<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999
REGISTRATION NO. 333-86361
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IMMERSION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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. [ ]
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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.
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<PAGE> 2
PROSPECTUS
4,250,000 SHARES
IMMERSION.LOGO
COMMON STOCK
This is an initial public offering of common stock by Immersion
Corporation.
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Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol IMMR.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $12.00 $51,000,000
Underwriting discounts and commissions...................... $ 0.84 $ 3,570,000
Proceeds to Immersion Corporation, before expenses.......... $11.16 $47,430,000
</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.
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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
November 12, 1999
<PAGE> 3
COVER PAGE ART
[Art: Rendition of a human hand reaching
out to touch a computer cursor]
Headline Above the Illustration: "Immersion currently focuses on licensing its
TouchSense technology in the entertainment and personal computer markets. In the
entertainment market, our licensees manufacture products such as the joystick,
steering wheel and gamepad shown on the following pages. To target the mouse
market, we have licensed Logitech to manufacture the first computer mouse
enabled with our technology which Logitech recently began shipping. We have
historically derived a majority of our revenues and will continue to derive
revenues from product sales, including sales of digitizing, medical simulation
and industrial products.
Headline Below the Illustration: "Engaging the Sense of Touch'
------------------------
GATE FOLD
Headline Across the Gate Fold: "Immersion licenses its TouchSense technology to
manufacturers of computer and medical devices. Our TouchSense technology enables
these devices to provide compelling tactile sensations for more natural
interaction, enhanced productivity and a more engaging experience."
FIRST GATE FOLD (LEFT)
[Art: Windows desktop with Yahoo home page and a smaller simulated Web page
advertisement for tennis racquet]
[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. With TouchSense
technology in the Wingman Mouse users can automatically feel the standard
desktop icons. Using Immersion's TouchSense authoring tool, web developers can
create custom sensations. 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."
Headline at bottom of page "With TouchSense technology users can automatically
feel standard desktop icons and hyperlinks."
SECOND GATE FOLD (RIGHT)
[Art: At top of page, a photo of a gamepad with the caption "HammerHead Fx"]
<PAGE> 4
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.
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 compelling tactile
sensations.
[Art: At right of page, a photo of a force feedback joystick with the caption
"WingMan Force"]
[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"]
INSIDE BACK PAGE
Headline at top left of page "Immersion licenses its TouchSense technology to
manufacturers of computer devices. The products depicted on this page are
manufactured by Logitech, one of our licensees."
[Art: Below text: a picture of a computer mouse with the caption "Logitech(R)
WingMan(R) Force Feedback Mouse Logitech recently began shipping the mouse,
which incorporates our TouchSense technology."]
[Art: At center top of page: a picture of a steering wheel with the caption
"WingMan Formula Force."]
Text to right of steering wheel: "Computer game enthusiasts can experience
compelling tactile sensations."
Text in center of page: "Patented technology makes it possible. A powerful
patent portfolio, Immersions intellectual property includes 37 patents issued
and over 125 applications pending."
[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> 5
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial Data........................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 31
Management.................................................. 44
Certain Transactions........................................ 54
Principal Stockholders...................................... 58
Description of Capital Stock................................ 61
Shares Eligible for Future Sale............................. 64
Underwriting................................................ 66
Legal Matters............................................... 68
Experts..................................................... 68
Where You Can Find Additional Information................... 68
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> 6
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.
IMMERSION CORPORATION
We develop hardware and software technologies that enable users to interact
with computers using their sense of touch. Our patented technologies, which we
call TouchSense, enable computer peripheral devices, such as joysticks, mice and
steering wheels, to deliver tactile sensations that correspond to on-screen
events. We currently focus on licensing our intellectual property for these
feel-enabling technologies to manufacturers of computer peripherals in the
computer gaming and general purpose personal computer markets. For the nine
months ended September 30, 1999, royalty revenue accounted for 23% of our total
revenues and royalty revenue from the sale by our licensees of gaming
peripherals used with personal computers accounted for 99% of our royalty
revenue. Logitech, a licensee of our intellectual property, began manufacturing
its computer mouse incorporating our feel-enabling technologies in commercial
quantities during the fourth quarter of 1999. It has begun shipping the mouse to
its distribution centers and recently commenced initial shipments and sales of
the mouse to distributors and retail customers. Logitech has set the initial
suggested retail price of the mouse at $99.95 and expects commercial quantities
of the product to be available for purchase by consumers in the fourth quarter
of 1999. We have recorded no royalty revenue from the sale of computer mice
incorporating our feel-enabling technologies for the nine months ended September
30, 1999. Our objective is to proliferate our TouchSense technologies across
markets, platforms and applications so that feel becomes as common as graphics
and sound in the modern computer user 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 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 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
that allows our licensees to incorporate our patented feel-enabling technologies
into their peripheral device products and that allows software programmers and
Web site developers to add feel-enabling elements to their applications. 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 feel technology designed for computer gaming
peripherals such as joysticks, steering wheels and gamepads. To date, we have
licensed intellectual property for our feel-enabling technologies to more than
16 companies, including Microsoft, Logitech and InterAct.
To target the general purpose personal computer market, we have developed
hardware and software technologies designed for cursor control products such as
mice and trackballs. The first feel-enabled computer mouse manufactured by
Logitech, incorporates these technologies. Logitech includes 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
4
<PAGE> 7
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.
Historically we have derived the majority of our revenues from the sale of
products that we manufacture. The products that we manufacture include devices
used to create three-dimensional computer images of small objects, a specialized
computer mouse used for mapmaking, feel-enabled joysticks and steering wheels
designed specifically for use in the arcade and location-based entertainment
market and specialized medical products for simulation, training and clinical
applications. For the nine months ended September 30, 1999, product sales
accounted for 58% of total revenues and the products we manufactured accounted
for 89% of our product sales. We have also derived revenues from development
contracts under which we assist our licensees in the development of their
feel-enabled products and from development contracts with government agencies
for feel-enabling technologies. For the nine months ended September 30, 1999,
revenues from these commercial and government development projects accounted for
19% of our total revenues. We expect that product sales and development contract
revenues will decline as a percentage of revenues if our royalty-based licensing
model proves to be successful.
At September 30, 1999, we had an accumulated deficit of approximately $7.9
million. Logitech accounted for 15% of our total revenues for the nine months
ended September 30, 1999 and 11% of our total revenues in 1998. The U.S.
Government accounted for 9% of our total revenues for the nine months ended
September 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 on November 3, 1999. Our headquarters are located at 2158 Paragon
Drive, San Jose, California 95131, and our telephone number is (408) 467-1900.
Our Web site address is www.immersion.com. Information contained on our Web site
is not part of this prospectus.
5
<PAGE> 8
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.
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 price of $2.72. This number also excludes 2,015,594 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 initial public offering
price of $12.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $2,737 $ 4,332 $ 5,021 $ 3,408 $ 5,585
Costs and expenses....................... 2,846 4,909 6,868 4,961 9,399
Operating loss........................... (109) (577) (1,847) (1,553) (3,814)
Net loss................................. (81) (527) (1,673) (1,418) (3,722)
Basic and diluted net loss per share..... $(0.03) $ (0.17) $ (0.43) $ (0.37) $ (0.71)
Shares used in calculating basic and
diluted net loss per share............ 2,825 3,162 3,909 3,876 5,234
Pro forma basic and diluted net loss per
share................................. $ (0.19) $ (0.36)
Shares used in calculating pro forma
basic and diluted net loss per
share................................. 8,630 10,365
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- ------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 3,798 $ 3,798 $50,228
Working capital........................................ 2,622 2,622 49,052
Total assets........................................... 11,935 11,935 58,365
Redeemable convertible preferred stock................. 1,481 -- --
Total stockholders' equity............................. 7,180 8,661 55,091
</TABLE>
6
<PAGE> 9
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 FEEL-ENABLING 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 licensees' products
we may not achieve or sustain revenue growth. To date, consumer demand for our
technologies has been limited to the computer gaming peripherals market, and
sales of joysticks and steering wheels incorporating our feel-enabling
technologies in that market began only in late 1996 and 1998, respectively.
Logitech began manufacturing its computer mouse incorporating our feel-enabling
technologies in commercial quantities during the fourth quarter of 1999. It has
begun shipping the mouse to its distribution centers and recently commenced
initial shipments and sales of the mouse to distributors and retail customers.
Logitech expects commercial quantities of the product to be available for
purchase by consumers in the fourth quarter of 1999. Feel-enabled mice may not
achieve commercial acceptance or generate significant 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 HAD AN ACCUMULATED DEFICIT OF $7.9 MILLION AS OF SEPTEMBER 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 THROUGH ROYALTY PAYMENTS FROM SALES BY OUR
LICENSEES OF COMPUTER PERIPHERAL PRODUCTS INCORPORATING OUR FEEL-ENABLING
TECHNOLOGIES, A STRATEGY FROM WHICH HISTORICALLY WE HAVE DERIVED LESS THAN
ONE-QUARTER OF OUR REVENUES
We cannot predict our future revenues based on our historical financial
information. Historically, we derived the majority of our revenues from product
sales, including sales of devices
7
<PAGE> 10
used to create three dimensional computer images of small objects, medical
simulation products and a specialized non-feel enabled computer mouse used for
map making. Historically, we have also derived revenues from contracts with our
licensees to assist in the development of our licensees' feel-enabled products
and from development contracts with government agencies for feel-enabling
technology. The majority of our historical product sales resulted from sales of
products that did not utilize our 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 general
purpose personal computer markets. For 1998, we derived only 6% of our total
revenues from royalty revenue and for the nine months ended September 30, 1999,
we derived 23% of our total revenues from royalty revenue. We anticipate that
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.
OUR BUSINESS STRATEGY FOR ACHIEVING REVENUE GROWTH RELIES SIGNIFICANTLY ON
ROYALTY PAYMENTS FROM SALES BY LOGITECH OF ITS FEEL-ENABLED MOUSE, A PRODUCT
WHICH BEGAN SHIPPING TO DISTRIBUTION CENTERS ONLY IN MID-OCTOBER 1999
If Logitech's feel-enabled mouse does not achieve commercial acceptance or
if production or other difficulties that sometimes occur when a new product is
introduced interfere with sales of the Logitech mouse, our ability to achieve
revenue growth could be significantly impaired. In the technology product
development agreement that we entered into with Logitech in 1998, Logitech
estimated that, based upon an assumed production of 100,000 units per year, its
target price for its feel-enabled mouse would be $99. Logitech, however, has
made no commitments to us regarding the production volume or pricing of its
feel-enabled mouse. The fact that the actual initial suggested retail price of
Logitech's mouse is $99.95 does not reflect any volume or pricing commitments
made to us by Logitech. In addition, we do not know whether Logitech will
manufacture and sell 100,000 units or any other minimum number of units per year
of the mouse or whether Logitech will choose to maintain the suggested retail
price of the mouse at $99.95.
WE DO NOT CONTROL OR INFLUENCE OUR LICENSEES' MANUFACTURING, PROMOTION,
DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING OUR FEEL-ENABLING
TECHNOLOGIES, UPON WHICH WE ARE DEPENDENT TO GENERATE ROYALTY REVENUE
Our primary business strategy is to license our intellectual property to
companies that manufacture and sell products incorporating our feel
technologies. The sale of those products generates royalty revenue for us. In
the nine months ended September 30, 1999, 23% of our total revenues was royalty
revenue, 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 products that are
manufactured and sold by our licensees and that incorporate our feel-enabling
technologies. 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 products incorporating our feel-enabling technologies
in a timely fashion and generate consumer demand through marketing and other
promotional activities. Products incorporating our feel-enabling technologies
are generally more difficult to design and manufacture than products that do not
incorporate our feel-enabling technologies, 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 computer gaming peripherals market, typically occurs in the
third and fourth calendar quarters as a result of increased demand during the
year-end holiday season. If our licensees do not ship licensed products in a
timely fashion or fail to achieve strong sales in the second half of the
calendar year, we would not receive related royalty revenue. Most of
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<PAGE> 11
our gaming device licensees have at least part of their manufacturing operations
located in Taiwan, which experienced a severe earthquake on September 21, 1999.
As a result of the earthquake, several of our licensees have indicated that they
have had temporary production difficulties.
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 FEEL-ENABLED MICE
PRODUCTS
Logitech is currently the only licensed manufacturer of feel-enabled mice.
If Logitech does not effectively 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 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;
- effective patent protection may not be available in every country in
which our licensees do business.
We also rely on licenses, confidentiality agreements and copyright,
trademark and trade secret laws to establish and protect our proprietary rights.
It is possible that:
- laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technologies or deter others from developing
similar technologies; and
- policing unauthorized use of our products and trademarks would be
difficult, expensive and time-consuming, particularly overseas.
IF WE ARE UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH OUR EXISTING
LICENSEES AND WITH ADDITIONAL THIRD-PARTY MANUFACTURERS FOR OUR FEEL TECHNOLOGY,
OUR ROYALTY REVENUE 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. 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 existing
and potential licensees;
- difficulties in persuading consumer product manufacturers to work with
us, to rely on us for critical technology and to disclose to us
proprietary product development and other strategies; and
- difficulties in persuading existing and potential licensees to bear the
development costs necessary to incorporate our technologies into their
products.
9
<PAGE> 12
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE, AND IF OUR FUTURE
RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE
PRICE OF OUR COMMON STOCK IS LIKELY TO DECLINE
Our revenues and operating results are likely to vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control and any of which could cause the price of our common stock to decline.
These factors include:
- the establishment or loss of licensing relationships;
- the timing of 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 GAMING AND CURSOR CONTROL PERIPHERAL PRODUCTS INCORPORATING
OUR FEEL-ENABLING TECHNOLOGIES AS COMPARED TO NON FEEL-ENABLED GAMING AND CURSOR
CONTROL PERIPHERALS MAY INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND SALE OF
PRODUCTS INCORPORATING OUR TECHNOLOGIES
Joysticks, steering wheels, gamepads and computer mice incorporating our
feel-enabling technologies are more expensive than similar competitive products
that are not feel-enabled. Although major providers of computer peripheral
devices, such as Logitech, Microsoft and InterAct, have licensed our technology,
the greater expense of products containing our feel-enabling technologies as
compared to non feel-enabled products may be a significant barrier to the
widespread adoption and sale of their feel-enabled products in consumer markets.
IF OUR TECHNOLOGIES ARE UNABLE TO GAIN MARKET ACCEPTANCE OTHER THAN IN
FEEL-ENABLED JOYSTICKS AND STEERING WHEELS, 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. Our I-FORCE royalty revenue
was $321,000 for 1998 and $1,270,000 for the nine months ended September 30,
1999. I-FORCE royalty revenue represented 100% and 99% of our royalty revenue in
1998 and 1999, respectively. The market for joysticks and steering wheels for
use with personal computers is a substantially smaller market than either the
mouse market or the dedicated gaming console market and is characterized by
declining average selling prices. If we are unable to gain market acceptance
beyond the personal computer gaming peripherals market, we may not achieve
revenue growth.
COMPETITION IN COMPUTER PERIPHERAL PRODUCTS IN BOTH THE GENERAL PURPOSE
COMPUTING AND COMPUTER GAMING MARKETS COULD LEAD TO REDUCTIONS IN THE SELLING
PRICE OF PERIPHERAL PRODUCTS OF OUR LICENSEES, WHICH WOULD REDUCE OUR ROYALTY
REVENUE
The general purpose computing and computer gaming markets in which our
licensees sell peripheral products are highly competitive and are characterized
by rapid technological change, short product life cycles, cyclical market
patterns, a trend of declining average selling prices and
10
<PAGE> 13
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.
LOGITECH ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE AND THE FAILURE OF
LOGITECH TO ACHIEVE SALES VOLUMES FOR ITS GAMING AND CURSOR CONTROL PERIPHERAL
PRODUCTS THAT INCORPORATE OUR FEEL-ENABLING TECHNOLOGIES MAY REDUCE OUR ROYALTY
REVENUE
We derived 15% of our total revenues and 43% of our royalty revenue for the
nine months ended September 30, 1999 from Logitech. We expect that a significant
portion of our total revenues will continue to be derived from Logitech. If
Logitech fails to achieve anticipated sales volumes for its computer peripheral
products that incorporate our technologies, our royalty revenue would be
reduced.
BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE OUR FEEL-ENABLING
TECHNOLOGIES CURRENTLY MUST WORK WITH MICROSOFT'S OPERATING SYSTEM SOFTWARE, OUR
COSTS COULD INCREASE AND OUR REVENUES COULD DECLINE IF MICROSOFT MODIFIES ITS
OPERATING SYSTEM SOFTWARE
Our hardware and software technology for personal computer peripheral
products that incorporate our feel-enabling technologies 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.
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 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 the products that
we manufacture and the technologies that we license. 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.
11
<PAGE> 14
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 improve the performance
and to help reduce the cost of computer peripheral products, such as joysticks
and mice, incorporating our feel technology. 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. Although Kawasaki LSI warrants that microprocessors
it supplies to us or to our customers will conform to our specifications and be
free from defects in materials and workmanship for a period of one year from
delivery, any delays in delivery of the processor, quality problems or cost
increases could cause us to lose customers and could damage our relationships
with our licensees.
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.
COMPETITION FROM PRODUCTS THAT DO NOT INCORPORATE OUR TECHNOLOGIES COULD LEAD TO
REDUCED PRICES AND SALES VOLUMES OF PRODUCTS INCORPORATING OUR TECHNOLOGIES THAT
ARE MANUFACTURED BY OUR LICENSEES, 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 for the specific requirements of feel technology, in the future,
Intel, Mitsubishi or other companies may elect to
12
<PAGE> 15
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 FROM
LICENSING JOYSTICKS AND STEERING WHEELS IN THE GAMING MARKET MIGHT DECLINE IF
MICROSOFT INCREASES ITS VOLUME OF SALES OF FEEL-ENABLED JOYSTICKS AND STEERING
WHEELS AT THE EXPENSE OF OUR OTHER LICENSEES
Under the terms of our present agreement with Microsoft, Microsoft receives
a perpetual, worldwide, irrevocable, non-exclusive license under our patents for
its SideWinder Force Feedback Pro Joystick and its SideWinder Force Feedback
Wheel, and for a future replacement version of these specific SideWinder
products having essentially similar functional features. Instead of an ongoing
royalty on Microsoft's sales of licensed products, the agreement provides for
payment of a fixed amount regardless of Microsoft's sales volume. At the present
time, we do not have a license agreement with Microsoft for products other than
the SideWinder joystick and steering wheel. Microsoft has a significant share of
the market for feel-enabled joysticks and steering wheels for personal
computers. Microsoft has significantly greater financial, sales and marketing
resources, as well as greater name recognition and a larger customer base, than
our other licensees. In the event that Microsoft increases its share of this
market, our royalty revenue from other licensees in this market segment might
decline.
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
13
<PAGE> 16
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.
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
Our initiatives to develop new and enhanced technologies and to license
technologies for new applications and new platforms may not be successful. Any
new or enhanced technologies may not be favorably received by consumers and
could damage our reputation or our brand. Expanding our technology could also
require significant additional expenses and strain our management, financial and
operational resources. 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.
14
<PAGE> 17
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 was 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 beginning on page 66 for a more
complete discussion of the factors 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 a majority of our outstanding
common stock after this offering. Acting together, these stockholders would be
able to control 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. In addition, certain provisions of Delaware law may discourage,
delay or prevent someone from acquiring or merging with us. These provisions
could limit the price that investors might be willing to pay in the future for
shares of our common stock. For more information, see "Description of Capital
Stock."
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 15,665,592 shares if the underwriters' over-allotment is
exercised in full. Of these, 11,113,678 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.
15
<PAGE> 18
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 $46,430,000, at an initial
offering price per share of $12.00 and after deducting the 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 $6.0 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 and 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> 19
CAPITALIZATION
The following table sets forth our capitalization as of September 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 initial public offering price of $12.00 per
share and after deducting the underwriting discounts and commissions and
estimated offering expenses. The common stock outstanding as of September 30,
1999 excludes:
- 7,991,975 shares reserved for issuance under our stock option plans, of
which 4,379,465 shares were subject to outstanding options, with a
weighted average exercise price of $3.18 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>
SEPTEMBER 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........... $ 1,481 $ -- $ --
------- ------- -------
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 6,060,756 shares issued and outstanding,
actual; 100,000,000 shares authorized, pro forma and
pro forma as adjusted; 11,191,856 shares issued and
outstanding, pro forma; 15,441,856 shares issued and
outstanding, pro forma as adjusted..................... 8,575 17,011 63,441
Warrants.................................................... 893 893 893
Deferred stock compensation................................. (1,287) (1,287) (1,287)
Accumulated other comprehensive loss........................ -- -- --
Note receivable from stockholder............................ (17) (17) (17)
Accumulated deficit......................................... (7,939) (7,939) (7,939)
------- ------- -------
Total stockholders' equity............................. 7,180 8,661 55,091
------- ------- -------
Total capitalization.............................. $ 8,661 $ 8,661 55,091
======= ======= =======
</TABLE>
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<PAGE> 20
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
$3,887,000, or $0.35 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 initial public offering price of $12.00 per share and
after deducting the underwriting discounts and commissions and estimated
offering expenses and receipt of the net proceeds, our adjusted pro forma net
tangible book value as of September 30, 1999 would have been approximately
$50,317,000, or $3.26 per share. This represents an immediate increase in net
tangible book value of $2.91 per share to existing stockholders and an immediate
dilution of $8.74 per share to the new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $12.00
Pro forma net tangible book value per share as of September
30, 1999.................................................... $0.35
Increase in net tangible book value attributable to new
investors.............................................. 2.91
-----
As adjusted pro forma net tangible book value per share
after the offering........................................ 3.26
------
Dilution per share to new investors......................... $ 8.74
======
</TABLE>
The following table sets forth, on a pro forma basis as of September 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
initial public offering price of $12.00 per share and before deducting the
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.... 11,191,856 72.5% $ 9,209,000 15.3% $ 0.82
New investors............ 4,250,000 27.5 51,000,000 84.7 $12.00
---------- ----- ----------- -----
Total.......... 15,441,856 100.0% $60,209,000 100.0%
========== ===== =========== =====
</TABLE>
The above tables exclude 8,491,975 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 4,379,465
shares were subject to outstanding options as of September 30, 1999 with a
weighted average price of $3.18 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.
18
<PAGE> 21
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 nine months ended September 30, 1998 and
1999 and the consolidated balance sheet data as of September 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>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 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 $ 1,279
Product sales.......................... 444 1,068 2,022 2,908 3,725 2,584 3,259
Development contracts and other........ 117 285 715 1,410 975 816 1,047
------ ------ ------ ------ ------- ------- -------
Total revenues.................... 561 1,353 2,737 4,332 5,021 3,408 5,585
------ ------ ------ ------ ------- ------- -------
Costs and expenses:
Cost of product sales.................. 210 540 947 1,186 1,507 1,072 1,451
Sales and marketing.................... 87 224 422 658 656 536 1,040
Research and development............... 216 393 710 1,515 1,817 1,278 1,593
General and administrative............. 55 267 766 1,550 2,677 2,025 3,255
Amortization of intangibles and
deferred stock compensation.......... -- -- 1 -- 211 50 870
In-process research and development.... -- -- -- -- -- -- 1,190
------ ------ ------ ------ ------- ------- -------
Total costs and expenses.......... 568 1,424 2,846 4,909 6,868 4,961 9,399
------ ------ ------ ------ ------- ------- -------
Operating loss........................... (7) (71) (109) (577) (1,847) (1,553) (3,814)
Other income............................. 2 14 28 50 174 135 92
------ ------ ------ ------ ------- ------- -------
Net loss................................. $ (5) $ (57) $ (81) $ (527) $(1,673) $(1,418) $(3,722)
====== ====== ====== ====== ======= ======= =======
Basic and diluted net loss per share..... $(0.01) $(0.02) $(0.03) $(0.17) $ (0.43) $ (0.37) $ (0.71)
====== ====== ====== ====== ======= ======= =======
Shares used in calculating basic and
diluted net loss per share............. 2,653 2,468 2,825 3,162 3,909 3,876 5,234
====== ====== ====== ====== ======= ======= =======
Pro forma basic and diluted net loss per
share.................................. $ (0.19) $ (0.36)
======= =======
Shares used in calculating pro forma
basic and diluted net loss per share... 8,630 10,365
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- SEPTEMBER 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 $ 3,798
Working capital................................... 149 779 1,151 2,080 3,975 2,622
Total assets...................................... 308 963 1,562 2,900 5,959 11,935
Redeemable convertible preferred stock............ -- -- -- 1,471 1,476 1,481
Total stockholders' equity........................ 157 876 1,383 944 3,773 7,180
</TABLE>
19
<PAGE> 22
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
revenues 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 began shipping the first mouse to distribution centers in
mid-October 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 Logitech for use in
its feel-enabled computer mouse.
We currently sell products in the industrial and professional markets. We
developed our first three-dimensional digitizer product, which is used to create
three-dimensional computer images of small objects, in 1994 and currently sell
this product under the name MicroScribe-3D. We began developing our Softmouse
product, a specialized computer mouse used for mapmaking, 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 15% of our total revenues for the nine months ended
September 30, 1999 and 11% of our total revenues in 1998. The U.S. Government
accounted for 9% of our total revenues for the nine months ended September 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
20
<PAGE> 23
September 30, 1999, we had capitalized patents and technology of $4.8 million,
net of accumulated amortization of $568,000. We are amortizing these patents and
technology over the estimated useful life of the technology of nine years. Of
this amount, we capitalized patents and technology of $3.4 million, net of
accumulated amortization of $234,000, associated with the acquisition of patents
and technology from Cybernet in March 1999. We are amortizing the Cybernet
patents and technology over the estimated useful life of the technology of nine
years, resulting in an amortization expense anticipated to be approximately
$402,000 per year.
In the quarter ended March 31, 1999, we expensed $1.2 million of in-process
research and development related to five development projects acquired from
Cybernet. 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 September 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 that 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
include 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 costs of the development effort and the amount of development 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 of 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
21
<PAGE> 24
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 commence 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 our other products.
We record revenues 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. On July 19, 1999, we entered into an irrevocable,
perpetual, non-exclusive, worldwide license agreement with Microsoft under which
Microsoft paid us a lump sum of $2.35 million to cover all shipments of its
SideWinder Force Feedback Wheel and its SideWinder Force Feedback Pro Joystick
and a replacement version of these specific SideWinder products having
essentially similar functional features. Under the terms of the agreement, the
Company is to provide marketing services related to feel-enabling technology and
related products for a twelve-month period following the effective date of the
agreement. Accordingly, we will recognize the license payment as revenue over
this twelve-month period.
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 currently anticipate signing a co-marketing agreement with Logitech in
the fourth quarter of 1999 in which we would agree to assist Logitech with the
launch and promotion of its feel-enabled mice. Under the terms of the proposed
agreement, for a period of five calendar quarters, beginning in the first
calendar quarter of 2000, we would reimburse Logitech for certain marketing
related expenses not to exceed $200,000 per quarter, an expense that would be
funded with working capital. Only third-party marketing services that are
targeted at promoting Logitech's feel-enabled mice would be eligible for
reimbursement. In addition, all promotional activities would have to be approved
by us in advance. In order to remain eligible for reimbursement, Logitech would
have to include our brand and slogan on all its marketing materials that
reference feel-enabled functionality or products, and commit to other conditions
regarding its feel-enabled mice.
We recorded deferred stock compensation of $1.5 million during the nine
months ended September 30, 1999 from the issuance of employee stock options. We
are amortizing the deferred stock compensation over the terms of the related
option agreements, which range up to four years.
22
<PAGE> 25
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a
percentage of total revenues.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------
1996 1997 1998 1998 1999
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Royalty revenue................................... --% 0.3% 6.4% 0.3% 22.9%
Product sales................................... 73.9 67.1 74.2 75.8 58.4
Development contracts and other................. 26.1 32.6 19.4 23.9 18.7
----- ----- ----- ------ ------
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 31.5 26.0
Sales and marketing............................. 15.4 15.2 13.1 15.7 18.6
Research and development........................ 25.9 35.0 36.2 37.5 28.5
General and administrative...................... 28.0 35.8 53.3 59.4 58.3
Amortization of intangibles and deferred stock
compensation................................. -- -- 4.2 1.5 15.6
In-process research and development............. -- -- -- -- 21.3
----- ----- ----- ------ ------
Total costs and expenses................ 103.9 113.4 136.8 145.6 168.3
----- ----- ----- ------ ------
Operating loss.................................... (3.9) (13.4) (36.8) (45.6) (68.3)
Other income...................................... 1.0 1.2 3.5 4.0 1.6
----- ----- ----- ------ ------
Net loss.......................................... (2.9)% (12.2)% (33.3)% (41.6)% (66.7)%
===== ===== ===== ====== ======
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
Total Revenues. Our total revenues increased by 64% from $3.4 million for
the nine months ended September 30, 1998 to $5.6 million for the nine months
September 30, 1999. Royalty revenue increased by $1.3 million from $8,000 to
$1.3 million due to higher royalty revenue received from our I-FORCE licensees,
including amortization of deferred revenue of $474,000 during the quarter ended
September 30, 1999 resulting from the one time lump sum payment made by
Microsoft under the July 1999 Microsoft license agreement. Amortization of
deferred revenue will contribute $587,000 to royalty revenue per quarter through
July 2000. We do not anticipate receipt in the future of significant revenue
from lump sum licensing arrangements, as opposed to per unit royalty
arrangements. Product sales increased by $675,000 from $2.6 million for the nine
months ended September 30, 1998 to $3.3 million for the nine months ended
September 30, 1999. The increase was primarily due to increased sales of medical
products of $473,000, resulting primarily from one large customer order, and
increased sales of our processor of $169,000, both of which increases were
primarily from increased unit shipments. Changes in average selling prices did
not significantly impact product sales. Development contracts and other revenue
increased by $231,000 from $816,000 to $1.0 million due to new government and
commercial contracts entered into in mid-1998 that were in progress during 1999.
Cost of Product Sales. Cost of product sales increased from $1.1 million
for the nine months ended September 30, 1998 to $1.5 million for the nine months
ended September 30, 1999. Approximately $141,000 of the increase was due to
increased sales of our processor, which has a higher cost of sales as a
percentage of product sales than our other products. The remainder was due to
other changes in product mix, none of which were individually significant. Cost
of product sales as a percentage of product sales increased from 41% for the
nine months ended September 30, 1998 to 45% for the nine months ended September
30, 1999. Cost of processor sales as a percentage of processor sales for the
nine months ended September 30, 1999 was approximately 83%.
23
<PAGE> 26
Sales and Marketing. Sales and marketing expenses increased by 94% or
$504,000 from $536,000 for the nine months ended September 30, 1998 to $1.0
million for the nine months ended September 30, 1999. The increase was primarily
a result of increased headcount and related compensation and benefits of
$271,000 and corporate identity and web development costs of $121,000. 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
25% or $315,000 from $1.3 million for the nine months ended September 30, 1998
to $1.6 million for the nine months ended September 30, 1999. Research and
development expenses increased due primarily to increases in employee headcount
and related compensation and benefits of $281,000. 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 61% or $1.2 million from $2.0 million for the nine months ended September 30,
1998 to $3.3 million for the nine months ended September 30, 1999. The increase
was primarily the result of increased headcount and related compensation and
benefits of $361,000 and an increase in recruiting expenses of $770,000. The
recruiting expenses result from the cash and stock compensation given to a
recruiter for identifying and employing three senior members of our management
team. 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 $820,000 from $50,000
for the nine months ended September 30, 1998 to $870,000 for the nine months
ended September 30, 1999.
In-Process Research and Development. During the nine months ended September
30, 1999, we incurred a charge of $1.2 million for in-process research and
development resulting from the March 1999 acquisition of patents and in-process
technology from Cybernet. The patents and technology were acquired in exchange
for 1,291,200 shares of our common stock. We capitalized $3.6 million of
purchased patents and technology in connection with this acquisition.
Strategically, this acquisition allowed us to increase the strength of our
intellectual property portfolio by obtaining Cybernet's portfolio of issued
patents and pending patent applications relating to hardware mechanisms and
software architectures designed to deliver tactile sensations to computer users.
It also allowed us to obtain five in-process research and development projects
that embody aspects of the acquired intellectual property, and that have
potential commercial value. These include a flexible force feedback development
environment that allows developers to implement varying levels of force feedback
functionality; a three-degree-of-freedom joystick that uses brushless motor and
encoder technology; a six-degree-of-freedom hand controller; a flight yoke that
realistically simulates the motion and feel of airplane controls; and a device
that allows the user to feel three-dimensional objects.
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 $135,000 for the nine months ended
September 30, 1998 to $92,000 for the nine months ended September 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.
24
<PAGE> 27
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 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 trade show
expenses of $156,000 and increased employee headcount and related compensation
and benefits of $59,000.
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 compensation, a $262,000 increase in consulting services and a
$132,000 increase in supplies. The increase from 1997 to 1998 was principally
due to an increase in employee headcount and related compensation of $424,000,
partially offset by a decrease in consulting services of $142,000.
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 of $584,000, an increase in legal and professional fees of $147,000
and an increase in consulting services of $109,000.
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 seven 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> 28
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, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Royalty revenue......................... $ 5 $ 3 $ -- $ 313 $ 481 $ 141 $ 657
Product sales......................... 720 884 980 1,141 1,085 1,048 1,126
Development contracts and other....... 314 251 251 159 310 438 299
------ ------ ------ ------ ------- ------ -------
Total revenues................. 1,039 1,138 1,231 1,613 1,876 1,627 2,082
------ ------ ------ ------ ------- ------ -------
Costs and expenses:
Cost of product sales................. 293 348 431 435 494 476 481
Sales and marketing................... 136 225 175 120 187 272 581
Research and development.............. 379 454 445 539 458 599 536
General and administrative............ 561 708 756 652 752 796 1,707
Amortization of intangibles and
deferred stock compensation......... 2 19 29 161 118 345 407
In-process research and development... -- -- -- -- 1,190 -- --
------ ------ ------ ------ ------- ------ -------
Total costs and expenses....... 1,371 1,754 1,836 1,907 3,199 2,488 3,712
------ ------ ------ ------ ------- ------ -------
Loss from operations.................... (332) (616) (605) (294) (1,323) (861) (1,630)
Other income............................ 24 55 56 39 40 26 26
------ ------ ------ ------ ------- ------ -------
Net loss................................ $ (308) $ (561) $ (549) $ (255) $(1,283) $ (835) $(1,604)
====== ====== ====== ====== ======= ====== =======
</TABLE>
In each of the quarters ended March 31, 1998, June 30, 1998 and September
30, 1998, we had only one licensee that was shipping a feel-enabled joystick.
Due to our licensee's limited success in the market, we received negligible
royalty revenue in the quarters ended March 31, 1998 and June 30, 1998 and no
royalty revenue in the quarter ended September 30, 1998. Royalty revenue in the
quarter ended December 31, 1998 increased to $313,000 from no revenue in the
quarter ended September 30, 1998 due to the commencement of sales by Logitech,
Anko Electronics, Thrustmaster, ACT Labs, LMP and SC&T International of
feel-enabled steering wheels and the commencement of the sale by Logitech of its
feel-enabled joystick. This increase resulted from our licensees introducing a
number of new products for the 1998 holiday season. Royalty revenue in this
period was adversely affected by the later than anticipated introduction of a
feel-enabled steering wheel by Logitech. Logitech did not ship this product in
commercial quantities to retail outlets until December 1998. 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. Our royalty
revenue for the six quarterly periods beginning with the quarter ended March 31,
1998 were adversely affected by competition from Microsoft, which was not one of
our licensees during any of these periods. Royalty revenue in the quarter ended
September 30, 1999 increased by $516,000 from $141,000 in the quarter ended June
30, 1999 primarily due to a license to Microsoft resulting in revenue of
$474,000 during the quarter. Increases and decreases in product sales within the
seven quarters ended September 30, 1999 have been primarily the result of
increases and decreases in unit shipments. Changes in average selling prices
have not had a significant impact on product sales during these periods.
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 revenues 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 trade
show expenses of $71,000 in the quarter ended September 30, 1998 and 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 expenses of a game
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developer conference we attended in March 1999. Sales and marketing expenses
increased from $272,000 in the quarter ended June 30, 1999 to $581,000 in the
quarter ended September 30, 1999, primarily due to increased headcount and
related compensation and benefits of $140,000 and corporate identity and web
development costs of $120,000. 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. This decrease was primarily due
to a $52,000 decrease in legal fees and a $41,000 decrease in consulting fees,
associated with less transaction-related activity and related consultations and
assistance. General and administrative expenses increased to $752,000 in the
quarter ended March 31, 1999 as transaction-related activity and related legal
and consulting expenses increased. General and administrative expenses increased
from $796,000 in the quarter ended June 30, 1999 to $1.7 million in the quarter
ended September 30, 1999, primarily due to an increase in recruiting expenses of
$759,000 related to the recruitment of key members of the senior management
team.
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.
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 September 30, 1999, we had an accumulated deficit of $7.9
million and working capital of $2.6 million, including cash and cash equivalents
of $3.8 million.
Net cash provided by operating activities for the nine months ended
September 30, 1999 was $1.9 million, primarily attributable to noncash charges
of $2.9 million, a $1.9 million increase in deferred revenue and increases in
accounts payable and accrued liabilities of $687,000, partially offset by a net
loss of $3.7 million. Deferred revenue at September 30, 1999 of $1.9 million
represents the unamortized portion of the $2.35 million license payment received
from Microsoft in July 1999. In 1998, net cash used in operating activities was
$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
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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 nine months ended September
30, 1999 was $924,000, and primarily consisted of $1.2 million of purchases of
property and other assets, offset by $401,000 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 are interest-bearing,
investment-grade securities with a maturity of greater than 90 days and less
than one year.
Net cash provided by financing activities for the nine months ended
September 30, 1999 was $191,000, and consisted primarily of net proceeds of
$190,000 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 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 remainder of 1999 and for the full year ended
December 31, 2000 will total approximately $1.0 million.
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
September 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 September 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
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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.
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 their 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
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suppliers and anticipate completing this assessment by November 30, 1999. 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 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 hardware and software technologies that enable users to interact
with computers using their sense of touch. Our patented technologies, which we
call TouchSense, enable computer peripheral devices, such as joysticks, mice and
steering wheels, to deliver tactile sensations that correspond to on-screen
events. We currently focus on licensing our intellectual property for these
feel-enabling technologies to manufacturers of computer peripherals in the
computer entertainment and general purpose personal computing markets. Our
objective is to proliferate our TouchSense technologies across markets,
platforms and applications so that feel becomes as common as graphics and sound
in the modern computer user interface.
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. To date, we have licensed our intellectual property to more than 16
companies, including Microsoft, Logitech and InterAct, which incorporate our
patented feel-enabling technologies, together with other technologies necessary
for computer gaming peripherals, into joysticks, gamepads and steering wheels
that they manufacture. For the nine months ended September 30, 1999, royalty
revenue accounted for 23% of our total revenues, and royalty revenue from the
sale of gaming peripherals by our licensees accounted for 99% of our royalty
revenue. To target the computer mouse market, we have licensed our intellectual
property to Logitech to manufacture the first feel-enabled computer mouse
incorporating our hardware and software technologies. Logitech began
manufacturing its computer mouse incorporating our feel-enabling technologies in
commercial quantities during the fourth quarter of 1999. It has begun shipping
the mouse to its distribution centers and recently commenced initial shipments
and sales of the product to distributors and retail customers. Logitech has set
the initial suggested retail price of the mouse at $99.95 and expects commercial
quantities of the product to be available for purchase by consumers in the
fourth quarter of 1999. As a result, we have recorded no royalty revenue from
the sale of feel-enabled mouse products for the nine months ended September 30,
1999.
Historically we have derived the majority of our revenues from the sale of
products that we manufacture. The products that we manufacture include devices
used to create three-dimensional computer images of small objects, a specialized
computer mouse used for mapmaking, feel-enabled joysticks and steering wheels
designed specifically for use in the arcade and location-based entertainment
market and specialized medical products for simulation, training and clinical
applications. For the nine months ended September 30, 1999, product sales
accounted for 58% of total revenues and the products we manufactured accounted
for 89% of our product sales. We have also derived revenues from development
contracts under which we assist our licensees in the development of their
feel-enabled products and from development contracts with government agencies
for feel-enabling technologies. For the nine months ended September 30, 1999,
revenues from these commercial and government development projects accounted for
19% of our total revenues. We expect that product sales and development contract
revenues will continue to decline as a percentage of revenues if our
royalty-based licensing model proves to be successful.
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.
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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.
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 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 joysticks, steering wheels, gamepads and mice.
Joysticks, steering wheels and gamepads incorporating our technology are
currently manufactured and sold by our licensees. We have licensed our
intellectual property to Logitech which has incorporated our feel-enabling
technologies into a computer mouse that it manufactures. Logitech began shipping
the first feel-enabled computer mouse to distribution centers in mid-October
1999. Logitech is currently marketing the mouse for use in gaming and Web
applications.
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 computer 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.
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Key benefits of our solution include:
Complete Solution. We offer a complete technical solution that allows our
licensees to incorporate our feel-enabling technologies into their computer
peripheral device products such as mice, joysticks, steering wheels and gamepads
at a reasonable cost and in a reasonable time frame. Our technical solution also
allows software programmers and Web site developers to add feel-enabling
elements to their applications. 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 peripheral
devices that incorporate our feel-enabling technologies more cost effectively
than would otherwise be possible. We have also developed and licensed
sophisticated software drivers and firmware that permit our licensees to avoid
substantial development costs and accelerate product introduction.
Presents Information 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.
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.
[FEELIT GRAPHIC]
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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. In
the computer gaming market, our licenses, such as Logitech, Microsoft and
InterAct, are currently manufacturing and selling products incorporating our
intellectual property. We believe that our technologies will increase user
satisfaction across many additional applications, including business
productivity, engineering, education and 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 technologies 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 to
incorporate our feel-enabling technologies into a computer mouse that it
manufactures. 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.
Facilitate Development of Feel-Enabled Products. We will continue to devote
significant resources to facilitate the development and manufacture by our
licensees of products incorporating our feel-enabling technologies. We offer
complete design packages that include sample hardware, software, firmware and
related documentation, and offer our technical expertise on a consulting basis.
To facilitate development of products incorporating our feel-enabling
technologies, 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 intellectual property 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 Web
site, www.immersion.com. We are
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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 Web
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 gaming 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 feel-enabling technologies
for use in 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.
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 Gaming. We initially licensed our intellectual property for
feel-enabling technologies for consumer gaming peripherals in 1996 and branded
this technology under the name I-FORCE. We have licensed our I-FORCE
intellectual property 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 designed specifically for 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.
General Purpose Personal Computers. In order to bring feel technology to
every desktop, we have targeted the general purpose computer 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.
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TECHNOLOGY LICENSING AND PRODUCTS
Technology Licensing
We currently license our intellectual property to manufacturers which
produce peripheral devices incorporating our feel-enabling technologies. 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 into 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 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 our intellectual property to manufacturers which
incorporate our feel-enabling technologies into joysticks, steering wheel and
gamepad 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. Currently, there is one
I-FORCE gamepad peripheral licensed under the I-FORCE brand, the Hammerhead FX
from InterAct.
Logitech began shipping the first feel-enabled computer mouse to
distribution centers in mid-October 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.
Logitech is currently marketing the mouse for use in gaming and Web
applications.
Medical Products. We license our intellectual property for our
feel-enabling technologies 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.
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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 computer peripheral devices incorporating our feel-enabling
technologies depends on the existence of software applications and Web pages
that take advantage of these devices. The development of such software likewise
depends on the existence of an installed base of 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 will be included with
Logitech's feel-enabled mouse at no additional cost, 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. We currently make I-FORCE Studio, FEELit
Studio and FEELtheWEB Designer available to developers and FEELit Desktop and
FEELtheWEB available to end users free of charge. We have licensed a limited
number of copies of I-FORCE Studio to persons other than developers but have not
generated significant revenues from these licenses.
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.
- 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.
- 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.
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Custom Microprocessors
Many feel-enabled peripheral devices utilize commercially available
microprocessors that process instructions needed to deliver force sensations to
the user. These microprocessors have not been tailored for the specific
requirements of feel-enabled products. We have developed our custom I-FORCE and
FEELit microprocessors to improve the performance and to help to reduce the cost
of gaming and peripheral products manufactured by our licensees. For example,
our microprocessors contain circuitry to work with low cost sensors used in
feel-enabled gaming and peripheral products and have been designed to streamline
processing of information sent between a personal computer and a feel-enabled
gaming or computer peripheral product. We believe that these microprocessors are
cost-effective components that allow our licensees to reduce their costs of
goods and the amount of custom development that they must perform to bring a
product to market, speeding their development cycle.
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.
Our I-FORCE and FEELit microprocessors are manufactured for us solely by
Kawasaki LSI, with which we have entered into an ASIC Design and Development
Agreement that remains in effect until cancelled by either party. We purchase
the I-FORCE microprocessors from Kawasaki LSI and sell them to those licensees
incorporating our feel technology in their gaming products that want to use the
microprocessors in their gaming products. We permit Kawasaki to sell our FEELit
microprocessor directly to Logitech for use in its feel-enabled computer mouse.
Kawasaki pays a royalty to us on the sales of the FEELit microprocessors to
Logitech. We generally warrant our microprocessors to conform to our
specifications and to be free from defects in materials and workmanship for a
period of one year from delivery, and Kawasaki extends a similar warranty to us.
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 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 feel-enabled joysticks and steering wheel products with enhanced durability
specifically for the arcade and location-based entertainment markets. We sell,
and expect to continue to sell, these products directly to entertainment
companies that operate entertainment centers. While these products are
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higher priced than the joysticks and wheel products sold by licensees that
incorporate our technologies into computer peripherals used for entertainment,
the arcade and location-based market is a relatively small market when compared
to the consumer markets served by our licensees.
Automotive Applications. We are currently engaged in the second phase of an
engineering development project for a major automobile manufacturer regarding a
feel-enabled control device for use in automobiles. We have no commitment from
the automobile manufacturer as to when or whether such a feel-enabled control
device may be incorporated into a shipping automobile model.
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. Our
sales and marketing expenses were approximately $422,000 in 1996, $658,000 in
1997, $656,000 in 1998 and $1.0 million in the nine months ended September 30,
1999. We currently anticipate that we will incur at least $6.0 million in sales
and marketing expenses through the end of the year 2000.
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 $1.6 million in the nine months
ended September 30, 1999. We currently anticipate that we will incur at least
$3.5 million in research and development expenses through the end of the year
2000. 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
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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.
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 pak."
Semiconductor companies, including Intel and Mitsubishi, manufacture
products that compete with the I-FORCE and FEELit processors but which have not
been tailored specifically for feel technology. Our microprocessors have been
optimized to work with low cost sensors used in feel-enabled gaming and
peripheral products and to streamline processing of information sent between a
personal computer and a feel-enabled gaming or computer peripheral product. We
are not aware of any companies other than us that currently market 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
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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
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 53 full-time employees, including 25 in
research and development, 11 in sales and marketing and 17 in finance,
administration and operations. As of that date, we also employed one independent
contractor. None of our employees is represented by a labor union, and we
consider our employee relations to be good. Competition for qualified personnel
in our industry is extremely intense, particularly for engineers and technical
staff. Our future success will depend in part on our continued ability to
attract, hire and retain qualified personnel.
FACILITIES
We have 16,280 square feet of office space in San Jose, California. Apart
from the I-FORCE and FEELit microprocessors which are manufactured by Kawasaki
LSI, all of the products that we sell are manufactured in our San Jose office.
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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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, she 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, an enterprise software company that
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. From
February 1990 to January 1993, Mr. Blank served as vice president of marketing
of SuperMac, a supplier of Macintosh peripherals.
Mr. Jonathan Rubinstein has served as a member of our board of directors
since October 2, 1999. Since February 1997, 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
bachelors and masters 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
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of Technology and master of science and doctorate degrees in mechanical
engineering from Stanford University.
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 established a compensation
committee in October 1999 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. Prior to the formation of the compensation committee,
the duties customarily performed by a compensation committee were the
responsibility of our board of directors, consisting of Dr. Rosenberg, Mr.
Lacey, Mr. Schena and Mr. Blank during
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<PAGE> 49
1998. Dr. Rosenberg and Messrs. Lacey and Schena were also executive officers
during 1998. Directors who were also officers abstained from voting on their own
compensation.
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 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
During 1998, the duties customarily performed by a compensation committee
were the responsibility of our board of directors. The members of our board of
directors who were also officers or employees are Dr. Rosenberg, Mr. Lacey and
Mr. Schena.
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, Ph.D................... 257,838 $942,531
Bruce Schena............................ 79,922 292,159
Timothy Lacey........................... 107,190 391,837
</TABLE>
MicroScribe Agreements. On July 1, 1997, we formed MicroScribe. In July
1997, we entered into an exchange agreement, a patent license agreement and an
intellectual property license agreement with MicroScribe. Pursuant to the
exchange agreement and patent license agreement, we assigned our patents and
associated intellectual property relating to three-dimensional digitizing
products and the PinPoint arm, a medical device used for image-guided biopsies
whose design is based on our three-dimensional digitizing products, to
MicroScribe in exchange for a worldwide, royalty-free, exclusive, irrevocable
license and all of the class 1 membership interests and class 2 membership
interests in MicroScribe. We retained the class 1 membership interest and
distributed the class 2 membership interests to the stockholders of our company
at the time of the exchange agreement, including:
<TABLE>
<CAPTION>
PERCENTAGE INTEREST
NAME OF BENEFICIAL HOLDER OWNED IN MICROSCRIBE
------------------------- ---------------------
<S> <C>
Louis Rosenberg, Ph.D............................ 25.9%
Bruce Schena..................................... 8.6
Timothy Lacey.................................... 10.8
</TABLE>
MicroScribe's sole business is the licensing of its patents and associated
intellectual property to us. We pay MicroScribe a formula-based royalty that
varies between 5% and 10% of our net receipts from sales of products that
incorporate MicroScribe technology. The royalty rate will be fixed at 10% of our
net receipts from sales of products that incorporate MicroScribe technology
beginning
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<PAGE> 50
in 2002. Distributable cash from its licensing activities is distributed 99% to
the class 2 members and 1% to us, as the sole class 1 member. The aggregate
amount paid to Dr. Rosenberg, Mr. Schena and Mr. Lacey in 1999 was approximately
$49,241 and in 1998 was approximately $53,000. Amounts distributed to Dr.
Rosenberg, Mr. Schena and Mr. Lacey were based on their percentage interest
owned in MicroScribe.
Neither of the members currently serving on our compensation committee has
at any time since our formation been one of our officers or employees, and
neither had a material interest in the transactions described under "Certain
Transactions." 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. ..................................... $138,615 72,465
President and Chief Executive Officer
Bruce Schena................................................ 121,683 22,819
Vice President, Chief Technology Officer and Director
Timothy Lacey............................................... 107,628 26,210
Chief Financial Officer and Director
</TABLE>
Mr. Lacey was serving as our chief financial officer as of December 31,
1998. In August 1999, Mr. Lacey resigned as our chief financial officer and was
appointed vice president, operations.
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<PAGE> 51
Option Grants in Fiscal Year Ended December 31, 1998. The following table
presents information with respect to stock options granted during 1998 to our
executive officers listed in the summary compensation table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES PERCENT OF TOTAL OF STOCK APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES PRICE EXPIRATION ---------------------------
NAME GRANTED(#) DURING PERIOD ($/SHARE) DATE 5% 10%
---- ---------- ---------------- -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Louis Rosenberg,
Ph.D................... 605 0.13% $0.68 02/24/03 $ 8,854 $ 11,281
605 0.13 0.68 03/03/03 8,854 11,281
1,210 0.25 1.36 03/24/03 16,886 21,739
403 0.08 1.36 03/31/03 5,624 7,240
1,210 0.25 1.36 04/15/03 16,886 21,739
63,591 13.26 1.36 03/16/08 1,156,513 1,892,780
1,210 0.25 0.41 01/15/03 18,036 22,889
3,631 0.76 4.02 11/06/03 41,014 55,577
Bruce Schena........... 605 0.13 0.62 02/24/08 11,451 18,455
605 0.13 0.62 03/03/08 11,451 18,455
21,004 4.38 1.24 03/16/08 384,515 627,703
605 0.13 3.66 11/06/08 9,611 16,616
Timothy Lacey.......... 26,210 5.47 1.36 03/16/03 365,770 470,892
</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 the initial public offering price of $12.00. The 5% and 10% assumed
annual rates of stock price appreciation are required by the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of future common stock prices.
In 1998, we granted options to purchase an aggregate of 422,406 shares to
employees.
The exercise price of each option granted to Dr. Rosenberg and Mr. Lacey
was equal to 110% of the fair market value of the common stock on the date of
grant as determined by the board of directors.
Dr. Rosenberg's option to purchase 63,591 shares of common stock vests as
to 1/24 of the shares per month for 24 months. Dr. Rosenberg's option to
purchase 605 shares with an expiration date of February 24, 2003 and option to
purchase 1,210 shares with an expiration of January 15, 2003 are fully vested.
His remaining options vest as to 1/12 of the shares per month for 12 months.
Mr. Schena's option to purchase 21,004 shares of common stock vests as to
1/24 of the shares per month for 24 months. His remaining options vest as to
1/12 of the shares per month for 12 months.
Mr. Lacey's option to purchase 26,210 shares of common stock vests as to
1/24 of the shares per month for 24 months.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Values. The following table presents information for our executive officers
listed in the summary compensation table concerning option exercises during 1998
and the value of exercisable and unexercisable options held as of December 31,
1998 by these officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1998(#) DECEMBER 31, 1998($)
ACQUIRED ON REALIZED ----------------------- -------------------------
NAME EXERCISE(#) ($) VESTED UNVESTED VESTED UNVESTED
---- ----------- ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Louis Rosenberg, Ph.D........... 129,120 $1,544,275 985,210 91,089 $11,629,023 $1,014,562
Bruce Schena.................... 80,700 965,172 399,626 34,909 4,736,451 396,800
Timothy Lacey................... 250,947 2,991,551 150,864 35,684 1,755,762 400,713
</TABLE>
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<PAGE> 52
The value realized upon exercise of options is calculated based on an
initial public offering price of $12.00 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 initial public
offering price of $12.00.
CHANGE OF CONTROL AND EMPLOYMENT ARRANGEMENTS
The options granted to Mr. Viegas 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
six months of base salary (or, if lesser, the number of months before he finds
other employment) and a portion of 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 accelerate in the event that we move
his principal office more than 60 miles from San Jose within 12 months of his
start date, there is a change in our control that results in his termination of
employment or if he resigns due to a material reduction in his duties. 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 three 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 three months.
The options granted to Ms. Saffo accelerate in the event of a change in our
control that results in her termination of 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 these 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 three 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 three 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. 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
August 1999 our board of directors approved an increase in the number of shares
that we are authorized to issue under the plan to 5,166,793. In addition, in
August 1999 our board of directors approved an amendment to the stock option
plan which provides that, without any need for stockholder and board approval,
the share reserve will automatically be increased on January 1 of each year
beginning January 1, 2001 by an amount equal to 5% of the number of shares of
our common stock that were issued and outstanding on the last day of the
preceding year. Our
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<PAGE> 53
stockholders approved these amendments in November 1999. The 1997 option plan is
currently administered by the board of directors. The plan allows 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, and 2,015,594 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> 54
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 outstanding and 14 shares remained available for future grant.
1999 Employee Stock Purchase Plan. In August 1999, our board of directors
adopted our 1999 employee stock purchase plan. Our stockholders approved the
plan in November 1999. 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.
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<PAGE> 55
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> 56
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 salaries, options, share repurchase and other 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
connection with these extensions, we recognized a consulting expense during 1998
in the amount of $41,100.
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 Dr. Rosenberg, Mr. Schena and Mr. Lacey. For more
information, please see "Compensation Committee Interlocks and Insider
Participation."
Logitech Agreements. In addition to Logitech being a holder of more than
10% of our capital stock, Logitech is a licensee which accounts for a large
portion of our licensing revenue. 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 world-wide, irrevocable,
non-exclusive license under our patents for feel-enabled gaming products.
Pursuant to the technology product development agreement, we provided Logitech
consulting services with respect to the development of a feel-enabled joystick
for which Logitech paid us approximately $270,000 and a feel-enabled steering
wheel for which Logitech paid us approximately $159,000. Pursuant to the license
agreement, Logitech is required to pay us a royalty of 5% of the revenue it
receives when it sells a gaming product incorporating our technology to third
parties. If Logitech ships more than 100,000 units in a single year without a
modification in technical specifications, the royalty for that product will be
reduced by 0.66% for the following year. If Logitech ships more
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<PAGE> 57
than 200,000 units in subsequent years without a modification in technical
specifications, the royalty will be reduced in each subsequent year by a further
0.66%. However, the royalty rate may not drop below 3%. We did not derive any
royalty revenue from the license agreement in 1997. We derived royalty revenue
of $249,000 in 1998 and $552,000 in the nine months ended September 30, 1999
under the license agreement. Other terms of the license agreement include the
following:
- The term of the license agreement extends until the end of the life of
the licensed patents. Currently, the life of the last to expire of these
patents continues until 2016.
- Logitech will abide by our branding requirements with respect to their
feel-enabled gaming products and will mark these products with our
patents.
- Each party will defend and indemnify the other against legal expenses and
liability arising from claims that the indemnifying party's technology
infringes a third party's copyrights, trade secrets or patents. This
obligation, however, is subject to exceptions, and is limited to the
greater of $500,000 or the royalties paid by Logitech to us in the
36-month period before the event giving rise to the obligation to
indemnify.
- We agree to indemnify Logitech against trademark infringement liability
arising from Logitech's compliance with its branding obligations under
the agreement.
- The agreement contains a "most-favored royalties" clause that entitles
Logitech to a matching royalty rate if we grant a third-party a lower
royalty rate than that being paid by Logitech for feel-enabled products
having functionality similar to the Logitech products. This provision
would not apply, however, if a portion of the consideration we receive
from that third-party consists of a cross-license under the third-party's
patents.
- The agreement prohibits either party from recovering from the other party
lost profit damages, or special, indirect, incidental or consequential
damages, arising from the agreement. Except for damages based on the
parties' indemnification obligations with respect to a third-party's
copyrights, trade secrets or patents, it also limits the parties'
liability to one another to no more than $1.0 million.
In April 1998, we entered into a royalty-based license agreement and a
technology product development agreement with Logitech. Pursuant to the
technology product development agreement, we provided Logitech consulting
services with respect to the development of a feel-enabled mouse for which
Logitech paid us approximately $351,000. Under the development agreement, we
also agreed that we would not enable a third-party to ship a similar
feel-enabled mouse product until October 23, 1999. Pursuant to the license
agreement, we granted Logitech an irrevocable, non-exclusive, worldwide license
to technology incorporated by Logitech into a feel-enabled mouse product.
Pursuant to the license agreement, Logitech is required to pay us a royalty of
5% of the revenue it receives from the sale of feel-enabled mouse products. For
the nine months ended September 30, 1999, we have not derived any royalty
revenue from the license agreement. Other terms of the license agreement include
the following:
- The term of the license agreement extends until the end of the life of
the licensed patents. Currently, the life of the last to expire of these
patents continues until 2016.
- Logitech will abide by our branding requirements with respect to their
feel-enabled mouse products and will mark these products with our
patents.
- Each party will defend and indemnify the other against legal expenses and
liability arising from claims that the indemnifying party's technology
infringes a third party's copyrights, trade secrets or patents. This
obligation, however, is subject to exceptions, and is further limited to
the greater of $500,000 or the royalties paid by Logitech to us in the
36-month period preceding the event giving rise to the obligation to
indemnify.
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<PAGE> 58
- We agree to indemnify Logitech against trademark infringement liability
arising from Logitech's compliance with its branding obligations under
the agreement.
- The agreement contains a "most-favored royalties" clause which entitles
Logitech to a matching royalty rate if we grant a third-party a lower
royalty rate than that being paid by Logitech for a feel-enabled mouse
having similar functionality to the Logitech product. This provision
would not apply, however, if a portion of the consideration we receive
from such a third-party consists of a cross-license under the
third-party's patents.
- The agreement prohibits either party from recovering from the other party
lost profit damages, or special, indirect, incidental or consequential
damages, arising from the agreement. Except for damages based on the
parties' indemnification obligations with respect to a third-party's
copyrights, trade secrets or patents, it also limits the parties'
liability to one another to no more than $1.0 million.
We currently anticipate signing a co-marketing agreement with Logitech in
the fourth quarter of 1999 in which we would agree to assist Logitech with the
launch and promotion of its feel-enabled mice. Under the terms of the proposed
agreement, for a period of five calendar quarters, beginning in the first
calendar quarter of 2000, we would reimburse Logitech for certain marketing
related expenses not to exceed $200,000 per quarter. Only third-party marketing
services that are targeted at promoting Logitech's feel-enabled mice would be
eligible for reimbursement. In addition, all promotional activities would have
to be approved by us in advance. In order to remain eligible for reimbursement,
Logitech would have to include our brand and slogan on all its marketing
materials that reference feel-enabled functionality or products, and commit to
other conditions regarding its feel-enabled mice.
Directed Share Program. We currently anticipate that up to 250,000 shares
of common stock may be sold at the initial public offering price to friends and
relatives of our employees, employees, consultants, directors and other persons
with business relationships to us.
MicroScribe Agreements. On July 1, 1997, we formed MicroScribe. In July
1997, we entered into an exchange agreement, a patent license agreement and an
intellectual property license agreement with MicroScribe LLC. MicroScribe LLC is
a privately-held limited liability company with two types of outstanding
membership interests -- class 1 membership interests and class 2 membership
interests. Pursuant to the exchange agreement and the patent license agreement,
we assigned our patents and associated intellectual property relating to
three-dimensional digitizing products and the Pin Point arm, a medical device
used for image-guided biopsies whose design is based on our three-dimensional
digitizing product, to MicroScribe in exchange for a worldwide, royalty-free,
exclusive, irrevocable license and all of the class 1 membership interests and
class 2 membership interests in MicroScribe. We retained the class 1 membership
interest and distributed the class 2 membership interests to stockholders of our
company in a one-time distribution based on their proportionate share ownership
in our company at the time of the distribution. There are no membership
interests in MicroScribe LLC other than the class 1 and class 2 membership
interests. MicroScribe LLC has not issued any additional membership interests
other than the initial issuance of the class 1 and class 2 membership interests
to us. Accordingly, stockholders who have acquired shares of our company after
the one-time distribution do not own any membership interests in MicroScribe.
The following table presents information regarding the percentage interest in
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<PAGE> 59
MicroScribe of each director, officer and 5% stockholder and each member of the
immediate family of such director, officer and 5% stockholder.
<TABLE>
<CAPTION>
PERCENTAGE INTEREST
NAME OF BENEFICIAL HOLDER OWNED IN MICROSCRIBE
------------------------- --------------------
<S> <C>
5% STOCKHOLDER
Cybernet Systems Corporation................................ --%
Intel Corporation........................................... 5.9
Timothy Lacey............................................... 10.78
Bruce Paul.................................................. 5.13
DIRECTOR AND EXECUTIVE OFFICER
Steven Blank................................................ 1.0
Kenneth Martin.............................................. 2.0
J. Stuart Mitchell.......................................... --
Louis Rosenberg, Ph.D....................................... 25.94
Jonathan Rubinstein......................................... --
Jennifer Saffo.............................................. --
Bruce Schena................................................ 8.56
Victor Viegas............................................... --
IMMEDIATE FAMILY OF 5% STOCKHOLDER, DIRECTOR AND OFFICER
Max and Helen Johnston...................................... .36
Patrick Lacey............................................... .29
Patrick and Nina Lacey...................................... .29
Nellie Lacey................................................ .08
Bruce Paul, custodian for Jason Paul........................ .39
Bruce Paul, custodian for Joanna Paul....................... .79
Bruce Paul, custodian for Matthew Paul...................... .79
Bruce Paul, custodian for Ryan Paul......................... .39
Arlene Paul................................................. .39
Arthur and Marilynn Rosenberg............................... .79
Arthur Rosenberg............................................ .32
Marilynn Rosenberg.......................................... .21
</TABLE>
The total distribution paid to these persons pursuant to their percentage
interests owned in MicroScribe in 1999 was approximately $55,500.
MicroScribe's sole business is the licensing of its patents and associated
intellectual property to us. Distributable cash from its licensing activities 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
three-dimensional digitizing products. Under the intellectual property license
agreement, we pay MicroScribe a formula-based royalty that varies between 5% and
10% of the net receipts we receive from selling products incorporating
MicroScribe technology. We paid MicroScribe $116,000 in 1998 and $99,000 for the
nine months ended September 30, 1999. The agreement, which has a term of ten
years and is scheduled to expire in 2007, also provides that beginning in 2002
the royalty rate will be set at 10% for the remainder of the license term.
Products for which we currently pay MicroScribe a royalty include our
MicroScribe-3D digitizing product and the PinPoint arm, a medical device used
for image-guided biopsies whose design is based upon the MicroScribe-3D. The
agreement also requires MicroScribe to indemnify us against claims that the
technology it has delivered to us infringes a third party's intellectual
property rights.
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. As a result of these transactions, Cybernet is a
holder of more than 10% of our capital stock.
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<PAGE> 60
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 48;
- 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
Timothy Lacey.................................... 1,083,821 9.5 6.6
c/o Immersion Corporation
2158 Paragon Drive
San Jose, California 95131
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>
Heidi Jacobus, the principal stockholder of Cybernet Systems Corporation,
and Charles Jacobus constitute a majority of the board of directors of Cybernet
Systems Corporation and exercise dispositive and voting power on behalf of
Cybernet Systems Corporation. Logitech International S.A. is a large public
company managed by its board of directors consisting of Mr. Daniel V. Borel,
also a principal stockholder of Logitech, Mr. Guerrino De Luca, Mr. Kwong Soon
Chay, Mr. Pier Carlo Falotti, Mr. Jean-Louis Gassee and Mr. Frank Gill.
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
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<PAGE> 61
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 an
additional 223,736 shares of common stock and selling stockholders will sell a
total of 413,764 shares of common stock. The following table presents
information regarding the beneficial ownership of our common stock as of
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>
Adam C. Braun.................................. 145,687 1.3% 141,652 0.9%
C. Gordon Bell Revocable Trust................. 53,802 0.5 38,802 0.2
Dean Chang, Ph.D............................... 128,639 1.1 120,639 0.8
Cybernet Systems Corporation................... 1,557,510 13.5 1,396,110 8.7
Craig H. Factor................................ 150,550 1.3 142,480 0.9
Christopher J. Hasser.......................... 85,783 0.8 85,218 0.5
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
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 73,541 0.5
Louis Rosenberg, Ph.D. ........................ 2,543,408 20.8 2,423,408 14.5
Bruce M. Schena................................ 869,475 7.5 861,405 5.4
</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 Timothy Lacey consist of 881,153 shares and
202,668 shares issuable upon exercise of options 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> 62
Shares listed as held by executive officers, directors and selling
stockholders listed in the tables above include shares subject to options
exercisable within 60 days of September 30, 1999 as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT TO OPTIONS HELD BY
EXECUTIVE OFFICERS AND DIRECTORS
---------------------------------
<S> <C>
Louis Rosenberg, Ph.D....................................... 1,044,408
Bruce M. Schena............................................. 432,718
Steven Blank................................................ 61,358
Jonathan Rubinstein......................................... 6,725
All directors and executive officers as a group (8
persons).................................................. 1,624,523
SHARES SUBJECT TO OPTIONS HELD BY
SELLING STOCKHOLDERS
- ------------------------------------------------------------
Adam C. Braun............................................... 46,352
C. Gordon Bell Revocable Trust.............................. 20,175
Dean Chang, Ph.D............................................ 60,851
Craig H. Factor............................................. 75,002
Christopher J. Hasser....................................... 10,230
Timothy Lacey............................................... 202,668
Kenneth Martin.............................................. 79,314
Louis Rosenberg, Ph.D....................................... 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.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists 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
In connection with our reincorporation in the state of Delaware, all
outstanding shares of preferred stock were converted into an aggregate of
5,131,100 shares of common stock, and 5,000,000 shares of undesignated preferred
stock were authorized for issuance. Our board of directors has 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> 64
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> 65
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.
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<PAGE> 66
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 11,113,678 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 78,178 shares will be eligible for sale beginning July
2000.
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.
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.
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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 6,491,975 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.
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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....................................... 1,665,000
Bear, Stearns & Co. Inc. ................................... 832,500
BancBoston Robertson Stephens Inc. ......................... 832,500
Banc of America Securities LLC.............................. 80,000
Deutsche Banc Securities Inc................................ 80,000
Goldman, Sachs & Co. ....................................... 80,000
Morgan Stanley & Co. Incorporated........................... 80,000
Charles Schwab & Co., Inc. ................................. 80,000
S.G. Cowen Securities Corporation........................... 80,000
Warburg Dillon Read LLC..................................... 80,000
Chatsworth Securities LLC................................... 40,000
E*Offering Corp. ........................................... 40,000
First Southwest Company..................................... 40,000
Gerard Klauer Mattison & Co., LLC........................... 40,000
Needham & Company, Inc. .................................... 40,000
Raymond James & Associates, Inc. ........................... 40,000
Stephens Inc. .............................................. 40,000
C. E. Unterberg, Towbin..................................... 40,000
Wit Capital Corporation..................................... 40,000
---------
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
$0.60 per share. The underwriters may allow and the dealers may reallow a
concession not in excess of $0.10 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.
66
<PAGE> 69
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................................. 12.00 51,000,000 58,650,000
Underwriting discount and commissions................. .84 3,570,000 4,105,500
Proceeds, before expenses, to Immersion............... 11.16 47,430,000 54,544,500
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1.0 million.
At our request, the underwriters have reserved up to 250,000 shares of
common stock to be sold in the offering and offered for sale, at the public
offering price, to friends and relatives of employees, employees, consultants,
directors and other persons with business relationships to us. The number of
shares of common stock available for sale to the general public will be reduced
to the extent these individuals purchase the reserved shares. Any reserved
shares which are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered by this prospectus.
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.
Substantially 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 was negotiated among us and the underwriters.
Among the factors considered in determining the initial public offering price of
the shares, in addition to prevailing market conditions, were 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.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol IMMR.
67
<PAGE> 70
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. 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.
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.
68
<PAGE> 71
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 September 30, 1999...................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 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 nine months ended September 30, 1999
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited)................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 72
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.
DELOITTE & TOUCHE LLP
San Jose, California
October 20, 1999
(November 3, 1999 as to Note 14)
F-2
<PAGE> 73
IMMERSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
---------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------ ------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 490 $ 2,592 $ 3,798
Short-term investments................................ 1,212 402 --
Accounts receivable (net of allowances for doubtful
accounts of: 1997, $38; 1998, $92; and 1999,
$118)............................................... 519 1,111 841
Inventories........................................... 295 481 606
Prepaid expenses and other assets..................... 49 99 651
------ ------- -------
Total current assets........................... 2,565 4,685 5,896
Property--net........................................... 334 329 426
Purchased patents and technology........................ -- 945 4,774
Other assets............................................ 1 -- 839
------ ------- -------
Total assets................................... $2,900 $ 5,959 $11,935
====== ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 288 $ 410 $ 763
Accrued compensation.................................. 125 171 319
Other accrued liabilities............................. 5 82 268
Deferred revenue...................................... -- -- 1,876
Customer advances..................................... 64 46 47
Income taxes payable.................................. 3 1 1
------ ------- -------
Total current liabilities...................... 485 710 3,274
------ ------- -------
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 1,481
------ ------- -------
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,
6,060,756; pro forma, 11,191,856.................... 57 961 8,575 $17,011
Warrants.............................................. 33 85 893 893
Deferred stock compensation........................... -- -- (1,287) (1,287)
Accumulated other comprehensive loss.................. 2 1 -- --
Note receivable from stockholder...................... -- (17) (17) (17)
Accumulated deficit................................... (693) (4,212) (7,939) (7,939)
------ ------- ------- -------
Total stockholders' equity..................... 944 3,773 7,180 $ 8,661
------ ------- ------- =======
Total liabilities, redeemable convertible preferred
stock and stockholders' equity........................ $2,900 $ 5,959 $11,935
====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 74
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- -------------------------
1996 1997 1998 1998 1999
------ ------ ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Royalty revenue............................. $ -- $ 14 $ 321 $ 8 $ 1,279
Product sales............................. 2,022 2,908 3,725 2,584 3,259
Development contracts and other........... 715 1,410 975 816 1,047
------ ------ ------- ------- -------
Total revenues.................... 2,737 4,332 5,021 3,408 5,585
------ ------ ------- ------- -------
Costs and expenses:
Cost of product sales..................... 947 1,186 1,507 1,072 1,451
Sales and marketing....................... 422 658 656 536 1,040
Research and development.................. 710 1,515 1,817 1,278 1,593
General and administrative................ 766 1,550 2,677 2,025 3,255
Amortization of intangibles and deferred
stock compensation..................... 1 -- 211 50 870
In-process research and development....... -- -- -- -- 1,190
------ ------ ------- ------- -------
Total costs and expenses.......... 2,846 4,909 6,868 4,961 9,399
------ ------ ------- ------- -------
Operating loss.............................. (109) (577) (1,847) (1,553) (3,814)
Other income................................ 28 50 174 135 92
------ ------ ------- ------- -------
Net loss.................................... (81) (527) (1,673) (1,418) (3,722)
Redeemable convertible preferred stock
accretion................................. -- 3 6 5 5
------ ------ ------- ------- -------
Net loss applicable to common
stockholders.............................. $ (81) $ (530) $(1,679) $(1,423) $(3,727)
====== ====== ======= ======= =======
Basic and diluted net loss per share........ $(0.03) $(0.17) $ (0.43) $ (0.37) $ (0.71)
====== ====== ======= ======= =======
Shares used in calculating basic and diluted
net loss per share........................ 2,825 3,162 3,909 3,876 5,234
====== ====== ======= ======= =======
Pro forma basic and diluted net loss per
share
(Note 1).................................. $ (0.19) $ (0.36)
======= =======
Shares used in calculating pro forma basic
and diluted net loss per share (Note 1)... 8,630 10,365
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 75
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*..................... 76,665 729
Exercise of common stock
warrants*......................... 7,061 1
Warrants issued for services*....... 808
Exercise of stock options*.......... 432,829 190
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*..................... 186
Preferred stock accretion*..........
--------- ------ --------- ------ ---- ------- ---
Balances at September 30, 1999*...... 4,267,329 $6,955 6,060,756 $8,575 $893 $(1,287) $--
========= ====== ========= ====== ==== ======= ===
*(Unaudited)
<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*........................... (3,722) (3,722) $(3,722)
Change in net unrealized gains from
short-term investments*........... (1) (1)
-------
Comprehensive loss*................. $(3,723)
=======
Issuance of common stock and options
for services*..................... 729
Exercise of common stock
warrants*......................... 1
Warrants issued for services*....... 808
Exercise of stock options*.......... 190
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*..................... 186
Preferred stock accretion*.......... (5) (5)
---- ------- -------
Balances at September 30, 1999*...... $(17) $(7,939) $(7,180)
==== ======= =======
*(Unaudited)
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 76
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- -------------------------
1996 1997 1998 1998 1999
----- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (81) $ (527) $(1,673) $(1,418) $(3,722)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 44 102 142 106 131
Amortization of intangibles............................. -- -- 211 49 676
Amortization of deferred stock compensation............. 1 -- -- -- 186
In-process research and development..................... -- -- -- -- 1,190
Stock and options issued for consulting services and
other................................................. -- -- 68 36 729
Stock options issued for license agreement.............. -- 5 -- -- --
Extension of warrants for consulting services........... -- -- 41 41 --
Changes in assets and liabilities:
Accounts receivable................................... (131) (100) (592) (221) 270
Inventories........................................... (94) (25) (186) (80) (125)
Prepaid expenses and other assets..................... (38) 2 (50) (29) 40
Accounts payable...................................... 75 189 122 22 353
Accrued liabilities................................... 14 52 123 62 334
Deferred revenue...................................... -- -- -- -- 1,876
Customer advances..................................... -- 64 (18) (13) 1
Income taxes payable.................................. 2 1 (2) (1) --
----- ------- ------- ------- -------
Net cash provided by (used in) operating
activities........................................ (208) (237) (1,814) (1,446) 1,939
----- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of short-term investments....................... (325) (1,487) (2,943) -- --
Sales and maturities of short-term investments............ 399 538 3,752 974 401
Purchases of property..................................... (181) (205) (138) (119) (228)
Purchase of patents and technology........................ -- -- (434) (420) (150)
Other assets.............................................. -- -- -- -- (947)
----- ------- ------- ------- -------
Net cash provided by (used in) investing
activities........................................ (107) (1,154) 237 435 (924)
----- ------- ------- ------- -------
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 91 190
Repurchase of stock....................................... -- -- (1,844) (1,844) --
Exercise of warrants...................................... -- 60 34 34 1
Collection of stockholder note............................ 6 -- -- -- --
----- ------- ------- ------- -------
Net cash provided by financing activities........... 596 1,557 3,679 3,673 191
----- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 281 166 2,102 2,662 1,206
Cash and cash equivalents:
Beginning of year......................................... 43 324 490 490 2,592
----- ------- ------- ------- -------
End of year............................................... $ 324 $ 490 $ 2,592 $ 3,152 $ 3,798
===== ======= ======= ======= =======
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 $ 617 $ 5,221
===== ======= ======= ======= =======
Issuance of warrants...................................... $ -- $ 6 $ -- $ -- $ 808
===== ======= ======= ======= =======
Accretion of redeemable preferred stock................... $ -- $ 3 $ 6 $ 5 $ 5
===== ======= ======= ======= =======
Exercise of stock option for note receivable.............. $ -- $ -- $ 17 $ 17 $ --
===== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 77
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 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 $568,000 at December 31, 1997
and 1998 and September 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> 78
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 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. Advance payments under license agreements that also require the
Company to provide future services to the licensee are deferred and recognized
over the service period when vendor specific objective evidence related to the
value of the services does not exist.
At September 30, 1999, the Company has no obligation to repay amounts
received under development contracts with the U.S. government or other
commercial customers.
Advertising--Advertising costs are expensed as incurred and included in
sales and marketing expense. Advertising expense was $129,000, $164,000,
$147,000 and $115,000 in 1996, 1997, 1998 and the nine months ended September
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 nine months ended September 30, 1999 is
comprised of unrealized gains on short-term investments of $2,000, $1,000 and
none, respectively.
F-8
<PAGE> 79
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
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.
The pro forma balance sheet presents the Company's balance sheet as if this had
occurred at September 30, 1999.
Unaudited Interim Financial Information--The interim financial information
for the nine months ended September 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.
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
F-9
<PAGE> 80
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
terms of its future financial position and results of operations: its ability to
obtain additional financing; the mix of revenues; the loss of significant
customers; fundamental changes in the technology underlying the Company's
products; market acceptance of the Company's and its licensees' products under
development; the availability of 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> 81
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 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 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, a
three-degree-of-freedom joystick, gives the operator smooth, intuitive movement
and feedback along three axes-roll, pitch and yaw-using brushless motor and
encoder technology. At the time of acquisition, the development was 36% complete
and the estimated cost to complete this development was $109,000. Management
expects products based on this technology to become available in December 2000.
The third of these projects, a six-degree-of-freedom hand controller, is a small
back drivable robot that moves in six degrees of freedom, three linear positions
and attitudes. At the time of acquisition, the development was 70% completed and
the estimated cost to complete this development was $88,000. Management expects
to complete development of this product and begin shipping it in June 2001. 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
F-11
<PAGE> 82
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
that licensees will ship products in fiscal 2001. The fifth development project
is a device that 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
2000.
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, include 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 commence 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 collaborate with the Company, in executing development
agreements with the U.S. government and other commercial customers for a three
year period. In consideration for certain consulting services and rights, the
Company granted to the seller a warrant to purchase 322,800 shares of the
Company's common stock at $3.66 per share (see Note 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 of $1,108,000, including the estimated
fair value of the warrant ($808,000), has been recorded as prepaid expenses and
noncurrent other assets. The
F-12
<PAGE> 83
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
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 value of the warrants was
determined at the date of grant using the methods specified by SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), with the following
assumptions: expected life, 10 years; risk free interest rate, 5.7%; volatility,
50% and no dividends during the expected term.
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 September
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
September 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 $--
====== ====== === ===
SEPTEMBER 30, 1999
Mutual funds..................................... $ -- $ -- $-- $--
====== ====== === ===
</TABLE>
The Company realized gains on the sales of securities of $19,000, $14,000,
$56,000 and none in 1996, 1997, 1998 and the nine months ended September 30,
1999, respectively, while realizing losses of $1,000 in 1996, 1997, 1998 and for
the nine months ended September 30, 1999, respectively.
4. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials and subassemblies............................ $223 $378 $436
Work in process............................................ 16 37 34
Finished goods............................................. 56 66 136
---- ---- ----
Total...................................................... $295 $481 $606
==== ==== ====
</TABLE>
F-13
<PAGE> 84
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
5. PROPERTY
Property consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
----- ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment....................................... $ 208 $ 314 $ 422
Machinery and equipment.................................. 172 177 200
Furniture and fixtures................................... 110 123 191
Leasehold improvements................................... -- 13 42
----- ----- -----
Total.................................................... 490 627 855
Less accumulated depreciation and amortization........... (156) (298) (429)
----- ----- -----
Property, net............................................ $ 334 $ 329 $ 426
===== ===== =====
</TABLE>
6. 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 $192,000 in
1996, 1997, 1998 and the nine months ended September 30, 1999, respectively.
The Company has offered to assist a significant customer, who is a
preferred stockholder, with co-marketing a licensed product. Pursuant to the
terms of the proposed agreement, the Company would reimburse the customer for
certain marketing related expenses not to exceed $200,000 per quarter for a
period of five quarters beginning with the first calendar quarter of 2000.
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.
F-14
<PAGE> 85
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
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.
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 $1.48 to a Series B preferred stock investor. These 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
F-15
<PAGE> 86
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
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 the following
assumptions: risk free interest rate, 5.5%; 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 7,991,975 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> 87
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 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................................................... 1,915,556 $6.85
Exercised................................................. (432,827) $0.44
Canceled.................................................. (25,147) $2.35
----------
Outstanding, September 30, 1999............................. 4,379,465 $3.18
==========
</TABLE>
Additional information regarding options outstanding as of December 31,
1998 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
========= ==== ===== ========= =====
</TABLE>
At December 31, 1998 and September 30, 1999, the Company had 754,379 and
2,015,594 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.
F-17
<PAGE> 88
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
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% and 5.3% in 1996, 1997 and 1998,
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 and 1998 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) and $1,885,000 ($0.48 net loss per
share) in 1996, 1997 and 1998, 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 September 30, 1999, respectively. Compensation expense of
none, $5,000, $68,000 and $138,000 was recognized as result of these options in
1996, 1997, 1998 and the nine months ended September 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 were 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 nine months ended September
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 nine months ended
September 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. These options were fully vested at the date of grant.
Accordingly, the fair value of the options was determined at the date of grant
using the methods specified by SFAS 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 September 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
F-18
<PAGE> 89
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
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)
and 68,595 shares of common stock with a fair value of $562,000 for recruiting
services.
Deferred Stock Compensation
In connection with grants of certain stock options to employees and
directors in the nine months ended September 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 nine months ended September 30, 1999 was $185,000.
Common Stock Reserved for Issuance
The Company had reserved shares of common stock for issuance as follows:
<TABLE>
<S> <C>
At December 31, 1998
Conversion of preferred stock............................... 5,131,100
Exercise of options....................................... 3,676,262
Exercise of warrants...................................... 182,854
----------
Total............................................. 8,990,216
==========
At September 30, 1999
Conversion of preferred stock............................. 5,131,100
Exercise of options....................................... 6,395,059
Exercise of warrants...................................... 498,593
----------
Total............................................. 12,024,752
==========
</TABLE>
F-19
<PAGE> 90
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1996 1997 1998 1998 1999
------ ------ ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................................... $ (81) $ (527) $(1,673) $(1,418) $(3,722)
Redeemable convertible preferred stock
accretion............................. -- 3 6 5 5
------ ------ ------- ------- -------
Net loss applicable to common
stockholders............................. $ (81) $ (530) $(1,679) $(1,423) $(3,727)
====== ====== ======= ======= =======
Denominator:
Weighted average common shares
outstanding........................... 3,311 3,338 3,970 3,951 5,305
Weighted average common shares held in
escrow................................ -- -- -- -- (71)
Weighted average common shares
outstanding subject to repurchase..... (486) (176) (61) (75) --
------ ------ ------- ------- -------
Shares used in calculating basic and
diluted net loss per share............ 2,825 3,162 3,909 3,876 5,234
====== ====== ======= ======= =======
Basic and diluted net loss per share....... $(0.03) $(0.17) $ (0.43) $ (0.37) $ (0.71)
====== ====== ======= ======= =======
</TABLE>
The Company's computation of net loss per share excludes 88,770 shares held
in escrow as discussed in Note 2, as the conditions required to release these
shares from escrow had not been satisfied as of September 30, 1999.
F-20
<PAGE> 91
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (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 3,025,929 4,379,465
Warrants......................... 195,899 287,087 182,854 213,117 498,593
---------- ---------- ---------- ---------- -----------
Total............................ 5,675,642 7,452,701 8,259,374 8,414,987 10,009,158
========== ========== ========== ========== ===========
Weighted average exercise price
of options..................... $ 0.10 $ 0.16 $ 0.36 $ 0.42 $ 1.13
========== ========== ========== ========== ===========
Weighted average exercise price
of warrants.................... $ 0.72 $ 0.56 $ 0.95 $ 0.97 $ 3.18
========== ========== ========== ========== ===========
</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> 92
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
The Company's effective tax rate differed from the expected benefit at the
federal statutory tax rate 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)
Stock compensation.......................................... -- -- --
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>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1998 1999
------ ------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
North America................................... $1,867 $3,325 $3,363 $3,962
Europe.......................................... 533 648 950 817
Far East........................................ 239 347 597 704
Rest of the world............................... 98 12 111 102
------ ------ ------ ------
$2,737 $4,332 $5,021 $5,585
====== ====== ====== ======
</TABLE>
F-22
<PAGE> 93
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Significant Customers
In 1996, one unrelated customer accounted for 16% of total revenues. In
1997, one unrelated customer accounted for 24% of total revenues. In 1998, a
preferred stockholder and an unrelated customer accounted for 11% and 10% of
total revenues, respectively. For the nine months ended September 30, 1999, a
preferred stockholder and a unrelated customer accounted for 15% and 9% of total
revenues, respectively.
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 $103,000 and $96,000, respectively, at September 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 $99,000 in 1997 and 1998
and the nine months ended September 30, 1999, respectively.
As discussed in Note 10, a preferred stockholder accounted for $249,000 and
$552,000 of royalty revenue in 1998 and the nine months ended September 30,
1999, respectively, and $316,000 and $270,000 of development contract revenue in
1998 and the nine months ended September 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
F-23
<PAGE> 94
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
process of obtaining written non-infringement and/or patent invalidity opinions
from outside patent 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 an amendment to the 1997
Stock Option Plan to increase the number of shares reserved for issuance by
1,149,975.
On November 3, 1999, the stockholders approved 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 increase the number
of shares authorized for issuance under the plan by 2,000,000 shares and
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> 95
-------------------------------------------------------------------------
--------------------------------------------------------------------------
4,250,000 SHARES
IMMERSION.LOGO
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
HAMBRECHT & QUIST
BEAR, STEARNS & CO. INC.
ROBERTSON STEPHENS
---------------------------
November 12, 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 DECEMBER 8, 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> 96
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...................... 90,000
Blue sky qualification fees and expenses.................... 10,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 320,000
Transfer agent and registrar fees........................... 5,000
Miscellaneous expenses...................................... 4,177
----------
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.
(2) On November 3, 1996, November 4, 1996, November 20, 1996, November
26, 1996 and November 27, 1996, the Registrant sold an aggregate of 396,778
shares of Series B preferred stock to accredited investors for an aggregate
purchase price of $590,004.
II-1
<PAGE> 97
(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 $0.50 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 1,376,928
shares of Series D preferred stock to accredited investors for an aggregate
purchase price of $5,750,928.
(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.
(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.
II-2
<PAGE> 98
(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 30,260 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> 99
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
32,280 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
40,350 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> 100
<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 October 4, 1996.#
10.19 Intellectual Property License Agreement with Logitech, Inc.
dated April 13, 1998.#
10.20 Technology Product Development Agreement with Logitech, Inc.
dated April 13, 1998.#
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
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.
** Previously filed with Amendment No. 2 to Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on October 5, 1999.
* Previously filed with Amendment No. 4 to Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on November 5, 1999.
# Certain information has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
(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> 101
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> 102
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 5 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 12th day of November, 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. 5 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 November 12, 1999
- --------------------------------------------- and Chief Executive Officer
Louis Rosenberg, Ph.D. (Principal Executive Officer)
/s/ VICTOR VIEGAS* Vice President, Finance and Chief November 12, 1999
- --------------------------------------------- Financial Officer (Principal
Victor Viegas Financial and Accounting Officer)
/s/ BRUCE SCHENA* Vice President, Chief Technology November 12, 1999
- --------------------------------------------- Officer, Secretary and Director
Bruce Schena
/s/ STEVEN BLANK* Director November 12, 1999
- ---------------------------------------------
Steven Blank
/s/ JONATHAN RUBINSTEIN* Director November 12, 1999
- ---------------------------------------------
Jonathan Rubinstein
*By: /s/ LOUIS ROSENBERG
---------------------------------------
Louis Rosenberg, Ph.D.
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 103
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 October 20, 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.
DELOITTE & TOUCHE LLP
San Jose, California
October 20, 1999
S-1
<PAGE> 104
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
Nine months ended September 30, 1999*
Allowance for doubtful accounts............ $92 $46 $20 $118
</TABLE>
- ---------------
*Unaudited.
S-2
<PAGE> 105
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
32,280 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
40,350 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> 106
<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 October 4, 1996.#
10.19 Intellectual Property License Agreement with Logitech, Inc.
dated April 13, 1998.#
10.20 Technology Product Development Agreement with Logitech, Inc.
dated April 13, 1998.#
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.
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.
** Previously filed with Amendment No. 2 to Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on October 5, 1999.
* Previously filed with Amendment No. 4 to Registrant's Registration
Statement on Form S-1 (File No. 333-86361) on November 5, 1999.
# Certain information has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 1
EXHIBIT 1.1
IMMERSION CORPORATION
4,250,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
November __, 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 4,250,000 shares of its authorized but unissued
Common Stock, $0.001 par value (herein called the Common Stock) (said 4,250,000
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 637,500
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. 333-86361), 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
- --------
(1) Plus an option to purchase from the Company and the Selling
Securityholders up to 637,500 additional shares to cover over-allotments
<PAGE> 2
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.
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;
2
<PAGE> 3
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 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, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge 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, whether any such transaction
described 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 Boston Equiserve, 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 Louis B. Rosenberg, Ph.D and Victor A.
Viegas
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as attorneys-in-fact (herein collectively called the "Attorneys" and
individually called an "Attorney") and appointing Boston Equiserve 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.
(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 except that the representations
and warranties set forth in this paragraph 2(b)(v) do not apply to
statements or omissions in the Registration Statement or the Prospectus
based upon information relating to any Underwriter furnished to the
Company by such Underwriters for use therein.
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(vi) The sale of the Stock by such Selling Securityholder pursuant
hereto is not prompted by any material adverse information concerning the
Company that is known by such Selling Securityholder and that is not set
forth in the Registration Statement and Prospectus.
(vii) Such Selling Stockholder 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.
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
4,250,000 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 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 637,500 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
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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 third, thirteenth, fourteenth and
fifteenth 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.
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.
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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.
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(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.
(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 Class I and II 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 Class I and II 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,
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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,
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, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge, 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 whether any such transaction described
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
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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 and (4) notwithstanding anything herein to the contrary, the
Underwriters agree that they will not seek indemnification under this Section
7(a) from the Selling Securityholders unless the Underwriters shall have first
sought indemnity from the Company under this Section 7(a) and the Company has
not agreed to satisfy such request for indemnification in full within 30 days;
provided, however, that the Underwriters shall not be required to effect such
initial demand upon the Company and wait such 30-day period if it would
prejudice their right to indemnification from the Selling Securityholders. 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 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
10
<PAGE> 11
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.
(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
11
<PAGE> 12
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 and under the representations contained in Section 2(a) and
paragraphs (v) and (vi) of Section 2(b) 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 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
12
<PAGE> 13
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 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.
13
<PAGE> 14
(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 June 30,
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,
sell, offer, contract to sell, transfer the economic risk of ownership in,
make any short sale, pledge, 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
whether any such transaction described 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.
14
<PAGE> 15
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 Victor A. Viegas at the above address. 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.
15
<PAGE> 16
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:
Adam C. Braun
C. Gordon Bell Revocable Trust
Dean Chang, Ph.D.
Scott Curtis
Cybernet Systems Corporation
Craig H. Factor
Christopher J. Hasser
Patrick H. and Nina J. Lacey
Timothy Lacey
Kenneth M. Martin
Nicholas Palevsky
Arthur and Marilyn Rosenberg
Louis B. Rosenberg, Ph.D
Bruce M. Schena
Ming-Chang Tsai
By:______________________________________
___________________, Attorney-in-Fact
16
<PAGE> 17
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.
17
<PAGE> 18
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>
18
<PAGE> 19
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
Louis B. Rosenberg, Ph.D............................. 120,000
CLASS II
Cybernet Systems Corporation......................... 161,400
Adam C. Braun........................................ 4,035
Dean Chang, Ph.D..................................... 8,000
Craig H. Factor...................................... 8,070
Timothy Lacey........................................ 40,309
Kenneth M. Martin.................................... 8,070
Bruce M. Schena...................................... 8,070
CLASS III
C. Gordon Bell Revocable Trust....................... 12,105
Scott Curtis......................................... 10,088
Christopher J. Hasser................................ 565
Patrick H. and Nina J. Lacey......................... 8,070
Nicholas Palevsky.................................... 20,175
Arthur and Marilyn Rosenberg......................... 12,000
Ming-Chang Tsai...................................... 28,245
--------
Total............................................ 457,272
=======
</TABLE>
19
<PAGE> 20
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 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 Preferred Stock, of which there are outstanding no
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
20
<PAGE> 21
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 Boston Equiserve, 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 (other
than any liens, encumbrances, equities, security interests and claims that
result from actions taken against the Underwriters), 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.
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<PAGE> 22
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
of which such counsel have knowledge, 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 "Intellectual Property," 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.
22
<PAGE> 1
EXHIBIT 10.12
*Certain information in this document has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
AGREEMENT DRAFT
FOR
ASIC DESIGN AND DEVELOPMENT
BY AND BETWEEN
IMMERSION CORPORATION
AND
KAWASAKI LSI U.S.A., INC.
<PAGE> 2
AGREEMENT FOR ASIC DESIGN AND DEVELOPMENT
This Agreement for ASIC Design and Development ("Agreement") is entered into and
is effective as of this 16th day of October 1997 (the "Effective Date") by and
between Immersion Corporation, a California corporation having its principal
place of business at 2158 Paragon Drive, San Jose, CA 95131 (hereinafter
referred to as "Immersion") and Kawasaki LSI U.S.A., Inc., a California
corporation having its principal place of business at 2570 North First Street,
Suite 301, San Jose, CA 95131 (hereinafter referred to as "KLSI").
RECITALS
Immersion wishes to have KLSI design and develop for Immersion and KLSI desires
to design and develop for Immersion an integrated circuit device as specified
more fully herein.
AGREEMENT
1. DEFINITIONS
1.1 "A/D Converter" shall mean the A/D converter described in
Exhibit A ("Specifications").
1.2 "AOX Modifications" shall mean modifications made by AOX
in the course of performance under the AXIS Chip Agreement to
the USB Microcode and the Clock Generation and General Purpose
I/O and the related Intellectual Property Rights.
1.3 "AOX Preexisting Technology" shall mean AOX technology and
the related Intellectual Property Rights in existence prior to
the Effective Date and used in the AXIS Chip, consisting of the
"QT Engine" Core Logic, the ROM BIOS, the Boot Loader Microcode,
the USB Controller, the USB Microcode, the Timer Subsection, the
Memory Controller, and the Clock Generation and General Purpose
I/O.
1.4 "AXIS Chip" shall mean an integrated circuit device which is
designed to provide an optimized version of the force-feedback
functions delivered by the Immersion force feedback firmware.
1.5 "AXIS-derived Chip" shall mean an integrated circuit device
which consists of the same or derivative base wafer, metal 1 and
metal 2 layers as the AXIS Chip and which (i) does not contain
the same ROM Mask Layer as the AXIS Chip, (ii) does not contain
any portion of the Force Feedback Microcode, (iii) does not
incorporate firmware that provides Force Feedback Functionality,
to the best of KLSI's knowledge, as determined by KLSI by making
a reasonable inquiry, and (iv) does have the Shaft Encoder Logic
present but disabled through a means disclosed and described to
Immersion in writing and approved by Immersion in writing.
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<PAGE> 3
1.6 "AXIS Chip Agreement" shall mean the written agreement between
KLSI and AOX regarding the development of the AXIS Chip and
the ownership and licensing of certain technology and the
related Intellectual Property Rights used in the AXIS Chip.
1.7 "Boot Loader Microcode" shall mean the boot loader microcode
described in Exhibit A ("Specifications").
1.8 "Clock Generation and General Purpose I/O" shall mean the clock
generation and general purpose I/O described in Exhibit A
("Specifications").
1.9 "Confidential Information" shall mean: (i) the Specifications,
the Product, the PLSSOP, the Prototype Units, the Shaft Encoder
Logic, the Force Feedback Microcode, the Immersion Requested
Revisions ("IRR") and any trade secrets related to any of the
foregoing, including but not limited to any information relating
to either party's product plans, costs, prices and names,
finances, marketing plans, business opportunities, personnel,
research, development or know-how; (ii) any information
designated by the disclosing party as confidential in writing
or, if disclosed orally, reduced to writing within thirty (30)
days, provided, however, that "Confidential Information" shall
not include information that (i) is or becomes generally known
or available by publication, commercial use or otherwise through
no fault of the receiving party; (ii) is known and has been
reduced to tangible form by the receiving party at the time of
disclosure and is not subject to restriction; (iii) is
independently developed by the receiving party by individuals
who do not have access to the same information from the
disclosing party; (iv) is lawfully obtained from a third party
who has the right to make such disclosure; or (v) is released
for publication by the disclosing party in writing.
1.10 "Deliverables" shall mean the PLSSOP, the testable Prototype
Units, the First Articles and Documentation.
1.11 "DMA Controller" shall mean the DMA controller described in
Exhibit A ("Specifications")
1.12 "Development and Payment Schedule" shall mean the time for the
parties' performance under this Agreement, as set forth in
Exhibit B ("Development and Payment Schedule").
1.13 "Documentation" shall mean the Specification, the VHDL File for
the AXIS Chip, and other documentation that would reasonably
accompany the Deliverables.
1.14 "Errors" shall mean: (i) in the case of acceptance under the
terms of Section 4.2 ("Acceptance"), defects in the Prototype
Units which cause such Prototype Units not to operate in
conformance with the requirements of this Agreement, and, in the
case of warranty under the terms of Section 7.1 ("Warranties"),
defects in the Deliverables which cause such Deliverables not to
operate in conformance with Exhibit A ("Specifications"); (ii)
defects in the Products which cause such Products not to operate
in conformance with Exhibit A ("Specifications"); and (iii)
defects in the Documentation which render it inaccurate,
erroneous or otherwise unreliable.
2
<PAGE> 4
1.15 "Final Mask ROM" shall mean the final mask ROM described in
Exhibit A ("Specifications").
1.16 "First Articles" shall mean a limited number of units of the
Product, as mutually agreed upon by the parties, which are
manufactured as a test run for review and acceptance by
Immersion prior to full production of the Product.
1.17 "Force Feedback Functionality" shall mean the basic functions
required by a local processor for use in a force feedback
product. These functions include (a) sending and receiving
commands from a host computer, (b) generating tactile sensations
felt by a user by reading local sensors and controlling local
actuators based upon embedded mathematical relations between
sensor data and actuator output, and (c) generating said tactile
sensations in response to said commands from said host computer.
1.18 "Force Feedback Microcode" shall mean the Immersion microcode
designed to implement the Force Feedback Functionality.
1.19 "Immersion Preexisting Technology" shall mean the Immersion
technology and related Intellectual Property Rights in existence
prior to the Effective Date and used in the AXIS Chip,
consisting of the Shaft Encoder Logic and the Force Feedback
Microcode.
1.20 "Immersion Requested Revisions" shall mean the technology
modifications and related Intellectual Property Rights created
by KLSI in the course of the performance under this Agreement
and/or the technology modifications and related Intellectual
Property Rights created by AOX in the course of performance
under the AXIS Chip Agreement, consisting of (i) modifications
to the Shaft Encoder Logic and the Force Feedback Microcode and
(ii) modifications, which are specifically implemented to
facilitate and support the implementation of the Force Feedback
Functionality which are made to the "QT Engine" Core Logic, the
ROM BIOS, the Boot Loader Microcode, the USB Controller, the
UART, the Time Subsection, the DMA Controller, the Memory
Controller, the PWM Generation Logic, the Watchdog Timer Logic
and the Final Mask ROM.
1.21 "Intellectual Property Rights" shall mean all worldwide patents
and other patent rights (such as continuations, continuations in
part and reissues), utility models, copyrights and mask work
rights, including without limitation, all applications and
registrations with respect thereto and rights in trade secrets
and know-how.
1.22 "Invention" shall mean any Invention or discovery which is or
may be patentable or otherwise protectable under Title 35 of the
United States Code.
1.23 "Inventions" shall mean all ideas, creations, works, processes,
designs and methods (whether or not patentable, copyrightable or
registrable as a mask work) incorporated in the design or
function of the Prototype Unit, and all documentation associated
therewith, which are created or discovered as part of the
Services; provided, however, that
3
<PAGE> 5
Inventions shall not include any discoveries, improvements or
ideas made solely by KLSI regarding methods of designing,
structuring or producing products generally.
1.24 "KLSI Modifications" shall mean modifications made by KLSI in
the course of performance under this Agreement to the USB
Transceiver and the A/D Converter and the related Intellectual
Property Rights.
1.25 "KLSI Preexisting Technology" shall mean KLSI technology and the
related Intellectual Property Rights in existence prior to the
Effective Date and used in the AXIS Chip, consisting of the USB
Transceiver, the A/D Converter and the Phase Lock Loop.
1.26 "Memory Controller" shall mean the memory controller described
in Exhibit A ("Specifications").
1.27 "Non-Immersion Technology" shall mean the AOX Preexisting
Technology, the AOX Modifications, the KLSI Preexisting
Technology and the KLSI Modifications.
1.28 "Phase Lock Loop" shall mean the phrase lock loop described in
Exhibit A ("Specifications").
1.29 "Product" shall mean the Axis Chip as more fully described in
the Specifications.
1.30 "Post Layout Simulation Sign Off Package" or "PLSSOP" shall mean
the computer generated simulation of the Prototype Unit that is
a model of the Prototype Unit and that is used to review the
features and functionality which will be present in the
Prototype Unit.
1.31 "Prototype Units" shall mean initial working testable units of
the Products that conform to the PLSSOP and the Specifications.
1.32 "Purchase Agreement" shall mean the agreement to be entered into
by Immersion and KLSI under which KLSI will produce AXIS Chips
and Immersion will purchase the AXIS Chips.
1.33 "PWM Generation Logic" shall mean the PWM generation logic
described in Exhibit A ("Specifications").
1.34 "`QT Engine' Core Logic" shall mean the QT engine core logic
described in Exhibit A ("Specifications").
1.35 "ROM BIOS" shall mean the ROM BIOS described in Exhibit A
("Specifications").
1.36 "Second Source" shall mean an alternative foundry for the AXIS
Chip licensed by Immersion to produce the AXIS Chip for
Immersion.
1.37 "Services" shall mean the design and development of the
Prototype Units and the fabrication and assembly of the
Prototype Units.
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<PAGE> 6
1.38 "Shaft Encoder Logic" shall mean the Immersion custom gate array
that extracts position, velocity and other relevant information
from shaft encoder signals.
1.39 "Specifications" shall mean the initial technical and design
specifications for the Product set forth in Exhibit A
("Specifications").
1.40 "Timer Subsection" shall mean the timer subsection described in
Exhibit A ("Specifications").
1.41 "UART" shall mean the UART described in Exhibit A
("Specifications").
1.42 "USB Controller" shall mean the USB controller described in
Exhibit A ("Specifications").
1.43 "USB Microcode" shall mean the USB microcode described in
Exhibit A ("Specifications").
1.44 "USB Transceiver" shall mean the USB transceiver described in
Exhibit A ("Specifications").
1.45 "Watchdog Timer Logic" shall mean the watchdog timer logic
described in Exhibit A ("Specifications").
2. SCOPE OF WORK
2.1 Services. Based on the terms and conditions set forth in this
Agreement, KLSI agrees to perform the Services in accordance
with the Development and Payment Schedule. Except for the design
and development functions of system definition, logic design and
breadboard definition and construction (which will be provided
by Immersion), KLSI will be responsible for obtaining all the
technology, labor, material, tooling and facilities necessary
for such design and development of the Prototype Unit.
2.2 Progress Reports. KLSI will provide Immersion with written
progress reports, as requested by Immersion, starting one week
after the Effective Date and ending on the date of Immersion's
final acceptance of the Prototype Unit and receipt of all
Deliverables. Each report shall indicate progress as follows:
(a) Status of progress toward the next scheduled milestone;
(b) Short description of problems in meeting such milestone,
if any;
(c) Proposed recover method to meet the next milestone, if
necessary;
(d) Probability of meeting the next milestone;
(e) Any changes in KLSI's estimate of recurring
manufacturing costs for the Prototype Unit or First
Articles.
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<PAGE> 7
3. DESIGN REVIEW AND SPECIFICATION CHANGES
3.1 Design Review. Immersion is entitled to conduct periodic design
reviews to ensure its satisfaction with the Services. Upon
reasonable notice, KLSI shall allow Immersion during normal
business hours, to visit its places of business for development
and manufacturing to discuss and inspect the status of the
development of the Product.
3.2 Changes to the Specification. Immersion is entitled to request
modifications in the form of changes or additions to the
Specifications at anytime time during the term of this
Agreement. Such requests shall be submitted by Immersion to KLSI
in writing. If any such modification of the Specifications
materially increases or decreases the cost or time of
performance of the Services, the parties will negotiate an
equitable adjustment to this Agreement. Upon receipt of
Immersion's written approval, KLSI will proceed with the
implementation of the prescribed changes and the Specifications
and other exhibits to the Agreement shall be modified in writing
accordingly to reflect such agreed upon changes and signed by
both parties.
4. DELIVERABLES: DELIVERY; ACCEPTANCE; AND REJECTION
4.1 Deliverables KLSI agrees to deliver the Deliverables in
accordance with the Development and Payment Schedule.
Deliverables shall be delivered to the Immersion Project Manager
accompanied by a written statement listing the items delivered
and stating that they are ready for Immersion's acceptance
testing. All Deliverables shall be sent to Immersion F.O.B.
Immersion's facility at the address stated above. KLSI's
liability for loss shall cease upon delivery to the F.O.B. point
and title to the Deliverables shall shift to Immersion without
any effect on the intellectual property rights in such
Deliverables.
4.2 Acceptance
(a) Immersion, with the assistance of KLSI if requested by
Immersion, shall examine and test the PLSSOP and the
Prototype Unit and examine each other Deliverable upon
delivery to determine whether the PLSSOP and the
Prototype Unit and each other Deliverable conforms to
the Specification and that the Prototype Unit conforms
to the PLSSOP.
(b) Within the acceptance period for each Deliverable
specified in Exhibit B ("Development and Payment
Schedule"), Immersion shall provide KLSI with written
acceptance of such Deliverable or a written statement of
Errors (the "Statement of Errors") to be corrected prior
to Immersion's payment of the amount due upon
Immersion's acceptance of such Deliverables, if any.
Immersion will examine the Deliverables received against
the list in Exhibit C ("Deliverables") to confirm that
all such Deliverables have, in fact, been delivered and
will notify KLSI if any items are missing. KLSI will
promptly deliver any Deliverables that are missing upon
notification by Immersion.
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<PAGE> 8
(c) KLSI will correct the Errors in any Deliverable set
forth in the Statement of Errors and redeliver the
Deliverable to Immersion. The parties will negotiate a
reasonable time period for each Error correction
depending on the nature of the Errors. The following
will serve as reasonable guidelines for Error
correction:
(i) seven (7) calendar days unless reprocessing of
prototypes, remasking or redesign is required,
(ii) twenty-one (21) calendar days if reprocessing of
prototypes is required,
(iii) twenty-five (25) calendar days if remasking is
required, and
(iv) thirty-five (35) calendar days if redesign (new
tape) is required.
(d) Immersion will, within thirty (30) calendar days after
any such redelivery, provide KLSI with written
acceptance or another Statement of Errors. The procedure
set forth in this Section 4.2 will be repeated until
Immersion accepts the Deliverables or terminates this
Agreement pursuant to Section 4.3 ("Rejection").
4.3 Rejection. Should any Prototype Unit fail to conform to the
PLSSOP and/or the Specification either (i) after the second
redelivery of such Prototype Unit pursuant to Section 4.2(b) or
(ii) after any delivery or redelivery which is late, then KLSI
will be deemed to be in material breach of this Agreement and
Immersion may terminate the Agreement pursuant to Section 10.1
("Termination for Cause by Either Party").
5. INTELLECTUAL PROPERTY RIGHT
5.1 Disclosure. KLSI will promptly and fully disclose and describe
to Immersion in writing any Inventions which are conceived or
reduced to practice during the term of this Agreement and within
the scope of the development of the Immersion Requested
Revisions.
5.2 Ownership.
(a) Ownership by Immersion. The parties agree that Immersion
owns and will solely own all Immersion Preexisting
Technology and Immersion Requested Revisions. Nothing in
this Agreement is intended to affect or restrict
Immersion's rights in the Immersion Preexisting
Technology or Immersion Requested Revisions. KLSI hereby
assigns to Immersion all right, title and interest in
the Immersion Requested Revisions. KLSI represents and
warrants and agrees to insure that under the terms of
the AXIS Chip Agreement, all Immersion Requested
Revisions created by AOX will be assigned to
Immersion, through KLSI. KLSI agrees that in no case
will Immersion be required to assign any Immersion
Preexisting Technology to KLSI or AOX and KLSI agrees
that KLSI's and AOX's use of the Immersion Requested
Revisions shall be limited to the licenses granted
herein.
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<PAGE> 9
(b) Ownership by KLSI. KLSI owns and will own all KLSI
Preexisting Technology. Nothing in this Agreement is
intended to affect or restrict KLSI's rights in the KLSI
Preexisting Technology. Immersion agrees that in no case
will KLSI be required to assign any KLSI Preexisting
Technology to Immersion and that assignment of the
Immersion Requested Revisions will not in any way grant
Immersion rights in the KLSI Preexisting Technology
except as licensed to Immersion under the terms of this
Agreement.
(c) Cooperation. KLSI agrees to assist Immersion, and will
make appropriate contractual arrangements with AOX
for AOX to assist Immersion, in any reasonable manner
to maintain and enforce Immersion's Intellectual
Property Rights in the Immersion Requested Revisions for
Immersion's benefit in any and all countries, and KLSI
agrees to execute, and to make appropriate contractual
arrangements with AOX for AOX to execute, when
requested by Immersion, applications for and assignments
to Immersion and any other documents necessary to
effectuate the ownership provisions applicable to the
Intellectual Property Rights in the Immersion Requested
Revisions. KLSI represents and agrees and will make
appropriate contractual arrangements with AOX for
AOX to represent and agree, that all persons who
perform work on the Immersion Requested Revisions will
have signed written agreements which vest all
Intellectual Property Rights in KLSI, or AOX, as
applicable, for assignment to Immersion.
5.3 Licenses.
(a) License by KLSI to Immersion. KLSI hereby grants
Immersion a worldwide nonexclusive license, under KLSI's
and AOX's Intellectual Property Rights in the
Non-Immersion Technology (i) to have KLSI manufacture
the AXIS Chip and to have a Second Source manufacture
the AXIS Chip if KLSI cannot accommodate Immersion and
Immersion's designated parties' requests in terms of
volume production of the AXIS Chip due to lack of wafer
capacity or allotment of wafer fabrication capacity, and
(ii) to distribute and sell the AXIS Chip through
Immersion's channels of distribution.
(b) License by Immersion to KLSI. Immersion hereby grants
KLSI a worldwide nonexclusive license, without a right
to sublicense, under Immersion's Intellectual Property
Rights in the Shaft Encoder Logic, the Immersion
Requested Revisions and the Force Feedback Microcode (i)
to use and modify the Shaft Encoder Logic, the Immersion
Requested Revisions and the Force Feedback Microcode in
developing, prototyping and manufacturing the AXIS Chip
and (ii) to distribute and sell the AXIS Chip to
Immersion and Immersion designated parties, as provided
in the Purchase Agreement. In addition, Immersion hereby
grants KLSI a license under Immersion's Intellectual
Property Rights in the Shaft Encoder Logic and the
Immersion Requested Revisions (i) to use and modify the
Immersion Requested Revisions and to include the Shaft
Encoder Logic (but to
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<PAGE> 10
disable such Shaft Encoder Logic) in developing,
prototyping and manufacturing the AXIS-derived Chip and
(ii) to distribute and sell the AXIS-derived Chip.
(c) Prohibitions. KLSI expressly agrees that it will not,
during the term of this Agreement or thereafter, without
Immersion's prior written consent:
(i) knowingly design, simulate, sell or otherwise
distribute a prototype device identical to the
Prototype Unit, either for KLSI's account or for
any third party, or assist any third party in so
doing; or
(ii) unless for Immersion, knowingly develop,
utilizing any Confidential Information regarding
the Prototype Unit obtained by KLSI from
Immersion, a prototype for a semiconductor
device that is pin-compatible with the Prototype
Unit, or assist any third party in so doing.
6. PAYMENTS
Immersion shall make payments to KLSI in accordance with the Development and
Payment Schedule, subject to completion of the applicable milestones and
acceptance of the applicable Deliverables by Immersion. Such payments shall be
due net thirty (30) days from Immersion's receipt of KLSI invoices.
7. WARRANTIES AND INDEMNIFICATION
7.1 Warranties KLSI warranties that: (i) all Deliverables delivered
to Immersion hereunder will conform to the Specifications for a
period of ninety (90) days after acceptance by Immersion; (ii)
in connection with KLSI performance of the Services, KLSI will
not knowingly infringe any patent, copyright, trade secret, mask
work right, or any other proprietary right of any third party;
(iii) KLSI has not previously granted and will not grant any
rights in the Product or any Inventions to any third party which
grant is inconsistent with the rights granted to Immersion
herein; and (iv) all Products delivered to Immersion hereunder
will conform to the Specifications for a period of ninety (90)
days after acceptance by Immersion. In the event that the
Products delivered to Immersion do not conform to the
Specifications, KLSI will repair or replace the nonconforming
Products.
7.2 Infringement Indemnity.
(a) KLSI shall, at its expense and at Immersion's request,
defend any claim or action brought against Immersion,
and Immersion's subsidiaries, affiliates, directors,
officers, employees, agents and independent contractors,
to the extent it is based on a claim that the Product
provided under this Agreement infringes or violates any
patent, copyright, trademark, trade secret or other
proprietary right of a third party, and shall indemnify
and hold harmless from and against any costs, damages
and fees reasonably incurred by Immersion including but
not limited to fees of attorneys and other professionals
that are attributable to such claim; provided,
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<PAGE> 11
however, that: (i) Immersion gives KLSI reasonably
prompt notice in writing of any such suit and permits
KLSI through counsel of its choice, to answer the charge
of infringement and defend such claim or suit; (ii)
Immersion provides KLSI with information, assistance and
authority, at KLSI's expense, to enable KLSI to defend
such suit; and (iii) KLSI shall not be responsible for
any settlement made by Immersion without KLSI's written
permission. In the event Immersion agrees to settle the
suit, Immersion agrees not to publicize the settlement
nor to permit the party claiming infringement to
publicize the settlement without first obtaining KLSI's
written permission.
(b) KLSI shall have no liability under this Section 7.2
("Infringement Indemnity") to the extent that such claim
or suit could have been avoided but for (i) the
combination, operation, or use of the Product with
equipment, logic, software or products not supplied by
KLSI, (ii) any alteration or modification made to the
Products after delivery by KLSI to Immersion or (iii)
the use by KLSI of specifications or requirements
provided by Immersion.
7.3 Duty to Correct. Notwithstanding Section 7.2 (a), should the
Product become the subject of a claim of infringement of a third
party's proprietary right, KLSI shall, at KLSI's expense: (i)
procure for Immersion the past right to make, use and sell and
the future right to continue to make, use and sell the Product;
(ii) replace or modify the Product to make such non-infringing,
provided that the same function is performed by the replacement
or modified Product to Immersion satisfaction; or (iii) if the
past and future rights to continue to make, use and sell cannot
be procured or the Product cannot be replaced or modified at
reasonable expense, reimburse Immersion for the total amount
paid under this Agreement.
7.4 General Indemnity. KLSI shall, at KLSI's expense, indemnify,
hold Immersion harmless and, at Immersion's request, defend
Immersion and Immersion's subsidiaries, affiliates, directors,
officers, employees, agents and independent contractors, from
and against any and all loss, cost, liability or expense
(including costs and reasonable fees of attorneys and other
professionals) arising out of or in connection with KLSI
performance under this Agreement to the extent caused by, in
whole or in part, any negligent act or omission or willful
misconduct of KLSI or KLSI employees, agent or independent
contractors, including but not limited to any act or omission
that contributes to : (i) any personal injury, sickness, disease
or death; (ii) any damage to or destruction of property of
Immersion or any loss of use resulting therefrom; (iii) any
violation of any statute, ordinance or regulation.
8. CONFIDENTIALITY AND PROPRIETARY NOTICE
8.1 Each party acknowledges that by reason of its relationship to
the other hereunder, it will access to other party's
Confidential Information. Each party agrees that it shall not
use in any way for its account or the account of any third
party, nor disclose to any third party any Confidential
Information revealed to it by the other party. Neither party
shall use the
10
<PAGE> 12
Confidential Information of the other party for purposes other
than those necessary to directly further the purposes of this
Agreement. Each party shall take every necessary precaution to
protect the confidentiality of all Confidential Information.
8.2 Any breach of the restrictions contained in this Section 8 is a
breach of this Agreement which will cause irreparable harm to
the other party entitling the other party to injunctive relief
in addition to all legal remedies.
8.3 KLSI will cause the outside package and top level metal mask
work layer of the Product to bear a mask work and copyright
notice for Immersion's benefit.
9. TERM
This Agreement will commence on the Effective Date and will continue until
terminated as provided in this Agreement.
10. TERMINATION
10.1 Termination for Cause By Either Party. Either party shall have
the right to terminate this Agreement immediately upon written
notice at any time if:
(a) the other party is in material breach of any warranty,
term, condition or covenant of this Agreement other than
those contained in Section 8 and fails to cure that
breach within sixty (60) days after written notice of
that breach;
(b) the other party is in material breach of any warranty,
term, condition or covenant of Section 8; or
(c) the other party: (i) becomes insolvent; (ii) falls to
pay its debts or perform its obligations in the ordinary
course of business as they mature; (iii) admits in
writing its insolvency or inability to pay its debts or
perform its obligations as they mature or (iv) makes any
assignment for the benefit of creditors.
10.2 Effect of Termination. Upon termination of this Agreement, each
party shall be released from all obligations and liabilities to
the other occurring or arising after the date of such
termination, except that any termination of this Agreement will
not relieve obligations under Sections 5, 7, 8 and 12 hereof,
nor will any such termination relieve Immersion or KLSI from any
liability arising from any breach of this Agreement. Neither
party will be liable to the other for damages of any sort solely
as a result of terminating this Agreement in accordance with its
terms. Termination of this Agreement will be without prejudice
to any other right or remedy of either party. Upon any
termination of this Agreement, KLSI will immediately deliver to
Immersion all work in process on the Deliverables, in whole or
in part and will confirm in writing the assignment of all
related Intellectual Property Rights.
11
<PAGE> 13
10.3 Payment by Immersion. Upon any termination of this Agreement
pursuant to the provisions of Section 10.1 above, Immersion's
monetary obligation to KLSI will be to pay for all milestones
completed and accepted by Immersion as set forth in the
Development and Payment Schedule, and to pay KLSI pro rata
(based on the ratio (equal to 1:1)) of the number of calendar
days elapsed since completion of the last payment milestone and
the number of days between such milestone and the next
subsequent milestone in the Development and Payment Schedule)
for work done by KLSI towards the next subsequent milestone,
including any costs, previously approved by Immersion in
writing, that are reasonably incurred for materials related to
any subsequent milestones. In no event, however, shall
Immersion's liability exceed the amounts set forth in the
Development and Payment Schedule.
11. DISCLAIMER OF CONSEQUENTIAL DAMAGES
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES FOR BREACH OF OR FAILURE TO PERFORM UNDER
THIS AGREEMENT, EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
12. GENERAL
12.1 Force Majeure. Neither party shall be liable for any failure or
delay in its performance under this Agreement due to causes,
including, but not limited to, acts of God, acts of civil or
military authority, fires, epidemics, floods, earthquakes,
riots, wars, sabotage, labor shortages or disputes, and
governmental actions, which are beyond its reasonable control;
provided that the delayed party: (i) gives the other party
written notice of such cause promptly, and in any event within
fifteen (15) days of discovery thereof, and (ii) uses its
reasonable efforts to correct such failure or delay in its
performance. The delayed party time for performance or cure
under this Section 12.1 shall be extended for a period equal to
the duration of the cause or sixty (60) days, whichever is less.
Notwithstanding the above provisions in this Section 12.1, the
obligations to make payments under this Agreement which are due
and owing shall not be deferred, excused or otherwise affected
by Force Majeure or any other reasons whether or not foreseen or
foreseeable so long as the services, Deliverables or Products
for which the payment is due are received.
12.2 Relationship of Parties. KLSI is an independent contractor.
Neither each party nor its employees, consultants, contractors
or agents are agents, employees or joint ventures of other party
nor do they have any authority to bind the other party by
contract or otherwise to any obligation. They will not represent
to the contrary, either expressly, implicitly, by appearance or
otherwise.
12.3 Personnel. KLSI employees, consultants, contractors and agents
who work on Immersion premises will be required to observe
Immersion regulations applying to non-Immersion personnel
working on Immersion premises.
12
<PAGE> 14
12.4 Employment Taxes and Benefits It will be KLSI's obligation to
report as income all compensation received by KLSI pursuant to
this Agreement and pay all taxes due on such compensation.
12.5 Other Tax Implications. The purpose of development of the
Deliverables under this Agreement is to demonstrate that the
Product developed hereunder will conform to the Specifications.
The Deliverables have no intrinsic value as an item. As such, no
value added, sales, or use taxes have been assessed or are
anticipated to be required as a result of the Services performed
under this Agreement. To the extent any such taxes are
ultimately assessed to Immersion as a retailer, Immersion shall
have responsibility to discharge the claim.
12.6 Assignment. The rights and liabilities of the parties hereto
will bind and inure to the benefit of their respective
successors, executors and administrators, as the case may be.
Each party may not assign or delegate its rights or obligations
under this Agreement either in whole or in part, without the
prior written consent of the other party except that Immersion
may assign this Agreement in the case of a merger, acquisition
or sale of assets. Any attempted assignment in violation of the
provisions of this Section 12.6 will be void. Immersion agrees
that KLSI may use AOX as a subcontractor to perform the
Services.
12.7 Applicable Law. This Agreement will be governed by and construed
in accordance with the laws of the United States and the State
of California as applied to agreements entered into and to be
performed entirely within California between California
residents.
12.8 Jurisdiction and Venue. The parties hereby submit to the
jurisdiction of, and waive any venue objections against, the
United States District Court for the Northern District of
California, the Superior Court of the State of California for
the County of Santa Clara, the Santa Clara Municipal Court, and
any mutually agreed to alternative dispute resolution proceeding
taking place in Santa Clara County, California, in any
litigation arising out of this Agreement.
12.9 Severability. If for any reason a court of competent
jurisdiction rinds any provision of this Agreement, or portion
thereof, to be unenforceable, that provision of this Agreement
shall be enforced to the maximum extent permissible so as to
effect the intent of the parties, and the remainder of this
Agreement shall continue in full force and effect.
12.10 Notices. All notices required or permitted under this Agreement
shall be in writing, and be deemed given when: (i) delivered
personally; (ii) when sent by confirmed telex or facsimile;
(iii) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or
(iv) one (1) day after deposit with a commercial overnight
carrier, with written verification of receipt. All
communications will be sent to the addresses first above
written. Either party may change its address by giving notice
pursuant to this Section 12.10.
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<PAGE> 15
12.11 No Waiver. Failure by either party to enforce any provision of
this Agreement shall not be deemed a waiver of future
enforcement of that or any other provision.
12.12 No Rights in Third Parties Rights. This Agreement is made for
the benefit of Immersion and KLSI and their respective
subsidiaries and affiliates, if any, and not for the benefit of
any third parties.
12.13 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original.
12.14 Headings and References. The headings and captions used in this
Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
12.15 Construction. This Agreement has been negotiated by the parties
and their respective counsel. This Agreement will be fairly
interpreted in accordance with its terms and without any strict
construction in favor of or against either party.
12.16 Complete Agreement. This Agreement, including all Exhibits,
constitutes the entire agreement between the parties with
respect to the subject matter hereof, and supersedes and
replaces all prior or contemporaneous understandings or
agreements, written or oral, regarding such subject matter
hereof. In the case of any conflict between the terms of this
Agreement and any of the Exhibits, the terms of the Agreement
shall govern and control. No amendment to or modification of
this Agreement shall be binding unless in writing and signed by
a duly authorized representative of both parties. To the extent
any terms and conditions of this Agreement conflict with the
terms and conditions of any invoice, purchase order or purchase
order acknowledgment placed hereunder, the terms and conditions
of this Agreement shall govern and control.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
KAWASAKI LSI U.S.A. INC. IMMERSION CORPORATION
By: /s/ Masanori Kodama By: /s/ Louis Rosenberg
---------------------------- ----------------------------
(Signature) (Signature)
Masanori Kodama Louis Rosenberg
---------------------------- ----------------------------
(Print Name) (Print Name)
President President
---------------------------- ----------------------------
(Title) (Title)
10/15/97 10/16/97
---------------------------- ----------------------------
(Date) (Date)
14
<PAGE> 16
EXHIBIT A
SPECIFICATIONS
Immersion ASIC Specification dated October 16, 1997
<PAGE> 17
IMMERSION ASIC SPECIFICATION
[****]
*All information in this forty page exhibit has been omitted and filed
separately with the Commission. Confidential treatment has been requested
with respect to the omitted portions.
1-40
<PAGE> 18
EXHIBIT B
DEVELOPMENT AND PAYMENT SCHEDULE
41
<PAGE> 19
IMMERSION CORPORATION
- -------------------------------------------------------------------------------
To KLSI c/o Brooks Technical Group April 24, 1997
10080 N. Wolfe Rd. SW3-100
Cupertino, CA 950114
408-257-3880 x 1307
408-252-4434 fax
PURCHASE ORDER
NO: 10499
Description of Purchased Item:
Design and development KLSI/AOX "Processor Plus" ASIC to be developed in
conjunction with Immersion personnel.
Total NRE Charges: $198,000 USD
Payment Schedule:
1) Design award/initiation - $15,000 USD
2) Technical transfer completion - $55,000 USD (action scheduled for completion
prior to 5/15/1997)
3) Design sign-off - $80,000
4) Ceramic sample delivery - $48,000 USD
This program will be run according to a Design and Development Agreement that
outlines the program in detail, itemizes each action step, who is assigned to
what action, and the completion date for each action. This plan will be
developed within 1 week of this purchase order date.
Bruce Schena
V.P./C.T.O. _________________________
Tim Lacey
V.P./C.F.O. _________________________
Thanks for your time. I look forward to hearing from you.
BRUCE SCHENA, CTO
IMMERSION
42
<PAGE> 20
EXHIBIT C
DELIVERABLES
43
<PAGE> 21
STATEMENT OF WORK
REV. 1.4
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NO TASK DATE/ WHO DESCRIPTION
TIME
-------------------------------
IMMERSION AOX KLSI
- -----------------------------------------------------------------------------------------------------------------------------------
1 Function 4/21/97 X X X Immersion, AOX, and KLSI agree to functional block
spec. sign-off specification and interface specification
- -----------------------------------------------------------------------------------------------------------------------------------
2 Issue P.O. 4/21/97 X Immersion issues formal Purchase Order number (1st
payment $15K)
- -----------------------------------------------------------------------------------------------------------------------------------
3 Detailed 6/12 X X X Immersion, AOX, and KLSI agree to detailed specification
spec. sign-off defines internal implementation of the chip. This document
add some details that are not well defined in the
function specification.
- -----------------------------------------------------------------------------------------------------------------------------------
4 Code 5/15/97 X Immersion transfers Intel 930 microcode to AOX
transfer
- -----------------------------------------------------------------------------------------------------------------------------------
5 Code 5/15/97 X - Immersion transfers all available date on shaft encoder
transfer
- -----------------------------------------------------------------------------------------------------------------------------------
6 Place & 6/18 X Trial place and route complete
route
--------------------------------------------------------------------------------------------------------------
7 Base water 5/18/97 X X KLSI and AOX sign off on base wafer
Master slice
sign-off
- -----------------------------------------------------------------------------------------------------------------------------------
8 VHDL X AOX completes VHDL functional code, simulates the
result and assures that the design agrees with the
detailed specification.
- -----------------------------------------------------------------------------------------------------------------------------------
9 Pre-layout X AOX synthesizes the VHDL code, simulates the
design resulting level netlist, and assures that the design
agrees with the specification.
- -----------------------------------------------------------------------------------------------------------------------------------
10 Pre-layout 6/12/97 X X AOX and KLSI agree that the pre-layout simulation
simulation result is satisfactory. 1st sign off
- -----------------------------------------------------------------------------------------------------------------------------------
11 post layout 6/19/97 X KLSI-placement generate post-layout file.
- -----------------------------------------------------------------------------------------------------------------------------------
12 ROM code 6/26/97 X AOX provides preliminary ROM code
- -----------------------------------------------------------------------------------------------------------------------------------
13 simulation 7/3/97 X AOX simulates the design and makes sure that the design
with the detailed specification
- -----------------------------------------------------------------------------------------------------------------------------------
14 second sign 7/3/97 X X AOX and KLSI agree that the post-layout simulation
off result is satisfactory, second sign off
- -----------------------------------------------------------------------------------------------------------------------------------
15 KLSI fabs X KLSI fabricates ceramic and plastic prototypes
- -----------------------------------------------------------------------------------------------------------------------------------
16 proto X Immersion provides AOX with prototype Joystick system
joystick
- -----------------------------------------------------------------------------------------------------------------------------------
17 KLSI 7/25/97 X KLSI delivers Xx ceramic prototypes
delivers
prototypes
- -----------------------------------------------------------------------------------------------------------------------------------
18 Integration X X AOX and Immersion integrate system
- -----------------------------------------------------------------------------------------------------------------------------------
19 marking X X Immersion and KLSI agrees to the marking specification.
marking will be based on KLSI's standard marking
with positive modifications to it depending on
Immersion's requirement.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 22
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DATE/
NO TASK TIME WHO DESCRIPTION
---------------------------
IMMERSION AOX KLSI
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
20 plastic 8/8/97 X KLSI delivers 12 plastic prototypes
prototypes
- -----------------------------------------------------------------------------------------------------
21 approval X Immersion approves prototype
- -----------------------------------------------------------------------------------------------------
22 ROM final X Immersion finalizes ROM code
- -----------------------------------------------------------------------------------------------------
23 Production X Immersion places first mass production
order order with 10 weeks time
- -----------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 1
EXHIBIT 10. 18
* Certain information in this document has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
INTELLECTUAL PROPERTY LICENSE AGREEMENT
IMMERSION CORPORATION AND LOGITECH, INC.
This Intellectual Property License Agreement (the "Agreement") between
Immersion Corporation, a California corporation, with principal offices in San
Jose, California (hereinafter "Immersion") and Logitech Inc., a California
corporation, with principal offices in Fremont, California (hereinafter
"Logitech"), is entered into as of October 4, 1996 (the "Effective Date").
RECITALS
A. Immersion is the owner of several United States patent applications
and one issued United States patent relating to certain force-feedback
technology.
B. Concurrently with this Agreement, Immersion and Logitech are entering
into a Technology Product Development Agreement dated the same date as this
Agreement. Pursuant to the Technology Product Development Agreement, Immersion
will develop and deliver to Logitech certain deliverables which are covered by
copyrights and trade secret rights owned by Immersion, as well as patents now
held or that may issue to Immersion in the future.
C. Logitech intends to develop "Gaming Devices" (as defined below) which
may or may not incorporate or utilize the deliverables to be delivered under the
Technology Product Development Agreement.
D. The parties desire that Immersion grant a license to Logitech under
the foregoing intellectual property rights of Immersion to develop and
distribute Gaming Devices, whether or not they incorporate or utilize the
deliverables to be delivered under the Technology Product Development Agreement,
all on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the promises and agreements set
forth below and the other consideration cited herein, the parties agree as
follows.
1. DEFINITIONS
In this Agreement the following words and expressions shall have the
following meanings:
1.1 AFFILIATES. This means any corporation or business entity which is
controlled by, controls, or is under common control of a Party. For this
purpose, the meaning of the word "control" shall include, without limitation,
direct or indirect
1
<PAGE> 2
ownership of more than fifty percent (50%) of the voting shares of interest of
such corporation or business entity.
1.2 DEFECT. This means, with respect to any non-software Deliverable,
failure to materially conform to the applicable then-current Specifications for
such non-software Deliverable.
1.3 DEFECT CORRECTION. This means either a modification or addition that
eliminates or works around a Defect in a non-software Deliverable so as to cause
the non-software Deliverable to comply with the applicable then-current
Specification.
1.4 DELIVERABLES. This means the various deliverables, which are
tangible implementations or items including interim deliverables or final
prototype deliverables, identified as such and described in any development
schedule to the Development Agreement and delivered to Logitech thereunder.
1.5 DEVELOPMENT AGREEMENT. This means the Technology Product Development
Agreement between Immersion and Logitech dated the same date as this Agreement.
1.6 ENHANCEMENT OR ENHANCEMENTS. This means any force-feedback
modification or addition made by Immersion, under the terms of Section 6.7
("Other Development") and Section 7.2 ("Enhancements by Immersion") of the
Development Agreement for the Gaming Field of Use, and which is a tangible
implementation other than a Defect Correction or Error Correction, that when
incorporated into the Gaming Device, materially reduces product costs of a
Gaming Device or materially changes the functional capability or form factor
(e.g., joystick to steering wheel).
1.7 ERROR. This means, with respect to any software Deliverable, failure
of any such software Deliverable to materially conform to the applicable
then-current Specification for such software Deliverable.
1.8 ERROR CORRECTION. This means either a modification or addition that
eliminates or works around an Error in the software Deliverable so as to cause
the software Deliverable to comply with the then-current Specification.
1.9 FINAL PROTOTYPE. This means a Deliverable which is the final
functional form of the Gaming Device, if any, including software and hardware,
produced by Immersion under a development schedule to the Development Agreement,
which prototype serves as a model for the final production version of the Gaming
Device, if any, and which conforms to the applicable Specification.
1.10 GAMING DEVICE(s). This means the consumer gaming computer input
peripherals marketed for entertainment applications, including but not limited
to the Joystick Product, other joysticks, steering wheels, flight yokes and
other similar devices.
2
<PAGE> 3
1.11 GAMING FIELD OF USE. This means the consumer gaming computer
peripherals market, which does not include the market for medical, industrial,
business, scientific and arcade products and applications.
1.12 IMMERSION PRODUCT MODEL TECHNOLOGY. This means that subset of
Immersion Technology delivered as a Deliverable under the terms of a development
schedule of the Development Agreement, or as an Enhancement or New Technology,
which is actually utilized in or in connection with and/or embedded in the final
production version of the Joystick Product, any subsequent Product Model of the
Joystick Product or any Product Model of any Gaming Device.
1.13 IMMERSION SOFTWARE. This means the driver software and computer
firmware subset of the Immersion Product Model Technology actually utilized in
or in connection with and/or embedded in the final production version of the
Joystick Product, any subsequent Product Model of the Joystick Product or any
Product Model of any Gaming Device that acts as an interface to and controls the
Joystick Product, any subsequent Product Model of the Joystick Product or any
Gaming Device.
1.14 IMMERSION TECHNOLOGY. This means any and all technology created or
acquired by Immersion, or licensed to Immersion by third parties, including but
not limited to software created by employees or consultants of Immersion, (i)
first developed or reduced to practice before or after the Effective Date solely
by Immersion independent of the scope of the work under the Development
Agreement or (ii) first developed or reduced to practice after the Effective
Date and within the scope of a Deliverable developed solely by Immersion (a)
under a development schedule in effect under the terms of the Development
Agreement, (b) as an Enhancement or (c) as New Technology.
1.15 INTELLECTUAL PROPERTY RIGHTS. This means the Licensed Patents and
utility models, copyrights and mask work rights, including without limitation
all applications and registrations with respect thereto, rights in trade
secrets, know-how, and all other intellectual property rights, excluding
trademarks and tradenames and patents other than the Licensed Patents.
1.16 JOYSTICK PRODUCT. This means the final production version of the
joystick described in the Specification in the first Exhibit A
("Specifications") of the Development Agreement which utilizes and/or contains
Immersion Product Model Technology, including but not limited to the applicable
Immersion Software, documentation, Defect Corrections and Error Corrections
thereto.
1.17 LICENSED PATENTS. This means (i) United States patent no.
5,576,727, titled "Electricalmechnical Human-Computer Interface with Force
Feedback", (ii) all patents that may issue based upon any of the United States
patent applications listed in Schedule A1 and A2 hereto or upon any
corresponding foreign patent applications that have been or may be filed, or
upon any continuations, continuations-in-part, or divisional
3
<PAGE> 4
applications related to any of the foregoing that have been or may be filed, and
(iii) any divisions, reissues and reexaminations based on any of the foregoing.
1.18 NET RECEIPTS. This means the gross receipts received by Logitech
and its Affiliates without taking into account any foreign withholding taxes
that may apply to transfers between Logitech and its affiliates upon any sales
of Royalty Bearing Products to unaffiliated third parties, less any actual
returns and/or credits actually credited to a customer's account in accordance
with Logitech's standard accounting practices applied in good faith. Net
Receipts shall not include freight, insurance and taxes. No other costs incurred
in the manufacture, sale, distribution, or exploitation of Royalty Bearing
Products shall be deducted from gross receipts in the calculation of Net
Receipts. If Royalty Bearing Products are bundled with other items sold by
Logitech or its Affiliates and are not invoiced separately, royalties will be
paid based on Logitech's (or if no Logitech averages sales price exists, the
applicable Affiliate average sales price) then-current average sales price for
each such Royalty Bearing Product when sold as a separate item (averaged for the
applicable Quarter in which the Net Receipts are received by Logitech or its
Affiliates, as applicable, for the country in which the sale was made) in like
quantities in arms length transactions to unrelated third parties other than
Logitech or Logitech Affiliates).
1.19 NEW TECHNOLOGY. This means any force-feedback technology
modification or addition made by Immersion, for the Gaming Field of Use, other
than a Defect Correction or Error-Correction, that when incorporated into the
Joystick Product or other Gaming Device, materially changes the utility,
efficiency, market value, functional capability or application, and which is
developed by Immersion on a non-exclusive basis and made "generally available"
for use in Gaming Devices in the Gaming Field of Use and which is delivered by
Immersion to Logitech as a tangible implementation pursuant to the terms of
Section 7.4 ("New Technology") of the Development Agreement. For purposes of
this definition, "generally available" shall mean offered under nonexclusive
license to any one unaffiliated third party (other than the original third party
for whom the technology, modification or addition was originally developed) for
use in Gaming Devices in the Gaming Field of Use.
1.20 OEM OR OEMS. This means any third party (not including Affiliates)
that does not manufacture Gaming Devices and that wishes to purchase finished
Gaming Devices for sale in the Gaming Field of Use under its own brand name.
1.21 PARTY OR PARTIES. This means Immersion and/or Logitech.
1.22 PRODUCT LAUNCH. This means the date on which first commercial-level
shipping of the Joystick Product or any Product Model commences to third party
unaffiliated customers of Logitech or a Logitech Affiliate.
1.23 PRODUCT MODEL. This means a single model of the Joystick Product or
any other Gaming Device. "Product Model" shall mean each variation of a Joystick
4
<PAGE> 5
Product or Gaming Device which (i) differs by virtue of addition of or
alteration through an Enhancement or (ii) constitutes a change in form factor
(e.g. joystick to steering wheel) or (iii) incorporates a material change in
force-feedback functionality made by a party other than Immersion. Purely
cosmetic alterations (e.g., color or styling) to the physical appearance of the
Joystick Product or a Gaming Device, or changes that do not alter the
force-feedback functionality but reduce manufacturing costs shall not be deemed
a Product Model.
1.24 ROYALTY BEARING PRODUCT. This means a Gaming Device which either
(1) incorporates or utilizes Immersion Product Model Technology that is not
otherwise made generally available to the public by Immersion without charge or
(2) is covered (a) by a Licensed Patent or (b) by a copyright of Immersion
embodied in any Immersion Product Model Technology that is not otherwise made
generally available to the public by Immersion without charge.
1.25 QUARTER OR QUARTERS. This means Logitech's yearly fiscal quarters.
Specifically, Logitech's yearly fiscal quarters begin and end on the following
dates: first quarter, April 1 - June 30; second quarter, July 1 - September 30;
third quarter, October 1 - December 31; and fourth quarter, January 1 - March
31.
1.26 SPECIFICATION(s). This means the Joystick Product specification
attached as the original Exhibit A ("Specification") to the Development
Agreement and each Gaming Device specification associated with a development
schedule which is attached by amendment to the Development Agreement.
1.27 YEAR. This means any full four-Quarter period.
1.28 Any reference to the words "PURCHASE," "SALE," or "SELL," when used
in connection with intellectual property, shall mean license.
2. GRANT OF LICENSES
2.1 GRANT WITH RESPECT TO THE LICENSED PATENTS. Subject to the terms of
this Agreement, Immersion grants to Logitech a worldwide, nonexclusive license
under the Licensed Patents to develop, make, have made, use, sell, lease,
license, demonstrate, market and distribute Gaming Devices in the Gaming Field
of Use. Except as provided in Section 2.3 ("Right to Sublicense"), no right to
sublicense the Licensed Patents is granted by Immersion to Logitech.
2.2 GRANT WITH RESPECT TO THE IMMERSION PRODUCT MODEL TECHNOLOGY.
Subject to the terms of this Agreement, Immersion grants to Logitech a
worldwide, nonexclusive license under any Intellectual Property Rights owned or
licensable by Immersion that cover the Immersion Product Model Technology,
excluding the New Technology except as separately licensed by Immersion to
Logitech in accordance with
5
<PAGE> 6
the terms of Section 7.4 ("New Technology") of the Development Agreement, to
use, copy, modify, and create derivative works based upon the Immersion Product
Model Technology and in order to develop, make, and have made Gaming Devices in
the Gaming Field of Use, and to sell, lease, license, demonstrate, perform,
market and distribute such Gaming Devices in the Gaming Field of Use. No access
rights or license to the source code for the Immersion Software are granted to
Logitech except as provided under the terms of Section 13 ("Source Code Escrow")
of the Development Agreement. Logitech and its Affiliates have no right and
Logitech agrees not to disassemble or decompile any portion of the software
portions of the Immersion Product Model Technology.
2.3 RIGHT TO SUBLICENSE. Subject to the terms of Section 2.6 ("Trademark
License from Immersion"), Immersion grants to Logitech the right to sublicense
any of the rights set forth in Sections 2.1 and 2.2 above subject to the
limitations of this Agreement: (i) to any Affiliate of Logitech and (ii) to any
non-Affiliate third party of Logitech solely for the purpose of assisting
Logitech in the design or development of Gaming Devices in the Gaming Field of
Use. Logitech agrees that any act or omission by a Logitech Affiliate that is
inconsistent with Logitech's obligations under the terms of this Agreement shall
be deemed to be an act or omission by Logitech and a breach of this Agreement by
Logitech.
2.4 DURATION. Subject to the obligation to pay royalties, the licenses
set forth above will extend to the full end of the term for which any Licensed
Patent is issued or any other Intellectual Property Right of Immersion licensed
hereunder is in force, unless sooner terminated as provided in this Agreement.
2.5 LABEL REQUIREMENTS. Subject to the terms of Section 2.6 ("Trademark
License for Immersion") and Section 2.7 ("Administration Procedure"), Logitech
shall place belly labels on Gaming Devices which are Royalty Bearing Products
which shall include the language and related logo: "I-Force(TM) Force Feedback
Technology Licensed from Immersion Corporation" (hereinafter the "Legend").
Logitech shall also place or have placed the Legend on retail manuals and boxes
as designated in Exhibit B ("Immersion Package Labeling Specification"). If OEM
customers object to belly label marking, the Parties will mutually agree upon a
reasonable solution in writing in advance. Logitech shall not remove Immersion's
copyright notices from any copies of the Immersion Software.
2.6 TRADEMARK LICENSE FROM IMMERSION. Subject to the procedures set
forth in subsection 2.7 below and Immersion's prior written approval, Immersion
hereby grants to Logitech a nonexclusive, nontransferable, worldwide license, to
use in connection with marketing the Joystick Product or any Gaming Device, the
trademark(s) used by Immersion ("Marks") to identify the Immersion Product Model
Technology and/or Licensed Patents and Logitech agrees to use such Marks on and
in connection with Royalty Bearing Products except in the case of OEM products
where, if the OEM customer objects, the parties will mutually agree upon a
reasonable solution in writing, in
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advance. Logitech acknowledges that all use of the Marks will inure to the
benefit of Immersion. Logitech shall not register Immersion's Marks in any
jurisdiction and will not adopt any trademark for use on the Joystick Product or
Gaming Device which is confusingly similar to any trademark of Immersion or
which includes a prominent portion of any trademark of Immersion. At Immersion's
reasonable request, Logitech shall provide Immersion with samples of Logitech's
use of Immersion trademarks. Logitech agrees to abide by Immersion's reasonable
written trademark policies as issued and provided to Logitech from time to time.
In any case where the Marks are not used in compliance with Immersion's
trademark policies and such use has been approved in writing by Immersion, upon
receipt of written notice from Immersion, Logitech will promptly correct the
non-compliance and submit samples of compliant use to Immersion for approval.
2.7 ADMINISTRATIVE PROCEDURES. The Parties agree that in order to
provide Immersion with appropriate information necessary for the orderly
administration of the Licensed Patents and Marks, Logitech will provide
Immersion with prompt written notice prior to Product Launch of each Product
Model and will enclose an information package which contains two prototypes or
production units of the Product Model sufficient to enable Immersion to
determine which of the Licensed Patents cover the Product Model and to review
and approve the use of the Marks. If in any case Immersion believes that the
quality of the Product Model does not meet Immersion's commercially reasonable
standards, Logitech will not be permitted to ship the Product Model with the
Marks until the quality issue is resolved, but Logitech may in is discretion
ship such Product Model without the Marks and shall be relieved of its
obligation to use the Marks on that Product Model.
2.8 GRANT WITH RESPECT TO KNOW-HOW. Subject to the terms of this
Agreement, each party grants to the other a worldwide, nonexclusive license to
use any know-how of such party disclosed to the other party pursuant to the
Development Agreement.
3. ROYALTIES
3.1 NEW TECHNOLOGY ROYALTIES. As provided in Section 9.6 ("New
Technology") of the Development Agreement, New Technology will be provided to
Logitech subject to royalties which are mutually agreed upon in writing by
Immersion and Logitech.
3.2 PER PRODUCT MODEL ROYALTY. Except as provided by Section 3.1 above,
Logitech shall pay Immersion a royalty based on a percentage of the Net Receipts
for each Product Model of a Royalty Bearing Product sold by Logitech or any
Logitech Affiliates to unrelated third parties (other than Logitech or Logitech
Affiliates) in arms length transactions, in accordance with the following. The
royalty percentage for each Product Model shall be five percent (5%) for all
units of a Royalty Bearing Product sold
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during the first twelve month period following the Product Launch of such
Product Model. At each annual anniversary of the initial Product Launch for such
Product Model thereafter, Logitech will determine the total number of all
Product Models of all Royalty Bearing Product units sold during the previous
four complete Quarters. If such total number of all Product Models of all
Royalty Bearing Product units exceeds the applicable threshold number of total
units set forth below, the royalty rate for that Product Model will be reduced
by two-thirds of one percent (0.66%) for the next twelve month period, but in no
event below a royalty rate of three percent (3%). If the total number does not
exceed the applicable threshold, the royalty rate for that Product Model will
remain the same for the next twelve month period. For purposes of this Section
3.2, the applicable threshold number of total units to be used for each Product
Model for computing whether a royalty rate reduction should take place at the
end of the first twelve month period following the Product Launch of each such
Product Model is one hundred thousand (100,000) units. The applicable threshold
number of total units to be used for each Product Model for computing whether a
royalty rate reduction should take place at the end of each subsequent twelve
(12) month period on each annual anniversary of the initial Product Launch
thereafter is two hundred thousand (200,000) units. Shipments of Royalty Bearing
Products between Logitech and the Logitech Affiliates or between Logitech
Affiliates will not be considered to be sold or otherwise transferred until sold
to an unrelated customer of Logitech or a Logitech Affiliate.
3.3 MOST FAVORABLE ROYALTIES. Immersion agrees that, in the event that
the royalty rates contained in any license agreement entered into by Immersion
and any third party governing the license of substantially similar Immersion
Technology for use in any joystick Gaming Device in the Gaming Field of Use that
has substantially similar force feedback functionality to the Joystick Product,
are less than the applicable rates for the Joystick Product herein, Immersion
hereby agrees that it will advise Logitech of such lesser royalty rates as of
the date such lesser royalties became effective for such other third party. Such
comparison will be on the basis of cash royalty rates only and will not apply in
situations where part of the consideration is a cross-license which is taken
into account in setting the cash royalty. Logitech shall have the right to have
an independent auditor mutually agreed upon by Logitech and Immersion audit
Immersion business records related to the performance of its obligations under
this Section 3.3 on an annual basis. Logitech shall pay the costs of such audit,
unless such audit reveals that Immersion is not in compliance with this Section
3.3, in which case other than termination Logitech's sole and exclusive remedy
will be, at Logitech's option, Immersion shall promptly credit Logitech's
account or repay any overpayment, the parties will amend the Agreement to
reflect the most favorable Royalty Rate and Immersion shall pay the reasonable
costs of such audit. Such audit shall be preceded by at least five (5) business
days advance written notice and shall be performed during normal business hours
by the auditor. The auditor shall have access to only those books and records of
Immersion that are reasonably necessary to determine the compliance by Immersion
with this Section 3.3. Any and all non-public information related to Immersion
or its business revealed in the course of such audit shall be kept confidential
by the auditor and by Logitech, and shall not be disclosed by the auditor to
anyone other than employees or professional
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advisors of Logitech who have a reasonable need to know in connection with such
audit, or used for any purpose, except to the extent reasonably necessary to
determine whether Immersion is in compliance with this Section 3.3.
3.4 PAYMENTS AND REPORTS. The royalties to be paid by Logitech to
Immersion hereunder shall be due forty-five (45) days after the close of each
Quarter. Royalty reports setting forth the royalty calculation by Product Model
and identifying whether the sales were made by Logitech or Logitech Affiliates
shall be included with such payments. Logitech will pay and account to Immersion
for royalties due hereunder with respect to sales or other disposition of
Royalty Bearing Products by any Logitech Affiliates, and for that purpose, sales
of Royalty Bearing Products by any Logitech Affiliate (other than sales or other
disposition by an Affiliate to Logitech or to another Logitech Affiliate) will
be deemed to be sales by Logitech.
3.5 AUDIT RIGHTS OF ROYALTY PAYMENTS. Immersion shall have the right to
have an independent auditor mutually agreed by Logitech and Immersion audit the
method used to calculate the average sales price, as well as the sales data
pursuant to Section 1.19 ("Net Receipts") and the royalty payments of Logitech
for itself and its Affiliates on an annual basis, but shall pay the costs of
such audit, unless such audit reveals any underpayment of royalties in an amount
greater than five percent (5%) of actual royalties due for any Year, in which
case Logitech shall promptly remit an amount equal to the underpayment and shall
pay the reasonable costs of such audit. Such audit shall be preceded by at least
five (5) business days advance written notice and shall be performed during
normal business hours by the auditor. The auditor shall have access to only
those books and records of Logitech which are reasonably necessary to determine
the relevant sales royalties due for Royalty Bearing Products for Logitech
itself and its Affiliates and the correctness of the royalty payments hereunder.
Any and all non-public information related to Logitech, its Affiliates, or their
business revealed in the course of such audit shall be kept confidential by the
auditor and by Immersion, and shall not be disclosed by the auditor to anyone
other than employees or professional advisors of Immersion who have a reasonable
need to know in connection with such audit, or used for any purpose, except to
the extent reasonably necessary to determine the correctness of royalty payments
made hereunder.
4. TERM AND TERMINATION
4.1 TERM. Unless earlier terminated in accordance with the provisions of
this Agreement, this Agreement will extend until the last to expire of the
Licensed Patents or any other Intellectual Property Right of Immersion licensed
hereunder.
4.2 TERMINATION BY LOGITECH.
4.2.1 TERMINATION WITHOUT CAUSE. Logitech may terminate this
Agreement without cause upon ninety (90) days written notice, and such written
notice
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under the terms of this Agreement shall also serve as written notice of the
termination of the Development Agreement, if such Agreement is still in effect
at such time, and the Development Agreement will then terminate within sixty
(60) days of such notice pursuant to the terms of Section 12.1 ("Termination by
Logitech Without Cause") and such termination shall be deemed to be a
termination without cause by Logitech and will be construed in accordance with
the terms of Section 12.3 ("Effect of Termination") therein.
4.2.2 TERMINATION WITH CAUSE. Logitech may terminate this
Agreement by written notice to Immersion if Immersion has materially breached
the terms of this Agreement and fails to cure the breach after written notice of
breach to Immersion and a thirty (30) day time period to cure.
4.3 TERMINATION BY IMMERSION FOR FAILURE TO PAY ROYALTIES. Immersion may
terminate this Agreement by written notice to Logitech in the event that
Logitech or any Logitech Affiliate breaches the terms of Section 3 ("Royalties")
including but not limited to any failure to pay any royalties due and payable by
Logitech and/or any of the Logitech Affiliates under this Agreement and Logitech
fails to cure such breach after written notice of breach and a thirty (30) day
time period to cure. If Immersion issues a written notice of termination to
Logitech under the terms of this Section 4.3 ("Termination by Immersion for
Failure to Pay Royalties") such notice shall also serve as written notice of
termination for cause by Immersion under the terms of Section 12.2 ("Termination
for Cause") of the Development Agreement, if such Agreement is still in effect
at such time. If the breach described in the aforementioned written notice of
termination is not cured in accordance with the terms of this Section 4.3
("Termination by Immersion for Failure to Pay Royalties"), the Development
Agreement will then terminate within thirty (30) days of such notice pursuant to
the terms of Section 12.2 ("Termination for Cause") and such termination will be
deemed to be a termination for cause by Immersion for purposes of Section 12.3
("Effect of Termination") and the effects of termination will be construed in
accordance with the terms of Section 12.3 ("Effects of Termination") therein.
4.4 TERMINATION BY IMMERSION FOR BREACH OF PATENT LICENSE. Immersion may
terminate this Agreement in the event that Logitech engages in activity which
exceeds the scope of the patent license granted in Section 2.1 or breaches the
labeling requirement of Section 2.5 and fails to cure the breach after written
notice of breach and a sixty (60) day time period to cure. Except as set forth
in this Section 4.4 or Section 4.3, the patent license granted in Section 2.1
shall not be terminable by Immersion. If Immersion issues a written notice of
termination to Logitech under the terms of this Section 4.4 ("Termination by
Immersion for Breach") such notice shall also serve as written notice of
termination for cause by Immersion under the terms of Section 12.2 ("Termination
for Cause") of the Development Agreement, if such Agreement is still in effect
at such time. If the breach described in the aforementioned written notice of
termination is not cured in accordance with the terms of this Section 4.4
("Termination by Immersion for Breach"), the Development Agreement will then
terminate within
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sixty (60) days of such notice pursuant to the terms of Section 12.2
("Termination for Cause") and such termination will be deemed to be a
termination for cause by Immersion for purposes of Section 12.3 ("Effect of
Termination") and the effects of termination will be construed in accordance
with the terms of Section 12.3 ("Effects of Termination") therein.
4.5 TERMINATION OF LICENSES TO IMMERSION PRODUCT MODEL TECHNOLOGY BY
IMMERSION FOR BREACH. Immersion may terminate the licenses granted with respect
to Immersion Product Model Technology in Section 2.2 above in the event that
Logitech engages in activity which exceeds the scope of such license or breaches
the terms of Section 2.3 or the labeling requirement of Section 2.5 and fails to
cure the breach after written notice of breach and a sixty (60) day time period
to cure. Termination of the licenses with respect to the Immersion Product Model
Technology shall not affect the patent licenses granted hereunder. Except as set
forth in this Section 4.5 or Section 4.3, the licenses granted in Section 2.2
shall not be terminable by Immersion.
4.6 EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement for any reason, Logitech agrees to pay Immersion for royalties due
under this Agreement from Logitech or any Logitech Affiliate. Upon a termination
of this Agreement for cause or without cause, Logitech and each Affiliate shall
have one hundred and twenty (120) days to distribute any remaining inventory in
process and in existence as of the effective date of the termination, subject to
the obligation for Logitech to pay royalties hereunder for any such distribution
by Logitech and/or any Logitech Affiliates. EXCEPT FOR DIRECT DAMAGES RESULTING
FROM A BREACH OF THE TERMS OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO A
BREACH BY LOGITECH OR ANY LOGITECH AFFILIATE OF SECTION 2 ("GRANT OF LICENSES"),
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY SORT AS A RESULT
OF TERMINATING THIS AGREEMENT IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT.
5. WARRANTY
Immersion represents and warrants that Immersion either has ownership
of, or sufficient rights in, the Immersion Product Model Technology to be
delivered under the terms of the Development Agreement and the Licensed Patents
to enter into this Agreement and grant all the rights set forth herein. As of
the Effective Date of the Agreement, Immersion is not aware of and has not
received any notice of any claim by a third party that the copyrights, patents,
trade secrets, trademarks or other intellectual property rights of any third
party are infringed by the Immersion Product Model Technology that Immersion, in
its sole discretion intends to, as of the Effective Date, use to comply with
Immersion's development obligations under the terms of the Development
Agreement, except as disclosed to Logitech in writing prior to the date of this
Agreement. Immersion further represents and warrants that (i) it neither holds
nor has applied for a patent that is dominant to the Licensed Patents and (ii)
that Schedule A
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contains all patent applications filed or contemplated to be filed as of the
Effective Date that relate to force-feedback technology.
6. INDEMNIFICATION
6.1 TRADEMARK INFRINGEMENT INDEMNIFICATION BY IMMERSION. Subject to the
limitations on cumulative liability under Section 7.1 ("Disclaimers of Certain
Types of Damages") and Section 7.3 ("Limitations of Liability with Respect to
Indemnity Obligations"), and Immersion's approval for Logitech to use the Legend
and the Marks pursuant to Section 2.5 ("Label Requirements"), Section 2.6
("Trademark License") and Section 2.7 ("Administrative Procedures") and further
subject to prompt notification by Logitech, cooperation by Logitech and control
of all litigation and/or settlement by Immersion, Immersion shall indemnify,
defend and hold Logitech harmless from and against any and all claims, damages,
liabilities, judgments, settlements, losses, costs and expenses (including court
costs and reasonable attorneys' and experts' fees) (collectively, "Costs")
suffered or incurred by Logitech arising out of a claim of infringement of any
Immersion Mark or Legend used by Logitech on a Gaming Device in the Gaming Field
of Use which is based on Logitech's use under the labeling requirement of
Section 2.5 ("Label Requirements") and/or the terms of Section 2.6 ("Trademark
License") and Section 2.7 ("Administrative Procedures"). In the case of an
infringement or alleged infringement by any such Immersion Mark or Legend used
by Logitech on a Gaming Device in the Gaming Field of Use: (i) Logitech will
have the right to remove such Marks and/or Legend from Logitech Gaming Devices
while any dispute or litigation concerning the same is pending, and shall begin
using such marks again only after such infringement claims or disputes have been
settled or dismissed with prejudice, and (ii) Immersion will have the right to
require Logitech to stop using such Marks and/or Legend and will provide a new
trademark to be used in connection with the Immersion Product Model Technology
and/or Licensed Patents, as applicable. Each party agrees to notify the other
promptly of any matters in respect to which the foregoing indemnity in this
Section 6.1 may apply. If notified in writing of any action or claim for which
Immersion is to provide indemnity, Immersion shall defend, subject to the
limitations of liability set forth in Section 7.1 ("Disclaimer of Certain Types
of Damages") and 7.3 ("Limitations of Liability With Respect to Indemnity
Obligations"), those actions or claims at Immersion's expense and pay the Costs
awarded against Logitech in any such action, or pay any settlement of such
action or claim entered into by Immersion.
6.2 COPYRIGHT INFRINGEMENT AND TRADE SECRET MISAPPROPRIATION
INDEMNIFICATION BY IMMERSION.
6.2.1 SCOPE. Subject to the limitations of cumulative liability
under Section 7.1 ("Disclaimer of Certain Types of Damages") and Section 7.3
("Limitations of Liability With Respect to Indemnity Obligations") and further
subject to prompt notification by Logitech, cooperation by Logitech and control
of all litigation and/or settlement by Immersion, Immersion shall indemnify,
defend and hold Logitech harmless from and against any and all Costs suffered or
incurred by Logitech as a result of any
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third party claim that any Immersion Product Model Technology delivered by
Immersion to Logitech infringes any copyright or misappropriates any trade
secret of any third party. In the case of any third party claim involving the
Immersion Software portion of the Immersion Product Model Technology, Immersion
may, in its sole discretion, provide Logitech with a modification to the
affected Immersion Software so that the Immersion Software portion of the
Immersion Product Model Technology becomes noninfringing or in the alternative,
may provide Logitech other software which is functionally equivalent. Each party
agrees to notify the other promptly of any matters in respect to which the
foregoing indemnity in this Section 6.2 ("Copyright Infringement and Trade
Secret Misappropriation Indemnification by Immersion") may apply. If notified in
writing of any action or claim for which Immersion is to provide indemnity,
Immersion shall defend, subject to the limitations of liability set forth in
Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of
Liability With Respect to Indemnity Obligations"), those actions or claims at
Immersion's expense and pay the Costs awarded against Logitech in any such
action, or pay any settlement of such action or claim entered into by Immersion.
6.2.2 EXCEPTIONS. The foregoing indemnity will not apply to any
infringement claim to the extent it arises from (i) any modification of any
Immersion Product Model Technology by parties other than Immersion or Immersion
subcontractors under contract with Immersion, (ii) use of any Immersion Product
Model Technology in conjunction with other non-Immersion products or components
where there would be no infringement absent such use with such other products or
components or (iii) an infringement which would not occur in the Immersion
Product Model Technology or any Final Prototype in which such Immersion Product
Model Technology is incorporated but which does occur in the final production
version of a Gaming Device.
6.3 PERSONAL INJURY AND PROPERTY DAMAGE CLAIMS. Neither party shall have
any obligation to indemnify, protect, defend and hold the other party harmless
from any Costs suffered or incurred by the other party to the extent such third
party claim or threatened claim arises from a personal or alleged personal
injury or damage or alleged damage to property arising out of the third party's
use of Gaming Devices.
6.4 PRODUCT LIABILITY INSURANCE. The Parties agree that they shall each
secure insurance covering product liability. Such insurance shall provide
coverage of at least ONE MILLION DOLLARS ($1,000,000) per occurrence and shall
remain in effect during the term of this Agreement. Each party will promptly
cause the other party to be named as an additional insured.
6.5 PATENT INFRINGEMENT INDEMNIFICATION BY IMMERSION.
6.5.1 SCOPE. Subject to the limitations of cumulative liability
under Section 7.1 ("Disclaimer of Certain Types of Damages") and Section 7.3
("Limitations of Liability With Respect to Indemnity Obligations"), and further
subject to prompt notification by Logitech, cooperation by Logitech and control
of all litigation and/or
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settlement by Immersion, Immersion shall indemnify, defend and hold harmless
Logitech from and against any and all Costs (except as provided in Section 6.5.3
below) suffered or incurred by Logitech as a result of any third party claim
that any Immersion Product Model Technology delivered by Immersion (for which
Logitech is currently paying royalties) infringes upon any United States patent.
Each Party agrees to notify the other promptly of any matters in respect to
which the foregoing indemnity in this Section 6.5 may apply. If notified in
writing of any action or claim for which Immersion is to provide indemnity,
Immersion shall defend, subject to the limitations of liability set forth in
Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of
Liability With Respect to Indemnity Obligations") and the provisions of Section
6.5.3 below, those actions or claims at its expense and pay the Costs awarded
against Logitech in any such action, or pay any settlement of such action or
claim entered into by Immersion. In any such action, Logitech will make
available to Immersion all defenses against such action or claim known or
available to Logitech.
6.5.2 EXCEPTIONS TO THE SCOPE OF THE INDEMNITY. Immersion shall
have no liability or obligation with respect to any claim of patent infringement
to the extent it arises from (a) Immersion's compliance with the Specifications
in Exhibit A of the Development Agreement for a Gaming Device, to the extent
such infringement would not have arisen but for compliance with such
Specifications, (b) use of Immersion Product Model Technology by Logitech or its
customers, subcontractors or any third party in or with an application,
embodiment or environment other than that for which the Immersion Product Model
Technology was designed as set forth in the applicable Specifications; (c)
modification of Immersion Product Model Technology by Logitech or its customers,
subcontractors or any third party; (d) the operation or use of any Immersion
Product Model Technology in combination with any Gaming Device, equipment or
technology not delivered by Immersion or recommended by Immersion pursuant to a
specific written obligation in the Specifications in Exhibit A of the
Development Agreement to make a recommendation; or (e) Immersion's compliance
with a Specification or any aspects or portions of the Specification which
"inherently" (as defined below) infringes any patent. For the purposes of this
Agreement "inherently" means that any device or aspect or portion of a device
which was in conformance with the Specification would infringe such patent.
6.5.3 EXCEPTIONS WITH RESPECT TO PATENTS ISSUED AFTER THE
EFFECTIVE DATE. The provisions of this Section 6.5.3 shall apply only with
respect to a United States patent issued after the Effective Date (an
"After-Issued Patent").
(a) NOTICE BY IMMERSION AND SUPPLY OF MODIFIED OR
SUBSTITUTE TECHNOLOGY. Logitech agrees to promptly notify Immersion if Logitech
becomes aware of an After-Issued Patent which Logitech reasonably believes is
infringed by any Immersion Product Model Technology that is the subject of an
indemnity obligation by Immersion hereunder. If upon receipt of notice from
Logitech or independently, Immersion becomes aware of an After-Issued Patent
which Immersion reasonably believes is infringed by any Immersion Product Model
Technology that is the
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subject of an indemnity obligation by Immersion hereunder, then Immersion will
notify Logitech in writing of such patent (the date of such notice being
referred to as the "Notice Date"). Within fifteen (15) days after the Notice
Date, Immersion shall supply Logitech with a written description and cost
estimate of a proposed redesign of the infringing Immersion Product Model
Technology to avoid the infringement. As reasonably promptly thereafter as
possible, Immersion shall supply Logitech with a modification to the affected
Immersion Product Model Technology so that the incorporated Immersion Product
Model Technology becomes noninfringing or substitute for the infringing
Immersion Product Model Technology other technology that conforms to the
Specifications in Exhibit A of the Development Agreement (which shall itself be
deemed to be Immersion Product Model Technology) or, if neither of the foregoing
are reasonably possible, procure for Logitech the right to continue to use such
Immersion Product Model Technology. If Immersion is unable to procure for
Logitech the right to continue to use such Immersion Product Model Technology
under commercially reasonable terms, as determined by Immersion, Immersion may,
in the alternative, refund to Logitech all royalties received by Immersion under
the Agreement relating to the allegedly infringing Immersion Product Model
Technology (reflecting any discounts granted to Logitech, less an amount for
depreciation calculated in a straight-line basis over an assumed useful life of
three (3) years).
(b) COSTS NOT COVERED BY INDEMNITY FOR AFTER-ISSUED
PATENTS. Immersion shall have no obligation to indemnify Logitech for
infringement of such After-Issued Patents with respect to any units of a Gaming
Device which are distributed or used by Logitech after the Notice Date.
Immersion shall have no liability hereunder to reimburse Logitech for any lost
inventory, retooling or other manufacturing costs incurred by Logitech that
result from Logitech's incorporation of such modified or substitute technology
in order to avoid infringement of an After-Issued Patent.
(c) ELECTION BY LOGITECH OF ALTERNATIVE REMEDY.
Notwithstanding the foregoing provisions, in any instance in which Immersion is
prepared and capable of supplying to Logitech modified or substitute technology
to avoid infringement of an After-Issued Patent, Logitech may, within a
reasonable time after receiving Immersion's written description and cost
estimate of Immersion's proposed redesign, elect either (i) to request, in
writing, that Immersion pursue a license under the After-Issued Patents on
behalf of Logitech to continue using the affected Immersion Product Model
Technology, in which event if such license would cost Immersion more than the
cost estimate provided by Immersion to Logitech, under the terms of (a) above,
to supply modified or substitute technology to avoid infringement, then Logitech
shall pay the difference between such costs, or (ii) to request, in writing,
that Logitech be allowed to continue to use the Immersion Product Model
Technology in unaltered form, in which event Immersion shall have no obligations
of indemnity or defense hereunder with respect to any infringement of the
After-Issued Patents resulting from copies of Gaming Devices incorporating the
unaltered Immersion Product Model Technology used or distributed by Logitech
after the Notice Date. If Immersion pursues the license
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described in (i) above, and is unable to procure such a license, Immersion will
not be in breach of this Agreement.
6.6 REMEDIES IN THE EVENT OF PROHIBITION OF USE. The provisions and
remedies set forth in Section 6.6 shall continue to be applicable with respect
to any copyright infringement or trade secret misappropriation under the terms
of Section 6.2 ("Copyright Infringement and Trade Secret Misappropriation"), and
any After-Issued Patents for which Immersion does not supply written notice to
Logitech in accordance with Section 6.5.3(a) above and any U.S. Patents issued
prior to the Effective Date of this Agreement. If a preliminary or final
judgment shall be obtained against Logitech's use, sale or distribution of a
Gaming Device that incorporates any Immersion Product Model Technology based
infringement within the scope of the indemnity set forth in Section 6.1, 6.2 or
6.5 (subject to the exceptions set forth therein), or if any Immersion Product
Model Technology is, or in Immersion's opinion, is likely to become, subject to
a claim for such infringement, then Immersion shall, at its expense, either (a)
modify the Immersion Product Model Technology so that the incorporated Immersion
Product Model Technology becomes noninfringing, or (b) procure for Logitech the
right to continue to use such Immersion Product Model Technology, or (c)
substitute for the infringing Immersion Product Model Technology other
technology that conforms to the Specifications in Exhibit A of the development
agreement (which shall itself be deemed to be Immersion Product Model
Technology). If (a), (b) or (c) are not commercially reasonable alternatives in
Immersion's opinion, Immersion shall refund to Logitech all royalties received
by Immersion under the Agreement relating to the allegedly infringing Immersion
Product Model Technology (reflecting any discounts granted to Logitech, less an
amount for depreciation calculated in a straight-line basis over an assumed
useful life of three (3) years).
6.7 INDEMNITY BY LOGITECH. Subject to the limitations of liability set
forth in Section 7 below, and subject to prompt notification by Immersion,
cooperation by Immersion and control of all litigation and/or settlement by
Logitech, Logitech shall indemnify, defend and hold harmless Immersion from and
against any and all Costs suffered or incurred by Immersion to the extent such
Costs are suffered or incurred by Immersion in the situations listed in the
exceptions (i) through (iii) enumerated in Section 6.2.2 above, and in the
exceptions (a) through (e) enumerated in Section 6.5.2 above, and/or in the
situation where Logitech and Immersion agree that Logitech will be allowed to
continue to use the Immersion Product Model Technology in unaltered form in
accordance with subsection (ii) of Section 6.5.3 (c) ("Election by Logitech of
Alternative Remedy"), provided that such situations arise because of Logitech's,
its subcontractors' or affiliates' use and modifications.
7. LIMITATIONS OF LIABILITY
7.1 DISCLAIMER OF CERTAIN TYPES OF DAMAGES. IN NO EVENT WILL LOGITECH
OR IMMERSION BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL,
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INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY
OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT. THIS
LIMITATION WILL APPLY EVEN IF LOGITECH AND IMMERSION HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE
OF ANY LIMITED REMEDY.
7.2 LIMITATIONS OF LIABILITY OTHER THAN INDEMNITY OBLIGATIONS. EXCEPT
WITH RESPECT TO THE PARTIES' OBLIGATIONS OF INDEMNITY, INCLUDING, BUT NOT
LIMITED TO COSTS OF DEFENSE AND "COSTS" (AS DEFINED ABOVE) SET FORTH IN SECTION
6 ABOVE WHICH ARE LIMITED BY THE TERMS OF SECTION 7.3 ("LIMITATIONS OF LIABILITY
WITH RESPECT TO INDEMNITY OBLIGATIONS") AND WITH RESPECT TO ANY ROYALTIES DUE
AND PAYABLE BY LOGITECH HEREUNDER, IN NO CASE WILL EITHER PARTY'S TOTAL
CUMULATIVE LIABILITY OR OBLIGATIONS UNDER THE TERMS OF OR ARISING OUT OF THIS
AGREEMENT EXCEED $1,000,000.
7.3 LIMITATIONS OF LIABILITY WITH RESPECT TO INDEMNITY OBLIGATIONS. IN
NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY WITH RESPECT TO ITS
OBLIGATIONS OF INDEMNITY INCLUDING, BUT NOT LIMITED TO COSTS OF DEFENSE AND
"COSTS" (AS DEFINED ABOVE) UNDER SECTION 6 ABOVE EXCEED THE GREATER OF (i)
$500,000 OR (ii) ROYALTIES PAID OR PAYABLE BY LOGITECH TO IMMERSION HEREUNDER
FOR THE THIRTY-SIX (36) MONTHS PRECEDING THE EVENT FIRST GIVING RISE TO SUCH
OBLIGATIONS.
7.4 NEGATION OF WARRANTIES AND OTHER OBLIGATIONS.
7.4.1 Nothing in this Agreement shall be construed:
(i) as a warranty or representation by Immersion as to
the validity or scope of any Licensed Patents;
(ii) as a warranty or representation that anything made,
used, sold or otherwise disposed of under any
license granted in this Agreement is or will be
free from infringement by patents, copyrights,
trade secrets, trademarks, or other rights of third
parties;
(iii) as granting by implication, estoppel or otherwise
any licenses or rights under patents or other
Intellectual Property Rights of Immersion other
than expressly granted herein, regardless of
whether such patents are dominant or subordinate to
any Licensed Patents, or
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(iv) (a) to require Immersion to file any patent
application relating to force-feedback in Gaming
Devices, (b) a warranty that Immersion will be
successful in securing the grant of any patent
relating to force-feedback in Gaming Devices or
any reissue or extensions thereof, and (c) to
require Immersion to pay any maintenance fees or
take any other steps to maintain Immersion's patent
rights relating to force feedback in Gaming
Devices, provided, however, that in the event
Immersion elects not to pay any maintenance fee or
take any step to maintain such patents, Immersion
shall so notify Logitech a reasonable period in
advance and Logitech may, at its option, pay such
maintenance fee or take such steps.
7.4.2 Except for Immersion's obligations of indemnity set forth
herein, Immersion does not assume any responsibility for the definition of the
Specifications, the manufacture of the Gaming Devices, or use of any Gaming
Device which is manufactured or sold by or for Logitech or the Logitech
Affiliates under the Licensed Patent licenses granted herein. All warranties in
connection with such Gaming Devices shall be made by Logitech or the Logitech
Affiliates as manufacturers or sellers of such Gaming Devices and such
warranties shall not directly or by implication obligate Immersion in any way.
8. THIRD PARTY ENFORCEMENT
Immersion shall not have any obligation or duty under this Agreement to
any party, including but not limited to Logitech, to enforce any patents or
Licensed Patents against any third party infringing any claim or claims of any
patent and/or the Licensed Patents provided, however, that should Logitech
become aware of any actual infringement of the Licensed Patents by a Gaming
Device distributed in the Gaming Field of Use by a third party, which Gaming
Device directly competes (e.g. Joystick to Joystick or wheel to wheel) with a
Gaming Device currently shipped by Logitech which is covered by the Licensed
Patents, Logitech will promptly communicate the details to Immersion. Immersion
shall thereupon have the right to take no action or whatever action Immersion
deems necessary, including cease and desist letters, negotiation, the filing of
lawsuits, and/or settlement to terminate such infringement and the strategy
and/or conclusion of such action or settlement shall be within Immersion's sole
discretion. Logitech shall cooperate with Immersion if Immersion takes any such
action but all expenses of Immersion shall be borne by Immersion. If Immersion
recovers any damages or compensation for any action Immersion takes hereunder,
including any settlement, Immersion shall retain one hundred percent (100%) of
such damages. If Immersion does not elect to take any action hereunder within
sixty (60) days of being made aware of such infringement by Logitech, then
Logitech shall have the right, but not the obligation, to provide Immersion with
a Patent Enforcement Justification, as defined below, and if the
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proposed enforcement action meets the Patent Enforcement Justification criteria,
Logitech may take and control any such action, subject to Immersion's absolute
right to control any and all assertions or admissions which relate to the scope
or validity of Immersion's Licensed Patents. For purposes of this Section 8, a
Patent Enforcement Justification is a written report prepared by Logitech which
includes: (i) the name and address of the entity manufacturing the Gaming Device
that is allegedly infringing the Licensed Patents and the names and addresses of
any entities distributing such Gaming Device, (ii) an analysis of which of the
Licensed Patent claims are infringed, (iii) a comparison of the allegedly
infringing Gaming Device and the affected Gaming Device distributed by Logitech
with which such allegedly infringing Gaming Device competes (which comparison
analyzes the competitive threat as to (a) feature and function, (b) positioning,
and (c) price point), (iv) the number of units of the Gaming Device sold by
Logitech in the most recent four (4) full Quarters and, if known or reasonably
estimable, the number or estimate of the number of units of the allegedly
infringing Gaming Device sold in the most recent four (4) full Quarters, on a
geographic area basis. The criteria which must be met by such report, in order
to permit Logitech to "justify" and to go forward with an infringement action,
as are follows:
(i) Logitech must be selling over 50,000 units of the affected Gaming
Device in the market in which the infringement is occurring
during the most recent four (4) full Quarters or, if the Product
Launch occurred during the most recent four (4) full Quarters,
Logitech reasonably estimates in good faith that it will sell
over 50,000 units of the affected Gaming Device in the market in
which the infringement is occurring during the next four (4) full
Quarters;
(ii) the allegedly infringing Gaming Device must be substantially
similar to the affected Gaming Device as to features and
functions such that the allegedly infringing Gaming Device is
having or reasonably will have a serious impact on the sales of
the affected Logitech Gaming Device;
(iii) the Licensed Patents to be enforced against the allegedly
infringing Gaming Device also cover the affected Logitech Gaming
Device; and
(iv) the number of units of the allegedly infringing Gaming Device
sold in the market in which the infringement is occurring in the
most recent four (4) full Quarters or reasonably estimated in
good faith to be sold in the next four (4) full Quarters must
meet or exceed 50,000 units.
If the aforementioned criteria are met, Immersion will cooperate with Logitech,
at Logitech's expense, including but not limited to joining any legal
proceedings as a named plaintiff to the extent required to confer jurisdiction,
and all of Logitech's expenses will be borne by Logitech. Immersion may elect to
have counsel of its own choosing participate at Immersion's sole expense in any
legal proceedings instituted by Logitech, but Logitech shall retain one hundred
percent (100%) of any damages Logitech recovers for any such proceedings
including any settlement, provided however that (i) Logitech
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shall first reimburse Immersion for Immersion's Costs to participate in such
action out of any recovery which exceeds Logitech's Costs for such action.
Immersion must agree to any settlement of any infringement or of any action
brought hereunder by Logitech, which consent will not be unreasonably withheld.
9. GENERAL
9.1 ENTIRE AGREEMENT. This Agreement and its Appendices, together with
the Development Agreement and its Exhibits, constitutes the complete agreement
of the parties and supersedes any other agreements, written or oral (including
all correspondence, emails and the letter regarding Phase 0 dated October 4,
1996 and the letter regarding Phase 1 dated November 8, 1996, and the two
letters each dated January 29, and a letter dated February 21, 1997 regarding
extension of the November 8, 1996 letter and continued business relationship
between the Parties and all such subsequent extension letters) concerning the
subject matter hereof and such materials do not have any effect upon the rights
and obligations of the Parties under this Agreement.
9.2 SUCCESSION AND ASSIGNMENT. Either party may assign this Agreement
provided that the other party has consented in writing to the assignment or
delegation and provided, further, that the rights and obligations of the parties
may be assigned to a corporate successor in interest in the case of a merger or
acquisition or in the case of a sale of assets without the prior approval of the
other party. Any attempt to assign this Agreement in violation of the provisions
of this Section 9.2 shall be void.
9.3 NOTICES. Notices required under this Agreement shall be addressed as
follows, except as otherwise revised by written notice:
TO IMMERSION: TO LOGITECH:
Louis B. Rosenberg, Ph. D. General Counsel
President Logitech, Inc.
Immersion Corporation 6505 Kaiser Drive
2158 Paragon Drive Fremont, CA 94555-3615
San Jose, CA 95131
9.4 GOVERNING LAW. The validity, interpretation and performance of this
Agreement shall be governed by the substantive laws of the State of California,
without the application of any principle that leads to the application of the
laws of any other jurisdiction.
9.5 NO AGENCY. Neither party is to be construed as the agent, partner,
or joint venturer or to be acting as the agent, partner or joint venturer of the
other party hereunder in any respect.
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9.6 NO RECRUITMENT. During the term of this Agreement and for one (1)
year after the termination or expiration of this Agreement, each Party agrees
not to recruit any employee of the other Party.
9.7 MULTIPLE COUNTERPARTS. This Agreement may be executed in several
counterparts, all of which taken together shall constitute one single Agreement
between the parties.
9.8 NO WAIVER. No delay or omission by either Party hereto to exercise
any right or power occurring upon any noncompliance or default by the other
Party with respect to any of the terms of this Agreement shall impair any such
right or power or be construed to be a waiver thereof. A waiver by either of the
Parties hereto of any of the covenants, conditions, or agreements to be
performed by the other shall not be construed to be a waiver of any succeeding
breach thereof or of any covenant, condition, or agreement herein contained.
Unless stated otherwise, all remedies provided for in this Agreement shall be
cumulative and in addition to and not in lieu of any other remedies available to
either party at law, in equity, or otherwise.
9.9 SEVERABILITY. If any one or more of the provisions of this Agreement
shall be held to be invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
9.10 AMENDMENTS IN WRITING. Any amendment to this Agreement shall be in
writing and signed by both parties hereto.
9.11 INTERPRETATION. Since this Agreement was prepared by both parties
hereto, it shall not be construed against any one party as the drafting party.
9.12 DISPUTE RESOLUTION. Except in the case of a breach of an obligation
related to a Party's Intellectual Property Rights, in the event either Party
concludes that it is in its best interest to file any legal action against the
other, the Party shall contact the other Party's management and at least two (2)
senior managers from each Party shall meet without legal counsel or interruption
for a minimum amount of three (3) eight (8) hour periods and diligently attempt
to resolve all disputed matters. If the Parties are unable to resolve their
difference and either Party desires to file a legal action against the other, at
least two (2) senior managers from each Party and their respective counsels
shall meet for three (3) eight (8) hour periods and diligently attempt to
resolve all disputed matters. Either Party may request that an independent third
party bound to mutually agreed upon obligations of confidentiality attend such
meeting in order to assist the Parties in reaching a reasonable resolution. All
oral and written information exchanged in these meetings shall be exchanged in
an effort to settle all disputed matters. If either Party still desires to file
a legal action against the other after these prescribed meetings, such Party may
file a legal action against the other Party as allowed by applicable law in
Santa Clara County state court or in the federal court. The Parties agree that
if a Party does not attend all of
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<PAGE> 22
the prescribed meetings it waives its rights to any monetary damages in the
legal action(s) it files.
9.13 SURVIVAL. Sections 3.2, 3.4, 3.5, 4.6, 5, 7 and 9 shall survive any
termination or expiration of this Agreement. In addition, the provisions of
Sections 6.1, 6.2, 6.5, 6.6 and 6.7 shall survive with respect to any units of a
Product Model of Royalty Bearing Products sold or otherwise distributed by
Logitech before the termination or expiration of this Agreement, provided,
however, that Immersion's obligations of indemnity under Sections 6.1, 6.2, 6.5
and 6.6 shall not survive in the event Immersion terminates this Agreement for
cause, including but not limited to, failure by Logitech to pay royalties due
hereunder.
9.14 FORCE MAJEURE. With the exception of the obligation to pay monies
due and owing, each Party hereto shall be excused from performance hereunder for
any period and to the extent that it is prevented from performing any services
pursuant hereto, in whole or in part, as a result of delays caused by the other
Party or an act of God, war, civil disturbance, court order, governmental
action, laws, orders, regulations, directions or requests, or as a result of
events such as acts of public enemies, earthquakes, fires, floods, strikes or
other labor disturbances of the other Party or any third party, or other cause
beyond its reasonable control and which it could not have prevented by
reasonable precautions, and such nonperformance shall not be a default hereunder
or a ground for termination hereof.
9.15 RESTRICTED USE OF SCHEDULE A. Logitech agrees to keep the serial
numbers of the pending patent applications set forth in Schedules A1 and A2
confidential until such applications issue or such information is otherwise made
available to the public by Immersion, and agrees not to use the information in
Schedule A for any purpose other than the performance or enforcement of this
Agreement, including but not limited to using the information to initiate
interference proceedings.
Upon execution of this Agreement, Schedule A1 shall be supplied by
Immersion to Logitech in an envelope marked "IMMERSION CONFIDENTIAL INFORMATION
SCHEDULE A1 TO INTELLECTUAL PROPERTY LICENSE AGREEMENT. TO BE SEEN BY LOGITECH
INC. PRESIDENT, CHAIRMAN OF THE BOARD, GENERAL COUNSEL AND OUTSIDE COUNSEL
ONLY." Schedule A1 shall include the serial numbers (for issued License Patents)
and the application numbers (of pending Licensed Patent applications), and the
jurisdictions where such patents have issued and where such applications have
been filed. Schedule A1 may only be reviewed by Logitech Inc.'s President,
Chairman, General Counsel and outside lawyers. Schedule A1 shall be maintained
in a sealed envelope in a secure location with Logitech.
Upon execution of the Agreement, Schedule A2 shall be supplied by
Immersion to Logitech in a sealed envelope marked "IMMERSION CONFIDENTIAL
INFORMATION SCHEDULE A2 TO INTELLECTUAL PROPERTY LICENSE AGREEMENT. TO BE SEEN
BY LOGITECH INC. PRESIDENT, CHAIRMAN OF
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THE BOARD, GENERAL COUNSEL AND OUTSIDE COUNSEL ONLY." Schedule A2 shall include
all the information included in Schedule A1 as well as the titles and filing
dates of the applications. Schedule A2 will not be opened except as may be
necessary to perform or enforce this Agreement. Schedule A2 shall be maintained
in a sealed envelope in a secure location within Logitech.
IN WITNESS WHEREOF, the authorized representatives of the parties hereto
have signed this Agreement as of the date and year last set forth below.
LOGITECH, INC. IMMERSION CORPORATION
By: /s/ B. Zwarenstein By: /s/ Louis Rosenberg
------------------------- -----------------------------
Name: B. Zwarenstein Name: Louis Rosenberg
------------------------- -----------------------------
Title: CFO Title: President/CEO
------------------------- -----------------------------
Date: 4/2/97 Date: 4/2/97
--------------------------- -------------------------------
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EXHIBIT A
Specification
Immersion shall develop a Joystick Product to conform to the following
specifications: The Joystick Product shall be a two degree of freedom joystick
style interface with active force feedback functionality. It must be compatible
with Intel based personal computers running Microsoft Windows 95 operating
system. It must connect to the PC through a universal Serial Bus ("USB")
interface using the USB communication protocol for "PID" class devices. The
completed work must include hose drivers, firmware and electromechanical
hardware that work together to allow force feedback sensations to be generated
by a processor on-board the Joystick Product. Said sensations must be
appropriately coordinated with events running in host gaming applications. The
programming of coordination between force sensations and gaming events will be
achieved using a high-level Application Programming Interface ("API") that
allows game developers to command force feedback sensations from their
applications. The Windows API will use the "Direct-X" force feedback
implementations as its core and the Joystick Product must have compatible
firmware that locally produces all key features supported by the current
Direct-X 5.0 (Direct-Input) specification. The API will also enable advanced
features not directly specified by Direct-X. The API will be functional within
Windows 95, DOS-Box, and Windows 97 environments. The Joystick Product will be
an "all digital" implementation.
Requirement Overview: The Joystick Product must be a high quality,
premium joystick capable of reproducing realistic feedback during action gaming.
It must be manufactured at a reasonable cost for the mass market. The product
must consist of the following subsystems:
Handle: Logitech to provide the design. The handle will be based on the
Wingman Extreme Digital handle industrial design with possible modifications to
allow the main handle shaft to be strengthened. A deadman switch is not required
from Immersion but may be included.
Gimbal: Immersion to provide the design concept. The gimbal must provide
two rotary degrees of freedom of the joystick handle with respect to two
grounded actuators. The cost shall be kept under [****] each.
Transmission: Immersion to provide the design concept. The transmission
will be a low backlash method of conveying mechanical power from motors to the
gimbal while creating a mechanical advantage.
Actuators: Immersion to make the motor recommendation and suggest
vendors. Primary goals will be low cost (less than [****] each) and minimal
cogging.
*Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 25
CONFIDENTIAL TREATMENT REQUESTED - EDITED COPY
Base Enclosure: Bridge Design to provide the industrial design.
Immersion must provide Bridge with envelope requirements.
Spring Centering: Immersion to provide spring centering concept with
similar force profile to other commercial Logitech joysticks.
Power Electronics: Immersion must provide the initial design. There will
be an external power source (brick). Combined cost will be under [****].
Microprocessor and Interface Electronics: Immersion must provide the
microprocessor board design and the firmware to create local force feedback
sensations. Design will be USB high speed compatible. It will allow for a
maximum of eight (8) switches and one (1) throttle control. Combined cost will
be under [****] in volume.
Sensors: Immersion must provide recommendation and design implementation
for sensors that monitor the motion of the gimbal and report such data back to
the host across the USB via the microprocessor.
Embedded Software: Immersion must provide. The embedded software will be
Direct-X and I-Force 2.0 compatible and USB enabled.
Host Software: Immersion must provide drivers that allow force feedback
interaction from DOS Box, Windows 95, and Windows 97. (Logitech will provide an
LES control panel).
Switches and Buttons: In addition to the buttons provided within the
Logitech designed handle, the joystick will contain the following:
Three Position Switch: This button will provide three levels
of force feedback. Off, standard play levels, and a maximum or "turbo" mode for
demo purposes. In the off mode the joystick must function as a standard joystick
without external power.
Base Buttons: The base shall allow for 4 to 8 buttons for the
user to program.
Throttle Control: The base shall allow for a single throttle
control.
Product Details: The product must perform as follows:
Range of Motion: at least [****] degrees in both axes of gimbal
Force Output: A minimum of [****] in each axis
Dimensions: The size shall be minimized within the constraints of packaging.
Weight: 2 to 3 lbs.
Power Consumption: 10 to 40 watts
*Certain information in this document has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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EXHIBIT B
Immersion Packaging Labeling Specification
Logitech must place or have placed the following notice or other similar mark,
at Immersion's request, on the underside (exterior) of those products which
incorporate Licensed Technology as well as on the packaging and manuals for such
products:
"I-Force(TM) Force Feedback Technology Licensed from Immersion Corporation"
Logitech must also place or have placed the following I-FORCE logo (or future
derivative of the mark as reasonably approved by Logitech) at Immersion's
request, prominently on retail packaging and manuals provided that the logo is
clearly legible and occupies a rectangular area of no less than one square inch.
The mark must be displayed on at least two surfaces of the retail packaging,
including the front surface and specifically not including the bottom surface.
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Immersion Corporation Confidential SCHEDULE A1
<TABLE>
<CAPTION>
ID Where Serial Number
-- ----- -------------
<S> <C> <C> <C>
1 P003 USA 08/275,120
2 P004 USA 08/344/148
3 P004-P PCT PCT/15301
4 P005 USA 08/374,288
5 P006 USA 08/400,233
6 P006-P PCT PCT/00701
7 P007A USA 08/784,198
8 P007US USA 08/583,032
9 P007-P PCT PCT/07851
10 P007-C Canada 2,167,304
11 P008 USA 08/489,068
12 P008-P PCT PCT/09664
13 P012 USA 08/534,791
14 P013 USA 08/560,091
15 P014 USA 08/566,282
16 P014P PCT PCT/15373
17 P015 USA [****]
18 P015P PCT PCT/01441
19 P016 USA 08/623,660
20 P016P PCT PCT/15350
21 P017 USA [****]
22 P018 USA [****]
23 P019 USA [****]
24 P020 USA 08/691,852
25 P022 USA 08/747,841
26 ISSUE-1 USA 5,576,727
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
27
<PAGE> 28
Immersion Corporation Confidential SCHEDULE A2
<TABLE>
<CAPTION>
ID Where Serial Number Date Title
-- ----- ------------- ---- -----
<S> <C> <C> <C> <C>
1 P003 USA 08/275,120 07/14/97 Method and Apparatus for Providing Mechanical I/O for Computer Systems
2 P004 USA 08/344/148 10/23/94 Method and Apparatus for Providing Mechanical I/O for Computer Systems
3 P004-P PCT PCT/15301 10/22/95 Method and Apparatus for Providing Mechanical I/O for Computer Systems
4 P005 USA 08/374,288 01/18/95 Method and Apparatus for Providing High Bandwidth Low Noise Force Feedback
5 P006 USA 08/400,233 03/03/95 Method and Apparatus for Providing Passive Force Feedback
6 P006-P PCT PCT/00701 01/17/96 Method and Apparatus for Providing High Bandwidth Low Noise Force Feedback
7 P007A USA 08/784,198 01/15/97 Multi Degree of Freedom Interface with Force Feedback
8 P007US USA 08/583,032 02/16/96 Electromechanical Human Interface with Force Feedback
9 P007-P PCT PCT/07851 07/12/94 Electromechanical Human Interface with Force Feedback
10 P007-C Canada 2,167,304 07/12/94 Electromechanical Human Interface with Force Feedback
11 P008 USA 08/489,068 06/07/97 Method and Apparatus for Passive Fluid Feedback
12 P008-P PCT PCT/09664 06/07/96 Method and Apparatus for Passive Fluid Force Feedback
13 P012 USA 08/534,791 09/27/95 Method and Apparatus for Controlling Human Computer Interaction
14 P013 USA 08/560,091 10/17/95 Method and Apparatus for Providing Low Cost Force Feedback
15 P014 USA 08/566,282 12/01/95 Method and Apparatus for Controlling Force Feedback
16 P014P PCT PCT/15373 09/25/96 Method and Apparatus for Controlling Force Feedback
17 PO15 USA [****] [****] [****]
18 P015P PCT PCT/01441 10/26/96 Method and Apparatus for Providing Force Feedback for a
19 P016 USA 08/623,660 03/28/96 Safe and Low Cost Computer Peripherals with Force Feedback
20 P016P PCT PCT/15350 09/25/95 Safe and Low Cost Computer Peripherals with Force Feedback
21 PO17 USA [****] [****] [****]
22 PO18 USA [****] [****] [****]
23 PO19 USA [****] [****] [****]
24 P020 USA 08/691,852 08/01/96 Method and Apparatus for Providing Force Feedback Over a Network
25 P022 USA 08/747,841 11/13/96 Method and Apparatus for Shaping Force Signals
26 ISSUE-1 USA 5,576,727 10/19/96 Electromechanical Human Interface with Force Feedback
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
28
<PAGE> 1
EXHIBIT 10.19
*Certain information in this document has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
INTELLECTUAL PROPERTY LICENSE AGREEMENT
IMMERSION CORPORATION AND LOGITECH, INC.
This Intellectual Property License Agreement (the "Agreement") between
Immersion Corporation, a California corporation, with principal offices in San
Jose, California (hereinafter "Immersion") and Logitech Inc., a California
corporation, with principal offices in Fremont, California (hereinafter
"Logitech"), is entered into as of April 13, 1998 (the "Effective Date").
RECITALS
A. Immersion is the owner of several United States patent applications
and several issued United States patents relating to certain force-feedback
technology.
B. Concurrently with this Agreement, Immersion and Logitech are entering
into a Technology Product Development Agreement and an OEM Purchase Agreement,
each of which are dated the same date as this Agreement. Pursuant to the
Technology Product Development Agreement, Immersion will develop and deliver to
Logitech certain deliverables which are covered by copyrights and trade secret
rights owned by Immersion, as well as patents now held or that may issue to
Immersion in the future. Pursuant to the OEM Purchase Agreement, Immersion will
supply certain components to Logitech to be used in peripheral devices produced
by Logitech.
C. Logitech intends to develop "Planar Force Feedback Cursor Control
Devices" (as defined below) which may or may not incorporate or utilize the
deliverables to be delivered under the Technology Product Development Agreement.
D. The parties desire that Immersion grant a license to Logitech under
the foregoing intellectual property rights of Immersion to develop and
distribute Planar Force Feedback Cursor Control Devices, which incorporate or
utilize the deliverables to be delivered under the Technology Product
Development Agreement, all on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the promises and agreements set
forth below and the other consideration cited herein, the parties agree as
follows.
1. DEFINITIONS
In this Agreement the following words and expressions shall have the
following meanings:
1.1 AFFILIATES. This means any corporation or business entity which is
controlled by, controls, or is under common control of a Party. For this
purpose, the meaning of the word "control" shall include, without limitation,
direct or indirect ownership of more than fifty percent (50%) of the voting
shares of interest of such corporation or business entity.
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1.2 DEFECT CORRECTION. This means either a modification or addition that
eliminates or works around a Defect in a non-software Deliverable so as to cause
the non-software Deliverable to comply with the applicable then-current
Specification.
1.3 DEFECT. This means, with respect to any non-software Deliverable,
failure to materially conform to the applicable then-current Specifications for
such non-software Deliverable.
1.4 DELIVERABLES. This means the various deliverables, which are
tangible implementations or items including interim deliverables or final
prototype deliverables, identified as such and described in any development
schedule to the Development Agreement and delivered to Logitech thereunder.
1.5 DEVELOPMENT AGREEMENT. This means the Technology Product Development
Agreement between Immersion and Logitech dated the same date as this Agreement.
1.6 ENHANCEMENT OR ENHANCEMENTS. This means any force-feedback
modification or addition made by Immersion, under the terms of Section 6.7
("Other Development") and Section 7.2 ("Enhancements by Immersion") of the
Development Agreement for the Planar Force Feedback Cursor Control Field of Use,
and which is a tangible implementation other than a Defect Correction or Error
Correction, that when incorporated into the Planar Force Feedback Cursor Control
Device, materially reduces product costs of a Planar Force Feedback Cursor
Control Device or materially changes the functional capability or form factor.
1.7 ERROR CORRECTION. This means either a modification or addition that
eliminates or works around an Error in the software Deliverable so as to cause
the software Deliverable to comply with the then-current Specification.
1.8 ERROR. This means, with respect to any software Deliverable, failure
of any such software Deliverable to materially conform to the applicable
then-current Specification for such software Deliverable.
1.9 FEELIT MOUSE PRODUCT. This means the final production version of the
mouse product described in the Specification in the first Exhibit A
("Specifications") of the Development Agreement which utilizes and/or contains
Immersion Product Model Technology, including but not limited to the applicable
Immersion Software, documentation, Defect Corrections and Error Corrections
thereto.
1.10 FINAL PROTOTYPE. This means a Deliverable which is the final
functional form of the Planar Force Feedback Cursor Control Device, if any,
including software and hardware, produced by Immersion under a development
schedule to the Development Agreement, which prototype serves as a model for the
final production version of the Planar Force Feedback Cursor Control Device, if
any, and which conforms to the applicable Specification.
1.11 IMMERSION PRODUCT MODEL TECHNOLOGY. This means that subset of
Immersion Technology delivered as a Deliverable under the terms of a development
schedule of the
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Development Agreement, or as an Enhancement or New Technology, which is actually
utilized in or in connection with and/or embedded in the final production
version of the FEELit Mouse Product, any subsequent Product Model of the FEELit
Mouse Product or any Product Model of any Planar Force Feedback Cursor Control
Device.
1.12 IMMERSION SOFTWARE. This means the driver software and computer
firmware subset of the Immersion Product Model Technology actually utilized in
or in connection with and/or embedded in the final production version of the
FEELit Mouse Product, any subsequent Product Model of the FEELit Mouse Product
or any Product Model of any Planar Force Feedback Cursor Control Device that
acts as an interface to and controls the FEELit Mouse Product, any subsequent
Product Model of the FEELit Mouse Product or any Planar Force Feedback Cursor
Control Device.
1.13 IMMERSION TECHNOLOGY. This means any and all technology created or
acquired by Immersion, or licensed to Immersion by third parties, including but
not limited to software created by employees or consultants of Immersion, (i)
first developed or reduced to practice before or after the Effective Date solely
by Immersion independent of the scope of the work under the Development
Agreement or (ii) first developed or reduced to practice after the Effective
Date and within the scope of a Deliverable developed solely by Immersion (a)
under a development schedule in effect under the terms of the Development
Agreement, (b) as an Enhancement or (c) as New Technology.
1.14 INTELLECTUAL PROPERTY RIGHTS. This means the Licensed Patents and
utility models, copyrights and mask work rights, including without limitation
all applications and registrations with respect thereto, rights in trade
secrets, know-how, and all other intellectual property rights, excluding
trademarks and tradenames and patents other than the Licensed Patents.
1.15 LICENSED PATENTS. This means any and all patents owned or
licensable by Immersion at any time during the term of this Agreement containing
one or more claims which cover any Planar Force Feedback Cursor Control Device.
1.16 PLANAR FORCE FEEDBACK CURSOR CONTROL FIELD OF USE. This means the
market for Planar Force Feedback Cursor Control Devices which are not targeted
for use in specific applications or designed for specific applications. The
Planar Force Feedback Cursor Device Field of Use does not include the market for
products specifically targeted for use in gaming, medical, industrial, human
disabilities, military, automotive, scientific and arcade products and
applications.
1.17 PLANAR FORCE FEEDBACK CURSOR CONTROL DEVICE(S). This means (i) a
force feedback computer cursor control device having the capability of tracking
position of an endpoint in a two dimensional plane and applying two dimensional
planar forces upon the user through said endpoint and (ii) one dimensional force
feedback cursor control embodiments, including but not limited to a force
feedback roller for "roller mouse" cursor control embodiments. Planar Force
Feedback Cursor Control Devices include but are not limited to the FEELit Mouse
Product. The endpoint may be a mouse handle, stylus, finger tip receptacle,
ball,
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or other manipulandum that can be moved by the user in two dimensional plane. A
Planar Force Feedback Cursor Control Device can be mounted in any housing
including but not limited to a housing shared by a keyboard, track ball or other
interface peripheral that provides additional functionality. Planar Force
Feedback Cursor Control Devices specifically do not include (i) devices that can
apply three dimensional forces through the device or (ii) a "Gaming Device" as
that term is defined in the Intellectual Property License Agreement between
Immersion and Logitech dated April 2, 1997.
1.18 NET RECEIPTS. This means the gross receipts received by Logitech
and its Affiliates without taking into account any foreign withholding taxes
that may apply to transfers between Logitech and its affiliates upon any sales
of Royalty Bearing Products to unaffiliated third parties, less any actual
returns and/or credits actually credited to a customer's account in accordance
with Logitech's standard accounting practices applied in good faith. Net
Receipts shall not include freight, insurance and taxes. No other costs incurred
in the manufacture, sale, distribution, or exploitation of Royalty Bearing
Products shall be deducted from gross receipts in the calculation of Net
Receipts. If Royalty Bearing Products are bundled with other items sold by
Logitech or its Affiliates and are not invoiced separately, royalties will be
paid based on Logitech's then-current average sales price for each such Royalty
Bearing Product (or if no Logitech averages sales price exists, the applicable
Affiliate average sales price) when sold as a separate item (averaged for the
applicable Quarter in which the Net Receipts are received by Logitech or its
Affiliates, as applicable, for the country in which the sale was made) in like
quantities in arms length transactions to unrelated third parties other than
Logitech or Logitech Affiliates).
1.19 NEW TECHNOLOGY. This means any force-feedback technology
modification or addition made by Immersion, for the Planar Force Feedback Cursor
Control Field of Use, other than a Defect Correction or Error Correction, that
when incorporated into the FEELit Mouse Product or other Planar Force Feedback
Cursor Control Device, materially changes the utility, efficiency, market value,
functional capability or application, and which is developed by Immersion on a
non-exclusive basis and made "generally available" for use in Planar Force
Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control
Field of Use and which is delivered by Immersion to Logitech as a tangible
implementation pursuant to the terms of Section 7.4 ("New Technology") of the
Development Agreement. For purposes of this definition, "generally available"
shall mean offered under nonexclusive license to any one unaffiliated third
party (other than the original third party for whom the technology, modification
or addition was originally developed) for use in Planar Force Feedback Cursor
Control Devices in the Planar Force Feedback Cursor Control Field of Use.
1.20 OEM OR OEMS. This means any third party (not including Affiliates)
that does not manufacture Planar Force Feedback Cursor Control Devices and that
wishes to purchase finished Planar Force Feedback Cursor Control Devices for
sale in the Planar Force Feedback Cursor Control Field of Use under its own
brand name.
1.21 PARTY OR PARTIES. This means Immersion and/or Logitech.
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1.22 PRODUCT LAUNCH. This means the date on which first commercial-level
shipping of the FEELit Mouse Product or any Product Model commences to third
party unaffiliated customers of Logitech or a Logitech Affiliate.
1.23 PRODUCT MODEL. This means a single model of the FEELit Mouse
Product or any other Planar Force Feedback Cursor Control Device. "Product
Model" shall mean each variation of a FEELit Mouse Product or Planar Force
Feedback Cursor Control Device which (i) differs by virtue of addition of or
alteration through an Enhancement or (ii) constitutes a change in form factor or
(iii) incorporates a material change in force-feedback functionality made by a
party other than Immersion. Purely cosmetic alterations (e.g., color or styling)
to the physical appearance of the FEELit Mouse Product or a Planar Force
Feedback Cursor Control Device, or changes that do not alter the force-feedback
functionality but reduce manufacturing costs shall not be deemed a Product
Model.
1.24 QUARTER OR QUARTERS. This means Logitech's yearly fiscal quarters.
Specifically, Logitech's yearly fiscal quarters begin and end on the following
dates: first quarter, April 1 - June 30; second quarter, July 1 - September 30;
third quarter, October 1 - December 31; and fourth quarter, January 1 - March
31.
1.25 ROYALTY BEARING PRODUCT. This means a Planar Force Feedback Cursor
Control Device which either (1) incorporates or utilizes Immersion Product Model
Technology that is not otherwise made generally available to the public by
Immersion without charge or (2) is covered (a) by a Licensed Patent or (b) by a
copyright of Immersion embodied in any Immersion Product Model Technology that
is not otherwise made generally available to the public by Immersion without
charge.
1.26 SPECIFICATION(S). This means the FEELit Mouse Product specification
attached as the original Exhibit A ("Specification") to the Development
Agreement and each Planar Force Feedback Cursor Control Device specification
associated with a development schedule which is attached by amendment to the
Development Agreement.
1.27 YEAR. This means any full four-Quarter period.
1.28 Any reference to the words "PURCHASE," "SALE," or "SELL," when used
in connection with intellectual property, shall mean license.
2. GRANT OF LICENSES
2.1 GRANT WITH RESPECT TO THE LICENSED PATENTS. Subject to the terms of
this Agreement, Immersion grants to Logitech a worldwide, nonexclusive license
under the Licensed Patents to develop, make, have made, use, sell, lease,
license, demonstrate, market and distribute the FEELit Mouse Product and any
other Planar Force Feedback Cursor Control Devices in the Planar Force Feedback
Cursor Control Device Field of Use. Except as provided in Section 2.3 ("Right to
Sublicense"), no right to sublicense the Licensed Patents is granted by
Immersion to Logitech.
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2.2 GRANT WITH RESPECT TO THE IMMERSION PRODUCT MODEL TECHNOLOGY.
Subject to the terms of this Agreement, Immersion grants to Logitech a
worldwide, nonexclusive license under any Intellectual Property Rights owned or
licensable by Immersion that cover the Immersion Product Model Technology,
excluding the New Technology except as separately licensed by Immersion to
Logitech in accordance with the terms of Section 7.4 ("New Technology") of the
Development Agreement, to use, copy, modify, and create derivative works based
upon the Immersion Product Model Technology and in order to develop, make, and
have made Planar Force Feedback Cursor Control Devices in the Planar Force
Feedback Cursor Control Field of Use, and to sell, lease, license, demonstrate,
perform, market and distribute such Planar Force Feedback Cursor Control Devices
in the Planar Force Feedback Cursor Control Field of Use. No access rights or
license to the source code for the Immersion Software are granted to Logitech
except (i) as provided under the terms of Section 13 ("Source Code Escrow") of
the Development Agreement and (ii) as provided under the terms of Section 2.2.1
("Firmware Source Code"). Logitech and its Affiliates have no right and Logitech
agrees not to disassemble or decompile any portion of the software portions of
the Immersion Product Model Technology.
2.2.1 FIRMWARE SOURCE CODE. Immersion may elect, from time to time,
and in its sole discretion, to (i) disclose portions of the Immersion firmware
to Logitech in source code form solely for informational purposes and as
Confidential Information under the terms of Section 16 ("Confidentiality") of
the Technology Product Development Agreement and (ii) to deliver portions of the
Immersion firmware (which is Immersion Product Model Technology and delivered as
a Deliverable or an Enhancement under the terms of the Technology Product
Development Agreement) to Logitech in source code form solely for informational
purposes and as Confidential Information under the terms of Section 16
("Confidentiality"). Such firmware source code, if delivered to Logitech, will
not be used by Logitech for other than informational purposes unless Immersion
notifies Logitech, in writing, that such specific firmware source code is
classified as "Authorized For Modification." With respect to firmware source
code which has been designated by Immersion as "Authorized For Modification,"
Immersion grants to Logitech a worldwide, nonexclusive license under any
Intellectual Property Rights owned or licensable by Immersion that cover the
firmware source code, to use, copy, modify, create derivative works based upon
the firmware source code, and to create an object code version of such firmware
derivative work for license as Immersion Product Model Technology under the
terms of Section 2.2 ("Grant With Respect to the Immersion Product Model
Technology"). No license to distribute the firmware source code in source code
form is granted herein.
2.3 RIGHT TO SUBLICENSE. Subject to the terms of Section 2.6 ("Trademark
License from Immersion"), Immersion grants to Logitech the right to sublicense
any of the rights set forth in Section 2.1 ("Grant With Respect to the Licensed
Patents") and Section 2.2 ("Grant With Respect to the Immersion Product Model
Technology") above subject to the limitations of this Agreement: (i) to any
Affiliate of Logitech and (ii) to any non-Affiliate third party of Logitech
solely for the purpose of assisting Logitech in the design or development of
Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor
Control Field of Use. Logitech agrees that any act or omission by a Logitech
Affiliate that is inconsistent with Logitech's obligations under the terms of
this Agreement shall be deemed to be an act or omission by Logitech and a breach
of this Agreement by Logitech.
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2.4 DURATION. Subject to the obligation to pay royalties, the licenses
set forth above will extend to the full end of the term for which any Licensed
Patent is issued or any other Intellectual Property Right of Immersion licensed
hereunder is in force, unless sooner terminated as provided in this Agreement.
2.5 LABEL REQUIREMENTS. Subject to the terms of Section 2.6 ("Trademark
License for Immersion") and Section 2.7 ("Administration Procedure"), Logitech
shall place belly labels on Force Feedback Cursor Control Devices which are
Royalty Bearing Products which shall include the language and related logo:
"FEELitTM Force Feedback Technology Licensed from Immersion Corporation"
(hereinafter the "Legend"). Logitech shall also place or have placed the Legend
on retail manuals and boxes as designated in Exhibit B ("Immersion Package
Labeling Specification"). Logitech shall not remove Immersion's copyright
notices from any copies of the Immersion Software. The parties agree that in the
case of each Planar Force Feedback Cursor Control Device noticed by Logitech to
Immersion under the terms of Section 2.7 ("Administrative Procedures"),
Immersion will provide Logitech with a list of applicable Licensed Patents which
will identify the "Key Licensed Patents" which will be identified on the belly
label of the particular device and will also identify the "Document Patents"
which will be identified in the product documentation included with the device.
The language on the belly label for the Key Licensed Patents will read as
follows: "{List Key License Patents} and other patents listed in associated
documentation." If OEM customers object to belly label marking or the inclusion
of patents in the documentation as described above, the Parties will mutually
agree upon a reasonable solution in writing in advance.
2.6 TRADEMARK LICENSE FROM IMMERSION. Subject to the procedures set
forth in Section 2.7 ("Administrative Procedures") below and Immersion's prior
written approval, Immersion hereby grants to Logitech a nonexclusive,
nontransferable, worldwide license, to use in connection with marketing the
FEELit Mouse Product or any Planar Force Feedback Cursor Control Device, the
trademark(s) used by Immersion ("Marks") to identify the Immersion Product Model
Technology and/or Licensed Patents and Logitech agrees to use such Marks on and
in connection with Royalty Bearing Products except in the case of OEM products
where, if the OEM customer objects, the parties will mutually agree upon a
reasonable solution in writing, in advance. Logitech acknowledges that all use
of the Marks will inure to the benefit of Immersion. Logitech shall not register
Immersion's Marks in any jurisdiction and will not adopt any trademark for use
on the FEELit Mouse Product or Planar Force Feedback Cursor Control Device which
is confusingly similar to any trademark of Immersion or which includes a
prominent portion of any trademark of Immersion. At Immersion's reasonable
request, Logitech shall provide Immersion with samples of Logitech's use of
Immersion trademarks. Logitech agrees to abide by Immersion's reasonable written
trademark policies as issued and provided to Logitech from time to time. In any
case where the Marks are not used in compliance with Immersion's trademark
policies and such use has been approved in writing by Immersion, upon receipt of
written notice from Immersion, Logitech will promptly correct the non-compliance
and submit samples of compliant use to Immersion for approval.
2.7 ADMINISTRATIVE PROCEDURES. The Parties agree that in order to
provide Immersion with appropriate information necessary for the orderly
administration of the Licensed
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Patents and Marks, Logitech will provide Immersion with prompt written notice
prior to Product Launch of each Product Model and will enclose an information
package which contains two prototypes or production units of the Product Model
sufficient to enable Immersion to determine which of the Licensed Patents cover
the Product Model and to review and approve the use of the Marks. If in any case
Immersion believes that the quality of the Product Model does not meet
Immersion's commercially reasonable standards, Logitech will not be permitted to
ship the Product Model with the Marks until the quality issue is resolved, but
Logitech may in is discretion ship such Product Model without the Marks and
shall be relieved of its obligation to use the Marks on that Product Model.
2.8 GRANT WITH RESPECT TO KNOW-HOW. Subject to the terms of this
Agreement, each party grants to the other a worldwide, nonexclusive license to
use any know-how of such party disclosed to the other party pursuant to the
Development Agreement.
3. ROYALTIES
3.1 NEW TECHNOLOGY ROYALTIES. As provided in Section 9.2 ("New
Technology Royalties") of the Development Agreement, New Technology will be
provided to Logitech subject to royalties which are mutually agreed upon in
writing by Immersion and Logitech.
3.2 PER PRODUCT MODEL ROYALTY. Except as provided by Section 3.1 ("New
Technology Royalties"), Logitech shall pay Immersion a royalty based on a
percentage of the Net Receipts for each Product Model of a Royalty Bearing
Product sold by Logitech or any Logitech Affiliates to unrelated third parties
(other than Logitech or Logitech Affiliates) in arms length transactions, in
accordance with the following. The royalty percentage for each Product Model
shall be five percent (5%) for all units of a Royalty Bearing Product sold.
Shipments of Royalty Bearing Products between Logitech and the Logitech
Affiliates or between Logitech Affiliates will not be considered to be sold or
otherwise transferred until sold to an unrelated customer of Logitech or a
Logitech Affiliate.
3.3 MOST FAVORABLE ROYALTIES. Immersion agrees that, in the event that
the royalty rates contained in any license agreement entered into by Immersion
and any third party governing the license of substantially similar Immersion
Product Model Technology for use in any Planar Force Feedback Cursor Control
Device in the Planar Force Feedback Cursor Control Field of Use that has
substantially similar force feedback functionality to a Planar Force Feedback
Cursor Control Device commercially released by Logitech, are less than the
applicable rates for such Planar Force Feedback Cursor Control Device herein,
Immersion hereby agrees that it will advise Logitech of such lesser royalty
rates as of the date such lesser royalties became effective for such other third
party. Such comparison will be on the basis of cash royalty rates only and will
not apply in situations where part of the consideration is a cross-license which
is taken into account in setting the cash royalty. Logitech shall have the right
to have an independent auditor mutually agreed upon by Logitech and Immersion
audit Immersion business records related to the performance of its obligations
under this Section 3.3 on an annual basis. Logitech shall pay the costs of such
audit, unless such audit reveals that Immersion is not in compliance with this
Section 3.3, in which case other than termination Logitech's sole and
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exclusive remedy will be, at Logitech's option, Immersion shall promptly credit
Logitech's account or repay any overpayment, the parties will amend the
Agreement to reflect the most favorable Royalty Rate and Immersion shall pay the
reasonable costs of such audit. Such audit shall be preceded by at least five
(5) business days advance written notice and shall be performed during normal
business hours by the auditor. The auditor shall have access to only those books
and records of Immersion that are reasonably necessary to determine the
compliance by Immersion with this Agreement. Any and all non-public information
related to Immersion or its business revealed in the course of such audit shall
be kept confidential by the auditor and by Logitech, and shall not be disclosed
by the auditor to anyone other than employees or professional advisors of
Logitech who have a reasonable need to know in connection with such audit, or
used for any purpose, except to the extent reasonably necessary to determine
whether Immersion is in compliance with this Agreement.
3.4 PAYMENTS AND REPORTS. The royalties to be paid by Logitech to
Immersion hereunder shall be due forty-five (45) days after the close of each
Quarter. Royalty reports setting forth the royalty calculation by Product Model
and identifying whether the sales were made by Logitech or Logitech Affiliates
shall be included with such payments. Logitech will pay and account to Immersion
for royalties due hereunder with respect to sales or other disposition of
Royalty Bearing Products by any Logitech Affiliates, and for that purpose, sales
of Royalty Bearing Products by any Logitech Affiliate (other than sales or other
disposition by an Affiliate to Logitech or to another Logitech Affiliate) will
be deemed to be sales by Logitech.
3.5 AUDIT RIGHTS OF ROYALTY PAYMENTS. Immersion shall have the right to
have an independent auditor mutually agreed by Logitech and Immersion audit the
method used to calculate the average sales price, as well as the sales data
pursuant to Section 1.19 ("Net Receipts") and the royalty payments of Logitech
for itself and its Affiliates on an annual basis, but shall pay the costs of
such audit, unless such audit reveals any underpayment of royalties in an amount
greater than five percent (5%) of actual royalties due for any Year, in which
case Logitech shall promptly remit an amount equal to the underpayment and shall
pay the reasonable costs of such audit. Such audit shall be preceded by at least
five (5) business days advance written notice and shall be performed during
normal business hours by the auditor. The auditor shall have access to only
those books and records of Logitech which are reasonably necessary to determine
the relevant sales royalties due for Royalty Bearing Products for Logitech
itself and its Affiliates and the correctness of the royalty payments hereunder.
Any and all non-public information related to Logitech, its Affiliates, or their
business revealed in the course of such audit shall be kept confidential by the
auditor and by Immersion, and shall not be disclosed by the auditor to anyone
other than employees or professional advisors of Immersion who have a reasonable
need to know in connection with such audit, or used for any purpose, except to
the extent reasonably necessary to determine the correctness of royalty payments
made hereunder.
4. TERM AND TERMINATION
4.1 TERM. Unless earlier terminated in accordance with the provisions of
this Agreement, this Agreement will extend until the last to expire of the
Licensed Patents or any other Intellectual Property Right of Immersion licensed
hereunder.
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4.2 TERMINATION BY LOGITECH.
4.2.1 TERMINATION WITHOUT CAUSE. Logitech may terminate this
Agreement without cause upon ninety (90) days written notice, and such written
notice under the terms of this Agreement shall also serve as written notice of
the termination of the Development Agreement, if such Agreement is still in
effect at such time, and the Development Agreement will then terminate within
sixty (60) days of such notice pursuant to the terms of Section 12.1
("Termination by Logitech Without Cause") and such termination shall be deemed
to be a termination without cause by Logitech and will be construed in
accordance with the terms of Section 12.3 ("Effect of Termination") therein.
4.2.2 TERMINATION WITH CAUSE. Logitech may terminate this Agreement
by written notice to Immersion if Immersion has materially breached the terms of
this Agreement and fails to cure the breach after written notice of breach to
Immersion and a thirty (30) day time period to cure.
4.3 TERMINATION BY IMMERSION FOR FAILURE TO PAY ROYALTIES. Immersion may
terminate this Agreement by written notice to Logitech in the event that
Logitech or any Logitech Affiliate breaches the terms of Section 3 ("Royalties")
including but not limited to any failure to pay any royalties due and payable by
Logitech and/or any of the Logitech Affiliates under this Agreement and Logitech
fails to cure such breach after written notice of breach and a thirty (30) day
time period to cure.
If Immersion issues a written notice of termination to Logitech under the terms
of this Section 4.3 ("Termination by Immersion for Failure to Pay Royalties")
such notice shall also serve as written notice of termination for cause by
Immersion under the terms of Section 12.2 ("Termination for Cause") of the
Development Agreement, if such Agreement is still in effect at such time. If the
breach described in the aforementioned written notice of termination is not
cured in accordance with the terms of this Section 4.3 ("Termination by
Immersion for Failure to Pay Royalties"), the Development Agreement will then
terminate within thirty (30) days of such notice pursuant to the terms of
Section 12.2 ("Termination for Cause") and such termination will be deemed to be
a termination for cause by Immersion for purposes of Section 12.3 ("Effect of
Termination") and the effects of termination will be construed in accordance
with the terms of Section 12.3 ("Effect of Termination") therein.
4.4 TERMINATION BY IMMERSION FOR BREACH OF PATENT LICENSE. Immersion may
terminate this Agreement in the event that Logitech engages in activity which
exceeds the scope of the patent license granted in Section 2.1 ("Grant With
Respect to the Licensed Patents") or breaches the labeling requirement of
Section 2.5 ("Label Requirements") and fails to cure the breach after written
notice of breach and a sixty (60) day time period to cure. Except as set forth
in this Section 4.4 or Section 4.3 ("Termination by Immersion for Failure to Pay
Royalties"), the patent license granted in Section 2.1 ("Grant With Respect to
the Licensed Patents") shall not be terminable by Immersion. If Immersion issues
a written notice of termination to Logitech under the terms of this Section 4.4
("Termination by Immersion for Breach") such notice shall also serve as written
notice of termination for cause by Immersion under the terms of Section 12.2
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("Termination for Cause") of the Development Agreement, if such Development
Agreement is still in effect at such time. If the breach described in the
aforementioned written notice of termination is not cured in accordance with the
terms of this Section 4.4 ("Termination by Immersion for Breach"), the
Development Agreement will then terminate within sixty (60) days of such notice
pursuant to the terms of Section 12.2 ("Termination for Cause") and such
termination will be deemed to be a termination for cause by Immersion for
purposes of Section 12.3 ("Effect of Termination") and the effects of
termination will be construed in accordance with the terms of Section 12.3
("Effects of Termination") therein.
4.5 TERMINATION OF LICENSES TO IMMERSION PRODUCT MODEL TECHNOLOGY BY
IMMERSION FOR BREACH. Immersion may terminate the licenses granted with respect
to Immersion Product Model Technology in Section 2.2 ("Grant With Respect to the
Licensed Patents") in the event that Logitech engages in activity which exceeds
the scope of such license or breaches the terms of Section 2.3 ("Right to
Sublicense") or the labeling requirement of Section 2.5 ("Label Requirements")
and fails to cure the breach after written notice of breach and a sixty (60) day
time period to cure. Termination of the licenses with respect to the Immersion
Product Model Technology shall not affect the patent licenses granted hereunder.
Except as set forth in this Section 4.5 ("Termination of Licenses to Immersion
Product Model Technology by Immersion for Breach") or Section 4.3 ("Termination
by Immersion for Failure to Pay Royalties"), the licenses granted in Section 2.2
("Grant With Respect to the Licensed Patents") shall not be terminable by
Immersion.
4.6 EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement for any reason, Logitech agrees to pay Immersion for royalties due
under this Agreement from Logitech or any Logitech Affiliate. Upon a termination
of this Agreement for cause or without cause, Logitech and each Affiliate shall
have one hundred and twenty (120) days to distribute any remaining inventory in
process and in existence as of the effective date of the termination, subject to
the obligation for Logitech to pay royalties hereunder for any such distribution
by Logitech and/or any Logitech Affiliates. EXCEPT FOR DIRECT DAMAGES RESULTING
FROM A BREACH OF THE TERMS OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO A
BREACH BY LOGITECH OR ANY LOGITECH AFFILIATE OF SECTION 2 ("GRANT OF LICENSES"),
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY SORT AS A RESULT
OF TERMINATING THIS AGREEMENT IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT.
5. WARRANTY
Immersion represents and warrants that Immersion either has ownership
of, or sufficient rights in, the Immersion Product Model Technology to be
delivered under the terms of the Development Agreement and the Licensed Patents
to enter into this Agreement and grant all the rights set forth herein. As of
the Effective Date of the Agreement, Immersion is not aware of and has not
received any notice of any claim by a third party that the copyrights, patents,
trade secrets, trademarks or other intellectual property rights of any third
party are infringed by the Immersion Product Model Technology that Immersion, in
its sole discretion intends to, as of the Effective Date, use to comply with
Immersion's development obligations under the terms of the
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Development Agreement, except as disclosed to Logitech in writing prior to the
date of this Agreement. Immersion further represents and warrants that it
neither holds nor has applied for a patent that is dominant to the Licensed
Patents.
6. INDEMNIFICATION
6.1 TRADEMARK INFRINGEMENT INDEMNIFICATION BY IMMERSION. Subject to the
limitations on cumulative liability under Section 7.1 ("Disclaimers of Certain
Types of Damages") and Section 7.3 ("Limitations of Liability with Respect to
Indemnity Obligations"), and Immersion's approval for Logitech to use the Legend
and the Marks pursuant to Section 2.5 ("Label Requirements"), Section 2.6
("Trademark License") and Section 2.7 ("Administrative Procedures") and further
subject to prompt notification by Logitech, cooperation by Logitech and control
of all litigation and/or settlement by Immersion, Immersion shall indemnify,
defend and hold Logitech harmless from and against any and all claims, damages,
liabilities, judgments, settlements, losses, costs and expenses (including court
costs and reasonable attorneys' and experts' fees) (collectively, "Costs")
suffered or incurred by Logitech arising out of a claim of infringement of any
Immersion Mark or Legend used by Logitech on a Planar Force Feedback Cursor
Control Device in the Planar Force Feedback Cursor Control Field of Use which is
based on Logitech's use under the labeling requirement of Section 2.5 ("Label
Requirements") and/or the terms of Section 2.6 ("Trademark License") and Section
2.7 ("Administrative Procedures"). In the case of an infringement or alleged
infringement by any such Immersion Mark or Legend used by Logitech on a Planar
Force Feedback Cursor Control Device in the Planar Force Feedback Cursor Control
Field of Use: (i) Logitech will have the right to remove such Marks and/or
Legend from Logitech Planar Force Feedback Cursor Control Devices while any
dispute or litigation concerning the same is pending, and shall begin using such
marks again only after such infringement claims or disputes have been settled or
dismissed with prejudice, and (ii) Immersion will have the right to require
Logitech to stop using such Marks and/or Legend and will provide a new trademark
to be used in connection with the Immersion Product Model Technology and/or
Licensed Patents, as applicable. Each party agrees to notify the other promptly
of any matters in respect to which the foregoing indemnity in this Section 6.1
("Trademark Infringement indemnification by Immersion") may apply. If notified
in writing of any action or claim for which Immersion is to provide indemnity,
Immersion shall defend, subject to the limitations of liability set forth in
Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of
Liability With Respect to Indemnity Obligations"), those actions or claims at
Immersion's expense and pay the Costs awarded against Logitech in any such
action, or pay any settlement of such action or claim entered into by Immersion.
6.2 COPYRIGHT INFRINGEMENT AND TRADE SECRET MISAPPROPRIATION
INDEMNIFICATION BY IMMERSION.
6.2.1 SCOPE. Subject to the limitations of cumulative liability
under Section 7.1 ("Disclaimer of Certain Types of Damages") and Section 7.3
("Limitations of Liability With Respect to Indemnity Obligations") and further
subject to prompt notification by Logitech, cooperation by Logitech and control
of all litigation and/or settlement by Immersion, Immersion shall indemnify,
defend and hold Logitech harmless from and against any and all Costs suffered
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or incurred by Logitech as a result of any third party claim that any Immersion
Product Model Technology delivered by Immersion to Logitech infringes any
copyright or misappropriates any trade secret of any third party. In the case of
any third party claim involving the Immersion Software portion of the Immersion
Product Model Technology, Immersion may, in its sole discretion, provide
Logitech with a modification to the affected Immersion Software so that the
Immersion Software portion of the Immersion Product Model Technology becomes
noninfringing or in the alternative, may provide Logitech other software which
is functionally equivalent. Each party agrees to notify the other promptly of
any matters in respect to which the foregoing indemnity in this Section 6.2
("Copyright Infringement and Trade Secret Misappropriation Indemnification by
Immersion") may apply. If notified in writing of any action or claim for which
Immersion is to provide indemnity, Immersion shall defend, subject to the
limitations of liability set forth in Section 7.1 ("Disclaimer of Certain Types
of Damages") and 7.3 ("Limitations of Liability With Respect to Indemnity
Obligations"), those actions or claims at Immersion's expense and pay the Costs
awarded against Logitech in any such action, or pay any settlement of such
action or claim entered into by Immersion.
6.2.2 EXCEPTIONS. The foregoing indemnity will not apply to any
infringement claim to the extent it arises from (i) any modification of any
Immersion Product Model Technology by parties other than Immersion or Immersion
subcontractors under contract with Immersion, (ii) use of any Immersion Product
Model Technology in conjunction with other non-Immersion products or components
where there would be no infringement absent such use with such other products or
components or (iii) an infringement which would not occur in the Immersion
Product Model Technology or any Final Prototype in which such Immersion Product
Model Technology is incorporated but which does occur in the final production
version of a Planar Force Feedback Cursor Control Device.
6.3 PERSONAL INJURY AND PROPERTY DAMAGE CLAIMS. Neither party shall have
any obligation to indemnify, protect, defend and hold the other party harmless
from any Costs suffered or incurred by the other party to the extent such third
party claim or threatened claim arises from a personal or alleged personal
injury or damage or alleged damage to property arising out of the third party's
use of Planar Force Feedback Cursor Control Devices.
6.4 PRODUCT LIABILITY INSURANCE. The Parties agree that they shall each
secure insurance covering product liability. Such insurance shall provide
coverage of at least ONE MILLION DOLLARS ($1,000,000) per occurrence and shall
remain in effect during the term of this Agreement. Each party will promptly
cause the other party to be named as an additional insured.
6.5 PATENT INFRINGEMENT INDEMNIFICATION BY IMMERSION.
6.5.1 SCOPE. Subject to the limitations of cumulative liability
under Section 7.1 ("Disclaimer of Certain Types of Damages") and Section 7.3
("Limitations of Liability With Respect to Indemnity Obligations"), and further
subject to prompt notification by Logitech, cooperation by Logitech and control
of all litigation and/or settlement by Immersion, Immersion shall indemnify,
defend and hold harmless Logitech from and against any and all Costs (except
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as provided in Section 6.5.3 ("Exceptions With Respect to Patents Issued After
the Effective Date")) suffered or incurred by Logitech as a result of any third
party claim that any Immersion Product Model Technology delivered by Immersion
(for which Logitech is currently paying royalties) infringes upon any United
States patent. Each Party agrees to notify the other promptly of any matters in
respect to which the foregoing indemnity in this Section 6.5 ("Patent
Infringement Indemnification by Immersion") may apply. If notified in writing of
any action or claim for which Immersion is to provide indemnity, Immersion shall
defend, subject to the limitations of liability set forth in Section 7.1
("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of Liability
With Respect to Indemnity Obligations") and the provisions of Section 6.5.3
("Exceptions With Respect to Patents Issued After the Effective Date"), those
actions or claims at its expense and pay the Costs awarded against Logitech in
any such action, or pay any settlement of such action or claim entered into by
Immersion. In any such action, Logitech will make available to Immersion all
defenses against such action or claim known or available to Logitech.
6.5.2 EXCEPTIONS TO THE SCOPE OF THE INDEMNITY. Immersion shall have
no liability or obligation with respect to any claim of patent infringement to
the extent it arises from (a) Immersion's compliance with the Specifications in
Exhibit A of the Development Agreement for a Planar Force Feedback Cursor
Control Device, to the extent such infringement would not have arisen but for
compliance with such Specifications, (b) use of Immersion Product Model
Technology by Logitech or its customers, subcontractors or any third party in or
with an application, embodiment or environment other than that for which the
Immersion Product Model Technology was designed as set forth in the applicable
Specifications; (c) modification of Immersion Product Model Technology by
Logitech or its customers, subcontractors or any third party; (d) the operation
or use of any Immersion Product Model Technology in combination with any Planar
Force Feedback Cursor Control Device, equipment or technology not delivered by
Immersion or recommended by Immersion pursuant to a specific written obligation
in the Specifications in Exhibit A of the Development Agreement to make a
recommendation; or (e) Immersion's compliance with a Specification or any
aspects or portions of the Specification which "inherently" (as defined below)
infringes any patent. For the purposes of this Agreement "inherently" means that
any device or aspect or portion of a device which was in conformance with the
Specification would infringe such patent.
6.5.3 EXCEPTIONS WITH RESPECT TO PATENTS ISSUED AFTER THE EFFECTIVE
DATE. The provisions of this Section 6.5.3 ("Exceptions With Respect to Patents
Issued After the Effective Date") shall apply only with respect to a United
States patent issued after the Effective Date (an "After-Issued Patent").
(a) NOTICE BY IMMERSION AND SUPPLY OF MODIFIED OR SUBSTITUTE
TECHNOLOGY. Logitech agrees to promptly notify Immersion if Logitech becomes
aware of an After-Issued Patent which Logitech reasonably believes is infringed
by any Immersion Product Model Technology that is the subject of an indemnity
obligation by Immersion hereunder. If upon receipt of notice from Logitech or
independently, Immersion becomes aware of an After-Issued Patent which Immersion
reasonably believes is infringed by any Immersion Product Model Technology that
is the subject of an indemnity obligation by Immersion hereunder, then
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Immersion will notify Logitech in writing of such patent (the date of such
notice being referred to as the "Notice Date"). Within fifteen (15) days after
the Notice Date, Immersion shall supply Logitech with a written description and
cost estimate of a proposed redesign of the infringing Immersion Product Model
Technology to avoid the infringement. As reasonably promptly thereafter as
possible, Immersion shall supply Logitech with a modification to the affected
Immersion Product Model Technology so that the incorporated Immersion Product
Model Technology becomes noninfringing or substitute for the infringing
Immersion Product Model Technology other technology that conforms to the
Specifications in Exhibit A of the Development Agreement (which shall itself be
deemed to be Immersion Product Model Technology) or, if neither of the foregoing
are reasonably possible, procure for Logitech the right to continue to use such
Immersion Product Model Technology. If Immersion is unable to procure for
Logitech the right to continue to use such Immersion Product Model Technology
under commercially reasonable terms, as determined by Immersion, Immersion may,
in the alternative, refund to Logitech all royalties received by Immersion under
the Agreement relating to the allegedly infringing Immersion Product Model
Technology (reflecting any discounts granted to Logitech, less an amount for
depreciation calculated in a straight-line basis over an assumed useful life of
three (3) years).
(b) COSTS NOT COVERED BY INDEMNITY FOR AFTER-ISSUED PATENTS.
Immersion shall have no obligation to indemnify Logitech for infringement of
such After-Issued Patents with respect to any units of a Planar Force Feedback
Cursor Control Device which are distributed or used by Logitech after the Notice
Date. Immersion shall have no liability hereunder to reimburse Logitech for any
lost inventory, retooling or other manufacturing costs incurred by Logitech that
result from Logitech's incorporation of such modified or substitute technology
in order to avoid infringement of an After-Issued Patent.
(c) ELECTION BY LOGITECH OF ALTERNATIVE REMEDY.
Notwithstanding the foregoing provisions, in any instance in which Immersion is
prepared and capable of supplying to Logitech modified or substitute technology
to avoid infringement of an After-Issued Patent, Logitech may, within a
reasonable time after receiving Immersion's written description and cost
estimate of Immersion's proposed redesign, elect either (i) to request, in
writing, that Immersion pursue a license under the After-Issued Patents on
behalf of Logitech to continue using the affected Immersion Product Model
Technology, in which event if such license would cost Immersion more than the
cost estimate provided by Immersion to Logitech, under the terms of (a) above,
to supply modified or substitute technology to avoid infringement, then Logitech
shall pay the difference between such costs, or (ii) to request, in writing,
that Logitech be allowed to continue to use the Immersion Product Model
Technology in unaltered form, in which event Immersion shall have no obligations
of indemnity or defense hereunder with respect to any infringement of the
After-Issued Patents resulting from units of Planar Force Feedback Cursor
Control Devices incorporating the unaltered Immersion Product Model Technology
used or distributed by Logitech after the Notice Date. If Immersion pursues the
license described in (i) above, and is unable to procure such a license,
Immersion will not be in breach of this Agreement.
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6.6 REMEDIES IN THE EVENT OF PROHIBITION OF USE. The provisions and
remedies set forth in this Section 6.6 ("Remedies In the Event of Prohibition of
Use") shall continue to be applicable with respect to any copyright infringement
or trade secret misappropriation under the terms of Section 6.2 ("Copyright
Infringement and Trade Secret Misappropriation"), and any After-Issued Patents
for which Immersion does not supply written notice to Logitech in accordance
with Section 6.5.3 (a) ("Notice by Immersion and Supply of Modified or
Substitute Technology") and any U.S. Patents issued prior to the Effective Date
of this Agreement. If a preliminary or final judgment shall be obtained against
Logitech's use, sale or distribution of a Planar Force Feedback Cursor Control
Device that incorporates any Immersion Product Model Technology based
infringement within the scope of the indemnity set forth in Section 6.1
("Trademark Infringement indemnification by Immersion"), 6.2 ("Copyright
Infringement and Trade Secret Misappropriation Indemnification by Immersion") or
6.5 (Patent Infringement Indemnification by Immersion") (subject to the
exceptions set forth therein), or if any Immersion Product Model Technology is,
or in Immersion's opinion, is likely to become, subject to a claim for such
infringement, then Immersion shall, at its expense, either (a) modify the
Immersion Product Model Technology so that the incorporated Immersion Product
Model Technology becomes noninfringing, or (b) procure for Logitech the right to
continue to use such Immersion Product Model Technology, or (c) substitute for
the infringing Immersion Product Model Technology other technology that conforms
to the Specifications in Exhibit A of the Development Agreement (which shall
itself be deemed to be Immersion Product Model Technology). If (a), (b) or (c)
above are not commercially reasonable alternatives in Immersion's opinion,
Immersion shall refund to Logitech all royalties received by Immersion under
this Agreement relating to the allegedly infringing Immersion Product Model
Technology (reflecting any discounts granted to Logitech, less an amount for
depreciation calculated in a straight-line basis over an assumed useful life of
three (3) years).
6.7 INDEMNITY BY LOGITECH. Subject to the limitations of liability set
forth in Section 7 ("Limitations of Liability"), and subject to prompt
notification by Immersion, cooperation by Immersion and control of all
litigation and/or settlement by Logitech, Logitech shall indemnify, defend and
hold harmless Immersion from and against any and all Costs suffered or incurred
by Immersion to the extent such Costs are suffered or incurred by Immersion in
the situations listed in the exceptions (i) through (iii) enumerated in Section
6.2.2 ("Exceptions"), and in the exceptions (a) through (e) enumerated in
Section 6.5.2 ("Exceptions to the Scope of Indemnity"), and/or in the situation
where Logitech and Immersion agree that Logitech will be allowed to continue to
use the Immersion Product Model Technology in unaltered form in accordance with
subsection (ii) of Section 6.5.3 (c) ("Election by Logitech of Alternative
Remedy"), provided that such situations arise because of Logitech's, its
subcontractors' or affiliates' use and modifications.
7. LIMITATIONS OF LIABILITY
7.1 DISCLAIMER OF CERTAIN TYPES OF DAMAGES. IN NO EVENT WILL LOGITECH OR
IMMERSION BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN
ANY WAY IN CONNECTION WITH THIS
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AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF LOGITECH AND IMMERSION HAVE BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
7.2 LIMITATIONS OF LIABILITY OTHER THAN INDEMNITY OBLIGATIONS. EXCEPT
WITH RESPECT TO THE PARTIES' OBLIGATIONS OF INDEMNITY, INCLUDING, BUT NOT
LIMITED TO COSTS OF DEFENSE AND "COSTS" (AS DEFINED ABOVE) SET FORTH IN SECTION
6 ("INDEMNIFICATION") WHICH ARE LIMITED BY THE TERMS OF SECTION 7.3
("LIMITATIONS OF LIABILITY WITH RESPECT TO INDEMNITY OBLIGATIONS") AND WITH
RESPECT TO ANY ROYALTIES DUE AND PAYABLE BY LOGITECH HEREUNDER, IN NO CASE WILL
EITHER PARTY'S TOTAL CUMULATIVE LIABILITY OR OBLIGATIONS UNDER THE TERMS OF OR
ARISING OUT OF THIS AGREEMENT EXCEED $1,000,000.
7.3 LIMITATIONS OF LIABILITY WITH RESPECT TO INDEMNITY OBLIGATIONS. IN
NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY WITH RESPECT TO ITS
OBLIGATIONS OF INDEMNITY INCLUDING, BUT NOT LIMITED TO COSTS OF DEFENSE AND
"COSTS" (AS DEFINED ABOVE) UNDER SECTION 6 ("INDEMNIFICATION") EXCEED THE
GREATER OF (i) $500,000 OR (ii) ROYALTIES PAID OR PAYABLE BY LOGITECH TO
IMMERSION HEREUNDER FOR THE THIRTY-SIX (36) MONTHS PRECEDING THE EVENT FIRST
GIVING RISE TO SUCH OBLIGATIONS.
7.4 NEGATION OF WARRANTIES AND OTHER OBLIGATIONS.
7.4.1 Nothing in this Agreement shall be construed:
(i) as a warranty or representation by Immersion as to the
validity or scope of any Licensed Patents;
(ii) as a warranty or representation that anything made,
used, sold or otherwise disposed of under any license
granted in this Agreement is or will be free from
infringement by patents, copyrights, trade secrets,
trademarks, or other rights of third parties;
(iii) as granting by implication, estoppel or otherwise any
licenses or rights under patents or other Intellectual
Property Rights of Immersion other than expressly
granted herein, regardless of whether such patents are
dominant or subordinate to any Licensed Patents, or
(iv) (a) to require Immersion to file any patent application
relating to force-feedback in Planar Force Feedback
Cursor Control Devices, (b) a warranty that Immersion
will be successful in securing the grant of any patent
relating to force- feedback in Planar Force
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Feedback Cursor Control Devices or any reissue or
extensions thereof, and (c) to require Immersion to pay
any maintenance fees or take any other steps to
maintain Immersion's patent rights relating to force
feedback in Planar Force Feedback Cursor Control
Devices, provided, however, that in the event Immersion
elects not to pay any maintenance fee or take any step
to maintain such patents, Immersion shall so notify
Logitech a reasonable period in advance and Logitech
may, at its option, pay such maintenance fee or take
such steps.
7.4.2 Except for Immersion's obligations of indemnity set forth
herein, Immersion does not assume any responsibility for the definition of the
Specifications, the manufacture of the Planar Force Feedback Cursor Control
Devices, or use of any Planar Force Feedback Cursor Control Device which is
manufactured or sold by or for Logitech or the Logitech Affiliates under the
Licensed Patent licenses granted herein. All warranties in connection with such
Planar Force Feedback Cursor Control Devices shall be made by Logitech or the
Logitech Affiliates as manufacturers or sellers of such Planar Force Feedback
Cursor Control Devices and such warranties shall not directly or by implication
obligate Immersion in any way.
8. THIRD PARTY ENFORCEMENT
Immersion shall not have any obligation or duty under this Agreement to
any party, including but not limited to Logitech to enforce any patents or
Licensed Patents against any third party infringing any claim or claims of any
patent and/or the Licensed Patents provided, however, that should Logitech
become aware of any actual infringement of the Licensed Patents by a Planar
Force Feedback Cursor Control Device distributed in the Planar Force Feedback
Cursor Control Field of Use by a third party, which Planar Force Feedback Cursor
Control Device directly competes with a Planar Force Feedback Cursor Control
Device currently shipped by Logitech as a formal product release which is
covered by the Licensed Patents, Logitech will promptly communicate the details
to Immersion. Immersion shall thereupon, within thirty (30) days of being made
aware by Logitech of such infringement, send copies of the relevant Licensed
Patents to such third party, however, Immersion shall have the right to take no
further action or whatever action Immersion deems necessary, including cease and
desist letters, negotiation, the filing of lawsuits, and/or settlement to
terminate such infringement and the strategy and/or conclusion of such action or
settlement shall be within Immersion's sole discretion. Logitech shall cooperate
with Immersion if Immersion takes any such action but all expenses of Immersion
shall be borne by Immersion. If Immersion recovers any damages or compensation
for any action Immersion takes hereunder, including any settlement, Immersion
shall retain one hundred percent (100%) of such damages. If Immersion does not
elect to take such further action hereunder within ninety (90) days of being
made aware of such infringement by Logitech, then Logitech shall have the right,
but not the obligation, to provide Immersion with a Patent Enforcement
Justification, as defined below, and if the proposed enforcement action meets
the Patent Enforcement Justification criteria, Logitech may take and control any
such action, subject to Immersion's absolute right to control any and all
assertions or admissions
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which relate to the scope or validity of Immersion's Licensed Patents. For
purposes of this Section 8 ("Third Party Enforcement"), a Patent Enforcement
Justification is a written report prepared by Logitech which includes: (i) the
name and address of the entity manufacturing the Planar Force Feedback Cursor
Control Device that is allegedly infringing the Licensed Patents and the names
and addresses of any entities distributing such Planar Force Feedback Cursor
Control Device, (ii) an analysis of which of the Licensed Patent claims are
infringed, (iii) a comparison of the allegedly infringing Planar Force Feedback
Cursor Control Device and the affected Planar Force Feedback Cursor Control
Device distributed by Logitech with which such allegedly infringing Planar Force
Feedback Cursor Control Device competes (which comparison analyzes the
competitive threat as to (a) feature and function, (b) positioning, and (c)
price point), (iv) the number of units of the Planar Force Feedback Cursor
Control Device sold by Logitech in the most recent four (4) full Quarters and,
if known or reasonably estimable, the number or estimate of the number of units
of the allegedly infringing Planar Force Feedback Cursor Control Device sold in
the most recent four (4) full Quarters, on a geographic area basis. The criteria
which must be met by such report, in order to permit Logitech to "justify" and
to go forward with an infringement action, as are follows:
(i) Logitech must be selling over 150,000 units of the
affected Planar Force Feedback Cursor Control Device in the market in which the
infringement is occurring during the most recent four (4) full Quarters or, if
the Product Launch occurred during the most recent four (4) full Quarters,
Logitech reasonably estimates in good faith that it will sell over 150,000 units
of the affected Planar Force Feedback Cursor Control Device in the market in
which the infringement is occurring during the next four (4) full Quarters;
(ii) the allegedly infringing Planar Force Feedback
Cursor Control Device must be substantially similar to the affected Planar Force
Feedback Cursor Control Device as to features and functions such that the
allegedly infringing Planar Force Feedback Cursor Control Device is having or
reasonably will have a serious impact on the sales of the affected Logitech
Planar Force Feedback Cursor Control Device;
(iii) the Licensed Patents to be enforced against the
allegedly infringing Planar Force Feedback Cursor Control Device also cover the
affected Logitech Planar Force Feedback Cursor Control Device;
(iv) the number of units of the allegedly infringing
Planar Force Feedback Cursor Control Device sold in the market in which the
infringement is occurring in the most recent four (4) full Quarters or
reasonably estimated in good faith to be sold in the next four (4) full Quarters
must meet or exceed 150,000 units; and
(v) Logitech has included the applicable Licensed Patent
numbers on the affected Planar Force Feedback Cursor Control Device in
accordance with the terms of Section 2.5 ("Label Requirements").
If the aforementioned criteria are met, Immersion will cooperate with Logitech,
at Logitech's expense, including but not limited to joining any legal
proceedings as a named plaintiff to the extent required to confer jurisdiction,
and all of Logitech's expenses will be borne by Logitech.
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Immersion may elect to have counsel of its own choosing participate at
Immersion's sole expense in any legal proceedings instituted by Logitech, but
Logitech shall retain one hundred percent (100%) of any damages Logitech
recovers for any such proceedings including any settlement, provided however
that (i) Logitech shall first reimburse Immersion for Immersion's Costs to
participate in such action out of any recovery which exceeds Logitech's Costs
for such action. Immersion must agree to any settlement of any infringement or
of any action brought hereunder by Logitech, which consent will not be
unreasonably withheld.
9. GENERAL
9.1 ENTIRE AGREEMENT. This Agreement, together with the Development
Agreement and its Exhibits, constitutes the complete agreement of the parties
and supersedes any other agreements, written or oral (including all
correspondence, emails and the letter regarding Phase 0 dated February 20, 1998
concerning the subject matter hereof and such materials do not have any effect
upon the rights and obligations of the Parties under this Agreement. This
Agreement and the Development Agreement in no way supersede or affect the
Intellectual Property License Agreement between Immersion and Logitech dated
April 2, 1997 and/or the Technology Product Development Agreement between
Immersion and Logitech dated April 2, 1997.
9.2 SUCCESSION AND ASSIGNMENT. Either party may assign this Agreement
provided that the other party has consented in writing to the assignment or
delegation and provided, further, that the rights and obligations of the parties
may be assigned to a corporate successor in interest in the case of a merger or
acquisition or in the case of a sale of assets without the prior approval of the
other party. In the case of any permissible assignment of this Agreement by
Immersion, the obligation for Logitech to include the phrase "from Immersion
Corporation" at the end of the Legend will be waived. Any attempt to assign this
Agreement in violation of the provisions of this Section 9.2 ("Succession and
Assignment") shall be void.
9.3 NOTICES. Notices required under this Agreement shall be addressed as
follows, except as otherwise revised by written notice:
TO IMMERSION: TO LOGITECH:
Louis B. Rosenberg, Ph. D. General Counsel
President Logitech, Inc.
Immersion Corporation 6505 Kaiser Drive
2158 Paragon Drive Fremont, CA 94555-3615
San Jose, CA 95131
9.4 GOVERNING LAW. The validity, interpretation and performance of this
Agreement shall be governed by the substantive laws of the State of California,
without the application of any principle that leads to the application of the
laws of any other jurisdiction.
9.5 NO AGENCY. Neither party is to be construed as the agent, partner,
or joint venturer or to be acting as the agent, partner or joint venturer of the
other party hereunder in any respect.
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9.6 NO RECRUITMENT. During the term of this Agreement and for one (1)
year after the termination or expiration of this Agreement, each Party agrees
not to recruit any employee of the other Party.
9.7 MULTIPLE COUNTERPARTS. This Agreement may be executed in several
counterparts, all of which taken together shall constitute one single Agreement
between the parties.
9.8 NO WAIVER. No delay or omission by either Party hereto to exercise
any right or power occurring upon any noncompliance or default by the other
Party with respect to any of the terms of this Agreement shall impair any such
right or power or be construed to be a waiver thereof. A waiver by either of the
Parties hereto of any of the covenants, conditions, or agreements to be
performed by the other shall not be construed to be a waiver of any succeeding
breach thereof or of any covenant, condition, or agreement herein contained.
Unless stated otherwise, all remedies provided for in this Agreement shall be
cumulative and in addition to and not in lieu of any other remedies available to
either party at law, in equity, or otherwise.
9.9 SEVERABILITY. If any one or more of the provisions of this Agreement
shall be held to be invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
9.10 AMENDMENTS IN WRITING. Any amendment to this Agreement shall be in
writing and signed by both parties hereto.
9.11 INTERPRETATION. Since this Agreement was prepared by both parties
hereto, it shall not be construed against any one party as the drafting party.
9.12 DISPUTE RESOLUTION. Except in the case of a breach of an obligation
related to a Party's Intellectual Property Rights, in the event either Party
concludes that it is in its best interest to file any legal action against the
other, the Party shall contact the other Party's management and at least two (2)
senior managers from each Party shall meet without legal counsel or interruption
for a minimum amount of three (3) eight (8) hour periods and diligently attempt
to resolve all disputed matters. If the Parties are unable to resolve their
difference and either Party desires to file a legal action against the other, at
least two (2) senior managers from each Party and their respective counsels
shall meet for three (3) eight (8) hour periods and diligently attempt to
resolve all disputed matters. Either Party may request that an independent third
party bound to mutually agreed upon obligations of confidentiality attend such
meeting in order to assist the Parties in reaching a reasonable resolution. All
oral and written information exchanged in these meetings shall be exchanged in
an effort to settle all disputed matters. If either Party still desires to file
a legal action against the other after these prescribed meetings, such Party may
file a legal action against the other Party as allowed by applicable law in
Santa Clara County state court or in the federal court. The Parties agree that
if a Party does not attend all of the prescribed meetings it waives its rights
to any monetary damages in the legal action(s) it files.
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9.13 SURVIVAL. Sections 3.2 ("Per Product Model Royalty"), 3.4
("Payments and Reports"), 3.5 ("Audit Rights of Royalty Payment"), 4.6 ("Effect
of Termination"), 5 ("Warranty"), 7 ("Limitations of Liability") and 9
("General") shall survive any termination or expiration of this Agreement. In
addition, the provisions of Sections 6.1 ("Trademark Infringement
Indemnification by Immersion"), 6.2 ("Copyright Infringement and Trade Secret
Misappropriation Indemnification by Immersion"), 6.5 ("Patent Infringement
Indemnification by Immersion"), 6.6 ("Remedies In the Event of Prohibition of
Use") and 6.7 ("Indemnity by Logitech") shall survive with respect to any units
of a Product Model of Royalty Bearing Products sold or otherwise distributed by
Logitech before the termination or expiration of this Agreement, provided,
however, that Immersion's obligations of indemnity under Sections 6.1
("Trademark Infringement Indemnification by Immersion"), 6.2 ("Copyright
Infringement and Trade Secret Misappropriation Indemnification by Immersion"),
6.5 ("Patent Infringement Indemnification by Immersion"), and 6.6 ("Remedies In
the Event of Prohibition of Use") shall not survive in the event Immersion
terminates this Agreement for cause, including but not limited to, failure by
Logitech to pay royalties due hereunder.
FORCE MAJEURE. With the exception of the obligation to pay monies due
and owing, each Party hereto shall be excused from performance hereunder for any
period and to the extent that it is prevented from performing any services
pursuant hereto, in whole or in part, as a result of delays caused by the other
Party or an act of God, war, civil disturbance, court order, governmental
action, laws, orders, regulations, directions or requests, or as a result of
events such as acts of public enemies, earthquakes, fires, floods, strikes or
other labor disturbances of the other Party or any third party, or other cause
beyond its reasonable control and which it could not have prevented by
reasonable precautions, and such nonperformance shall not be a default hereunder
or a ground for termination hereof.
IN WITNESS WHEREOF, the authorized representatives of the parties hereto
have signed this Agreement as of the date and year last set forth below.
Logitech: Immersion:
LOGITECH, INC. IMMERSION CORPORATION
By: /s/ By: /s/ Louis Rosenberg
-------------------------------- ----------------------------------
Title: S.V.P./ G.M. Title: President
----------------------------- --------------------------------
Date: April 13, 1998 Date: April 13, 1998
------------------------------ --------------------------------
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EXHIBIT A
SPECIFICATION
Immersion shall develop a Mouse Product to conform to the following
basic specifications: The Mouse Product shall be a two degree of freedom mouse
controller with active force feedback functionality along each of the two
displacement axes. The Mouse Product will be fixed by a linkage to a mouse pad
that houses the actuators and sensors. The Mouse Product will allow both
absolute position data and relative position data to be reported to the host
computer. The Mouse Product must be compatible with Intel based personal
computers (or equivalent) running Microsoft Windows 98 and NT operating systems.
It must connect to the PC through a universal Serial Bus ("USB") interface using
the USB communication protocol for "HID" and/or "PID" class devices (or HID
equivalent). In addition to receiving position data and button press data from
the Mouse Product across the USB, the host computer will command force
sensations on the Mouse Product by sending a high level force command with
command parameters across the USB. The completed work must include host drivers,
firmware and electromechanical hardware that work together to allow cursor
related force feedback sensations to be generated by a processor on-board the
Mouse Product (for example, physical detent sensations when traversing a menu
item). Said sensations must be appropriately coordinated with events running in
host software applications. The programming of coordination between force
sensations and software events will be achieved using a high-level Application
Programming Interface ("API") that allows software developers to command force
feedback sensations from their applications. For gaming applications, the
Windows API will use the "DirectX" force feedback implementation as its core and
the Mouse Product must have compatible firmware that locally produces all key
features supported by the then current DirectX 6.0 (Direct-Input) specification.
For non-gaming applications, API will also enable advanced features not
necessarily specified by DirectX as included in the current FEELit API
specification. The device must be able to provide mouse functionality (no force
feedback) when powered by USB only, in low power mode (4.4V, 100 mA) to comply
with the USB Specification at power up.
Requirement Overview: The Mouse Product must be a high quality, premium
cursor control peripheral capable of providing accurate positioning data
and producing realistic force feedback sensations. The product must
consist of the following subsystems:
Mouse Handle: Logitech to provide the design. A deadman switch is not
currently provided from Immersion but may be included by Logitech if it
proves necessary.
Base Enclosure/Support: Immersion to provide the basic mouse pad housing
concept and recommendations. Logitech to provide the industrial design.
Logitech to do detailed design with input from Immersion. The support
must carry the mouse loads, both user loads and force feedback loads,
without introducing excessive friction or binding. The support must
include a hard stop around the peripheral of the mouse workspace. Range
of motion provided for the Mouse Product is specified at the end of this
section.
Transmission: Immersion to provide a parallel linkage design. The
transmission will be a five-bar linkage structure that conveys
mechanical power from actuators to the Mouse Handle.
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Actuator: Immersion to provide the full design of custom flat actuators
(voice coils) optimized for the Mouse Product embodiment. Logitech will
produce the actuator coils but Immersion will supply the Magnet Assembly
as a separate component governed by a separate Component Supply
Agreement.
Spring Centering: Physical springs are not needed for this product. All
spring centering for gaming applications will be simulated by the local
processor.
Power Electronics: Immersion must provide the initial design. There will
be an external power source (brick) in the initial product. [****]
Product will draw non-force feedback power from USB.
Microprocessor and Interface Electronics: Immersion must provide the
board design for controller electronics, to be industrialised by
Logitech. Immersion will supply the FEELit Chip processor under a
separate OEM agreement, said processor including firmware to create
local force feedback sensations. Design will be USB high speed
compatible. It is currently estimated that the COG for the die-shrink
version of the FEELit Chip in production volumes (100,000 units per
year) will be [****] or less.
Sensors: Immersion provides recommendation and design implementation for
sensors that monitor the motion of the mouse and report such data back
to the host across USB via the microprocessor. It is currently estimated
that the COG for the sensing electronics will be less than [****].
Sensitivity: Mouse to support basic mouse ballistic scaling algorithms
wherein mouse position sensitivity is varied with velocity of mouse
movement. [****].
Embedded Software: Immersion must provide the HEX code. The embedded
software will be Direct-X and FEELit compatible and USB enabled.
Logitech will not have access to any parts of the source code (including
but not limited to the force feedback core) except as provided in
Section 2.2.1 ("Firmware Source Code"). [****] After the final firmware
is delivered, Immersion will provide access to several sections of the
firmware including those related to [****]
Host Software: Immersion will provide drivers that manage force feedback
of the device in Windows 98 and NT. The driver will support the
DirectInput API and the FeelIt API. A custom interface may be needed to
communicate with existing Logitech MouseWare drivers. This custom
interface would be developed between Logitech and Immersion. The general
breakdown of the software should be such that Immersion manages the
Force Feedback components, and Logitech's MouseWare manages the button
programmability, wheel support, port management, and sensor and button
reporting for cursor movement control as well as gaming movement control
through DirectX.
*Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
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Switches and Buttons: The product will support three standard moue
buttons plus [****], all processed by the FEELit Chip if possible.
Compliance: The Immersion/Logitech design must comply with 761325-0000
Rev A Logitech EMI standard. Exceptions to this standard must be duly
approved by Logitech. GOI-740329-00 Rev B is the current generic
reference for reliability. Applicable standards are the following:
Drop: 90 cm
Light immunity: 100 kLux
Environmental: -40.. +70C (non Operating, 53 Hours cycle)
0C (operating, 8 hours)
+40C (operating, 90% RH, 8 hours)
+40C (operating, 10% RH, 8 hours)
Vibration: refer to GOI-740329-00
Shock: refer to GOI-740329-00
Product Details: The product must perform as follows:
Range of Motion: No less than [****]
Force Output: A minimum of [****] grams (peak)
Dimensions: The size shall be minimized within the constraints of
packaging.
Power Consumption: No more than [****] watts peak.
Tracking: Allows [****].
Target Cost: Logitech desires a product with a suggested retail price of
$99 assuming China based labor costs, approximately [****] Logitech margin, and
approximately [****] in nine-level costs. While many of the component costs,
labor costs, and other factors that affect Logitech's ability to hit any given
price target are not related to Immersion's obligations under this contract,
there are currently unknown component costs that do depend upon Immersion's
design. These unknown component costs are the cost of goods for the sensor
electronics and actuator subsystem. At the present time, the preliminary sensor
electronics component costs are estimated at [****] and the preliminary actuator
component costs are estimated at [****]. Based upon the current specification,
Immersion has informed Logitech that it expects that [****] to [****] can be cut
from the combined component costs of the sensor electronics and actuator
subsystem. Note: all costs are based upon the production volume target of
100,000 units per year.
*Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
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EXHIBIT B
Immersion Packaging Labeling Specification
Logitech must place or have placed the following notice or other similar mark,
at Immersion's request, on the underside (exterior) of those products which
incorporate Licensed Technology as well as on the packaging and manuals for such
products:
"FEELit(TM) Force Feedback Technology Licensed from Immersion
Corporation".
Logitech must also place or have placed the following FEELit Mouse logo (or
future derivative of the mark as reasonably approved by Logitech) at Immersion's
request, prominently on retail packaging and manuals such that the logo is
clearly legible and occupies a rectangular area of no less than 0.70 inches by
0.825 inches. The mark must be displayed on at least two surfaces of the retail
packaging, including the front surface and specifically not including the bottom
surface.
[FEELit LOGO] [DIAGRAM]
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<PAGE> 1
EXHIBIT 10.20
*Certain information in this document has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
TECHNOLOGY PRODUCT DEVELOPMENT AGREEMENT
IMMERSION CORPORATION AND LOGITECH, INC.
This Technology Product Development Agreement (the "Agreement") between
Immersion Corporation, a California corporation, with principal offices
in San Jose, California (hereinafter "Immersion") and Logitech Inc., a
California corporation, with principal offices in Fremont, California
(hereinafter "Logitech"), is entered into as of April 13, 1998 (the
"Effective Date").
RECITALS
WHEREAS, Logitech and Immersion desire to establish a mutually
beneficial business relationship and to develop, verify and launch under
their best efforts high quality and competitively priced "FEELit Mouse"
force-feedback Planar Force Feedback Cursor Control Devices; and,
WHEREAS, Immersion is in the business of developing certain computer
peripheral force feedback industrial, business, gaming, arcade and
medical devices, and represents it is the owner and/or licensee of
certain know-how, trade secrets and issued or pending patents; and,
WHEREAS, Logitech is in the business of developing, manufacturing and
distributing software and electrical computer peripheral devices such as
input data, gaming, and control devices including, but not limited to,
Planar Force Feedback Cursor Control Devices, and represents it is the
owner and/or licensee of certain know-how, trade secrets and issued or
pending patents; and,
WHEREAS, Logitech desires to develop internally and with third parties,
use, manufacture and distribute Planar Force Feedback Cursor Control
Devices which utilize FEELit Mouse technology.
NOW, THEREFORE, in consideration of the promises and agreements set
forth below and the other consideration cited herein, the parties agree
as follows:
1. PURPOSE AND SCOPE OF THE AGREEMENT
1.1 PURPOSE. The purpose of this Agreement is to expressly define the
terms and conditions of Logitech's and Immersion's business
relationship with respect to force-feedback Planar Force Feedback
Cursor Control Device projects.
<PAGE> 2
1.2 SCOPE. The scope of this Agreement encompasses Immersion's and
Logitech's respective development, service and support rights and
obligations regarding Planar Force Feedback Cursor Control Device
projects provided for herein.
2. DEFINITIONS
In this Agreement, including the Exhibits hereto, the following words
and expressions shall have the following meanings:
2.1 AFFILIATES. This means any corporation or business entity which
is controlled by, controls, or is under common control of a
Party. For this purpose, the meaning of the word "control" shall
include, without limitation, direct or indirect ownership of more
than fifty percent (50%) of the voting shares of interest of such
corporation or business entity.
2.2 DEFECT. This means, with respect to any non-software Deliverable,
failure to materially conform to the applicable then-current
Specifications for such non-software Deliverable.
2.3 DEFECT CORRECTION. This means either a modification or addition
that eliminates or works around a Defect in a non-software
Deliverable so as to cause the non-software Deliverable to comply
with the applicable then-current Specification.
2.4 DELIVERABLES. This means the various deliverables, which are
tangible implementations or items, including interim deliverables
or final prototype deliverables, identified as such and described
in Exhibit B ("Development Schedule"), or any subsequent
development schedule attached hereto by amendment.
2.5 ENHANCEMENT OR ENHANCEMENTS. This means any force-feedback
modification or addition made by Immersion under the terms of
Section 6.7 ("Other Development") and Section 7.2 ("Enhancements
by Immersion"), for the Planar Force Feedback Cursor Control
Field of Use, and which is a tangible implementation, other than
a Defect Correction or Error Correction, that when incorporated
into the Planar Force Feedback Cursor Control Device, materially
reduces the product cost of a Planar Force Feedback Cursor
Control Device, or materially changes the functional capability,
or form factor.
2.6 ERROR. This means, with respect to any software Deliverable,
failure of any such software Deliverable to materially conform to
the applicable then-current Specification for such software
Deliverable.
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<PAGE> 3
2.7 ERROR CORRECTION. This means either a modification or addition
that eliminates or works around an Error in the software
Deliverable so as to cause the software Deliverable to comply
with the then-current Specification.
2.8 FEELIT MOUSE PRODUCT. This means the final production version of
the mouse described in the first Exhibit A ("Specifications")
which utilizes and/or contains Immersion Product Model
Technology, including but not limited to the applicable Immersion
Software, documentation, Defect Corrections and Error Corrections
thereto.
2.9 FINAL PROTOTYPE. This means a Deliverable which is the final
functional form of the Planar Force Feedback Cursor Control
Device, if any, including software and hardware, produced by
Immersion under a development schedule, which prototype serves as
a model for the final production version of the Planar Force
Feedback Cursor Control Device, if any, and which conforms to the
applicable Specification.
2.10 IMMERSION PRODUCT MODEL TECHNOLOGY. This means that subset of
Immersion Technology delivered as a Deliverable under the terms
of a development schedule, or as an Enhancement or New
Technology, which is actually utilized in or in connection with
and/or embedded in the final production version of the FEELit
Mouse Product, any subsequent Product Model of the FEELit Mouse
Product or any Product Model of any Planar Force Feedback Cursor
Control Device.
2.11 IMMERSION SOFTWARE. This means the driver software and computer
firmware subset of the Immersion Product Model Technology
actually utilized in or in connection with and/or embedded in the
final production version of the FEELit Mouse Product, any
subsequent Product Model of the FEELit Mouse Product or any
Product Model of any Planar Force Feedback Cursor Control Device
that acts as an interface to and controls the FEELit Mouse
Product, any subsequent Product Model of the FEELit Mouse Product
or any Planar Force Feedback Cursor Control Device.
2.12 IMMERSION TECHNOLOGY. This means any and all technology created
or acquired by Immersion, or licensed to Immersion by third
parties, including but not limited to software created by
employees or consultants of Immersion, (i) first developed or
reduced to practice before or after the Effective Date solely by
Immersion independent of the scope of the work under this
Agreement or (ii) first developed or reduced to practice after
the Effective Date and within the scope of a Deliverable
developed solely by Immersion (a) under a development schedule in
effect under the terms of this Agreement, (b) as an Enhancement
or (c) as New Technology.
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2.13 INTELLECTUAL PROPERTY LICENSE AGREEMENT. This means the
Intellectual Property License Agreement between Immersion and
Logitech dated the same date as this Agreement.
2.14 JOINT TECHNOLOGY. This means any and all technology created
and/or invented jointly by Immersion and Logitech employees or
consultants after the Effective Date and within the scope of
development of the FEELit Mouse Product or any Planar Force
Feedback Cursor Control Device and/or any Enhancements under the
terms of this Agreement. The term "Joint Technology" specifically
excludes Immersion Technology and Logitech Technology.
2.15 LOGITECH PRODUCT MODEL TECHNOLOGY. This means that subset of
Logitech Technology which is actually utilized in or in
connection with and/or embedded in the final production version
of the FEELit Mouse Product, any subsequent Product Model of the
FEELit Mouse Product or any Product Model of any Planar Force
Feedback Cursor Control Device.
2.16 LOGITECH TECHNOLOGY. This means any and all technology created or
acquired by Logitech, or licensed to Logitech by third parties,
including but not limited to software created by employees or
consultants of Logitech (i) first developed or reduced to
practice before or after the Effective Date solely by Logitech
independent of the scope of the work under this Agreement or (ii)
first developed or reduced to practice after the Effective Date
solely by Logitech and within the scope of a development schedule
in effect under the terms of this Agreement.
2.17 PLANAR FORCE FEEDBACK CURSOR CONTROL FIELD OF USE. This means the
market for Planar Force Feedback Cursor Control Devices which are
not targeted for use in specific applications or designed for
specific applications. The Planar Force Feedback Cursor Device
Field of Use does not include the market for products
specifically targeted for use in gaming, medical, industrial,
human disabilities, military, automotive, scientific and arcade
products and applications.
2.18 PLANAR FORCE FEEDBACK CURSOR CONTROL DEVICE(S). This means (i) a
force feedback computer cursor control device having the
capability of tracking position of an endpoint in a two
dimensional plane and applying two dimensional planar forces upon
the user through said endpoint and (ii) one-dimensional force
feedback cursor control embodiments, including but not limited to
a force feedback roller for "roller mouse" cursor control
embodiments. Planar Force Feedback Cursor Control Devices include
but are not limited to the FEELit Mouse Product. The endpoint may
be a mouse handle, stylus, finger tip receptacle, ball, or other
manipulandum that can be moved by the user in two dimensional
plane. A Planar Force Feedback Cursor Control Device can be
mounted in any housing including but not limited to a housing
shared by a
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keyboard, track ball or other interface peripheral that provides
additional functionality. Planar Force Feedback Cursor Control
Devices specifically do not include (i) devices that can apply
three dimensional forces through the device or (ii) a "Gaming
Device" as that term is defined in the Intellectual Property
License Agreement between Immersion and Logitech dated April 2,
1997.
2.19 NEW TECHNOLOGY. This means any force-feedback technology
modification or addition made by Immersion, for the Planar Force
Feedback Cursor Control Field of Use, other than a Defect
Correction or Error-Correction, that when incorporated into a
Planar Force Feedback Cursor Control Device, materially changes
the utility, efficiency, market value, functional capability or
application, and which is developed by Immersion on a
non-exclusive basis and made "generally available" for use in
Planar Force Feedback Cursor Control Devices in the Planar Force
Feedback Cursor Control Field of Use and which is delivered by
Immersion to Logitech as a tangible implementation pursuant to
the terms of Section 7.4 ("New Technology"). For purposes of this
definition, "generally available" shall mean offered under
nonexclusive license to any one unaffiliated third party (other
than the original third party for whom the technology,
modification or addition was originally developed) for use in
Planar Force Feedback Cursor Control Devices in the Planar Force
Feedback Cursor Control Field of Use.
2.20 OEM OR OEMS. This means any third party (not including
Affiliates) that does not manufacture Planar Force Feedback
Cursor Control Devices and that wishes to purchase finished
Planar Force Feedback Cursor Control Devices for sale in the
Planar Force Feedback Cursor Control Field of Use under its own
brand name.
2.21 PARTY OR PARTIES. This means Immersion and/or Logitech.
2.22 PRODUCT LAUNCH. This means the date on which first
commercial-level shipping of the FEELit Mouse Product or any
Product Model commences to third party unaffiliated customers of
Logitech or a Logitech Affiliate.
2.23 PRODUCT MODEL. This means a single model of the FEELit Mouse
Product or any other Planar Force Feedback Cursor Control Device.
"Product Model" shall mean each variation of a FEELit Mouse
Product or Planar Force Feedback Cursor Control Device which (i)
differs by virtue of addition of or alteration through an
Enhancement or (ii) constitutes a change in form factor or (iii)
incorporates a material change in force-feedback functionality
made by a party other than Immersion. Purely cosmetic alterations
(e.g., color or styling) to the physical appearance of the FEELit
Mouse Product or a Planar Force Feedback Cursor Control Device,
or changes that do not alter the force-feedback functionality but
reduce manufacturing costs shall not be deemed a Product Model.
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2.24 QUARTER OR QUARTERS. This means Logitech's yearly fiscal
quarters. Specifically, Logitech's yearly fiscal quarters begin
and end on the following dates: first quarter, April 1 - June 30;
second quarter, July 1 - September 30; third quarter, October 1 -
December 31; and fourth quarter, January 1 - March 31.
2.25 ROYALTY BEARING PRODUCT. This means a Planar Force Feedback
Cursor Control Device which either (1) incorporates or utilizes
Immersion Product Model Technology that is not otherwise made
generally available to the public by Immersion without charge or
(2) is covered by a Licensed Patent as defined in the
Intellectual Property License Agreement or by a copyright of
Immersion embodied in any Immersion Product Model Technology that
is not otherwise made generally available to the public by
Immersion without charge generally.
2.26 SPECIFICATION(S). This means the FEELit Mouse Product
specification attached hereto as Exhibit A ("Specification") and
each Planar Force Feedback Cursor Control Device specification
associated with a development schedule which is attached by
amendment to this Agreement.
2.27 YEAR. This means any full four-Quarter period.
2.28 Any reference to the words "PURCHASE," "SALE," or "SELL," when
used in connection with intellectual property, shall mean
license.
3. EXHIBITS
The following Exhibits shall be attached hereto and incorporated in
their entirety by this reference.
EXHIBIT A ("Specification"), the Specification, contains the description
of the FEELit Mouse Product.
EXHIBIT B ("Development Schedule"), the Development Schedule, contains
the Milestones, Deliverables and Deliverable Due Dates. The parties
agree to complete Exhibit B within thirty (30) days of the Effective
Date and add such Exhibit B to this Agreement by written amendment
within such time period.
EXHIBIT C ("Change Order Form"), is the Change Order Form.
EXHIBIT D ("Software License Agreement") is the end user software
license agreement.
EXHIBIT E ("Immersion Packaging Labeling Specification") is the
Immersion Packaging Labeling specification.
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<PAGE> 7
4. TERM
The initial term of this Agreement shall be for a period of five (5)
years commencing on the Effective Date, unless otherwise earlier
terminated by the Parties according to the terms of this Agreement.
Thereafter, this Agreement shall automatically renew for subsequent
two-year periods, unless either party terminates the Agreement by
written notice at least one hundred eighty (180) days prior to the end
of the initial term or any renewal term.
5. ENGAGEMENT OF SERVICES
5.1 PROJECT ASSIGNMENT. Subject to the terms of this Agreement,
Immersion and Logitech will render the services and develop the
Deliverables described in Exhibit B ("Development Schedule"),
based upon Exhibit A ("Specifications"), which development
schedule and/or Specification may be modified by the Parties from
time to time in accordance with the procedures described in
Section 6.6 ("Modification of Specification"). Immersion shall
dedicate full-time employees of sufficient technical and
professional caliber to define, develop, complete and verify the
Planar Force Feedback Cursor Control Device it develops with
Logitech in accordance with Exhibit B ("Development Schedule"),
based on Exhibit A ("Specifications"), and will assist Logitech
in launching and supporting the resulting Planar Force Feedback
Cursor Control Device in accordance with the terms of Section 7.1
("Technical Service and Support").
5.2 PERFORMANCE OF SERVICES. Logitech has selected Immersion to
perform the services described in this Agreement based upon
Logitech receiving Immersion's personal services. Immersion may
not, therefore, subcontract or otherwise assign and delegate its
obligations under this Agreement without Logitech's prior written
consent.
5.3 PRESS RELEASE. Each of the Parties agree to credit appropriately
the other Party in all press releases, promotions, advertisement
and announcements that mention the force feedback Planar Force
Feedback Cursor Control Devices. Prior to a Party releasing any
information that references the other Party, the publishing Party
shall obtain the other Party's prior written approval. The
parties shall announce their FEELit Mouse partnership within six
months of the Effective Date.
6. PLANAR FORCE FEEDBACK CURSOR CONTROL DEVICE DEVELOPMENT
6.1 FUNDING. Logitech shall fund all costs related to its internal
development of the Planar Force Feedback Cursor Control Devices.
In consideration of the duties and obligations of Immersion with
respect to its development obligations hereunder for Logitech,
Logitech will pay Immersion on a reasonable time and material
basis. Immersion will be liable for all taxes levied against
Immersion which arise
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<PAGE> 8
in connection with Immersion's performance under this Agreement
and the payments received from Logitech. Any payment designated
as due and payable based upon completion of development of a
specified Deliverable(s) and acceptance by Logitech shall not be
payable until Logitech's acceptance thereof.
6.1.1 FEELit MOUSE PRODUCT FUNDING. In consideration of the
duties and obligations of Immersion with respect to
development pursuant to Exhibit B ("Development Schedule")
by Immersion, Logitech will pay Immersion a total amount
of three hundred and sixty two thousand dollars ($362,000)
(US Dollars) ("Development Fee"), which sum is in addition
to the eight thousand dollars ($8,000) to be paid by
Logitech to Immersion under the terms of the Parties'
Phase 0 Term Sheet, receipt of which previous payment is
hereby acknowledged by Immersion. The Development Fee will
be payable based on a segmented development schedule with
scheduled deliverables as described in Exhibit B
("Development Schedule").
6.2 DEVELOPMENT MILESTONES. Immersion's development obligation under
the terms of this Agreement as described in Exhibit B
("Development Schedule") shall be conducted on a first priority
basis. The FEELit Mouse Product development schedule is described
with particularity in Exhibit B ("Development Schedule") and the
schedule is divided into milestones ("Milestones"), each of which
require the delivery of one or more Deliverables on specific
Deliverable due dates ("Deliverable Due Dates"). Upon completion
of each Milestone associated with a Deliverable under Exhibit B
("Development Schedule") as amended in writing by the Parties
from time to time, Immersion shall promptly deliver to Logitech
the applicable Deliverable called for under such Milestone.
Logitech agrees to promptly complete and deliver to Immersion
Deliverables required to be completed and delivered by Logitech
pursuant to the terms of Exhibit B ("Development Schedule").
6.3 DELIVERY AND ACCEPTANCE OF DELIVERABLES BY LOGITECH. Upon
completion of each Deliverable, Immersion shall deliver to
Logitech such Deliverable, including documentation, if included
as part of the Deliverable requirement, for evaluation by
Logitech. Logitech shall review, test, and evaluate each
Deliverable and where indicated in the Development Schedule,
accept or reject each Deliverable in accordance with Exhibit B
("Development Schedule") and make the associated payment, if any,
for accepted Deliverables. Logitech shall provide Immersion with
written acceptance of each Deliverable (for which acceptance is
indicated as a requirement in the Development Schedule), or a
written statement of Defects and/or Errors to be corrected within
ten (10) business days after such delivery unless a different
acceptance time period for a Deliverable is described in Exhibit
B ("Development Schedule") or as otherwise mutually agreed upon
in a
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writing signed by the Parties. Immersion shall promptly correct
such Defects and/or Errors and return the corrected Deliverables
for retesting and reevaluation, and unless otherwise provided for
in Exhibit B ("Development Schedule"), Logitech shall within ten
(10) business days after such redelivery provide Immersion with
written acceptance or a statement of Defects and/or Errors to be
corrected. The foregoing procedure shall be repeated until
Logitech accepts the Deliverable or finally rejects the
Deliverable and either terminates the Agreement or the
development project related to the unacceptable Deliverable
pursuant to Section 12 ("Termination").
6.4 PROGRAM MANAGERS. Immersion and Logitech shall each appoint a
program manager ("Program Manager"). Each Party reserves the
right to change such Program Manager, at any time, upon written
notice to the other Party. Immersion's appointed Program Manager
as of the Effective Date is Ken Martin. Logitech's appointed
Program Manager as of the Effective Date is Laurent Plancherel.
6.5 STATUS MEETINGS. The Parties shall notify each other of any
anticipated problems and any indication of delay in fixed or
tentative schedules. At least once each month, the Parties shall
conference, as mutually agreed, for progress discussions
describing in detail the status of the work performed and
discussion of possible resolution of any problems which have
arisen.
6.6 MODIFICATION OF SPECIFICATION. Logitech may modify the
Specifications at any time during development after consulting
with Immersion. If any such modification requires an increase in
the time or cost to perform by Immersion, an equitable adjustment
shall be negotiated and mutually agreed upon in writing by
Immersion and Logitech. Such changes will be implemented only
pursuant to a change order form in the form of Exhibit C ("Change
Order Form"), signed by both Parties. Such changes will become
effective and will be deemed incorporated into the Agreement as
an amendment to the applicable exhibit or section of the
Agreement. This procedure is used to control the technical
configuration of the Deliverables, as well as to control and
document costs and schedules. Logitech shall not be liable for
any work performed by Immersion which differs from the
then-current Specification and/or development schedule prior to
such work being authorized in a signed Change Order Form.
6.7 OTHER DEVELOPMENT. Should Logitech desire to have Immersion
design other Planar Force Feedback Cursor Control Devices after
the FEELit Mouse Product and/or Enhancements, the Parties will
mutually agree in writing upon a supplemental development
schedule substantially in the form of Exhibit B
("Development Schedule"), and reasonable associated development
fees, and an accompanying Exhibit A ("Specifications") and shall
amend this Agreement to
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incorporate such project. Except as provided in Section 7.4 ("New
Technology"), all terms and conditions of this Agreement, and the
Intellectual Property License Agreement including royalty rates
set forth in the Intellectual Property License Agreement, Section
3 ("Royalties"), shall apply to any Planar Force Feedback Cursor
Control Device developed under this Agreement unless otherwise
mutually agreed in writing.
7. IMMERSION'S POST-DEVELOPMENT OBLIGATIONS
7.1 TECHNICAL SERVICE AND SUPPORT. Immersion shall provide Logitech
with ongoing engineering and technical support up to at least
sixty (60) hours per week for the Planar Force Feedback Cursor
Control Device, as reasonably requested by Logitech. So long as
Logitech has "preferred customer status," Immersion will provide
such ongoing engineering and technical support on a first
priority basis. If Logitech does not have "preferred customer
status", Immersion will continue to provide such ongoing
engineering and technical support on an as-available basis
without the sixty (60) hour per week minimum commitment. In
consideration of any such support, whether on a priority or
as-available basis, Logitech shall pay Immersion at a reasonable
time and materials rate.
7.1.1 EXCEPTION. Immersion shall promptly provide Error
Corrections without charge for any Errors, including
software Errors in any Immersion Software including any
firmware.
7.2 ENHANCEMENTS BY IMMERSION. So long as Logitech has "preferred
customer status," and in accordance with Section 6.7 ("Other
Development") above, an Enhancement project shall be scheduled on
a first priority basis. If Logitech does not have "preferred
customer status", Immersion may agree to provide Enhancements
under the terms of this Section 7.2 ("Enhancements by Immersion")
on a case by case and time available basis but Immersion will be
under no obligation to accept an Enhancement project.
7.3 OEM REFERRAL. Should an OEM contact Immersion concerning
manufacture of a Planar Force Feedback Cursor Control Device for
the Planar Force Feedback Cursor Control Field of Use, Immersion
agrees to direct such OEM to contact Logitech with respect to
manufacturing such Planar Force Feedback Cursor Control Device.
The obligation of Immersion to direct OEMs to Logitech is
independent of Logitech having "preferred customer status" and is
not required for such referrals. Logitech agrees that when
contacted by any OEM referred by Immersion, Logitech will include
Immersion Product Model Technology and/or technology covered by
the Licensed Patents as defined in the Intellectual Property
License Agreement in any initial proposals or designs for
manufacturing a Planar Force Feedback Cursor Control Device for
such OEM. If Logitech's proposal or
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design incorporating Immersion Product Model Technology and/or
technology covered by the Licensed Patents as defined in the
Intellectual Property License Agreement is accepted, Logitech
agrees to make good faith efforts to utilize Immersion Product
Model Technology and/or technology covered by the Licensed
Patents as defined in the Intellectual Property License Agreement
in the Planar Force Feedback Cursor Control Device manufactured
for such OEM and to pay royalties therefor to Immersion in
accordance with this Agreement. If the OEM in its own discretion
elects to reject Logitech's proposal and/or design which
incorporates Immersion Product Model Technology and/or technology
covered by the Licensed Patents as defined in the Intellectual
Property License Agreement, then (i) Immersion agrees and
acknowledges that Logitech may manufacture a Planar Force
Feedback Cursor Control Device for the OEM without incorporating
Immersion Product Model Technology and/or technology covered by
the Licensed Patents and (ii) Logitech agrees and acknowledges
that Immersion may enter into an agreement with the OEM with
respect to Planar Force Feedback Cursor Control Devices in the
Planar Force Feedback Cursor Control Field of Use.
7.4 NEW TECHNOLOGY. So long as Logitech has "preferred customer
status", if Immersion develops and decides to make "generally
available" and to license, on a nonexclusive basis, to any one
unaffiliated third party (other than the original third party for
whom the New Technology was originally developed) any New
Technology for use in Planar Force Feedback Cursor Control
Devices in the Planar Force Feedback Cursor Control Field of Use,
Immersion shall provide Logitech with an opportunity to license
such New Technology, under the terms of a separate agreement, on
a nonexclusive basis and on terms at least as favorable as those
upon which such New Technology is offered by Immersion to others,
which royalty terms may or may not be as favorable as the royalty
terms in the Intellectual Property License Agreement Section 3
("Royalties"). If Logitech does not have "preferred customer
status", Immersion may decide to offer New Technology under the
terms of this Section 7.4 ("New Technology") but is not obligated
to do so.
7.5 NOTICE OF IMMERSION MANUFACTURE. Immersion shall provide Logitech
with twelve (12) months' written notice prior to commencement by
Immersion of distribution of a Planar Force Feedback Cursor
Control Device for the Planar Force Feedback Cursor Control Field
of Use to be manufactured by Immersion or manufactured by a third
party on Immersion's behalf for distribution by Immersion under
Immersion's name. Upon expiration of this notice period,
Immersion may, but shall no longer be obligated to offer Logitech
Enhancements in accordance with Section 7.2 ("Enhancements by
Immersion"), may but shall no longer be obligated to offer OEMs
to Logitech in accordance with Section 7.3
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("OEM Referral"), and may but shall no longer be obligated to
provide New Technology under Section 7.4 ("New Technology").
7.6 LOGITECH PREEMPTION PROTECTION. Provided that Logitech is in
compliance with its development obligations under the terms of
this Agreement, which will be measured by Logitech making
substantial progress toward meeting its milestones as indicated
in Exhibit B ("Development Schedule"), Immersion agrees not to
enter into an agreement with any third party manufacturer which
will permit such third party manufacturer to ship a mouse product
for the Planar Force Feedback Cursor Control Field of Use which
incorporates similar Immersion Technology as incorporated into
the FEELit Mouse Product (a "Similar Product") on or before three
(3) months after the Product Launch Commitment Date as defined in
Section 8.4 ("Product Launch Commitment").
7.7 ADVISEMENT PERIOD. Although Immersion's development relationship
with Logitech under the terms of this Agreement is not exclusive,
Immersion agrees, during the Advisement Period (as defined
below), to provide Logitech with written notice if Immersion
enters into an agreement with a third party manufacturer which
will permit such third party manufacturer to produce a Similar
Product that is scheduled or planned to ship during calendar
1999. Such notice will not identify the third party manufacturer
and will not provide details regarding the Similar Product but
will simply advise Logitech that such an agreement has been
signed. For purposes of this Agreement, the Advisement Period
shall be a period which commences on the Effective Date of this
Agreement and ends three (3) months after the Product Launch
Commitment Date.
8. LOGITECH'S OBLIGATIONS
8.1 DEVELOPMENT. Logitech shall (i) work with Immersion to produce
each set of Exhibit A ("Specifications") which shall include
product features, performance and design criteria, power
requirements, schematics, quality requirements, and the
preliminary component summary; and Exhibit B ("Development
Schedule"), including technical assistance in the development
thereof; (ii) review, test and evaluate the Immersion
Deliverables for conformance with the applicable Specification,
and (iii) deliver the Logitech Deliverables to Immersion for use
in development in accordance with Exhibit B ("Development
Schedule"). Immersion agrees not to disclose or copy for any
purpose Logitech's Specifications and Deliverables without the
express written consent of Logitech or in fulfillment of
Immersion's obligations under this Agreement.
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8.2 PREFERRED CUSTOMER STATUS.
8.2.1 REQUIREMENTS. Logitech shall have "preferred customer
status" during the first four quarter period (the "Initial
Period") following the Product Launch. If the Product
Launch falls within the first half of a Quarter, such
Quarter will be counted as the first such Quarter. If the
Product Launch falls in the second half of a Quarter, the
next Quarter will be counted as the first such Quarter.
Thereafter, except as provided in Section 7.5 ("Notice of
Immersion Manufacture"), for so long as (i) Logitech
continues to timely pay royalties to Immersion according
to the Intellectual Property License Agreement Section 3
("Royalties") in an amount equal to at least three hundred
twenty thousand dollars ($320,000) ("Minimum Annual
Revenue Requirement") per four Quarter period (a "Revenue
Period") beginning at the expiration of the Initial
Period, payable on a quarterly basis as set forth in
Section 8.2.2 ("Minimum Annual Revenue Requirement"); and
(ii) Logitech is not distributing (directly or through
OEMs) any force-feedback Planar Force Feedback Cursor
Control Device which is not a Royalty Bearing Product,
Immersion agrees to grant Logitech "preferred customer
status." Notwithstanding the foregoing, Logitech may, by
written notice given at least thirty (30) days prior to
the first day of any given Revenue Period terminate the
"preferred customer status" for the upcoming Revenue
Period. Upon termination of "preferred customer status" as
described herein all of the obligations of Immersion and
Logitech, and any provisions in this Agreement, which are
contingent upon "preferred customer status" shall be null
and void and of no further force or effect upon expiration
of the then current four Quarter period. If Logitech does
not send a termination notice as permitted herein, the
"preferred customer status" will continue for the duration
of the upcoming Revenue Period, except as otherwise
provided herein. If Immersion does not receive a
termination notice from Logitech as provided herein,
Immersion will send a notice to Logitech, confirming that
no termination notice has been received, within thirty
(30) days after the subject Revenue Period commences;
however a failure by Immersion to send such notice will
not be a material breach and will in no way change
Logitech's "preferred customer status."
8.2.2 MINIMUM ANNUAL REVENUE REQUIREMENT. Each Minimum Annual
Revenue Requirement shall consist of four (4) payments of
eighty thousand dollars ($80,000) each. Each quarterly
payment shall be referred to as a "Quarterly Payment".
Each such Quarterly Payment shall be due on the last day
of each Quarter ("Preferred Status Quarter") and is
payable within forty-five (45) days after the end of each
Preferred Status Quarter. Royalties accrued in each
Preferred Status Quarter as provided in the
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Intellectual Property License Agreement Section 3
("Royalties") shall be credited toward the Quarterly
Payments due for such Preferred Status Quarter. If the
actual royalties due for the Preferred Status Quarter are
less than the Quarterly Payment due, Logitech will submit
the actual royalty payment and Logitech will pay the
difference between the Quarterly Payment due and the
actual royalties due for the Preferred Status Quarter. If
the actual royalties due for the Preferred Status Quarter
are greater than the Quarterly Payment due, such excess
amount shall be credited toward future Quarterly Payments
within the same Revenue Period. Actual royalties paid in
excess of the Minimum Annual Revenue Requirement for a
given Revenue Period will not be applied as a credit
toward Quarterly Payments due for Preferred Status
Quarters in a later Revenue Period. Should Logitech not
timely pay any required Quarterly Payment and fail to make
such payment within ten (10) days of receiving written
notice from Immersion and unless otherwise agreed to in
writing by the Parties, preferred customer status benefits
as described in Sections 7.1 ("Technical Services and
Support"), 7.2 ("Enhancement by Immersion") and 7.4 ("New
Technology") shall no longer be in force or effect,
effective as of the date on which such Quarterly Payment
was due.
8.2.3 TERMINATION OF PREFERRED CUSTOMER STATUS. If Logitech
terminates its "preferred customer status" by distributing
(either directly or through OEMs) a force-feedback Planar
Force Feedback Cursor Control Device in the Planar Force
Feedback Cursor Control Field of Use which is not a
Royalty Bearing Product, Logitech agrees to provide
Immersion with six (6) months' prior written notice. Upon
expiration of such notice period, (i) Logitech shall no
longer be obligated to pay the Quarterly Payments starting
on the date the next Quarterly Payment would have come due
after the expiration of the six (6) month notice, however,
Logitech will submit a pro rata Quarterly Payment for the
portion of the Quarter in which the "preferred customer
status" was in effect prior to the expiration date of the
six (6) month notice which shall be applied in accordance
with Section 8.2.2 ("Minimum Annual Revenue Requirement")
and (ii) all of the obligations of Immersion and Logitech,
and any provisions in this Agreement which are contingent
upon "preferred customer status" shall be null and void
and of no further force or effect upon expiration of the
notice period.
8.3 DEVELOPER UNITS. Subject to the timely completion of Immersion's
development obligations under the terms of this Agreement,
Logitech agrees to produce one hundred (100) FEELit Mouse units
(PVT) at least six (6) months prior to the Product Launch.
Immersion shall be responsible for providing such units to
software developers in a timely manner.
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8.4 PRODUCT LAUNCH COMMITMENT. Logitech agrees to use
reasonable efforts to launch the FEELit Mouse Product with
a "Product Availability Date" or "PAD" on or before July
23, 1999 (such date (and not the actual shipment date)
shall be referred to as the "Product Launch Commitment
Date"). Immersion recognizes that the actual shipment date
may be adjusted to a later date due to unforeseen events,
manufacturing issues, and/or sourcing issues and that
Logitech, by way of this provision, is merely confirming
Logitech's commitment of the resources and priority level
to make Product Launch by July 23, 1999 a strong
possibility. The parties have designated a date in the
milestone schedule in Exhibit B ("Milestone Schedule") as
the "Design Freeze" date, after which Immersion shall not
be responsible for schedule delays resulting from
subsequent Logitech changes to the design specification of
the FEELit Mouse. Immersion acknowledges that Immersion
may be responsible for several time sensitive and critical
steps in a given milestone schedule which will need to be
completed prior to the Design Freeze date. The parties
agree that the Product Launch Commitment Date of July 23,
1999 is dependent upon this Design Freeze date identified
in the milestone schedule in Exhibit B ("Milestone
Schedule") being met. Therefore, the parties agree that
for each day that the Design Freeze is adjusted to a later
date substantially due to Immersion's failure to complete
milestones which are substantially Immersion's
responsibility to complete and substantially within
Immersion's control and upon which the Design Freeze date
is dependent, the Product Launch Commitment Date will be
moved back one day not including weekends.
8.5 OEM SOLE SOURCE INITIATIVE. The parties intend to
negotiate in good faith to sign an OEM Purchase Agreement
under which, for the first eighteen (18) months of such
agreement, Logitech agrees to purchase all of its
peripheral device components requirements which can be met
by certain FEELit Mouse Controller Chip and Custom
Actuator Core components as defined in the OEM Purchase
Agreement.
9. FINANCIAL TERMS
9.1 DEVELOPMENT FEES. Development of the FEELit Mouse Product
will be funded in accordance with the terms of Section 6.1
("Funding") and any subsequent development will be funded
as provided under the terms of Section 6.7 ("Other
Development").
9.2 NEW TECHNOLOGY ROYALTIES. New Technology will be provided
under royalties which are subject to the terms of Section
7.4 ("New Technology") and which are mutually agreed upon
in writing by Immersion and Logitech.
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10. OWNERSHIP OF TECHNOLOGY
10.1 IMMERSION TECHNOLOGY. Immersion shall retain ownership of all
Immersion Technology (and Immersion Product Model Technology).
10.2 LOGITECH TECHNOLOGY. Logitech shall retain ownership of all
Logitech Technology (and Logitech Product Model Technology).
10.3 JOINT TECHNOLOGY. All Joint Technology shall be jointly owned by
Immersion and Logitech. Exploitation of and subsequent
development of Joint Technology, including commercial development
and/or licensing, will be by each Party without financial
accounting to, or the consent of, the other Party. Each Party
agrees to assist the other Party in any reasonable manner to
obtain and enforce intellectual property rights with respect to
the Joint Technology for the requesting Party's benefit in any
and all countries, and each Party agrees to execute, when
requested, applications and assignments to the requesting Party
and any other lawful documents deemed necessary by the requesting
Party to carry out the ownership provisions of this Agreement. If
called upon to render assistance under this Section 10.3 ("Joint
Technology"), a Party will be entitled to a fair and reasonable
fee, in addition to reimbursement of expenses incurred, at the
prior written request of the other Party.
10.4 JOINT TECHNOLOGY COPYRIGHTS. Each Party agrees to execute, upon
written request of the other Party, a signed transfer of an
undivided one-half interest in any Joint Technology copyright to
the other Party (so that the Parties are joint owners of the
copyright).
10.5 JOINT TECHNOLOGY INVENTIONS. Immersion and Logitech will
determine whether any Joint Technology inventions were conceived
or first actually or constructively reduced to practice within
the scope of development of the FEELit Mouse Product, or any
Planar Force Feedback Cursor Control Device and/or any
Enhancements during the term of the Agreement, and the Parties
will discuss the circumstances of the invention. The Parties will
discuss whether a patent application should be filed for a
particular Joint Technology invention or, in the alternative, the
Joint Technology invention should be kept as a trade secret by
the Parties. If the Parties mutually agree to file a patent for a
particular Joint Technology invention, the Parties will discuss
the patent filing details, including but not limited to which
Party shall file and prosecute the U.S. and any foreign patent
applications. The cost of such filing and prosecution shall be
evenly distributed between the Parties. If the Parties cannot
mutually agree to file for a patent for a particular Joint
Technology invention, such Joint Invention shall be treated as a
trade secret by both Parties provided, however, such treatment
shall not prevent either party from shipping a product based upon
such trade secret. In
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any case where the Parties mutually agree to file for a patent,
the application shall include all inventors and the Parties shall
jointly own the patent. Should both Parties agree not to file for
a patent such Joint Invention shall be treated as a trade secret
by both Parties, provided, however, such treatment shall not
prevent either party from shipping a product based upon such
trade secret. Assignment of patent(s) issuing from application(s)
for Joint Technology inventions shall be made jointly to
Immersion and Logitech.
10.6 SURVIVAL OF JOINT TECHNOLOGY OBLIGATIONS. The obligations set
forth in this Section 10 ("Ownership of Technology") shall
survive the expiration or termination of this Agreement.
11. LOGITECH DEVELOPMENT LICENSE TO IMMERSION
Logitech grants Immersion a non-exclusive license to use the Logitech
Technology under Logitech's intellectual property rights, provided to
Immersion hereunder for purposes of performing Immersion's development
obligations under any development schedule attached to this Agreement,
to have and distribute internally Logitech Technology and to modify or
copy the materials exclusively for the purpose of performing the
development activities required under this Agreement. Immersion's
intellectual property license to Logitech with respect to all
Deliverables delivered hereunder and all development performed under the
terms of this Agreement, with the exception of Joint Technology is
described and subject to the terms and conditions of the Intellectual
Property License Agreement.
12. TERMINATION
12.1 TERMINATION BY LOGITECH WITHOUT CAUSE. Logitech may terminate
this Agreement and/or any development project without cause upon
sixty (60) days written notice.
12.2 TERMINATION FOR CAUSE. Immersion may terminate this Agreement
and/or any development project by written notice if Logitech
materially breaches Section 16 ("Confidentiality") or if Logitech
fails to make development payments as provided in this Agreement
and any Exhibit B ("Development Schedule"). Immersion's
termination shall become effective upon thirty (30) days written
notice of breach, provided Logitech fails to cure its breach
within the notice period. Logitech may terminate this Agreement
upon thirty (30) days written notice if Immersion materially
breaches this Agreement and fails to cure its breach during the
notice period.
12.3 EFFECT OF TERMINATION. If either Party terminates this Agreement
and/or a development project hereunder, both Parties will stop
all work in progress and minimize all related costs (e.g. pending
materials orders). If a Party
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independently elects to proceed with its work in progress it
shall be solely responsible for related costs. If Logitech
requests that Immersion complete work in progress, Logitech shall
be responsible for related costs according to the applicable
Exhibit B ("Development Schedule"). If Immersion terminates the
Agreement as provided in Section 12.2 ("Termination for Cause"),
or Logitech terminates the Agreement or an Exhibit B
("Development Schedule") without cause Logitech shall pay
Immersion for Deliverables due and delivered up to the effective
date of termination and Logitech shall also pay for development
fees then owing under this Agreement based upon a pro rata
portion of the number of calendar days elapsed since completion
of the last Deliverable for which payment was due and the number
of the days between such Deliverable and the next sequent
Deliverable for work done for such deliverable. If Logitech
terminates this Agreement or an Exhibit B ("Development
Schedule") for cause, no further payments shall be due under this
Agreement except for Deliverables accepted up to the date of
termination. In no event, however, will either Party's liability
under this Agreement for any development project of a Planar
Force Feedback Cursor Control Device exceed the amounts set forth
in the applicable Exhibit B ("Development Schedule"). NEITHER
PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY SORT AS A
RESULT OF TERMINATING THIS AGREEMENT IN ACCORDANCE WITH THE TERMS
OF THE AGREEMENT.
12.4 THIRD PARTY ACQUISITION OF IMMERSION.
12.4.1 SPECIAL HANDLING PROVISIONS. In the case of a merger or
acquisition where Immersion is not the surviving entity or
in the case of a sale of assets by Immersion in accordance
with the terms of Section 18.2 ("Succession and
Assignment"), Immersion is not required to obtain
Logitech's prior approval to assign this Agreement,
however, Immersion will provide Logitech with written
notice as soon as possible, consistent with and subject to
Immersion's obligations of confidentiality with respect to
such merger, acquisition or sale of assets transaction.
Immersion recognizes that Logitech may have concerns with
respect to the assignee of this Agreement ("Assignee") if
such Assignee is viewed by Logitech to be a competitor,
however, notwithstanding competitive concerns, Logitech
may not desire to terminate this Agreement. Immersion
therefore agrees to permit Logitech to be able to require
that the following "special handling" provisions described
in this Section 12.4 ("Third Party Acquisition of
Immersion") be implemented if so requested by Logitech, in
writing.
12.4.2 CONFIDENTIAL INFORMATION SPECIAL HANDLING. If Logitech
desires to prevent the Assignee from accessing Logitech's
confidential information
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after assignment of this Agreement because such Assignee
is viewed by Logitech as a competitor, Logitech may so
notify Immersion in writing and Immersion will implement
special procedures to keep the Logitech confidential
information separate from the Assignee's information and
will limit disclosure of the Logitech confidential
information to those employees who had previously had
access prior to the assignment of the Agreement. In such
case, the Logitech confidential information will be stored
and used in a separate area in order to limit access to
only those former Immersion employees who are authorized
to work with such Logitech confidential information. If
invoked, such special procedures will be observed for at
least ninety (90) days from the date of notice by Logitech
so as to give Logitech time to assess the situation,
however, Logitech must cancel the special procedures or
terminate this Agreement in accordance with Section 12.1
("Termination by Logitech Without Cause"), effective one
year from the date of the written notice which invoked the
special procedures unless the Assignee, in its sole
discretion, agrees in writing to continue the special
procedures, for the mutual benefit of the Parties. Upon
Logitech's request Immersion shall return any and all
copies of Logitech's confidential information or, at
Logitech's option, Immersion shall destroy such copies and
notify Logitech in writing when such copies have been
destroyed, however if Logitech requests such return or
destruction, immersion shall be released from all
obligations under this Agreement which Immersion is unable
to perform without access to such confidential
information, if any.
12.4.3 TERMINATION OF OBLIGATIONS. After receipt by Logitech of
notice from Immersion as described in Section 12.4.1
("Special Handling Provisions"), Immersion may but shall
no longer be obligated to refer OEMs to Logitech in
accordance with Section 7.3 ("OEM Referral") and (iii)
provide New Technology under Section 7.4 ("New
Technology"). For six (6) months after receipt of such
notice, Immersion shall continue to provide to End User in
accordance with Section 7.2 ("Enhancements by Immersion")
on a reasonable (versus priority) commercial basis.
13. SOURCE CODE ESCROW. Logitech may request Immersion to deposit
Source Code materials and if so, then Immersion shall promptly
provide to a mutually agreeable escrow agent, under the terms of
a mutually agreeable escrow agreement, all Immersion Software
source code, drawings, specifications, and other information
necessary for Logitech to continue development or support of each
Final Prototype or Deliverable described in the applicable
Exhibit B ("Development Schedule") ("Source Code Materials"),
which is being developed under Exhibit B ("Development
Schedule"). Immersion shall promptly deposit any future updates
or revisions with the escrow agent. Under the terms of the escrow
agreement, the escrow agent shall be instructed to deliver
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such Source Code Materials to Logitech upon a certification from
Logitech that Immersion has become bankrupt and is unable to
perform any of its material software development obligations
relating to software, including firmware, pursuant to Exhibit B
("Development Schedule") prior to completion of the Final
Prototype of any Planar Force Feedback Cursor Control Device and
acceptance by Logitech pursuant to the terms of this Agreement
and/or fails to perform any of its material software development
obligations relating to software, including firmware, pursuant to
Exhibit B ("Development Schedule") prior to completion of the
Final Prototype of any Planar Force Feedback Cursor Control
Device and acceptance by Logitech pursuant to the terms of this
Agreement or Logitech terminates the Agreement for cause based on
Immersion's failure to perform any of its material software
development obligations relating to software, including firmware,
pursuant to Exhibit B ("Development Schedule") prior to
completion of the Final Prototype of any Planar Force Feedback
Cursor Control Device and acceptance by Logitech pursuant to the
terms of this Agreement. If Logitech elects to disclose Source
Code materials (other than firmware source code designated by
Immersion as "Authorized For Modification" pursuant to Section
2.2.1 of the Intellectual Property License Agreement) to any
Affiliate and prior to any disclosure, Logitech shall enter into
a written agreement with such Affiliate and such written
agreement shall contain terms similar to subsections (i)-(v)
below. Logitech will not disclose Source Code material (other
than firmware source code designated by Immersion as "Authorized
For Modification" pursuant to Section 2.2.1 of the Intellectual
Property License Agreement) to any third parties without
Immersion's prior written consent. Such disclosures, if any,
shall be upon terms similar to subsections (i)-(v) below. The
escrow agreement will include the following minimum terms and
conditions, which shall not be applicable to the firmware source
code that is designated by Immersion as "Authorized For
Modification" pursuant to Section 2.2.1 of the Intellectual
Property License Agreement, use of which is governed by the
Intellectual Property License Agreement:
(i) Immersion will grant Logitech the right to use the Source Code
Materials solely for the purpose of maintaining object code
versions of the Immersion Software portion of the Immersion
Product Model Technology in the Planar Force Feedback Cursor
Control Devices or to continue development or support of the
Planar Force Feedback Cursor Control Devices.
(ii) Logitech will acknowledge and agree that use of the Source Code
Materials is furnished to Logitech on a confidential and secret
basis for the sole and exclusive use of Logitech, and not for
copying, distribution, sale, sublicense or disclosure to third
parties except as provided under the Intellectual Property
License Agreement signed by the Parties. In the event that
Logitech obtains the Source Code Materials pursuant to the terms
of the escrow agreement, Logitech will agree that it will not
publish, disclose or otherwise divulge the Immersion Source Code
to any person, except officers, employees and independent
contractors of Logitech who have entered into non-disclosure
agreements and need access to the Immersion Source Code Materials
to perform their duties. Logitech may make one
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<PAGE> 21
(1) machine-readable copy of the Immersion Source Code Materials
solely for backup and archival purposes. Logitech agrees to
reproduce and include all copyright and other proprietary notices
appearing in or on any and all Immersion Source Code Materials
provided to Logitech by the escrow agent on any copy made by
Logitech.
(iii) Logitech will agree to take all necessary steps to prevent
unauthorized disclosure of the Immersion Source Code Materials,
including but not limited to the following:
(a) The building in which Logitech uses the Immersion
Source Code Materials shall have restricted access twenty-four
(24) hours a day;
(b) The Immersion Source Code Materials shall be used only
in a location within such building to which access is further
restricted to persons authorized to use the Immersion Source
Code;
(c) Logitech shall prevent telephone or other remote
access to the Immersion Source Code Materials from other
locations; and
(d) The Immersion Source Code Materials shall be installed
only on a single computer system which is password protected, and
all Immersion Source Code Materials files will be password
protected.
(iv) Logitech shall be liable to Immersion or its successor company for all
direct and indirect, consequential, special and incidental damages
resulting from any unauthorized disclosure by Logitech of the Immersion
source code. To the extent, if any this Section 13 ("Source Code
Escrow") is inconsistent or conflicts with any provision of this
Agreement, this Section 13 ("Source Code Escrow") shall be controlling.
(v) The obligations of this Section 13 ("Source Code Escrow") shall survive
any termination or expiration of the escrow agreement.
14. LOGITECH WARRANTY.
Logitech represents and warrants that it will not knowingly provide to
Immersion any data, specifications, designs or similar information that
infringe upon or violate any intellectual property rights of a third
party.
15. TRADEMARK INFRINGEMENT INDEMNIFICATION BY IMMERSION
Subject to prompt notification by Logitech, cooperation by Logitech and
control of all litigation and/or settlement by Immersion, Immersion
shall indemnify, defend and hold Logitech harmless from and against any
and all claims, damages, liabilities, judgments, settlements, costs and
expenses (including reasonable attorneys' fees) suffered or incurred by
Logitech arising out of a claim of infringement of any Immersion
trademark, service
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<PAGE> 22
mark, or trade name resulting from the labeling requirement of
Intellectual Property License Agreement Section 2.5 ("Label
Requirements"). In the case of an infringement or alleged infringement
of any such Immersion trademark, service mark, or trade name, Immersion
will have the right to require Logitech to stop using such trademark,
service mark, or trade name and will provide a new trademark to be used
in connection with the Immersion Product Model Technology.
16. CONFIDENTIALITY.
16.1 OBLIGATIONS. During the course of this Agreement, each Party may
be a disclosing Party (hereinafter called Discloser) for
transmitting certain proprietary information to the other Party
(hereinafter called Recipient). Recipient agrees to treat as
confidential all such proprietary information, including all
information, written or oral, relating thereto, including, but
not limited to, know how, concepts, techniques, drawings,
specifications, processes, computer programs, designs and
systems, manufacturing and marketing information, received from
Discloser, and Recipient agrees not to publish such information
or disclose same to others except to those employees,
subcontractors and sublicensees to whom disclosure is necessary
to order to carry out the purpose for which such information is
supplied. Recipient shall inform such employees, subcontractors
and sublicensees of the confidential nature of such information
and of their obligation to keep same confidential. Recipient
further agrees not to use such proprietary information for
Recipient's own benefit or for the benefit of others, other than
in accordance with this Agreement, without Discloser's prior
written consent, and that all tangible materials, including
written material, photographs, discs or other documentation
embodying such proprietary information shall remain the sole
property of Discloser and shall be delivered to Discloser upon
Discloser's request. Upon Discloser's request a Receiving party
shall return any and all copies of Discloser's confidential
information or, at Discloser's option, the Receiving party shall
destroy such copies and notify Discloser in writing when such
copies have been destroyed.
16.2 EXCEPTIONS. The foregoing obligations of confidentiality do not
apply to information which was previously known to Recipient, is
rightfully received from a third party by Recipient, or becomes
publicly known or available without breach of this Agreement by
Recipient.
17. LIMITATION OF LIABILITY.
17.1 EXCEPT AS PROVIDED IN SECTION 13 ("SOURCE CODE ESCROW"), IN NO
EVENT WILL LOGITECH OR IMMERSION BE LIABLE FOR LOST PROFITS, OR
ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES,
HOWEVER CAUSED AND ON ANY
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<PAGE> 23
THEORY OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS
AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF LOGITECH AND
IMMERSION HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES
AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY.
17.2 EXCEPT WITH RESPECT TO THE PARTIES' OBLIGATIONS SET FORTH IN
SECTION 13 ("SOURCE CODE ESCROW") AND WITH RESPECT TO ANY
QUARTERLY PAYMENTS DUE AND PAYABLE BY LOGITECH HEREUNDER, IN NO
CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY OR
OBLIGATIONS UNDER THE TERMS OF OR ARISING OUT OF THIS AGREEMENT
EXCEED ONE MILLION U.S. DOLLARS ($1,000,000).
18. GENERAL PROVISIONS
18.1 ENTIRE AGREEMENT. This Agreement and its exhibits, together with
the Intellectual Property License Agreement, constitutes the
complete agreement of the parties and supersedes any other
agreements, written or oral (including all correspondence,
emails, such as but not limited to the letter regarding Phase 0
dated February 20, 1998 concerning the subject matter hereof and
such materials do not have any effect upon the rights and
obligations of the Parties under this Agreement. This Agreement
and the Intellectual Property License Agreement in no way
supersede or affect the Intellectual Property License Agreement
between Immersion and Logitech dated April 2, 1997 and/or the
Technology Product Development Agreement between Immersion and
Logitech dated April 2, 1997.
18.2 SUCCESSION AND ASSIGNMENT. Either party may assign this Agreement
provided that the other party has consented in writing to the
assignment or delegation and provided, further, that the rights
and obligations of the parties may be assigned to a corporate
successor in interest in the case of a merger or acquisition or
in the case of a sale of assets without the prior approval of the
other party. Any attempt to assign this Agreement in violation of
the provisions of this Section 18.2 ("Succession and Assignment")
shall be void.
18.3 NOTICES. Notices required under this Agreement shall be addressed
as follows, except as otherwise revised by written notice:
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<PAGE> 24
TO IMMERSION: TO LOGITECH:
Louis B. Rosenberg, Ph.D. General Counsel
President Logitech, Inc.
Immersion Corporation 6505 Kaiser Drive
2158 Paragon Drive Fremont, CA 94555-3615
San Jose, CA 95131
18.4 GOVERNING LAW. The validity, interpretation and performance of
this Agreement shall be governed by the substantive laws of the
State of California, without the application of any principle
that leads to the application of the laws of any other
jurisdiction.
18.5 NO AGENCY. Neither party is to be construed as the agent or to be
acting as the agent of the other party hereunder in any respect.
18.6 NO RECRUITMENT. During the term of this Agreement and for one (1)
year after the termination or expiration of this Agreement, each
Party agrees not to recruit any employee of the other Party.
18.7 MULTIPLE COUNTERPARTS. This Agreement may be executed in several
counterparts, all of which taken together shall constitute one
single Agreement between the parties.
18.8 NO WAIVER. No delay or omission by either Party hereto to
exercise any right or power occurring upon any noncompliance or
default by the other party with respect to any of the terms of
this Agreement shall impair any such right or power or be
construed to be a waiver thereof. A waiver by either of the
parties hereto of any of the covenants, conditions, or agreements
to be performed by the other shall not be construed to be a
waiver of any succeeding breach thereof or of any covenant,
condition, or agreement herein contained. Unless stated
otherwise, all remedies provided for in this Agreement shall be
cumulative and in addition to and not in lieu of any other
remedies available to either party at law, in equity, or
otherwise.
18.9 SEVERABILITY. If any one or more of the provisions of this
Agreement shall be held to be invalid, illegal or unenforceable,
the validity, legality or enforceability of the remaining
provisions of this Agreement shall not in any way be affected or
impaired thereby.
18.10 AMENDMENTS IN WRITING. Any amendment to this Agreement shall be
in writing and signed by both parties hereto.
18.11 INTERPRETATION. Since this Agreement was prepared by both parties
hereto, it shall not be construed against any one party as the
drafting party.
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18.12 DISPUTE RESOLUTION. Except in the case of a breach of an
obligation related to a Party's intellectual property rights, in
the event either Party concludes that it is in its best interest
to file any legal action against the other, the Party shall
contact the other Party's management and at least two (2) senior
managers from each Party shall meet without legal counsel or
interruption for a minimum amount of three (3) eight (8) hour
periods and diligently attempt to resolve all disputed matters.
If the Parties are unable to resolve their difference and either
Party desires to file a legal action against the other, at least
two (2) senior managers from each Party and their respective
counsels shall meet for three (3) eight (8) hour periods and
diligently attempt to resolve all disputed matters. Either Party
may request that an independent third party, bound to mutually
agreed upon legations of confidentially, attend such meeting in
order to assist the Parties in reaching a reasonable resolution.
All oral and written information exchanged in these meetings
shall be exchanged in an effort to settle all disputed matters.
If either Party still desires to file a legal action against the
other after these prescribed meetings such Party may file a legal
action against the other Party as allowed by applicable law in
Santa Clara County state court or in the Federal Circuit. The
Parties agree that if a Party does not attend all of the
prescribed meetings it waives its rights to any monetary damages
in the legal action(s) it files.
18.13 SURVIVAL. Sections 6.1 ("Funding"), 6.1.1 ("FEELit Mouse Product
Funding"), 10 ("Ownership of Technology"), 12.3 ("Effect of
Termination"), 12.4 ("Third Party Acquisition of Immersion"), 13
("Source Code Escrow"), 14 ("Logitech Warranty"), 15 ("Trademark
Infringement Indemnification by Immersion"), 16
("Confidentiality"), 17 ("Limitation of Liability") and 18
("General Provisions") will continue after the expiration or
termination of this Agreement.
18.14 FORCE MAJEURE. With the exception of the obligation to pay monies
due and owing, each Party hereto shall be excused from
performance hereunder for any period and to the extent that it is
prevented from performing any services pursuant hereto, in whole
or in part, as a result of delays caused by the other Party or an
act of God, war, civil disturbance, court order, governmental
action, laws, orders, regulations, directions or requests, or as
a result of events such as acts of public enemies, earthquakes,
fires, floods, strikes or other labor disturbances of the other
Party or any third party, or other cause beyond its reasonable
control and which it could not have prevented by reasonable
precautions, and such nonperformance shall not be a default
hereunder or a ground for termination hereof.
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IN WITNESS WHEREOF, the authorized representatives of the parties hereto
have signed this Agreement as of the date and year last set forth below.
LOGITECH: IMMERSION:
LOGITECH, INC. IMMERSION CORPORATION
By: /s/ W. H. Hausen By: /s/ Louis Rosenberg
-------------------------- --------------------------------
Name: W. H. Hausen Name: Louis Rosenberg
------------------------ -------------------------------
Title: SVP/GM Title: President
----------------------- -------------------------------
Date: 4/13/98 Date: April 13, 1998
------------------------ -------------------------------
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EXHIBIT A
SPECIFICATION
Immersion shall develop a Mouse Product to conform to the following
basic specifications: The Mouse Product shall be a two degree of freedom mouse
controller with active force feedback functionality along each of the two
displacement axes. The Mouse Product will be fixed by a linkage to a mouse pad
that houses the actuators and sensors. The Mouse Product will allow both
absolute position data and relative position data to be reported to the host
computer. The Mouse Product must be compatible with Intel based personal
computers (or equivalent) running Microsoft Windows 98 and NT operating systems.
It must connect to the PC through a universal Serial Bus ("USB") interface using
the USB communication protocol for "HID" and/or "PID" class devices (or HID
equivalent). In addition to receiving position data and button press data from
the Mouse Product across the USB, the host computer will command force
sensations on the Mouse Product by sending a high level force command with
command parameters across the USB. The completed work must include host drivers,
firmware and electromechanical hardware that work together to allow cursor
related force feedback sensations to be generated by a processor on-board the
Mouse Product (for example, physical detent sensations when traversing a menu
item). Said sensations must be appropriately coordinated with events running in
host software applications. The programming of coordination between force
sensations and software events will be achieved using a high-level Application
Programming Interface ("API") that allows software developers to command force
feedback sensations from their applications. For gaming applications, the
Windows API will use the "DirectX" force feedback implementation as its core and
the Mouse Product must have compatible firmware that locally produces all key
features supported by the then current DirectX 6.0 (Direct-Input) specification.
For non-gaming applications, API will also enable advanced features not
necessarily specified by DirectX as included in the current FEELit API
specification. The device must be able to provide mouse functionality (no force
feedback) when powered by USB only, in low power mode (4.4V, 100 mA) to comply
with the USB Specification at power up.
Requirement Overview: The Mouse Product must be a high quality, premium
cursor control peripheral capable of providing accurate positioning data and
producing realistic force feedback sensations. The product must consist of the
following subsystems:
Mouse Handle: Logitech to provide the design. A deadman switch is not
currently provided from Immersion but may be included by Logitech if it
proves necessary.
Base Enclosure/Support: Immersion to provide the basic mouse pad housing
concept and recommendations. Logitech to provide the industrial design.
Logitech to do detailed design with input from Immersion. The support
must carry the mouse loads, both user loads and force feedback loads,
without introducing excessive friction or binding. The support must
include a hard stop around the peripheral of the mouse workspace. Range
of motion provided for the Mouse Product is specified at the end of this
section.
Transmission: Immersion to provide a parallel linkage design. The
transmission will be a five-bar linkage structure that conveys
mechanical power from actuators to the Mouse Handle.
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Actuator: Immersion to provide the full design of custom flat actuators
(voice coils) optimized for the Mouse Product embodiment. Logitech will
produce the actuator coils but Immersion will supply the Magnet Assembly
as a separate component governed by a separate Component Supply
Agreement.
Spring Centering: Physical springs are not needed for this product. All
spring centering for gaming applications will be simulated by the local
processor.
Power Electronics: Immersion must provide the initial design. There will
be an external power source (brick) in the initial product. [****]
Product will draw non-force feedback power from USB.
Microprocessor and Interface Electronics: Immersion must provide the
board design for controller electronics, to be industrialised by
Logitech. Immersion will supply the FEELit Chip processor under a
separate OEM agreement, said processor including firmware to create
local force feedback sensations. Design will be USB high speed
compatible. It is currently estimated that the COG for the die-shrink
version of the FEELit Chip in production volumes (100,000 units per
year) will be [****] or less.
Sensors: Immersion provides recommendation and design implementation for
sensors that monitor the motion of the mouse and report such data back
to the host across USB via the microprocessor. It is currently estimated
that the COG for the sensing electronics will be less than [****].
Sensitivity: Mouse to support basic mouse ballistic scaling algorithms
wherein mouse position sensitivity is varied with velocity of mouse
movement. [****].
Embedded Software: Immersion must provide the HEX code. The embedded
software will be Direct-X and FEELit compatible and USB enabled.
Logitech will not have access to any parts of the source code (including
but not limited to the force feedback core) except as provided in
Section 2.2.1 ("Firmware Source Code"). [****] After the final firmware
is delivered, Immersion will provide access to several sections of the
firmware including those related to [****]
Host Software: Immersion will provide drivers that manage force feedback
of the device in Windows 98 and NT. The driver will support the
DirectInput API and the FeelIt API. A custom interface may be needed to
communicate with existing Logitech MouseWare drivers. This custom
interface would be developed between Logitech and Immersion. The general
breakdown of the software should be such that Immersion manages the
Force Feedback components, and Logitech's MouseWare manages the button
programmability, wheel support, port management, and sensor and button
reporting for cursor movement control as well as gaming movement control
through DirectX.
*Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
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Switches and Buttons: The product will support three standard moue
buttons plus [****], all processed by the FEELit Chip if possible.
Compliance: The Immersion/Logitech design must comply with 761325-0000
Rev A Logitech EMI standard. Exceptions to this standard must be duly
approved by Logitech. GOI-740329-00 Rev B is the current generic
reference for reliability. Applicable standards are the following:
Drop: 90 cm
Light immunity: 100 kLux
Environmental: -40.. +70C (non Operating, 53 Hours cycle)
0C (operating, 8 hours)
+40C (operating, 90% RH, 8 hours)
+40C (operating, 10% RH, 8 hours)
Vibration: refer to GOI-740329-00
Shock: refer to GOI-740329-00
Product Details: The product must perform as follows:
Range of Motion: No less than [****]
Force Output: A minimum of [****] grams (peak)
Dimensions: The size shall be minimized within the constraints of
packaging.
Power Consumption: No more than [****] watts peak.
Tracking: Allows [****].
Target Cost: Logitech desires a product with a suggested retail price of
$99 assuming China based labor costs, approximately [****] Logitech margin, and
approximately [****] in nine-level costs. While many of the component costs,
labor costs, and other factors that affect Logitech's ability to hit any given
price target are not related to Immersion's obligations under this contract,
there are currently unknown component costs that do depend upon Immersion's
design. These unknown component costs are the cost of goods for the sensor
electronics and actuator subsystem. At the present time, the preliminary sensor
electronics component costs are estimated at [****] and the preliminary actuator
component costs are estimated at [****]. Based upon the current specification,
Immersion has informed Logitech that it expects that [****] to [****] can be cut
from the combined component costs of the sensor electronics and actuator
subsystem. Note: all costs are based upon the production volume target of
100,000 units per year.
*Certain information on this page has been omitted and filed separately with the
Commission. Confidential treatment has been requested with respect to the
omitted portions.
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EXHIBIT B
MILESTONE SCHEDULE
<TABLE>
<CAPTION>
PAYMENT MILESTONES AMOUNT APPROX DATE
- ------------------ ------ -----------
<S> <C> <C> <C>
DESIGN STAGE (Q2)
Actuator design has been approved
PAO PWA transferred to Logitech, and
approved by Logitech
TOTAL 75k AUG 98
EVT PREPARATION (Q3)
Actuator ready for qualification
EVT actuators available in TWN
FW available for EVT
TOTAL 75k NOV-DEC 98
EVT EXIT - DVT ENTRY (Q4)
EVT completed successfully
DVT actuators available in TWN
FWQA1 completed
TOTAL 75k MAR 99
DVT EXIT - PVT ENTRY (Q1)
DVT completed successfully
PVT actuators available in TWN
FWQA2 completed successfully
TOTAL 40k APR-MAY 99
PVT EXIT (Q2)
PVT completed successfully
MP started
TOTAL 20k JULY 99
SW ACTIVITIES:
To be planned according to SW milestones ...> Jim McCarthy 85k
</TABLE>
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EXHIBIT C
Change Order Form
Date:
Change Control Form No.:
Description of Change:
Reason for Change:
Man Hours:
Impact on Schedule:
Affect on Cost:
Accepted by Logitech: Accepted by Immersion:
LOGITECH, INC. IMMERSION CORPORATION
By: By:
------------------------------ ----------------------------------
Name: Name:
---------------------------- --------------------------------
Title: Title:
--------------------------- -------------------------------
Date: Date:
---------------------------- --------------------------------
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EXHIBIT D
Software License Agreement
SOFTWARE LICENSE AGREEMENT. LOGITECH IS WILLING TO LICENSE THE ENCLOSED SOFTWARE
TO YOU ONLY ON THE CONDITION THAT YOU ACCEPT ALL OF THE TERMS CONTAINED IN THIS
LICENSE AGREEMENT. This is a legal agreement between (either an individual
end-user or an entity) and Logitech. By opening the software package, you are
agreeing to be bound by the terms and conditions of the Agreement. If you do not
agree to the terms of this Agreement, promptly return the software package and
other items that are part of this product in their original package with your
payment receipt to your point of purchase for a full refund.
GRANT OF LICENSE. Logitech and its suppliers grant you a nonexclusive license to
use one copy of the enclosed software program ("Software") on one computer only
with the Logitech product you have purchased. No other rights are granted. The
Software is in use if it is loaded on the computer's permanent or temporary
memory. For backup purposes only, you may make one copy of the Software. You
must include on the backup copy all copyright and other notices included on the
Software as supplied by Logitech. Installation on a network server for the sole
purpose of your internal distribution of the Software is permitted only if you
have purchased an individual Software package for each networked computer to
which the Software is distributed.
RESTRICTIONS. Logitech and its suppliers retain ownership of the Software. You
shall not decompile, disassemble, reverse-engineer, or modify the Software in
any way. You may not transmit the Software over a network (except as expressly
permitted by above), by telephone, or electronically using any means. You may
not transfer the software except upon a permanent transfer of the enclosed
Logitech product provided that all software updates are included in the
transfer, you do not retain a copy of the Software, and the transferee agrees to
be bound by the terms and conditions in the license. Upon any violation of the
provisions of this Agreement, rights to use the Software shall automatically
terminate and the Software must be returned to Logitech or all copies of the
Software destroyed.
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EXHIBIT E
Immersion Packaging Labeling Specification
Logitech must place or have placed the following notice or other similar mark,
at Immersion's request, on the underside (exterior) of those products which
incorporate Licensed Technology as well as on the packaging and manuals for such
products:
"FEELit(TM) Force Feedback Technology Licensed from Immersion
Corporation".
Logitech must also place or have placed the following FEELit Mouse logo (or
future derivative of the mark as reasonably approved by Logitech) at Immersion's
request, prominently on retail packaging and manuals such that the logo is
clearly legible and occupies a rectangular area of no less than 0.70 inches by
0.825 inches. The mark must be displayed on at least two surfaces of the retail
packaging, including the front surface and specifically not including the bottom
surface.
[LOGO] [DIAGRAM]
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Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
of Immersion Corporation:
We consent to the use in this Amendment No. 5 to Registration Statement No.
333-86361 of Immersion Corporation of our report dated October 20, 1999
(November 3, 1999 as to Note 14) appearing in the Prospectus, which is part of
this Registration Statement, and of our report dated October 20, 1999 relating
to the financial statement schedule appearing elsewhere in this Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
DELOITTE & TOUCHE LLP
San Jose, California
November 10, 1999
