U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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 Small Business Issuer as Specified in Its Charter)
Washington 91-1600822
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2203 Airport Way South, Suite 100, Seattle, Washington 98134
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (206) 623-7055
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes __X__ No________
As of September 30, 1998, 6,023,326 shares of the Company's common stock, no par
value, were outstanding.
Transitional Small Business Disclosure Format: Yes_____ No __X__
1
PART I
FINANCIAL INFORMATION
Page
----
Item 1 - Financial Statements
Balance Sheet at September 30, 1998 and December 31, 1997 3
Statement of Operations for the three and nine months ended 4
September 30, 1998 and 1997
Statement of Cash Flows for the nine months ended 5
September 30, 1998 and 1997
Statement of Comprehensive Loss for the three months 6
and nine months ended September 30, 1998 and 1997
Notes to Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
PART II
OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 2 - Change in Securities and Use of Proceeds 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 5 - Other Information 19
Item 6 - Exhibit and Reports on Form 8-K 19
2
MICROVISION, INC.
Balance Sheet
September 30, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 3,935,000 $ 5,049,200
Investment securities available-for-sale 800,000 3,792,000
Accounts receivable, net 1,336,100 150,000
Costs and estimated earnings in excess
OF billings on uncompleted contracts 364,800 843,800
Other current assets 155,500 113,100
----------- -----------
Total current assets 6,591,400 9,948,100
Property and equipment, net 1,365,100 772,700
Other assets 110,300 20,000
----------- -----------
$ 8,066,800 $10,740,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,148,300 $ 768,200
Accrued liabilities 1,320,400 715,900
Billings in excess of costs and
estimated earnings on uncompleted contracts 476,600 -
Current portion of capital lease obligations 95,200 22,700
----------- -----------
Total current liabilities 3,040,500 1,506,800
----------- -----------
Capital lease obligations,
net of current portion 222,400 69,600
----------- -----------
Shareholders' Equity
Common stock 25,504,800 25,375,300
Deferred compensation (202,200) (701,200)
Unrealized holding loss
on investment securities - (1,200)
Accumulated deficit (20,498,700) (15,508,500)
----------- -----------
Total shareholders' equity 4,803,900 9,164,400
----------- -----------
$ 8,066,800 $10,740,800
=========== ===========
See accompanying notes to financial statements.
3
MICROVISION, INC.
Statement of Operations
(Unaudited)
Three months ended September 30, Nine months ended September 30,
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Contract revenue $ 1,818,800 $ 750,300 $ 5,582,900 $ 852,500
Research and development expense 2,529,500 1,362,600 7,315,300 2,946,000
Marketing, general and
administrative expense 976,000 702,900 3,490,600 2,110,100
----------- ----------- ----------- -----------
Total expenses 3,505,500 2,065,500 10,805,900 5,056,100
----------- ----------- ----------- -----------
Loss from operations (1,686,700) (1,315,200) (5,223,000) (4,203,600)
Other income - - - 222,500
Interest income 67,600 143,600 257,100 476,700
Interest expense (11,400) (400) (24,300) (1,700)
----------- ----------- ----------- -----------
Net loss $(1,630,500) $(1,172,000) $(4,990,200) $(3,506,100)
=========== =========== =========== ===========
Net loss per share $ (0.27) $ (0.20) $ (0.84) $ (0.61)
=========== =========== =========== ===========
Weighted average shares outstanding 6,016,400 5,791,700 5,975,400 5,784,300
=========== =========== =========== ===========
Net loss per share assuming dilution $ (0.27) $ (0.20) $ (0.84) $ (0.61)
=========== =========== =========== ===========
Weighted average shares outstanding
assuming dilution 6,016,400 5,791,700 5,975,400 5,784,300
=========== =========== =========== ===========
See accompanying notes to financial statements.
4
MICROVISION, INC.
Statement of Cash Flows
(Unaudited)
Nine months ended September 30,
------------------------------
1998 1997
---- ----
Cash flows from operating activities
Net loss $(4,990,200) $ (3,506,100)
Adjustments to net cash used in operations:
Depreciation 350,900 84,900
Non-cash expenses related to issuance of stock,
warrants and options and deferred compensation 396,400 86,400
Changes in:
Accounts receivable (1,186,100) (238,800)
Costs and expenses in excess of billings 479,000 -
Other current assets (42,400) (458,900)
Other assets (90,300) 16,400
Accounts payable 380,100 2,200
Accrued liabilities 604,500 (31,200)
Billings in excess of costs and expenses 476,600 -
----------- ------------
Net cash used in operating activities (3,621,500) (4,045,100)
----------- ------------
Cash flows from investing activities:
Sales of investment securities, net 2,993,200 -
Purchases of property and equipment (676,600) (383,000)
----------- ------------
Net cash provided by (used in) investing activities 2,316,600 (383,000)
----------- ------------
Cash flows from financing activities:
Principal payments on capital leases (41,400) -
Issuance of common stock 232,100 184,200
----------- ------------
Net cash provided by financing activities 190,700 184,200
----------- ------------
Net decrease in cash and cash equivalents (1,114,200) (4,243,900)
Cash and cash equivalents at beginning of period 5,049,200 14,265,800
----------- ------------
Cash and cash equivalents at end of period $ 3,935,000 $ 10,021,900
=========== ============
Non-Cash Investing and Financing Activities
(Unaudited)
Property and equipment acquired
under capital lease agreements $ 266,700 $ -
=========== ============
Reversal of deferred compensation $ 137,300 $ -
=========== ============
See accompanying notes to financial statements.
5
MICROVISION, INC.
Statement of Comprehensive Loss
(Unaudited)
Three months ended September 30, Nine months ended September 30,
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net loss $(1,630,500) $(1,172,000) $(4,990,200) $(3,506,100)
Other comprehensive income:
Unrealized gain on investment
securities available-for-sale 4,700 - 1,200 -
----------- ----------- ----------- -----------
Comprehensive loss $(1,625,800) $(1,172,000) $(4,989,000) $(3,506,100)
=========== =========== =========== ===========
6
MICROVISION, INC.
Notes to Financial Statements
September 30, 1998
Management's Statement
The accompanying unaudited financial statements of Microvision, Inc. (the
"Company") at September 30, 1998 and for the three and nine month periods ended
September 30, 1998 have been prepared in accordance with generally accepted
accounting principles for interim financial information on a basis consistent
with the audited financial statements of the Company for the twelve month period
ended December 31, 1997. These statements include all adjustments (consisting
only of normal recurring accruals) that, in the opinion of the Company's
management, are necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented. The interim
results are not necessarily indicative of results that may be expected for a
full year and should be read in conjunction with MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS set forth herein and
with the Company's audited financial statements for the year ended December 31,
1997, which are included in the Company's Annual Report on Form 10-KSB as filed
with the Securities and Exchange Commission.
Non-Recourse Receivables Assignment Facility
The Company has 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 administration fee
and an interest discount, expires on September 24, 1999. As of September 30,
1998, approximately $1,500,000 of receivables were assigned under this Facility
and were recorded by the Company as a reduction of trade accounts receivable.
Computation of Net Loss Per Share
Net loss per share and net loss per share assuming dilution information is
computed using the weighted average number of shares of common stock outstanding
during each period in which the Company reports a loss. Common equivalent shares
issuable upon the exercise of outstanding options and warrants to purchase
shares of the Company's common stock (using the treasury stock method) are not
included in the calculation of the net loss per share and net loss per share
assuming dilution because the effect of their inclusion is anti-dilutive.
7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
The information set forth in this Item 2 contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. 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," 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. Such statements are inherently subject to risks and
uncertainties as further described herein and in the "Considerations Related to
the Company's Business" section of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997, as filed with the Securities and Exchange
Commission. The Company's actual results may differ materially from the results
projected in the forward-looking statements.
Overview
The Company commenced operations in May 1993 to develop and commercialize
technology for displaying images and information onto the retina of the viewer's
eye. In 1993, the Company acquired an exclusive license (the "Exclusive
License") to the Virtual Retinal Display(TM) technology ("VRD"(TM)) from the
University of Washington and entered into a research agreement (the "Research
Agreement") with the University of Washington to further develop the VRD
technology. The Company was in the development stage as of and for 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 develop and market VRD technology. As of December 31, 1997, the Company
was no longer considered a development stage enterprise. 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 core research and development work from the
University of Washington's Human Interface Technology 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's objective is to be a leading provider of personal display
products and imaging technology in a broad range of professional and consumer
applications. The Company expects to achieve this objective and to generate
revenues through a combination of the following activities: technology licensing
to original equipment manufacturers ("OEMs") of consumer electronics products;
provision of engineering services associated with cooperative product
development arrangements and research contracts; and the manufacture and sale of
high-performance personal display products to professional users directly and
through OEMs and through joint ventures.
8
The Company is in discussions with systems and equipment manufacturers in
the defense and wireless communications, computing, and commercial and consumer
electronics industries concerning the potential development of or co-development
of specific products that the Company believes to be the most commercially
viable.
To date, the Company's revenues have been derived from development
contracts with both commercial and government customers. Revenues from sales of
products may not occur for several years.
The Company currently has several prototype versions of the VRD including
monochromatic and color portable units and a full-color bench-top model. The
Company plans to continue funding prototype and demonstration versions of
products incorporating the VRD technology throughout 1998 and 1999. Future
revenues, profits and cash flow, and the Company's ability to achieve its
strategic objectives as described herein will depend upon 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. Additionally, the Company must be able to attract,
retain and motivate qualified technical and management personnel and anticipate
and adapt to a rapidly changing, competitive market for information display
technologies.
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 VRD technology. The Company continues to
identify, assess and pursue 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 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
products. The Company has established, staffed, and equipped an in-house
laboratory to support VRD technology development and product development
engineering associated with current and potential future development contracts.
The Company plans to continue hiring technical personnel to achieve the
Company's technology development objectives and to continue performing on the
Company's development contracts.
Results of Operations
The Company's revenues have been derived generally from development
contracts with both commercial and government customers. As of September 30,
1998, the Company had an accumulated deficit since inception of $20.5 million.
The Company expects to continue and to increase expenditures in research and
development as well as in sales, marketing and administration as it continues to
focus its efforts on further development and refinement of the VRD technology
and as it continues to pursue commercialization of the VRD technology.
9
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenue in the three months ended September 30, 1998 increased $1,068,500
to $1,818,800 or 142% from $750,300 in the comparable period in 1997. The
revenue for the period ended September 30, 1998 was derived from contracts into
which the Company entered during both 1997 and the current year.
Research and development expenses in the three months ended September 30,
1998 increased $1,166,900 or 86% to $2,529,500 from $1,362,600 in the comparable
period in 1997. In the period ended September 30, 1997, the Company made a
payment of $320,800 to the University of Washington pursuant to the Research
Agreement. The balance of the expenses of $2,529,500 and $1,041,800 in the
periods ended September 30, 1998 and 1997, respectively, was incurred directly
by the Company in part to further develop the VRD technology.
The increase in research and development expenses of $1,166,900 for the
quarter ended September 30, 1998 over the comparable period in 1997 reflects
continued implementation of the Company's operating plan, which calls for
building its technical staff, supporting activities to further develop the
Company's technology, establishing and equipping its own in-house laboratory,
and performing work in support of the Company's sales and marketing activities
related to the commercialization of the VRD technology. The increase also
includes increased costs incurred in the performance of contracts.
In 1997, the Company made the final payment due under its Research
Agreement with the University of Washington, which resulted in the Company
having paid in full the $5.1 million license fee due under its exclusive license
for the VRD technology. In September 1997, the Company and the UW agreed to
extend the term of the Research Agreement from October 31, 1997 to March 31,
1998 at no additional cost to the Company. In March 1998, the Company and the UW
agreed to extend the term of the Research Agreement from March 31, 1998 to
December 31, 1998, at no additional cost to the Company. The extension is
expected to enable the UW to complete performance of certain research activities
under the Research Agreement.
The Company expects its research and development expenses to increase in
the future over prior periods. In addition to costs associated with performing
on contracts, the Company plans to continue to build its technical staff and
research capabilities in support of current and potential future contracts, to
expand internal research and development activities, to increase technical
support of sales and marketing efforts, and to prepare for performing on future
contracts relating to the commercialization of the VRD technology.
Marketing, general and administrative expenses in the three months ended
September 30, 1998 increased $273,100 or 39% to $976,000 from $702,900 in the
comparable period in 1997. The increase includes increased aggregate
compensation and associated support costs for employees including those employed
at September 30, 1997 and those hired subsequent to that date in sales and
marketing and in administration. The Company expects marketing, general and
administrative expenses to increase in future periods as the Company makes
additional investments in sales and marketing activities to promote its VRD
technology and anticipated
10
products, and as it adds to its sales and marketing and administrative staff
and increases the level of corporate and administrative activity.
Net interest income in the three months ended September 30, 1998 was
$56,200 compared to net interest income of $143,200 in the comparable period of
1997. This decrease was due principally to lower average cash balances in the
three months ended September 30, 1998, compared to the same period in 1997,
representing the remaining net proceeds received by the Company from its initial
public offering in August 1996.
During the quarter the Company demonstrated a microminiature scanner that
represents a breakthrough for a wide variety of next-generation display and
imaging products. The development is significant because of the degree of system
miniaturization it enables, and because it has the potential to afford
significant production economies through the use of highly automated batch
fabrication techniques. The patented device, in which optical surfaces and small
hinges are formed on silicon wafers using semiconductor fabrication techniques,
is an example of a technology known as microelectromechanical systems or MEMS.
While the technology will initially be used in the Company's Virtual Retinal
Display system, the device can also be used as an optical sensor or camera by
rapidly scanning light reflected from the surface of an object onto a
photoreceptor.
Also during the quarter ended September 30, 1998 the Company announced that
it had successfully conducted its first demonstrations of a laser projection
television display using the same principles as the Company's technology. The
full color 17" image projected by the prototype system has the resolution of a
VGA computer monitor and provides full motion video. With additional
development, the Company plans to increase the size of the projected image and
to improve resolution to extremely high levels. This application reflects the
Company's plans to leverage its display and imaging technology to enable a
breadth of applications.
In August, the Company delivered its second helmet mounted display (HMD) to
Saab AB and Ericcsson Saab Avionics AB for evaluation in their aircraft
simulators. The prototype - a full color high resolution HMD system uses the
Company's VRD technology to allow superior image fidelity for fighter pilots.
This latest prototype supports the on-going effort between the Company and Saab
AB and Ericcsson Saab Avionics to evaluate the VRD technology for HMD's for use
in fighter aircraft. The delivery demonstrates the Company's ability to meet the
technology requirements of providing exceptional color and resolution -- not
obtainable by commercial display technologies - to the industry's leading
defense and aerospace companies.
The Company continues to increase its intellectual property (IP) portfolio
both related to its proprietary VRD technology and in other technologies. Rapid
growth of the IP portfolio is a part of the Company's marketing strategy and
aggressive micro-display technology research and development efforts.
11
In September, the Company announced it had filed eight new patent
applications covering a wide range of optics and scanning technologies. With the
new applications, the Company holds exclusive rights to 11 issued patents and
34 pending U.S. patents as well as rights to a number of non-U.S. patent
applications.
Recent Events
Subsequent to September 30, 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 incorporate Microvision's VRD technology,
is expected to allow surgeons to view anatomical images and other relevant data
during surgery. Unlike current surgical displays, Microvision's head-wearable
system is expected to provide "see-through" readability at SVGA resolution and a
high brightness level to allow the surgeon to easily access information while
simultaneously performing the surgical procedure. In addition, the system's full
color palette and high contrast level is expected to enable the surgeon to see
true tissue differentiation. The contract calls for the Company to deliver the
first version of the device by the third quarter of 1999.
Also subsequent to the end of the quarter, the Company entered into a
contract to develop a lightweight, head-wearable display for the U.S. Navy. The
VRD enabled display will be used on naval vessels to provide an enhanced user
interface to complex on-board information systems. Under the initial phase of
the development effort, the Company will deliver a prototype display for sea
trial testing as early as December 1998.
Also subsequent to the end of the quarter, the Company announced the
addition of Admiral William Owens and Doug Trumbull to the board of directors.
Owens is currently the vice chairman of Teledesic, a telecommunications services
company. Admiral Owens has also served as Vice Chairman of the Joint Chiefs of
Staff, the second highest ranking military officer in the United States.
Trumbull is a leading innovator in visual effects. With a career in the
entertainment business spanning over 30 years, he is currently the President and
CEO of Entertainment Design Workshop of Sheffield, Mass.
12
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenue in the nine months ended September 30, 1998 increased by $4,730,400
or 555% to $5,582,900 from $852,500 in the comparable period in 1997. The
revenue for the period ended September 30, 1998 was derived from contracts into
which the Company entered during both 1997 and the current year.
Research and development expenses in the nine months ended September 30,
1998 increased by $4,369,300 or 148% to $7,315,300 from $2,946,000 in the
comparable period in 1997. In the period ended September 30, 1997, the Company
made payments totaling $962,400 to the University of Washington pursuant to the
Research Agreement. The balance of the expenses of $7,315,300 and $1,983,600 in
the periods ended September 30, 1998 and 1997, respectively, were incurred
directly by the Company in part to further develop the VRD technology.
The increase in research and development expenses of $4,369,300 for the
nine months ended September 30, 1998 over the comparable period in 1997 reflects
continued implementation of the Company's operating plan, which calls for
building its technical staff, supporting activities to further develop the
Company's technology, establishing and equipping its own in-house laboratory,
and performing work in support of the Company's sales and marketing activities
related to the commercialization of the VRD technology. The increase includes
costs associated with the Company's acquisition of the exclusive license on
certain MEMS based microminiature scanner technology. The increase also includes
increased costs incurred in the performance of contracts.
The Company expects its research and development expenses to increase in
the future over prior periods. In addition to costs associated with performing
on contracts, the Company plans to continue to build its technical staff and
research capabilities in support of current and potential future contracts, to
expand internal research and development activities, to increase technical
support of sales and marketing efforts, and to prepare for performing on future
contracts relating to the commercialization of the VRD technology.
Marketing, general and administrative expenses in the nine months ended
September 30, 1998 increased $1,380,500 or 65% to $3,490,600 from $2,110,100 in
the comparable period in 1997. The increase includes increased aggregate
compensation and associated support costs for employees including those employed
at September 30, 1997 and those hired subsequent to that date in sales and
marketing and in administration. The Company expects marketing, general and
administrative expenses to increase in future periods as the Company makes
additional investments in sales and marketing activities to promote its VRD
technology and anticipated products and as it adds to its sales and marketing
and administrative staff and increases the level of corporate and administrative
activity.
Other income for the nine months ended September 30, 1997 was $222,500,
which resulted from the reduction of an accrued liability for litigation upon
settlement of the matter at a lesser amount than the established reserve.
13
Net interest income in the nine months ended September 30, 1998 was
$232,800 compared to net interest income of $475,000 in the comparable period of
1997. This decrease was due principally to lower average cash balances in the
nine months ended September 30, 1998, as compared to the same period in 1997,
representing the remaining net proceeds received by the Company from its initial
public offering in August 1996.
LIQUIDITY AND CAPITAL RESOURCES
From inception through July 1996, the Company financed its operations
primarily through private equity sales and a private placement of convertible
subordinated notes. In August 1996, the Company completed its initial public
offering of 2,250,000 units, each unit consisting of one share of common stock
and one five-year redeemable warrant to purchase one share of common stock at
$12.00 per share. The Company received net proceeds from the offering of
approximately $15.5 million after deducting underwriting discounts and offering
expenses.
At September 30, 1998 the Company had $4.7 million in combined cash, cash
equivalents and investment securities available-for-sale. The Company believes
that these funds together with revenue earned on contracts will satisfy its
budgeted cash requirements for several quarters based on the Company's current
operating plan. Actual expenses, however, may exceed the amounts budgeted, and
will depend, in part, on the opportunities that arise for commercialization of
the VRD technology. The Company may require additional capital earlier to
develop products, to respond to competitive pressures, to meet unanticipated
development difficulties, or for other working capital purposes. There can be no
assurance that any additional financing will be available when needed or, if
available, on terms satisfactory to the Company.
During the quarter ended September 30, 1998, the Company established a
non-recourse receivables assignment facility with a financing institution to
facilitate the Company's working capital requirements. During the quarter,
approximately $1,500,000 of receivables were assigned to the financing
institution for cash.
Subsequent to September 30, 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 would lease between
92,000 square feet and 101,000 square feet in two commitments 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 at approximately $861,000, increasing to approximately $931,000
in the second year. The proposed 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 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. The requirement
for the lease bond can be eliminated when the Company meets certain financial
criteria as described in the lease. In addition, the Company has
14
the option to finance up to $420,000 of tenant improvements through the
landlord. Should it exercise all or part of this election, the Company would be
required to provide the landlord with a letter of credit to support such
borrowing. Occupancy is expected late in the first quarter of 1999. The
effectiveness of the lease is conditioned on the approval of the board of
directors of the landlord.
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 its commercialization activities, 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. If the Company is successful in establishing co-development and
joint venture arrangements, it is expected that the Company's partners would
fund certain non-recurring engineering costs for product development.
Nevertheless, the Company expects its cash requirements to increase
significantly each year as it expands its operations.
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,
and 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:
------------------------- -------------------
Technology Current level
of compliance
------------------------- -------------------
PC-based hardware 90%
------------------------- -------------------
Embedded systems 25%
------------------------- -------------------
Enterprise software 70%
------------------------- -------------------
Individual software 50%
------------------------- -------------------
The Company has entered into a lease to occupy new premises beginning in
the first half of 1999. 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 Y2K 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
15
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 plans to request a
statement from all of its customers regarding their levels of Y2K compliance.
The Company presently expects its overall Y2K assessment to be completed
within the first 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 first
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's 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 purchases from vendors for the 90 day period following
January 1, 2000 in order to insure 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 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.
16
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to, nor is its property subject to, any
material pending legal proceeding.
Item 2. Changes In Securities and Use of Proceeds
In July 1998, the Company issued 3,500 shares of restricted common
stock to a vendor as compensation for having provided the Company with
exclusive rights to utilize the vendor's services for technology
development projects in the Company's field of use.
Item 3. Defaults upon Senior Securities
None
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 A. 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 shares to 3,000,000
shares was approved.
The appointment of PricewaterhouseCoopers LLP as independent auditors
of the Company for the year ending December 31, 1998 was approved.
17
Shareholders cast their votes as follows:
- - ---------------------------- --------- ------- ---------------- ----------------
Nominee/Proposal For Against Abstain/Withhold Broker Non-Votes
- - ---------------------------- --------- ------- ---------------- ----------------
Richard F. Rutkowski 5,088,892 -- 18,716 -
- - ---------------------------- --------- ------- ---------------- ----------------
Stephen R. Willey 5,088,892 -- 18,716 -
- - ---------------------------- --------- ------- ---------------- ----------------
Richard A. Raisig 5,088,892 -- 18,716 -
- - ---------------------------- --------- ------- ---------------- ----------------
Walter J. Lack 5,088,892 -- 18,716 -
- - ---------------------------- --------- ------- ---------------- ----------------
Robert A. Ratliffe 5,088,892 -- 18,716 -
- - ---------------------------- --------- ------- ---------------- ----------------
Richard A. Cowell 5,088,892 -- 18,716 -
- - ---------------------------- --------- ------- ---------------- ----------------
Jacob Brouwer 5,088,792 -- 18,816 -
- - ---------------------------- --------- ------- ---------------- ----------------
Amendment of Stock
Option Plan 1,854,701 309,390 25,267 2,939,492
- - ---------------------------- --------- ------- ---------------- ----------------
Appointment of
PricewaterhouseCoopers LLP 5,088,295 7,455 11,858 -
- - ---------------------------- --------- ------- ---------------- ----------------
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
--------
10.1 Lease between S/I Northcreek II, LLC and Microvision, Inc.,
dated October 27, 1998
10.2 Fourth amendment to office lease between the City of Seattle
and Microvision, Inc. dated July 23, 1998 relating to Suite
100 of office building located at 2203 Airport Way South,
Seattle, Washington 98134
10.3 Microvision, Inc. 1996 Stock Option Plan, as amended
10.4 Non-recourse Receivable Purchase Agreement dated as of
September 25, 1998 between Silicon Valley Financial Services
and Microvision, Inc.
11. Computation of Net Loss Per Share and Net Loss Per Share
Assuming Dilution
27. Financial Data Schedule
18
b. Reports on Form 8-K
-------------------
During the quarterly period ended September 30, 1998, the
Company filed no Current Reports on Form 8-K.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICROVISION, INC.
Date: November 16, 1998 RICHARD F. RUTKOWSKI
----------------------------------------
Richard F. Rutkowski
President, Chief Executive Officer
(Principal Executive Officer)
Date: November 16, 1998 RICHARD A. RAISIG
------------------------------------
Richard A. Raisig
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
EXHIBIT INDEX
Exhibit
Number Description
- - ------- -----------
10.1 Lease between S/I Northcreek II, LLC and Microvision, Inc.,
dated October 27, 1998
10.2 Fourth amendment to office lease between the City of Seattle
and Microvision, Inc. dated July 23, 1998 relating to Suite
100 of office building located at 2203 Airport Way South,
Seattle, Washington 98134
10.3 Microvision, Inc. 1996 Stock Option Plan, as amended
10.4 Non-recourse Receivable Purchase Agreement dated as of
September 25, 1998 between Silicon Valley Financial Services
and Microvision, Inc.
11. Computation of Net Loss Per Share and Net Loss Per Share
Assuming Dilution
27. Financial Data Schedule