1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended MARCH 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 000-27969
IMMERSION CORPORATION
--------------------------------------
(Name of small business issuer in its charter)
DELAWARE 94-3180138
-------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) Identification No.)
2158 PARAGON DRIVE, SAN JOSE, CALIFORNIA 95131
-------------------------------------------- ---------------------
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (408) 467-1900
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Number of shares of Common Stock outstanding at May 5, 2000: 16,066,788
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IMMERSION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2000
and December 31, 1999........................................................3
Condensed Consolidated Statements of Operations (Unaudited) for the Three
Months Ended March 31, 2000 and 1999.........................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three
Months Ended March 31, 2000 and 1999.........................................5
Notes to Condensed Consolidated Financial Statements (Unaudited).............6
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................11
Item 3. Quantitative and Qualitative Disclosures About Market
Risks.......................................................................22
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................22
SIGNATURES..................................................................................23
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PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IMMERSION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
ASSETS
MARCH 31 DECEMBER 31
2000 1999
--------- ------------
Current assets:
Cash and cash equivalents ............................................. $ 28,714 $ 46,527
Short-term investments ................................................ 20,212 4,781
Accounts receivable, net of allowances of $188 and $134 respectively .. 1,271 1,064
Inventories ........................................................... 683 660
Prepaid expenses and other assets ..................................... 1,447 1,057
-------- --------
Total current assets ......................................... 52,327 54,089
Property - net .......................................................... 899 591
Purchased intangibles and other assets .................................. 9,950 4,758
-------- --------
Total assets ............................................................ $ 63,176 $ 59,438
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 960 $ 750
Accrued compensation .................................................. 503 180
Other accrued liabilities and income taxes payable .................... 1,091 505
Deferred revenue and customer advances ................................ 768 1,355
-------- --------
Total current liabilities .................................... 3,322 2,790
-------- --------
Stockholders' equity:
Common stock - $0.001 par value; 100,000,000 shares authorized; shares
issued and outstanding: 16,008,241 and 15,765,211 respectively ...... 76,702 65,554
Warrants .............................................................. 831 831
Deferred compensation ................................................. (6,494) (1,167)
Accumulated other comprehensive loss .................................. (32) 19
Note receivable from stockholder ...................................... (17) (17)
Accumulated deficit ................................................... (11,136) (8,572)
-------- --------
Total stockholders' equity ................................... 59,854 56,648
-------- --------
Total liabilities and stockholders' equity .............................. $ 63,176 $ 59,438
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
QUARTER ENDED
MARCH 31
----------------------------
2000 1999
---------- ----------
Revenues:
Royalty revenue ............................................. $ 884 $ 481
Product sales ............................................... 1,220 1,085
Development contracts and other ............................. 358 310
-------- --------
Total revenues ..................................... 2,462 1,876
Costs and expenses:
Cost of product sales ....................................... 623 494
Sales and marketing ......................................... 1,528 187
Research and development .................................... 676 458
General and administrative .................................. 1,400 752
Amortization of intangibles and deferred stock compensation * 672 118
In-process research and development ......................... 887 1,190
-------- --------
Total costs and expenses ............................ 5,786 3,199
Operating loss ................................................ (3,324) (1,323)
Interest and other income...................................... 760 40
-------- --------
Net loss ...................................................... (2,564) (1,283)
Redeemable convertible preferred stock accretion .............. - 2
-------- --------
Net loss applicable to common stockholders .................... $ (2,564) $ (1,285)
======== ========
Basic and diluted net loss per share .......................... $ (0.16) $ (0.29)
======== ========
Shares used in calculating basic and diluted net loss per share 15,766 4,459
======== ========
* Amortization of intangibles and deferred stock compensation
Amortization of intangibles .............................. $ 408 $ 116
Deferred stock compensation - sales and marketing ........ 15 -
Deferred stock compensation - research and development ... 168 -
Deferred stock compensation - general and administrative . 81 2
-------- --------
Total ............................................... $ 672 $ 118
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
QUARTER ENDED
MARCH 31
------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net loss ......................................................................... $ (2,564) $ (1,283)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................................................. 74 40
Amortization of intangibles .................................................... 408 116
Amortization of deferred stock compensation .................................... 264 2
In-process research and development ............................................ 887 1,190
Stock and options issued for consulting services and other ..................... 10 40
Changes in assets and liabilities:
Accounts receivable .......................................................... (140) 24
Inventories................................................................ (6) (200)
Prepaid expenses and other assets ............................................ (300) 62
Accounts payable ............................................................. (144) (162)
Accrued liabilities and income taxes payable ................................. 606 126
Deferred revenue and customer advances ....................................... (587) 7
-------- --------
Net cash used in operating activities ................................... (1,492) (38)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments .............................................. (15,481) -
Sales and maturities of short-term investments ................................... - 398
Purchase of property ............................................................. (292) (90)
Purchases of patents and technology .............................................. - (370)
Acquisitions, net of cash acquired ............................................... (581) -
Other assets ..................................................................... - (23)
-------- --------
Net cash used in investing activities ................................... (16,354) (85)
-------- --------
Cash flows from financing activities:
Exercise of stock options ........................................................ 33 -
-------- --------
Net cash provided by financing activities ............................... 33 -
-------- --------
Net decrease in cash and cash equivalents .......................................... (17,813) (123)
Cash and cash equivalents:
Beginning of the period .......................................................... 46,527 2,592
-------- --------
End of the period.................................................................. $ 28,714 $ 2,469
======== ========
Supplemental disclosure of cash flow information :
Cash paid for taxes ............................................................... $ 1 $ -
======== ========
Noncash activities:
Change in net unrealized gains (losses) from short-term investments ............... $ (51) $ (1)
======== ========
Issuance of equity instruments for patents, technology and licenses ............... $ - $ 5,092
======== ========
Issuance of equity instruments for acquisition .................................... $ 5,513 $ -
======== ========
Issuance of warrants .............................................................. $ - $ 808
======== ========
Accretion of redeemable preferred stock ........................................... $ - $ 2
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements reflect all the normal recurring adjustments which are, in
the opinion of management, necessary to present fairly the condensed
consolidated financial position at March 31, 2000 and the condensed consolidated
statements of operations and cash flows for the three-month periods ended March
31, 2000 and March 31, 1999.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all information and footnotes necessary for a complete
presentation of the financial position, results of operations, and cash flows,
in conformity with generally accepted accounting principles. Immersion
Corporation ("Immersion" or the "Company") filed audited consolidated financial
statements which included all information and footnotes necessary for such
presentation of the financial position, results of operations, and cash flows
for the years ended December 31, 1999, 1998, and 1997 in the Company's 1999
Annual Report on Form 10-K.
The results of operations for the interim period ended March 31, 2000, are
not necessarily indicative of the results to be expected for the full year.
Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on net loss or stockholders' equity.
2. PURCHASED INTANGIBLES AND OTHER ASSETS
In March 2000, the Company acquired all outstanding shares of
Montreal-based Haptic Technologies Inc. ("Haptic") for approximately $6.8
million, consisting of 141,538 shares of the Company's common stock and $338,000
paid in cash. Haptic develops and markets hardware and software that brings the
sense of touch to computing environments. As a result of the acquisition, Haptic
became a wholly-owned subsidiary of Immersion and will continue operations in
Montreal, Canada. The acquisition was accounted for using the purchase method
and accordingly the acquired assets and liabilities were recorded at their fair
market values at the date of acquisition. Pro forma results of the combined
operations have not been presented as they are not materially different from the
Company's reported results of operations. Haptic operates on a fiscal year
ending on August 31. Accordingly, the Company will consolidate the results of
Haptic based on Haptic's fiscal quarters ended February 28, May 31, August 31,
and November 30 combined with the Company's calendar quarters ended March 31,
June 30, September 30, and December 31, respectively.
In connection with the transaction, the Company assumed unvested options of
Haptic resulting in deferred stock compensation of $5.5 million, which will be
amortized over the remaining vesting period of approximately four years. The
Haptic option plan was established in February, 2000 and under the plan the
Company may grant options to purchase up to 391,238 shares of common stock to
employees, directors, and consultants. The options generally expire ten years
from the date of grant. As of March 31, 2000 there were 366,352 option grants
outstanding.
The aggregate purchase price of $6.8 million (including acquisition costs)
has been allocated to the assets and in-process research and development
acquired. The total purchase price was allocated among the assets acquired
(including acquired in-process research and development) as follows (in
thousands):
Purchase price allocation:
Tangible assets........................................................ $ 416
In-process research and development.................................... 887
Intangible assets:
Goodwill.......................................................... 3,979
Core technology................................................... 871
Developed technology.............................................. 396
Workforce......................................................... 139
Pending patents................................................... 65
-------
Total.................................................................. $ 6,753
=======
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The goodwill, core technology and pending patents are being amortized over
their estimated useful lives of four years. The developed technology and
workforce are being amortized over their estimated useful lives of three and two
years, respectively. The allocation of the purchase price to the respective
intangibles was based on management's estimates of the after-tax cash flows and
gave explicit consideration to the Securities and Exchange Commission's views on
purchased in-process research and development as set forth in its September 9,
1998 letter to the American Institute of Certified Public Accountants.
Specifically, the valuation gave consideration to the following: (i) the
employment of a fair market value premise excluding any Company-specific
considerations that could result in estimates of investment value for the
subject assets; (ii) comprehensive due diligence concerning all potential
intangible assets; (iii) the value of existing technology was specifically
addressed, with a view toward ensuring the relative allocations to existing
technology and in-process research and development were consistent with the
relative contributions of each to the final product; and (iv) the allocation to
in-process research and development was based on a calculation that considered
only the efforts completed as of the transaction date, and only the cash flow
associated with these completed efforts for one generation of the products
currently in process.
As indicated above, the Company recorded a one-time charge of $887,000 upon
the acquisition in March 2000 for purchased in-process research and development
related to three development projects. The charge related to the portion of
these products that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
Management's conclusion that the in-process development effort had no
alternative future use was reached in consultation with the engineering
personnel from both the Company and the seller.
The first of these projects focuses on providing products for moving
vehicles that use computers in their instrumentation and control panels and
targets both end-user in-vehicle systems and design phase solutions. The product
being developed is a software product to be bundled with a haptic peripheral
device. The software product is designed to provide a touch feedback module for
the peripheral device, which will introduce the sense of touch into the
interface allowing designers to feel the buttons on the screen as they design
the control panel. This product is expected to be released in late FY 2000 and
at the time of the acquisition was approximately 50% complete with estimated
costs to complete the development of $60,000. The second of these projects is
the MilleniumCat technologies, aimed at the multimedia market that will offer a
full high fidelity affordable haptic device. Haptic currently sells the
PenCat/Pro, a stylus based touch-enabled computer interface device. The
MilleniumCat product will be the next generation PenCat/Pro offering both the
hardware device utilizing a mouse and the next generation multimedia feedback
technology associated with Haptic's developed suite of products that combine
audio, graphics, speech, video and other media into one package solution for
customers. This product is expected to be released mid FY 2000 and at the time
of the acquisition was estimated to be 67% complete with estimated costs to
complete the development at $50,000. The third of these projects is aimed at the
engineering and artistic creation market. Haptic's current product PenCat/Pro
targets 3D designers that have a need for advanced input technologies. The
PenCat/Pro product used by 3D designers will be replaced by the MilleniumCat
product in FY 2001. While this product incorporates much of the MilleniumCat
product, it will require some additional software and a different user interface
and thus at the time of the acquisition was estimated at 40% complete with
estimated costs to complete development of $20,000.
The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require the Company to
accelerate the time period over which the intangibles are being amortized, which
could have a material adverse effect on the Company's business, financial
condition and results of operation. Significant assumptions used to determine
the value of in-process research and development, include the
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following: (i) forecast of net cash flows that were expected to result from the
development effort using projections prepared by Haptic's management; (ii) the
completed portion of the projects estimated by considering a number of factors,
including the costs invested to date relative to total cost of the development
effort and the amount of progress completed as of the acquisition date, on a
technological basis, relative to the overall technological achievements required
to achieve the functionality of the eventual product. The technological issues
were addressed by engineering representatives from both the Company and Haptic,
and when estimating the value of the technology, the projected financial results
of the acquired assets were estimated on a stand-alone basis without any
consideration to potential synergistic benefits or "investment value" related to
the acquisition. Accordingly, separate projected cash flows were prepared for
both the existing as well as the in-process projects. These projected results
were based on the projected number of units sold times the expected average
selling price less the expected associated costs. After preparing the estimated
cash flows from the products being developed, a portion of these cash flows were
attributed to the developed and core technology, which was embodied in the
in-process product lines and enabled a quicker and more cost-effective
development of these products. When estimating the value of the developed, core
and in-process technologies, discount rates of 15%, 20%, and 25% were used
respectively. The discount rates considered both the status and risks associated
with the cash flows at the acquisition date. Projected revenues from the
developed technologies are expected to continue through the beginning of FY
2002, while revenue from in-process technologies are expected to commence late
FY 2000 and continue through a portion of FY 2004.
3. INVENTORIES
MARCH 31 DECEMBER 31
2000 1999
---- ----
(In thousands)
Raw materials and subassemblies .............................................. .$503 $504
Work in process .............................................................. 31 23
Finished goods ............................................................... 149 133
---- ----
Total ........................................................................ $683 $660
==== ====
4. PREPAID EXPENSES AND OTHER ASSETS
MARCH 31 DECEMBER 31
2000 1999
---- ----
(In thousands)
Cybernet Consulting ........................................................... $ 505 $ 578
Prepaid insurance ............................................................. 306 346
Prepaid rent .................................................................. 110 43
Research and development tax credit due from Canadian government .............. 237 -
Other prepaids and other assets ............................................... 289 90
------ ------
Total................................................................... $1,447 $1,057
====== ======
5. PROPERTY
MARCH 31 DECEMBER 31
2000 1999
------ ------
(In thousands)
Computer equipment and purchased software ................ $ 829 $ 573
Machinery and equipment .................................. 309 292
Furniture and fixtures ................................... 354 180
Leasehold improvements ................................... 42 42
------ ------
Total .................................................. 1,534 1,087
Less accumulated depreciation ............................ 635 496
------ ------
Property, net ............................................ $ 899 $ 591
====== ======
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6. 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):
QUARTER ENDED
March 31
--------------------------
2000 1999
-------- --------
Numerator:
Net loss .................................................................. $ (2,564) $ (1,283)
Redeemable preferred stock accretion ...................................... - 2
-------- --------
Net loss applicable to common stockholders $ (2,564) $ (1,285)
======== ========
Denominator:
Weighted average common shares outstanding ................................. 15,855 4,495
Weighted average common shares held in escrow .............................. (89) (36)
-------- --------
Shares used in computation, basic and diluted .............................. 15,766 4,459
======== ========
Net loss per share, basic and diluted ........................................ $ (0.16) $ (0.29)
======== ========
In November 1999, the Company's Board of Directors approved a 0.807-for-one
reverse common and Series C and D preferred stock split and a 4.035-for-one
Series A and B preferred stock split. All references to share and per-share data
for all periods presented have been retroactively adjusted to give effect to the
split.
The Company's computation of net loss per share excludes 88,770 shares held
in escrow. Conditions required to release these shares from escrow had not been
satisfied as of March 31, 2000.
For the above-mentioned periods, the Company had securities outstanding
that could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented since their effect would have been antidilutive. These outstanding
securities consisted of the following:
QUARTER ENDED
MARCH 31
----------------------------
2000 1999
---------- ----------
Redeemable convertible preferred stock ............ - 863,771
Convertible preferred stock ....................... - 4,267,329
Outstanding options ............................... 6,110,400 3,246,628
Warrants .......................................... 425,963 505,655
Weighted average exercise price
of options ..................................... $ 10.52 $ 0.70
========== ==========
Weighted average exercise price
of warrants .................................... $ 2.93 $ 2.68
========== ==========
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7. COMPREHENSIVE LOSS
The following table sets forth the components of comprehensive loss:
QUARTER ENDED
MARCH 31
--------------------
2000 1999
-------- --------
(In thousands)
Net loss: ........................................................... $(2,564) $(1,283)
Redeemable preferred stock accretion ................................ - (2)
Change in unrealized gains (losses) on short-term investments ....... (51) (1)
------- -------
Total comprehensive loss .............................................. $(2,615) $(1,286)
======= =======
8. 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 by geographic areas.
Revenues are broken out geographically by the ship-to location of the customer.
QUARTER ENDED
MARCH 31
--------------------
2000 1999
------ ------
REVENUES
(In thousands)
North America ......................................... $1,803 $1,244
Europe ................................................ 439 268
Far East .............................................. 203 353
Rest of the world ..................................... 17 11
------ ------
Total............................................. $2,462 $1,876
====== ======
Significant Customers
In first quarter of fiscal 2000, 36% of our total revenues came from two
unrelated customers, these customers accounted for 24% and 12% of our total
revenue. In the first quarter of fiscal 1999, 33% of our total revenue came from
two unrelated customers, representing 22% and 11% of our total revenue.
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9. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Except for the
historical information contained in this discussion and analysis of financial
condition and results of operations, the matters discussed herein are forward
looking statements. These forward looking statements include but are not limited
to the Company's plans regarding royalty revenue, royalty-bearing touch-enabled
cursor control products, stimulating demand for touch-enabled products,
expectations of gross margin, expenses, new product introduction, and the
Company's liquidity and capital needs. These matters involve risks and
uncertainties that could cause actual results to differ materially from the
statements made. In addition to the risks and uncertainties described in
"Factors that May Affect Future Results", below, these risks and uncertainties
may include consumer trends, business cycles, scientific developments, changes
in governmental policy and regulation, currency fluctuations, economic trends in
the United States and inflation. These and other factors may cause actual
results to differ materially from those anticipated in forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
Immersion Corporation was incorporated in California in 1993 and
reincorporated in Delaware in 1999. The Company's principal executive offices
are located 2158 Paragon Drive, San Jose, California 95131. The Company's
telephone number is (408) 467-1900. The Company's website is www.immersion.com.
We develop hardware and software technologies that enable users to interact
with computers using their sense of touch. Our patented technologies, which we
call TouchSenseTM, enable computer peripheral devices, such as joysticks, mice
and steering wheels, to deliver tactile sensations that correspond to on-screen
events. We currently focus on licensing our intellectual property for these
touch-enabling technologies to manufacturers of computer peripherals in the
computer entertainment and general purpose personal computing markets. Our
objective is to proliferate our TouchSense technologies across markets,
platforms and applications so that touch and feel become as common as graphics
and sound in the modern computer user interface.
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We hold 43 U.S. patents covering various aspects of our hardware and
software technologies and have over 125 patent applications pending in the U.S.
and abroad. To date, we have licensed our intellectual property to more than 16
companies, including Microsoft and Logitech, which incorporate our patented
touch-enabling technologies, together with other technologies necessary for
computer gaming peripherals, into joysticks, gamepads and steering wheels that
they manufacture. To target the computer mouse market, we have licensed our
intellectual property to Logitech to manufacture the first touch-enabled
computer mouse incorporating our hardware and software technologies. Logitech
began marketing and selling the first version of its touch-enabled mouse during
the fourth quarter of 1999.
RESULTS OF OPERATIONS
QUARTER ENDED
MARCH 31 CHANGE
----------------------------------
REVENUE 2000 1999
------ ------
($ In thousands)
Royalty revenue ........................................... $ 884 $ 481 84%
Product sales ............................................. 1,220 1,085 12%
Development contracts and other ........................... 358 310 15%
------ ------ --
Total Revenue ............................................. $2,462 $1,876 31%
====== ====== ==
Total Revenue. Our total revenue for the first quarter of fiscal 2000
increased by $586,000 or 31% from the first quarter of fiscal 1999. All revenue
categories experienced growth during the current quarter with the largest
increase in royalty revenue of $403,000 or 84%. Royalty revenue is comprised of
royalties earned on sales by our TouchSense licensees including $587,000 of
revenues recognized under the Microsoft agreement. Revenue recognized under the
current Microsoft agreement will end mid-July 2000. The increase in product
sales of $135,000 for the three months ended March 31, 2000 as compared to the
same three-month period last year is due to increased sales of our
MicroScribe-3D, SoftMouse, and professional medical products during the quarter
offset by a decrease in our microprocessor sales. Development contract and other
revenue category is comprised of revenue on commercial and government contracts
efforts, which increased during the first quarter of fiscal 2000 as compared to
the first quarter of fiscal 1999 due to an increase in related development
activity.
We categorize our geographic information into four major regions: North
America, Europe, Far East, Rest of the world. In the first quarter of fiscal
2000, revenue generated in North America, Europe, and Far East represented 73%,
18%, and 8% respectively compared to 66%, 14%, and 19% respectively, for the
first quarter of fiscal 1999. The shift in revenues among regions is mainly due
to the timing of microprocessor shipments sold to our customers in the Far East,
which were lower in the first quarter of 2000 versus the first quarter of 1999.
QUARTER ENDED
MARCH 31 CHANGE
----------------------------------
COST OF PRODUCT SALES 2000 1999
------ ------
($ In thousands)
Cost of product sales...................................... $623 $ 494 26%
% of total product revenue........................... 51% 46%
Cost of Product Sales. Cost of product sales increased by $129,000 or
26% for the three months ended March 31, 2000 as compared to the three months
ended March 31, 1999. The increase is due to a combination of
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higher product sales volume, increased overhead costs and the mix of product
sold. The increase in product sales volume contributed $67,000 to the overall
increase while overhead costs and product mix accounted for the remainder of the
increase in cost of products sold for the three months ended March 31, 2000
versus the three months ended March 31, 1999.
QUARTER ENDED
MARCH 31 CHANGE
-----------------------------------
OPERATING EXPENSES AND OTHER 2000 1999
------ ------
($ In thousands)
Sales and marketing .......................................... $1,528 $ 187 717%
% of total revenue ..................................... 62% 10%
Research and development ..................................... $ 676 $ 458 48%
% of total revenue ..................................... 27% 24%
General and administrative ................................... $1,400 $ 752 86%
% of total revenue ..................................... 57% 40%
Amortization of intangibles and deferred stock compensation .. $ 672 $ 118 469%
% of total revenue ..................................... 27% 6%
In-process research and development .......................... $ 887 $1,190 (25)%
% of total revenue ..................................... 36% 63%
Sales and Marketing. Sales and marketing expenses increased by $1.3 million
or 717% in the first quarter of fiscal 2000 compared to the same period last
year. The significant increase was mainly due to increased headcount and related
compensation, benefits, and overhead costs of $736,000. Expenses related to
corporate identity, market research, web development, expenses incurred under
our co-marketing agreement, and developer programs contributed to $456,000 of
the increase. The remainder of the increase is attributed to increased tradeshow
expenses of $96,000. We anticipate sales and marketing expenses to continue to
increase in absolute dollars due to the planned growth of our sales and
marketing organizations and our co-marketing agreement with Logitech. Under the
terms of the agreement, for a period of five calendar quarters, beginning in the
first calendar quarter of 2000, we will reimburse Logitech for certain marketing
related expenses not to exceed $200,000 per quarter. Only third-party marketing
services that are targeted at promoting Logitech's touch-enabled mice are
eligible for reimbursement. In addition, all promotional activities will have to
be approved by us in advance. In order to remain eligible for reimbursement,
Logitech will have to include our brand and slogan on all its marketing
materials that reference touch-enabled functionality or products, and commit to
other conditions regarding its touch-enabled mice.
Research and Development. Research and development expenses increased by
$218,000 or 48% in the first quarter of fiscal 2000 compared to the same period
last year. The increase is mainly due to increased headcount and related
compensation, benefits, and overhead costs of $87,000 and subcontracted
non-recurring engineering expenses of $84,000. Expenses related to research and
development activities at our wholly-owned subsidiary, Haptic, will contribute
to future increases in this expense category beginning in the second quarter of
fiscal 2000. We believe that continued investment in our research and
development is critical to our future success, and we expect these expenses to
increase in absolute dollars in future periods.
General and Administrative. General and administrative expenses increased
by $648,000 or 86% in the first quarter of fiscal 2000 compared to the same
period last year. The increase is attributed to $308,000 for recruiting
employees and board of director members as well as increased headcount and
related compensation, benefits, and overhead costs of $119,000. The remainder of
the increase is due to increased legal expenses and costs related to being a
public company. We expect that the dollar amount of general and administrative
expenses will increase in the future as we incur the significant additional
costs of being a public company.
14
Amortization of Intangibles and Stock Compensation. Amortization of
intangibles and deferred stock compensation grew by $554,000 or 469% in the
first quarter of fiscal 2000 compared to the same period last year. Amortization
of intangibles increased by $292,000 and is comprised of $119,000 of
amortization of goodwill and other purchased intangibles related to the
acquisition of Haptic, and $173,000 of amortization related to purchased patents
and technology. Deferred stock compensation amortization increased by $261,000.
Of the $261,000 increase, $144,000 is the result of amortization related to the
$5.5 million of deferred stock compensation recorded in conjunction with the
assumption of Haptic's unvested options at the time of acquisition.
In-Process Research and Development. During the three months ended March
31, 2000 we incurred a charge of $887,000 for in-process research and
development resulting from the March 2000 acquisition of all the outstanding
shares of Haptic. The in-process research and development relates to three
development projects: a haptic software package which will assist designers of
moving vehicles; a high fidelity affordable haptic device for the multimedia
market; and a haptic device aimed at the engineering and artistic creation
market.
Interest and Other Income. Interest and other income consists primarily of
interest income from cash, cash equivalents and short-term investments. Interest
and other income grew by $720,000 in the first quarter of fiscal 2000 compared
to the same period last year. The increase during the three months ended March
31, 2000 is due to the increase in cash and cash equivalents and short-term
investments chiefly from the $48.3 million net proceeds of our public offering
in November 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents, and short-term investments consist primarily of
money market funds and highly liquid debt instruments. All of our cash
equivalents and short-term investments are classified as available-for-sale
under the provisions of SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities." The securities are stated at market value with
unrealized gains and losses reported as a component of accumulated other
comprehensive loss within stockholders' equity.
At March 31, 2000 our cash, cash equivalents and short-term investments
totaled $48.9 million, down $2.4 million from $51.3 million at December 31,
1999. Excluding short-term investments our cash and cash equivalents totaled
$28.7 million, down $17.8 million from $46.5 million at December 31, 1999
Net cash used in operating activities during the first fiscal quarter of
2000 was $1.5 million, a significant increase from the $38,000 used during the
same period last year. Cash used in operations during the period was comprised
of our $2.6 million net loss, a decrease due to a change in deferred revenue of
$587,000 attributable to revenue recognized under the Microsoft agreement, and a
decrease due to a $300,000 change in prepaid expenses and other assets primarily
the result of insurance premiums paid. Cash used in operations was offset by
noncash activities of $1.6 million, including the $887,000 one-time charge for
in-process research and development relating to the Haptic acquisition and a
$606,000 increase in accrued liabilities.
Net cash used in investing activities during the first fiscal quarter of
2000 was $16.4 million, a considerable increase from the $85,000 used during the
same period last year. Cash used in investing during the period was made up of
$15.5 million purchases of short-term investments, $292,000 to purchase capital
equipment, and $581,000 related to the Haptic acquisition. In order to improve
our rate of return on cash and still provide short-term liquidity, we
periodically purchase or sell short-term investments, which typically are
interest-bearing, investment-grade securities with a maturity of greater than 90
days and less than one year.
The Company leases its manufacturing and office facilities under a
noncancelable operating lease that expires in October 2002. During January 2000
the Company signed a noncancelable operating lease for expanded facilities,
which will expire in 2005, five years from the lease commencement date, which is
anticipated to be June 2000. The Company intends to sublease its current
facilities but had not executed a sublease with any party as of March 31, 2000.
The operating lease payments in fiscal year 2000 on the new lease are expected
to be approximately $.5 million assuming a June, 2000 commencement date. The
aggregate of the lease payments after fiscal year 2000 on the new lease are
expected to be approximately $3.8 million.
15
We believe that our cash, cash equivalents and short-term investments will
be sufficient to meet our working capital needs and capital expenditure
requirements for at least the next 12 months. We anticipate that capital
expenditures for the full year ended December 31, 2000 will total approximately
$3.0 million in connection with anticipated growth in operations, infrastructure
and personnel. If the Company acquires one or more businesses or products, the
Company's capital requirements could increase substantially. In the event of
such an acquisition or should any unanticipated circumstances arise which
significantly increase the Company's capital requirements, we may elect to raise
additional capital through debt or equity financing. Although we may intend to
raise additional capital there can be no assurance that necessary additional
capital will be available on terms acceptable to the Company, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE MARKET FOR OUR TOUCH-ENABLING TECHNOLOGIES IS AT AN EARLY STAGE AND, IF
MARKET DEMAND DOES NOT DEVELOP, WE MAY NOT ACHIEVE OR SUSTAIN REVENUE GROWTH.
The consumer market for touch-enabling technology is at an early stage, and
if we and our licensees are unable to develop consumer demand for our licensees'
products we may not achieve or sustain revenue growth. To date, consumer demand
for our technologies has been limited to the computer gaming peripherals market,
and sales of joysticks and steering wheels incorporating our touch-enabling
technologies in that market began only in late 1996 and 1998, respectively.
Logitech, a licensee of our technology, launched a computer mouse incorporating
our touch-enabling technologies during the fourth quarter of 1999. This
touch-enabled mouse is the first entrant in a new category of touch-enabled
computer cursor control devices. Touch-enabled mice may not achieve commercial
acceptance or generate significant royalty revenue for us. In addition, software
developers may elect not to create additional games or other applications that
support our touch-enabling technology.
Even if our technologies are ultimately widely adopted by consumers,
widespread adoption may take a long time to occur. The timing and amount of
royalties that we receive will depend on whether the products marketed by those
licensees that pay us per-unit royalties achieve widespread adoption and, if so,
how rapidly that adoption occurs. We expect that we will need to pursue
extensive and expensive marketing and sales efforts to educate prospective
licensees and consumers about the uses and benefits of our technologies and to
persuade software developers to create software that utilizes our technologies.
WE HAD AN ACCUMULATED DEFICIT OF $11.1 MILLION AS OF MARCH 31, 2000, WILL
EXPERIENCE LOSSES IN THE FUTURE AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
Since 1997, we have incurred losses in every fiscal quarter, and we expect
losses through at least 2000. We will need to generate significant revenue to
achieve and maintain profitability. We may not achieve, sustain or increase
profitability in the future. We anticipate that our expenses will increase
substantially in the foreseeable future as we:
- attempt to expand the market for touch-enabled products;
- increase our sales efforts;
- continue to develop our technologies;
- pursue strategic relationships; and
- protect and enforce our intellectual property.
If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, we may not achieve or maintain profitability.
OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT OUR PRIMARY BUSINESS
STRATEGY FOR ACHIEVING REVENUE GROWTH THROUGH ROYALTY PAYMENTS FROM SALES BY OUR
LICENSEES OF COMPUTER PERIPHERAL PRODUCTS INCORPORATING OUR TOUCH-ENABLING
TECHNOLOGIES, A STRATEGY FROM WHICH HISTORICALLY WE HAVE DERIVED LESS THAN
ONE-THIRD OF OUR REVENUES.
We cannot predict our future revenues based on our historical financial
information. Historically, we derived the majority of our revenues from product
sales, including sales of devices used to create three dimensional computer
images of small objects, medical simulation products and a specialized non-touch
enabled computer mouse used for map making. Historically, we have also derived
revenues from contracts with our licensees to assist in the development of our
licensees' touch-enabled products and from development contracts with government
agencies for touch-enabling technology. The majority of our historical product
sales resulted from sales of products that did not
16
utilize our touch-enabling technology but utilized related advanced computer
peripheral technologies. Accordingly, our historical results should not be
relied upon as an indicator of our future performance.
We currently concentrate our marketing, research and development activities
on licensing our touch-enabling technology in the computer entertainment and
general purpose personal computer markets. For 1998, we derived only 6% of our
total revenues from royalty revenue, for 1999, we derived 28% of our total
revenues from royalty revenue, and for the three months ended March 31, 2000 we
derived 36% of our total revenues from royalty revenue. We anticipate that
royalty revenue from licensing our technologies will constitute an increasing
portion of our revenues; however on a period-to-period basis royalty revenue as
a percentage of total revenue may vary significantly due to factors such as the
timing of new product introductions and the seasonality of royalty revenue.
OUR BUSINESS STRATEGY FOR ACHIEVING REVENUE GROWTH RELIES SIGNIFICANTLY ON
ROYALTY PAYMENTS FROM SALES BY LOGITECH OF ITS TOUCH-ENABLED MICE PRODUCTS, THE
FIRST VERSION OF WHICH LOGITECH BEGAN SELLING IN THE FOURTH QUARTER OF 1999.
If Logitech's touch-enabled mice products do not achieve commercial
acceptance or if production or other difficulties that sometimes occur when a
new product is introduced interfere with sales of the Logitech mice products,
our ability to achieve revenue growth could be significantly impaired. In the
technology product development agreement that we entered into with Logitech in
1998, Logitech estimated that, based upon an assumed production of 100,000 units
per year, its target price for its first touch-enabled mouse would be $99.
Logitech, however, has made no commitments to us regarding the production volume
or pricing of its touch-enabled mice. The fact that the actual initial suggested
retail price of Logitech's mouse is $99.95 does not reflect any volume or
pricing commitments made to us by Logitech. To date, sales of the current
touch-enabled mouse product, the Wingman Force Feedback Mouse, has not reached
volume levels. We believe that the facts that the current product is being
marketed, in part, as a gaming product, and that it was introduced late in the
1999 Christmas buying season contributed to a slow ramp-up of initial sales.
Desired sales volumes of touch-enabled mice may not be achieved until the first
general purpose productivity version of the mouse has been introduced. We also
expect that sales volume of touch-enabled mice will be affected by the quantity
and quality of touch-enabled software titles available to consumers. Although we
promote the incorporation of our touch-enabling technologies into software
applications and Web sites, we have limited control over when and if third party
software and Web developers adopt touch-enabling technologies. In addition,
retailers may not recognize touch-enabled mouse products as a separate product
category until there are additional manufacturers of touch-enabled mouse
products and this may be a barrier to sales volume.
In March 2000, we and Logitech amended our existing license agreement and
technology product development agreement, each relating to Immersion's
touch-enabled cursor control technology, to cover a new technology developed by
us for a lower-cost, touch-enabled mouse to be targeted for use with
productivity and web applications. Under the amendment, we and Logitech have
agreed to promote the existing mouse technology together with the new lower-cost
mouse technology as a product family. The amendment also requires Logitech to
pay us a royalty of 5% of the revenue it receives from products based upon this
new tactile mouse technology.
WE DO NOT CONTROL OR INFLUENCE OUR LICENSEES' MANUFACTURING, PROMOTION,
DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING OUR TOUCH-ENABLING
TECHNOLOGIES, UPON WHICH WE ARE DEPENDENT TO GENERATE ROYALTY REVENUE.
Our primary business strategy is to license our intellectual property to
companies that manufacture and sell products incorporating our touch-enabling
technologies. The sale of those products generates royalty revenue for us. For
the year ended December 31, 1999, 28% of our total revenues was royalty revenue,
and for the three-month period ended March 31, 2000, 36% of our total revenues
was royalty revenue. However, we do not control or influence the manufacture,
promotion, distribution or pricing of products that are manufactured and sold by
our licensees and that incorporate our touch-enabling technologies. As a result,
products incorporating our technologies may not be brought to market, achieve
commercial acceptance or generate meaningful royalty revenue for us. For us to
generate royalty revenue, those licensees that pay us per-unit royalties must
manufacture and distribute products incorporating our touch-enabling
technologies in a timely fashion and generate consumer demand through marketing
and other promotional activities. Products incorporating our touch-enabling
technologies are generally more difficult to design and manufacture than
products that do not incorporate our touch-enabling technologies, and these
difficulties may cause product introduction delays. If our licensees fail to
stimulate and capitalize upon market demand for products that generate royalties
for us, our revenues will not grow. Peak demand for products that incorporate
our technologies, especially in the computer gaming peripherals market,
typically occurs in the third and fourth calendar quarters as a result of
increased demand during the year-end holiday season. If our licensees do not
ship licensed products in a timely fashion or fail to achieve strong sales in
the second half of the calendar year, we would not receive related royalty
revenue.
17
BECAUSE LOGITECH IS OUR ONLY LICENSEE CURRENTLY MANUFACTURING TOUCH-ENABLED
MICE, OUR ROYALTY REVENUE FROM TOUCH-ENABLED MICE WILL BE SIGNIFICANTLY REDUCED
IF LOGITECH DOES NOT EFFECTIVELY MANUFACTURE AND MARKET TOUCH-ENABLED MICE
PRODUCTS.
Logitech is currently the only licensee manufacturing touch-enabled mice.
If Logitech does not effectively manufacture, market and distribute its
touch-enabled mouse product, our royalty revenue from touch-enabled mice would
be significantly reduced. In addition, a lack of market acceptance of the
Logitech touch-enabled mouse might dissuade other potential licensees from
licensing our technologies for touch-enabled mice and other products.
IF WE FAIL TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY
TO LICENSE OUR TECHNOLOGIES AND TO GENERATE REVENUES WOULD BE IMPAIRED.
Our business depends on generating revenues by licensing our intellectual
property rights and by selling products that incorporate our technologies. If we
are not able to protect and enforce those rights, our ability to obtain future
licenses and royalty revenue could be impaired. In addition, if a court were to
limit the scope of, declare unenforceable or invalidate any of our patents,
current licensees may refuse to make royalty payments or may themselves choose
to challenge one or more of our patents. Also it is possible that:
- our pending patent applications may not result in the issuance of
patents;
- our patents may not be broad enough to protect our proprietary rights;
- effective patent protection may not be available in every country in
which our licensees do business.
We also rely on licenses, confidentiality agreements and copyright,
trademark and trade secret laws to establish and protect our proprietary rights.
It is possible that:
- laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technologies or deter others from developing
similar technologies; and
- policing unauthorized use of our products and trademarks would be
difficult, expensive and time-consuming, particularly overseas.
IF WE ARE UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH OUR EXISTING
LICENSEES AND WITH ADDITIONAL THIRD-PARTY MANUFACTURERS FOR OUR TOUCH-ENABLING
TECHNOLOGY, OUR ROYALTY REVENUE MAY NOT GROW.
Our revenue growth depends on our ability to enter into new licensing
arrangements. Our failure to enter into new licensing arrangements will cause
our operating results to suffer. We face numerous risks in obtaining new
licenses on terms consistent with our business objectives and in maintaining,
expanding and supporting our relationships with our current licensees. These
risks include:
- the lengthy and expensive process of building a relationship with
potential licensees;
- the fact that we may compete with the internal design teams of existing
and potential licensees;
- difficulties in persuading consumer product manufacturers to work with
us, to rely on us for critical technology and to disclose to us
proprietary product development and other strategies; and
- difficulties in persuading existing and potential licensees to bear the
development costs necessary to incorporate our technologies into their
products.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE, AND IF OUR FUTURE
RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE
PRICE OF OUR COMMON STOCK IS LIKELY TO DECLINE.
Our revenues and operating results are likely to vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control and any of which could cause the price of our common stock to decline.
These factors include:
- the establishment or loss of licensing relationships;
- the timing of payments under fixed and/or up-front license agreements;
- the timing of our expenses, including costs related to acquisitions of
technologies or businesses;
18
- the timing of introductions of new products and product enhancements by
our licensees and their competitors;
- our ability to develop and improve our technologies;
- our ability to attract, integrate and retain qualified personnel; and
- seasonality in the demand for our licensees' products.
Accordingly, we believe that period-to-period comparisons of our operating
results should not be relied upon as an indicator of our future performance. In
addition, because a high percentage of our operating expenses is fixed, a
shortfall of revenues can cause significant variations in operating results from
period to period.
THE HIGHER COST OF GAMING AND CURSOR CONTROL PERIPHERAL PRODUCTS INCORPORATING
OUR TOUCH-ENABLING TECHNOLOGIES AS COMPARED TO NON TOUCH-ENABLED GAMING AND
CURSOR CONTROL PERIPHERALS MAY INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND
SALE OF PRODUCTS INCORPORATING OUR TECHNOLOGIES.
Joysticks, steering wheels, gamepads and computer mice incorporating our
touch-enabling technologies are more expensive than similar competitive products
that are not touch-enabled. Although major providers of computer peripheral
devices, such as Logitech and Microsoft, have licensed our technology, the
greater expense of products containing our touch-enabling technologies as
compared to non touch-enabled products may be a significant barrier to the
widespread adoption and sale of their touch-enabled products in consumer
markets.
IF OUR TECHNOLOGIES ARE UNABLE TO GAIN MARKET ACCEPTANCE OTHER THAN IN
TOUCH-ENABLED JOYSTICKS AND STEERING WHEELS, OUR REVENUE GROWTH WILL BE LIMITED.
Substantially all of our royalty revenue is derived from the licensing of
our portfolio of touch-enabling technology for personal computer gaming
peripherals such as joysticks and steering wheels. The market for joysticks and
steering wheels for use with personal computers is a substantially smaller
market than either the mouse market or the dedicated gaming console market and
is characterized by declining average selling prices. If we are unable to gain
market acceptance beyond the personal computer gaming peripherals market, we may
not achieve revenue growth.
COMPETITION IN COMPUTER PERIPHERAL PRODUCTS IN BOTH THE GENERAL PURPOSE
COMPUTING AND COMPUTER GAMING MARKETS COULD LEAD TO REDUCTIONS IN THE SELLING
PRICE OF PERIPHERAL PRODUCTS OF OUR LICENSEES, WHICH WOULD REDUCE OUR ROYALTY
REVENUE.
The general purpose computing and computer gaming markets in which our
licensees sell peripheral products are highly competitive and are characterized
by rapid technological change, short product life cycles, cyclical market
patterns, a trend of declining average selling prices and increasing foreign and
domestic competition. We believe that competition among computer peripheral
manufacturers will continue to be intense, and that competitive pressures will
drive the price of our licensees' products downward. Any reduction in our
royalties per unit that is not offset by corresponding increases in unit sales
will cause our revenues to decline.
BECAUSE WE HAVE A FIXED PAYMENT LICENSE WITH MICROSOFT, OUR ROYALTY REVENUE FROM
LICENSING JOYSTICKS AND STEERING WHEELS IN THE GAMING MARKET MIGHT DECLINE IF
MICROSOFT INCREASES ITS VOLUME OF SALES OF TOUCH-ENABLED JOYSTICKS AND STEERING
WHEELS AT THE EXPENSE OF OUR OTHER LICENSEES.
Under the terms of our present agreement with Microsoft, Microsoft receives
a perpetual, worldwide, irrevocable, non-exclusive license under our patents for
its SideWinder Force Feedback Pro Joystick and its SideWinder Force Feedback
Wheel, and for a future replacement version of these specific SideWinder
products having essentially similar functional features. Instead of an ongoing
royalty on Microsoft's sales of licensed products, the agreement provides for a
payment of $2.35 million, which we recognize in equal monthly increments over a
one-year period ending mid-July 2000. The payment of $2.35 million is fixed
regardless of Microsoft's sales volume of these two licensed products. We
derived 13% of our total revenues and 48% of our royalty revenue for the twelve
months ended December 31, 1999 from Microsoft. In addition, we derived 24% of
our total revenues and 66% of our royalty revenues for the three months ended
March 31, 2000 from Microsoft. At the present time, we do not have a license
agreement with Microsoft for products other than the SideWinder joystick and
steering wheel. Microsoft has a significant share of the market for
touch-enabled joysticks and steering wheels for personal computers. Microsoft
has significantly greater financial, sales and marketing resources, as well as
greater name recognition and a larger customer base, than our other licensees.
In the event that Microsoft increases its share of this market, our royalty
revenue from other licensees in this market segment might decline.
LOGITECH ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE AND THE FAILURE OF
LOGITECH TO ACHIEVE SALES VOLUMES FOR ITS GAMING AND CURSOR CONTROL PERIPHERAL
PRODUCTS THAT INCORPORATE OUR TOUCH-ENABLING TECHNOLOGIES MAY REDUCE OUR ROYALTY
REVENUE.
19
We derived 13% of our total revenues and 32% of our royalty revenue for the
twelve months ended December 31, 1999 from Logitech. For the three-month period
ended March 31, 2000 we derived 12% of our total revenues and 30% of our royalty
revenue from Logitech. We expect that a significant portion of our total
revenues will continue to be derived from Logitech. If Logitech fails to achieve
anticipated sales volumes for its computer peripheral products that incorporate
our technologies, our royalty revenue would be reduced.
BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE OUR
TOUCH-ENABLING TECHNOLOGIES CURRENTLY MUST WORK WITH MICROSOFT'S OPERATING
SYSTEM SOFTWARE, OUR COSTS COULD INCREASE AND OUR REVENUES COULD DECLINE IF
MICROSOFT MODIFIES ITS OPERATING SYSTEM SOFTWARE.
Our hardware and software technology for personal computer peripheral
products that incorporate our touch-enabling technologies is currently
compatible with Microsoft's Windows 98 operating system software, including
DirectX, Microsoft's entertainment applications programming interface. If
Microsoft modifies its operating system, including DirectX, we may need to
modify our technologies and this could cause delays in the release of products
by our licensees. If Microsoft modifies its software products in ways that limit
the use of our other licensees' products, our costs could be increased and our
revenues could decline.
LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS COULD BE EXPENSIVE,
DISRUPTIVE, AND TIME CONSUMING, AND COULD ADVERSELY AFFECT OUR BUSINESS.
Any intellectual property litigation, whether brought by us or by others,
could result in the expenditure of significant financial resources and the
diversion of management's time and efforts. From time to time, we initiate
claims against third parties that we believe infringe our intellectual property
rights. To date, these claims have not led to any litigation. However, any
litigation to protect and enforce our intellectual property rights could be
costly, time-consuming and distracting to management and could result in the
impairment or loss of portions of our intellectual property. In addition,
litigation in which we are accused of infringement may cause product shipment
delays, require us to develop non-infringing technology or require us to enter
into royalty or license agreements even before the issue of infringement has
been decided on the merits.
If any litigation were not resolved in our favor, we could become subject
to substantial damage claims from third parties and indemnification claims from
our licensees. We and our licensees could be enjoined from the continued use of
the technology at issue without a royalty or license agreement. Royalty or
license agreements, if required, might not be available on acceptable terms, or
at all. If a third party claiming infringement against us prevailed and we could
not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our expenses would increase and
our revenues could decrease.
We attempt to avoid infringing known proprietary rights of third parties.
We have not, however, conducted and do not conduct comprehensive patent searches
to determine whether aspects of our technology infringe patents held by third
parties. Third parties may hold, or may in the future be issued, patents that
could be infringed by our products or technologies. Any of these third parties
might make a claim of infringement against us with respect to the products that
we manufacture and the technologies that we license. From time to time, we have
received letters from companies, several of which have significantly greater
financial resources than we do, asserting that some of our technologies, or
those of our licensees, infringe their intellectual property rights. Certain of
our licenses have received similar letters from the same four companies. Such
letters may influence our licensees' decisions whether to ship products
incorporating our technologies. Although none of these matters has resulted in
litigation to date, any of these notices, or additional notices that we could
receive in the future from these or other companies, could lead to litigation
WE DEPEND ON KAWASAKI LSI TO PRODUCE OUR IMMERSION PROCESSORS AND MAY LOSE
CUSTOMERS IF KAWASAKI LSI DOES NOT MEET OUR REQUIREMENTS.
Kawasaki LSI is the sole supplier of our custom Immersion Processors, which
we develop, license and sell to improve the performance and to help reduce the
cost of computer peripheral products, such as joysticks and mice, incorporating
our touch-enabling technology. Because Kawasaki LSI manufactures and tests our
processors, we have limited control over delivery schedules, quality assurance,
manufacturing capacity, yields, costs and misappropriation of our intellectual
property. Although Kawasaki LSI warrants that microprocessors it supplies to us
or to our customers will conform to our specifications and be free from defects
in materials and workmanship for a period of one year from delivery, any delays
in delivery of the processor, quality problems or cost increases could cause us
to lose customers and could damage our relationships with our licensees.
IF WE ARE UNABLE TO CONTINUALLY IMPROVE, AND REDUCE THE COST OF, OUR
TECHNOLOGIES, COMPANIES MAY NOT INCORPORATE OUR TECHNOLOGIES INTO THEIR
PRODUCTS, WHICH COULD IMPAIR OUR REVENUE GROWTH.
Our ability to achieve revenue growth depends on our continuing ability to
improve, and reduce the cost of, our technologies and to introduce these
technologies to the marketplace in a timely manner. If our development
20
efforts are not successful or are significantly delayed, companies may not
incorporate our technologies into their products and our revenue growth may be
impaired.
THREE KEY MEMBERS OF OUR MANAGEMENT TEAM HAVE RECENTLY JOINED US AND THEY MAY
NOT BE EFFECTIVELY INTEGRATED INTO OUR COMPANY, WHICH COULD IMPEDE THE EXECUTION
OF OUR BUSINESS STRATEGY.
Our Vice President of Finance, Vice President of Marketing and Vice
President of Business Development each joined us in July or August 1999.
Accordingly, each of these individuals has limited experience with our business.
Our success will depend to a significant extent on the ability of our new
officers to integrate themselves into our daily operations, to gain the trust
and confidence of other employees and to work effectively as a team. If any of
them fails to do so, our ability to execute our business strategy would be
impeded.
COMPETITION FROM UNLICENSED PRODUCTS COULD LEAD TO REDUCED PRICES AND SALES
VOLUMES OF OUR LICENSEES' PRODUCTS, WHICH COULD LIMIT OUR REVENUES OR CAUSE OUR
REVENUES TO DECLINE.
Our licensees or other third parties may seek to develop products which
they believe do not require a license under our intellectual property. These
potential competitors may have significantly greater financial, technical and
marketing resources than we do, and the costs associated with asserting our
intellectual property against such products and such potential competitors could
be significant. Moreover, if such alternative designs were determined by a court
not to require a license under our intellectual property, competition from such
unlicensed products could limit or reduce our revenues.
COMPETITION TO OUR IMMERSION PROCESSORS MAY LEAD TO REDUCED PRICES AND SALES
VOLUMES OF OUR MICROPROCESSORS.
To date, the market for our Immersion Processors has been small. If the
market grows, we expect more companies to compete in this market. Increased
competition could result in significant price erosion, reduced revenues or loss
of market share, any of which would have an adverse effect on our business and
operating results. Currently, semiconductor companies, including Mitsubishi and
STMicroelectronics, manufacture products that compete with our microprocessors.
Although the products of these semiconductor companies have not been optimized
for the specific requirements of touch-enabling technology, in the future,
Mitsubishi, STMicroelectronics or other companies may elect to enter the market
for optimized touch-enabling microprocessors. These companies may have greater
financial, technical, manufacturing, distribution and other resources, greater
name recognition and market presence, longer operating histories, lower cost
structures and larger customer bases than we do. Accordingly, we may not be able
to compete successfully against either current or future competitors.
WE MIGHT BE UNABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD SLOW
THE DEVELOPMENT AND DEPLOYMENT OF OUR TECHNOLOGIES.
Our ability to develop and deploy our technologies and to sustain our
revenue growth depends upon the continued service of our executive officers and
other key personnel and upon hiring additional key personnel. We intend to hire
additional sales, support, marketing and research and development personnel in
2000. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. In addition, our technologies are complex and we rely upon the continued
service of our existing engineering personnel to support licensees, enhance
existing technology and develop new technologies.
WE HAVE EXPERIENCED RAPID GROWTH AND CHANGE IN OUR BUSINESS, AND OUR FAILURE TO
MANAGE THIS AND ANY FUTURE GROWTH COULD HARM OUR BUSINESS.
We are increasing the number of our employees rapidly. Our business may be
harmed if we do not integrate and train our new employees quickly and
effectively. We also cannot be sure that our revenues will continue to grow at a
rate sufficient to support the costs associated with an increasing number of
employees.
Any future periods of rapid growth may place significant strains on our
managerial, financial, engineering and other resources. The rate of any future
expansion, in combination with our complex technologies, may demand an unusually
high level of managerial effectiveness in anticipating, planning, coordinating
and meeting our operational needs as well as the needs of our licensees.
PRODUCT LIABILITY CLAIMS, INCLUDING CLAIMS RELATING TO ALLEGED REPETITIVE STRESS
INJURIES, COULD BE TIME-CONSUMING AND COSTLY TO DEFEND, AND COULD EXPOSE US TO
LOSS.
Claims that consumer products have flaws or other defects that lead to
personal or other injury are common in the computer peripherals industry. If
products that we or our licensees sell cause personal injury, financial loss or
other injury to our or our licensees' customers, the customers or our licensees
may seek damages or other recovery from us. Any claims against us would be
time-consuming, expensive to defend and distracting to management and could
result in damages and injure our reputation or the reputation of our licensees
or their products. This damage could limit the market for our licensees'
touch-enabled products and harm our results of operations.
21
In the past, manufacturers of peripheral products, such as computer mice,
have been subject to claims alleging that use of their products has caused or
contributed to various types of repetitive stress injuries, including carpal
tunnel syndrome. We have not experienced any product liability claims to date.
Although our license agreements typically contain provisions designed to
limit our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could limit or invalidate the provisions.
IF WE FAIL TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW COMPUTER APPLICATIONS
AND PLATFORMS, WE MAY NOT BE ABLE TO CREATE A MARKET FOR OUR TECHNOLOGIES AND
OUR ABILITY TO GROW AND OUR RESULTS OF OPERATIONS MIGHT BE HARMED.
Our initiatives to develop new and enhanced technologies and to license
technologies for new applications and new platforms may not be successful. Any
new or enhanced technologies may not be favorably received by consumers and
could damage our reputation or our brand. Expanding our technology could also
require significant additional expenses and strain our management, financial and
operational resources. The lack of market acceptance of these efforts or our
inability to generate additional revenues sufficient to offset the associated
costs could harm our results of operations.
WE HAVE IN THE PAST, AND MAY IN THE FUTURE, ENGAGE IN ACQUISITIONS THAT DILUTE
STOCKHOLDER VALUE, DIVERT MANAGEMENT ATTENTION OR CAUSE INTEGRATION PROBLEMS.
As part of our business strategy, we have in the past acquired, and may
in the future, acquire businesses or intellectual property that we feel could
complement our business, enhance our technical capabilities or increase our
intellectual property portfolio. If we consummate acquisitions through an
exchange of our securities, our stockholders could suffer significant dilution.
Acquisitions could create risks for us, including:
- unanticipated costs associated with the acquisitions;
- use of substantial portions of our available cash to consummate the
acquisitions;
- diversion of management's attention from other business concerns;
- difficulties in assimilation of acquired personnel or operations; and
- intellectual property infringement claims and claims related to the
ownership of acquired intellectual property.
Any acquisitions, even if successfully completed, might not generate any
additional revenue or provide any benefit to our business.
YEAR 2000 COMPLIANCE COSTS AND RISKS ARE DIFFICULT TO ASSESS AND COULD RESULT IN
DELAY OR LOSS OF REVENUES, DAMAGE TO OUR REPUTATION AND DIVERSION OF DEVELOPMENT
RESOURCES.
Many computer programs and embedded date-reliant systems use two digits
rather than four to define the applicable year. Programs and systems that record
only the last two digits of the calendar year may not be able to distinguish
whether "00" means 1900 or 2000. If not corrected, date-related information and
data could cause these programs or systems to fail or to generate erroneous
information.
To the extent that any third-party product with which our technology is
associated is not Year 2000 compliant, our reputation may be harmed. Our revenue
and operating results could become subject to unexpected fluctuations if our
licensees encounter Year 2000 compliance problems that affect their ability to
distribute licensed products. In addition, a delay or failure by our critical
suppliers to be Year 2000 compliant could interrupt our business. To date, our
business has not been affected by Year 2000 compliance problems.
OUR STOCK MAY BE VOLATILE.
The stock market has experienced extreme volatility that often has been
unrelated or disproportionate to the performance of particular companies. These
market fluctuations may cause our stock price to decline regardless of our
performance.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS RETAIN SIGNIFICANT
CONTROL OVER US, WHICH MAY LEAD TO CONFLICTS WITH OTHER STOCKHOLDERS OVER
CORPORATE GOVERNANCE MATTERS.
Our current directors, officers and more than 5% stockholders, as a group,
beneficially own more than 40% of our outstanding common stock. Acting together,
these stockholders would be able to exercise significant control on matters that
our stockholders vote upon, including the election of directors and mergers or
other business
22
combinations, which could have the effect of delaying or preventing a third
party from acquiring control over or merging with us.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. In addition, certain provisions of Delaware law may discourage,
delay or prevent someone from acquiring or merging with us. These provisions
could limit the price that investors might be willing to pay in the future for
shares of our common stock.
A LARGE NUMBER OF SHARES RECENTLY BECAME AVAILABLE IN THE MARKET, WHICH MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of May 10, 2000, upon the expiration of lock-up agreements entered into
in connection with our initial public offering, approximately 11 million shares
of our common stock became available for sale in the public market, in addition
to the approximately 5 million shares registered in our initial public offering.
Sales of substantial numbers of shares of our common stock in the public market,
or the perception that sales may be made, could cause the market price of our
common stock to decline. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional equity securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has limited exposure to financial market risks, including
changes in interest rates. The fair value of the Company's portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the major
portion of our investment portfolio. An increase or decrease in interest rates
would not significantly increase or decrease interest expense on debt
obligations due to the fixed nature of the Company's debt obligations. The
Company's foreign operations are limited in scope and thus the Company is not
materially exposed to foreign currency fluctuations.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Industrial Lease between WW&LJ Gateways, Ltd. and Immersion Corporation
dated January 11, 2000.
10.2 Amendment #1 to the April 13, 1998 Intellectual Property License
Agreement and Technology Product Development Agreement with Logitech,
Inc. dated March 21, 2000.
21.1 Subsidiaries of Immersion.
27.1 Financial Data Schedule for the period ended March 31, 2000.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on March 24, 2000 reporting
the completion of the Company's acquisition of Haptic Technologies Inc. on March
9, 2000.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this Report to be signed on behalf by the undersigned
thereunto duly authorized.
IMMERSION CORPORATION
Registrant
Date: May 12, 2000 /s/ LOUIS ROSENBERG
--------------------------------------------------
Louis Rosenberg
Chairman, President and Chief Executive Officer
Date: May 12, 2000 /s/ VICTOR VIEGAS
---------------------------------------------------
Victor Viegas
Vice President, Finance and Chief Financial Officer
24
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
10.1 Industrial Lease between WW&LJ Gateways, Ltd. and Immersion Corporation
dated January 11, 2000.
10.2 Amendment #1 to the April 13, 1998 Intellectual Property License
Agreement and Technology Product Development Agreement with Logitech,
Inc. dated March 21, 2000.
21.1 Subsidiaries of Immersion.
27.1 Financial Data Schedule for the period ended March 31, 2000.