<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 1999
REGISTRATION NO. 333-86361
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IMMERSION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3577 94-3180138
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
2158 PARAGON DRIVE
SAN JOSE, CALIFORNIA 95131
(408) 467-1900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
LOUIS B. ROSENBERG
CHIEF EXECUTIVE OFFICER
IMMERSION CORPORATION
2158 PARAGON DRIVE
SAN JOSE, CALIFORNIA 95131
(408) 467-1900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
BRUCE SCHAEFFER, ESQ. LAIRD H. SIMONS, III, ESQ.
TOM FURLONG, ESQ. KATHERINE TALLMAN SCHUDA, ESQ.
PAMELA B. BURKE, ESQ. CYNTHIA E. GARABEDIAN, ESQ.
GRAY CARY WARE & FREIDENRICH LLP FENWICK & WEST LLP
400 HAMILTON AVENUE TWO PALO ALTO SQUARE
PALO ALTO, CALIFORNIA 94301-1825 PALO ALTO, CALIFORNIA 94306
(650) 328-6561 (650) 494-0600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED SHARE PRICE REGISTRATION FEE(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($0.001 par
value)...................... 4,250,000 $11.00 $53,762,500 $14,946
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Previously paid in connection with the filing of Immersion's Registration
Statement on Form S-1 (File No. 333-86361) on September 1, 1999.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES, IN ANY STATE WHERE SUCH AN OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 5, 1999
PROSPECTUS
4,250,000 SHARES
IMMERSION.LOGO
COMMON STOCK
This is an initial public offering of common stock by Immersion
Corporation. The estimated initial public offering price is between $9.00 and
$11.00 per share.
------------------
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol IMMR.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Immersion Corporation, before expenses.......... $ $
</TABLE>
Immersion Corporation and the selling stockholders have granted the
underwriters an option for a period of 30 days to purchase up to 637,500
additional shares of common stock.
------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
HAMBRECHT & QUIST
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
, 1999
<PAGE> 3
COVER PAGE ART
[Art: Rendition of a human hand reaching
out to touch a computer cursor]
Headline Above the Illustration: "Engaging the Sense of Touch'
------------------------
FIRST GATE FOLD (LEFT)
[Art: Windows desktop with Yahoo home page and a smaller simulated Web page
advertisement for tennis racquet]
Headline Above the Desktop Illustration: "Immersion TouchSense Technology
Provides realistic Sensations For More Natural Interaction, Enhanced
Productivity And A More Engaging Experience."
Smaller Text Below the Headline But Above the Desktop Illustration: "With
Immersion TouchSense technology, it's now possible to deliver tactile feedback
through an enhanced computer mouse."
[Surrounding the Yahoo home page, a series of call-outs describing how Immersion
technology adds feel to particular aspects of the home page:
Call-out from Web page "Search" button: Web page buttons have dimensionality
that can be felt as well as seen, making them easier to activate.
Call-out from hyperlink: "Like a Magnet, the cursor snaps to links on a Web
page, enabling faster and easier navigation."
Call-out from menu: "Feeling the cursor click over each item in a pull-down menu
improves accuracy, resulting in fewer incorrect selections."
Call-out from lower-right corner of Web page window: "Resize the window by
pulling the edge and feel it stretch."
Call-out from folder icon: "Feel the cursor engage an icon with a tactile snap.
Drag an icon and feel its weight."
Call-out from simulated Web page advertisement for tennis racquet: "Enhancing
online experiences. TouchSense technology lets users feel physical sensations
such as textures, surfaces, springs, liquids, and vibrations. This simulated
advertisement is an example of how shopping online can be enhanced by
interacting with TouchSense authored attributes that let users feel the physical
characteristics of products prior to purchase."
[Art: At lower middle of left gate-fold, a gamepad with the caption "HammerHead
Fx"
Headline at bottom of page (below desktop on either side of gamepad): "Computer
game enthusiasts can experience unprecedented realism."
SECOND GATE FOLD (RIGHT)
[Art: At top of page, a photo of feel-enabled mouse with the caption "Logitech
WingMan Force Feedback Mouse"]
Text in middle of page:
"Adding realistic physical sensations to medical training. Immersion TouchSense
technology enables doctors and students to practice surgical procedures in
training environments that feel real.
For example, as the user manipulates the Endoscopic Sinus Surgery Simulator
(pictured below), the computer tracks the position and orientation of the
device. As the user interacts with the virtual organs and tissue, simulated
physical sensations create the feeling of operating on an actual patient.
<PAGE> 4
Patented technology makes it possible. More than just a pointer, a TouchSense
enabled mouse delivers compelling physical sensations to the user that
correspond to on-screen events. The mouse incorporates magnetic actuators, a
specialized microprocessor, and advanced sensors. Our patented distributed
processing architecture is optimized to handle the continuous stream of rapid
calculations that are required to generate the tactile forces the user feels.
The result is an immediate, realistic experience.
Improving educational resources. TouchSense technology can help demonstrate
principles of physics and other sciences. Students can use computers to
experience hands-on manipulation of forces such as gravity, friction, inertia,
and magnetism."
[Art: At middle right of page, a photo of an apple and a ruler]
[Art: At bottom left of page, a photo of a stethoscope, a sinus surgery
simulator and a globe with a caption by the globe "Compress an Object and feel
it flex"]
[Art: At bottom right of page, a drawing of molecules]
INSIDE BACK PAGE
[Art: At top left of page: a photo of a feel-enabled steering wheel with the
caption "WingMan Formula Force"]
Text on right side of page:
Customers and Licensees
Anko
ACT Labs
HT Medical
InterAct
KYE/Mouse Systems
LMP
Logitech
Microsoft
Mad Catz
Padix
Picker
Quantum3D
Sysgration
Thrustmaster
Text in middle of page:
Evolving the games industry. From flight simulation to action games, our
TouchSense technology helps create more compelling, realistic interactions. The
vibrations of turbulence in flight, the recoil from a weapon, and the impact of
hitting a wall are all sensations that users can feel. Action games can be
energized by jolts and blasts. Driving games can add the roughness of the road
and the force of moving around tight turns. Whether using a mouse, a joystick,
or a steering wheel, computer game enthusiasts can experience unprecedented
realism.
A powerful patent portfolio. With 37 patents issued and another 125 applications
pending, Immersion technology applies to broad market opportunities. The
customers and licensees listed to the right are using Immersion TouchSense
technology to develop devices that provide tactile feedback.
[Art: At bottom left of page, a photo of a force feedback joystick with the
caption "WingMan Force"]
<PAGE> 5
[Art: At center bottom of page: a picture of Immersion logo, which is an
artist's representation of a hand with the caption "Immersion"]
Small text on bottom right of page:
(C)1999 Immersion Corporation. HammerHead FX is a product of InterAct
Accessories and 3Dfx Interactive. Immersion and the Immersion logo are
trademarks of Immersion Corporation. Logitech, the Logitech logo, and the
Logitech products referred to herein are either the trademarks or registered
trademarks of Logitech. Yahoo! and the Yahoo! logo are trademarks of Yahoo! Inc.
All other trademarks are the property of their respective owners. All rights
reserved.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Forward-Looking Statements.................................. 17
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Consolidated Financial Data........................ 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 31
Management.................................................. 43
Certain Transactions........................................ 52
Principal Stockholders...................................... 54
Description of Capital Stock................................ 57
Shares Eligible for Future Sale............................. 60
Underwriting................................................ 62
Legal Matters............................................... 64
Experts..................................................... 64
Where You Can Find Additional Information................... 64
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
All brand names and trademarks appearing in this prospectus are the
property of their respective holders.
3
<PAGE> 7
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information,
our financial statements and the related notes and the risks of investing in our
common stock discussed under "Risk Factors" before making an investment
decision. Except as otherwise noted, all information in this prospectus assumes
the conversion of all outstanding shares of preferred stock into common stock,
no exercise of the underwriters' over-allotment option and our reincorporation
in Delaware prior to the date of this prospectus.
IMMERSION CORPORATION
Immersion Corporation develops and licenses technologies that enable users
to interact with computers using their sense of touch. Our TouchSense feel
technology enables computer peripheral devices such as mice and joysticks to
deliver compelling tactile sensations that correspond to on-screen events. We
are the leading provider of such technology to consumer markets and have
licensed our intellectual property to more than 16 companies, including
Microsoft, Logitech and InterAct. We hold 37 U.S. patents covering various
aspects of our hardware and software technologies and have over 125 patent
applications pending in the U.S. and abroad. Our objective is to proliferate our
feel technology across markets, platforms and applications so that feel becomes
as common as graphics and sound in the modern computer interface.
Early computers had crude user interfaces that only displayed text and
numbers. In the 1980s, computers began to use graphics and sound to engage
users' perceptual senses more naturally, leading to the popularization of the
video game, the graphical user interface and the Web. While most modern
computers realistically present information to the senses of sight and sound,
they still lack the ability to convey content through the sense of touch.
We develop and license affordable technologies that allow computer users to
touch and feel computer content. Our patented designs incorporate specialized
hardware elements such as motors, control electronics and mechanisms into
computer peripheral devices. Driven by sophisticated software algorithms, these
hardware elements direct tactile sensations to the user's hand. We offer a
complete technical solution to our licensees and to software programmers and Web
developers. Our technologies comply with leading hardware and software standards
including Universal Serial Bus (USB) and Microsoft's DirectX application
programming interface.
In 1996, we introduced I-FORCE, our feel technology designed for
entertainment peripherals such as joysticks, steering wheels and gamepads.
I-FORCE has gained acceptance in the computer entertainment market, in which
licensees such as Logitech, Microsoft and InterAct are currently manufacturing
and selling hardware products incorporating I-FORCE technology.
To target the mainstream computing market, we have developed FEELit, a
hardware and software solution designed for feel-enabled cursor control products
such as mice and trackballs. Our first FEELit licensee, Logitech, has announced
that it will begin shipping feel-enabled mice in late 1999. Logitech currently
plans to include copies of our FEELit Desktop and FEELtheWEB software with each
of its feel-enabled mice. FEELit Desktop, which works with Windows 98-
compatible software, automatically adds feel to many of the basic Windows
controls, such as icons, menus and buttons. FEELtheWEB, which works with
Internet Explorer and Netscape Navigator, automatically adds feel to the
standard interface elements of Web pages, such as hyperlinks, check boxes and
menus.
We currently concentrate our marketing, research and development and
business development activities on licensing our TouchSense feel technology in
the computer entertainment and mainstream computing markets. We have
historically derived the substantial majority of our revenues and will continue
to derive revenues from commercial and government development contracts and
product sales, including sales of three dimensional digitizing products, medical
simulation products and industrial products.
4
<PAGE> 8
At June 30, 1999, we had an accumulated deficit of approximately $6.3
million. Logitech accounted for 19% of our total revenues for the six months
ended June 30, 1999 and 11% of our total revenues in 1998. The U.S. Government
accounted for 11% of our total revenues for the six months ended June 30, 1999,
10% of our total revenues in 1998, 24% of our total revenues in 1997 and 16% of
our total revenues in 1996.
Key elements of our strategy are to:
- pursue a royalty-based licensing model;
- facilitate development of feel-enabled hardware products;
- expand software support for our feel technology;
- utilize the Internet to create market demand for feel-enabled products;
- expand market awareness of our technologies and brands;
- secure licensees in new markets for feel technology; and
- continue to develop and protect our intellectual property.
We were incorporated in California in May 1993 and reincorporated in
Delaware prior to the date of their prospectus. Our headquarters are located at
2158 Paragon Drive, San Jose, California 95131, and our telephone number is
(408) 467-1900. Our website address is www.immersion.com. Information contained
on our website is not part of this prospectus.
THIRD QUARTER REVENUE
For the three months ended September 30, 1999, we had total revenues of
approximately $2.1 million. These revenues consisted of approximately $700,000
in royalty revenue, $1.1 million in product sales and $300,000 in development
contracts and other revenues.
5
<PAGE> 9
THE OFFERING
Common stock offered by us................ 4,250,000 shares
Common stock to be outstanding after this
offering.................................. 15,441,856 shares
Use of proceeds........................... For working capital and other
general corporate purposes.
Proposed Nasdaq National Market symbol.... IMMR
------------------------
The number of shares of common stock to be outstanding after this offering
is based on 11,191,856 shares outstanding as of September 30, 1999. This number
excludes 4,379,465 shares of common stock issuable upon exercise of stock
options outstanding as of September 30, 1999 with a weighted average exercise
price of $3.18 per share and 498,593 shares of common stock issuable upon
exercise of warrants outstanding as of September 30, 1999 with a weighted
average exercise prices of $2.72. This number also excludes 15,594 shares of
common stock available for future issuance under our 1997 Stock Option Plan and
500,000 shares reserved for sale under our 1999 Employee Stock Purchase Plan.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The pro forma numbers in the consolidated balance sheet data reflect the
automatic conversion of all shares of preferred stock into common stock upon the
closing of this offering. The pro forma as adjusted numbers in the consolidated
balance sheet data reflect the receipt of the net proceeds from the sale of the
4,250,000 shares of common stock offered by us at an assumed initial public
offering price of $10.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................. $2,737 $ 4,332 $ 5,021 $ 2,177 $ 3,503
Costs and expenses....................... 2,846 4,909 6,868 3,125 5,687
Operating loss........................... (109) (577) (1,847) (948) (2,184)
Net loss................................. (81) (527) (1,673) (869) (2,118)
Basic and diluted net loss per share..... $(0.03) $ (0.17) $ (0.43) $ (0.23) $ (0.42)
Shares used in calculating basic and
diluted net loss per share............ 2,825 3,162 3,909 3,839 5,003
Pro forma basic and diluted net loss per
share................................. $ (0.19) $ (0.21)
Shares used in calculating pro forma
basic and diluted net loss per
share................................. 8,630 10,134
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- ------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $2,204 $2,204 $40,729
Working capital......................................... 3,339 3,339 41,864
Total assets............................................ 9,706 9,706 48,231
Redeemable convertible preferred stock.................. 1,479 -- --
Total stockholders' equity.............................. 7,370 8,849 47,374
</TABLE>
6
<PAGE> 10
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider the risks described below carefully and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. If any of the following risks actually occurs, our business, financial
condition and results of operations would suffer. In this case, the trading
price of our common stock could decline, and you might lose all or part of your
investment in our common stock.
THE MARKET FOR OUR TECHNOLOGIES IS AT AN EARLY STAGE AND, IF MARKET DEMAND DOES
NOT DEVELOP, WE MAY NOT ACHIEVE OR SUSTAIN REVENUE GROWTH
The consumer market for feel technology is at an early stage, and if we and
our licensees are unable to develop consumer demand for our licensed products we
may not achieve or sustain revenue growth. To date, consumer demand for our
technologies has been limited to the computer gaming market, and sales of
feel-enabled products in that market began only in late 1996. We anticipate that
the first FEELit computer mouse will be introduced this year, and it may not
achieve commercial acceptance or generate royalty revenue for us. In addition,
software developers may elect not to create additional games or other
applications that support our feel technology. Even if our technologies are
ultimately widely adopted by consumers, widespread adoption may take a long time
to occur. The timing and amount of royalties that we receive will depend on
whether the products marketed by our licensees 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 consumers about the uses and benefits of our technologies and to
persuade software developers to create software that utilizes our technologies.
WE HAVE AN ACCUMULATED DEFICIT OF $6.3 MILLION AS OF JUNE 30, 1999, 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 2000. 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 feel-enabled products;
- increase our sales efforts;
- 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.
OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT OUR PRIMARY BUSINESS
STRATEGY FOR ACHIEVING REVENUE GROWTH
We cannot predict our future revenues based on our historical financial
information. Historically, we derived the substantial majority of our revenues
from commercial and government development contracts related to feel-enabling
technology and product sales, including sales of three dimensional digitizing
products, medical simulation products and industrial products. The majority of
our historical product sales resulted from sales of products that did not
utilize the Company's feel technology but utilized related advanced computer
peripheral technologies. We currently concentrate our marketing, research and
development activities on licensing our feel technology in the computer
entertainment and mainstream computing markets. We anticipate that
7
<PAGE> 11
royalty revenue from licensing our technologies will constitute an increasing
portion of our revenues. Accordingly, our historical results should not be
relied upon as an indicator of our future performance.
WE DO NOT CONTROL OR INFLUENCE THE MANUFACTURE, PROMOTION, DISTRIBUTION OR
PRICING OF OUR LICENSED PRODUCTS BY OUR LICENSEES UPON WHOM WE ARE DEPENDENT TO
GENERATE ROYALTY REVENUE
Our primary business strategy is to license our intellectual property to
companies that manufacture and sell feel-enabled products. The sale of those
products generates royalty revenue for us. In the six months ended June 30,
1999, 18% of our total revenues were royalty revenues, and we expect royalty
revenue will be an increasing portion of our total revenues in the future.
However, we do not control or influence the manufacture, promotion, distribution
or pricing of our licensed products by our licensees. 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, our licensees must manufacture and distribute feel-enabled
products in a timely fashion and generate consumer demand through marketing and
other promotional activities. Feel-enabled products are generally more difficult
to design and manufacture than products that are not feel-enabled, and these
difficulties 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 gaming 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 would not receive related royalty revenue.
IF INDUSTRY LEADERS DO NOT ADOPT OUR TECHNOLOGIES, WE MAY NOT ACHIEVE REVENUE
GROWTH
An important part of our strategy is to penetrate new markets by targeting
licensees that are leaders in those markets. This strategy is designed to
encourage other participants in those markets to also adopt our technologies. If
industry leaders in new markets do not adopt our technologies, our technologies
may not achieve widespread market acceptance and this would significantly impair
our ability to sustain or achieve revenue growth. In addition, if a high profile
industry participant adopts our technologies for one or more of its products but
fails to achieve revenue or market penetration with those products, other
industry participants' perceptions of our technologies could be adversely
affected. Likewise, if a market leader adopts and achieves success with a
competing technology, our revenue growth could be limited and other potential
licensees may not license our technologies.
BECAUSE LOGITECH IS CURRENTLY OUR ONLY LICENSED MANUFACTURER OF FEEL-ENABLED
MICE, OUR ROYALTY REVENUE FROM FEEL-ENABLED MICE WILL BE SIGNIFICANTLY REDUCED
IF LOGITECH DOES NOT EFFECTIVELY MANUFACTURE AND MARKET OUR PRODUCTS
Logitech is currently the only licensed manufacturer of feel-enabled mice.
If Logitech does not manufacture, market and distribute its feel-enabled mouse
product, our royalty revenue from feel-enabled mice would be significantly
reduced. In addition, a lack of market acceptance of the Logitech feel-enabled
mouse might dissuade other potential licensees from licensing our technologies
for feel-enabled mice and other products.
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
8
<PAGE> 12
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;
- our patents could be challenged and potentially invalidated by one or
more third parties, which could result in our loss of the right to
prevent others from exploiting the inventions claimed in those patents;
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;
- "shrinkwrap" and "clickwrap" license agreements upon which we rely to
protect some of our software may not be enforceable under the laws of all
jurisdictions;
- other companies may claim common law trademark rights based upon state or
foreign laws that precede federal registration of our trademarks;
- current federal laws that prohibit software copying will provide only
limited protection from software pirates, and effective trademark,
copyright and trade secret protection may be unavailable or limited in
some foreign countries; and
- policing unauthorized use of our products and trademarks would be
difficult, expensive and time-consuming, particularly overseas.
IF WE ARE UNABLE TO DEVELOP NEW LICENSING ARRANGEMENTS, OUR REVENUES MAY NOT
GROW
Our revenue growth depends on our ability to enter into new licensing
arrangements. Our failure to enter into new licensing arrangements will cause
our operating results to suffer. Particularly with respect to those licenses
that involve the implementation of our hardware components or software
solutions, we face 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 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 potential licensees to bear the development
costs necessary to incorporate our technologies into their products.
9
<PAGE> 13
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 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 our expenses, including costs related to acquisitions of
technologies or businesses;
- the timing of introductions of new products and product enhancements by
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.
THE HIGHER COST OF FEEL-ENABLED PRODUCTS MAY INHIBIT OR PREVENT OUR TECHNOLOGIES
FROM ACHIEVING MARKET ACCEPTANCE
Feel-enabled products are more expensive than products that are not
feel-enabled. The greater expense of products containing our technologies may be
a significant barrier to their widespread adoption and sale in consumer markets.
IF OUR TECHNOLOGIES ARE UNABLE TO GAIN MARKET ACCEPTANCE BEYOND THE PERSONAL
COMPUTER GAMING PERIPHERALS MARKET, OUR REVENUE GROWTH WILL BE LIMITED
Substantially all of our royalty revenue is derived from the licensing of
I-FORCE, our portfolio of feel technology for personal computer gaming
peripherals such as joysticks and steering wheels. The personal computer gaming
peripherals market 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 revenue growth.
COMPETITION IN THE COMPUTER PERIPHERALS MARKET COULD LEAD TO REDUCTIONS IN THE
SELLING PRICE OF LICENSED PRODUCTS, WHICH WOULD REDUCE OUR ROYALTY REVENUE
The computer peripherals market in which our licensees compete is highly
competitive and is characterized by rapid technological change, short product
life cycles, cyclical market patterns, a trend of declining average selling
prices and increasing foreign and domestic competition. We believe that
competition among computer peripheral manufacturers will continue to be intense,
and that competitive pressures will drive the price of our licensees' products
downward. Any reduction in our royalties per unit that is not offset by
corresponding increases in unit sales will cause our revenues to decline.
A SMALL NUMBER OF LICENSEES ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE
We derived 93% of our royalty revenue for the six months ended June 30,
1999 from three of our licensees. We expect that a significant portion of our
total revenues will continue to be derived
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<PAGE> 14
from a limited number of licensees, including Logitech. If any of this limited
group of licensees fails to achieve anticipated sales volumes for their products
that incorporate our technologies or fails to pay our royalties in a timely
manner, our results of operations may be adversely affected.
BECAUSE OUR TECHNOLOGIES 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 is currently compatible with
Microsoft's operating system 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.
WE DEPEND ON KAWASAKI LSI TO PRODUCE OUR I-FORCE AND FEELIT MICROPROCESSORS AND
MAY LOSE CUSTOMERS IF KAWASAKI LSI DOES NOT MEET OUR REQUIREMENTS
Kawasaki LSI is the sole supplier of our custom I-FORCE and FEELit
microprocessors which we develop, license and sell to support the requirements
of our feel technology in gaming and PC peripheral products. Because Kawasaki
LSI manufactures and tests our processors, we have limited control over delivery
schedules, quality assurance, manufacturing capacity, yields, costs and
misappropriation of our intellectual property. 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.
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.
THREE KEY MEMBERS OF OUR MANAGEMENT TEAM HAVE RECENTLY JOINED US AND THEY MAY
NOT BE EFFECTIVELY INTEGRATED INTO OUR COMPANY, WHICH COULD IMPEDE THE EXECUTION
OF OUR BUSINESS STRATEGY
Our Chief Financial Officer, Vice President of Marketing and Vice President
of Business Development each joined us in July or August 1999. Accordingly, each
of these individuals has limited experience with our business. Our success will
depend to a significant extent on the ability of our new officers to integrate
themselves into our daily operations, to gain the trust and confidence of other
employees and to work effectively as a team. If any of them fails to do so, our
ability to execute our business strategy would be impeded.
THIRD-PARTY CLAIMS OF INFRINGEMENT OF THEIR PROPRIETARY RIGHTS COULD RESULT IN
EXPENSIVE, TIME-CONSUMING LITIGATION, WHICH COULD ADVERSELY AFFECT OUR BUSINESS
Any 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. In addition, 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
11
<PAGE> 15
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.
We have not, however, conducted and do not conduct comprehensive patent searches
to determine whether aspects of our technology infringe patents held by third
parties. 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 our products and
technologies. Between May 1995 and June 1999, we received letters from four
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. 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. We might also elect to enforce our patents and other intellectual
property rights against third parties, which could result in litigation.
COMPETITION FROM PRODUCTS THAT DO NOT INCORPORATE OUR TECHNOLOGIES COULD LEAD TO
REDUCED PRICES AND SALES VOLUMES OF OUR LICENSED PRODUCTS, WHICH COULD LIMIT OUR
REVENUES OR CAUSE OUR REVENUES TO DECLINE
Our licensees may seek to develop products that are based on alternative
technologies that do not require a license under our intellectual property. We
did not invent the concept of force feedback, a field in which there is a
substantial history of prior art. Several companies currently market products
that incorporate more expensive variations of feel technology for scientific and
industrial use and may shift their focus to consumer markets if those markets
continue to grow. These or other potential competitors may have significantly
greater financial, technical and marketing resources. If existing or potential
licensees do not license technology or intellectual property from us, our
revenue growth could be limited or revenues could decline.
COMPETITION TO OUR I-FORCE AND FEELIT MICROPROCESSORS MAY LEAD TO REDUCED PRICES
AND SALES VOLUMES OF OUR MICROPROCESSORS
To date, the market for our I-FORCE and FEELit microprocessors has been
small. If the market grows, we expect more companies to compete in this market.
Increased competition could result in significant price erosion, reduced
revenues or loss of market share, any of which would have an adverse effect on
our business and operating results. Currently, semiconductor companies,
including Intel and Mitsubishi, manufacture products that compete with our
microprocessors. Although the products of these semiconductor companies have not
been optimized specifically for feel technology, in the future, Intel,
Mitsubishi or other companies may elect to enter the market for optimized feel
microprocessors. These companies may have greater financial, technical,
manufacturing, distribution and other resources, greater name recognition and
market presence, longer operating histories, lower cost structures and larger
customer bases than we do. Accordingly, we may not be able to compete
successfully against either current or future competitors.
BECAUSE WE HAVE A FIXED PAYMENT LICENSE WITH MICROSOFT, OUR ROYALTY REVENUE IN
THE PERSONAL COMPUTER JOYSTICK AND STEERING WHEEL GAMING MARKET MIGHT DECLINE IF
MICROSOFT DOMINATES THAT MARKET
Under the terms of our present agreement with Microsoft, Microsoft receives
a perpetual license under our patents for its present generation of feel-enabled
joystick and steering wheel peripheral products targeted at the personal
computer market, and for a future replacement version of these joystick and
steering wheel products having essentially similar functional features. Instead
of an ongoing royalty on Microsoft's sales of licensed products, the agreement
provides for payment of a fixed amount regardless of Microsoft's sales volume.
At the present time, we do not have a
12
<PAGE> 16
license agreement with Microsoft for products other than joysticks and steering
wheels. Microsoft has a significant share of the market for feel-enabled
joysticks and steering wheels for personal computers. In the event that
Microsoft increases its share of this market, our royalty revenue from other
licensees in this market segment might decline. Microsoft has significantly
greater financial, sales and marketing resources, as well as greater name
recognition and a larger customer base, than our other licensees.
WE MIGHT BE UNABLE TO RECRUIT OR RETAIN 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. We intend to hire
additional sales, support, marketing and research and development personnel in
the remainder of calendar 1999 and in 2000. Competition for these individuals is
intense, and we may not be able to attract, assimilate or retain additional
highly qualified personnel in the future. 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 HAVE EXPERIENCED RAPID GROWTH AND CHANGE IN OUR BUSINESS, AND OUR FAILURE TO
MANAGE THIS AND ANY FUTURE GROWTH COULD HARM OUR BUSINESS
We are increasing the number of our employees rapidly. 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.
PRODUCT LIABILITY CLAIMS, INCLUDING CLAIMS RELATING TO ALLEGED REPETITIVE STRESS
INJURIES, COULD BE TIME-CONSUMING AND COSTLY TO DEFEND, AND COULD EXPOSE US TO
LOSS
Claims that consumer products have flaws or other defects that lead to
personal or other injury are common in the computer peripherals industry. 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
substantial damages and damage our reputation or the reputation of our licensees
or their products. This damage could limit the market for our licensees'
feel-enabled 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.
13
<PAGE> 17
IF WE FAIL TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW COMPUTER APPLICATIONS
AND PLATFORMS, WE MAY NOT BE ABLE TO CREATE A MARKET FOR OUR TECHNOLOGIES AND
OUR ABILITY TO GROW AND OUR RESULTS OF OPERATIONS MIGHT BE HARMED
We expect to develop new or enhanced technologies and to license
technologies for new applications and new platforms. These initiatives 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. The lack of market
acceptance of these efforts or our inability to generate additional revenues
sufficient to offset the associated costs could harm our results of operations.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE STOCKHOLDER VALUE, DIVERT
MANAGEMENT ATTENTION OR CAUSE INTEGRATION PROBLEMS
As part of our business strategy, we have in the past acquired, and might
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. If we consummate acquisitions through an
exchange of our securities, our stockholders could suffer significant dilution.
Acquisitions could create risks for us, including:
- unanticipated costs associated with the acquisitions;
- use of substantial portions of our available cash, including the proceeds
of this offering, to consummate the acquisitions;
- diversion of management's attention from other business concerns; and
- difficulties in assimilation of acquired personnel or operations.
Any future acquisitions, even if successfully completed, might not generate
any additional revenue or provide any benefit to our business.
YEAR 2000 COMPLIANCE COSTS AND RISKS ARE DIFFICULT TO ASSESS AND COULD RESULT IN
DELAY OR LOSS OF REVENUES, DAMAGE TO OUR REPUTATION AND DIVERSION OF DEVELOPMENT
RESOURCES
Many computer programs and embedded date-reliant systems use two digits
rather than four to define the applicable year. Programs and systems that record
only the last two digits of the calendar year may not be able to distinguish
whether "00" means 1900 or 2000. If not corrected, date-related information and
data could cause these programs or systems to fail or to generate erroneous
information.
To the extent that any third-party product with which our technology is
associated is not Year 2000 compliant, our reputation may be harmed. Our revenue
and operating results could become subject to unexpected fluctuations if our
licensees encounter Year 2000 compliance problems that affect their ability to
distribute licensed products. In addition, a delay or failure by our critical
suppliers to be Year 2000 compliant could interrupt our business.
WE MAY NOT BE ABLE TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH COULD LIMIT
OUR ABILITY TO GROW
We may in the future be required to raise additional funds through public
or private financing, strategic relationships or other arrangements. We cannot
be certain that any financing will be available on acceptable terms, or at all,
and our failure to raise capital when needed could limit our ability to expand
our business. In addition, an equity financing may be dilutive to the holders of
our common stock, and debt financing, if available, may involve restrictive
covenants. Moreover, strategic relationships, if necessary to raise additional
funds, may require that we relinquish valuable rights.
14
<PAGE> 18
OUR STOCK MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR
ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. The market
price of our common stock after the offering may vary from the initial public
offering price. If you purchase shares of our common stock, you may not be able
to resell those shares at or above the initial public offering price. In
addition, 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. You should read the "Underwriting" section on page 62 for a more
complete discussion of the factors to be considered in determining the initial
public offering price of our common stock.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL RETAIN SIGNIFICANT
CONTROL OVER US AFTER THIS OFFERING, WHICH MAY LEAD TO CONFLICTS WITH OTHER
STOCKHOLDERS OVER CORPORATE GOVERNANCE MATTERS
We anticipate that our current directors, officers and more than 5%
stockholders will, as a group, beneficially own approximately 46% of our
outstanding common stock after this offering. Acting together, these
stockholders would be able to significantly influence all 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. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. These provisions
include, among others:
- the division of our board of directors into three separate classes;
- the ability of our board of directors to issue up to 5,000,000 shares of
preferred stock, and to determine the prices, rights, preferences,
privileges and restrictions, including voting rights, of those shares
without any further vote or action by the stockholders;
- advance notice requirements for stockholders to nominate directors and
bring stockholder proposals to a vote; and
- the inability of stockholders to act by written consent.
Furthermore, because we are incorporated in Delaware, we are subject to the
provisions of Section 203 of the Delaware General Corporation Law. These
provisions prohibit stockholders owning 15% or more of the outstanding voting
stock from consummating a merger or combination between us and another
corporation unless:
- 66 2/3% of the shares of voting stock not owned by the large stockholders
approve the merger or combination; or
- The board of directors approves the merger or combination or the
transaction that resulted in the large stockholders which own 15% or more
of our outstanding voting stock.
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<PAGE> 19
MANAGEMENT COULD SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH OUR
STOCKHOLDERS MAY NOT AGREE
We plan to use the proceeds from this offering for working capital and
other general corporate purposes. We may use the proceeds in ways with which you
do not agree or that prove to be disadvantageous to our stockholders. We may not
be able to invest the proceeds of this offering, in our operations or external
investments, to yield a favorable return.
THERE ARE A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK
Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that sales may be made, could
cause the market price of our common stock to decline. In addition, the sale of
these shares could impair our ability to raise capital through the sale of
additional equity securities. Based on shares outstanding as of September 30,
1999, following this offering, we will have 15,441,856 shares of common stock
outstanding or 15,579,086 shares if the underwriters' over-allotment is
exercised in full. 8,875,526 shares will become available for sale 180 days
following the date of this prospectus upon the expiration of lock-up agreements,
subject to the restrictions imposed by the federal securities laws on sales by
affiliates. Hambrecht & Quist LLC, however, may waive the lock-up restrictions
at its sole discretion.
16
<PAGE> 20
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industry's actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements. These risks and other factors include those listed under "Risk
Factors" and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "might," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue," the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risks
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of any of these
forward-looking statements. We are under no duty to update any of these
forward-looking statements after the date of this prospectus to conform our
prior statements to actual results or revised expectations.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 4,250,000 shares of
common stock offered by us will be approximately $38,525,000, at an assumed
initial offering price per share of $10.00 and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.
The principal purposes of the offering are to obtain additional working
capital, establish a public market for our common stock and facilitate our
future access to public capital markets. We currently expect to use the net
proceeds from this offering for working capital and other general corporate
purposes. We have not yet determined our expected use of these proceeds, but we
currently anticipate that we will incur at least $3.5 million in research and
development expenses and $6 million in sales and marketing expenses through the
end of the year 2000. Actual expenditures may vary substantially from these
estimates. The amounts and timing of our actual expenditures will depend upon
numerous factors, including the status of our development efforts, marketing and
sales activities and the amount of cash generated by our operations. We may find
it necessary or advisable to use portions of the proceeds for other purposes. We
may also use a portion of the net proceeds to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
We have no current commitments or agreements with respect to any acquisition or
investment. Pending these uses, we intend to invest the net proceeds in
short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain earnings, if any, to finance the growth and
development of our business. Therefore, we do not anticipate paying cash
dividends on our common stock in the foreseeable future. The decision whether to
pay dividends will be made by our board of directors from time to time in light
of conditions then existing including, among other things, our results of
operations, financial condition and capital expenditure requirements.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. The
pro forma information reflects the conversion of all outstanding shares of our
preferred stock into 5,131,100 shares of common stock upon the closing of the
offering. The pro forma as adjusted information reflects the sale of shares of
common stock offered by us at an assumed initial public offering price of $10.00
per share and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses. The common stock outstanding as of
June 30, 1999 excludes:
- 5,991,973 shares reserved for issuance under our stock option plans, of
which 3,344,329 shares were subject to outstanding options, with a
weighted average exercise price of $1.13 per share;
- 498,593 shares subject to outstanding warrants, with a weighted average
exercise price of $2.72 per share; and
- 500,000 shares reserved for issuance under our 1999 Employee Stock
Purchase Plan.
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable convertible preferred stock, $0.001 par value;
863,778 shares designated, 863,771 shares issued and
outstanding, actual; none authorized, issued or
outstanding, pro forma or pro forma as adjusted........... $ 1,479 $ -- $ --
------- ------- -------
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 10,215,716
shares authorized, actual; 4,267,329 shares issued and
outstanding, actual; 5,000,000 shares authorized and
none issued or outstanding, pro forma or pro forma as
adjusted............................................... 6,955 -- --
Common stock, $0.001 par value; 100,000,000 shares
authorized and 5,901,405 shares issued and outstanding,
actual; 100,000,000 shares authorized, pro forma and
pro forma as adjusted; 11,032,505 shares issued and
outstanding, pro forma; 15,282,505 shares issued and
outstanding, pro forma as adjusted..................... 7,947 16,381 54,906
Warrants.................................................... 893 893 893
Deferred stock compensation................................. (2,075) (2,075) (2,075)
Accumulated other comprehensive loss........................ -- -- --
Note receivable from stockholder............................ (17) (17) (17)
Accumulated deficit......................................... (6,333) (6,333) (6,333)
------- ------- -------
Total stockholders' equity............................. 7,370 8,849 47,374
------- ------- -------
Total capitalization.............................. $ 8,849 $ 8,849 $47,374
======= ======= =======
</TABLE>
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<PAGE> 22
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $4,008,000,
or $0.36 per share of common stock. Pro forma net tangible book value per share
represents the amount of our total tangible assets (total assets excluding
purchased patents and technology) less the amount of our total liabilities and
divided by the total number of shares of common stock outstanding after
conversion of all outstanding shares of preferred stock into common stock.
Taking into account the sale of the 4,250,000 shares of common stock offered by
us at an assumed initial public offering price of $10.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses and receipt of the net proceeds, our adjusted pro forma net
tangible book value as of June 30, 1999 would have been approximately
$42,533,000, or $2.78 per share. This represents an immediate increase in net
tangible book value of $2.42 per share to existing stockholders and an immediate
dilution of $7.22 per share to the new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $0.36
Increase in net tangible book value attributable to new
investors.............................................. 2.42
-----
As adjusted pro forma net tangible book value per share
after the offering........................................ 2.78
------
Dilution per share to new investors......................... $ 7.22
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1999,
the difference between the number of shares of common stock purchased, the total
consideration paid and the average price per share paid by the existing
stockholders and by the new investors purchasing shares in this offering, at an
assumed initial public offering price of $10.00 per share and before deducting
the estimated underwriting discounts and commissions and estimated offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 11,032,505 72.2% $ 8,590,000 16.8% $ 0.78
New investors............ 4,250,000 27.8 42,500,000 83.2 $10.00
---------- ----- ----------- -----
Total.......... 15,282,505 100.0% $51,090,000 100.0%
========== ===== =========== =====
</TABLE>
The above tables exclude 6,491,973 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 3,344,329
shares were subject to outstanding options as of June 30, 1999 with a weighted
average price of $1.13 per share, and 498,593 shares of common stock were
subject to outstanding warrants with a weighted average price of $2.72 per
share. New investors will experience further dilution if any additional shares
of our common stock are issued upon the exercise of these options or warrants.
19
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the consolidated financial statements,
related notes and other financial information included in this prospectus. The
selected consolidated statement of operations data for the years ended December
31, 1996, 1997 and 1998 and the consolidated balance sheet data as of December
31, 1997 and 1998 are derived from the audited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated balance sheet
data as of December 31, 1996 are derived from audited consolidated financial
statements not included in this prospectus. The selected consolidated financial
data as of and for the years ended December 31, 1994 and 1995 are derived from
unaudited financial statements not included in this prospectus. The consolidated
statement of operations data for the six months ended June 30, 1998 and 1999 and
the consolidated balance sheet data as of June 30, 1999 are derived from
unaudited consolidated financial statements included elsewhere in this
prospectus. We believe that the unaudited consolidated financial statements
contain all adjustments necessary to present fairly the information included in
those statements, and that the adjustments consist only of normal recurring
adjustments. Historical results are not necessarily indicative of the results to
be expected in the future, and results of interim periods are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Royalty revenue.................... $ -- $ -- $ -- $ 14 $ 321 $ 8 $ 622
Product sales...................... 444 1,068 2,022 2,908 3,725 1,604 2,133
Development contracts and other.... 117 285 715 1,410 975 565 748
------ ------ ------ ------ ------- ------ -------
Total revenues................ 561 1,353 2,737 4,332 5,021 2,177 3,503
------ ------ ------ ------ ------- ------ -------
Costs and expenses:
Cost of product sales.............. 210 540 947 1,186 1,507 641 970
Sales and marketing................ 87 224 422 658 656 361 459
Research and development........... 216 393 710 1,515 1,817 833 1,057
General and administrative......... 55 267 766 1,550 2,677 1,269 1,548
Amortization of intangibles and
deferred stock compensation...... -- -- 1 -- 211 21 463
In-process research and
development...................... -- -- -- -- -- -- 1,190
------ ------ ------ ------ ------- ------ -------
Total costs and expenses...... 568 1,424 2,846 4,909 6,868 3,125 5,687
------ ------ ------ ------ ------- ------ -------
Operating loss....................... (7) (71) (109) (577) (1,847) (948) (2,184)
Other income......................... 2 14 28 50 174 79 66
------ ------ ------ ------ ------- ------ -------
Net loss............................. $ (5) $ (57) $ (81) $ (527) $(1,673) $ (869) $(2,118)
====== ====== ====== ====== ======= ====== =======
Basic and diluted net loss per
share.............................. $(0.01) $(0.02) $(0.03) $(0.17) $ (0.43) $(0.23) $ (0.42)
====== ====== ====== ====== ======= ====== =======
Shares used in calculating basic and
diluted net loss per share......... 2,653 2,468 2,825 3,162 3,909 3,839 5,003
====== ====== ====== ====== ======= ====== =======
Pro forma basic and diluted net loss
per share.......................... $ (0.19) $ (0.21)
======= =======
Shares used in calculating pro forma
basic and diluted net loss per
share.............................. 8,630 10,134
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................... $ 156 $ 37 $ 324 $ 490 $2,592 $2,204
Working capital............................. 149 779 1,151 2,080 3,975 3,339
Total assets................................ 308 963 1,562 2,900 5,959 9,706
Redeemable convertible preferred stock...... -- -- -- 1,471 1,476 1,479
Total stockholders' equity.................. 157 876 1,383 944 3,773 7,370
</TABLE>
20
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and the notes thereto beginning on page
F-1 of this prospectus and the Selected Consolidated Financial Data above.
Except for historical information, the discussion in this prospectus contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include the risks discussed in the
section titled "Risk Factors."
OVERVIEW
Immersion was founded in 1993 to develop technologies that help improve
human to computer interaction. Historically, we have derived most of our revenue
from sales of products and from development contracts. We began generating
royalty revenue in the first quarter of 1997 and anticipate that royalty revenue
will become an increasing percentage of our total revenues.
We began developing feel-enabled computer peripherals in 1993. In 1995, we
introduced our Impulse Engine line of high-end feel-enabled devices for
industrial, research and education markets. We manufacture and sell these
products directly to our customers. In 1996, we introduced I-FORCE, our first
branded portfolio of feel technology for consumer markets. We license I-FORCE,
generally on a per unit royalty basis, to computer gaming peripheral
manufacturers. Also in 1996, the first computer joystick incorporating I-FORCE
was introduced.
We introduced FEELit, a technology for feel-enabled cursor control
products, such as mice and trackballs, in 1997. In 1998, we licensed FEELit to
Logitech, which has announced its intention to ship the first FEELit mouse in
late 1999.
We have developed a custom processor for feel-enabled products that is
manufactured by Kawasaki LSI, and we began selling this processor in September
1998. In addition to selling the processors ourselves, we granted Kawasaki LSI a
limited royalty-bearing license to sell these processors to our customers.
We currently sell products in the industrial and professional markets. We
developed our first three dimensional digitizer product in 1994 and currently
sell this product under the name MicroScribe-3D. We began developing our
Softmouse product for the geographic information systems market in 1994. This
mouse product is sold to original equipment manufacturers. We began developing
technology and products for the medical market in 1993. We derive revenues from
selling medical training and simulation products. In June 1999, we also began to
license technologies for the medical training and simulation market.
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.
Logitech accounted for 19% of our total revenues for the six months ended
June 30, 1999 and 11% of our total revenues in 1998. The U.S. Government
accounted for 11% of our total revenues for the six months ended June 30, 1999,
10% of our total revenues in 1998, 24% of our total revenues in 1997 and 16% of
our total revenues in 1996.
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 June 30, 1999,
we had capitalized patents and technology of $4.8 million, net of accumulated
21
<PAGE> 25
amortization of $426,000. We are amortizing these patents and technology over
the estimated useful life of the technology of nine years.
In the quarter ended March 31, 1999, we expensed $1.2 million of acquired
in-process research and development related to five development projects. 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% completed and
the estimated cost to complete this development was $438,000. Management expects
to ship products using this software beginning in June, 2001. 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% completed and the estimated cost to complete this
development was $109,000. Management expects products based on this technology
to become available in December 2000. The third of these projects is a six
degree-of-freedom hand controller, 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 expects to complete
development of a product based on this technology and begin shipping it in
fiscal 2000. 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 licensed products using this
technology in fiscal 2001. The fifth development project is a device which
allows the user to reach inside the computer monitor and feel three-dimensional
objects. At the time of acquisition, the development was 11% completed and the
estimated cost to complete this development was $248,000. Management expects
that a product based on this technology will become available for sale in fiscal
2000.
We 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 us to accelerate the time period over which
the intangibles are being amortized, which could have a material adverse effect
on our business, financial condition and results of operation. Significant
assumptions used to determine the value of in-process research and development
including the following: (i) forecast of net cash flows that were expected to
result from the development effort using projections prepared by us and the
seller's management; (ii) the portion of the projects completed 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 us 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 the existing
and 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 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. Projected revenues from
the in-process products are expected to begin in 2000 and 2001 as the products
are completed and begin to ship. Initial annual
22
<PAGE> 26
revenue growth rates after introduction are 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.
We record revenue from product sales upon 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.
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. 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. Our sales and marketing expenses are comprised
primarily of employee headcount and related compensation and benefits,
advertising, trade shows, brochures, travel and an allocation of facilities
costs. 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.
We recorded deferred stock compensation of $2.3 million during the six
months ended June 30, 1999 from the issuance of warrants for services and from
employee stock options. We are amortizing the deferred stock compensation over
the terms of the related option agreements, which range up to four years.
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a
percentage of total revenues.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Royalty revenue................................... --% 0.3% 6.4% 0.4% 17.8%
Product sales..................................... 73.9 67.1 74.2 73.7 60.9
Development contracts and other................... 26.1 32.6 19.4 25.9 21.3
----- ----- ----- ----- -----
Total revenues............................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of product sales............................. 34.6 27.4 30.0 29.4 27.7
Sales and marketing............................... 15.4 15.2 13.1 16.6 13.1
Research and development.......................... 25.9 35.0 36.2 38.2 30.2
General and administrative........................ 28.0 35.8 53.3 58.3 44.2
Amortization of intangibles and deferred stock
compensation................................... -- -- 4.2 1.0 13.2
In-process research and development............... -- -- -- -- 34.0
----- ----- ----- ----- -----
Total costs and expenses.................. 103.9 113.4 136.8 143.5 162.4
----- ----- ----- ----- -----
Operating loss...................................... (3.9) (13.4) (36.8) (43.5) (62.4)
Other income........................................ 1.0 1.2 3.5 3.6 1.9
----- ----- ----- ----- -----
Net loss............................................ (2.9)% (12.2)% (33.3)% (39.9)% (60.5)%
===== ===== ===== ===== =====
</TABLE>
23
<PAGE> 27
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Total Revenues. Our total revenues increased by 61% from $2.2 million for
the six months ended June 30, 1998 to $3.5 million for the six months ended June
30, 1999. Royalty revenue increased by $614,000 from $8,000 to $622,000 due to
higher sales by our I-FORCE licensees. Product sales increased by $529,000 from
$1.6 million to $2.1 million primarily due to increased sales of industrial and
professional products. Development contracts and other revenue increased by
$183,000 from $565,000 to $748,000 due to new government and commercial
contracts entered into in mid-1998 which were in progress during 1999.
Cost of Product Sales. Cost of product sales increased from $641,000 for
the six months ended June 30, 1998 to $970,000 for the six months ended June 30,
1999. Cost of product sales as a percentage of product sales increased from 40%
for the six months ended June 30, 1998 to 46% for the six months ended June 30,
1999. The increase in cost of product sales as a percentage of product sales was
primarily due to increased sales of our processor, which has a lower margin than
other products.
Sales and Marketing. Sales and marketing expenses increased by 27% from
$361,000 for the six months ended June 30, 1998 to $459,000 for the six months
ended June 30, 1999 primarily as a result of increased headcount and related
compensation and benefits. We expect sales and marketing expenses to increase
significantly 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. Research and development expenses increased by
27% from $833,000 for the six months ended June 30, 1998 to $1.1 million for the
six months ended June 30, 1999. Research and development expenses increased due
to increases in employee headcount and related compensation of $182,000, and an
increase of $28,000 in consulting services. 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. General and administrative expenses increased
by 22% from $1.3 million for the six months ended June 30, 1998 to $1.5 million
for the six months ended June 30, 1999. The increase was primarily the result of
increased compensation and benefits. We expect that the dollar amount of general
and administrative expenses will increase in the future as we incur the
significant additional costs related to being a public company.
Amortization of Intangibles and Deferred Stock Compensation. Amortization
of intangibles and deferred stock compensation increased $442,000 from $21,000
for the six months ended June 30, 1998 to $463,000 for the six months ended June
30, 1999.
In-Process Research and Development. During the six months ended June 30,
1999, we incurred a charge of $1.2 million dollars for in-process research and
development resulting from the acquisition of technology from Cybernet Haptic
Systems.
Other Income. Other income consists primarily of interest income, dividend
income and capital gains from cash and cash equivalents and short-term
investments. Other income decreased from $79,000 for the six months ended June
30, 1998 to $66,000 for the six months ended June 30, 1999 primarily due to a
decrease in cash and cash equivalents and short-term investments.
Income Taxes. We have not recorded provisions for income taxes other than
minimum state taxes because we have experienced net losses since our inception.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Total Revenues. Our total revenues increased 58% from $2.7 million in 1996
to $4.3 million in 1997 and an additional 16% to $5.0 million in 1998. The
increase from 1996 to 1997 was primarily the result of an $886,000 increase in
product sales, principally from our MicroScribe-3D and
24
<PAGE> 28
industrial products, and a $695,000 increase in development contract revenue,
relating primarily to an increase in government contract revenue. The increase
from 1997 to 1998 was principally the result of an $817,000 increase in product
sales, primarily from our MicroScribe-3D and industrial products, and a $307,000
increase in royalty revenue due to increased sales by our I-FORCE licensees in
1998. The increase in product sales and royalty revenue was partially offset by
a $435,000 decrease in contract revenue.
Cost of Product Sales. Cost of product sales were $947,000 in 1996, $1.2
million in 1997 and $1.5 million in 1998. Cost of product sales as a percentage
of product sales was 47% in 1996, 41% in 1997 and 40% in 1998. Cost of product
sales as a percentage of product sales decreased from 1996 to 1997 and 1998
primarily due to increased sales of higher margin industrial products and
manufacturing efficiencies resulting from higher unit sales.
Sales and Marketing. Sales and marketing expenses increased 56% from
$422,000 in 1996 to $658,000 in 1997 and remained constant at $656,000 in 1998.
The increase from 1996 to 1997 was primarily a result of increased employee
headcount and related compensation and benefits.
Research and Development. Research and development expenses increased 113%
from $710,000 in 1996 to $1.5 million in 1997 and by 20% from 1997 to $1.8
million in 1998. The increase from 1996 to 1997 was due to a $436,000 increase
in employee headcount and related compensation, a $262,000 increase in
consulting services and an increase of $103,000 in supplies. The increase from
1997 to 1998 was principally due to an increase in employee headcount and
related compensation.
General and Administrative. General and administrative expenses increased
102% from $766,000 in 1996 to $1.6 million in 1997 and by 73% from 1997 to $2.7
million in 1998. The increase from 1996 to 1997 was due to an increase of
$309,000 in employee headcount and related compensation expenses and an increase
of $290,000 in legal and professional fees. The increase from 1997 to 1998 was
principally due to an increase in employee headcount and related compensation
and benefits.
Amortization of Intangibles and Stock Compensation. Amortization of
intangibles and stock compensation expense was $211,000 in 1998, representing
amortization of licenses and patents acquired in 1998.
Other Income. Other income consists primarily of interest income, dividend
income and capital gains from cash and cash equivalents and short-term
investments. Other income was $28,000 in 1996, $50,000 in 1997 and $174,000 in
1998. These increases were due to increases in cash and cash equivalents and
short-term investments in each of those years.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited consolidated statement of
operations data for our six most recent quarters. This information has been
derived from our unaudited consolidated financial statements. In our opinion,
this unaudited information has been prepared on the same basis as the annual
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
information for the quarters presented. This information should be read in
conjunction with the consolidated financial
25
<PAGE> 29
statements and related notes included elsewhere in this prospectus. Historical
results for any quarter are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Royalty revenue................................ $ 5 $ 3 $ -- $ 313 $ 481 $ 141
Product sales.................................. 720 884 980 1,141 1,085 1,048
Development contracts and other................ 314 251 251 159 310 438
------ ------ ------ ------ ------- ------
Total revenues.......................... 1,039 1,138 1,231 1,613 1,876 1,627
------ ------ ------ ------ ------- ------
Costs and expenses:
Cost of product sales.......................... 293 348 431 435 494 476
Sales and marketing............................ 136 225 175 120 187 272
Research and development....................... 379 454 445 539 458 599
General and administrative..................... 561 708 756 652 752 796
Amortization of intangibles and deferred stock
compensation................................. 2 19 29 161 118 345
In-process research and development............ -- -- -- -- 1,190 --
------ ------ ------ ------ ------- ------
Total costs and expenses................ 1,371 1,754 1,836 1,907 3,199 2,488
------ ------ ------ ------ ------- ------
Loss from operations............................. (332) (616) (605) (294) (1,323) (861)
Other income..................................... 24 55 56 39 40 26
------ ------ ------ ------ ------- ------
Net loss......................................... $ (308) $ (561) $ (549) $ (255) $(1,283) $ (835)
====== ====== ====== ====== ======= ======
</TABLE>
Royalty revenue in the quarter ended December 31, 1998 increased to
$313,000 from no revenue in the quarter ended September 30, 1998. This increase
resulted from nine new products introduced for the 1998 holiday season by our
licensees. Royalty revenue in the quarter ended June 30, 1999 decreased to
$141,000 from $481,000 in the quarter ended March 31, 1999. This decline was due
primarily to a decrease in revenues from our licensing partners following the
holiday season. Development contracts and other revenue in the quarter ended
March 31, 1999 increased to $310,000 from $159,000 in the quarter ended December
31, 1998. This increase was partially due to a new government contract signed in
late 1998, which began generating revenue in the quarter ended March 31, 1999.
Sales and marketing expenses decreased from $175,000 in the quarter ended
September 30, 1998 to $120,000 in the quarter ended December 31, 1998 due
primarily to the absence of any significant trade show expenses in the quarter
ended December 31, 1998. Sales and marketing expenses increased from $120,000 in
the quarter ended December 31, 1998 to $187,000 in the quarter ended March 31,
1999 due primarily to the trade show expense of a game developer conference we
attended in March 1999. Research and development expenses decreased in the
quarter ended March 31, 1999 due to a temporary drop in the number of employees
and a reduction in consulting expenses. General and administrative expenses
decreased from $756,000 in the quarter ended September 30, 1998 to $652,000 in
the quarter ended December 31, 1998. The decrease was primarily due to a $52,000
decrease in legal fees and a $41,000 decrease in consulting fees.
Because our historical financial information does not reflect our primary
business strategy for the future, we cannot forecast future revenues based on
historical results. We base our expenses in part on future revenue projections.
Most of our expenses are fixed in nature, and we may not be able to reduce
spending quickly if revenue is lower than we have projected. We expect that our
business, operating results and financial condition would be harmed if revenues
do not meet expectations.
26
<PAGE> 30
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 our
control and any of which could cause the price of our common stock to decline.
These factors include:
- the mix of product sales, development contracts and royalty revenue;
- the establishment or loss of licensing relationships;
- the timing of our expenses;
- the timing of announcements and introductions of new products and product
enhancements by our licensees and their competitors;
- our ability to develop and improve our technologies;
- our ability to attract, integrate and retain qualified personnel;
- costs related to acquisitions of technologies or businesses; and
- seasonality in the demand for our licensees' products.
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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily from the sale of
preferred stock. As of June 30, 1999, we had an accumulated deficit of $6.3
million and working capital of $3.3 million, including cash and cash equivalents
of $2.2 million.
Net cash used in operating activities for the six months ended June 30,
1999 was $195,000, primarily attributable to a net loss of $2.1 million, largely
offset by non-cash charges, including a $1.2 million in-process research and
development charge and $257,000 of amortization expense in connection with our
acquisition of Cybernet. In 1998, net cash used in operating activities was $1.8
million, primarily attributable to a net loss of $1.7 million, an increase of
$592,000 in accounts receivable and an increase of $186,000 in inventories. In
1997, net cash used in operating activities was $237,000, primarily attributable
to a net loss of $527,000, largely offset by an increase in accounts payable of
$189,000. In 1996, net cash use in operating activities was $208,000,
attributable primarily to a net loss of $81,000, an increase of $131,000 in
accounts receivable and an increase of $94,000 in inventories, offset by an
increase of $75,000 in accrued liabilities.
Net cash used in investing activities for the six months ended June 30,
1999 was $345,000, and primarily consisted of $476,000 of purchases of property
and other assets, offset by $201,000 from sales of short-term investments. In
1998, net cash provided by investing activities was $237,000, attributable to
$3.8 million from sales of short-term investments primarily offset by $2.9
million of purchases of short-term investments and $434,000 for purchases of
patents and technology. In 1997, net cash used in investing activities was $1.2
million, and was attributable to $1.5 million of purchases of short-term
investments and $205,000 of purchases of property, offset by $538,000 from sales
of short-term investments. In 1996, net cash used in investing activities was
$107,000, and was attributable to $325,000 of purchases of short-term
investments and $181,000 of purchases of property, offset by $399,000 from sales
of short-term investments. 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 include interest bearing investment grade securities
with a maturity of greater than 90 days and less than one year.
Net cash provided by financing activities for the six months ended June 30,
1999 was $152,000, and consisted primarily of net proceeds of $151,000 from the
exercise of stock options. In 1998, net cash provided by financing activities
was $3.7 million and was attributable primarily to net proceeds of $5.4 million
from the sale of preferred stock, offset by the repurchase of $1.8 million of
stock. In 1997, net cash provided by financing activities was $1.6 million and
was attributable primarily to the proceeds of $1.5 million from the sale of
preferred stock. In 1996, net cash provided by financing
27
<PAGE> 31
activities was $596,000 and was attributable primarily to net proceeds of
$590,000 from the sale of preferred stock.
We believe that the net proceeds of this offering, together with our cash,
cash equivalents and short-term investments, will be sufficient to meet our
working capital needs for at least the next 12 months. We anticipate that
capital expenditures for the last six months of 1999 and for the full year ended
December 31, 2000 will be approximately $1.0 million. Thereafter, we may require
additional funds to support our working capital requirements or for other
purposes and may seek to raise additional funds through public or private equity
financing or from other sources. Additional financing may not be available at
all or, if available, may not be obtainable on terms favorable to us. In
addition, any additional financing may be dilutive. Although there are no
present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, from time to time in
the ordinary course of business, we evaluate potential acquisitions of
businesses, products or technologies that are complementary to those of our
business and may in the future use a portion of our cash to acquire or invest in
complementary businesses or products or obtain the right to use complementary
technologies.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. Our operating results have not been sensitive to
changes in the general level of U.S. interest rates, particularly because most
of our cash equivalents are invested in short-term debt instruments. If market
interest rates were to change immediately and uniformly by 10% from levels at
June 30, 1999, the fair value of our cash equivalents would not change by a
significant amount.
Foreign Currency Fluctuations. We have not had any significant transactions
in foreign currencies, nor did we have any significant balances that were due or
payable in foreign currencies at June 30, 1999. Therefore, a hypothetical 10%
change in foreign currency rates would not have a significant impact on our
financial position and results of operations. We do not hedge any of our foreign
currency exposure.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources. Accumulated other comprehensive income at December 31, 1998 is
comprised of unrealized gains on short-term investments of $1,000. The FASB also
issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. We currently operate in one
reportable segment under SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities 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 will be effective for us beginning
in 2001. We believe that this statement will not have a significant impact on
our financial condition and results of operations.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
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We have reviewed the current versions of our products to determine Year
2000 readiness. Based on our review and the results of our tests, we believe
that our products, when configured properly and used in accordance with our
instructions, will function properly during the transition and into the next
century. We have not tested and do not plan to test the Year 2000 compatibility
of prior versions of our products that have not been sold within the last two
years. These products are functionally similar to current products that we have
tested and determined are Year 2000 compliant. Accordingly, based on this
review, we do not believe that there will be any material Year 2000 failures
associated with prior versions of our products.
We have tested third-party software that is used with our products. Despite
testing by us and by customers, and assurances from developers of products sold
to operate with our products, these products may contain undetected errors or
defects associated with the Year 2000 date functions. In addition, because our
products are used in complex computer environments, they may directly or
indirectly interact with a number of other hardware and software systems with
uncertain results. We are unable to predict to what extent our business may be
affected if our products or technologies should experience Year 2000 related
problems. Known or unknown errors or defects that affect the operation of our
products could result in delay or loss of revenues, diversion of development
resources, damage to our reputation or increased service and warranty costs, any
of which could harm our business.
Our internal systems include our information technology systems and
non-information technology systems. We have completed an initial assessment of
our information technology systems and non-information technology systems. We
have purchased the majority of our software and hardware within the last 24
months. Purchases have mostly been the latest software versions and the latest
commercially available hardware. To the extent that we have not tested the
technology provided by third-party vendors, we are seeking assurances from these
vendors that their systems are Year 2000 compliant and anticipate completing
this assessment by November 30, 1999. Vendors of the majority of our software
and hardware have represented the Year 2000 compliance of such products. Based
on our review to date, we have determined that our telephone voice messaging
systems will require an upgrade to be Year 2000 compliant. We are not currently
aware of any material operational issues associated with preparing our
information technology systems and non-information technology systems for the
Year 2000. However, we may experience unanticipated problems or additional costs
caused by undetected errors or defects in the technology used in our internal
information technology systems and non-information technology systems.
We have identified our significant suppliers and service providers to
determine the extent to which we are vulnerable to their failures to address
Year 2000 issues. Many of these suppliers have indicated through publicly
available information or through its Web site that the supplier believes its
applications are Year 2000 compliant. We are seeking written assurances from all
our significant suppliers and anticipate completing this assessment by November
30,1999. We have not yet received any public or written assurances from Kawasaki
LSI. We are continuing to monitor the progress of third parties that are
critical to our business. We cannot be certain that the representations of these
third parties are accurate or that they will reach Year 2000 compliance in a
timely manner. If we determine that the progress of specific suppliers or
service providers toward Year 2000 compliance is insufficient, we intend to
change to other suppliers and service providers that have demonstrated Year 2000
readiness. We may not find alternative suppliers or service providers. In the
event that any of our significant suppliers or significant service providers do
not achieve Year 2000 compliance in a timely manner, and we are unable to
replace them with alternate sources, our business would be harmed.
In addition, governmental agencies, utility companies, third-party service
providers and others outside of our control might not be Year 2000 compliant.
The failure by these entities to be Year 2000 compliant could result in a
systemic failure beyond our control, for example, a prolonged
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telecommunications or electrical failure. We believe the primary business risks,
in the event of these failures, would include:
- loss of telecommunication tools to support our licensees;
- lost revenue;
- increased operating costs; and
- claims of mismanagement, misrepresentation or breach of contract.
To date, we have not incurred any material costs directly associated with
our Year 2000 compliance efforts, except for compensation expense associated
with our salaried employees who have devoted some of their time to our Year 2000
assessment and remediation efforts. We do not expect the total cost of Year 2000
problems to be material to our business, financial condition and operating
results. We have and will continue to expense all costs arising from Year 2000
issues, funding them from working capital.
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BUSINESS
OVERVIEW
We develop and license technologies that enable users to interact with
computers using their sense of touch. While today's standard user interfaces
incorporate advanced graphics and sound capabilities, computers still lack the
ability to present information that users can feel. Our TouchSense feel
technology enables computer peripheral devices such as mice and joysticks to
deliver compelling tactile sensations that correspond to on-screen events. We
are the leading provider of such technologies, and have licensed our
intellectual property to more than 16 companies, including Microsoft, Logitech
and InterAct. We hold 37 U.S. patents covering various hardware and software
solutions and have over 125 patent applications pending in the U.S. and abroad.
We also manufacture and sell specialized peripheral devices in industrial,
medical and scientific markets. Our objective is to proliferate our feel
technology across markets, platforms and applications so that feel becomes as
common as graphics and sound in the modern user interface.
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 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 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, graphics and
audio technologies are standard features of most computer systems.
While most modern computers realistically present information to the senses
of sight and sound, they 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. For example, current computing environments do
not allow online shoppers to feel physical attributes of products prior to
purchase and do not permit students to feel physical concepts like gravity and
magnetism. Software designers strive to develop compelling applications for
users to see and hear, but do not provide applications that users can feel. 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 grabbing 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.
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Like sight and sound, touch is critical for interacting with and
understanding our 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 and license affordable technologies that allow computer users to
touch and feel computer content. In diverse applications like computer gaming,
business productivity, medical simulation and surfing the Web, our technologies
enable software applications to engage a user's sense of touch through common
peripheral devices such as mice, joysticks, steering wheels and gamepads.
Our hardware and software technologies work together to enable peripheral
devices to present touch and feel sensations. Our patented designs include
specialized hardware elements such as motors, control electronics and
mechanisms, which are incorporated into common peripheral devices such as mice
and joysticks. Driven by sophisticated software algorithms, these hardware
elements direct tactile sensations corresponding to on-screen events to the
user's hand. For example, when a feel-enabled mouse is used to lift a "heavy"
object within the computer application, software directs the mouse's motors to
apply resistance to that motion to create a realistic simulation of weight. By
contrast, when the cursor is moved against a "soft" object, the motors apply
gradations of force to simulate the soft compliance of the object.
Key benefits of our solution include:
Complete Solution. We offer a complete technical solution to peripheral
device manufacturers and to software and Web developers. Our technologies allow
manufacturers to design high-quality feel-enabled peripheral devices such as
mice, joysticks, steering wheels and gamepads at a reasonable cost and in a
reasonable time frame. Our software automatically enables users to feel the
basic user interface features of software applications running on Windows 98
without additional developer support. Our software also 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 feel
sensations into their own applications.
Compatible with Industry Standards. We have designed our hardware and
software technologies to be compatible with leading hardware and software
standards. Our technologies operate across multiple platforms and comply with
such standards as DirectX, Microsoft's entertainment application programming
interface, and USB (Universal Serial Bus).
Cost-Effective Solution. We have developed component technologies that
permit peripheral device manufacturers to design and manufacture feel-enabled
peripheral devices 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 to 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 scientific or engineering principle or
the physical response of an object in a simulated gaming environment.
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Improves User Productivity in Cursor Manipulation Tasks. Computer users
routinely select items on the screen using a cursor. This task involves
precisely positioning a cursor on a desired target like a menu or a hyperlink,
and then pressing a button to indicate that the target should be selected. With
a traditional mouse, users can confirm only through visual feedback that the
correct item has been selected. This task demands significant visual attention,
slows execution and distracts the user from other activities. With a
feel-enabled mouse, the user can feel each encounter between the cursor and an
item on the screen. For example, the edge of a window feels like a groove carved
into a desktop; when the cursor slides into the groove, users feel a distinct
physical engagement. Users interpret these sensations intuitively because of
their similarity to real-world encounters. When selecting icons, scrolling
through a menu or clicking on a hyperlink on a Web page, the ability to feel the
encounter greatly facilitates interaction.
LOGO
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 software applications more interesting, engaging and satisfying.
Products incorporating our intellectual property have already gained acceptance
in the computer gaming market, and we believe that our technologies will
increase user satisfaction across many additional applications, including
business productivity, engineering, education and e-commerce.
Enhances the Effectiveness of Simulation and Training Applications. Some
computer applications, such as medical training, 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 technologies increase the
effectiveness of these systems by providing tactile feedback that simulates what
a doctor would feel when performing an actual procedure. Our technologies are
used in training systems for laparoscopic surgery, endoscopic surgery and
catheter insertion.
STRATEGY
Our objective is to proliferate our TouchSense feel technology across
markets, platforms and applications so that feel becomes as common as graphics
and sound in the modern computer interface. We intend to maintain and enhance
our position as the leading provider of feel technology in consumer markets by
employing the following strategies:
Pursue A Royalty-Based Licensing Model. We believe that the most effective
way to proliferate our feel technology is to license our intellectual property
to computer peripheral device manufacturers. We have licensed our intellectual
property to manufacturers of joysticks and steering wheels targeted at game
consumers and have recently licensed our intellectual property to Logitech for
the manufacture of feel-enabled computer mice. We have also licensed our
intellectual property to companies that make industrial products, such as
medical simulation hardware and arcade systems. We intend to expand the number
and scope of our licensing relationships and expect that licensing royalties
will constitute an increasingly significant portion of our revenues in the
future.
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Facilitate Development of Feel-Enabled Products. We will continue to devote
significant resources to facilitate development by our manufacturing licensees
of feel-enabled products. 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 feel-enabled
products, we sell 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 a particular emphasis on reducing
the cost of feel-enabled products.
Expand Software Support for Our Feel Technology. In addition to licensing
our technologies to computer peripheral device manufacturers and supporting
their product development efforts, we have focused on expanding software support
for our feel technology. We have developed software that enables users to
automatically feel icons, menus and other objects in software running in Windows
98 applications or on Web pages. We offer specialized authoring tools that
simplify adding feel to software applications and Web pages. We also are
promoting an efficient file format, called ".ifr," to facilitate the creation
and storage of custom feel sensations.
Utilize the Internet to create market demand for feel-enabled products. We
believe that adding feel sensations to Web pages will provide on-line
advertisers with a new means to attract and keep customers on their sites. We
intend to promote this benefit to Web developers and to encourage them to
incorporate feel content into their Web pages. When software developers add feel
content to a Web site using our FEELtheWEB Designer authoring tool, they are
required by license to include an active link from their Web page to our site
www.immersion.com. We are modifying our Web site to enable users to buy
feel-enabled products by linking our Web site to our licensees' Web sites, such
as Logitech's e-commerce site www.buylogitech.com.
Expand Market Awareness. We promote adoption of our feel 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 feel content to their applications by
providing them with our authoring tools and technical support. As part of our
license agreements, we require our licensees to use our trademarks and logos to
create brand awareness among consumers. We intend to devote significant
resources in the future to expand market awareness of our feel technology and
our brands.
Secure Licensees in New Markets for Feel Technology. We believe that our
feel technology can be used in virtually all areas of computing. We initially
focused on the computer entertainment market where we have experienced rapid
acceptance of our technologies by key licensees. We have recently broadened our
focus to include mainstream computing and have licensed our technologies for use
in feel-enabled computer mice. We intend to expand our market opportunities by
addressing new platforms such as dedicated game consoles and set-top boxes,
small computer appliances that plug into a television set enabling it to access
the Internet.
Develop and Protect Feel Technology. We hold 37 U.S. patents and have more
than 125 patent applications pending in the U.S. and abroad covering our feel
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.
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MARKET APPLICATIONS
While we believe that our technologies are broadly applicable, we are
focusing our initial marketing and business development activities on the
following target markets:
Computer Entertainment. We initially introduced our feel technology for
consumer gaming peripherals in 1996 and branded this technology under the name
I-FORCE. We have licensed our I-FORCE technology to 16 manufacturers, including
Logitech, Microsoft and InterAct. According to PC Data, feel-enabled joysticks
accounted for approximately 3% of domestic PC joystick sales by unit volume in
1997 and doubled to approximately 6% of the domestic PC joystick sales by unit
volume in 1998. In addition, we have developed I-FORCE technologies for gaming
applications in arcade and location-based entertainment markets. We intend to
expand our I-FORCE licensing business to include new product categories for the
PC platform, such as gamepads, which are hand-held controllers for gaming
consoles, and flight yokes, which are game controllers that simulate the
controls of an airplane, and to target additional gaming platforms.
Mainstream Computing. In order to bring feel technology to every desktop,
we have targeted the computer mouse market. To address this large opportunity,
we developed FEELit, a feel 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 will manufacture mice incorporating our feel
technology. We plan to expand the FEELit licensing business with new types of
controllers and platforms.
Medical and Other Professional Computing. We have identified and addressed
demand for our feel technology in various industrial, medical and scientific
markets. We currently have both product manufacturing and product licensing
business relationships in these markets.
TECHNOLOGY LICENSING AND PRODUCTS
Technology Licensing
We currently license our intellectual property to manufacturers that
produce peripheral devices incorporating our feel technology. In general, our
licenses permit manufacturers to produce only a particular category of product
within a specified field of use. We recently introduced our TouchSense brand
which covers all of our feel technologies. We grant licenses for gaming
products, such as joysticks, steering wheels and game pads, under the I-FORCE
brand. We grant licenses for cursor control products, such as mice or
trackballs, and for our medical simulation devices under the FEELit brand. We
make our reference designs available to our licensees for an additional fee. A
reference design is a package consisting of a technology binder, an electronic
database and a hardware prototype that can be used in the development of a
feel-enabled product.
Our basic licensing model includes a per unit royalty paid by the
manufacturer that is a percentage of the wholesale selling price of the
feel-enabled product. In addition, each licensee
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must abide by a branding obligation. The prominent display of I-FORCE and FEELit
logos on retail packaging generates customer awareness for our technologies.
I-FORCE.LOGO FEELit.LOGO
Consumer Products. We license joysticks and steering wheel gaming peripherals
targeted at the PC platform. Currently, there are three consumer joysticks sold
under the I-FORCE brand: the Wingman Force Feedback Joystick from Logitech, the
Sidewinder Force Feedback Joystick from Microsoft and the Force-FX Joystick from
CH Products. Currently, there are ten I-FORCE steering wheel gaming peripherals
licensed under the I-FORCE brand, including the Wingman Formula Force from
Logitech, the Force GT from Thrustmaster, the Sidewinder Force Feedback Wheel
from Microsoft and the V4 Force Feedback Racing Wheel and FX Force Feedback
Racing Wheel from InterAct.
Logitech has announced that it will ship the first computer mouse
incorporating our feel technology in late 1999. This mouse, to be called the
Wingman Force Feedback Mouse, will automatically allow users to feel many of the
basic desktop controls in Windows 98 and standard interface elements of Web
pages and will be marketed with an entertainment focus.
Medical Products. We license our feel technology to HT Medical Systems for
use in three medical simulation products, CathSim, PreOp Endoscopic Simulator
and PreOp Endovascular Simulator. 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.
Arcade and Location-Based Entertainment Products. In order to help increase
consumer awareness of feel technology in gaming applications, we license our
feel technology to manufacturers of joystick and steering wheel arcade units.
Software and Developer Products
Demand for feel-enabled computer peripheral devices 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 feel-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 the mouse, and which
automatically adds feel to many of the basic Windows 98 controls. Second, we
have developed and provide to developers and end users software authoring tools
that help programmers add feel content to software applications and web pages.
We have developed an efficient file format, called an ".ifr" file, for
representing, storing and transmitting feel sensations. This file format allows
the development of feel sensation libraries that facilitate the development of
feel-enabled applications software.
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Automatic Support
- FEELit Desktop adds feel to many of the basic Windows 98 controls, such
as icons, menus, buttons, sliders and windows. It immediately makes any
application running under Windows 98 more interesting and enhances
productivity during mouse use. It includes a control panel that gives
users the ability to customize the feel of their desktop. We expect that
this product will be bundled with each feel-enabled mouse.
- FEELtheWEB adds feel to web pages accessed through Internet Explorer and
Netscape Navigator. In conjunction with FEELit Desktop, it allows users
to feel the standard interface elements of Web pages such as hyperlinks,
check boxes and menus. It also allows users to feel custom sensations
that have been added to Web pages. We expect that this product will be
bundled with each feel-enabled mouse.
Authoring Tools
- I-FORCE Studio is a fully animated graphical environment that allows game
developers to design feel sensations for their software titles by
adjusting physical parameters and feel sensations. Each software file
describing the feel sensation that a developer creates can be saved into
an ".ifr" file and then can be quickly inserted into gaming applications
and Web pages during the development process. We currently sell I-FORCE
Studio to developers for $19.95.
- FEELit Studio is an authoring tool that allows developers of mainstream
productivity, Web and gaming software to design feel sensations into
their software titles. Like I-FORCE Studio, it employs an intuitive
graphical interface that allows feel sensations to be designed rapidly,
implemented and saved as ".ifr" files. We currently distribute FEELit
Studio to developers and end users free of charge.
- FEELtheWEB Designer is an easy-to-use authoring tool that allows Web
developers to add feel sensations to Web pages. They can load any HTML
Web page into the tool and modify it to support feel sensations. We
currently make FEELtheWEB Designer available to developers and end users
free of charge.
Custom Microprocessors
Many feel-enabled peripheral devices utilize commercially available
microprocessors which process instructions needed to deliver force sensations to
the user. These microprocessors have not been optimized for feel-enabled
products. We develop, license and sell custom microprocessors to support the
requirements of our feel technology in gaming and PC peripheral products. 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.
We have invested in this technology because we believe it is important as
an enabling technology for low-cost feel-enabled devices. By incorporating
commonly used components on a single piece of silicon, our microprocessors
reduce the number of discrete components required on a printed circuit board and
can help lower overall system costs for our licensees. This level of integration
simplifies the manufacture of feel-enabled products while increasing performance
and reliability.
Specialty Products
Medical Simulation and Other Medical Equipment. We have developed numerous
technologies that can be used for medical training and simulation. By allowing
computers to deliver feel sensations to users, our technologies can support
realistic simulations that are effective in teaching
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medical students and doctors what it feels like to perform a given procedure.
Currently, we manufacture and sell a number of low volume specialized medical
products, including:
- Virtual Laparoscopic Interface, a fully integrated tool designed to let
developers, researchers and educators simulate minimally invasive
surgical procedures;
- Laparoscopic Impulse Engine, a three-dimensional interface for virtual
reality simulations of laparoscopic and endoscopic surgical procedures
that allows users to feel actual surgical tools as if they were
performing these procedures;
- PinPoint, a stereotactic arm manufactured for Picker International, Inc.,
which is integrated with Picker CT scanners to enable image-guided
biopsies and radiation therapy; and
- Endoscopic Sinus Surgery Simulation Trainer, an electro-mechanical system
that recreates an operating room environment to simulate endoscopic
procedures.
Arcade and Location-Based Entertainment Products. We manufacture versions
of force feedback joysticks and steering wheel products with enhanced durability
for the arcade and location-based entertainment markets. We sell these products
directly to prominent entertainment companies that operate entertainment
centers.
MicroScribe-3D. Our MicroScribe-3D product allows users to create
three-dimensional computer models directly from physical objects. It contains
sensor and microprocessor technologies that allow users to digitize physical
objects simply by tracing their contours with a stylus. The computer records the
three-dimensional geometry of the object and reproduces it on the screen as a
three-dimensional computer model. MicroScribe-3D is designed to support the
needs of game developers, engineers, animators, film makers, industrial
designers and other professionals who need to create realistic three-dimensional
computer images quickly and easily.
Softmouse. We also manufacture a high performance non-feel-enabled mouse
for geographic information systems and the map-making industry. This product has
a two-handed interface with ten buttons and a rotary thumbwheel. We currently
sell this product to several major manufacturers, including Intergraph, Vision
International and LH Systems. End users of Softmouse include the U.S. Geological
Survey, NASA and the U.S. Department of Defense.
TECHNOLOGY
Feel simulation, also known as force feedback, haptic feedback or force
reflection, refers to the technique of adding feel sensations to computer
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. Feel-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 feel-enabled device, such as a mouse, motors within
the device apply computer modulated forces that either resist or assist 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 mouse, motors within the mouse apply forces
that simulate the feel of encountering the wall. As the user moves the mouse 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.
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FEEL-ENABLED PRODUCT ARCHITECTURE
[DIAGRAM]
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 or a
telephone. Textures can be added to these complex surfaces so that the
windshield of the sportscar feels smooth and its tires feel rubbery.
To simplify the process of generating feel sensations, we have developed a
parallel processing architecture in which a dedicated processor resides within
the peripheral device and performs the complex mathematics. The dedicated
processor offloads the processing burden from the host computer. This
distributed processing architecture, along with specialized software, provides a
software developer with an easy-to-use high-level application programming
interface that abstracts feel programming into a perceptual rather than
mathematical level. The application programming interface allows programmers to
define and initiate feel sensations with software routines that have descriptive
physical names such as "wall," "vibration" or "liquid." Programmers can easily
adjust multiple parameters to customize different types of sensations.
We have developed two application programming interfaces, one for gaming
markets and one for productivity markets. The gaming application programming
interface is called the I-FORCE API. The productivity application programming
interface is called the FEELit API. Both allow software developers to
incorporate feel sensations into software applications quickly. In 1997,
Microsoft included support for our I-FORCE API into DirectX, Microsoft's
standard gaming device application programming interface for the Windows
platform.
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. Feel-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). The
computer and the device need to communicate quickly in order to present
realistic sensations.
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We have developed efficient processing techniques to minimize the amount of
information that needs to be communicated between the computer and the
peripheral. We use dedicated processors in the device to produce feel sensations
in response to high-level commands from the computer. Our control architecture
has the added benefit of performing force feedback computations in parallel with
the computer's execution of a software application.
SALES, MARKETING AND SUPPORT
We establish licensing relationships and sell a number of our products
through our direct sales efforts. We also sell some of our products indirectly
through distributors and value-added resellers.
Consistent with our intellectual property licensing strategy, 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, provide product information over our Web site and advertise in
entertainment and game industry publications.
Another focus of our marketing efforts is to promote the adoption of our
feel technology by software and Web developers to facilitate the implementation
of feel sensations into software applications. We have developed the Feel
Foundation Classes Software Development Kits, which contain our software
authoring tools, as well as documentation, tutorials and software files
containing sample feel 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 feel-enabled
applications. We provide sample feel sensations to developers through our Web
site and through our I-FORCE Studio and FEELtheWEB Designer authoring tools. We
intend to devote substantial resources to supporting software developers and Web
page designers in the creation of feel-enabled software applications, including
hiring additional software engineers and other technical personnel.
We anticipate allocating substantially more resources to sales and
marketing to proliferate our technology and to support the sales of our licensed
products. To date, we have not focused on marketing to end users of our
licensees' products. However, we believe that it is important to increase
awareness of our feel technology among potential end users. As part of our
strategy to increase our visibility and promote our feel technology, our license
agreements generally require our licensees to display the TouchSense, I-FORCE or
FEELit logos on licensed products they distribute. In addition, we intend to
substantially increase our advertising and marketing efforts to end users.
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 feel technology
development, including mechanical engineering, electrical engineering and
computer science.
Our research and development expenses were approximately $710,000 in 1996,
$1.5 million in 1997, $1.8 million in 1998 and $1.1 million in the six months
ended June 30, 1999. 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. Although we expect to continue to invest
substantially in research and development activities, we expect government
sponsored research activity to decline.
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<PAGE> 44
COMPETITION
We are aware of several companies that claim to possess feel technology
applicable to the consumer market, but we do not believe that these companies or
their licensees have introduced feel-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 feel 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 developing computer peripheral technologies that
do not make use of our feel technology.
Our competitive position is partially dependent on our licensees'
competitive positions. 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. Feel-related benefits may be viewed
simply as enhancements, and products incorporating our feel technology might
face competition from computer peripheral devices that are not feel-enabled as
well as from peripheral devices that use simple vibration technology, sometimes
referred to as "dual shock" or "rumble shock."
Semiconductor companies, including Intel and Mitsubishi, manufacture
products that compete with the I-FORCE and FEELit processors but which have not
been optimized specifically for feel technology. We are not aware of any
companies that currently produce optimized feel processors.
There are several companies that currently sell high-end simulation
products that compete with our professional and medical products. The principal
bases for competition in these markets are technological sophistication and
price. We believe we compete favorably on these bases.
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.
We hold 37 U.S. patents and have more than 125 pending patent applications,
both domestic and foreign, covering feel technology. These patents and patent
applications cover a variety of hardware and software innovations relating
primarily to force feedback. Our current U.S. patents expire between the years
2011 and 2016. 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 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 we regard as proprietary. 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
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<PAGE> 45
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. Between May 1995 and June 1999, we received four
such letters. 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 against us, 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.
From time to time, we initiate claims against third parties that we believe
infringe our intellectual property rights. To date, these claims have not led to
any litigation. However, any litigation 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 assets.
EMPLOYEES
As of September 30, 1999, we had 54 full-time employees, including 25 in
research and development, 11 in sales and marketing and 18 in finance,
administration and operations. As of that date, we also employed one independent
contractor and five temporary seasonal employees. 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.
FACILITIES
We have 16,280 square feet of office space in San Jose, California. Our
lease for this building expires on October 31, 2002. We anticipate that we may
need to add office space over the next year in order to accommodate new
employees.
LEGAL MATTERS
We are not currently involved in any legal or arbitration proceedings, nor
have we been involved in any such proceedings during the past 12 months.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The following table sets forth information regarding our executive
officers, directors and other key employees as of September 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Louis Rosenberg, Ph.D.................... 30 Chairman of the board, President and Chief
Executive Officer
Victor Viegas............................ 42 Vice President, Finance and Chief Financial
Officer
J. Stuart Mitchell....................... 46 Vice President, Business Development
Bruce Schena............................. 35 Vice President, Chief Technology Officer,
Secretary and Director
Jennifer Saffo........................... 45 Vice President, Marketing
Kenneth Martin........................... 34 Director of Product Development
Steven Blank............................. 45 Director
Jonathan Rubinstein...................... 42 Director
KEY EMPLOYEES
Richard Abramson......................... 43 Director of Litigation and Intellectual Property
Adam Braun............................... 28 Director of Embedded Systems
Dean Chang, Ph.D......................... 32 Director of Platforms and Applications
Craig Factor............................. 31 General Counsel
Timothy Lacey............................ 29 Vice President, Operations
Michael Levin............................ 34 Director of Professional and Industrial Products
</TABLE>
Dr. Louis Rosenberg is a founder of Immersion and has served as Chairman of
our board of directors and as President and Chief Executive Officer since May
1993. 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.
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 Vice President, Business
Development since August 1999. 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.
Mr. Bruce Schena has served as our Vice President, Chief Technology
Officer, Secretary, and a member of our board of directors since January 1995.
Since April 1997, Mr. Schena has also served
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<PAGE> 47
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.
Ms. Jennifer Saffo has served as our Vice President, Marketing since July
1999. From January 1991 to July 1999, Ms. Saffo owned and operated a sole
proprietorship marketing company delivering strategic marketing advice to
Internet and software companies. From 1987 to 1990, Ms. Saffo served as director
of marketing for Adobe Systems, Inc., a technology licensing desktop publishing
and graphics software company. From 1984 to 1987, Ms. Saffo was a founder and
director of Aldus Corporation, a desktop publishing company and from 1981 to
1984, served as national accounts manager at Microsoft Corporation, a software
company. Ms. Saffo holds a bachelor of arts degree in linguistics from
University of Colorado, Boulder.
Mr. Kenneth Martin has served as our Director of Product Development since
April 1996. From June 1994 to April 1996, Mr. Martin served as a design engineer
at IDEO Product Development Inc., a product design company. Since 1994, Mr.
Martin also has served as a lecturer in the design division in 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. Steven Blank has served as a member of our board of directors since
October 1996. From November 1996 to August 1999, Mr. Blank served as executive
vice president of marketing for E.piphany Marketing, an enterprise software
company which Mr. Blank Co-founded. From February 1993 to October 1996, he
served as chief executive officer of Rocket Science Games, a video game software
company.
Mr. Jonathan Rubinstein has served as a member of our board of directors
since October , 1999. From February 1997 to present, Mr. Rubinstein has served
as senior vice president of Hardware Engineering at Apple Computer, Inc., a
personal computer company. From August 1993 to August 1997, Mr. Rubinstein was
executive vice president and chief operating officer of Fire Power Systems, a
developer and manufacturer of Power PC-based computer systems. Mr. Rubinstein
has a masters and bachelors of science degree in electrical engineering from
Cornell University and a master of science degree in computer science from
Colorado State University.
Mr. Richard Abramson has served as our Director of Litigation and
Intellectual Property since February 1999. Since 1998, Mr. Abramson also has
served as an adjunct professor at the University of California at Berkeley,
Boalt Hall School of Law. From September 1991 to February 1999, Mr. Abramson was
a litigation partner at the law firm of Heller Ehrman White & McAuliffe,
specializing in patent and other intellectual property litigation. From August
1984 to 1991, Mr. Abramson was a litigation associate and partner at the law
firm of Irell & Manella. Mr. Abramson holds a bachelor of arts degree from
Claremont McKenna College and a juris doctorate degree from the University of
California at Berkeley, Boalt Hall School of Law.
Mr. Adam Braun has served as our Director of Embedded Systems since
September 1995. From May 1994 to September 1995, Mr. Braun was an embedded
systems engineer at Autonomous Effects Inc., a consulting company. Mr. Braun
holds a bachelor of science degree in mechanical engineering from Brown
University and a master of science degree in mechanical engineering from
Stanford University.
Dr. Dean Chang has served as our Director of Platforms and Applications
since July 1995. From 1989 to July 1995, Dr. Chang was completing his master of
science and doctorate degrees at Stanford University. Dr. Chang holds a bachelor
of science degree from the Massachusetts Institute of Technology and master of
science and doctorate degrees in mechanical engineering from Stanford
University.
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<PAGE> 48
Mr. Craig Factor has served as our General Counsel since September 1997.
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.
Mr. Timothy Lacey is a founder of Immersion and has served as our Vice
President, Operations since August 1999. From May 1993 to August 1999, Mr. Lacey
served as our chief financial officer and from May 1993 to October 1999 as a
member of our board of directors. Since April 1997, Mr. Lacey has served as a
manager of MicroScribe LLC, a licensing company in which we hold a membership
interest. Mr. Lacey holds bachelor of science and master of science degrees in
mechanical engineering from Stanford University.
Mr. Michael Levin has served as our Director of Professional and Industrial
Products since July 1995. From July 1990 to May 1995, Mr. Levin served as
manager of automation at Merck & Co., Inc., a pharmaceutical company. Mr. Levin
holds a bachelor of science degree in aeronautics and astronautics and a master
of science degree in mechanical engineering from Massachusetts Institute of
Technology.
BOARD COMPOSITION
Our board of directors currently consists of four members. Our board of
directors is divided into three classes, with each director serving a three-year
term and one class being elected at each year's annual meeting of stockholders.
Messrs. Blank and Schena will be in the class of directors whose term expires at
the 2000 annual meeting of stockholders. Mr. Rubinstein will be in the class of
directors whose term expires at the 2001 annual meeting of stockholders. Dr.
Rosenberg will be in the class of directors whose term expires at the 2002
annual meeting of stockholders.
ELECTION OF DIRECTORS AND EXECUTIVE OFFICERS
At each annual meeting of the stockholders, the successors to each class of
directors will be elected to serve for three year terms from the time of
election and qualification until the next annual meeting at which the director's
class stands for election.
Executive officers are elected by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified. There are
no family relationships among any of our directors or officers.
BOARD COMMITTEES
Audit Committee. The board of directors has established an audit committee
consisting of Mr. Blank and Mr. Rubinstein. The audit committee reviews with our
independent auditors the scope and timing of their audit services and any other
services that they are asked to perform, the auditors' report on our
consolidated financial statements following completion of their audit, and our
policies and procedures with respect to internal accounting and financial
controls. In addition, the audit committee makes annual recommendations to our
board of directors regarding the appointment of independent auditors for the
upcoming year.
Compensation Committee. The board of directors has established a
compensation committee consisting of Mr. Blank and Mr. Rubinstein. The
compensation committee makes recommendations to the board concerning salaries
and incentive compensation for our officers and employees and administers our
employee benefit plans.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors. Under our 1997 stock option plan, nonemployee directors are eligible
to receive stock option grants at the
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<PAGE> 49
discretion of the board of directors. In November 1996, we issued an option to
purchase 80,700 shares of common stock at an exercise price of $0.17 per share
to Mr. Blank. This option contains a provision providing Mr. Blank with the
right to maintain his percentage interest of stock in our company. This right
will terminate upon the closing of this offering. Pursuant to this provision, we
have granted to Mr. Blank additional options to purchase shares of our common
stock as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT EXERCISE PRICE
DATE OF GRANT TO OPTION PER SHARE
------------- -------------- --------------
<S> <C> <C>
June 18, 1997 18,157 $0.25
December 12, 1997 6,052 0.37
March 16, 1998 20,336 1.24
April 22, 1999 20,175 3.66
June 21, 1999 3,228 3.66
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
None of the members of our compensation committee has at any time since our
formation been one of our officers or employees. None of our executive officers
currently serves or in the past has served as a member of a compensation
committee or board of directors of any other entity that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table presents information
concerning compensation received during the year ended December 31, 1998 by our
chief executive officer and each of our two other executive officers whose total
salary and bonus earned during that year exceeded $100,000. In accordance with
the rules of the Securities and Exchange Commission, the compensation described
in this table does not include perquisites and other personal benefits received
by these executive officers that do not exceed the lesser of $50,000 or 10% of
the total salary and bonus reported for these officers.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY OPTIONS(#)
---------------------------- ------------ ------------
<S> <C> <C>
Louis Rosenberg, Ph.D. ..................................... $138,615 72,465
President and Chief Executive Officer
Bruce Schena................................................ 121,683 22,819
Vice President, Chief Technology Officer and Director
Timothy Lacey............................................... 107,628 26,210
Chief Financial Officer and Director
</TABLE>
Mr. Lacey was serving as our chief financial officer as of December 31,
1998. In August 1999, Mr. Lacey resigned as our chief financial officer and was
appointed vice president, operations.
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<PAGE> 50
Option Grants in Fiscal Year Ended December 31, 1998. The following table
presents information with respect to stock options granted during 1998 to our
executive officers listed in the summary compensation table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE TERM
OPTIONS TO EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED(#) DURING PERIOD ($/SHARE) DATE 5% 10%
---- ---------- ---------------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Louis Rosenberg, Ph.D.... 605 0.14% $0.68 02/24/03 $ 9,443 $ 15,281
605 0.14 0.68 03/03/03 9,443 15,281
1,210 0.29 1.36 03/24/03 18,064 29,739
403 0.10 1.36 03/31/03 6,016 9,905
1,210 0.29 1.36 04/15/03 18,064 29,739
63,591 15.05 1.36 03/16/08 949,347 1,562,903
1,210 0.29 0.41 01/15/03 19,214 30,888
3,631 0.86 4.02 11/06/03 44,549 79,582
Bruce Schena............. 605 0.14 0.62 02/24/08 9,480 15,317
605 0.14 0.62 03/03/08 9,480 15,317
21,004 4.97 1.24 03/16/08 316,088 518,745
605 0.14 3.66 11/06/08 7,641 13,478
Timothy Lacey............ 26,210 6.20 1.36 03/16/03 391,288 644,174
</TABLE>
The potential realizable value represents the hypothetical gains of the
options granted based on assumed annual compound stock appreciation rates of 5%
and 10% over an assumed initial public offering price of $10.00. The 5% and 10%
assumed annual rates of stock price appreciation are required by the rules of
the Securities and Exchange Commission and do not represent our estimate or
projection of future common stock prices.
In 1998, we granted options to purchase an aggregate of 422,406 shares to
employees.
The exercise price of each option granted to Dr. Rosenberg and Mr. Lacey
was equal to 110% of the fair market value of the common stock on the date of
grant as determined by the board of directors.
Dr. Rosenberg's option to purchase 63,591 shares of common stock vests as
to 1/24 of the shares per month for 24 months. Dr. Rosenberg's option to
purchase 605 shares with an expiration date of February 24, 2003 and option to
purchase 1,210 shares with an expiration of January 15, 2003 are fully vested.
His remaining options vest as to 1/12 of the shares per month for 12 months.
Mr. Schena's option to purchase 21,004 shares of common stock vests as to
1/24 of the shares per month for 24 months. His remaining options vest as to
1/12 of the shares per month for 12 months.
Mr. Lacey's option to purchase 26,210 shares of common stock vests as to
1/24 of the shares per month for 24 months.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Values. The following table presents information for our executive officers
listed in the summary compensation table concerning option exercises during 1998
and the value of exercisable and unexercisable options held as of December 31,
1998 by these officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1998(#) DECEMBER 31, 1998($)
ACQUIRED ON REALIZED ----------------------- ------------------------
NAME EXERCISE(#) ($) VESTED UNVESTED VESTED UNVESTED
---- ----------- ---------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Louis Rosenberg, Ph.D.............. 129,120 $1,286,035 985,210 91,089 $9,658,603 $832,384
Bruce Schena....................... 80,700 803,772 399,626 34,909 3,937,199 326,982
Timothy Lacey...................... 250,947 2,488,859 150,864 35,684 1,454,034 329,345
</TABLE>
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The value realized upon exercise of options is calculated based on an
assumed initial public offering price of $10.00 less the exercise price. It does
not necessarily indicate that the option holder sold the stock for the amount
listed. The value of unexercised in-the-money options represents the positive
difference between the exercise price of the stock options and an assumed
initial public offering price of $10.00.
CHANGE OF CONTROL AND EMPLOYMENT ARRANGEMENTS
The options granted to Mr. Viegas may accelerate in the event of a change
in our control, if he resigns due to a material reduction in his duties or if we
move his principal office more than 60 miles from San Jose. If the event occurs
within 18 months of his start date, vesting will be accelerated by 12 months and
if the event occurs more than 18 months after his start date, 50% of the
unvested shares will become vested. In addition, if we terminate Mr. Viegas'
employment other than for cause, we will pay him a severance payment equal to 6
months of base salary (or, if lesser, the number of months before he finds other
employment) and his options will also accelerate. If the termination occurs
before the first anniversary of his start date, 37.5% of the shares will become
vested, and if the termination occurs after his first anniversary but within 18
months of his start date, vesting will be accelerated by 12 months.
The options granted to Mr. Mitchell may accelerate in the event of a change
in our control that results in his termination of employment, if he resigns due
to a material reduction in his duties or if we move his principal office more
than 60 miles from San Jose within 12 months of his start date. If one of the
events occurs, vesting will be accelerated by 12 months. In addition, if we
terminate Mr. Mitchell's employment other than for cause, we will pay him a
severance payment equal to 3 months of base salary (or, if lesser, the number of
months before he finds other employment) and the vesting of his options will be
accelerated by 3 months.
The options granted to Ms. Saffo may accelerate in the event of a change in
our control that results in her termination employment, if she resigns due to a
material reduction in her duties or if we move her principal office more than 60
miles from San Jose within 12 months of her start date. If one of the events
occurs, vesting will be accelerated by 12 months. In addition, if we terminate
Ms. Saffo's employment other than for cause, we will pay her a severance payment
equal to 3 months of base salary (or, if lesser, the number of months before she
finds other employment) and the vesting of her options will be accelerated by 3
months.
Our 1994 stock option plan provides that, in the event of a change in
control, our board of directors may either:
- arrange with the acquiring corporation that outstanding options be
assumed or that equivalent options be substituted by the acquiring
corporation; or
- provide that any unexercisable or unvested portion of the outstanding
option shall be immediately exercisable and vested in full.
The options terminate if they are not assumed, substituted or exercised prior to
a change of control.
EMPLOYEE BENEFIT PLANS
1997 Stock Option Plan. Our 1997 stock option plan was adopted by our board
of directors in June 1997 and approved by our stockholders in July 1997. The
stock option plan was amended in July 1999. We are authorized to issue under
this plan up to 3,166,793 shares of common stock. The number of shares may be
increased with the approval of our stockholders. In addition, independent of
stockholder and board approval, the share reserve will automatically be
increased on January 1 of each year beginning on or after January 1, 2001 by an
amount equal to 5% of the number of shares of our common stock which were issued
and outstanding on the last day of the preceding year. The 1997 option plan is
currently administered by the board of directors. The plan allows
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<PAGE> 52
grants of incentive stock options, within the meaning of Section 422 of the
Internal Revenue Code of 1986, to employees, including officers and employee
directors. In addition, it allows grants of nonstatutory stock options to
employees, non-employee directors and consultants. Incentive stock options may
not be granted after June 2007, although the plan may be terminated sooner by
the board of directors.
The exercise price of incentive stock options granted under the 1997 stock
option plan must not be less than the fair market value of the common stock on
the date of grant. In the case of nonstatutory stock options, the exercise price
must not be less than 85% of fair market value. With respect to any option
holder who owns stock representing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option must be equal to at least 110% of the fair market value of the
common stock on the date of grant, and the term of the option may not exceed
five years. The terms of all other options may not exceed ten years. The
aggregate fair market value of the common stock for which an incentive stock
option may become exercisable for the first time may not exceed $100,000 in any
calendar year. The fair market value will be determined as of the date of the
option grant. The board of directors or any committee administering the 1997
stock option plan has discretion to determine exercise schedules and vesting
requirements, if any, of all options granted under the plan. In the event of a
change in control, the acquiring or successor corporation may assume or
substitute for the outstanding options granted under our 1997 stock option. The
outstanding options will terminate to the extent that they are neither exercised
nor assumed or substituted for by the acquiring or successor corporation.
As of September 30, 1999, 304,276 shares of common stock had been issued
upon exercise of options outstanding under this plan. Options to purchase
2,846,923 shares of common stock, at a weighted average exercise price of $4.76,
were outstanding, while 15,594 shares remained available for future grants.
1994 Stock Option Plan. Our 1994 stock option plan was adopted by our board
of directors in August 1994 and approved by our stockholders in August 1994.
Prior to the adoption of the 1997 stock option plan, a total of 2,381,330 shares
of common stock were reserved for issuance under the 1994 stock option plan. In
July 1997, upon the adoption of the 1997 stock option plan, our board of
directors terminated the 1994 stock option plan. While no additional options
will be granted under that plan, options to purchase 1,149,217 shares of common
stock are outstanding and remain subject to the provisions of the 1994 stock
option plan. The plan is administered by the board of directors.
The 1994 stock option plan allowed the grant of incentive stock options and
nonstatutory stock options. The exercise price of incentive stock options
granted under the plan had to be at least equal to the fair market value of the
common stock on the date of grant. With respect to any option holder who owned
stock representing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any stock option had to be at
least equal to 110% of the fair market value of the common stock on the date of
grant and the term of the option may not exceed five years. The terms of all
other options could not exceed ten years. The aggregate fair market value of the
common stock for which an incentive stock option may become exercisable for the
first time may not exceed $100,000 in any calendar year. In the event of a
change in control, our board of directors may either:
- arrange with the acquiring corporation that outstanding options be
assumed or that equivalent options be substituted by the acquiring
corporation; or
- provide that any unexercisable or unvested position of the outstanding
option be immediately exercisable and vested in full.
The outstanding options will terminate to the extent that they are neither
exercised nor assumed or substituted for by the acquiring or successor
corporation.
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<PAGE> 53
As of September 30, 1999, 1,232,099 shares of common stock had been issued
upon exercise of options outstanding under this plan. Options to purchase
1,149,217 shares of common stock, at a weighted average exercise price of $0.10,
were also outstanding.
1999 Employee Stock Purchase Plan. In August 1999, our board of directors
adopted, subject to approval by our stockholders, our 1999 employee stock
purchase plan. We have reserved a total of 500,000 shares of common stock for
issuance under the 1999 employee stock purchase plan, none of which has been
issued as of the effective date of this offering. The share reserve will
automatically be increased on January 1, 2001 and on each subsequent January 1
through January 1, 2010, by 500,000 shares per year or a lesser number of shares
determined by our board of directors.
The employee stock purchase plan is intended to qualify under Section 423
of the Internal Revenue Code. Employees, including officers and employee
directors, of us or any subsidiary designated by the board for participation in
the plan are eligible to participate in the plan if they are customarily
employed for more than 20 hours per week and more than five months per year.
Eligible employees may begin participating at the start of any offering period.
The first offering period will run for approximately 24 months and will be
divided into four consecutive purchase periods of approximately six months. The
first offering period and the first purchase period will commence on the date of
this offering. The first offering period will terminate on the last day of
January 2002. The first purchase period will terminate on the last day of
January 2000. Subsequent purchase periods will generally have a duration of
approximately six months. Purchasing periods after the initial purchase period
will commence on the first day of February and August of each year. The board
may change the dates or duration of one or more offering periods, but no
offering period may exceed 27 months. Participants will purchase shares on the
last day of each purchase period of the initial offering period and on the last
day of each subsequent six month offering period.
The employee stock purchase plan permits eligible employees to purchase
common stock through payroll deductions at a price equal to 85% of the lower of
the fair market value of the common stock on the first day of the offering
period, or the purchase date. Participants generally may not purchase more than
1,000 shares on any purchase date or stock having a value greater than $25,000
in any calendar year as measured at the beginning of the offering period. In the
event of a change in control, the board may accelerate the purchase date of the
then-current offering period to a date prior to the change in control, unless
the acquiring or successor corporation assumes or replaces the purchase rights
outstanding under the employee stock purchase plan. Our board of directors may
amend or terminate the 1999 employee stock purchase plan at any time, as long as
such amendment or termination does not impair outstanding purchase rights.
401(k) Plan. We have a 401(k) retirement and deferred savings plan covering
all eligible employees that is intended to qualify as a tax-qualified plan under
the Internal Revenue Code. Employees are eligible to participate in the plan
after completing one month of service with us. Employees may participate in the
plan beginning on the first day of the calendar quarter immediately following
satisfaction of the eligibility requirement. The plan provides that each
participant may contribute up to 15% of his or her pre-tax gross compensation,
up to a statutory limit, which was $10,000 in the 1998 calendar year. All
amounts contributed by participants and earnings on these contributions are
immediately vested. We may contribute an amount up to 6% of the participant's
annual compensation if that amount is less than or equal to the amount of the
participant's contribution that will vest on the last day of the plan year for
employees employed on that date. We may also make discretionary non-matching
contributions. These contributions would vest ratably over six years or seven
years depending on the nature of the contribution. Continued employment is a
condition of vesting. To date, we have made no contributions to the 401(k) plan.
50
<PAGE> 54
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF DIRECTORS'
LIABILITY
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which they derived an improper personal benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers and may indemnify other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in that capacity, regardless of
whether Delaware law would permit indemnification.
In addition to indemnification provisions in our bylaws, we have entered
into agreements to indemnify our directors and executive officers. These
agreements provide for indemnification of our directors and executive officers
for some types of expenses, including attorneys' fees, judgments, fines and
settlement amounts incurred by persons in any action or proceeding, including
any action by or in the right of Immersion, arising out of their services as our
director or executive officer. We believe that these provisions and agreements
are necessary to attract and retain qualified persons as directors and executive
officers.
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<PAGE> 55
CERTAIN TRANSACTIONS
Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are a
party in which the amount involved exceeds $60,000 and in which any of our
directors, executive officers or holders of more than 5% of our capital stock
had or will have a direct or indirect material interest other than:
- the agreements that are described in "Management;" and
- the transactions described below.
FINANCING TRANSACTIONS
In November 1996, we issued 394,760 shares of Series B preferred stock to
individuals for an aggregate purchase price of $590,004. Of these shares, we
issued 20,175 shares to Bruce Paul, a holder of more than 5% of our capital
stock. In November 1996, we also issued Mr. Paul a warrant to purchase 32,280
shares of Series B preferred stock at an exercise price of $1.49 per share. In
December 1996, we issued Mr. Paul a warrant to purchase 40,350 shares of Series
B preferred stock at an exercise price of $1.49 per share. We amended these
warrants in September 1998 to extend their term from two years to five years.
In June 1997, we issued 864,642 shares of Series C preferred stock for an
aggregate purchase price of $1,500,005. Of these shares, we issued 518,788
shares to Intel, a holder of more than 5% of our capital stock. In connection
with this sale of Series C preferred stock to Intel, we issued Intel a warrant
to purchase 91,191 shares of common stock at an exercise price of $0.19 per
share. In connection with this sale, we agreed to provide the holders of Series
C preferred stock with registration rights with respect to the common stock
issuable upon conversion of the Series C preferred stock and upon exercise of
Intel's warrant.
In April 1998, we issued shares of our Series D preferred stock to Intel
and Logitech, each a holder of more than 5% of our capital stock. Intel
purchased 179,599 shares and Logitech purchased 1,197,329 shares of our Series D
preferred stock at a purchase price of $4.17 per share for an aggregate purchase
price of $5,750,002. In connection with this sale, we agreed to provide each of
Intel and Logitech with registration rights with respect to the common stock
issuable upon conversion of this Series D preferred stock.
OTHER TRANSACTIONS
Share Repurchase. In May 1998, we repurchased 502,014 shares of our common
stock at $3.66 per share from stockholders who elected to participate in the
repurchase, including:
<TABLE>
<CAPTION>
NUMBER OF
STOCKHOLDER SHARES SOLD CONSIDERATION PAID
----------- ----------- ------------------
<S> <C> <C>
Louis Rosenberg................................. 257,838 $ 942,531
Bruce Schena.................................... 79,922 292,159
Timothy Lacey................................... 107,190 391,837
</TABLE>
Logitech Agreement. In October 1996, we entered into a royalty-based
license agreement and a technology product development agreement with Logitech.
The license agreement grants Logitech a license under such patents for
feel-enabled gaming products. Pursuant to the technology product development
agreement, we provided Logitech consulting services with respect to the
development of feel-enabled gaming products. Pursuant to these agreements,
Logitech is required to mark its products with our relevant patents and abide by
our product branding requirements. We derived royalty revenue of $242,000 in
1997 and $149,000 in 1998 from these agreements.
In April 1998, we entered into a royalty-based license agreement and a
technology product development agreement with Logitech. The license agreement
grants Logitech a license under such patents for feel-enabled cursor control
devices. Pursuant to the technology product development agreement, we provided
Logitech consulting services with respect to the development of feel-
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<PAGE> 56
enabled cursor control devices. Pursuant to these agreements, Logitech is
required to mark its products with our relevant patents and abide by our product
branding requirements. We derived royalty revenue of $161,000 in 1998 and
$190,000 for the six months ended June 30, 1999 from these agreements.
MicroScribe Agreements. In July 1997, we entered into an exchange
agreement, a patent license agreement and an intellectual property license
agreement with MicroScribe LLC. Pursuant to the exchange agreement and the
patent license agreement, we assigned certain of our patents to MicroScribe in
exchange for a worldwide, royalty-free, exclusive, irrevocable license and all
of the class 1 membership interests in MicroScribe. All of the class 2
membership interests of MicroScribe were distributed to shareholders of our
company at the time of the exchange agreement. The following table presents
information regarding the percentage interest in MicroScribe of each person
listed individually in our principal stockholders table on page 54.
<TABLE>
<CAPTION>
PERCENTAGE INTEREST
NAME OF BENEFICIAL HOLDER OWNED IN MICROSCRIBE
------------------------- --------------------
<S> <C>
Cybernet System Corporation.................... --%
Logitech International S.A..................... --
Intel Corporation.............................. 5.9
Bruce Paul..................................... 7.5
Louis Rosenberg................................ 25.9
Bruce Schena................................... 8.6
Jonathan Rubinstein............................ --
Steven Blank................................... 1.0
</TABLE>
The aggregate amount paid to these persons in 1999 was approximately
$53,000.
Distributable cash from normal business operations of MicroScribe is
distributed 99% to the class 2 members and 1% to us, as the sole class 1 member.
Pursuant to the terms of the license agreement, MicroScribe granted us rights to
use intellectual property of MicroScribe for the development and distribution of
3D digitizing products. We paid MicroScribe $116,487 in 1998 and $67,696 for the
six months ended June 30, 1999.
Cybernet Agreements. In March 1999, we acquired patents and in-process
technology from Cybernet Systems Corporation in exchange for 1,291,200 shares of
our common stock. In addition, we entered into a consulting services agreement
with Cybernet, under which we issued Cybernet a warrant to purchase 322,800
shares of common stock at an exercise price of $3.66 and agreed to pay Cybernet
$300,000. We paid $150,000 of this amount in March 1999 and must pay $75,000 in
January 2000 and $75,000 in January 2001. In connection with this acquisition
and consulting arrangement, we agreed to provide Cybernet with registration
rights with respect to their common stock and the common stock issuable upon
exercise of this warrant.
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<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of our common stock as of September 30, 1999, and as adjusted to reflect the
sale of the 4,250,000 shares of common stock offered by us, by:
- each stockholder known by us to beneficially own more than five percent
of our common stock;
- each of the executive officers listed in our summary compensation table
on page 47;
- each director; and
- all executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENTAGE OF COMMON STOCK
OWNED BENEFICIALLY OWNED
------------ ---------------------------------
NAME OF BENEFICIAL OWNER NUMBER BEFORE OFFERING AFTER OFFERING
------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
5% STOCKHOLDERS
Cybernet Systems Corporation..................... 1,557,510 13.5% 9.9%
727 Airport Boulevard
Ann Arbor, Michigan 48108-1639
Logitech International S.A. ..................... 1,197,329 10.7 7.8
6505 Kaiser Drive
Fremont, California 94555-3615
Intel Corporation................................ 789,578 7.0 5.1
2200 Mission College Boulevard
M&A Portfolio Manager, RN 6-46
Santa Clara, California 95052
Bruce Paul....................................... 781,781 6.9 5.0
One Hampton Road
Purchase, NY 10577
EXECUTIVE OFFICERS AND DIRECTORS
Louis Rosenberg, Ph.D. .......................... 2,543,408 20.8 15.4
Bruce Schena..................................... 869,475 7.5 5.5
Steven Blank..................................... 146,093 1.3 0.9
Jonathan Rubinstein.............................. 14,795 0.1 0.1
All executive officers and directors as a group
(8 persons).................................... 3,776,656 29.5 22.1
</TABLE>
The principal stockholders and members of the board of directors of
Cybernet Systems Corporation exercise dispositive and voting power on behalf of
Cybernet Systems Corporation.
As of September 30, 1999, there were 11,191,856 shares of common stock
outstanding, assuming conversion of all shares of preferred stock into common
stock. Following completion of this offering, there will be 15,441,856 shares of
common stock outstanding, assuming no exercise of the underwriters'
over-allotment option. The column that shows the percentage of shares
outstanding after the offering assumes that the underwriters' over-allotment
option is not exercised.
If the over-allotment option is exercised in full, we will sell a total of
137,230 shares of common stock and selling stockholders will sell a total of
500,270 shares of common stock. The following table presents information
regarding the beneficial ownership of our common stock as of
54
<PAGE> 58
September 30, 1999, assuming the exercise of the over-allotment option in full,
as adjusted to reflect the sale of common stock offered by each selling
stockholder:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
BEFORE OFFERING AFTER OFFERING
----------------------- ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
------------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Bernie G. and Linda A. Jackson, and trustees of
the Regina trust............................. 414,909 3.7% 391,394 2.5%
Adam C. Braun.................................. 145,687 1.3 141,652 0.9
C. Gordon Bell Revocable Trust................. 53,802 0.5 41,697 0.3
Scott Curtis................................... 10,087 0.1 0 0.0
Cybernet Systems Corporation................... 1,557,510 13.5 1,396,110 8.8
Craig H. Factor................................ 150,550 1.3 142,480 0.9
Alex Goldenberg................................ 14,379 0.1 14,218 0.1
David R. Hague................................. 97,160 0.9 89,090 0.6
Christopher J. Hasser.......................... 85,783 0.8 85,218 0.5
John Gibson Limited............................ 171,486 1.5 163,416 1.0
Patrick H. and Nina J. Lacey................... 30,262 0.3 22,192 0.1
Timothy Lacey.................................. 1,083,821 9.5 1,043,512 6.6
Michael D. Levin............................... 129,313 1.2 128,970 0.8
Kenneth Martin................................. 202,885 1.8 194,815 1.2
Nicholas Palevsky.............................. 20,175 0.2 0 0.0
Arthur and Marilyn Rosenberg................... 85,541 0.8 71,822 0.5
Louis Rosenberg, Ph.D. ........................ 2,543,408 20.8 2,414,288 14.5
Bruce M. Schena................................ 869,475 7.5 861,405 5.4
Sia Tan........................................ 32,279 0.3 24,209 0.2
Ming-Chang Tsai................................ 28,245 0.3 0 0.0
</TABLE>
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission. All of the shares of common stock subject to options
currently exercisable or exercisable within 60 days after September 30, 1999 are
treated as outstanding and beneficially owned by the person holding them for the
purpose of computing the number of shares beneficially owned by and the
percentage of ownership of that person. They are not, however, treated as
outstanding and beneficially owned for the purpose of computing the percentage
ownership of any other person. Except where indicated and subject to applicable
community property laws, based on information provided by the persons named in
the table, these persons have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them.
Shares listed as held by Cybernet consist of 1,246,008 shares and 311,502
shares issuable upon exercise of warrants exercisable within 60 days of
September 30, 1999.
Shares listed as held by Intel consist of 698,387 shares and 91,191 shares
issuable upon exercise of warrants exercisable within 60 days of September 30,
1999.
Shares listed as held by Bruce Paul include 467,051 shares and 72,630
shares issuable upon exercise of warrants exercisable within 60 days of
September 30, 1999. In addition, Mr. Paul's shares include 242,100 shares held
by Mr. Paul as custodian for his minor children under the California uniform
transfers to minors act. Mr. Paul disclaims beneficial ownership of these
shares.
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<PAGE> 59
Shares listed as held by the persons listed in the tables above include
shares subject to options exercisable within 60 days of September 30, 1999 as
follows:
<TABLE>
<CAPTION>
SHARES SUBJECT
EXECUTIVE OFFICERS AND DIRECTORS TO OPTIONS
-------------------------------- --------------
<S> <C>
Louis Rosenberg............................................. 1,044,408
Bruce Schena................................................ 432,718
Steven Blank................................................ 61,358
Jonathan Rubinstein......................................... 6,725
All directors and executive officers as a group (8
persons).................................................. 1,624,523
SELLING STOCKHOLDERS
- ------------------------------------------------------------
Adam C. Braun............................................... 46,352
C Gordon Bell Revocable Trust............................... 20,175
Craig H. Factor............................................. 75,002
Alex Goldenberg............................................. 162
David R. Hague.............................................. 3,950
Christopher J. Hasser....................................... 10,230
Timothy Lacey............................................... 202,669
Michael D. Levin............................................ 1,392
Kenneth Martin.............................................. 79,314
Louis Rosenberg............................................. 1,044,408
Bruce M. Schena............................................. 432,718
</TABLE>
In addition, Mr. Schena's shares include 2,734 shares held by Rita Schena,
as custodian for Mr. Schena's minor child under the California uniform transfers
to minors act. Mr. Schena disclaims beneficial ownership of these shares.
56
<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock will consist of 100,000,000 shares of common
stock, $0.001 par value per share, and 5,000,000 shares of preferred stock,
$0.001 par value per share. The following summary of provisions of the common
stock and preferred stock is subject to, and qualified in its entirety by, our
certificate of incorporation and bylaws and by the provisions of applicable law.
COMMON STOCK
As of September 30, 1999, there were 11,191,856 shares of common stock
outstanding held by approximately 108 stockholders of record. Subject to
preferences that may be applicable to any preferred stock outstanding at the
time, the holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available at the times and in the amounts that
the board from time to time may determine in its sole discretion. Holders of
common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders. Cumulative voting for the election of
directors is not authorized by our certificate of incorporation, which means
that the holders of a majority of the shares voted can elect all of the
directors then standing for election. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption. If we
liquidate, dissolve or wind-up our business, the holders of common stock would
be entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation of any preferred stock. Each outstanding share
of common stock is, and all shares of common stock to be outstanding upon
completion of this offering upon payment will be, duly and validly issued, fully
paid and nonassessable. The rights, preferences and privileges of the holders of
common stock are subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock, that we may issue in the future.
PREFERRED STOCK
Before the closing of this offering and in connection with our
reincorporation in the state of Delaware, all outstanding shares of preferred
stock will be converted into an aggregate of 5,131,100 shares of common stock,
and 5,000,000 shares of undesignated preferred stock will be authorized for
issuance. Our board of directors will have the authority, without further action
by the stockholders, to issue this undesignated preferred stock in one or more
series. In addition, the board may:
- fix the designations, powers, preferences, privileges and relative
participating, optional or special rights of this preferred stock; and
- set the qualifications, limitations or restrictions of this preferred
stock, including dividend rights, conversion rights, voting rights, terms
of redemption and liquidation preferences.
Any or all of these rights may be greater than the rights of the common
stock. As a result, the board of directors, without stockholder approval, may
issue preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay or prevent a change in our control or make removal of our management more
difficult. Additionally, the issuance of preferred stock may have the effect of
decreasing the market price of the common stock. We have no present plans to
issue any shares of preferred stock.
REGISTRATION RIGHTS
Some of our stockholders have registration rights under the Securities Act.
Piggyback Registration. If we elect to register any of our shares of stock
for an underwritten public offering, the holders of 4,505,589 shares of our
common stock and 402,693 shares of common stock issuable upon exercise of
warrants, or their permitted transferees, will be entitled to include their
securities in the registration, subject to the ability of underwriters to limit
the number of shares included in the offering.
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<PAGE> 61
Form S-3 Registration. If we qualify for registration on Form S-3, holders
of 2,240,707 shares of our common stock and 91,191 shares of common stock
issuable upon exercise of warrants, or their permitted transferees, may request
that we register these securities on Form S-3, provided that at least 121,050
shares are to be registered.
Demand Registration. The holders of 2,240,707 shares of our common stock
and 91,191 shares of common stock issuable upon exercise of warrants, or their
permitted transferees, upon the vote of 50% of these securities, may demand on
two occasions that we file a registration statement for an underwritten public
offering covering some or all of these securities. The underwriters may reduce
the number of shares proposed to be registered in view of market conditions.
We will pay all expenses in connection with any of these registrations,
other than underwriting discounts, fees or commissions or fees of legal counsel
for the holders.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of our company by means of a tender
offer, a proxy contest or other means, or the removal of incumbent officers and
directors. We expect these provisions to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of our company to negotiate first with our board of
directors. We believe that the benefits provided by our ability to negotiate
with the proponent of an unfriendly or unsolicited proposal outweigh the
disadvantages of discouraging these proposals. We believe the negotiation of an
unfriendly or unsolicited proposal could result in an improvement of its terms.
We are subject to section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder, unless:
- prior to that date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder's
becoming an interested stockholder;
- upon completion of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
- on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation in a transaction involving the interested
stockholder;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; and
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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<PAGE> 62
In general, section 203 defines an interested stockholder as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by that entity or person.
Our certificate of incorporation provides that our board of directors will
be divided into three classes of directors, with each class serving a three-year
term. The term of the first class of directors expires at the 2000 annual
meeting. The term of the second class expires at the 2001 annual meeting. The
term of the third class expires at the 2002 annual meeting.
We believe that a classified board of directors will help to assure the
continuity and stability of the board of directors and our business strategies
and policies as determined by the board of directors, since a majority of the
directors at any given time will have had prior experience as directors of our
company. We believe that this, in turn, will permit the board of directors to
represent the interests of stockholders more effectively.
With a classified board of directors, at least two annual meetings of
stockholders will generally be required to effect a change in the majority of
the board of directors. As a result, a classified board of directors may
discourage proxy contests for the election of directors or purchases of a
substantial block of our common stock because it could prevent obtaining control
of the board of directors in a relatively short period of time. The
classification provision could also have the effect of discouraging a third
party from making a tender offer or attempting to obtain control of our company
in some other manner. Under the Delaware General Corporation Law, a director on
a classified board may be removed by the stockholders of the corporation only
for cause. Our certificate of incorporation does not provide for cumulative
voting in the election of directors. The amendment of the provisions relating to
the classified board requires approval by 66 2/3% or more of the outstanding
common stock.
Further, provisions of our certificate of incorporation and bylaws prevent
our stockholders from taking action by means of written consent and require our
stockholders to provide advance notice before nominating directors and bringing
stockholder proposals.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston, N.A.
59
<PAGE> 63
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this initial public offering, there has not been a public market
for our common stock. Future sales of substantial amounts of common stock in the
public market could adversely affect the trading price of the common stock.
Upon completion of this offering, we will have outstanding 15,441,856
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants to purchase common
stock subsequent to September 30, 1999. Of these shares, the 4,250,000 shares
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by our
"affiliates" as defined in Rule 144 under the Securities Act, whose sales would
be subject to the limitations and restrictions described below.
The remaining 11,191,856 shares of common stock outstanding upon completion
of this offering will be "restricted securities" as defined in Rule 144. These
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144 or 701 under the
Securities Act, which are summarized below. Sales of these restricted securities
in the public market, or the availability of these shares for sale, could
adversely affect the trading price of our common stock.
The number of restricted securities that will be available for sale in the
public market, subject in some cases to the volume limitations and other
restrictions of Rule 144, will be as follows:
- no shares will be eligible for immediate sale as of the date of this
prospectus;
- approximately 8,875,526 additional shares will be eligible for sale
beginning 181 days after the date of this prospectus pursuant to Rules
144 and 701 upon expiration of the lock-up agreements; and
- approximately 2,316,330 shares will be eligible for sale beginning one
year after the date of this prospectus pursuant to Rule 144, subject in
some cases to certain volume, manner of sale and other limitations under
Rule 144.
Following the completion of this offering, warrants to purchase 498,593
shares will be outstanding, which, if exercised pursuant to net-exercise
provisions, would be immediately salable without restriction upon the expiration
of the 180 day lock-up period.
Lock-up Agreements. All of our officers and directors and substantially all
of our stockholders have signed lock-up agreements that prohibit them from
offering, selling or otherwise disposing of any shares of common stock, options
or warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock owned by them without the prior written
consent of Hambrecht & Quist LLC during the 180-day period following date of
this prospectus. Hambrecht & Quist LLC may choose to release some of these
shares from these restrictions prior to the expiration of this 180-day period,
although it has no current intention to do so.
Rule 144. In general, under Rule 144, beginning 90 days after the date of
this prospectus, a person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except our affiliates, would be entitled to
sell within any three-month period a number of shares not to exceed the greater
of:
- one percent of the number of outstanding shares of our common stock,
which will equal approximately 154,418 shares immediately after this
offering, or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
60
<PAGE> 64
Sales under Rule 144 are also subject to certain manner-of-sale and notice
requirements, as well as to the availability of current public information about
us.
Rule 144(k). Under Rule 144(k), a person who has not been considered our
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except our affiliates, is
entitled to sell these shares without complying with the manner-of-sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701. Shares issued upon exercise of options granted by us prior to the
date of this prospectus will be available for sale in the public market under
Rule 701 of the Securities Act. Rule 701 permits resales of these shares in
reliance upon Rule 144 but without compliance with various restrictions,
including the holding period requirement, imposed under Rule 144.
Stock Options. We have reserved a total of 6,048,123 shares of common stock
for issuance pursuant to our stock option plans and our stock purchase plan. As
of September 30, 1999, options to purchase a total of 4,379,465 shares of common
stock were outstanding under our stock option plans. We intend to file
registration statements on Form S-8 under the Securities Act approximately 180
days after the date of this prospectus to register a total of 6,895,058 shares
of common stock outstanding and reserved for issuance under the stock option
plans and the purchase plan. Shares of common stock issued under these plans
after the filing of the registration statement will be freely tradable in the
public market, subject to the Rule 144 limitations in the case of our
affiliates, the lock-up agreements and vesting restrictions imposed by us.
61
<PAGE> 65
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Hambrecht & Quist LLC,
Bear, Stearns & Co. Inc. and BancBoston Robertson Stephens Inc., have severally
agreed to purchase from us the following respective numbers of shares of our
common stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Hambrecht & Quist LLC.......................................
Bear, Stearns & Co. Inc. ...................................
BancBoston Robertson Stephens Inc. .........................
----------
Total....................................................... 4,250,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to conditions, including the absence of any material
adverse change in our business and the receipt of certificates, opinions and
letters from us, our counsel and our independent auditors. The nature of the
underwriters' obligations requires that they purchase all shares of common stock
offered in this offering if they purchase any of the shares in this offering.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to dealers at that price less a concession not in excess of
$ per share. The underwriters may allow and the dealers may reallow a
concession not in excess of $ per share to other dealers. After the public
offering of the shares, the underwriters may change the offering price and other
selling terms. The representatives have advised us that the underwriters do not
intend to confirm discretionary sales in excess of 5% of the shares of common
stock offered by this prospectus.
We and certain selling stockholders have granted to the underwriters an
option, exercisable no later than 30 days after the effective date of this
offering, to purchase up to 637,500 additional shares of common stock at the
initial public offering price, less the underwriting discount and commissions
set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase approximately the same percentage that the number of shares of
common stock to be purchased by it shown in the above table bears to the total
number of shares of common stock offered in this offering. We and the selling
stockholders will be obligated to sell shares to the underwriters to the extent
the option is exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of common stock offered in this
offering.
The following table shows the per share and total public offering price,
the underwriting discount and commissions and the proceeds before expenses to
us.
<TABLE>
<CAPTION>
TOTAL
----------------------
WITHOUT WITH
OVER- OVER-
ALLOTMENT ALLOTMENT
PER SHARE OPTION OPTION
--------- --------- ---------
<S> <C> <C> <C>
Public offering price.....................................
Underwriting discount and commissions.....................
Proceeds, before expenses, to Immersion...................
</TABLE>
62
<PAGE> 66
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1.0 million.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and, if the underwriters' over-allotment option is exercised, the
selling stockholders, have agreed to indemnify the underwriters against
liabilities connected to this offering, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect of those liabilities.
All of our stockholders, including all of our executive officers and
directors and the selling stockholders, who will own in the aggregate 11,191,856
shares of common stock after the offering, have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into shares
of common stock owned by them during the 180-day period following the date of
this prospectus. We have agreed that we will not, without the prior written
consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options granted before the date of this
prospectus, and may grant additional options under our stock option plans,
provided that, without the prior written consent of Hambrecht & Quist LLC, the
additional options will not be exercisable during the 180-day period.
Before this offering, there has been no public market for our shares. The
initial public offering price will be negotiated among us and the underwriters.
Among the factors to be considered in determining the initial public offering
price of the shares, in addition to prevailing market conditions, will be our
historical performance, estimates of our business potential and earnings
prospects, an assessment of management and the consideration of the above
factors in relation to market valuations of companies in related businesses. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol IMMR.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discounts and commissions received by it because the representatives have
repurchased shares sold by or for the account of that underwriter in stabilizing
or short-covering transactions.
These activities by the underwriters may stabilize, maintain or affect the
market price of the common stock in another manner. As a result, the price of
the common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
63
<PAGE> 67
LEGAL MATTERS
Gray Cary Ware & Freidenrich LLP, Palo Alto, California will pass upon the
validity of the issuance of the shares of common stock offered by this
prospectus. Fenwick & West LLP, Palo Alto, California will pass upon legal
matters for the underwriters.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998, and
for each of the three years in the period ended December 31, 1998, included in
this prospectus and the related financial statement schedule included elsewhere
in the registration statement have been audited by Deloitte and Touche LLP,
independent auditors, as stated in their reports appearing in this prospectus
and elsewhere in the registration statement, and have been so included in
reliance upon the reports of that firm given upon their authority as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information contained in the
registration statement. Some of that information is contained in exhibits to the
registration statement as permitted by the rules and regulations of the
Securities and Exchange Commission. For further information with respect to us
and our common stock being offered by this prospectus, please see the
registration statement and related exhibits. Statements made in this prospectus
concerning the contents of any document referred to in this prospectus are not
necessarily complete. With respect to each document filed with the Securities
and Exchange Commission as an exhibit to the registration statement, please see
the exhibit for a more complete description of the matter involved. The
registration statement, and related exhibits may be inspected without charge at
the principal office of the Securities and Exchange Commission located at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part of these
documents may be obtained from the Securities and Exchange Commission's public
reference rooms at the same location and at the Securities and Exchange
Commission's regional offices located at Seven World Trade Center, New York, New
York 10048 and Citicorp Center, 5000 West Madison Street, Chicago, Illinois
60661 upon payment of the fees prescribed by them. The Securities and Exchange
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with them. The address of that web site is http://www.sec.gov.
64
<PAGE> 68
IMMERSION CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and June 30, 1999 (unaudited)............................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and the six months ended
June 30, 1998 and 1999 (unaudited)........................ F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 1996,
1997 and 1998 and the six months ended June 30, 1999
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and the six months ended
June 30, 1998 and 1999 (unaudited)........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 69
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Immersion Corporation:
We have audited the accompanying consolidated balance sheets of Immersion
Corporation and its subsidiary (the Company) as of December 31, 1997 and 1998,
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, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Immersion Corporation and its
subsidiary at December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
San Jose, California
April 2, 1999
(August 31, 1999 as to Note 14)
To the Board of Directors and Stockholders
of Immersion Corporation:
The consolidated financial statements included herein have been adjusted to
give effect to the reincorporation in Delaware and the related 0.807-for-one
reverse common and Series C and D preferred stock split and the 4.035-for-one
reverse Series A and B preferred stock split as described in the second
paragraph of Note 14 to the consolidated financial statements. The above report
is in the form that will be signed by Deloitte & Touche LLP upon effectiveness
of such event assuming that, from August 31, 1999 to the effective date of such
event, no other events shall have occurred that would affect the accompanying
consolidated financial statements or notes thereto.
DELOITTE & TOUCHE LLP
San Jose, California
October 5, 1999
F-2
<PAGE> 70
IMMERSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------- JUNE 30, JUNE 30,
1997 1998 1999 1999
------ ------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 490 $ 2,592 $ 2,204
Short-term investments.................................. 1,212 402 200
Accounts receivable (net of allowances for doubtful
accounts of: 1997, $38; 1998, $92; and 1999, $76)..... 519 1,111 1,094
Inventories............................................. 295 481 606
Prepaid expenses and other assets....................... 49 99 92
------ ------- -------
Total current assets............................. 2,565 4,685 4,196
Property--net............................................. 334 329 398
Purchased patents and technology.......................... -- 945 4,841
Other assets.............................................. 1 -- 271
------ ------- -------
Total assets..................................... $2,900 $ 5,959 $ 9,706
====== ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 288 $ 410 $ 394
Accrued compensation.................................... 125 171 224
Other accrued liabilities............................... 5 82 179
Customer advances....................................... 64 46 59
Income taxes payable.................................... 3 1 1
------ ------- -------
Total current liabilities........................ 485 710 857
------ ------- -------
Commitments and contingencies (Notes 6 and 13)
Redeemable convertible preferred stock, Series C--$0.001
par value; 863,778 shares designated; shares issued and
outstanding: 1997, 864,642; 1998 and 1999, 863,771; pro
forma, none (liquidation preference $1,500,005)......... 1,471 1,476 1,479
------ ------- -------
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
authorized, 10,215,716 shares actual; pro forma,
5,000,000:
Series A--$0.001 par value; 2,495,648 shares
designated; shares issued and outstanding: 1997,
2,465,384; 1998 and 1999, 2,495,644; pro forma, none
(liquidation preference $244,400)................... 976 1,012 1,012
Series B--$0.001 par value; 467,390 shares designated;
shares issued and outstanding: 1997, 396,778; 1998
and 1999, 394,757; pro forma, none (liquidation
preference $590,004)................................ 569 566 566
Series D--$0.001 par value; 1,388,901 shares
designated; shares issued and outstanding: 1997,
none; 1998 and 1999, 1,376,928; pro forma, none
(liquidation preference $5,750,002)................. -- 5,377 5,377
Common stock--$0.001 par value; 100,000,000 shares
authorized, actual and pro forma; shares issued and
outstanding: 1997, 3,418,495; 1998, 4,164,231; 1999,
5,901,405; pro forma, 11,032,505...................... 57 961 7,947 $16,381
Warrants................................................ 33 85 893 893
Deferred stock compensation............................. -- -- (2,075) (2,075)
Accumulated other comprehensive loss.................... 2 1 -- --
Note receivable from stockholder........................ -- (17) (17) (17)
Accumulated deficit..................................... (693) (4,212) (6,333) (6,333)
------ ------- ------- -------
Total stockholders' equity....................... 944 3,773 7,370 $ 8,849
------ ------- ------- =======
Total liabilities, redeemable convertible preferred stock
and stockholders' equity................................ $2,900 $ 5,959 $ 9,706
====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 71
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Royalty revenue................................... $ -- $ 14 $ 321 $ 8 $ 622
Product sales..................................... 2,022 2,908 3,725 1,604 2,133
Development contracts and other................... 715 1,410 975 565 748
------ ------ ------- ------ -------
Total revenues............................ 2,737 4,332 5,021 2,177 3,503
------ ------ ------- ------ -------
Costs and expenses:
Cost of product sales............................. 947 1,186 1,507 641 970
Sales and marketing............................... 422 658 656 361 459
Research and development.......................... 710 1,515 1,817 833 1,057
General and administrative........................ 766 1,550 2,677 1,269 1,548
Amortization of intangibles and deferred stock
compensation................................... 1 -- 211 21 463
In-process research and development............... -- -- -- -- 1,190
------ ------ ------- ------ -------
Total costs and expenses.................. 2,846 4,909 6,868 3,125 5,687
------ ------ ------- ------ -------
Operating loss...................................... (109) (577) (1,847) (948) (2,184)
Other income........................................ 28 50 174 79 66
------ ------ ------- ------ -------
Net loss............................................ (81) (527) (1,673) (869) (2,118)
Redeemable convertible preferred stock accretion.... -- 3 6 3 3
------ ------ ------- ------ -------
Net loss applicable to common stockholders.......... $ (81) $ (530) $(1,679) $ (872) $(2,121)
====== ====== ======= ====== =======
Basic and diluted net loss per share................ $(0.03) $(0.17) $ (0.43) $(0.23) $ (0.42)
====== ====== ======= ====== =======
Shares used in calculating basic and diluted net
loss per share.................................... 2,825 3,162 3,909 3,839 5,003
====== ====== ======= ====== =======
Pro forma basic and diluted net loss per share
(Note 1).......................................... $ (0.19) $ (0.21)
======= =======
Shares used in calculating pro forma basic and
diluted net loss per share (Note 1)............... 8,630 10,134
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 72
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK DEFERRED OTHER
------------------ ------------------ STOCK COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION INCOME (LOSS)
--------- ------ --------- ------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996.......... 2,344,331 $ 910 3,311,334 $ 28 $ 12 $ -- $15
Net loss............................
Change in net unrealized gains from
short-term investments............ (10)
Comprehensive loss..................
Issuance of Series B convertible
preferred stock, net of issuance
costs of $21...................... 396,778 569 21
Issuance of warrant................. (6) 6
Collection of stockholder note
receivable........................
Exercise of stock options........... 2,017 --
Stock compensation.................. 1
--------- ------ --------- ------ ---- ------- ---
Balances at December 31, 1996........ 2,741,109 1,473 3,313,351 29 39 -- 5
Net loss............................
Change in net unrealized gains from
short-term investments............ (3)
Comprehensive loss..................
Issuance of warrants in connection
with issuance of Series C
redeemable convertible preferred
stock............................. 6
Exercise of Series A preferred stock
warrant........................... 121,050 72 (12)
Exercise of stock options........... 105,144 23
Issuance of stock options for
license agreement................. 5
Preferred stock accretion...........
--------- ------ --------- ------ ---- ------- ---
Balances at December 31, 1997........ 2,862,159 1,545 3,418,495 57 33 -- 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
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)
Preferred stock accretion...........
--------- ------ --------- ------ ---- ------- ---
Balances at December 31, 1998........ 4,267,329 $6,955 4,164,231 $ 961 $ 85 $ -- $ 1
Net loss*...........................
Change in net unrealized gains from
short-term investments*........... (1)
Comprehensive loss*.................
Issuance of common stock and options
for services*..................... 8,070 140
Exercise of common stock
warrants*......................... 7,061 1
Warrants issued for services*....... 808 (808)
Exercise of stock options*.......... 342,073 151
Issuance of common stock and options
for patents*...................... 1,379,970 5,092
Issuance of stock options for
license agreement*................ 129
Deferred stock compensation*........ 1,473 (1,473)
Amortization of stock
compensation*..................... 206
Preferred stock accretion*..........
--------- ------ --------- ------ ---- ------- ---
Balances at June 30, 1999*........... 4,267,329 $6,955 5,901,405 $7,947 $893 $(2,075) $--
========= ====== ========= ====== ==== ======= ===
<CAPTION>
NOTE
RECEIVABLE TOTAL
FROM ACCUMULATED COMPREHENSIVE
STOCKHOLDER DEFICIT TOTAL LOSS
----------- ----------- ------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1996.......... $ (6) $ (82) $ 877
Net loss............................ (81) (81) $ (81)
Change in net unrealized gains from
short-term investments............ (10) (10)
-------
Comprehensive loss.................. $ (91)
=======
Issuance of Series B convertible
preferred stock, net of issuance
costs of $21...................... 590
Issuance of warrant................. --
Collection of stockholder note
receivable........................ 6 6
Exercise of stock options........... --
Stock compensation.................. 1
---- ------- -------
Balances at December 31, 1996........ -- (163) 1,383
Net loss............................ (527) (527) $ (527)
Change in net unrealized gains from
short-term investments............ (3) (3)
-------
Comprehensive loss.................. $ (530)
=======
Issuance of warrants in connection
with issuance of Series C
redeemable convertible preferred
stock............................. 6
Exercise of Series A preferred stock
warrant........................... 60
Exercise of stock options........... 23
Issuance of stock options for
license agreement................. 5
Preferred stock accretion........... (3) (3)
---- ------- -------
Balances at December 31, 1997........ -- (693) 944
Net loss............................ (1,673) (1,673) $(1,673)
Change in net unrealized gains from
short-term investments............ (1) (1)
-------
Comprehensive loss.................. $(1,674)
=======
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........... (17) 97
Issuance of common stock and options
for patents....................... 720
Issuance of stock options for
consulting services............... 68
Repurchase of stock................. (1,840) (1,844)
Preferred stock accretion........... (6) (6)
---- ------- -------
Balances at December 31, 1998........ $(17) $(4,212) $ 3,773
Net loss*........................... (2,118) (2,118) $(2,118)
Change in net unrealized gains from
short-term investments*........... (1) (1)
-------
Comprehensive loss*................. $(2,119)
=======
Issuance of common stock and options
for services*..................... 140
Exercise of common stock
warrants*......................... 1
Warrants issued for services*....... --
Exercise of stock options*.......... 151
Issuance of common stock and options
for patents*...................... 5,092
Issuance of stock options for
license agreement*................ 129
Deferred stock compensation*........ --
Amortization of stock
compensation*..................... 206
Preferred stock accretion*.......... (3) (3)
---- ------- -------
Balances at June 30, 1999*........... $(17) $(6,333) $ 7,370
==== ======= =======
</TABLE>
(* Unaudited)
See notes to consolidated financial statements.
F-5
<PAGE> 73
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- -----------------
1996 1997 1998 1998 1999
----- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (81) $ (527) $(1,673) $ (869) $(2,118)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 44 102 142 58 84
Amortization of intangibles............................. -- -- 211 21 257
Amortization of deferred stock compensation............. 1 -- -- -- 206
In-process research and development..................... -- -- -- -- 1,190
Stock and options issued for consulting services and
other.................................................. -- -- 68 23 140
Stock options issued for license agreement.............. -- 5 -- -- --
Extension of warrants for consulting services........... -- -- 41 -- --
Changes in assets and liabilities:
Accounts receivable................................... (131) (100) (592) (197) 17
Inventories........................................... (94) (25) (186) (81) (125)
Prepaid expenses and other assets..................... (38) 2 (50) (10) 7
Accounts payable...................................... 75 189 122 304 (16)
Accrued liabilities................................... 14 52 123 55 150
Customer advances..................................... -- 64 (18) -- 13
Income taxes payable.................................. 2 1 (2) (2) --
----- ------- ------- ------- -------
Net cash used in operating activities............... (208) (237) (1,814) (698) (195)
----- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of short-term investments....................... (325) (1,487) (2,943) -- --
Sales and maturities of short-term investments............ 399 538 3,752 382 201
Purchases of property..................................... (181) (205) (138) (89) (153)
Purchase of patents and technology........................ -- -- (434) (385) (70)
Other assets.............................................. -- -- -- -- (323)
----- ------- ------- ------- -------
Net cash provided by (used in) investing
activities.......................................... (107) (1,154) 237 (92) (345)
----- ------- ------- ------- -------
Cash flows from financing activities:
Issuance of Series D convertible preferred stock and
warrants, net........................................... -- -- 5,393 5,393 --
Issuance of Series C redeemable convertible preferred
stock, net.............................................. -- 1,474 (1) (1) --
Issuance of Series B convertible preferred stock, net..... 590 -- -- -- --
Exercise of stock options................................. -- 23 97 86 151
Repurchase of stock....................................... -- -- (1,844) (1,844) --
Exercise of warrants...................................... -- 60 34 2 1
Collection of stockholder note............................ 6 -- -- -- --
----- ------- ------- ------- -------
Net cash provided by financing activities........... 596 1,557 3,679 3,636 152
----- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 281 166 2,102 2,846 (388)
Cash and cash equivalents:
Beginning of year......................................... 43 324 490 490 2,592
----- ------- ------- ------- -------
End of year............................................... $ 324 $ 490 $ 2,592 $ 3,336 $ 2,204
===== ======= ======= ======= =======
Supplemental disclosure of cash flow information -
Cash paid for taxes....................................... $ -- $ 12 $ 1 $ 1 $ 1
===== ======= ======= ======= =======
Noncash activities:
Change in net unrealized gains from short-term
investments............................................. $ (10) $ (3) $ (1) $ -- $ (1)
===== ======= ======= ======= =======
Issuance of equity instruments for patents, technology and
licenses................................................ $ -- $ -- $ 720 $ 514 $ 5,221
===== ======= ======= ======= =======
Issuance of warrants...................................... $ -- $ 6 $ -- $ -- $ 808
===== ======= ======= ======= =======
Accretion of redeemable preferred stock................... $ -- $ 3 $ 6 $ 3 $ 3
===== ======= ======= ======= =======
Exercise of stock option for note receivable.............. $ -- $ -- $ 17 $ 17 $ --
===== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 74
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business--Immersion Corporation was originally incorporated
in May 1993 in California and provides technologies that enable users to
interact with computers using their sense of touch.
Principles of Consolidation--The consolidated financial statements include
the accounts of Immersion Corporation and its wholly-owned subsidiary (the
"Company"). All intercompany transactions and balances have been eliminated in
consolidation.
Cash Equivalents--The Company considers all highly liquid debt or equity
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 loss within stockholders' equity.
Inventories--Inventories are stated at the lower of cost (first-in,
first-out basis) or market.
Property--Property is stated at cost and is depreciated using the
straight-line method over the estimated useful life of the related asset. The
estimated useful lives are as follows:
<TABLE>
<S> <C>
Computer equipment................................ 3 years
Machinery and equipment........................... 5 years
Furniture and fixtures............................ 5 years
</TABLE>
Leasehold improvements are amortized over the shorter of the lease term or
their useful life.
Purchased Patents and Technology--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.
Accumulated amortization was none, $221,000 and $426,000 at December 31, 1997
and 1998 and June 30, 1999, respectively.
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.
Product Warranty--The Company sells the majority of its products with
warranties ranging from three to 12 months. Historically, warranty-related costs
have been immaterial.
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--Revenues from product sales are recorded upon
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
F-7
<PAGE> 75
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
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. 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.
The Company has no obligation to repay amounts received under development
contracts with the U.S. government at June 30, 1999.
Advertising--Advertising costs are expensed as incurred and included in
sales and marketing expense. Advertising expense was $129,000, $164,000,
$147,000 and $76,000 in 1996, 1997, 1998 and the six months ended June 30, 1999,
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.
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 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.
Comprehensive Income--In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income, which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources. The
Company adopted this statement in 1998 and has presented its total comprehensive
loss in the statements of stockholders' equity. Accumulated other comprehensive
loss during 1997 and 1998 and the six months ended June 30, 1999 is comprised of
unrealized gains on short-term investments of $2,000, $1,000 and none,
respectively.
Unaudited Pro Forma Information--Upon the closing of the initial public
offering, each of the outstanding shares of Series D convertible preferred stock
and Series C redeemable convertible preferred stock will convert into 0.807
shares of common stock and each of the outstanding shares of Series A and Series
B convertible preferred stock will convert into 4.035 shares of common stock.
F-8
<PAGE> 76
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
The pro forma balance sheet presents the Company's balance sheet as if this had
occurred at June 30, 1999.
Unaudited Interim Financial Information--The interim financial information
as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is
unaudited and has been prepared on the same basis as the audited consolidated
financial statements. In the opinion of management, this unaudited financial
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
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.
Pro Forma Net Loss per Share--Pro forma basic and diluted net loss per
share is computed by dividing net loss by the sum of the weighted average number
of common shares outstanding for the period (excluding shares subject to
repurchase) and the weighted average number of common shares resulting from the
assumed conversion of outstanding shares of redeemable convertible preferred
stock and convertible preferred stock.
Use of Estimates--The preparation of consolidated financial statements in
accordance with generally accepted accounting principles 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. These management estimates include the
allowance for doubtful accounts and the net realizable value of inventory.
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 mutual funds of large U.S. securities firms 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
F-9
<PAGE> 77
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
technology underlying the Company's products; market acceptance of the Company's
and its licensees' products under development; the availability of foundry
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 and short-term investments. Cash equivalents and
short-term investments are stated at fair value based on quoted market prices.
Recently Issued Accounting Standards--In June 1997, the FASB issued SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information,
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. The Company currently operates in one
reportable segment under SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities 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 will be effective for the Company's
year ending December 31, 2001. The management believes that this statement will
not have a material impact on the Company's financial position or results of
operations.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on net loss or stockholders' equity.
2. PURCHASED PATENTS AND TECHNOLOGY
During 1998, the Company entered into a license agreement and acquired
various patents relating to feel 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 7). 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 feel 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 and the earlier to occur of five years or certain
defined liquidity events of the Company (such as an initial public offering
meeting specified criteria). If such conditions are 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.
F-10
<PAGE> 78
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
In March 1999, the Company acquired certain additional feel patents 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 seller has the option to put 807,000 of the shares back to the
Company after five years and to require the Company to return the patents,
subject to the Company's retaining a non-exclusive license to the patents. This
put option expires upon an initial public offering meeting certain criteria, a
sale of the Company or certain defined changes in control. The Company has
included in the aggregate purchase price of the purchased patents and in-process
research and development the estimated fair value of $42,000 for the put option
and $45,000 of direct acquisition costs. The aggregate purchase price of
$4,807,000 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 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 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 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, the CYBERIMPACT SDK, 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. Management expects to complete this development of this product
and begin shipping it in September 2001. The second of these projects, the
CYBERIMPACT 3DOF 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
this product to become available in December 2000. The third of these projects
is the CYBERIMPACT 6DOF 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 expects to complete
development of this product and begin shipping it in June 2001. The fourth
project is the CYBERIMPACT, which Flight Yoke 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
F-11
<PAGE> 79
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
development was $175,000. Management expects that the product will become
available for sale in fiscal 2001. The fifth development project is the STYLIN
3D, which allows the user to reach inside the computer monitor and feel
three-dimensional objects. At the time of acquisition, the development was 11%
completed and the estimated cost to complete this development was $248,000.
Management expects that the product will become available for sale in fiscal
2001.
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 operation. Significant assumptions used to determine
the value of in-process research and development, including the following: (i)
forecast of net cash flows that were expected to result from the development
effort using projections 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 the existing and 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 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. Projected revenues from
the in-process products are expected to begin in 2000 and 2001 as the products
are completed and begin to ship. Initial annual revenue growth rates after
introduction are 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 feel
technology, and collaboration with 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 7), paid the seller $150,000, and is obligated to
pay an additional $75,000 in 2000 and 2001. The consideration for the consulting
services is $1,108,000, including the estimated fair value of the
F-12
<PAGE> 80
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
warrant ($808,000) which has been recorded as deferred compensation within
stockholders' equity. The cash portion of the services ($300,000) has been paid
or accrued, with a corresponding amount included in other assets recorded as
other assets. The consideration for the consulting service will be amortized
over the two-year estimated period of benefit of the consulting services. The
warrants were fully vested at the date of grant. Accordingly, the fair 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.
Also 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 June 30,
1999 (see Note 7).
3. SHORT-TERM INVESTMENTS
Short-term investments included the following equity securities and gross
unrealized holding gains and losses as of December 31, 1997 and 1998 and June
30, 1999 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED MARKET HOLDING HOLDING
COST VALUE GAINS LOSSES
--------- ------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Mutual funds..................................... $1,210 $1,212 $ 2 $--
====== ====== === ===
DECEMBER 31, 1998
Mutual funds..................................... $ 401 $ 402 $ 1 $--
====== ====== === ===
JUNE 30, 1999
Mutual funds..................................... $ 200 $ 200 $-- $--
====== ====== === ===
</TABLE>
The Company realized gains on the sales of securities of $19,000, $14,000,
$56,000 and none in 1996, 1997 and 1998 and the six months ended June 30, 1999,
respectively, while realizing losses of $1,000, $1,000, $1,000 and none in 1996,
1997, 1998 and for the six months ended June 30, 1999, respectively.
4. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1997 1998 1999
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials and subassemblies............................. $223 $378 $504
Work in process............................................. 16 37 38
Finished goods.............................................. 56 66 64
---- ---- ----
Total....................................................... $295 $481 $606
==== ==== ====
</TABLE>
F-13
<PAGE> 81
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
5. PROPERTY
Property consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1997 1998 1999
----- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment.......................................... $ 208 $ 314 $ 385
Machinery and equipment..................................... 172 177 195
Furniture and fixtures...................................... 110 123 174
Leasehold improvements...................................... -- 13 27
----- ----- -----
Total....................................................... 490 627 781
Less accumulated depreciation and amortization.............. (156) (298) (383)
----- ----- -----
Property, net............................................... $ 334 $ 329 $ 398
===== ===== =====
</TABLE>
6. LEASE COMMITMENTS
The Company leases its manufacturing and office facilities under a
noncancelable operating lease that expires in October 2002.
Minimum future operating lease payments are as follows:
<TABLE>
<CAPTION>
PERIODS ENDING DECEMBER 31,
--------------------------- (IN THOUSANDS)
<S> <C>
1999........................................................ $230
2000........................................................ 243
2001........................................................ 255
2002........................................................ 263
----
Total minimum lease payments................................ $991
====
</TABLE>
Rent expense was approximately $94,000, $117,000, $169,000 and $117,000 in
1996, 1997, 1998 and the six months ended June 30, 1999, respectively.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Preferred Stock--During June 1997, the Company issued a total of 864,642
shares of Series C redeemable convertible preferred stock ("Series C preferred
stock") to investors for gross proceeds of $1,500,005. At the option of the
stockholders, at any time on or after June 4, 2002, the Series C preferred
stockholders can require the Company to pay them the price originally paid plus
an amount equal to the declared but unpaid dividends. These payments will be
made in four equal installments on June 4, 2002 and every six months thereafter.
Issuance costs are being amortized over five years to accrete the carrying value
of the stock to $1,500,005 on June 4, 2002.
During June 1993 and May 1995, the Company issued a total of 2,344,331
shares of Series A convertible preferred stock to investors for gross proceeds
of $922,000. During November 1996, the Company issued 396,778 shares of Series B
convertible preferred stock to investors for gross proceeds of $590,004. During
April 1998, the Company issued 1,376,928 shares of Series D convertible
preferred stock to investors for gross proceeds of $5,750,002.
F-14
<PAGE> 82
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
The significant terms of the redeemable convertible preferred stock and the
convertible preferred stock are as follows:
- Each share of preferred stock is convertible into one share of common
stock (subject to adjustments for events of dilution).
- Each share of Series A and B preferred stock will automatically convert
in the event of a public offering in which the Company receives proceeds
equal to or greater than $5,000,000. Each share of Series C and D
preferred stock will automatically convert in the event of a public
offering in which the Company receives proceeds equal to or greater than
$10,000,000.
- Each share of Series A, B, C and D preferred stock has voting rights
equivalent to the number of shares of common stock into which it is
convertible. In addition, the Series C and D preferred stock have certain
protective voting rights with respect to corporate matters.
- In the event of liquidation, dilution or winding up of the Company, the
holders of Series C and Series D preferred stock will receive first, and
in preference to any distribution to the holders of Series A and Series B
preferred stock and common stock, an amount equal to $1.73 per share of
Series C preferred stock and $4.18 per share of Series D preferred stock
plus all declared but unpaid dividends. Upon satisfaction of the Series C
and Series D liquidation preferences, the holders of Series A and Series
B preferred stock will receive $0.10 and $1.49 per share plus all
declared but unpaid dividends, respectively. Upon satisfaction of the
Series A and Series B liquidation preferences, the holders of Series C
and Series D preferred stock will receive an additional $1.73 and $2.50
per share, respectively, and will be entitled to receive with the common
stock stockholders on a pro rata basis the remaining assets of the
Company, based on the number of shares of common stock into which their
shares are convertible.
- In the event the Board of Directors declares dividends payable on the
then outstanding common stock, Series A, B, C and D preferred
stockholders will receive $0.005, $0.01, $0.17 and $0.41 per share,
respectively. The right to these dividends is not cumulative.
Preferred Stock Warrants--In connection with the Series A preferred stock
offering, the Company issued warrants to purchase 121,050 and 30,260 shares of
Series A preferred stock at exercise prices of $0.50 and $0.99, respectively, to
a Series A preferred stock investor. During 1997, the warrant to purchase
121,050 shares was exercised. During 1998, the remaining warrant was exercised.
The estimated fair values of these warrants of $12,000 and $6,000, respectively,
were accounted for as reductions to the Series A preferred stock financing
proceeds.
In connection with the Series B offering, the Company issued warrants to
purchase 40,350 and 32,280 shares of Series B preferred stock at an exercise
price of $6.00 to a Series B preferred stock investor. Such warrants were
originally issued with a two-year term, expiring in 1998. The estimated fair
values of these warrants of $12,000 and $9,000, respectively, were accounted for
as reductions to the Series B preferred stock financing proceeds. During 1998,
upon the expiration of the original warrant terms the Company extended the term
of these exercisable warrants for three additional years through 2001 in
consideration for prior strategic planning consulting services. The estimated
fair value of the extension of the warrants of $41,000 was accounted for as a
consulting expense. The fair value of the extension of the warrants was
determined at the date of the grant extension using the methods specified by
SFAS 123 with following assumptions: risk free interest rate, 5.5%;
F-15
<PAGE> 83
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
volatility 50% and no dividends during the expected term. An expected life of
three years is based on the remaining contractual life of the warrant
agreements.
In connection with the Series D preferred stock offering, the Company
issued warrants 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
these warrants of $17,000 has been accounted for as a reduction to the Series D
preferred stock financing proceeds.
Common Stock Warrants--During 1995, the Company issued to two former
employees warrants to purchase 85,945 and 7,061 shares of the Company's common
stock, each at an exercise price of $0.04 for past services to the Company.
During 1998, the warrant to purchase 85,945 shares was exercised. During 1999,
the remaining warrant was exercised. The estimated fair value of these warrants
was not considered material.
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 is 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.
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 5,991,975 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 four years.
F-16
<PAGE> 84
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
Details of activity under the option plans are as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding, January 1, 1996................................ 1,471,846 $0.06
Granted (weighted average fair value of $0.01)............ 925,629 $0.16
Exercised................................................. (2,017) $0.17
Canceled.................................................. -- $ --
----------
Outstanding, December 31, 1996 (1,620,720 exercisable at a
weighted average price of $0.10).......................... 2,395,458 $0.10
Granted (weighted average fair value of $0.04)............ 1,022,860 $0.30
Exercised................................................. (105,144) $0.21
Canceled.................................................. (168) $0.19
----------
Outstanding, December 31, 1997 (2,871,999 exercisable at a
weighted average price of $0.16).......................... 3,313,006 $0.16
Granted (weighted average fair value of $0.38)............ 721,976 $1.31
Exercised................................................. (1,024,615) $0.11
Canceled.................................................. (88,484) $3.59
----------
Outstanding, December 31, 1998.............................. 2,921,883 $0.36
Granted (weighted average fair of value $0.47)............ 784,167 $3.74
Exercised................................................. (342,073) $0.45
Canceled.................................................. (19,648) $1.98
----------
Outstanding, June 30, 1999.................................. 3,344,329 $1.13
==========
</TABLE>
F-17
<PAGE> 85
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
Additional information regarding options outstanding as of December 31,
1998 and June 30, 1999 is as follows:
<TABLE>
<CAPTION>
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
- -------------------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
$0.04 - $0.14................... 1,099,568 3.80 $0.07 1,010,500 $0.07
0.17 - 0.37.................... 1,139,540 6.71 0.26 1,059,832 0.26
0.41 - 1.24.................... 545,356 7.72 0.67 545,356 0.67
1.36 - 4.02.................... 137,419 5.91 2.12 106,692 1.67
--------- ---- ----- --------- -----
$0.04 - $4.03................... 2,921,883 5.73 $0.35 2,722,380 $0.32
========= ==== ===== ========= =====
June 30, 1999:
$0.04 - $0.14................... 907,960 5.92 $0.07 877,193 $0.07
0.17 - 0.37.................... 1,018,602 5.90 0.26 969,090 0.27
0.41 - 1.36.................... 628,077 7.89 0.77 628,077 0.77
3.11 - 4.03.................... 789,690 9.80 3.75 83,889 3.71
--------- ---- ----- --------- -----
$0.04 - $4.03................... 3,344,329 7.20 $1.13 2,558,249 $0.43
========= ==== ===== ========= =====
</TABLE>
At December 31, 1998 and June 30, 1999, the Company had 754,379 and
1,141,493 shares, respectively, available for future grants under the option
plans.
Additional Stock Plan Information--As discussed in Note 1, the Company
accounted for its stock-based awards using the intrinsic value method in
accordance with APB No. 25, Accounting for Stock Issued to Employees and its
related interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation ("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 minimum value method with
the following weighted average assumptions: expected life, 18 months following
vesting; risk free interest rate, 5.5%, 6.0%, 5.3% and 5.2% in 1996, 1997, 1998
and the first six months of 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 1996, 1997, 1998 and the first six months of
1999 had been amortized to expense over the vesting periods of the awards, pro
forma net loss would have been $90,000 ($0.04 net loss per share), $545,000
($0.17 net loss per share), $1,885,000 ($0.48 net loss per share) and $2,202,000
($0.45 net loss per share) in 1996, 1997 and 1998 and the six months ended June
30, 1999, respectively.
The Company had outstanding nonstatutory stock options to consultants to
purchase 104,182, 153,570 and 203,604 shares of common stock at December 31,
1997 and 1998 and June 30, 1999,
F-18
<PAGE> 86
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
respectively. Compensation expense of none, $5,000, $68,000 and $111,000 was
recognized as result of these options in 1996, 1997, 1998 and the six months
ended June 30, 1999, 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 are determined at the date of vesting using the methods specified
by SFAS 123 with the following weighted average assumptions during 1996, 1997,
1998 and the six months ended June 30, 1999, respectively: expected life, 10
years; risk free interest rate, 5.5%, 6.0%, 5.3% and 5.2%; 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
242,100 and 20,175 shares of common stock in 1998 and the six months ended June
30, 1999, respectively, in connection with the acquisition of patents and the
licensing of technology (see Note 2). The estimated fair value of these options
of $219,000 and $129,000, respectively, has been recorded as purchased patents
and technology. Such 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 No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), with the following assumptions during 1998 and 1999,
respectively: expected life, 10 years, risk free interest rate, 5.5% and 5.0%;
volatility, 25% and 50% and no dividends during the expected term.
Common Stock--Common stock issued to the founders and certain other
employees is subject to repurchase agreements under which the Company has the
option to repurchase the unvested shares upon termination of employment at the
original issue price. The Company's repurchase right generally lapses over four
years. At December 31, 1998, 23,537 shares of common stock were subject to
repurchase by the Company. At June 30, 1999, the Company's repurchase rights had
lapsed.
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. During 1999, the
Company issued 1,379,970 shares of common stock in connection with purchases of
patents and technology (see Note 2).
Deferred Stock Compensation
In connection with grants of certain stock options to employees and
directors in the six months ended June 30, 1999, the Company recorded $1,473,000
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
(generally four years). Amortization of deferred stock compensation for the six
months ended June 30, 1999 was $66,000.
F-19
<PAGE> 87
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
Common Stock Reserved for Issuance
At December 31, 1998, the Company had reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock............................... 5,131,100
Exercise of options......................................... 3,676,262
Exercise of warrants........................................ 182,854
----------
Total............................................. 8,990,216
==========
</TABLE>
8. 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):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -----------------
1996 1997 1998 1998 1999
------ ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss...................................... $ (81) $ (527) $(1,673) $ (869) $(2,118)
Redeemable convertible preferred stock
accretion.................................. -- 3 6 3 3
------ ------ ------- ------- -------
Net loss applicable to common stockholders...... $ (81) $ (530) $(1,679) $ (872) $(2,121)
====== ====== ======= ======= =======
Denominator:
Weighted average common shares outstanding.... 3,311 3,338 3,970 3,926 5,003
Weighted average common shares outstanding
subject to repurchase...................... (486) (176) (61) (87) --
------ ------ ------- ------- -------
Shares used in calculating basic and diluted
net loss per share......................... 2,825 3,162 3,909 3,839 5,003
====== ====== ======= ======= =======
Basic and diluted net loss per share............ $(0.03) $(0.17) $ (0.43) $ (0.23) $ (0.42)
====== ====== ======= ======= =======
</TABLE>
F-20
<PAGE> 88
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
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 antidilutive. These outstanding
securities consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Redeemable convertible preferred
stock.............................. -- 864,642 863,771 863,771 863,771
Convertible preferred stock.......... 2,741,109 2,862,159 4,267,329 4,237,074 4,267,329
Shares of common stock subject to
repurchase......................... 343,176 125,813 23,537 75,096 --
Outstanding options.................. 2,395,458 3,313,006 2,921,883 2,925,425 3,344,329
Warrants............................. 195,899 287,087 182,854 213,117 498,593
---------- ---------- ---------- ---------- ----------
Total................................ 5,675,642 7,452,701 8,259,374 8,314,483 8,974,022
========== ========== ========== ========== ==========
Weighted average exercise price of
options............................ $ 0.10 $ 0.16 $ 0.36 $ 0.30 $ 1.13
========== ========== ========== ========== ==========
Weighted average exercise price of
warrants........................... $ 0.72 $ 0.56 $ 0.95 $ 0.97 $ 2.71
========== ========== ========== ========== ==========
</TABLE>
9. INCOME TAXES
No provision for federal income taxes was required for the years ended
December 31, 1996, 1997 and 1998 due to the Company's net losses in these
periods.
Significant components of the net deferred tax assets for federal and state
income taxes consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
----- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 173 $ 830
Research and development credits.......................... 13 130
Reserves and accruals recognized in different periods..... 39 75
Depreciation and amortization............................. -- 2
----- -------
Total deferred tax assets................................... 225 1,037
Valuation reserve........................................... (225) (1,037)
----- -------
Net deferred tax assets..................................... $ -- $ --
===== =======
</TABLE>
F-21
<PAGE> 89
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
The Company's effective tax rate differed from the expected benefit at the
federal statutory tax rate at December 31 as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate.................................. (35.0)% (35.0)% (35.0)%
State taxes, net of federal benefit......................... (6.0) (6.0) (6.0)
Other....................................................... 1.7 0.6 0.6
Valuation allowance......................................... 39.3 40.4 40.4
----- ----- -----
Effective tax rate.......................................... --% --% --%
===== ===== =====
</TABLE>
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $1,926,000 and $967,000, respectively, expiring
through 2018 and through 2003, 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.
10. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company operates in one business segment, which is the design,
development, production, marketing and licensing of products based on feel
technology. These devices are used in computer entertainment, personal
computing, medical and other professional computing applications. The Company
operates entirely in North America and does not maintain operations in other
countries. The following is a summary of revenues within geographic areas.
Revenues are broken out geographically by the ship-to location of the customer.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
North America................................. $1,867 $3,325 $3,363 $1,428 $2,494
Europe........................................ 533 648 950 425 469
Far East...................................... 239 347 597 259 465
Rest of the world............................. 98 12 111 59 75
------ ------ ------ ------ ------
$2,737 $4,332 $5,021 $2,171 $3,503
====== ====== ====== ====== ======
</TABLE>
F-22
<PAGE> 90
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
Significant Customers
In 1996, one unrelated customer accounted for 11% of total revenues. In
1997, one unrelated customer accounted for 13% of total revenues. In 1998, a
preferred stockholder accounted for 11% of total revenues. For the six months
ended June 30, 1999, a preferred stockholder accounted for 19% of total
revenues.
Receivables due from two unrelated customers were $158,000 and $57,000,
respectively, at December 31, 1997. Receivables due from a preferred stockholder
were $387,000 at December 31, 1998. Receivables due from two unrelated parties
were $215,000 and $184,000, respectively, at June 30, 1999.
11. 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. No contributions by the Company have been made to the
401(k) plan since its inception.
12. 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 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 $49,000, $116,000 and $68,000 in 1997 and 1998
and the six months ended June 30, 1999, respectively.
As discussed in Note 10, a preferred stockholder accounted for $249,000 and
$462,000 of royalty revenue in 1998 and the six months ended June 30, 1999,
respectively, and $316,000 and $222,000 of development contract revenue in 1998
and the six months ended June 30, 1999, respectively.
13. CONTINGENCIES
The Company has 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 or is in the process of
obtaining written non-infringement and/or patent invalidity opinions from
outside patent
F-23
<PAGE> 91
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
counsel. Accordingly, in the opinion of management, the outcome of such claims
will not have a material effect on the financial statements of the Company.
14. SUBSEQUENT EVENTS
In June 1999, the Board of Directors approved, subject to stockholder
approval, an amendment to the 1997 Stock Option Plan to increase the number of
shares reserved for issuance by 1,149,975.
On August 31, 1999, the Board of Directors approved, subject to stockholder
approval, the following:
- Reincorporation of the Company in the state of Delaware and a concurrent
0.807-for-one reverse common and Series C and D preferred stock split and
4.035-for-one reverse Series A and B preferred stock split.
- Adoption of the Company's 1999 Employee Stock Purchase Plan (the "ESPP").
The ESPP becomes effective upon the closing of the Company's initial
public offering. Under the ESPP, eligible employees may purchase common
stock through payroll deductions. Participants may not purchase more than
1,000 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 issuance under the ESPP plus an automatic annual increase on
January 1, 2000 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.
- Amendment of the Company's 1997 Stock Option Plan to provide for an
automatic increase in the shares reserved for issuance on January 1 of
each year, beginning on January 1, 2001, by an amount equal to 5% of the
number of shares of common stock which were issued and outstanding on the
last day of the preceding year.
F-24
<PAGE> 92
-------------------------------------------------------------------------
--------------------------------------------------------------------------
4,250,000 SHARES
IMMERSION.LOGO
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
HAMBRECHT & QUIST
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
---------------------------
, 1999
---------------------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING
OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS
AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME
OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR
DISTRIBUTION OF THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO
COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE
UNITED STATES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY
RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS
APPLICABLE TO THAT JURISDICTION.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions payable by the Registrant in connection
with the sale and distribution of the Common Stock being registered. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market application
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 14,946
NASD filing fee............................................. 5,877
Nasdaq National Market application fee...................... 1,000
Blue sky qualification fees and expenses....................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Director and officer liability insurance....................
Transfer agent and registrar fees...........................
Miscellaneous expenses......................................
----------
Total............................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant has entered into separate indemnification agreements (Exhibit 10.3)
with its directors and officers which require the Registrant, among other
things, to indemnify them against certain liabilities which may arise by reason
of their status or service (other than liabilities arising from willful
misconduct of a culpable nature). The Registrant also intends to maintain
director and officer liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreements may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has sold and issued the following unregistered securities:
(1) From inception to September 30, 1999, we have issued options to
purchase an aggregate of 3,038,372 shares of common stock under the 1994
stock option plan, of which 1,232,099 have been exercised, and 3,254,842
shares of common stock under the 1997 stock option plan, of which 304,276
have been exercised.
II-1
<PAGE> 94
(2) On November 3, 1996, November 4, 1996, November 20, 1996, November
26, 1996 and November 27, 1996, the Registrant sold an aggregate of 396,777
shares of Series B preferred stock to accredited investors for an aggregate
purchase price of $590,004.
(3) In November 1996, the Registrant issued an option to purchase
80,700 shares of common stock to Steven Blank at an exercise price of $0.17
per share.
(4) In November 1996, the Registrant issued a warrant to purchase
32,280 shares of Series B preferred stock to Bruce Paul at an exercise
price of $1.48 per share.
(5) From November 1996 through June 1999, the Registrant issued
options to purchase an aggregate of 154,648 shares of common stock to
Steven Blank at exercise prices ranging between $0.173 per share and $3.66
per share. These options may be exercised at any time within ten years
after their date of issuance.
(6) In December 1996, the Registrant issued a warrant to purchase
40,350 shares of Series B preferred stock to Bruce Paul at an exercise
price of $1.48 per share.
(7) In March 1997, the Registrant issued 121,050 shares of Series A
preferred stock to Bruce Paul pursuant to an exercise of a warrant dated
April 1995 at an exercise price of $0.49 per share.
(8) On June 3, 1997, the Registrant sold an aggregate of 864,642
shares of Series C preferred stock to accredited investors for an aggregate
purchase price of $1,500,005.40.
(9) On June 3, 1997, the Registrant issued a warrant to purchase
91,191 shares of common stock to an accredited investor at an exercise
price of $0.19 per share.
(10) In December 1997, the Registrant issued an option to purchase
80,700 shares of common stock to Washington Research Foundation at an
exercise price of $0.37 per share in consideration of consulting services.
This option may be exercised at any time within ten years after its
issuance.
(11) In February 1998, the Registrant issued an option to purchase
20,175 shares of common stock to Asia Pacific Ventures Co. at an exercise
price of $0.37 in consideration of consulting services. This option may be
exercised at any time within ten years after its issuance.
(12) In March 1998, the Registrant issued an option to purchase
242,100 shares of common stock to Lex Computer Management at an exercise
price of $0.62 per share in consideration of consulting services.
(13) In March 1998, the Registrant issued 60,525 shares of common
stock to Steven Blank pursuant to an exercise of an option dated November
1996 at an exercise price of $0.17 per share. The consideration was paid by
the company in exchange for a promissory note from Mr. Blank.
(14) In March 1998, the Registrant issued 28,245 shares of common
stock to Craig Culver with a fair market value of $3.66 per share in
consideration for an assignment of a patent.
(15) On April 13, 1998, the Registrant sold an aggregate of 1,376,929
shares of Series D preferred stock to accredited investors for an aggregate
purchase price of $5,750,002.
(16) On April 13, 1998, the Registrant issued a warrant to purchase
11,972 shares of Series D preferred stock to BancAmerica Robertson Stephens
at an exercise price of $4.18 per share.
II-2
<PAGE> 95
(17) In June 1998, the Registrant issued 80,700 shares of common stock
to Digital Equipment Corporation with a fair market value of $3.66 per
share in consideration of consulting services and assignment of a patent.
(18) In June 1998, the Registrant issued 85,945 shares of common stock
to Bernie G. Jackson pursuant to an exercise of a warrant dated June 1995
at an exercise price of $0.04 per share.
(19) In July 1998, the Registrant issued 28,245 shares of common stock
to Ming-Chang Tsai and Gemintek Corporation at a price of $3.66 per share
in consideration of an assignment of the patent.
(20) In August 1998, the Registrant issued 30,262 shares of Series A
preferred stock to Bruce Paul pursuant to an exercise of a warrant dated
August 1996 at an exercise price of $0.99 per share.
(21) In February 1999, the Registrant issued 8,070 shares of common
stock to Washington Research Foundation in consideration for a patent
license.
(22) In February 1999, the Registrant issued 88,770 shares of common
stock to the University of British Columbia for consideration of the sale
and transfer of a patent.
(23) On March 4, 1999, the Registrant issued an aggregate of 1,291,200
shares of common stock to Cybernet Systems Corporation with a fair market
value of $3.66 pursuant to an Agreement and Plan of Reorganization.
(24) On March 4, 1999, the Registrant issued a warrant to purchase
322,800 shares of common stock to Cybernet Systems Corporation at an
exercise price of $3.66 in consideration for certain consulting services.
(25) In May 1999, the Registrant issued 7,061 shares of common stock
to Richard Brent Gillespie pursuant to an exercise of a warrant dated
August 1995 at an exercise price of $0.04 per share.
(26) In June 1999, the Registrant issued an option to purchase 20,175
shares of common stock at an exercise price of $3.66 per share to Coactive
Drive Corporation in consideration for a technology licensing agreement.
This option may be exercised at any time within ten years after its
issuance.
(27) In July 1999, the Registrant issued 68,595 shares of common stock
to Michael Reich and Associates in consideration of services.
There were no underwriters employed in connection with any of the transactions
set forth in Item 15.
Certain issuances described in this Item 15 were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and/or Rules 504, 505 or 506 promulgated under the Securities Act
as transactions by an issuer not involving a public offering. Certain issuances
described in this Item 15 were deemed exempt from registration under the
Securities Act in reliance on Section 4(2) or Rule 701 promulgated thereunder as
transactions pursuant to compensatory benefit plans and contracts relating to
compensation. The recipients of securities in each of these transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about us or had access, through employment or other relationships, to that
information.
II-3
<PAGE> 96
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
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.**
3.1 Amended and Restated Articles of Incorporation of Immersion,
as amended to date.**
3.2 Certificate of Incorporation of Immersion.
3.3 Form of Amended and Restated Certificate of Incorporation of
Immersion (to be filed with the Delaware Secretary of State
prior to the date of this prospectus).
3.4 Certificate of Designations of Immersion (to be filed with
the Delaware Secretary of State prior to the date of this
prospectus).
3.5 Agreement and Plan of Merger (to be executed prior to the
date of this prospectus).
3.6 Certificate of Elimination of Immersion (to be filed with
the Delaware Secretary of State upon completion of the
offering).
3.7 Certificate of Amendment of Restated Certificate of
Incorporation of Immersion (to be filed with the Delaware
Secretary of State upon completion of the offering).
3.8 Bylaws of Immersion.**
3.9 Form of Bylaws.*
4.1 Information and Registration Rights Agreement dated April
13, 1998.**
4.2 Immersion Corporation Cybernet Registration Rights Agreement
dated March 5, 1999.**
4.3 Common Stock Grant and Purchase Agreement and Plan with
Michael Reich & Associates dated July 6, 1999.**
4.4 Common Stock Agreement with Digital Equipment Corporation
dated June 12, 1998.**
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 1994 Stock Option Plan and form of Incentive Stock Option
Agreement and form of Nonqualified Stock Option Agreement.**
10.2 1997 Stock Option Plan and form of Incentive Stock Option
Agreement and form of Nonqualified Stock Option Agreement.**
10.3 Form of Indemnity Agreement.*
10.4 Immediately Exercisable Nonstatutory Stock Option Agreement
with Steven G. Blank dated November 1, 1996.**
10.5 Common Stock Purchase Warrant issued to Cybernet Systems
Corporation dated March 5, 1999.**
10.6 Consulting Services Agreement with Cybernet Systems
Corporation dated March 5, 1999.**
10.7 Amendment to Warrant to Purchase Shares of Series B
Preferred Stock to Bruce Paul amending warrant to purchase
8,000 shares of Series B Preferred Stock dated September 22,
1998.**
10.8 Amendment to Warrant to Purchase Shares of Series B
Preferred Stock to Bruce Paul amending warrant to purchase
10,000 shares of Series B Preferred Stock dated September
22, 1998.**
10.9 Operating Agreement with MicroScribe, LLC dated July 1,
1997.**
10.10 Exchange Agreement with MicroScribe, LLC dated July 1,
1997.**
10.11 Lease with Spieker Properties, L.P. dated October 26, 1998.*
10.12 Agreement Draft for ASIC Design and Development with
Kawasaki LSI, U.S.A., Inc., dated October 16, 1997.*+
10.13 Patent License Agreement with Microsoft Corporation dated
July 19, 1999.*+
10.14 Semiconductor Device Component Purchase Agreement with
Kawasaki LSI, U.S.A., Inc., dated August 17, 1998.*+
10.15 Amendment No. 1 to Semiconductor Device Component Purchase
Agreement with Kawasaki LSI, U.S.A., Inc. dated April 27,
1999.*+
</TABLE>
II-4
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.16 Intercompany Intellectual Property License Agreement with
MicroScribe, LLC dated July 1, 1997.*+
10.17 Patent License Agreement with MicroScribe, LLC dated July 1,
1997.*+
10.18 Intellectual Property License Agreement with Logitech, Inc.
dated [#].*+
10.19 Intellectual Property License Agreement with Logitech, Inc.
dated [#].*+
10.20 Technology Product Development Agreement with Logitech, Inc.
dated [#].*+
10.21 1999 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
21.1 Subsidiaries of Immersion.**
23.1 Consent of Deloitte & Touche LLP (to be filed upon
subsequent amendment).
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on page II-5).**
27.1 Financial Data Schedule (EDGAR filed version only).**
</TABLE>
- ---------------
** Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 333-86361) on September 1, 1999.
* Previously filed with Amendment No. 1 to Registrant's Registration Statement
on Form S-1 (File No. 333-86361) on September 13, 1999.
# Certain information has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
+ Confidential treatment is being requested as to a portion of this exhibit.
(B) FINANCIAL STATEMENT SCHEDULES.
The following are filed herewith:
Independent Auditors' Report on Schedule.
Schedule II Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE> 98
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose,
State of California, on the fifth day of October, 1999
IMMERSION CORPORATION
By: /s/ LOUIS ROSENBERG
------------------------------------
Louis Rosenberg, Ph.D.
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LOUIS ROSENBERG Chairman of the Board, President and October 5, 1999
- --------------------------------------------- Chief Executive Officer (Principal
Louis Rosenberg, Ph.D. Executive Officer)
/s/ VICTOR VIEGAS* Chief Financial Officer (Principal October 5, 1999
- --------------------------------------------- Financial and Accounting Officer)
Victor Viegas
/s/ BRUCE SCHENA* Vice President, Chief Technology October 5, 1999
- --------------------------------------------- Officer, Secretary and Director
Bruce Schena
/s/ STEVEN BLANK* Director October 5, 1999
- ---------------------------------------------
Steven Blank
/s/ JONATHAN RUBINSTEIN Director October 5, 1999
- ---------------------------------------------
Jonathan Rubinstein
*By: /s/ LOUIS ROSENBERG
---------------------------------------
Louis Rosenberg, Ph.D.
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 100
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders
of Immersion Corporation:
We have audited the consolidated financial statements of Immersion
Corporation (the Company) as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, and have issued our report
thereon dated April 2, 1999 (included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. The 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 financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
San Jose, California
April 2, 1999
To the Board of Directors and Stockholders
of Immersion Corporation:
The consolidated financial statements included herein have been adjusted to
give effect to the reincorporation in Delaware and the related 0.807-for-one
reverse common and Series C and D preferred stock split and the 4.035-for-one
reverse Series A and B preferred stock split as described in the second
paragraph of Note 14 to the consolidated financial statements. The above report
is in the form that will be signed by Deloitte & Touche LLP upon effectiveness
of such event assuming that, from August 31, 1999 to the effective date of such
event, no other events shall have occurred that would affect the accompanying
consolidated financial statements or notes thereto.
DELOITTE & TOUCHE LLP
San Jose, California
October 5, 1999
S-1
<PAGE> 101
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND DEDUCTIONS/ END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts............ $ 5 $40 $37 $ 8
Year ended December 31, 1997
Allowance for doubtful accounts............ $ 8 $39 $ 9 $38
Year ended December 31, 1998
Allowance for doubtful accounts............ $38 $57 $ 3 $92
Six months ended June 30, 1999
Allowance for doubtful accounts*........... $92 $ 4 $20 $76
</TABLE>
- ---------------
* Unaudited
S-2
<PAGE> 102
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
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.**
3.1 Amended and Restated Articles of Incorporation of Immersion,
as amended to date.**
3.2 Certificate of Incorporation of Immersion.
3.3 Form of Amended and Restated Certificate of Incorporation of
Immersion (to be filed with the Delaware Secretary of State
prior to the date of this prospectus).
3.4 Certificate of Designations of Immersion (to be filed with
the Delaware Secretary of State prior to the date of this
prospectus).
3.5 Agreement and Plan of Merger (to be executed prior to the
date of this prospectus).
3.6 Certificate of Elimination of Immersion (to be filed with
the Delaware Secretary of State upon completion of the
offering).
3.7 Certificate of Amendment of Restated Certificate of
Incorporation of Immersion (to be filed with the Delaware
Secretary of State upon completion of the offering).
3.8 Bylaws of Immersion.**
3.9 Form of Bylaws.*
4.1 Information and Registration Rights Agreement dated April
13, 1998.**
4.2 Immersion Corporation Cybernet Registration Rights Agreement
dated March 5, 1999.**
4.3 Common Stock Grant and Purchase Agreement and Plan with
Michael Reich & Associates dated July 6, 1999.**
4.4 Common Stock Agreement with Digital Equipment Corporation
dated June 12, 1998.**
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 1994 Stock Option Plan and form of Incentive Stock Option
Agreement and form of Nonqualified Stock Option Agreement.**
10.2 1997 Stock Option Plan and form of Incentive Stock Option
Agreement and form of Nonqualified Stock Option Agreement.**
10.3 Form of Indemnity Agreement.*
10.4 Immediately Exercisable Nonstatutory Stock Option Agreement
with Steven G. Blank dated November 1, 1996.**
10.5 Common Stock Purchase Warrant issued to Cybernet Systems
Corporation dated March 5, 1999.**
10.6 Consulting Services Agreement with Cybernet Systems
Corporation dated March 5, 1999.**
10.7 Amendment to Warrant to Purchase Shares of Series B
Preferred Stock to Bruce Paul amending warrant to purchase
8,000 shares of Series B Preferred Stock dated September 22,
1998.**
10.8 Amendment to Warrant to Purchase Shares of Series B
Preferred Stock to Bruce Paul amending warrant to purchase
10,000 shares of Series B Preferred Stock dated September
22, 1998.**
10.9 Operating Agreement with MicroScribe, LLC dated July 1,
1997.**
10.10 Exchange Agreement with MicroScribe, LLC dated July 1,
1997.**
10.11 Lease with Spieker Properties, L.P. dated October 26, 1998.*
10.12 Agreement Draft for ASIC Design and Development with
Kawasaki LSI, U.S.A., Inc., dated October 16, 1997.*+
10.13 Patent License Agreement with Microsoft Corporation dated
July 19, 1999.*+
10.14 Semiconductor Device Component Purchase Agreement with
Kawasaki LSI, U.S.A., Inc., dated August 17, 1998.*+
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.15 Amendment No. 1 to Semiconductor Device Component Purchase
Agreement with Kawasaki LSI, U.S.A., Inc. dated April 27,
1999.*+
10.16 Intercompany Intellectual Property License Agreement with
MicroScribe, LLC dated July 1, 1997.*+
10.17 Patent License Agreement with MicroScribe, LLC dated July 1,
1997.*+
10.18 Intellectual Property License Agreement with Logitech, Inc.
dated [#].*+
10.19 Intellectual Property License Agreement with Logitech, Inc.
dated [#].*+
10.20 Technology Product Development Agreement with Logitech, Inc.
dated [#].*+
10.21 1999 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
21.1 Subsidiaries of Immersion.**
23.1 Consent of Deloitte & Touche LLP (to be filed upon
subsequent amendment).
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on page II-5).**
27.1 Financial Data Schedule (EDGAR filed version only).**
</TABLE>
- ---------------
** Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 333-86361) on September 1, 1999.
* Previously filed with Amendment No. 1 to Registrant's Registration Statement
on Form S-1 (File No. 333-86361) on September 13, 1999.
# Certain information has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
+ Confidential treatment is being requested as to a portion of this exhibit.
<PAGE> 1
EXHIBIT 1.1
IMMERSION CORPORATION
SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
_____ __, 1999
HAMBRECHT & QUIST LLC
Bear, Stearns & Co. Inc.
BancBoston Robertson Stephens Inc.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Immersion Corporation, a Delaware corporation (herein called the
Company), proposes to issue and sell _______ shares of its authorized but
unissued Common Stock, $0.001 par value (herein called the Common Stock) (said
shares of Common Stock being herein called the Underwritten Stock). The Company
and the stockholders of the Company named in Schedule II hereto (herein
collectively called the Selling Securityholders) propose to grant to the
Underwriters (as hereinafter defined) an option to purchase up to additional
shares of Common Stock (herein called the Option Stock and with the Underwritten
Stock herein collectively called the Stock). The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and
warrant that you have been authorized by each of the other Underwriters to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 33-_____), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
- --------
(1) Plus an option to purchase from the Company and the Selling
Securityholders up to additional shares to cover over-allotments.
1
<PAGE> 2
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.
(a) The Company and each Class I Selling Securityholder in Schedule II
hereto hereby represent and warrant as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement and the
Prospectus and as being conducted, and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the
character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary (except where the failure
to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole).
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the
ordinary course of business, other than as set forth in the Registration
Statement and the Prospectus, and since such dates, except in the
ordinary course of business, neither the Company nor any of its
subsidiaries has entered into any material transaction not referred to
in the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the
rules and regulations of the Commission thereunder; on the Effective
Date, the Registration Statement did not contain any untrue statement of
a material fact and did not omit to state any material fact required to
be stated therein or necessary in order to make the statements therein
not misleading; and, on the Effective Date the Prospectus did not and,
on the Closing Date and any later date on which Option Stock is to be
purchased, will not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omissions from, the Registration Statement or the
Prospectus made in reliance upon and in conformity with information
herein or otherwise furnished in writing to the Company by or on behalf
of the Underwriters for use in the Registration Statement or the
Prospectus.
(iv) The Stock is duly and validly authorized, is (or, in the
case of shares of the Stock to be sold by the Company, will be, when
issued and sold to the Underwriters as provided herein) duly and validly
issued, fully paid and nonassessable and conforms to the description
thereof in the Prospectus. No further approval or authority of the
stockholders or the Board of Directors of the Company will be required
for the transfer and sale of the Stock to be sold by the Selling
Securityholders or the issuance and sale of the Stock as contemplated
herein.
(v) Except as disclosed in the Prospectus, each of the Company
and its subsidiaries owns or possesses adequate rights to use all
patents, patent rights or licenses, inventions, collaborative research
agreements, trade secrets, know-how, trademarks, service marks, trade
names and copyrights which are necessary to conduct its businesses as
described in the Registration Statement and Prospectus; the expiration
of any patents, patent rights, trade secrets, trademarks, service marks,
trade names or copyrights would not result in a materially adverse
change in the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, that
is not otherwise disclosed in the Prospectus; except as disclosed in the
Prospectus, the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of
the Company by others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and, except as disclosed in the Prospectus, the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect
to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a materially adverse change in the business,
properties, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole. Except as disclosed in the
Prospectus, there is no claim being made against the Company regarding
patents, patent rights or licenses, inventions, collaborative research,
trade secrets, know-how, trademarks, service marks, trade names or
copyrights. The Company and its subsidiaries do not in the conduct of
their business as now or proposed to be conducted as described in the
Prospectus infringe or conflict with any right or patent of any third
party, or any discovery, invention, product or process which is the
subject of a patent application filed by any third party, known to the
Company or any of its subsidiaries, which such infringement or conflict
is reasonably likely to result in a materially adverse
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<PAGE> 3
change in the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.
(vi) The Company has been advised of the rules and requirements
under the Investment Company Act of 1940, as amended (herein called the
Investment Company Act). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the
Investment Company Act.
(vii) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected
to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Stock.
(viii) Substantially all outstanding shares of Common Stock, and
all securities convertible into or exercisable or exchangeable for
Common Stock, are subject to valid, binding and enforceable agreements
to the effect that, without the prior written consent of Hambrecht &
Quist LLC on behalf of the Underwriters, the holder will not, for a
period of 180 days following the commencement of the public offering of
the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire
Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or
ownership of Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or
such other securities, in cash or otherwise. The Company has provided to
counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities
held by each securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the lock-up
agreements in effect.
(b) Each of the Selling Securityholders, severally and not jointly,
hereby represents and warrants as follows:
(i) Such Selling Securityholder has good and marketable title to
all the shares of Stock to be sold by such Selling Securityholder
hereunder, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever, with full right and authority to
deliver the same hereunder, subject, in the case of such Selling
Securityholder, to the rights of degrees , as custodian (herein called
the Custodian), and that upon the delivery of and payment for such
shares of the Stock hereunder, the several Underwriters will receive
good and marketable title thereto, free and clear of all liens,
encumbrances, equities, security interests and claims whatsoever.
(ii) Such Selling Securityholder has duly authorized, executed
and delivered, in the form heretofore furnished to the Underwriters, a
Custody Agreement and Power of Attorney (herein called the Custody
Agreement and Power of Attorney) appointing ____________ and
____________ as attorneys-in-fact (herein collectively called the
"Attorneys" and individually called an "Attorney") and appointing
____________ as Custodian; each of the Custody Agreement and Power of
Attorney constitutes a valid and binding agreement on the part of such
Selling Securityholder, enforceable in accordance with its terms, except
as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting creditors' rights generally or by general equitable
principles; and each of such Selling Securityholder's Attorneys, acting
alone, is authorized to execute and deliver this Agreement on behalf of
such Selling Securityholder, to determine the purchase price to be paid
by the several Underwriters to such Selling Securityholder as provided
in Section 3 hereof, to authorize the delivery of the shares of Stock to
be sold by such Selling Securityholder under this Agreement and to duly
endorse (in blank or otherwise) the certificate or certificates
representing such Stock or a stock power or power with respect thereto,
to accept payment therefor, and otherwise to act on behalf of such
Selling Securityholder in connection with this Agreement.
(iii) All consents, approvals, authorizations and orders
required for the execution and delivery by such Selling Securityholder
of the Custody Agreement and Power of Attorney, the execution and
delivery by or on behalf of such Selling Securityholder of this
Agreement and the sale and delivery of the shares of Stock to be sold by
such Selling Securityholder under this Agreement have been obtained and
are in full force and effect; such Selling Securityholder, if other than
a natural person, has been duly organized and is validly existing in
good standing under the laws of the jurisdiction of its organization as
the type of entity that it purports to be; and such Selling
Securityholder has full legal right, power and authority to enter into
and perform its obligations under this Agreement and such Custody
Agreement and Power of Attorney, and to sell, assign, transfer and
deliver the Stock to be sold by such Selling Securityholder under this
Agreement.
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<PAGE> 4
(iv) Certificates in negotiable form for the shares of the Stock
to be sold by such Selling Securityholder have been placed in custody
under a Custody Agreement for delivery under this Agreement with the
Custodian; such Selling Securityholder specifically agrees that the
shares of the Stock represented by the certificates so held in custody
for such Selling Securityholder are subject to the interests of the
several Underwriters and the Company, that the arrangements made by such
Selling Securityholder for such custody, including the Power of Attorney
provided for in such Custody Agreement, are to that extent irrevocable,
and that the obligations of such Selling Securityholder shall not be
terminated by any act of such Selling Securityholder or by operation of
law, whether by the death or incapacity of such Selling Securityholder
(or, in the case of a Selling Securityholder that is not an individual,
the dissolution or liquidation of such Selling Securityholder) or the
occurrence of any other event; if any such death, incapacity,
dissolution, liquidation or other such event should occur before the
delivery of such shares of the Stock hereunder, certificates for such
shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(v) If such Selling Securityholder is a Class I or Class II
Selling Securityholder in Schedule II hereto, such Selling
Securityholder has reviewed the Registration Statement and Prospectus
and, although such Selling Securityholder has not independently verified
the accuracy or completeness of all the information contained therein,
nothing has come to the attention of such Selling Securityholder that
would lead such Selling Securityholder to believe that on the Effective
Date, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus contained and, on
the Closing Date and any later date on which Option Stock is to be
purchased, contains any untrue statement of a material fact or omitted
or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
[ADD ADDITIONAL REPS OF SELLING SECURITYHOLDERS]
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
shares of the Underwritten Stock to the several Underwriters and each of the
Underwriters agrees to purchase from the Company the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and purchased by the several Underwriters shall be $___ per share. In making
this Agreement, each Underwriter is contracting severally and not jointly;
except as provided in paragraphs (b) and (c) of this Section 3, the agreement of
each Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company and the Selling
Securityholders shall have the right to postpone the Closing Date determined as
provided in Section 5 hereof for not more than seven business days after the
date originally fixed as the Closing Date pursuant to said Section 5 in order
that any necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made. If neither the non-defaulting
Underwriters nor the Company and the Selling Securityholders shall make
arrangements within the 24-hour periods stated above for the purchase of all the
shares of the Stock which the
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<PAGE> 5
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company or the Selling Securityholders to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company or the Selling Securityholders.
Nothing in this paragraph (b), and no action taken hereunder, shall relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
and the Selling Securityholders grant an option to the several Underwriters to
purchase, severally and not jointly, up to shares in the aggregate of the
Option Stock from the Company and the Selling Securityholders at the same price
per share as the Underwriters shall pay for the Underwritten Stock. Said option
may be exercised only to cover over-allotments in the sale of the Underwritten
Stock by the Underwriters and may be exercised in whole or in part at any time
(but not more than once) on or before the thirtieth day after the date of this
Agreement upon written or telegraphic notice by you to the Company setting forth
the aggregate number of shares of the Option Stock as to which the several
Underwriters are exercising the option. Delivery of certificates for the shares
of Option Stock, and payment therefor, shall be made as provided in Section 5
hereof. The number of shares of the Option Stock to be purchased by each
Underwriter shall be the same percentage of the total number of shares of the
Option Stock to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Stock, as adjusted by you in such manner as you
deem advisable to avoid fractional shares. The number of shares of Option Stock
to be sold by each Selling Securityholder is set forth in Schedule II opposite
the name of each Selling Securityholder.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the ______, _______ and ______
paragraphs under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus (insofar as such information relates to the
Underwriters) constitutes the only information furnished by the Underwriters to
the Company for inclusion in the Registration Statement, any Preliminary
Prospectus, and the Prospectus, and you on behalf of the respective Underwriters
represent and warrant to the Company that the statements made therein are
correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo
Alto, California 94301-1825, at 7:00 a.m., San Francisco time, on the fourth
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such fourth business day, as
shall be agreed upon in writing by the Company, you and (if Option Stock is to
be delivered) the Selling Securityholders. The date and hour of such delivery
and payment (which may be postponed as provided in Section 3(b) hereof) are
herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Gray Cary Ware & Freidenrich
LLP, 400 Hamilton Avenue, Palo Alto, California 94301-1825, at 7:00 a.m., San
Francisco time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks or by wire, in either case in same day funds. Such payment shall be made
upon delivery of certificates for the Stock to you for the respective accounts
of the several Underwriters against receipt therefor signed by you. Certificates
for the Stock to be delivered to you shall be registered in such name or names
and shall be in such denominations as you may request at least one business day
before the Closing Date, in the case of Underwritten Stock, and at least one
business day prior to the purchase thereof, in the case of the Option Stock.
Such certificates will be made available to the Underwriters for inspection,
checking and packaging at the offices of Lewco Securities Corporation, 2
Broadway, New York, New York 10004 on the business day prior to the Closing Date
or, in the case of the Option Stock, by 3:00 p.m., New York time, on the
business day preceding the date of purchase.
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<PAGE> 6
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter. Any
such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders (where expressly indicated)
respectively covenants and agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A and (ii) not file any amendment to
the Registration Statement or supplement to the Prospectus of which you
shall not previously have been advised and furnished with a copy or to
which you shall have reasonably objected in writing or which is not in
compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, (ii) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement, (iii)
the institution or notice of intended institution of any action or
proceeding for that purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice
of the initiation or threatening of any proceeding for such purpose. The
Company and the Selling Securityholders will make every reasonable
effort to prevent the issuance of such a stop order and, if such an
order shall at any time be issued, to obtain the withdrawal thereof at
the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver
to you a signed copy of the Registration Statement as originally filed
and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a
signed copy of each post-effective amendment, if any, to the
Registration Statement (together with, in each case, all exhibits
thereto unless previously furnished to you) and will also deliver to
you, for distribution to the Underwriters, a sufficient number of
additional conformed copies of each of the foregoing (but without
exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as
many copies of the Prospectus as you may reasonably request, and (iii)
thereafter from time to time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, likewise
send to the Underwriters as many additional copies of the Prospectus and
as many copies of any supplement to the Prospectus and of any amended
prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by you, shall occur as a result of which it is
necessary, in the opinion of counsel for the Company or of counsel for
the Underwriters, to supplement or amend the Prospectus in order to make
the Prospectus not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser of the Stock, the Company
will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances existing
at the time such Prospectus is delivered to such purchaser, not
misleading. If, after the initial public offering of the Stock by the
Underwriters and during such period, the Underwriters shall propose to
vary the terms of offering thereof by reason of changes in general
market conditions or otherwise, you will advise the Company in writing
of the proposed variation, and, if in the opinion either of counsel for
the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company
will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the
Stock may be sold by the several Underwriters to use the Prospectus, as
from time to time amended or supplemented, in connection with the sale
of the Stock in accordance with the applicable provisions of the
Securities Act and the applicable rules and regulations thereunder for
such period.
(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the
Prospectus or any amended prospectus proposed to be filed.
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<PAGE> 7
(f) The Company will cooperate, when and as requested by you, in
the qualification of the Stock for offer and sale under the securities
or blue sky laws of such jurisdictions as you may designate and, during
the period in which a prospectus is required by law to be delivered by
an Underwriter or dealer, in keeping such qualifications in good
standing under said securities or blue sky laws; provided, however, that
the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified. The Company will, from
time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in
effect for so long a period as you may reasonably request for
distribution of the Stock.
(g) During a period of five years commencing with the date
hereof, the Company will furnish to you, and to each Underwriter who may
so request in writing, copies of all periodic and special reports
furnished to stockholders of the Company and of all information,
documents and reports filed with the Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective
Date, the Company will make generally available to its security holders
an earnings statement in accordance with Section 11(a) of the Securities
Act and Rule 158 thereunder.
(i) The Company and the Selling Securityholders jointly and
severally agree to pay all costs and expenses incident to the
performance of their obligations under this Agreement, including all
costs and expenses incident to (i) the preparation, printing and filing
with the Commission and the National Association of Securities Dealers,
Inc. ("NASD") of the Registration Statement, any Preliminary Prospectus
and the Prospectus, (ii) the furnishing to the Underwriters of copies of
any Preliminary Prospectus and of the several documents required by
paragraph (c) of this Section 6 to be so furnished, (iii) the printing
of this Agreement and related documents delivered to the Underwriters,
(iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this
Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi)
the printing and issuance of stock certificates, including the transfer
agent's fees. The Selling Securityholders will pay any transfer taxes
incident to the transfer to the Underwriters of the shares the Stock
being sold by the Selling Securityholders.
(j) The Company and the Selling Securityholders jointly and
severally agree to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their
counsel in qualifying the Stock under state or international securities
or blue sky laws and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses
and costs which the Company and the Selling Securityholders hereby agree
to pay and shall not affect any agreement which the Company and the
Selling Securityholders may make, or may have made, for the sharing of
any such expenses and costs.
(l) The Company and each of the Selling Securityholders hereby
agrees that, without the prior written consent of Hambrecht & Quist LLC
on behalf of the Underwriters, the Company or such Selling
Securityholder, as the case may be, will not, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock or
(ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of Common Stock,
whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to the Stock to be
sold to the Underwriters pursuant to this Agreement. The obligations of
the Company under this subsection (l) also shall not apply to (A) shares
of Common Stock issued by the Company upon the exercise of options
granted under the stock option plans of the Company (the "Option Plans")
or upon the exercise of warrants outstanding as of the date hereof, all
as described in the introduction to the table under the caption
"Capitalization" in the Preliminary Prospectus, (B) options to purchase
Common Stock granted under the Option Plans, and (C) shares of Common
Stock issued by the Company under its employee stock purchase plan.
(m) The Company agrees to use its best efforts to cause all
directors, officers, and stockholders to agree that, without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
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<PAGE> 8
such person or entity will not, for a period of 180 days following the
commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any
short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock
or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
The Company will not release any of its officers, directors or other
stockholders from any lock-up agreements currently existing or hereafter
effected without the prior written consent of Hambrecht & Quist LLC.
(n) If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in
your opinion the market price for the Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Prospectus), the
Company will, after written notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning
the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting
on such rumor, publication or event.
(o) The Company is familiar with the Investment Company Act of
1940, as amended, and will in the future conduct its affairs, in such a
manner to ensure that the Company was not and will not be an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended, and the rules
and regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Securities Exchange Act of
1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof, and (3) each Class III
Selling Securityholder shall only be liable under this paragraph with respect to
(A) information pertaining to such Selling Securityholder furnished by or on
behalf of such Selling Securityholder expressly for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such amendment
thereof or supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in Section
2(b) hereof. The indemnity agreements of the Company and the Selling
Securityholders contained in this paragraph (a) and the representations and
warranties of the Company and the Selling Securityholders contained in Section 2
8
<PAGE> 9
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b)
of this Section 7 agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such paragraphs, it
will promptly give written notice (herein called the Notice) of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
9
<PAGE> 10
(d) If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a) or (b)
of this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Securityholders on the one hand and the Underwriters on the other shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Stock received by the Company and the Selling
Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders will, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under the indemnity and
reimbursement agreements contained in the provisions of this Section 7 and
Section 11 hereof shall be limited to an amount equal to the initial public
offering price of the stock sold by such Selling Securityholder to the
Underwriters less underwriting discounts and commissions. The Company and the
Selling Securityholders may agree, as among themselves and without limiting the
rights of the Underwriters under this Agreement, as to the respective amounts of
such liability for which they each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or
10
<PAGE> 11
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company or the Selling Securityholders to the Underwriters and
no liability of the Underwriters to the Company or the Selling Securityholders;
provided, however, that in the event of any such termination the Company and the
Selling Securityholders agree to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company and the Selling Securityholders under this Agreement, including all
costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and
no stop order suspending the effectiveness thereof shall have been
issued and no proceedings therefor shall be pending or threatened by the
Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing the
Stock, all corporate proceedings and other legal matters incident to the
foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein),
shall have been approved at or prior to the Closing Date by Fenwick &
West LLP, counsel for the Underwriters.
(c) You shall have received from Gray Cary Ware & Freidenrich,
counsel for the Company and the Selling Securityholders, and from
Hickman, Stephens & Coleman LLP, patent counsel for the Company,
opinions, addressed to the Underwriters and dated the Closing Date,
covering the matters set forth in Annex A and Annex B hereto,
respectively, and if Option Stock is purchased at any date after the
Closing Date, additional opinions from each such counsel, addressed to
the Underwriters and dated such later date, confirming that the
statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date,
the statements made in the Registration Statement and the Prospectus
were true and correct in all material respects and neither the
Registration Statement nor the Prospectus omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth
in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective
dates as of which information is given in the Registration Statement in
the form in which it originally became effective and the Prospectus
contained therein, there has not been any material adverse change or any
development involving a prospective material adverse change in or
affecting the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered
into any material transaction not referred to in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, (iv) neither the Company nor any of its
subsidiaries has any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus, (v) there
are not any pending or known threatened legal proceedings to which the
Company or any of its subsidiaries is a party or of which property of
the Company or any of its subsidiaries is the subject which are material
and which are not disclosed in the Registration Statement and the
Prospectus, (vi) there are not any franchises, contracts, leases or
other documents which are required to be filed as exhibits to the
Registration Statement which have not been filed as required, (vii) the
representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later
date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for
securities in general or in political, financial or economic conditions
from those reasonably foreseeable as to render it impracticable in your
reasonable judgment to make a public offering of the Stock, or a
material adverse change in market levels for securities in general (or
those of companies in particular) or financial or economic conditions
which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the Closing
Date or such later date, as the case may be, and signed
11
<PAGE> 12
by the President and the Chief Financial Officer of the Company, stating
that the respective signers of said certificate have carefully examined
the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein and any supplements or
amendments thereto, and that the statements included in clauses (i)
through (vii) of paragraph (d) of this Section 9 are true and correct.
(f) You shall have received from Deloitte & Touche LLP, a letter
or letters, addressed to the Underwriters and dated the Closing Date and
any later date on which Option Stock is purchased, confirming that they
are independent public accountants with respect to the Company within
the meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their
letter delivered to you concurrently with the execution of this
Agreement (herein called the Original Letter), but carried out to a date
not more than three business days prior to the Closing Date or such
later date on which Option Stock is purchased (i) confirming, to the
extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the Closing Date or such later date,
as the case may be, and (ii) setting forth any revisions and additions
to the statements and conclusions set forth in the Original Letter which
are necessary to reflect any changes in the facts described in the
Original Letter since the date of the Original Letter or to reflect the
availability of more recent financial statements, data or information.
The letters shall not disclose any change, or any development involving
a prospective change, in or affecting the business or properties of the
Company or any of its subsidiaries which, in your sole judgment, makes
it impractical or inadvisable to proceed with the public offering of the
Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have received from Deloitte & Touche LLP a letter
stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope
of their examination of the Company's financial statements as at , 1999,
did not disclose any weakness in internal controls that they considered
to be material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the
qualification referred to in paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold
by the Company and the Stock to be sold by the Selling Securityholders
shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received
from all directors and officers and from stockholders holding
substantially all of the remaining stock agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating that without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
such person or entity will not, for a period of 180 days following the
commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any
short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock
or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Fenwick & West LLP, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
<PAGE> 13
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 2158 Paragon Drive, San Jose,
California 95131, Attention: Chief Executive Officer; and if to the Selling
Securityholders, shall be mailed, telegraphed or delivered to the Selling
Securityholders in care of at . All notices given by telegraph shall be promptly
confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (l), (m) and (n) of Section 6 hereof shall be
of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
<PAGE> 14
Please sign and return to the Company and to the Selling Securityholders
in care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
IMMERSION CORPORATION
By
----------------------------
Name:
----------------------------
Title:
----------------------------
SELLING SECURITYHOLDERS:
By:
---------------------------------
, Attorney-in-Fact
---------------
14
<PAGE> 15
The foregoing Agreement is hereby confirmed and
accepted as of the date first above written.
HAMBRECHT & QUIST LLC
BEAR, STEARNS & CO. INC.
BANCBOSTON ROBERTSON STEPHENS INC.
By Hambrecht & Quist LLC
By __________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I
hereto.
15
<PAGE> 16
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC.......................................................
Bear, Stearns & Co. Inc.....................................................
BancBoston Robertson Stephens Inc...........................................
Total............................................................
---------
=========
</TABLE>
16
<PAGE> 17
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
NAME AND CLASS OF NUMBER OF SHARES OF
SELLING SECURITYHOLDERS OPTION STOCK TO BE SOLD
----------------------- -----------------------
<S> <C>
CLASS I
CLASS II
CLASS III
Total.....................................................
======
</TABLE>
17
<PAGE> 18
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF GRAY CARY WARE & FREIDENRICH
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly
qualified as a foreign corporation and in good standing in each state of
the United States of America in which its ownership or leasing of
property requires such qualification (except where the failure to be so
qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole), and has full corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding
capital stock of each of the subsidiaries of the Company has been duly
authorized and validly issued and is fully paid and nonassessable, and,
except as disclosed in the Prospectus, is owned by the Company free and
clear of all liens, encumbrances and security interests, and to the best
of such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership
interests in such subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of
shares of Stock, of which there are outstanding shares, and shares of
Common Stock, $0.001 par value, of which there are outstanding shares
(including the Underwritten Stock plus the number of shares of Option
Stock issued on the date hereof); proper corporate proceedings have been
taken validly to authorize such authorized capital stock; all of the
outstanding shares of such capital stock (including the Underwritten
Stock and the shares of Option Stock issued, if any) have been duly and
validly issued and are fully paid and nonassessable; any Option Stock
purchased after the Closing Date, when issued and delivered to and paid
for by the Underwriters as provided in the Underwriting Agreement, will
have been duly and validly issued and be fully paid and nonassessable;
and no preemptive rights of, or rights of refusal in favor of,
stockholders exist with respect to the Stock, or the issue and sale
thereof, pursuant to the Certificate of Incorporation or Bylaws of the
Company and, to the knowledge of such counsel, there are no contractual
preemptive rights that have not been waived, rights of first refusal or
rights of co-sale which exist with respect to the Stock being sold by
the Selling Securityholders or the issue and sale of the Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending
or preventing the use of the Prospectus is in effect and no proceedings
for that purpose have been instituted or are pending or contemplated by
the Commission;
(iv) the Registration Statement and the Prospectus (except as to
the financial statements and schedules and other financial data
contained therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Securities Act and with the rules and regulations of the Commission
thereunder;
(v) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such
counsel) and 11(c) of Form S-1 is to such counsel's knowledge accurately
and adequately set forth therein in all material respects or no response
is required with respect to such Items, and the description of the
Company's stock option plans and the options granted and which may be
granted thereunder and the options and warrants granted otherwise than
under such plans set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to said plans
and options and warrants to the extent required by the Securities Act
and the rules and regulations of the Commission thereunder;
(vi) such counsel do not know of any franchises, contracts,
leases, documents or legal proceedings, pending or threatened, which in
the opinion of such counsel are of a character required to be described
in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not described and
filed as required;
(vii) the Underwriting Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the Underwriting Agreement has been duly executed and
delivered by or on behalf of the Selling Securityholders and the Custody
Agreement between the Selling Securityholders and ,
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<PAGE> 19
as Custodian, and the Power of Attorney referred to in such Custody
Agreement have been duly executed and delivered by the several Selling
Securityholders;
(ix) the issue and sale by the Company of the shares of Stock
sold by the Company as contemplated by the Underwriting Agreement will
not conflict with, or result in a breach of, the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries or any
agreement or instrument known to such counsel to which the Company or
any of its subsidiaries is a party or any applicable law or regulation,
or so far as is known to such counsel, any order, writ, injunction or
decree, of any jurisdiction, court or governmental instrumentality;
(x) to such counsel's knowledge, all holders of securities of
the Company having rights to the registration of shares of Common Stock,
or other securities, because of the filing of the Registration Statement
by the Company have waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent
to file the Registration Statement;
(xi) valid marketable title to the shares of Stock sold by the
Selling Securityholders under the Underwriting Agreement, free and clear
of all liens, encumbrances, equities, security interests and claims, has
been transferred to the Underwriters who have severally purchased such
shares of Stock under the Underwriting Agreement, assuming for the
purpose of this opinion that the Underwriters purchased the same in good
faith without notice of any adverse claims; and
(xii) based insofar as factual matters with respect to the stock
to be sold by the Selling Securityholders are concerned solely upon
certificates of the Selling Securityholders, the accuracy of which such
counsel have no reason to question, no consent, approval, authorization
or order of any court or governmental agency or body is required for the
consummation of the transactions contemplated in the Underwriting
Agreement, except such as have been obtained under the Securities Act
and such as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Stock by the
Underwriters.
In addition to the enumerated opinions, such counsel shall also
state that such counsel has no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need not
express any opinion or belief) at the Effective Date contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus (except as to the
financial statements and schedules and other financial data contained or
incorporated by reference therein, as to which such counsel need not
express any opinion or belief) as of its date or at the Closing Date (or
any later date on which Option Stock is purchased), contained or
contains any untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading;
------------------------------------
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the State of California, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
19
<PAGE> 20
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF HICKMAN, STEPHENS & COLEMAN
PATENT COUNSEL FOR THE COMPANY
Such counsel are familiar with the technology used by the Company in its
business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(i) such counsel have no reason to believe that the Registration
Statement or the Prospectus (A) contains any untrue statement of a
material fact with respect to patents, trade secrets, trademarks,
service marks or other proprietary information or materials owned or
used by the Company or any of its subsidiaries, or the manner of its use
thereof, or any allegation on the part of any person that the Company or
any of its subsidiaries is infringing any patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials
of any such person or (B) omits to state any material fact relating to
patents, trade secrets, trademarks, service marks or other proprietary
information or materials owned or used by the Company or any of its
subsidiaries, or the manner of its use thereof, or any allegation of
which such counsel have knowledge, that is required to be stated in the
Registration Statement or the Prospectus or is necessary to make the
statements therein not misleading;
(ii) to the best of such counsel's knowledge and except as set forth in
the Prospectus under the caption " ," there are no legal or governmental
proceedings pending relating to patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials
of the Company or any of its subsidiaries, and to the best of such
counsel's knowledge no such proceedings are threatened or contemplated
by governmental authorities or others;
(iii) such counsel do not know of any contracts or other documents,
relating to the Company's or any subsidiary's patents, trade secrets,
trademarks, service marks or other proprietary information or materials
of a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or
the Prospectus that are not filed or described as required;
(iv) except as set forth in the Prospectus, to the best of such
counsel's knowledge, neither the Company nor any of its subsidiaries is
infringing or otherwise violating any patents, trade secrets,
trademarks, service marks or other proprietary information or materials
of others, and to the best of such counsel's knowledge there are no
infringements by others of any of the Company's or any subsidiary's
patents, trade secrets, trademarks, service marks or other proprietary
information or materials which in the judgment of such counsel could
affect materially the use thereof by the Company or any of its
subsidiaries; and
(v) to the best of such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use all patents, trade
secrets, trademarks, service marks or other proprietary information or
materials necessary to conduct the business now being or proposed to be
conducted by the Company as described in the Prospectus.
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
IMMERSION CORPORATION DELAWARE
FIRST: The name of this corporation is Immersion Corporation Delaware
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the
City of Dover, County of Kent. The name of the registered agent at that address
is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOURTH: The Corporation is authorized to issue a total of 25,000,000
shares of stock in two classes designated respectively "Preferred Stock" and
"Common Stock." The total number of shares of all series of Preferred Stock that
the Corporation shall have the authority to issue is 5,000,000 and the total
number of shares of Common Stock that the Corporation shall have the authority
to issue is 20,000,000. All of the authorized shares shall have a par value of
$0.001.
FIFTH: The name and mailing address of the incorporator is:
Andrea Charvet
c/o Gray Cary Ware & Freidenrich LLP
139 Townsend Street, Suite 400
San Francisco, CA 94107-1922
SIXTH: The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by Statute or by this Certificate of
Incorporation or the Bylaws of the Corporation, the
1
<PAGE> 2
directors are hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation. Election of
directors need not be by written ballot unless the Bylaws so provide.
SEVENTH: The Board of Directors is authorized to make, adopt, amend,
alter or repeal the Bylaws of the Corporation. The stockholders shall also have
power to make, adopt, amend, alter or repeal the Bylaws of the Corporation.
EIGHTH: This Corporation reserves the right to amend or repeal any of
the provisions contained in this Certificate of Incorporation in any manner now
or hereafter permitted by law, and the rights of the stockholders of this
Corporation are granted subject to this reservation.
NINTH: To the fullest extent permitted by the Delaware General
Corporation Law, a director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. Any repeal or modification of the foregoing provisions of
this Article NINTH by the stockholders of the Corporation shall not adversely
affect any right or protection of a director of the Corporation existing at the
time of such repeal or modification.
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereto set my hand this 26th day of August, 1999.
/s/ ANDREA CHARVET
---------------------------------------
Andrea Charvet
2
<PAGE> 1
EXHIBIT 3.3
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
IMMERSION CORPORATION DELAWARE
(Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware)
Immersion Corporation Delaware, a corporation organized and existing
under the General Corporation Law of the State of Delaware on August 26, 1999,
(the "Corporation") certifies as follows:
1. The Corporation's Amended and Restated Certificate of Incorporation
was duly adopted by the Board of Directors and sole stockholder by written
consent in accordance with Sections 242 and 245 of the General Corporation Law.
2. The Corporation's Certificate of Incorporation is restated to read
in full as follows:
FIRST: The name of the Corporation is Immersion Corporation Delaware.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Incorporating Services, Ltd., 15 East North
Street, in the City of Dover, County of Kent. The name of the
registered agent at that address is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the
General Corporation Law of Delaware.
FOURTH:
A. The Corporation is authorized to issue a total of 110,215,716
shares of stock in two classes designated respectively "Preferred
Stock" and "Common Stock". The total number of shares of all
series of Preferred Stock that the Corporation shall have the
authority to issue is 10,215,716 and the total number of shares
of Common Stock that the Corporation shall have the authority to
issue is 100,000,000. All of the authorized shares shall have a
par value of $0.001.
The shares of Preferred Stock may be divided into such number of
series as the Board of Directors may determine. The Board of
Directors is authorized to determine and alter the rights,
preferences, privileges and restrictions granted to and imposed
upon the Preferred Stock or any series thereof with respect to
any wholly unissued series of Preferred Stock, and to fix the
number of shares of any such series of Preferred Stock. The Board
of Directors, within the limits and restrictions stated in any
<PAGE> 2
resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any
series, may increase or decrease (but not below the number
of shares of such series then outstanding) the number of
shares of any series subsequent to the issue of shares of
that series.
FIFTH: The following provisions are inserted for the management
of the business and the conduct of the affairs of the
Corporation, and for further definition, limitation and
regulation of the powers of the Corporation and of its
directors and stockholders:
A. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of
Directors. In addition to the powers and authority
expressly conferred upon them by statute or by this
Certificate of Incorporation or the Bylaws of the
Corporation, the directors are hereby empowered to
exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
C. On and after the closing date of the first sale of the
Corporation's Common Stock pursuant to a firmly
underwritten registered public offering (the "IPO"), any
action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly
called annual or special meeting of stockholders of the
Corporation and may not be effected by any consent in
writing by such stockholders. Prior to such sale, unless
otherwise provided by law, any action which may otherwise
be taken at any meeting of the stockholders may be taken
without a meeting and without prior notice, if a written
consent describing such actions is signed by the holders
of outstanding shares having not less than the minimum
number of votes which would be necessary to authorize or
take such action at a meeting at which all shares entitled
to vote thereon were present and voted.
D. Special meetings of stockholders of the Corporation may
be called only (1) by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the
time any such resolution is presented to the Board for
adoption) or (2) by the holders of not less than ten
percent (10%) of all of the shares entitled to cast votes
at the meeting.
2
<PAGE> 3
SIXTH:
A. The number of directors shall initially be set at
four (4) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the
time any such resolution is presented to the Board for
adoption). Upon the closing of the IPO, the directors
shall be divided into three classes with the term of
office of the first class (Class I) to expire at the first
annual meeting of the stockholders following the IPO; the
term of office of the second class (Class II) to expire at
the second annual meeting of stockholders held following
the IPO; the term of office of the third class (Class III)
to expire at the third annual meeting of stockholders; and
thereafter for each such term to expire at each third
succeeding annual meeting of stockholders after such
election. Subject to the rights of the holders of any
series of Preferred Stock then outstanding, a vacancy
resulting from the removal of a director by the
stockholders as provided in Article SIXTH, Section C below
may be filled at a special meeting of the stockholders
held for that purpose. All directors shall hold office
until the expiration of the term for which elected, and
until their respective successors are elected, except in
the case of the death, resignation, or removal of any
director.
B. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created
directorships resulting from any increase in the
authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation or
other cause (other than removal from office by a vote of
the stockholders) may be filled only by a majority vote of
the directors then in office, though less than a quorum,
and directors so chosen shall hold office for a term
expiring at the next annual meeting of stockholders at
which the term of office of the class to which they have
been elected expires, and until their respective
successors are elected, except in the case of the death,
resignation, or removal of any director. No decrease in
the number of directors constituting the Board of
Directors shall shorten the term of any incumbent
director.
C. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any directors, or the
entire Board of Directors, may be removed from office at
any time, with or without cause, but only by the
affirmative vote of the holders of at least a majority of
the voting power of all of the then outstanding shares of
capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as
a single class. Vacancies in the Board of Directors
resulting from such removal may be filled by a majority of
the directors then in office, though less than a quorum,
or by the stockholders as provided in Article SIXTH,
Section A above. Directors so chosen shall hold office for
a term expiring at the next annual meeting of stockholders
at which the term of office of the class to which they
have been elected expires, and until their
3
<PAGE> 4
respective successors are elected, except in the case of
the death, resignation, or removal of any director.
SEVENTH: The Board of Directors is expressly empowered to adopt,
amend or repeal Bylaws of the Corporation. Any adoption,
amendment or repeal of Bylaws of the Corporation by the
Board of Directors shall require the approval of a
majority of the total number of authorized directors
(whether or not there exist any vacancies in previously
authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented
to the Board). The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation. Any
adoption, amendment or repeal of Bylaws of the Corporation
by the stockholders shall require, in addition to any vote
of the holders of any class or series of stock of the
Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as
a single class.
EIGHTH: A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit.
If the Delaware General Corporation Law is hereafter
amended to authorize the further elimination or limitation
of the liability of a director, then the liability of a
director of the Corporation shall be eliminated or limited
to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing provisions of
this Article EIGHTH by the stockholders of the Corporation
shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such
repeal or modification.
4
<PAGE> 5
NINTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation
in the manner prescribed by the laws of the State of
Delaware and all rights conferred upon stockholders are
granted subject to this reservation; provided, however,
that, notwithstanding any other provision of this
Certificate of Incorporation or any provision of law which
might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series
of the stock of this Corporation required by law or by
this Certificate of Incorporation, the affirmative vote of
the holders of at least 66-2/3% of the voting power of all
of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be
required to amend or repeal this Article NINTH, Article
FIFTH, Article SIXTH, Article SEVENTH or Article EIGHTH.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate to be signed by a duly authorized officer on this ______ day of
October, 1999.
IMMERSION CORPORATION DELAWARE
By:
-------------------------------
Louis Rosenberg, Ph.D.,
Chief Executive Officer
5
<PAGE> 1
EXHIBIT 3.4
IMMERSION CORPORATION DELAWARE
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF THE TERMS OF THE
SERIES A, SERIES B, SERIES C AND SERIES D PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
We, the President and the Secretary, respectively, of Immersion
Corporation Delaware, organized and existing under the General Corporation Law
of the State of Delaware, in accordance with the provisions of Section 103
thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the said Corporation, the said Board of
Directors on August 30, 1999, adopted the following resolution creating (i) a
series of 2,495,648 shares of Preferred Stock designated as Series A Preferred
Stock, (ii) a series of 467,390 shares of Preferred Stock designated as Series B
Preferred Stock (iii) a series of 863,778 shares of Preferred Stock designated
as Series C Preferred Stock, and (iv) a series of 1,388,901 shares of Preferred
Stock designated as Series D Preferred Stock.
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Certificate of Incorporation, series of Preferred Stock of the Corporation be
and they hereby are created, and that the designation and amount thereof and the
powers, preferences and relative, participating, optional and other special
rights of the shares of such series, and the qualifications, limitations or
restrictions thereof are as follows:
Designation and Amount. The first series of Preferred Stock shall be
designated Series A Preferred Stock and shall be comprised of 2,495,648 shares.
The second series of Preferred Stock shall be designated Series B Preferred
Stock and shall be comprised of 467,390 shares. The third series of Preferred
Stock shall be designated Series C Preferred Stock and shall be comprised of
863,778 shares. The fourth series of Preferred Stock shall be designated
Series D Preferred Stock and shall be comprised of 1,388,901 shares.
Relative rights, preferences, privileges and restrictions granted to or
imposed upon the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock (collectively, the "Preferred
Stock") are as follows:
Section 1. Voting Rights.
Section 1.1 Except as otherwise required by law or as set forth herein,
the shares of Series A, Series B, Series C and Series D Preferred Stock shall be
voted equally and together with the shares of the Corporation's Common Stock at
any annual or special meeting of shareholders of the Corporation, or may act by
written consent in the same manner as the
1
<PAGE> 2
Corporation's Common Stock, upon the following basis: each holder of shares of
Series A, Series B, Series C and Series D Preferred Stock shall be entitled to
such number of votes for the Series A, Series B, Series C and Series D Preferred
Stock held by him on the record date fixed for such meeting, or on the effective
date of such written consent, as shall be equal to the whole number of shares of
the Corporation's Common Stock into which all of his shares of Series A, Series
B, Series C and Series D Preferred Stock are convertible immediately after the
close of business on the record date fixed for such meeting or the effective
date of such written consent.
Section 2. Protective Provisions.
Section 2.1 If any shares of Series C Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval by vote or
written consent, in the manner provided by law, of the holders of more than
fifty percent (50%) of the total number of shares of Series C Preferred Stock
then outstanding, voting together as a single class, undertake any of the
following actions: (a) amend or change the rights, preferences, privileges or
powers of, or the restrictions provided for the benefit of the Series C
Preferred Stock; or (b) authorize, create or issue shares of any class of stock
having rights, preferences, privileges or powers superior to that of the Series
C Preferred Stock; or (c) reclassify any outstanding shares of any class of
stock into shares having rights, preferences, privileges or powers as to
dividends or assets senior to the preferences, rights, privileges or powers of
the Series C Preferred Stock; or (d) amend the Corporation's Restated Articles
to adversely affect the rights, preferences, privileges or powers of the Series
C Preferred Stock; provided, however, that any amendment to the Corporation's
Restated Articles authorizing any class of stock having rights, preferences,
privileges or powers on parity with the Series C Preferred Stock shall not be
deemed to adversely affect the rights of the Series C Preferred Stock,
respectively.
Section 2.2 If any shares of Series D Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval by vote or
written consent, in the manner provided by law, of the holders of more than
fifty percent (50%) of the total number of shares of Series D Preferred Stock
then outstanding, voting together as a single class, undertake any of the
following actions: (a) amend or change the rights, preferences, privileges or
powers of, or the restrictions provided for the benefit of the Series D
Preferred Stock; or (b) authorize, create or issue shares of any class of stock
having rights, preferences, privileges or powers superior to that of the Series
D Preferred Stock; or (c) reclassify any outstanding shares of any class of
stock into shares having rights, preferences, privileges or powers as to
dividends or assets senior to the preferences, rights, privileges or powers of
the Series D Preferred Stock; or (d) amend the Corporation's Restated Articles
to adversely affect the rights, preferences, privileges or powers of the Series
D Preferred Stock; provided, however, that any amendment to the Corporation's
Restated Articles authorizing any class of stock having rights, preferences,
privileges or powers on parity with the Series D Preferred Stock shall not be
deemed to adversely affect the rights of the Series D Preferred Stock,
respectively.
2
<PAGE> 3
Section 3. Dividends.
Section 3.1 The holders of the then outstanding Series A, Series B,
Series C and Series D Preferred Stock shall be entitled to receive in any fiscal
year, prior and in preference to any distribution of dividends to the holders of
the Common Stock, when, as and if, declared by the Board of Directors, out of
any assets at the time legally available therefor, dividends in cash at the rate
of $0.0050, $0.0149, $0.1735, and $0.4089 per annum per share, respectively on a
pari passu basis, as adjusted for any consolidations, combinations, stock
distributions, stock dividends, stock splits or similar events (each a
"Recapitalization Event"). The right to such dividends on the Series A, Series
B, Series C and Series D Preferred Stock shall not be cumulative and no right
shall accrue to holders of Series A, Series B, Series C or Series D Preferred
Stock by reason of the fact that dividends on said shares are not declared in
any prior year, nor shall any undeclared or unpaid dividends bear or accrue
interest. Dividends may be declared or paid upon shares of Common Stock in any
fiscal year of the Corporation only if dividends shall have been paid to or
declared and set apart upon, as the case may be, all shares of Series A, Series
B, Series C and Series D Preferred Stock at such annual rate for each quarter of
such fiscal year of the Corporation including the quarter in which such
dividends upon common shares are declared. No dividends shall be paid on any
Common Stock unless an equal dividend is paid with respect to all outstanding
shares of Series A, Series B, Series C and Series D Preferred Stock in an amount
for each such share of Series A, Series B, Series C and Series D Preferred Stock
equal to the aggregate amount of such dividends for all Common Stock into which
each such share of Series A, Series B, Series C and Series D Preferred Stock
could then be converted.
Section 3.2 Each holder of Series A, Series B, Series C or Series D
Preferred Stock shall be deemed to have consented, for purposes of Sections 502,
503 and 506 of the General Corporation Law of the State of California, to (i)
distributions made by the Corporation in connection with the repurchase of
Common Stock issued to or held by employees or consultants upon termination of
their employment or services pursuant to agreements providing for such
repurchase and (ii) the use of up to two million dollars ($2,000,000) from the
sale of Series D Preferred Stock to purchase outstanding shares of the Company's
Common Stock or Preferred Stock at the fair market value of the Common Stock as
determined by the Board of Directors of the Company.
Section 4. Redemption Rights
Section 4.1 At any time on or after June 4, 2002, this Corporation
shall, upon receipt of the written request (the "Redemption Request") of the
holders of at least a majority of the Series C Preferred Stock then outstanding,
redeem for cash out of any funds legally available therefor ratably from holders
thereof, on or before each of the relevant Redemption Dates (as defined below),
that number of shares of Series C Preferred Stock equal to one-fourth of the
number of such shares outstanding on the first Redemption Date. Redemptions of
each share of Series C Preferred Stock pursuant to this Section 4.1 shall be
made at the price originally paid by the holders of Series C Preferred Stock
(and without interest as adjusted for any Recapitalization Event) for such
Series C Preferred Stock, plus an amount equal to the amount of all declared but
unpaid dividends as of the relevant Redemption Date payable in accordance with
Section 3.1
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above on each such share to be redeemed. The total amount to be paid with
respect to each share of Series C Preferred Stock is hereinafter referred to as
the "Redemption Price."
Section 4.2 The Redemption Request shall set forth the requested date of
the redemption, which date in no event shall be fewer than twenty (20) days nor
more than sixty (60) days after the date of the Redemption Request, or such
later date as the holders of at least a majority of the then outstanding Series
C Preferred Stock agree to in writing. Such date and the six (6) month, twelve
(12) month, and eighteen (18) month anniversaries thereof are referred to herein
collectively as the "Redemption Dates" and individually as a "Redemption Date."
Within ten (10) days of the Redemption Request, this Corporation shall give
written notice by mail, postage prepaid, to each holder of record (at the close
of business on the business day next preceding the day on which notice is
deposited in the mail) of the Series C Preferred Stock to be redeemed, at the
address last shown on the records of this corporation for such holder or given
by the holder to this Corporation for the purpose of notice, or if no such
address appears or is given, at the place where the principal executive office
of this Corporation is located, notifying such holder of the redemption to be
effected, specifying the number of shares to be redeemed from such holder, the
applicable Redemption Date, the applicable Redemption Price, the place at which
payment may be obtained and the date on which such holder's Conversion Rights as
to such shares terminate and calling upon such holder to surrender to this
Corporation, in the manner and at the place designated, his certificate or
certificates representing the shares to be redeemed (the "Redemption Notice").
On or after such Redemption Date, each holder of Series C Preferred Stock to be
redeemed shall surrender to this corporation the certificate or certificates
representing such shares, in the manner and at the place designated in the
Redemption Notice, and thereupon the applicable Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event fewer than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
Section 4.3 From and after the applicable Redemption Date, unless there
shall have been a default in payment of the applicable Redemption Price, all
dividends on the Series C Preferred Stock designated for redemption in the
Redemption Notice shall cease to accrue, all rights of the holders of such
shares as holders of the Series C Preferred Stock (except the right to receive
the Redemption Price without interest upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of this corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the corporation legally
available for redemption of Series C Preferred Stock on any Redemption Date are
insufficient to redeem the total number of Series C Preferred Stock to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares ratably among the holders of
such shares to be redeemed. The shares of Series C Preferred Stock not redeemed
shall remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the corporation are
legally available for the redemption of the Series C Preferred Stock, such funds
will immediately be used to redeem the balance of the shares which the
corporation has become obligated to redeem on any Redemption Date but which it
has not redeemed.
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Section 5. Liquidation Preference.
Section 5.1 In the event of the liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, distributions to the
shareholders of the Corporation shall be made in the following manner:
(a) The holders of Series C and Series D Preferred Stock
then outstanding shall be entitled to be paid out of the assets of the
Corporation, on a pari passu basis, for each share of Series C or Series D
Preferred Stock then held by them, first, prior and in preference to any
distribution to the holders of the Series A and Series B Preferred Stock, and
the Common Stock, an amount equal to $1.7348 per share of Series C Preferred
Stock and $3.37 per share of Series D Preferred Stock (as adjusted for
Recapitalization Events) plus an amount equal to all declared and unpaid
dividends with respect thereto. If upon the occurrence of such event, the assets
and funds available for distribution are insufficient to permit the payment to
the holders of Series C and Series D Preferred Stock the full preferential
amount, then the entire assets and funds of the Corporation legally available
for distribution to shareholders will be distributed among the holders of the
Series C and Series D Preferred Stock ratably in proportion to the full
preferential amount which they would be entitled to receive pursuant to the
preceding sentence of this Section 5.1(a).
(b) After payment has been made to the holders of Series C
and Series D Preferred Stock of the full preferential amounts to which they
shall be entitled, if any, as aforesaid, the holders of the Series A and Series
B Preferred Stock then outstanding shall be entitled to be paid, pari passu, out
of the assets of the Corporation, for each share of Series A or Series B
Preferred Stock then held by them, first, prior and in preference to any
distribution to the holders of the Common Stock, and amount equal to (A) $0.0991
per share for the Series A Preferred Stock and $1.4870 per share for the
Series B Preferred Stock (as adjusted for Recapitalization Events) plus (B) an
amount equal to all declared and unpaid dividends with respect thereto.
(c) After payment has been made to the holders of the
Series A, Series B, Series C and Series D Preferred Stock of the full
preferential amounts to which they shall be entitled, if any, as aforesaid and
until the holders of the Series C and Series D Preferred Stock then outstanding
have received an additional $1.7348 and $2.5031 per share of Series C and
Series D Preferred Stock, respectively (as adjusted for Recapitalization
Events), the holders of the Common Stock and the Series C and Series D Preferred
Stock shall be entitled to receive, pro rata, the remaining assets of the
Corporation available for distribution to shareholders, based on the number of
shares of Common Stock then held, with each share of Series C and Series D
Preferred Stock treated as the number of shares of Common Stock into which such
share of Preferred Stock is then convertible.
(d) After payment has been made to the holders of the
Series C and Series D Preferred Stock and holders of Common Stock pursuant to
Section 5.1(c), the holders of Common Stock shall be entitled to receive, pro
rata, the remaining assets of the Corporation
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available for distribution to shareholders, based on the number of shares of
Common Stock then held.
Section 5.2 Events Deemed to be Liquidation.
(a) For the purposes of this Section 5 and with respect to
the Series A and Series B Preferred Stock, (i) a consolidation or merger of the
Corporation with or into any other corporation or corporations (other than a
wholly-owned subsidiary) in which the shareholders of the Corporation
immediately prior to such transaction hold fifty percent (50%) or less of the
total voting power for the election of directors of the acquiring or surviving
entity immediately following the transaction, or (ii) the sale, transfer or
other disposition of all or substantially all of the assets of the Corporation
or (iii) the consummation of any transaction or series of related transactions
which results in the Corporation's shareholders immediately prior to such
transaction holding fifty percent (50%) or less of the voting power of the
acquiring or surviving entity immediately following the transaction (each such
event is hereinafter defined as a "Corporate Sale") shall not be deemed to be a
liquidation, dissolution or winding up.
(b) For purposes of this Section 5 and with respect to the
Series C and Series D Preferred Stock, a Corporate Sale shall be deemed a
liquidation, dissolution or winding up.
Section 6. Conversion Rights.
Section 6.1 Conversion of Series A and Series B Preferred Stock.
(a) Optional Conversion. Each share of Series A and Series
B Preferred Stock will be convertible, at the option of the holder thereof, at
the office of the Corporation or any transfer agent for the Series A and Series
B Preferred Stock, into Common Stock. The number of shares of Common Stock into
which each share of Series A Preferred Stock will be converted will be equal to
$0.0991 divided by the Series A Conversion Price (as hereafter defined) such
conversion ratio being referred to as the "Series A Conversion Rate." The
initial Series A Conversion Price will be $0.0991 and the initial Series A
Conversion Rate shall be one-to-one. The number of shares of Common Stock into
which each share of Series B Preferred Stock will be converted will be equal to
$1.4870 divided by the Series B Conversion Price (as hereafter defined) such
conversion ratio being referred to as the "Series B Conversion Rate." The
initial Series B Conversion Price will be $1.4870 and the initial Series B
Conversion Rate shall be one-to-one. Any decrease or increase of the Series A
Conversion Price or Conversion Rate, or the Series B Conversion Price or
Conversion Rate as described in this Section F will cause an increase or
decrease in the conversion rate or conversion price accordingly.
(b) Automatic Conversion of the Series A and Series B
Preferred Stock. Each share of Series A and Series B Preferred Stock will be
converted into shares of Common Stock at the then effective Series A Conversion
Rate or Series B Conversion Rate:
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(i) immediately upon the closing of the sale of stock
pursuant to a registration statement under the Securities Act of 1933, as
amended, (the "Securities Act") for an underwritten public offering (other than
a registration on Form S-8, Form S-4 or comparable or successor forms) covering
the Corporation's Common Stock which results in aggregate cash proceeds (prior
to underwriters' commissions and expenses) to the Corporation of more than
$5,000,000, and which has a public offering price of not less than $0.720 per
share (as appropriately adjusted for stock splits, combinations,
reclassifications and the like);
(ii) immediately upon the affirmative vote or written
consent of the holders of a majority of the then outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, voting together as a class; or
(iii) on the date that less than twenty percent (20%) of
the highest number of the total number of shares of Series A Preferred Stock and
Series B Preferred Stock that have been outstanding at any time remain
outstanding.
(c) Adjustment for Dividends, Distributions, Subdivisions
or Combinations of Common Stock. In the event the Corporation at any time or
from time to time after the date hereof (a) effects a subdivision or combination
of its outstanding Common Stock into a greater or lesser number of shares
without a proportionate and corresponding subdivision or combination of its
outstanding Series A Preferred Stock and its outstanding Series B Preferred
Stock or (b) issues a dividend or other distribution of additional shares of
Common Stock or other securities or rights (collectively hereinafter referred to
as "Common Stock Equivalents") convertible into or entitling the holder thereof
to receive additional shares of Common Stock without payment of any
consideration by such holder for such Common Stock Equivalents or the additional
shares of Common Stock, then the existing Series A Conversion Price and Series B
Conversion Price will be decreased or increased proportionately.
(d) Recapitalizations. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for in Section 5),
provision shall be made so that the holders of the Series A and Series B
Preferred Stock will thereafter be entitled to receive upon conversion of the
Series A and Series B Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 6.1 with respect to the rights of
the holders of the Series A and Series B Preferred Stock after the
recapitalization to the end that the provisions of this Section 6.1 (including
adjustment of the Series A and Series B Conversion Price then in effect and the
number of shares issuable upon conversion of the Series A or Series B Preferred
Stock) shall be applicable after that event in as nearly an equivalent manner as
may be practicable.
(e) Certificate as to Adjustments. Upon the occurrence of
each adjustment or readjustment of the Series A Conversion Rate or Series B
Conversion Rate pursuant to this Section 6, the Corporation at its expense
promptly will compute such adjustment
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or readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series A or Series B Preferred Stock, a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation, upon the written request
at any time of any holder of Series A or Series B Preferred Stock, will furnish
or cause to be furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Series A or Series B Conversion
Rate at the time in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be received upon
the conversion of the Series A or Series B Preferred Stock held by such holder.
Section 6.2 Conversion of Series C and Series D Preferred Stock.
(a) Conversion. The holders of the Series C and
Series D Preferred Stock have conversion rights as follows (the "Conversion
Rights"):
(i) Right to Convert Series C Preferred. Each share of
Series C Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share into the number of
fully paid and nonassessable shares of Common Stock which results from dividing
the Series C Conversion Value (as defined below) by the Series C Conversion
Price (as defined below) per share in effect for such series at the time of
conversion. The initial Series C Conversion Price per share of the Series C
Preferred shall be $1.7348, and the Series C Conversion Value per share of the
Series C Preferred shall be $1.7348. The initial Series C Conversion Price per
share of the Series C Preferred Stock shall be subject to adjustment from time
to time as provided in Section 6.2(a)(iv) hereof. Upon conversion, all declared
and unpaid dividends on the Series C Preferred Stock shall be paid in cash, to
the extent legally permitted.
(ii) Right to Convert Series D Preferred. Each share of
Series D Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share into the number of
fully paid and nonassessable shares of Common Stock which results from dividing
the Series D Conversion Value (as defined below) by the Series D Conversion
Price (as defined below) per share in effect for such series at the time of
conversion. The initial Series D Conversion Price per share of the Series D
Preferred shall be $4.1760 and the Series D Conversion Value per share of the
Series D Preferred shall be $4.1760. The initial Series D Conversion Price per
share of the Series D Preferred Stock shall be subject to adjustment from time
to time as provided in Section 6.2(a)(iv) hereof. Upon conversion, all declared
and unpaid dividends on the Series D Preferred Stock shall be paid in cash, to
the extent legally permitted.
(iii) Automatic Conversion of Series C and Series D
Preferred Stock. Each share of Series C and Series D Preferred Stock will be
converted into shares of Common Stock at the then effective Series C Conversion
Price and Series D Conversion Price, respectively, immediately upon the closing
of the sale of stock pursuant to a registration statement under the Securities
Act for an underwritten public offering (other than a registration on Forms S-8,
Form S-4 or comparable or successor forms) covering the Corporation's Common
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Stock (an "Offering") which results in aggregate cash proceeds to the
Corporation of more than $10,000,000 and which has a public offering price of
not less than $8.6741 per share (as adjusted for Recapitalization Events).
(iv) Adjustments to Conversion Price of Series C
and Series D Preferred Stock.
(1) Special Definitions. For purposes
of this Section 6.2(a)(iii), the following definitions shall apply:
(A) "Options" shall mean rights,
options or warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities.
(B) "Convertible Securities" shall
mean any evidences of indebtedness, shares or other securities convertible into
or exchangeable for Common Stock.
(C) "Additional Shares of Common"
shall mean all shares of Common Stock issued (or, pursuant to Section
6.2(a)(iv)(3) below, deemed to be issued) by the Corporation after the Original
Issue Date, other than shares of Common Stock issued or issuable:
(I) upon conversion of
shares of Series A, Series B, Series C and Series D Preferred Stock;
(II) upon exercise of
warrants to purchase an aggregate of (i) 228,250 shares of Common Stock, (ii)
7,500 shares of Series A Preferred Stock, and (iii) 18,000 shares of Series C
Preferred Stock outstanding as of the Original Issue Date (as adjusted for
Recapitalization Events);
(III) to officers, directors
or employees of, or consultants to, the Corporation pursuant to a stock grant,
option plan or purchase plan or other employee stock incentive program or
agreement approved by the Board, not to exceed 5,971,800 shares, inclusive of
the 3,549,596 shares subject to outstanding options and the 1,101,693 shares
issued upon exercise of outstanding options but net of repurchases,
cancellations, terminations and expirations, since the Original Issue Date (as
adjusted for Recapitalization Events);
(IV) in connection with the
acquisition by the Company of another business entity or majority ownership
thereof, provided that (A) such entity is not an affiliate (any person or entity
controlling, controlled by or under common control with the Company, an
"Affiliate") of any director, officer or other natural person who is an
Affiliate of the Company (a "Control Person") other than in such Control
Person's capacity as an officer, director or shareholder of the Company and such
Control Person does not have a material interest in such entity other than as an
officer, director or shareholder of the Company, or
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(B) such issuances of Common Stock issued or issuable are made in a bona fide
arm's length transaction as determined by the Board of Directors of the Company;
(V) in an amount up to
605,250 shares of Common Stock (as adjusted for Recapitalization Events), in
connection with any lease financing transaction approved by the Company's Board
of Directors;
(VI) as a dividend or
distribution on Series A, Series B, Series C or Series D Preferred Stock;
(VII) upon exercise of
nonqualified stock options outstanding as of the Original Issue Date to purchase
80,700 shares of Common Stock (as adjusted for Recapitalization Events);
(VIII) by way of dividend or
other distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common by the foregoing clauses (I) through (VII) or this
clause (VIII); or
(IX) solely for purposes of
calculating adjustments to the Series D Conversion Price, Additional Shares of
Common shall also exclude all shares of Common Stock issued or issuable in an
amount up to 645,600 shares of Common Stock (as adjusted for Recapitalization
Events), issued in connection with strategic investment and/or the acquisition
of technology approved by the Company's Board of Directors.
(D) "Original Issue Date" shall
mean October __, 1999.
(2) No Adjustment of Conversion Price. No adjustment
in the Series C or Series D Conversion Price shall be made in respect of the
issuance of Additional Shares of Common unless the consideration per share for
an Additional Share of Common issued or deemed to be issued by the Corporation
is less than the Series C or Series D Conversion Price, as applicable, in effect
on the date of, and immediately prior to, such issue.
(3) Deemed Issue of Additional Shares of Common.
(A) Options and Convertible Securities. In the
event the Corporation at any time or from time to time after the Original Issue
Date shall issue any Options or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the exercise of such Options and
conversion or exchange of such Convertible Securities shall be deemed to be
Additional Shares of Common issued as of the time of such issue or, in case such
a record date shall have been fixed, as of the close of business on such record
date, provided that Additional Shares of Common shall not be deemed to have been
issued unless the
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consideration per share (determined pursuant to Section 6.2(a)(iv)(5) hereof) of
such Additional Shares of Common would be less than the Series C or Series D
Conversion Price in effect on the date of and immediately prior to such issue,
or such record date, as the case may be, and provided further that in any such
case in which Additional Shares of Common are deemed to be issued:
(I) except as provided in Section
6.2(a)(iv)(3)(II) below, no further adjustment in the Series C or Series D
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(II) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any change in the consideration payable to the Corporation, or change in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof (other than under or by reason of provisions designed to
protect against dilution), a Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto) and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities; and
(III) no readjustment pursuant to
clause (II) above shall have the effect of increasing the Series C or Series D
Conversion Price to an amount which exceeds the lower of (1) the Series C or
Series D Conversion Price on the original adjustment date or (2) the Series C or
Series D Conversion Price that would have resulted from any issuance of
Additional Shares of Common between the original adjustment date and such
readjustment date.
(B) Stock Dividends and Subdivisions. In the event
the Corporation at any time or from time to time after the Original Issue Date
shall declare or pay any dividend on the Common Stock payable in Common Stock,
or effect a split or subdivision of the outstanding shares of Common Stock into
a greater number of shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in Common Stock), then and in any such event,
Additional Shares of Common shall be deemed to have been issued:
(I) in the case of any
such dividend, immediately after the close of business on the record date for
the determination of holders of any class of securities entitled to receive such
dividend, or
(II) in the case of any such
subdivision, at the close of business on the date immediately prior to the date
upon which such corporate action becomes effective.
(4) Adjustment of Conversion Price Upon
Issuance of Additional Shares of Common. In the event this Corporation shall
issue Additional Shares of
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Common (including Additional Shares of Common deemed to be issued pursuant to
Section 6.2(a)(iv)(3)) without consideration or for a consideration per share
less than the Series C or Series D Conversion Price in effect on the date of and
immediately prior to such issue (such issuance price being referred to herein as
the "Dilution Price"), then and in each such event the Series C or Series D
Conversion Price, as applicable, shall be reduced to a price (calculated to the
nearest cent) determined by multiplying such Series C or Series D Conversion
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of
shares of Common Stock which the aggregate consideration received by the
Corporation for the total number of Additional Shares of Common so issued would
purchase at such Series C or Series D Conversion Price; and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of such Additional Shares of Common so
issued; provided that, for the purposes of this Section 6.2(a)(iv)(4), all
shares of Common Stock issuable upon conversion of all outstanding Preferred
Stock, and other Convertible Securities and all outstanding Options (provided
such Options have an exercise price below the Series C or Series D Conversion
Price immediately prior to such issue) shall be deemed to be outstanding, and,
immediately after any Additional Shares of Common are deemed issued pursuant to
Section 6.2(a)(iv)(3), such Additional Shares of Common shall be deemed to be
outstanding.
(5) Determination of Consideration.
For purposes of this Section 6.2(a)(iv), the consideration received by the
Corporation for the issue of any Additional Shares of Common shall be computed
as follows:
(A) Cash and Property: Such
consideration shall:
(I) insofar as it
consists of cash, be computed at the aggregate amount of cash received by the
Corporation;
(II) insofar as it consists
of property other than cash, be computed at the fair value thereof at the time
of such issue, as determined by Board in the good faith exercise of its
reasonable business judgment; and
(III) in the event Additional
shares of Common are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses (A) and (B)
above, as determined in good faith by the Board.
(B) Options and Convertible
(I) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the
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instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such consideration) payable to the Corporation
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for Convertible Securities,
the exercise of such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities, by
(II) the maximum number of
shares of Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities.
(C) Stock Dividends and Stock
Subdivisions. Any Additional Shares of Common deemed to have been issued,
relating to stock dividends and stock splits or subdivisions, shall be deemed to
have been issued for no consideration.
(6) Other Adjustments to Series C and
Series D Conversion Price.
(A) Subdivisions, Combinations,
or Consolidations of Common Stock. In the event the outstanding shares of Common
Stock shall be subdivided, combined or consolidated, by stock split, stock
dividend, combination or like event, into a greater or lesser number of shares
of Common Stock after the Original Issue Date, the Series C and the Series D
Conversion Price in effect immediately prior to such subdivision, combination,
consolidation or stock dividend shall, concurrently with the effectiveness of
such subdivision, combination or consolidation, be proportionately adjusted.
(B) Distributions Other Than
Cash Dividends Out of Retained Earnings. In case the Corporation shall declare a
cash dividend upon its Common Stock payable otherwise than out of retained
earnings or shall distribute to holders of its Common Stock shares of its
capital stock (other than Common Stock), stock or other securities of other
persons, evidences of indebtedness issued by the Corporation or other persons,
assets (excluding cash dividends) or options or rights (excluding options to
purchase and rights to subscribe for Common Stock or other securities of the
Corporation convertible into or exchangeable for Common Stock), then, in each
such case, the holders of shares of Series C and Series D Preferred Stock shall,
concurrently with the distribution to holders of Common Stock, receive a like
distribution based upon the numbers of shares of Common Stock into which the
Series C and Series D Preferred Stock is then convertible.
(C) Reclassifications. In the
case, at any time after the date hereof, of any capital reorganization or any
reclassification of the stock of the Corporation (other than as a result of a
stock dividend or subdivision, split-up or combination of shares), or Corporate
Sale (other than a consolidation or merger in which the Corporation is the
continuing entity and which does not result in any change in the Common Stock),
the shares of the Series C and Series D Preferred Stock shall, after such
reorganization, reclassification or Corporate Sale, be convertible into the kind
and number of shares of stock or other securities or property of the Corporation
or otherwise to which such holder would have been entitled if
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immediately prior to such reorganization, reclassification or Corporate Sale,
the holder had converted the holder's shares of the Series C and Series D
Preferred Stock into Common Stock. The provisions of this Section
6.2(a)(iv)(6)(C) shall similarly apply to successive reorganizations,
reclassifications, consolidations or Corporate Sales.
(b) Certificate as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the Series C or Series D
Conversion Price pursuant to this Section 6.2, the Corporation at its expense
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and furnish to each holder of Series C and/or Series D Preferred
Stock a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
C or Series D Preferred Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price of the Series C or Series D Preferred Stock at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the conversion of the
Series C or Series D Preferred Stock.
Section 6.3 No Fractional Shares. No fractional shares of Common Stock
will be issued upon conversion of Series A, Series B, Series C or Series D
Preferred Stock and any fractional share which otherwise would result from
conversion by a holder of all of his shares of Series A, Series B, Series C or
Series D Preferred Stock will be redeemed by payment in an amount equal to such
fraction of the then effective Series A, Series B, Series C or Series D
Conversion Price as promptly as funds legally are available therefor.
Section 6.4 Mechanics of Conversion. Before any holder of Series A,
Series B, Series C or Series D Preferred Stock will be entitled to convert the
same into shares of Common Stock, he will surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series A, Series B, Series C or Series D Preferred Stock,
and he will give written notice to the Corporation stating the name or names in
which he wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation, as soon as practicable thereafter, will issue and
deliver at such office to such holder of Series A, Series B, Series C or Series
D Preferred Stock or to his nominee or nominees, a certificate or certificates
for the number of shares of Common Stock to which he will be entitled as
aforesaid. Such conversion will be deemed to have been made, in the event of
automatic conversion, immediately prior to the close of business on the date of
the event of conversion or, in the event of voluntary conversion, immediately
prior to the close of business on the date when the Corporation receives a
holder's certificate or certificates for Series A, Series B, Series C or Series
D Preferred Stock and any other documents or instruments required hereunder or
by applicable law, and the person or persons entitled to receive the shares of
Common Stock issuable upon conversion will be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
Section 6.5 No Impairment. The Corporation, whether by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
merger, dissolution, issue or
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sale of securities or any other voluntary action, will not avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but at all times in good faith will
assist in the carrying out of all of such action as may be necessary or
appropriate in order to protect the conversion rights pursuant to this Section 6
of the holders of Series A, Series B, Series C and Series D Preferred Stock
against impairment.
Section 6.6 Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any Common Stock
Equivalents or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, the Corporation will mail to each holder of Series A, Series B,
Series C or Series D Preferred Stock at least ten (10) days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or rights, and the
amount and character of such dividend, distribution or right.
Section 6.7 Reservation of Stock Issuable Upon Conversion. The
Corporation at all times will reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of Series A, Series B, Series C or Series D Preferred
Stock such number of its shares of Common Stock as from time to time will be
sufficient to effect the conversion of all then outstanding shares of Series A,
Series B, Series C and Series D Preferred Stock; and if at any time the number
of authorized but unissued shares of Common Stock is not sufficient to effect
the conversion of all then outstanding shares of Series A, Series B, Series C
and Series D Preferred Stock, in addition to such other remedies as may be
available to the holders of Series A, Series B, Series C and Series D Preferred
Stock for such failure, the Corporation will take such corporate action as, in
the opinion of its counsel, may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as will be sufficient
for such purpose.
1. Section 6.8 Notices. Any notices required by the provisions of this Section 6
to be given to the holders of shares of Series A, Series B, Series C or Series D
Preferred Stock must be in writing and will be deemed given upon personal
delivery, one day after deposit with a reputable overnight courier service for
overnight delivery or after transmission by facsimile telecopier with
confirmation of successful transmission, or five days after deposit in the
United States mail, by registered or certified mail postage prepaid, or upon
actual receipt if given by any other method, addressed to each holder of such
record at his address appearing on the books of the Corporation.
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<PAGE> 16
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and
do affirm the foregoing as true under the penalties of perjury this _____ day of
________________, 1999.
-----------------------------------------------
Louis Rosenberg, Chief Executive Officer
-----------------------------------------------
Bruce Schena, Secretary
16
<PAGE> 1
EXHIBIT 3.5
CERTIFICATE OF ELIMINATION OF
SERIES A, SERIES B, SERIES C AND SERIES D PREFERRED STOCK OF
IMMERSION CORPORATION
(Pursuant to Section 151 of the General
Corporation Law of the State of Delaware)
Immersion Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), certifies
as follows:
FIRST: Article FOURTH of the Certificate of Incorporation of the
Corporation authorizes the issuance of 10,215,716 shares of Preferred Stock, par
value $0.001 per share (the "Preferred Stock"), of which 2,495,647 shares have
been designated Series A Preferred Stock, 467,390 shares have been designated
Series B Preferred Stock, 863,778 shares have been designated Series C
Preferred Stock and 1,388,901 shares have been designated Series D Preferred
Stock pursuant to a Certificate of Designations filed pursuant to Section 151 of
the General Corporation Law of the State of Delaware.
SECOND: The following resolution was adopted on August 30, 1999 by
the Board of Directors of the Corporation as required by Section 151(g) of the
General Corporation Law of the State of Delaware:
RESOLVED, that none of the authorized shares of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock are outstanding and no shares of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock will be issued subject to the Certificate of
Designations previously filed with respect to such Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock.
THIRD: Pursuant to the provisions of Section 151(g) of the General
Corporation Law of the State of Delaware, all matters set forth in the
Certificate of Designations with respect to such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
are hereby eliminated from the Certificate of Incorporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its duly authorized officer this ____ day of October, 1999.
IMMERSION CORPORATION
By:
--------------------------------------------
Its:
--------------------------------------------
<PAGE> 1
EXHIBIT 3.6
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is entered
into as of ____________________, 1999 by and between Immersion Corporation a
California corporation ("Immersion California"), and Immersion Corporation
Delaware, a Delaware corporation ("Immersion Delaware").
WITNESSETH:
WHEREAS, Immersion Delaware is a corporation duly organized and
existing under the laws of the State of Delaware;
WHEREAS, Immersion California is a corporation duly organized and
existing under the laws of the State of California;
WHEREAS, on the date of this Merger Agreement, Immersion Delaware has
authority to issue 100,000,000 shares of Common Stock, par value $0.001 per
share (the "Immersion Delaware Common Stock"), of which 100 shares are issued
and outstanding and owned by Immersion California and 10,215,717 shares of
Preferred Stock, par value $0.001 per share (the "Immersion Delaware Preferred
Stock), of which no shares are issued or outstanding;
WHEREAS, on the date of this Merger Agreement, Immersion California has
authority to issue 100,000,000 shares of Common Stock (the "Immersion California
Common Stock"), of which ________ shares are issued and outstanding, and
5,000,000 shares of Preferred Stock (the "Immersion California Preferred
Stock"), of which 3,492,923 shares are issued and outstanding;
WHEREAS, the respective Boards of Directors for Immersion Delaware and
Immersion California have determined that, for the purpose of effecting the
reincorporation of Immersion California in the State of Delaware, it is
advisable and to the advantage of said two corporations and their shareholders
that Immersion California merge with and into Immersion Delaware upon the terms
and conditions herein provided; and
WHEREAS, the respective Boards of Directors of Immersion Delaware and
Immersion California, the shareholders of Immersion California, and the sole
stockholder of Immersion Delaware have adopted and approved this Merger
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements and covenants
set forth herein, Immersion California and Immersion Delaware hereby agree to
merge as follows:
1. Merger. Immersion California shall be merged with and into Immersion
Delaware, and Immersion Delaware shall survive the merger ("Merger"), effective
upon the date when this Merger Agreement is made effective in accordance with
applicable law (the "Effective Date").
2. Governing Documents. The Amended and Restated Certificate of
Incorporation of Immersion Delaware (the "Certificate of Incorporation") shall
continue to be the Certificate of Incorporation of Immersion Delaware as the
surviving Corporation. Article FIRST of the Restated Certificate of
Incorporation of Immersion Delaware shall be amended to read as follows:
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<PAGE> 2
FIRST: The name of the Corporation is Immersion Corporation.
The Bylaws of Immersion Delaware, in effect on the Effective Date, shall
continue to be the Bylaws of Immersion Delaware as the surviving Corporation
without change or amendment until further amended in accordance with the
provisions thereof and applicable laws.
3. Directors and Officers. The directors and officers of Immersion
California shall become the directors and officers of Immersion Delaware upon
the Effective Date and any committee of the Board of Directors of Immersion
California shall become the members of such committees for Immersion Delaware.
4. Succession. On the Effective Date, Immersion Delaware shall succeed
to Immersion California in the manner of and as more fully set forth in Section
259 of the General Corporation Law of the State of Delaware.
5. Further Assurances. From time to time, as and when required by
Immersion Delaware or by its successors and assigns, there shall be executed and
delivered on behalf of Immersion California such deeds and other instruments,
and there shall be taken or caused to be taken by it such further and other
action, as shall be appropriate or necessary in order to vest, perfect or
confirm, of record or otherwise, in Immersion Delaware the title to and
possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Immersion California, and
otherwise to carry out the purposes of this Merger Agreement and the officers
and directors of Immersion Delaware are fully authorized in the name and on
behalf of Immersion California or otherwise to take any and all such action and
to execute and deliver any and all such deeds and other instruments.
6. Stock of Immersion California.
a. Common Stock. Upon the Effective Date, by virtue of the Merger
and without any action on the part of the holder thereof, each one (1) share of
Immersion California Common Stock outstanding immediately prior thereto shall be
changed and converted into 0.807 fully paid and nonassessable share of Immersion
Delaware Common Stock.
b. Preferred Stock. Upon the Effective Date, by virtue of the
Merger and without any action on the part of the holder thereof, (i) each one
(1) share of Immersion California Series A Preferred and Series B Preferred
outstanding immediately prior thereto shall be changed and converted into 4.035
fully paid and nonassessable equivalent shares of Immersion Delaware Series A
Preferred or Series B Preferred Stock and (ii) each one share of Series C
Preferred Stock and Series D Preferred Stock outstanding immediately prior
thereto shall be changed and converted into 0.807 fully paid and nonassessable
equivalent share of Immersion Delaware Series C or Series D Preferred Stock.
c. Fractional Shares. No fractional shares which a Immersion
Delaware stockholder would otherwise be entitled to receive by reason of the
exchange of Immersion California stock for Immersion Delaware stock shall be
issued. In lieu of any fractional shares to which a holder would otherwise be
entitled, Immersion Delaware shall pay cash equal to such fraction multiplied by
the fair market value of the Common Stock on the Effective Date as determined by
the Board of Directors of Immersion Delaware and for the Preferred Stock, such
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<PAGE> 3
fraction multiplied by the Conversion Prices as defined in Article FOURTH,
subparagraph 4(a) of this Certificate of Incorporation.
7. Stock Certificates. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of
Immersion California stock shall be deemed for all purposes to evidence
ownership of and to represent the shares of Immersion Delaware stock into which
the shares of Immersion California stock represented by such certificates have
been converted as herein provided. The registered owner on the books and records
of Immersion Delaware or its transfer agent of any such outstanding stock
certificate shall, until such certificate shall have been surrendered for
transfer or otherwise accounted for to Immersion Delaware or its transfer agent,
have and be entitled to exercise any voting and other rights with respect to and
to receive any dividend and other distributions upon the shares of Immersion
Delaware stock evidenced by such outstanding certificate as above provided.
8. Options and Warrants. Upon the Effective Date, (i) each outstanding
option, warrant to purchase common Stock, Series C Preferred Stock or Series D
Preferred Stock or other right to purchase Common Stock, Series C Preferred
Stock or Series D Preferred Stock of Immersion California, including those
options granted under the 1994 Stock Option Plan and 1997 Stock Option Plan
(collectively, the "Option Plan") of Immersion California, shall be converted
into and become an option, warrant, or right to purchase the number of shares of
Immersion Delaware stock determined by multiplying the number of shares of
Immersion California subject to the option, warrant or right to purchase by
0.807, rounded down to the nearest whole number, at a price per share equal to
the exercise price of the option, warrant or right to purchase Immersion
California stock divided by 0.807, rounded down to the nearest whole cent, and
upon the same terms and subject to the same conditions as set forth in the
Option Plan and other plan or agreement entered into by Immersion California
pertaining to such options, warrants, or rights and (ii) each outstanding
warrant to purchase Series A or Series B Preferred Stock of Immersion California
shall be converted into and become a warrant to purchase the equivalent number
of shares of Series A Preferred Stock or Series B Preferred Stock of Immersion
Delaware stock determined by multiplying the number of shares of Immersion
California subject to the warrant by 4.035 rounded down to the nearest whole
number, at a price per share equal to the exercise price of the warrant divided
by 4.035, rounded down to the nearest whole cent, and upon the same terms and
subject to the same conditions as set forth in the agreements entered into by
Immersion California pertaining to the warrant. A number of shares of Immersion
Delaware stock of the relevant class and series shall be reserved for purposes
of (i) the options, warrants, and rights described in clause (i) of the
preceding sentence equal to the number of shares of Immersion California stock
so reserved as of the Effective Date multiplied by 0.807 and (ii) of the
warrants described in clause (ii) of the preceding sentence equal to the number
of shares of Immersion California stock of the relevant class and series so
reserved as of the Effective Date multiplied by 4.035. As of the Effective Date,
Immersion Delaware shall assume all obligations of Immersion California under
agreements pertaining to such options, warrants and rights, including the Option
Plans, and the outstanding options, warrants or other rights, or portions
thereof, granted pursuant thereto.
9. Other Employee Benefit Plans. As of the Effective Date, Immersion
Delaware hereby assumes all obligations of Immersion California under any and
all employee benefit plans
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<PAGE> 4
in effect as of said date or with respect to which employee rights or accrued
benefits are outstanding as of said date.
10. Outstanding Common Stock of Immersion Delaware. Forthwith upon the
Effective Date, the One Hundred (100) shares of Immersion Delaware Common Stock
presently issued and outstanding in the name of Immersion California shall be
canceled and retired and resume the status of authorized and unissued shares of
Immersion Delaware Common Stock, and no shares of Immersion Delaware Common
Stock or other securities of Immersion Delaware shall be issued in respect
thereof.
11. Covenants of Immersion Delaware. Immersion Delaware covenants and
agrees that it will, on or before the Effective Date:
a. Qualify to do business as a foreign corporation in the State
of California, and in all other states in which Immersion California is so
qualified and in which the failure so to qualify would have a material adverse
impact on the business or financial condition of Immersion Delaware. In
connection therewith, Immersion Delaware shall irrevocably appoint an agent for
service of process as required under the provisions of Section 2105 of the
California Corporations Code and under applicable provisions of state law in
other states in which qualification is required hereunder.
b. File any and all documents with the California Franchise Tax
Board necessary to the assumption by Immersion Delaware of all of the franchise
tax liabilities of Immersion California.
12. Amendment. At any time before or after approval and adoption by the
stockholders of Immersion California, this Merger Agreement may be amended in
any manner as may be determined in the judgment of the respective Boards of
Directors of Immersion Delaware and Immersion California to be necessary,
desirable or expedient in order to clarify the intention of the parties hereto
or to effect or facilitate the purposes and intent of this Merger Agreement.
13. Abandonment. At any time before the Effective Date, this Merger
Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of either Immersion California or Immersion Delaware or both,
notwithstanding approval of this Merger Agreement by the sole stockholder of
Immersion Delaware and the shareholders of Immersion California.
14. Counterparts. In order to facilitate the filing and recording of
this Merger Agreement, the same may be executed in any number of counterparts,
each of which shall be deemed to be an original.
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IN WITNESS WHEREOF, this Merger Agreement, having first been duly
approved by resolution of the Board of Directors of Immersion California and
Immersion Delaware, is hereby executed on behalf of each of said two
corporations by their respective officers thereunto duly authorized.
IMMERSION CORPORATION DELAWARE, a Delaware
corporation
By:
-----------------------------------------------
Louis Rosenberg, Chief Executive Officer
IMMERSION CORPORATION, a California
corporation
By:
-----------------------------------------------
Louis Rosenberg, Chief Executive Officer
5
<PAGE> 1
EXHIBIT 3.7
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
IMMERSION CORPORATION
Immersion Corporation, a Delaware corporation (the "Corporation"),
hereby certifies:
1. That the Corporation's Board of Directors has duly adopted the following
resolutions:
RESOLVED, that the first paragraph of Article FOURTH of the Restated
Certificate of Incorporation is hereby amended to read in full as
follows:
FOURTH:The Corporation is authorized to issue a total of
105,000,000 shares of stock in two classes designated
respectively "Preferred Stock" and "Common Stock." The total
number of shares of all series of Preferred Stock that the
Corporation shall have the authority to issue is 5,000,000 and
the total number of shares of Common Stock that the Corporation
shall have the authority to issue is 100,000,000. All of the
authorized shares shall have a par value of $0.001.
2. That the proposed amendment has been duly adopted by the
Corporation's Board of Directors and sole stockholder in
accordance with the provisions of Sections 242 and 228 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be signed by a duly
authorized officer on this _____ day of ___________, 1999.
IMMERSION CORPORATION
-----------------------------------------------
Louis Rosenberg, Ph.D., Chief Executive
Officer
<PAGE> 1
EXHIBIT 5.1
[Gray Cary Ware & Freidenrich LLP Letterhead]
400 Hamilton Avenue, Palo Alto, CA 94301-1825
Phone 650-833-2000 Fax 650-327-3699 www.graycary.com
Our File No: 1090369-900000
______________, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: IMMERSION CORPORATION REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
As counsel to Immersion Corporation (the "Company"), we are rendering
this opinion in connection with a proposed sale of those certain shares of the
Company's newly-issued Common Stock as set forth in the Registration Statement
on Form S-1 to which this opinion is being filed as Exhibit 5.1 (the "Shares").
We have examined all instruments, documents and records which we deemed relevant
and necessary for the basis of our opinion hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies.
We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance, or (ii) the effect of bankruptcy,
insolvency, reorganization, moratorium or equitable principles relating to or
limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares
identified in the above-referenced Registration Statement will be, upon
effectiveness of the Registration Statement and receipt by the Company of
payment therefor, validly authorized, legally issued, fully paid, and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich LLP
GRAY CARY WARE & FREIDENRICH LLP
SILICON VALLEY SAN DIEGO SAN FRANCISCO AUSTIN SACRAMENTO
LA JOLLA IMPERIAL VALLEY MEXICO
<PAGE> 1
EXHIBIT 10.21
IMMERSION CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. This 1999 Employee Stock Purchase Plan (the "PLAN")
is hereby established effective as of the effective date of the initial
registration by the Company of its Stock under Section 12 of the Securities
Exchange Act of 1934, as amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
Company and its shareholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one or
more Committees have been appointed by the Board to administer the Plan, "Board"
also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended, and
any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means Immersion Corporation, a California corporation,
or any successor corporation thereto.
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(e) "COMPENSATION" means, with respect to any Offering Period, base
wages or salary, commissions, overtime, bonuses, annual awards, other incentive
payments, shift premiums, and all other compensation paid in cash during such
Offering Period before deduction for any contributions to any plan maintained by
a Participating Company and described in Section 401(k) or Section 125 of the
Code. Compensation shall not include reimbursements of expenses, allowances,
long-term disability, workers' compensation or any amount deemed received
without the actual transfer of cash or any amounts directly or indirectly paid
pursuant to the Plan or any other stock purchase or stock option plan, or any
other compensation not included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements
set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
any military leave, sick leave, or other bona fide leave of absence approved by
the Company of ninety (90) days or less. In the event an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in good
faith and in the exercise of its discretion whether an individual has become or
has ceased to be an Employee and the effective date of such individual's
employment or termination of employment, as the case may be. For purposes of an
individual's participation in or other rights, if any, under the Plan as of the
time of the Company's determination, all such determinations by the Company
shall be final, binding and conclusive, notwithstanding that the Company or any
governmental agency subsequently makes a contrary determination.
(h) "ENTRY DATE" means (i) the Offering Date of an Offering Period,
or (ii) with respect to persons who first become Eligible Employees after the
commencement of the Initial Offering Period (as defined in Section 6.1 below)
but prior to the commencement of the final Purchase Period of the Initial
Offering Period, the first day of the Purchase Period following the date on
which such person becomes an Eligible Employee. Notwithstanding the foregoing,
in the event that the Fair Market Value of a share of Stock on the first, second
or third Purchase Date of the Initial Offering Period is less than the Fair
Market Value of a share of Stock on the Entry Date for a Participant who was
participating in the Offering as of such Purchase Date, the Entry Date for such
Participant for the remainder of the Offering shall be the first day of the next
Purchase Period immediately following such Purchase Date.
(i) "FAIR MARKET VALUE" means, as of any date, if there is then a
public market for the Stock, the closing price of a share of Stock (or the mean
of the closing bid and asked prices if the Stock is so quoted instead) as quoted
on the Nasdaq National Market, The Nasdaq SmallCap Market or such other national
or regional securities exchange or market system constituting the primary market
for the Stock, as reported in The Wall Street Journal or such other source as
the Company deems reliable. If the relevant date does not fall on a day on
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<PAGE> 3
which the Stock has traded on such securities exchange or market system, the
date on which the Fair Market Value shall be established shall be the last day
on which the Stock was so traded prior to the relevant date, or such other
appropriate day as shall be determined by the Board, in its discretion. If, as
of any date, there is then no public market for the Stock, the Fair Market Value
on any relevant date shall be as determined by the Board. Notwithstanding the
foregoing, the Fair Market Value per share of Stock on the Effective Date shall
be deemed to be the public offering price set forth in the final prospectus
filed with the Securities and Exchange Commission in connection with the initial
public offering of the Stock.
(j) "OFFERING" means an offering of Stock as provided in Section 6.
(k) "OFFERING DATE" means, for any Offering, the first day of the
Offering Period with respect to such Offering.
(l) "OFFERING PERIOD" means a period established in accordance with
Section 6.1.
(m) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPANT" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and remains a
participant in accordance with the Plan.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation designated by the Board as a corporation
the Employees of which may, if Eligible Employees, participate in the Plan. The
Board shall have the sole and absolute discretion to determine from time to time
which Parent Corporations or Subsidiary Corporations shall be Participating
Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time, the
Company and all other corporations collectively which are then Participating
Companies.
(q) "PURCHASE DATE" means the last day of (i) any Purchase Period
during the Initial Offering Period, or (ii) an Offering Period which begins
after the Initial Offering Period.
(r) "PURCHASE PERIOD" means a period established in accordance with
Section 6.2.
(s) "PURCHASE PRICE" means the price at which a share of Stock may
be purchased under the Plan, as determined in accordance with Section 9.
(t) "PURCHASE RIGHT" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section 8,
which the Participant may or may not exercise during the Offering Period in
which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated
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payroll deductions of the Participant not previously applied to the purchase of
Stock under the Plan and to terminate participation in the Plan at any time
during an Offering Period.
(u) "STOCK" means the common stock of the Company, as adjusted from
time to time in accordance with Section 4.2.
(v) "SUBSCRIPTION AGREEMENT" means a written agreement in such form
as specified by the Company, stating an Employee's election to participate in
the Plan and authorizing payroll deductions under the Plan from the Employee's
Compensation.
(w) "SUBSCRIPTION DATE" means the last business day prior to an
Entry Date or such other date as the Company shall establish.
(x) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board. All questions of interpretation of the Plan, of any form of agreement or
other document employed by the Company in the administration of the Plan, or of
any Purchase Right shall be determined by the Board and shall be final and
binding upon all persons having an interest in the Plan or the Purchase Right.
Subject to the provisions of the Plan, the Board shall determine all of the
relevant terms and conditions of Purchase Rights granted pursuant to the Plan;
provided, however, that all Participants granted Purchase Rights pursuant to the
Plan shall have the same rights and privileges within the meaning of Section
423(b)(5) of the Code. All expenses incurred in connection with the
administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The
Company may, from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll
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deduction greater than or less than the amount designated by a Participant in
order to adjust for the Company's delay or mistake in processing a Subscription
Agreement or in otherwise effecting a Participant's election under the Plan or
as advisable to comply with the requirements of Section 423 of the Code, and (e)
determination of the date and manner by which the Fair Market Value of a share
of Stock is determined for purposes of administration of the Plan.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be five hundred thousand (500,000),
cumulatively increased on January 1, 2001 and each January 1 thereafter until
and including January 1, 2010 by an amount equal to the lesser of (a) five
hundred thousand (500,000) shares, or (b) a lesser amount of shares determined
by the Board, and shall consist of authorized but unissued or reacquired shares
of Stock, or any combination thereof. If an outstanding Purchase Right for any
reason expires or is terminated or canceled, the shares of Stock allocable to
the unexercised portion of such Purchase Right shall again be available for
issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company, or
in the event of any merger (including a merger effected for the purpose of
changing the Company's domicile), sale of assets or other reorganization in
which the Company is a party, appropriate adjustments shall be made in the
number and class of shares subject to the Plan and each Purchase Right and in
the Purchase Price. If a majority of the shares which are of the same class as
the shares that are subject to outstanding Purchase Rights are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the outstanding Purchase Rights to provide that such Purchase
Rights are exercisable for New Shares. In the event of any such amendment, the
number of shares subject to, and the Purchase Price of, the outstanding Purchase
Rights shall be adjusted in a fair and equitable manner, as determined by the
Board, in its sole discretion. Notwithstanding the foregoing, any fractional
share resulting from an adjustment pursuant to this Section 4.2 shall be rounded
down to the nearest whole number, and in no event may the Purchase Price be
decreased to an amount less than the par value, if any, of the stock subject to
the Purchase Right. The adjustments determined by the Board pursuant to this
Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the Participating
Company Group for less than twenty (20) hours per week; or
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(b) Any Employee who is customarily employed by the Participating
Company Group for not more than five (5) months in any calendar year.
5.2 EXCLUSION OF CERTAIN SHAREHOLDERS. Notwithstanding any provision
of the Plan to the contrary, no Employee shall be granted a Purchase Right under
the Plan if, immediately after such grant, such Employee would own or hold
options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS.
(a) INITIAL OFFERING PERIOD. The Plan shall be implemented by
sequential Offerings (an "OFFERING PERIOD"). The first Offering Period shall
commence on the Effective Date and end on the last day of January, 2002 (the
"INITIAL OFFERING PERIOD").
(b) SUBSEQUENT OFFERING PERIODS. After the completion of the Initial
Offering Period, subsequent Offerings shall commence on the first day of
February and August of each year and end on the last day of July and January,
respectively, occurring thereafter, and will have a duration of approximately
six (6) months.
6.2 PURCHASE PERIODS. The Initial Offering Period shall consist of
four (4) consecutive Purchase Periods of approximately six (6) months duration.
Purchase Periods shall commence on the Effective Date, August 1, 2000, February
1, 2001 and August 1, 2001. Purchase Periods beginning on the first day of
February and August shall end on the last day of July and January, respectively,
occurring thereafter. The Purchase Period commencing on the Effective Date shall
end on July 31, 2000.
6.3 DISCRETION TO VARY DURATION. Notwithstanding the foregoing, the
Board may establish a different duration for one or more Offering Periods or
Purchase Periods or different commencing or ending dates for such periods;
provided, however, that no Offering Period may have a duration exceeding
twenty-seven (27) months. If the first or last day of an Offering Period or a
Purchase Period is not a day on which the national securities exchanges or
Nasdaq Stock Market are open for trading, the Company shall specify the trading
day that will be deemed the first or last day, as the case may be, of the
period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the Company not later than the close of business for
such office on the Subscription Date established by the Company for the
applicable Entry Date. An Eligible Employee who does not deliver a properly
completed Subscription Agreement to the Company's designated office on or before
the Subscription Date shall not participate in that Offering Period or any
subsequent Offering Period
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unless such Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before the
Subscription Date for such subsequent Offering Period. An Employee who becomes
an Eligible Employee after the Offering Date of an Offering Period (other than
the Initial Offering Period) shall not be eligible to participate in such
Offering Period but may participate in any subsequent Offering Period provided
such Employee is still an Eligible Employee as of the Offering Date of such
subsequent Offering Period.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 10.7 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new Subscription
Agreement for a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering Period
shall be granted automatically, on his or her Entry Date, a Purchase Right
consisting of an option to purchase, on each Purchase Date within such Offering
Period, that number of whole shares of Stock determined by dividing the
aggregate payroll deductions collected from the Participant by the applicable
Purchase Price on such Purchase Date; provided, that no Participant may purchase
more than two thousand (2,000) shares of Stock on any Purchase Date.
8.2 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision
of the Plan to the contrary, no Participant shall be granted a Purchase Right
which permits his or her right to purchase shares of Stock under the Plan to
accrue at a rate which, when aggregated with such Participant's rights to
purchase shares under all other employee stock purchase plans of a Participating
Company intended to meet the requirements of Section 423 of the Code, exceeds
Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or such other
limit, if any, as may be imposed by the Code) for each calendar year in which
such Purchase Right is outstanding at any time. For purposes of the preceding
sentence, the Fair Market Value of shares purchased during a given Offering
Period shall be determined as of the Entry Date for such Offering Period. The
limitation described in this Section shall be applied in conformance with
applicable regulations under Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired in an
Offering Period upon the exercise of all or any portion of a Purchase Right
shall be established by the Board; provided, however, that the Purchase Price
shall not be less than eighty-five percent
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(85%) of the lesser of (a) the Fair Market Value of a share of Stock on the
Participant's Entry Date of the Offering Period or (b) the Fair Market Value of
a share of Stock on the Purchase Date. Unless otherwise provided by the Board
prior to the commencement of an Offering Period, the Purchase Price for that
Offering Period shall be eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Participant's Entry Date of the Offering
Period, or (b) the Fair Market Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any portion of
a Purchase Right may be paid for only by means of payroll deductions from the
Participant's Compensation accumulated during the Offering Period for which such
Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period (after the Participant's
Entry Date) shall be determined by the Participant's Subscription Agreement. The
Subscription Agreement shall set forth the percentage of the Participant's
Compensation to be deducted on each payday during an Offering Period (after the
Participant's Entry Date) in whole percentages of not less than one percent (1%)
(except as a result of an election pursuant to Section 10.3 to stop payroll
deductions made effective following the first payday during an Offering after
the Participant's Entry Date) or more than ten percent (10%). Notwithstanding
the foregoing, the Board may change the limits on payroll deductions effective
as of any future Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Entry Date and shall continue to the
end of the Offering Period unless sooner altered or terminated as provided
herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an Offering
Period, a Participant may elect to increase or decrease the rate of or to stop
deductions from his or her Compensation by delivering to the Company an amended
Subscription Agreement authorizing such change on or before the "Change Notice
Date." The "CHANGE NOTICE DATE" shall be a date prior to the beginning of the
first pay period for which such election is to be effective as established by
the Company from time to time and announced to the Participants. A Participant
who elects to decrease the rate of his or her payroll deductions to zero percent
(0%) shall nevertheless remain a Participant in the current Offering Period
unless such Participant withdraws from the Plan as provided in Section 12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company may,
in its sole discretion, suspend a Participant's payroll deductions under the
Plan as the Company deems advisable to avoid accumulating payroll deductions in
excess of the amount that could reasonably be anticipated to purchase the
maximum number of shares of Stock permitted during a calendar year under the
limit set forth in Section 8.2. Payroll deductions shall be resumed at the rate
specified in the Participant's then effective Subscription Agreement at the
beginning of the next Purchase Period the Purchase Date of which falls in the
following calendar year.
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10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions received
or held by the Company may be used by the Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company a written notice on a form provided by the Company for
such purpose. A Participant who withdraws the entire remaining balance credited
to his or her Plan account shall be deemed to have withdrawn from the Plan in
accordance with Section 12.1. Amounts withdrawn shall be returned to the
Participant as soon as practicable after the withdrawal and may not be applied
to the purchase of shares in any Offering under the Plan. The Company may from
time to time establish or change limitations on the frequency of withdrawals
permitted under this Section, establish a minimum dollar amount that must be
retained in the Participant's Plan account, or terminate the withdrawal right
provided by this Section.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date, each
Participant who has not withdrawn from the Plan and whose participation in the
Offering has not terminated before such Purchase Date shall automatically
acquire pursuant to the exercise of the Participant's Purchase Right the number
of whole shares of Stock determined by dividing (a) the total amount of the
Participant's payroll deductions accumulated in the Participant's Plan account
during the Purchase Period and not previously applied toward the purchase of
Stock by (b) the Purchase Price. No shares of Stock shall be purchased on a
Purchase Date on behalf of a Participant whose participation in the Offering or
the Plan has terminated before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number of
shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 4.1, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
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11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised all
or part of his or her Purchase Right shall receive, as soon as practicable after
the Purchase Date, a report of such Participant's Plan account setting forth the
total payroll deductions accumulated prior to such exercise, the number of
shares of Stock purchased, the Purchase Price for such shares, the date of
purchase and the cash balance, if any, remaining immediately after such purchase
that is to be refunded or retained in the Participant's Plan account pursuant to
Section 11.4. The report required by this Section may be delivered in such form
and by such means, including by electronic transmission, as the Company may
determine.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may withdraw
from the Plan by signing and delivering to the Company a written notice of
withdrawal on a form provided by the Company for such purpose. Such withdrawal
may be elected at any time prior to the end of an Offering Period; provided,
however, that if a Participant withdraws from the Plan after the Purchase Date
of a Purchase Period, the withdrawal shall not affect shares of Stock acquired
by the Participant on such Purchase Date. A Participant who voluntarily
withdraws from the Plan is prohibited from resuming participation in the Plan in
the same Offering from which he or she withdrew, but may participate in any
subsequent Offering by again satisfying the requirements of Sections 5 and 7.1.
The Company may impose a requirement that the notice of withdrawal from the Plan
be on file with the Company for a reasonable period prior to the effectiveness
of the Participant's withdrawal.
12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Section 12.1, the Participant's accumulated
payroll deductions which have not been applied toward the purchase of shares of
Stock shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any
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interest, and the Participant's interest in the Plan or the Offering, as
applicable, shall terminate. Such accumulated payroll deductions to be refunded
in accordance with this Section may not be applied to any other Offering under
the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be an Employee
of the Participating Company Group for any reason, including retirement,
disability or death, or the failure of a Participant to remain an Eligible
Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the Participant's
Plan account since the last Purchase Date shall, as soon as practicable, be
returned to the Participant or, in the case of the Participant's death, to the
Participant's legal representative, and all of the Participant's rights under
the Plan shall terminate. Interest shall not be paid on sums returned pursuant
to this Section 13. A Participant whose participation has been so terminated may
again become eligible to participate in the Plan by again satisfying the
requirements of Sections 5 and 7.1.
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if
any of the following occurs with respect to the Company: (i) the direct or
indirect sale or exchange in a single or series of related transactions by the
shareholders of the Company of more than fifty percent (50%) of the voting stock
of the Company; (ii) a merger or consolidation in which the Company is a party;
(iii) the sale, exchange, or transfer of all or substantially all of the assets
of the Company; or (iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the
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Company's rights and obligations under the Plan. If the Acquiring Corporation
elects not to assume the Company's rights and obligations under outstanding
Purchase Rights, the Purchase Date of the then current Purchase Period shall be
accelerated to a date before the date of the Change in Control specified by the
Board, but the number of shares of Stock subject to outstanding Purchase Rights
shall not be adjusted. All Purchase Rights which are neither assumed by the
Acquiring Corporation in connection with the Change in Control nor exercised as
of the date of the Change in Control shall terminate and cease to be outstanding
effective as of the date of the Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
A Purchase Right may not be transferred in any manner otherwise than by
will or the laws of descent and distribution and shall be exercisable during the
lifetime of the Participant only by the Participant.
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to compliance with
all applicable requirements of federal, state and foreign law with respect to
such securities. A Purchase Right may not be exercised if the issuance of shares
upon such exercise would constitute a violation of any applicable federal, state
or foreign securities laws or other law or regulations or the requirements of
any securities exchange or market system upon which the Stock may then be
listed. In addition, no Purchase Right may be exercised unless (a) a
registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
17. RIGHTS AS A SHAREHOLDER AND EMPLOYEE.
A Participant shall have no rights as a shareholder by virtue of the
Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company
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Group or interfere in any way with any right of the Participating Company Group
to terminate the Participant's employment at any time.
18. LEGENDS.
The Company may at any time place legends or other identifying symbols
referencing any applicable federal, state or foreign securities law restrictions
or any provision convenient in the administration of the Plan on some or all of
the certificates representing shares of Stock issued under the Plan. The
Participant shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION
TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN EMPLOYEE STOCK
PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE
CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER
HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE PLAN IN
THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE)."
19. NOTIFICATION OF SALE OF SHARES.
The Company may require the Participant to give the Company prompt notice
of any disposition of shares acquired by exercise of a Purchase Right within two
(2) years from the date of granting such Purchase Right or one (1) year from the
date of exercise of such Purchase Right. The Company may require that until such
time as a Participant disposes of shares acquired upon exercise of a Purchase
Right, the Participant shall hold all such shares in the Participant's name (or,
if elected by the Participant, in the name of the Participant and his or her
spouse but not in the name of any nominee) until the lapse of the time periods
with respect to such Purchase Right referred to in the preceding sentence. The
Company may direct that the certificates evidencing shares acquired by exercise
of a Purchase Right refer to such requirement to give prompt notice of
disposition.
20. NOTICES.
All notices or other communications by a Participant to the Company under
or in connection with the Plan shall be deemed to have been duly given when
received in the form specified by the Company at the location, or by the person,
designated by the Company for the receipt thereof.
21. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have as
members of the Board or officers or employees of the Participating Company
Group, members of the
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Board and any officers or employees of the Participating Company Group to whom
authority to act for the Board or the Company is delegated shall be indemnified
by the Company against all reasonable expenses, including attorneys' fees,
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except that (a) such
termination shall not affect Purchase Rights previously granted under the Plan,
provided that the Board may terminate the Plan (and any Offering thereunder) on
any Purchase Date if the Board determines that such termination is in the best
interests of the Company and its shareholders except as permitted under the
Plan, and (b) no amendment may adversely affect a Purchase Right previously
granted under the Plan (except to the extent permitted by the Plan or as may be
necessary to qualify the Plan as an employee stock purchase plan pursuant to
Section 423 of the Code or to obtain qualification or registration of the shares
of Stock under applicable federal, state or foreign securities laws). In
addition, an amendment to the Plan must be approved by the shareholders of the
Company within twelve (12) months of the adoption of such amendment if such
amendment would authorize the sale of more shares than are authorized for
issuance under the Plan or would change the definition of the corporations that
may be designated by the Board as Participating Companies.
14
<PAGE> 15
IMMERSION CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print): __________________________________________________________
(Last) (First) (Middle)
ADDRESS: _________________________________________________________________
MY SOCIAL SECURITY NUMBER: ____________________________________________________
[ ] Original Application for the Offering Period beginning
____________________, 199__.
[ ] Change in Payroll Deduction rate effective with the pay period ending
____________________, 199__.
I hereby elect to participate in the 1999 Employee Stock Purchase Plan (the
"PLAN") of Immersion Corporation (the "COMPANY") and subscribe to purchase
shares of the Company's Stock in accordance with this Subscription Agreement and
the Plan.
I hereby authorize payroll deductions in the amount of ________ percent (in
whole percentages not less than 1% or more than 10%) of my "Compensation" on
each payday throughout the "OFFERING PERIOD" in accordance with the Plan. I
understand that these payroll deductions will be accumulated for the purchase of
shares of Stock at the applicable purchase price determined in accordance with
the Plan. I understand that, except as otherwise provided by the Plan, I will
automatically purchase shares on each Purchase Date under the Plan unless I
withdraw from the Plan by giving written notice on a form provided by the
Company or unless my employment terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which I
am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set forth
below. (Shares may be issued in the participant's name alone or together with
the participant's spouse as community property or in joint tenancy.)
NAME(S):________________________________________________________________
[ ] In my name alone [ ] Community Property [ ] Joint Tenancy
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase of
shares under the Plan and/or my disposition of such shares. The Company may, but
will not be obligated to, withhold from my compensation the amount necessary to
meet such withholding obligations.
I agree that while I hold shares acquired under the Plan, unless otherwise
permitted by the Company, I will hold such shares in the name(s) entered above
(and not in the name of any nominee). This restriction only applies to the
name(s) in which shares are held and does not affect my ability to dispose of
Plan shares.
THE TAX TREATMENT OF A DISPOSITION OF PLAN SHARES (INCLUDING A GIFT)
DEPENDS ON WHEN THE DISPOSITION OCCURS. I AGREE THAT I WILL NOTIFY THE CHIEF
FINANCIAL OFFICER OF THE COMPANY IN WRITING WITHIN 30 DAYS AFTER ANY DISPOSITION
OF PLAN SHARES THAT OCCURS WITHIN 2 YEARS AFTER THE ENTRY DATE OR 1 YEAR AFTER
THE PURCHASE DATE (A "DISQUALIFYING DISPOSITION"). I FURTHER AGREE THAT IF I DO
NOT RESPOND WITHIN 30 DAYS TO A COMPANY SURVEY DELIVERED TO ME REQUESTING
INFORMATION ABOUT A POSSIBLE DISQUALIFYING DISPOSITION, THE COMPANY MAY (1)
TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY THAT A DISQUALIFYING
DISPOSITION OCCURRED, AND (2) REPORT THE ORDINARY INCOME I MUST RECOGNIZE AS A
RESULT OF THE DISQUALIFYING DISPOSITION TO THE INTERNAL REVENUE SERVICE.
I am familiar with the provisions of the Plan and agree to participate in
the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided by
the Plan. I understand that the effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Plan.
Date:________________ Signature:__________________________________
<PAGE> 16
IMMERSION CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print): __________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under Immersion Corporation
1999 Employee Stock Purchase Plan (the "PLAN") which began on
_________________________, 19____ and in which I am currently participating (the
"CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
[ ] A. I elect to terminate immediately my participation in the
Current Offering and in the Plan.
I request that the Company cease all further payroll deductions
from my Compensation under the Plan (provided that I have given
sufficient notice prior to the next payday). I request that all
payroll deductions credited to my account under the Plan (if any)
not previously used to purchase shares under the Plan shall not
be used to purchase shares on the next Purchase Date of the
Current Offering. Instead, I request that all such amounts be
paid to me as soon as practicable. I understand that this
election immediately terminates my interest in the Current
Offering and in the Plan.
[ ] B. I elect to terminate my participation in the Current Offering
and in the Plan following my purchase of shares on next Purchase
Date of the Current Offering.
I request that the Company cease all further payroll deductions
from my Compensation under the Plan (provided that I have given
sufficient notice prior to the next payday). I request that all
payroll deductions credited to my account under the Plan (if any)
not previously used to purchase shares under the Plan shall be
used to purchase shares on the next Purchase Date of the Current
Offering to the extent permitted by the Plan. I understand that
this election will terminate my interest in the Current Offering
and in the Plan immediately following such purchase. I request
that any cash balance remaining in my account under the Plan
after my purchase of shares be paid to me as soon as practicable.
I understand that by making this election I am terminating my interest in
the Plan and that no further payroll deductions will be made (provided that I
have given sufficient notice prior to the next payday) unless I elect in
accordance with the Plan to become a participant in another Offering under the
Plan by filing a new Subscription Agreement with the Company.
Date:_______________________ Signature:________________________________
