The Bigger Picture
2008 Annual Report
The SHOWWX™
Our pocket-sized pico
projector, embedded with
the PicoP® display engine.
On with the SHOW
Today’s mobile devices are tiny miracles—with the emphasis on tiny. Their video-play-
Going inside
ing power is amazing, but constrained by the necessarily small size of their displays.
Enter the SHOWWX™, our game-changing, pocket-sized pico projector that connects
to mobile devices and projects always-in-focus, DVD-resolution imagery on just about
any surface. In 2008, a prototype of the SHOWWX won raves for the size and clarity of
its picture. Next steps? Rolling out the SHOWWX for the consumer market as we also
work with our OEM partners to embed the PicoP® display engine into their products.
In 2008, we readied the
SHOWWX for the consumer
market. We’re also designing
our PicoP display engine to
be sold to Original Equipment
Manufacturers as an embedded
component for a wide variety
of mobile devices.
Microvision 2008 Annual Report
1
Dear Fellow Shareowner,
The year 2008 was a very productive
conditions and longer than expected
and reliability of our MEMS scanning
year for Microvision as we continued
to execute on our PicoP® commercial-
ization roadmap. We made tremen-
development and commercialization
mirror, resulting in: (i) unmatched
cycles by some of our key component
small font readability and viewing
suppliers—both of which delayed the
screen size versus the existing com-
dous progress on our goals to launch
full achievement of our planned
petitive offerings; (ii) a 25 percent
our first PicoP display engine enabled
objectives for the year.
reduction in the form factor versus
accessory projector and accelerate
the path to market for new PicoP-
enabled applications while carefully
managing operating expenses.
Despite these delays, the tireless
efforts of the Microvision team and
the growing enthusiasm of our OEM
and supply chain partners continue
We are focused on the big picture.
to support the level of energy and
We at Microvision want to fundamen-
optimism that have become synony-
tally change how people on the
mous with the kind of Microvision
move interact with, view and share
that I gave my commitment to build.
“ We at Microvision want to fundamentally change how people on the move
interact with, view and share information whether at home, in their cars or
in public places.”
earlier prototypes; and (iii) exceeding
drop test performance requirements
of the MEMS, one of the most critical
components of the PicoP display
engine. The company also com-
pleted ASIC electronics with world-
renowned electronics component
manufacturers to enable the initial
accessory product launch in 2009.
Supply Chain. We strengthened our
supply chain by engaging Asia
Optical, one of the world’s largest
manufacturers of digital cameras,
DVD engines, and electronics assem-
information whether at home, in their
I would like to reflect on some of
blies, to manufacture the PicoP dis-
cars or in public places. Everything
the key accomplishments achieved
play engine and first PicoP accessory
we do is intended to be aligned with
by this amazing Microvision team in
projector. We actively managed all
our vision of creating greater value
the past year.
for our shareholders and customers
by shaping positive and unforgetta-
ble experiences at every point of
contact with our company.
2008 Recap
Technology, Supply Chain,
Business Development
Technology. We made considerable
improvements to the PicoP platform
in the areas of image quality, optical
We made substantial progress on the
engine maturity, overall product size
objectives set early in 2008 in com-
key component suppliers, and while
we received delivery of next-genera-
tion green lasers for our customer trial
units in September, the green laser
suppliers experienced longer than
expected development and commer-
cialization cycles for this critical com-
ponent which forced us to delay our
accessory product launch plans.
pleting multiple cus-
tomer development,
technology, and
supply chain mile-
stones that are essen-
tial for bringing our
first PicoP-enabled
consumer product
to market. However,
2008 also brought
deteriorating economic
2
Microvision 2008 Annual Report
The PicoP display engine: In 2008, we further advanced the PicoP product
miniaturization and power reduction while continuously improving image
quality. Whether embedded into consumers’ mobility products, vehicle dis-
plays, innovative eyewear or other novel product design applications, the
PicoP display engine offers customers a new and valuable display capability.
Business Development. We began
customer and user trials in late 2008
display applications that aligned with
our strategic roadmap. We also con-
Barcode Scanner. The barcode scan-
ner segment achieved 25 percent
in order to finalize the accessory
tinued to develop our laser barcode
revenue growth over the prior year,
product design. The trial units incor-
scanner business.
but sales were impacted by the dete-
porated several important advance-
ments including new-generation
green lasers, an improved PicoP dis-
play engine and several critical image
quality enhancements. The outcome
of these initial customer trials and our
progress during 2008 culminated in
the successful delivery and demon-
stration of the company’s pre-pro-
duction ultra-miniature plug-and-play
accessory pico projector code named
SHOWWX™ at the MacWorld Expo,
the Consumer Electronics Show (CES),
and GSMA Mobile World Congress
in early 2009. As a result of these
demonstrations, we developed a core
funnel of prospective OEM customers
which include handset manufacturers
and distributors, mobile operators,
and large consumer electronics
brands and distributors.
We made commercially available the
PicoP Evaluation Kits (PEKs) as part
of our strategy to increase embed-
PicoP Automotive Display Applications.
We developed PicoHUD, the first
head-up display (HUD) demonstrator
based on the PicoP display engine.
PicoHUD is more than half the size,
four times brighter and has almost
fifteen times greater contrast com-
pared to existing best-in-class HUD
solutions. These compact units are
being marketed to global mobility
players for aftermarket automotive
applications such as navigation and
telematics that facilitate improved
driver situational awareness. During
2008 we delivered HUD and instru-
ment cluster display (ICD) prototypes
to several global automotive Tier 1
integrators for vehicle embedded
applications.
riorating economy. Our continued
focus on product quality resulted in
a dramatic improvement in the field
return rate to less than 0.5 percent
of all units shipped and improved
production yield of the ROV™ bar-
code scanner to greater than 98 per-
cent. The cross-functional product
development best practices created
through the transformation of the
barcode scanner segment in 2007
have been adopted by the PicoP
new product development programs.
2009 Priorities
Supported by our strong and grow-
ing brand reputation across an
emerging marketplace, we expect
2009 to be a pivotal year for us.
“The tireless efforts of the Microvision team and the growing enthusiasm of
our OEM and supply chain partners continue to support the level of energy
and optimism that have become synonymous with the kind of Microvision
ded product opportunities. PEKs
that I gave my commitment to build.”
are designed to help prospective
customers develop their own novel
products which we expect will facili-
tate the creation of a new ecosystem
of applications based upon our core
technology.
Automotive Display, Wearable
Display, Barcode Scanner
In 2008, we supported new business
development opportunities for PicoP-
enabled automotive and wearable
PicoP Wearable Displays. We signed
contracts with two customers for
development of a High Definition
(HD) PicoP display engine, totaling
$1.5 million. Microvision’s HD devel-
opment program is part of our ongo-
ing strategy to anticipate future mar-
ket needs and continually improve
the PicoP platform. We also delivered
on all ongoing eyewear government
contracts and received new funding
opportunities for 2009.
Our priorities are crystal clear:
1. Launch the first PicoP-enabled
accessory projector and begin to
convert strong OEM interest into
sustainable, profitable customer
relationships.
2. Develop several opportunities
for PicoP-embedded applications,
including mobile phones for
commercialization in 2010.
3
Microvision 2008 Annual Report 3
Microvision 2008 Annual Report
We have developed a core funnel
products, including still and video
On behalf of everyone at Microvision,
of prospective OEM customers
cameras, portable media players and
we look forward to continuing our
for the launch of a PicoP-enabled
mobile television players. As a result,
dialogue with you as we grow our
accessory product. We also plan
we have introduced new customer
business, take advantage of this
to implement a distribution strategy
tools such as PEKs to increase the
unique market opportunity and stay
for a Microvision-branded PicoP
business opportunities in these and
focused on the big picture.
accessory product to maximize
other application areas.
our go-to-market flexibility.
“ We developed a core funnel of prospective OEM customers which include
handset manufacturers and distributors, mobile operators, and large con-
sumer electronics brands and distributors.”
Thank you for your confidence and
support.
Sincerely,
We have streamlined our 2009 oper-
The opportunity in front of us is
ating plan by consolidating programs
very compelling. We have already
and are working to efficiently manage
welcomed a strategic supply chain
Alexander Y. Tokman
President and Chief Executive Officer
our resources through the economic
partner, Walsin Lihwa, as a new major
July 20, 2009
downturn.
During the past year we have seen
tremendous growth in the global
demand for pico projectors.
We are seeing increasing interest
in embedding pico projectors in
a growing number of consumer
investor in 2009. Walsin Lihwa’s
investment and public statements
in making the investment are in con-
cert with our belief that we are well
positioned to execute on this large
and emerging market opportunity.
Through hard work and solid execu-
tion of our plan, we believe we can
increase shareholder value.
4
Microvision 2008 Annual Report
Selected Financial Data—2008
A summary of selected financial data as of and for the five years ended December 31, 2008 is set forth below. It should be read in
conjunction with our consolidated financial statements and related notes appearing elsewhere in this annual report.
Years ended December 31
(in thousands, except per share data)
Statement of Operations Data
2008
2007
2006
2005
2004
Revenue
$ 6,611
$ 10,484
$ 7,043
$ 14,746
$ 11,418
Net loss available for common shareholders
(32,620)
(19,787)
(27,257)
(30,284)
(33,543)
Basic and diluted net loss per share
(0.53)
(0.40)
(0.81)
(1.35)
(1.56)
Weighted average shares outstanding,
basic and diluted
Balance Sheet Data
Cash and cash equivalents
61,643
49,963
33,572
22,498
21,493
$ 25,533
$ 13,399
$ 14,552
$ 6,860
$ 1,268
Investments available-for-sale
2,705
22,411
—
—
Working capital
Total assets
Long-term liabilities
24,347
30,043
19,160
(4,723)
36,964
45,298
35,325
23,363
25,538
1,776
2,201
2,616
4,412
52
—
903
Mandatorily redeemable preferred stock
—
—
—
4,166
7,647
Total shareholders’ equity (deficit)
27,651
33,061
21,864
(3,509)
7,190
Statement of Operations data for 2004 includes financial information for our previously consolidated subsidiary Lumera. Lumera was deconsolidated in July 2004.
Microvision 2008 Annual Report 5
PricewaterhouseCoopers LLP
1420 Fifth Avenue
Suite 1900
Seattle, WA 98101
Telephone (206) 398 3000
Facsimile (206) 398 3100
Report of Independent Registered Public Accounting Firm
To the Board of Directors
and Shareholders of Microvision, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, mandatory redeemable convertible preferred stock and shareholders’ equity,
comprehensive loss and cash flows present fairly, in all material respects, the financial position of
Microvision, Inc. at December 31, 2008 and December 31, 2007, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible
for these financial statements and the financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions on these financial statements, financial
statement schedule and on the Company’s internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered
6
Microvision 2008 Annual Report
necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Seattle, Washington
March 5, 2009
Microvision 2008 Annual Report 7
Microvision, Inc.
Consolidated Balance Sheets (in thousands, except per share information)
Asse ts
Current assets
Cash and cash equivalents
Investment securities, available-for-sale
Accounts receivable, net of allowances of $57 and $123
Costs and estimated earnings in excess of billings on uncompleted contracts
Inventory
Other current assets
T otal current assets
Property and equipment, net
Restricted investments
Other assets
T otal assets
Liabilitie s and Share holde rs' Equity
Current liabilities
Accounts payable
Accrued liabilities
Billings in excess of costs and estimated earnings on uncompleted contracts
Liability associated with common stock warrants
Current portion of capital lease obligations
Current portion of long-term debt
T otal current liabilities
Capital lease obligations, net of current portion
Long-term debt, net of current portion
Deferred rent, net of current portion
T otal liabilities
Commitments and contingencies
Shareholders' Equity
Common stock, par value $.001; 125,000 shares authorized; 68,080 and
56,730 shares issued and outstanding
Additonal paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
T otal shareholders' equity
De ce mbe r 31,
2008
2007
$
25,533
$
$
$
2,705
537
695
1,525
889
31,884
3,701
1,332
47
36,964
$
3,487
$
3,545
62
331
41
71
7,537
45
322
1,409
9,313
--
68
319,662
(38)
(292,041)
27,651
13,399
22,411
1,885
443
761
1,180
40,079
4,047
1,125
47
45,298
2,146
4,154
970
2,657
44
65
10,036
88
393
1,720
12,237
--
57
292,374
51
(259,421)
33,061
45,298
T otal liabilities and shareholders' equity
$
36,964
$
The accompanying notes are an integral part of these consolidated financial statements.
8
Microvision 2008 Annual Report
Microvision, Inc.
Consolidated Statements of Operations (in thousands, except per share information)
Contract revenue
Product revenue
T otal revenue
Cost of contract revenue
Cost of product revenue
T otal cost of revenue
Gross margin
Research and development expense
Sales, marketing, general and administrative expense
Gain on disposal of fixed assets
T otal operating expenses
Loss from operations
Interest income
Interest expense
Impairment of investment securities, available-for-sale
Gain (loss) on derivative instruments, net
Other expense
Ye ars Ende d De ce mbe r 31,
2008
2007
2006
$
4,874
$
9,010
$
1,737
6,611
1,708
2,143
3,851
1,474
10,484
4,916
1,690
6,606
5,275
1,768
7,043
3,398
4,768
8,166
2,760
3,878
(1,123)
22,575
15,730
(5)
38,300
14,944
15,779
(117)
30,606
10,715
17,362
(198)
27,879
(35,540)
(26,728)
(29,002)
1,130
(48)
(300)
2,196
(58)
1,358
(513)
--
(483)
(27)
719
(5,753)
--
1,627
(23)
Net loss before Lumera transactions
(32,620)
(26,393)
(32,432)
Equity in losses of Lumera
Gain on sale of investment in Lumera
--
--
--
6,606
(290)
8,738
Net loss
(32,620)
(19,787)
(23,984)
Stated dividend on mandatorily redeemable convertible preferred stock
Accretion to par value of preferred stock
Inducement for conversion of preferred stock
Net loss available for common shareholders
Net loss per share basic and diluted
--
--
--
--
--
--
(59)
(138)
(3,076)
$
$
(32,620) $
(19,787) $
(27,257)
(0.53) $
(0.40) $
(0.81)
Weighted-average shares outstanding basic and diluted
61,643
49,963
33,572
The accompanying notes are an integral part of consolidated financial statements.
Microvision 2008 Annual Report 9
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Microvision 2008 Annual Report
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Microvision 2008 Annual Report 11
Microvision, Inc.
Consolidated Statements of Comprehensive Loss (in thousands)
Net loss
Other comprehensive gain (loss)
Unrealized gain (loss) on investment securities, available-for-sale:
Unrealized holding gain (loss) arising during period
Less: reclassification adjustment for gains realized in net loss
Net unrealized gain (loss)
Comprehensive loss
Years Ended December 31,
2008
2007
2006
$
(32,620) $
(19,787) $
(23,984)
(89)
--
(89)
(1,962)
(6,606)
(8,568)
17,357
(8,738)
8,619
$
(32,709) $
(28,355) $
(15,365)
The accompanying notes are an integral part of these consolidated financial statements.
12
Microvision 2008 Annual Report
Microvision, Inc.
Consolidated Statements of Cash Flows (in thousands)
Cash flows from ope rating activitie s
Net loss
Adjustments to reconcile net loss to net cash used in operations:
Depreciation
Gain on disposal of fixed assets
Non-cash expenses related to issuance of stock, warrants, and options,
and amortization of deferred compensation
Non-cash interest expense, net
Loss (gain) on derivative instruments
Impairment of short-term investment securities
Inventory write-downs
Allowance for receivables from related parties
Equity in losses of Lumera
Gain on sale of investment in Lumera
Net accretion of discount on short-term investments
Increase in deferred rent
Non-cash deferred rent
Change in:
Accounts receivable
Costs and estimated earnings in excess of billings on uncompleted contracts
Inventory
Other current assets
Other assets
Accounts payable
Accrued liabilities
Billings in excess of costs and estimated earnings on uncompleted contracts
Ye ars Ende d De ce mbe r 31,
2008
2007
2006
$
(32,620) $
(19,787) $
(23,984)
989
(5)
2,831
--
(2,196)
300
475
(241)
--
--
(97)
--
(275)
1,348
(252)
(1,239)
184
--
1,188
(642)
(908)
953
(117)
1,897
371
482
--
84
23
--
(6,606)
(80)
--
(277)
(719)
122
198
408
(6)
461
515
770
Net cash used in operating activities
(31,160)
(21,308)
Cash flows from inve sting activitie s
Sales of investment securities
Purchases of investment securities
Sales of restricted investment securities
Purchases of restricted investment securities
Decrease in restricted investment
Decrease in restricted cash
Collections of receivables from related parties
Sale of long-term investment - Lumera
Proceeds on sale of property and equipment
Purchases of property and equipment
Net cash provided by (used in) investing activities
20,400
(986)
--
(350)
143
--
241
--
5
7,200
(29,504)
2,329
(2,329)
143
--
227
8,637
117
(495)
18,958
(1,058)
(14,238)
1,218
(198)
1,825
4,753
(1,627)
--
1,181
542
290
(8,738)
--
1,042
(231)
214
639
(1,465)
121
83
(689)
(1,139)
149
(26,014)
--
--
1,100
(268)
--
755
--
12,142
200
(2,152)
11,777
Microvision 2008 Annual Report 13
Microvision, Inc.
Consolidated Statements of Cash Flows (continued) (in thousands)
Cash flows from financing activitie s
Principal payments under capital leases
Principal payments under long-term debt
Increase in long-term debt
Payments on notes payable
Payment of embedded derivative feature of preferred stock conversion
Payment of preferred dividend
Net proceeds from issuance of common stock and warrants
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supple me ntal disclosure of cash flow information
Cash paid for interest
Supple me ntal sche dule of non-cash inve sting and financing activitie s
Property and equipment acquired under capital leases
Other non-cash additions to property and equipment
Conversion of preferred stock into common stock
Issuance of common stock for payment of principal and interest on senior
secured exchangeable convertible notes
Conversion of convertible debt into common stock
Inducement for conversion of preferred stock
Ye ars Ende d De ce mbe r 31,
2008
2007
2006
(41)
(65)
--
--
--
--
24,442
24,336
12,134
13,399
(45)
(58)
--
(1,400)
--
--
35,896
34,393
(1,153)
14,552
25,533
$
13,399
$
(40)
(55)
536
(9,600)
(1,074)
(43)
32,205
21,929
7,692
6,860
14,552
48
$
92
$
786
--
199
--
--
--
--
$
$
$
$
$
$
--
46
--
1,388
--
--
$
$
$
$
$
$
80
115
4,417
1,755
344
3,076
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
14
Microvision 2008 Annual Report
The Company - Note 1
Microvision is developing compact, low power, high-resolution display and imaging systems based on its
integrated photonics module technology platform. Microvision’s technology has potential applications for
a broad range of consumer, automotive, medical, industrial, and military products. The Company’s
proprietary technology platform combines bi-axial Micro-Electrical Mechanical system (MEMS) light
scanning technologies, lasers, optics, electronics, with its system controls expertise to produce compact
display or imaging solutions that the Company anticipates will lead to introduction of new applications and
products in the consumer and automotive markets. Historically, Microvision has entered into development
agreements with commercial and U.S. government customers to develop applications using its light
scanning technologies. Microvision has one commercially marketed product, ROV, a hand-held bar code
scanner that incorporates the Company’s proprietary MEMS technology.
Microvision’s strategy is to design, develop and supply a proprietary display engine called PicoP®, an
ultra-miniature video projector capable of producing large, color rich, high resolution images that is small
and low power enough to be embedded directly into mobile devices, such as cell phones. Microvision is
also marketing PicoP-based miniature projection engines to original equipment manufacturers (OEMs) to
be embedded into a variety of consumer products. The primary goal for consumer display applications is to
provide users with a large screen, high resolution viewing experience from their mobile devices.
Microvision is currently developing a small accessory projector that would be the first commercial product
based on its PicoP display engine. The accessory projector is expected to display images from a variety of
video sources including cell phones, portable media players, PDAs, gaming consoles, laptop computers,
digital cameras, and other consumer electronics products. It would allow users to watch movies, play
videos, and display photos and other data onto a variety of flat or curved surfaces. Microvision expects that
the accessory product will be commercially available during 2009.
The PicoP display engine, with some modification, could be embedded into a vehicle or integrated into a
portable standalone aftermarket device to create a head-up display (HUD) that could project point-by-point
navigation, critical operational, safety and other information important to the vehicle operator. In working
with Tier 1 suppliers, the Company has produced prototypes that demonstrate the PicoP's ability to project
onto an automobile windshield a high-resolution image readable during day or night. The Company
believes that the PicoP display engine could also be modified to be embedded into a pair of glasses to
provide a mobile user with a see-through or occluded personal display to view movies, play games or
access other content. The Company has worked with the U.S. government and commercial customers to
further develop the optical design and integration of the PicoP display engine for wearable applications
such as helmet mounted displays and full color see-through eyewear.
Microvision has incurred significant losses since inception. The Company’s operating plan for 2009
includes the launch of its first accessory product, further development of the PicoP display engine for
embedded applications and further development of HUD and eyewear applications. The Company will
require additional capital in 2009 to fully fund its product launch and its other development efforts.
Microvision’s operating plan calls for the addition of sourcing, technical and other staff and the purchase of
additional laboratory and production equipment. The Company’s capital requirements will depend on
many factors, including, but not limited to, the rate at which it can, directly or through arrangements with
OEMs, introduce products incorporating the PicoP display engine and image capture technologies and the
market acceptance and competitive position of such products, the progress of its research and development
program, 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 revenues are less than
anticipated, if the level and mix of revenues vary from anticipated amounts and allocations or if expenses
exceed the amounts budgeted, the Company may require additional capital earlier than expected to further
the development of its technologies, for expenses associated with product development, and to respond to
competitive pressures or to meet unanticipated development difficulties. In addition, the Company’s
Microvision 2008 Annual Report 15
operating plan provides for the development of strategic relationships with systems and equipment
manufacturers that may require additional investments by Microvision.
The Company plans to obtain additional cash through the issuance of equity or debt securities in the next
several months. 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 or on a timely basis. If adequate
funds are not available during 2009 to fully implement its plan, or planned revenues are not generated, the
Company may be required to reduce the scope of its business to extend its operations as it pursues other
financing opportunities and business relationships. This reduction in scope could include delaying product
launch and projects resulting in reductions in staff and operating costs as well as reductions in capital
expenditures and investment in research and development. With these adjustments to its operating plan, the
Company believes it currently has sufficient cash, cash equivalents, and investment securities to fund
operations through at least February 28, 2010.
Summary of significant accounting policies – Note 2
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the
United States requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Company’s management has identified the following areas where significant
estimates and assumptions have been made in preparing the financial statements: revenue recognition,
valuation of auction-rate securities (“ARS”), allowance for uncollectible receivables and management
loans, inventory valuation and valuation of derivative financial instruments.
Principles of consolidation
The consolidated financial statements include Microvision and equity investments in which Microvision
has the ability to exercise significant influence but does not have voting control.
Cash and cash equivalents; investment securities, available-for-sale; and
fair value of financial instruments
The Company’s financial instruments include cash and cash equivalents, investments available-for-sale,
accounts receivable, accounts payable, accrued liabilities and long-term debt. The carrying value of cash
and cash equivalents, investments available-for-sale other than ARS, accounts receivable, accounts payable
and accrued liabilities approximate fair value due to the short maturities. In the case of the ARS, the
carrying value approximates fair value due to an other than temporary impairment adjustment. The
carrying amount of long-term debt at December 31, 2008 and 2007 was not materially different from the
fair value based on rates available for similar types of arrangements.
The Company accounts for investment securities in accordance with the provisions of Statement of
Financial Accounting Standards (“FAS”) No. 115, Accounting for Certain Investments in Debt and Equity
Securities (“FAS 115”) and FAS No. 157, Fair Value Measurements (“FAS 157”). FAS 115 addresses the
accounting and reporting for investments in equity securities that have readily determinable fair values and
for investments in debt securities. FAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. FAS 157 was issued in September 2006
and the Company’s adoption of FAS 157 effective January 1, 2008 for financial assets and liabilities did
not have a material impact on its consolidated financial position, results of operations or cash flows.
Included in the FAS 157 framework is a three level valuation inputs hierarchy with Level 1 being inputs
and transactions that can be effectively fully observed by market participants spanning to Level 3 where
estimates are unobservable by market participants outside of the Company and must be estimated using
assumptions developed by the Company. The Company discloses the lowest level input significant to each
category of asset or liability valued within the scope of FAS 157 and the valuation method as exchange,
income or use. The Company uses inputs which are as observable as possible and the methods most
applicable to the specific situation of each company or valued item.
16
Microvision 2008 Annual Report
In accordance with FAS 115 and related guidance, the Company considers fair valued assets impaired
when the value is less than cost. When the impairment is significant, the Company judges whether the
impairment is temporary or other-than-temporary. A significant impairment is generally considered other-
than-temporary in the period when there is deemed sufficient reason to conclude that the fair value of the
asset is not expected to fully recover prior to the expected time of sale or maturity.
The Company’s cash equivalents and investment securities available-for-sale are comprised of U.S.
government and agency securities, corporate debt and, since 2007, ARS. The Company classifies
investment securities available-for-sale purchased with 90 days or less remaining until contractual
maturities as cash equivalents. Investment securities purchased with more than 90 days until contractual
maturities are classified as current investment securities available-for-sale on the consolidated balance
sheet with unrealized gains and losses included in the consolidated statement of comprehensive loss.
Interest income, realized gains and losses, and other-than-temporary impairments are recognized in the
period earned or incurred and presented separately in the consolidated statement of operations. Changes in
the fair values of derivatives are realized in the period of remeasurement and recorded in Gain (loss) on
derivative instruments, net in the consolidated statement of operations. The cost of securities sold is based
on the specific identification method.
Inventory
Inventory consists of raw material, work in process and finished goods for the Company’s ROV and Flic
products. Inventory is recorded at the lower of cost or market with cost determined using the weighted-
average method. Management periodically assesses the need to provide for obsolescence of inventory and
adjusts the carrying value of inventory to its net realizable value when required. In addition, Microvision
reduces the value of its inventory to its estimated scrap value when management determines that it is not
probable that the inventory will be consumed through normal production during the next twelve months.
Restricted investments
As of December 31, 2008, restricted investments were in money market funds and serve as collateral for
$1.3 million in irrevocable letters of credit. Two letters of credit totaling $982,000 are outstanding in
connection with a lease agreement for the corporate headquarters building in Redmond, WA. The required
balance decreases over the term of the lease, which expires in 2013. In addition, a $350,000 letter of credit
is outstanding under the terms of a supplier agreement.
Property and equipment
Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (two to
five years) using the straight-line method. Leasehold improvements are depreciated over the shorter of
estimated useful lives or the lease term.
Revenue recognition
Revenue has primarily been generated from contracts for further development of the light scanning
technology and to produce demonstration units for commercial enterprises and the U.S. government. We
recognize contract revenue as work progresses on long-term cost plus fixed fee and fixed price contracts
using the percentage-of-completion method, which relies on estimates of total expected contract revenue
and costs. Our revenue contracts generally include a statement of the work we are to complete and the total
fee we will earn from the contract. When we begin work on the contract and at the end of each accounting
period, we work with the members of our technical team to estimate the labor and material and other cost
required to complete the statement of work compared to cost incurred to date. We use information provided
by project managers, vendors, outside consultants and others as we deem necessary to develop our cost
estimates. Since our contracts generally require some level of technology development to complete, the
actual cost required to complete a statement of work can vary from our estimated cost to complete. We
have developed processes that allow us to make reasonable estimates of the cost to complete a contract.
Historically, we have made only immaterial revisions in the estimates to complete the contract at each
reporting period. Recognized revenues are subject to revisions as the contract progresses to completion and
actual revenue and cost become certain. Revisions in revenue estimates are reflected in the period in which
the facts that give rise to the revision become known. In the future, revisions in these estimates could
significantly impact recognized revenue in any one reporting period. The U.S. government can terminate a
contract with the Company at any time for convenience. If the U.S. government cancels a contract, we
would receive payment for work performed and costs committed to prior to the cancellation.
Microvision 2008 Annual Report 17
The Company recognizes losses, if any, as soon as identified. Losses occur when the estimated direct and
indirect costs to complete the contract exceed unrecognized revenue. The Company evaluates the reserve
for contract losses on a contract-by-contract basis.
Revenue from product shipments is recognized in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition. Revenue is recognized when the product is shipped, there is sufficient evidence of
an arrangement, the selling price is fixed or determinable and collection is reasonably assured. Revenue for
product shipments with acceptance provisions is recognized upon acceptance of the product by the
customer or expiration of the contractual acceptance period, after which there are no rights of return.
Provisions are made for warranties at the time revenue is recorded. Warranty expense was not material for
any periods presented.
Concentration of credit risk and sales to major customers
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily
cash equivalents, investment securities available-for-sale and accounts receivable. The Company typically
does not require collateral from its customers. The Company has an investment policy that generally
directs investment managers to select investments to achieve the following goals: preservation of principal,
adequate liquidity and return. As of December 31, 2008, the Company’s cash and cash equivalents and
investments available-for-sale securities portfolio are comprised of short-term highly rated money market
funds and commercial paper, and the student loan ARS (“SLARS”).
As of December 31, 2008 and 2007, the Company held $3.0 million and $8.8 million in ARS, respectively.
During February through May 2008, $5.8 million in municipal ARS were sold at par value leaving $3.0
million in SLARS. As of December 31, 2008, 90% of total cash and cash equivalents and investment
securities available-for-sale had variable interest rates or are very short-term discount notes traded in active
markets. Therefore, the Company believes its exposure to credit market and interest rate risk is not
material. The remaining 10% is composed of the $3.0 million par value SLARS. The SLARS are highly
rated long-term bonds and are structured with variable interest rate resets to be determined via a Dutch
Auction process every 28 days. However, beginning in February 2008 as global credit markets
significantly deteriorated, each auction has failed rendering the SLARS temporarily illiquid through the
auction process and secondary markets for them. Given the adverse credit market conditions, the fair value
of the principal of these bonds has become affected by changes in interest rates, the spread between short
and long rates, and credit market liquidity. As a result, in the quarter ended September 30, 2008, the
Company estimated that the fair value of the SLARS was approximately $2.7 million and that the $300,000
adjustment was other than temporary. If market conditions worsen, the Company may have to further
adjust the estimated fair value of the SLARS, including additional charges to earnings if it believes the
adjustment is other than temporary. In the event the Company needs access to the funds invested in the
SLARS, it could be required to sell them below the original purchase value. Any of these events could
affect the Company’s consolidated financial condition, results of operations and cash flows. However,
based on the Company’s current operating plan and ability to access its $25.5 million held in cash and cash
equivalents and other highly liquid investments held as of December 31, 2008, it does not expect to be
required to sell the securities materially below the current estimated value.
Concentration of Sales to Major Customers
The United States government accounted for approximately 34%, 61%, and 51% of total revenue during
2008, 2007, and 2006, respectively. Two commercial customers accounted for approximately 15% and
11%, respectively, of total revenue during 2008, one commercial customer accounted for approximately
15% of total revenue during 2007 and one commercial customer accounted for approximately 11% of total
revenue during 2006. Contracts with three commercial customers represented 35%, 22%, and 17% of total
revenues during 2008, 2007 and 2006, respectively. The U.S. government accounted for approximately
19% and 28% of the accounts receivable balance at December 31, 2008 and 2007, respectively.
Income taxes
Deferred tax assets and liabilities are recorded for differences between the financial statement and tax bases
of the assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted
tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
18
Microvision 2008 Annual Report
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is recorded for the amount of income tax payable for the period
increased or decreased by the change in deferred tax assets and liabilities during the period.
Net loss per share
Basic net loss per share is calculated on the basis of the weighted-average number of common shares
outstanding during the periods. Net loss per share assuming dilution is calculated on the basis of the
weighted-average number of common shares outstanding and the dilutive effect of all potentially dilutive
securities, including common stock equivalents and convertible securities. Net loss per share assuming
dilution is equal to basic net loss per share because the effect of dilutive securities outstanding during the
periods including options and warrants computed using the treasury stock method, is anti-dilutive.
As of December 31, 2008, 2007, and 2006, the Company excluded the following convertible securities
from diluted net loss per share as the effect of including them would have been anti-dilutive. The shares
shown represent the number of shares of common stock which would be issued upon conversion as of
December 31, 2008, 2007, and 2006.
Publicly traded warrants
Options and private warrants
Notes payable
2008
6,703,000
9,804,000
--
De cember 31,
2007
--
9,518,000
--
2006
12,362,000
10,906,000
620,000
16,507,000
9,518,000
23,888,000
Research and development
Research and development costs are expensed as incurred.
Fair value of financial instruments
The Company’s financial instruments generally include cash and cash equivalents, investments available-
for-sale, accounts receivable, accounts payable, accrued liabilities and long-term debt. The carrying
amount of long-term debt at December 31, 2008 and 2007 was not materially different from the fair value
based on rates available for similar types of arrangements. The carrying value of the Company’s financial
instruments, other than ARS, approximates fair value due to the short maturities.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets when an impairment is indicated based
on expected undiscounted cash flows and recognizes impairment of the carrying value of long-lived assets,
if any, based on the fair value of such assets.
Stock-based compensation
The Company has one stock-based incentive compensation plan as of December 31, 2008 and a separate
board of director stock-based compensation plan. In June 2008, the Company determined it would no
longer issue additional options from the Independent Director Stock Option Plan. Both are more fully
described in Note 11.
The Company accounts for stock-based employee compensation arrangements in accordance with the
provisions of FAS No. 123, as revised December 2004, Share-Based Payment (“FAS 123(R)”). The
Company adopted FAS123(R) effective January 1, 2006. The Company accounts for non-employee share-
based compensation in accordance with the provisions of FAS No. 123 and Emerging Issues Task Force
(“EITF”) Issue No. 96-18. The following table shows the amount of stock-based compensation expense
included in the statements of operations for each period shown:
Microvision 2008 Annual Report 19
Cost of contract revenue
Cost of product revenue
Research and development expense
Year Ended Dece mber 31,
2008
2007
$
85,000
$
138,000
$
25,000
824,000
20,000
365,000
Sales, marketing, general and administrative expense
1,873,000
1,274,000
2006
80,000
70,000
246,000
1,429,000
$
2,807,000
$
1,797,000
$
1,825,000
Reclassifications
Certain reclassifications have been made to prior year financial statements to conform to classifications
used in the current year. These reclassifications had no impact on net loss, shareholders’ equity or cash
flows as previously reported.
New accounting pronouncements
In October 2008, the Financial Accounting Standards Board (“FASB”) released a FASB Staff Position,
FSP FAS 157-3 — Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not
Active, to clarify the application of the provisions of FAS 157 in an inactive market. Implementing this
standard upon its issuance did not have a material impact on the Company’s consolidated financial position
and results of operations.
In February 2008, the FASB released a FASB Staff Position, FSP FAS 157-2 — Effective Date of FASB
Statement No. 157, which delays the effective date of FAS 157 for all nonfinancial assets and liabilities,
except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to
fiscal years beginning after November 15, 2008. The Company is currently assessing the financial impact
of FSP FAS 157-2 on its financial statements.
In June 2007, the EITF reached a final consensus on EITF Issue No. 07-1, Accounting for Collaborative
Arrangements (“EITF 07-1”). EITF 07-1 discusses how to determine whether an arrangement constitutes a
collaborative arrangement, how costs incurred and revenue generated on sales to third parties should be
reported by the participants, how an entity should characterize payments made between participants and
what participants should disclose in the notes to the financial statements about a collaborative arrangement.
EITF 07-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008
and interim periods within those fiscal years. The Company is currently assessing the financial impact of
EITF 07-1 on its financial statements.
Long-term contracts – Note 3
Cost and estimated earnings in excess of billings on uncompleted contracts comprises amounts of revenue
recognized on contracts that the Company has not yet billed to customers because the amounts were not
contractually billable at December 31, 2008 and 2007. The following table summarizes when the Company
will be contractually able to bill the balance as of December 31, 2008 and 2007.
Billable within 30 days
Billable between 31 and 90 days
Billable after 90 days
Year Ended Decembe r 31,
2008
2007
688,000
$
434,000
--
7,000
--
9,000
695,000
$
443,000
$
$
The Company’s current contracts with the U.S. government are primarily cost plus fixed fee type contracts.
Under the terms of a cost plus fixed fee contract, the U.S. government reimburses the Company for
negotiated actual direct and indirect cost incurred in performing the contracted services. The Company is
under no obligation to spend more than the contract value to complete the contracted services. The period
of performance is generally one year. Each of the Company’s contracts with the United States government
20
Microvision 2008 Annual Report
can be terminated for convenience by the government at any time. To date, the U.S. government has not
terminated a contract with the Company.
In December 2007, we entered into a $1 million contract with a commercial customer to develop prototype
units based on our PicoP technology, for evaluation of future consumer electronics product applications.
The development work under this contract was initiated and fully completed in 2008.
In May 2007, the Company announced that it had entered into a $3,181,000 contract with the U.S. Air
Force to provide a lightweight, see-through, full-color eyewear display prototype to the government. The
contract, which continues a development effort with the Air Force, specifies the development, design,
verification, testing, and delivery of a lightweight, see-through full-color wearable display for evaluation by
several DOD project offices. As of December 31, 2008 this contract had been completed.
In September 2006, the Company entered into a 12 month development agreement with Visteon, a major
global Tier 1 automotive supplier, to develop a commercial scanned-beam head-up display (HUD) product
for automotive applications. Under the agreement, Visteon and Microvision will design and produce a
series of advanced HUD samples, including devices specifically designed to be compatible with automotive
environmental requirements. As of December 31, 2007 this contract had been completed.
In September 2006, the Company entered into an 18 month, $5,945,000 contract with General Dynamics
C4 Systems to supply full-color, daylight readable, see-through helmet-mounted displays as part of the U.S.
Army's Mounted Warrior HMD Improvement Program. General Dynamics holds prime contracts with the
U.S. Army for other Warrior programs including Land Warrior, Air Warrior and Future Force Warrior
Advanced Technology Demonstration. The contract specifies the development and delivery of ten full-
color display units for evaluation. As of December 31, 2008 this contract had been completed.
The following table summarizes the costs incurred on the Company’s revenue contracts:
Costs and estimated earnings incurred on uncompleted contracts
Billings on uncompleted contracts
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted
contracts
Billings in excess of costs and estimated earnings on uncompleted
contracts
December 31,
December 31,
2008
14,166,000
(13,533,000)
633,000
$
$
2007
9,357,000
(9,884,000)
(527,000)
695,000
$
443,000
(62,000)
633,000
$
(970,000)
(527,000)
$
$
$
$
Cash equivalents, investment securities, available-for-sale, and fair value measurements – Note 4
The Company accounts for investment securities in accordance with the provisions of FAS 115 and FAS
157. General descriptions of each are included in Note 2.
FAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a
liability in its principal or most advantageous market in an orderly transaction between market participants
on the measurement date. FAS 157 establishes a three level fair value inputs hierarchy, and requires an
entity to maximize the use of observable valuation inputs and minimize the use of unobservable inputs. A
company is to utilize market data, assumptions and risks it believes market participants would use in
measuring the fair value of the asset or liability, including the risks inherent in the inputs and the valuation
techniques. The hierarchy is summarized below.
Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Microvision 2008 Annual Report 21
Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in markets that are not
sufficiently active to qualify as level 1 or, other observable inputs.
Level 3 - Unobservable inputs for which there is little or no market data, which requires a company to
develop its own assumptions, which are significant to the measurement of the fair values.
The Company’s investment securities are comprised of debt securities. Generally, they are issued by the
U.S. government, its agencies, corporations, and currently, student loan financial aid organizations.
Accounting for these investments is discussed in Note 2.
The principal markets for the debt securities are dealer markets which have a high level of price
transparency. The market participants for debt securities are typically large money center banks and
regional banks, brokers, dealers, pension funds, and other entities with debt investment portfolios.
As of December 31, 2007, the Company held $8.8 million aggregate par value of ARS, $5.8 million in
municipal ARS and $3.0 million in SLARS. The municipal ARS were sold at par value during the period
from February through May 2008.
At December 31, 2008, the Company continued to hold $3.0 million par value SLARS. The SLARS
owned by the Company are highly rated long-term bonds, structured with variable interest rate resets,
purchases and sales to be determined via a Dutch Auction process every 28 days. They were issued to fund
US government guaranteed student loans. However, beginning in February 2008 as global credit markets
significantly deteriorated, insufficient clearing bids have been submitted for the SLARS. The auctions
have thus failed, the interest rates have been reset to “maximum rates” instead of “auction rates” and the
SLARS have been temporarily illiquid through the auction process and secondary ARS markets.
At the time of the Company’s initial investment, and through the filing date of this report, the SLARS held
by the Company have maintained the following credit factors:
•
•
•
•
guaranteed by the Federal Family Education Loan Program (“FFELP”) and other federal and state
student loan guarantee programs,
collateralized by the student loans funded with the SLARS proceeds and collections thereon,
no declines in the credit ratings of the issuers; and,
no material changes in loan collection rates.
At the time of the Company’s initial investment, the SLARS and AMBAC, the insurer of half of the
SLARS, held AAA ratings. As of December 31, 2008, one of the SLARS was downgraded to A by only
one of its rating services. Based on its revised lower rating of AMBAC, Moody’s reduced its rating on the
insured SLARS to that of AMBAC, Baa1. AMBAC has since been down-graded to A by Standard &
Poor’s and to Baa1 by Moody’s rating services. AMBAC is continuing actions to manage its credit rating.
The US government guarantee on the student loan collateral reduces the impact of the ratings changes on
the SLARS.
Prior to June 30, 2008, the Company used the market approach to measure fair values of its investments in
all debt and equity securities and the income approach for derivatives. Under the market approach, prices
and other relevant information generated by market transactions involving identical or comparable assets or
liabilities are used to estimate values. Under the income approach, valuation techniques to convert future
amounts to a single present amount are used. During the quarter ended June 30, 2008, the Company
determined the market did not have sufficient liquidity and market participant activity to continue
supporting the market approach to value its SLARS, and changed to the income approach.
As of September 30, 2008, based on continuing low market liquidity and auction failures with significant
uncertainty as to when such conditions would improve, the Company determined that the estimated fair
value of the SLARS no longer approximated par value, and the impairments were other-than-temporary.
The Company used a discounted cash flow model, with rates adjusted for liquidity, to determine the
estimated fair values of the SLARS as of September 30, 2008 and recorded an “impairment of investment
securities, available-for-sale” of $300,000 on the consolidated statement of operations. The Company also
reclassified the SLARS from Level 2 to Level 3 of the fair value hierarchy because of the significance of
sufficiently unobservable assumptions and inputs developed by the Company and used in the valuations.
22
Microvision 2008 Annual Report
As of December 31, 2008, the Company derived the same conclusions regarding the valuation approach,
inputs hierarchy and fair values for the SLARS.
The following table summarizes the activity for those financial assets where fair value measurements are
estimated utilizing Level 3 inputs:
Balance, December 31, 2007
T ransfer into Level 3, September 30, 2008
Recognized loss included in earnings
Balance, December 31, 2008
$
$
--
3,000,000
(300,000)
2,700,000
The valuation inputs hierarchy classification for assets and liabilities measured at fair value on a recurring
basis in accordance with FAS 157 are summarized below as of December 31, 2008:
Assets
Corporate debt securities
Auction rate securities
Liabilities
Liability associated with
common stock warrants
Level 1
Level 2
Leve l 3
Total
$
$
--
--
--
$
$
$
4,984,000
--
4,984,000
$
$
--
2,700,000
2,700,000
331,000
$
$
$
4,984,000
2,700,000
7,684,000
331,000
The corporate debt securities are classified within Level 2 of the fair value hierarchy because they are
valued using actual and quoted pricing sources with sufficient levels of price transparency using the market
approach. The liability associated with common stock warrants is classified within Level 2 because it is
valued using the Black-Scholes option valuation method using inputs with sufficient levels of observability
using the income approach. Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
The Company’s investments and liability associated with common stock warrants are summarized below as
of December 31, 2008 and December 31, 2007.
Microvision 2008 Annual Report 23
Cost/
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cash
Investment
Securities,
Available-
Cost
Gains
Losses
Fair Value
Equivalents
For-Sale
Liability
Associated
With
Common
Stock
Warrants
Other
Current
Assets
Classification on Balance Sheet
$
$
5,022,000
$
2,700,000
7,722,000
$
--
--
--
$
$
(38,000) $
4,984,000
$
4,979,000
$
5,000
$
--
2,700,000
--
2,700,000
(38,000) $
7,684,000
$
4,979,000
$
2,705,000
$
--
--
--
$
331,000
$
331,000
Classification on Balance Sheet
Cost/
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cash
Investment
Securities,
Available-
Cost
Gains
Losses
Fair Value
Equivalents
For-Sale
Liability
Associated
With
Common
Stock
Warrants
Other
Current
Assets
As of December 31, 2008:
Assets
Corporate debt securities
Auction-rate securities
Liabilities
Liability associated with
common stock warrants
As of December 31, 2007:
Assets
Corporate debt securities
$
9,074,000
$
54,000
$
(5,000) $
9,123,000
$
U.S. government and agency securities
Auction-rate securities
Warrants
4,486,000
8,800,000
--
3,000
--
--
(1,000)
--
--
4,488,000
8,800,000
130,000
$
22,360,000
$
57,000
$
(6,000) $
22,541,000
$
--
--
--
--
--
$
9,123,000
$
4,488,000
8,800,000
--
$
22,411,000
$
--
--
--
130,000
130,000
Liabilities
Liability associated with
common stock warrants
$
2,657,000
$
2,657,000
As of December 31, 2008, the unrealized losses on the Company’s investments in debt securities were due
primarily to changes in interest rates and credit market conditions.
The realized gains and losses associated with the liability attributed to common stock warrants were
primarily due to changes in the Microvision stock price and decreasing terms to expiration.
The maturities of the investment securities available-for-sale as of December 31, 2008 are shown below:
Gross
Gross
Amortized
Unrealiz ed
Unrealize d
Cost
Gains
Losses
Estimated
Fair Value
$
$
5,022,000
--
2,700,000
7,722,000
--
(38,000) $
4,984,000
--
2,700,000
$
7,684,000
Maturity date:
Less than one year
Due in 1-3 years
Greater than five years
Inventory – Note 5
Inventory consists of the following:
24
Microvision 2008 Annual Report
Raw materials
Work in process
Finished goods
December 31,
December 31,
2008
2007
45,000
$
--
1,480,000
1,525,000
$
122,000
10,000
629,000
761,000
$
$
The inventory at December 31, 2008 and 2007 consisted of raw materials, work in process and finished
goods for ROV and the discontinued Flic bar code product. Inventory is stated at the lower of cost or
market, with cost determined on a weighted average basis. Management periodically assesses the need to
provide for obsolescence of inventory and adjusts the carrying value of inventory to its net realizable value
when required. In addition, Microvision reduces the value of its inventory to its estimated scrap value
when management determines that it is not probable that the inventory will be consumed through the
normal course of business during the next twelve months. In 2008, 2007, and 2006, Microvision recorded
inventory write-downs of $475,000, $84,000, and $1,181,000, respectively. During the second quarter of
2006, the Company determined that it would no longer promote the Nomad product and recorded an
expense of $210,000 to reduce the value of Nomad inventory to zero. In addition, the Company recorded
$100,000 as additional accelerated depreciation expense related to fixed assets used in Nomad production.
Both inventory and fixed asset balances related to Nomad production were zero at December 31, 2008 and
December 31, 2007.
Accrued liabilities – Note 6
Accrued liabilities consist of the following:
Bonuses
Payroll and payroll taxes
Compensated absences
Deferred rent credit
Adverse purchase commitments
Professional fees
Other
Property and equipment, net – Note 7
Property and equipment consists of the following:
December 31,
2008
2007
500,000
$
1,500,000
809,000
623,000
311,000
119,000
343,000
840,000
656,000
458,000
306,000
--
447,000
787,000
3,545,000
$
4,154,000
$
$
Microvision 2008 Annual Report 25
Production equipment
Leasehold improvements
Computer hardware and software/lab equipment
Office furniture and equipment
Less: Accumulated depreciation
December 31,
2008
2007
3,124,000
$
3,310,000
7,192,000
1,496,000
15,122,000
(11,421,000)
2,815,000
3,304,000
6,879,000
1,490,000
14,488,000
(10,441,000)
3,701,000
$
4,047,000
$
$
Depreciation expense was $989,000, $953,000, and $1,218,000 in 2008, 2007, and 2006, respectively.
Receivables from related parties – Note 8
In 2000, 2001 and 2002, the Board of Directors authorized the Company to provide unsecured lines of
credit to each of the Company's three officers. The lines of credit carry interest rates of 5.4% to 6.2% and
were due within one year of the officer's termination.
In January 2006, two officers with outstanding loans left the Company and their loans became due in
January 2007. In May 2007, the Company foreclosed on 50,000 shares of Lumera common stock pledged
as collateral for one of the officer's loans and sold the shares for net proceeds of $227,000. A third officer
with outstanding loans left the Company in August 2007 and his loans became due in August 2008.
Under the terms of a settlement agreement with one of the former officers who left in January 2006, the
Company received payments of $241,000 in 2008. The Company is pursuing collection of the remaining
outstanding balances from the other former officers.
As of December 31, 2008 and December 31, 2007, the total amount outstanding under the lines of credit
was $1,851,000 and $2,496,000, respectively. As of December 31, 2008 and December 31, 2007, the
allowance for receivables from related parties was $1,851,000 and $2,496,000, respectively.
The interest on the lines of credit is forgiven if the executive is an employee of the Company at December
31 of the respective year. Compensation expense of $22,000 was recognized in 2006, for interest forgiven.
Common stock – Note 9
In July 2008, the Company raised approximately $26.0 million, before issuance costs of approximately
$2.0 million, through a registered direct public offering of 11,172,000 shares of common stock and
warrants to purchase 6,703,000 shares of its common stock. Details of the warrants are described below in
Note 10.
On June 21, 2007, the Company exercised its right to call its publicly traded warrants issued in 2006. The
Company received $34.1 million from the exercise of 12,855,000 publicly traded warrants.
In November 2006, the Company raised $7.9 million, before issuance costs of $779,000, through an
underwritten public offering of 3,318,000 shares of its common stock.
In June and July 2006, the Company raised an aggregate of $27.1 million, before issuance costs of $2.2
million, through an underwritten public offering of 11.6 million shares of its common stock and warrants to
purchase 12.4 million shares of its common stock. The warrants had an exercise price of $2.65 per share, a
five year term, and were not exercisable for one year from the date of issuance. The Company could call
the warrants after one year from the date of issuance if the average closing bid price of its stock exceeded
$5.30 for any 20 consecutive trading days. In connection with the offering, the Company issued the
26
Microvision 2008 Annual Report
underwriter a warrant to purchase 537,500 shares of Microvision common stock at an exercise price of
$2.76 per share. The Company also issued the underwriter a warrant to acquire 537,500 warrants, identical
to those sold in the offering, at an exercise price of $0.16 per warrant. Both underwriter warrants were
issued with a 4 year term. In June 2007, the Company called the public warrants as described above and
the underwriter exercised the warrants for warrants in connection with the call.
Warrants – Note 10
In July 2008, the Company raised approximately $26.0 million, before issuance costs of approximately
$2.0 million, through a registered direct public offering of 11,172,000 shares of our common stock and
warrants to purchase 6,703,000 million shares of our common stock. The warrants have an exercise price
of $3.60 per share, a five year term, and are not exercisable for one year from the date of issuance. The
Company can call the warrants after one year from the date of issuance if the average closing bid price of
its stock is over $7.20 (200% of exercise price) for any 20 consecutive trading days. The warrants are
listed on the NASDAQ Global Market under the ticker “MVISW”.
On June 21, 2007, the Company exercised its right to call its publicly traded warrants issued in its June and
July 2006 financing transactions. The Company received $34.1 million from the exercise of 12,855,000
publicly traded warrants. A total of 45,000 warrants expired unexercised.
The following summarizes activity with respect to Microvision common stock warrants during the three
years ended December 31, 2008:
O utstanding at De ce mbe r 31, 2005
Granted:
Exercise price greater than intrinsic value
Exercise price equal to intrinsic value
Exercised
Canceled/expired
O utstanding at De ce mbe r 31, 2006
Granted:
Exercise price greater than intrinsic value
Exercise price equal to intrinsic value
Exercised
Canceled/expired
O utstanding at De ce mbe r 31, 2007
Granted:
Exercise price greater than intrinsic value
Exercise price equal to intrinsic value
Exercised
Canceled/expired
O utstanding at De ce mbe r 31, 2008
Exe rcisable at De ce mbe r 31, 2008
Warrants to
purchase
common
share s
4,120,000
12,900,000
537,000
--
--
17,557,000
537,000
25,000
(13,803,000)
(252,000)
4,064,000
--
6,703,000
--
--
(1,257,000)
9,510,000
2,807,000
$
$
We ighte d
ave rage
e xce rcise
price
6.99
2.66
2.81
--
--
3.50
2.65
3.42
2.59
6.30
6.19
--
3.60
--
--
6.11
4.32
6.04
The following table summarizes information about the weighted-average fair value of Microvision
common stock warrants granted for the periods shown:
Microvision 2008 Annual Report 27
Exercise price greater than fair value
Exercise price equal to fair value
Exercise price less than fair value
Year Ended December 31,
2008
2007
2006
$
1.59
$
--
$
--
--
2.08
0.47
1.81
--
2.00
The fair values of the Microvision common stock warrants granted were estimated on the respective grant
dates using the Black-Scholes option pricing model with the following weighted-average assumptions used
for grants in 2008, 2007, and 2006, respectively: dividend yield of zero percent for all years; expected
volatility of 65%, 47%, and 65%; risk-free interest rates of 3.2%, 4.9%, and 5.0% and expected lives of 5,
0.3, and 5 years, respectively.
The following table summarizes information about Microvision common stock warrants outstanding and
exercisable at December 31, 2008:
Warrants outstanding
Weighted
average
remaining
contractual
life (years)
Weighted
ave rage
exce rcise
price
Number
outstanding at
De cember 31,
2008
472,000
7,065,000
1,304,000
469,000
200,000
9,510,000
$
2.24
4.36
1.87
1.19
1.61
2.93
3.60
3.91
5.03
34.00
Warrants exercisable
Number
excercisable at
December 31,
2008
Weighted
average
excercise
price
$
472,000
362,000
1,304,000
469,000
200,000
2,807,000
2.93
3.61
3.91
5.03
34.00
Range of exercise prices
$2.76-$3.51
$3.60-$3.61
$3.77-$3.94
$5.03-$5.32
$34.00
$2.76-$34.00
Share-Based Compensation – Note 11
The Company accounts for equity instruments issued to employees in accordance with the provisions of
FAS123(R). FAS 123(R) requires all employee share-based awards to be valued at fair value and expensed
over the applicable service period. The valuation of and accounting for share-based awards includes a
number of complex and subjective estimates. These estimates include, but are not limited to, the future
volatility of the Company’s stock price, future employee stock option exercise behaviors and future
employee terminations. The Company uses the estimated forfeiture and straight-line expense attribution
methods.
As a result of adopting FAS 123(R), the Company’s net loss for each of the years ended December 31,
2008, 2007 and 2006 included $2.8 million, $1.8 million and $1.8 million of share-based employee
compensation expense. In addition, basic and diluted net loss per share was greater by $0.05, $0.04 and
$0.05 per share, respectively.
The share-based employee compensation expense charged against loss was as shown below (in thousands):
Share-based employee compensation expense charged against loss $
2,807
$
1,797
$
1,825
Year Ended Dece mber 31,
2008
2007
2006
28
Microvision 2008 Annual Report
The Company accounts for equity instruments issued to non-employees in accordance with the provisions
of FAS 123 and EITF 96-18.
Stock Option Exchange
Subject to the terms of its tender offer filed in April 2006, on May 17, 2006, the Company exchanged 2.2
million existing options for 2.2 million new options affecting 105 employees. The new options have an
exercise price of $2.77. The new options vested 25% on the grant date and will vest 25% on each
subsequent annual anniversary. The tender offer did not result in the acceleration of vesting of any options.
The new options have the same expiration dates as the options exchanged. The Company also adjusted the
exercise price of 386,000 options not subject to the tender offer to $2.77 on the same date affecting 19
employees.
The tender offer was accounted for in accordance with FAS 123(R). The Company will recognize
$496,000 incremental fair value as additional non-cash compensation. The incremental expense is
recognized ratably over the vesting periods of the options, 25% on the grant date with the remaining 75%
straight-line over the remaining vesting period. The incremental fair value of the modified options was
estimated using the Black-Scholes option pricing model with the following assumptions.
Weighted average:
Exercise price
Volatility
Expected term (years)
Risk free rate
Pre-vest forfeiture rate
Description of Incentive Plans
Pre-
Post-
modification
modification
$
$
8.84
73%
6.9
5.0%
5.0%
2.77
65%
4.2
5.0%
5.0%
The Company currently has two share-based incentive plans. The 2006 Incentive Plan described below is
administered by the Board of Directors, or its designated committee ("Plan Administrator"), and provides
for various awards as determined by the Plan Administrator. The Company terminated using a second
share-based incentive plan, the Independent Director Stock Option Plan described below, in June 2008.
In July 2006, the 1996 Stock Option Plan (the “1996 Plan”) expired. In September 2006, Company
shareholders approved the 2006 Microvision, Inc. Incentive Plan which amends, restates and renames the
1996 Plan (“2006 Incentive Plan”). All awards outstanding under the 1996 Plan remain outstanding under
the 2006 Incentive Plan. The 2006 Incentive Plan retained the 8.0 million share authorization of the 1996
Plan and permits granting non-qualified stock options (“NSOs”), incentive stock options (“ISOs”), stock
appreciation rights, restricted or unrestricted stock, deferred stock, other share-based awards, or cash
awards to employees, officers and certain non-employees of the Company. Any award may be a
performance-based award. Awards granted under the 2006 Incentive Plan have generally been to
employees under non-qualified stock option agreements with the following provisions: exercise prices
greater than or equal to the Company’s closing stock price on the date of grant; vesting periods ranging
from three years to four years; expiration 10 years from the date of grant; and optionees who terminate their
service after vesting have a limited time to exercise their options (typically three to twelve months). In
June 2008, the Company shareholders approved an amendment to the 2006 Incentive Plan to increase the
common stock reserved for issuance under the plan to 11.4 million shares and allow non-employee
directors to participate in the plan.
The Independent Director Stock Option Plan (“IDSOP”) has 900,000 shares authorized and permits
granting NSOs to independent directors of the Company. In June 2005, shareholders approved an
amendment to the Director Option Plan, increasing the number of shares reserved for the plan by 400,000
to 900,000 shares. Under the IDSOP, upon initial election or appointment to the Board of Directors,
Microvision 2008 Annual Report 29
Directors received a fully vested option to purchase 15,000 shares of common stock and a second option to
purchase 15,000 shares of common stock. Upon reelection to the Board, Directors received a subsequent
option to purchase 15,000 shares of common stock. The second initial option grant and any reelection
grant vested the earlier of one year from date of grant or the day before the next regularly scheduled annual
shareholder meeting. Grants awarded under the IDSOP generally, had the following terms: exercise price
equal to the Company’s closing stock price on the date of grant, expiration 10 years from the date of grant,
and vested grants remain exercisable until their expiration dates if a director leaves the Board. In June
2008, the Company shareholders approved an amendment to the 2006 Incentive Plan described above to
allow non-employee directors to participate in the plan. Annual grants were made to independent directors
from the IDSOP concurrent with each director’s annual reelection in June 2008. The Company does not
intend to issue additional options from the IDSOP.
Options Valuation Methodology and Assumptions
The Company uses the Black-Scholes option valuation model to determine the fair value of options granted
and uses the closing price of its common stock as the fair market value of its stock on that date.
The Company considers historical stock price volatilities, volatilities of similar companies and other factors
in determining its estimates of future volatilities.
The Company uses historical lives, including post-termination exercise behavior, publications, comparable
company estimates, and other factors as the basis for estimating expected lives.
Risk free rates are based on the U.S. Treasury Yield Curve as published by the U.S. Treasury.
The following table summarizes the weighted-average valuation assumptions and weighted-average grant
date fair value of options granted, excluding grants issued under the Company's tender offer which require
an incremental valuation methodology and are disclosed above, during the periods shown below:
Year Ended Dece mber 31,
2008
2007
2006
Assumptions (weighted average)
Volatility
Expected term (in years)
Risk-free rate
Expected dividends
Pre-vest forfeiture rate
65%
5.1
3.0%
--
5.0%
68%
6.2
5.0%
--
5.0%
Grant date fair value of options granted
$
1.32
$
2.67
$
72%
6.1
5.0%
--
5.0%
2.26
Options Activity and Positions
The following table summarizes activity and positions with respect to options for the year ended December
31, 2008:
30
Microvision 2008 Annual Report
Options
Shares
Weighted
Average
Weighted
Remaining
Average
Exercise
Price
Contractual
Aggregate
Term
(years)
Intrinsic
Value
Outstanding at December 31, 2005
5,320,000 $
11.09
6.8 $
3,000
Granted *
Exercised
Forfeited or expired *
Outstanding as of December 31, 2006
Granted
Exercised
Forfeited or expired
Outstanding as of December 31, 2007
Granted
Exercised
Forfeited or expired
Outstanding as of December 31, 2008
Vested and expected to vest as of December 31, 2008
Exercisable as of December 31, 2008
4,280,000
(16,000)
(3,873,000)
5,711,000
1,617,000
(84,000)
(1,790,000)
5,454,000
2,276,000
(143,000)
(590,000)
6,997,000 $
6,745,000 $
3,163,000 $
2.99
2.77
9.62
6.04
4.08
2.78
9.05
4.52
2.33
2.72
2.93
3.98
4.02
5.12
6.9
1,384,000
6.9
3,320,000
7.2 $
63,000
7.1 $
59,000
6.1 $
27,000
* Includes 2.2 million shares exchanged pursuant to stock option exchange disclosed above
The total intrinsic value of options exercised during the years ended December 31, 2008, 2007, and 2006
were $87,000, $163,000, and $5,000, respectively.
As of December 31, 2008, the Company’s unamortized share-based compensation was $4.7 million. The
Company plans to amortize this share-based compensation cost over the next 2.4 years.
In October 2008, the Company’s Board of Directors approved the payment of one half of each independent
director’s annual retainer fee to be paid in the Company’s common stock. The common stock was valued
at intrinsic value on the date of grant. A total of $50,000 was expensed on the grant date. Each
independent director received 7,092 shares of common stock.
In March 2008, the Company’s Board of Directors approved the issuance of 125,000 nonvested equity
shares of the Company’s common stock to the executive employees under the terms and conditions of the
2006 Incentive Plan. The shares vest over a three year period from the date of grant. The nonvested equity
shares were valued at intrinsic value on the date of grant and the share-based compensation expense will be
amortized over the three year service period.
As of December 31, 2008, the Company’s unamortized nonvested equity share-based compensation was
$177,000. The Company plans to amortize this nonvested equity share-based compensation over the next
2.2 years.
Commitments and contingencies – Note 12
Agreements with the University of Washington (“UW”)
In October 1993, the Company entered into a Research Agreement and an exclusive license agreement
(“License Agreement”) with the UW. The License Agreement grants the Company the rights to certain
intellectual property, including the technology being subsequently developed under the Microvision
Microvision 2008 Annual Report 31
research agreement (“Research Agreement”), whereby the Company has an exclusive, royalty-bearing
license to make, use and sell or sublicense the licensed technology. In consideration for the license, the
Company agreed to pay a one-time nonrefundable license issue fee of $5,134,000. Payments under the
Research Agreement were credited to the license fee. In addition to the nonrefundable fee, which has been
paid in full, the Company is required to pay certain ongoing royalties. Beginning in 2001, the Company is
required to pay the UW a nonrefundable license maintenance fee of $10,000 per quarter, to be credited
against royalties due.
Litigation
The Company has sued its former CEO and President Richard Rutkowski and his spouse to collect
$1,733,000 in outstanding loans from the Company that were due in January 2007 and remain unpaid.
Counterclaims were filed by Mr. Rutkowski and his spouse, seeking to recover damages in an amount in
excess of $15,000,000. The Company believes these claims are without merit and intends to defend them
vigorously. However, an adverse outcome could have a material adverse affect on its financial condition.
The Company is subject to other various claims and pending or threatened lawsuits in the normal course of
business. The Company is not currently party to any such other legal proceedings that management
believes would have a material adverse effect on the Company's financial position, results of operations or
cash flows.
Lease commitments
The Company leases its office space and certain equipment under noncancelable capital and operating
leases with initial or remaining terms in excess of one year.
The Company entered into a 90 month facility lease that commenced in February 2006. The lease includes
extension and rent escalation provisions over the 90 month term of the lease. Rent expense will be
recognized on a straight-line basis over the lease term.
Future minimum rental commitments under capital and operating leases for years ending December 31 are
as follows:
2009
2010
2011
2012
2013
T hereafter
T otal minimum lease payments
Less: Amount representing interest
Present value of capital lease obligations
Less: Current portion
Capital
leases
O perating
leases
$
47,000
$
40,000
8,000
--
--
--
844,000
870,000
904,000
938,000
564,000
--
95,000
$
4,120,000
(9,000)
86,000
(41,000)
45,000
Long-term obligation at December 31, 2008
$
The capital leases are collateralized by the related assets financed and by security deposits held by the
lessors under the lease agreements. The cost and accumulated depreciation of equipment under capital
leases was $1,017,000 and $932,000, respectively, at December 31, 2008 and $1,017,000 and $886,000,
respectively, at December 31, 2007.
32
Microvision 2008 Annual Report
Net rent expense was $861,000, $830,000, and $1,082,000 for 2008, 2007, and 2006, respectively. Sub-
lease income of $0, $0, and $125,000 for 2008, 2007, and 2006, respectively, was included as a reduction
in rent expense.
Long-term debt
During 2006, the Company entered into a loan agreement with the lessor of the Company’s corporate
headquarters in Redmond to finance $536,000 in tenant improvements. The loan carries a fixed interest
rate of 9% per annum, is repayable over the initial term of the lease, which expires in 2013, and is secured
by a letter of credit. The balance of the loan was $393,000 at December 31, 2008.
Adverse purchase commitments
The Company has periodically entered into noncancelable purchase contracts in order to ensure the
availability of materials to support bar code scanner production. Management periodically assesses the
need to provide for impairment on these purchase contracts and records a loss on purchase commitments
when required. In December 2008, the Company recorded a loss of $119,000 to cost of product revenue as
a result of commitments to purchase materials for the ROV scanner that were in excess of its estimated
future proceeds from the sale of the ROV scanners. In December 2006, the Company recorded a loss of
$310,000 to cost of product revenue as a result of commitments to purchase materials for the Flic scanner
that are were excess of its estimated future proceeds from the sale of the Flic scanners.
Income taxes – Note 13
A provision for income taxes has not been recorded for 2008, 2007, and 2006 due to the valuation
allowances placed against the net operating losses and deferred tax assets arising during such periods. A
valuation allowance has been recorded for all deferred tax assets because based on the Company's history
of losses since inception, the available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets.
At December 31, 2008, Microvision has net operating loss carry forwards of approximately $217.6 million,
for federal income tax reporting purposes. In addition, Microvision has research and development tax
credits of $4.3 million. The net operating loss carry forwards and research and development credits
available to offset future taxable income, if any, will expire in varying amounts from 2009 to 2027 if not
previously utilized. In certain circumstances, as specified in the Internal Revenue Code, a 50% or more
ownership change by certain combinations of the Company’s stockholders during any three-year period
would result in limitations on the Company’s ability to utilize its net operating loss carry-forwards. The
Company has determined that such a change occurred during 1995 and the annual utilization of loss carry-
forwards generated through the period of that change will be limited to approximately $761,000. An
additional change occurred in 1996; and the limitation for losses generated in 1996 is approximately
$1,600,000.
Deferred tax assets are summarized as follows:
Microvision 2008 Annual Report 33
Deferred tax assets, current
Reserves
Other
T otal gross deferred tax assets, current
Deferred tax assets, noncurrent
Net operating loss carryforwards
R&D credit carryforwards
Depreciation/amortization deferred
Other
T otal gross deferred tax assets, noncurrent
Deferred tax liabilities, noncurrent
Convertible debt
T otal gross deferred tax liabilities, noncurrent
Net deferred taxes before valuation allowance
Less: Valuation allowance
Deferred tax assets
De ce mbe r 31,
2008
2007
$
1,990,000
$
2,460,000
996,000
2,986,000
712,000
3,172,000
74,605,000
4,258,000
15,665,000
3,520,000
98,048,000
68,658,000
3,601,000
10,848,000
2,581,000
85,688,000
(1,828,000)
(1,828,000)
99,206,000
(1,209,000)
(1,209,000)
87,651,000
(99,206,000)
(87,651,000)
$
--
$
--
The valuation allowance and the research and development credit carry forwards account for substantially
all of the difference between the Company’s effective income tax rate and the Federal statutory tax rate of
34%.
Certain net operating losses arise from the deductibility for tax purposes of compensation under
nonqualified stock options equal to the difference between the fair value of the stock on the date of exercise
and the exercise price of the options. For financial reporting purposes, the tax effect of this deduction when
recognized is accounted for as a credit to shareholders’ equity.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, on January 1, 2007. The Company did not have any unrecognized tax benefits which would
require an adjustment to the January 1, 2007 beginning balance of retained earnings. The Company did not
have any unrecognized tax benefits at December 31, 2007 and at December 31, 2008.
The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense.
During the years ended December 31, 2008 and 2007 the Company recognized no interest or penalties.
The Company files income tax returns in the U.S. federal jurisdiction and various states. The tax years
2005-2007 generally remain open to examination by major taxing jurisdictions to which the Company is
subject.
Retirement savings plan – Note 14
The Company has a retirement savings plan (“the Plan”) that qualifies under Internal Revenue Code
Section 401(k). The Plan covers all qualified employees. Contributions to the Plan by the Company are
made at the discretion of the Board of Directors.
Under the Plan, the Company matches 50% of employee contributions to the Plan up to 6% of the
employee’s per pay period compensation. During 2008, 2007, and 2006, the Company contributed
$365,000, $295,000, and $308,000, respectively, to the Plan under the matching program.
34
Microvision 2008 Annual Report
Segment Information – Note 15
Microvision operates as one segment. At January 31, 2006, Lumera was a significant unconsolidated
equity investment of Microvision. For the one month period ended January 31, 2006, Lumera revenue was
$168,000, gross profit was $82,000, loss from operations was $1,109,000 and net loss was $1,040,000.
Quarterly Financial Information (Unaudited) - Note 16
The following table presents the Company’s unaudited quarterly financial information for the years ending
December 31, 2008 and 2007:
Revenue
Gross Margin
Year Ende d De cember 31, 2008
December 31,
September 30,
June 30,
March 31,
$
1,525,000
$
894,000
$
1,622,000
$
287,000
285,000
719,000
2,570,000
1,469,000
Net loss available for common shareholders
(9,873,000)
(8,443,000)
(9,266,000)
(5,038,000)
Net loss per share basic and diluted
(0.15)
(0.13)
(0.16)
(0.09)
Revenue
Gross Margin
Year Ende d De cember 31, 2007
December 31,
September 30,
June 30,
March 31,
$
2,988,000
$
2,599,000
$
2,662,000
$
2,235,000
1,092,000
846,000
999,000
941,000
Net loss available for common shareholders
(6,022,000)
(4,718,000)
(2,155,000)
(6,892,000)
Net loss per share basic and diluted
(0.11)
(0.08)
(0.05)
(0.16)
Subsequent Events – Note 17
During January 2009, the Company terminated 9 employees or approximately 5% of its workforce. The
Company expects to record expense of approximately $202,000 related to the severance agreements for
these employees in the first quarter of 2009. The cost associated with the work force reduction will be
accounted for in accordance with FAS 146—Accounting for Costs Associated with Exit or Disposal
Activities, which requires that the liability for the costs associated with the exit or disposal activity be
recognized and measured at fair value in the period in which the liability is incurred.
Microvision 2008 Annual Report 35
MICROVISION, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE
(in thousands)
Balance at
Charges to
Charges to
Additions
Description
Year Ended December 31, 2006
beginning of
fiscal period
costs and
expense s
Allowance for receivables from related parties $
1,931
$
542
$
T ax valuation allowance
Year Ended December 31, 2007
Allowance for receivables from related parties
T ax valuation allowance
Year Ended December 31, 2008
Allowance for receivables from related parties
T ax valuation allowance
71,028
2,473
76,565
2,496
87,651
--
23
--
--
--
Balance at
end of
other
accounts
Deductions
fiscal period
--
$
5,537
$
--
--
2,473
76,565
--
11,086
--
11,555
--
--
(645)
--
2,496
87,651
1,851
99,206
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There have been no changes in or disagreements with accountants in accounting or financial disclosure matters
during the Company’s fiscal years ended December 31, 2008 and 2007.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
We are developing miniature display and imaging engines based upon our technology platform. Our technology
platform utilizes our expertise in two dimensional Micro-Electrical Mechanical systems (MEMS), lasers, optics and
electronics to create a high quality video or still image from a small form factor device with lower power needs than
conventional display technologies.
In 2006, we announced our strategy to develop and supply a proprietary display engine called PicoP to potential
original equipment manufacturing (OEM) customers who will embed them into a variety of consumer and
automotive products. The primary objective for consumer applications is to provide users of mobile devices with a
large screen viewing experience produced by a small embedded projector. Mobile devices may include cell phones,
PDA's, gaming consoles and other consumer electronics products. These potential products would allow users to
watch movies, play videos, display images, and other data onto a variety of surfaces. The PicoP with some
modification could be embedded into the dashboard of an automobile or an airplane or integrated into a portable
aftermarket device to create a head-up display (HUD) that could project point-by-point navigation, critical
operational, safety and other information important to the driver or pilot. The PicoP could be further modified to be
embedded into a pair of glasses to provide the mobile user with a see-through or occluded personal display to view
movies, play games or access other content.
We have incurred substantial losses since inception and expect to incur a substantial loss during the fiscal year
ending December 31, 2009.
36
Microvision 2008 Annual Report
Key Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On
an on-going basis, we evaluate our estimates, including those related to revenue recognition, contract losses, bad
debts, investments and contingencies and litigation. We base our estimates on historical experience, terms of
existing contracts, our evaluation of trends in the display and image capture industries, information provided by our
current and prospective customers and strategic partners, information available from other outside sources, and on
various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following key accounting policies require more significant judgments and estimates used in the
preparation of its consolidated financial statements:
Revenue Recognition. We recognize contract revenue as work progresses on long-term, cost plus fixed fee, and
fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected
contract revenue and costs. Our revenue contracts generally include a statement of the work we are to complete and
the total fee we will earn from the contract. When we begin work on the contract and at the end of each accounting
period, we work with the members of our technical team to estimate the labor and material and other cost required to
complete the statement of work compared to cost incurred to date. We use information provided by project
mangers, vendors, outside consultants and others as we deem necessary to develop our cost estimates. Since our
contracts generally require some level of technology development to complete, the actual cost required to complete a
statement of work can vary from our estimated cost to complete. We have developed processes that allow us to
make reasonable estimates of the cost to complete a contract. Historically, we have made only immaterial revisions
in the estimates to complete the contract at each reporting period. Recognized revenues are subject to revisions as
the contract progresses to completion and actual revenue and cost become certain. Revisions in revenue estimates
are reflected in the period in which the facts that give rise to the revision become known. In the future, revisions in
these estimates could significantly impact recognized revenue in any one reporting period. If the U.S. government
cancels a contract, we would receive payment for work performed and costs committed to prior to the cancellation.
Our product sales generally include acceptance provisions. We recognize revenue for product shipments upon
acceptance of the product by the customer or expiration of the contractual acceptance period.
Losses on Uncompleted Contracts. We establish an allowance for estimated losses if a contract has an estimated
cost to complete that is in excess of the remaining contract value. The entire estimated loss is recorded in the period
in which the loss is first determined. We determine the estimated cost to complete a contract through a detailed
review of the work to be completed, the resources available to complete the work and the technical difficulty of the
remaining work. If the revised estimated cost to complete the contract is higher than the total contract revenue, the
entire contract loss is recognized. The actual cost to complete a contract can vary significantly from the estimated
cost, due to a variety of factors including availability of technical staff, availability of materials and technical
difficulties that arise during a project. Most of our development contracts are cost plus fixed fee type contracts.
Under these types of contracts, we are not required to spend more than the contract value to complete the contracted
work.
Allowance for uncollectible receivables. We maintain allowances for uncollectible receivables, including accounts
receivable, cost and estimated earnings in excess of billings on uncompleted contracts and receivables from related
parties. We review several factors in determining the allowances including the customer’s and related party’s past
payment history and financial condition. If the financial condition of our customers or the related parties with whom
we have receivables were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances could be required.
Inventory. We value inventory at the lower of cost or market with cost determined on a weighted average cost basis.
We review several factors in determining the market value of our inventory including evaluating the replacement
cost of the raw materials and the net realizable value of the finished goods. If we do not achieve our targeted sales
Microvision 2008 Annual Report 37
prices, if market conditions for our components or products were to decline or if we do not achieve our sales
forecast, additional reductions in the carrying value of the inventory would be required.
Investments Available-For-Sale and Fair Value Measurements. We account for investment securities in accordance
with the provisions of Statement of Financial Accounting Standards (“FAS”) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (“FAS 115”) and FAS No. 157, Fair Value Measurements (“FAS 157”).
FAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable
fair values and for investments in debt securities. FAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. Adopting FAS 157 on January 1,
2008 for financial assets and liabilities did not have a material impact on our consolidated financial position, results
of operations or cash flows.
FAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in
its principal or most advantageous market in an orderly transaction between market participants on the measurement
date. FAS 157 establishes a three level fair value inputs hierarchy, and requires an entity to maximize the use of
observable valuation inputs and minimize the use of unobservable inputs. We utilize market data, assumptions and
risks we believe market participants would use in measuring the fair value of the asset or liability, including the risks
inherent in the inputs and the valuation techniques. The hierarchy is summarized below.
• Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities
• Level 2 - Observable inputs such as quoted prices for similar assets or liabilities in markets that are not
sufficiently active to qualify as level 1 or, other observable inputs
• Level 3 - Unobservable inputs for which there is little or no market data, which requires us to develop our
own assumptions, which are significant to the measurement of the fair values
Estimating valuation inputs and selecting and applying valuation methods may require significant judgments by
management. Changes in the estimated inputs and valuation methods could result in materially different values,
credits and charges presented in the consolidated financial statements.
The investments are stated at fair value and classified as cash and cash equivalents or current investment securities
available-for-sale on the consolidated balance sheets with unrealized gains and losses included in the consolidated
statements of comprehensive loss. We classify investment securities available-for-sale purchased with 90 days or
less remaining until contractual maturity as cash equivalents on the balance sheet in “Cash and cash equivalents.”
Interest income, realized gains and losses, and other-than-temporary impairments are recognized in the period
earned or incurred, and presented separately in the consolidated statements of operations. Changes in the fair values
of derivatives are realized in the period of remeasurement and recorded in “Gain (loss) on derivative instruments,
net” in the consolidated statements of operations. The cost of securities sold is based on the specific identification
method.
Employee Share-Based Compensation. We issue share-based compensation to employees in the form of options
exercisable into our common stock and restricted or unrestricted shares of our common stock. We account for
employee share-based compensation under the guidance provided by Financial Accounting Standards Board
(“FASB”) Statement No. 123(R), Share-Based Payment (“FAS123(R)”). The value of equity shares is determined
using the fair value method, which is based on the number of shares granted and the closing price of our common
stock on the NASDAQ Global Market on the date of grant. The value of options is determined using the Black-
Scholes option pricing model with estimates of option lives, stock price volatilities and interest rates, then expensed
over the periods of service allowing for pre-vest forfeitures. This widely accepted method results in reasonable
option values and interperiod expense allocation, and comparability across companies. Changes in the estimated
inputs or using other option valuation methods could result in materially different option values and share-based
compensation expense.
The key accounting policies described above are not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally
accepted accounting principles, with no need for us to apply judgment or make estimates. There are also areas in
which our judgment in selecting any available alternative would not produce a materially different result to our
consolidated financial statements. Additional information about our accounting policies, and other disclosures
38
Microvision 2008 Annual Report
required by generally accepted accounting principles, are set forth in the notes to our consolidated financial
statements.
Inflation has not had a material impact on our revenues, or income from continuing operations over the three most
recent fiscal years.
Results of Operations
YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007
Contract Revenue.
(in thousands)
Government revenue
Commercial revenue
T otal contract revenue
2008
2,237
2,637
4,874
$
$
% of
contract
revenue
45.9
54.1
2007
6,430
2,580
9,010
$
$
% of
contract
reve nue
71.4
28.6
$ change
(4,193)
57
(4,136)
$
$
% change
(65.2)
2.2
(45.9)
We earn contract revenue from performance on development contracts with the United States government and
commercial customers. Our contract revenue in a particular period is dependent upon when we enter into a contract,
the value of the contracts we have entered into, and the availability of technical resources to perform work on the
contracts.
Contract revenue from government contracts was substantially lower during 2008 than in 2007 due to reduced
contract activity and lower beginning backlog in 2008 compared to the previous year. We expect that we will have
fewer opportunities to enter into new development contracts as we move closer to the commercialization of products
based on our PicoP display engine.
As long as most of our revenue is earned from performance on development contracts, we believe there may be a
high degree of variability in revenue from one period to another.
In December 2007, we entered into a $1 million contract with a commercial customer to develop prototype units
based on our PicoP technology, for evaluation of future consumer electronics product applications. The
development work under this contract was initiated and fully completed in 2008.
Our backlog of development contracts at December 31, 2008 was $714,000 in government contracts and $228,000
in commercial contracts compared to $2.0 million in government contracts and $1.8 million in commercial contracts
at December 31, 2007. The decrease in backlog from 2007 is primarily attributed to completion of government and
commercial development contracts in 2007 and early 2008. We plan to complete the entire contract backlog during
2009.
Product Revenue.
(in thousands)
Bar code revenue
Nomad revenue
T otal product revenue
2008
1,737
0
1,737
$
$
% of
product
revenue
100.0
0.0
2007
1,393
81
1,474
$
$
% of
product
reve nue
94.5
5.5
$ change
344
(81)
263
$
$
% change
24.7
(100.0)
17.8
Microvision 2008 Annual Report 39
Bar code revenue includes the sales of ROV and our discontinued Flic bar code scanners. The increase in bar code
revenue for the year ended December 31, 2008 compared to the same period in 2007 was due to the increased sales
of our ROV product line.
Our quarterly revenue may vary substantially due to the timing of product orders from customers, production
constraints and raw material availability.
The backlog of product orders at December 31, 2008 was approximately $276,000, compared to $245,000 at
December 31, 2007, all of which is scheduled for delivery during 2009.
Cost of Contract Revenue.
(in thousands)
Cost of contract revenue
2008
$
1,708
% of
contract
revenue
35.0
2007
$
4,916
% of
contract
revenue
54.6
$ change
$
(3,208)
% change
(65.3)
Cost of contract revenue includes both the direct and allocated indirect costs of performing on development
contracts. Direct costs include labor, materials and other costs incurred directly in performing on a contract.
Indirect costs include labor and other costs associated with operating our research and development department and
building our technical capabilities and capacity. Cost of contract revenue is determined both by the level of direct
costs incurred on development contracts and by the level of indirect costs incurred in operating and building our
technical capabilities and capacity. Both the direct and indirect costs can fluctuate substantially from period to
period.
The cost of contract revenue as a percentage of revenue was lower in 2008 than in 2007 as a result of negotiating
better terms on contracts and from the sale of prototype units that have been previously expensed to internally
funded programs.
The cost of revenue as a percentage of revenue can fluctuate significantly from period to period, depending on the
contract cost mix and the levels of direct and indirect costs incurred. However, over longer periods of time we
expect modest fluctuations in the cost of contract revenue, as a percentage of contract revenue.
Cost of Product Revenue.
(in thousands)
Cost of product revenue
2008
$
2,143
% of
product
revenue
123.4
2007
$
1,690
% of
product
revenue
114.7
$ change
453
$
% change
26.8
Cost of product revenue includes both the direct and allocated indirect costs of manufacturing products sold to
customers. Direct costs include labor, materials and other costs incurred directly in the manufacture of these
products. Indirect costs include labor and other costs associated with operating our manufacturing capabilities and
capacity.
Our overhead, which includes the costs of procuring, inspecting and storing material, facility and depreciation costs,
is allocated to inventory, cost of product revenue, cost of contract revenue, and research and development expense
based on the proportion of direct material purchased for the respective activity. During 2008 and 2007, we expensed
approximately $143,000 and $289,000, respectively, of manufacturing overhead associated with production capacity
in excess of production requirements.
The increase in cost of product revenue for 2008 compared to 2007 was a result of increased revenue from the sales
of ROV and the increase in inventory write-downs during the respective periods. In 2008, cost of product revenue
included $475,000 of inventory write-downs compared to $84,000 for the same period in 2007.
40
Microvision 2008 Annual Report
The cost of product revenue as a percentage of product revenue can fluctuate significantly from period to period,
depending on the product mix, the level of overhead expense and the volume of direct materials purchased.
Research and Development Expense.
(in thousands)
Research and development
2008
22,575
$
2007
14,944
$ change
7,631
$
$
% change
51.1
Research and development expense consists of:
• Compensation related costs of employees and contractors engaged in internal research and product
development activities,
• Laboratory operations, outsourced development and processing work, and
• Other operating expenses.
In addition, we allocate our research and development resources based on the business opportunity of the available
projects, the skill mix of the resources available and the contractual commitments we have made to customers. In
order to accelerate our time to market and because contract revenue was lower for the year ended December 31,
2008 compared to the same period in 2007, we directed more of our research and development work to internally
funded projects compared to the same period last year. We have increased spending in research and development as
part of our strategy to accelerate the time to market for products based on the PicoP. The increase in cost is
primarily attributable to increases in payroll costs and contracted services.
We believe that a substantial level of continuing research and development expense will be required to develop
additional commercial products using the light scanning technology. Accordingly, we anticipate our level of
research and development spending will continue to be substantial.
Sales, Marketing, General and Administrative Expense.
(in thousands)
Sales, marketing, general and administrative
2008
15,730
$
2007
15,779
$
$
$ change
(49)
% change
(0.3)
Sales, marketing, general and administrative expense includes compensation and support costs for marketing, sales,
management and administrative staff, and for other general and administrative costs, including legal and accounting
services, consultants and other operating expenses.
We continue to aggressively manage these costs as part of our strategy to accelerate the development of PicoP-based
products while controlling our cash used in operations.
Interest Income and Expense.
(in thousands)
Interest income
(in thousands)
Interest expense
2008
1,130
2008
48
$
$
2007
1,358
2007
513
$ change
(228)
$ change
(465)
$
$
% change
(16.8)
% change
(90.6)
$
$
The decrease in interest income in 2008 from 2007 results primarily from lower interest rates on our investment
securities compared to 2007.
In March and December 2005, we issued convertible notes (the "Notes") with an aggregate principal amount of $20
million. The last payment on the Notes was made in March 2007, resulting in a decrease in interest expense for the
year ended December 31, 2008 compared to the same period in 2007.
Impairment of investment securities, available-for-sale.
Microvision 2008 Annual Report 41
(in thousands)
Impairment of investments, available-for-sale
2008
2007
$ change
$
(300) $
0
$
(300)
% change
n/a
At December 31, 2008, our marketable securities portfolio included $3.0 million par value AAA rated student loan
auction-rate securities ("SLARS"). Based on the length of the historical duration of failed SLARS auctions and
significant uncertainty of the prospective duration of inactivity and lack of liquidity in the SLARS market, we
determined that the estimated fair values of the SLARS were less than par value and the impairments were other-
than-temporary. We used a discounted cash flow model, with rates adjusted for liquidity, to determine the estimated
fair values of the SLARS as of December 31, 2008. We recorded an "impairment of investment securities, available-
for-sale" of $300,000 for the period ended December 31, 2008.
Gain (Loss) on Derivative Instruments, Net.
(in thousands)
Gain (loss) on derivative instruments, net
2008
2007
$
2,196
$
(483) $
$ change
2,679
% change
(554.7)
We issued warrants to purchase 2,302,000 shares of common stock in connection with the issuance of the Notes.
The warrants met the definition of derivative instruments that must be accounted for as liabilities under the
provisions of Emerging Issues Task Force (“EITF”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF 00-19”), because we cannot
engage in certain corporate transactions affecting the common stock unless we made a cash payment to the holders
of the warrants. In July 2008, warrants to purchase 750,000 shares of common stock expired unexercised. We
record changes in the fair values of the warrants in the statement of operations each period. We valued the
remaining warrants to purchase 1,552,000 shares of common stock at December 31, 2008 using the Black-Scholes
option pricing model with the following assumptions: expected volatility of 72%; expected dividend yield of 0%;
risk free interest rates ranging from 0.6% to 0.8%; and contractual lives ranging from 1.2 years to 1.9 years. The
change in value of the warrants of $2.3 million in 2008 was recorded as a non-operating gain and is included in
“Gain (loss) on derivative instruments, net” in the consolidated statement of operations.
Prior to December 9, 2008 we held warrants to purchase 170,500 shares of Lumera common stock. On December 9,
2008, Lumera merged with GigOptix, LLC and the combined company will conduct business as GigOptix, Inc. Our
Lumera warrants were exchanged for warrants to purchase shares of the new company’s common stock, after
applying a 0.125 exchange ratio and exercise price escalation. As of December 31, 2008, the fair value of the
warrants was determined to be zero and the change in value of $130,000 in 2008 was recorded as a loss to “Gain
(loss) on derivative instruments, net.”
Gain on sale of investment in Lumera.
Gain on sale of securities of equity investment:
(in thousands)
Gain on sale of investment in Lumera
2008
2007
$ change
$
0
$
6,606
$
(6,606)
% change
(100.0)
During 2007, we sold 1,714,000 shares of Lumera common stock for gross proceeds of $8.7 million and we
recorded a gain of $6.6 million.
As result of the merger discussed above, the 36,000 shares of Lumera common stock we held were exchanged for
5,000 shares of GigOptix common stock.
Income Taxes.
No provision for income taxes has been recorded because we have experienced net losses from inception through
December 31, 2008. At December 31, 2008, we had net operating loss carry-forwards of approximately $217.6
42
Microvision 2008 Annual Report
million for federal income tax reporting purposes. In addition, we have research and development tax credits of $4.3
million. The net operating loss carry forwards and research and development credits available to offset future
taxable income, if any, will expire in varying amounts from 2009 to 2027 if not previously utilized. In certain
circumstances, as specified in the Internal Revenue Code, a 50% or more ownership change by certain combinations
of our shareholders during any three-year period would result in a limitation on our ability to utilize a portion of our
net operating loss carry-forwards. We have determined that such a change of ownership occurred during 1995 and
that the annual utilization of loss carry-forwards generated through the period of that change will be limited to
approximately $761,000. An additional change of ownership occurred in 1996 and the annual limitation for losses
generated in 1996 is approximately $1.6 million.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January
1, 2007. We did not have any unrecognized tax benefits which would require an adjustment to the January 1, 2007
beginning balance of retained earnings. We did not have any unrecognized tax benefits at December 31, 2007 or at
December 31, 2008.
We recognize interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years
ended December 31, 2008 and 2007, we recognized no interest and penalties.
YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006
Contract Revenue.
(in thousands)
Government revenue
Commercial revenue
T otal contract revenue
2007
6,430
2,580
9,010
$
$
% of
contract
revenue
71.4
28.6
2006
3,586
1,689
5,275
$
$
% of
contract
reve nue
68.0
32.0
$ change
2,844
891
3,735
$
$
% change
79.3
52.8
70.8
Contract revenue was higher during 2007 than in 2006, due to higher beginning government contract backlog and an
increased level of activity on commercial contracts compared to the prior year.
In May 2007, we announced that we had entered into a $3.2 million contract with the U.S. Air Force to provide a
lightweight, see-through, full-color eyewear display prototype to the government. The contract, which continued a
development activity with the Air Force, specified the development, design, verification, testing, and delivery of a
lightweight, see-through full-color wearable display for evaluation by several DOD project offices.
Our backlog of development contracts at December 31, 2007 was $2.0 million in government contracts and $1.8
million in commercial contracts compared to $5.2 million in government contracts and $1.6 million in commercial
contracts at December 31, 2006.
Product Revenue.
(in thousands)
Bar code revenue
Nomad revenue
T otal product revenue
2007
1,393
81
1,474
$
$
% of
product
revenue
94.5
5.5
2006
1,589
179
1,768
$
$
% of
product
reve nue
89.9
10.1
$ change
(196)
(98)
(294)
$
$
% change
(12.3)
(54.7)
(16.6)
In May 2007, we announced the launch of ROV, our new bar code scanner product. We had planned to begin
commercial shipments of ROV during the third quarter of 2007. During our Beta evaluation, we determined that
ROV did not meet our quality standards and we delayed the launch of ROV production until we could correct the
deficiencies. Commercial shipments of ROV began during the fourth quarter of 2007.
Microvision 2008 Annual Report 43
The decrease in bar code revenue in 2007 compared to 2006 was the result of the timing of the release of ROV. We
believe that many of our customers were waiting for the availability of ROV before placing orders for our bar code
scanning products.
The decrease in Nomad revenue was the result of our decision in June 2006 to no longer promote the Nomad
product. The Nomad had not gained the commercial acceptance we had planned when it was introduced.
The backlog of product orders at December 31, 2007 was approximately $245,000, compared to $353,000 at
December 31, 2006.
Cost of Contract Revenue.
(in thousands)
Cost of contract revenue
2007
$
4,916
% of
contract
revenue
54.6
2006
$
3,398
% of
contract
revenue
64.4
$ change
1,518
$
% change
44.7
The cost of contract revenue as a percentage of revenue was lower in 2007 than in 2006 as a result of negotiating
better terms on contracts entered into in late 2006 and early 2007. We target a gross margin for each contract of at
least 40%; however, the gross margin can vary based on the technical challenges encountered in completing the
contract.
Cost of Product Revenue.
(in thousands)
Cost of product revenue
2007
$
1,690
% of
product
revenue
114.7
2006
$
4,768
% of
product
revenue
269.7
$ change
$
(3,078)
% change
(64.6)
During 2007 and 2006, we expensed approximately $289,000 and $1,224,000, respectively, of manufacturing
overhead associated with production capacity in excess of production requirements.
The decline in cost of product revenue as a percentage of product revenue for 2007 compared to 2006 is attributable
to the following factors:
• The decision in June 2006 to no longer support the Nomad product line. During 2006, we recorded
expenses of $1.2 million associated with the Nomad product line that were not repeated in 2007.
• Reduced direct cost and overhead on the Flic product line resulting in a savings of approximately 108% for
the year ended December 31, 2007 compared to the same period in 2006.
• The absence of losses associated with noncancelable purchase contracts. In 2006, we recorded a loss of
$310,000 to cost of product revenue as a result of commitments to purchase materials for the Flic scanner
that were in excess of our estimated future proceeds from the sale of the Flic scanners.
Research and Development Expense.
(in thousands)
Research and development
2007
14,944
$
2006
10,715
$ change
4,229
$
$
% change
39.5
The increase in research and development expense in 2007 compared to 2006 was the result of our increased
spending as part of our strategy to accelerate the time to market for products based on the PicoP. The increase in
cost was primarily attributable to increases in payroll costs and contracted services.
Sales, Marketing, General and Administrative Expense.
44
Microvision 2008 Annual Report
(in thousands)
Sales, marketing, general and administrative
2007
15,779
$
2006
17,362
$ change
$
(1,583)
% change
(9.1)
$
In early 2006, we announced our plan to reduce spending in sales, marketing, general and administrative expenses.
The decrease in sales, marketing, general and administrative expense in 2007 compared to 2006 is the result of the
cost reduction efforts.
Interest Income and Expense.
(in thousands)
Interest income
(in thousands)
Interest expense
2007
2006
1,358
$
719
$
$ change
639
% change
88.9
2007
2006
$ change
513
$
5,753
$
(5,240)
% change
(91.1)
$
$
The increase in interest income in 2007 from 2006 results from higher average cash and investment securities
balances.
In March and December 2005, we issued convertible notes (the "Notes") with an aggregate principal amount of $20
million. The last payment on the Notes was made in March 2007, resulting in a decrease in interest expense for the
year ended December 31, 2007 compared to the same period in 2006.
Gain (Loss) on Derivative Instruments, Net.
The following table shows the gain on derivative instruments, net:
(in thousands)
Gain (loss) on derivative instruments, net
2007
2006
$ change
$
(483) $
1,627
$
(2,110)
% change
(129.7)
In connection with the issuance of the Notes in 2005, we concluded that the note holders' right to convert all or a
portion of the Notes into our common stock is an embedded derivative instrument as defined by FAS 133,
Accounting for Derivative Instruments and Hedging Activities (“FAS 133”). We determine the value of the
derivative features at each balance sheet date using the Black-Scholes option pricing model. We retired the Notes in
March 2007 and decreased the value of the derivative feature to zero. The change in value of $68,000 from
December 31, 2006 to the date of retirement of the Notes was recorded as a non-operating gain and is included in
"Gain (loss) on derivative instruments, net" in the consolidated statement of operations.
We issued warrants to purchase 2,302,000 shares of common stock in connection with the issuance of the Notes.
The warrants met the definition of derivative instruments that must be accounted for as liabilities under the
provisions of EITF 00-19, because we cannot engage in certain corporate transactions affecting the common stock
unless we made a cash payment to the holders of the warrants. We record changes in the fair values of the warrants
in the statement of operations each period. We valued the warrants at December 31, 2007 using the Black-Scholes
option pricing model with the following assumptions: expected volatility of 67%, expected dividend yield of 0%,
risk free interest rates ranging from 3.05% to 3.07%, and contractual lives ranging from 0.6 years to 2.9 years. The
change in value of the warrants of $85,000 in 2007 was recorded as a non-operating loss and is included in "Gain
(loss) on derivative instruments, net" in the consolidated statement of operations.
At December 31, 2007, we held warrants to purchase 170,500 shares of Lumera common stock. Changes in the fair
value of the warrants are recorded in the statement of operations each period. As of December 31, 2007, the
warrants were valued using the Black-Scholes option pricing model with the following assumptions: expected
volatility of 83%, expected dividend yield of 0%, risk free interest rate of 3.11%, and contractual life of 3.2 years.
As of December 31, 2007, the fair value of the warrants decreased to $130,000 and the change in value of $465,000
in 2007 was recorded as a loss to "Gain (loss) on derivative instruments, net."
Microvision 2008 Annual Report 45
Equity in losses of Lumera and Gain on sale of securities of equity investment.
Equity in losses of Lumera:
(in thousands)
Equity in losses of Lumera
2007
2006
$
0
$
(290) $
$ change
290
% change
(100.0)
Gain on sale of securities of equity investment:
(in thousands)
Gain on sale of investment in Lumera
2007
2006
$ change
$
6,606
$
8,738
$
(2,132)
% change
(24.4)
In 2006, we sold 2.9 million shares of our Lumera common stock for $12.2 million. We recorded a "Gain on sale of
investment in Lumera" of approximately $8.7 million. In January 2006, we recorded a charge of $290,000 for our
proportion of Lumera net loss for the period preceding the change in accounting method which resulted from the
reduction of our ownership in Lumera.
During 2007, we sold 1,714,000 shares of Lumera common stock for gross proceeds of $8.7 million and we
recorded a gain of $6.6 million. As of December 31, 2007, we owned 36,000 shares of Lumera common stock.
Income Taxes.
At December 31, 2007, we had net operating loss carry-forwards of approximately $200.0 million for federal
income tax reporting purposes. In addition, we had research and development tax credits of $3.6 million.
Inducement for Conversion of Preferred Stock.
(in thousands)
Inducement for conversion of preferred stock
2007
2006
$
0
$
(3,076) $
$ change
3,076
% change
(100.0)
In September 2004, we raised $10.0 million before issuance costs of $90,000 from the sale of 10,000 shares of
Series A Convertible Preferred Stock and a warrant to purchase 362,000 shares of common stock. The preferred
stock terms included a dividend of 3.5% per annum, payable quarterly in cash or registered common stock, at our
election, subject to certain conditions.
The net cash proceeds of $9,910,000 were allocated to the preferred stock and the warrant based on the relative fair
values of the securities. The warrants were valued using the Black-Scholes option pricing model with the following
assumptions: expected volatility of 75%, expected dividend yield of 0%, risk free interest rate of 3.4%, and
contractual life of five years. Proceeds of $1.3 million were allocated to the warrant and recorded as an increase to
additional paid-in capital.
Subsequent to the relative fair value allocation, the effective conversion price of the convertible preferred stock was
less than the closing price of our common stock on the date of commitment to purchase the preferred stock, resulting
in the recognition of a beneficial conversion feature in accordance with EITF No. 00-27, Application of Issue No.
98-5 to Certain Convertible Instruments. This beneficial conversion feature was measured at $1.2 million, which
represents the difference between the fair value of the common stock and the effective conversion price. The
beneficial conversion feature was recorded as additional paid-in capital and a deemed dividend to preferred
stockholders. It was amortized using the effective interest method over the three year stated life of the preferred
stock. During 2005, we recorded $280,000 in dividends on the preferred stock and $303,000 in amortization of the
beneficial conversion feature of the preferred stock.
In May 2006, we entered into a Conversion Agreement with the holders of our preferred stock. As consideration for
converting 5,000 preferred shares, we issued a total of 1,353,066 shares of our common stock, $.001 par value, of
46
Microvision 2008 Annual Report
which 565,000 shares were issued as an inducement to convert ("Incentive Shares"). The value of the Incentive
Shares of $2.0 million together with unamortized discounts of $0.6 million and fees of $0.1 million were recorded as
"Inducement for conversion of preferred stock" in the consolidated statement of operations.
In connection with the conversion, we agreed to register the Incentive Shares and to a 45-trading-day price
protection provision. We determined that the price protection feature of the Incentive Shares included an embedded
derivative feature as defined by FAS 133. We estimated the initial value of the derivative feature at conversion to be
$401,000 using the Black-Scholes option pricing model with the following assumptions: expected volatility of 65%,
dividend yield of 0%, risk free interest rate of 4.9%, and contractual life 0.3 years and recorded it as a non-operating
expense included in "Inducement for conversion of preferred stock" in the consolidated statement of operations.
The value of the price protection feature fluctuated with the value of our common stock and, to a lesser extent, with
changes in valuation variables. In August 2006, the Company determined and recorded the final value and paid the
liability of $1,074,000. The change in estimated fair value of the derivative feature of $673,000 was included as a
non-operating expense in "Gain (loss) on Derivative instruments, net".
Liquidity and Capital Resources
We have incurred significant losses since inception. We have funded operations to date primarily through the sale
of common stock, convertible preferred stock, warrants, the issuance of convertible debt and, to a lesser extent, from
development contract revenues and product sales. In July 2008, we received $26.0 million, before issuance costs,
from the issuance of 11,172,000 shares of our common stock and warrants exercisable for 6,703,000 shares of our
common stock at $3.60 per share. At December 31, 2008, we had $28.2 million in cash, cash equivalents, and
investment securities, available-for-sale. Our cash, cash equivalents, and investment securities available-for-sale
balance includes $2.7 million in auction rate securities (“ARS”). There is currently no established market for these
ARS and if we were required to sell them in a short period of time we may receive less than our book value for
them.
Our operating plan for 2009 includes the launch of our first accessory product, further development of the PicoP
display engine for embedded applications and further development of automotive HUD and eyewear applications.
In order to fully fund our product launch and our other development efforts, we will require additional capital in
2009. We plan to obtain additional cash through the issuance of equity or debt securities. There can be no
assurance that additional cash will be available or that, if available, it will be available on terms acceptable to us on a
timely basis. If adequate funds are not available in the next several months to fully implement our plan we will
begin to reduce the scope of our business to extend our operations as we pursue other financing opportunities and
business relationships. This reduction in scope could include delaying product launch and development projects
resulting in reductions in staff, operating costs, capital expenditures and investment in research and development.
With these adjustments to our operating plan, we believe we currently have sufficient cash, cash equivalents, and
investment securities to fund operations through at least February 28, 2010.
Cash used in operating activities totaled $31.2 million during 2008, compared to $21.3 million during 2007. During
2008, the increased cash outlay was primarily driven by the acceleration of research and development activities on
our PicoP and related technologies for planned PicoP and other product applications. The balance of the change was
largely due to lower contract revenue in 2008 than in 2007.
We had the following material gains and charges, and changes in assets and liabilities during the year ended
December 31, 2008.
•
“(Gain) loss on derivative instruments” In connection with the issuances of our Notes in 2005, we issued
warrants to purchase 2,302,000 shares of our common stock, which are accounted for as derivative security
liabilities according to guidance in EITF 00-19. The value of the warrants fluctuates with our common
stock price and the decreasing lives of the warrants as they approach expiration. The net decrease in our
stock price during 2008 combined with decreasing terms to expiration resulted in a $2.3 million non-cash
non-operating gain recorded in “(Gain) loss on derivative instruments, net” on the consolidated statements
of operations and a non-cash adjustment in operating cash flows recorded to “(Gain) loss on derivative
instruments” on the consolidated statements of cash flows. We record the fair values of the warrants in
“Liability associated with common stock warrants” on the consolidated balance sheets. The valuation
assumptions and method are detailed in the Results of Operations section above.
Microvision 2008 Annual Report 47
•
•
“Accounts receivable, net” Our accounts receivable decreased by approximately $1.3 million from the end
of 2007 due to lower contract revenue near the end of 2008.
"Billings in excess of costs and estimated earnings on uncompleted contracts" We ended 2008 with
$908,000 less than 2007. This was mostly a result of receiving a $500,000 advance cash payment from a
customer in December 2007 for contract revenue work performed in January 2008. The balance of the
decrease is associated with completing contracts in the third quarter of 2008 and lower contract revenue
near the end of 2008.
• “Inventory” Ending inventory increased by $764,000 over 2007 as a result of the timing of our production
schedule for ROV and lower than expected sales volumes. We value inventory at the lower of cost or
market with cost determined on a weighted average cost basis. The following table shows the composition
of the inventory at December 31, 2008 and 2007:
Raw materials
Work in process
Finished goods
Investing Activities
December 31,
December 31,
2008
2007
45,000
$
--
1,480,000
1,525,000
$
122,000
10,000
629,000
761,000
$
$
Cash provided by investing activities totaled $19.0 million in 2008 compared to cash used in investing activities of
$14.2 million in 2007. We invested the proceeds from our July 2008 issuance of common stock and warrants of
$26.0 million, before issuance fees, into money market accounts and short term investments. As a result, the
purchases and sales of these investments appear in cash and cash equivalents changes instead of in investing
activities on the consolidated statements of cash flows. Cash provided by investing activities in 2008 was generated
from the net sales of investment securities to fund continuing operations which were purchased in 2007. The 2007
net purchases in investing activities of $22.3 million were made with proceeds from the call of our publicly traded
warrants and sale of Lumera common stock.
Financing Activities
Cash provided by financing activities totaled $24.3 million in 2008, compared to $34.4 million in 2007, largely as a
result of the relative sizes of our financing transactions completed in 2008 and 2007, coupled with cash payments
totaling $1.4 million in 2007 to retire our Notes. The following is a list of our securities issuances during 2008,
2007 and 2006.
•
•
•
In July 2008, we raised an aggregate of $26.0 million before issuance costs of approximately $2.0 million
through a registered direct public offering of 11.2 million shares of our common stock and warrants to
purchase 6.7 million shares of our common stock. The warrants have an exercise price of $3.60 per share,
a five year term, and are not exercisable for one year from the date of issuance. The warrants are callable
after one year from the date of issuance if the average closing bid price of our stock is over $7.20 for any
20 consecutive trading days. The warrants are listed on the NASDAQ Global Market under the ticker
“MVISW.”
In June 2007, we called our publicly traded warrants issued as part of a 2006 mid-year financing
transaction. The warrant holders had until July 6, 2007 to exercise their warrants or the warrants would
expire. We received $34.1 million from the exercise of 12,855,000 warrants.
In November 2006, we raised $7.9 million before issuance costs of $779,000 through an underwritten
public offering of 3,318,000 shares of our common stock.
48
Microvision 2008 Annual Report
•
In June and July 2006, we raised an aggregate of $27.1 million before issuance costs of $2.2 million
through an underwritten public offering of 11.6 million shares of our common stock and warrants to
purchase 12.4 million shares of our common stock. In connection with the offering, we also issued the
underwriter a warrant to acquire 537,500 warrants, identical to those sold in the offering, at an exercise
price of $0.16 per warrant. The underwriter exercised the warrants for warrants in connection with the call
in June 2007.
The following is a list of scheduled payments we made in connection with our Notes during 2007 and 2006.
• During 2007:
o
o
cash payments of $1.4 million in principal and $28,000 in interest, and
issued 459,000 shares of our common stock in payment of $1.4 million in principal and $21,000 in
interest.
• During 2006:
o
o
cash payments of $9.6 million in principal and $722,000 in interest, and
issued 1.4 million shares of our common stock in payment of $1.7 million in principal and
$88,000 in interest.
We may also raise cash through future sales of our common or preferred stock, warrants, and issuance of debt
securities or through other borrowings. Should expenses exceed the amounts budgeted in our current operating plan,
we may require additional cash earlier than expected to further the development of our technology, for expenses
associated with product development, and to respond to competitive pressures or to meet unanticipated development
difficulties. Our operating plan also provides for the development of strategic relationships with systems and
equipment manufacturers that may require additional investments. There can be no assurance that additional
financing will be available to us or, if available, it will be available on acceptable terms on a timely basis. If
adequate funds are not available to satisfy either short-term or long-term capital requirements or planned revenues
are not generated, we may be required to limit our operations substantially. This limitation of operations may
include reductions in staff and discretionary costs, which may include non-contractual research costs. Our cash
requirements will depend on many factors, including, but not limited to, the rate at which we can, directly or through
arrangements with original equipment manufacturers, introduce products incorporating our technology and the
market acceptance and competitive position of such products.
Future operating expenditures and capital requirements will depend on numerous factors, including the following:
•
•
•
•
•
the progress of research and development programs,
the progress in commercialization activities and arrangements,
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property
rights,
competing technological and market developments, and
our ability to establish cooperative development, joint venture and licensing arrangements.
In order to maintain our exclusive rights under our license agreement with the University of Washington, we are
obligated to make royalty payments to the University of Washington with respect to the Virtual Retinal Display
technology. If we are successful in establishing original equipment manufacturer co-development and joint venture
arrangements, we expect our partners to fund certain non-recurring engineering costs for technology development
and/or for product development. Nevertheless, we expect our cash requirements to remain high as we expand our
activities and operations with the objective of commercializing our light scanning technology.
The following table lists our contractual obligations (in thousands):
Microvision 2008 Annual Report 49
Less than 1 year
1-3 ye ars
3-5 ye ars
More than 5 years
Total
December 31,
Contractual O bligations:
Open purchase obligations *
Minimum payments under capital leases
Minimum payments under operating leases
Minimum payments under long-term debt
Minimum payments under research, royalty
and licensing agreements
T otal
$
$
3,991
$
104
$
47
844
103
735
5,720
$
48
1,774
206
1,733
3,865
$
$
74
--
1,502
172
1,733
3,481
$
--
--
--
--
$
4,169
95
4,120
481
-- †
4,201
--
$
13,066
*
†
Open purchase obligations represent commitments to purchase inventory, materials, capital equipment,
maintenance agreements and other goods used in the normal operation of our business.
License and royalty obligations continue through the lives of the underlying patents, which is currently
through at least 2017.
New accounting pronouncements
In October 2008, the FASB released a FASB Staff Position, FSP FAS 157-3—Determining the Fair Value of a
Financial Asset When The Market for That Asset Is Not Active, to clarify the application of the provisions of FAS
157 in an inactive market. Implementing of this standard upon its issuance did not have a material impact on our
consolidated financial position and results of operations.
In February 2008, the FASB released a FASB Staff Position, FSP FAS 157-2—Effective Date of FASB Statement
No. 157, which delays the effective date of FAS 157 for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after
November 15, 2008. We are currently assessing the financial impact of FSP FAS 157-2 on our financial statements.
In June 2007, the EITF reached a final consensus on EITF Issue No. 07-1, Accounting for Collaborative
Arrangements (“EITF 07-1”). EITF 07-1 discusses how to determine whether an arrangement constitutes a
collaborative arrangement, how costs incurred and revenue generated on sales to third parties should be reported by
the participants, how an entity should characterize payments made between participants and what participants should
disclose in the notes to the financial statements about a collaborative arrangement. EITF 07-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years. We are currently assessing the financial impact of EITF 07-1 on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Market Liquidity Risks
As of the end of 2008, 90% of our total cash, cash equivalents and investment securities available-for-sale have
variable interest rates or are very short-term discount notes traded in active markets. Therefore, we believe our
exposure to the market and interest rate risk is not material. The remaining 10% is composed of $3.0 million par
student loan auction-rate securities (“SLARS”). Our SLARS are highly rated long-term bonds and are structured
with variable interest rate resets to be determined via a Dutch Auction process every 28 days. However, beginning
in February 2008 as global credit markets deteriorated significantly, each auction has failed rendering the SLARS
temporarily illiquid through the auction process and adverse credit market conditions have resulted in inactive
secondary ARS markets. Given the adverse credit market conditions, the fair value of the principal of these bonds
has become affected by changes in interest rates, the spread between short and long rates, and credit market
liquidity. As a result, in the quarter ended September 30, 2008, we estimated that the fair value of our SLARS was
approximately $2.7 million and that the $300,000 adjustment was other than temporary. If market conditions
worsen, we may have to further adjust the estimated fair value of the SLARS, including additional charges to
earnings if we believe the adjustment is other than temporary. In the event we need access to the funds invested in
the SLARS, we could be required to sell these securities at an amount below our original purchase value. Any of
these events could affect our consolidated financial condition, results of operations and cash flows. However, based
50
Microvision 2008 Annual Report
on our current operating plan and ability to access our $25.5 million held in cash and cash equivalents and other
highly liquid investments held as of December 31, 2008, we do not expect to be required to sell these securities
materially below their current estimated value.
Our investment policy generally directs that the investment managers should select investments to achieve the
following goals: principal preservation, adequate liquidity and return. As of December 31, 2008, our cash and cash
equivalents and investments available-for-sale securities portfolio are comprised of short-term highly rated money
market funds and commercial paper, and the SLARS.
The values of cash equivalents and investment securities, available-for-sale by maturity date as of December 31,
2008, are as follows:
Cash and cash equivalents
Less than one year
One to two years
Greater than five years
Amount
Percent
$
$
16,173,000
9,365,000
--
2,700,000
28,238,000
57.3 %
33.1
--
9.6
100.0 %
Foreign Exchange Rate Risk
All of our development contract payments are made in U.S. dollars. However, in the future we may enter into
additional development contracts in foreign currencies that may subject us to foreign exchange rate risk. We intend
to enter into foreign currency hedges to offset material exposure to currency fluctuations when we can adequately
determine the timing and amounts of the foreign currency exposure.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on The NASDAQ Global Market under the symbol “MVIS.” As of July 20, 2009, there
were approximately 372 holders of record of 76,163,000 shares of common stock outstanding. We have never
declared or paid cash dividends on our common stock. We currently anticipate that we will retain all future earnings
to fund the operations of our business and do not anticipate paying dividends on the common stock in the
foreseeable future.
Our common stock began trading publicly on August 27, 1996. The quarterly high and low sales prices of the
Company’s common stock for each full quarterly period in the last two fiscal years and the year to date as reported
by The NASDAQ Global Market are as follows:
Quarter Ended
2007
March 31, 2007
June 30, 2007
September 30, 2007
December 31, 2007
2008
March 31, 2008
June 30, 2008
September 30, 2008
December 31, 2008
2009
March 31, 2009
June 30, 2009
July 1, 2009 to July 20, 2009
Common Stock
HIGH
LOW
$
4.08
$
2.98
5.90
6.08
4.75
3.62
4.40
3.83
$
4.65
$
1.82
4.05
3.16
2.20
2.35
1.85
1.06
$
2.20
$
.77
3.30
3.22
1.20
2.70
Microvision 2008 Annual Report 51
Stock Performance Graph
Comparison of 5-year cumulative total return among Microvision, Inc., NASDAQ® Market Index,
and Peer Group Index
The following graph compares the cumulative total shareholder return on an initial $100 investment in the Company’s common
stock for the five fiscal years ended December 31, 2008, to two indices: The NASDAQ Market Index and an index of peer compa-
nies selected by the Company (Peer Group). The companies in the Peer Group are Kopin Corporation, Planar Systems, Inc. and
Universal Display Corp. The graph and table assume that $100 was invested on December 31, 2003, in the Company’s common
stock, the NASDAQ Market Index, and the Peer Group and that all dividends were reinvested. The past performance of the
Company’s common stock is not an indication of future performance. We cannot assure you that the price of the Company’s
common stock will appreciate at any particular rate or at all in future years.
Assumes $100 invested on Jan. 1, 2004;
$ 150
Assumes dividend reinvested;
Fiscal year ending Dec. 31, 2008
125
100
75
50
25
Fiscal year ending
2003
2004
2005
2006
2007
2008
Microvision, Inc.
100.00
91.86
47.24
41.86
51.18
22.05
Peer Group Index
100.00
56.43
64.95
65.22
70.45
NASDAQ Market Index
100.00
108.41
110.79
122.16
134.29
32.89
79.25
52
Microvision 2008 Annual Report
Corporate Information
Board of Directors
Richard A. Cowell
Slade Gorton
Jeanette Horan
Marc Onetto*
Alexander Y. Tokman
Brian Turner
Principal, Booz Allen Hamilton, Inc.
Of Counsel, K&L Gates, LLP; Former U.S. Senator
Vice President, Enterprise Business Transformation, IBM
Senior Vice President, Worldwide Operations, Amazon.com
President and Chief Executive Officer, Microvision, Inc.
Former Chief Financial Officer, Coinstar, Inc.
Executive Officers
Alexander Y. Tokman
Ian D. Brown
Sridhar Madhavan
Thomas M. Walker
Jeff T. Wilson
President and Chief Executive Officer
Vice President, Sales and Marketing
Vice President, Engineering
Vice President, General Counsel and Secretary
Chief Financial Officer
Transfer Agent
American Stock Transfer and Trust Company
59 Maiden Lane, New York, NY 10038 Shareholder Services
800.937.5449
Stock Listing
Microvision, Inc. common stock is traded on the NASDAQ® Stock Market under the symbol MVIS.
Investor Inquiries
Microvision, Inc.
Attn: Investor Relations, 6222 185th Ave NE, Redmond, WA 98052
425.936.6847
ir@microvision.com
Corporate Counsel
Ropes & Gray LLP
One International Place, Boston, MA 02110
Independent Accountants PricewaterhouseCoopers LLP
Forward–Looking
Statements
Statements contained in this annual report that relate to future plans, events or performance and potential applications of our technology,
including projections of revenues and results, timing of product releases, plans for product development, sales, customers and channel part-
ners, performance under contracts, signing of contracts, future operations and shipping of products, as well as statements containing words like
“expect,” “believe,” “anticipate,” “targeting,” “planning,” “intending,” “will,” “poised,” and other similar expressions, are forward-looking
statements that involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from those projected
in the Company’s forward-looking statements include the following: market acceptance of and the current developmental stage of our tech-
nologies and products; our financial and technical resources relative to those of our competitors; our ability to obtain financing; our history of
negative cash flows and current expectation of additional losses; our lack of manufacturing experience and ongoing capital requirements; our
dependence on key personnel; our ability to keep up with rapid technological change; changes in display technologies; government regulation
of our technologies; our ability to enforce our intellectual property rights and protect our proprietary technologies; the ability to obtain addi-
tional contract awards and to develop partnership opportunities; the timing of commercial product launches; the ability to achieve key techni-
cal milestones in key products; dependency on advances by third parties in certain technology used by us and other risk factors identified from
time to time in the Company’s SEC Filings, it’s Annual Report on Form 10-K for the year ended December 31, 2008 and its Quarterly Reports
on Form 10-Q. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
*Not standing for re-election at 2009 Annual Shareholder Meeting.
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© 2009 Microvision, Inc. All rights reserved. The Microvision logo, PicoP, ROV and SHOWWX are trademarks of Microvision, Inc.
All other trademarks are the property of their respective owners.
Cert no. SCS-COC-00648
www.microvision.com
Microvision, Inc. 6222 185th Ave NE, Redmond, WA 98052 USA Tel 425.936.MVIS (6847) Fax 425.882.6600