Back to GetFilings.com
1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 000-27969
IMMERSION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3180138
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
801 FOX LANE
SAN JOSE, CALIFORNIA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
(408) 467-1900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE NASDAQ
(TITLE OF CLASS) (NAMES OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held on March 20, 2001 by
non-affiliates of the registrant: $78,995,278. Number of shares of Common Stock
outstanding at March 20, 2001: 18,542,335.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statements for the 2001 Annual Meeting are
incorporated by reference into Part III hereof.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
2
IMMERSION CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 25
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 34
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 68
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 68
Item 11. Executive Compensation...................................... 68
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 68
Item 13. Certain Relationships and Related Transactions.............. 68
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 68
Signatures............................................................ 73
i
3
PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements as a result of certain factors, including those
set forth in Item 1, those described elsewhere in this report and those
described in other reports under the Securities Exchange Act of 1934. Readers
are referred to the "Sales, Marketing and Support," "Research and Development,"
"Competition," "Intellectual Property," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Risk Factors" sections
contained in this Annual Report on Form 10-K, which identify some of the
important factors or events that could cause actual results or performances to
differ materially from those contained in the forward-looking statements.
OVERVIEW
We develop hardware and software technologies that enable users to interact
with computers using their sense of touch. Our patented technologies, which are
branded TouchSense(TM), enable devices such as mice, joysticks, knobs, and
medical simulation products to deliver tactile sensations that correspond to
on-screen events. We focus on four application areas -- computing and
entertainment, medical simulation, professional and industrial, and
three-dimensional capture and interaction. With respect to high volume
applications of our technologies, such as computer peripherals and automotive
interfaces, we primarily license our touch-enabling technologies to third party
manufacturers. We currently license our technology to market leaders in these
areas, including companies such as Logitech and BMW. With respect to emerging
lower volume applications of our technologies, such as medical simulation and
three-dimensional computer imaging, we focus primarily on product sales. In all
application areas, we engage in development projects for third parties. Our
objective is to proliferate our TouchSense technologies across markets,
platforms and applications so that touch and feel become as common as color,
graphics and sound in modern user interfaces. Immersion and its wholly-owned
subsidiaries hold more than 95 issued patents and 230 pending patent
applications in the U.S. and abroad covering various aspects of their hardware
and software technologies.
INDUSTRY BACKGROUND
Early computers had crude user interfaces that only displayed text and
numbers. These machines, commonly known as "green screen" computers, were
effective at processing data but did not communicate information in an engaging
and intuitive manner. As a result, computing was used primarily in selected
scientific and business applications. In the early 1980s, computers began to use
graphics and sound to engage users' perceptual senses more naturally. Graphics
technologies transformed monochrome screens to color, and brought pictures,
charts, diagrams and animation to the computer screen. Audio technologies
enabled sound and music.
By the late 1980s, graphics and audio technologies had spread to consumer
markets, initially through computer gaming applications. By the early 1990s, the
penetration of color graphics and sound into consumer markets had expanded
beyond gaming into mainstream productivity applications, largely due to the
introduction of the Windows 3.0 graphical user interface. By the late 1990s, the
proliferation of graphics and audio content helped transform the Internet into a
highly interactive and popular medium for communication, commerce and
entertainment.
The evolution from alphanumeric characters to the modern user interface is
widely considered to be one of the great advances in computing. By presenting
content in ways that engage the senses more fully, computers were "humanized,"
becoming more personal, less intimidating and easier to use. These improvements
helped expand the audience for computer technologies, encouraging people to use
software for business, home and entertainment applications. Today, color
graphics and audio technologies are standard features of most computer systems.
1
4
While most modern computers realistically present information to the senses
of sight and sound, most still lack the ability to convey content through the
sense of touch. The absence of touch is a substantial barrier to making computer
use more natural and intuitive. Software designers strive to develop compelling
applications for users to see and hear, but do not provide applications that
engage users' sense of touch. As a result, software is not as engaging and
informative as it would be if tactile sensations were conveyed.
The absence of touch and feel in modern computers also limits user
productivity. The Windows interface, for example, is based on a physical
metaphor: users must move the cursor on a screen to drag, drop, stretch and
click. However, users must manipulate graphical elements without the benefit of
tactile feedback. As a result, using a cursor is visually taxing. Selecting an
icon, clicking on a hyperlink or targeting the edge of a window are common tasks
that would be easier to perform if users could feel the engagement of their
cursor with the intended target.
Touch and feel can also be used to enhance a wide variety of applications
beyond personal computing. For example, adding touch to medical simulation
equipment allows medical professionals to train to perform surgical procedures
in a way never before possible. Adding touch to automotive controls can help
simplify the control of multiple systems within a car by allowing the driver to
identify tactiley which system is being controlled.
Like sight and sound, touch is critical for interacting with and
understanding one's physical surroundings. Technology that brings the sense of
touch to computing has the potential to further humanize the computer and
increase the ease, usefulness and enjoyment of computing.
OUR SOLUTION
We develop technologies that allow users to touch and feel computer
content. In diverse applications like computer gaming, business productivity,
medical simulation, automotive controls, and surfing the Web, our technologies
enable software applications to engage a user's sense of touch through a wide
range of devices, such as mice, joysticks, medical interface devices, automobile
dashboard controls, gloves and gamepads.
Our hardware and software technologies work together to enable peripheral
devices to present touch sensations. Our patented designs include specialized
hardware elements such as motors, control electronics and mechanisms, which are
incorporated into common computer peripheral devices, such as mice and
joysticks, or more complex devices, such as endoscopic surgical simulators.
Driven by software algorithms, these hardware elements direct tactile sensations
corresponding to on-screen events to the user's hand.
Key benefits of our solution include:
Complete Solution. We offer a complete technical solution that allows our
licensees to incorporate our touch-enabling technologies into their computer
interface products such as mice, joysticks, knobs, wheels and gamepads at a
reasonable cost and in a reasonable time frame. Our technical solution also
allows software programmers and Web site developers to add touch-enabling
elements to their applications. Our software automatically enables users to feel
the basic user interface features of software applications running on Windows
98, Windows 2000 and Windows Me without additional developer support. Our
software enables users to feel basic Web page features represented through
standard Hypertext Markup Language (HTML), Java and ActiveX protocols. In
addition, we provide authoring tools that permit software developers to quickly
design and incorporate custom touch sensations into their own applications.
Enhances the Effectiveness of Simulation and Training Applications. Some
computer applications, such as medical simulation and product design, require
realism to be effective. Companies and institutions have begun to replace
traditional means of surgical training with more accessible and versatile
simulation systems for training doctors to perform surgical procedures. Our
medical simulation systems provide tactile feedback that simulates what a doctor
would feel when performing an actual procedure. Our technologies are used in
training systems for laparoscopic surgery, endovascular surgery, endoscopic
surgery and catheter insertion. In addition, companies use our whole-hand
sensing glove technologies in order to save time and expense in product design,
which together with our software products, allow for real-time,
three-dimensional object manipulation.
2
5
Compatible with Industry Standards. We have designed our consumer hardware
and software technologies to be compatible with leading hardware and software
standards. Our consumer technologies operate across multiple platforms and
comply with such standards as DirectX, Microsoft's entertainment application
programming interface, and USB (Universal Serial Bus), a standard connector
interface. Our Visual Basic tutorial allows developers to add Immersion
TouchSense technology to their Microsoft(R) Visual Basic(TM) applications using
the Immersion Web ActiveX Control. In addition, our software technology works
with the Flash(TM), Shockwave(TM) and Dreamweaver(R) standards from Macromedia.
Cost-Effective Solution. We have developed component technologies that
permit peripheral device manufacturers to design and manufacture peripheral
devices that incorporate our touch-enabling technologies more cost effectively
than would otherwise be possible. We have also developed and licensed
sophisticated software drivers and firmware that permit our licensees to avoid
substantial development costs and accelerate product introduction.
Presents Information through the Sense of Touch. It is difficult to
communicate physical properties such as texture, compliance, weight and friction
solely through words or pictures. Our technologies allow computer users to use
their sense of touch to perceive these physical properties in a way that is
instantly understandable and intuitively accessible. Our technologies
significantly improve the ability of software to communicate to users the
physical features of a product, the physical properties of a medical procedure
or the physical response of an object in a simulated gaming environment.
Increases Satisfaction and Enjoyment of the Computing Experience. By
engaging the user's sense of touch, our technologies have the potential to make
a variety of consumer software applications more interesting, engaging and
satisfying. In the personal computer gaming market, our licensees, such as
Logitech and Microsoft, are currently manufacturing and selling products
incorporating our intellectual property. We believe that our technologies will
increase user satisfaction across many additional applications, including
business productivity, engineering, education and electronic commerce.
STRATEGY
Our objective is to proliferate our TouchSense technologies across markets,
platforms and applications so that touch becomes as common as color graphics and
sound in the modern computer interface. We intend to maintain and enhance our
position as the leading provider of touch-enabling technology by employing the
following strategies:
Pursue Royalty-Based Licensing Model for High Volume Applications of our
Technologies. We believe that the most effective way to proliferate our
touch-enabling technology across high volume applications of our technologies,
such as computer peripherals and automotive controls, is to license our
intellectual property. We have licensed our intellectual property to numerous
manufacturers of mice, joysticks and steering wheels targeted at consumers. In
addition, we have licensed our technology to BMW for use in the controls of
certain of its upcoming vehicles. We intend to expand the number and scope of
our licensing relationships in the future.
Pursue Direct Product Sales in Lower-Volume Applications of our
Technologies. For lower-volume emerging applications of our technologies, such
as medical simulation systems and three-dimensional capture and interaction
products, our primary strategy is to manufacture and sell products through
direct sales, distributors and value added resellers. We currently sell medical
simulation devices that simulate intravenous catheterization, endovascular
interventions and endoscopy procedures. Our three-dimensional capture and
interaction products consist primarily of our line of computer digitizing
products, including the MicroScribe-3D(R) and the newly introduced
LightScribe-3D(TM), and specialized whole-hand sensing gloves, such as the
CyberGlove(R), CyberGrasp(TM) and CyberForce(TM), that permit simulated
interaction with three-dimensional environments.
Secure Licensees in New Markets for Touch-Enabling Technology. We believe
that our touch-enabling technology can be used in virtually all areas of
computing. We initially focused on computer gaming applications for personal
computers, an area in which we have experienced acceptance of our technologies
by
3
6
key licensees. We have broadened our focus to include additional applications,
such as cursor control for personal computers, automotive controls and medical
simulation. In the future, we intend to expand our market opportunities by
addressing new platforms, such as dedicated game consoles.
Facilitate Our Licensees' Development of Touch-Enabled Products. We will
continue to devote significant resources to facilitate the development of
touch-enabled products by our licensees. We offer complete design packages that
include sample hardware, software, firmware and related documentation, and offer
our technical expertise on a consulting basis. To facilitate development of
products incorporating our touch-enabling technologies, we also offer
specialized microprocessors for controlling the motors in mice, joysticks and
steering wheels. We will continue to invest in research and development to
improve our technologies, with particular emphases on reducing the cost of
consumer touch-enabled products and expanding the breadth of our medical
simulation product offerings.
Expand Software Support for Our Touch-Enabling Technology. In addition to
licensing our intellectual property to computer peripheral device manufacturers
and supporting their product development efforts, we have focused on expanding
software support for our touch-enabling technology. We have developed software
that enables users to automatically feel icons, menus and other objects in
software running in Windows 98, Windows 2000 and Windows Me applications or on
Web pages accessed through Internet Explorer and Netscape Navigator. We offer
specialized authoring tools that simplify adding touch sensations to software
applications and Web pages. Our Visual Basic tutorial allows developers to add
Immersion TouchSense technology to their Microsoft Visual Basic applications
using the Immersion Web ActiveX Control. We also are promoting an efficient file
format, called ".ifr," to facilitate the creation and storage of custom touch
sensations. In addition, our software technology works with the Flash, Shockwave
and Dreamweaver standards from Macromedia.
Expand Market Awareness. We promote adoption of our touch-enabling
technology by increasing market awareness among peripheral device manufacturers,
software developers and consumers. We devote significant resources to working
directly with our licensees to encourage and assist their product development
efforts. We encourage software developers to add touch-enabled content to their
applications by providing them with our authoring tools and technical support.
As part of our license agreements, we typically require our licensees to use our
trademarks and logos to create brand awareness among consumers. We also devote
significant resources to promote our brands.
Develop and Protect Touch-Enabling Technology. Immersion and its
wholly-owned subsidiaries hold more than 95 issued patents and 230 pending
patent applications in the U.S. and abroad covering various aspects of their
hardware and software technologies, including touch-enabling technology. Our
success depends on our ability to license and commercialize our intellectual
property and to continue to expand our intellectual property portfolio. We
devote substantial resources to research and development and are engaged in
projects focused on expanding the scope and application of our technologies. We
have also secured technology by acquisition. We intend to continue to invest in
technology development and potential acquisitions and to protect our
intellectual property rights.
RECENT ACQUISITIONS
We completed three acquisitions in 2000. In the first quarter of 2000, we
acquired Immersion Canada, formerly Haptic Technologies, a corporation with
approximately 20 employees based in Montreal, Canada. Employees of Immersion
Canada play a key role in the development of our software applications, tools
and application program interfaces. This software is used in our computing and
entertainment, and automotive applications.
In the third quarter of 2000, we completed the acquisition of Immersion
Medical, formerly HT Medical Systems, a corporation with approximately 60
employees based in Gaithersburg, Maryland. Immersion Medical designs,
manufactures and sells computer-based medical simulators that allow medical
professionals to practice procedures without using animals or cadavers, or
placing patients at risk. Immersion Medical's products integrate proprietary
computer software and tactile feedback robotics with low-cost and high-power
graphics computers to achieve highly realistic simulation systems. Immersion
Medical's three key simulation
4
7
product lines address intravenous catheterization, endovascular interventions
and endoscopy. All are comprised of software modules, an interface device and a
hardware platform. Immersion Medical's strategy is to sell hardware systems to
customers, followed by sales of multiple software packages for specific medical
procedures.
We also completed the acquisition of Virtual Technologies in the third
quarter of 2000. Virtual Technologies, a corporation with approximately 15
employees based in Palo Alto, California, designs, manufactures and sells
hardware and software technologies used in high-end simulation, mechanical
computer-aided design, visualization and motion-capture applications, as well as
research. Virtual Technologies' whole-hand sensing gloves, which include
CyberGlove, CyberGrasp and CyberForce, are sophisticated hand-measurement
devices that accurately measure the position and orientation of a user's hand
and fingers and, when used in conjunction with Virtual Technologies' software,
map these measurements to a graphical hand on a computer screen. This allows
users to "reach in and grab" digital objects in a software application as if
they were physical objects. Virtual Technologies' current software products
include the VirtualHand(R) Suite 2000 and SimStudio(TM). VirtualHand Suite 2000
is a software toolkit that helps users integrate Virtual Technologies' hardware
products into their own applications. SimStudio is a software tool used for
verifying, testing and evaluating three-dimensional digital models in real-time.
MARKET APPLICATIONS
While we believe that our technologies are broadly applicable, we are
currently focusing our marketing and business development activities on the
following target application areas:
Computing and Entertainment. We initially licensed our intellectual
property for touch-enabling technologies for consumer gaming peripherals in
1996, under the I-Force(R) trademark. While our licensees continue to market
gaming-related goods under the I-Force mark, we are in the process of
transitioning our branding to the TouchSense mark, which extends beyond gaming
to all aspects and applications of our haptics-related products and services. We
have licensed our TouchSense intellectual property to over 16 peripheral
manufacturers, including Logitech and Microsoft. According to PC Data,
touch-enabled joysticks accounted for approximately 6% of the domestic PC
joystick sales by unit volume in 1998, 10% of the domestic PC joystick sales by
unit volume in 1999, and 12% of the domestic PC joystick sales by unit volume in
2000. In addition, we have developed TouchSense technologies for gaming
applications designed specifically for arcade and location-based entertainment
markets. We intend to expand our TouchSense licensing business to include new
product categories for the personal computer platform and to target additional
gaming platforms.
In order to bring touch-enabling technology to every desktop, we have
targeted the general purpose personal computer market. To address this large
opportunity, we developed a touch-enabling technology designed for cursor
control products that enables all the basic functionality of a traditional mouse
but also presents information to the sense of touch. In 1998, we entered into a
license with Logitech under which Logitech sells computer mice incorporating our
touch-enabling technology. Logitech launched the first computer mouse
incorporating our touch-enabling technologies, the WingMan(R) Force Feedback
Mouse, during the fourth quarter of 1999. In September 2000, Logitech launched
two new lower-cost, touch-enabled mouse products, the iFeel(TM) Mouse and the
iFeel(TM) MouseMan(R), each of which is targeted for use with general-purpose
computer applications, such as business productivity and Web applications. The
iFeel Mouse lists for $39.95 and the iFeel MouseMan lists for $59.95. To date,
Logitech has sold over 250,000 units of its touch-enabled iFeel mice. In
addition to Logitech, we have also partnered with Kensington, enabling
Kensington to sell touch-enabled mice and trackballs under the Kensington and
Gravis brand names. Finally, we have also announced a licensing partnership with
Primax Electronics, enabling Primax Electronics to produce touch-enabled
computer mice using Immersion's patented TouchSense technology.
Medical Simulation. We have developed numerous technologies that can be
used for medical training and simulation. By enabling computers to deliver touch
sensations to users, our technologies can support realistic simulations that are
effective in teaching medical students and doctors what it feels like to perform
a given procedure. The use of our simulators allow healthcare providers to
practice procedures in an
5
8
environment that poses no risks to patients, where mistakes have no dire
consequences and animal or cadaver use is avoided. We partner with leading
medical technology companies, such as Medtronic, to develop applications that
closely simulate not only the look, but also the feel of performing an actual
medical procedure, allowing doctors to safely practice and perfect techniques
before they start performing operations on patients.
Professional and Industrial. In recent years there has been a proliferation
of automotive sub-systems which are directly accessed by drivers and passengers.
These include radio, CD, navigation, telephone and climate control systems,
among others. As a result, there has been a corresponding increase in the number
of physical control devices in the automotive cockpit. This clutter may be
hazardous to the extent it distracts the driver's attention. Our TouchSense
control knob controls multiple systems and has a different feel for each system
to allow the driver to identify tactilely which system is being controlled. The
result is a simpler, more easily-accessed control environment. We have licensed
our automotive control knob technology to BMW, which has indicated that it
intends to introduce the TouchSense control knob in future models. We are also
working with several other major automobile manufacturers who have expressed
interest in touch-enabled automobile controls.
In addition to automotive control knobs, we manufacture and sell
specialized computer peripherals that are not touch-enabled, but incorporate
related advanced computer peripheral technologies. These specialized peripherals
include the Softmouse, a high performance, non-touch-enabled mouse optimized for
use in geographic information systems and mapmaking, and PinPoint, a
stereotactic arm used to enable image-guided biopsies and radiation therapy.
Three-Dimensional Capture and Interaction. A major focus of our efforts in
this area is computer peripherals that we manufacture and sell and which are
targeted at three-dimensional computer imaging applications. These include the
MicroScribe-3D product line and the recently introduced LightScribe-3D product.
Both allow users to capture three-dimensional computer models directly from
physical objects. The MicroScribe-3D products contain sensor and microprocessor
technologies that allow users to digitize physical objects simply by tracing
their contours with a stylus. A computer records the three-dimensional geometry
of the object and reproduces it on the screen as a three-dimensional computer
model. The LightScribe-3D achieves a similar result using a camera and a
hand-held laser to generate high-quality, fully-textured three-dimensional
models of physical objects. The LightScribe-3D simplifies the creation of
three-dimensional interactive content, especially three-dimensional content
intended for display on Web pages. The MicroScribe product line is designed to
support the needs of game developers, engineers, animators, filmmakers,
industrial designers and other professionals who need to create realistic
three-dimensional computer images quickly and easily. The LightScribe product is
designed for animators, Web designers and developers.
Another focus of our efforts is our CyberGlove, CyberGrasp and CyberForce
line of touch-enabled gloves and our three-dimensional interaction software
products, including VirtualHand Suite 2000 and SimStudio, that simulate the
manipulation of objects in three-dimensional environments. Our CyberGlove line
of whole-hand sensing gloves and three-dimensional software products are used in
research applications and in high-end simulation, mechanical computer-aided
design, visualization and motion-capture applications to improve the product
development process.
TECHNOLOGIES AND PRODUCTS
Technology Licensing. We currently license our intellectual property to
manufacturers which produce peripheral devices incorporating our touch-enabling
technologies. In general, our licenses permit manufacturers to produce only a
particular category of product within a specified field of use. Our basic
licensing model includes a per unit royalty paid by the manufacturer that is a
percentage of the wholesale selling price of the touch-enabled product. In
addition, the licensee generally must abide by a branding obligation. The
prominent display of the TouchSense logo on retail packaging generates customer
awareness for our technologies.
Computing and Entertainment Products. We license our intellectual property
to manufacturers which incorporate our touch-enabling technologies into various
computer peripheral devices targeted at the personal computer platform.
Currently, there are a number of consumer joysticks sold using TouchSense
technology,
6
9
including the Wingman Force 3D from Logitech, the Sidewinder Force Feedback 2
from Microsoft, the Force Feedback Joystick from Guillemot and the TopShot Force
Feedback from AVB. There are also a number of steering wheel gaming peripherals
licensed under the TouchSense brand, including the Wingman Formula Force GP from
Logitech, the Force Feedback Racing Wheel from Guillemot and the Sidewinder
Force Feedback Wheel from Microsoft. Logitech began selling its latest line of
touch-enabled computer mice, the iFeel Mouse and the iFeel MouseMan, in
September 2000. These products automatically allow users to feel many of the
basic desktop controls in Windows 98, Windows 2000 and Windows Me and standard
interface elements of Web pages accessed through Internet Explorer and Netscape
Navigator.
Demand for computer peripheral devices incorporating our touch-enabling
technologies depends on the existence of software applications and Web pages
that take advantage of these devices. The development of such software likewise
depends on the existence of an installed base of touch-enabled hardware devices.
We have addressed this interdependency of hardware and software solutions in two
ways. First, we have developed end-user software that is included with
Logitech's touch-enabled mice at no additional cost, and which automatically
adds touch to many of the basic Windows 98, Windows 2000 and Windows Me
controls. Second, we have developed and provided to developers and end users
software authoring tools that help programmers add touch-enabled content to
software applications and Web pages.
To improve the performance and to help reduce the cost of gaming and
peripheral products manufactured by our licensees, we have developed our custom
Immersion Processors. Our microprocessors contain circuitry to work with low
cost sensors used in touch-enabled gaming and peripheral products, and have been
designed to streamline processing of information sent between a personal
computer and a touch-enabled computer peripheral product. We believe that these
microprocessors are cost-effective components that allow our licensees to reduce
their costs of goods and the amount of custom development that they must perform
to bring a product to market, speeding their development cycle. Immersion
Processors are manufactured for us solely by Kawasaki LSI, with which we have
entered into an ASIC Design and Development Agreement that remains in effect
until cancelled by either party. We purchase the Immersion Processors from
Kawasaki LSI and sell them to those licensees that want to use the
microprocessors in their gaming products. We generally warrant our
microprocessors to conform to our specifications and to be free from defects in
materials and workmanship for a period of one year from delivery, and Kawasaki
LSI extends a similar warranty to us.
Medical Products. We have three medical simulation product lines: our
CathSim(R) Vascular Access Simulator, which simulates intravenous
catheterization; our AccuTouch Endoscopy(R) Simulator, which simulates
endovascular interventions; and our AccuTouch(R) Endovascular Simulator, which
simulates endoscopy. These devices are used for training purposes and enable
clinicians to feel simulations of sensations experienced during medical
procedures, such as encountering an unexpected obstruction in an artery. All are
comprised of software modules, an interface device and a hardware platform. We
sell hardware systems ranging from $6,000 to $30,000, which may be followed by
additional sales of software. We design each product line to maximize the number
of procedures that can be simulated. The relatively low price of our software
modules provides an opportunity for repeat sales.
Automotive Controls. We have developed TouchSense technology appropriate
for use in automobile dashboards. We have begun efforts to license this
technology to automobile manufacturers and automobile component suppliers. BMW
has taken a license to our TouchSense knob technology for use in the dashboard
controls of certain of its upcoming automobiles. We have also formed a strategic
partnership with ALPS Electronics, a leading automotive component supplier, as
part of a strategy to speed adoption of our TouchSense technologies across the
automotive industry. We are also working with several other major automobile
manufacturers who have expressed interest in touch-enabled automobile controls.
Whole-Hand Interfaces. We manufacture and sell the CyberGlove, a glove that
accurately measures the movement of a user's hand and, used in conjunction with
our software, maps it to a graphical hand on the computer screen. Users can
"reach in and grab" digital objects similar to physical objects. CyberTouch(TM)
is a CyberGlove with a vibro-tactile feedback option that provides users with
tactile cues when they manipulate digital objects. CyberGrasp is an option for
the CyberGlove that adds force-feedback to the fingertips. With CyberGrasp users
can feel the three-dimensional graphical objects being manipulated on the
screen.
7
10
CyberForce is an enhanced, grounded force-feedback product, which was introduced
in the fourth quarter of 2000. Incorporating our TouchSense technologies,
CyberForce allows users to better sense immovable objects, as well as inertia,
by restricting arm movement.
Our software products for our whole-hand interfaces include the VirtualHand
Suite 2000 and SimStudio. Virtual Hand Suite 2000 is a software toolkit that
helps users integrate our whole-hand interface products into specific
applications. Besides incorporating algorithms for real-time, three-dimensional
object manipulation, the toolkit provides collision-detection capabilities that
are essential for assembly tasks. The toolkit also computes the information
required for directing forces to the user. Our recently released, SimStudio is a
software tool used for verifying, testing and evaluating three-dimensional
digital models in real-time. It allows for the direct import of
three-dimensional data from multiple sources, such as SolidWorks(R) and 3D
Studio(R), to construct functional digital prototypes.
HAPTICS -- THE SCIENCE OF TOUCH SIMULATION
Touch or feel simulation, also known as force feedback, haptic feedback or
force reflection, refers to the technique of adding touch sensations to computer
hardware and software by imparting physical forces upon the user's hand. These
forces are imparted by actuators, usually motors, that are incorporated into
consumer peripheral devices such as mice, joysticks, steering wheels or
gamepads, or into more sophisticated interfaces designed for industrial, medical
or scientific applications. Touch-enabled peripheral devices can impart to users
physical sensations like rough textures, smooth surfaces, viscous liquids,
compliant springs, jarring vibrations, heavy masses and rumbling engines.
As a user manipulates a touch-enabled device, such as a joystick, motors
within the device apply computer-modulated forces that resist, assist or
otherwise enhance the manipulations. These forces are generated based on
mathematical models that simulate the desired sensations. For example, when
simulating the feel of a rigid wall with a force feedback joystick, motors
within the joystick apply forces that simulate the feel of encountering the
wall. As the user moves the joystick to penetrate the wall, the motors apply a
force that resists the penetration. The harder the user pushes, the harder the
motors push back. The end result is a sensation that feels like a physical
encounter with an obstacle.
The mathematical models that control the motors may be simple modulating
forces based on a function of time, such as jolts and vibrations, or may be more
complex modulating forces based on user manipulations such as surfaces,
textures, springs and liquids. Complex sensations can be created by combining a
number of simpler sensations. For example, a series of simulated surfaces can be
combined to give the seamless feel of a complex object like a sports car.
Textures can be added to these complex surfaces so that the windshield of the
sportscar feels smooth and its tires feel rubbery.
Most computer interface devices, such as mice and joysticks, are input-only
devices, meaning that they track a user's physical manipulations but provide no
manual feedback. As a result, information flows in only one direction, from the
peripheral to the computer. Touch-enabled devices are input-output devices,
meaning that they track a user's physical manipulations (input) and provide
realistic physical sensations coordinated with on-screen events (output).
SALES, MARKETING AND SUPPORT
With respect to certain high-volume applications for our technologies, we
establish licensing relationships. In other lower-volume applications, we sell
our products through our direct sales efforts or indirectly through distributors
and value-added resellers. As part of our strategy to increase our visibility
and promote our touch-enabling technology, our license agreements generally
require our licensees to display the TouchSense logos on licensed products they
distribute.
With respect to intellectual property licensing, we have focused our
marketing activities on developing relationships with potential licensees and on
participating with existing licensees in their marketing and sales efforts. To
generate awareness of our technologies and our licensees' products, we
participate in industry trade shows, maintain ongoing contact with industry
press and provide product information over our Web site.
8
11
With respect to medical simulation, we employ a direct sales force that
markets simulation systems to hospitals, health management organizations,
nursing schools, medical schools, emergency medical technician training
programs, the military and other organizations involved in procedural medicine.
We have approximately ten sales representatives in the United States and two
sales representatives in Europe. In Asia, we also work with a network of
distributors. We have distributors in most major Asian markets, including those
in Japan, South Korea, Malaysia and Singapore. Our sales force is also augmented
through co-marketing arrangements with strategic partners.
A focus of our marketing efforts is to promote the adoption of our
touch-enabling technology by software and Web developers to facilitate the
implementation of touch sensations into software applications. We have developed
the Immersion TouchSense Developer Toolkit, which contains our software
authoring tools, as well as documentation, tutorials and software files
containing sample touch sensations. We currently distribute this software to
software developers at no cost. Our software support staff also works closely
with developers to assist them in developing compelling touch-enabled
applications.
We believe that it is important to increase awareness of our touch-enabling
technology among potential end users. To this end, we have engaged in a series
of public relations, marketing and promotional campaigns. The goal of these
efforts is to create consumer awareness of the benefits of touch-enabling
technologies. Our sales and marketing expenses were $11.0 million in 2000, $3.5
million in 1999, and $1.6 million in 1998.
RESEARCH AND DEVELOPMENT
Our success depends on our ability to improve, and reduce the costs of, our
technologies in a timely manner. We have assembled a team of highly skilled
engineers who possess experience in the disciplines required for touch-enabling
technology development, including mechanical engineering, electrical engineering
and computer science.
Our research and development expenses were $7.3 million in 2000, $5.5
million in 1999, and $5.2 million in 1998. Our research and development efforts
have been focused on technology development, including hardware, software and
designs. We have entered into numerous contracts with government agencies and
corporations that help fund advanced research and development. Our government
contracts permit us to retain ownership of the technology developed under the
contracts, provided that we provide the applicable government agency a license
to use the technology for non-commercial purposes.
COMPETITION
With respect to touch-enabled consumer products, we are aware of several
companies that claim to possess force feedback technology applicable to the
consumer market, but we are not aware that any of these companies or their
licensees have introduced touch-enabled products. Several companies also
currently market force feedback products to non-consumer markets and could shift
their focus to the consumer market. In addition, our licensees may develop
products that compete with products employing our touch-enabling technology but
are based on alternative technologies. Many of our licensees, including
Microsoft and Logitech, and other potential competitors have greater financial
and technical resources upon which to draw in attempting to develop computer
peripheral technologies that do not make use of our touch-enabling technology.
Our competitive position is partially dependent on the competitive
positions of our licensees that pay a per-unit royalty. Our licensees' markets
are highly competitive. We believe that the principal competitive factors in our
licensees' markets include price, performance, user-centric design, ease of use,
quality and timeliness of products, as well as the manufacturer's
responsiveness, capacity, technical abilities, established customer
relationships, retail shelf space, advertising, promotion programs and brand
recognition. Touch-related benefits in such markets may be viewed simply as
enhancements and compete with non-touch-enabled technologies.
There are several companies that currently sell high-end simulation
products that compete with our professional and industrial, and medical
products, including Simbionics. The principal bases for competition in
9
12
these markets are technological sophistication and price. We believe we compete
favorably on these bases. With respect to our whole-hand sensing gloves, we have
several competitors including Fifth Dimension Technologies and Nissho
Electronics.
Our microprocessors have been optimized to work with low cost sensors used
in touch-enabled gaming and peripheral products and to streamline processing of
information sent between a personal computer and a touch-enabled gaming or
computer peripheral product. Currently, semiconductor companies, including
Mitsubishi and ST Microelectronics, manufacture products that compete with the
Immersion Processors.
INTELLECTUAL PROPERTY
We rely on a combination of patents, copyrights, trade secrets, trademarks,
employee and third-party nondisclosure agreements and licensing arrangements to
protect our intellectual property. We consider our ability to protect our
intellectual property to be critical to our success.
Immersion and its wholly-owned subsidiaries hold more than 95 issued
patents and 230 pending patent applications in the U.S. and abroad covering
various aspects of their hardware and software technologies. Our current U.S.
patents expire between the years 2011 and 2018. Our failure to obtain or
maintain adequate protection for our intellectual property rights for any reason
could hurt our competitive position. Patents may not issue from the patent
applications that we have filed or may file. Our issued patents may be
challenged, invalidated or circumvented, and claims of our patents may not be of
sufficient scope or strength, or issued in the proper geographic regions, to
provide meaningful protection or any commercial advantage.
In addition, others may attempt to develop technologies that are similar or
superior to our technologies, duplicate our technologies or design around our
patents. Effective intellectual property protection may be unavailable or
limited in some foreign countries. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise use
aspects of our methods and devices that it regards as proprietary. From time to
time, we will need to litigate in order to protect or enforce our intellectual
property rights. Litigation may be costly, time-consuming and a distraction to
management, and could result in the impairment or loss of portions of our
intellectual property. If our intellectual property protection is insufficient
to protect our intellectual property rights, we could face increased competition
in the market for our technologies or be unable to persuade or require companies
to enter into royalty-bearing license arrangements.
We have acquired patents from third parties and also license some
technologies from third parties. We must rely upon the owners of the patents or
the technologies for information on the origin and ownership of the acquired or
licensed technologies. As a result, our exposure to infringement claims may
increase. We generally obtain representations as to the origin and ownership of
acquired or licensed technology and indemnification to cover any breach of these
representations. However, representations may not be accurate and
indemnification may not provide adequate compensation for breach of the
representations.
From time to time, we have received claims from third parties that our
technologies, or those of our licensees, infringe the intellectual property
rights of these third parties. After examination of these claims and
consultation with counsel, we believe that these claims are without merit. To
date, none of these companies has filed a legal action against us. However,
these or other matters might lead to litigation costs in the future.
Intellectual property claims, whether or not they have merit, could be
time-consuming to defend, cause product shipment delays, require us to pay
damages, or require us to cease utilizing the technology unless we can enter
into royalty or licensing agreements. Royalty or licensing agreements might not
be available on terms acceptable to us or at all. Furthermore, claims could also
result in claims from our licensees under the indemnification provisions of
their agreements with us.
EMPLOYEES
As of December 31, 2000, we had 162 full-time and 6 part-time employees,
including 59 in research and development, 58 in sales and marketing and 51 in
finance, administration and operations. As of that date, we also had 1
independent contractor. None of our employees is represented by a labor union,
and we consider our employee relations to be good. Competition for qualified
personnel in our industry is extremely intense, particularly for engineers and
technical staff. Our future success will depend in part on our continued ability
to attract, hire and retain qualified personnel.
10
13
EXECUTIVE OFFICERS
The following table sets forth information regarding our executive officers
as of March 1, 2001:
NAME POSITION WITH THE COMPANY AGE
---- ------------------------- ---
Robert O'Malley........................... President and Chief Executive Officer, Director 55
Louis Rosenberg, Ph.D. ................... Chairman, Director 31
Victor Viegas............................. Vice President, Finance and Chief Financial
Officer 43
J. Stuart Mitchell........................ Executive Vice President, Business Groups 47
Bruce Schena.............................. Vice President, Chief Technology Officer 36
Kenneth Martin............................ Vice President, Engineering 35
Bhartendu Parekh.......................... Vice President and General Manager, Computing and
Entertainment Group 41
Craig Factor.............................. General Counsel and Secretary 32
Mr. Robert O'Malley has served as our President and Chief Executive Officer
since October 2000. From June 1999 to July 2000, he served as president of
Intermec Technologies Corporation, a supply chain management company, a
subsidiary of Unova, Inc, an industrial technologies company. From May 1995 to
June 1999, Mr. O'Malley held several executive positions at MicroAge, an
information technologies company, and its wholly-owned subsidiary Pinacor, a
distributor of communications product solutions, including serving as its chief
executive officer from March 1998 until June 1999 and President of MicroAge from
November 1996 until February 1998. From 1976 to 1995, Mr. O'Malley held a
variety of management positions at IBM, an information systems company,
including general manager of desktop systems from September 1994 to February
1995. Mr. O'Malley holds a bachelor of science degree in aeronautical
engineering from the University of Minnesota, and a master of business
administration from Arizona State University. Mr. O'Malley is a board member of
the University of North Dakota Aerospace Foundation, serves on the board of
regents of Brophy College Preparatory, and is a member of the Global Advisory
Council for Thunderbird Graduate School of International Management. Mr.
O'Malley served as a captain in the United States Air Force from 1967 to 1973.
Dr. Louis Rosenberg is a founder of Immersion and has served as Chairman
since May 1993. Dr. Rosenberg also served as our President and Chief Executive
Officer from May 1993 until October 2000. Since April 1997, Dr. Rosenberg has
also served as a manager of MicroScribe LLC, a licensing company in which we
hold a membership interest. Dr. Rosenberg holds bachelor of science, master of
science and doctorate degrees in mechanical engineering from Stanford
University. Dr. Rosenberg currently serves as a director of the Humane Society
of Silicon Valley.
Mr. Victor Viegas has served as our Chief Financial Officer and Vice
President, Finance since August 1999. From June 1996 to August 1999, he served
as vice president, finance and administration and chief financial officer of
Macrovision Corporation, a developer and licensor of video and software copy
protection technologies. From October 1986 to June 1996, he served as vice
president of finance and chief financial officer of Balco Incorporated, a
manufacturer of advanced automotive service equipment. He holds a bachelor of
science degree in accounting and a master of business administration degree from
Santa Clara University. Mr. Viegas is also a certified public accountant in the
State of California.
Mr. J. Stuart Mitchell has served as our Executive Vice President, Business
Groups since August 2000. From August 1999 to August 2000, Mr. Mitchell, served
as our Vice President, Business Development. From February 1987 to February
1999, Mr. Mitchell served as vice president of sales and marketing, systems
products division and vice president of worldwide technology licensing business
for Adobe Systems, Inc., a technology licensing desktop publishing and graphics
software company. From May 1982 to January 1987, Mr. Mitchell served in various
sales and marketing management positions for Zentec Corporation, a computer
systems and display terminal company and, from April 1977 to April 1982, Mr.
Mitchell served in various sales and marketing positions for Xerox Corporation,
an information technology and document systems company. Mr. Mitchell holds a
bachelor of science degree in engineering physics with a minor in business from
the University of Colorado, Boulder.
11
14
Mr. Bruce Schena has served as our Vice President, Chief Technology Officer
since January 1995. From January 1995 to February 2000, Mr. Schena served as a
member of our board of directors. From January 1995 to October 2000, Mr. Schena
also served as our Secretary. Since April 1997, Mr. Schena has also served as a
manager of MicroScribe LLC, a licensing company in which we hold a membership
interest. From June 1993 to December 1994, Mr. Schena consulted for Pandemonium
Product Development, a product design company owned by Mr. Schena. Mr. Schena
holds bachelor of science and master of science degrees in mechanical
engineering from Massachusetts Institute of Technology and a degree of engineer
in mechanical engineering from Stanford University.
Mr. Kenneth Martin has served as our Vice President of Engineering since
February 2000. From April 1996 to February 2000, Mr. Martin served as our
Director of Product Development. From June 1994 to April 1996, Mr. Martin served
as a design engineer at IDEO Product Development Inc., a product design company.
From 1994 to 1998, he also served as a lecturer in the design division of the
mechanical engineering department of Stanford University. Mr. Martin holds a
bachelor of applied science degree from the University of Toronto and a master
of science degree in manufacturing systems engineering from Stanford University.
Mr. Bhartendu Parekh has served as our Vice President and General Manager
of our Computing and Entertainment Group since February 2001. From December 1998
to January 2001, Mr. Parekh served in several marketing positions at Gateway, a
personal computer company, including marketing director for Asia. From January
1996 to November 1998, Mr. Parekh was with Fujitsu PC Corporation, a personal
computer corporation and a division of Fujitsu Limited. During Mr. Parekh's
tenure at Fujitsu PC, he served as a director of product marketing and director
of marketing & strategic planning. Mr. Parekh holds a master of science in
computer science from Wayne State University and a bachelor of science in
electrical engineering from Sardar Patel University, India.
Mr. Craig Factor has served as our General Counsel since September 1997 and
Secretary since October 2000. From January 1995 to January 1997, Mr. Factor was
an associate at the law firm of Wilson Sonsini Goodrich & Rosati. From September
1993 to January 1995, Mr. Factor was an associate at the law firm of Wiley, Rein
& Fielding. Mr. Factor holds a bachelor of arts degree in social studies from
Harvard University and a juris doctorate degree from the Duke University School
of Law.
RISK FACTORS
THE MARKET FOR TOUCH-ENABLING TECHNOLOGIES AND TOUCH-ENABLED PRODUCTS IS AT AN
EARLY STAGE AND IF MARKET DEMAND DOES NOT DEVELOP, WE MAY NOT ACHIEVE OR SUSTAIN
REVENUE GROWTH.
The market for our touch-enabling technologies, and our and our licensees'
touch-enabled products is at an early stage. If we and our licensees are unable
to develop demand for touch-enabling technologies and touch-enabled products, we
may not achieve or sustain revenue growth. We cannot accurately predict the
growth of the markets for these technologies and products, the timing of product
introductions or the timing of commercial acceptance of these products. We are
currently working to increase the demand for these technologies and products in
the following five principal application areas:
- cursor control peripherals, such as touch-enabled mice and trackballs,
for use with personal computers;
- touch-enabled medical simulators that can be used for training and skills
assessment for procedures such as catheterization, bronchoscopy and
sigmoidoscopy;
- touch-enabled peripherals for computer gaming on personal computers and
dedicated gaming consoles, such as Sony's PlayStation(R) 2;
- touch-enabled automotive interfaces; and
- touch-enabled, whole-hand sensing gloves, such as our CyberForce product.
Even if our touch-enabling technologies and our and our licensees' touch-enabled
products are ultimately widely adopted, widespread adoption may take a long time
to occur. The timing and amount of royalties and
12
15
product sales that we receive will depend on whether the products marketed
achieve widespread adoption and, if so, how rapidly that adoption occurs. We
expect that we will need to pursue extensive and expensive marketing and sales
efforts to educate prospective licensees and end users about the uses and
benefits of our technologies and to persuade software developers to create
software that utilizes our technologies.
WE HAD AN ACCUMULATED DEFICIT OF $37.7 MILLION AS OF DECEMBER 31, 2000, WILL
EXPERIENCE LOSSES IN THE FUTURE AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
Since 1997, we have incurred losses in every fiscal quarter, and we expect
losses through at least the third quarter of 2001. We will need to generate
significant revenue to achieve and maintain profitability. We may not achieve,
sustain or increase profitability in the future. We anticipate that our expenses
will increase substantially in the foreseeable future as we:
- attempt to expand the market for touch-enabled products;
- increase our sales efforts;
- incur additional expenses related to the operation of businesses we have
acquired or will acquire;
- continue to develop our technologies;
- pursue strategic relationships; and
- protect and enforce our intellectual property.
If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, we may not achieve or maintain profitability.
THE RECENT SLOWDOWN IN PERSONAL COMPUTER SALES MAY LEAD TO A REDUCTION IN SALES
OF OUR LICENSEES' TOUCH-ENABLED PERIPHERAL PRODUCTS, SUCH AS TOUCH-ENABLED MICE
AND JOYSTICKS, WHICH MAY ADVERSELY AFFECT OUR ROYALTY REVENUE.
In the past several months, large personal computer manufacturers have
announced slower than anticipated sales of personal computers. This slowdown in
personal computer sales may adversely affect sales of our licensees'
royalty-bearing, touch-enabled peripheral products, such as touch-enabled mice
and joysticks, that are used with personal computers. The slowdown affecting
personal computer companies may also make it more difficult to convince such
companies to incorporate a touch-enabled mice product into their product lines.
The impact of this downturn on our royalty revenue may be more pronounced if a
significant cause of this trend is a reduction in the amount that individuals
and companies have budgeted for personal computer-related devices, such as
touch-enabled mice, rather than saturation of the market for personal computers
generally.
WE MAY BE UNABLE TO INCREASE SALES OF OUR MEDICAL SIMULATION DEVICES IF, AS A
RESULT OF THE CURRENT ECONOMIC SLOWDOWN OR OTHER FACTORS, WE ARE UNABLE TO
PERSUADE HOSPITALS TO PROVIDE IN THEIR BUDGETS FOR PURCHASES OF THESE NEW
MEDICAL SIMULATION DEVICES.
Our medical simulation products, such as our AccuTouch Endoscopy Simulator
and our AccuTouch Endovascular Simulator, have only recently begun to be used by
hospitals and medical schools to train healthcare professionals. As a result,
there is often no allocation in the existing budgets of these training
facilities for such simulation devices. To increase sales of our simulation
devices, we must, in addition to convincing training facility personnel of the
utility of the devices, persuade them to include a significant expenditure in
their budgets. If these training facilities are unwilling to budget for
simulation devices or reduce their budgets as a result of current economic
slowdown, cost-containment pressures or other factors, we may not be able to
increase sales of medical simulators at a satisfactory rate.
13
16
REDUCED SPENDING BY CORPORATE RESEARCH AND DEVELOPMENT DEPARTMENTS MAY ADVERSELY
AFFECT SALES OF OUR THREE-DIMENSIONAL CAPTURE AND INTERACTION PRODUCTS.
We believe that the current economic downturn has lead to a reduction in
corporations' budgets for research and development in several sectors, including
the automotive and aerospace sectors, that use our three-dimensional capture and
interaction products. Sales of our three-dimensional capture and interaction
products, including our CyberGlove line of whole-hand sensing gloves and our
MicroScribe line of three-dimensional digitizers, may be adversely affected by
these cuts in corporate research and development budgets.
AUTOMOBILES INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES ARE SUBJECT TO LENGTHY
PRODUCT DEVELOPMENT PERIODS, MAKING IT DIFFICULT TO PREDICT WHEN AND WHETHER WE
WILL RECEIVE PER UNIT AUTOMOTIVE ROYALTIES.
The product development process for automobiles is very lengthy. We do not
earn per unit royalty revenue on our automotive technologies unless, and until,
automobiles featuring our technologies are shipped to customers, which can be
several years after we enter into an agreement with an automobile manufacturer.
During the entire product development process, we face the risk that an
automobile manufacture may delay the incorporation or choose not to incorporate
our technologies into its automobiles, making it difficult for us to predict the
per unit automotive royalties we may receive.
THE MARKET FOR OUR LIGHTSCRIBE-3D PRODUCT, AN OPTICALLY-BASED, THREE-DIMENSIONAL
DIGITIZER, IS AT AN EARLY STAGE, AND OUR PRODUCT REVENUES MAY NOT GROW IF MARKET
DEMAND DOES NOT DEVELOP.
We recently introduced our LightScribe-3D product, which uses a video
camera, hand-held laser stylus, and specialized image processing software to
allow users to create three-dimensional images of objects. The LightScribe-3D is
being marketed for the creation of high-quality, fully-textured,
three-dimensional models that can be displayed and manipulated on Web pages. The
market for digitizers to facilitate the creation of such three-dimensional Web
content is at an early stage and has been adversely affected by the economic
downturn affecting Web-based retailers. If demand does not develop we may not be
able to grow our product revenues.
THE INTEGRATION OF IMMERSION MEDICAL AND VIRTUAL TECHNOLOGIES MAY BE DIFFICULT
TO ACHIEVE, WHICH MAY ADVERSELY AFFECT OPERATIONS.
In the third quarter of 2000, we completed the acquisition of Immersion
Medical, a corporation with approximately 60 employees based in Gaithersburg,
Maryland and Virtual Technologies, a corporation with approximately 15 employees
based in Palo Alto, California. Immersion, Immersion Medical and Virtual
Technologies have operated independently in the past. The combination of these
three businesses may be difficult. If we fail to integrate the businesses
successfully the operating results of the combined company could be adversely
affected and the combined company may not achieve the benefits or operating
efficiencies that we hope to obtain from the acquisitions. Moreover, we do not
know whether the products, systems and personnel of the three companies will be
fully compatible.
WE HAVE LIMITED EXPERIENCE MARKETING AND SELLING THE PRODUCTS OF OUR RECENTLY
ACQUIRED SUBSIDIARIES, AND IF WE ARE UNSUCCESSFUL IN MARKETING AND SELLING THESE
PRODUCTS WE MAY NOT ACHIEVE OR SUSTAIN PRODUCT REVENUE GROWTH.
Immersion has limited experience marketing and selling medical simulation
or high-end simulation products either directly or through distributors. The
success of our efforts to sell Immersion Medical's medical simulation products
and Virtual Technologies' glove-based simulation products will depend upon our
ability to establish a qualified sales force and establish relationships with
distributors. Our current sales and marketing staff is very limited, and we must
attract and retain qualified personnel to direct the sales and marketing of our
simulation products. We may not be successful in attracting and retaining the
personnel necessary to sell and market our simulation products successfully.
There is no assurance that our direct selling efforts will be effective,
distributors will market our products successfully or, if our relationships with
distributors terminate,
14
17
we will be able to establish relationships with other distributors on
satisfactory terms, if at all. Any disruption in the distribution, sales or
marketing network for our simulation products could have a material adverse
effect on our product revenues.
WE HAVE IN THE PAST, AND MAY IN THE FUTURE, ENGAGE IN ACQUISITIONS THAT DILUTE
STOCKHOLDERS' INTERESTS, DIVERT MANAGEMENT ATTENTION OR CAUSE INTEGRATION
PROBLEMS.
As part of our business strategy, we have in the past acquired, and may in
the future acquire, businesses or intellectual property that we feel could
complement our business, enhance our technical capabilities or increase our
intellectual property portfolio. We recently completed the acquisitions of
Immersion Medical and Virtual Technologies. If we consummate acquisitions
through an exchange of our securities, our stockholders could suffer significant
dilution. Acquisitions could also create risks for us, including:
- unanticipated costs associated with the acquisitions;
- use of substantial portions of our available cash to consummate the
acquisitions;
- diversion of management's attention from other business concerns;
- difficulties in assimilation of acquired personnel or operations; and
- potential intellectual property infringement claims related to newly
acquired product lines.
Any acquisitions, even if successfully completed, might not generate
significant additional revenue or provide any benefit to our business.
WE MIGHT BE UNABLE TO RETAIN OR RECRUIT NECESSARY PERSONNEL, WHICH COULD SLOW
THE DEVELOPMENT AND DEPLOYMENT OF OUR TECHNOLOGIES.
Our ability to develop and deploy our technologies and to sustain our
revenue growth depends upon the continued service of our executive officers and
other key personnel and upon hiring additional key personnel. Moreover,
uncertainties as to whether Immersion Medical and Virtual Technologies employees
will remain with Immersion Medical, Virtual Technologies, Immersion and/or the
combined company during the integration process may affect the business
operations of each company. A number of employees of these subsidiaries have
departed since the acquisitions were completed. It may not be possible to retain
enough key employees of Immersion Medical and Virtual Technologies to operate
our businesses effectively.
We intend to hire additional sales, support, marketing and research and
development personnel. Competition for these individuals is intense, and we may
not be able to attract, assimilate or retain additional highly qualified
personnel in the future. Our executive officers and key employees hold stock
options with exercise prices considerably above the current market price of our
common stock, which may impair our ability to retain the services of such
employees. In addition, our technologies are complex and we rely upon the
continued service of our existing engineering personnel to support licensees,
enhance existing technology and develop new technologies.
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR BUSINESS OPERATIONS, AND WE CANNOT BE
SURE THAT ADDITIONAL FINANCING WILL BE AVAILABLE.
Since 1997, we have experienced negative cash flow from operations and
expect to experience significant negative cash flow from operations at least
until the fourth quarter of 2001. If our operations do not result in positive
cash flow, we may require additional financing for working capital to fund our
operations. We cannot be certain that additional financing will be available to
us on favorable terms when required, or at all. Changes in equity markets in
fiscal 2000 and 2001 have adversely affected the ability to raise equity
financing and have adversely affected the markets for financing for companies
with a history of losses such as ours. Additional financing may involve our
issuing additional shares of our common or preferred stock and our stockholders
may experience substantial dilution.
15
18
WE DO NOT CONTROL OR INFLUENCE OUR LICENSEES' MANUFACTURING, PROMOTION,
DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING OUR TOUCH-ENABLING
TECHNOLOGIES, UPON WHICH WE ARE DEPENDENT TO GENERATE ROYALTY REVENUE.
A key part of our business strategy is to license our intellectual property
to companies that manufacture and sell products incorporating our touch-enabling
technologies. Sales of those products generate royalty revenue for us. Royalty
revenue as a percentage of our total revenue for the years ended December 31,
2000, 1999 and 1998 was 21%, 20% and 4%, respectively. However, we do not
control or influence the manufacture, promotion, distribution or pricing of
products that are manufactured and sold by our licensees. In addition, we
generally do not have commitments from our licensees that they will continue to
use our technology in future products. As a result, products incorporating our
technologies may not be brought to market, achieve commercial acceptance or
generate meaningful royalty revenue for us. For us to generate royalty revenue,
licensees that pay us per-unit royalties must manufacture and distribute
products incorporating our touch-enabling technologies in a timely fashion and
generate consumer demand through marketing and other promotional activities.
Products incorporating our touch-enabling technologies are generally difficult
to design and manufacture which may cause product introduction delays. If our
licensees fail to stimulate and capitalize upon market demand for products that
generate royalties for us, our revenues will not grow.
Peak demand for products that incorporate our technologies, especially in
the computer gaming peripherals market, typically occurs in the third and fourth
calendar quarters as a result of increased demand during the year-end holiday
season. If our licensees do not ship licensed products in a timely fashion or
fail to achieve strong sales in the second half of the calendar year, we may not
receive related royalty revenue.
THE HIGHER COST OF PRODUCTS INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES MAY
INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND SALE OF PRODUCTS INCORPORATING
OUR TECHNOLOGIES.
Personal computer gaming peripherals, computer mice and automotive controls
incorporating our touch-enabling technologies are more expensive than similar
competitive products that are not touch-enabled. Although major manufacturers,
such as Logitech, Microsoft and BMW, have licensed our technology, the greater
expense of products containing our touch-enabling technologies as compared to
non-touch-enabled products may be a significant barrier to the widespread
adoption and sale of touch-enabled products.
COMPETITION WITH OUR PRODUCTS AND OUR LICENSEES' PRODUCTS MAY REDUCE OUR
REVENUE.
The markets in which we and our licensees' compete are characterized by
rapid technological change, short product life cycles, cyclical market patterns,
declining average selling prices and increasing foreign and domestic
competition. We believe that competition in these markets will continue to be
intense, and that competitive pressures will drive the price of our products and
our licensees' products downward. These price reductions, if not offset by
increases in unit sales or productivity, will cause our revenues to decline.
We face competition from unlicensed products as well. Our licensees or
other third parties may seek to develop products which they believe do not
require a license under our intellectual property. These potential competitors
may have significantly greater financial, technical and marketing resources than
we do, and the costs associated with asserting our intellectual property against
such products and such potential competitors could be significant. Moreover, if
such alternative designs were determined by a court not to require a license
under our intellectual property, competition from such unlicensed products could
limit or reduce our revenues.
IF WE ARE UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH OUR EXISTING
LICENSEES AND WITH ADDITIONAL THIRD-PARTY MANUFACTURERS FOR OUR TOUCH-ENABLING
TECHNOLOGY, OUR ROYALTY REVENUE MAY NOT GROW.
Our revenue growth is significantly dependent on our ability to enter into
new licensing arrangements. Our failure to enter into new licensing arrangements
will cause our operating results to suffer. We face
16
19
numerous risks in obtaining new licenses on terms consistent with our business
objectives and in maintaining, expanding and supporting our relationships with
our current licensees. These risks include:
- the lengthy and expensive process of building a relationship with
potential licensees;
- the fact that we may compete with the internal design teams of existing
and potential licensees;
- difficulties in persuading consumer product manufacturers to work with
us, to rely on us for critical technology and to disclose to us
proprietary product development and other strategies; and
- difficulties in persuading existing and potential licensees to bear the
development costs necessary to incorporate our technologies into their
products.
A substantial majority of our royalty revenue has been derived from the
licensing of our portfolio of touch-enabling technology for personal computer
gaming peripherals, such as joysticks and steering wheels. The market for
joysticks and steering wheels for use with personal computers is a substantially
smaller market than either the mouse market or the dedicated gaming console
market and is characterized by declining average selling prices. If we are
unable to gain market acceptance beyond the personal computer gaming peripherals
market, we may not achieve royalty revenue growth.
IF WE ARE UNABLE TO CONTINUALLY IMPROVE, AND REDUCE THE COST OF, OUR
TECHNOLOGIES, COMPANIES MAY NOT INCORPORATE OUR TECHNOLOGIES INTO THEIR
PRODUCTS, WHICH COULD IMPAIR OUR REVENUE GROWTH.
Our ability to achieve revenue growth depends on our continuing ability to
improve, and reduce the cost of, our technologies and to introduce these
technologies to the marketplace in a timely manner. If our development efforts
are not successful or are significantly delayed, companies may not incorporate
our technologies into their products and our revenue growth may be impaired.
IF WE FAIL TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW APPLICATIONS AND
PLATFORMS, WE MAY NOT BE ABLE TO CREATE A MARKET FOR OUR TECHNOLOGIES OR OUR
TECHNOLOGIES MAY BECOME OBSOLETE AND OUR ABILITY TO GROW AND OUR RESULTS OF
OPERATIONS MIGHT BE HARMED.
Our initiatives to develop new and enhanced technologies and to
commercialize these technologies for new applications and new platforms may not
be successful. Any new or enhanced technologies may not be favorably received by
consumers and could damage our reputation or our brand. Expanding our technology
could also require significant additional expenses and strain our management,
financial and operational resources. Moreover, technology products generally
have relatively short product life cycles and our current products may become
obsolete in the future. Our ability to generate revenues will be harmed if we:
- fail to develop new technologies,
- our new technologies fail to gain market acceptance; or
- our current products become obsolete.
LOGITECH ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE AND THE FAILURE OF
LOGITECH TO ACHIEVE SALES VOLUMES FOR ITS GAMING AND CURSOR CONTROL PERIPHERAL
PRODUCTS THAT INCORPORATE OUR TOUCH-ENABLING TECHNOLOGIES MAY REDUCE OUR ROYALTY
REVENUE.
For the year ended December 31, 2000, we derived 9% of our total revenues
and 41% of our royalty revenue from Logitech. We expect that a significant
portion of our total revenues will continue to be derived from Logitech. If
Logitech fails to achieve anticipated sales volumes for its computer peripheral
products that incorporate our technologies, our royalty revenue would be
reduced.
17
20
BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE OUR
TOUCH-ENABLING TECHNOLOGIES CURRENTLY MUST WORK WITH MICROSOFT'S OPERATING
SYSTEM SOFTWARE, OUR COSTS COULD INCREASE AND OUR REVENUES COULD DECLINE IF
MICROSOFT MODIFIES ITS OPERATING SYSTEM SOFTWARE.
Our hardware and software technology for personal computer peripheral
products that incorporate our touch-enabling technologies is currently
compatible with Microsoft's Windows 98, Windows 2000 and Windows Me operating
systems software, including DirectX, Microsoft's entertainment applications
programming interface. If Microsoft modifies its operating system, including
DirectX, we may need to modify our technologies and this could cause delays in
the release of products by our licensees. If Microsoft modifies its software
products in ways that limit the use of our other licensees' products, our costs
could be increased and our revenues could decline.
LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS COULD BE EXPENSIVE,
DISRUPTIVE, AND TIME CONSUMING; COULD RESULT IN THE IMPAIRMENT OR LOSS OF
PORTIONS OF OUR INTELLECTUAL PROPERTY; AND COULD ADVERSELY AFFECT OUR BUSINESS.
Intellectual property litigation, whether brought by us or by others, could
result in the expenditure of significant financial resources and the diversion
of management's time and efforts. From time to time, we initiate claims against
third parties that we believe infringe our intellectual property rights. To
date, most of these claims have not led to any litigation. However, on June 18,
2000, we filed an action for patent infringement in the United States District
Court for the Northern District of California against InterAct Accessories,
Inc., one of our existing licensees, based on certain unlicensed gamepad and
steering wheel products currently being marketed by InterAct. On January 2,
2001, the action was broadened to add STD Manufacturing Limited, the
manufacturer of InterAct's products, as a defendant. This litigation, like any
litigation brought to protect and enforce our intellectual property rights,
could be costly, time-consuming and distracting to management and could result
in the impairment or loss of portions of our intellectual property. In addition,
any litigation in which we are accused of infringement may cause product
shipment delays, require us to develop non-infringing technology or require us
to enter into royalty or license agreements even before the issue of
infringement has been decided on the merits. If any litigation were not resolved
in our favor, we could become subject to substantial damage claims from third
parties and indemnification claims from our licensees. We and our licensees
could be enjoined from the continued use of the technology at issue without a
royalty or license agreement. Royalty or license agreements, if required, might
not be available on acceptable terms, or at all. If a third party claiming
infringement against us prevailed and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and
cost-effective basis, our expenses would increase and our revenues could
decrease.
We attempt to avoid infringing known proprietary rights of third parties.
However, third parties may hold, or may in the future be issued, patents that
could be infringed by our products or technologies. Any of these third parties
might make a claim of infringement against us with respect to the products that
we manufacture and the technologies that we license. From time to time, we have
received letters from companies, several of which have significantly greater
financial resources than we do, asserting that some of our technologies, or
those of our licensees, infringe their intellectual property rights. Certain of
our licensees have received similar letters from these or other companies. Such
letters may influence our licensees' decisions whether to ship products
incorporating our technologies. Although none of these matters has resulted in
litigation to date, any of these notices, or additional notices that we could
receive in the future from these or other companies, could lead to litigation.
Intellectual property claims against us or our licensees, whether or not
they have merit, could be time-consuming to defend, cause product shipment
delays, require us to pay damages, or require us or our licensees to cease
utilizing the technology unless we can enter into royalty or licensing
agreements. Royalty or licensing agreements might not be available on terms
acceptable to us or at all. Furthermore, claims could also result in claims from
our licensees under the indemnification provisions of their agreements with us.
18
21
IF WE FAIL TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY
TO LICENSE OUR TECHNOLOGIES AND TO GENERATE REVENUES WOULD BE IMPAIRED.
Our business depends on generating revenues by licensing our intellectual
property rights and by selling products that incorporate our technologies. If we
are not able to protect and enforce those rights, our ability to obtain future
licenses and royalty revenue could be impaired. In addition, if a court were to
limit the scope of, declare unenforceable or invalidate any of our patents,
current licensees may refuse to make royalty payments or may themselves choose
to challenge one or more of our patents. Also it is possible that:
- our pending patent applications may not result in the issuance of
patents;
- our patents may not be broad enough to protect our proprietary rights;
and
- effective patent protection may not be available in every country in
which our licensees do business.
We also rely on licenses, confidentiality agreements and copyright,
trademark and trade secret laws to establish and protect our proprietary rights.
It is possible that:
- laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technologies or deter others from developing
similar technologies; and
- policing unauthorized use of our products and trademarks would be
difficult, expensive and time-consuming, particularly overseas.
PRODUCT LIABILITY CLAIMS COULD BE TIME-CONSUMING AND COSTLY TO DEFEND, AND COULD
EXPOSE US TO LOSS.
Claims that our products or our licensees' products have flaws or other
defects that lead to personal or other injury are common in the computer
peripherals industry and medical field. If products that we or our licensees
sell cause personal injury, financial loss or other injury to our or our
licensees' customers, the customers or our licensees may seek damages or other
recovery from us. Any claims against us would be time-consuming, expensive to
defend and distracting to management and could result in damages and injure our
reputation or the reputation of our licensees or their products. This damage
could limit the market for our and our licensees' products and harm our results
of operations.
In the past, manufacturers of peripheral products, such as computer mice,
have been subject to claims alleging that use of their products has caused or
contributed to various types of repetitive stress injuries, including carpal
tunnel syndrome. We have not experienced any product liability claims to date.
Although our license agreements typically contain provisions designed to limit
our exposure to product liability claims, existing or future laws or unfavorable
judicial decisions could limit or invalidate the provisions.
WE COULD LOSE SOME OR ALL OF THE INVESTMENT THAT WE HAVE MADE IN SEVERAL EARLY
STAGE TECHNOLOGY COMPANIES SHOULD THOSE COMPANIES NOT BE SUCCESSFUL IN
DEVELOPING THEIR TECHNOLOGIES OR NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING IF
AND WHEN NEEDED.
From time to time we have made strategic investments in early stage
technology companies that are developing technologies that we believe could
complement or enhance our own technologies, if successful. We have made these
investments to provide funding for the development of these companies
technologies primarily because of the anticipated benefits to Immersion of the
availability of these technologies. The prospect of realizing a substantial
return on these investments was a secondary, though important, consideration.
One or more of these companies may not succeed in developing its technology,
might be unsuccessful in marketing its technology or products based on its
technology or might fail for any number of other reasons, including an inability
to obtain additional capital if required to fund operations, including the
completion of the development of its technology. In the event that any of the
companies in which we have invested fails or does not achieve a level of success
that permits us to realize the value of our investments, we could experience a
complete or partial loss on some or all of the investments. If we experience a
complete or partial loss on some or all of our investments, we will be forced to
write off some or all of that investment as an extraordinary loss, which would
decrease our assets and increase our losses.
19
22
FAILURE TO QUALIFY FOR POOLING-OF-INTERESTS ACCOUNTING TREATMENT WITH RESPECT TO
OUR RECENT ACQUISITION OF IMMERSION MEDICAL MAY HARM OUR FUTURE OPERATING
RESULTS.
We have accounted for our recent acquisition of Immersion Medical as a
pooling-of-interests business combination. Under the pooling-of-interests method
of accounting, each of Immersion and Immersion Medical's historical recorded
assets and liabilities have been carried forward to the combined company at
their recorded amounts. In addition, the operating results of the combined
company include Immersion's and Immersion Medical's operating results for all of
fiscal 2000, and Immersion's and Immersion Medical's historical reported
operating results for prior periods have been combined and restated as the
operating results of the combined company.
Events may occur that cause the Immersion Medical merger to no longer
qualify for pooling-of-interests accounting treatment. In that case, we would be
required to account for the acquisition under the purchase method of accounting.
Under that method, we would record the estimated fair value of Immersion common
stock issued in the merger as the cost of acquiring the business of Immersion
Medical. That cost would be allocated to the net assets acquired, with the
excess of the estimated fair value of Immersion common stock over the fair value
of net assets acquired recorded as goodwill or other intangible assets. To the
extent goodwill and other intangibles are recorded on Immersion's financial
statements, Immersion would be required to take a noncash charge to earnings
every year for periods of up to 5 years until the full values of this goodwill
and other intangibles have been fully amortized. The fair value of Immersion
common stock issued in the merger is much greater than the historical net book
value at which Immersion Medical carried its assets in its accounts. Therefore,
purchase accounting treatment would result in charges to operations of the
combined company for several years compared to pooling-of-interests accounting
treatment.
OUR REPORTED RESULTS MAY BE ADVERSELY AFFECTED BY CHANGES IN ACCOUNTING
PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA.
We prepare our financial statements in conformity with generally accepted
accounting principles (GAAP). GAAP is subject to interpretation by the American
Institute of Certified Public Accountants, the Securities and Exchange
Commission and various bodies formed to interpret and create appropriate
accounting policies. A change in these policies or interpretations can have a
significant effect on our reported results, and may even affect the reporting of
transactions completed prior to the announcement of a change.
IF OUR SAN JOSE FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS, OUR OPERATIONS
WOULD BE SERIOUSLY HARMED.
Our facilities could be subject to a catastrophic loss such as fire, flood,
earthquake or power outage. California has recently experienced problems with
its power supply. As a result, we have experienced utility cost increases and
may experience unexpected interruptions in our power supply that could have a
material adverse effect on our sales, results of operations and financial
condition. In addition, a substantial portion of our research and development
activities, manufacturing, our corporate headquarters and other critical
business operations are located near major earthquake faults in San Jose,
California, an area with a history of seismic events. Any such loss at our
facilities could disrupt our operations, delay production, shipments and revenue
and result in large expenses to repair and replace the facility. While we have
obtained insurance to cover most potential losses at our facilities, our
existing insurance may not be adequate for all possible losses.
ROBERT O'MALLEY, OUR CHIEF EXECUTIVE OFFICER AND PRESIDENT, RECENTLY JOINED US
AND IF THERE ARE DIFFICULTIES WITH THIS LEADERSHIP TRANSITION IT COULD IMPEDE
THE EXECUTION OF OUR BUSINESS STRATEGY.
Robert O'Malley, our Chief Executive Officer and President, joined us in
October 2000. Our success will depend to a significant extent on Mr. O'Malley's
ability to implement a successful strategy, to successfully lead and motivate
our employees, and to work effectively with our executive staff. If this
leadership transition is not successful, our ability to execute our business
strategy would be impeded.
20
23
WE HAVE EXPERIENCED RAPID GROWTH AND CHANGE IN OUR BUSINESS, AND OUR FAILURE TO
MANAGE THIS AND ANY FUTURE GROWTH COULD HARM OUR BUSINESS.
In addition to the employees of Immersion Medical and Virtual Technologies
that we are currently integrating, we have rapidly increased the number of our
employees in our San Jose headquarters. Our business may be harmed if we do not
integrate and train our new employees quickly and effectively. We also cannot be
sure that our revenues will continue to grow at a rate sufficient to support the
costs associated with an increasing number of employees. Any future periods of
rapid growth may place significant strains on our managerial, financial,
engineering and other resources. The rate of any future expansion, in
combination with our complex technologies, may demand an unusually high level of
managerial effectiveness in anticipating, planning, coordinating and meeting our
operational needs as well as the needs of our licensees.
BECAUSE WE HAVE A FIXED PAYMENT LICENSE WITH MICROSOFT, OUR ROYALTY REVENUE FROM
LICENSING JOYSTICKS AND STEERING WHEELS IN THE GAMING MARKET MIGHT DECLINE IF
MICROSOFT INCREASES MICROSOFT'S VOLUME OF SALES OF TOUCH-ENABLED JOYSTICKS AND
STEERING WHEELS AT THE EXPENSE OF OUR OTHER LICENSEES.
Under the terms of our present agreement with Microsoft, Microsoft receives
a perpetual, worldwide, irrevocable, non-exclusive license under our patents for
Microsoft's SideWinder Force Feedback Pro Joystick and its SideWinder Force
Feedback Wheel, and for a future replacement version of these specific
SideWinder products having essentially similar functional features. Instead of
an ongoing royalty on Microsoft's sales of licensed products, the agreement
provides for a payment of $2.35 million, which we recognized in equal monthly
increments over a one-year period that ended in mid-July 2000. We will not
receive any further revenues or royalties from Microsoft under our current
agreement with Microsoft. We derived 10% of our total revenues and 48% of our
royalty revenue for the twelve months ended December 31, 1999 from Microsoft. In
addition, we derived 8% of our total revenues and 40% of our royalty revenues
for the year ended December 31, 2000 from Microsoft. At the present time, we do
not have a license agreement with Microsoft for products other than the
SideWinder joystick and steering wheel. Microsoft has a significant share of the
market for touch-enabled joysticks and steering wheels for personal computers.
Microsoft has significantly greater financial, sales and marketing resources, as
well as greater name recognition and a larger customer base, than our other
licensees. In the event that Microsoft increases its share of this market, our
royalty revenue from other licensees in this market segment might decline.
BECAUSE WE NO LONGER RECEIVE ROYALTY REVENUE UNDER OUR CURRENT AGREEMENT WITH
MICROSOFT, OUR ROYALTY REVENUES IN FUTURE PERIODS MAY DECLINE.
As described above, revenue recognized under our current agreement with
Microsoft ended in mid-July 2000. Because the agreement with Microsoft accounted
for a substantial portion of our royalty revenues, our royalty revenues in
future periods will decline if we do not either enter into agreements with
additional licensees of our touch-enabling technologies or receive larger
royalty payments from our existing licensees.
WE DEPEND ON A SINGLE SUPPLIER TO PRODUCE OUR IMMERSION PROCESSORS AND MAY LOSE
CUSTOMERS IF THIS SUPPLIER DOES NOT MEET OUR REQUIREMENTS.
We have one supplier of our custom Immersion Processors, which we develop,
license and sell to improve the performance and to help reduce the cost of
computer peripheral products, such as joysticks and mice, incorporating our
touch-enabling technology. We have limited control over delivery schedules,
quality assurance, manufacturing capacity, yields, costs and misappropriation of
our intellectual property. Although our supplier warrants that microprocessors
it supplies to us or to our customers will conform to our specifications and be
free from defects in materials and workmanship for a period of one year from
delivery, any delays in delivery of the processor, quality problems or cost
increases could cause us to lose customers and could damage our relationships
with our licensees.
21
24
MEDICAL LICENSING AND CERTIFICATION AUTHORITIES MAY NOT ENDORSE OR REQUIRE USE
OF OUR TECHNOLOGIES FOR TRAINING PURPOSES, SIGNIFICANTLY SLOWING OR INHIBITING
THE MARKET PENETRATION OF OUR MEDICAL SIMULATION TECHNOLOGIES.
Several key medical certification bodies, including the American Board of
Internal Medicine (ABIM) and the American College of Cardiology (ACC), have
great influence in endorsing particular medical methodologies, including medical
training methodologies, for use by medical professionals. In the event that the
ABIM and the ACC, as well as other, similar bodies, do not endorse our medical
simulation training products as a training vehicle, market penetration for our
products could be significantly and adversely affected.
OUR RELATIONSHIP WITH MEDTRONIC, INC., A LEADING MEDICAL DEVICE COMPANY, MAY
INTERFERE WITH OUR ABILITY TO ENTER INTO DEVELOPMENT AND LICENSING RELATIONSHIPS
WITH MEDTRONIC'S COMPETITORS.
In August 1999, we entered into an agreement with Medtronic, Inc., a
leading medical device company, in which Medtronic was given a right of first
offer for additional development agreements. Under the terms of the right of
first offer, we must notify Medtronic if we have received a written offer, or if
we are seeking to find a third party to enter a development agreement to develop
a simulation system within a field in which Medtronic is active. If Medtronic is
interested in participating in a development agreement with respect to such new
simulation system then for a period of thirty days we will negotiate exclusively
with Medtronic. If an agreement is not reached within this period, we may enter
into an agreement with a third party, provided that the terms of the agreement
are more favorable to us than the offer presented by Medtronic. Although the
right of first offer has not impeded our ability to interest other medical
device companies in our technologies to date, our relationship with Medtronic
may impede our ability to enter into development or license agreements with
other large medical device companies that compete with Medtronic.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE, AND IF OUR FUTURE
RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE
PRICE OF OUR COMMON STOCK IS LIKELY TO DECLINE.
Our revenues and operating results are likely to vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control and any of which could cause the price of our common stock to decline.
These factors include:
- the establishment or loss of licensing relationships;
- the timing of payments under fixed and/or up-front license agreements;
- the timing of our expenses, including costs related to acquisitions of
technologies or businesses;
- the timing of introductions of new products and product enhancements by
us, our licensees and their competitors;
- our ability to develop and improve our technologies;
- our ability to attract, integrate and retain qualified personnel; and
- seasonality in the demand for our licensees' products.
Accordingly, we believe that period-to-period comparisons of our operating
results should not be relied upon as an indicator of our future performance. In
addition, because a high percentage of our operating expenses is fixed, a
shortfall of revenues can cause significant variations in operating results from
period to period.
OUR STOCK MAY BE VOLATILE.
The stock market has experienced extreme volatility that often has been
unrelated or disproportionate to the performance of particular companies. These
market fluctuations may cause our stock price to decline regardless of our
performance. The market price of our common stock has been, and in the future
could be, significantly affected by factors such as: actual or anticipated
fluctuations in operating results; announcements of technical innovations; new
products or new contracts; sales or the perception in the market of possible
sales
22
25
of large number of shares of Immersion common stock by insiders or others;
changes in securities analysts' recommendations; changing circumstances
regarding competitors or their customers; governmental regulatory action;
developments with respect to patents or proprietary rights; changes in financial
estimates by securities analysts; and general market conditions. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has been initiated against that company.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS RETAIN SIGNIFICANT
CONTROL OVER US, WHICH MAY LEAD TO CONFLICTS WITH OTHER STOCKHOLDERS OVER
CORPORATE GOVERNANCE MATTERS.
Our current directors, officers and non-mutual fund stockholders holding
more than 5% of our outstanding stock, as a group, beneficially own more than
38% of our outstanding common stock. Acting together, these stockholders would
be able to exercise significant influence over matters that our stockholders
vote upon, including the election of directors and mergers or other business
combinations, which could have the effect of delaying or preventing a third
party from acquiring control over or merging with us.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. In addition, certain provisions of Delaware law may discourage,
delay or prevent someone from acquiring or merging with us. These provisions
could limit the price that investors might be willing to pay in the future for
shares.
ITEM 2. PROPERTIES
The Company leases a facility in San Jose, California of approximately
48,000 square feet, which serves as the Company's corporate headquarters and
houses sales, marketing, administration, research and development, manufacturing
and distribution functions. Products produced in San Jose include our
MicroScribe-3D and LightScribe-3D products, and several of our professional and
industrial, and medical simulation products, including the Softmouse and our
laparoscopic simulation products. The lease for this property expires in June
2005.
The Company leases a facility in Palo Alto, California of approximately
4,400 square feet, which houses Virtual Technologies, a wholly-owned subsidiary
of the Company. The facility is used for sales, marketing, administration,
research and development, manufacturing and distribution functions. Products
produced and distributed in Palo Alto include the CyberGlove line of whole-hand
sensing gloves and three-dimensional software products. The lease for this
property is month to month.
The Company leases a facility in Montreal, Canada of approximately 5,500
square feet, which houses Immersion Canada. The facility is used for sales,
marketing, administration, and research and development functions. Two leases,
covering subdivisions of the property, expire in September 2002 and September
2005.
The Company leases a facility in Gaithersburg, Maryland of approximately
18,900 square feet, which houses Immersion Medical. The facility is used for
sales, marketing, administration, research and development, manufacturing and
distribution functions. Products produced and distributed in Gaithersburg
include three medical simulators: the CathSim Intravenous Simulator, the
AccuTouch Endoscopy Simulator, and the Accutouch Endovascular Simulator. The
lease for this property expires in May 2009.
Overall, the rent paid, including operating expenses, property taxes, and
assessments, is $126,000 per month and is subject to annual adjustment. We
believe that our existing facilities are adequate to meet our current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings relating to some of its
intellectual property rights. Specifically, in June 2000, the Company filed a
complaint against InterAct Accessories, Inc. in the United States District Court
for the Northern District of California (Case No. C-00-20663 JF). The complaint
23
26
alleges that multiple InterAct products, including InterAct's Dual Impact, Dual
Impact 2, Barracuda 2 and Stormchaser gamepads, and its V3FX, V3FX 2, Blue
Thunder and Concept 4 steering wheels, infringe three of the Company's United
States patents. On January 2, 2001, the Company filed a First Amended Complaint
adding STD Manufacturing Limited, a Hong Kong manufacturer of computer
peripheral devices and the manufacturer of the accused products, as a defendant
in the action. The Company seeks to recover compensatory damages, and based on
allegations that InterAct's and STD's infringement is willful, to have such
damages trebled. InterAct and STD have filed answers to the complaint denying
infringement and asserting on various grounds, including in a declaratory relief
counterclaim filed by InterAct, that the patents-in-suit are invalid. The
Company believes its claims to be meritorious, and intends vigorously to pursue
them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of fiscal 2000.
24
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"IMMR." Our initial public offering of stock was November 12, 1999 at $12.00 per
share for an aggregate initial public offering of 53,685,000. The following
table sets forth, for the periods indicated, the high and low sales prices for
our common stock on such market.
HIGH LOW
------ ------
FISCAL YEAR ENDING DECEMBER 31, 2000
Fourth Quarter........................................... $ 9.00 $ 7.25
Third Quarter............................................ $16.00 $14.38
Second Quarter........................................... $30.25 $26.13
First Quarter............................................ $65.88 $57.00
FISCAL YEAR ENDING DECEMBER 31, 1999
Fourth Quarter........................................... $49.94 $15.88
On March 14, 2001, there were 259 stockholders of record.
In March 2000, we issued 141,538 shares of our common stock in connection
with the acquisition of Haptic Technologies, Inc., now named Immersion Canada.
The transaction was valued at approximately $6.8 million, including
approximately $338,000 paid in cash, and was exempt from registration under
Regulation S, promulgated under the Securities Act of 1933 (the "Act"). The
transaction was privately negotiated and we made no public solicitation in the
United States in the placement of the securities.
In August 2000, we issued 320,584 shares of our common stock in connection
with the acquisition of Virtual Technologies, Inc. The transaction was valued at
approximately $8.0 million, including approximately $1.2 million paid in cash,
and was exempt from registration under Regulation D, promulgated under the Act.
The transaction was privately negotiated and we made no public soliciation in
the placement of these securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and we do not anticipate paying cash dividends in the
foreseeable future.
25
28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below has been restated to give retroactive effect to
the merger of Immersion and HT Medical Systems, Inc. (HT), now named Immersion
Medical, on September 29, 2000, which has been accounted for as a pooling of
interests as described in note 3 to our consolidated financial statements. The
selected consolidated statement of operations data set forth below for the
fiscal years ended December 31, 2000, 1999 and 1998 and the consolidated balance
sheet data as of December 31, 2000 and 1999 are derived from our audited
consolidated financial statements, which are included elsewhere in this Annual
Report on Form 10-K. The selected consolidated balance sheet data as of December
31, 1997 is derived from the combination of our respective audited consolidated
financial statements that are not included in this Annual Report on Form 10-K.
The selected consolidated financial data as of and for the fiscal year ended
December 31, 1996 is derived from the combination of Immersion's audited
consolidated financial statements and HT's audited financial statements (which
disclaimed an opinion on the statements of income, stockholders' equity
(deficiency) and cash flows for the year then ended due to a scope limitation on
the opening balance sheet) that are not included in this Annual Report on Form
10-K.
Prior to the merger, HT ended its fiscal year on May 31. Subsequent to the
merger, HT changed its fiscal year end to December 31 to conform to Immersion's
presentation. The restated consolidated balance sheets as of December 31, 1999,
1998, 1997, and 1996 include amounts for HT as of May 31, 2000, 1999, 1998, and
1997 respectively. The consolidated statements of operations for each of the
four years in the period ended December 31, 1999 include amounts for HT for the
fiscal years ended five months later. As a result of this presentation, HT's
results of operations for the five months ended May 31, 2000 are included in
both the years ended December 31, 2000 and 1999. Revenue and net loss for HT for
the five months ended May 31, 2000 were $973,000 and $2,427,000 respectively.
The following financial data is qualified in its entirety by, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this Annual Report on Form 10-K.
Historic results are not indicative of the results that may be expected for any
future period.
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues.............................. $ 15,263 $10,942 $ 8,703 $ 6,884 $ 4,917
Cost and expenses..................... 39,125 19,854 12,262 8,317 6,143
Operating loss........................ (23,862) (8,912) (3,559) (1,433) (1,226)
Net loss.............................. (22,172) (9,470) (3,669) (1,618) (1,330)
Basic and diluted net loss per
share.............................. $ (1.25) $ (1.21) $ (0.73) $ (0.40) $ (0.37)
Shares used in calculating basic and
diluted net loss per share......... 17,719 7,852 5,023 4,004 3,571
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 23,474 $46,606 $ 2,595 $ 663 $ 459
Working capital....................... 27,565 50,657 3,940 2,331 981
Total assets.......................... 57,494 60,987 7,123 2,576 2,253
Redeemable convertible preferred
stock.............................. -- -- 1,476 1,471 --
Long-term obligations................. 4,192 3,823 1,914 1,849 1,313
Total stockholders' equity
(deficiency)....................... 48,343 52,963 2,136 (446) 247
26
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements as a result of certain factors, including those
set forth in Item 1, those described elsewhere in this report and those
described in other reports under the Securities Exchange Act of 1934. We caution
you not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report.
OVERVIEW
We develop hardware and software technologies that enable users to interact
with computers using their sense of touch. We focus on four application
areas -- computing and entertainment, medical simulation, professional and
industrial, and three-dimensional capture and interaction. In high volume market
areas such as consumer computer peripherals and automotive interfaces, we
primarily license our touch-enabling technologies to third party manufacturers.
We have licensed our intellectual property to numerous manufacturers of mice,
joysticks and steering wheels targeted at consumers. In addition, we are
currently working on development projects with several automobile manufacturers
and have licensed our technology to BMW for use in the controls of certain of
its upcoming vehicles.
For lower-volume markets like medical simulation systems and
three-dimensional capture and interaction products, our primary strategy is to
manufacture and sell products through direct sales, distributors and value added
resellers. We sell medical simulation devices used to train professionals in a
variety of procedures. These devices simulate such procedures as intravenous
catheterization, endovascular interventions and endoscopy. We also sell
three-dimensional capture and interaction products. These consist primarily of
our line of computer digitizing products, including the MicroScribe-3D and the
newly introduced LightScribe-3D, and specialized whole-hand sensing gloves, such
as the CyberGlove, CyberGrasp and CyberForce, that permit simulated interaction
with three-dimensional environments. In all market areas, we engage in
development projects for third parties.
We have entered into numerous contracts with government agencies and
corporations since 1993. Government contracts help fund advanced research and
development, are typically less than two years in duration, are usually for a
fixed price or for our costs plus a fixed fee, and allow the government agency
to license the resulting technology for government applications, specifically
excluding any commercial activity. Corporate contracts are typically for product
development consulting, are for a fixed fee and are also less than two years in
duration.
In March 2000, the Company acquired all outstanding shares of
Montreal-based Immersion Canada for approximately $6.8 million, consisting of
141,538 shares of the Company's common stock and $338,000 paid in cash.
Immersion Canada develops and markets hardware and software that brings the
sense of touch to computing environments. As a result of the acquisition,
Immersion Canada became a wholly-owned subsidiary of Immersion with operations
in Montreal, Canada. The acquisition was accounted for using the purchase method
and accordingly the acquired assets and liabilities were recorded at their fair
market values at the date of acquisition.
In August 2000, the Company acquired Virtual Technologies Inc. ("VTI") for
approximately $7.75 million, consisting of 320,584 shares of the Company's
common stock and $965,000 paid in cash. During the fourth quarter of 2000, the
Company had incurred an additional $242,000 of acquisition related charges. VTI
develops and markets hardware and software products that are used in high-end
simulation, mechanical computer-aided design, visualization and motion-capture
applications as well as research. As a result of the acquisition, VTI became a
wholly-owned subsidiary of Immersion with operations in Palo Alto, California.
The acquisition was accounted for using the purchase method and accordingly the
acquired assets and liabilities were recorded at their fair market values at the
date of acquisition.
27
30
We completed our acquisition of HT in September 2000. The merger was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements have been restated for all periods presented as if we and HT had
always been combined. In connection with the merger, we incurred one-time
expenses of approximately $1.4 million, which are included in acquisition
related charges in our consolidated statement of operations for the year ended
December 31, 2000. HT is a developer and manufacturer of medical simulation
devices that create realistic training environments for doctors and other
healthcare personnel. We issued a total of approximately 1.335 million shares of
Immersion common stock in exchange for all outstanding shares of HT Medical
Systems common stock and preferred stock. We assumed 195,670 common and
preferred stock warrants, a promissory note convertible into 226,450 shares of
the Company's common stock and reserved approximately 835,000 shares of common
stock for issuance upon the exercise of options assumed in the merger or granted
after the merger.
Since inception, we have completed a number of acquisitions of patents and
technology. We capitalize the cost of patents and technology and license
agreements, except for amounts relating to acquired in-process research and
development for which there is no alternative future use. As of December 31,
2000, we have capitalized patents and technology of $4.6 million, net of
accumulated amortization of $1.3 million. We are amortizing these patents and
technology over the estimated useful life of the technology of nine years. Of
this amount, we capitalized patents and technology of $3.3 million, associated
with the acquisition of patents and technology from Cybernet in March 1999.
Our revenues include royalties and fees from licensing our technology,
revenues from product sales and revenues for development projects. On sales by
our licensees' of consumer computer peripheral devices, such as touch-enabled
mice and joysticks, we receive a per unit royalty that is a percentage of the
unit's wholesale selling price. We also receive fees from licensing our
touch-enabling technologies for automotive controls, and expect to receive
additional per unit royalty revenue from sales of automobiles that include
touch-enabled controls incorporating our technology. We receive product revenue
from sales of a number of products, including medical simulation hardware
devices and software modules used in conjunction with such devices;
three-dimensional digitizing products, such as the MicroScribe-3D; hardware and
software for our whole-hand sensing gloves, such as the CyberGlove; and
Immersion Processors, which are designed for use by our licensees in their
touch-enabled computer peripheral devices. Development projects generally
involve assisting our licensees in the development of their touch-enabled
products for which we receive fixed payments for product-related deliverables or
consulting services.
We recognize revenues in accordance with applicable accounting standards
including American Institute of Certified Public Accountants' Statement of
Position 97-2, Software Revenue Recognition, as amended. Revenue is recognized
when persuasive evidence of an arrangement exists, delivery has occurred or
service has been rendered, the fee is fixed and determinable, and collectibility
is probable. This generally occurs at the time of shipment. We recognize
fixed-fee contract revenue under the cost-to-cost percentage-of-completion
accounting method based on the actual physical completion of work performed and
the ratio of costs incurred to total estimated costs to complete the contract.
We recognize allowable fees under cost-reimbursement contracts as costs are
incurred. Losses on contracts are recognized when determined. Revisions in
estimates are reflected in the period in which the conditions become known. We
recognize royalty revenue based on royalty reports or related information
received from the licensee. On July 19, 1999, we entered into an irrevocable,
perpetual, non-exclusive, worldwide license agreement with Microsoft under which
Microsoft paid us a lump sum of $2.35 million to cover all shipments of
Microsoft's SideWinder Force Feedback Wheel and its SideWinder Force Feedback
Pro Joystick and a replacement version of these specific SideWinder products
having essentially similar functional features. Under the terms of the
agreement, we recognized the license payment as revenue in equal monthly
increments over the twelve-month period that ended in mid-July, 2000.
28
31
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a
percentage of total revenues.
2000 1999 1998
------ ----- -----
Revenues:
Royalty revenue.......................................... 20.9% 20.2% 3.7%
Product sales............................................ 53.6 55.4 51.4
Development contracts and other.......................... 25.5 24.4 44.9
------ ----- -----
Total revenues................................... 100.0 100.0 100.0
------ ----- -----
Costs and expenses:
Cost of product sales.................................... 29.4 27.0 22.5
Sales and marketing...................................... 72.0 32.4 18.5
Research and development................................. 47.5 50.4 59.4
General and administrative............................... 51.5 48.0 37.7
Amortization of intangibles and deferred stock
compensation.......................................... 33.1 12.7 2.8
Acquisition related charges.............................. 22.8 10.9 --
------ ----- -----
Total costs and expenses......................... 256.3 181.4 140.9
------ ----- -----
Operating loss............................................. (156.3) (81.4) (40.9)
Interest and other income.................................. 16.8 4.7 2.3
Interest and other expense................................. (5.7) (9.8) (3.6)
------ ----- -----
Net loss................................................... (145.2)% (86.5)% (42.2)%
====== ===== =====
COMPARISON OF YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Revenue
2000 CHANGE 1999 CHANGE 1998
------- ------ ------- ------ ------
Royalty revenue.............................. $ 3,186 44% $ 2,211 589% $ 321
Product sales................................ 8,176 35% 6,063 36% 4,472
Development contract and other............... 3,901 46% 2,668 (32)% 3,910
------- -- ------- --- ------
Total revenue...................... $15,263 39% $10,942 26% $8,703
======= == ======= === ======
Our total revenues for the year ended December 31, 2000 increased to $15.3
million from $10.9 million in 1999, an increase of 39%. Royalty revenue
increased by $975,000 or 44% from 1999 to 2000. Royalty revenue is comprised of
royalties earned on sales by our TouchSense licensees and license fees charged
for our intellectual property portfolio. The royalty revenue increase is
comprised of an increase of $323,000 due to increased sales by our current
licensees and new licensees for gaming and entertainment devices, $309,000 of
new automotive license fees and an increase of $343,000 on royalties earned on
our licensees' mouse products. During 2000 and 1999 royalty revenue included
$1.3 million and $1.1 million respectively of revenue recognized under our
agreement with Microsoft which ended mid-July 2000. We will not receive any
further revenues or royalties from Microsoft under our current agreement with
Microsoft. Product sales increased by $2.1 million or 35% from 1999 to 2000. The
increase in product sales is primarily due to an increase in professional
medical product sales of $606,000, an increase of $338,000 in Immersion
Processor sales, an increase of $231,000 for our MicroScribe-3D products and
$874,000 related to sales by VTI our wholly-owned subsidiary. The increase in
medical products sold is attributed to new product introductions and an
increased sales force during 2000 versus 1999. Products sold by VTI include the
CyberGlove for use in research in computer-aided design, simulation, training
and virtual reality applications and CyberForce. The August 2000 acquisition of
VTI was accounted for as a purchase and accordingly our financial statements
only include the revenue of VTI for four months during fiscal 2000. Development
contract and other revenue increased by $1.2 million or 46% from 1999 to 2000.
Development contract and other revenue category is comprised of
29
32
revenue on commercial and government contracts efforts, which increased during
fiscal 2000 due to an increase in related development activity on commercial
contracts, including the Geometrix, Inc. strategic partnership agreement to
develop LightScribe-3D products. The total revenues for the year ended December
31, 1999 increased to $10.9 million from $8.7 million in 1998, an increase of
26%. The year over year increase was primarily the result of a $1.9 million or
589% increase in royalty revenue due to increased 1999 sales by our TouchSense
licensees and $1.1 million in revenues recognized under the Microsoft agreement.
The remainder of the 1999 increase in sales over 1998 was due to an increase in
product sales of $1.6 million or 36%, which was partially offset by a decrease
in contract revenue of $1.2 million, or 32%. The increase in product sales is
mainly attributed to a $1.3 million increase in sales of professional medical
products, and a $343,000 increase in Immersion Processors sales with smaller
increases and decreases in other product categories. The decrease in contract
revenue is mainly attributed to the conclusion of several long-term contracts
and the decision to shift focus from contract and research and development
revenues to product sales and licensing.
Cost of Product Sales
2000 CHANGE 1999 CHANGE 1998
------ ------ ------ ------ ------
Cost of product sales.......................... $4,496 52% $2,964 52% $1,954
% of product sales............................. 55% 49% 44%
Our cost of product sales consists primarily of materials, labor and
overhead. There is no cost of sales associated with royalty revenue or
development contract revenue. Costs of product sales were $4.5 million in 2000,
$3.0 million in 1999 and $2.0 million in 1998. The $1.5 million increase in cost
of products sales in 2000 is due to a combination of increased volume and
increased overhead costs with offsetting changes in product mix. Total product
sales volume increased by 35% over the prior year and contributed approximately
$1.0 million to the increase in cost of product sales year over year. The
increase in overhead costs contributed approximately $400,000. The 6% increase
in cost of product sales as a percentage of product sales during 2000 is mainly
due to increased overhead costs related to new facilities and new product
introductions. The shifts in product mix mainly offset each other and only
contributed slightly to an increase in costs of products sales as a percentage
of products sales during 2000. The $1.0 million increase in cost of product
sales in 1999 is mainly due to higher sales volume, a 36% increase in product
sales over the prior year and increased sales of Immersion Processors which have
a higher cost of sales as a percentage of product sales than our other products.
Cost of product sales as a percentage of product sales increased in 1999 from
1998 primarily due to the aforementioned increase in Immersion Processors sales,
an increase of 276% from 1998 to 1999.
Expenses
2000 CHANGE 1999 CHANGE 1998
------- ------ ------ ------ ------
Sales and marketing........................... $10,990 210% $3,547 120% $1,612
Research and development...................... 7,250 31% 5,518 7% 5,168
General and administrative.................... 7,855 50% 5,250 60% 3,283
Amortization of intangibles and deferred stock
compensation................................ 5,053 265% 1,385 465% 245
Acquisition related charges................... 3,481 193% 1,190 nm --
Sales and Marketing. Our sales and marketing expenses are comprised
primarily of employee headcount and related compensation and benefits,
advertising, trade shows, brochures, market development funds, travel and an
allocation of facilities costs. During the fourth quarter of 1999, we signed a
co-marketing agreement with Logitech in which we agreed to assist Logitech with
the launch and promotion of its touch-enabled mice. Under the terms of the
agreement, for a period of five calendar quarters, beginning in the first
calendar quarter of 2000, we are required to reimburse Logitech for certain
marketing related expenses not to exceed $200,000 per quarter, an expense funded
with working capital. Only third-party marketing services that are targeted at
promoting Logitech's touch-enabled mice are eligible for reimbursement. In
addition, all promotional activities must be approved by us in advance. In order
to remain eligible for reimbursement, Logitech must
30
33
include our brand and slogan on all its marketing materials that reference
touch-enabled functionality or products, and meet other conditions regarding its
touch-enabled mice.
Sales and marketing expenses grew to $11.0 million in 2000 from $3.5
million in 1999 and $1.6 million in 1998. We began considerable planned growth
of our sales and marketing team during the fourth quarter of fiscal 1999 to
enable us to proliferate our TouchSense technologies across markets, platforms
and applications. The significant increase of $7.4 million in 2000 is mainly due
to increased headcount and related compensation, benefits, and overhead costs of
$3.5 million. Expenses related to corporate identity, advertising, collateral
design and production and expenses incurred under a co-marketing agreement with
Logitech contributed $1.8 million to the increase of fiscal 2000 over 1999.
Increases associated with developer programs and production of showcase
applications of our tools of $1.0 million, increased website development and
maintenance of $238,000, increased tradeshow expenses of $177,000, and increased
travel expenses of $196,000 make up a majority of the remaining variance from
1999 to 2000. The $1.9 million or 120% increase in 1999 was primarily a result
of increased headcount and related compensation, benefits, and overhead costs of
$1.4 million and corporate identity and web development costs of $319,000. We
expect sales and marketing expenses to increase in absolute dollars due to
planned growth of our sales and marketing organization. These planned increases
include higher employee headcount and related compensation and increased
advertising and marketing expenses.
Research and Development. Our research and development expenses are
comprised primarily of headcount and related compensation and benefits,
consulting fees, costs of acquired technology, tooling and supplies and an
allocation of facilities costs. Research and development expenses increased to
$7.3 million in 2000 from $5.5 million in 1999 and $5.2 million in 1998. The
$1.7 million or 31% increase in 2000 is primarily due to $1.0 million of
research and development costs incurred at our wholly-owned subsidiaries
Immersion Canada and VTI during fiscal 2000 which were acquired in transactions
accounted for under the purchase method and therefore are, accordingly, not
reflected in our 1999 fiscal research and development expenses. Increased
headcount and related compensation, benefits and overhead costs of $372,000 and
increased engineering consulting and prototyping expenses of $312,000 contribute
to the remainder of the increase in research and development expenses from 1999
to 2000. The $350,000 or 7% increase in 1999 is mainly due to an increase in
employee headcount and the related compensation, benefits and overhead costs. We
believe that continued investment in research and development is critical to our
future success, and we expect these expenses to increase in absolute dollars in
future periods.
General and Administrative. Our general and administrative expenses are
comprised primarily of employee headcount and related compensation and benefits,
legal and professional fees, office supplies, recruiting, travel and an
allocation of facilities costs. General and administrative expenses increased to
$7.9 million in 2000 from $5.3 million in 1999 and $3.3 million in 1998. The
$2.6 million or 50% increase in 2000 is primarily due to $1.1 million in
employee headcount and related compensation, benefits, and overhead costs, a
$582,000 stock compensation charge related to an employment agreement, and
$555,000 of increased legal fees, investor fees and other fees related to being
a public company. Additionally our fiscal 2000 general and administrative
expenses include $453,000 related to charges incurred at our wholly-owned
subsidiaries Immersion Canada and VTI which were acquired in transactions
accounted for under the purchase method and therefore are, accordingly, not
reflected in our 1999 fiscal general and administrative expenses. The $2.0
million or 60% increase in 1999 is mainly attributed to an increase of $1.0
million in employee headcount and related compensation, benefits, and overhead
costs and an $824,000 increase in recruiting costs. The recruiting expenses are
predominantly from cash and stock compensation given to a recruiter for
identifying and employing three senior members of Immersion's management team.
We expect that the dollar amount of general and administrative expenses will
increase in the future as we incur additional costs related to supporting the
Company's growth in existing and new markets.
Amortization of Intangibles and Deferred Stock Compensation. Amortization
of intangibles consists primarily of amortization on acquired patents and
technology and goodwill on our acquisitions recorded under the purchase method
of accounting. Amortization of intangibles and deferred stock compensation
increased to $5.1 million in 2000 from $1.4 million in 1999 and $245,000 in
1998. The year over year increase of $3.7 million from 1999 to 2000 is comprised
of a $1.8 million increase in deferred stock compensation and a
31
34
$1.7 million increase in amortization of goodwill and other purchased
intangibles related to the acquisitions of Immersion Canada and VTI. The
deferred stock compensation amortization increase is mainly the result of
amortization of $1.2 million related to the $5.5 million of deferred stock
compensation recorded in conjunction with the assumption of Immersion Canada's
unvested options at the time of acquisition and $309,000 of amortization for the
deferred compensation charge related to the acceleration of options upon the
consummation of the merger with HT. The increase in amortization of goodwill and
purchased intangibles of $1.7 million in 2000 is due to $1.2 million
amortization related to the acquisition of Immersion Canada and $537,000
representing four months of amortization of goodwill and other purchased
intangibles related to the acquisition of VTI. The increase of $1.1 million from
1998 to 1999 is primarily the result of a $340,000 increase in amortization of
licenses and patents, a $482,000 increase in amortization on a consulting
agreement signed in March 1999 and $306,000 of deferred stock compensation
amortization. We recorded deferred stock compensation of $2.5 million in 1999
from the issuance of employee and director stock options. We are amortizing the
deferred stock compensation over the terms of the related option agreements,
which range up to four years.
Acquisition Related Charges. During the year ended December 31, 2000 we
incurred $3.5 million of acquisition related charges consisting of $887,000 for
in-process research and development resulting from the March 2000 acquisition of
all the outstanding shares of Immersion Canada, $1.2 million for in-process
research and development resulting from the August 2000 acquisition of all the
outstanding shares of VTI and $1.4 million of merger expenses related to the
September 2000 acquisition of HT. (See Note 3 of notes to consolidated financial
statements.) During the year ended December 31, 1999 we incurred a charge of
$1.2 million for in-process research and development resulting from the March
1999 acquisition of patents and in-process technology from Cybernet. The patents
and technology were acquired in exchange for 1,291,200 shares of our common
stock. We capitalized $3.6 million of purchased patents and technology in
connection with this acquisition. Strategically, these acquisitions allowed us
to increase the strength of our intellectual property portfolio by obtaining
numerous issued patents and pending patent applications relating to our
business. They also allowed Immersion to obtain a number of in-process research
and development projects that embody aspects of the acquired intellectual
property and that have potential commercial value. (See Note 2 of notes to
consolidated financial statements.) In addition, the three acquisitions in 2000
benefit Immersion as a result of the immediate addition of trained and skilled
employees in the field of haptics for new and existing market opportunities.
Interest and Other Income. Interest and other income, consists primarily of
interest income, dividend income and capital gains from cash and cash
equivalents and short-term investments. Interest and other income was $2.6
million in 2000, $510,000 in 1999 and $199,000 in 1998. The significant increase
in interest and other income is due to the increase in interest income on cash
and cash equivalents and short-term investments chiefly from the $48.3 million
net proceeds of our public offering on November 12, 1999. The $2.1 million
increase in 2000 from 1999 represents the public offering proceeds less
operating cash needs invested for twelve months in 2000 versus less than two
months in 1999.
Interest and Other Expense. Interest and other expense, consists primarily
of interest and warrant expense on long term debt. (See Note 9 of notes to
consolidated financial statements.) Interest and other expense was $870,000 in
2000, $1.1 million in 1999 and $309,000 in 1998. The decrease of $198,000 in
2000 was mainly due to additional interest expense incurred during 1999 on the
recalculation of interest due on the initial investment by Maryland Health Care
Product Development Corp., Cook, Inc. and the Maryland Department of Business
and Economic Development from 14% to 25% at the time the Company converted their
liability to a combination of cash and equity resulting in an expense of
$422,000 offset by increases in 2000 interest expense on the Medtronic note of
$143,000 and other notes of $81,000. The significant increase in 1999 was due to
the aforementioned recalculation of interest expense and interest expense on the
Medtronic convertible note and other notes, as well as the amortization of
interest expense related to the Medtronic warrant.
32
35
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering on November 12, 1999 we funded our
operations primarily from the sale of preferred stock as well as loans and
investments from strategic partners. Net proceeds from the initial public
offering were $48.3 million. As of December 31, 2000, we had an accumulated
deficit of $37.7 million and working capital of $27.6 million, including cash,
cash equivalents and short-term investments of $25.8 million.
Net cash used in operating activities during 2000 was $17.2 million,
primarily attributable to a net loss of $22.2 million, an increase of $2.2
million in accounts receivable, an increase in prepaid expenses and other assets
of $1.0 million, and an increase in inventories of $524,000 partially offset by
noncash charges of $8.8 million. Net cash used in operating activities during
1999 was $2.4 million, primarily attributable to a net loss of $9.5 million
partially offset by noncash charges of $4.5 million, a $1.5 million increase in
deferred revenue and increases in accounts payable and accrued liabilities of
$1.3 million. Other current liabilities at December 31, 1999 included deferred
revenue of $1.7 million. Of this amount, $1.3 million represented the
unamortized portion of the $2.35 million license payment received from Microsoft
in July 1999. In 1998, net cash used in operating activities was $3.5 million,
primarily attributable to a net loss of $3.7 million, an increase of $1.0
million in accounts receivable partially offset by noncash charges of $745,000.
Net cash used in investing activities during 2000 was $9.0 million and
primarily consisted of purchases of $21.9 million of short-term investments,
minority investments made of $3.3 million and a long-term receivable of $3.2
million, purchases of property and equipment of $2.8 million and $2.1 million
for acquisitions, net of cash acquired primarily offset by sales of short-term
investments of $24.3 million. Net cash used in investing activities during 1999
was $6.1 million and primarily consisted of purchases of $4.8 million of
short-term investments and $1.7 million of property and equipment, intangibles,
and other assets, offset by $403,000 from sales of short-term investments. In
1998, net cash provided by investing activities was $72,000, attributable to
$3.8 million from sales of short-term investments primarily offset by $2.9
million of purchases of short-term investments and $737,000 for purchases of
property and equipment and patents and technology. In order to improve our rate
of return on cash and still provide short-term liquidity, we periodically
purchase or sell short-term investments, which typically are interest-bearing,
investment-grade securities with a maturity of greater than 90 days and less
than one year.
Net cash provided by financing activities during 2000 was $683,000, and
arose primarily from the net proceeds from the exercise of stock options,
warrants and issuance of stock of $779,000 offset by the payment on notes
payable and capital leases of $96,000. Net cash provided by financing activities
during 1999 was $52.5 million, and consisted primarily of net proceeds of $48.3
million from our initial public offering of common stock in November 1999, net
proceeds from notes payable of $3.9 million, and $323,000 from the exercise of
stock options and warrants. In 1998, net cash provided by financing activities
was $5.4 million and was attributable primarily to net proceeds of $5.4 million
from the sale of preferred stock and $1.8 million from the exercise of stock
options, offset by the repurchase of $1.8 million of stock.
We believe that our cash, cash equivalents and short-term investments, will
be sufficient to meet our working capital needs and capital expenditure
requirements for at least the next 12 months. We anticipate that capital
expenditures for the full year ended December 31, 2001 will total approximately
$2.0 million in connection with anticipated growth in operations, infrastructure
and personnel. If the Company acquires one or more businesses or products, the
Company's capital requirements could increase substantially. In the event of
such an acquisition or should any unanticipated circumstances arise which
significantly increase the Company's capital requirements, there can be no
assurance that necessary additional capital will be available on terms
acceptable to the Company, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
133, certain contracts that
33
36
were not formerly considered derivatives may now meet the definition of a
derivative. SFAS 133, as amended, requires the recognition of all derivative
instruments as either assets or liabilities on the balance sheet measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The Company has adopted SFAS 133
effective January 1, 2001. The adoption of SFAS 133 did not have a material
impact on the financial position, results of operations, or cash flows of the
Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company adopted SAB 101 in the fourth quarter of 2000.
The adoption of SAB 101 did not have a material effect on the financial
position, results of operations or cash flows of the Company.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB 25 ("FIN 44"). Among other things, FIN 44
clarifies the application of APB 25 to modifications to existing stock option
awards and the accounting for an exchange of stock compensation awards in a
business combination. The Company adopted FIN 44 during the year on dates
specified in the Interpretation.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited exposure to financial market risks, including
changes in interest rates. The fair value of the Company's portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the major
portion of our investment portfolio. An increase or decrease in interest rates
would not significantly increase or decrease interest expense on debt
obligations due to the fixed nature of the Company's debt obligations. The
Company's foreign operations are limited in scope and thus the Company is not
materially exposed to foreign currency fluctuations.
34
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IMMERSION CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ 36
Report of Independent Auditors.............................. 37
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 38
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... 39
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the Years Ended December 31, 2000,
1999, and 1998............................................ 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... 42
Notes to Consolidated Financial Statements.................. 44
35
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Immersion Corporation:
We have audited the consolidated balance sheets of Immersion Corporation as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and comprehensive loss, and cash flows for each
of the three years in the period ended December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits. The consolidated financial statements give retroactive
effect to the merger of Immersion Corporation and HT Medical Systems, Inc.,
which has been accounted for as a pooling of interests as described in Note 3 to
the consolidated financial statements. We did not audit the consolidated balance
sheet of HT Medical Systems, Inc. as of May 31, 2000, or the related
consolidated statements of operations, stockholders' deficit and cash flows of
HT Medical Systems, Inc. for each of the two years in the period ended May 31,
2000, which statements reflect total assets of $1,549,000 as of May 31, 2000,
and total revenues of $2,925,000 and $3,682,000 for the years ended May 31, 2000
and 1999, respectively. Those statements were audited by other auditors whose
report (which as to May 31, 2000 included an explanatory paragraph with respect
to substantial doubt about HT Medical Systems, Inc.'s ability to continue as a
going concern and management's plan described in Note 11 to HT Medical Systems,
Inc.'s financial statements not separately presented herein) has been furnished
to us, and our opinion, insofar as it relates to the amounts included for HT
Medical Systems, Inc. for such periods, is based solely on the report of such
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Immersion Corporation at December
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
February 7, 2001
36
39
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
HT Medical Systems, Inc.
We have audited the accompanying consolidated balance sheets of HT Medical
Systems, Inc. as of May 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
two years in the period ended May 31, 2000 (not presented separately herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HT Medical
Systems, Inc. at May 31, 2000 and the consolidated results of its operations and
its cash flows for each of the two years in the period ended May 31, 2000 in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that HT Medical Systems, Inc. will continue as a going concern. As more
fully described in Note 11, the Company has incurred recurring operating losses
and has a working capital deficiency. These conditions in addition to the
Company's limited capital resources raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 11. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
McLean, Virginia
July 21, 2000
37
40
IMMERSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 23,474 $ 46,606
Short-term investments.................................... 2,360 4,781
Accounts receivable (net of allowances for doubtful
accounts of:
2000, $227; and 1999, $173)............................ 3,675 1,362
Inventories............................................... 1,709 949
Prepaid expenses and other current assets................. 1,306 1,160
-------- --------
Total current assets.............................. 32,524 54,858
Property and equipment, net................................. 3,606 1,316
Purchased intangibles and other assets, net................. 14,864 4,813
Other investments........................................... 6,500 --
-------- --------
Total assets................................................ $ 57,494 $ 60,987
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,720 $ 1,372
Accrued compensation...................................... 1,042 478
Other current liabilities................................. 2,077 2,241
Current portion of long-term debt......................... 100 103
Current portion of capital lease obligation............... 20 7
-------- --------
Total current liabilities......................... 4,959 4,201
Long-term debt, less current portion........................ 3,835 3,461
Capital lease obligation, less current portion.............. 68 34
Warrant liability........................................... 289 289
Other long-term liabilities................................. -- 39
-------- --------
Total liabilities................................. 9,151 8,024
-------- --------
Commitments and contingencies (Notes 11 and 19)
Stockholders' equity:
Common stock -- $0.001 par value; 100,000,000 shares
authorized; shares issued and outstanding: 2000,
18,476,061; 1999, 17,047,023........................... 89,334 71,135
Warrants.................................................. 1,990 1,996
Deferred stock compensation............................... (5,255) (2,166)
Accumulated other comprehensive income.................... 40 19
Note receivable from stockholder.......................... (17) (17)
Accumulated deficit....................................... (37,749) (18,004)
-------- --------
Total stockholders' equity........................ 48,343 52,963
-------- --------
Total liabilities and stockholders' equity.................. $ 57,494 $ 60,987
======== ========
See notes to consolidated financial statements.
38
41
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
Revenues:
Royalty revenue........................................... $ 3,186 $ 2,211 $ 321
Product sales............................................. 8,176 6,063 4,472
Development contracts and other........................... 3,901 2,668 3,910
-------- ------- -------
Total revenues.................................... 15,263 10,942 8,703
Costs and expenses:
Cost of product sales..................................... 4,496 2,964 1,954
Sales and marketing....................................... 10,990 3,547 1,612
Research and development.................................. 7,250 5,518 5,168
General and administrative................................ 7,855 5,250 3,283
Amortization of intangibles and deferred stock
compensation(*)........................................ 5,053 1,385 245
Acquisition related charges............................... 3,481 1,190 --
-------- ------- -------
Total costs and expenses.......................... 39,125 19,854 12,262
-------- ------- -------
Operating loss.............................................. (23,862) (8,912) (3,559)
Interest and other income................................... 2,560 510 199
Interest and other expense.................................. (870) (1,068) (309)
-------- ------- -------
Net loss.................................................... (22,172) (9,470) (3,669)
Redeemable convertible preferred stock accretion............ -- 6 6
-------- ------- -------
Net loss applicable to common stockholders.................. $(22,172) $(9,476) $(3,675)
======== ======= =======
Basic and diluted net loss per share........................ $ (1.25) $ (1.21) $ (0.73)
======== ======= =======
Shares used in calculating basic and diluted net loss per
share..................................................... 17,719 7,852 5,023
======== ======= =======
(*) Amortization of intangibles and deferred stock
compensation
(*) Amortization of intangibles............................. $ 2,886 $ 1,033 $ 211
(*) Deferred stock compensation -- sales and marketing...... 176 61 --
(*) Deferred stock compensation -- research and
development............................................... 1,442 72 34
(*) Deferred stock compensation -- general and
administrative............................................ 549 219 --
-------- ------- -------
Total............................................. $ 5,053 $ 1,385 $ 245
======== ======= =======
See notes to consolidated financial statements.
39
42
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONVERTIBLE ACCUMULATED NOTE
PREFERRED STOCK COMMON STOCK DEFERRED OTHER RECEIVABLE
------------------- -------------------- STOCK COMPREHENSIVE FROM
SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION INCOME (LOSS) STOCKHOLDER
---------- ------ ---------- ------- -------- ------------ ------------- -----------
BALANCES AT JANUARY 1,
1998........................ 2,862,159 $1,545 4,327,062 $1,129 $ 33 $ (141) $ 2 $ --
Net loss.....................
Change in net unrealized
gains from short-term
investments................. (1)
Comprehensive loss...........
Issuance of Series D
convertible preferred stock,
net of issuance costs of
$374........................ 1,376,928 5,376 17
Exercise of Series A
preferred stock warrants.... 30,260 36 (6)
Exercise of common stock
warrants.................... 85,945 4
Extension of Series B
preferred stock warrants.... 41
Exercise of stock options.... 1,024,615 114 (17)
Issuance common stock........ 244,566 1,680
Issuance of common stock for
service..................... 3,882 30
Issuance of options to
nonemployees................ 4
Issuance of common stock and
options for patents......... 137,190 720
Issuance of stock options for
consulting services......... 68
Repurchase of stock.......... (2,018) (2) (502,014) (2)
Amortization of stock
compensation................ 34
Preferred stock accretion....
---------- ------ ---------- ------- ------ ------- ---- ----
BALANCES AT DECEMBER 31,
1998........................ 4,267,329 6,955 5,321,246 3,747 85 (107) 1 (17)
Net loss.....................
Change in net unrealized
gains from short-term
investments................. 18
Comprehensive loss...........
Issuance of common stock upon
conversion of investment
agreement................... 55,762 862
Issuance of common stock..... 68,517 995
Issuance of common stock
warrants.................... 7,061 --
Exercise of convertible
preferred stock warrants.... 72,630 108 62 (62)
Warrants issued for
services.................... 808
Warrants issued with debt.... 1,165
Exercise of stock options.... 460,336 215
Issuance of common stock and
options for patents......... 1,379,970 5,092
Issuance of stock options for
license agreement........... 129
Issuance of common stock
options for services........ 76,665 770
Deferred stock
compensation................ 2,494 (2,494)
Amortization of stock
compensation................ 400
Reversal of deferred stock
compensation due to
cancellation of stock
options..................... (83) 35
Issuance of common stock in
connection with initial
public offering, net of
expenses of $1,620.......... 4,473,736 48,307
Conversion of preferred stock
to common stock............. (4,339,959) (7,063) 4,339,959 7,063
Conversion of redeemable
preferred stock to common
stock....................... 863,771 1,482
Preferred stock accretion....
---------- ------ ---------- ------- ------ ------- ---- ----
BALANCES AT DECEMBER 31,
1999......................... -- -- 17,047,023 71,135 1,996 (2,166) 19 (17)
TOTAL
ACCUMULATED COMPREHENSIVE
DEFICIT TOTAL LOSS
----------- -------- -------------
BALANCES AT JANUARY 1,
1998........................ $ (3,013) (445)
Net loss..................... (3,669) (3,669) $ (3,669)
Change in net unrealized
gains from short-term
investments................. (1) (1)
--------
Comprehensive loss........... $ (3,670)
========
Issuance of Series D
convertible preferred stock,
net of issuance costs of
$374........................ 5,393
Exercise of Series A
preferred stock warrants.... 30
Exercise of common stock
warrants.................... 4
Extension of Series B
preferred stock warrants.... 41
Exercise of stock options.... 97
Issuance common stock........ 1,680
Issuance of common stock for
service..................... 30
Issuance of options to
nonemployees................ 4
Issuance of common stock and
options for patents......... 720
Issuance of stock options for
consulting services......... 68
Repurchase of stock.......... (1,840) (1,844)
Amortization of stock
compensation................ 34
Preferred stock accretion.... (6) (6)
-------- --------
BALANCES AT DECEMBER 31,
1998........................ (8,528) 2,136
Net loss..................... (9,470) (9,470) $ (9,470)
Change in net unrealized
gains from short-term
investments................. 18 18
--------
Comprehensive loss........... $ (9,452)
========
Issuance of common stock upon
conversion of investment
agreement................... 862
Issuance of common stock..... 995
Issuance of common stock
warrants.................... --
Exercise of convertible
preferred stock warrants.... 108
Warrants issued for
services.................... 808
Warrants issued with debt.... 1,165
Exercise of stock options.... 215
Issuance of common stock and
options for patents......... 5,092
Issuance of stock options for
license agreement........... 129
Issuance of common stock
options for services........ 770
Deferred stock
compensation................ --
Amortization of stock
compensation................ 400
Reversal of deferred stock
compensation due to
cancellation of stock
options..................... (48)
Issuance of common stock in
connection with initial
public offering, net of
expenses of $1,620.......... 48,307
Conversion of preferred stock
to common stock............. --
Conversion of redeemable
preferred stock to common
stock....................... 1,482
Preferred stock accretion.... (6) (6)
-------- --------
BALANCES AT DECEMBER 31,
1999......................... (18,004) 52,963
(Continued)
40
43
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONVERTIBLE ACCUMULATED NOTE
PREFERRED STOCK COMMON STOCK DEFERRED OTHER RECEIVABLE
------------------- -------------------- STOCK COMPREHENSIVE FROM
SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION INCOME (LOSS) STOCKHOLDER
---------- ------ ---------- ------- -------- ------------ ------------- -----------
BALANCES AT DECEMBER 31,
1999........................ -- $ -- 17,047,023 $71,135 $1,996 $(2,166) $ 19 $(17)
Net loss.....................
Change in net unrealized
gains from short-term
investments................. (20)
Foreign currency translation
adjustment.................. 41
Comprehensive loss...........
Issuance of common stock in
connection with the
acquisition of Immersion
Canada...................... 141,538 5,513
Exercise of common stock
warrants.................... 103,363 74 (6)
Issuance of stock for ESPP
purchase.................... 26,165 267
Exercise of stock options.... 799,870 446
Payment for fractional
shares...................... (47) (2)
Issuance of stock and options
as compensation............. 37,565 590
Adjustment for change in HT's
fiscal year-end.............
Deferred stock
compensation................ 5,875 (5,875)
Reversal of deferred stock
compensation due to
cancellation of stock
options..................... (690) 690
Amortization of deferred
stock compensation.......... 2,096
Issuance of common stock in
connection with the
acquisition of VTI.......... 320,584 6,126
---------- ------ ---------- ------- ------ ------- ---- ----
BALANCES AT DECEMBER 31,
2000........................ -- $ -- 18,476,061 $89,334 $1,990 $(5,255) $ 40 $(17)
========== ====== ========== ======= ====== ======= ==== ====
TOTAL
ACCUMULATED COMPREHENSIVE
DEFICIT TOTAL LOSS
----------- -------- -------------
BALANCES AT DECEMBER 31,
1999........................ $(18,004) $ 52,963
Net loss..................... (22,172) (22,172) $(22,172)
Change in net unrealized
gains from short-term
investments................. (20) (20)
Foreign currency translation
adjustment.................. 41 41
--------
Comprehensive loss........... $(22,151)
========
Issuance of common stock in
connection with the
acquisition of Immersion
Canada...................... 5,513
Exercise of common stock
warrants.................... 68
Issuance of stock for ESPP
purchase.................... 267
Exercise of stock options.... 446
Payment for fractional
shares...................... (2)
Issuance of stock and options
as compensation............. 590
Adjustment for change in HT's
fiscal year-end............. 2,427 2,427
Deferred stock
compensation................ --
Reversal of deferred stock
compensation due to
cancellation of stock
options..................... --
Amortization of deferred
stock compensation.......... 2,096
Issuance of common stock in
connection with the
acquisition of VTI.......... 6,126
-------- --------
BALANCES AT DECEMBER 31,
2000........................ $(37,749) $ 48,343
======== ========
(Concluded)
See notes to consolidated financial statements.
41
44
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(22,172) $(9,470) $(3,669)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 732 384 265
Amortization of discount on notes payable............... 285 319 --
Amortization of intangibles............................. 2,886 1,033 211
Amortization of deferred stock compensation............. 2,096 352 34
In-process research and development..................... 2,045 1,190 --
Loss on sale of equipment............................... 15 -- --
Stock and options issued for consulting services and
other.................................................. 590 770 102
Extension of warrants for consulting services........... -- -- 41
Noncash interest expense................................ 175 453 92
Changes in operating assets and liabilities:
Accounts receivable................................... (2,217) 371 (1,013)
Inventories........................................... (524) (308) (294)
Prepaid expenses and other assets..................... (1,002) (378) (138)
Accounts payable...................................... (137) 514 505
Accrued liabilities................................... 784 829 186
Deferred revenue and customer advances................ (805) 1,505 157
-------- ------- -------
Net cash used in operating activities.............. (17,249) (2,436) (3,521)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments....................... (21,873) (4,764) (2,943)
Sales and maturities of short-term investments............ 24,274 403 3,752
Purchase of property and equipment........................ (2,839) (1,153) (303)
Proceeds from sale of equipment........................... 10 -- --
Purchases of patents and technology....................... -- (445) (434)
Acquisitions, net of cash acquired........................ (2,060) -- --
Other assets and investments.............................. (6,500) (140) --
-------- ------- -------
Net cash provided by (used in) investing
activities........................................ (8,988) (6,099) 72
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Series D convertible preferred stock and
warrants, net........................................... -- -- 5,393
Issuance of Series C redeemable convertible preferred
stock, net.............................................. -- -- (1)
Issuance of common stock.................................. 265 995 --
Exercise of stock options................................. 446 215 1,778
Repurchase of stock....................................... -- -- (1,844)
Exercise of warrants...................................... 68 108 34
Net proceeds from capital leases.......................... -- 41 --
Payment on notes payable and capital leases............... (96) (85) (39)
Proceeds from (payments on) note due to shareholder....... -- (60) 60
Proceeds from notes payable............................... -- 3,887 --
Payoff of investment agreement............................ -- (862) --
Repurchase of common stock................................ -- -- --
Insurance of common stock in connection with public
offering................................................ -- 48,307 --
-------- ------- -------
Net cash provided by financing activities.......... 683 52,546 5,381
-------- ------- -------
Effect of exchange rates on cash and cash equivalents..... (5) -- --
-------- ------- -------
Net increase in cash and cash equivalents................... (25,559) 44,011 1,932
Adjustment for change in HT's fiscal year-end............... 2,427 -- --
CASH AND CASH EQUIVALENTS:
Beginning of year......................................... 46,606 2,595 663
-------- ------- -------
End of year............................................... $ 23,474 $46,606 $ 2,595
======== ======= =======
(Continued)
42
45
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for taxes....................................... $ 2 $ -- $ 1
======== ======= =======
Cash paid for interest.................................... $ 83 $ 487 $ 217
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Change in net unrealized gains (losses) from short-term
investments............................................. $ (20) $ 18 $ (1)
======== ======= =======
Issuance of equity instruments for patents, technology and
licenses................................................ $ -- $ 5,221 $ 720
======== ======= =======
Issuance of warrants for services......................... $ -- $ 808 $ --
======== ======= =======
Accretion of redeemable preferred stock................... $ -- $ 6 $ 6
======== ======= =======
Exercise of stock option for note receivable.............. $ -- $ -- $ 17
======== ======= =======
Asset purchased under capital lease....................... $ -- $ 45 $ --
======== ======= =======
Conversion of investment agreement to equity.............. $ -- $ 862 $ --
======== ======= =======
Issuance of warrants for debt............................. $ -- $ 1,165 $ --
======== ======= =======
Assumption of stock options for acquisition............... $ 58 $ -- $ --
======== ======= =======
(Concluded)
See notes to consolidated financial statements.
43
46
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Immersion Corporation (the "Company") was
incorporated in May 1993 in California and reincorporated in Delaware in 1999
and provides technologies that enable users to interact with computers using
their sense of touch.
Principles of Consolidation and Basis of Presentation -- The consolidated
financial statements include the accounts of Immersion Corporation and its
majority-owned subsidiaries. All intercompany transactions and balances have
been eliminated in consolidation. In September 2000, Immersion acquired all
outstanding shares of HT Medical Systems, Inc.'s (HT) common and preferred stock
in a merger accounted for as a pooling of interests (see Note 3). Accordingly,
the consolidated financial statements have been restated for all periods
presented as if Immersion and HT had always been combined.
Cash Equivalents -- The Company considers all highly liquid debt
instruments purchased with an original maturity at the date of purchase of 90
days or less to be cash equivalents.
Short-Term Investments -- Short-term investments consist primarily of
highly liquid debt instruments purchased with an original maturity at the date
of purchase of greater than 90 days and investments in mutual funds. Short-term
investments are classified as available-for-sale securities and are stated at
market value with unrealized gains and losses reported as a component of
accumulated other comprehensive income/loss within stockholders' equity.
Inventories -- Inventories are stated at the lower of cost (principally on
a standard cost basis which approximates FIFO) or market.
Property and Equipment -- Property is stated at cost and is generally
depreciated using the straight-line method over the estimated useful life of the
related asset. The estimated useful lives are as follows:
Machinery and equipment.................................. 3 - 5 years
Computer equipment and purchased software................ 3 years
Furniture and fixtures................................... 5 - 7 years
Leasehold improvements are amortized over the shorter of the lease term or
their useful life.
Purchased Intangibles and Other Assets -- Purchased intangibles and other
assets is comprised of purchased patents and technology and goodwill and other
intangibles resulting from business combinations. Purchased patents and
technology are stated at cost and are amortized over the shorter of the
remaining life of the patent or the estimated useful life of the technology,
generally nine years. Goodwill and other intangibles resulting from business
combinations are stated at cost and are amortized over their estimated useful
lives (see Note 2 and Note 3).
DECEMBER 31,
-----------------
2000 1999
------- ------
(IN THOUSANDS)
Purchased patents and technology, net..................... $ 4,645 $4,687
Goodwill and other intangibles, net....................... 10,136 --
Other assets.............................................. 83 126
------- ------
Total........................................... $14,864 $4,813
======= ======
Accumulated amortization on purchased patents and technology was $1.3
million and $714,000 at December 31, 2000 and 1999 respectively. Accumulated
amortization on goodwill and other intangibles was $1.7 million and $0 at
December 31, 2000 and 1999 respectively.
44
47
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Long-Lived Assets -- The Company reviews for the impairment of a long-lived
asset whenever events or changes in circumstances indicate that the carrying
amount of that asset may not be recoverable. An impairment loss would be
recognized when the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount. Measurement of an impairment loss for long-lived assets and
certain identifiable intangible assets that management expects to hold and use
are based on the fair value of the asset.
Product Warranty -- The Company sells the majority of its products with
warranties ranging from three to twelve months. Historically, warranty-related
costs have not been significant.
Note Receivable from Stockholder -- The note receivable from stockholder
was issued in exchange for common stock, bears interest at 5.39% per annum and
is due March 2001.
Revenue Recognition -- The Company recognizes revenues in accordance with
applicable accounting standards including American Institute of Certified Public
Accountants' (the "AICPA") Statement of Position 97-2, Software Revenue
Recognition, as amended. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the fee
is fixed and determinable, and collectibility is probable. This generally occurs
at the time of shipment.
Revenues from development contracts with the U.S. government and other
commercial customers are derived from either fixed price or reimbursement of
costs contracts. Contract revenues are recognized under the cost-to-cost
percentage-of-completion accounting method based on actual physical completion
of work performed and the ratio of costs incurred to total estimated costs to
complete the contract. Losses on contracts are recognized when determined.
Revisions in estimates are reflected in the period in which the conditions
become known. Allowable fees under cost-reimbursement contracts are recognized
as costs are incurred.
The Company recognizes royalty revenue based on royalty reports or related
information received from the licensee. Advance payments under license
agreements that also require the Company to provide future services to the
licensee are deferred and recognized over the service period when vendor
specific objective evidence related to the value of the services does not exist.
At December 31, 2000, the Company has no obligation to repay amounts
received under development contracts with the U.S. government or other
commercial customers.
Advertising -- Advertising costs (including obligations under cooperative
marketing programs) are expensed as incurred and included in sales and marketing
expense. Advertising expense was $926,000, $213,000, and $182,000 in 2000, 1999,
and 1998 respectively.
Research and Development -- Research and development costs are expensed as
incurred. The Company has generated revenues from development contracts with the
U.S. government and other commercial customers that have enabled it to
accelerate its own product development efforts. Such development revenues have
only partially funded the Company's product development activities, and the
Company generally retains ownership of the products developed under these
arrangements. As a result, the Company classifies all development costs related
to these contracts as research and development expenses.
Income Taxes -- The Company provides for income taxes using the asset and
liability approach defined by Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes.
Software Development Costs -- Certain of the Company's products include
software. Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized in accordance with SFAS No. 86, Computer Software to
be Sold, Leased or Otherwise Marketed. The Company considers technological
feasibility to be established upon completion of a working
45
48
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
model of the software and the related hardware. Because the Company believes its
current process for developing software is essentially completed concurrently
with the establishment of technological feasibility, no costs have been
capitalized to date.
Stock-Based Compensation -- The Company accounts for its stock-based awards
to employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees and its related interpretations.
Comprehensive Income -- Comprehensive loss includes net loss as well as
other comprehensive income/loss. The Company's other comprehensive loss consists
of unrealized gains and losses on available-for-sale securities and foreign
currency translation adjustments. Total comprehensive loss and the components of
accumulated other comprehensive income are presented in the accompanying
Consolidated Statement of Stockholders' Equity and Comprehensive Loss. Total
accumulated other comprehensive income is displayed as a separate component of
stockholders' equity in the accompanying Consolidated Balance Sheet.
Net Loss per Share -- Basic net loss per share excludes dilution and is
computed by dividing net loss applicable to common stockholders by the weighted
average number of common shares outstanding for the period (excluding shares
subject to repurchase). Diluted net loss per common share was the same as basic
net loss per common share for all periods presented since the effect of any
potentially dilutive securities is excluded as they are anti-dilutive because of
the Company's net losses.
Use of Estimates -- The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of Credit Risks -- Financial instruments that potentially
subject the Company to a concentration of credit risk principally consist of
cash and cash equivalents, short-term investments and accounts receivable. The
Company invests primarily in money market accounts, commercial paper, and debt
securities of U.S. government agencies. The Company sells products primarily to
companies in North America, Europe and the Far East. A majority of these sales
are to customers in the personal computer industry. To reduce credit risk,
management performs periodic credit evaluations of its customers' financial
condition. The Company maintains reserves for potential credit losses, but
historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area.
Certain Significant Risks and Uncertainties -- The Company operates in a
dynamic industry and, accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a negative effect on the Company in terms of its future
financial position and results of operations: its ability to obtain additional
financing; the mix of revenues; the loss of significant customers; fundamental
changes in the technology underlying the Company's products; market acceptance
of the Company's and its licensees' products under development; the availability
of contract manufacturing capacity; development of sales channels; litigation or
other claims against the Company; the hiring, training and retention of key
employees; successful and timely completion of product and technology
development efforts; and new product or technology introductions by competitors.
Fair Value of Financial Instruments -- Financial instruments consist
primarily of cash equivalents, short-term investments, accounts receivable,
accounts payable, accrued liabilities, and long-term debt. Cash equivalents and
short-term investments are stated at fair value based on quoted market prices.
The recorded cost of accounts receivable, accounts payable, accrued liabilities
and long-term debt approximate the fair value of the respective assets and
liabilities.
46
49
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Recently Issued Accounting Standards -- In June 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133,
as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. SFAS 133, as amended, requires the recognition of all derivative
instruments as either assets or liabilities on the balance sheet measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 is effective for all
fiscal years beginning after June 15, 2000. The Company has adopted SFAS 133
effective January 1, 2001. The adoption of SFAS 133 did not have a material
impact on the financial position, results of operations, or cash flows of the
Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company adopted SAB 101 in the fourth quarter of 2000.
The adoption of SAB 101 did not have a material effect on the financial
position, results of operations or cash flows of the Company.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB 25 ("FIN 44"). Among other things, FIN 44
clarifies the application of APB 25 to modifications to existing stock option
awards and the accounting for an exchange of stock compensation awards in a
business combination. The Company adopted FIN 44 during the year on dates
specified in the Interpretation.
Reclassifications -- Certain reclassifications have been made to prior year
balances in order to conform to the current year presentation.
2. PURCHASED PATENTS AND TECHNOLOGY
During 1998, the Company entered into a license agreement and acquired
various patents relating to touch-enabling technology. In connection with these
agreements, the Company paid $434,000, issued 137,190 shares of common stock and
issued an option to purchase 242,100 shares of common stock at $3.66 per share
(see Note 12). The Company has recorded the estimated fair value of the
aggregate consideration of $1,154,000 as purchased patents and technology.
In February 1999, the Company acquired certain patents and related
materials pertaining to touch-enabling technology from another company in
exchange for $25,000 in cash and 88,770 shares of the Company's common stock. In
addition, the Company is required to issue an additional 16,140 shares of common
stock to the seller if the Company is successful in obtaining either a reissue
or a foreign version of at least one of the patents. The Company's stock issued
in this transaction is being held in escrow until the successful reissue of at
least one of the patents. If this condition is not met at the end of five years
and the stock is therefore still held in escrow, the seller has the right to put
the shares back to the Company for $3.72 per share. The existence of the put
option has the effect of increasing the value assigned to the shares issued to
$3.72 per share. As a result, the estimated value of $355,000 (representing
88,770 shares at $3.72 per share plus $25,000) has been recorded as purchased
patents and technology.
In March 1999, the Company acquired certain additional patents relating to
touch-enabling technologies and in-process research and development from another
company in exchange for 1,291,200 shares of the Company's common stock with an
estimated fair value of $4,720,000. The aggregate purchase price of $4,807,000
(including acquisition and other costs) has been allocated $3,617,000 to
purchased patents and technology and $1,190,000 to acquired in-process research
and development. The purchased patents and technology are being amortized over
the estimated useful life of nine years. The allocation of the purchase
47
50
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
price to the respective intangibles was based on management's estimates of the
after-tax cash flows and gave explicit consideration to the Securities and
Exchange Commission's views on purchased in-process research and development as
set forth in its September 9, 1998 letter to the American Institute of Certified
Public Accountants. Specifically, the valuation gave consideration to the
following: (i) the employment of a fair market value premise excluding any
Company-specific considerations that could result in estimates of investment
value for the subject assets; (ii) comprehensive due diligence concerning all
potential intangible assets; (iii) the determination that none of the technology
development had been completed at the time of acquisition; and (iv) the
allocation to in-process research and development based on a calculation that
considered only the efforts completed as of the transaction date, and only the
cash flow associated with these completed efforts for one generation of the
products currently in process. As indicated above, the Company recorded a
one-time charge of $1,190,000 upon the acquisition in March 1999 for purchased
in-process research and development related to five development projects. The
charge related to the portion of these projects that had not reached
technological feasibility, had no alternative future use and for which
successful development was uncertain. Management's conclusion that the
in-process development effort had no alternative future use was reached in
consultation with the engineering personnel from both the Company and the
seller.
The first of these projects is a flexible force feedback development
environment that allows developers to choose the level of
complexity/functionality that fits their needs. At the time of acquisition, the
development was 81% complete and the estimated cost to complete this development
was $438,000. The resulting technology from this project was combined with
existing software technology from Immersion to become key features in Immersion
Studio and Immersion Desktop, both of which were released and began shipping in
September 2000. The second of these projects, a three-degree-of-freedom
joystick, gives the operator smooth, intuitive movement and feedback along three
axes -- roll, pitch and yaw -- using brushless motor and encoder technology. At
the time of acquisition, the development was 36% complete and the estimated cost
to complete this development was $109,000. Management expects products based on
this technology to become available in the fourth quarter of 2001. The third of
these projects, a six-degree-of-freedom hand controller, is a small back
drivable robot that moves in six degrees of freedom, three linear positions and
attitudes. At the time of acquisition, the development was 70% completed and the
estimated cost to complete this development was $88,000. Management has
redirected the development of this product to address specific needs in the
Medical and 3D content capture markets and expects to begin shipping products in
June 2002. The fourth project is a Flight Yoke, which provides the intuitive
motion and feel of an airplane control yoke. It translates in and out to control
the pitch, rotates for roll control, and provides the corresponding feel along
these axes of motion. At the time of acquisition, the development was 49%
completed and the estimated cost to complete this development was $175,000.
Management expects that licensees will ship products in fiscal 2002. The fifth
development project is a device that allows the user to physically interact with
computer generated three-dimensional objects. At the time of acquisition, the
development was 11% completed and the estimated cost to complete this
development was $248,000. The resulting technology from this project was
combined with existing technology from Immersion and is currently integrated in
the CyberGrasp and CyberForce products, both of which were released and began
shipping in 2000.
The Company began to benefit from the acquired research and development of
these products once they began shipping. Future benefits will depend on the
continued success of these products and the future products, which may result
from completion of the remaining projects. Failure to reach successful
completion of these projects could result in impairment of the associated
capitalized intangible assets and could require the Company to accelerate the
time period over which the intangibles are being amortized, which could have a
material adverse effect on the Company's business, financial condition, and
results of operations. Significant assumptions used to determine the value of
in-process research and development, include the following: (i) forecast of net
cash flows that were expected to result from the development effort using
projections
48
51
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
prepared by the Company's and the seller's management; (ii) the portion of the
projects estimated by considering a number of factors, including the costs
invested to date relative to total cost of the development effort and the amount
of progress completed as of the acquisition date, on a technological basis,
relative to the overall technological achievements required to achieve the
functionality of the eventual product. The technological issues were addressed
by engineering representatives from both the Company and the seller, and when
estimating the value of the technology, the projected financial results of the
acquired assets were estimated on a stand-alone basis without any consideration
to potential synergistic benefits or "investment value" related to the
acquisition. As there were no existing products acquired, separate projected
cash flows were prepared for only the in-process projects.
These projected results were based on the number of units sold times the
expected average selling price less the associated costs. After preparing the
estimated cash flows from the products being developed, a portion of these cash
flows were attributed to the existing technology, which was embodied in the
in-process product lines and enabled a quicker and more cost-effective
development of these products. When estimating the value of the in-process
technologies, a discount rate of 30% was used. The discount rate considered both
the status and risks associated with the cash flows at the acquisition date.
Revenues from the in-process products commenced in 2000 and are expected to
continue in 2001 as the remaining products are completed and begin to ship.
Initial annual revenue growth rates after introduction were projected to exceed
50% and decline to less than 15% by 2005. Gross margins from these products are
anticipated to be consistent with the gross margins from its other products.
The technology was acquired in a transaction that was tax-free to the
seller and, as a result, the Company has a minimal tax basis in the acquired
technology. Accordingly, a deferred tax liability of $1,410,000 has been
recorded for the difference in the book and tax bases of the acquired assets.
This resulted in the concurrent recognition of previously reserved deferred tax
assets of an equal amount. Also, in connection with this acquisition, the
Company entered into a consulting arrangement with the seller to provide
consulting services related to the development of various platforms of
touch-enabling technology, and collaborate with the Company, in executing
development agreements with the U.S. government and other commercial customers
for a three year period. In consideration for certain consulting services and
rights, the Company granted to the seller a warrant to purchase 322,800 shares
of the Company's common stock at $3.66 per share (see Note 12) paid the seller
$150,000, and is obligated to pay an additional $75,000 in 2000 and 2001. The
consideration for the consulting services of $1,108,000, including the estimated
fair value of the warrant ($808,000), has been recorded as prepaid expenses and
noncurrent other assets. The consideration for the consulting service is being
amortized over the two-year estimated period of benefit of the consulting
services. Amortization expense incurred on the consulting agreement was $578,000
and $482,000 in 2000 and 1999 respectively. The warrants were fully vested at
the date of grant. Accordingly, the fair value of the warrants was determined at
the date of grant using the methods specified by SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), with the following assumptions: expected
life, 10 years; risk free interest rate, 5.7%; volatility, 50%; and no dividends
during the expected term.
During 1999, in consideration for a technology license agreement, the
Company issued an option to purchase 20,175 shares of common stock at an
exercise price of $3.66 per share. The Company has recorded the estimated fair
value of the option of $129,000 as purchased patents and technology at December
31, 1999 (see Note 12).
49
52
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
3. BUSINESS COMBINATIONS
Purchase Transactions
In March 2000, the Company acquired all outstanding shares of
Montreal-based Immersion Canada Inc. ("Immersion Canada") formerly named Haptic
Technologies Inc. for approximately $6.8 million, consisting of 141,538 shares
of the Company's common stock and $338,000 paid in cash. Immersion Canada
develops and markets hardware and software that brings the sense of touch to
computing environments. As a result of the acquisition, Immersion Canada became
a wholly-owned subsidiary of Immersion with operations in Montreal, Canada. The
acquisition was accounted for using the purchase method and accordingly the
acquired assets and liabilities were recorded at their fair market values at the
date of acquisition. Pro forma results of the combined operations have not been
presented as they are not materially different from the Company's reported
results of operations
In connection with the transaction, the Company assumed unvested options of
Immersion Canada resulting in deferred stock compensation of $5.5 million, which
will be amortized over the remaining vesting period of approximately four years.
The aggregate purchase price of $6.8 million (including acquisition costs)
was allocated among the assets acquired (including acquired in-process research
and development) as follows (in thousands):
Purchase price allocation:
--------------------------
Tangible assets............................................. $ 416
In-process research and development......................... 887
Intangible assets:
Goodwill.................................................. 3,979
Core technology........................................... 871
Developed technology...................................... 396
Workforce................................................. 139
Pending patents........................................... 65
------
$6,753
======
The goodwill, core technology, and pending patents are being amortized over
their estimated useful lives of 4 years. The developed technology and workforce
are being amortized over their estimated useful lives of 3 and 2 years,
respectively. The allocation of the purchase price to the respective intangibles
was based on management's estimates of the after-tax cash flows and gave
explicit consideration to the Securities and Exchange Commission's views on
purchased in-process research and development as set forth in its September 9,
1998 letter to the American Institute of Certified Public Accountants.
Specifically, the valuation gave consideration to the following: (i) the
employment of a fair market value premise excluding any Company-specific
considerations that could result in estimates of investment value for the
subject assets; (ii) comprehensive due diligence concerning all potential
intangible assets; (iii) the value of existing technology was specifically
addressed, with a view toward ensuring the relative allocations to existing
technology and in-process research and development were consistent with the
relative contributions of each to the final product; and (iv) the allocation to
in-process research and development was based on a calculation that considered
only the efforts completed as of the transaction date, and only the cash flow
associated with these completed efforts for one generation of the products
currently in process.
As indicated above, the Company recorded a one-time charge of $887,000 upon
the acquisition in March 2000 for purchased in-process research and development
related to three development projects. The charge related to the portion of
these products that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
Management's conclusion that the in-process
50
53
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
development effort had no alternative future use was reached in consultation
with the engineering personnel from both the Company and the seller.
The first of these projects focuses on providing products for moving
vehicles that use computers in their instrumentation and control panels and
targets both end-user in-vehicle systems and design phase solutions. The product
being developed is a software product to be bundled with a haptic peripheral
device. The software product is designed to provide a touch feedback module for
the peripheral device, which will introduce the sense of touch into the
interface allowing designers to feel the buttons on the screen as they design
the control panel. This product is expected to be released in late FY 2002 and
at the time of the acquisition was approximately 50% complete with estimated
costs to complete the development of $60,000. The second of these projects is
the MilleniumCat technologies, aimed at the multimedia market that will offer a
full high fidelity affordable haptic device. Immersion Canada currently sells
the PenCat/Pro, a stylus based touch-enabled computer interface device. The
MilleniumCat product will be the next generation PenCat/Pro offering both the
hardware device utilizing a mouse and the next generation multimedia feedback
technology associated with Immersion Canada's developed suite of products that
combine audio, graphics, speech, video and other media into one package solution
for customers. This product is expected to be released late FY 2002 and at the
time of the acquisition was estimated to be 67% complete with estimated costs to
complete the development at $50,000. The third of these projects is aimed at the
engineering and artistic creation market. Immersion Canada's current product
PenCat/Pro targets 3D designers that have a need for advanced input
technologies. The PenCat/Pro product used by 3D designers will be replaced by
the MilleniumCat product in FY 2002. While this product incorporates much of the
MilleniumCat product, it will require some additional software and a different
user interface and thus at the time of the acquisition was estimated at 40%
complete with estimated costs to complete development of $20,000.
The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require the Company to
accelerate the time period over which the intangibles are being amortized, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant assumptions used to determine
the value of in-process research and development, include the following: (i)
forecast of net cash flows that were expected to result from the development
effort using projections prepared by Immersion Canada's management; (ii) the
completed portion of the projects estimated by considering a number of factors,
including the costs invested to date relative to the total cost of the
development effort and the amount of progress completed as of the acquisition
date, on a technological basis, relative to the overall technological
achievements required to achieve the functionality of the eventual product. The
technological issues were addressed by engineering representatives from both the
Company and Immersion Canada, and when estimating the value of the technology,
the projected financial results of the acquired assets were estimated on a
stand-alone basis without any consideration to potential synergistic benefits or
"investment value" related to the acquisition. Accordingly, separate projected
cash flows were prepared for both the existing as well as the in-process
projects. These projected results were based on the number of units sold times
the average selling price less the associated costs. After preparing the
estimated cash flows from the products being developed, a portion of these cash
flows were attributed to the developed and core technology, which was embodied
in the in-process product lines and enabled a quicker and more cost-effective
development of these products. When estimating the value of the developed, core
and in-process technologies, discount rates of 15%, 20%, and 25% were used
respectively. The discount rates considered both the status and risks associated
with the cash flows at the acquisition date. Projected revenues from the
developed technologies are expected to continue through the beginning of FY
2002, while revenue from in-process technologies are expected to commence late
FY 2002 and continue through a portion of FY 2004.
51
54
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
In August 2000, the Company acquired all outstanding shares of Virtual
Technologies Inc. ("VTI") for approximately $7.75 million, consisting of 320,584
shares of the Company's common stock and $965,000 paid in cash. During the
fourth quarter of 2000, the Company had incurred an additional $242,000 of
acquisition related charges. VTI develops and markets hardware and software
products that are used throughout the world in high-end simulation, mechanical
computer-aided design, visualization and motion-capture applications as well as
research. As a result of the acquisition, VTI became a wholly-owned subsidiary
of Immersion with operations in Palo Alto, California. The acquisition was
accounted for using the purchase method and accordingly the acquired assets and
liabilities were recorded at their fair market values at the date of
acquisition. Pro forma results of the combined operations have not been
presented as they are not materially different from the Company's reported
results of operations.
In connection with the transaction, the Company assumed unvested options of
VTI resulting in deferred stock compensation of $282,000, which will be
amortized over the remaining vesting period of approximately five years.
The aggregate purchase price of $8.0 million (including acquisition costs)
was allocated among the assets acquired (including acquired in-process research
and development) as follows (in thousands):
Purchase price allocation:
--------------------------
Tangible assets............................................. $ 419
In-process research and development......................... 1,158
Intangible assets:
Goodwill.................................................. 2,056
Core technology........................................... 2,344
Developed technology...................................... 552
Workforce................................................. 394
Patents................................................... 855
Trade name................................................ 214
------
$7,992
======
The goodwill, core technology, patents, and trade name are being amortized
over their estimated useful lives of 5 years. The developed technology and
workforce are being amortized over their estimated useful lives of 1.5 and 2
years, respectively. The allocation of the purchase price to the respective
intangibles was based on management's estimates of the after-tax cash flows and
gave explicit consideration to the Securities and Exchange Commission's views on
purchased in-process research and development as set forth in its September 9,
1998 letter to the American Institute of Certified Public Accountants.
Specifically, the valuation gave consideration to the following: (i) the
employment of a fair market value premise excluding any Company-specific
considerations that could result in estimates of investment value for the
subject assets; (ii) comprehensive due diligence concerning all potential
intangible assets; (iii) the value of existing technology was specifically
addressed, with a view toward ensuring the relative allocations to existing
technology and in-process research and development were consistent with the
relative contributions of each to the final product; and (iv) the allocation to
in-process research and development was based on a calculation that considered
only the efforts completed as of the transaction date, and only the cash flow
associated with these completed efforts for one generation of the products
currently in process.
As indicated above, the Company recorded a one-time charge of $1.2 million
upon the acquisition in August 2000 for purchased in-process research and
development related to three development projects. The charge related to the
portion of these products that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
Management's conclusion that the
52
55
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
in-process development effort had no alternative future use was reached in
consultation with the engineering personnel from both the Company and the
seller.
The first of these projects is the development of SimStudio, a software
product solution which will enable digital testing and evaluation of prototypes.
SimStudio will permit digital prototypes to be tested for ease of assembly and
inspected for fit, functionality and ergonomics by virtual design teams located
anywhere in the world, working collaboratively and in real time. This product
was released in the fourth quarter of 2000 and at the time of the acquisition
was approximately 60% complete with estimated costs to complete the development
of $135,000. The second of these projects is the CyberTalon, a lightweight low
cost, hand-based interface used for measuring the position of the hand in
three-dimensional space. This product is expected to be released at the end of
2001 and at the time of the acquisition was approximately 31% complete with
estimated costs to complete the development of $230,000. The third of these
projects is CyberForce, an extension of CyberGrasp, adding grounded forces.
CyberGrasp is an option for the CyberGlove that adds force feedback to the
fingertips. CyberGrasp users can feel the three dimensional graphical objects
being manipulated on the screen as if they were real, physical objects. This
first version of the product was released in December 2000, additional safety
features and testing, manufacturability and software programs will also be
developed. At the time of the acquisition CyberForce was estimated to be 71%
complete with estimated costs to complete the development at $68,000. As of
December 31, 2000 the costs to complete each of the projects were substantially
in line with the original estimates to complete.
The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require the Company to
accelerate the time period over which the intangibles are being amortized, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant assumptions used to determine
the value of in-process research and development, include the following: (i)
forecast of net cash flows that were expected to result from the development
effort using projections prepared by VTI's management; (ii) the completed
portion of the projects estimated by considering a number of factors, including
the costs invested to date relative to total cost of the development effort and
the amount of progress completed as of the acquisition date, on a technological
basis, relative to the overall technological achievements required to achieve
the functionality of the eventual product. The technological issues were
addressed by engineering representatives from VTI, and when estimating the value
of the technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without any consideration to potential
synergistic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the existing
as well as the in-process projects. These projected results were based on the
number of units sold multiplied by the average selling price less the associated
costs. After preparing the estimated cash flows from the products being
developed, a portion of these cash flows were attributed to the developed and
core technology, which was embodied in the in-process product lines and enabled
a quicker and more cost-effective development of these products. When estimating
the value of the developed, core and in-process technologies, discount rates of
20%, 25%, and 30% were used respectively. The discount rates considered both the
inherent risk and expected growth of the developed and in-process technologies
at the acquisition date. A small portion of the revenue for FY 2000 is
attributable to the in-process products while the remainder is due to the
existing products. The majority of 2001 revenue is attributable to the
in-process products. As new technologies are developed and future products are
launched in 2002 and beyond, the level of revenue attributable to the in-
process products declines as a percent of revenue. The in-process products are
expected to have five year lives.
Pooling Transaction
As discussed in Note 1, the Company completed its merger with HT in
September 2000 in a business combination accounted for as a pooling of
interests. HT, a developer and manufacturer of state-of-the-art
53
56
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
products that simulate hands-on medical procedures to create realistic training
environments for doctors and other healthcare personnel, became a wholly-owned
subsidiary of the Company upon consummation of the merger. Under the terms of
the agreement, the former holders of HT securities received shares, warrants and
options of Immersion common stock at the rate of 0.5176 shares of Immersion
common stock for each share of HT common and preferred stock. The Company issued
a total of approximately 1.335 million shares of Immersion common stock in
exchange for all outstanding shares of HT common and preferred stock, assumed
195,670 common and preferred stock warrants, assumed a convertible note
convertible into 226,450 shares of the Company's common stock and reserved
approximately 835,000 shares of common stock for issuance upon the exercise of
HT options assumed pursuant to the agreement and granted after the merger. In
connection with the merger, the Company incurred expenses of approximately $1.4
million, which are included in acquisition related charges in the consolidated
statement of operations for the year ended December 31, 2000.
The consolidated financial statements of Immersion have been restated to
include the financial position, results of operations and cash flows of HT for
all periods presented as if HT had always been combined. Prior to the merger
with Immersion, HT ended its fiscal year on May 31. The restated consolidated
balance sheet as of December 31, 1999 includes amounts for HT as of May 31,
2000. The restated consolidated statements of operations, stockholders' equity
and comprehensive loss, and cash flows for the years ended December 31, 1999 and
1998 include amounts for HT for the fiscal years ended five months later.
Subsequent to the merger, HT changed its fiscal year to December 31 to conform
to Immersion's presentation. As a result of conforming the reporting periods of
Immersion and HT, the operating results of HT for the five-month period ended
May 31, 2000 are included in the restated financial statements for both 1999 and
2000. HT revenues and net loss for the five-month period ended May 31, 2000 were
$973,000 and $2,427,000, respectively.
The restated consolidated statement of operations include the following
amounts for Immersion and HT derived from the fiscal years indicated above (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
Total revenues:
Immersion.......................................... $ 12,126 $ 8,038 $ 5,021
HT................................................. 3,152 2,925 3,682
Eliminations....................................... (15) (21) --
-------- ------- -------
Total...................................... $ 15,263 $10,942 $ 8,703
======== ======= =======
Net Loss:
Immersion.......................................... $(15,038) $(4,354) $(1,673)
HT................................................. (7,134) (5,116) (1,996)
-------- ------- -------
Total...................................... $(22,172) $(9,470) $(3,669)
======== ======= =======
The combined results of operations include elimination of royalty revenue
derived by Immersion from HT and certain reclassifications of HT's financial
statements to conform to Immersion's presentation.
54
57
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
4. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities at December 31,
2000 (in thousands):
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ----------- ------------ -------
Commercial paper........................... $21,896 $ -- $ (1) $21,895
======= =========== ============ =======
Included in cash equivalents............... $19,535
Included in short-term investments......... 2,360
-------
Total available-for-sale
securities..................... $21,895
=======
The following is a summary of available-for-sale securities at December 31,
1999 (in thousands):
AMORTIZED UNREALIZED UNREALIZED MARKET
COST HOLDING GAINS HOLDING LOSSES VALUE
--------- -------------- --------------- -------
Commercial paper.......................... $49,495 $ 19 $ -- $49,514
======= =========== ============ =======
Included in cash equivalents.............. $44,733
Included in short-term investments........ 4,781
-------
Total available-for-sale
securities.................... $49,514
=======
The Company realized gains on the sales of available-for-sale securities of
$0, $0, and $56,000 in 2000, 1999 and 1998, respectively, while realizing losses
of $0, $0, and $1,000 in 2000, 1999 and 1998 respectively.
5. INVENTORIES
DECEMBER 31,
--------------
2000 1999
------ ----
(IN THOUSANDS)
Raw materials and subassemblies............................. $1,287 $770
Work in process............................................. 168 34
Finished goods.............................................. 254 145
------ ----
Total............................................. $1,709 $949
====== ====
6. PROPERTY AND EQUIPMENT
DECEMBER 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Computer equipment and purchased software................ $ 1,788 $ 665
Machinery and equipment.................................. 1,601 1,165
Furniture and fixtures................................... 1,314 565
Leasehold improvements................................... 701 165
------- -------
Total.......................................... 5,404 2,560
Less accumulated depreciation............................ (1,798) (1,244)
------- -------
Property and equipment, net.............................. $ 3,606 $ 1,316
======= =======
7. OTHER INVESTMENTS
At December 31, 2000, other investments comprised $6.5 million of equity
investments in privately-held companies accounted for under the cost method. The
Company intends to hold its equity investments for the
55
58
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
long term and monitors whether there have been other-than-temporary declines in
value of these investments based on management's estimates of their net
realizable value taking into account the companies' respective financial
condition and ability to raise third-party financing. During the second quarter
of fiscal 2000 the Company made a $5 million strategic investment in Geometrix,
Inc. ("Geometrix"), the developer of the 3Scan(TM) product line which enables
creation of three-dimensional models through the use of digital cameras. At
December 31, 2000 the $5 million investment was comprised of $1.8 million
representing the purchase of 880,000 shares of Series B Preferred Stock or an 8%
ownership interest and a $3.2 million unsecured convertible promissory note. The
unsecured convertible promissory note has an automatic conversion feature which
is triggered when the Company's ownership percentage is reduced to less than 8%
as a result of additional financing raised by Geometrix exceeding certain
minimum amounts. The automatic conversion feature limits the amount of the
promissory note converted such that the Company's ownership interest does not
exceed 8%. The note accrues interest at a rate of 7% per annum and the note plus
accrued interest, if not converted by June 12, 2002, is due in two payments over
a one-year period. The Company also signed a strategic partnership agreement
with Geometrix during the second quarter of fiscal 2000 to develop products for
the three-dimensional Web marketplace. Under the agreement, Geometrix has
contracted with Immersion for development work. As of December 31, 2000 we had
completed all requirements of the development work and fully recognized all
revenue for the contract. The remainder of $1.5 million of investments
represents a $1.0 million equity investment in There, Inc., a technology
application developer, and $500,000 equity investment in EndPoints, Inc., an
application specific integrated circuit design semiconductor company. Both
investments represent less than a 5% ownership interest.
8. OTHER CURRENT LIABILITIES
As of December 31, 2000 and 1999, other current liabilities consist of (in
thousands):
DECEMBER 31,
----------------
2000 1999
------ ------
Deferred revenue........................................... $ 892 $1,697
Customer advances.......................................... 39 39
Other accrued liabilities.................................. 1,146 505
------ ------
Total............................................ $2,077 $2,241
====== ======
9. LONG-TERM DEBT
The components of long-term debt are as follows (in thousands):
DECEMBER 31,
----------------
2000 1999
------ ------
Medtronic note payable..................................... $3,290 $2,896
Subordinated note payable to SECA VII...................... 500 500
Discount on subordinated note payable to SECA VII.......... (145) (187)
Secured promissory note to Third Coast Capital............. 255 307
Other...................................................... 35 48
------ ------
Total............................................ 3,935 3,564
Current portion............................................ (100) (103)
------ ------
Total long-term debt............................. $3,835 $3,461
====== ======
Medtronic Note Payable -- On August 10, 1999, the Company issued a Secured
Convertible Promissory Note (the "Note") to Medtronic Asset Management, Inc.
("Medtronic") in exchange for $3,000,000. On
56
59
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
March 3, 2000, an additional $500,000 was borrowed under the Note. The $3.5
million note bears interest at a rate of 8% per annum and is due on August 10,
2002. Medtronic may elect to convert all or any part of the outstanding
principal plus a pro rata share of accrued interest into shares of common stock,
at a conversion price of the lesser of $15.46 per share or the price per share
at which any shares of common stock are sold. The Note may also be converted
into any other class of capital stock that the Company may issue at a per share
price equal to the lowest per share price at which any such shares are issued or
sold.
In connection with the original issuance of the Note and then amended in
connection with the additional borrowing in March 2000, the Company granted
Medtronic a warrant to purchase up to $2,000,000 of common stock at a price per
share equal to the lesser of $15.46 per share or the price per share at which
any shares of common stock are sold. The warrant may also be exercised for any
other class of capital stock that the Company may issue at a per share price
equal to the lowest per share price at which any such shares are issued or sold.
The warrant expires on the later to occur of November 10, 2000 or six months
after HT completes a sale of capital stock of at least $6 million. The Company
allocated $1,126,849 of the note payable proceeds to the warrant and will
amortize this amount to interest expense using the effective interest method
over the three year period that the related debt is expected to be outstanding.
The effect of this allocation results in an effective interest rate of
approximately 17%.
Medtronic was also given the right of first offer for additional
development agreements. Under the specific terms of the right of first offer, as
amended September 2000, HT must notify Medtronic if it has received a written
offer, or if it is seeking to find a third party to enter a development
agreement to develop a simulation system within a field in which Medtronic is
active. If Medtronic is interested in participating in a development agreement
then Medtronic has a thirty-day period to negotiate exclusively with HT. If an
agreement is not reached within this thirty-day period, the Company may enter
into an agreement with a third party, provided that the terms of the agreement
are more favorable to HT than the offer presented by Medtronic.
Subordinated Note Payable -- In December 1997, the Company entered into a
subordinated note and warrant purchase agreement with SECA VII, under which it
was granted a subordinated promissory note for $500,000 with interest at the
rate of 13% per annum. The note is secured by substantially all of the Company's
assets and was subordinate to the Investment Agreement that was repaid in August
1999 (See Note 10). The note is also secured by a life insurance policy on a
Company's employee in the amount of $750,000.
In connection with the note, the Company gave SECA VII a warrant to
purchase 31,056 shares of common stock at a purchase price of $5.16 per share.
The warrant may be exercised in increments of 1,500 shares and expires on June
30, 2003. SECA VII has certain put rights that allow it to have the Company
purchase the warrant or, if the warrant has been exercised, the shares of common
stock issued upon exercise of the warrant, at any time during the six-month
period prior to the maturity date of the subordinated note (or upon earlier
acceleration of the note). If the warrant has been exercised, the purchase price
of the put securities would be the fair market value of one share of common
stock multiplied by the number of shares of common stock issued upon exercise of
the warrant. If the warrant has not been exercised, the purchase price would be
the amount by which the fair market value exceeds the $5.16 purchase price,
multiplied by the number of shares for which the warrant is then exercisable.
The Company allocated $289,000 of the note payable proceeds to the warrant and
is amortizing this amount to interest expense over the five-year period that the
related debt is expected to be outstanding. The warrant has been recorded as a
liability and is subject to future value adjustments.
Secured Promissory Note Payable -- In April 2000, the Company entered into
a Master Loan and Security Agreement with Third Coast Capital. Under the terms
of this agreement, the Company may borrow up to $500,000 through April 1, 2001;
however, the Company must borrow at least $250,000 prior to October 1, 2000. All
borrowings must be for the purchase of qualifying assets including
telecommunication
57
60
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
and office equipment or computers and will be secured by those assets. As the
amounts are borrowed, each individual note has a term of 36 months and an
interest rate of 10.5% per annum. At the expiration of the term of the first
note, the Company will also have to make a lump sum payment equal to 10% of the
greater of the asset valuation financed under that note or the line of credit
balance. On April 11, 2000, the Company borrowed $317,050 against this line of
credit that is secured with certain furniture and equipment. In connection with
the agreement, the Company issued ten-year warrants to purchase 1,618 shares of
common stock at $15.46 per share. These warrants may be exercised at any time
prior to April 9, 2010. The Company allocated $11,281 of the proceeds to the
warrant and will amortize this amount to interest expense using the effective
interest method over the three year period that the related debt is expected to
be outstanding.
Annual maturities of long-term debt at December 31, 2000 are as follows (in
thousands):
2001........................................................ $ 100
2002........................................................ 3,835
------
Total............................................. $3,935
======
10. INVESTMENT AGREEMENT
In September 1996, the Company entered into an Investment Agreement with
Maryland Health Care Product Development, COOK, Inc. and the Department of
Business and Economic Development of the State of Maryland, (collectively, the
"Investors") under which the Investors invested a total of $1,050,000 in the
Company.
On August 10, 1999, the Company exercised its one-time right to convert 50%
of the payment stream payable to the Investors to equity within thirty days
after the Company obtaining additional equity financing through a qualified
private offering. The Company issued the Investors 55,762 shares of common stock
at $15.46 per share, which provided the Investors an internal rate of return of
25% per annum. The Company also elected to pay the remaining balance of $861,854
in cash.
11. COMMITMENTS
The Company leases several of its facilities under operating leases. In
addition, the Company has several operating leases for telephone and computer
equipment that expire during fiscal years 2002 through 2003.
Minimum future lease payments are as follows (in thousands):
CAPITAL LEASE OPERATING LEASE
------------- ---------------
2001............................................. $ 33 $1,159
2002............................................. 32 1,175
2003............................................. 30 1,187
2004............................................. 16 1,221
2005............................................. -- 786
Thereafter....................................... -- 1,138
---- ------
Total future minimum lease payments.... 111 $6,666
======
Portion representing interest.................... (23)
----
$ 88
====
Rent expense was $1.1 million, $689,000, and $344,000 in 2000, 1999, and
1998 respectively.
The Company has signed an agreement with a significant customer to
co-market a licensed product. Under the terms of the agreement, for a period of
five calendar quarters, beginning in the first calendar quarter
58
61
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
of 2000, we are required to reimburse the customer for certain marketing related
expenses not to exceed $200,000 per quarter, an expense funded with working
capital. Only third-party marketing services that are targeted at promoting the
customer's touch-enabled mice are eligible for reimbursement. In addition, all
promotional activities must be approved by us in advance. In order to remain
eligible for reimbursement, the customer must include our brand and slogan on
all its marketing materials that reference touch-enabled functionality or
products, and meet other conditions regarding its touch-enabled mice
12. STOCKHOLDERS' EQUITY
Common Stock
On November 12, 1999, the Company completed its initial public offering of
4,887,500 shares of its common stock (including 637,500 shares issued upon the
exercise of the underwriters' over-allotment option) at $12.00 per share. Of the
4,887,500 shares sold, 4,473,736 shares were sold by the Company and 413,764
shares were sold by selling shareholders. Net proceeds to the Company, after
deducting underwriting discounts and commissions and offering expenses,
aggregated approximately $48.3 million. At the closing of the initial public
offering all preferred stock was converted to common stock.
During 1999, the Company issued 1,379,970 shares of common stock in
connection with purchases of patents and technology (see Note 2) and 68,595
shares of common stock with a fair value of $562,000 for recruiting services.
During 1998, the Company issued 137,190 shares of common stock in connection
with purchases of patents. The fair value of the common stock of $501,000 was
recorded as purchased patents and technology. In July 1998, the Company issued
3,882 shares of common stock at $7.73 per share as compensation to an employee
of the Company.
On June 22, 1999, the Company issued 39,402 shares of common stock at
$15.46 per share for a total of $609,000 in cash. The Company also paid
commissions and fees of approximately $45,000 related to this private placement
and issued a warrant to purchase 2,679 shares of common stock with an exercise
price of $18.55 per share that expires on June 21, 2009. The holders of these
warrants also have the right to require the Company to convert the warrants at
any time into shares of common stock.
On August 10, 1999, the Company issued a total of 55,762 shares of common
stock in conjunction with the conversion of the Investment Agreement (see Note
10).
On December 27, 1999, the Company issued 12,940 shares of common stock for
a total of $200,000 in cash.
During fiscal 1999, the Company issued 9,705 shares of its common stock for
a total of $150,000 in cash. In addition, the Company issued warrants to
purchase an additional 6,470 shares of its common stock at the same price of
$15.46 per share. The warrants expired on November 10, 2000.
The Company also issued 6,470 of its common stock to private investors for
total proceeds of $100,000 during 1999.
In August 1998, the Company closed two private placements for a total of
$1,890,000 that gave the Company net proceeds of $1,681,083. Upon closing the
private placements, 244,566 shares of common stock were issued at $7.73 per
share. These financing transactions also included the issuance of warrants to
purchase 24,456 shares of the Company's common stock at an exercise price of
$7.73 per share. The warrants expire in August 2008.
59
62
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Stock Split
In November 1999, the Company's Board of Directors approved a 0.807-for-one
reverse common and Series C and D preferred stock split and a 4.035-for-one
Series A and B preferred stock split. All references to share and per-share data
for all periods presented have been retroactively adjusted to give effect to the
split.
Common Stock Warrants
During June 1997, the Company issued a warrant to purchase 91,191 shares of
the Company's common stock at an exercise price of $0.19 per share to a Series C
preferred investor. The warrant was exercisable through 2002. The estimated fair
value of this warrant of $6,000 has been accounted for as a reduction to the
Series C preferred stock financing proceeds. At the closing of the Company's
initial public offering, this warrant to purchase preferred stock was converted
to a warrant to purchase common stock. In October 2000 the warrant was exercised
for 89,097 shares.
In connection with the sale of Series D preferred stock, the Company issued
a warrant to purchase 11,972 shares of Series D preferred stock at an exercise
price of $4.18 to an investment banker. The estimated fair value of this warrant
of $17,000 has been accounted for as a reduction to the Series D preferred stock
financing proceeds. At the closing of the Company's initial public offering,
this warrant to purchase preferred stock was converted to a warrant to purchase
common stock.
As discussed in Note 2, during March 1999, the Company issued a warrant to
purchase 322,800 shares of the Company's common stock at an exercise price of
$3.66 per share for consulting services. The warrant is exercisable through
2009. The estimated fair value of the warrant of $808,000 has been recorded as
prepaid consulting services and is being amortized over the service period of
two years.
Stock Options
Under the Company's stock option plans, the Company may grant options to
purchase up to 10,218,436 shares of common stock to employees, directors and
consultants at prices not less than the fair market value on the date of grant
for incentive stock options and not less than 85% of fair market value on the
date of grant for nonstatutory stock options. These options generally expire ten
years from the date of grant. The Company has granted immediately exercisable
options as well as options that become exercisable over periods ranging from
three months to five years.
As part of the business combination with HT, the Company assumed HT's 1995B
and 1998 stock option plans. Under the plans, a total of 310,560 shares of
common stock are reserved for issuance. The majority of the options cliff vest
on each anniversary date over a five-year period. Under its plan, the Company
granted options to purchase 12,422 shares of common stock to members of its
subsidiary's Board of Directors in June 1998 with quarterly vesting provisions
over a two-year period. The 1998 Plan provides for certain provisions for
accelerated vesting upon a change of control. All of the options expire ten
years from the date of the grant.
As part of the business combination with VTI, the Company assumed VTI's
1997 stock option plan. Under VTI's 1997 stock option plan, a total of 700,000
shares of common stock are reserved for issuance to employees (Incentive Stock
Options) and non-employees (Nonstatutory Stock Options). The options expire ten
years from the date of the grant. The majority of the options cliff vest on each
anniversary date over a five-year period. The plan provided that in the event of
a merger of the Company with or into another corporation, each outstanding
option or stock purchase right under the plan must be assumed or an equivalent
option or right substituted by the successor corporation or an affiliate.
60
63
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Details of activity under the option plans are as follows:
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
Outstanding, January 1, 1998....................... 3,533,465 $ 0.19
Granted (weighted average fair value of $0.68 per
share)........................................... 784,298 1.94
Exercised.......................................... (1,024,615) 0.11
Canceled........................................... (88,484) 3.59
---------- ------
Balances, December 31, 1998 (2,822,404 exercisable
at a weighted average price of $0.33 per
share)........................................... 3,204,664 0.55
Granted (weighted average fair value of $1.77 per
share)........................................... 2,647,597 7.54
Exercised.......................................... (460,336) 0.47
Canceled........................................... (169,006) 2.40
---------- ------
Balances, December 31, 1999 (3,291,302 exercisable
at a weighted average price of $0.70 per
share)........................................... 5,222,919 4.02
Granted (weighted average fair value of $17.17 per
share)........................................... 3,684,626 21.27
Exercised.......................................... (799,870) 0.77
Canceled........................................... (1,060,186) 31.61
---------- ------
Balances, December 31, 2000........................ 7,047,489 $ 9.61
========== ======
Additional information regarding options outstanding as of December 31,
2000 is as follows:
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------------ -------- ----------- --------
$ 0.04 - $ 0.41.. 1,559,649 4.51 $ 0.18 1,554,186 $ 0.18
0.62 - 3.66.. 733,583 6.66 2.49 544,787 2.25
4.02 - 8.09.. 714,504 9.09 6.70 245,095 5.38
8.50 - 9.29.. 1,701,921 8.98 8.99 415,340 8.96
9.63 - 15.50.. 1,078,944 9.31 12.63 158,529 10.01
16.38 - 31.88.. 1,030,102 9.47 23.10 0 0.00
33.50 - 43.25.. 228,786 9.13 35.55 0 0.00
- - --------------- --------- ---- ------ --------- ------
$ .04 - $43.25.. 7,047,489 7.89 $ 9.61 2,917,937 $ 2.79
=============== ========= ==== ====== ========= ======
At December 31, 2000, the Company had 748,726 shares available for future
grants under the option plans.
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB No. 25 and its related
interpretations. SFAS 123 requires the disclosure of pro forma net loss had the
Company adopted the fair value method as of the beginning of fiscal 1996. Under
SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though these models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the
61
64
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
minimum value method with the following weighted average assumptions: expected
life, 18 months following vesting; risk free interest rate, 6.2%, 5.4%, and 5.3%
in 2000, 1999 and, 1998 respectively; volatility, 138% and 50% in 2000 and 1999
respectively; and no dividends during the expected term. The Company's fair
value calculations on stock-based awards under the 1999 Employee Stock Purchase
Plan ("ESPP") were also made using the option pricing model with the following
weighted average assumptions: expected life, 18 months; risk free interest rate,
6.2% and 5.4% in 2000 and 1999 respectively; volatility, 138% and 50% in 2000
and 1999 respectively; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the awards issued
in 2000, 1999 and 1998 had been amortized to expense over the vesting periods of
the awards, pro forma net loss would have been $35.5 million ($2.00 net loss per
share), $10.1 million ($0.59 net loss per share) and $3.9 million ($0.73 net
loss per share) in 2000, 1999 and 1998 respectively.
The Company had outstanding nonstatutory stock options to consultants to
purchase 11,986, 107,612, and 161,850 shares of common stock at December 31,
2000, 1999 and 1998 respectively. Compensation expense of $15,000, $149,000, and
$68,000 was recognized as result of these options in 2000, 1999, and 1998,
respectively. The fair value of the unvested portion of these options is being
amortized over the vesting period. The fair value attributable to the unvested
portion of these options is subject to adjustment based upon the future value of
the Company's common stock. The fair values of these options were determined at
the date of vesting using the methods specified by SFAS 123 with the following
weighted average assumptions during 2000, 1999, and 1998, respectively: expected
life, 10 years; risk free interest rate, 6.0%, 5.2%, and 5.3% and; volatility,
50%; and no dividends during the expected term. Forfeitures are recognized as
they occur.
In addition, the Company granted nonstatutory stock options to purchase
20,175 and 242,100 shares of common stock in 1999 and 1998, respectively, in
connection with licensing of technology and the acquisition of patents (see Note
2). The estimated fair value of these options of $129,000 and $219,000 as of
1999 and 1998, respectively, has been recorded as purchased patents and
technology. These options were fully vested at the date of grant. Accordingly,
the fair value of the options was determined at the date of grant using the
methods specified by SFAS 123, with the following assumptions during 1999 and
1998, respectively: expected life, 10 years; risk free interest rate, 5.0% and
5.5%; volatility, 50% and 25%; and no dividends during the expected term.
Employee Stock Purchase Plan
Upon the closing of the Company's initial public offering on November 12,
1999, the Company adopted its ESPP. Under the ESPP, eligible employees may
purchase common stock through payroll deductions at a purchase price of 85% of
the lower of the fair market value of the Company's stock at the beginning of
the offering period or the purchase date. Participants may not purchase more
than 2,000 shares in a six-month offering period or stock having a value greater
than $25,000 in any calendar year as measured at the beginning of the offering
period. A total of 500,000 shares of common stock are reserved for the issuance
under the ESPP plus an automatic annual increase on January 1, 2001 and on each
January 1 thereafter through January 1, 2010 by an amount equal to the lesser of
500,000 shares per year or a number of shares determined by the Board of
Directors. As of December 31, 2000, 26,165 shares had been purchased under the
plan.
Deferred Stock Compensation
In connection with grants of certain stock options to employees and
directors in 1999, the Company recorded $2,494,000 for the difference between
the deemed fair value for accounting purposes and the stock price as determined
by the Board of Directors on the date of grant. This amount has been presented
as a reduction of stockholders' equity and is being amortized to expense over
the vesting period of the related stock options.
62
65
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
In January 2000, HT's board of directors approved a repricing of all
outstanding stock options that had been granted on or after June 1, 1998 from
$15.46 per share to $7.73 per share. A total of 30,797 options were repriced.
During 2000 the Company recognized $374,000 as stock compensation expense
relating to the repricing and acceleration of option vesting at the time of the
merger. Future expense related to vested and unvested stock option shares is
dependent on the market value of the shares at the end of each quarter until the
repriced stock options are exercised, forfeited or expire and is therefore
unknown at this time.
In March 2000, in connection with the acquisition of Immersion Canada, the
Company assumed unvested options of Immersion Canada resulting in deferred stock
compensation of $5.5 million, which will be amortized over the remaining vesting
period of approximately four years. The Immersion Canada option plan was
established in February 2000 and under the plan the Company may grant options to
purchase up to 391,238 shares of common stock to employees, directors, and
consultants. The options generally expire ten years from the date of grant. As
of December 31, 2000 there were 391,238 such options outstanding.
In August 2000, in connection with the acquisition of VTI, the Company
assumed unvested options of VTI resulting in deferred stock compensation of
$282,000, which will be amortized over the remaining vesting period of
approximately five years. The VTI option plan was established in August 2000 and
under the plan the Company may grant options to purchase up to 500,000 shares of
common stock to employees, directors, and consultants. The options generally
expire ten years from the date of grant. As of December 31, 2000 there were
401,000 such option grants outstanding.
13. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
Numerator:
Net loss:.......................................... $(22,172) $(9,470) $(3,669)
Redeemable preferred stock accretion............... -- 6 6
-------- ------- -------
Net loss applicable to common stockholders........... $(22,172) $(9,476) $(3,675)
======== ======= =======
Shares (denominator):
Weighted average common shares outstanding......... 17,808 7,928 5,084
Weighted average common shares held in escrow...... (89) (76) --
Weighted average common shares outstanding subject
to repurchase................................... -- -- (61)
-------- ------- -------
Shares used in computation, basic and diluted...... 17,719 7,852 5,023
======== ======= =======
Net loss per share, basic and diluted................ $ (1.25) $ (1.21) $ (0.73)
======== ======= =======
The Company's computation of net loss per share excludes 88,770 shares held
in escrow as discussed in Note 2, as the conditions required to release these
shares from escrow had not been satisfied as of December 31, 2000.
63
66
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
For the above-mentioned periods, the Company had securities outstanding
that could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented since their effect would have been anti-dilutive. These outstanding
securities consisted of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Investment agreement.............................. -- -- 84,969
Convertible note payable.......................... 226,450 226,450 --
Redeemable convertible preferred stock............ -- -- 863,771
Convertible preferred stock....................... -- 124,279 4,267,329
Shares of common stock subject to repurchase...... -- -- 23,537
Outstanding options............................... 7,047,489 5,222,919 3,204,664
Warrants.......................................... 523,972 679,581 296,306
14. INCOME TAXES
No provision for federal income taxes was required for the years ended
December 31, 2000, 1999 and 1998 due to net losses in these periods.
Significant components of the net deferred tax assets and liabilities for
federal and state income taxes consisted of (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- -------
Deferred tax assets:
Net operating loss carryforwards...................... $ 15,681 $ 4,181
Deferred revenue...................................... 364 713
Deferred stock compensation........................... 63 31
Deferred rent......................................... 5 15
Research and development credits...................... 514 206
Reserves and accruals recognized in different
periods............................................ 196 174
Depreciation and amortization......................... -- 105
-------- -------
Total deferred tax assets..................... 16,823 5,425
Deferred tax liabilities:
Depreciation and amortization......................... (149) --
Difference in tax basis of purchased technology....... (3,152) (1,139)
Cash to accrual basis adjustment...................... -- (45)
Valuation reserve....................................... (13,522) (4,241)
-------- -------
Net deferred tax assets................................. $ -- $ --
======== =======
A deferred tax liability relating to a difference in the tax basis for
purchased technology was established in 2000 of $1.9 million relating to the
acquisitions of Immersion Canada and VTI discussed in Note 3. This resulted in
the concurrent $1.9 million reversal of the valuation reserve for deferred tax
assets in 2000. A deferred tax liability relating to a difference in the tax
basis for purchased technology was established in 1999 relating to the Cybernet
transaction discussed in Note 2. This resulted in the concurrent $1.4 million
reversal of the valuation reserve for deferred tax assets in 1999.
64
67
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The Company's effective tax rate differed from the expected benefit at the
federal statutory tax rate as follows:
2000 1999
----- -----
Federal statutory tax rate.................................. (35.0)% (35.0)%
State taxes, net of federal benefit......................... (3.0) (6.0)
Deferred stock compensation................................. 3.4 2.3
Amortization of goodwill and in-process research and
development............................................... 5.2 0.0
Other....................................................... 1.9 (0.2)
Valuation allowance......................................... 27.5 38.9
----- -----
Effective tax rate.......................................... --% --%
===== =====
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 2000, the Company has federal and state net operating loss
carryforwards of approximately $40,051,000 and $28,533,000, respectively,
expiring through 2021 and through 2005, respectively.
Current federal and state tax laws include provisions limiting the annual
use of net operating loss carryforwards in the event of certain defined changes
in stock ownership. The Company's issuances of common and preferred stock may
have resulted in such a change. Accordingly, the annual use of the Company's net
operating loss carryforwards would be limited according to these provisions.
Management has not yet determined the extent of this limitation, and this
limitation may result in the loss of carryforward benefits due to their
expiration.
15. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company is currently operating in one reportable segment which is the
design, development, production, marketing and licensing of products based on
touch-enabling technology. These devices are used in computer entertainment,
personal computing, medical and other professional computing applications. The
Company's acquisitions during 2000 has expanded its technology and product
offerings and markets. In addition, the Company's CEO who has been designated as
the chief operating decision maker joined the Company in October 2000 and is
currently evaluating the Company's reporting structure. The following is a
summary of revenues by geographic areas. Revenues are broken out geographically
by the ship-to location of the customer.
Revenue by Region
Geographic revenue as a percentage of total revenue was as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
----- ----- -----
North America............................................... 69% 76% 78%
Europe...................................................... 19% 12% 13%
Far East.................................................... 11% 11% 8%
Rest of the world........................................... 1% 1% 1%
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
65
68
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
During the years ended 2000, 1999, and 1998 we derived 68%, 75%, and 77%
respectively of our revenues from the United States. Revenues from other
countries during the periods presented represented less than 10% individually.
Significant Customers
Customers comprising 10% or greater of the Company's net revenues are
summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
----- ----- -----
Customer A.................................................. 10% * *
Customer B.................................................. * 10% *
Customer C.................................................. * 14% *
Customer D.................................................. * * 10%
-- -- --
Total............................................. 10% 24% 10%
== == ==
- - ---------------
* Revenue derived from customer represented less than 10% for the period.
Of the significant customers noted above, none had a balance of 10% or
greater of the outstanding accounts receivable for the corresponding years ended
listed.
The majority of our long-lived assets were located in the United States.
Long-lived assets included net property and equipment and long-term investments
and other assets. Long-lived assets that were outside the United States
constituted less than 10% of the total at December 31, 2000, 1999 and 1998.
16. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan under which eligible
employees may elect to have a portion of their salary deferred and contributed
to the 401(k) plan. Contributions may be made by the Company at the discretion
of the Board of Directors. The recorded expenses were approximately $119,000,
$95,000, and $31,000 for 2000, 1999 and 1998, respectively.
17. GOVERNMENT AUDITS
Billings under certain cost-based government contracts are calculated using
provisional rates that permit recovery of indirect costs. These rates are
subject to audit on an annual basis by the government agencies' cognizant audit
agency. The cost audit will result in the negotiation and determination of the
final indirect cost rates that the Company may use for the period(s) audited.
The final rates, if different from the provisionals, may create an additional
receivable or liability.
As of December 31, 2000, the Company has not reached final settlements on
indirect rates. The Company has negotiated provisional indirect rates for the
years ended December 31, 1999 and 1998. The Company periodically reviews its
cost estimates and experience rates, and any needed adjustments are made and
reflected in the period in which the estimates are revised. In the opinion of
management, redetermination of any cost-based contracts for the open years will
not have a material effect on the Company's financial position or results of
operations.
18. RELATED PARTIES
In July 1997, the Company transferred certain patent rights related to its
MicroScribe product to a newly created limited liability corporation,
MicroScribe LLC, in exchange for 1,000 Class 1 Units and 98,999 Class 2 Units.
This investment represents a 99% ownership of MicroScribe LLC. Subsequently, the
Company
66
69
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
distributed all Class 2 Units to its then outstanding common, preferred and
vested option holders on a pro rata basis. The Company maintains a 1% ownership
of MicroScribe LLC subsequent to the distribution of the Class 2 Units. There
was no recorded value related to these internally-developed patent agreements,
and thus no amount was recognized as a result of the transfer.
During July 1997, the Company also entered into an exclusive ten-year
license agreement with MicroScribe LLC (the "Agreement") for the right to
manufacture, market and sell the related MicroScribe technology. Under the terms
of the Agreement, the Company must pay a royalty to MicroScribe LLC based on a
variable percentage of net receipts as defined under the Agreement. Royalty
expense under the Agreement was $117,000, $132,000, and $116,000 in 2000, 1999,
and 1998, respectively.
In April 1999, an executive officer loaned the Company $60,000 to meet its
immediate cash needs. The note was not discounted due to the short-term nature
of the borrowing and the fact that the total discount amount was not material to
the Company's financial position or statement of operations. The note was repaid
on August 16, 1999.
Two of the Company's stockholders loaned the Company $35,000 in 1999. The
loans were repaid in 2000.
19. CONTINGENCIES
The Company has in the past received claims from third parties asserting
that the Company's technologies, or those of its licensees, infringe on the
other parties' intellectual property rights. Management believes that these
claims are without merit and, with respect to each, has obtained written
non-infringement and/or patent invalidity opinions from outside patent counsel.
None of these matters is currently active. Accordingly, in the opinion of
management, the outcome of such claims will not have a material effect on the
financial statements of the Company.
The Company's 70% owned subsidiary, Sky Fitness, has had claims against it
relating to the Sky Fitness mark. The claims allege that the SkyCYCLE infringes
a competitor's mark and that an employee of the Company violated a noncompete
clause within his employment agreement. The Company believes these claims are
without merit and would vigorously defend itself if these claims were to
progress.
20. QUARTERLY RESULTS OF OPERATIONS -- (UNAUDITED)
The following table presents certain unaudited consolidated statement of
operations data for our eight most recent quarters. These quarterly numbers have
been restated to reflect the merger with HT as discussed in Note 1.
DEC 31, SEPT 30, JUNE 30, MAR 31, DEC 31, SEPT 30, JUNE 30, MAR 31,
2000 2000 2000 2000 1999 1999 1999 1999
------- -------- -------- ------- ------- -------- -------- -------
(IN THOUSANDS)
Revenues................................... $5,211 $ 3,804 $ 2,960 $3,288 $2,976 $ 2,711 $ 2,490 $ 2,765
Gross profit............................... 3,522 2,654 2,139 2,452 2,140 2,029 1,813 1,996
Operating loss............................. (5,628) (8,729) (5,347) (4,158) (2,479) (2,764) (1,649) (2,020)
Net loss................................... (5,385) (8,349) (4,866) (3,572) (2,322) (2,906) (1,781) (2,461)
Basic and diluted net loss per share....... $(0.29) $ (0.46) $ (0.28) $(0.21) $(0.19) $ (0.41) $ (0.27) $ (0.43)
Shares used in calculating basic and
diluted net loss per share............... 18,331 17,955 17,533 17,034 11,915 7,085 6,675 5,674
67
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The SEC allows us to include information required in this report by
referring to other documents or reports we have already or will soon be filing.
This is called "Incorporation by Reference." We intend to file our definitive
proxy statement pursuant to Regulation 14A not later than 120 days after the end
of the fiscal year covered by this report, and certain information therein is
incorporated in this report by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to executive officers is
set forth in Part I of this Annual Report on Form 10-K and the information
required by this Item 10 with respect to directors is incorporated by reference
from the section entitled "Election of Directors" in Immersion's definitive
Proxy Statement for its 2001 annual stockholders' meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section entitled "Director and Executive Compensation" in Immersion's definitive
Proxy Statement for its 2001 annual stockholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in Immersion's definitive Proxy Statement for its 2001 annual
stockholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
section entitled "Certain Transactions" in Immersion's definitive Proxy
Statement for its 2001 annual stockholders' meeting.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Financial Statements
PAGE
----
Independent Auditors' Report................................ 36
Report of Independent Auditors.............................. 37
Consolidated Balance Sheets................................. 38
Consolidated Statements of Operations....................... 39
Consolidated Statements of Stockholders' Equity and 40
Comprehensive Loss........................................
Consolidated Statements of Cash Flows....................... 42
Notes to Consolidated Financial Statements.................. 44
Independent Auditors' Report................................ 74
Valuation and Qualifying Accounts........................... 75
68
71
2. Financial Statement Schedules
All schedules have been omitted because the required information is
not present or not present in amounts sufficient to require submission of
the schedules or because the information required is included in the
Consolidated Financial Statements or Notes thereto or noted in Item 14(a)
1. above.
3. Exhibits:
The following exhibits are filed herewith:
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
2.1 Agreement and Plan of Reorganization with Cybernet Systems
Corporation ("Cybernet"), its wholly-owned subsidiary and
our wholly-owned subsidiary dated March 4, 1999. (Previously
filed with Registrant's Registration Statement on Form S-1
(File No. 333-86361) on September 1, 1999.)
2.2 Share Purchase Agreement with Haptic Technologies Inc.
("Haptech") and 9039-4115 Quebec, Inc. ("Holdco") and the
Shareholders of Haptech and Holdco and 511220 N.B. Inc.
("Purchaser") dated February 28, 2000. (Previously filed
with Registrant's Annual Report on Form 10-K (File No.
000-27969) on March 23, 2000.)
2.2 Indemnification and Joinder Agreement dated as of July 28,
2000, among Immersion Corporation, James F. Kramer and Marc
Tremblay. (Previously filed with Registrant's Current Report
on Form 8-K (File No. 000-27969) on September 15, 2000.)
2.3 Escrow Agreement dated as of August 31, 2000, among
Immersion Corporation, James F. Kramer and U.S. Trust
Company, National Association. (Previously filed with
Registrant's Current Report on Form 8-K (File No. 000-27969)
on September 15, 2000.)
2.5 Agreement and Plan of Merger dated as of July 28, 2000,
among Immersion Corporation, VT Acquisition, Inc., Virtual
Technologies, Inc., and James F. Kramer. (Previously filed
with Registrant's Registration Statement on Form S-4 (File
No. 333-45254) on September 6, 2000.)
2.6 Agreement and Plan of Reorganization dated as of July 31,
2000, among Immersion Corporation, HT Medical Systems, Inc.,
HT Merger, Inc. and Greg Merril. (Previously filed with
Registrant's Registration Statement on Form S-4 (File No.
333-45254) on September 6, 2000.)
2.7 Indemnification and Joinder Agreement dated as of July 31,
2000, among Immersion Corporation, Gregg Merril,
individually and as Representative, and other stockholders
of HT Medical Systems, Inc. (Previously filed with
Registrant's Registration Statement on Form S-4 (File No.
333-45254) on September 6, 2000.)
2.8 Escrow Agreement dated as of September 29, 2000, among
Immersion Corporation, HT Medical Systems, Inc., Greg Merril
as the Representative and U.S. Trust Company, National
Association. (Previously filed with Registrant's
Registration Statement on Form S-4 (File No. 333-45254) on
September 6, 2000.)
3.1 Form of Bylaws. (Previously filed with Amendment No. 1 to
Registration's Registration Statement on Form S-1 (File No.
333-86361) on September 13, 1999.)
3.2 Amended and Restated Certificate of Incorporation.
(Previously filed with Registrant's Quarterly Report on Form
10-Q (File No. 000-27969) on August 14, 2000.)
4.1 Information and Registration Rights Agreement dated April
13, 1998. (Previously filed with Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on September 1,
1999.)
4.2 Immersion Corporation Cybernet Registration Rights Agreement
dated March 5, 1999. (Previously filed with Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
September 1, 1999.)
4.3 Common Stock Grant and Purchase Agreement and Plan with
Michael Reich & Associates dated July 6, 1999. (Previously
filed with Registrant's Registration Statement on Form S-1
(File No. 333-86361) on September 1, 1999.)
69
72
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
4.4 Common Stock Agreement with Digital Equipment Corporation
dated June 12, 1998. (Previously filed with Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
September 1, 1999.)
4.5 Registration Rights Agreement dated as of August 31, 2000,
among Immersion Corporation and the shareholders party
thereto. (Previously filed with Registrant's Current Report
on Form 8-K (File No. 000-27969) on September 15, 2000.)
10.1 1994 Stock Option Plan and form of Incentive Stock Option
Agreement and form of Nonqualified Stock Option Agreement.
(Previously filed with Registrant's Registration Statement
on Form S-1 (File No. 333-86361) on September 1, 1999.)
10.2 1997 Stock Option Plan and form of Incentive Stock Option
Agreement and form of Nonqualified Stock Option Agreement.
(Previously filed with Amendment No. 4 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 5, 1999.)
10.3 Form of Indemnity Agreement. (Previously filed with
Amendment No. 1 to Registration's Registration Statement on
Form S-1 (File No. 333-86361) on September 13, 1999.)
10.4 Immediately Exercisable Nonstatutory Stock Option Agreement
with Steven G. Blank dated November 1, 1996. (Previously
filed with Registrant's Registration Statement on Form S-1
(File No. 333-86361) on September 1, 1999.)
10.5 Common Stock Purchase Warrant issued to Cybernet Systems
Corporation dated March 5, 1999. (Previously filed with
Registrant's Registration Statement on Form S-1 (File No.
333-86361) on September 1, 1999.)
10.6 Consulting Services Agreement with Cybernet Systems
Corporation dated March 5, 1999. (Previously filed with
Registrant's Registration Statement on Form S-1 (File No.
333-86361) on September 1, 1999.)
10.7 Amendment to Warrant to Purchase Shares of Series B
Preferred Stock to Bruce Paul amending warrant to purchase
32,280 shares of Series B Preferred Stock dated September
22, 1998. (Previously filed with Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on September 1,
1999.)
10.8 Amendment to Warrant to Purchase Shares of Series B
Preferred Stock to Bruce Paul amending warrant to purchase
40,350 shares of Series B Preferred Stock dated September
22, 1998. (Previously filed with Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on September 1,
1999.)
10.9 Operating Agreement with MicroScribe, LLC dated July 1,
1997. (Previously filed with Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on September 1,
1999.)
10.10 Exchange Agreement with MicroScribe, LLC dated July 1, 1997.
(Previously filed with Registrant's Registration Statement
on Form S-1 (File No. 333-86361) on September 1, 1999.)
10.11 Lease with Speiker Properties, L.P. dated October 26, 1998.
(Previously filed with Amendment No. 1 to Registration's
Registration Statement on Form S-1 (File No. 333-86361) on
September 13, 1999.)
10.12 Agreement Draft for ASIC Design and Development with
Kawasaki LSI, U.S.A., Inc., dated October 16, 1997.
(Previously filed with Amendment No. 5 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 12, 1999.) ##
10.13 Patent License Agreement with Microsoft Corporation dated
July 19, 1999. (Previously filed with Amendment No. 4 to
Registrant's Registration Statement on Form S-1 (File No.
333-86361) on November 5, 1999.) ##
10.14 Semiconductor Device Component Purchase Agreement with
Kawasaki LSI, U.S.A., Inc., dated August 17, 1998.
(Previously filed with Amendment No. 4 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 5, 1999.) ##
70
73
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
10.15 Amendment No. 1 to Semiconductor Device Component Purchase
Agreement with Kawasaki LSI, U.S.A., Inc. dated April 27,
1999. (Previously filed with Amendment No. 4 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 5, 1999.) ##
10.16 Intercompany Intellectual Property License Agreement with
MicroScribe, LLC dated July 1, 1997. (Previously filed with
Amendment No. 4 to Registrant's Registration Statement on
Form S-1 (File No. 333-86361) on November 5, 1999.)
10.17 Patent License Agreement with MicroScribe, LLC dated July 1,
1997. (Previously filed with Amendment No. 4 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 5, 1999.)
10.18 Intellectual Property License Agreement with Logitech, Inc.
dated October 4, 1996. (Previously filed with Amendment No.
5 to Registrant's Registration Statement on Form S-1 (File
No. 333-86361) on November 12, 1999.) ##
10.19 Intellectual Property License Agreement with Logitech, Inc.
dated April 13, 1998. (Previously filed with Amendment No. 5
to Registrant's Registration Statement on Form S-1 (File No.
333-86361) on November 12, 1999.) ##
10.20 Technology Product Development Agreement with Logitech, Inc.
dated April 13, 1998. (Previously filed with Amendment No. 5
to Registrant's Registration Statement on Form S-1 (File No.
333-86361) on November 12, 1999.) ##
10.21 1999 Employee Stock Purchase Plan and form of subscription
agreement thereunder. (Previously filed with Amendment No. 2
to Registrant's Registration Statement on Form S-1 (file No.
333-86361) on October 5, 1999.)
10.22 Common Stock Purchase Warrant issued to Intel Corporation
dated June 6, 1997. (Previously filed with Registrant's
Annual Report on Form 10-K (File No. 000-27969) on March 23,
2000.)
10.23 Marketing Development Fund Letter Agreement with Logitech,
Inc. dated November 15, 1999. (Previously filed with
Registrant's Annual Report on Form 10-K (File No. 000-27969)
on March 23, 2000.)#
10.24 HT Medical Systems, Inc. Amended Secured Convertible
Promissory Note. (Previously filed with Registrant's
Quarterly Report on Form 10-Q (File No. 000-27969) on
November 14, 2000.)
10.25 Industrial Lease between WW&LJ Gateways, Ltd. and Immersion
Corporation dated January 11, 2000. (Previously filed with
Registrant's Quarterly Report on Form 10-Q (File No.
000-27969) on May 15, 2000.)
10.26 Amendment #1 to the April 13, 1998 Intellectual Property
License Agreement and Technology Product Development
Agreement with Logitech, Inc. dated March 21, 2000.
(Previously filed with Registrant's Quarterly Report on Form
10-Q (File No. 000-27969) on May 15, 2000.)
10.27 Immersion Corporation 2000 Non-Officer Nonstatutory Stock
Option Plan. (Previously filed with Registrant's
Registration Statement on Form S-4 (File No. 333-45254) on
September 6, 2000.)
10.28 Immersion Corporation 2000 HT Non-Officer Nonstatutory Stock
Option Plan. (Previously filed with Registrant's Current
Report on Form 8-K (File No. 000-27969) on October 13,
2000.)
10.29 Logitech Letter Agreement dated September 26, 2001.
10.30 Stock Option Cancellation Agreement between Immersion
Corporation and Bruce Schena dated October 25, 2000.
10.31 Stock Option Cancellation Agreement between Immersion
Corporation and Bruce Schena dated October 25, 2000.
10.32 Stock Option Cancellation Agreement between Immersion
Corporation and Louis Rosenberg dated October 25, 2000.
71
74
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
10.33 Stock Option Cancellation Agreement between Immersion
Corporation and Charles Boesenberg dated October 25, 2000.
10.34 Stock Option Cancellation Agreement between Immersion
Corporation and Charles Boesenberg dated October 25, 2000.
10.35 Lease Agreement between Mor Bennington LLLP and HT Medical
Systems, Inc. dated February 2, 1999.
10.36 Haptic Technologies, Inc. 2000 Stock Option Plan.
(Previously filed with Registrant's Registration Statement
on Form S-4 (File No. 333-45254) on September 6, 2000.)
21.1 Subsidiaries of Immersion. (Previously filed with
Registrant's Quarterly Report on Form 10-Q (File No.
000-27969) on November 14, 2000.)
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
- - ---------------
# Certain information has been omitted and filed separately with the
Commission. Confidential Treatment has been requested with respect to the
omitted portions.
## Certain information has been omitted and filed separately with the
Commission. Confidential treatment has been granted with respect to the
omitted portions.
(b)Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on March 24, 2000 reporting
the completion of the Company's acquisition of Haptic Technologies Inc. on March
9, 2000.
The Company filed a Current Report on Form 8-K on September 15, 2000
reporting the completion of the Company's acquisition of Virtual Technologies,
Inc. on August 31, 2000.
The Company filed a Current Report on Form 8-K on October 13, 2000
reporting the completion of the Company's acquisition of HT Medical Systems,
Inc. on September 29, 2000.
The Company filed a Current Report on Form 8-K on January 3, 2001 reporting
the historical financial statements of the combined operating results of
Immersion Corporation and HT Medical Systems, Inc.
72
75
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 30, 2001
Immersion Corporation
By /s/ ROBERT O'MALLEY
------------------------------------
Robert O'Malley
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert O'Malley and Victor Viegas,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ ROBERT O'MALLEY President, Chief Executive March 30, 2001
- - ----------------------------------------------------- Officer and Director
Robert O'Malley
/s/ LOUIS ROSENBERG, PH.D. Chairman and Director March 30, 2001
- - -----------------------------------------------------
Louis Rosenberg, Ph.D.
/s/ VICTOR VIEGAS Chief Financial Officer March 30, 2001
- - ----------------------------------------------------- (Principal Financial and
Victor Viegas Accounting Officer)
/s/ CRAIG FACTOR General Counsel and March 30, 2001
- - ----------------------------------------------------- Secretary
Craig Factor
/s/ CHARLES BOSENBERG Director March 30, 2001
- - -----------------------------------------------------
Charles Bosenberg
/s/ STEVEN BLANK Director March 28, 2001
- - -----------------------------------------------------
Steven Blank
/s/ JONATHAN RUBINSTEIN Director March 30, 2001
- - -----------------------------------------------------
Jonathan Rubinstein
73
76
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Immersion Corporation:
We have audited the consolidated financial statements of Immersion
Corporation as of December 31, 2000 and 1999, and for each of the three years in
the period ended December 31, 2000, and have issued our report thereon dated
February 7, 2001. Our audits also included the consolidated financial statement
schedule of Immersion Corporation, listed in the Index at Item 14(a)(2). This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
February 7, 2001
74
77
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS/ END OF
OF PERIOD EXPENSES WRITEOFFS PERIOD
---------- ---------- ----------- ----------
(IN THOUSANDS)
Year ended December 31, 1998
Allowance for doubtful accounts.............. $ 38 $ 57 $ 3 $ 92
Year ended December 31, 1999
Allowance for doubtful accounts.............. $ 92 $104 $ 23 $173
Year ended December 31, 2000
Allowance for doubtful accounts.............. $173 $177 $123 $227
75
78
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
2.1 Agreement and Plan of Reorganization with Cybernet Systems
Corporation ("Cybernet"), its wholly-owned subsidiary and
our wholly-owned subsidiary dated March 4, 1999. (Previously
filed with Registrant's Registration Statement on Form S-1
(File No. 333-86361) on September 1, 1999.)
2.2 Share Purchase Agreement with Haptic Technologies Inc.
("Haptech") and 9039-4115 Quebec, Inc. ("Holdco") and the
Shareholders of Haptech and Holdco and 511220 N.B. Inc.
("Purchaser") dated February 28, 2000. (Previously filed
with Registrant's Annual Report on Form 10-K (File No.
000-27969) on March 23, 2000.)
2.2 Indemnification and Joinder Agreement dated as of July 28,
2000, among Immersion Corporation, James F. Kramer and Marc
Tremblay. (Previously filed with Registrant's Current Report
on Form 8-K (File No. 000-27969) on September 15, 2000.)
2.3 Escrow Agreement dated as of August 31, 2000, among
Immersion Corporation, James F. Kramer and U.S. Trust
Company, National Association. (Previously filed with
Registrant's Current Report on Form 8-K (File No. 000-27969)
on September 15, 2000.)
2.5 Agreement and Plan of Merger dated as of July 28, 2000,
among Immersion Corporation, VT Acquisition, Inc., Virtual
Technologies, Inc., and James F. Kramer. (Previously filed
with Registrant's Registration Statement on Form S-4 (File
No. 333-45254) on September 6, 2000.)
2.6 Agreement and Plan of Reorganization dated as of July 31,
2000, among Immersion Corporation, HT Medical Systems, Inc.,
HT Merger, Inc. and Greg Merril. (Previously filed with
Registrant's Registration Statement on Form S-4 (File No.
333-45254) on September 6, 2000.)
2.7 Indemnification and Joinder Agreement dated as of July 31,
2000, among Immersion Corporation, Gregg Merril,
individually and as Representative, and other stockholders
of HT Medical Systems, Inc. (Previously filed with
Registrant's Registration Statement on Form S-4 (File No.
333-45254) on September 6, 2000.)
2.8 Escrow Agreement dated as of September 29, 2000, among
Immersion Corporation, HT Medical Systems, Inc., Greg Merril
as the Representative and U.S. Trust Company, National
Association. (Previously filed with Registrant's
Registration Statement on Form S-4 (File No. 333-45254) on
September 6, 2000.)
3.1 Form of Bylaws. (Previously filed with Amendment No. 1 to
Registration's Registration Statement on Form S-1 (File No.
333-86361) on September 13, 1999.)
3.2 Amended and Restated Certificate of Incorporation.
(Previously filed with Registrant's Quarterly Report on Form
10-Q (File No. 000-27969) on August 14, 2000.)
4.1 Information and Registration Rights Agreement dated April
13, 1998. (Previously filed with Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on September 1,
1999.)
4.2 Immersion Corporation Cybernet Registration Rights Agreement
dated March 5, 1999. (Previously filed with Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
September 1, 1999.)
4.3 Common Stock Grant and Purchase Agreement and Plan with
Michael Reich & Associates dated July 6, 1999. (Previously
filed with Registrant's Registration Statement on Form S-1
(File No. 333-86361) on September 1, 1999.)
4.4 Common Stock Agreement with Digital Equipment Corporation
dated June 12, 1998. (Previously filed with Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
September 1, 1999.)
4.5 Registration Rights Agreement dated as of August 31, 2000,
among Immersion Corporation and the shareholders party
thereto. (Previously filed with Registrant's Current Report
on Form 8-K (File No. 000-27969) on September 15, 2000.)
76
79
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
10.1 1994 Stock Option Plan and form of Incentive Stock Option
Agreement and form of Nonqualified Stock Option Agreement.
(Previously filed with Registrant's Registration Statement
on Form S-1 (File No. 333-86361) on September 1, 1999.)
10.2 1997 Stock Option Plan and form of Incentive Stock Option
Agreement and form of Nonqualified Stock Option Agreement.
(Previously filed with Amendment No. 4 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 5, 1999.)
10.3 Form of Indemnity Agreement. (Previously filed with
Amendment No. 1 to Registration's Registration Statement on
Form S-1 (File No. 333-86361) on September 13, 1999.)
10.4 Immediately Exercisable Nonstatutory Stock Option Agreement
with Steven G. Blank dated November 1, 1996. (Previously
filed with Registrant's Registration Statement on Form S-1
(File No. 333-86361) on September 1, 1999.)
10.5 Common Stock Purchase Warrant issued to Cybernet Systems
Corporation dated March 5, 1999. (Previously filed with
Registrant's Registration Statement on Form S-1 (File No.
333-86361) on September 1, 1999.)
10.6 Consulting Services Agreement with Cybernet Systems
Corporation dated March 5, 1999. (Previously filed with
Registrant's Registration Statement on Form S-1 (File No.
333-86361) on September 1, 1999.)
10.7 Amendment to Warrant to Purchase Shares of Series B
Preferred Stock to Bruce Paul amending warrant to purchase
32,280 shares of Series B Preferred Stock dated September
22, 1998. (Previously filed with Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on September 1,
1999.)
10.8 Amendment to Warrant to Purchase Shares of Series B
Preferred Stock to Bruce Paul amending warrant to purchase
40,350 shares of Series B Preferred Stock dated September
22, 1998. (Previously filed with Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on September 1,
1999.)
10.9 Operating Agreement with MicroScribe, LLC dated July 1,
1997. (Previously filed with Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on September 1,
1999.)
10.10 Exchange Agreement with MicroScribe, LLC dated July 1, 1997.
(Previously filed with Registrant's Registration Statement
on Form S-1 (File No. 333-86361) on September 1, 1999.)
10.11 Lease with Speiker Properties, L.P. dated October 26, 1998.
(Previously filed with Amendment No. 1 to Registration's
Registration Statement on Form S-1 (File No. 333-86361) on
September 13, 1999.)
10.12 Agreement Draft for ASIC Design and Development with
Kawasaki LSI, U.S.A., Inc., dated October 16, 1997.
(Previously filed with Amendment No. 5 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 12, 1999.)##
10.13 Patent License Agreement with Microsoft Corporation dated
July 19, 1999. (Previously filed with Amendment No. 4 to
Registrant's Registration Statement on Form S-1 (File No.
333-86361) on November 5, 1999.)##
10.14 Semiconductor Device Component Purchase Agreement with
Kawasaki LSI, U.S.A., Inc., dated August 17, 1998.
(Previously filed with Amendment No. 4 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 5, 1999.)##
10.15 Amendment No. 1 to Semiconductor Device Component Purchase
Agreement with Kawasaki LSI, U.S.A., Inc. dated April 27,
1999. (Previously filed with Amendment No. 4 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 5, 1999.)##
10.16 Intercompany Intellectual Property License Agreement with
MicroScribe, LLC dated July 1, 1997. (Previously filed with
Amendment No. 4 to Registrant's Registration Statement on
Form S-1 (File No. 333-86361) on November 5, 1999.)
77
80
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
10.17 Patent License Agreement with MicroScribe, LLC dated July 1,
1997. (Previously filed with Amendment No. 4 to Registrant's
Registration Statement on Form S-1 (File No. 333-86361) on
November 5, 1999.)
10.18 Intellectual Property License Agreement with Logitech, Inc.
dated October 4, 1996. (Previously filed with Amendment No.
5 to Registrant's Registration Statement on Form S-1 (File
No. 333-86361) on November 12, 1999.)##
10.19 Intellectual Property License Agreement with Logitech, Inc.
dated April 13, 1998. (Previously filed with Amendment No. 5
to Registrant's Registration Statement on Form S-1 (File No.
333-86361) on November 12, 1999.)##
10.20 Technology Product Development Agreement with Logitech, Inc.
dated April 13, 1998. (Previously filed with Amendment No. 5
to Registrant's Registration Statement on Form S-1 (File No.
333-86361) on November 12, 1999.)##
10.21 1999 Employee Stock Purchase Plan and form of subscription
agreement thereunder. (Previously filed with Amendment No. 2
to Registrant's Registration Statement on Form S-1 (file No.
333-86361) on October 5, 1999.)
10.22 Common Stock Purchase Warrant issued to Intel Corporation
dated June 6, 1997. (Previously filed with Registrant's
Annual Report on Form 10-K (File No. 000-27969) on March 23,
2000.)
10.23 Marketing Development Fund Letter Agreement with Logitech,
Inc. dated November 15, 1999. (Previously filed with
Registrant's Annual Report on Form 10-K (File No. 000-27969)
on March 23, 2000.)#
10.24 HT Medical Systems, Inc. Amended Secured Convertible
Promissory Note. (Previously filed with Registrant's
Quarterly Report on Form 10-Q (File No. 000-27969) on
November 14, 2000.)
10.25 Industrial Lease between WW&LJ Gateways, Ltd. and Immersion
Corporation dated January 11, 2000. (Previously filed with
Registrant's Quarterly Report on Form 10-Q (File No.
000-27969) on May 15, 2000.)
10.26 Amendment #1 to the April 13, 1998 Intellectual Property
License Agreement and Technology Product Development
Agreement with Logitech, Inc. dated March 21, 2000.
(Previously filed with Registrant's Quarterly Report on Form
10-Q (File No. 000-27969) on May 15, 2000.)
10.27 Immersion Corporation 2000 Non-Officer Nonstatutory Stock
Option Plan. (Previously filed with Registrant's
Registration Statement on Form S-4 (File No. 333-45254) on
September 6, 2000.)
10.28 Immersion Corporation 2000 HT Non-Officer Nonstatutory Stock
Option Plan. (Previously filed with Registrant's Current
Report on Form 8-K (File No. 000-27969) on October 13,
2000.)
10.29 Logitech Letter Agreement dated September 26, 2001.
10.30 Stock Option Cancellation Agreement between Immersion
Corporation and Bruce Schena dated October 25, 2000.
10.31 Stock Option Cancellation Agreement between Immersion
Corporation and Bruce Schena dated October 25, 2000.
10.32 Stock Option Cancellation Agreement between Immersion
Corporation and Louis Rosenberg dated October 25, 2000.
10.33 Stock Option Cancellation Agreement between Immersion
Corporation and Charles Boesenberg dated October 25, 2000.
10.34 Stock Option Cancellation Agreement between Immersion
Corporation and Charles Boesenberg dated October 25, 2000.
10.35 Lease Agreement between Mor Bennington LLLP and HT Medical
Systems, Inc. dated February 2, 1999.
78
81
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
10.36 Haptic Technologies, Inc. 2000 Stock Option Plan.
(Previously filed with Registrant's Registration Statement
on Form S-4 (File No. 333-45254) on September 6, 2000.)
21.1 Subsidiaries of Immersion. (Previously filed with
Registrant's Quarterly Report on Form 10-Q (File No.
000-27969) on November 14, 2000.)
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
- - ---------------
# Certain information has been omitted and filed separately with the
Commission. Confidential Treatment has been requested with respect to the
omitted portions.
## Certain information has been omitted and filed separately with the
Commission. Confidential treatment has been granted with respect to the
omitted portions.
79