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PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-86361
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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PER SHARE TOTAL
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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
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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.
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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
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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"]
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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.
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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
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All brand names and trademarks appearing in this prospectus are the
property of their respective holders.
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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
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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.
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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
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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.
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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1996 1997 1998 1998 1999
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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
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SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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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
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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
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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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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.
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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
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<PAGE> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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.
16
<PAGE> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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
26
<PAGE> 28
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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<PAGE> 41
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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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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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. ..................................... $138,615 72,465
President and Chief Executive Officer
Bruce Schena................................................ 121,683 22,819
Vice President, Chief Technology Officer and Director
Timothy Lacey............................................... 107,628 26,210
Chief Financial Officer and Director
</TABLE>
Mr. Lacey was serving as our chief financial officer as of December 31,
1998. In August 1999, Mr. Lacey resigned as our chief financial officer and was
appointed vice president, operations.
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Option Grants in Fiscal Year Ended December 31, 1998. The following table
presents information with respect to stock options granted during 1998 to our
executive officers listed in the summary compensation table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES PERCENT OF TOTAL OF STOCK APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM
OPTIONS TO EMPLOYEES PRICE EXPIRATION ---------------------------
NAME GRANTED(#) DURING PERIOD ($/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> 51
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> 52
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> 53
As of September 30, 1999, 1,232,099 shares of common stock had been issued
upon exercise of options outstanding under this plan, options to purchase
1,149,217 shares of common stock, at a weighted average exercise price of $0.10,
were 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> 54
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF DIRECTORS'
LIABILITY
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which they derived an improper personal benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers and may indemnify other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in that capacity, regardless of
whether Delaware law would permit indemnification.
In addition to indemnification provisions in our bylaws, we have entered
into agreements to indemnify our directors and executive officers. These
agreements provide for indemnification of our directors and executive officers
for some types of expenses, including attorneys' fees, judgments, fines and
settlement amounts incurred by persons in any action or proceeding, including
any action by or in the right of Immersion, arising out of their services as our
director or executive officer. We believe that these provisions and agreements
are necessary to attract and retain qualified persons as directors and executive
officers.
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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> 56
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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- 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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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.
57
<PAGE> 59
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
58
<PAGE> 60
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.
59
<PAGE> 61
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.
60
<PAGE> 62
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.
61
<PAGE> 63
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.
62
<PAGE> 64
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.
63
<PAGE> 65
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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<PAGE> 66
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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<PAGE> 67
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....................................... 1,685,000
Bear, Stearns & Co. Inc. ................................... 842,500
BancBoston Robertson Stephens Inc. ......................... 842,500
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
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.
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<PAGE> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 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)
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> 94
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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.
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