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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) September 29, 2000
IMMERSION CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Delaware 000-27969 94-3180138
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(State or Other Jurisdiction of (Commission File Number) (IRS Employer
Incorporation) Identification No.)
801 Fox Lane, San Jose, California 95131
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(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code: (408) 467-1900
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER ITEMS AND REGULATION FD DISCLOSURE.
On September 29, 2000, Immersion Corporation acquired HT Medical Systems,
Inc., ("HT") through the merger of Immersion's wholly owned subsidiary with and
into HT, under an Agreement and Plan of Reorganization, dated as of July 31,
2000, among Immersion, Merger Sub, HT and Greg Merril, as the representative of
HT's stockholders. The merger was accounted for as a pooling of interests as
described in Note 18 to the consolidated financial statements.
Immersion is filing this report to provide historical financial statements
and additional disclosure to reflect combined operating results of Immersion and
HT. In this current report, "Immersion," "we," "us," and "our" refer to
Immersion Corporation.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below has been restated to give retroactive effect to
the merger of Immersion and HT Medical Systems, Inc. (HT) on September 29, 2000
which has been accounted for as a pooling of interests as described in note 18
to our consolidated financial statements. The selected consolidated financial
data set forth below for the fiscal years ended December 31, 1999, 1998 and 1997
and the consolidated balance sheet data as of December 31, 1999 and 1998 are
derived from our audited consolidated financial statements, which are included
elsewhere in this Current Report. The selected consolidated balance sheet data
as of December 31, 1997 is derived from the combination of our respective
audited consolidated financial statements that are not included in this Current
Report. The selected consolidated financial data as of and for the fiscal year
ended December 31, 1996 is derived from the combination of Immersion's audited
consolidated financial statements and HT's audited financial statements (which
disclaimed an opinion on the statements of income, stockholders' equity
(deficiency) and cash flows for the year then ended due to a scope limitation on
the opening balance sheet) that are not included in this Current Report. The
selected consolidated financial data as of and for the fiscal year ended
December 31, 1995 is derived from the combination of our respective unaudited
consolidated financial statements that are not included in this Current Report .
The consolidated statement of operations data for the nine months ended
September 30, 2000 and 1999 and the balance sheet data as of September 30, 2000
are derived from our unaudited condensed consolidated financial statements
included elsewhere in this Current Report. Immersion believes that the unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
statements.
Prior to the merger, HT ended its fiscal year on May 31. Subsequent to
the merger, HT changed its fiscal year end to December 31 to conform to
Immersion's presentation. The consolidated financial statements as of and for
the nine months ended September 30, 2000 include amounts for HT as of September
30, 2000 and for the nine months then ended. The consolidated statement of
operations for the nine months ended September 30, 1999 includes amounts for HT
for the nine months ended February 2000. The restated consolidated balance
sheets as of December 31, 1999, 1998, 1997, 1996 and 1995 include amounts for HT
as of May 31, 2000, 1999, 1998, 1997 and 1996 respectively. The consolidated
statements of operations for each of the five years ended December 31 include
amounts for HT for the fiscal years ended five months later. As a result of this
presentation, HT's results of operations for the five months ended May 31, 2000
are included in both the year ended December 31, 1999 and the nine months ended
September 30, 2000, and HT's result of operations for the two months ended
February 2000 are included in both the nine months ended September 30, 2000 and
1999. Revenue and net loss for HT for the five months ended May 31, 2000 were
$973,000 and $2,427,000 respectively. Revenue and net loss of HT for the two
months ended February 29, 2000 were $444,000 and $779,000, respectively. The
following financial data is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Current Report. Historic results are not
necessarily indicative of the results that may be expected for any future period
or for a full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
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2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Royalty revenue $ 2,158 $ 1,265 $ 2,211 $ 321 $ 14 $ -- $ --
Product sales 5,179 4,479 6,063 4,472 2,952 2,022 1,068
Development contracts and other 2,715 2,222 2,668 3,910 3,918 2,895 2,675
-------- -------- -------- -------- -------- -------- --------
Total revenues 10,052 7,966 10,942 8,703 6,884 4,917 3,743
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of product sales 2,822 2,128 2,964 1,954 1,226 947 540
Sales and marketing 7,713 2,239 3,547 1,612 1,225 806 224
Research and development 4,974 3,943 5,518 5,168 3,787 3,152 2,108
General and administrative 5,852 4,023 5,250 3,283 2,052 1,237 1,067
Amortization of intangibles and deferred
stock compensation 3,460 876 1,385 245 27 1 --
In-process research and development 3,469 1,190 1,190 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses 28,290 14,399 19,854 12,262 8,317 6,143 3,939
-------- -------- -------- -------- -------- -------- --------
Operating loss (18,238) (6,433) (8,912) (3,559) (1,433) (1,226) (196)
Other income (expense) 1,451 (715) (558) (110) (185) (104) (11)
-------- -------- -------- -------- -------- -------- --------
Net loss $(16,787) $ (7,148) $ (9,470) $ (3,669) $ (1,618) $ (1,330) $ (207)
======== ======== ======== ======== ======== ======== ========
Basic and diluted net loss per share $ (0.96) $ (1.10) $ (1.21) $ (0.73) $ (0.40) $ (0.37) $ (0.06)
======== ======== ======== ======== ======== ======== ========
Shares used in calculating basic and
diluted net loss per share 17,509 6,478 7,852 5,023 4,004 3,571 3,200
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
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2000 1999 1999 1998 1997 1996 1995
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(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amortization of intangibles and deferred
stock compensation
Amortization of intangibles 1,834 684 1,033 211 -- -- --
Deferred stock compensation--sales and
marketing 143 41 61 -- -- -- --
Deferred stock compensation--research and
development 1,048 21 72 34 27 1 --
Deferred stock compensation--general and
administrative 435 130 219 -- -- -- --
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3,460 876 1,385 245 27 1 --
================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------------------------------
2000 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $24,899 $46,606 $ 2,595 $ 663 $ 459 $ 52
Working capital 31,697 50,657 3,940 2,331 981 786
Total assets 63,608 60,987 7,123 2,576 2,253 1,804
Redeemable convertible preferred stock -- -- 1,476 1,471 -- --
Long-term obligations 3,928 3,823 1,914 1,849 1,313 281
Total stockholders' equity (deficiency) 53,224 52,963 2,136 (446) 247 788
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements made in this current report, other than statements of historical
fact, are forward-looking statements. This current report, including the
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes to Consolidated Financial Statements
contain forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, level
of activity, performance or achievements to differ materially from the results,
level of activity, performance or achievements expressed or implied by the
forward-looking statements.
These risks and other factors include those listed under "Risk Factors" in
our reports and registration statements filed with the Securities and Exchange
Commission and elsewhere in this current report. Forward-looking statements may,
but do not necessarily, include words such as "anticipate," "believe," "plan,"
"expect," "future," "intend," "may," "will," "should," "estimate," "predict,"
"potential," "continue," the negative of these terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors" in
our reports and registration statements filed with the Securities and Exchange
Commission. These factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, level of activity, performance or achievements. Moreover, neither we
nor any other person assumes responsibility for the accuracy and completeness of
any of these forward-looking statements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform the
prior statements to actual results or revised expectations.
OVERVIEW
Immersion was founded in 1993 to develop technologies that help improve
human to computer interaction. Historically, we have derived most of our
revenues from sales of products and from development contracts. We began
generating royalty revenue in the first quarter of 1997 and anticipate that
royalty revenue will become an increasing percentage of our total revenues.
We began developing touch-enabled computer peripherals in 1993. In 1995,
we introduced our Impulse Engine line of high-end touch-enabled devices for
industrial, research and education markets. We manufacture and sell these
products directly to our customers. In 1996, we introduced I-FORCE, our first
branded portfolio of touch-enabling technology for consumer markets. We license
I-FORCE(R), now called TouchSense(TM), generally on a per unit royalty basis, to
computer gaming peripheral manufacturers. Also in 1996, the first computer
joystick incorporating I-FORCE was introduced.
We introduced FEELit, now called TouchSense, a technology for
touch-enabled cursor control products, such as mice and trackballs, in 1997. In
1998, we licensed FEELit to Logitech, which began selling the first mouse during
the fourth quarter of 1999. In August 2000, Logitech announced two new
lower-cost, touch-enabled mouse products, the iFeel(TM) Mouse and the iFeel(TM)
MouseMan(R), each of which is targeted for use with general-purpose computer
applications, such as business productivity and web applications.
We developed the Immersion Processors, custom microprocessors for
touch-enabled products that are manufactured by Kawasaki LSI, and began selling
the Immersion Processors in September 1998. In addition to selling the Immersion
Processors itself, we granted Kawasaki LSI a limited royalty-bearing license to
sell the Immersion Processors to Logitech for use in its touch-enabled computer
mouse.
We currently sell specialized computer peripherals used in industrial
and professional applications. We developed our first three-dimensional
digitizer product, which is used to create three-dimensional computer images of
small objects, in 1994 and currently sell this product under the name
MicroScribe-3D. We began developing our Softmouse product, a specialized
computer mouse used for mapmaking, in 1994. This mouse product is sold to
original equipment
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manufacturers. We began developing technology and products for the medical
market in 1993. We derive revenues from selling medical training and simulation
products that allow medical personnel to practice procedures without placing
patients at risk. In May 2000, we licensed our touch-enabled products to BMW for
use in automotive controls.
We have entered into numerous contracts with government agencies
and corporations since 1993. Government contracts help fund advanced research
and development, are typically less than two years in duration, are usually for
a fixed price or for its costs plus a fixed fee, and allow the government agency
to license the resulting technology for government applications, specifically
excluding any commercial activity. Corporate contracts are typically for product
development consulting, are for a fixed fee and are also less than two years in
duration.
Since inception, we have completed a number of acquisitions of
patents and technology. We capitalize the cost of patents and technology and
license agreements, except for amounts relating to acquired in-process research
and development for which there is no alternative future use. As of December 31,
1999, we have capitalized patents and technology of $4.7 million, net of
accumulated amortization of $714,000. We are amortizing these patents and
technology over the estimated useful life of the technology of nine years. Of
this amount, we capitalized patents and technology of $3.3 million, associated
with the acquisition of patents and technology from Cybernet in March 1999. We
have amortized the Cybernet patents and technology over the estimated useful
life of the technology of nine years.
We recognize revenues in accordance with applicable accounting
standards including American Institute of Certified Public Accountants'
Statement of Position 97-2, Software Revenue Recognition, as amended. Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred or service has been rendered, the fee is fixed and determinable, and
collectibility is probable. This generally occurs at the time of shipment.
We recognize fixed-fee contract revenue under the cost-to-cost
percentage-of-completion accounting method based on the actual physical
completion of work performed and the ratio of costs incurred to total estimated
costs to complete the contract. We recognize allowable fees under
cost-reimbursement contracts as costs are incurred. Losses on contracts are
recognized when determined. Revisions in estimates are reflected in the period
in which the conditions become known. We recognize royalty revenue based on
royalty reports or related information received from the licensee. On July 19,
1999, we entered into an irrevocable, perpetual, non-exclusive, worldwide
license agreement with Microsoft under which Microsoft paid us a lump sum of
$2.35 million to cover all shipments of Microsoft's SideWinder Force Feedback
Wheel and its SideWinder Force Feedback Pro Joystick and a replacement version
of these specific SideWinder products having essentially similar functional
features. Under the terms of the agreement, we recognized the license payment as
revenue in equal monthly increments over the twelve-month period that ended in
mid-July, 2000.
Our cost of product sales consists primarily of materials, labor
and overhead. There is no cost of sales associated with royalty revenue or
development contract revenue. Our research and development expenses are
comprised primarily of headcount and related compensation and benefits,
consulting fees, costs of acquired technology, tooling
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and supplies and an allocation of facilities costs. Our sales and marketing
expenses are comprised primarily of employee headcount and related compensation
and benefits, advertising, trade shows, brochures, travel and an allocation of
facilities costs. Our general and administrative expenses are comprised
primarily of employee headcount and related compensation and benefits, legal and
professional fees, office supplies, recruiting, travel and an allocation of
facilities costs.
We signed a co-marketing agreement with Logitech during the fourth
quarter of fiscal 1999 in which we agreed to assist Logitech with the launch and
promotion of its touch-enabled mice. Under the terms of the agreement, for a
period of five calendar quarters, beginning in the first calendar quarter of
2000, we are required to reimburse Logitech for certain marketing related
expenses not to exceed $200,000 per quarter, an expense funded with working
capital. Only third-party marketing services that are targeted at promoting
Logitech's touch-enabled mice are eligible for reimbursement. In addition, all
promotional activities must be approved by us in advance. In order to remain
eligible for reimbursement, Logitech must include our brand and slogan on all
its marketing materials that reference touch-enabled functionality or products,
and meet other conditions regarding its touch-enabled mice.
We recorded deferred stock compensation of $2.5 million in 1999 from the
issuance of employee and director stock options. We are amortizing the deferred
stock compensation over the terms of the related option agreements, which range
up to four years.
Historical Results of Operations
The following table sets forth our statement of operations data as a percentage
of total net revenues.
<TABLE>
<CAPTION>
Percentage of
Total Net Revenues
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net revenues:
Royalty revenue 20.2% 3.7% 0.2%
Product sales 55.4 51.4 42.9
Development contracts and other 24.4 44.9 56.9
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of product sales 27.1 22.5 17.8
Sales and marketing 32.4 18.5 17.8
Research and development 50.4 59.4 55.0
General and administrative 48.0 37.7 29.8
Amortization of intangibles and deferred stock
compensation 12.7 2.8 0.4
In-process research and development 10.9 -- --
----- ----- -----
Total costs and expenses 181.5 140.9 120.8
----- ----- -----
Operating loss (81.5) (40.9) (20.8)
Interest and other expense, net (5.1) (1.3) (2.7)
----- ----- -----
</TABLE>
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<TABLE>
<CAPTION>
Percentage of
Total Net Revenues
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net loss (86.6)% (42.2)% (23.5)%
===== ===== =====
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Total Revenues. Our total revenues for the year ended December 31, 1999
increased to $10.9 million from $8.7 million in 1998, an increase of 26%. The
year over year increase was primarily the result of a $1.9 million or 589%
increase in royalty revenue due to increased 1999 sales by our I-FORCE licensees
and $1.1 million in revenues recognized under the Microsoft agreement. The
remainder of the 1999 increase in sales over 1998 was due to an increase in
product sales of $1.6 million or 36%, which was partially offset by a decrease
in contract revenue of $1.2 million, or 32%. The increase in product sales is
mainly attributed to a $1.3 million increase in sales of professional medical
products, and a $343,000 increase in Immersion Processors sales with smaller
increases and decreases in other product categories. The decrease in contract
revenue is mainly attributed to the conclusion of several long-term contracts
and the conscious shift in focus from contract and research and development
revenues to product sales. Total revenue for the year ended December 31, 1998
grew by $1.8 million over total 1997 revenues. The 1998 increase was principally
the result of a $1.5 million increase in product sales, primarily from
professional medical products, our MicroScribe-3D and other industrial products,
and a $307,000 increase in royalty revenue due to increased sales by our I-FORCE
licensees in 1998.
Cost of Product Sales. Costs of product sales were $3.0 million in 1999,
$2.0 million in 1998 and $1.2 million in 1997. The $1.0 million increase in cost
of product sales in 1999 is mainly due to higher sales volume, a 36% increase in
product sales over the prior year and increased sales of Immersion Processors
which have a higher cost of sales as a percentage of product sales than our
other products. The $728,000 increase in 1998 cost of product sales over 1997
was due to increased product sales volume. Cost of product sales as a percentage
of product sales was 49% in 1999, 44% in 1998 and 42% in 1997. Cost of product
sales as a percentage of product sales increased in 1999 from 1998 primarily due
to a 276% increase in sales of our microprocessors, which have a higher cost as
a percentage of sales than our other products.
Sales and Marketing. Sales and marketing expenses grew to $3.5 million
in 1999 from $1.6 million in 1998 and $1.2 million in 1997. The $1.9 million or
120% increase in 1999 was primarily a result of increased headcount and related
compensation, benefits, and overhead costs of $1.4 million and corporate
identity and web development costs of $319,000. We expect sales and marketing
expenses to increase significantly in absolute dollars due to planned growth of
our sales and marketing organization. These planned increases include higher
employee headcount and related compensation and increased advertising and
marketing expenses. These planned increases also include expenses related to a
co-marketing agreement that we entered into with Logitech in November 1999.
Under the co-marketing agreement, we
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agreed to reimburse Logitech for certain marketing-related expenses not to
exceed $200,000 per quarter during a five-quarter period beginning the first
quarter of 2000.
Research and Development. Research and development expenses increased to
$5.5 million in 1999 from $5.2 million in 1998 and $3.8 million in 1997. The
$350,000 or 7% increase in 1999 is mainly due to an increase in employee
headcount and the related compensation, benefits and overhead costs. The
increase from 1997 to 1998 of $1.4 million, was principally due to an increase
in employee headcount and related compensation of $1.5 million, partially offset
by a decrease in consulting services of $142,000. We believe that continued
investment in research and development is critical to our future success, and we
expect these expenses to increase in absolute dollars in future periods.
General and Administrative. General and administrative expenses
increased to $5.3 million in 1999 from $3.3 million in 1998 and $2.1 million in
1997. The $2.0 million or 60% increase in 1999 is mainly attributed to an
increase of $1.0 million in employee headcount and related compensation,
benefits, overhead costs and an $824,000 increase in recruiting costs. The
recruiting expenses are predominantly from cash and stock compensation given to
a recruiter for identifying and employing three senior members of Immersion's
management team. The increase from 1997 to 1998 was principally due to an
increase in employee headcount and related compensation and benefits of
$584,000, an increase in legal and professional fees of $147,000 and an increase
in consulting services of $109,000. We expect that the dollar amount of general
and administrative expenses will increase in the future as we incur the
significant additional costs related to being a public company.
Amortization of Intangibles and Deferred Stock Compensation.
Amortization of intangibles and deferred stock compensation increased to $1.4
million in 1999 from $245,000 in 1998 and $27,000 in 1997. Amortization of
licenses and patents was $551,000 in 1999 and $211,000 in 1998 representing a
$340,000 increase year over year. The remainder of the 1999 increase is due to
$482,000 of amortization on a consulting agreement signed in March 1999 and
$306,000 of stock compensation amortization. We incurred $27,000 of amortization
expense related to intangibles and deferred stock compensation in 1997.
In-Process Research and Development. During the year ended December 31,
1999 we incurred a charge of $1.2 million for in-process research and
development resulting from the March 1999 acquisition of patents and in-process
technology from Cybernet. The patents and technology were acquired in exchange
for 1,291,200 shares of our common stock. We capitalized $3.6 million of
purchased patents and technology in connection with this acquisition.
Strategically, this acquisition allowed us to increase the strength of our
intellectual property portfolio by obtaining Cybernet's portfolio of issued
patents and pending patent applications relating to hardware mechanisms and
software architectures designed to deliver tactile sensations to computer users.
It also allowed Immersion to obtain five in-process research and development
projects that embody aspects of the acquired intellectual property and that have
potential commercial value. These include a flexible force feedback development
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environment that allows developers to implement varying levels of force feedback
functionality; a three-degree-of-freedom joystick that uses brushless motor and
encoder technology; a six-degree-of-freedom hand controller; a flight yoke that
realistically simulates the motion and feel of airplane controls; and a device
that allows the user to touch three-dimensional objects. (See Note 2 of notes to
consolidated financial statements.)
Interest and Other Expense, Net. Interest and other expense, consists
primarily of interest and warrant expense partially offset by interest income,
dividend income and capital gains from cash and cash equivalents and short-term
investments. Interest and other expense, net was $558,000 in 1999, $110,000 in
1998 and $185,000 in 1997. The significant increase in 1999 was due to interest
expense on the Medtronic convertible note and other notes, as well as the
amortization of warrant costs related to the Medtronic warrant. This expense was
partially offset by an increase in interest income on cash and cash equivalents
and short-term investments chiefly from the $48.3 million net proceeds of our
public offering on November 12, 1999. The 1998 decrease from 1997 interest and
other expense, is largely due to income from increases in cash and cash
equivalents and short-term investments of those years.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering on November 12, 1999 we funded our
operations primarily from the sale of preferred stock as well as loans and
investments from strategic partners. Net proceeds from the initial public
offering were $48.3 million. As of December 31, 1999, we had an accumulated
deficit of $18.0 million and working capital of $50.7 million, including cash
and cash equivalents of $46.6 million.
Net cash used in operating activities during 1999 was $2.4 million,
primarily attributable to a net loss of $9.5 million partially offset by noncash
charges of $4.5 million, a $1.5 million increase in deferred revenue and
increases in accounts payable and accrued compensation of $671,000. Other
current liabilities at December 31, 1999 included deferred revenue of $1.7
million. Of this amount, $1.3 million represents the unamortized portion of the
$2.35 million license payment received from Microsoft in July 1999. In 1998, net
cash used in operating activities was $3.5 million, primarily attributable to a
net loss of $3.7 million, an increase of $1.0 million in accounts receivable
partially offset by noncash charges of $745,000. In 1997, net cash used in
operating activities was $1.3 million, primarily attributable to a net loss of
$1.6 million, partially offset by noncash charges of $565,000.
Net cash used in investing activities during 1999 was $6.1 million and
primarily consisted of purchases of $4.8 million of short-term investments and
$1.7 million of property and equipment, intangibles, and other assets, offset by
$403,000 from sales of short-term investments. In 1998, net cash provided by
investing activities was $72,000, attributable to $3.8 million from sales of
short-term investments primarily offset by $2.9 million of purchases of
short-term investments and $737,000 for purchases of property and equipment and
patents and technology. In 1997, net cash used in investing activities
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was $1.2 million, and was attributable to $1.5 million of purchases of
short-term investments and $275,000 of purchases of property, offset by $538,000
from sales of short-term investments. In order to improve our rate of return on
cash and still provide short-term liquidity, we periodically purchase or sell
short-term investments, which typically are interest-bearing, investment-grade
securities with a maturity of greater than 90 days and less than one year.
Net cash provided by financing activities during 1999 was $52.5 million,
and consisted primarily of net proceeds of $48.3 million from our initial public
offering of common stock in November, 1999, net proceeds from notes payable of
$3.9 million, and $256,000 from the exercise of stock options and warrants. In
1998, net cash provided by financing activities was $5.4 million and was
attributable primarily to net proceeds of $5.4 million from the sale of
preferred stock and $1.8 million from the exercise of stock options, offset by
the repurchase of $1.8 million of stock. In 1997, net cash provided by financing
activities was $2.7 million and was attributable primarily to the proceeds from
the sale of preferred stock of $1.5 million, the proceeds from the exercise of
stock options of $733,000 and $500,000 from the proceeds of notes payable.
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
$2.0 million in connection with anticipated growth in operations, infrastructure
and personnel. If the Company acquires one or more businesses or products, the
Company's capital requirements could increase substantially. In the event of
such an acquisition or should any unanticipated circumstances arise which
significantly increase the Company's capital requirements, there can be no
assurance that necessary additional capital will be available on terms
acceptable to the Company, if at all.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998,the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities,or SFAS No. 133. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
Immersion beginning in 2001. We believe that this statement will not have a
significant impact on our financial condition and results of operations.
10
<PAGE> 11
IMMERSION CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................................. F-2
Report of Independent Auditors............................................................ F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998.............................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 1999,
1998 and 1997 .......................................................................... F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the Years Ended December 31, 1999, 1998 and 1997.................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997 ............................................................................ F-8
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1999, 1998 and 1997........................................................ F-10
</TABLE>
F-1
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Immersion Corporation:
We have audited the consolidated balance sheets of Immersion Corporation and its
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and comprehensive loss, and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits. The consolidated financial statements
give retroactive effect to the merger of Immersion Corporation and HT Medical
Systems, Inc., which has been accounted for as a pooling of interests as
described in Note 18 to the consolidated financial statements. We did not audit
the consolidated balance sheets of HT Medical Systems, Inc. as of May 31, 2000
and 1999, or the related consolidated statements of operations, stockholders'
deficit and cash flows of HT Medical Systems, Inc. for each of the three years
in the period ended May 31, 2000, which statements reflect total assets of
$1,549,000 and $1,164,000 as of May 31, 2000 and 1999, respectively, and total
revenues of $2,925,000, $3,682,000, and $2,552,000 for the years ended May 31,
2000, 1999 and 1998, respectively. Those statements were audited by other
auditors whose report (which as to May 31, 2000 included an explanatory
paragraph with respect to substantial doubt about HT Medical Systems, Inc.'s
ability to continue as a going concern and management's plan described in Note
11 to HT Medical Systems, Inc.'s financial statements not separately presented
herein) has been furnished to us, and our opinion, insofar as it relates to the
amounts included for HT Medical Systems, Inc. for such periods is based solely
on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Immersion Corporation and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
February 4, 2000
(December 21, 2000 as to Note 18)
F-2
<PAGE> 13
Report of Independent Auditors
The Board of Directors and Stockholders
HT Medical Systems, Inc.
We have audited the accompanying consolidated balance sheets of HT Medical
Systems, Inc. as of May 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
three years in the period ended May 31, 2000 (not presented separately herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HT Medical
Systems, Inc. at May 31, 2000 and 1999 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
May 31, 2000 in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial statements have been prepared assuming
that HT Medical Systems, Inc. will continue as a going concern. As more fully
described in Note 11, the Company has incurred recurring operating losses and
has a working capital deficiency. These conditions in addition to the Company's
limited capital resources raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 11. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
McLean, Virginia
July 21, 2000
F-3
<PAGE> 14
IMMERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................................... $ 46,606 $ 2,595
Short-term investments ........................................................................ 4,781 402
Accounts receivable, net of allowances of $173 and $92, respectively .......................... 1,362 1,733
Inventories ................................................................................... 949 641
Prepaid expenses and other current assets ..................................................... 1,160 166
-------- --------
Total current assets ................................................................. 54,858 5,537
Property and equipment, net ..................................................................... 1,316 547
Purchased patents and technology ................................................................ 4,687 945
Other assets .................................................................................... 126 94
-------- --------
Total assets .................................................................................... $ 60,987 $ 7,123
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................................. $ 1,372 $ 858
Accrued compensation .......................................................................... 478 321
Other current liabilities ..................................................................... 2,241 374
Current portion of long-term debt ............................................................. 103 44
Current portion of capital lease obligation ................................................... 7 --
-------- --------
Total current liabilities ............................................................ 4,201 1,597
Long-term debt, less current portion ............................................................ 3,461 312
Capital lease obligation, less current portion .................................................. 34 --
Investment agreement ............................................................................ -- 1,313
Warrant liability ............................................................................... 289 289
Other long-term liabilities ..................................................................... 39 --
-------- --------
Total liabilities .................................................................... 8,024 3,511
-------- --------
Commitments and contingencies (Notes 9 and 17)
Redeemable convertible preferred stock, Series C - $0.001 par value; 863,778
shares designated; shares issued and outstanding: 1999, 0; 1998, 863,771 ........................ -- 1,476
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized:
Series A - $0.001 par value; 2,495,648 shares designated; shares issued and outstanding:
1999, 0; 1998, 2,495,644 .................................................................. -- 1,012
Series B - $0.001 par value; 467,390 shares designated; shares issued and outstanding:
1999, 0; 1998, 394,757 .................................................................... -- 566
Series D - $0.001 par value; 1,388,901 shares designated; shares issued and outstanding:
1999, 0; 1998, 1,376,928 .................................................................. -- 5,377
Common stock, $0.001 par value; 100,000,000 shares authorized; shares issued and
outstanding: 1999, 17,047,023; 1998, 5,321,246 .............................................. 71,135 3,747
Warrants ...................................................................................... 1,996 85
Deferred stock compensation ................................................................... (2,166) (107)
Accumulated other comprehensive income ........................................................ 19 1
Note receivable from stockholder .............................................................. (17) (17)
Accumulated deficit ........................................................................... (18,004) (8,528)
-------- --------
Total stockholders' equity ........................................................... 52,963 2,136
-------- --------
Total liabilities, redeemable convertible preferred stock and stockholders' equity .............. $ 60,987 $ 7,123
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 15
IMMERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Royalty revenue .................................................... $ 2,211 $ 321 $ 14
Product sales ...................................................... 6,063 4,472 2,952
Development contracts and other .................................... 2,668 3,910 3,918
-------- -------- --------
Total revenues ............................................ 10,942 8,703 6,884
-------- -------- --------
Costs and expenses:
Cost of product sales .............................................. 2,964 1,954 1,226
Sales and marketing ................................................ 3,547 1,612 1,225
Research and development ........................................... 5,518 5,168 3,787
General and administrative ......................................... 5,250 3,283 2,052
Amortization of intangibles and deferred stock compensation* ....... 1,385 245 27
In-process research and development ................................ 1,190 -- --
-------- -------- --------
Total costs and expenses .................................. 19,854 12,262 8,317
-------- -------- --------
Loss from operations ................................................. (8,912) (3,559) (1,433)
Interest and other expense, net ...................................... (558) (110) (185)
-------- -------- --------
Net loss ............................................................. (9,470) (3,669) (1,618)
Redeemable convertible preferred stock accretion ..................... 6 6 3
-------- -------- --------
Net loss applicable to stockholders .................................. $ (9,476) $ (3,675) $ (1,621)
======== ======== ========
Basic and diluted net loss per share ................................. $ (1.21) $ (0.73) $ (0.40)
======== ======== ========
Shares used in calculating basic and diluted net loss per
share .............................................................. 7,852 5,023 4,004
======== ======== ========
* Amortization of intangibles and deferred stock compensation:
Amortization of intangibles ..................................... $ 1,033 $ 211 $ --
Deferred stock compensation - sales and marketing ............... 61 -- --
Deferred stock compensation - research and development .......... 72 34 27
Deferred stock compensation - general and administrative ........ 219 -- --
-------- -------- --------
Total ........................................................... $ 1,385 $ 245 $ 27
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 16
IMMERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
------------------------- -------------------------
Shares Amount Shares Amount Warrants
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 ...................... 2,741,109 $ 1,473 4,067,135 $ 123 $ 39
Net loss ......................................... -- -- -- -- --
Change in net unrealized gains from short-
term investments ............................... -- -- -- -- --
Comprehensive loss ............................... -- -- -- -- --
Issuance of warrants in connection with
issuance of Series C convertible
preferred stock ................................ -- -- -- -- 6
Exercise of Series A preferred stock warrant ..... 121,050 72 -- -- (12)
Exercise of stock options ........................ -- -- 105,144 23 --
Issuance of common stock ......................... -- -- 137,163 710 --
Issuance of common stock for services ............ -- -- 20,219 104 --
Issuance of stock options for license
agreement ...................................... -- -- -- 5 --
Repurchase of common stock ....................... -- -- (2,599) (4) --
Deferred stock compensation ...................... -- -- -- 168 --
Amortization of stock compensation ............... -- -- -- -- --
Preferred stock accretion ........................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 .................... 2,862,159 $ 1,545 4,327,062 $ 1,129 $ 33
Net loss ......................................... -- -- -- -- --
Change in net unrealized gains from short-
term investments ............................... -- -- -- -- --
Comprehensive loss ............................... -- -- -- -- --
Issuance of Series D convertible preferred
stock, net of issuance costs of $374 ........... 1,376,928 5,376 -- -- 17
Exercise of Series A preferred stock
warrants ....................................... 30,260 36 -- -- (6)
Exercise of common stock warrants ................ -- -- 85,945 4 --
Extension of Series B preferred stock
warrants ....................................... -- -- -- -- 41
Exercise of stock options ........................ -- -- 1,024,615 114 --
Issuance of common stock ......................... -- -- 244,566 1,680 --
Issuance of common stock for services ............ -- -- 3,882 30 --
Issuance of options to nonemployees .............. -- -- -- 4 --
Issuance of common stock and options
for patents .................................... -- -- 137,190 720 --
Issuance of stock options for consulting
services ....................................... -- -- -- 68 --
Repurchase of stock .............................. (2,018) (2) (502,014) (2) --
Amortization of stock compensation ............... -- -- -- -- --
Preferred stock accretion ........................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 .................... 4,267,329 $ 6,955 5,321,246 $ 3,747 $ 85
</TABLE>
<TABLE>
<CAPTION>
Accumulated Note
Deferred Other Receivable
Stock Comprehensive from
Compensation Income(Loss) Stockholder
------------ ------------- -----------
<S> <C> <C> <C>
Balances at January 1, 1997 ...................... $ -- $ 5 $ --
Net loss ......................................... -- -- --
Change in net unrealized gains from short-
term investments ............................... -- (3) --
Comprehensive loss ............................... -- -- --
Issuance of warrants in connection with
issuance of Series C convertible
preferred stock ................................ -- -- --
Exercise of Series A preferred stock warrant ..... -- -- --
Exercise of stock options ........................ -- -- --
Issuance of common stock ......................... -- -- --
Issuance of common stock for services ............ -- -- --
Issuance of stock options for license
agreement ...................................... -- -- --
Repurchase of common stock ....................... -- -- --
Deferred stock compensation ...................... (168) -- --
Amortization of stock compensation ............... 27 -- --
Preferred stock accretion ........................ -- -- --
---------- ---------- ----------
Balances at December 31, 1997 .................... $ (141) $ 2 $ --
Net loss ......................................... -- -- --
Change in net unrealized gains from short-
term investments ............................... -- (1) --
Comprehensive loss ............................... -- -- --
Issuance of Series D convertible preferred
stock, net of issuance costs of $374 ........... -- -- --
Exercise of Series A preferred stock
warrants ....................................... -- -- --
Exercise of common stock warrants ................ -- -- --
Extension of Series B preferred stock
warrants ....................................... -- -- --
Exercise of stock options ........................ -- -- (17)
Issuance of common stock ......................... -- -- --
Issuance of common stock for services ............ -- -- --
Issuance of options to nonemployees .............. -- -- --
Issuance of common stock and options
for patents .................................... -- -- --
Issuance of stock options for consulting
services ....................................... -- -- --
Repurchase of stock .............................. -- -- --
Amortization of stock compensation ............... 34 -- --
Preferred stock accretion ........................ -- -- --
---------- ---------- ----------
Balances at December 31, 1998 .................... $ (107) $ 1 $ (17)
</TABLE>
<TABLE>
<CAPTION>
Total
Total Compre-
Accumulated Stockholders' hensive
Deficit Equity Loss
---------- ---------- ----------
<S> <C> <C> <C>
Balances at January 1, 1997 ...................... $ (1,392) $ 248
Net loss ......................................... (1,618) (1,618) $ (1,618)
Change in net unrealized gains from short-
term investments ............................... -- (3) (3)
----------
Comprehensive loss ............................... -- -- $ (1,621)
==========
Issuance of warrants in connection with
issuance of Series C convertible
preferred stock ................................ -- 6
Exercise of Series A preferred stock warrant ..... -- 60
Exercise of stock options ........................ -- 23
Issuance of common stock ......................... -- 710
Issuance of common stock for services ............ -- 104
Issuance of stock options for license
agreement ...................................... -- 5
Repurchase of common stock ....................... -- (4)
Deferred stock compensation ...................... -- --
Amortization of stock compensation ............... -- 27
Preferred stock accretion ........................ (3) (3)
---------- ----------
Balances at December 31, 1997 .................... $ (3,013) $ (445)
Net loss ......................................... (3,669) (3,669) $ (3,669)
Change in net unrealized gains from short-
term investments ............................... -- (1) (1)
----------
Comprehensive loss ............................... -- -- $ (3,670)
==========
Issuance of Series D convertible preferred
stock, net of issuance costs of $374 ........... -- 5,393
Exercise of Series A preferred stock
warrants ....................................... -- 30
Exercise of common stock warrants ................ -- 4
Extension of Series B preferred stock
warrants ....................................... -- 41
Exercise of stock options ........................ -- 97
Issuance of common stock ......................... -- 1,680
Issuance of common stock for services ............ -- 30
Issuance of options to nonemployees .............. -- 4
Issuance of common stock and options
for patents .................................... -- 720
Issuance of stock options for consulting
services ....................................... -- 68
Repurchase of stock .............................. (1,840) (1,844)
Amortization of stock compensation ............... -- 34
Preferred stock accretion ........................ (6) (6)
---------- ----------
Balances at December 31, 1998 .................... $ (8,528) $ 2,136
</TABLE>
(Continued)
F-6
<PAGE> 17
IMMERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
---------------------------- ---------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1998 ......................... 4,267,329 $ 6,955 5,321,246 $ 3,747
Net loss .............................................. -- -- -- --
Change in net unrealized gains from
short-term investments .............................. -- -- -- --
Comprehensive loss .................................... -- -- -- --
Issuance of common stock upon conversion
of investment agreement ............................. -- -- 55,762 862
Issuance of common stock .............................. -- -- 68,517 995
Issuance of Series A convertible preferred
stock, net .......................................... -- -- -- --
Exercise of convertible preferred stock
warrants ............................................ 72,630 108 -- 62
Warrants issued for services .......................... -- -- -- --
Warrants issued with debt ............................. -- -- -- --
Issuance of common stock warrants ..................... -- -- 7,061 --
Exercise of stock options ............................. -- -- 460,336 215
Issuance of common stock and options
for patents ......................................... -- -- 1,379,970 5,092
Issuance of stock options for license
agreement ........................................... -- -- -- 129
Issuance of common stock options for
services ............................................ -- -- 76,665 770
Deferred stock compensation ........................... -- -- -- 2,494
Amortization of stock compensation .................... -- -- -- --
Reversal of deferred stock compensation
due to cancellation of stock options ............... -- -- -- (83)
Issuance of common stock in connection
with initial public offering, net of expenses
of $1,620 ........................................... -- -- 4,473,736 48,307
Conversion of preferred stock to common
stock ............................................... (4,339,959) (7,063) 4,339,959 7,063
Conversion of redeemable convertible
preferred stock to common stock ..................... -- -- 863,771 1,482
Preferred stock accretion ............................. -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1999 ......................... -- $ -- 17,047,023 $ 71,135
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Note
Deferred Other Receivable
Stock Comprehensive from
Warrants Compensation Income (Loss) Stockholder
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1998 ......................... $ 85 $ (107) $ 1 $ (17)
Net loss .............................................. -- -- -- --
Change in net unrealized gains from
short-term investments .............................. -- -- 18 --
Comprehensive loss .................................... -- -- -- --
Issuance of common stock upon conversion
of investment agreement ............................. -- -- -- --
Issuance of common stock .............................. -- -- -- --
Issuance of Series A convertible preferred
stock, net .......................................... -- -- -- --
Exercise of convertible preferred stock
warrants ............................................ (62) -- -- --
Warrants issued for services .......................... 808 -- -- --
Warrants issued with debt ............................. 1,165 -- -- --
Issuance of common stock warrants ..................... -- -- -- --
Exercise of stock options ............................. -- -- -- --
Issuance of common stock and options
for patents ......................................... -- -- -- --
Issuance of stock options for license
agreement ........................................... -- -- -- --
Issuance of common stock options for
services ............................................ -- -- -- --
Deferred stock compensation ........................... -- (2,494) -- --
Amortization of stock compensation .................... -- 400 -- --
Reversal of deferred stock compensation
due to cancellation of stock options ............... -- 35 -- --
Issuance of common stock in connection
with initial public offering, net of expenses
of $1,620 ........................................... -- -- -- --
Conversion of preferred stock to common
stock ............................................... -- -- -- --
Conversion of redeemable convertible
preferred stock to common stock ..................... -- -- -- --
Preferred stock accretion ............................. -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1999 ......................... $ 1,996 $ (2,166) $ 19 $ (17)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Total
Total Compre-
Accumulated Stockholders' hensive
Deficit Equity Loss
---------- ---------- ----------
<S> <C> <C> <C>
Balances at December 31, 1998 ......................... $ (8,528) $ 2,136
Net loss .............................................. (9,470) (9,470) $ (9,470)
Change in net unrealized gains from
short-term investments .............................. -- 18 18
----------
Comprehensive loss .................................... -- -- $ (9,488)
==========
Issuance of common stock upon conversion
of investment agreement ............................. -- 862
Issuance of common stock .............................. -- 995
Issuance of Series A convertible preferred
stock, net .......................................... -- --
Exercise of convertible preferred stock
warrants ............................................ -- 108
Warrants issued for services .......................... -- 808
Warrants issued with debt ............................. -- 1,165
Issuance of common stock warrants ..................... -- --
Exercise of stock options ............................. -- 215
Issuance of common stock and options
for patents ......................................... -- 5,092
Issuance of stock options for license
agreement ........................................... -- 129
Issuance of common stock options for
services ............................................ -- 770
Deferred stock compensation ........................... -- --
Amortization of stock compensation .................... -- 400
Reversal of deferred stock compensation
due to cancellation of stock options ............... -- (48)
Issuance of common stock in connection
with initial public offering, net of expenses
of $1,620 ........................................... -- 48,307
Conversion of preferred stock to common
stock ............................................... -- --
Conversion of redeemable convertible
preferred stock to common stock ..................... -- 1,482
Preferred stock accretion ............................. (6) (6)
---------- ----------
Balances at December 31, 1999 ......................... $ (18,004) $ 52,963
========== ==========
</TABLE>
(Concluded)
See notes to consolidated financial statements.
F-7
<PAGE> 18
IMMERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ..................................................................... $ (9,470) $ (3,669) $ (1,618)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .............................................. 384 265 215
Amortization of discounts on notes payable ................................. 319 -- --
Amortization of intangibles ................................................ 1,033 211 --
Amortization of deferred stock compensation ................................ 352 34 27
Write-off of patents and trademarks ........................................ -- -- 69
In-process research and development ........................................ 1,190 -- --
Stock and options issued for consulting services and other ................. 770 102 104
Stock options issued for license agreement ................................. -- -- 5
Extension of warrants for consulting services .............................. -- 41 --
Noncash interest expense ................................................... 453 92 145
Changes in operating assets and liabilities:
Accounts receivable ...................................................... 371 (1,013) (104)
Inventories .............................................................. (308) (294) (77)
Prepaid expenses and other assets ........................................ (378) (138) --
Accounts payable ......................................................... 514 505 197
Accrued compensation ..................................................... 157 65 15
Other current liabilities ................................................ 2,138 278 (231)
Deferred rent expense .................................................... 39 -- --
-------- -------- --------
Net cash used in operating activities ............................... (2,436) (3,521) (1,253)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments .......................................... (4,764) (2,943) (1,487)
Sales and maturities of short-term investments ............................... 403 3,752 538
Purchase of property and equipment ........................................... (1,153) (303) (275)
Purchase of patents and technology ........................................... (445) (434) --
Other assets ................................................................. (140) -- --
-------- -------- --------
Net cash provided by (used in) investing activities ................. (6,099) 72 (1,224)
-------- -------- --------
Cash flows from financing activities:
Issuance of Series D convertible preferred stock and warrants, net ........... -- 5,393 --
Issuance of Series C redeemable convertible preferred stock, net ............. -- (1) 1,474
Issuance of common stock ..................................................... 995 -- --
Exercise of stock options .................................................... 215 1,778 733
Repurchase of stock .......................................................... -- (1,844) --
Exercise of warrants ......................................................... 108 34 60
Net proceeds from capital lease .............................................. 41 -- --
Payments on note payable ..................................................... (85) (39) (82)
Proceeds from (payments on) note due to shareholder .......................... (60) 60 --
Proceeds from notes payable .................................................. 3,887 -- 500
Payoff of investment agreement ............................................... (862) -- --
Repurchase of common stock ................................................... -- -- (4)
Issuance of common stock in connection with public offering .................. 48,307 -- --
-------- -------- --------
Net cash provided by financing activities ........................... 52,546 5,381 2,681
-------- -------- --------
Net increase in cash and cash equivalents ...................................... 44,011 1,932 204
Cash and cash equivalents, beginning of period ................................. 2,595 663 459
-------- -------- --------
Cash and cash equivalents, end of period ....................................... $ 46,606 $ 2,595 $ 663
======== ======== ========
</TABLE>
(Continued)
F-8
<PAGE> 19
IMMERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------- ------- -----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for taxes ..................................................... $ -- $ 1 $ 12
======= ======= =====
Cash paid for interest .................................................. $ 487 $ 217 $ 100
======= ======= =====
Supplemental disclosure of noncash investing and financing activities:
Changes in net unrealized gains (losses) from short-term investments .... $ 18 $ (1) $ (3)
======= ======= =====
Issuance of equity instruments for patents, technology and licenses ..... $ 5,221 $ 720 $ --
======= ======= =====
Issuance of warrants for services ....................................... $ 808 $ -- $ 6
======= ======= =====
Accretion of redeemable preferred stock ................................. $ 6 $ 6 $ 3
======= ======= =====
Exercise of stock option for note receivable ............................ $ -- $ 17 $ --
======= ======= =====
Asset purchased under a capital lease ................................... $ 45 $ -- $ --
======= ======= =====
Conversion of investment agreement to equity ............................ $ 862 $ -- $ --
======= ======= =====
Issuance of warrants for debt ........................................... $ 1,165 $ -- $ --
======= ======= =====
</TABLE>
(Concluded)
See notes to consolidated financial statements.
F-9
<PAGE> 20
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immersion Corporation (the "Company") was
incorporated in May 1993 in California and reincorporated in Delaware in
1999 and provides technologies that enable users to interact with
computers using their sense of touch.
Principles of Consolidation and Basis of Presentation - The consolidated
financial statements include the accounts of Immersion Corporation and
its majority-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation. In September 2000,
Immersion acquired all outstanding shares of HT Medical System Inc.'s
(HT) common and preferred stock in a merger accounted for as a pooling
of interests (See note 18). Accordingly, the consolidated financial
statements have been restated for all periods presented as if Immersion
and HT had always been combined.
Cash Equivalents - The Company considers all highly liquid debt or
equity instruments purchased with an original maturity at the date of
purchase of 90 days or less to be cash equivalents.
Short-Term Investments - Short-term investments consist primarily of
highly liquid debt instruments purchased with an original maturity at
the date of purchase of greater than 90 days and investments in mutual
funds. Short-term investments are classified as available-for-sale
securities and are stated at market value with unrealized gains and
losses reported as a component of accumulated other comprehensive loss
within stockholders' equity.
Inventories - Inventories are stated at the lower of cost (principally
on a standard cost basis) or market. Costs are measured using standard
costing or first-in first-out method.
Property - Property is stated at cost and is generally depreciated using
the straight-line method over the estimated useful life of the related
asset. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment .......................... 3-5 years
Computer equipment and purchased software ........ 3 years
Furniture and fixtures ........................... 5-7 years
</TABLE>
Leasehold improvements are amortized over the shorter of the lease term
or their useful life.
Purchased Patents and Technology - Purchased patents and technology are
stated at cost and are amortized over the shorter of the remaining life
of the patent or the estimated useful life of the technology, generally
nine years.
Accumulated amortization was $714,000 and $221,000 at December 31, 1999
and 1998 respectively.
Long-Lived Assets - The Company reviews for the impairment of a
long-lived asset whenever events or changes in circumstances indicate
that the carrying amount of that asset may not be recoverable. An
impairment loss would be recognized when the sum of the undiscounted
future net cash flows expected to result from the use of the asset and
its eventual disposition is less than its carrying amount.
Product Warranty - The Company sells the majority of its products with
warranties ranging from three to twelve months. Historically,
warranty-related costs have been immaterial.
F-10
<PAGE> 21
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Note Receivable from Stockholder - The note receivable from stockholder
was issued in exchange for common stock, bears interest at 5.39% per
annum and is due March 2001.
Revenue Recognition - The Company recognizes revenues in accordance with
applicable accounting standards including American Institute of
Certified Public Accountants' (the "AICPA") Statement of Position 97-2,
Software Revenue Recognition, as amended. Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred or
service has been rendered, the fee is fixed and determinable, and
collectibility is probable. This generally occurs at the time of
shipment.
Revenues from development contracts with the U.S. government and other
commercial customers are derived from either fixed price or
reimbursement of costs contracts. Contract revenues are recognized under
the cost-to-cost percentage-of-completion accounting method based on
actual physical completion of work performed and the ratio of costs
incurred to total estimated costs to complete the contract. Losses on
contracts are recognized when determined. Revisions in estimates are
reflected in the period in which the conditions become known. Allowable
fees under cost-reimbursement contracts are recognized as costs are
incurred.
The Company recognizes royalty revenue based on royalty reports or
related information received from the licensee. Advance payments under
license agreements that also require the Company to provide future
services to the licensee are deferred and recognized over the service
period when vendor specific objective evidence related to the value of
the services does not exist.
At December 31, 1999, the Company has no obligation to repay amounts
received under development contracts with the U.S. government or other
commercial customers.
Advertising - Advertising costs (including obligations under cooperative
marketing programs) are expensed as incurred and included in sales and
marketing expense. Advertising expense was $213,000, $182,000, and
$226,000 in 1999, 1998 and 1997 respectively.
Research and Development - Research and development costs are expensed
as incurred. The Company has generated revenues from development
contracts with the U.S. government and other commercial customers that
have enabled it to accelerate its own product development efforts. Such
development revenues have only partially funded the Company's product
development activities, and the Company generally retains ownership of
the products developed under these arrangements. As a result, the
Company classifies all development costs related to these contracts as
research and development expenses.
Income Taxes - The Company provides for income taxes using the asset and
liability approach defined by Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes.
Software Development Costs - Certain of the Company's products include
software. Costs for the development of new software products and
substantial enhancements to existing software products are expensed as
incurred until technological feasibility has been established, at which
time any additional costs would be capitalized in accordance with SFAS
No. 86, Computer Software to be Sold, Leased or Otherwise Marketed. The
Company considers technological feasibility to be established upon
F-11
<PAGE> 22
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
completion of a working model of the software and the related hardware.
Because the Company believes its current process for developing software
is essentially completed concurrently with the establishment of
technological feasibility, no costs have been capitalized to date.
Stock-Based Compensation - The Company accounts for its stock-based
awards to employees using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
issued to Employees.
In March 2000, FASB issued Interpretation (FIN) No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - An Interpretation of
APB Opinion No. 25." FIN 44 clarifies the application of APB Opinion No.
25 and, among other issues, clarifies the following: the definition of
an employee for purposes of applying APB Opinion No. 25; the criteria
for determining whether a plan qualifies as a non-compensatory plan; the
accounting consequence of various modifications to the terms of
previously fixed stock options or awards; and the accounting for an
exchange of stock compensation award in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occurred after either December 15, 1998 or January
12, 2000. The Company does not expect the application of FIN 44 to have
a material impact on its financial position or results of operations.
Comprehensive Income - In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, which requires that an enterprise
report, by major components and as a single total, the change in its net
assets during the period from nonowner sources. The Company adopted this
statement in 1998 and has presented its total comprehensive loss in the
statements of stockholders' equity. Accumulated other comprehensive loss
during 1999, 1998 and 1997 is comprised of unrealized gains on
available-for-sale investments of $19,000, $1,000 and $2,000,
respectively.
Net Loss per Share - Basic net loss per share excludes dilution and is
computed by dividing net loss applicable to common stockholders by the
weighted average number of common shares outstanding for the period
(excluding shares subject to repurchase). Diluted net loss per common
share was the same as basic net loss per common share for all periods
presented since the effect of any potentially dilutive securities is
excluded as they are anti-dilutive because of the Company's net losses.
Use of Estimates - The preparation of consolidated financial statements
in accordance with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Credit Risks - Financial instruments that potentially
subject the Company to a concentration of credit risk principally
consist of cash and cash equivalents, short-term investments and
accounts receivable. The Company invests primarily in money market
accounts, commercial paper, and debt securities of U.S. government
agencies. The Company sells products primarily to companies in North
America, Europe and the Far East. A majority of these sales are to
customers in the personal computer industry. To reduce credit risk,
management performs periodic credit evaluations of its
F-12
<PAGE> 23
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
customers' financial condition. The Company maintains reserves for
potential credit losses, but historically has not experienced any
significant losses related to individual customers or groups of
customers in any particular industry or geographic area.
Certain Significant Risks and Uncertainties - The Company operates in a
dynamic industry and, accordingly, can be affected by a variety of
factors. For example, management of the Company believes that changes in
any of the following areas could have a negative effect on the Company
in terms of its future financial position and results of operations: its
ability to obtain additional financing; the mix of revenues; the loss of
significant customers; fundamental changes in the technology underlying
the Company's products; market acceptance of the Company's and its
licensees' products under development; the availability of contract
manufacturing capacity; development of sales channels; litigation or
other claims against the Company; the hiring, training and retention of
key employees; successful and timely completion of product and
technology development efforts; and new product or technology
introductions by competitors.
Fair Value of Financial Instruments - Financial instruments consist
primarily of cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued liabilities, and long-term debt.
Cash equivalents and short-term investments are stated at fair value
based on quoted market prices. The recorded cost of accounts receivable,
accounts payable, accrued liabilities and long-term debt approximate the
fair value of the respective assets and liabilities.
Recently Issued Accounting Standards - In June 1997, the FASB issued
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company
currently operates in one reportable segment under SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for the Company's year ending December 31,
2001. Management believes that this statement will not have a material
impact on the Company's financial position or results of operations.
2. PURCHASED PATENTS AND TECHNOLOGY
During 1998, the Company entered into a license agreement and acquired
various patents relating to touch-enabling technology. In connection
with these agreements, the Company paid $434,000, issued 137,190 shares
of common stock and issued an option to purchase 242,100 shares of
common stock at $3.66 per share (see Note 10). The Company has recorded
the estimated fair value of the aggregate consideration of $1,154,000 as
purchased patents and technology.
In February 1999, the Company acquired certain patents and related
materials pertaining to touch-enabling technology from another company
in exchange for $25,000 in cash and 88,770 shares of the Company's
common stock. In addition, the Company is required to issue an
additional 16,140 shares of common stock to the seller if the Company is
successful in obtaining either a reissue or a foreign version
F-13
<PAGE> 24
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
of at least one of the patents. The Company's stock issued in this
transaction is being held in escrow until the successful reissue of at
least one of the patents. If this condition is not met at the end of
five years and the stock is therefore still held in escrow, the seller
has the right to put the shares back to the Company for $3.72 per share.
The existence of the put option has the effect of increasing the value
assigned to the shares issued to $3.72 per share. As a result, the
estimated value of $355,000 (representing 88,770 shares at $3.72 per
share plus $25,000) has been recorded as purchased patents and
technology.
In March 1999, the Company acquired certain additional patents relating
to touch-enabling technologies and in-process research and development
from another company in exchange for 1,291,200 shares of the Company's
common stock with an estimated fair value of $4,720,000. The seller had
the option to put 807,000 of the shares back to the Company after five
years and to require the Company to return the patents, subject to the
Company's retaining a non-exclusive license to the patents. This put
option expired upon the Company's initial public offering in November,
1999. The Company has included in the aggregate purchase price of the
purchased patents and in-process research and development the estimated
fair value of $42,000 for the put option and $45,000 of direct
acquisition costs. The aggregate purchase price of $4,807,000 has been
allocated $3,617,000 to purchased patents and technology and $1,190,000
to acquired in-process research and development. The purchased patents
and technology are being amortized over the estimated useful life of
nine years. The allocation of the purchase price to the respective
intangibles was based on management's estimates of the after-tax cash
flows and gave explicit consideration to the Securities and Exchange
Commission's views on purchased in-process research and development as
set forth in its September 9, 1998 letter to the American Institute of
Certified Public Accountants. Specifically, the valuation gave
consideration to the following: (i) the employment of a fair market
value premise excluding any Company-specific considerations that could
result in estimates of investment value for the subject assets; (ii)
comprehensive due diligence concerning all potential intangible assets;
(iii) the determination that none of the technology development had been
completed at the time of acquisition; and (iv) the allocation to
in-process research and development based on a calculation that
considered only the efforts completed as of the transaction date, and
only the cash flow associated with these completed efforts for one
generation of the products currently in process. As indicated above, the
Company recorded a one-time charge of $1,190,000 upon the acquisition in
March 1999 for purchased in-process research and development related to
five development projects. The charge related to the portion of these
products that had not reached technological feasibility, had no
alternative future use and for which successful development was
uncertain. Management's conclusion that the in-process development
effort had no alternative future use was reached in consultation with
the engineering personnel from both the Company and the seller.
The first of these projects is a flexible force feedback development
environment that allows developers to choose the level of
complexity/functionality that fits their needs. At the time of
acquisition, the development was 81% complete and the estimated cost to
complete this development was $438,000. Management expects to complete
this development of this product and begin shipping it in September
2001. The second of these projects, a three-degree-of-freedom joystick,
gives the operator smooth, intuitive movement and feedback along three
axes - roll, pitch and yaw - using brushless motor and encoder
technology. At the time of acquisition, the development was 36% complete
and the estimated cost to complete this development was $109,000.
Management expects products based on this technology to become available
in December 2000. The third of these projects, a six-degree-of-freedom
hand controller, is a small back drivable robot that moves in six
degrees of freedom, three linear
F-14
<PAGE> 25
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
positions and attitudes. At the time of acquisition, the development was
70% completed and the estimated cost to complete this development was
$88,000. Management expects to complete development of this product and
begin shipping it in June 2001. The fourth project is a Flight Yoke,
which provides the intuitive motion and feel of an airplane control
yoke. It translates in and out to control the pitch, rotates for roll
control, and provides the corresponding feel along these axes of motion.
At the time of acquisition, the development was 49% completed and the
estimated cost to complete this development was $175,000. Management
expects that licensees will ship products in fiscal 2001. The fifth
development project is a device that allows the user to physically
interact with computer generated three-dimensional objects. At the time
of acquisition, the development was 11% completed and the estimated cost
to complete this development was $248,000. Management expects that the
product will become available for sale in fiscal 2000.
The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of
the associated capitalized intangible assets and could require the
Company to accelerate the time period over which the intangibles are
being amortized, which could have a material adverse effect on the
Company's business, financial condition and results of operation.
Significant assumptions used to determine the value of in-process
research and development, include the following: (i) forecast of net
cash flows that were expected to result from the development effort
using projections prepared by the Company's and the seller's management;
(ii) the portion of the projects estimated by considering a number of
factors, including the costs invested to date relative to total cost of
the development effort and the amount of progress completed as of the
acquisition date, on a technological basis, relative to the overall
technological achievements required to achieve the functionality of the
eventual product. The technological issues were addressed by engineering
representatives from both the Company and the seller, and when
estimating the value of the technology, the projected financial results
of the acquired assets were estimated on a stand-alone basis without any
consideration to potential synergistic benefits or "investment value"
related to the acquisition. As there were no existing products acquired,
separate projected cash flows were prepared for only the in-process
projects.
These projected results were based on the number of units sold times the
expected average selling price less the associated costs. After
preparing the estimated cash flows from the products being developed, a
portion of these cash flows were attributed to the existing technology,
which was embodied in the in-process product lines and enabled a quicker
and more cost-effective development of these products. When estimating
the value of the in-process technologies, a discount rate of 30% was
used. The discount rate considered both the status and risks associated
with the cash flows at the acquisition date. Projected revenues from the
in-process products are expected to commence in 2000 and 2001 as the
products are completed and begin to ship. Initial annual revenue growth
rates after introduction are projected to exceed 50% and decline to less
than 15% by 2005. Gross margins from these products are anticipated to
be consistent with the gross margins from its other products.
The technology was acquired in a transaction that was tax-free to the
seller and, as a result, the Company has a minimal tax basis in the
acquired technology. Accordingly, a deferred tax liability of $1,410,000
has been recorded for the difference in the book and tax bases of the
acquired assets. This resulted in the concurrent recognition of
previously reserved deferred tax assets of an equal amount. Also, in
connection with this acquisition, the Company entered into a consulting
arrangement with the seller to provide consulting services related to
the development of various platforms of touch-enabling
F-15
<PAGE> 26
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
technology, and collaborate with the Company, in executing development
agreements with the U.S. government and other commercial customers for a
three year period. In consideration for certain consulting services and
rights, the Company granted to the seller a warrant to purchase 322,800
shares of the Company's common stock at $3.66 per share (see Note 10),
paid the seller $150,000, and is obligated to pay an additional $75,000
in 2000 and 2001. The consideration for the consulting services of
$1,108,000, including the estimated fair value of the warrant
($808,000), has been recorded as prepaid expenses and noncurrent other
assets. The consideration for the consulting service will be amortized
over the two-year estimated period of benefit of the consulting
services. The warrants were fully vested at the date of grant.
Accordingly, the fair value of the warrants was determined at the date
of grant using the methods specified by SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), with the following assumptions:
expected life, 10 years; risk free interest rate, 5.7%; volatility, 50%;
and no dividends during the expected term.
During 1999, in consideration for a technology license agreement, the
Company issued an option to purchase 20,175 shares of common stock at an
exercise price of $3.66 per share. The Company has recorded the
estimated fair value of the option of $129,000 as purchased patents and
technology at December 31, 1999 (see Note 10).
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities at December
31, 1999 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
Commercial paper ....................... $49,495 $ 19 $-- $49,514
======= ==== === =======
Included in cash equivalents ........... $44,733
Included in short-term investments ..... 4,781
-------
Total available-for-sale securities .... $49,514
=======
</TABLE>
The following is a summary of available-for-sale securities at December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Commercial paper ....................... $401 $ 1 $-- $402
==== ==== === ====
Included in cash equivalents ........... $ --
Included in short-term investments ..... 402
----
Total available-for-sale securities .... $402
====
</TABLE>
The Company realized gains on the sales of securities of $0, $56,000 and
$14,000 in 1999, 1998 and 1997, respectively, while realizing losses of
$0, $1,000 and $1,000 in 1999, 1998 and 1997 respectively.
F-16
<PAGE> 27
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Raw materials and subassemblies .... $770 $528
Work in process .................... 34 37
Finished goods ..................... 145 76
---- ----
Total .............................. $949 $641
==== ====
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Machinery and equipment ...................... 1,165 856
Computer equipment and purchased software .... $ 665 $ 353
Furniture and fixtures ....................... 565 216
Leasehold improvements ....................... 165 13
------- -------
Total ........................................ 2,560 1,438
Accumulated depreciation ..................... (1,244) (891)
------- -------
Property and equipment, net .................. $ 1,316 $ 547
======= =======
</TABLE>
6. OTHER CURRENT LIABILITIES
As of December 31, 1999 and 1998, other current liabilities consist of
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
------ ------
<S> <C> <C>
Deferred revenue .................. $1,697 $ 185
Customer advances ................. 39 46
Income taxes payable .............. 2 1
Other accrued liabilities ......... 503 82
Note payable to stockholder ....... -- 60
------ ------
Total ............................. $2,241 $ 374
====== ======
</TABLE>
F-17
<PAGE> 28
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. LONG-TERM DEBT
The components of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Medtronic note payable ................................ $ 2,896 $ --
Subordinated note payable to SECA VII ................. 500 500
Discount on subordinated note payable to SECA VII ..... (187) (229)
Secured promissory note to Third Coast Capital ........ 307 --
Other ................................................. 48 85
------- -------
Total ................................................. 3,564 356
Current portion ....................................... (103) (44)
------- -------
Total long-term debt .................................. $ 3,461 $ 312
======= =======
</TABLE>
Medtronic Note Payable - On August 10, 1999, the Company issued a
Secured Convertible Promissory Note (the "Note") to Medtronic Asset
Management, Inc. ("Medtronic") in exchange for $3,000,000. On March 3,
2000, an additional $500,000 was borrowed under the Note. The $3.5
million note bears interest at a rate of 8% per annum and is due on
August 10, 2002. Medtronic may elect to convert all or any part of the
outstanding principal plus a pro rata share of accrued interest into
shares of common stock, at a conversion price of the lesser of $15.46
per share or the price per share at which any shares of common stock are
sold. The Note may also be converted into any other class of capital
stock that the Company may issue at a per share price equal to the
lowest per share price at which any such shares are issued or sold.
In connection with the original issuance of the Note and then amended in
connection with the additional borrowing in March 2000, the Company
granted Medtronic a warrant to purchase up to $2,000,000 of common stock
at a price per share equal to the lesser of $15.46 per share or the
price per share at which any shares of common stock are sold. The
warrant may also be exercised for any other class of capital stock that
the Company may issue at a per share price equal to the lowest per share
price at which any such shares are issued or sold. The warrant expires
on the later to occur of November 10, 2000 or six months after HT
completes a sale of capital stock of at least $6 million. The Company
allocated $1,126,849 of the note payable proceeds to the warrant and
will amortize this amount to interest expense using the effective
interest method over the three year period that the related debt is
expected to be outstanding. The effect of this allocation results in an
effective interest rate of approximately 17%.
Medtronic was also given the right of first offer for additional
development agreements as well as a sale of all or a substantial portion
of HT. Under the specific terms of each right of first offer, HT must
notify Medtronic if it has received a written offer, or if it is seeking
to find a third party to (i) enter a development agreement to develop a
simulation system within a field in which Medtronic is active, or (ii)
to sell all or a substantial portion of HT. In either case, if Medtronic
is interested in (i) participating in a development agreement or (ii) in
a purchase of all or a substantial portion of HT, then Medtronic has a
thirty day period to negotiate exclusively with HT. If an agreement is
not reached within this thirty day period, the Company may enter into an
agreement with a third party, provided that the terms of the agreement
are at least as favorable to HT as the offer presented by Medtronic.
F-18
<PAGE> 29
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Subordinated Note Payable - In December 1997, the Company entered into a
subordinated note and warrant purchase agreement with SECA VII, under
which it was granted a subordinated promissory note for $500,000 with
interest at the rate of 13% per annum. The note is secured by
substantially all of the Company's assets and was subordinate to the
Investment Agreement that was repaid in August 1999 (See Note 8). The
note is also secured by a life insurance policy on a Company's
employee in the amount of $750,000.
In connection with the note, the Company gave SECA VII a warrant to
purchase 31,056 shares of common stock at a purchase price of $5.16 per
share. The warrant may be exercised in increments of 1,500 shares and
expires on June 30, 2003. SECA VII has certain put rights that allow it
to have the Company purchase the warrant or, if the warrant has been
exercised, the shares of common stock issued upon exercise of the
warrant, at any time during the six-month period prior to the maturity
date of the subordinated note (or upon earlier acceleration of the
note). If the warrant has been exercised, the purchase price of the put
securities would be the fair market value of one share of common stock
multiplied by the number of shares of common stock issued upon exercise
of the warrant. If the warrant has not been exercised, the purchase
price would be the amount by which the fair market value exceeds the
$5.16 purchase price, multiplied by the number of shares for which the
warrant is then exercisable. The Company allocated $289,000 of the note
payable proceeds to the warrant and is amortizing this amount to
interest expense over the five year period that the related debt is
expected to be outstanding.
Secured Promissory Note Payable - In April 2000, the Company entered
into a Master Loan and Security Agreement with Third Coast Capital.
Under the terms of this agreement, the Company may borrow up to $500,000
through April 1, 2001; however, the Company must borrow at least
$250,000 prior to October 1, 2000. All borrowings must be for the
purchase of qualifying assets including telecommunication and office
equipment or computers and will be secured by those assets. As the
amounts are borrowed, each individual note has a term of 36 months and
an interest rate of 10.5% per annum. At the expiration of the term of
the first note, the Company will also have to make a lump sum payment
equal to 10% of the greater of the asset valuation financed under that
note or the line of credit balance. On April 11, 2000, the Company
borrowed $317,050 against this line of credit that is secured with
certain furniture and equipment. In connection with the agreement, the
Company issued ten-year warrants to purchase 1,618 shares of common
stock at $15.46 per share. These warrants may be exercised at any time
prior to April 9, 2010. The Company allocated $11,281 of the proceeds to
the warrant and will amortize this amount to interest expense using the
effective interest method over the three year period that the related
debt is expected to be outstanding.
Annual maturities of long-term debt at December 31, 1999 are as follows
(in thousands):
<TABLE>
<S> <C>
2000 .......... $ 103
2001 .......... 100
2002 .......... 3,258
------
Total ......... $3,461
======
</TABLE>
8. INVESTMENT AGREEMENT
In September 1996, the Company entered into an Investment Agreement with
Maryland Health Care Product Development, COOK, Inc. and the Department
of Business and Economic Development of the State of Maryland,
(collectively, the "Investors") under which the Investors invested a
total of $1,050,000 in the Company.
F-19
<PAGE> 30
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
On August 10, 1999, the Company exercised its one-time right to convert
50% of the payment stream payable to the Investors to equity within
thirty days after the Company obtaining additional equity financing
through a qualified private offering. The Company issued the Investors
55,762 shares of common stock at $15.46 per share, which provided the
Investors an internal rate of return of 25% per annum. The Company also
elected to pay the remaining balance of $861,854 in cash.
9. COMMITMENTS
The Company leases several of its facilities under operating leases. In
addition, the Company has several operating leases for telephone and
computer equipment that expire during fiscal years 2000 through 2003.
Minimum future lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------ ------
<S> <C> <C>
2000 ................................... $ 12 $ 643
2001 ................................... 12 656
2002 ................................... 12 633
2003 ................................... 12 377
2004 ................................... 6 386
Thereafter ............................. -- 1,637
------ ------
Total future minimum lease payments .... 54 $4,332
======
Portion representing interest .......... (13)
------
$ 41
======
</TABLE>
Rent expense was $689,000, $344,000, and $379,000 in 1999, 1998, and
1997 respectively.
The Company has signed an agreement with a significant customer to
co-market a licensed product. Pursuant to the terms of the agreement,
the Company will reimburse the customer for certain marketing related
expenses not to exceed $200,000 per quarter for a period of five
quarters beginning with the first calendar quarter of 2000.
10. STOCKHOLDERS' EQUITY
Common Stock
On November 12, 1999, the Company completed its initial public offering
of 4,887,500 shares of its common stock (including 637,500 shares issued
upon the exercise of the underwriters' over-allotment option) at $12.00
per share. Of the 4,887,500 shares sold 4,473,736 shares were sold by
the Company and 413,764 shares were sold by selling shareholders. Net
proceeds to the Company, after deducting underwriting discounts and
commissions and offering expenses, aggregated approximately $48.3
million. At the closing of the initial public offering all preferred
stock was converted to common stock.
F-20
<PAGE> 31
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common stock issued to the founders and certain other employees is
subject to repurchase agreements under which the Company has the option
to repurchase the unvested shares upon termination of employment at the
original issue price. The Company's repurchase right generally lapses
over four years. At December 31, 1999, the Company's repurchase rights
had lapsed. At December 31, 1998, 23,537 shares of common stock were
subject to repurchase by the Company.
During 1999, the Company issued 1,379,970 shares of common stock in
connection with purchases of patents and technology (see Note 2) and
68,595 shares of common stock with a fair value of $562,000 for
recruiting services. During 1998, the Company issued 137,190 shares of
common stock in connection with purchases of patents. The fair value of
the common stock of $501,000 was recorded as purchased patents and
technology. In July 1998, the Company issued 3,882 shares of common
stock at $7.73 per share as compensation to an employee of the Company.
On June 22, 1999, the Company issued 39,402 shares of common stock at
$15.46 per share for a total of $609,000 in cash. The Company also paid
commissions and fees of approximately $45,000 related to this private
placement and issued a warrant to purchase 2,679 shares of common stock
with an exercise price of $18.55 per share that expires on June 21,
2009. The holders of these warrants also have the right to require the
Company to convert the warrants at any time into shares of common stock.
On August 10, 1999, the Company issued a total of 55,762 shares of
common stock in conjunction with the conversion of the Investment
Agreement (see Note 8).
On December 27, 1999, the Company issued 12,940 shares of common stock
for a total of $200,000 in cash.
During fiscal 1999, the Company issued 9,705 shares of its common stock
for a total of $150,000 in cash. In addition, the Company issued
warrants to purchase an additional 6,470 shares of its common stock at
the same price of $15.46 per share on or before November 10, 2000.
The Company also issued 6,470 of its common stock to private investors
for total proceeds of $100,000 during 1999.
In August 1998, the Company closed two private placements for a total of
$1,890,000 that gave the Company net proceeds of $1,681,083. Upon
closing the private placements, 244,566 shares of common stock were
issued at $7.73 per share. These financing transactions also included
the issuance of warrants to purchase 24,456 shares of the Company's
common stock at an exercise price of $7.73 per share. The warrants
expire in August 2008. In fiscal 1997, the Company completed a private
placement in which 135,870 shares of the Company's stock were sold to
investors at $5.16 per share and 1,293 shares were sold at $7.73 per
share. In connection with the private placement, warrants were also
issued for 57,746 shares with an exercise price of $5.16 per share and
194 shares with an exercise price of $7.73 per share. The warrants
expire on July 1, 2000.
F-21
<PAGE> 32
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
During fiscal 1997, the Company issued 4,691 shares of common stock at
$5.16 per share as compensation expense to a director of the Company and
15,528 shares of common stock at $5.16 per share as compensation expense
to a consultant. Compensation expense of $104,168 was charged to sales
and marketing expenses based on the estimated fair value of the stock.
The Company repurchased 2,599 shares of common stock in the year ended
December 31, 1997 from employees at a price of $0.323 per share.
Stock Split
In November 1999, the Company's Board of Directors approved a
0.807-for-one reverse common and Series C and D preferred stock split
and a 4.035-for-one Series A and B preferred stock split. All references
to share and per-share data for all periods presented have been
retroactively adjusted to give effect to the split.
Common Stock Warrants
During June 1997, the Company issued a warrant to purchase 91,191 shares
of the Company's common stock at an exercise price of $0.19 per share to
a Series C preferred investor. The warrant is exercisable through 2002.
The estimated fair value of this warrant of $6,000 has been accounted
for as a reduction to the Series C preferred stock financing proceeds.
In connection with the sale of Series D preferred stock, the Company
issued a warrant to purchase 11,972 shares of Series D preferred stock
at an exercise price of $4.18 to an investment banker. The estimated
fair value of this warrant of $17,000 has been accounted for as a
reduction to the Series D preferred stock financing proceeds. At the
closing of the Company's initial public offering, this warrant to
purchase preferred stock was converted to a warrant to purchase common
stock.
As discussed in Note 2, during March 1999, the Company issued a warrant
to purchase 322,800 shares of the Company's common stock at an exercise
price of $3.66 per share for consulting services. The warrant is
exercisable through 2009. The estimated fair value of the warrant of
$808,000 has been recorded as prepaid consulting services and is being
amortized over the service period of two years.
Stock Options
Under the Company's stock option plans, the Company may grant options to
purchase up to 7,991,975 shares of common stock to employees, directors
and consultants at prices not less than the fair market value on the
date of grant for incentive stock options and not less than 85% of fair
market value on the date of grant for nonstatutory stock options. These
options generally expire ten years from the date of grant. The Company
has granted immediately exercisable options as well as options that
become exercisable over periods ranging from three months to four years.
As part of the business combination, the Company assumed HT's 1998 stock
option plans.
F-22
<PAGE> 33
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Under HT's 1998 Plan, a total of 310,560 shares of common stock are
reserved for issuance. The majority of the options cliff vest on each
anniversary date over a five-year period. Under its plan, the Company
granted 12,422 options to members of its subsidiary's Board of Directors
in June 1998 with quarterly vesting provisions over a two-year period.
In connection with an employment agreement, the Company also granted its
subsidiary's chief executive officer options for 2,174 shares of common
stock which vested immediately and options for 75,131 shares of common
stock that vest upon the completion of a financing of at least $6
million. Both issuances provide for a cash bonus upon exercise of the
options and therefore the options are accounted for as variable awards.
The 1998 Plan provides for certain provisions for accelerated vesting
upon a change of control. All of the options expire ten years from the
date of the grant.
Details of activity under the option plans are as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding, January 1, 1997 ............................... 2,617,470 $ 0.15
Granted (weighted average fair value of $0.21 per share) ... 1,060,127 0.31
Exercised .................................................. (105,144) 0.21
Canceled ................................................... (38,988) 0.64
---------- ------
Balances, December 31, 1997 (2,928,319 exercisable at a
weighted average price of $0.17 per share) ............... 3,533,465 0.19
Granted (weighted average fair value of $0.68 per share) ... 784,298 1.94
Exercised .................................................. (1,024,615) 0.11
Canceled ................................................... (88,484) 3.59
---------- ------
Balances, December 31, 1998 (2,822,404 exercisable at a
weighted average price of $0.33 per share) ............... 3,204,664 0.55
Granted (weighted average fair value of $1.77 per share) ... 2,647,597 7.54
Exercised .................................................. (460,336) 0.47
Canceled ................................................... (169,006) 2.40
---------- ------
Balances, December 31, 1999 (3,291,302 exercisable at a
weighted average price of $0.70 per share) ............... 5,222,919 $ 4.02
========== ======
</TABLE>
F-23
<PAGE> 34
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Additional information regarding options outstanding as of December 31,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------- ---------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.04 - $ 0.14 857,803 5.40 $ 0.07 851,078 $ 0.07
$0.17 - $ 0.37 966,839 5.27 0.26 943,049 0.26
$0.41 - $ 1.24 672,189 7.67 0.66 626,009 0.67
$1.36 - $ 4.02 1,015,853 8.75 4.22 330,452 3.37
$8.67 - $10.00 1,710,235 9.45 9.34 7,527 9.50
-------------- --------- --------- --------- --------- ---------
$0.04 - $10.00 5,222,919 7.64 $ 4.02 2,758,115 $ 0.70
============== ========= ========= ========= ========= =========
</TABLE>
At December 31, 1999, the Company had 1,626,598 shares available for
future grants under the option plans.
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB No. 25 and its
related interpretations. SFAS 123 requires the disclosure of pro forma
net loss had the Company adopted the fair value method as of the
beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing
models, even though these models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were
made using the minimum value method with the following weighted average
assumptions: expected life, 18 months following vesting; risk free
interest rate, 5.4%, 5.3%, and 6.0% in 1999, 1998, and 1997
respectively; volatility, 50% subsequent to the initial public filing in
November 1999; and no dividends during the expected term. The Company's
fair value calculations on stock-based awards under the 1999 Employee
Stock Purchase Plan ("ESPP") were also made using the option pricing
model with the following weighted average assumptions: expected life, 18
months; volatility, 50%; risk free interest rate, 5.4%; and no dividends
during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as
they occur. If the computed fair values of the awards issued in 1999,
1998, and 1997 had been amortized to expense over the vesting periods of
the awards, pro forma net loss would have been $10,122,631 ($0.59 net
loss per share), $3,887,226 ($0.73 net loss per share) and $1,618,252
($0.37 net loss per share) in 1999, 1998, and 1997, respectively.
The Company had outstanding nonstatutory stock options to consultants to
purchase 239,604, 169,570, and 111,182 shares of common stock at
December 31, 1999, 1998 and 1997, respectively. Compensation expense of
$138,000, $78,000, and $10,000 was recognized as result of these options
in 1999, 1998, and 1997, respectively. The fair value of the unvested
portion of these options is being amortized over the vesting period. The
fair value attributable to the unvested portion of these options is
F-24
<PAGE> 35
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
subject to adjustment based upon the future value of the Company's
common stock. The fair values of these options were determined at the
date of vesting using the methods specified by SFAS 123 with the
following weighted average assumptions during 1999, 1998, and 1997,
respectively: expected life, 10 years; risk free interest rate, 5.2%,
5.3% and 6.0%; volatility, 50%; and no dividends during the expected
term. Forfeitures are recognized as they occur.
In addition, the Company granted nonstatutory stock options to purchase
20,175 and 242,100 shares of common stock in 1999 and 1998,
respectively, in connection with licensing of technology and the
acquisition of patents (see Note 2). The estimated fair value of these
options of $129,000 and $219,000 as of 1999 and 1998, respectively, has
been recorded as purchased patents and technology. These options were
fully vested at the date of grant. Accordingly, the fair value of the
options was determined at the date of grant using the methods specified
by SFAS 123, with the following assumptions during 1999 and 1998,
respectively: expected life, 10 years; risk free interest rate, 5.0% and
5.5%; volatility, 50% and 25%; and no dividends during the expected
term.
Employee Stock Purchase Plan
Upon the closing of the Company's initial public offering on November
12, 1999, the Company adopted its' ESPP. Under the ESPP, eligible
employees may purchase common stock through payroll deductions at a
purchase price of 85% of the lower of the fair market value of the
Company's stock at the beginning of the offering period or the purchase
date. Participants may not purchase more than 1,000 shares in a
six-month offering period or stock having a value greater than $25,000
in any calendar year as measured at the beginning of the offering
period. A total of 500,000 shares of common stock are reserved for the
issuance under the ESPP plus an automatic annual increase on January 1,
2000 and on each January 1 thereafter through January 1, 2010 by an
amount equal to the lesser of 500,000 shares per year or a number of
shares determined by the Board of Directors. As of December 31, 1999, no
shares had been purchased under the plan.
Deferred Stock Compensation
In connection with grants of certain stock options to employees and
directors in 1999, the Company recorded $2,494,000 for the difference
between the deemed fair value for accounting purposes and the stock
price as determined by the Board of Directors on the date of grant. This
amount has been presented as a reduction of stockholders' equity and is
being amortized to expense over the vesting period of the related stock
options.
In January 2000, HT's board of directors approved a repricing of all
outstanding stock options that had been granted on or after June 1,
1998 from $15.46 per share to $7.73 per share. A total of 30,797
options were repriced. Beginning July 1, 2000, the Company will
recognize stock compensation relating to the unexpired repriced shares.
Future expense related to vested and unvested stock option shares is
dependent on the market value of the shares at the end of each quarter
until the repriced stock options are exercised, forfeited or expire and
is therefore unknown at this time.
F-25
<PAGE> 36
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
11. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators
used in computing basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net loss ................................................. $(9,470) $(3,669) $(1,618)
Redeemable preferred stock accretion ..................... 6 6 3
------- ------- -------
Net loss applicable to common stockholders ................. $(9,476) $(3,675) $(1,621)
======= ======= =======
Denominator:
Weighted average common shares outstanding ............... 7,928 5,084 4,180
Weighted average common shares held in escrow ............ (76) -- --
Weighted average common shares outstanding subject to
repurchase ............................................. -- (61) (176)
------- ------- -------
Shares used in computation, basic and diluted .............. 7,852 5,023 4,004
======= ======= =======
Loss per common share, basic and diluted ................... $ (1.21) $ (0.73) $ (0.40)
======= ======= =======
</TABLE>
The Company's computation of net loss per share excludes 88,770 shares
held in escrow as discussed in Note 2, as the conditions required to
release these shares from escrow had not been satisfied as of December
31, 1999.
For the above-mentioned periods, the Company had securities outstanding
that could potentially dilute basic earnings per share in the future,
but were excluded from the computation of diluted net loss per share in
the periods presented since their effect would have been anti-dilutive.
These outstanding securities consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Investment agreement ............................. -- 84,969 84,969
Convertible note payable ......................... 226,450 -- --
Redeemable convertible preferred stock ........... -- 863,771 864,642
Convertible preferred stock ...................... 264,445 4,267,329 2,862,159
Shares of common stock subject to repurchase ..... -- 23,537 125,813
Outstanding options .............................. 5,222,919 3,204,664 3,533,465
Warrants ......................................... 539,415 296,306 287,087
</TABLE>
12. INCOME TAXES
No provision for federal income taxes was required for the years ended
December 31, 1999, 1998 and 1997 due to net losses in these periods.
F-26
<PAGE> 37
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Significant components of the net deferred tax assets and liabilities
for federal and state income taxes consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ......................... $ 4,181 $ 2,264
Deferred revenue ......................................... 713 13
Deferred compensation .................................... 31 13
Deferred rent ............................................ 15 --
Research and development credits ......................... 206 147
Reserves and accruals recognized in different periods .... 174 84
Depreciation and amortization ............................ 105 79
------- -------
Total deferred tax assets .................................. 5,425 2,600
Deferred tax liabilities:
Difference in tax basis of purchased technology .......... (1,139) --
Cash to accrual basis adjustment ......................... (45) (67)
Valuation reserve .......................................... (4,241) (2,533)
------- -------
Net deferred tax assets .................................... $ -- $ --
======= =======
</TABLE>
As discussed in Note 2, a deferred tax liability relating to a
difference in the tax basis for purchased technology was established in
1999. This resulted in the concurrent $1.4 million reversal of the
valuation reserve for deferred tax assets.
The Company's effective tax rate differed from the expected benefit at
the federal statutory tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal statutory tax rate ................. (35.0)% (35.0)% (35.0)%
State taxes, net of federal benefit ........ (6.0) (6.0) (6.0)
Stock compensation ......................... 2.3 -- --
Other ...................................... (0.2) 0.6 0.6
Valuation allowance ........................ 38.9 40.4 40.4
------ ------ ------
Effective tax rate ......................... -- % -- % -- %
====== ====== ======
</TABLE>
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $10,806,000 and $9,241,000,
respectively, expiring through 2020 and through 2004, respectively.
F-27
<PAGE> 38
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Current federal and state tax laws include provisions limiting the annual
use of net operating loss carryforwards in the event of certain defined
changes in stock ownership. The Company's issuances of common and preferred
stock may have resulted in such a change. Accordingly, the annual use of
the Company's net operating loss carryforwards would be limited according
to these provisions. Management has not yet determined the extent of this
limitation, and this limitation may result in the loss of carryforward
benefits due to their expiration.
13. 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 entirely in North America and does not
maintain operations in other countries. The following is a summary of
revenues within geographic areas. Revenues are broken out geographically by
the ship-to location of the customer as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
North America .......................... $ 8,295 $6,770 $5,877
Europe ................................. 1,274 1,124 648
Far East ............................... 1,218 698 347
Rest of the world ...................... 155 111 12
------- ------ ------
Total .................................. $10,942 $8,703 $6,884
======= ====== ======
</TABLE>
Significant Customers
In 1999, 19% of total revenues came from two unrelated customers, each
customer accounted for 9.5% of our total revenues. In 1998, a stockholder
and two unrelated customers accounted for 6%, 10% and 10% of total
revenues, respectively. In 1997, one unrelated customer accounted for 24%
of total revenue.
Receivables due from one unrelated customer was $137,000 at December 31,
1999. Receivables due from a stockholder were $387,000 at December 31,
1998. Receivables due from two unrelated customers were $158,000 and
$57,000 at December 31, 1997.
14. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan under which eligible
employees may elect to have a portion of their salary deferred and
contributed to the 401(k) plan. Contributions may be made by the Company at
the discretion of the Board of Directors. As of December 31, 1999 the
recorded expenses were approximately $95,000, $31,000, and $27,000 for
1999, 1998 and 1997, respectively.
F-28
<PAGE> 39
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. GOVERNMENT AUDITS
Billings under certain cost-based government contracts are calculated using
provisional rates that permit recovery of indirect costs. These rates are
subject to audit on an annual basis by the government agencies' cognizant
audit agency. The cost audit will result in the negotiation and
determination of the final indirect cost rates that the Company may use for
the period(s) audited. The final rates, if different from the provisionals,
may create an additional receivable or liability.
As of December 31, 1999, the Company has not reached final settlements on
indirect rates. The Company has negotiated provisional indirect rates for
the years ended December 31, 1999 and 1998. The Company periodically
reviews its cost estimates and experience rates, and any needed adjustments
are made and reflected in the period in which the estimates are revised. In
the opinion of management, redetermination of any cost-based contracts for
the open years will not have a material effect on the Company's financial
position or results of operations.
16. RELATED PARTIES
In July 1997, the Company transferred certain patent rights related to its
MicroScribe product to a newly created limited liability corporation,
MicroScribe LLC, in exchange for 1,000 Class 1 Units and 98,999 Class 2
Units. This investment represents a 99% ownership of MicroScribe LLC.
Subsequently, the Company distributed all Class 2 Units to its then
outstanding common, preferred and vested option holders on a pro rata
basis. The Company maintains a 1% ownership of MicroScribe LLC subsequent
to the distribution of the Class 2 Units. There was no recorded value
related to these internally-developed patent agreements, and thus no amount
was recognized as a result of the transfer.
During July 1997, the Company also entered into an exclusive ten-year
license agreement with MicroScribe LLC (the "Agreement") for the right to
manufacture, market and sell the related MicroScribe technology. Under the
terms of the Agreement, the Company must pay a royalty to MicroScribe LLC
based on a variable percentage of net receipts as defined under the
Agreement. Royalty expense under the Agreement was $132,000, $116,000 and
$49,000 in 1999, 1998 and 1997, respectively.
As discussed in Note 13, a stockholder accounted for $249,000 of royalty
revenue and $316,000 of development contract revenue in 1998.
In fiscal year 1995, the Company loaned $4,000 to Biomedical Visualization
International, L.L.C., ("BVI"), which is wholly owned by two of the
Company's stockholders. The terms of the note called for interest to be
accrued at a rate of 10% per annum with principal and interest payable on
demand. On April 10, 2000, BVI filed for dissolution and repaid
approximately $2,500 of its indebtedness. The Company wrote off the
remaining balance.
In April 1999, an executive officer loaned the Company $60,000 to meet its
immediate cash needs. The note was not discounted due to the short-term
nature of the borrowing and the fact that the total discount amount was not
material to the Company's financial position or statement of operations.
The note was repaid on August 16, 1999.
Two of the Company's stockholders loaned the Company $35,000 in 1999.
F-29
<PAGE> 40
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
17. 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 effect on
the financial statements of the Company.
The Company's 70% owned subsidiary, Sky Fitness, has had claims against it
relating to the Sky Fitness mark. The claims allege that the SkyCYCLE
infringes a competitor's mark and that an employee of the Company violated
a noncompete clause within his employment agreement. The Company believes
these claims are without merit and would vigorously defend itself if these
claims were to progress.
18. SUBSEQUENT EVENTS
The Company completed a merger with HT on September 29, 2000, in a business
combination accounted for as a pooling of interests. HT, a leading
developer and manufacturer of products that simulate hands-on medical
procedures to create realistic training environments for doctors and other
healthcare personnel, became a wholly-owned subsidiary of the Company upon
consummation of the merger. Under the terms of the agreement, the former
shareholders, warrant and option holders of HT common and preferred stock
received shares, warrants and options of Immersion common stock at the rate
of approximately 0.5176 shares of Immersion common stock for each share of
HT common and preferred stock. Immersion issued a total of approximately
1.335 million shares of its common stock in exchange for all outstanding
shares of HT common and preferred stock and reserved approximately 835,000
shares of common stock for issuance upon the exercise of HT options the
Company assumed pursuant to the agreement. In connection with the merger,
the Company incurred merger expenses of approximately $1.4 million, which
are included in acquisition related charges in the unaudited condensed
consolidated statement of operations for the nine months ended September
30, 2000.
The consolidated financial statements of Immersion have been restated to
include the financial position, results of operations and cash flows of HT
for all periods presented as if HT had always been combined. Prior to the
merger with Immersion, HT ended its fiscal year on May 31. The restated
consolidated balance sheet as of December 31, 1999 and 1998 include amounts
for HT as of May 31, 2000 and 1999 respectively. The restated consolidated
statement of operations, stockholders equity and comprehensive loss and
cash flows for the years ended December 31, 1999, 1998 and 1997 include
amounts for HT for the fiscal years ended five months later.
F-30
<PAGE> 41
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The restated consolidated statement of operations include the following
amounts for Immersion and HT derived from the fiscal years indicated above:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Total revenues:
Immersion ......................... $ 8,038 $ 5,021 $ 4,332
HT ................................ 2,925 3,682 2,552
Eliminations ...................... (21) -- --
-------- ------- -------
Total ............................... $ 10,942 $ 8,703 $ 6,884
======== ======= =======
Net loss:
Immersion ......................... $ (4,354) $(1,673) $ (527)
HT ................................ (5,116) (1,996) (1,091)
-------- ------- -------
Total ............................... $ (9,470) $(3,669) $(1,618)
======== ======= =======
</TABLE>
The combined results of operations include elimination of royalty revenue
derived by Immersion from HT and certain reclassifications of HT's
financial statements to conform to Immersion's presentation.
Subsequent to the merger, HT changed its fiscal year to December 31 to
conform to Immersion's presentation. Immersion's 10Q for the nine months
ended September 30, 2000 includes amounts for HT for the nine months ended
September 30, 2000 combined with Immersion's statement of operations for
the same period.
In June 2000, the Company made a $5.0 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 Company also signed a strategic partnership agreement
with Geometrix during the second quarter of fiscal 2000 to develop products
for the three-dimensional web marketplace. Under the agreement, Geometrix
has contracted with the Company for development work.
In March 2000 and June 2000, the Company made an investment of $1.0 million
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.
In March 2000, the Company completed its acquisition of Montreal-based
Haptic Technologies Inc. ("Haptic") for approximately $7.0 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 the Company and
will continue operations in Montreal, Canada. The acquisition was accounted
for using the purchase method. 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.
In August 2000, the Company acquired all outstanding shares of Virtual
Technologies Inc. ("VTI") for approximately $7.75 million, consisting of
320,598 shares of the Company's common stock and $965,000 paid in cash. VTI
develops and markets hardware and software products that are used
throughout the world in high-end simulation, mechanical computer aided
design, visualization and motion capture applications as well as research.
As a result of the acquisition, VTI became a wholly-owned subsidiary of
Immersion. 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
F-31
<PAGE> 42
IMMERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
acquisition. In connection with the transaction, the Company assumed
unvested options of VTI, resulting in deferred stock compensation of
$282,000, which will be amortized over the remaining vesting period of
approximately five years.
* * * * *
F-32
<PAGE> 43
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
23.1 Consent of Deloitte & Touche LLP, independent auditors
23.2 Consent of Ernst & Young LLP, independent auditors
27 Restated Financial Data Schedules
</TABLE>
<PAGE> 44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 2, 2000
Immersion Corporation
By /s/ VICTOR VIEGAS
--------------------------------------
Victor Viegas
Chief Financial Officer
and Vice President, Finance
3
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
23.1 Consent of Deloitte & Touche LLP, independent auditors
23.2 Consent of Ernst & Young LLP, independent auditors
27 Restated Financial Data Schedules
</TABLE>
4
