<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 000-27969
IMMERSION CORPORATION
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 94-3180138
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employee
incorporation or organization) Identification No.)
801 Fox Lane, San Jose, California 95131
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (408) 467-1900
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Number of shares of Common Stock outstanding at August 7, 2000:
16,513,018
<PAGE> 2
IMMERSION CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2000
and December 31, 1999.........................................................2
Condensed Consolidated Statements of Operations (Unaudited) for the Three
Months and Six Months ended June 30, 2000 and 1999............................3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 2000 and June 30, 1999..................................4
Notes to Condensed Consolidated Financial Statements (Unaudited)..............5
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risks..................27
PART II
OTHER INFORMATION
Item 1. Legal Proceedings...........................................................28
Item 4. Submission of Matters to a Vote of Security Holders.........................28
Item 6. Exhibits and Reports on Form 8-K............................................29
SIGNATURES..................................................................................30
</TABLE>
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PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IMMERSION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999(1)
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,839 $ 46,527
Short-term investments 14,886 4,781
Accounts receivable, net of allowances of $187 and $134 respectively 1,716 1,064
Inventories 855 660
Prepaid expenses and other current assets 2,401 1,057
-------- --------
Total current assets 42,697 54,089
Property and equipment, net 2,435 591
Purchased intangibles and other assets, net 9,596 4,758
Other investments 6,500 -
-------- --------
Total assets $ 61,228 $ 59,438
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,265 $ 750
Accrued compensation 649 180
Other accrued liabilities and income taxes payable 1,322 505
Deferred revenue and customer advances 372 1,355
-------- --------
Total current liabilities 3,608 2,790
-------- --------
Stockholders' equity:
Common stock - $0.001 par value; 100,000,000 shares authorized; shares
issued and outstanding: 16,507,518 and 15,765,211 respectively 77,036 65,554
Warrants 831 831
Deferred stock compensation (6,020) (1,167)
Accumulated other comprehensive income (loss) (12) 19
Note receivable from stockholder (17) (17)
Accumulated deficit (14,198) (8,572)
-------- --------
Total stockholders' equity 57,620 56,648
-------- --------
Total liabilities and stockholders' equity $ 61,228 $ 59,438
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(1) The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Royalty revenue $ 982 $ 141 $ 1,866 $ 622
Product sales 1,047 1,048 2,267 2,133
Development contracts and other 525 438 883 748
-------- -------- -------- --------
Total revenues 2,554 1,627 5,016 3,503
Costs and expenses:
Cost of product sales 570 476 1,193 970
Sales and marketing 2,363 272 3,891 459
Research and development 868 599 1,544 1,057
General and administrative 1,386 796 2,786 1,548
Amortization of intangibles and deferred stock compensation(*) 1,121 345 1,793 463
In-process research and development - - 887 1,190
-------- -------- -------- --------
Total costs and expenses 6,308 2,488 12,094 5,687
-------- -------- -------- --------
Operating loss (3,754) (861) (7,078) (2,184)
Interest and other income, net 691 26 1,451 66
-------- -------- -------- --------
Net loss (3,063) (835) (5,627) (2,118)
Redeemable convertible preferred stock accretion - 2 - 3
-------- -------- -------- --------
Net loss applicable to common stockholders $ (3,063) $ (837) $ (5,627) $ (2,121)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.19) $ (0.15) $ (0.35) $ (0.43)
======== ======== ======== ========
Shares used in calculating basic and diluted net loss per share 16,247 5,423 16,006 4,944
======== ======== ======== ========
(*) Amortization of intangibles and deferred stock compensation
Amortization of intangibles $ 647 $ 281 $ 1,055 $ 397
Deferred stock compensation - sales and marketing 24 1 39 1
Deferred stock compensation - research and development 342 12 510 12
Deferred stock compensation - general and administrative 108 51 189 53
-------- -------- -------- --------
Total $ 1,121 $ 345 $ 1,793 $ 463
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,627) $ (2,118)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 198 84
Amortization of intangibles 1,055 397
Amortization of deferred stock compensation 738 66
In-process research and development 887 1,190
Stock and options issued for consulting services and other 10 140
Changes in assets and liabilities:
Accounts receivable (586) 17
Inventories (178) (125)
Prepaid expenses and other assets (805) 7
Accounts payable 159 (16)
Accrued liabilities and income taxes payable 977 150
Deferred revenue and customer advances (983) 13
-------- --------
Net cash used in operating activities (4,155) (195)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (18,290) -
Sales and maturities of short-term investments 8,144 201
Purchase of property (1,955) (153)
Purchases of patents and technology - (323)
Acquisitions, net of cash acquired (581) -
Other assets (750) (70)
Other investments (6,500) -
-------- --------
Net cash used in investing activities (19,932) (345)
-------- --------
Cash flows from financing activities:
Exercise of stock options 368 151
Exercise of warrants - 1
-------- --------
Net cash provided by financing activities 368 152
-------- --------
Effect of foreign currency exchange rates on cash and cash equivalents 31 -
-------- --------
Net decrease in cash and cash equivalents (23,688) (388)
Cash and cash equivalents:
Beginning of the period 46,527 2,592
-------- --------
End of the period $ 22,839 $ 2,204
======== ========
Supplemental disclosure of cash flow information:
Cash paid for taxes $ 1 $ 1
======== ========
Noncash activities:
Change in net unrealized gains (losses) from short-term investments $ (41) $ (1)
======== ========
Issuance of equity instruments for patents, technology and licenses $ - $ 5,221
======== ========
Issuance of equity instruments for acquisition $ 5,513 $ -
======== ========
Issuance of warrants $ - $ 808
======== ========
Accretion of redeemable preferred stock $ - $ 3
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed
consolidated financial statements reflect all the normal recurring adjustments
which are, in the opinion of management, necessary to present fairly the
condensed consolidated financial position, statements of operations and cash
flows for the interim periods presented.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all information and footnotes necessary for a complete
presentation of the financial position, results of operations, and cash flows,
in conformity with generally accepted accounting principles. Immersion
Corporation ("Immersion" or the "Company") filed its audited consolidated
financial statements which included all information and footnotes necessary for
such presentation of the financial position, results of operations, and cash
flows in the Company's 1999 Annual Report on Form 10-K.
The results of operations for the interim period ended June 30, 2000,
are not necessarily indicative of the results to be expected for the full year.
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 INTANGIBLES AND OTHER ASSETS, NET
In March 2000, the Company acquired all outstanding shares of
Montreal-based Haptic Technologies Inc. ("Haptic") for approximately $6.8
million, consisting of 141,538 shares of the Company's common stock and $338,000
paid in cash. Haptic develops and markets hardware and software that brings the
sense of touch to computing environments. As a result of the acquisition, Haptic
became a wholly-owned subsidiary of Immersion and will continue operations in
Montreal, Canada. The acquisition was accounted for using the purchase method
and accordingly the acquired assets and liabilities were recorded at their fair
market values at the date of acquisition. Pro forma results of the combined
operations have not been presented as they are not materially different from the
Company's reported results of operations. Haptic operates on a fiscal year
ending on August 31. Accordingly, the Company will consolidate the results of
Haptic based on Haptic's fiscal quarters ended February 28, May 31, August 31,
and November 30 combined with the Company's calendar quarters ended March 31,
June 30, September 30, and December 31, respectively.
In connection with the transaction, the Company assumed unvested options
of Haptic resulting in deferred stock compensation of $5.5 million, which will
be amortized over the remaining vesting period of approximately four years. The
Haptic option plan was established in February 2000 and under the plan the
Company may grant options to purchase up to 391,238 shares of common stock to
employees, directors, and consultants. The options generally expire ten years
from the date of grant. As of June 30, 2000 there were 391,238 options
outstanding.
The aggregate purchase price of $6.8 million (including acquisition
costs) has been allocated to the assets and in-process research and development
acquired. The total purchase price was allocated among the assets acquired
(including acquired in-process research and development) as follows (in
thousands):
<TABLE>
<S> <C>
Purchase price allocation:
Tangible assets $ 416
In-process research and development 887
Intangible assets:
Goodwill 3,979
Core technology 871
Developed technology 396
Workforce 139
Pending patents 65
------
$6,753
======
</TABLE>
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<PAGE> 7
The goodwill, core technology and pending patents are being amortized
over their estimated useful lives of 4 years. The developed technology and
workforce are being amortized over their estimated useful lives of 3 and 2
years, respectively. The allocation of the purchase price to the respective
intangibles was based on management's estimates of the after-tax cash flows and
gave explicit consideration to the Securities and Exchange Commission's views on
purchased in-process research and development as set forth in its September 9,
1998 letter to the American Institute of Certified Public Accountants.
Specifically, the valuation gave consideration to the following: (i) the
employment of a fair market value premise excluding any Company-specific
considerations that could result in estimates of investment value for the
subject assets; (ii) comprehensive due diligence concerning all potential
intangible assets; (iii) the value of existing technology was specifically
addressed, with a view toward ensuring the relative allocations to existing
technology and in-process research and development were consistent with the
relative contributions of each to the final product; and (iv) the allocation to
in-process research and development was based on a calculation that considered
only the efforts completed as of the transaction date, and only the cash flow
associated with these completed efforts for one generation of the products
currently in process.
As indicated above, the Company recorded a one-time charge of $887,000
upon the acquisition in March 2000 for purchased in-process research and
development related to three development projects. The charge related to the
portion of these products that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
Management's conclusion that the in-process development effort had no
alternative future use was reached in consultation with the engineering
personnel from both the Company and the seller.
The first of these projects focuses on providing products for moving
vehicles that use computers in their instrumentation and control panels and
targets both end-user in-vehicle systems and design phase solutions. The product
being developed is a software product to be bundled with a haptic peripheral
device. The software product is designed to provide a touch feedback module for
the peripheral device, which will introduce the sense of touch into the
interface allowing designers to feel the buttons on the screen as they design
the control panel. This product is expected to be released in late FY 2000 and
at the time of the acquisition was approximately 50% complete with estimated
costs to complete the development of $60,000. The second of these projects is
the MilleniumCat technologies, aimed at the multimedia market that will offer a
full high fidelity affordable haptic device. Haptic currently sells the
PenCat/Pro, a stylus based touch-enabled computer interface device. The
MilleniumCat product will be the next generation PenCat/Pro offering both the
hardware device utilizing a mouse and the next generation multimedia feedback
technology associated with Haptic's developed suite of products that combine
audio, graphics, speech, video and other media into one package solution for
customers. This product is expected to be released late FY 2000 and at the time
of the acquisition was estimated to be 67% complete with estimated costs to
complete the development at $50,000. The third of these projects is aimed at the
engineering and artistic creation market. Haptic's current product PenCat/Pro
targets 3D designers that have a need for advanced input technologies. The
PenCat/Pro product used by 3D designers will be replaced by the MilleniumCat
product in FY 2001. While this product incorporates much of the MilleniumCat
product, it will require some additional software and a different user interface
and thus at the time of the acquisition was estimated at 40% complete with
estimated costs to complete development of $20,000.
The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require the Company to
accelerate the time period over which the intangibles are being amortized, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant assumptions used to determine
the value of in-process research and development, include the
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<PAGE> 8
following: (i) forecast of net cash flows that were expected to result from the
development effort using projections prepared by Haptic's management; (ii) the
completed portion of the projects estimated by considering a number of factors,
including the costs invested to date relative to the total cost of the
development effort and the amount of progress completed as of the acquisition
date, on a technological basis, relative to the overall technological
achievements required to achieve the functionality of the eventual product. The
technological issues were addressed by engineering representatives from both the
Company and Haptic, and when estimating the value of the technology, the
projected financial results of the acquired assets were estimated on a
stand-alone basis without any consideration to potential synergistic benefits or
"investment value" related to the acquisition. Accordingly, separate projected
cash flows were prepared for both the existing as well as the in-process
projects. These projected results were based on the number of units sold times
the average selling price less the associated costs. After preparing the
estimated cash flows from the products being developed, a portion of these cash
flows were attributed to the developed and core technology, which was embodied
in the in-process product lines and enabled a quicker and more cost-effective
development of these products. When estimating the value of the developed, core
and in-process technologies, discount rates of 15%, 20%, and 25% were used
respectively. The discount rates considered both the status and risks associated
with the cash flows at the acquisition date. Projected revenues from the
developed technologies are expected to continue through the beginning of FY
2002, while revenue from in-process technologies are expected to commence late
FY 2000 and continue through a portion of FY 2004.
3. INVENTORIES
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(In thousands)
<S> <C> <C>
Raw materials and subassemblies $ 600 $ 504
Work in process 44 23
Finished goods 211 133
-------- --------
Total $ 855 $ 660
======== ========
</TABLE>
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(In thousands)
<S> <C> <C>
Cybernet consulting $ 360 $ 578
Prepaid royalties 370 -
Prepaid insurance 188 346
Prepaid rent 62 43
Research and development tax credit due from Canadian government 277 -
Promissory note receivable 750 -
Other prepaids and other current assets 394 90
-------- --------
Total $ 2,401 $ 1,057
======== ========
</TABLE>
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<PAGE> 9
5. PROPERTY
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(In thousands)
<S> <C> <C>
Computer equipment and purchased software $ 1,261 $ 573
Machinery and equipment 527 292
Furniture and fixtures 877 180
Leasehold improvements 476 42
-------- --------
Total 3,141 1,087
Less accumulated depreciation 706 496
-------- --------
Property, net $ 2,435 $ 591
======== ========
</TABLE>
6. OTHER INVESTMENTS
At June 30, 2000, other investments included $6.5 million of equity
investments in privately-held companies accounted for under the cost method. The
Company intends to hold its equity investments for the long term and monitors
whether there have been other-than-temporary declines in value of these
investments based on management's estimates of their net realizable value taking
into account the companies' respective financial condition and ability to raise
third-party financing. During the quarter the Company made a $5 million
strategic investment in Geometrix, Inc. ("Geometrix"), the developer of the
3Scan(TM) product line which enables creation of three-dimensional models
through the use of digital cameras. The $5 million investment is comprised of
$1.45 million to purchase 725,000 shares of Series B Preferred Stock
representing an 8% ownership interest and $3.55 million unsecured convertible
promissory note. The unsecured convertible promissory note has a voluntary
conversion feature which expires August 15, 2000 and an automatic conversion
feature which is triggered when the Company's ownership percentage is reduced to
less than 8% as a result of additional financing raised by Geometrix exceeding
certain minimum amounts. The automatic conversion feature limits the amount of
the promissory note converted such that the Company's ownership interest does
not exceed 8%. The note accrues interest at a rate of 7% per annum and the note
plus accrued interest, if not converted by June 12, 2002, is due in two payments
over a one-year period. The Company also signed a strategic partnership
agreement with Geometrix during the quarter to develop products for the Web 3D
marketplace. Under the agreement, Geometrix has contracted with Immersion for
development work. Revenues under this contract are recognized based on the
cost-to-cost percentage-of-completion accounting method in accordance with our
revenue recognition policy. The remainder of $1.5 million of investments
represents a $1.0 million equity investment in There, Inc., a technology
application developer, and a $500,000 equity investment in EndPoints, Inc., an
application specific integrated circuit design semiconductor company. Both
investments represent less than a 5% ownership interest.
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<PAGE> 10
7. 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>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (3,063) $ (835) $ (5,627) $ (2,118)
Redeemable preferred stock accretion - 2 - 3
-------- -------- -------- --------
Net loss applicable to common stockholders $ (3,063) $ (837) $ (5,627) $ (2,121)
======== ======== ======== ========
Denominator:
Weighted average common shares outstanding 16,336 5,512 16,095 5,006
Weighted average common shares held in escrow (89) (89) (89) (62)
-------- -------- -------- --------
Shares used in computation, basic and diluted 16,247 5,423 16,006 4,944
======== ======== ======== ========
Net loss per share, basic and diluted $ (0.19) $ (0.15) $ (0.35) $ (0.43)
======== ======== ======== ========
</TABLE>
In November 1999, the Company's Board of Directors approved a
0.807-for-one reverse common and Series C and D preferred stock split and a
4.035-for-one Series A and B preferred stock split. All references to share and
per-share data for all periods presented have been retroactively adjusted to
give effect to the split.
The Company's computation of net loss per share excludes 88,770 shares
held in escrow. Conditions required to release these shares from escrow had not
been satisfied as of June 30, 2000.
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>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Redeemable convertible preferred stock -- 863,771 -- 863,771
Convertible preferred stock -- 4,267,329 -- 4,267,329
Outstanding options 5,619,607 3,317,424 5,619,531 3,317,424
Warrants 425,963 498,593 425,963 498,593
--------- --------- --------- ---------
Total 6,045,570 8,947,117 6,045,494 8,947,117
========= ========= ========= =========
Weighted average exercise price
of options $ 12.01 $ 1.11 $ 12.00 $ 1.11
========= ========= ========= =========
Weighted average exercise price
of warrants $ 2.93 $ 2.72 $ 2.93 $ 2.72
========= ========= ========= =========
</TABLE>
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<PAGE> 11
8. COMPREHENSIVE LOSS
The following table sets forth the components of comprehensive loss:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss: $ (3,063) $ (835) $ (5,627) $ (2,118)
Redeemable preferred stock accretion - (2) - (3)
Change in unrealized gains (losses) on short-term investments 10 - (41) (1)
Foreign currency translation adjustments 10 - 10 -
-------- -------- -------- --------
Total comprehensive loss $ (3,043) $ (837) $ (5,658) $ (2,122)
======== ======== ======== ========
</TABLE>
9. 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
touch-enabling technology. These devices are used in computer entertainment,
personal computing, medical and other professional computing applications. The
Company operates primarily in the United States and in Canada through its
wholly-owned subsidiary Haptic. The following is a summary of revenues by
geographic areas. Revenues are broken out geographically by the ship-to location
of the customer.
Geographic revenue as a percentage of total revenue was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
REVENUE BY REGION 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
North America 60% 78% 67% 72%
Europe 24% 11% 21% 13%
Far East 15% 10% 12% 14%
Rest of the world 1% 1% 0% 1%
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
For the periods presented we derived a significant amount of revenue from
individual countries as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
MAJOR COUNTRIES 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States 59% 77% 65% 71%
Germany 14% * 10% *
Tawain 10% * * 11%
</TABLE>
* Revenue derived from country represented less than 10% for the period.
SIGNIFICANT CUSTOMERS
Customers comprising 10% or greater of the Company's net revenues are summarized
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Customer A 23% * 23% *
Customer B * 16% * 19%
Customer C * 18% * 10%
Customer D 12% * * *
---- ---- ---- ----
Total 35% 34% 23% 29%
==== ==== ==== ====
</TABLE>
* Revenue derived from customer represented less than 10% for the period.
As of June 30, 2000, customer D accounted for 27% of the Company's trade
receivables. As of December 31, 1999, customer B represented 13% of the
Company's trade receivables. The remaining customers accounted for less than 10%
of the Company's trade receivable for the periods presented.
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<PAGE> 12
10. CONTINGENCIES
The Company has received claims from third parties asserting that the
Company's technologies, or those of its licensees, infringe on the other
parties' intellectual property rights. Management believes that these claims are
without merit and, with respect to each, has obtained or is in the process of
obtaining written non-infringement and/or patent invalidity opinions from
outside patent counsel. Accordingly, in the opinion of management, the outcome
of such claims will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
11. SUBSEQUENT EVENTS
During the third quarter of 2000 the Company signed definitive
agreements to acquire two privately-held companies, HT Medical Systems, Inc. (HT
Medical) and Virtual Technologies, Inc. (VTI). HT Medical, located in
Gaithersburg, Maryland, has been a leading developer of advanced medical
simulation systems since 1987. It is expected that HT Medical will become a
wholly-owned subsidiary of Immersion and its 50 employees would remain located
in Gaithersburg, Maryland. The HT Medical transaction is intended to be
accounted for as a pooling of interests. VTI, located in Palo Alto, California
is a developer of tactile feedback technologies that are primarily used in 3D
graphical environments for computer-aided design and computer-based training. It
is planned that VTI will become a wholly-owned subsidiary of Immersion and its
17 employees with remain in Palo Alto, California. The VTI transaction is
intended to be accounted for as a purchase.
The closing of the HT Medical acquisition is subject to registration
with the SEC of the Immersion common stock to be issued in the transaction,
approval by the holders of more than two-thirds of HT Medical's capital stock
and other customary closing conditions. The VTI acquisition is subject to
approval by a majority of the shareholders of VTI and other customary closing
conditions. There can be no assurance that the transactions will be completed.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Except for the
historical information contained in this discussion and analysis of financial
condition and results of operations, the matters discussed herein are forward
looking statements. These forward looking statements include but are not limited
to the Company's plans regarding increasing royalty revenue, royalty-bearing
cursor control products, stimulating demand for touch-enabled products,
expectations of gross margin, expenses, new product introduction, and the
Company's liquidity and capital needs. These matters involve risks and
uncertainties that could cause actual results to differ materially from the
statements made. In addition to the risks and uncertainties described below in
"Factors that May Affect Future Results," these risks and uncertainties may
include consumer trends, business cycles, scientific developments, changes in
governmental policy and regulation, currency fluctuations, economic trends in
the United States and inflation. These and other factors may cause actual
results to differ materially from those anticipated in forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
Immersion Corporation was incorporated in California in 1993 and
reincorporated in Delaware in 1999. The Company's principal executive offices
are located at 801 Fox Lane, San Jose, California 95131. The Company's telephone
number is (408) 467-1900. The Company's website is www.immersion.com.
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(TM), enable devices, such as mice, joysticks, knobs,
and steering wheels, to deliver tactile sensations that correspond to on-screen
events. We focus on four application areas - consumer computer peripherals,
automotive interfaces, medical simulation products and specialized computer
peripherals for professional and industrial applications. In high volume market
areas such as consumer computer peripherals and automotive interfaces, we
primarily license our touch-enabling technologies to third party manufacturers.
We currently license our technology to market leaders in these areas, including
companies such as Microsoft, Logitech and BMW. In lower volume markets, such as
medical simulation and three-dimensional computer imaging, we focus on both
product sales and technology licensing. In all market areas, we engage in
development projects for third parties. Our objective is to proliferate our
TouchSense technologies across markets, platforms and applications so that touch
and feel become as common as graphics and sound in the modern computer user
interface.
We hold 57 U.S. patents covering various aspects of our hardware and
software technologies and have over 180 patent applications pending in the U.S.
and abroad. To date, we have licensed our intellectual property to more than 16
companies, including market leaders Microsoft and Logitech, which incorporate
our patented touch-enabling technologies, together with other technologies
necessary for computer gaming peripherals, into joysticks, gamepads and steering
wheels that they manufacture. To target the computer mouse market, we have
licensed our touch-enabling intellectual property to multiple mice
manufacturers, including market leader Logitech. Logitech began marketing and
selling the first version of its touch-enabled mouse during the fourth quarter
of 1999. In the automotive market, we have licensed our touch-enabling
technologies to BMW for use in automotive controls. In the medical simulation
market, we manufacture and sell a number of low volume specialized medical
products, including devices for simulating laparoscopic and endoscopic surgical
procedures. With respect to professional and industrial applications, we
manufacture specialized computer peripherals, including computer digitizing
devices that allow users to create three-dimensional computer models directly
from physical objects, touch-enabled joysticks and steering wheels for use in
arcades, and an advanced computer mouse used for mapmaking.
-12-
<PAGE> 14
Results of Operations for the three months and the six months ended June 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
June 30, Change
----------------------------------
REVENUES 2000 1999
------ ------
($ In thousands)
<S> <C> <C> <C>
Three months ended:
Royalty revenue $ 982 $ 141 596%
Product sales 1,047 1,048 0%
Development contracts and other 525 438 20%
------ ------
Total Revenue $2,554 $1,627 57%
====== ======
Six months ended:
Royalty revenue $1,866 $ 622 200%
Product sales 2,267 2,133 6%
Development contracts and other 883 748 18%
------ ------
Total Revenue $5,016 $3,503 43%
====== ======
</TABLE>
Total Revenue. Our total revenue for the second quarter of fiscal 2000
increased by $927,000 or 57% from the second quarter of fiscal 1999. Royalty
revenue for the three-month period ended June 30, 2000 grew to $982,000 from
$141,000 for the three-month period ended June 30, 1999, a 596% increase.
Royalty revenue is comprised of royalties earned on sales by our TouchSense
licensees and license fees charge for our intellectual property portfolio
including $587,000 of revenues recognized under the Microsoft agreement and
$234,000 recognized from automotive licenses during the current period. Revenue
recognized under the Microsoft agreement will end mid-July 2000. During the
quarter we signed a licensing and development agreement with BMW under which we
will recognize both licensing revenue and development contract revenue in
amounts determined by the cost-to-cost percentage-of-completion accounting
method over the next two years. Product sales remained constant for the
three-month period ended June 30, 2000 as compared to the same period ended June
30, 1999. Although total product sales remained constant we did experience an
increase during the second quarter of 2000 of $134,000 and $96,000 in the sales
of our MicroScribe-3D products and our microprocessors respectively versus the
second quarter of 1999. Increases in the product categories mentioned above were
offset by a decrease in sales of our professional medical products of $229,000
for the second quarter of 2000 versus the second quarter of 1999 mainly due to
the timing of new products launched by our medical customers, into which our
products are integrated. Development contract and other revenue category is
comprised of revenue on commercial and government contracts efforts, which
increased during the second quarter of fiscal 2000 from an increase in related
development activity on commercial contracts namely the Geometrix strategic
partnership agreement to develop LightScribe-3D products.
Our total revenue for the first half of fiscal 2000 increased by $1.5
million or 43% from the first half of fiscal 1999. All revenue categories
experienced growth during the first half of fiscal 2000 with the largest
increase in royalty revenues of $1.2 million or 200%. The increase is
attributable to the slightly less than $1.2 million recognized under the
Microsoft agreement during the six months ended June 30, 2000. We did not
recognize any revenue under this agreement for the same period ended June 30,
1999. As mentioned above, revenue recognized under the Microsoft agreement will
end mid-July 2000. The increase in product sales for the six-month period ended
June 30, 2000 of $134,000 is mainly attributable to the increased sales of our
MicroScribe-3D products offset by lower sales in other product categories. The
increase in development contract and other revenue of $135,000 for the first
half of fiscal 2000 compared to the first half of fiscal 1999 is due to an
increase in related development activity on commercial contracts.
-13-
<PAGE> 15
We categorize our geographic information into four major regions: North
America, Europe, Far East, Rest of the world. In the second quarter of fiscal
2000, revenue generated in North America, Europe, and Far East represented 60%,
24%, and 15% respectively compared to 78%, 11%, and 10% respectively, for the
second quarter of fiscal 1999. The shift in revenues among regions is mainly due
to an increase in licensing and development contract efforts for customers in
Europe and the Far East in the second quarter of fiscal 2000 versus the second
quarter of 1999 as well as the timing of product sales during the three months
ended June 30, 2000. Professional medical products which have typically been
sold to North American customers decreased during the second quarter of 2000
versus the second quarter of 1999 and microprocessors shipments sold to Far East
customers increased for the same comparative periods.
In the first half of fiscal 2000, revenue generated in North America,
Europe, and Far East represented 67%, 21%, and 12% respectively compared to 72%,
13%, and 14% respectively, for the first half of fiscal 1999. The shift in
revenues among regions is primarily due to an increase in licensing and
development contract efforts for customers in Europe and a decrease in product
shipments to customers in North America, mainly due to the timing of shipments
of our professional medical products, for the six months ended June 30, 2000
versus the same period ended June 30, 1999.
<TABLE>
<CAPTION>
June 30, Change
------------------------------------
COST OF PRODUCT SALES 2000 1999
------ ------
($ In thousands)
<S> <C> <C> <C>
Three months ended:
Cost of product sales $ 570 $ 476 20%
% of total product revenue 54% 45%
Six months ended:
Cost of product sales $1,193 $ 970 23%
% of total product revenue 53% 45%
</TABLE>
Cost of Product Sales. Cost of product sales increased by $94,000 or 20%
for the three months ended June 30, 2000 as compared to the three months ended
June 30, 1999. The increase is due to a combination of increased overhead costs
and the mix of product sold. The increase in overhead costs contributed $63,000
to the overall increase while the shift in product mix due to increased sales of
our MicroScribe-3D and our microprocessors which have higher cost of product
sales than our professional medical products accounted for the remainder of the
increase in cost of products sold for the three months ended June 30, 2000.
Cost of product sales increased by $223,000 or 23% for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999. The
increase is due to a combination of increased overhead costs and the mix of
product sold. The increase in overhead costs contributed $105,000 to the overall
increase while the shift in product mix due to increased sales of our
MicroScribe-3D and our microprocessors which have higher cost of product sales
than our professional medical products accounted for the remainder of the
increase in cost of products sold for the six months ended June 30, 2000.
-14-
<PAGE> 16
<TABLE>
<CAPTION>
June 30, Change
------------------------------------
OPERATING EXPENSES AND OTHER 2000 1999
------ ------
($ In thousands)
<S> <C> <C> <C>
Three months ended:
Sales and marketing $2,363 $ 272 769%
% of total revenue 93% 17%
Research and development $ 868 $ 599 45%
% of total revenue 34% 37%
General and administrative $1,386 $ 796 74%
% of total revenue 54% 49%
Amortization of intangibles and deferred stock compensation $1,121 $ 345 225%
% of total revenue 44% 21%
Six months ended:
Sales and marketing $3,891 $ 459 748%
% of total revenue 78% 13%
Research and development $1,544 $1,057 46%
% of total revenue 31% 30%
General and administrative $2,786 $1,548 80%
% of total revenue 56% 44%
Amortization of intangibles and deferred stock compensation $1,793 $ 463 287%
% of total revenue 36% 13%
In-process research and development $ 887 $1,190 (25)%
% of total revenue 18% 34%
</TABLE>
Sales and Marketing. Sales and marketing expenses increased by $2.1
million or 769% in the second quarter of fiscal 2000 compared to the same period
last year. We began considerable planned growth of our sales and marketing team
during the fourth quarter of fiscal 1999 to enable us to proliferate our
TouchSense technologies across markets, platforms and applications. The
significant increase noted was mainly due to increased headcount and related
compensation, benefits, and overhead costs of $817,000. Expenses related to
corporate identity, advertising, collateral design and production and expenses
incurred under our co-marketing agreement with Logitech contributed $587,000 to
the increase for the second quarter of fiscal 2000 over the same period during
1999. The remainder of the increase was associated with developer programs and
production of showcase applications of our tools of $315,000, website
development and maintenance of $98,000 and increased travel expenses of $62,000.
Sales and marketing expenses increased by $3.4 million or 748% in the
first half of fiscal 2000 compared to the same period last year. The significant
increase was mainly due to increased headcount and related compensation,
benefits, and overhead costs of $1.6 million. Expenses related to corporate
identity, advertising, collateral design and production and expenses incurred
under our co-marketing agreement with Logitech contributed $932,000 to the
increase for the first half of fiscal 2000 versus the first half of fiscal 1999.
The remainder of the increase was associated with developer programs and
production of showcase applications of our tools of $365,000, website
development and maintenance of $158,000 and increased travel expenses of
$112,000. We anticipate sales and marketing expenses to continue to increase in
absolute dollars due to the planned growth of our sales and marketing
organizations and our co-marketing agreement with Logitech. Under the terms of
the agreement, for a period of five calendar quarters, beginning in the first
calendar quarter of 2000, the Company will 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 touch-enabled mice
are eligible for reimbursement. In addition, all promotional activities will
have to be approved by the Company in advance. In order to remain eligible for
reimbursement, Logitech will have to include the Company's brand and slogan on
all its marketing materials that reference touch-enabled functionality or
products, and commit to other conditions regarding its touch-enabled mice.
-15-
<PAGE> 17
Research and Development. Research and development expenses increased by
$269,000 or 45% in the second quarter of fiscal 2000 compared to the same period
last year. The increase is due to increased headcount and related compensation,
benefits, and overhead costs of $224,000 and subcontracted non-recurring
engineering expenses of $57,000 offset by minor decreases in other expense
categories. The three-month period ended June 30, 2000 includes a full quarter
of expenses related to research and development activities at our wholly-owned
subsidiary, Haptic, which was acquired on March 9, 2000 via purchase accounting
and is, accordingly, not reflected in our three months ended June 30, 1999
research and development expense.
Research and development expenses increased by $487,000 or 46% in the
first half of fiscal 2000 compared to the same period last year. The increase is
due to increased headcount and related compensation, benefits, and overhead
costs of $311,000 and subcontracted non-recurring engineering expenses of
$141,000. We believe that continued investment in our 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 $590,000 or 74% in the second quarter of fiscal 2000 compared to
the same period last year. The increase is attributed to increased headcount and
related compensation, benefits, and overhead costs of $238,000 and recruiting
costs of $70,000. The remainder of the increase is due to increased legal
expenses and investor expenses of $362,000 for our proxy, acquisition related
matters, intellectual property litigation, annual report and our annual
shareholder meeting held in June 2000.
General and administrative expenses increased by $1.2 million or 80% in
the second half of fiscal 2000 compared to the same period last year. The
increase is attributed to increased headcount and related compensation,
benefits, and overhead costs of $357,000 and recruiting costs of $378,000 for
recruiting employees and board of director members. The remainder of the
increase is due to increased legal expenses and investor expenses of $475,000
for our proxy, acquisition related matters, intellectual property litigation,
annual report, annual shareholder meeting, and other costs related to being a
public company. We expect that the dollar amount of general and administrative
expenses will increase in the future as we continue to increase infrastructure
and incur the additional costs of being a public company.
Amortization of Intangibles and Stock Compensation. Amortization of
intangibles and deferred stock compensation grew by $776,000 or 225% in the
second quarter of fiscal 2000 compared to the same period last year. The
increase in amortization of intangibles of $366,000 is mainly comprised of the
$358,000 of amortization of goodwill and other purchased intangibles related to
the acquisition of Haptic. Deferred stock compensation amortization increased by
$410,000. Of the $410,000 increase, $345,000 is the result of amortization
related to the $5.5 million of deferred stock compensation recorded in
conjunction with the assumption of Haptic's unvested options at the time of
acquisition.
Amortization of intangibles and deferred stock compensation grew by $1.3
million or 287% in the first half of fiscal 2000 compared to the same period
last year. The increase in amortization of intangibles of $658,000 is comprised
of $477,000 of amortization of goodwill and other purchased intangibles related
to the acquisition of Haptic, and $181,000 of amortization related to purchased
patents and technology. Deferred stock compensation amortization increased by
$672,000. Of the $672,000 increase, $489,000 is the result of amortization
related to the $5.5 million of deferred stock compensation recorded in
conjunction with the assumption of Haptic's unvested options at the time of
acquisition, and $183,000 is related to the $1.5 million of deferred stock
compensation recorded during the second quarter of fiscal 1999.
In-Process Research and Development. During the six months ended June
30, 2000 we incurred a charge of $887,000 for in-process research and
development resulting from the March 2000 acquisition of all the outstanding
shares of Haptic compared to a charge of $1.2 million during the prior year
resulting from the acquisition of Cybernet.
Interest and Other Income, Net. Interest and other income consists
primarily of interest income, dividend income and capital gains from cash and
cash equivalents and short-term investments. Interest and other income grew by
$665,000 in the second quarter of fiscal 2000 compared to the same period last
year and $1.4 million for the six months ended June 30, 2000 versus the
six-month period ended June 30, 1999. The increase during the three and six
months ended June 30, 2000 is due to the increase in cash and cash equivalents
and short-term investments chiefly from the $48.3 million net proceeds or our
public offering in November 1999.
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<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents, and short-term investments consist primarily
of money market funds and highly liquid debt instruments. All of our cash
equivalents and short-term investments are classified as available-for-sale
under the provisions of SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities." The securities are stated at market value with
unrealized gains and losses reported as a component of accumulated other
comprehensive loss within stockholders' equity.
At June 30, 2000 our cash, cash equivalents and short-term investments
totaled $37.7 million, down $13.6 million from $51.3 million at December 31,
1999. Excluding short-term investments our cash and cash equivalents totaled
$22.8 million, down $23.7 million from $46.5 million at December 31, 1999.
Net cash used in operating activities during the first half of fiscal
2000 was $4.2 million, a significant increase from the $195,000 used during the
same period last year. Cash used in operations during the six-month period ended
June 30, 2000 was comprised of our $5.6 million net loss, a decrease due to a
change in deferred revenue of $983,000 mainly attributable to revenue recognized
under the Microsoft agreement, a decrease due to a $586,000 change in accounts
receivable and a decrease of $805,000 due to a change in prepaid expenses and
other assets primarily the result of capitalization of patent application costs
of $225,000 and a lump sum payment to buy out the future royalties due on our
microprocessors of $370,000. Cash used in operations was offset by noncash
activities of $2.9 million, including amortization of intangibles and deferred
compensation of $1.8 million and the $887,000 one-time charge for in-process
research and development relating to the Haptic acquisition and a $977,000
increase in accrued liabilities mostly due to the timing of payments to vendors
used on our new corporate facilities.
Net cash used in investing activities during the first half of fiscal
2000 was $19.9 million, a considerable increase from the $345,000 used during
the same period last year. Net cash used in investing during the period was made
up of $18.3 million purchases of short-term investments offset by sales and
maturities of $8.1 million, $6.5 million purchases of equity investments in
privately-held companies, $2.0 million to purchase capital equipment and
leasehold improvements on our new corporate facilities and information
technology infrastructure, and $581,000 related to the Haptic acquisition. 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.
During January 2000 the Company signed a noncancelable operating lease
for expanded facilities, which will expire in 2005, five years from the lease
commencement date of June 2000. The operating lease payments in fiscal year 2000
on the new lease are expected to be approximately $500,000. The aggregate of the
lease payments after fiscal year 2000 on the new lease are expected to be
approximately $3.8 million. Subsequent to quarter end June 30, 2000 the Company
was released from all further obligations under the operating lease for its
former corporate headquarters.
At June 30, 1999 our cash, cash equivalents and short-term investments
totaled $2.4 million, down $590,000 from $3.0 million at December 31, 1998.
Excluding short-term investments our cash and cash equivalents totaled $2.2
million, down $388,000 from $2.6 million at December 31, 1998.
Net cash used in operating activities during the first half of fiscal
1999 was $195,000. Cash used in operations during the six-month period ended
June 30, 1999 was comprised of our $2.1 million net loss, offset by noncash
activities of $1.9 million, including the $1.2 million one-time charge for
in-process research and development relating to the Cybernet technology
acquisition.
Net cash used in investing activities during the first half of fiscal
1999 was $345,000 which was made up of $323,000 to purchase patents and
technology, $153,000 to purchase capital equipment offset by sales and
maturities of short term investments of $201,000.
We believe that our cash, cash equivalents and short-term investments
will be sufficient to meet our working capital needs and capital expenditure
requirements for at least the next 12 months. We anticipate that capital
expenditures for the full year ended December 31, 2000 will total approximately
$3.0 million in connection with anticipated growth in operations, infrastructure
and personnel. If the Company acquires one or more businesses or products, the
Company's capital requirements could increase substantially. In the event of
such an acquisition or should any unanticipated circumstances arise which
significantly increase the Company's capital requirements, we may elect to raise
additional capital through debt or equity financing. Although we may intend to
raise additional capital there can be no assurance that necessary additional
capital will be available on terms acceptable to the Company, if at all.
-17-
<PAGE> 19
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE MARKET FOR OUR TOUCH-ENABLING TECHNOLOGIES IS AT AN EARLY STAGE AND IF
MARKET DEMAND DOES NOT DEVELOP, WE MAY NOT ACHIEVE OR SUSTAIN REVENUE GROWTH.
The market for touch-enabling 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 touch-enabling
technologies in that market began only in late 1996 and 1998, respectively.
We are currently working to increase the demand for our touch-enabling
technologies in the general purpose personal computer market by licensing
touch-enabling technologies for computer mice and in the automotive market by
licensing out touch-enabling technologies for automotive controls. The first
computer mouse incorporating our touch-enabling technologies was launched by
Logitech, one of our licensees, during the fourth quarter of 1999. This
touch-enabled mouse is the first entrant in a new category of touch-enabled
computer cursor control devices. Although we expect additional royalty-bearing,
touch-enabled mouse products to ship by the end of the 2000 calendar year,
touch-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 touch-enabling
technology. In the automotive market, we have licensed our touch-enabling
technologies to BMW for use in automotive controls and have entered into a
strategic partnership with ALPS, which designates ALPS as a preferred supplier
of Immersion's TouchSense-enabled automotive controls. Our efforts to increase
our royalty revenue in these markets may be unsuccessful.
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 those
licensees that pay us per-unit royalties 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 $14.2 MILLION AS OF JUNE 30, 2000, WILL
EXPERIENCE LOSSES IN THE FUTURE AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
Since 1997, we have incurred losses in every fiscal quarter, and we
expect losses through at least 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 touch-enabled products;
- increase our sales efforts;
- incur additional expenses related to the operation of businesses we
acquire;
- continue to develop our technologies;
- pursue strategic relationships; and
- protect and enforce our intellectual property.
If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, we may not achieve or maintain profitability.
-18-
<PAGE> 20
OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT OUR BUSINESS STRATEGY FOR
ACHIEVING REVENUE GROWTH THROUGH ROYALTY PAYMENTS FROM SALES BY OUR LICENSEES OF
TOUCH-ENABLED PRODUCTS, A STRATEGY FROM WHICH HISTORICALLY WE HAVE DERIVED LESS
THAN ONE-THIRD 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 used to create three dimensional computer
images of small objects, medical simulation products and a specialized non-touch
enabled computer mouse used for mapmaking. Historically, we have also derived
revenues from contracts with our licensees to assist in the development of our
licensees' touch-enabled products and from development contracts with government
agencies for touch-enabling technology. The majority of our historical product
sales resulted from sales of products that did not utilize our touch-enabling
technology but utilized related advanced computer peripheral technologies.
Our current marketing, research and development activities concentrate
on licensing our touch-enabling technology to a greater degree than in the past.
Accordingly, our historical results should not be relied upon as an indicator of
our future performance. For example, we derived only 6% of our total revenues
for 1998 from royalty revenue. By contrast, for 1999, we derived 28% of our
total revenues from royalty revenue, for the six months ended June 30, 2000 we
derived 37% of our total revenues from royalty revenue, and for the three months
ended June 30, 2000 we derived 38% of our total revenues from royalty revenue.
We anticipate that royalty revenue from licensing our technologies will
constitute an increasing portion of our revenues; however, on a period-to-period
basis royalty revenue as a percentage of total revenue may vary significantly
due to factors such as the timing of new product introductions and the
seasonality of royalty revenue. In addition, HT Medical and VTI have
historically derived most of their revenues from product sales. If either or
both of the HT Medical and VTI acquisitions are completed, our revenues
attributable to products sales are likely to increase in the short term.
IF THE ACQUISITIONS OF HT MEDICAL AND VTI ARE COMPLETED, INTEGRATION MAY BE
DIFFICULT TO ACHIEVE, WHICH MAY ADVERSELY AFFECT OPERATIONS.
We recently announced the signing of definitive agreements providing for
the acquisition by Immersion of HT Medical, a corporation with approximately 50
employees based in Gaithersburg, Maryland and, in an unrelated transaction, VTI,
a corporation with approximately 20 employees based in Palo Alto, California.
Immersion, HT Medical and VTI have different technologies, products and business
operations that have operated independently. The combination of these three
businesses after the completion of the acquisitions may be difficult. If we fail
to integrate the businesses successfully the operating results of the combined
company could be adversely affected and the combined company may not achieve the
benefits or operating efficiencies that we hope to obtain from the acquisitions.
The uncertainties of whether HT Medical and VTI employees will remain with HT
Medical, VTI, Immersion and/or the combined company after announcement of the
merger and during the integration process may affect the business operations of
each company. It may not be possible to retain enough key employees of HT
Medical and VTI to operate those business effectively during the period prior to
or after the completion of the acquisitions. Moreover, we do not know whether
the products, systems and personnel of the three companies will be fully
compatible.
WE HAVE IN THE PAST, AND MAY IN THE FUTURE, ENGAGE IN 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 may
in the future acquire, businesses or intellectual property that we feel could
complement our business, enhance our technical capabilities or increase our
intellectual property portfolio. We recently announced the signing of definitive
agreements to acquire HT Medical and VTI. If we consummate acquisitions through
an exchange of our securities, our stockholders could suffer significant
dilution. Acquisitions could also create risks for us, including:
- unanticipated costs associated with the acquisitions;
- use of substantial portions of our available cash to consummate
the acquisitions;
- diversion of management's attention from other business concerns;
- difficulties in assimilation of acquired personnel or operations;
and
- potential intellectual property infringement claims related to
newly acquired product lines.
Any acquisitions, even if successfully completed, might not generate any
additional revenue or provide any benefit to our business. We intend to account
for the acquisition of HT Medical as a pooling of interests. If we are unable to
do so and are required to account for the acquisition of HT Medical under the
purchase method, our expenses will increase substantially reducing our net
income or increasing our net loss in the future.
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<PAGE> 21
THE COSTS OF COMPLETING THE HT MEDICAL AND VTI ACQUISITIONS ARE SUBSTANTIAL, AND
MAY AFFECT OUR RESULTS OF OPERATIONS.
Completion of the acquisitions of HT Medical and VTI will result in
total pre-tax costs estimated at between $1.5 and $2.0 million (including an
$850,000 success fee to our financial advisors only if the HT Medical
acquisition is completed), primarily relating to costs associated with combining
the businesses of the two companies and the fees of financial advisors,
attorneys, consultants and accountants. The completion of each of the
acquisitions is subject to a number of conditions, including approval by the
shareholders of each of HT Medical and VTI, and there can be no assurance that
the acquisitions will close.
Although we do not believe that the acquisition costs will exceed our
estimate, our estimate may not be correct and unanticipated events could occur
that will substantially increase the costs of combining the two companies. In
any event, costs associated with the merger are likely to negatively affect our
results of operations in the quarter in which the merger is completed.
OUR BUSINESS STRATEGY FOR ACHIEVING REVENUE GROWTH RELIES SIGNIFICANTLY ON
ROYALTY PAYMENTS FROM SALES BY OUR LICENSEES OF THEIR TOUCH-ENABLED MICE
PRODUCTS.
If our licensees' touch-enabled mice products do not achieve commercial
acceptance or if production or other difficulties that sometimes occur when a
new product is introduced interfere with sales of our licensees' mice products,
our ability to achieve revenue growth could be significantly impaired. The first
computer mouse incorporating our technology was launched by Logitech, a licensee
of our technology, during the fourth quarter of 1999. To date, sales of
Logitech's current touch-enabled mouse product, the Wingman Force Feedback
Mouse, have not reached desired levels. We believe that the facts that the
current product is being marketed, in part, as a gaming product, that it was
introduced late in the 1999 Christmas buying season, that it was relatively
expensive, and that many popular software titles targeted at mice do not yet
support force feedback, have contributed to slow sales of this product.
We and Logitech amended our existing license agreement and product
technology agreement in March 2000 to cover a new technology developed by us
for lower-cost, touch-enabled mouse products to be targeted for use with
productivity and web applications. In addition to their lower cost, these new
mice products are designed to provide basic tactile feedback to users without
additional external software support, and therefore to mitigate the need for
external software development in order to create demand for TouchSense-enabled
hardware products. In the second half of 2000, we expect Logitech to transition
its manufacturing, sales and marketing efforts from the Wingman Force Feedback
Mouse to these new lower-cost, touch-enabled mouse products. In addition, we
recently licensed our lower-cost, touch-enabling mice technology to an
additional manufacturer of computer mice. However, there can be no assurance
that these new mice products will be widely accepted in the marketplace, and if
it is not widely accepted, we may be unable to grow our revenues.
WE DO NOT CONTROL OR INFLUENCE OUR LICENSEES' MANUFACTURING, PROMOTION,
DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING OUR TOUCH-ENABLING
TECHNOLOGIES, UPON WHICH WE ARE DEPENDENT TO GENERATE ROYALTY REVENUE.
A key part of our primary business strategy is to license our
intellectual property to companies that manufacture and sell products
incorporating our touch-enabling technologies. The sale of those products
generates royalty revenue for us. For the year ended December 31, 1999, 28% of
our total revenues was royalty revenue, for the six-month period ended June 30,
2000, 37% of our total revenues was royalty revenue, and for the three-month
period ended June 30, 2000, 38% of our total revenues was royalty revenue.
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 touch-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,
those licensees that pay us per-unit royalties must manufacture and distribute
products incorporating our touch-enabling technologies in a timely fashion and
generate consumer demand through marketing and other promotional activities.
Products incorporating our touch-enabling technologies are generally more
difficult to design and manufacture than products that do not incorporate our
touch-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.
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BECAUSE LOGITECH IS OUR ONLY LICENSEE CURRENTLY SELLING TOUCH-ENABLED MICE, OUR
ROYALTY REVENUE FROM TOUCH-ENABLED MICE WILL BE SIGNIFICANTLY REDUCED IF
LOGITECH DOES NOT EFFECTIVELY MANUFACTURE AND MARKET TOUCH-ENABLED MICE
PRODUCTS.
Although we have licensed our touch-enabling mouse technology to an
additional licensee, Logitech is currently the only licensee selling
touch-enabled mice. If Logitech does not effectively manufacture, market and
distribute its touch-enabled mouse product, our royalty revenue from
touch-enabled mice would be significantly reduced. In addition, a lack of market
acceptance of the Logitech touch-enabled mouse might dissuade other potential
licensees from licensing our technologies for touch-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 TOUCH-ENABLING
TECHNOLOGY, OUR ROYALTY REVENUE MAY NOT GROW.
Our revenue growth is significantly dependent on our ability to enter
into new licensing arrangements. Our failure to enter into new licensing
arrangements will cause our operating results to suffer. We face 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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<PAGE> 23
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE, AND IF OUR FUTURE
RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE
PRICE OF OUR COMMON STOCK IS LIKELY TO DECLINE.
Our revenues and operating results are likely to vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control and any of which could cause the price of our common stock to decline.
These factors include:
- the establishment or loss of licensing relationships;
- the timing of payments under fixed and/or up-front license
agreements;
- the timing of our expenses, including costs related to
acquisitions of technologies or businesses;
- the timing of introductions of new products and product
enhancements by us, our licensees and their competitors;
- our ability to develop and improve our technologies;
- our ability to attract, integrate and retain qualified personnel;
and
- seasonality in the demand for our licensees' products.
Accordingly, we believe that period-to-period comparisons of our
operating results should not be relied upon as an indicator of our future
performance. In addition, because a high percentage of our operating expenses is
fixed, a shortfall of revenues can cause significant variations in operating
results from period to period.
THE HIGHER COST OF PRODUCTS INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES MAY
INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND SALE OF PRODUCTS INCORPORATING
OUR TECHNOLOGIES.
Personal computer gaming peripherals, computer mice and automotive
controls incorporating our touch-enabling technologies are more expensive than
similar competitive products that are not touch-enabled. Although major
manufacturers, such as Logitech, Microsoft and BMW, have licensed our
technology, the greater expense of products containing our touch-enabling
technologies as compared to non-touch-enabled products may be a significant
barrier to the widespread adoption and sale of touch-enabled products.
IF OUR TECHNOLOGIES ARE UNABLE TO GAIN MARKET ACCEPTANCE OTHER THAN IN
TOUCH-ENABLED JOYSTICKS AND STEERING WHEELS, OUR ROYALTY REVENUE GROWTH WILL BE
LIMITED.
Substantially all of our royalty revenue is derived from the licensing
of our portfolio of touch-enabling technology for personal computer gaming
peripherals such as joysticks and steering wheels. The market for joysticks and
steering wheels for use with personal computers is a substantially smaller
market than either the mouse market or the dedicated gaming console market and
is characterized by declining average selling prices. If we are unable to gain
market acceptance beyond the personal computer gaming peripherals market, we may
not achieve royalty revenue growth.
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 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.
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<PAGE> 24
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 TOUCH-ENABLED JOYSTICKS AND STEERING
WHEELS AT THE EXPENSE OF OUR OTHER LICENSEES.
Under the terms of our present agreement with Microsoft, Microsoft
receives a perpetual, worldwide, irrevocable, non-exclusive license under our
patents for 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 a payment of $2.35 million, which we recognized in equal monthly
increments over a one-year period that ended in mid-July 2000. We will not
receive any further revenues or royalties from Microsoft under our current
agreement with Microsoft. We derived 13% of our total revenues and 48% of our
royalty revenue for the twelve months ended December 31, 1999 from Microsoft. In
addition, we derived 23% of our total revenues and 63% of our royalty revenues
for the six months ended June 30, 2000 from Microsoft and 23% of our total
revenues and 60% of our royalty revenues for the three months ended June 30,
2000 from Microsoft. At the present time, we do not have a license agreement
with Microsoft for products other than the SideWinder joystick and steering
wheel. Microsoft has a significant share of the market for touch-enabled
joysticks and steering wheels for personal computers. Microsoft has
significantly greater financial, sales and marketing resources, as well as
greater name recognition and a larger customer base, than our other licensees.
In the event that Microsoft increases its share of this market, our royalty
revenue from other licensees in this market segment might decline.
BECAUSE WE NO LONGER RECEIVE ROYALTY REVENUE UNDER OUR CURRENT AGREEMENT WITH
MICROSOFT, OUR ROYALTY REVENUES IN FUTURE PERIODS MAY DECLINE.
As described above, revenue recognized under our current agreement with
Microsoft ended in mid-July 2000. Because the agreement with Microsoft accounted
for a substantial portion of our royalty revenues, our royalty revenues in
future periods will decline if we fail to enter into agreements with additional
licensees of our touch-enabling technologies. We may not be successful in
entering into such agreements.
LOGITECH ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE AND THE FAILURE OF
LOGITECH TO ACHIEVE SALES VOLUMES FOR ITS GAMING AND CURSOR CONTROL PERIPHERAL
PRODUCTS THAT INCORPORATE OUR TOUCH-ENABLING TECHNOLOGIES MAY REDUCE OUR ROYALTY
REVENUE.
We derived 13% of our total revenues and 32% of our royalty revenue for
the twelve months ended December 31, 1999 from Logitech. For the six-month
period ended June 30, 2000, we derived 7% of our total revenues and 20% of our
royalty revenue from Logitech and for the three-month period ended June 30,
2000, we derived 3% of our total revenues and 8% of our royalty revenue from
Logitech. We expect that a significant portion of our total revenues will
continue to be derived from Logitech. If Logitech fails to achieve anticipated
sales volumes for its computer peripheral products that incorporate our
technologies, our royalty revenue would be reduced.
BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE OUR
TOUCH-ENABLING TECHNOLOGIES CURRENTLY MUST WORK WITH MICROSOFT'S OPERATING
SYSTEM SOFTWARE, OUR COSTS COULD INCREASE AND OUR REVENUES COULD DECLINE IF
MICROSOFT MODIFIES ITS OPERATING SYSTEM SOFTWARE.
Our hardware and software technology for personal computer peripheral
products that incorporate our touch-enabling technologies is currently
compatible with Microsoft's Windows 98 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.
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<PAGE> 25
LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS COULD BE EXPENSIVE,
DISRUPTIVE, AND TIME CONSUMING, AND COULD ADVERSELY AFFECT OUR BUSINESS.
Intellectual property litigation, whether brought by us or by others,
could result in the expenditure of significant financial resources and the
diversion of management's time and efforts. From time to time, we initiate
claims against third parties that we believe infringe our intellectual property
rights. To date, most of these claims have not led to any litigation. However,
on June 18, 2000, we filed an action for patent infringement in the United
States District Court for the Northern District of California against InterAct
Accessories, Inc., one of our existing licensees, based on certain unlicensed
gamepad products currently being marketed by InterAct. This litigation, like any
litigation brought to protect and enforce our intellectual property rights,
could be costly, time-consuming and distracting to management and could result
in the impairment or loss of portions of our intellectual property. In addition,
any litigation in which we are accused of infringement may cause product
shipment delays, require us to develop non-infringing technology or require us
to enter into royalty or license agreements even before the issue of
infringement has been decided on the merits. If any litigation were not resolved
in our favor, we could become subject to substantial damage claims from third
parties and indemnification claims from our licensees. We and our licensees
could be enjoined from the continued use of the technology at issue without a
royalty or license agreement. Royalty or license agreements, if required, might
not be available on acceptable terms, or at all. If a third party claiming
infringement against us prevailed and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and
cost-effective basis, our expenses would increase and our revenues could
decrease.
We attempt to avoid infringing known proprietary rights of third
parties. 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. From time to
time, we have received letters from companies, several of which have
significantly greater financial resources than we do, asserting that some of our
technologies, or those of our licensees, infringe their intellectual property
rights. Certain of our licenses have received similar letters from the same four
companies. Such letters may influence our licensees' decisions whether to ship
products incorporating our technologies. Although none of these matters has
resulted in litigation to date, any of these notices, or additional notices that
we could receive in the future from these or other companies, could lead to
litigation.
WE DEPEND ON KAWASAKI LSI TO PRODUCE OUR IMMERSION PROCESSORS AND MAY LOSE
CUSTOMERS IF KAWASAKI LSI DOES NOT MEET OUR REQUIREMENTS.
Kawasaki LSI is the sole supplier of our custom Immersion Processors,
which we develop, license and sell to improve the performance and to help reduce
the cost of computer peripheral products, such as joysticks and mice,
incorporating our touch-enabling technology. 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.
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<PAGE> 26
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 Vice President of Finance, 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 UNLICENSED PRODUCTS COULD LEAD TO REDUCED PRICES AND SALES
VOLUMES OF OUR LICENSEES' PRODUCTS, WHICH COULD LIMIT OUR REVENUES OR CAUSE OUR
REVENUES TO DECLINE.
Our licensees or other third parties may seek to develop products which
they believe do not require a license under our intellectual property. These
potential competitors may have significantly greater financial, technical and
marketing resources than we do, and the costs associated with asserting our
intellectual property against such products and such potential competitors could
be significant. Moreover, if such alternative designs were determined by a court
not to require a license under our intellectual property, competition from such
unlicensed products could limit or reduce our revenues.
COMPETITION TO OUR IMMERSION PROCESSORS MAY LEAD TO REDUCED PRICES AND SALES
VOLUMES OF OUR MICROPROCESSORS.
To date, the market for our Immersion Processors 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 Mitsubishi and
ST Microelectronics, manufacture products that compete with our microprocessors,
and ST Microelectronics has recently started selling to our licensees at least
one competitive chip for use in low-end touch-enabled peripheral products. 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.
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
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. Several of our executive officers and key employees hold stock options
with exercise prices considerably below the current market price of our common
stock, which may impair our ability to retain the services of such employees.
In addition, our technologies are complex and we rely upon the continued service
of our existing engineering personnel to support licensees, enhance existing
technology and develop new technologies.
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<PAGE> 27
WE HAVE EXPERIENCED RAPID GROWTH AND CHANGE IN OUR BUSINESS, AND OUR FAILURE TO
MANAGE THIS AND ANY FUTURE GROWTH COULD HARM OUR BUSINESS.
In addition to the employees of HT Medical and VTI that we will have to
integrate if those acquisitions are completed, we are rapidly increasing the
number of our employees in our San Jose headquarters. Our business may be harmed
if we do not integrate and train our new employees quickly and effectively. We
also cannot be sure that our revenues will continue to grow at a rate sufficient
to support the costs associated with an increasing number of employees. Any
future periods of rapid growth may place significant strains on our managerial,
financial, engineering and other resources. The rate of any future expansion, in
combination with our complex technologies, may demand an unusually high level of
managerial effectiveness in anticipating, planning, coordinating and meeting our
operational needs as well as the needs of our licensees.
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 damages and injure our reputation or the reputation of our licensees
or their products. This damage could limit the market for our licensees'
touch-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 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.
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. To date, our business has not been affected by Year 2000 compliance
problems.
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<PAGE> 28
OUR STOCK MAY BE VOLATILE.
The stock market has experienced extreme volatility that often has been
unrelated or disproportionate to the performance of particular companies. These
market fluctuations may cause our stock price to decline regardless of our
performance. The market price or our common stock has been, and in the future
could be, significantly affected by factors such as: actual or anticipated
fluctuations in operating results; announcements of technical innovations; new
products or new contracts; competitors or their customers; governmental
regulatory action; developments with respect to patents or proprietary rights;
changes in financial estimates by securities analysts; and general market
conditions. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has been initiated
against that company.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS RETAIN SIGNIFICANT
CONTROL OVER US, WHICH MAY LEAD TO CONFLICTS WITH OTHER STOCKHOLDERS OVER
CORPORATE GOVERNANCE MATTERS.
Our current directors, officers and more than 5% stockholders, as a
group, beneficially own more than 40% of our outstanding common stock. Acting
together, these stockholders would be able to exercise significant control on
matters that our stockholders vote upon, including the election of directors and
mergers or other business combinations, which could have the effect of delaying
or preventing a third party from acquiring control over or merging with us.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the effect of
delaying or preventing a change of control or changes in our management. In
addition, certain provisions of Delaware law may discourage, delay or prevent
someone from acquiring or merging with us. These provisions could limit the
price that investors might be willing to pay in the future for shares.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has limited exposure to financial market risks, including
changes in interest rates. The fair value of the Company's portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the major
portion of our investment portfolio. An increase or decrease in interest rates
would not significantly increase or decrease interest expense on debt
obligations due to the fixed nature of the Company's debt obligations. The
Company's foreign operations are limited in scope and thus the Company is not
materially exposed to foreign currency fluctuations.
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<PAGE> 29
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal proceedings relating to some of its
intellectual property rights. Specifically, in June 2000, the Company filed a
complaint against InterAct Accessories, Inc. in the United States District Court
for the Northern District of California (Case No. C-00-20663 JF). The complaint
alleges that InterAct's Dual Impact and Barracuda 2 gamepads, and its V3FX and
Concept 4 steering wheels, infringe three of the Company's United States
patents. The Company seeks to recover compensatory damages, and based on
allegations that InterAct's infringement is willful, to have such damages
trebled. InterAct has filed an answer to the complaint denying infringement and
asserting on various grounds, including in a declaratory relief counterclaim,
that the patents-in-suit are invalid. The Company believes its claims to be
meritorious, and intends vigorously to pursue them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of stockholders (the "Annual
Meeting") on June 6, 2000, which was adjourned and reconvened on June 9, 2000,
to consider and vote on the following proposals: (i) to elect two (2) members of
the Board of Directors to serve for three-year terms as Class I directors
(Proposal 1), (ii) to amend and restate the Certificate of Incorporation of the
Company to eliminate the provision requiring an affirmative vote of at least 66
2/3% of the outstanding shares to amend or repeal the bylaws and certain
provisions of the certificate of incorporation of the Company and to eliminate
the right of stockholders to remove Board members without cause (Proposal 2),
and (iii) ratification of Deloitte & Touche LLP as the Company's independent
auditors (Proposal 3).
Proposal 1. Steven Blank and Charles Boesenberg, each of whom was a
director of the Company prior to the Annual Meeting, were elected as Class I
Directors. Of the 14,166,175 shares voted at the Annual Meeting, 13,240,825
shares were voted for the election of Mr. Blank and 925,890 shares were
withheld, and 14,148,856 shares were voted for the election of Mr. Boesenberg
and 17,859 shares were withheld.
Proposal 2. The Company's stockholders approved Proposal 2 with a vote
of 10,988,078 shares voted for, 1,791,499 shares voted against and 159,764
shares abstaining. The total number of shares eligible to vote as of the record
date was 16,023,628.
Proposal 3. The Company's stockholders approved Proposal 3 with a vote
of 14,144,910 shares voted for, 16,316 shares voted against and 5,489 shares
abstaining.
-28-
<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.
27.1 Financial Data Schedule for the period ended June 30, 2000.
</TABLE>
-------------
-29-
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this Report to be signed on behalf by the undersigned
thereunto duly authorized.
IMMERSION CORPORATION
Registrant
Date: August 14, 2000 /s/ Louis Rosenberg
----------------------------------------
Louis Rosenberg
Chairman, President and Chief Executive
Officer
Date: August 14, 2000 /s/ Victor Viegas
----------------------------------------
Victor Viegas
Vice President, Finance and Chief
Financial Officer
-30-
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.
27.1 Financial Data Schedule for the period ended June 30, 2000.
</TABLE>
-------------
