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 September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 000-27969
IMMERSION CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 94-3180138
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. employee Identification No.)
801 Fox Lane, San Jose, California 95131
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (408) 467-1900
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ]
Number of shares of Common Stock outstanding at November 8, 2000: 18,359,274
2
IMMERSION CORPORATION
INDEX
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2000
and December 31, 1999...........................................................................3
Condensed Consolidated Statements of Operations (Unaudited) for the three
months and nine months Ended September 30, 2000 and 1999........................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine
months Ended September 30, 2000 and September 30, 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..........15
Item 3. Quantitative and Qualitative Disclosures About Market Risks....................................32
PART II
OTHER INFORMATION
Item 5. Other Information...............................................................................33
Item 6. Exhibits and Reports on Form 8-K................................................................33
SIGNATURES.......................................................................................................34
3
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IMMERSION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30, December 31,
ASSETS 2000 1999
------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents .................................................... $ 24,899 $ 46,606
Short-term investments ....................................................... 8,002 4,781
Accounts receivable, net of allowances of $147 and $173 respectively ......... 2,457 1,362
Inventories .................................................................. 1,475 949
Prepaid expenses and other current assets .................................... 1,320 1,160
-------- --------
Total current assets ................................................ 38,153 54,858
Property and equipment, net .................................................... 3,627 1,316
Purchased intangibles and other assets, net .................................... 15,328 4,813
Other investments .............................................................. 6,500 --
-------- --------
Total assets ................................................................... $ 63,608 $ 60,987
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 2,436 $ 1,372
Accrued compensation ......................................................... 594 478
Other accrued liabilities and income taxes payable ........................... 2,400 505
Deferred revenue and customer advances ........................................ 911 1,736
Current portion of long-term debt ............................................. 115 110
-------- --------
Total current liabilities ........................................... 6,456 4,201
-------- --------
Long-term debt ................................................................. 3,928 3,682
Other long-term liabilities .................................................... -- 39
-------- --------
Total liabilities .................................................. 10,384 7,922
-------- --------
Stockholders' equity:
Common stock - $0.001 par value; 100,000,000 shares authorized; shares
issued and outstanding: 18,328,930 and 17,047,023 respectively ............. 89,421 71,173
Warrants ..................................................................... 1,969 1,958
Deferred stock compensation .................................................. (5,883) (2,166)
Accumulated other comprehensive income (loss) ................................ (4) 19
Note receivable from stockholder ............................................. (17) (17)
Accumulated deficit .......................................................... (32,262) (17,902)
-------- --------
Total stockholders' equity .......................................... 53,224 53,065
-------- --------
Total liabilities and stockholders' equity ..................................... $ 63,608 $ 60,987
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
-------- ------- -------- --------
Revenues:
Royalty revenue .................................................... $ 308 $ 649 $ 2,158 $ 1,265
Product sales ...................................................... 2,153 1,547 5,179 4,479
Development contracts and other .................................... 1,343 515 2,715 2,222
-------- ------- -------- --------
Total revenues ............................................ 3,804 2,711 10,052 7,966
-------- ------- -------- --------
Costs and expenses:
Cost of product sales .............................................. 1,165 682 2,822 2,128
Sales and marketing ................................................ 2,914 988 7,713 2,239
Research and development ........................................... 1,876 1,388 4,974 3,943
General and administrative ......................................... 2,408 1,973 5,852 4,023
Amortization of intangibles and deferred stock compensation * ...... 1,590 444 3,460 876
Acquisition related charges ........................................ 2,583 -- 3,469 1,190
-------- ------- -------- --------
Total costs and expenses ................................... 12,536 5,475 28,290 14,399
-------- ------- -------- --------
Operating loss ....................................................... (8,732) (2,764) (18,238) (6,433)
Interest and other income ............................................ 584 26 2,040 92
Interest expense ..................................................... (201) (168) (589) (807)
-------- ------- -------- --------
Net loss ............................................................. (8,349) (2,906) (16,787) (7,148)
Redeemable convertible preferred stock accretion ..................... -- 2 -- 5
-------- ------- -------- --------
Net loss applicable to common stockholders ........................... $ (8,349) $(2,908) $(16,787) $ (7,153)
======== ======= ======== ========
Basic and diluted net loss per share ................................. $ (0.46) $ (0.41) $ (0.96) $ (1.10)
======== ======= ======== ========
Shares used in calculating basic and diluted net loss per share ...... 17,955 7,085 17,509 6,478
======== ======= ======== ========
* Amortization of intangibles and deferred stock compensation
Amortization of intangibles ..................................... $ 778 $ 286 $ 1,834 $ 684
Deferred stock compensation - sales and marketing ............... 80 22 143 41
Deferred stock compensation - research and development .......... 517 58 1,048 21
Deferred stock compensation - general and administrative ........ 215 78 435 130
-------- ------- -------- --------
Total ...................................................... $ 1,590 $ 444 $ 3,460 $ 876
======== ======= ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2000 1999
----------- -------------
Cash flows from operating activities:
Net loss ....................................................................... $(16,787) $(7,148)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................ 449 232
Amortization of intangibles .................................................. 1,834 684
Amortization of deferred stock compensation .................................. 1,552 192
Amortization of discounts on notes payable ................................... 131 223
In-process research and development .......................................... 2,045 1,190
Loss on sale of equipment .................................................... 15 --
Stock and options issued for consulting services and other ................... 593 729
Non-cash interest expense .................................................... -- 413
Changes in assets and liabilities:
Accounts receivable ........................................................ (999) 533
Inventories ................................................................ (290) (185)
Prepaid expenses and other assets .......................................... (654) 29
Accounts payable ........................................................... 520 402
Accrued liabilities and income taxes payable ............................... 1,696 418
Deferred revenue and customer advances ..................................... (826) 1,931
-------- -------
Net cash used in operating activities ................................. (10,721) (357)
-------- -------
Cash flows from investing activities:
Purchases of short-term investments ............................................ (21,780) --
Sales and maturities of short-term investments ................................. 18,536 451
Purchase of property ........................................................... (2,571) (833)
Proceeds from sale of equipment ................................................ 10 --
Purchases of patents and technology ............................................ -- (150)
Acquisitions, net of cash acquired ............................................. (1,818) --
Other assets and investments ................................................... (6,500) (947)
-------- -------
Net cash used in investing activities ................................. (14,123) (1,479)
-------- -------
Cash flows from financing activities:
Net proceeds from issuance of stock ............................................ 266 740
Exercise of stock options ...................................................... 418 194
Exercise of warrants ........................................................... 73 1
Conversion of investment agreement ............................................. -- (862)
Payments on notes payable ...................................................... (47) (145)
Proceeds from notes payable and capital leases ................................. -- 3,113
-------- -------
Net cash provided by financing activities ............................. 710 3,041
-------- -------
Net increase (decrease) in cash and cash equivalents ............................. (24,134) 1,205
Adjustment for change in HT's fiscal year-end .................................. 2,427 --
-------- -------
Cash and cash equivalents:
Beginning of the period ........................................................ 46,606 2,595
-------- -------
End of the period .............................................................. $ 24,899 $ 3,800
======== =======
Supplemental disclosure of cash flow information :
Cash paid for taxes ............................................................ $ 2 $ 1
======== =======
Cash paid for interest ......................................................... $ 59 $ 60
======== =======
Noncash activities:
Assets purchased under capital leases .......................................... $ -- $ 45
======== =======
Conversion of investment agreement to equity ................................... $ -- $ 862
======== =======
Change in net unrealized gains (losses) from short-term investments ............ $ (23) $ 1
======== =======
Issuance of equity instruments for patents, technology and licenses ............ $ -- $ 5,221
======== =======
Issuance of equity instruments for acquisition ................................. $ 11,580 $ --
======== =======
Assumption of stock options for acquisition .................................... $ 58 $ --
======== =======
Issuance of warrants ........................................................... $ -- $ 808
======== =======
Accretion of redeemable preferred stock ........................................ $ -- $ 5
======== =======
See accompanying Notes to Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed
consolidated financial statements reflect all the normal recurring adjustments
which are, in the opinion of management, necessary to present fairly the
condensed consolidated financial position, statements of operations and cash
flows for the interim periods presented.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all information and footnotes necessary for a complete
presentation of the financial position, results of operations, and cash flows,
in conformity with generally accepted accounting principles. These unaudited
condensed consolidated financial statements should be read in conjunction with
our audited consolidated financial statements included in the Company's 1999
Annual Report on Form 10-K and the audited financial statements of HT Medical
Systems Inc. ("HT") for the year ended May 31, 2000 included in our Form S-4
filed in September 2000.
In September 2000, the Company acquired all outstanding shares of HT
common and preferred stock (see Note 2). The merger was accounted for as a
pooling of interests. Accordingly, the consolidated financial statements have
been restated for all periods presented as if HT and the Company had always been
combined. Prior to the merger, HT had operated on a fiscal year ended May 31. In
recording the pooling of interests combination, the Company's consolidated
statements of operations for the three and nine months ended September 30, 2000
have been combined with HT's statements of operations for the same periods. The
Company's consolidated statements of operations for the three and nine months
ended September 30, 1999, have been combined with HT's statements of operations
for the three and nine months ended February 29, 2000. The consolidated balance
sheets of the Company as of September 30, 2000 and December 31, 1999, have been
combined with the balance sheets of HT as of September 30, 2000 and May 31, 2000
respectively.
The results of operations for the interim period ended September 30,
2000 are not necessarily indicative of the results to be expected for the full
year.
Reclassifications - Certain prior period amounts have been
reclassified to conform to the current period presentation. These
reclassifications had no effect on net loss or stockholders' equity.
2. BUSINESS COMBINATIONS
PURCHASE TRANSACTIONS
In March 2000, the Company acquired all outstanding shares of
Montreal-based Immersion Canada Inc. ("Immersion Canada") formally named Haptic
Technologies Inc. for approximately $6.8 million, consisting of 141,538 shares
of the Company's common stock and $338,000 paid in cash. Immersion Canada
develops and markets hardware and software that brings the sense of touch to
computing environments. As a result of the acquisition, Immersion Canada 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. Immersion Canada operates on a fiscal
year ending on August 31. Accordingly, the Company will consolidate the results
of Immersion Canada based on Immersion Canada'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 Immersion Canada resulting in deferred stock compensation of $5.5
million, which will be amortized over the remaining vesting period of
approximately four years. The Immersion Canada 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 September 30,
2000 there were 391,238 such options outstanding.
7
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
------
$6,753
======
The goodwill, core technology and pending patents are being amortized
over their estimated useful lives of 4 years. The developed technology and
workforce are being amortized over their estimated useful lives of 3 and 2
years, respectively. The allocation of the purchase price to the respective
intangibles was based on management's estimates of the after-tax cash flows and
gave explicit consideration to the Securities and Exchange Commission's views on
purchased in-process research and development as set forth in its September 9,
1998 letter to the American Institute of Certified Public Accountants.
Specifically, the valuation gave consideration to the following: (i) the
employment of a fair market value premise excluding any Company-specific
considerations that could result in estimates of investment value for the
subject assets; (ii) comprehensive due diligence concerning all potential
intangible assets; (iii) the value of existing technology was specifically
addressed, with a view toward ensuring the relative allocations to existing
technology and in-process research and development were consistent with the
relative contributions of each to the final product; and (iv) the allocation to
in-process research and development was based on a calculation that considered
only the efforts completed as of the transaction date, and only the cash flow
associated with these completed efforts for one generation of the products
currently in process.
As indicated above, the Company recorded a one-time charge of $887,000
upon the acquisition in March 2000 for purchased in-process research and
development related to three development projects. The charge related to the
portion of these products that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
Management's conclusion that the in-process development effort had no
alternative future use was reached in consultation with the engineering
personnel from both the Company and the seller.
The first of these projects focuses on providing products for moving
vehicles that use computers in their instrumentation and control panels and
targets both end-user in-vehicle systems and design phase solutions. The product
being developed is a software product to be bundled with a haptic peripheral
device. The software product is designed to provide a touch feedback module for
the peripheral device, which will introduce the sense of touch into the
interface allowing designers to feel the buttons on the screen as they design
the control panel. This product is expected to be released in late FY 2000 and
at the time of the acquisition was approximately 50% complete with estimated
costs to complete the development of $60,000. The second of these projects is
the MilleniumCat technologies, aimed at the multimedia market that will offer a
full high fidelity affordable haptic device. Immersion Canada 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 Immersion Canada's developed suite of products that
combine audio, graphics, speech, video and other media into one package solution
for customers. This product is expected to be released late FY 2000 and at the
time of the acquisition was estimated to be 67% complete with estimated costs to
complete the development at $50,000. The third of these projects is aimed at the
engineering and artistic creation market. Immersion Canada'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.
8
The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require the Company to
accelerate the time period over which the intangibles are being amortized, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant assumptions used to determine
the value of in-process research and development, include the following: (i)
forecast of net cash flows that were expected to result from the development
effort using projections prepared by Immersion Canada's management; (ii) the
completed portion of the projects estimated by considering a number of factors,
including the costs invested to date relative to the total cost of the
development effort and the amount of progress completed as of the acquisition
date, on a technological basis, relative to the overall technological
achievements required to achieve the functionality of the eventual product. The
technological issues were addressed by engineering representatives from both the
Company and Immersion Canada, and when estimating the value of the technology,
the projected financial results of the acquired assets were estimated on a
stand-alone basis without any consideration to potential synergistic benefits or
"investment value" related to the acquisition. Accordingly, separate projected
cash flows were prepared for both the existing as well as the in-process
projects. These projected results were based on the number of units sold times
the average selling price less the associated costs. After preparing the
estimated cash flows from the products being developed, a portion of these cash
flows were attributed to the developed and core technology, which was embodied
in the in-process product lines and enabled a quicker and more cost-effective
development of these products. When estimating the value of the developed, core
and in-process technologies, discount rates of 15%, 20%, and 25% were used
respectively. The discount rates considered both the status and risks associated
with the cash flows at the acquisition date. Projected revenues from the
developed technologies are expected to continue through the beginning of FY
2002, while revenue from in-process technologies are expected to commence late
FY 2000 and continue through a portion of FY 2004.
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 and will continue operations
in Palo Alto, California. 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.
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. The
VTI option plan was established in August 2000 and under the plan the Company
may grant options to purchase up to 500,000 shares of common stock to employees,
directors, and consultants. The options generally expire ten years from the date
of grant. As of September 30, 2000 there were 452,000 such option grants
outstanding.
The aggregate purchase price of $7.75 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 $ 419
In-process research and development 1,158
Intangible assets:
Goodwill 1,814
Core technology 2,344
Developed technology 552
Workforce 394
Patents 855
Tradename 214
------
$7,750
======
The goodwill, core technology, patents, and tradename are being
amortized over their estimated useful lives of 5 years. The developed technology
and workforce are being amortized over their estimated useful lives of 1.5 and 2
9
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 $1.2
million upon the acquisition in August 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 is the development of SimStudio, a software
product solution which will enable digital testing and evaluation of prototypes.
SimStudio will permit digital prototypes to be tested for ease of assembly and
inspected for fit, functionality and ergonomics by virtual design teams located
anywhere in the world, working collaboratively and in real time. This product is
expected to be released in the fourth quarter of 2000 and at the time of the
acquisition was approximately 60% complete with estimated costs to complete the
development of $135,000. The second of these projects is the CyberTalon, a
lightweight low cost, hand-based interface used for measuring the position of
the hand in three-dimensional space. This product is expected to be released at
the end of 2001 and at the time of the acquisition was approximately 31%
complete with estimated costs to complete the development of $230,000. The third
of these projects is CyberForce, an extension of CyberGrasp, adding grounded
forces. CyberGrasp is an option for the CyberGlove that adds force feedback to
the fingertips. CyberGrasp users can feel the three-dimensional graphical
objects being manipulated on the screen as if they were real, physical objects.
This first version of the product is expected to be released in December 2000,
additional safety features and testing, manufacturability and software programs
will also be developed. At the time of the acquisition CyberForce was estimated
to be 71% complete with estimated costs to complete the development at $68,000.
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 following: (i)
forecast of net cash flows that were expected to result from the development
effort using projections prepared by VTI'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 VTI, and when estimating the value
of the technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without any consideration to potential
synergistic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the existing
as well as the in-process projects. These projected results were based on the
number of units sold multiplied by the average selling price less the associated
costs. After preparing the estimated cash flows from the products being
developed, a portion of these cash flows were attributed to the developed and
core technology, which was embodied in the in-process product lines and enabled
a quicker and more cost-effective development of these products. When estimating
the value of the developed, core and in-process technologies, discount rates of
20%, 25%, and 30% were used respectively. The discount rates considered both the
inherent risk and expected growth of the developed and in-process technologies
at the acquisition date. A small portion of the revenue for FY 2000 is
attributable to the in-process products while the remainder is due to the
existing products. The majority of 2001 revenue is attributable to the
in-process products. As new technologies are developed and future products are
launched in 2002 and beyond, the level of revenue attributable to the in-process
products declines as a precent of revenue. The in-process products are expected
to have five year lives.
POOLING TRANSACTION
10
As discussed in Note 1, the Company completed its merger
with HT in September 2000 in a business combination accounted for as a pooling
of interests. HT, a developer and manufacturer of state-of-the-art 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 holders of HT securities received shares, warrants and options of
Immersion common stock at the rate of 0.5176 shares of Immersion common stock
for each share of HT common and preferred stock. The Company issued a total of
approximately 1.335 million shares of Immersion common stock in exchange for all
outstanding shares of HT common and preferred stock, assumed 195,670 common and
preferred stock warrants, assumed a convertible note convertible into 226,450
shares of the Company's common stock and reserved approximately 835,000 shares
of common stock for issuance upon the exercise of HT options assumed pursuant to
the agreement and granted after the merger. In connection with the merger, the
Company incurred one-time expenses of approximately $1.4 million, which are
included in acquisition related charges in the condensed consolidated statement
of operations for the three and nine months ended September 30, 2000.
Prior to the combination, HT's fiscal year ended on May 31.
Subsequent to the pooling, HT changed its year-end to December 31, to conform
with that of the Company. In recording the business combination, HT's statements
of operations for the three and nine months ended September 30, 2000 were
combined with the Company's consolidated statements of operations for the same
periods. HT's statements of operations for the three and nine months ended
February 29, 2000 were combined with the Company's consolidated statements of
operations for the three and nine months ended September 30, 1999, respectively.
As a result, HT's results of operations for the two months ended February 29,
2000 have been included in both nine-month periods ended September 30, 1999 and
2000. The consolidated balance sheets of the Company as of September 30, 2000
and December 31, 1999, have been combined with the balance sheets of HT as of
September 30, 2000 and May 31, 2000 respectively. Revenue and net loss of HT for
the two months ended February 29, 2000 were $444,000 and $779,000, respectively.
The table below summarizes the components of the combined results of operations
for the three and nine months ended September 30, 2000 and 1999.
NET REVENUE (In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------- ----------------------
Immersion $2,995 $ 2,082 $ 8,012 $ 5,585
HT 809 637 2,056 2,395
Eliminations -- (8) (16) (14)
------ ------- -------- -------
Total $3,804 $ 2,711 $ 10,052 $ 7,966
====== ======= ======== =======
NET LOSS (In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------- ----------------------
Immersion $(5,783) $(1,604) $(11,409) $(3,722)
HT (2,566) (1,302) (5,378) (3,426)
------- ------- -------- -------
Total $(8,349) $(2,906) $(16,787) $(7,148)
======= ======= ======== =======
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 presentation. There were no adjustments
required to conform HT's accounting policies to those of the Company.
3. INVENTORIES
11
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
Raw materials and subassemblies ...................................... $1,148 $770
Work in process ...................................................... 79 34
Finished goods ....................................................... 248 145
------ ----
Total ................................................................ $1,475 $949
====== ====
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
Cybernet consulting .................................................. $ 193 $ 578
Prepaid royalties .................................................... 345 --
Prepaid insurance .................................................... 99 346
Prepaid rent ......................................................... 1 43
Research and development tax credit due from Canadian government ..... 56 --
Deposits ............................................................. 350 11
Other prepaids and other current assets .............................. 276 182
------ ------
Total ................................................................ $1,320 $1,160
====== ======
5. PROPERTY
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
Computer equipment and purchased software ............................ $1,638 $ 664
Machinery and equipment .............................................. 1,525 1,165
Furniture and fixtures ............................................... 1,286 565
Leasehold improvements ............................................... 697 165
------ ------
Total ................................................................ 5,146 2,559
Less accumulated depreciation ........................................ 1,519 1,243
------ ------
Property, net ........................................................ $3,627 $1,316
====== ======
6. OTHER INVESTMENTS
At September 30, 2000, other investments included $6.5 million of
equity investments in privately-held companies accounted for under the cost
method. The Company intends to hold its equity investments for the long term and
monitors whether there has been other-than-temporary declines in value of these
investments based on management's estimates of their net realizable value taking
into account the companies' respective financial condition and ability to raise
third-party financing. During the second quarter of fiscal 2000 the Company made
a $5 million strategic investment in Geometrix, Inc. ("Geometrix"), the
developer of the 3Scan (TM) product line which enables creation of
three-dimensional models through the use of digital cameras. At September 30,
2000 the $5 million investment was comprised of $1.8 million representing the
purchase of
12
880,000 shares of Series B Preferred Stock or an 8% ownership interest and a
$3.2 million unsecured convertible promissory note. The unsecured convertible
promissory note has a voluntary conversion feature which expired August 15, 2000
and an automatic conversion feature which is triggered when the Company's
ownership percentage is reduced to less than 8% as a result of additional
financing raised by Geometrix exceeding certain minimum amounts. The automatic
conversion feature limits the amount of the promissory note converted such that
the Company's ownership interest does not exceed 8%. The note accrues interest
at a rate of 7% per annum and the note plus accrued interest, if not converted
by June 12, 2002, is due in two payments over a one-year period. The Company
also signed a strategic partnership agreement with Geometrix during the second
quarter of fiscal 2000 to develop products for the three-dimensional Web
marketplace. Under the agreement, Geometrix has contracted with Immersion for
development work. Revenues under this contract are recognized based on the
cost-to-cost percentage-of-completion accounting method in accordance with our
revenue recognition policy. The remainder of $1.5 million of investments
represents a $1.0 million equity investment in There, Inc., a technology
application developer, and $500,000 equity investment in EndPoints, Inc., an
application specific integrated circuit design semiconductor company. Both
investments represent less than a 5% ownership interest.
7. LONG-TERM DEBT
On August 10, 1999, HT issued a $3,000,000 Secured Convertible
Promissory Note (the "Note") to Medtronic Asset Management, Inc. ("Medtronic").
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 the Company's
common stock, at a conversion price of $15.46 per share.
In connection with the original issuance of the Note and then amended
in connection with the additional borrowing in March 2000, HT granted Medtronic
a warrant, which is now exercisable to purchase 129,400 shares of the Company's
common stock at $15.46 per share. The warrant expires on the later of November
10, 2000 or six months after the closing of HT's sale of at least $6 million of
capital stock. The Company allocated $1,126,849 of the note payable proceeds to
the warrant based on its estimated fair value 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. Under the specific terms of the 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 enter a development agreement to develop a simulation
system within a field in which Medtronic is active. If Medtronic is interested
in participating in a development agreement then Medtronic has a forty-day
period to negotiate exclusively with HT. If an agreement is not reached within
this forty-day period, the Company may enter into an agreement with a third
party, provided that the terms of the agreement are more favorable to HT than
the offer presented by Medtronic.
In April 2000, HT entered into a Master Loan and Security Agreement
with Third Coast Capital. Per the terms of this agreement HT may borrow up to
$500,000 through April 1, 2001; however, HT 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 annual interest rate of 10.5%. At the expiration of the
term of the first note, HT 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, HT borrowed $317,050 against this line of
credit that is secured with certain furniture and equipment. In connection with
the agreement, HT issued 10 year warrants, which are exercisable to purchase
1,617 shares of the Company's common stock at $15.46 per share. These warrants
may be exercised at any time prior to April 9, 2010. HT 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.
In December 1997, HT entered into a subordinated note and warrant
purchase agreement with SECA VII, under which HT 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 HT's assets and by a life insurance
policy on the HT's Founder and Chief Visionary Officer in the amount of
$750,000. Under the terms of the note HT pays monthly interest payments and all
principal and unpaid interest are due in full on December 31, 2002.
13
In connection with the note, HT gave SECA VII a warrant. The warrant to
purchase up to 31,056 shares of the Company's common stock is exercisable in
increments of 776 shares at $5.16 per share and expires on June 30, 2003. SECA
VII has certain put rights that allow it to have HT 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.
8. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands except per share
amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- -------
Numerator:
Net loss ........................................................... $ (8,349) $(2,906) $(16,787) $(7,148)
Redeemable preferred stock accretion ............................... -- 2 -- 5
-------- ------- -------- -------
Net loss applicable to common stockholders ........................... $ (8,349) $(2,908) $(16,787) $(7,153)
======== ======= ======== =======
Denominator:
Weighted average common shares outstanding ......................... 18,044 7,174 17,598 6,549
Weighted average common shares held in escrow ...................... (89) (89) (89) (71)
-------- ------- -------- -------
Shares used in computation, basic and diluted ...................... 17,955 7,085 17,509 6,478
======== ======= ======== =======
Net loss per share, basic and diluted ................................ $ (0.46) $ (0.41) $ (0.96) $ (1.10)
======== ======= ======== =======
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 September 30, 2000.
9. COMPREHENSIVE LOSS
The following table sets forth the components of comprehensive loss:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- -------
Net loss: .......................................................... $(8,349) $(2,906) $(16,787) $(7,148)
Redeemable preferred stock accretion ............................... (2) (5)
Change in unrealized gains (losses) on short-term investments ...... 18 -- (23) (1)
------- ------- -------- -------
Total comprehensive loss ............................................. $(8,331) $(2,908) $(16,810) $(7,154)
======= ======= ======== =======
14
10. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company operates in one business segment, which is the design,
development, production, marketing and licensing of products based on
touch-enabling technology. These devices are used in computer entertainment,
personal computing, medical and other professional computing applications. The
Company operates primarily in the United States and in Canada through its
wholly-owned subsidiary Immersion Canada. The following is a summary of revenues
by geographic areas. Revenues are broken out geographically by the ship-to
location of the customer.
Geographic revenue as a percentage of total revenue was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
REVENUE BY REGION 2000 1999 2000 1999
---- ---- ---- ----
North America ................ 73% 75% 71% 77%
Europe ....................... 17% 16% 18% 11%
Far East ..................... 9% 7% 10% 10%
Rest of the World ............ 1% 2% 1% 2%
--- --- --- ---
Total ................... 100% 100% 100% 100%
=== === === ===
We derived 71% and 73% of our total revenues from the United States for the
three months ended September 30, 2000 and 1999 respectively. We derived 70% and
76% of our total revenues from the United States for the nine months ended
September 30, 2000 and 1999 respectively. Revenues from other countries during
the periods presented represented less than 10% individually.
SIGNIFICANT CUSTOMERS
Customers comprising 10% or greater of the Company's net revenues are summarized
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ----- ---- ----
Customer A ................... * 17% 13% *
Customer B ................... 22% * 10% *
Customer C ................... * * * 10%
-- -- -- --
Total ................... 22% 17% 23% 10%
== == == ==
* Revenue derived from customer represented less than 10% for the period.
As of September 30, 2000, customer B accounted for 13% of the Company's trade
receivables. The remaining customers accounted for less than 10% of the
Company's accounts receivable for the periods presented.
11. CONTINGENCIES
The Company has received claims from third parties asserting that the
Company's technologies, or those of its licensees, infringe on the other
parties' intellectual property rights. Management believes that these claims are
without merit and, with respect to each, has obtained or is in the process of
obtaining written non-infringement and/or patent invalidity opinions from
outside patent counsel. Accordingly, in the opinion of management, the outcome
of such claims will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
15
HT's 70% owned subsidiary, Sky Fitness, Inc., 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 HT violated a non-compete clause
within his employment agreement. The Company believes these claims are without
merit and would vigorously defend itself if these claims were to progress.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Except for the
historical information contained in this discussion and analysis of financial
condition and results of operations, the matters discussed herein are forward
looking statements. These forward-looking statements include but are not limited
to the Company's plans regarding increasing royalty revenue, royalty-bearing
cursor control products, stimulating demand for touch-enabled products,
expectations of gross margin, expenses, new product introduction, and the
Company's liquidity and capital needs. These matters involve risks and
uncertainties that could cause actual results to differ materially from the
statements made. In addition to the risks and uncertainties described below in
"Factors that May Affect Future Results," these risks and uncertainties may
include consumer trends, business cycles, scientific developments, changes in
governmental policy and regulation, currency fluctuations, economic trends in
the United States and inflation. These and other factors may cause actual
results to differ materially from those anticipated in forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
Immersion Corporation was incorporated in California in 1993 and
reincorporated in Delaware in 1999. The Company's principal executive offices
are located at 801 Fox Lane, San Jose, California 95131. The Company's telephone
number is (408) 467-1900. The Company's website is www.immersion.com.
We develop hardware and software technologies that enable users to
interact with computers using their sense of touch. Our patented technologies,
which are called TouchSense(TM), enable devices such as mice, joysticks, knobs,
and steering wheels to deliver tactile sensations that correspond to on-screen
events. We focus on four application areas - consumer computer peripherals,
automotive interfaces, medical simulation products and specialized computer
peripherals for professional and industrial applications. In high volume market
areas such as consumer computer peripherals and automotive interfaces, we
primarily license our touch-enabling technologies to third party manufacturers.
We currently license our technology to market leaders in these areas, including
companies such as Microsoft, Logitech and BMW. In lower volume markets, such as
medical simulation and three-dimensional computer imaging, we focus on both
product sales and technology licensing. In all market areas, we engage in
development projects for third parties. Our objective is to proliferate our
TouchSense technologies across markets, platforms and applications so that touch
and feel become as common as graphics and sound in the modern computer user
interface.
We hold more than 85 issued patents and 250 pending patent applications
in the U.S. and abroad covering various aspects of our hardware and software
technologies. To date, we have licensed our intellectual property to more than
16 companies, including market leaders Microsoft and Logitech, which incorporate
our patented touch-enabling technologies, together with other technologies
necessary for computer gaming peripherals, into joysticks, gamepads and steering
wheels that they manufacture. To target the computer mouse market, we have
licensed our touch-enabling intellectual property to multiple mouse
manufacturers, including market leader Logitech. The first computer mouse
incorporating our touch-enabling technologies was launched by Logitech, one of
our licensees, during the fourth quarter of 1999. In September 2000, Logitech
launched two new lower-cost mouse products that incorporate our touch-enabling
technologies. In the automotive market, Immersion has licensed its
touch-enabling technologies to BMW for use in automotive controls. In the
medical simulation market, we sell surgical simulation products through our
wholly-owned subsidiary HT. With respect to professional and industrial
applications, we manufacture specialized computer peripherals, including
computer digitizing devices that allow users to create three-dimensional
computer models directly from physical objects, touch-enabled joysticks and
steering wheels for use in arcades, touch-enabled gloves for use in
computer-aided design, simulation, training and virtual reality applications,
and an advanced computer mouse used for mapmaking.
16
We completed our merger with HT in September 2000. The merger was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements have been restated for all periods presented as if we and HT had
always been combined. In connection with the merger, we incurred one-time
expenses of approximately $1.4 million, which are included in acquisition
related charges in the condensed consolidated statement of operations for the
three and nine months ended September 30, 2000. HT is a developer and
manufacturer of state-of-the-art products that simulate hands-on medical
procedures to create realistic training environments for doctors and other
healthcare personnel. Under the terms of the agreement, the former holders of HT
securities received shares, warrants and options of Immersion common stock at
the rate of 0.5176 shares of Immersion common stock for each share of HT common
stock or preferred stock. We issued a total of approximately 1.335 million
shares of Immersion common stock in exchange for all outstanding shares of HT
common stock and preferred stock. We assumed 195,670 common and preferred stock
warrants, a convertible note convertible into 226,450 shares of the Company's
common stock and reserved approximately 835,000 shares of common stock for
issuance upon the exercise of HT options assumed pursuant to the agreement and
granted after the merger.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
2000 AND 1999 ARE AS FOLLOWS:
September 30, Change
-------------------------------
REVENUES 2000 1999
------- ------
($ In thousands)
Three months ended:
Royalty revenue ........................ $ 308 $ 649 (53)%
Product sales .......................... 2,153 1,547 39%
Development contracts and other ........ 1,343 515 161%
------- ------ ----
Total Revenue .......................... $ 3,804 $2,711 40%
======= ====== ====
Nine months ended:
Royalty revenue ........................ $ 2,158 $1,265 71%
Product sales .......................... 5,179 4,479 16%
Development contracts and other ........ 2,715 2,222 22%
------- ------ ----
Total Revenue .......................... $10,052 $7,966 26%
======= ====== ====
Total Revenue. Our total revenue for the third quarter of fiscal 2000
increased by $1.1 million or 40% from the third quarter of fiscal 1999. Royalty
revenue for the three-month period ended September 30, 2000 declined to $308,000
from $649,000 for the three-month period ended September 30, 1999, a 53%
decrease. Royalty revenue is comprised of royalties earned on sales by our
TouchSense licensees and license fees charged for our intellectual property
portfolio. The entire royalty revenue decrease is attributable to the expiration
of the Microsoft agreement which ended mid-July 2000. Excluding the amortization
of non-recurring Microsoft deferred royalty revenue, recurring royalty revenue
in the third quarter of 2000 increased by 11% as compared to the third quarter
of 1999. Third quarter royalty revenue was also impacted by expected seasonality
revolving around the holiday season. Many of our licensees discontinue prior
year's products at the beginning of the third quarter and introduce new products
at the end of this period. Product sales for the three-month period ended
September 30, 2000 increased by 39% to $2.2 million from $1.5 million for the
comparable period ended September 30, 1999. The increase in product sales was
due to an increase of $125,000 for our microprocessors, an increase of $226,000
related to products sold by our wholly-owned subsidiary, VTI, and an increase of
$227,000 related to medical products sold by HT compared with the three-month
period ended September 30, 1999. Products sold by VTI include the CyberGlove for
use in research in computer-aided design, simulation, training and virtual
reality applications. The August 2000 acquisition of VTI was accounted for as a
purchase and accordingly our financial statements only include the revenue of
VTI for the month of September 2000. HT sells computer-based medical simulators
and software training modules. The increase of $227,000 is due to new product
introductions and an increased salesforce during the current period versus the
prior period. Development contract and other revenue category is comprised of
revenue on commercial and government contracts efforts, which increased during
the third quarter of fiscal 2000 from an increase in related development
activity on commercial contracts, including the Geometrix strategic partnership
agreement to develop LightScribe 3D(TM) products.
17
Our total revenue for the first nine months of fiscal 2000 increased by
$2.1 million or 26% from the first nine months of fiscal 1999. All revenue
categories experienced growth during the first nine months of fiscal 2000 with
the largest increase in royalty revenues of $893,000 or 71%. The increase is
mainly attributable to an increase of $815,000 recognized under the Microsoft
agreement during the nine months ended September 30, 2000 versus the nine months
ended September 30, 1999. As mentioned above, revenue recognized under the
Microsoft agreement ended in mid-July 2000. The increase in product sales for
the nine-month period ended September 30, 2000 of $700,000 is mainly
attributable to the increased sales of our MicroScribe-3D and microprocessors
products offset by a decrease in other product categories of $287,000, the
products sales of VTI noted above and an increase of $187,000 related to the
product sales of HT. The increase in development contract and other revenue of
$493,000 for the first nine months of fiscal 2000 compared to the first nine
months of fiscal 1999 is due to an increase in related development activity on
commercial contracts.
We categorize our geographic information into four major regions: North
America, Europe, Far East, and Rest of the World. In the third quarter of fiscal
2000, revenue generated in North America, Europe, and Far East represented 73%,
17%, and 9%, respectively compared to 75%, 16%, and 7%, respectively for the
third quarter of fiscal 1999. The shift in revenues among regions is mainly due
to an increase in licensing and development contract efforts for customers in
Europe and the Far East in the third quarter of fiscal 2000 versus the third
quarter of 1999 as well as the timing of product sales during the nine months
ended September 30, 2000.
In the first nine months of fiscal 2000, revenue generated in North
America, Europe, and Far East represented 71%, 18%, and 10% respectively
compared to 77%, 11%, and 10% respectively, for the first nine months of fiscal
1999. The shift in revenues among regions is primarily due to an increase in
licensing and development contract efforts for customers in Europe and a
decrease in development contract efforts for HT's North American customers as HT
began to transition from development contracts to product sales. A decrease in
product shipments to customers in North America, mainly due to the timing of
shipments of our professional medical products, also contributed to the shift
for the nine months ended September 30, 2000 versus the same period ended
September 30, 1999.
September 30, Change
-----------------------------
COST OF PRODUCT SALES 2000 1999
------ -------
($ In thousands)
Three months ended:
Cost of product sales ....................... $1,165 $ 682 71%
% of total product revenue ............ 54% 44%
Nine months ended:
Cost of product sales ....................... $2,822 $2,128 33%
% of total product revenue ............ 54% 48%
Cost of Product Sales. Cost of product sales increased by $483,000 or
71% for the three months ended September 30, 2000 as compared to the three
months ended September 30, 1999. The increase is primarily due to the 39%
increase in product sales volume for the period, increased overhead costs and
mix of products sold. The increase in overhead costs contributed $82,000 to the
overall increase while the shift in product mix due to increased sales of our
microprocessors which have higher cost of product sales than our other products
accounted for the remainder of the increase in cost of products sold for the
three months ended September 30, 2000.
Cost of product sales increased by $694,000 or 33% for the nine months
ended September 30, 2000 as compared to the nine months ended September 30,
1999. The increase is due to a combination of increased volume,
18
increased overhead costs and the mix of product sold. Product sales volume
increase by 16% for the nine months ended September 30, 2000 versus the nine
months ended September 30, 1999. The increase in overhead costs contributed
$254,000 to the overall increase while the shift in product mix due to increased
sales of our MicroScribe-3D and our microprocessors which have higher cost of
product sales than our professional medical products accounted for the remainder
of the increase in cost of products sold for the nine months ended September 30,
2000.
September 30, Change
------------------------------
OPERATING EXPENSES AND OTHER 2000 1999
------ ------
($ In thousands)
Three months ended:
Sales and marketing ............................................. $2,914 $ 988 195%
% of total revenue ........................................ 77% 36%
Research and development ........................................ $1,876 $1,388 35%
% of total revenue ........................................ 49% 51%
General and administrative ...................................... $2,408 $1,973 22%
% of total revenue ........................................ 63% 73%
Amortization of intangibles and deferred stock compensation ..... $1,590 $ 444 258%
% of total revenue ........................................ 42% 16%
Acquisition related charges ..................................... $2,583 -- 100%
% of total revenue ........................................ 68% --
Nine months ended:
Sales and marketing ............................................. $7,713 $2,239 244%
% of total revenue ........................................ 77% 28%
Research and development ........................................ $4,974 $3,943 26%
% of total revenue ........................................ 49% 49%
General and administrative ...................................... $5,852 $4,023 45%
% of total revenue ........................................ 58% 51%
Amortization of intangibles and deferred stock compensation ..... $3,460 $ 876 295%
% of total revenue ........................................ 34% 11%
Acquisition related charges ..................................... $3,469 $1,190 192%
% of total revenue ........................................ 35% 15%
Sales and Marketing. Sales and marketing expenses increased by $1.9
million or 195% in the third quarter of fiscal 2000 compared to the comparable
period last year. We began considerable planned growth of our sales and
marketing team during the fourth quarter of fiscal 1999 to enable us to
proliferate our TouchSense technologies across markets, platforms and
applications. The significant increase noted was mainly due to increased
headcount and related compensation, benefits, and overhead costs of $958,000.
Expenses related to corporate identity, advertising, collateral design and
production and expenses incurred under our co-marketing agreement with Logitech
contributed $479,000 to the increase for the third quarter of fiscal 2000 over
the comparable period during 1999. The remainder of the increase was associated
with developer programs and production of showcase applications of our tools of
$200,000, website development and maintenance of $143,000 and increased travel
expenses of $73,000.
Sales and marketing expenses increased by $5.5 million or 244% in the
first nine months of fiscal 2000 compared to the comparable period last year.
The significant increase was mainly due to increased headcount and related
compensation, benefits, and overhead costs of $2.5 million. Expenses related to
corporate identity, advertising, collateral design and production and expenses
incurred under our co-marketing agreement with Logitech contributed $1.4 million
to the increase for the first nine months of fiscal 2000 versus the first nine
months of fiscal 1999. The remainder of the increase was associated with
developer programs and production of showcase applications of our tools of
$565,000, website development and maintenance of $301,000 and increased travel
expenses of $185,000. We anticipate sales and marketing expenses to continue to
increase in absolute dollars due to the planned growth of our sales and
marketing organizations and our co-marketing agreement with Logitech. Under the
terms of the agreement, for a period of five calendar quarters, beginning in the
first calendar quarter of 2000, the Company will reimburse Logitech for certain
marketing related expenses not to exceed $200,000 per quarter. Only third-party
marketing services that are targeted at promoting Logitech's touch-enabled mice
are eligible for reimbursement. In addition, all promotional activities will
have to be approved by the Company in advance. In order to remain eligible for
reimbursement, Logitech will have to include the Company's brand and slogan on
all its marketing materials that reference touch-enabled functionality or
products, and commit to other conditions regarding its touch-enabled mice.
19
Research and Development. Research and development expenses increased by
$488,000 or 35% in the third quarter of fiscal 2000 compared to the comparable
period last year. The increase is primarily due to increased headcount and
related compensation, benefits, and overhead costs of $457,000. The three-month
period ended September 30, 2000 includes a full quarter of expenses related to
research and development activities at our wholly-owned subsidiary, Immersion
Canada, which was acquired on March 9, 2000 and one month of activity at our
wholly-owned subsidiary, VTI, which was acquired on August 31, 2000 in
transactions accounted for under the purchase method and therefore are,
accordingly, not reflected in our three months ended September 30, 1999 research
and development expense.
Research and development expenses increased by $1 million or 26% in the
first nine months of fiscal 2000 compared to the same period last year. The
increase is due to increased headcount and related compensation, benefits, and
overhead costs of $767,000 and subcontracted non-recurring engineering expenses
of $200,000. We believe that continued investment in our research and
development is critical to our future success, and we expect these expenses to
increase in absolute dollars in future periods.
General and Administrative. General and administrative expenses
increased by $435,000 or 22% in the third quarter of fiscal 2000 compared to the
comparable period last year. The increase is attributed to increased headcount
and related compensation, benefits, and overhead costs of $215,000, a one time
stock compensation charge of $582,000 related to an employment agreement at HT
upon the consummation of the merger, and increased legal, accounting, and
investor expenses of $260,000 offset by reduced recruiting expenses of $731,000.
General and administrative expenses increased by $1.8 million or 45% in
the first nine months of fiscal 2000 compared to the comparable period last
year. The increase is attributed to increased headcount and related
compensation, benefits, and overhead costs of $571,000, a one-time stock
compensation charge of $582,000 noted above, increased legal expenses and
investor expenses of $731,000 for our proxy, acquisition related matters,
intellectual property litigation, annual report, annual shareholder meeting, and
other costs related to being a public company. These expense increases were
offset by a decrease in recruiting expenses of $353,000 for the nine months
ended September 30, 2000 versus the nine months ended September 30, 1999. We
expect that the dollar amount of general and administrative expenses will
increase in the future as we continue to increase infrastructure and incur the
additional costs of being a public company.
Amortization of Intangibles and Deferred Stock Compensation.
Amortization of intangibles and deferred stock compensation grew by $1.1 million
or 258% in the third quarter of fiscal 2000 compared to the comparable period
last year. The increase in amortization of intangibles of $492,000 is mainly
comprised of the $358,000 of amortization of goodwill and other purchased
intangibles related to the acquisition of Immersion Canada and $132,000
representing one month of amortization of goodwill and other purchased
intangibles related to the acquisition of VTI. Deferred stock compensation
amortization increased by $654,000. Of the $654,000 increase, $349,000 is the
result of amortization related to the $5.5 million of deferred stock
compensation recorded in conjunction with the assumption of Immersion Canada's
unvested options at the time of acquisition and $309,000 represents the one-time
deferred compensation charge related to the acceleration of options upon the
consummation of the merger with HT.
Amortization of intangibles and deferred stock compensation grew by
$2.6 million or 295% in the first nine months of fiscal 2000 compared to the
comparable period last year. The increase in amortization of intangibles of $1.1
million is comprised of $834,000 of amortization of goodwill and other purchased
intangibles related to the acquisition of Immersion Canada, $132,000 of
amortization of goodwill and other purchased intangibles related to the
acquisition of VTI and $183,000 of amortization related to purchased patents and
technology. Deferred stock compensation amortization increased by $1.4 million.
Of the $1.4 million increase, $838,000 is the result of amortization related to
the $5.5 million of deferred stock compensation recorded in conjunction with the
assumption of Immersion Canada's unvested options at the time of acquisition,
$386,000 related to deferred compensation for HT options including the one-time
charge of $309,000 noted above, and $172,000 is related to the $1.5 million of
deferred stock compensation recorded during the third quarter of fiscal 1999.
20
Acquisition Related Charges. During the three months ended September
30, 2000 we incurred $2.6 million of acquisition related charges consisting of
$1.2 million for in-process research and development resulting from the August
2000 acquisition of all the outstanding shares of VTI and $1.4 million of
one-time merger expenses related to the September 2000 acquisition of HT.
During the nine months ended September 30, 2000 we incurred $3.5
million of acquisition related charges compared to $1.2 million for the nine
months ended September 30, 1999. The $3.5 million is made up of the $2.6 million
related to acquisitions in the third quarter of fiscal 2000 referenced above and
a charge of $887,000 for in-process research and development resulting from the
March 2000 acquisition of all the outstanding shares of Immersion Canada. The
$1.2 million incurred during the prior year was the result of the acquisition of
Cybernet.
Interest and Other Income. Interest and other income consists primarily
of interest income, dividend income and capital gains from cash and cash
equivalents and short-term investments. Other income grew by $558,000 in the
third quarter of fiscal 2000 compared to the comparable period last year and
$1.9 million for the nine months ended September 30, 2000 versus the nine-month
period ended September 30, 1999. The increase during the three and nine months
ended September 30, 2000 is due to the increase in cash and cash equivalents and
short-term investments chiefly from the $48.3 million net proceeds or our public
offering in November 1999.
Interest Expense. Interest expense consists primarily of interest
expense on HT's secured convertible promissory note and other notes payable (see
note 7). Interest expense grew by $33,000 in the third quarter of fiscal 2000
compared to the comparable period last year and declined by $218,000 for the
nine months ended September 30, 2000 versus the nine-month period ended
September 30, 1999. The increase during the three months ended September 30,
2000 is due to the $500,000 increase to the secured notes payable due to
Medtronic in March of 2000 and a new secured note payable to Third Coast Capital
in April 2000. The decline in interest expense for the nine months ended
September 30, 2000 versus the nine months ended September 30, 1999 is primarily
due to additional interest expense incurred during 1999 on the recalculation of
interest due on the initial investment by Maryland Health Care Product
Development Corp., Cook, Inc. and the Maryland Department of Business and
Economic Development from 14% to 25% at the time HT converted their liability to
a combination of cash and equity.
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 September 30, 2000 our cash, cash equivalents and short-term
investments totaled $32.9 million, down $18.5 million from $51.4 million at
December 31, 1999. Excluding short-term investments our cash and cash
equivalents totaled $24.9 million, down $21.7 million from $46.6 million at
December 31, 1999
Net cash used in operating activities during the first nine months of
fiscal 2000 was $10.7 million, a significant increase from the $357,000 used
during the comparable period last year. Cash used in operations during the
nine-month period ended September 30, 2000 was comprised of our $16.8 million
net loss, a decrease due to a change in deferred revenue of $826,000 mainly
attributable to revenue recognized under the Microsoft agreement offset by
increases in deferred revenue for HT, a decrease due to a $999,000 change in
accounts receivable and a decrease of $654,000 due to a change in prepaid
expenses and other assets primarily the result of capitalization of patent
application costs of $419,000 and a lump sum payment to buy out the future
royalties due on our microprocessors of $345,000. Cash used in operations was
offset by noncash activities of $6.6 million, including amortization of
intangibles and deferred stock compensation of $3.4 million and $2 million in
one-time charges for in-process research and development relating to the
acquisitions of Immersion Canada and VTI and a $1.7 million increase in accrued
liabilities mostly due to the timing of payments to vendors included those who
rendered services in relation to our Form S-4 filing in September 2000 and
$965,000 of cash due to the shareholders of VTI relating to the August 2000
acquisition.
21
Net cash used in investing activities during the first nine months of
fiscal 2000 was $14.1 million, a considerable increase from the $1.5 million
used during the comparable period last year. Net cash used in investing during
the period was made up of $21.8 million purchases of short-term investments
offset by sales and maturities of $18.5 million, $6.5 million purchases of
equity investments in privately-held companies, $2.6 million to purchase capital
equipment and leasehold improvements on our new corporate facilities and
information technology infrastructure, and $1.8 million related to the Immersion
Canada and VTI acquisitions. In order to improve our rate of return on cash and
still provide short-term liquidity, we periodically purchase or sell short-term
investments, which typically are interest-bearing, investment-grade securities
with a maturity of greater than 90 days and less than one year.
During January 2000 the Company signed a noncancelable operating lease
for expanded facilities, which will expire in 2005, five years from the lease
commencement date of June 2000. The operating lease payments in fiscal year 2000
on the new lease are expected to be approximately $500,000. The aggregate of the
lease payments after fiscal year 2000 on the new lease are expected to be
approximately $3.8 million.
At September 30, 1999 our cash, cash equivalents and short-term
investments totaled $3.8 million, an increase of $754,000 from $3.0 million at
December 31, 1998. Excluding short-term investments our cash and cash
equivalents totaled $ 3.8 million, up $1.2 million from $2.6 million at December
31, 1998.
Net cash used in operating activities during the first nine months of
fiscal 1999 was $357,000. Cash used in operations during the nine-month period
ended September 30, 1999 was comprised of our $7.1 million net loss, offset by
noncash activities of $3.7 million, including amortization of intangibles and
deferred stock compensation of $876,000, a $1.2 million one-time charge for
in-process research and development relating to the Cybernet technology
acquisition and $729,000 of stock and options issued for consulting and other
services. An increase of $1.9 million in deferred revenue and an increase of
$820,000 in accounts payable and other accrued liabilities also offset the net
loss for the period. The $1.9 million of deferred revenue at September 30, 1999
represents the unamortized portion of the $2.35 million license payment received
from Microsoft in July 1999.
Net cash used in investing activities during the first nine months of
fiscal 1999 was $1.5 million which was made up of $947,000 to purchase other
assets, $150,000 to purchase patents and technology, and $833,000 to purchase
capital equipment offset by sales and maturities of short term investments of
$451,000.
Net cash provided in financing activities during the first nine months
of fiscal 1999 was $3 million. Net cash provided from financing during the
period was made up of $3.1 million proceeds from notes payable and capital
leases and $934,000 for issuance of stock and exercise of stock options, offset
by $862,000 paid upon the conversion of an investment agreement by HT. The
majority of the $3.1 million notes payable relates to the issuance of a $3
million Secured Convertible Promissory Note to Medtronic (see Note 2).
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 market for touch-enabling technology is at an early stage and if we
and our licensees are unable to develop consumer demand for touch-enabled
products, we may not achieve or sustain revenue growth. To date, consumer demand
for our technologies has been largely limited to the computer gaming peripherals
market.
22
We are currently working to increase the demand for our touch-enabling
technologies in the general purpose personal computer market by licensing
touch-enabling technologies for computer mice. The first computer mouse
incorporating our touch-enabling technologies was launched by Logitech, one of
our licensees, during the fourth quarter of 1999. In September 2000, Logitech
launched two new lower-cost mouse products, the iFeel(TM) Mouse and the
iFeel(TM) MouseMan(R), that incorporate our touch-enabling technologies. While
the first touch-enabled mouse was marketed for gaming and web applications, the
new iFeel mouse products are being marketed for use with general purpose
computer applications. Despite the introduction of these new mouse products,
touch-enabled mice may not achieve commercial acceptance or generate significant
royalty revenue for us. In addition, software developers may elect not to create
additional games or other applications that support our touch-enabling
technology.
In addition to touch-enabled mice, we are also working to increase
demand for our technologies in the automotive market and in the medical
simulation market. In the automotive market, we have licensed our touch-enabling
technologies to BMW for use in automotive controls and have entered into a
strategic partnership with ALPS, which designates ALPS as a preferred supplier
of our TouchSense-enabled automotive controls. In the medical simulation market,
we sell surgical simulation products. Our efforts to increase our revenue in
these markets may be unsuccessful.
Even if our technologies are ultimately widely adopted, widespread
adoption may take a long time to occur. The timing and amount of royalties and
product sales that we receive will depend on whether the products marketed
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 $32.3 MILLION AS OF SEPTEMBER 30, 2000, WILL
EXPERIENCE LOSSES IN THE FUTURE AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
Since 1997, we have incurred losses in every fiscal quarter, and we
expect losses through at least 2000. We will need to generate significant
revenue to achieve and maintain profitability. We may not achieve, sustain or
increase profitability in the future. We anticipate that our expenses will
increase in the foreseeable future as we:
- attempt to expand the market for touch-enabled products;
- increase our sales efforts;
- incur additional expenses related to the operation of
businesses we have acquired or will acquire;
- continue to develop our technologies;
- pursue strategic relationships; and
- protect and enforce our intellectual property.
If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, we may not achieve or maintain profitability.
OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT OUR BUSINESS STRATEGY FOR
ACHIEVING REVENUE GROWTH THROUGH ROYALTY PAYMENTS FROM SALES BY OUR LICENSEES OF
TOUCH-ENABLED PRODUCTS, A STRATEGY FROM WHICH HISTORICALLY WE HAVE DERIVED LESS
THAN ONE-THIRD OF OUR REVENUES.
We cannot predict our future revenues based on our historical financial
information. Historically, we derived the majority of our revenues from product
sales, including sales of devices used to create three-dimensional computer
images of small objects, medical simulation products and a specialized non-touch
enabled computer mouse used for mapmaking. Historically, we have also derived
revenues from contracts with our licensees to assist in the development of our
licensees' touch-enabled products and from development contracts with government
agencies for touch-enabling technology. The majority of our historical product
sales resulted from sales of products that did not utilize our touch-enabling
technology but utilized related advanced computer peripheral technologies.
23
Our current marketing, research and development activities concentrate
on licensing our touch-enabling technology to a greater degree than in the past.
Accordingly, our historical results should not be relied upon as an indicator of
our future performance. For example, we derived only 4% of our total revenues
for 1998 from royalty revenue. By contrast, for 1999, we derived 20% of our
total revenues from royalty revenue, for the nine months ended September 30,
2000 we derived 21% of our total revenues from royalty revenue, and for the
three months ended September 30, 2000 we derived 8% of our total revenues from
royalty revenue. We anticipate that royalty revenue from licensing our
technologies will constitute an increasing portion of our revenues; however, on
a period-to-period basis royalty revenue as a percentage of total revenue may
vary significantly due to factors such as the timing of new product
introductions and the seasonality of royalty revenue. In addition, our recently
acquired subsidiaries, HT and VTI, have historically derived most of their
revenues from product sales. Therefore, our revenues attributable to products
sales are likely to increase in the short term.
THE INTEGRATION OF HT AND VTI MAY BE DIFFICULT TO ACHIEVE, WHICH MAY ADVERSELY
AFFECT OPERATIONS.
We recently completed the acquisition of HT, a corporation with
approximately 50 employees based in Gaithersburg, Maryland and VTI, a
corporation with approximately 20 employees based in Palo Alto, California.
Immersion, HT and VTI have different technologies, products and business
operations that have operated independently. The combination of these three
businesses may be difficult. If we fail to integrate the businesses successfully
the operating results of the combined company could be adversely affected and
the combined company may not achieve the benefits or operating efficiencies that
we hope to obtain from the acquisitions. The uncertainties of whether HT and VTI
employees will remain with HT, VTI, Immersion and/or the combined company during
the integration process may affect the business operations of each company. It
may not be possible to continue to retain enough key employees of HT and VTI to
operate those businesses effectively. Moreover, we do not know whether the
products, systems and personnel of the three companies will be fully compatible.
WE HAVE IN THE PAST, AND MAY IN THE FUTURE, ENGAGE IN ACQUISITIONS THAT DILUTE
STOCKHOLDER VALUE, DIVERT MANAGEMENT ATTENTION OR CAUSE INTEGRATION PROBLEMS.
As part of our business strategy, we have in the past acquired, and may
in the future acquire, businesses or intellectual property that we feel could
complement our business, enhance our technical capabilities or increase our
intellectual property portfolio. We recently completed the acquisitions of HT
and VTI. If we consummate acquisitions through an exchange of our securities,
our stockholders could suffer significant dilution. Acquisitions could also
create risks for us, including:
- unanticipated costs associated with the acquisitions;
- use of substantial portions of our available cash to
consummate the acquisitions;
- diversion of management's attention from other business
concerns;
- difficulties in assimilation of acquired personnel or
operations; and
- potential intellectual property infringement claims related to
newly acquired product lines.
Any acquisitions, even if successfully completed, might not generate
any additional revenue or provide any benefit to our business.
OUR BUSINESS STRATEGY FOR ACHIEVING REVENUE GROWTH RELIES SIGNIFICANTLY ON
ROYALTY PAYMENTS FROM SALES BY OUR LICENSEES OF THEIR TOUCH-ENABLED MICE
PRODUCTS.
If our licensees' touch-enabled mice products do not achieve commercial
acceptance or if production or other difficulties that sometimes occur when a
new product is introduced interfere with sales of our licensees' mice products,
our ability to achieve revenue growth could be significantly impaired. The first
computer mouse incorporating our technology was launched by Logitech, a licensee
of our technology, during the fourth quarter of
24
1999. To date, sales of Logitech's first touch-enabled mouse product, the
Wingman Force Feedback Mouse, have not reached desired levels. We believe that
the facts that the first product was being marketed, in part, as a gaming
product, that it was introduced late in the 1999 Christmas buying season, that
it was relatively expensive, and that many popular software titles targeted at
mice do not yet support force feedback, have contributed to slow sales of this
product.
In September 2000, Logitech launched 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. In addition to their lower cost, these new
mice products are designed to provide basic tactile feedback to users without
additional external software support, and therefore to mitigate the need for
external software development in order to create demand for TouchSense-enabled
hardware products. We expect Logitech to transition its manufacturing, sales and
marketing efforts from the Wingman Force Feedback Mouse to these new lower-cost,
touch-enabled mouse products. In addition, we have also licensed our lower-cost,
touch-enabling mice technology to Primax, a manufacturer of computer mice.
However, there can be no assurance that these new mice products will be widely
accepted in the marketplace, and if they are not widely accepted, we may be
unable to grow our revenues.
WE DO NOT CONTROL OR INFLUENCE OUR LICENSEES' MANUFACTURING, PROMOTION,
DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING OUR TOUCH-ENABLING
TECHNOLOGIES, UPON WHICH WE ARE DEPENDENT TO GENERATE ROYALTY REVENUE.
A key part of our primary business strategy is to license our
intellectual property to companies that manufacture and sell products
incorporating our touch-enabling technologies. The sale of those products
generates royalty revenue for us. For the year ended December 31, 1999, 20% of
our total revenues was royalty revenue, for the nine-month period ended
September 30, 2000, 21% of our total revenues was royalty revenue, and for the
three-month period ended September 30, 2000, 8% 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. Because there is a
one-month lag in our recognition of royalty revenue, the results of an increased
demand for touch-enabled products in the third and fourth quarters may be
recognized in our fourth and first quarter results of operations. 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.
WE HAVE LIMITED EXPERIENCE MARKETING AND SELLING THE PRODUCTS OF OUR RECENTLY
ACQUIRED SUBSIDIARIES, AND IF WE ARE UNSUCCESSFUL IN MARKETING AND SELLING THESE
PRODUCTS WE MAY NOT ACHIEVE OR SUSTAIN PRODUCT REVENUE GROWTH.
Immersion has limited experience marketing and selling medical
simulation products either directly or through distributors. The success of our
efforts to sell HT's medical simulation products will depend upon our ability to
establish a qualified sales force and establish relationships with distributors.
HT's current sales and marketing staff is very limited, and Immersion and HT
must attract and retain qualified personnel to direct the sales and marketing of
HT's medical procedural simulation products. We may not be successful in
attracting and retaining the personnel necessary to successfully sell and market
HT's products. There is no assurance that our direct selling efforts will be
effective, HT's distributors will market its products successfully or, if HT's
relationships with distributors terminate, it will be able to establish
relationships with other distributors on satisfactory terms, if at all. Any
disruption in HT's distribution, sales or marketing network could have a
material adverse effect on our product revenues.
Immersion has limited experience marketing and selling high-end
simulation products. The success of our efforts to sell VTI's whole-hand,
touch-enabled gloves, such as VTI's CyberGlove(R), and real-time,
three-dimensional interactive software products will depend upon our ability to
effectively manage a qualified sales force and establish relationships with
distributors. VTI's current sales and marketing staff is limited and we must
attract and retain qualified personnel to direct the sales and marketing of its
products. We may not be successful in attracting and retaining the personnel
necessary to successfully sell and market VTI's products. There is no assurance
that our direct selling efforts will be effective, VTI's distributors will
market its products successfully or, if VTI's relationships with distributors
terminate, it will be able to establish relationships with other distributors on
satisfactory terms, if at all. Any disruption in VTI's distribution, sales or
marketing network could have a material adverse effect on our product revenues.
25
BECAUSE LOGITECH IS OUR ONLY LICENSEE CURRENTLY SELLING TOUCH-ENABLED MICE, OUR
ROYALTY REVENUE FROM TOUCH-ENABLED MICE WILL BE SIGNIFICANTLY REDUCED IF
LOGITECH DOES NOT EFFECTIVELY MANUFACTURE AND MARKET TOUCH-ENABLED MICE
PRODUCTS.
Although we have licensed our touch-enabling mouse technology to an
additional licensee, Primax, Logitech is currently the only licensee selling
touch-enabled mice. If Logitech does not effectively manufacture, market and
distribute its touch-enabled mouse product, our royalty revenue from
touch-enabled mice would be significantly reduced. In addition, a lack of market
acceptance of the Logitech touch-enabled mouse might dissuade other potential
licensees from licensing our technologies for touch-enabled mice and other
products.
IF WE FAIL TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY
TO LICENSE OUR TECHNOLOGIES AND TO GENERATE REVENUES WOULD BE IMPAIRED.
Our business depends on generating revenues by licensing our
intellectual property rights and by selling products that incorporate our
technologies. If we are not able to protect and enforce those rights, our
ability to obtain future licenses and royalty revenue could be impaired. In
addition, if a court were to limit the scope of, declare unenforceable or
invalidate any of our patents, current licensees may refuse to make royalty
payments or may themselves choose to challenge one or more of our patents. Also
it is possible that:
- our pending patent applications may not result in the issuance
of patents;
- our patents may not be broad enough to protect our proprietary
rights;
- effective patent protection may not be available in every
country in which our licensees do business.
We also rely on licenses, confidentiality agreements and copyright,
trademark and trade secret laws to establish and protect our proprietary rights.
It is possible that:
- laws and contractual restrictions may not be sufficient to
prevent misappropriation of our technologies or deter others
from developing similar technologies; and
- policing unauthorized use of our products and trademarks would
be difficult, expensive and time-consuming, particularly
overseas.
IF WE ARE UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH OUR EXISTING
LICENSEES AND WITH ADDITIONAL THIRD-PARTY MANUFACTURERS FOR OUR TOUCH-ENABLING
TECHNOLOGY, OUR ROYALTY REVENUE MAY NOT GROW.
Our revenue growth is significantly dependent on our ability to enter
into new licensing arrangements. Our failure to enter into new licensing
arrangements will cause our operating results to suffer. We face numerous risks
in obtaining new licenses on terms consistent with our business objectives and
in maintaining, expanding and supporting our relationships with our current
licensees. These risks include:
- the lengthy and expensive process of building a relationship
with potential licensees;
- the fact that we may compete with the internal design teams of
existing and potential licensees;
- difficulties in persuading consumer product manufacturers to
work with us, to rely on us for critical technology and to
disclose to us proprietary product development and other
strategies; and
26
- 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;
- the timing of introductions of new products and product
enhancements by us, our licensees and their competitors;
- our ability to develop and improve our technologies;
- our ability to attract, integrate and retain qualified
personnel; and
- seasonality in the demand for our licensees' products.
Accordingly, we believe that period-to-period comparisons of our
operating results should not be relied upon as an indicator of our future
performance. In addition, because a high percentage of our operating expenses is
fixed, a shortfall of revenues can cause significant variations in operating
results from period to period.
THE HIGHER COST OF PRODUCTS INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES MAY
INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND SALE OF PRODUCTS INCORPORATING
OUR TECHNOLOGIES.
Personal computer gaming peripherals, computer mice and automotive
controls incorporating our touch-enabling technologies are more expensive than
similar competitive products that are not touch-enabled. Although major
manufacturers, such as Logitech, Microsoft and BMW, have licensed our
technology, the greater expense of products containing our touch-enabling
technologies as compared to non-touch-enabled products may be a significant
barrier to the widespread adoption and sale of touch-enabled products.
IF OUR TECHNOLOGIES ARE UNABLE TO GAIN MARKET ACCEPTANCE OTHER THAN IN
TOUCH-ENABLED JOYSTICKS AND STEERING WHEELS, OUR ROYALTY REVENUE GROWTH WILL BE
LIMITED.
Substantially all of our royalty revenue is derived from the licensing
of our portfolio of touch-enabling technology for personal computer gaming
peripherals such as joysticks and steering wheels. The market for joysticks and
steering wheels for use with personal computers is a substantially smaller
market than either the mouse market or the dedicated gaming console market and
is characterized by declining average selling prices. If we are unable to gain
market acceptance beyond the personal computer gaming peripherals market, we may
not achieve royalty revenue growth.
COMPETITION IN COMPUTER PERIPHERAL PRODUCTS IN BOTH THE GENERAL PURPOSE
COMPUTING AND COMPUTER GAMING MARKETS COULD LEAD TO REDUCTIONS IN THE SELLING
PRICE OF PERIPHERAL PRODUCTS OF OUR LICENSEES, WHICH WOULD REDUCE OUR ROYALTY
REVENUE.
The general purpose computing and computer gaming markets in which our
licensees sell peripheral products are highly competitive and are characterized
by rapid technological change, short product life cycles, cyclical market
patterns, a trend of declining average selling prices and increasing foreign and
domestic competition. We believe that competition among computer peripheral
manufacturers will continue to be intense, and that competitive pressures will
drive the price of our licensees' products downward. Any reduction in our
royalties per unit that is not offset by corresponding increases in unit sales
will cause our revenues to decline.
27
COMPETITION IN THE TOUCH-ENABLED GLOVE MARKET AND THE REAL-TIME, THREE-
DIMENSIONAL SOFTWARE PRODUCT MARKET COULD LEAD TO REDUCTIONS IN THE SELLING
PRICES OF VTI'S PRODUCTS, WHICH MAY REDUCE OUR PRODUCT REVENUE.
Like the computer peripheral product market, the touch-enabled glove
and real-time, three-dimensional interactive software products markets are
highly competitive and subject to rapid technological change, a trend of
declining average selling prices and increasing competition. We expect that
competition in this market will continue to be intense and that this competition
may drive the price of VTI's products downward. Declining prices of VTI's
products which are not offset by increased volume may cause our product revenues
to decline.
THE MARKET FOR OUR LIGHTSCRIBE 3D PRODUCT, AN OPTICALLY-BASED, THREE-DIMENSIONAL
DIGITIZER, IS AT AN EARLY STAGE, AND OUR PRODUCT REVENUES MAY NOT GROW IF MARKET
DEMAND DOES NOT DEVELOP.
We recently introduced our LightScribe 3D product, which uses a video
camera, hand-held laser stylus, and specialized image processing software to
allow users to create three-dimensional images of objects. The LightScribe 3D is
being marketed for the creation of high-quality, fully-textured,
three-dimensional models that can be displayed and manipulated on web pages. The
market for digitizers to facilitate the creation of such three-dimensional web
content is at an early stage and if demand does not develop we may not be able
to grow our product revenues.
BECAUSE WE HAVE A FIXED PAYMENT LICENSE WITH MICROSOFT, OUR ROYALTY REVENUE FROM
LICENSING JOYSTICKS AND STEERING WHEELS IN THE GAMING MARKET MIGHT DECLINE IF
MICROSOFT INCREASES ITS VOLUME OF SALES OF TOUCH-ENABLED JOYSTICKS AND STEERING
WHEELS AT THE EXPENSE OF OUR OTHER LICENSEES.
Under the terms of our present agreement with Microsoft, Microsoft
receives a perpetual, worldwide, irrevocable, non-exclusive license under our
patents for its SideWinder Force Feedback Pro Joystick and its SideWinder Force
Feedback Wheel, and for a future replacement version of these specific
SideWinder products having essentially similar functional features. Instead of
an ongoing royalty on Microsoft's sales of licensed products, the agreement
provides for a payment of $2.35 million, which we recognized in equal monthly
increments over a one-year period that ended in mid-July 2000. We will not
receive any further revenues or royalties from Microsoft under our current
agreement with Microsoft. We derived 10% of our total revenues and 48% of our
royalty revenue for the twelve months ended December 31, 1999 from Microsoft. In
addition, we derived 13% of our total revenues and 60% of our royalty revenues
for the nine months ended September 30, 2000 from Microsoft and 3% of our total
revenues and 37% of our royalty revenues for the three months ended September
30, 2000 from Microsoft. At the present time, we do not have a license agreement
with Microsoft for products other than the SideWinder joystick and steering
wheel. Microsoft has a significant share of the market for touch-enabled
joysticks and steering wheels for personal computers. Microsoft has
significantly greater financial, sales and marketing resources, as well as
greater name recognition and a larger customer base, than our other licensees.
In the event that Microsoft increases its share of this market, our royalty
revenue from other licensees in this market segment might decline.
BECAUSE WE NO LONGER RECEIVE ROYALTY REVENUE UNDER OUR CURRENT AGREEMENT WITH
MICROSOFT, OUR ROYALTY REVENUES IN FUTURE PERIODS MAY DECLINE.
As described above, revenue recognized under our current agreement with
Microsoft ended in mid-July 2000. Because the agreement with Microsoft accounted
for a substantial portion of our royalty revenues, our royalty revenues in
future periods will decline if we do not either enter into agreements with
additional licensees of our touch-enabling technologies or receive larger
royalty payments from our existing licensees.
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.
28
We derived 9% of our total revenues and 33% of our royalty revenue for
the twelve months ended December 31, 1999 from Logitech. For the nine-month
period ended September 30, 2000, we derived 5% of our total revenues and 19% of
our royalty revenue from Logitech and for the three-month period ended September
30, 2000, we derived 2% of our total revenues and 29% 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.
Intellectual property litigation, whether brought by us or by others,
could result in the expenditure of significant financial resources and the
diversion of management's time and efforts. From time to time, we initiate
claims against third parties that we believe infringe our intellectual property
rights. To date, most of these claims have not led to any litigation. However,
on June 18, 2000, we filed an action for patent infringement in the United
States District Court for the Northern District of California against InterAct
Accessories, Inc., one of our existing licensees, based on certain unlicensed
gamepad and steering wheel products currently being marketed by InterAct. This
litigation, like any litigation brought to protect and enforce our intellectual
property rights, could be costly, time-consuming and distracting to management
and could result in the impairment or loss of portions of our intellectual
property. In addition, any litigation in which we are accused of infringement
may cause product shipment delays, require us to develop non-infringing
technology or require us to enter into royalty or license agreements even before
the issue of infringement has been decided on the merits. If any litigation were
not resolved in our favor, we could become subject to substantial damage claims
from third parties and indemnification claims from our licensees. We and our
licensees could be enjoined from the continued use of the technology at issue
without a royalty or license agreement. Royalty or license agreements, if
required, might not be available on acceptable terms, or at all. If a third
party claiming infringement against us prevailed and we could not develop
non-infringing technology or license the infringed or similar technology on a
timely and cost-effective basis, our expenses would increase and our revenues
could decrease.
We attempt to avoid infringing known proprietary rights of third
parties. However, 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 these or
other 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.
FAILURE TO QUALIFY FOR POOLING-OF-INTERESTS ACCOUNTING TREATMENT WITH RESPECT TO
OUR RECENT ACQUISITION OF HT MAY HARM OUR FUTURE OPERATING RESULTS.
We have accounted for our recent acquisition of HT as a
pooling-of-interests business combination. Under the pooling-of-interests method
of accounting, each of Immersion and HT's historical recorded assets and
liabilities are carried forward to the combined company at their recorded
amounts. In addition, the operating results of the combined company include
Immersion's and HT's operating results for all of fiscal 2000 and Immersion's
and HT's historical reported operating results for prior periods have been
combined and restated as the operating results of the combined company.
29
Events may occur that cause the HT merger to no longer qualify for
pooling-of-interests accounting treatment. In that case, we would be required to
account for the acquisition under the purchase method of accounting. Under that
method, we would record the estimated fair value of Immersion common stock
issued in the merger as the cost of acquiring the business of HT. That cost
would be allocated to the net assets acquired, with the excess of the estimated
fair value of Immersion common stock over the fair value of net assets acquired
recorded as goodwill or other intangible assets. To the extent goodwill and
other intangibles are recorded on Immersion's financial statements, Immersion
would be required to take a noncash charge to earnings every year for periods of
up to 5 years until the full values of this goodwill and other intangibles have
been fully amortized. The fair value of Immersion common stock issued in the
merger is much greater than the historical net book value at which HT carried
its assets in its accounts. Therefore, purchase accounting treatment would
result in charges to operations of the combined company for several years
compared to pooling-of-interests accounting treatment.
ROBERT O'MALLEY, OUR CHIEF EXECUTIVE OFFICER AND PRESIDENT, RECENTLY JOINED US
AND IF THERE ARE DIFFICULTIES WITH THIS LEADERSHIP TRANSITION IT COULD IMPEDE
THE EXECUTION OF OUR BUSINESS STRATEGY.
Bob O'Malley, our Chief Executive Officer and President, joined us in October
2000. Our success will depend to a significant extent on Mr. O'Malley's ability
to successfully lead and motivate our employees, and to work effectively with
our executive staff. If this leadersip transition is not successful, our ability
to execute our business strategy would be impeded.
WE DEPEND ON A SINGLE SUPPLIER TO PRODUCE OUR IMMERSION PROCESSORS AND MAY LOSE
CUSTOMERS IF THIS SUPPLIER DOES NOT MEET OUR REQUIREMENTS.
We have one 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. We have limited control over delivery schedules,
quality assurance, manufacturing capacity, yields, costs and misappropriation of
our intellectual property. Although our supplier warrants that microprocessors
it supplies to us or to our customers will conform to our specifications and be
free from defects in materials and workmanship for a period of one year from
delivery, any delays in delivery of the processor, quality problems or cost
increases could cause us to lose customers and could damage our relationships
with our licensees.
IF WE ARE UNABLE TO CONTINUALLY IMPROVE, AND REDUCE THE COST OF, OUR
TECHNOLOGIES, COMPANIES MAY NOT INCORPORATE OUR TECHNOLOGIES INTO THEIR
PRODUCTS, WHICH COULD IMPAIR OUR REVENUE GROWTH.
Our ability to achieve revenue growth depends on our continuing ability
to improve, and reduce the cost of, our technologies and to introduce these
technologies to the marketplace in a timely manner. If our development efforts
are not successful or are significantly delayed, companies may not incorporate
our technologies into their products and our revenue growth may be impaired.
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 WITH OUR IMMERSION PROCESSORS MAY LEAD TO REDUCED PRICES AND SALES
VOLUMES OF OUR MICROPROCESSORS.
30
To date, the market for our Immersion Processors has been small. If the
market grows, we expect more companies to compete in this market. Increased
competition could result in significant price erosion, reduced revenues or loss
of market share, any of which would have an adverse effect on our business and
operating results. Currently, semiconductor companies, including Mitsubishi and
ST Microelectronics, manufacture products that compete with our microprocessors,
and ST Microelectronics has recently started selling to our licensees at least
one competitive chip for use in low-end touch-enabled peripheral products. These
companies may have greater financial, technical, manufacturing, distribution and
other resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than we do.
Accordingly, we may not be able to compete successfully against either current
or future competitors.
WE MIGHT BE UNABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD SLOW
THE DEVELOPMENT AND DEPLOYMENT OF OUR TECHNOLOGIES.
Our ability to develop and deploy our technologies and to sustain our
revenue growth depends upon the continued service of our executive officers and
other key personnel and upon hiring additional key personnel. We intend to hire
additional sales, support, marketing and research and development personnel.
Competition for these individuals is intense, and we may not be able to attract,
assimilate or retain additional highly qualified personnel in the future.
Several of our executive officers and key employees hold stock options with
exercise prices considerably below the current market price of our common stock,
which may impair our ability to retain the services of such employees. In
addition, our technologies are complex and we rely upon the continued service of
our existing engineering personnel to support licensees, enhance existing
technology and develop new technologies.
WE HAVE EXPERIENCED RAPID GROWTH AND CHANGE IN OUR BUSINESS, AND OUR FAILURE TO
MANAGE THIS AND ANY FUTURE GROWTH COULD HARM OUR BUSINESS.
In addition to the employees of HT and VTI that we are currently
integrating, we are rapidly increasing the number of our employees in our San
Jose headquarters. Our business may be harmed if we do not integrate and train
our new employees quickly and effectively. We also cannot be sure that our
revenues will continue to grow at a rate sufficient to support the costs
associated with an increasing number of employees. Any future periods of rapid
growth may place significant strains on our managerial, financial, engineering
and other resources. The rate of any future expansion, in combination with our
complex technologies, may demand an unusually high level of managerial
effectiveness in anticipating, planning, coordinating and meeting our
operational needs as well as the needs of our licensees.
PRODUCT LIABILITY CLAIMS, INCLUDING CLAIMS RELATING TO ALLEGED REPETITIVE STRESS
INJURIES, COULD BE TIME-CONSUMING AND COSTLY TO DEFEND, AND COULD EXPOSE US TO
LOSS.
Claims that consumer products have flaws or other defects that lead to
personal or other injury are common in the computer peripherals industry. If
products that we or our licensees sell cause personal injury, financial loss or
other injury to our or our licensees' customers, the customers or our licensees
may seek damages or other recovery from us. Any claims against us would be
time-consuming, expensive to defend and distracting to management and could
result in damages and injure our reputation or the reputation of our licensees
or their products. This damage could limit the market for our licensees'
touch-enabled products and harm our results of operations. In the past,
manufacturers of peripheral products, such as computer mice, have been subject
to claims alleging that use of their products has caused or contributed to
various types of repetitive stress injuries, including carpal tunnel syndrome.
We have not experienced any product liability claims to date. Although our
license agreements typically contain provisions designed to limit our exposure
to product liability claims, existing or future laws or unfavorable judicial
decisions could limit or invalidate the provisions.
IF WE FAIL TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW APPLICATIONS AND
PLATFORMS, WE MAY NOT BE ABLE TO CREATE A MARKET FOR OUR TECHNOLOGIES AND OUR
ABILITY TO GROW AND OUR RESULTS OF OPERATIONS MIGHT BE HARMED.
Our initiatives to develop new and enhanced technologies and to license
technologies for new applications and new platforms may not be successful. Any
new or enhanced technologies may not be favorably received by consumers and
could damage our reputation or our brand. Expanding our technology could also
require significant additional expenses and strain our management, financial and
operational resources. The lack of market acceptance
31
of these efforts or our inability to generate additional revenues sufficient to
offset the associated costs could harm our results of operations.
OUR STOCK MAY BE VOLATILE.
The stock market has experienced extreme volatility that often has been
unrelated or disproportionate to the performance of particular companies. These
market fluctuations may cause our stock price to decline regardless of our
performance. The market price or our common stock has been, and in the future
could be, significantly affected by factors such as: actual or anticipated
fluctuations in operating results; announcements of technical innovations; new
products or new contracts; sales or the perception in the market of possible
sales of large number of shares of Immersion common stock by insiders or others;
changes in securities analysts' recommendations; changing circumstances
regarding competitors or their customers; governmental regulatory action;
developments with respect to patents or proprietary rights; changes in financial
estimates by securities analysts; and general market conditions. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has been initiated against that company.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS RETAIN SIGNIFICANT
CONTROL OVER US, WHICH MAY LEAD TO CONFLICTS WITH OTHER STOCKHOLDERS OVER
CORPORATE GOVERNANCE MATTERS.
Our current directors, officers and more than 5% stockholders, as a
group, beneficially own more than 38% of our outstanding common stock. Acting
together, these stockholders would be able to exercise significant control on
matters that our stockholders vote upon, including the election of directors and
mergers or other business combinations, which could have the effect of delaying
or preventing a third party from acquiring control over or merging with us.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. In addition, certain provisions of Delaware law may discourage,
32
delay or prevent someone from acquiring or merging with us. These provisions
could limit the price that investors might be willing to pay in the future for
shares.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has limited exposure to financial market risks, including
changes in interest rates. The fair value of the Company's portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the major
portion of our investment portfolio. An increase or decrease in interest rates
would not significantly increase or decrease interest expense on debt
obligations due to the fixed nature of the Company's debt obligations. The
Company's foreign operations are limited in scope and thus the Company is not
materially exposed to foreign currency fluctuations.
33
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 22, 2000, the Company's Board of Directors adopted a
resolution increasing the number of directors of the Company from four to five
and elected Robert O'Malley, the Company's President and CEO, to serve as a
director of the Company until the 2002 annual meeting of the stockholders of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith:
Exhibit
Number Description
- ------ -----------
10.1 HT Medical Systems, Inc. Amended Secured Convertible Promissory Note
21.1 Subsidiaries of Immersion
27.1 Financial Data Schedule for the period ended September 30, 2000.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on September 15, 2000
reporting the completion of the Company's acquisition of Virtual Technologies,
Inc. on August 31, 2000.
The Company filed a Current Report on Form 8-K on October 13, 2000
reporting the completion of the Company's acquisition of HT Medical Systems,
Inc. on September 29, 2000.
34
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: November 13, 2000 /s/ Louis Rosenberg
----------------------------
Louis Rosenberg
Chairman
Date: November 14, 2000 /s/ Victor Viegas
---------------------------
Victor Viegas
Vice President, Finance and
Chief Financial Officer
Date: November 13, 2000 /s/ Robert O'Malley
----------------------------
Robert O'Malley
President and Chief
Executive Officer
35
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.1 HT Medical Systems, Inc. Amended Secured Convertible Promissory Note
21.1 Subsidiaries of Immersion
27.1 Financial Data Schedule for the period ended September 30, 2000.
- ----------