December 31, 1998, the Company
had outstanding 6,064,626 shares of Common Stock; 2,273,926 Public Warrants to
purchase 2,273,926 shares of Common Stock; and private warrants to purchase an
aggregate of 69,526 shares of Common Stock. As of that date, the Company had
grants outstanding under its stock option plans options to purchase an aggregate
of 2,365,151 shares of Common Stock. Almost all of the Company's outstanding
shares of Common Stock may be sold without substantial restriction. All shares
issued upon exercise of options granted under the Company's stock option plans
are available for sale in the public market, subject in some cases to volume and
other limitations. The Company also had granted Paulson Investment Company, Inc.
and marion bass securities corporation, investment banking firms, the right to
purchase 178,075 shares of Common Stock and 178,075 warrants exercisable for
178,075 shares of Common Stock (the "Representatives' Warrants"). The remaining
286,150 shares of Common Stock that are issuable upon exercise of the
Representatives' Warrants (including exercise of the warrants included therein)
will be eligible for resale without restriction under the Securities Act.
Potential Effect of Anti-Takeover Provisions. The Company's Restated
Articles of Incorporation (the "Articles of Incorporation") give the Company's
Board of Directors the authority to issue, and to fix the rights and preferences
of, shares of the Company's Preferred Stock, which may have the effect of
delaying, deterring or preventing a change in control of the Company without
action by the Company's shareholders. Furthermore, the Articles of Incorporation
provide that the written demand of at least 25% of the outstanding shares is
required to call a special meeting of the shareholders. In addition, certain
provisions of Washington law could have the effect of delaying, deterring or
preventing a change in control of the Company.
Industry Background
The 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 also has been stimulated by the increasing popularity
of portable pagers and cellular phones; interest in simulated environments and
augmented vision systems; and the recognition that 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
7
system that scans the beam rapidly left to right and top to bottom. A magnetic
lens focuses the beam into a small glowing dot on the phosphor screen. It is
these rapidly moving spots of light ("pixels") that "paint" the image on the
surface of the viewing screen. The next generation of imaging technology, flat
panel displays, is now in widespread use in portable computers, calculators, and
other personal display devices. The most prevalent flat panel technology is the
liquid crystal display ("LCD"), which can consist of hundreds of thousands of
pixels, each of which is formed by a single transistor acting on a crystalline
material.
In recent years, as the computer and electronics industries have made
substantial advances in miniaturization, manufacturers have sought lightweight,
low power, cost effective displays to enable the development of more portable
products. Flat panel technologies have made meaningful advances in these areas,
and liquid crystal flat panel displays are now commonly used for laptop
computers and other electronic products. Both CRT and flat panel technologies,
however, pose difficult engineering and fabrication problems for more highly
miniaturized products, because of inherent constraints in size, weight and power
consumption. In addition, CRT and flat panel displays often become dim and
difficult to see in outdoor or other settings where the ambient light is
stronger than the light emitted from the screen. The Company believes that as
display technologies attempt to keep pace with miniaturization and other
advances in information delivery systems, conventional CRT and flat panel
technologies will no longer 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 Display Technology
The Company's VRD technology is fundamentally different from previously
commercialized display technologies. VRD systems create an image on the retina
like a miniaturized video 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 "direct" rows of pixels to the retina of the viewer's eye, the VRD
technology creates a high resolution, full motion image. The light source acts
on the retina in much the same way as other natural light sources.
The drive electronics of the VRD technology acquire and process signals
from the image or data source to control and synchronize the color mix,
"gray-level" and placement of pixels. Color pixels are generated by a modulated
light source, which varies the intensity of each of the red, green and blue
lights to generate a complete palette of colors and shades. The pixels are then
arranged on the retina by a horizontal scanner that rapidly sweeps the light
beam to place the pixels into a row, and a vertical scanner, which moves the
light beam downward where another row of pixels is drawn. This process is
continued until an entire field of "rows" has been placed and a full image
appears to the user. Optical elements direct the beam of light through the pupil
of the viewer's eye to create an image on the retina.
8
Strategy
The Company's objective is to be a leading provider of scanned display and
image capture products in a broad range of professional and consumer
applications. Key elements of the Company's strategy to achieve this objective
are:
Custom design, manufacture and sale of high performance products. The
Company anticipates providing high performance products to professional
end-users in markets with lower product volume requirements. The Company expects
that end-users in this category will include professionals in the defense, law
enforcement, industrial process 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, or may seek to form
one or more joint ventures to manufacture the products.
Licensing of proprietary technology to OEMs for volume manufacture of
products. The Company believes that in consumer markets the ability to compete
effectively is largely driven by the ability to price aggressively for maximum
market penetration. Significant economies of scale in purchasing, volume
manufacturing and distribution are important factors in driving costs downward
to achieve pricing objectives and profitability. The Company's strategy will be
to seek both initial license fees from such arrangements as well as ongoing per
unit royalties.
Additionally, certain potential applications of the VRD technology, such as
pagers or cellular phones, could require integration of the VRD technology with
other unrelated technologies. In markets requiring volume production of personal
display components or subsystems that can be integrated with non-display
components, the Company may provide components, subsystems or systems design
technology to OEMs under licensing agreements.
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
allocated to such development projects. The nature of the relationships with
such OEMs may vary from partner to partner depending on the proposed application
for the VRD, the product to be developed, and the OEM's design, manufacturing
and distribution capabilities. The Company believes that by limiting its own
direct manufacturing obligations for consumer products it will reduce the
capital requirements and risks inherent in bringing the VRD technology to the
consumer market.
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 VRD technology and by expanding its portfolio of
intellectual property rights. A key part of
9
the Company's technology development strategy includes developing and protecting
(i) concepts relating to the function, design and application of the VRD system;
(ii) component technologies and integration techniques essential to the
commercialization of the VRD technology and which are expected to reduce the
cost and improve the performance of the system; and (iii) component technologies
and integration techniques that reduce technical requirements and accelerate the
pace of commercial development. The Company is continuing to develop a portfolio
of patented technologies and proprietary processes and techniques that relate
directly to the functionality and to the commercial viability of the VRD
technology. See "-Technology Development" and " - Intellectual Property and
Proprietary Rights."
Applications, Markets and Products
The Company has identified a variety of potential applications for its VRD
technology, including the following:
Hand-held Communications Devices. Manufacturers of wireless and cellular
communications devices have identified a need for products that incorporate
personal display units for viewing 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 power supply. The Company
expects that the range of potential products in this category may include
cellular phones, pagers, or personal digital assistants that project into view
electronic mail messages, faxes, or other information as a bright, sharp image.
Visualization for Defense, Healthcare, Commercial, Industrial and Consumer
Applications. Manufacturers of interactive media products have recognized that
the visual experience offered by simulation is enhanced by high resolution,
three-dimensional displays projected over a wide field of vision. Although
simulated environments traditionally have been used as a training tool for
professional use, they are increasingly popular as a means of entertainment,
particularly in computer games.
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-mounted display could superimpose critical patient
information such as vital signs, EKG traces, reference materials, X-rays or MRI
images in a surgeon's field of vision. For military applications, troops could
be equipped with eyeglasses that display high definition imagery that could be
viewed without blocking normal vision and could assist in threat detection,
reconnaissance and other activities.
The Company has targeted various market segments for these potential
applications, including defense and public safety, healthcare, business,
industrial and consumer electronics. The following table identifies product
development opportunities within each of these markets.
10
MARKETS
- -----------------------------------------------------------------------------------------------------------------------------
..........................Defense & Public
..........................Safety Healthcare Business Industrial Consumer
- -----------------------------------------------------------------------------------------------------------------------------
Hand-held o Command and o Patient status o Fax viewing o Maintenance o E-mail viewing
Communication control monitoring o E-mail viewing and field o Internet
Devices o Tactical o Internet access service access
information
systems
o Portable
maintenance
o Public safety
o Law
A enforcement
P -----------------------------------------------------------------------------------------------------------------------
P Simulation and o Battlefield o Surgical o Architecture o Training o Gaming
L Entertainment simulation training and interior o On-line
I Displays o Aircraft o Endoscopic design shopping
C simulation surgeries o Industrial o Virtual
A design reality
T simulation
I -----------------------------------------------------------------------------------------------------------------------
O Augmented o Pilot o Overlay o Multiple o Maintenance o Private
N Vision information of patient screen viewing o Inventory viewing
S systems data during for securities control laptop
o Mine surgeries traders o Factory systems
detection o "Head-down" process
o Tactical viewing of control
warfare data patient vitals o Sales
o Personnel automation
status
monitor
o GENII
soldier
system
- -----------------------------------------------------------------------------------------------------------------------------
The Company believes certain market segments will be early adopters of the
VRD technology, particularly those applications for which VRD technology, even
at an earlier stage of development, can offer significant productivity or
performance gains and associated cost savings. The Company believes that
military and industrial users will value the ability of personal VRD 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 VRD systems are expected
to deliver.
Prototypes
The Company has developed several prototypes to demonstrate the feasibility
of the VRD technology. These prototypes are not incorporated into specific
commercial products or applications, but rather are demonstration models of the
technology. The first prototype developed was a table-top model that received
output from a personal computer and generated a full color image. The second and
third prototypes are portable hand-held devices. For
11
demonstration purposes, they also connect to a personal computer. The projection
optics of the portable prototypes are packaged together with the vertical and
horizontal scanners. One demonstrator is monochromatic and fits in an attache
case that 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 that is the size of an
airline carry-on bag. In 1998, 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 developed: an SVGA (480,000 pixels) color helmet-mounted VRD; a
high luminance, SXGA (approximately 1,300,000 pixels) green monochrome
helmet-mounted VRD; a high-luminance, SXGA full color head-mounted VRD; and a
battery powered, head-mounted red monochrome VRD. Currently under development is
a "very high resolution" green monochrome system. During this same period, a
color portable SVGA display was specifically developed for use by the Company
for marketing purposes.
Technology Development
The Company's existing prototypes have demonstrated the technological
feasibility of the VRD system and the Company's ability to miniaturize certain
of its key components. Additional work is in progress to continue
miniaturization advances necessary for large scale application, to achieve full
color capability in highly miniaturized versions and to design new architectures
for specific applications. Research and development expenses for the fiscal
years ended December 31, 1998, 1997 and 1996 were $3,305,600, $2,593,900 and
$1,586,700, respectively. All of the Company's contract revenue to date has been
derived from performance on development contracts. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Drive Electronics. The Company has identified three areas where additional
development of the drive electronics is necessary. The first involves further
miniaturization using integrated circuits and advanced packaging techniques. To
date, the Company has identified no technological barriers to the further
miniaturization of the drive electronics. The second area involves refining the
timing and nature of the signals driving the photon source and scanners to
improve display quality. The third 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
video format standards and the output from most personal computers. In 1998, two
electronics architectures were developed, namely a very high resolution
subsystem and a low-power subsystem. Both were incorporated into prototypes that
were sold to customers. In 1999, the Company intends to develop the VRD
technology to conform to a broader range of interface standards, including
existing higher resolution standards and emerging standards such as high
definition television. For interfaces with emerging video standards, additional
development of the drive electronics technology will likely be required.
Photon Sources. The photon generator is the source of the light beam that
creates the image on the retina. In a full color VRD system, red, green and blue
photon generators will be used and modulated to generate a mix yielding the
desired color and brightness. Low power solid state lasers, laser diodes and
light-emitting diodes ("LEDs") are suitable photon
12
generators for the VRD system. Red and green solid state lasers are currently
available, but are useful only for VRD applications where cost and size are not
critical. Miniaturized visible laser diodes are currently available only in red,
although a number of companies are developing blue laser diodes in anticipation
of large data storage markets. Miniaturized LEDs are less expensive than laser
diodes. The Company expects these LEDs will provide sufficient 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 others to complete development of the materials and processes
necessary to produce commercial blue and green LEDs and laser diodes. This
development is not expected prior to the introduction of the Company's proposed
initial products, and as a result the Company's proposed initial full color VRD
products may use conventional lasers. However, 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.
Scanning. A pair of scanners, one horizontal and one vertical, is used to
direct the light beam that creates the image on the retina. In laser printers
and bar code readers, a spinning or oscillating mirror is used to scan a light
beam, but these mechanical scanners are typically too large and too slow for use
in miniaturized display settings. To solve this problem, the Company developed a
mechanical resonance scanner ("MRS") to create the horizontal scan. In
operation, the MRS resembles a very small tuning fork with a mirrored surface.
It is tuned to resonate at the exact scanning frequency needed to generate the
display, so that very little power is needed to keep it oscillating. Directing
the light beam at the vibrating mirror causes the light beam to scan rapidly
back and forth horizontally. A second vibrating mirror is used to direct the
horizontal beam vertically. The Company believes that its MRS and its vertical
scanner counterpart may have significant commercial value independent of VRD
applications.
Continued development of the scanning subsystem of the VRD will be required
in order to allow scanning capability for current standard video formats,
including high definition television, as well as new digital video standards.
Existing designs for scanner and scanner electronics may prove ineffective at
higher resolutions and may need to be replaced with alternative scanning
methods. In 1998 the Company demonstrated smaller "micro-electro-mechanical
system" (MEMS) versions of both horizontal and vertical scanners. With the
availability of both MRS and MEMS scanning systems, the Company achieved
important flexibility from the standpoint of developing optimal architectures
for potential products.
Optics. For applications where the VRD device is to be worn, it is
desirable to have an exit pupil (the range within which the viewer's eye can
move and continue to see the image) of 10 to 15 millimeters. The Company has
recently developed an expanded exit pupil of approximately 15 millimeters, which
was demonstrated in a full color system. Continued design and engineering of
this expanded exit pupil is required to develop commercial applications. In
1998, Company engineers developed optics designs for both monocular (one-eye)
and biocular (two-eye) prototypes. A full "binocular" system was also developed
and shipped to a customer. This system offered viewing of 3-dimensional imagery.
The Company's ongoing optics development is directed at the creation of optical
systems that are lightweight, high performance and cost-effective to
manufacture.
13
Intellectual Property and Proprietary Rights
In 1993, the Company acquired the exclusive rights to the VRD technology
under the UW License Agreement. Additional development of the VRD technology
took place at the University's Human Interface Technology Lab (the "HIT Lab")
pursuant to a research agreement between the Company and the University (the
"Research Agreement"). See " - University of Washington License Agreement." The
University has received seven patents on the VRD technology and the MRS and has
an additional seventeen 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 of
Washington 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 fiber; an
expanded exit pupil; and the MRS.
During 1998, the Company entered into a license agreement with a third
party whereby the Company acquired an exclusive license to certain intellectual
property related to the design and fabrication of a microminiature scanner using
semiconductor fabrication techniques. The licensor has received four patents and
has 11 patent applications pending pertaining to the intellectual property
licensed by the Company.
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, and has filed seven patent applications in
its own name resulting from these activities. The inventions covered by such
applications generally address and accommodate component miniaturization,
specific implementation of various system components and design elements to
facilitate mass production.
The Company considers protection of these key enabling technologies and
components to be a fundamental aspect of its strategy to penetrate diverse
markets with unique products. As such, it intends to continue to develop its
portfolio of proprietary and patented technologies at the system, component, and
process levels.
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. In addition, the University of
Washington retains the right to publish information regarding the VRD technology
for academic purposes.
14
The Company filed for registration of the marks "Virtual Retinal Display"
and "VRD" in the United States Patent and Trademark Office. The marks were
examined and entered into the opposition phase, where an opposition was filed.
The Company believes the opposition filing is without merit and that the Company
should prevail in the proceedings. Regardless of the outcome, the Company
believes that it will be entitled to continue to use the terms "Virtual Retinal
Display" and "VRD."
University of Washington License Agreement
The VRD technology was originally developed at the University of
Washington's HIT Lab by a team of technicians and engineers under the direction
of Dr. Thomas A. Furness, III. In 1993, the Company secured the exclusive rights
to the VRD technology and associated intellectual property from the University
of Washington pursuant to the UW License Agreement. The scope of the license
covers all possible commercial uses of the VRD 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.
The Company could lose the exclusivity under the UW 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 of Washington has the right to terminate the License Agreement in the
event that the other party fails to cure a material breach of the Agreement
within 30 days of written notice of the breach. The Company may terminate the
License Agreement at any time by serving 90 days prior written notice on the
University of Washington. In the event of any termination of the License
Agreement, the license granted to the Company would terminate.
Under the terms of the UW License Agreement, Microvision agreed to pay a
non-refundable fee of $5,133,500 (the "License Fee") and to issue to the
University and to the inventors of the VRD technology, including Dr. Furness,
shares of the Company's Common Stock. In addition, the University of Washington
is entitled to receive certain ongoing royalties. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." In August 1997, the Company made the final payment due under
the Research Agreement, which resulted in the Company having paid in full the
$5,133,500 license fee due under the UW License Agreement. In the event the
Company defaults on its obligations, including the royalty obligation, the
University of Washington may terminate the License Agreement.
15
At the same time it entered into the UW License Agreement, Microvision
contracted with the HIT Lab and the Washington Technology Center to fund further
research and development of the VRD technology pursuant to the Research
Agreement. The Research Agreement called for the Company to pay $5,133,500 to
the University of Washington over a four year term. Payments made pursuant to
the Research Agreement were credited against the License Fee. Any intellectual
property developed by the HIT Lab pursuant to the Research Agreement is included
in the exclusive license granted to Microvision under the UW License Agreement.
In October 1997, the Company and the University of Washington agreed to extend
the term of the Research Agreement from October 31, 1997 through March 31, 1998,
at no additional cost to the Company, in order to enable the University of
Washington to complete performance of certain research activities under the
Research Agreement. In August 1997, the Company made the final payment due under
the Research Agreement. In March 1998, the Company and the University of
Washington again agreed to extend the terms of the Research Agreement from April
1, 1998 through December 31, 1998, at no additional cost to the Company, in
order to enable the University of Washington to complete performance of certain
research activities under the Research Agreement. The Research Agreement
terminated on December 31, 1998. See Note 7 of Notes to the Financial
Statements.
Human Factors and Safety
As part of its research and development activities, the Company conducts
ongoing research as to the cognitive, physiological and ergonomic factors that
must be addressed by products incorporating VRD technologies and the safety of
VRD technology, including such issues as the maximum permissible laser exposure
limits established by American National Standards Institute ("ANSI").
Researchers from the HIT Lab have concluded that laser exposure to the retina
under normal operating conditions would be below the calculated maximum
permissible exposure level set by ANSI.
Competition
The information display industry is highly competitive. The Company's
products and the VRD technology will compete with established manufacturers of
miniaturized CRT and flat panel display devices, including companies such as
Sony Corporation and Texas Instruments Incorporated, most of which have
substantially greater financial, technical and other resources than the Company
and many of which are developing alternative miniature display technologies. The
Company also will compete with other developers of miniaturized display devices.
There can be no assurance that the Company's competitors will not succeed in
developing information display technologies and products that would render the
VRD 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 VRD
technology or the Company's proposed products will remain competitive with such
advances or that the Company
16
will have sufficient funds to invest in new technologies or products or
processes. Although the Company believes that its VRD technology and proposed
display products could deliver images of a quality and resolution substantially
better than that 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 to do so arise.
In March 1994, the Company entered into a second exclusive license
agreement with the University of Washington to commercialize imaging technology
unrelated to the VRD technology. This technology involves the projection of data
and information onto the inside of a dome that is placed over the viewer's head.
This imaging technology is referred to as HALO. The HALO license agreement
requires the Company to pay $175,000 to the University, and to issue 93,750
shares of Common Stock to the University and the inventors of the technology,
$75,000 and 31,250 shares of Common Stock upon filing of the first patent and
$100,000 and 62,500 shares of Common Stock upon issuance of the first patent.
See Note 7 of Notes to the Financial Statements.
Employees
As of March 31, 1999, Microvision had 95 employees and seven 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
On April 12, 1999, the Company completed its move to its new headquarters
located at 19910 North Creek Parkway, Bothell, Washington, where the Company
initially leases approximately 67,500 square feet of combined use office and
laboratory space. The Company also has a commitment to lease between 25,000 and
34,000 additional square feet during the fourth year of the seven year lease.
See "--Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property subject to, any material
pending legal proceeding.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on October
15, 1998.
Richard F. Rutkowski, Stephen R. Willey, Richard A. Raisig, Jacob Brouwer,
Robert A. Ratliffe, Richard Cowell, and Walter J. Lack were elected as directors
for one year terms expiring at the next annual meeting of shareholders.
The amendment of the Company's 1996 Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance upon exercise of options
granted under the Plan from 750,000 to 3,000,000 shares was approved.
The appointment of PricewaterhouseCoopers LLP as independent auditors of
the Company for the year ending December31, 1998 was approved.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND WARRANTS; RELATED
SHAREHOLDER MATTERS.
The Company's Common Stock and Public Warrants are traded on the Nasdaq
National Market under the symbols "MVIS" and "MVISW," respectively. As of March
25, 1999, there were 149 holders of record of 6,159,399 shares of Common Stock
and ten holders of record of 2,273,926 Public Warrants. The Company has never
declared or paid cash dividends on the Common Stock. The Company currently
anticipates that it will retain all future earnings to fund the operation of its
business and does not anticipate paying dividends on the Common Stock in the
foreseeable future.
The Company's Common Stock and Public Warrants began trading publicly on
August 27, 1996. The quarterly high and low sales prices of the Company's Common
Stock and Public Warrants 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:
Common Stock Public Warrants
-------------------- --------------------
Quarter Ended High Low High Low
- ------------- -------- -------- -------- --------
March 31, 1997 7 11/16 3 1/2 2 11/16 15/16
June 30, 1997 6 7/8 5 3/16 2 7/8 1 1/2
September 30, 1997 18 3/4 5 1/4 8 3/8 1 1/2
December 31, 1997 19 1/4 11 3/8 9 5/8 5 3/8
March 31, 1998 16 3/8 12 1/2 7 7/8 5 1/4
June 30, 1998 14 7/8 8 5/8 7 13/16 3 1/8
September 30, 1998 11 15/16 6 4 17/32 1 1/2
December 31, 1998 13 1/2 4 9/16 3 1/4 1 3/4
March 31, 1999 16 3/4 11 3/8 8 3/8 4 11/16
On March 31, 1999, the closing sale price for the Common Stock was $16.625
and the closing sale price for the Public Warrants was $7.750.
19
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data set forth below with respect to the years
ended December 31, 1998, 1997 and 1996, and the balance sheet data at December
31, 1998 and December 31, 1997 are derived from, and are qualified by reference
to, the audited financial statements included elsewhere in this report and
should be read in conjunction with those financial statements and notes thereto.
The statement of operations data for the years ended December 31, 1995 and 1994
and the balance sheet data at December 31, 1996, 1995 and 1994 are derived from
audited financial statements not included herein.
Selected Financial Data
(in thousands, except per share data)
Years Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Statement of Operations Data
Contract revenue $ 7,074 $ 1,713 $ 102 $ 29 $ --
Net loss (7,328) (4,945) (3,457) (2,944) (2,812)
Net loss per share (1.22) (.85) (.90) (.63) --
Weighted average shares
outstanding 5,994 5,806 3,832 4,677
Balance Sheet Data
Cash, cash equivalents and $ 2,269 $ 8,841 $14,266 $ 99 $ 68
investments held for
resale
Working capital 1,358 8,441 13,321 (376) (30)
Total assets 6,362 10,741 14,565 179 138
Capital lease obligations 418 92 -- -- --
Total shareholders' equity
(deficit) 2,589 9,164 13,509 (365) (10)
20
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
from the University of Washington and entered into a research agreement with the
University of Washington to further develop the VRD technology. The Company was
in the development stage through the period ended December 31, 1996. In
connection with its development activities, the Company incurred costs to
incorporate and establish its business activities as well as to develop and
market the VRD technology. Since the completion of its initial public offering
in August 1996, the Company also has established and equipped its own in-house
laboratory for the continuing development of the VRD technology and has
transferred the research and development work from the HIT Lab to the Company.
The Company has incurred substantial losses since its inception and expects to
continue to incur significant operating losses over the next several years.
The Company currently has several prototype versions of the VRD including
monochromatic and color portable units and a full color table-top model. The
Company expects to continue funding prototype and demonstration versions of
products incorporating the VRD technology throughout 1999. Future revenues,
profits and cash flow and the Company's ability to achieve its strategic
objectives as described herein will depend on a number of factors including
acceptance of the VRD technology by various industries and OEMs, market
acceptance of products incorporating the VRD technology and the technical
performance of such products. See "Description of Business - Considerations
Related to the Company's Business."
Plan of Operation
The Company intends to continue entering into strategic co-development
relationships with systems and equipment manufacturers to pursue the development
of commercial products incorporating the VRD technology. In 1997, the Company
hired a Vice President, Sales with experience in technical product sales to
pursue development contracts as well as strategic relationships with systems
integrators and equipment manufacturers for the joint development of commercial
products incorporating the VRD technology. In March 1999, the Company hired a
Vice President, Marketing to identify and assess the various market and product
opportunities available to the Company for the commercialization of the VRD
technology and to identify and evaluate potential co-development partners. The
Company plans to continue to expand its sales and marketing staff in support of
its objective of commercializing the VRD technology.
The Company plans to continue to pursue, obtain and perform on development
contracts, with the expectation that such contracts will lead to products
incorporating the
21
Company's VRD technology as well as to further the development of the VRD
technology. The Company also plans to continue investing in ongoing innovation
and improvements to the VRD technology, including the development of component
technology and additional prototypes, as well as design of subsystems and
potential products. In March 1999, the Company hired a Vice President, Research
& Development with experience in product development and technology
commercialization to lead the Company's research and product development
efforts, manage the performance of revenue contracts, and direct the Company's
internal research and product development activities. The Company has
established, staffed, and equipped in-house laboratories to support its
performance on development contracts as well as VRD technology development. The
Company intends to continue hiring qualified technical personnel to achieve the
Company's technology development objectives.
Results of Operations
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997.
Contract Revenue. Contract revenue increased by $5,361,400 to $7,074,100 in
1998 from $1,712,700 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 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 VRD
technology directed toward meeting specific customer applications.
In the commercial segment in 1998, the Company announced that it had
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 VRD 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 the year, 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 segment 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
22
prototype will be a light weight, dual eye (biocular) head-worn device with full
color and high resolution. During the year, the Company received a Phase II
Small Business Innovation Research (SBIR) contract for the development of a high
fidelity head-mounted 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-mounted display system using the
Company's VRD 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 VRD enabled display, which features daylight "see-through"
readability, will be used on Navy vessels to provide enhanced user interface to
complex on-board information systems. The demonstrator was delivered to the U.S.
Navy in December 1998.
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 activities
undertaken in conjunction with work performed in fulfillment of development
contracts.
Cost of revenue increased by $4,596,700 to $6,416,900 in 1998 from
$1,820,200 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.
23
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 VRD
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 $711,700 to $3,305,600 in
1998 from $2,593,900 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 $3,305,600 and $1,631,400 in 1998 and 1997
respectively, were incurred directly by the Company to further develop the VRD
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 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 $711,700 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 VRD technology
and to develop products incorporating the VRD technology. Accordingly, the
Company anticipates that it will continue to commit substantial resources to
research and development, including hiring additional technical and support
personnel, and that these costs will continue to increase in future periods.
Marketing, General and Administrative Expense. Marketing, general and
administrative 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 $1,827,100 to
$4,904,600 in 1998 from $3,077,500 in 1997. The increase includes increased
aggregate compensation and
24
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 management and administrative areas. The Company expects
marketing, general and administrative expenses to increase substantially in
future periods as the Company adds to its sales and marketing staff, makes
additional investments in sales and marketing activities to support
commercialization of its VRD technology and development of anticipated products
and as it increases the level of corporate and administrative activity.
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.
Income Taxes. At December 31, 1998 the Company has net operating loss
carry-forwards of approximately $17,866,500 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 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 actual amount of the annual limitation is not significant.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Contract Revenue. Contract revenue increased by $1,610,500 to $1,712,700 in
1997 from $102,200 in 1996. The increase resulted from the Company recognizing
revenue from various contracts entered into in 1997, which exceeded the
recognition of contract revenue in 1996. See Note 2 of Notes to the Financial
Statements.
During 1997, the Company entered into several development contracts with
both commercial and defense entities for further development of the VRD
technology directed toward meeting specific customer applications.
25
In the commercial segment, the Company entered into a contract with Saab
AB, in collaboration with Ericsson Saab Avionics AB to explore the possibilities
of advanced visual display systems incorporating the VRD technology. The Company
was also contracted by The Boeing Company to build a technology demonstration
system incorporating the VRD technology. The Company delivered the demonstrator
to the Boeing Company in August 1997, which was the Company's first full color
VRD system to be delivered to any customer. Also during 1997, the Company
entered into a third commercial development contract to incorporate its VRD
technology into advanced helmet-mounted display systems for fixed wing military
aircraft.
In the defense segment, the Company was awarded a multi-million dollar
contract to build a helmet-mounted display system based on the VRD technology
for the Army's ACIS Comanche Compatible Common Helmet Program. The phase one
contract, exceeding $4 million, calls for the Company to provide the U.S. Army
with a prototype display system that incorporates a higher performance
alternative to commercial helmet-mounted display technologies currently in use.
The defense segment also included two Small Business Innovation Research
(SBIR) contracts with the United States Air Force. One SBIR is to initiate the
development of a full color, high definition, head-mounted display for pilot
training applications. The second SBIR is to explore the development of very
wide field of view, immersive display systems for command, control,
communications, and computer information systems. The Company was awarded its
third SBIR from the United States Army to initiate the development of a
high-definition, head-mounted display to present visual imagery to helicopter
pilots in an operation flight simulator.
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 and
managerial capabilities in preparation for performing on 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 activities undertaken in conjunction with work performed in
fulfillment of development contracts.
Cost of revenue increased by $1,618,400 to $1,820,200 in 1997 from $201,800
in 1996. 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 in 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 1997 over 1996 also
reflects a higher level of investment made by the Company in developing its
technology through work performed on development contracts in addition to that
performed on its own internal research and development projects. See "--Research
and Development Expense."
26
Research and Development Expense. Research and development expense consists
of compensation and related support costs of employees and contractors engaged
in internal research and product development activities; costs incurred for lab
materials, outside development and processing work; payments made under the
Research Agreement; 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. To date, the Company has expensed
all such costs. See Note 2 of Notes to the Financial Statements.
Research and development expenses increased by $1,007,200 to $2,593,900 in
1997 from $1,586,700 in 1996. The Company made payments totaling $962,500 and
$1,283,400 in 1997 and 1996 respectively to the University of Washington
pursuant to the Research Agreement. The balance of the expenses of $1,631,400
and $303,300 in 1997 and 1996 respectively, were incurred directly by the
Company to further develop the VRD technology and to build the Company's
research and product development capabilities through the addition of staff and
equipment and related supporting costs.
The increase in research and development expense of $1,007,200 in 1997 over
1996 reflects implementation of the Company's operating plan, which calls for
building its technical staff and supporting activities to further develop the
Company's technology, independent of work performed at the University of
Washington pursuant to the Research Agreement.
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 $1,227,700 to
$3,077,500 in 1997 from $1,849,800 in 1996. The increase includes increased
aggregate compensation and associated support costs for employees and
contractors, including those employed at December 31, 1996 and those hired
subsequent to that date, in sales and marketing and in management and
administration.
Other Income. Other income of $222,500 in 1997 resulted from the reduction
of an accrued liability for litigation upon settlement of the matter at a lesser
amount than the established reserve.
Interest Income and Expense. Interest income increased by $334,800 to
$614,800 in 1997 from $280,000 in 1996. This increase resulted from higher
average cash and investment balances in 1997, representing the remaining net
proceeds received by the Company from its initial public offering in August
1996.
Interest expense decreased by $197,100 to $3,400 in 1997 from $200,500 in
1996. This decrease resulted from the repayment in November and December 1996 of
the Company's 7% Convertible Subordinated Notes and related interest.
27
Liquidity and Capital Resources
From inception through July 1996, the Company financed its operations
primarily through private offerings of common stock and convertible preferred
stock and convertible subordinated notes. In August 1996, the Company completed
an initial public offering of 2,250,000 units, each unit consisting of one share
of Common Stock and one five-year redeemable Public Warrant to purchase one
share of Common Stock at $12.00 per share. The Company received net proceeds
from the offering of approximately $15,500,000 after deducting underwriting
discounts and offering expenses.
In July 1996, the Company raised net proceeds of $707,500 in a private
placement of $750,000 in principal amount of its 7% Convertible Subordinated
Notes due 1997 (the "7% Notes"). From November 25, 1996, through March 15, 1997,
the 7% Notes were redeemable at the option of the noteholder at par (plus
accrued and unpaid interest) plus 6,000 shares of Common Stock for every
$100,000 principal so redeemed. In November and December 1996, the 7% Notes were
redeemed in full (plus accrued interest) and 45,000 shares of Common Stock were
issued to the noteholders. See Note 6 of Notes to the Financial Statements.
Through December 31, 1998, the Company had incurred an accumulated deficit
of $22,836,000, of which $5,133,500 represented payments made to the University
of Washington to fund the research and development of its VRD technology
pursuant to the terms of the Research Agreement, and $2,357,300 represented
non-cash expenses for compensation and services associated with the issuances of
stock, warrants and options.
In 1998, the Company established a non-recourse receivables assignment
facility (the "Facility") with a financial institution. The Facility allows the
Company to assign accounts receivable to the financial institution on a
non-recourse basis for cash. The maximum amount of assigned but uncollected
receivables at any one time is $2,500,000. The Facility, which carries an
administrative fee and an interest discount, expires on September 24, 1999. As
of December 31, 1998, approximately $696,800 of receivables were assigned under
this Facility and were recorded by the Company as a reduction of trade accounts
receivable. See Note 5 to Notes to the Financial Statements.
In January 1999, the Company raised $5,000,000 from the sale of convertible
preferred stock to a private investor in a private placement. Unless converted
sooner at the election of the investor, the convertible preferred stock will
automatically convert into 400,000 shares of common stock at the end of its
five-year term. The convertible preferred stock carries a cumulative dividend of
4% per annum, payable in cash or additional convertible preferred stock at the
election of the Company. The investor also acquired two options to purchase
additional convertible preferred stock, one with a six-month maturity and one
with a nine-month maturity from the closing date of the transaction. Terms of
the transaction include certain rights for the investor to have the common stock
issuable upon conversion of the preferred stock registered under the Securities
Act of 1933 (the "Securities Act") for resale by the holders thereof. See Note
11 of Notes to the Financial Statements.
28
In April 1999, the Company raised $6,000,000 from the sale of 440,893
shares of common stock to a private investment fund in a private placement. The
investor also acquired two warrants to purchase additional common stock, one
with a five-year term and the other with a one-year term. Under the terms of the
agreement, the Company will register the shares issued in the initial sale and
underlying the two warrants for resale by the holders thereof in accord with the
Securities Act. Terms of the transaction include a provision that could result
in a one-time issuance of additional shares, up to a fixed maximum, if the
market price, as defined in the purchase agreement, of the Company's common
stock on the date of effectiveness of the registration statement is less than
the market price of the common stock on the closing date of the initial sale.
See Note 11 of Notes to the Financial Statements.
In October 1998, the Company entered into a lease for office space to house
the Company's operations over the longer term by providing space to accommodate
planned growth in staff, lab and production space requirements. Under the terms
of the lease, the Company will lease between 92,000 square feet and 101,000
square feet over the first four years of the seven-year term of the lease. Based
on the initial commitment of approximately 67,500 square feet, the base rent
expense during the first year of occupancy is approximately $951,500, increasing
to approximately $1,002,300 in the second year. The lease is a triple net lease,
which requires the Company to pay operating expenses in addition to the base
rent. The lease terms include an option for the Company to extend the initial
lease term for one period of five years, a second option to extend for an
additional period of two years, and other options to acquire additional space
during the initial seven-year term should the need arise. The terms of the lease
require the Company to provide the landlord with a lease bond in the amount of
$1,150,000 as credit enhancement for the lease. As of December 31, 1998,
$400,000 of the required lease bond had been issued, with the remaining $750,000
being issued in January 1999. The Company was required to secure one-half of the
lease bond with a letter of credit. The Company was further required to secure
the full amount of the letter of credit with cash. The requirement to maintain
the lease bond can be terminated when the Company meets certain financial
criteria as described in the lease. In January 1999, the Company exercised its
option to finance $420,000 of tenant improvements through the landlord and
provided a letter of credit to support the borrowing. The Company was required
to secure the entire amount of the letter of credit with cash. The amount of the
letter of credit required is reduced over the term of the borrowing based on
repayments made. Repayment of the borrowing will be included in the Company's
rent. The Company completed its relocation into this facility in April 1999.
The Company's future expenditures and capital requirements will depend on
numerous factors, including the progress of its research and development
program, the progress in commercialization activities and arrangements, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments
and the ability of the Company to establish cooperative development, joint
venture and licensing arrangements. In order to maintain its exclusive rights
under the UW License Agreement, the Company is obligated to make payments with
respect to royalties on the VRD. See "Description of Business- University of
Washington License Agreement." If the Company is successful in establishing OEM
co-development and joint venture arrangements, it is expected that the Company's
partners would fund certain non-recurring
29
engineering costs for product development. Nevertheless, the Company expects its
cash requirements to increase significantly each year as it expands its
activities and operations.
At December 31, 1998, the Company's total cash, cash equivalents and
short-term investment securities balance was $2,269,000. The Company believes
that this balance, together with the $5,000,000 of proceeds received in January
1999 from the sale of convertible preferred stock and the $6,000,000 of proceeds
received in April 1999 from the sale of common stock, will satisfy its budgeted
cash requirements for at least the next 12 months, based on the Company's
current operating plan. Actual expenses, however, may exceed the amounts
budgeted therefor and the Company may require additional capital earlier to
develop its products, to respond to competitive pressures or to meet
unanticipated development difficulties. The Company's operating plan calls for
the purchase and installation of certain laboratory equipment and facilities and
the addition of technical and business staff. The operating plan also provides
for the development of strategic relationships with systems and equipment
manufacturers. See "Description of Business." There can be no assurance that
additional financing will be available to the Company or that, if available, it
will be available on terms acceptable to the Company on a timely basis. If
adequate funds are not available to satisfy either short-term or long-term
capital requirements, the Company may be required to limit its operations
significantly. The Company's capital requirements will depend on many factors,
including, but not limited to, the rate at which the Company can, directly or
through arrangements with OEMs, introduce products incorporating the VRD
technology and the market acceptance and competitive position of such products.
See "Description of Business - Considerations Related to the Company's Business
- - Capital Requirements."
Year 2000 Compliance Strategy
The Company has developed and is implementing a comprehensive strategy for
updating its information technology ("IT") and non-IT systems for Year 2000
("Y2K") compliance. These systems include PC-based hardware, embedded systems,
enterprise software (available Company-wide) and individual software (available
on a user-by-user basis). The Company's strategy for achieving Y2K compliance
includes evaluating its current systems and software for Y2K compliance,
purchasing new systems and software where necessary and developing contingency
plans for those systems that the Company cannot control.
Essentially all of the Company's IT systems have been purchased within the
last three years. During that period, Y2K compliance has been a consideration in
the purchase of all of the Company's primary IT and non-IT systems. The Company
believes that it has currently reached the following levels of compliance:
30
Current Level
Technology of Compliance
---------- -------------
PC-based hardware 90%
Embedded systems 25%
Enterprise software 70%
Individual software 50%
In April 1999, the Company moved its headquarters and commenced a new lease
with a different lessor. See "-- Liquidity and Capital Resources." Pursuant to
the terms of the lease, the lessor is responsible for making the systems serving
the facility "Year 2000 Compliant."
The Company's strategy includes identifying third parties whose failure to
be Y2K compliant could have a material adverse impact on the Company's
operations or financial condition. This process includes examining the Company's
interaction with other IT systems including those of vendors and parties with
which it communicates via e-mail and other information systems. The Company
plans to request a statement from all significant vendors and third parties
reporting their Y2K compliance status. If such vendors or other third parties
raise Y2K compliance concerns, the Company plans to utilize backup vendors that
are Y2K compliant. In addition, the Company is requesting a statement from all
of its customers regarding their levels of Y2K compliance.
The Company presently expects its overall Y2K assessment to be completed
the second quarter of 1999. There is no assurance, however, that taking the
steps described within the proposed timeframe will ensure complete Y2K
compliance.
To date, the cost of the Company's Y2K compliance strategy has been
immaterial. The Company will have a budget of potential expenditures relating to
its Y2K compliance strategy upon completion of its assessment in the second
quarter of 1999.
The effect on the Company of an internal Y2K failure, a third party Y2K
failure or a combination of internal and external Y2K failures could range from
a minor disruption in the Company purchases to an extended interruption in the
IT and non-IT systems of third-parties whose operations materially impact the
Company's operations. Such an interruption could result in a material adverse
effect on the Company's operating results and financial position. In addition,
if the Company has a production product by the year 2000, the potential for a
material adverse effect on the Company would increase. There can be no assurance
that such a scenario, or part of such a scenario, will not occur.
The Company's contingency plans for a Y2K disruption of its operations
include making additional purchase from vendors for a reasonable period
following January 1, 2000 in order to ensure the availability of materials
needed for the Company to perform on its contractual obligations. The Company is
also in the process of developing backup plans that will enable it to continue
operations with the least amount of downtime and expense. There is
31
no assurance, however, that such backup plans will enable the Company to avoid a
materially adverse impact on its results of operations in the event of a Y2K
disruption.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
33
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.............................................35
Balance Sheet as of December 31, 1998 and December 31, 1997...................36
Statement of Operations for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996.......................................37
Statement of Shareholders' Equity for the years ended
December 31, 1998, December 31, 1997 and December 31, 1996....................38
Statement of Comprehensive Loss for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996.......................................40
Statement of Cash Flows for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996.......................................41
Notes to Financial Statements ...............................................42
34
Report of Independent Accountants
April 1, 1999
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, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
35
Microvision, Inc.
Balance Sheet
- ----------------------------------------------------------------------------------------------
December 31,
1998 1997
Assets
Current assets
Cash and cash equivalents $ 2,269,000 $ 5,049,200
Investment securities available-for-sale 3,792,000
Accounts receivable, net of allowance of $24,000 and $0 1,538,800 150,000
Costs and estimated earnings in excess of billings on
uncompleted contracts 758,500 843,800
Other current assets 282,800 113,100
------------ ------------
Total current assets 4,849,100 9,948,100
Property and equipment, net 1,394,100 772,700
Other assets 119,000 20,000
------------ ------------
Total assets $ 6,362,200 $ 10,740,800
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 1,327,700 $ 768,200
Accrued liabilities 1,028,100 715,900
Allowance for estimated contract losses 228,000
Billings in excess of costs and estimated
earnings on uncompleted contracts 771,500
Current portion of capital lease obligations 136,100 22,700
------------ ------------
Total current liabilities 3,491,400 1,506,800
------------ ------------
Capital lease obligations, net of current portion 281,800 69,600
------------ ------------
Commitments and contingencies (Notes 7 and 8)
Shareholders' equity
Preferred stock, no par value, 31,250,000 shares
authorized, none issued and outstanding
Common stock, no par value, 31,250,000 shares
authorized, 6,064,626 and 5,920,264 shares issued
and outstanding 25,742,600 25,375,300
Deferred compensation (238,700) (701,200)
Subscriptions receivable from related parties (78,900)
Unrealized holding loss on investment securities (1,200)
Accumulated deficit (22,836,000) (15,508,500)
------------ ------------
Total shareholders' equity 2,589,000 9,164,400
------------ ------------
Total liabilities and shareholders' equity $ 6,362,200 $ 10,740,800
============ ============
The accompaning notes are an integral part of these financial statements.
36
Microvision, Inc.
Statement of Operations
- -------------------------------------------------------------------------------------------------------
Year ended December 31,
1998 1997 1996
Contract revenue $ 7,074,100 $ 1,712,700 $ 102,200
Cost of revenue 6,416,900 1,820,200 201,800
----------- ----------- -----------
Gross margin 657,200 (107,500) (99,600)
----------- ----------- -----------
Research and development expense 3,305,600 2,593,900 1,586,700
Marketing, general and administrative expense 4,904,600 3,077,500 1,849,800
----------- ----------- -----------
Total operating expenses 8,210,200 5,671,400 3,436,500
----------- ----------- -----------
Loss from operations (7,553,000) (5,778,900) (3,536,100)
Other income 222,500
Interest income 307,100 614,800 280,000
Interest expense (81,600) (3,400) (200,500)
----------- ----------- -----------
Net loss $(7,327,500) $(4,945,000) $(3,456,600)
=========== =========== ===========
Net loss per share $ (1.22) $ (.85) $ (.90)
=========== =========== ===========
Weighted-average shares outstanding 5,993,500 5,806,200 3,832,000
=========== =========== ===========
Net loss per share assuming dilution $ (1.22) $ (.85) $ (.90)
=========== =========== ===========
Weighted-average shares outstanding assuming dilution 5,993,500 5,806,200 3,832,000
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
37
Microvision, Inc.
Statement of Shareholders' Equity
- -------------------------------------------------------------------------------------------------------
page 1, part 1 of 2
Preferred stock Common stock Deferred
Shares Amount Shares Amount compensation
Balance at December 31, 1995 499,478 $2,038,900 3,098,828 $ 4,745,900 $ (42,800)
Issuance of stock to board
members for services 22,250 110,000 (65,500)
Issuance of warrants and
options for common stock 23,400
Issuance of preferred stock
for cash, net of costs 360,298 1,493,900
Issuance of common stock and
warrants for services 10,605 71,000
Exercise of warrants
for common stock 50,000 40,000
Cashless exercise of warrants
for common stock 296,875
Cancellation of founder's
common stock (859,375) (66,000)
Amortization of deferred
compensation, net 64,700
Sale of common stock and
warrants in IPO 2,250,000 15,482,900
Conversion of convertible
preferred stock (859,776) (3,532,800) 859,776 3,532,800
Collection of
subscription receivable
Issuance of stock relating
to retirement of 7%
subordinated notes 45,000 176,200
Other 4,817
Net loss
-------- ---------- ---------- ----------- ----------
Balance at December 31, 1996 - - 5,778,776 24,116,200 (43,600)
The accompanying notes are an integral part of these financial statements.
38a
page 1, part 2 of 2
Unrealized
Subscriptions holding (loss)
receivable gain on
from related investment Accumulated Shareholders'
parties securities deficit equity
Balance at December 31, 1995 $ - $ - $(7,106,900) $ (364,900)
Issuance of stock to board
members for services 44,500
Issuance of warrants and
options for common stock 23,400
Issuance of preferred stock
for cash, net of costs 1,493,900
Issuance of common stock and
warrants for services 71,000
Exercise of warrants
for common stock (10,000) 30,000
Cashless exercise of warrants
for common stock -
Cancellation of founder's