EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Immersion Corporation:
We have audited the accompanying consolidated balance sheets of
Immersion Corporation (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
2003. Our audits also included the consolidated financial statement schedule
listed in Exhibit 99.3. These consolidated financial statements and the
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and the consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Immersion Corporation at
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set therein.
As discussed in Note 5 to the consolidated financial statements, in
2002 the Company changed its method of accounting for goodwill and other
intangible assets to conform to Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets."
Deloitte & Touche LLP
San Jose, California
March 23, 2004
19
IMMERSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
--------------------
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 21,738 $ 8,717
Accounts receivable (net of allowances for doubtful accounts of:
2003, $147; and 2002, $334) ........................................ 4,927 3,645
Inventories .......................................................... 2,099 2,128
Prepaid expenses and other current assets ............................ 1,099 1,151
-------- --------
Total current assets ............................................... 29,863 15,641
Property and equipment, net ............................................ 1,454 2,044
Intangibles and other assets, net ...................................... 6,596 6,616
Other investments ...................................................... - 1,000
-------- --------
Total assets ........................................................... $ 37,913 $ 25,301
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ..................................................... $ 1,752 $ 1,160
Accrued compensation ................................................. 864 671
Other current liabilities ............................................ 2,066 1,311
Deferred revenue and customer advances ............................... 3,116 3,515
Current portion of long-term debt .................................... 10 64
Current portion of capital lease obligation .......................... 23 22
-------- --------
Total current liabilities .......................................... 7,831 6,743
Long-term debt, less current portion ................................... 16 26
Capital lease obligation, less current portion ......................... - 25
Long-term deferred revenue, less current portion ....................... 4,235 4,559
Long-term customer advance from Microsoft (Note 9) ..................... 27,050 -
-------- --------
Total liabilities .................................................. 39,132 11,353
-------- --------
Commitments and contingencies (Notes 9, 10 and 17)
Stockholders' equity (deficit):
Common stock - $0.001 par value; 100,000,000 shares authorized; shares
issued and outstanding: 2003, 20,670,541; 2002, 20,137,040 ......... 89,903 89,061
Warrants ............................................................. 1,974 1,974
Deferred stock compensation .......................................... (130) (1,046)
Accumulated other comprehensive income (loss) ........................ 33 (16)
Accumulated deficit .................................................. (92,999) (76,025)
-------- --------
Total stockholders' equity (deficit) ............................... (1,219) 13,948
-------- --------
Total liabilities and stockholders' equity (deficit) ................... $ 37,913 $ 25,301
======== ========
See notes to consolidated financial statements.
20
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Revenues:
Royalty and license .......................................................... $ 6,088 $ 5,231 $ 5,362
Product sales ................................................................ 9,455 10,723 10,360
Development contracts and other .............................................. 4,680 4,281 3,510
-------- -------- --------
Total revenues ............................................................. 20,223 20,235 19,232
Costs and expenses:
Cost of product sales (exclusive of amortization of intangibles shown
separately below) .......................................................... 5,276 5,881 6,074
Sales and marketing (exclusive of amortization of deferred stock compensation) 7,764 7,566 9,868
Research and development (exclusive of amortization of deferred stock
compensation) .............................................................. 7,045 6,496 7,548
General and administrative (exclusive of amortization of deferred stock
compensation) .............................................................. 12,508 8,064 7,694
Amortization of intangibles and deferred stock compensation (*) .............. 2,480 3,108 5,252
Impairment of goodwill ....................................................... - 3,758 -
Other charges ................................................................ - 397 224
-------- -------- --------
Total costs and expenses ................................................... 35,073 35,270 36,660
-------- -------- --------
Operating loss ................................................................. (14,850) (15,035) (17,428)
Interest and other income ...................................................... 126 306 1,088
Interest expense ............................................................... (50) (582) (859)
Other expense .................................................................. (2,046) (1,219) (4,547)
-------- -------- --------
Loss before provision for income taxes ......................................... (16,820) (16,530) (21,746)
Provision for income taxes ..................................................... (154) - -
-------- -------- --------
Net loss ....................................................................... $(16,974) $(16,530) $(21,746)
======== ======== ========
Basic and diluted net loss per share ........................................... $ (0.83) $ (0.83) $ (1.16)
======== ======== ========
Shares used in calculating basic and diluted net loss per share ................ 20,334 19,906 18,702
======== ======== ========
(*) Amortization of intangibles and deferred stock compensation
Amortization of intangibles ............................................... $ 1,619 $ 1,830 $ 3,756
Deferred stock compensation - sales and marketing ......................... 4 12 10
Deferred stock compensation - research and development .................... 854 1,248 1,231
Deferred stock compensation - general and administrative .................. 3 18 255
-------- -------- --------
Total ..................................................................... $ 2,480 $ 3,108 $ 5,252
======== ======== ========
See notes to consolidated financial statements.
21
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK DEFERRED OTHER
--------------------- STOCK COMPREHENSIVE
SHARES AMOUNT WARRANTS COMPENSATION INCOME (LOSS)
---------- -------- -------- ------------ -------------
Balances at January 1, 2001 ..... 18,476,061 $ 89,334 $ 1,990 $ (5,255) $ 40
Net loss ........................
Change in net unrealized gains
from short-term investments ... 2
Foreign currency translation
adjustment. ................... (61)
Comprehensive loss ..............
Repayment of note receivable ....
Issuance of stock for ESPP
purchase ...................... 41,824 297
Exercise of stock options ....... 455,223 466
Reversal of deferred stock
compensation due to
cancellation of stock options.. (803) 803
Amortization of deferred stock
compensation .................. 1,496
---------- -------- -------- -------- -----
Balances at December 31, 2001 ... 18,973,108 $ 89,294 $ 1,990 $ (2,956) $ (19)
NOTE
RECEIVABLE TOTAL
FROM ACCUMULATED COMPREHENSIVE
STOCKHOLDER DEFICIT TOTAL LOSS
----------- ----------- --------- -------------
Balances at January 1, 2001 ...... $ (17) $ (37,749) $ 48,343
Net loss ......................... (21,746) (21,746) $ (21,746)
Change in net unrealized gains
from short-term investments .... 2 2
Foreign currency translation
adjustment. .................... (61) (61)
---------
Comprehensive loss ............... $ (21,805)
=========
Repayment of note receivable ..... 17 17
Issuance of stock for ESPP
purchase ....................... 297
Exercise of stock options ........ 466
Reversal of deferred stock
compensation due to
cancellation of stock options... -
Amortization of deferred stock
compensation ................... 1,496
------- ---------- ---------
Balances at December 31, 2001..... $ - $ (59,495) $ 28,814
(CONTINUED)
22
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK DEFERRED OTHER
--------------------- STOCK COMPREHENSIVE
SHARES AMOUNT WARRANTS COMPENSATION INCOME (LOSS)
---------- -------- -------- ------------ -------------
Net loss .........................
Foreign currency translation
adjustment ..................... 3
Comprehensive loss ...............
Exercise of common stock warrants 11,972 66 (16)
Issuance of stock for ESPP
purchase ....................... 41,957 95
Exercise of stock options ........ 1,110,003 224
Stock based compensation ......... 14
Reversal of deferred stock
compensation due to cancellation
of stock options ............... (632) 632
Amortization of deferred stock
compensation ................... 1,278
---------- -------- -------- --------- -----
Balances at December 31, 2002 20,137,040 $ 89,061 $ 1,974 $ (1,046) $ (16)
NOTE
RECEIVABLE TOTAL
FROM ACCUMULATED COMPREHENSIVE
STOCKHOLDER DEFICIT TOTAL LOSS
----------- ----------- --------- -------------
Net loss ......................... (16,530) (16,530) $ (16,530)
Foreign currency translation
adjustment ..................... 3 3
-----------
Comprehensive loss ............... $ (16,527)
===========
Exercise of common stock warrants. 50
Issuance of stock for ESPP
purchase ....................... 95
Exercise of stock options ......... 224
Stock based compensation .......... 14
Reversal of deferred stock
compensation due to cancellation
of stock options ................ -
Amortization of deferred stock
compensation .................... 1,278
------- ----------- ---------
Balances at December 31, 2002 ..... $ - $ (76,025) $ 13,948
(CONTINUED)
23
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK DEFERRED OTHER
--------------------- STOCK COMPREHENSIVE
SHARES AMOUNT WARRANTS COMPENSATION INCOME (LOSS)
---------- -------- -------- ------------ -------------
Net loss ..........................
Foreign currency translation
adjustment ...................... 49
Comprehensive loss ................
Exercise of common stock warrants .
Issuance of stock for ESPP purchase 31,367 35
Exercise of stock options ......... 502,134 858
Stock based compensation .......... 4
Reversal of deferred stock
compensation due to cancellation
of stock options ................ (55) 55
Amortization of deferred stock
compensation .................... 861
---------- -------- -------- ---------- ----------
Balances at December 31, 2003 ..... 20,670,541 $ 89,903 $ 1,974 $ (130) $ 33
========== ======== ======== ========== ==========
TOTAL
ACCUMULATED COMPREHENSIVE
DEFICIT TOTAL LOSS
----------- --------- -------------
Net loss .......................... (16,974) (16,974) $ (16,974)
Foreign currency translation
adjustment ...................... 49 49
----------
Comprehensive loss ................ $ (16,925)
==========
Exercise of common stock warrants . -
Issuance of stock for ESPP purchase 35
Exercise of stock options ......... 858
Stock based compensation .......... 4
Reversal of deferred stock
compensation due to cancellation
of stock options ................ -
Amortization of deferred stock
compensation .................... 861
----------- ---------
Balances at December 31, 2003 ..... $ (92,999) $ (1,219)
=========== =========
(CONCLUDED)
See notes to consolidated financial statements.
24
IMMERSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
---------------------------------
2003 2002 2001
-------- -------- ---------
Cash flows from operating activities:
Net loss ................................................................................ ($16,974) ($16,530) ($21,746)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization ......................................................... 1,040 1,294 1,263
Amortization of intangibles ........................................................... 1,619 1,830 3,756
Amortization of deferred stock compensation ........................................... 861 1,278 1,496
Interest and other expense - Microsoft (Note 9) ....................................... 1,050 - -
Amortization of discount on notes payable ............................................. 1 293 451
Fair value adjustment for warrant liability ........................................... (2) (118) (169)
Noncash interest expense .............................................................. 16 212 316
Noncash compensation expense .......................................................... 4 14 -
Impairment of goodwill ................................................................ - 3,758 -
Loss on disposal of equipment ......................................................... 3 22 34
Loss on writedown of investments ...................................................... 1,000 1,200 4,300
Loss on writedown of interest receivable .............................................. - - 239
Changes in operating assets and liabilities:
Accounts receivable ................................................................. (1,257) 135 (344)
Inventories ......................................................................... 29 (163) (256)
Prepaid expenses and other current assets ........................................... 26 450 (343)
Accounts payable .................................................................... (207) 421 (1,034)
Accrued compensation and other current liabilities .................................. 933 237 (430)
Deferred revenue and customer advances .............................................. (722) 7,121 21
-------- -------- --------
Net cash provided by (used in) operating activities ............................... (12,580) 1,454 (12,446)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments ..................................................... - (5) (3,564)
Sales and maturities of short-term investments .......................................... - 2,550 3,381
Purchase of property and equipment ...................................................... (441) (442) (612)
Other assets ............................................................................ (1,573) (566) (481)
-------- -------- --------
Net cash provided by (used in) investing activities ............................... (2,014) 1,537 (1,276)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock ................................................................ 35 95 297
Exercise of stock options ............................................................... 858 224 466
Exercise of warrants .................................................................... - 50 -
Long-term customer advance from Microsoft (Note 9) ...................................... 26,000 - -
Payment on notes payable and capital leases ............................................. (102) (5,042) (120)
Proceeds from shareholder note .......................................................... - - 17
-------- -------- --------
Net cash provided by (used in) financing activities ............................... 26,791 (4,673) 660
-------- -------- --------
(Continued)
25
Effect of exchange rates on cash and cash equivalents ..................................... 824 18 (31)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...................................... 13,021 (1,664) (13,093)
Cash and cash equivalents:
Beginning of year ....................................................................... 8,717 10,381 23,474
-------- -------- --------
End of year ............................................................................. $ 21,738 $ 8,717 $ 10,381
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................................. $ 32 $ 1,003 $ 92
======== ======== ========
Supplemental disclosure of noncash investing and financing activities:
Change in net unrealized gains from short-term investments .............................. $ - $ - $ 2
======== ======== ========
See notes to consolidated financial statements. (Concluded)
26
IMMERSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immersion Corporation (the "Company") was
incorporated in May 1993 in California and reincorporated in Delaware in 1999
and provides technologies that let users interact with digital devices using
their sense of touch.
Principles of Consolidation and Basis of Presentation - The
consolidated financial statements include the accounts of Immersion Corporation
and its majority-owned subsidiaries. All intercompany accounts, transactions and
balances have been eliminated in consolidation.
Reclassifications - Certain reclassifications have been made to prior
year balances in order to conform to the current year presentation. These
reclassifications had no material effect on net loss or stockholders' equity
(deficit).
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original or remaining maturity of less than three
months at the date of purchase to be cash equivalents.
Short-Term Investments - Short-term investments consist primarily of
highly liquid debt instruments purchased with an original or remaining maturity
at the date of purchase of greater than 90 days and investments in mutual funds.
Short-term investments are classified as available-for-sale securities and are
stated at market value with unrealized gains and losses reported as a component
of accumulated other comprehensive income (loss) within stockholders' equity
(deficit).
Inventories - Inventories are stated at the lower of cost (principally
on a standard cost basis which approximates FIFO) or market.
Property and Equipment - Property is stated at cost and is generally
depreciated using the straight-line method over the estimated useful life of the
related asset. The estimated useful lives are as follows:
Computer equipment and purchased software............. 3 years
Machinery and equipment............................... 3-5 years
Furniture and fixtures................................ 5-7 years
Leasehold improvements are amortized over the shorter of the lease term
or their useful life.
Intangible Assets - In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives will be amortized and that
goodwill and intangible assets with indefinite lives will not be amortized, but
rather will be tested at least annually for impairment. The Company adopted SFAS
No. 142 effective January 1, 2002 and discontinued the amortization of goodwill
(see Note 5).
In addition to purchased intangible assets the Company capitalizes the
external legal and filing fees associated with its patents and trademarks. These
costs are amortized once the patent or trademark is issued.
For intangibles with definite useful lives amortization is recorded
utilizing the straight-line method, which approximates the pattern of
consumption, over the estimated useful lives of the respective assets, generally
two to ten years.
27
Long-Lived Assets - The Company evaluates its long-lived assets for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," whenever events or changes in circumstances
indicate that the carrying amount of that asset may not be recoverable. An
impairment loss would be recognized when the sum of the undiscounted future net
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. Measurement of an impairment loss
for long-lived assets and certain identifiable intangible assets that management
expects to hold and use are based on the fair value of the asset. As of December
31, 2003, management believes that no impairment losses are required.
Product Warranty - The Company sells the majority of its products with
warranties ranging from three to twenty-four months. Historically,
warranty-related costs have not been significant.
Revenue Recognition - The Company recognizes revenues in accordance
with applicable accounting standards including Staff Accounting Bulletin ("SAB")
No. 104, "Revenue Recognition," EITF 00-21 "Accounting for Revenue Arrangements
with Multiple Deliverables" and the American Institute of Certified Public
Accountants' (the "AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the fee
is fixed and determinable, and collectibility is probable. The Company derives
its revenues from three principal sources: royalty and license fees, product
sales, and development contracts. The Company recognizes royalty and license
revenue based on royalty reports or related information received from the
licensee as well as time-based licenses of its intellectual property portfolio.
Up-front payments under license agreements are deferred and recognized as
revenue based on either the royalty reports received or amortized over the
license period depending on the nature of the agreement. Advance payments under
license agreements that also require the Company to provide future services to
the licensee are deferred and recognized over the service period when vendor
specific objective evidence related to the value of the services does not exist.
Examples of the Company's typical license models are as follows:
LICENSE REVENUE MODEL REVENUE RECOGNITION
--------------------- -------------------
Perpetual license of intellectual property Based on royalty reports received from
portfolio based on per unit royalties, no licensees. No further obligations to
services contracted licensee exist.
Time-based license of intellectual Based on straight-line amortization of an
property portfolio with up-front annual minimum/up-front payments
payments and/or annual minimum recognized over contract period or
royalty requirements, no services annual minimum period. No further
contracted obligations to licensee exist.
Perpetual license of intellectual property Based on cost-to-cost percentage-of-
portfolio or technology license along completion accounting method over the
with contract for development work service period. Obligation to licensee
exists until development work is
complete.
License of software or technology, no Up-front revenue recognition based
modification necessary on SOP 97-2 criteria or EITF 00-21, as
applicable.
The Company generally licenses and recognizes revenue from its
licensees under the above license models or a combination thereof. Individual
contracts may have characteristics that do not fall within a specific license
model or may have characteristics of a combination of license models. Under
those circumstances, the Company recognizes revenue in accordance with SAB No.
104, EITF 00-21 and SOP 97-2, as amended, to guide the accounting treatment for
each individual contract. If the information received from the Company's
licensees regarding royalties is
28
incorrect or inaccurate, it could adversely affect revenue in future periods. To
date all information received from the Company's licensees has caused no
material adjustment to period revenues. The Company recognizes revenues from
product sales when the product is shipped provided collection is determined to
be probable and no significant obligation remains. The Company sells the
majority of its products with warranties ranging from three to twenty-four
months. The Company records the estimated warranty costs during the quarter the
revenue is recognized. Historically, warranty-related costs and related accruals
have not been significant. The Company offers a general right of return on the
MicroScribe G2 product line for 14 days after purchase. The Company recognizes
revenue at the time of shipment of a MicroScribe digitizer and provides an
accrual for potential returns based on historical experience. No other general
right of return is offered on its products. Development contract revenues are
recognized under the cost-to-cost percentage-of-completion accounting method
based on physical completion of the work to be performed. Losses on contracts
are recognized when determined. Revisions in estimates are reflected in the
period in which the conditions become known. The Company's revenue recognition
policies are significant because its revenue is a key component of its results
of operations. In addition, the Company's revenue recognition determines the
timing of certain expenses, such as commissions and royalties.
At December 31, 2003, the Company has no obligation to repay amounts
received under development contracts with the U.S. government or other
commercial customers.
Advertising - Advertising costs (including obligations under
cooperative marketing programs) are expensed as incurred and included in sales
and marketing expense. Advertising expense was $166,000, $388,000 and $817,000
in 2003, 2002 and 2001 respectively.
Research and Development - Research and development costs are expensed
as incurred. The Company has generated revenues from development contracts with
the U.S. government and other commercial customers that have enabled it to
accelerate its own product development efforts. Such development revenues have
only partially funded the Company's product development activities, and the
Company generally retains ownership of the products developed under these
arrangements. As a result, the Company classifies all development costs related
to these contracts as research and development expenses.
Income Taxes - The Company provides for income taxes using the asset
and liability approach defined by SFAS No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are recognized for the expected tax
consequences between the tax bases of assets and liabilities and their reported
amounts. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized and are reversed at such time
that realization is believed to be more likely than not.
Software Development Costs - Certain of the Company's products include
software. Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized in accordance with SFAS No. 86, "Computer Software to
be Sold, Leased or Otherwise Marketed." The Company considers technological
feasibility to be established upon completion of a working model of the software
and the related hardware. Because the Company believes its current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no costs have been capitalized to date.
Stock-Based Compensation - The Company accounts for its stock-based
awards to employees using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and its related interpretations. The Company accounts for
stock-based awards to non-employees in accordance with EITF 96-18. Pro forma
disclosures required under SFAS No. 123, "Accounting for Stock-Based
Compensation," as if the Company had adopted the fair value based method of
accounting for stock options are as follows (in thousands, except per share
amounts):
29
2003 2002 2001
---- ---- ----
Net loss - as reported ............................... $(16,974) $(16,530) $(21,746)
Add: Stock-based employee compensation included in
reported net loss, net of related tax effects ...... 861 1,278 1,496
Less: Stock-based compensation expense determined
using fair value method, net of tax ................ (4,134) (6,792) (15,125)
-------- -------- --------
Net loss - pro forma ................................. $(20,247) $(22,044) $(35,375)
======== ======== ========
Basic and diluted loss per common share - as reported. $ (0.83) $ (0.83) $ (1.16)
Basic and diluted loss per common share - pro forma .. $ (1.00) $ (1.11) $ (1.89)
Comprehensive Income (Loss) - Comprehensive income (loss) includes net
loss as well as other items of comprehensive income (loss). The Company's other
comprehensive loss consists of unrealized gains and losses on available-for-sale
securities and foreign currency translation adjustments. Total comprehensive
loss and the components of accumulated other comprehensive income (loss) are
presented in the accompanying Consolidated Statement of Stockholders' Equity
(Deficit).
Net Loss per Share - Basic net loss per share excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase). Diluted net
loss per common share was the same as basic net loss per common share for all
periods presented since the effect of any potentially dilutive securities is
excluded, as they are anti-dilutive because of the Company's net losses.
Use of Estimates - The preparation of consolidated financial statements
and related disclosures in accordance with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risks - Financial instruments that potentially
subject the Company to a concentration of credit risk principally consist of
cash and cash equivalents, short-term investments and accounts receivable. The
Company invests primarily in money market accounts, commercial paper, and debt
securities of U.S. government agencies. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally, these deposits may be
redeemed upon demand. The Company sells products primarily to companies in North
America, Europe and the Far East. To reduce credit risk, management performs
periodic credit evaluations of its customers' financial condition. The Company
maintains reserves for potential credit losses, but historically has not
experienced any significant losses related to individual customers or groups of
customers in any particular industry or geographic area.
Certain Significant Risks and Uncertainties - The Company operates in a
dynamic industry and, accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a negative effect on the Company in terms of its future
financial position and results of operations: its ability to obtain additional
financing; the mix of revenues; the loss of significant customers; fundamental
changes in the technology underlying the Company's products; market acceptance
of the Company's and its licensees' products under development; the availability
of contract manufacturing capacity; development of sales channels; litigation or
other claims against the Company; the ability to successfully assert its patent
rights against others; the hiring, training and retention of key employees;
successful and timely completion of product and technology development efforts;
and new product or technology introductions by competitors.
30
The Company has incurred net losses each year since 1997 including
losses of $17.0 million in 2003, $16.5 million in 2002, and $21.7 million in
2001. As of December 31, 2003, the Company had an accumulated deficit of $93.0
million. The Company believes its cash and cash equivalents of $21.7 million are
sufficient to meet its anticipated cash needs for working capital and capital
expenditures through at least December 31, 2004. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may seek to raise additional financing or reduce the scope of its
planned product development and marketing efforts.
Supplier Concentrations - The Company depends on a single supplier to
produce some of its medical simulators. While the Company seeks to maintain a
sufficient level of supply and endeavors to maintain ongoing communications with
this supplier to guard against interruptions or cessation of supply, any
disruption in the manufacturing process from its sole supplier could adversely
affect the Company's ability to deliver its products, ensure quality workmanship
and could result in a reduction of the Company's product sales.
Fair Value of Financial Instruments - Financial instruments consist
primarily of cash equivalents, short-term investments, accounts receivable,
accounts payable and long-term debt. Cash equivalents and short-term investments
are stated at fair value based on quoted market prices. The recorded cost of
accounts receivable, accounts payable and long-term debt approximate the fair
value of the respective assets and liabilities.
Foreign Currency Translation - The functional currency of the Company's
foreign subsidiary is its local currency. Accordingly, gains and losses from the
translation of the financial statements of the foreign subsidiary are reported
as a separate component of accumulated other comprehensive income (loss).
Foreign currency transaction gains and losses are included in earnings.
Recent Accounting Pronouncements - In November 2002, the EITF reached a
consensus on Issue No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables." The EITF concluded that revenue arrangements with multiple
elements should be divided into separate units of accounting if the deliverables
in the arrangement have value to the customer on a standalone basis, if there is
objective and reliable evidence of fair value of the undelivered elements, and
as long as there are no rights of return or additional performance guarantees by
the Company. The provisions of EITF Issue No. 00-21 are applicable to agreements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
EITF No. 00-21 did not have a material impact on the Company's financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." The statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company adopted the disclosure provisions
of SFAS No. 148 at December 31, 2002.
The FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities," in January 2003, and a revised interpretation of
FIN 46 ("FIN 46-R") in December 2003. FIN 46 requires certain variable interest
entities ("VIEs") to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 are effective immediately
for all arrangements entered into after January 31, 2003. Since January 31,
2003, the Company has not invested in any entities it believes are variable
interest entities for which the Company is the primary beneficiary. For all
arrangements entered into after January 31, 2003, the Company is required to
continue to apply FIN 46 through the end of the first quarter of fiscal 2004.
The Company is required to adopt the provisions of FIN 46-R for those
arrangements in the second quarter of fiscal 2004. For arrangements entered into
prior to February 1, 2003, the Company is required to adopt the provisions of
FIN 46-R in the second quarter of fiscal 2004. The Company does not expect the
adoption of FIN 46-R to have an impact on the financial position, results of
operations or cash flows of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires that certain financial instruments be presented as
31
liabilities that were previously presented as equity or as temporary equity.
Such instruments include mandatory redeemable preferred and common stock, and
certain options and warrants. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and was effective at the
beginning of the first interim period beginning after June 15, 2003. In November
2003, the FASB issued FASB Staff Position ("FSP") No. 150-3, "Effective Date,
Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests under SFAS No. 150," which defers the effective date for various
provisions of SFAS No. 150. The Company believes that it has properly classified
and measured in its balance sheets and disclosed in its interim consolidated
financial statements both characteristics of both liabilities and equity
appropriately. While not required by SFAS No. 150, the Company has classified
its Series A Preferred Stock as a liability rather than between total
liabilities and stockholders' equity (deficit).
In December 2003 the SEC issued SAB 104, "Revenue Recognition." SAB 104
updates portions of existing interpretative guidance in order to make this
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104 did not have a material
effect on the Company's consolidated financial statements.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (in thousands):
DECEMBER 31,
-----------------
2003 2002
------- -------
Cash .............................. $ 916 $ 3,510
Cash equivalents:
Certificate of deposit .......... 25 25
Money market funds .............. 20,797 5,182
------- -------
Total cash equivalents ........ 20,822 5,207
------- -------
Total cash and cash equivalents ... $21,738 $ 8,717
======= =======
The Company realized no gains or losses on the sales of
available-for-sale securities in 2003, 2002 and 2001.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31,
---------------
2003 2002
------ ------
Raw materials and subassemblies $1,539 $1,587
Work in process ............... 247 183
Finished goods ................ 313 358
------ ------
Total ....................... $2,099 $2,128
====== ======
4. PROPERTIES AND EQUIPMENT
Property and equipment consist of the following (in thousands):
32
DECEMBER 31,
-------------------
2003 2002
------- --------
Computer equipment and purchased software $ 2,251 $ 2,002
Machinery and equipment ................. 2,010 1,810
Furniture and fixtures .................. 1,320 1,325
Leasehold improvements .................. 692 692
------- -------
Total ................................. 6,273 5,829
Less accumulated depreciation ........... (4,819) (3,785)
------- -------
Property and equipment, net ............. $ 1,454 $ 2,044
======= =======
5. INTANGIBLES AND OTHER ASSETS
The components of intangibles and other assets are as follows (in
thousands):
DECEMBER 31,
--------------------
2003 2002
-------- --------
Patents and technology ........................... $ 8,535 $ 6,962
Other intangibles ................................ 5,748 5,748
Other assets ..................................... 110 83
-------- --------
Gross intangibles and other assets ............... $ 14,393 $ 12,793
Accumulated amortization of patents and technology (3,226) (2,545)
Accumulated amortization of other intangibles .... (4,571) (3,632)
-------- --------
Net purchased intangibles and other assets ....... $ 6,596 $ 6,616
======== ========
Amortization of intangibles during the years ended December 31, 2003
and 2002 was $1.6 million and $1.8 million respectively. The estimated annual
amortization expense for intangible assets as of December 31, 2003 is $1.4
million in 2004, $1.1 million in 2005, $694,000 in 2006, $614,000 in 2007,
$195,000 in 2008, and $271,000 in 2009 through 2014.
In connection with adopting SFAS No. 142, the Company reassessed the
useful lives and the classification of its identifiable intangible assets and
determined that they continued to be appropriate except for acquired workforce
of $82,000, which was reclassified into goodwill.
In conjunction with the adoption of SFAS No. 142 the Company performed
its transition impairment test of goodwill as of January 1, 2002 and determined
that there was no impairment upon adoption of SFAS No. 142. The Immersion
Computing, Entertainment & Industrial reporting unit was tested for impairment
in the fourth quarter of 2002, after the annual forecasting process. The
continued economic slowdown during 2002 caused delayed purchasing decisions by
the Company's customers for its high-end products as well as reduced royalties
from gaming licensees due to a reduction in the general personal computing and
PC gaming peripheral device sales. These factors contributed to the operating
profits and cash flows for this unit during the third and fourth quarter of 2002
to be lower than expected. Based on that trend the earnings forecast for the
next six years was revised. In December 2002, a goodwill impairment loss of $3.8
million was recognized in the Immersion Computing, Entertainment & Industrial
unit. The fair value of that reporting unit was estimated using the expected
present value of future cash flows.
The changes in the carrying amount of goodwill were as follows (in
thousands):
33
YEAR ENDED
DECEMBER 31,
------------
2002
-------
Balance as of December 31, 2001 $ 3,676
Acquired workforce reclass .... 82
Impairment loss ............... (3,758)
-------
Balance as of December 31, 2002 $ -
=======
The following pro forma financial information reflects net loss and
diluted net loss per share as if goodwill and certain intangible assets were not
subject to amortization for the periods presented (in thousands, except per
share amounts):
YEARS ENDED
DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Net loss:
Amounts as reported .................... $ (16,974) $ (16,530) $ (21,746)
Amortization of goodwill and intangibles - - 1,676
---------- ---------- ----------
Pro forma amounts ...................... $ (16,974) $ (16,530) $ (20,070)
========== ========== ==========
Diluted net loss per share:
Amounts as reported .................... $ (0.83) $ (0.83) $ (1.16)
Amortization of goodwill and intangibles - - 0.09
---------- ---------- ----------
Pro forma amounts ...................... $ (0.83) $ (0.83) $ (1.07)
========== ========== ==========
6. OTHER INVESTMENTS
Other investments comprise investments in privately held companies and
are accounted for under the cost method. The balance of other investments was
written off in the fourth quarter of 2003 and comprised the following investment
(in thousands):
DECEMBER 31,
----------------
2003 2002
---- ----
There, Inc., a technology application developer - 1,000
---- ------
$ - $1,000
==== ======
The Company's approach is to hold its investments for the long term and
monitor whether there have been other-than-temporary declines in value of these
investments based on management's estimates of their net realizable value taking
into account the companies' respective business prospects, financial condition
and ability to raise third-party financing. If the decline in fair value has
been determined to be other-than-temporary, an impairment loss is recorded in
other expense and the individual security is written down to a new cost basis.
As a result of its review, the Company recorded a noncash impairment loss of
$1.0 million during the fourth quarter of 2003. The impairment loss was based on
There, Inc.'s continued decline in financial condition, uncertain future revenue
streams and inability to raise adequate third-party financing. Additionally the
Company recorded noncash impairment losses of $1.2 million and $4.3 million on
other investments during 2002 and 2001 respectively.
7. COMPONENTS OF OTHER CURRENT LIABILITIES AND DEFERRED REVENUE AND
CUSTOMER ADVANCES
Other current liabilities consist of (in thousands):
34
DECEMBER 31,
---------------
2003 2002
------ ------
Accrued legal ................................ $ 945 $ 523
Other current liabilities .................... 1,121 788
------ ------
Total other current liabilities ............ $2,066 $1,311
====== ======
Deferred revenue ............................. $3,032 $ 976
Customer advances ............................ 84 2,539
------ ------
Total deferred revenue and customer advances $3,116 $3,515
====== ======
At December 31, 2002, customer advances included a $2.5 million
prepayment from one licensee. Subsequent to December 2002, $500,000 of this
prepayment was returned to the licensee as a result of the final agreement
reached between the Company and the licensee regarding the terms of the
prepayment and the Company reclassified $2.0 million to deferred revenue, which
is being amortized to revenue based on royalty reports received from the
licensee. The deferred revenue increase is primarily attributable to $1.0
million from one customer related to a medical development contract, the
unamortized portion reclassed from customer advances during 2003 noted above,
and other prepayments by the Company's licensees.
8. LONG-TERM DEBT
The components of long-term debt are as follows (in thousands):
DECEMBER 31,
-------------
2003 2002
---- ----
Secured promissory note repaid in 2003 $ - $ 52
Other ................................ 26 38
---- ----
Total .............................. 26 90
Current portion ...................... (10) (64)
---- ----
Total long-term debt ............... $ 16 $ 26
==== ====
Annual maturities of long-term debt at December 31, 2003 are as follows
(in thousands):
2004 ........................................ $ 10
2005 ........................................ 10
2006 ........................................ 6
----
Total........................................ $ 26
====
9. LONG-TERM CUSTOMER ADVANCE FROM MICROSOFT
On July 25, 2003, the Company contemporaneously executed a series of
agreements with Microsoft Corporation ("Microsoft") that (1) settled the
Company's lawsuit against Microsoft, (2) granted Microsoft a worldwide
royalty-free, irrevocable license to the Company's portfolio of patents (the
"License Agreement") in exchange for a payment of $19.9 million, (3) provided
Microsoft with sublicense rights to pursue certain license arrangements directly
with third parties including Sony Computer Entertainment which, if consummated,
would result in payments to the Company (the "Sublicense Rights") and conveyed
to Microsoft the right to a payment of cash in the event of a settlement within
certain parameters of the Company's patent litigation against Sony Computer
Entertainment of America, Inc. and Sony Computer Entertainment, Inc.
(collectively, "Sony Computer Entertainment;" the "Participation Rights") in
exchange for a payment of $0.1 million, (4) issued Microsoft shares of the
Company's Series A Redeemable Convertible Preferred Stock that includes
redemption features discussed below ("Series A Preferred Stock") for a payment
of $6.0 million and (5) allows the Company to sell debentures of
35
$9.0 million to Microsoft under the terms and conditions established in newly
authorized 7% Senior Redeemable Convertible Debentures ("7% Debentures") with
annual draw down rights over a 48 month period.
Under these agreements the Company is required to make certain cash
payments to Microsoft based on a settlement of the Company's ongoing patent
litigation against Sony Computer Entertainment. As discussed in Note 17, the
Company intends to continue its patent litigation against Sony Computer
Entertainment. In the event of a settlement of the Sony Computer Entertainment
litigation under certain terms, the Company will be required to make a cash
payment to Microsoft of (i) an amount to be determined based on the settlement
proceeds, (ii) a redemption of the Series A Preferred stock for a maximum of two
and one half (2 1/2) times the original purchase price plus any dividends in the
form of additional shares of Series A Preferred Stock that remain unpaid plus
any accrued but unpaid cash dividends per share, (iii) any accrued but unpaid
dividends on the Series A Preferred Stock, and (iv) any funds received from
Microsoft under the 7% Debentures.
In a settlement outcome of the Sony Computer Entertainment litigation,
the Company will realize and retain net cash proceeds received from Sony
Computer Entertainment only to the extent that settlement proceeds exceed the
amounts due Microsoft for its Participation Rights and the payments required to
redeem the Series A Preferred Stock, 7% Debentures and accrued dividends and
interest as specified above. Under certain circumstances related to a Company
initiated settlement with Sony Computer Entertainment, the Company would be
obligated to pay Microsoft a minimum of $30.0 million. Such amount would be
reduced to the extent that Microsoft elects to convert its shares of Series A
Preferred Stock to Company common stock.
In the event of an unfavorable judicial resolution or a dismissal or
withdrawal by Immersion of the lawsuit meeting certain conditions, the Company
would not be required to make any payments to Microsoft except pursuant to the
redemption and dividend provisions of the Series A Preferred Stock and the
payment provisions relating to the 7% Debentures.
Under certain other specified circumstances, including the acquisition
of the Company, the redemption of the Series A Preferred Stock as well as the 7%
Debentures would become immediately due and payable.
The $26.0 million received from Microsoft as described above has been
reflected as a liability in the accompanying financial statements. The Company
does not believe that it is possible to separate and value the contingent
payments due Microsoft pursuant to its Participation Rights and the payments due
Microsoft upon redemption of the Series A Preferred Stock under all possible
litigation settlement outcomes. The Series A Preferred Stock, while not meeting
the definition of a liability under SFAS 150, does not qualify as shareholders'
equity pursuant to Securities and Exchange Commission regulations regarding the
form and content requirements for financial statements.
Payments, which may be due Microsoft as a result of a settlement with
Sony Computer Entertainment, will accrete from $26.0 million to $30.0 million
over the expected life of the litigation, which the Company has estimated to be
24 months. During the year ended December 31, 2003, the Company recorded as
interest and other expense, $1.0 million related to the accretion of payments
which may be due Microsoft and the cumulative dividends on the Series A
Preferred Stock.
Series A Redeemable Convertible Preferred Stock. The Company has
authorized and issued 2,185,792 shares of Series A Preferred Stock, par value
$0.001 per share. Under the terms of the Series A Redeemable Convertible
Preferred Stock purchase agreement, Microsoft purchased 2,185,792 shares of
Series A Preferred Stock for $2.745, an aggregate purchase price of $6.0
million. The Series A Preferred Stock accrues cumulative dividends at a rate of
7% per year, payable in cash or additional shares of Series A Preferred Stock,
is initially convertible into one share of Immersion common stock for each share
of Series A Preferred Stock, is entitled to the number of votes equal to the
number of whole shares of common stock into which each share of Series A
Preferred Stock is convertible with the exception of dilutive issuances and is
redeemable under certain circumstances by either the holder or Immersion. The
Series A Preferred Stock can be redeemed at the request of Microsoft for twice
the original purchase price plus any dividends in the form of additional shares
that remain unpaid and any accrued but unpaid cash dividends per share on or
after July 25, 2006.
36
In addition, if at any time that the closing price for the Company's
common stock shall be two and one half (2 1/2) times the original purchase price
plus any dividends in the form of additional shares that remain unpaid and any
accrued but unpaid cash dividends per share for each of thirty (30) successive
trading days, at the election of the Company, it may redeem all (and not less
than all) of the shares of Series A Preferred Stock at a redemption price equal
to 125% of the original purchase price plus any dividends in the form of
additional shares that remain unpaid and any accrued but unpaid cash dividends
per share. On March 12, 2004, the Company satisfied the closing price and
trading day requirements and therefore the Company has the ability to redeem the
Series A Preferred Stock pursuant to this provision, but has not yet exercised
this right.
Under the Company's agreements with Microsoft, the Company agreed to
file, at its expense, with the Securities and Exchange Commission (the
"Commission"), a shelf registration statement on Form S-3 covering the resale of
shares of common stock issued to Microsoft upon conversion of the Series A
Preferred Stock and the common stock issuable upon the conversion of any
debentures issued to Microsoft. There is a monthly penalty (equal to $45,000)
for the failure to file or update this registration statement on Form S-3,
failure to deliver the Company's response letter to the Commission within 15
days of receipt, obtain the effectiveness of the registration statement within
180 days after filing, to fail to maintain the effectiveness of the registration
statement, or for the suspension of trading under the registration statement on
Form S-3 for more than 90 days in any six-month period. As the Company did not
obtain the effectiveness of the registration statement by March 6, 2004, the
Company has not satisfied its obligation to do so within 180 days after filing.
On March 18, 2004, Microsoft waived its right to receive penalties for this
failure to timely register their shares, as well as its right to receive
dividends that would otherwise accrue after the registration statement becomes
effective. In exchange, the Company agreed that Microsoft shall have the right
to convert its shares of Series A Preferred Stock into common stock in advance
of any decision by us to redeem such shares of Series A Preferred Stock. The
Company also agreed to continue to work diligently towards obtaining the
effectiveness of the registration statement.
Senior Redeemable Convertible Debentures. Under the terms of the Senior
Redeemable Convertible Debentures agreement, the Company may sell to Microsoft
up to $9.0 million of Senior Redeemable Convertible Debentures over a 48-month
period. The Company can sell up to $3.0 million the first year and $2.0 million
per year for the following three years under the provisions of the Senior
Redeemable Convertible Debentures agreement. Debenture proceeds may only be used
to finance the Sony Computer Entertainment litigation. The Senior Redeemable
Convertible Debentures are callable by Microsoft after 3 years at 110%. It is
also callable by Microsoft upon settlement of the Sony Computer Entertainment
litigation at 125% of par. The Senior Redeemable Convertible Debentures are
convertible into common stock at 364 shares/$1,000 face value (based on $2.75
per share).
10. COMMITMENTS
The Company leases several of its facilities under operating leases. In
addition, the Company has several operating leases for vehicles and various
computer and office equipment that expire during fiscal years 2004 through 2005.
Minimum future lease payments are as follows (in thousands):
CAPITAL LEASE OPERATING LEASE
------------- ---------------
2004 .................................... 24 1,255
2005 .................................... - 815
2006 .................................... - 322
2007 .................................... - 331
2008 .................................... - 341
Thereafter 144
------------- ---------------
Total future minimum lease payments $ 24 $ 3,208
---------------
Portion representing interest (1)
$ 23
=============
Rent expense was $1.3 million, $1.3 million and $1.4 million in 2003,
2002 and 2001 respectively.
Under the terms of a co-marketing agreement with a significant
customer, we reimbursed the customer for certain marketing related expenses not
to exceed $200,000 per quarter for the five quarters ended March 31, 2001.
37
11. STOCKHOLDERS' EQUITY (DEFICIT)
STOCK OPTIONS
Under the Company's stock option plans, the Company may grant options
to purchase up to 12,747,744 shares of common stock to employees, directors and
consultants at prices not less than the fair market value on the date of grant
for incentive stock options and not less than 85% of fair market value on the
date of grant for nonstatutory stock options. These options generally expire ten
years from the date of grant. The Company has granted immediately exercisable
options as well as options that become exercisable over periods ranging from
three months to five years.
As part of the business combination with Immersion Medical in fiscal
2000, the Company assumed Immersion Medical's 1995B and 1998 stock option plans.
Under the plans, a total of 310,560 shares of common stock are reserved for
issuance. The majority of the options cliff vest on each anniversary date over a
five-year period. The 1998 Plan provides for certain provisions for accelerated
vesting upon a change of control. All of the options expire ten years from the
date of the grant.
As part of the business combination with Virtual Technologies, Inc.
("VTI") in fiscal 2000, the Company assumed VTI's 1997 stock option plan. Under
VTI's 1997 stock option plan, a total of 700,000 shares of common stock are
reserved for issuance to employees (Incentive Stock Options) and non-employees
(Nonstatutory Stock Options). The options expire ten years from the date of the
grant. The majority of the options cliff vest on each anniversary date over a
five-year period. The plan provided that in the event of a merger of the Company
with or into another corporation, each outstanding option or stock purchase
right under the plan must be assumed or an equivalent option or right
substituted by the successor corporation or an affiliate.
Details of activity under the option plans are as follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
Outstanding, January 1, 2001 (2,917,937 exercisable at a weighted
average price of $9.79 per share) ............................................. 7,047,489 $ 9.61
Granted (weighted average fair value of $5.22 per share) ....................... 2,349,590 $ 7.27
Exercised ...................................................................... (455,223) $ 1.02
Canceled ....................................................................... (1,180,470) $ 14.85
----------
Balances, December 31, 2001 (3,700,069 exercisable at a weighted
average price of $6.64 per share) ............................................. 7,761,386 $ 8.61
Granted (weighted average fair value of $1.67 per share) ....................... 2,958,500 $ 1.99
Exercised ...................................................................... (1,110,003) $ 0.20
Canceled ....................................................................... (2,060,158) $ 7.50
----------
Balances, December 31, 2002 (3,989,165 exercisable at a weighted
average price of $9.66 per share) ............................................. 7,549,725 $ 7.56
Granted (weighted average fair value of $ 2.56 per share) ...................... 2,250,750 $ 3.37
Exercised ...................................................................... (502,134) $ 1.71
Canceled ....................................................................... (1,961,433) $ 8.56
----------
Balances, December 31, 2003 (3,470,621 exercisable at a weighted
average price of $9.61 per share) ............................................. 7,336,908 $ 6.40
==========
Additional information regarding options outstanding as of December 31,
2003 is as follows:
38
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------ ----------- ------------ ----- ----------- -----
$0.12 - $1.20 409,772 6.42 $ 0.87 227,924 $ 0.61
1.20 - 1.28 1,073,536 8.98 1.27 35,960 1.22
1.32 - 1.76 1,012,100 8.82 1.66 260,140 1.68
1.77 - 2.74 883,341 8.32 2.41 362,884 2.41
2.75 - 6.03 979,074 8.38 5.09 387,119 4.80
6.06 - 6.25 746,291 9.18 6.20 173,728 6.23
6.26 - 8.98 853,073 5.85 8.66 812,023 8.71
9.63 -15.50 776,794 6.56 12.13 660,490 12.03
17.13 - 34.75 578,041 6.43 24.15 527,541 24.45
43.25 - 43.25 24,886 6.28 43.25 22,812 43.25
----------- -----------
$0.12 -$43.25 7,336,908 7.85 $ 6.40 3,470,621 $ 9.61
=========== ===========
At December 31, 2003, the Company had 921,254 shares available for
future grants under the option plans.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB No. 25 and its related
interpretations. SFAS No. 123 requires the disclosure of pro forma net loss had
the Company adopted the fair value method as of the beginning of fiscal 1996.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though these models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they occur.
The Company's calculations were made using the following weighted average
assumptions:
OPTIONS EMPLOYEE STOCK PURCHASE PLAN
------------------ ----------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Expected life (in years) 2.5 2.5 2.5 0.5 0.5 1.5
Interest rate 2.8% 3.6% 4.1% 1.2% 2.4% 4.1%
Volatility 112% 144% 110% 112% 144% 110%
Dividend yield - - - - - -
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan ("ESPP"). Under the
ESPP, eligible employees may purchase common stock through payroll deductions at
a purchase price of 85% of the lower of the fair market value of the Company's
stock at the beginning of the offering period or the purchase date. Participants
may not purchase more than 2,000 shares in a six-month offering period or stock
having a value greater than $25,000 in any calendar year as measured at the
beginning of the offering period. A total of 500,000 shares of common stock are
reserved for the issuance under the ESPP plus an automatic annual increase on
January 1, 2001 and on each January 1 thereafter through January 1, 2010 by an
amount equal to the lesser of 500,000 shares per year or a number of shares
determined by the Board of Directors. As of December 31, 2003, 141,313 shares
had been purchased under the plan.
39
DEFERRED STOCK COMPENSATION
In January 2000, Immersion Medical's board of directors approved a
repricing of all outstanding stock options relating to Immersion Medical that
had been granted on or after June 1, 1998 from $15.46 per share to $7.73 per
share. A total of 30,797 options were repriced. Beginning July 1, 2000, the
Company began to recognize stock compensation relating to the unexpired repriced
shares. The Company recognized $374,000 as stock compensation expense relating
to the repricing and acceleration of option vesting at the time of the merger.
The repricing requires that compensation associated with these options be
remeasured until they are exercised, or forfeited or expire. During the years
ended December 31, 2003 and 2002, the Company did not record any deferred stock
compensation in connection with these repriced options, as the price of
Immersion's stock was not higher than the repriced amount at any quarter-end
during those periods. During the year ended December 31, 2001, the Company
reversed $202,000 of previously recorded deferred stock compensation expense on
these repriced options as a result of the price of Immersion's stock falling
below that of the repriced options. Future expense related to vested and
unvested stock option shares is dependent on the market value of the shares at
the end of each quarter until the repriced stock options are exercised,
forfeited or expire and is therefore unknown at this time.
In fiscal 2000, in connection with two business combinations accounted
for under the purchase method, the Company recorded $5.8 million of deferred
stock compensation which represented the intrinsic value of unvested assumed
stock options, and is being amortized over the respective remaining service
periods on a straight-line basis.
WARRANTS
In conjunction with a note payable to Medtronic Asset Management, Inc.
("Medtronic") dated August 10, 1999, amended in March 2000 and subsequently
repaid in 2002, the Company granted Medtronic a warrant to purchase up to
$2,000,000 of common stock at a price per share equal to the lesser of $15.46
per share or the price per share at which any shares of common stock are sold.
The warrant may also be exercised for any other class of capital stock that the
Company may issue at a per share price equal to the lowest per share price at
which any such shares are issued or sold. The warrant expires on the later to
occur of November 10, 2000 or six months after Immersion Medical completes a
sale of capital stock of at least $6 million. The Company allocated $1,126,849
of the note payable proceeds to the warrant and amortized the amount to interest
expense using the effective interest method over the three-year period of the
debt. The effective interest rate was 17% based on this method of allocation.
In 2000, the Company issued to a lender ten-year warrants to purchase
1,618 shares of common stock at $15.46 per share. These warrants may be
exercised at any time prior to April 9, 2010. The Company allocated $11,281 of
the proceeds to the warrant and amortized this amount to interest expense using
the effective interest method over the three-year period that the related debt
was outstanding. None of the warrants have been exercised, and all remain
outstanding at December 31, 2003.
12. 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 data):
40
YEARS ENDED
DECEMBER 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Numerator:
Net loss ............................................. $ (16,974) $ (16,530) $ (21,746)
========= ========= =========
Denominator:
Shares used in computation, basic and diluted
(weighted average common shares outstanding) ......... 20,334 19,906 18,702
--------- --------- ---------
Net loss per share, basic and diluted ................ $ (0.83) $ (0.83) $ (1.16)
========= ========= =========
For the above-mentioned periods, the Company had securities outstanding
that could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented since their effect would have been anti-dilutive. These outstanding
securities consisted of the following:
YEARS ENDED
DECEMBER 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Convertible note payable ............................. - - 226,450
Outstanding stock options ............................ 7,336,908 7,549,725 7,761,386
Warrants ............................................. 480,943 511,999 523,971
Series A Redeemable Convertible Preferred Stock ...... 2,185,792 - -
13. INCOME TAXES
A provision for federal income tax of $154,000 was made during the year
ended December 31, 2003. No provision for federal income taxes was required for
the years ended December 31, 2002 and 2001 due to net losses in these periods.
Significant components of the net deferred tax assets and liabilities
for federal and state income taxes consisted of (in thousands):
DECEMBER 31,
---------------------
2003 2002
-------- --------
Deferred tax assets:
Net operating loss carryforwards ..................................... $ 18,859 $ 21,758
Deferred revenue ..................................................... 2,961 2,259
Deferred rent ........................................................ 71 44
Research and development credits ..................................... 1,243 1,763
Reserves and accruals recognized in different periods ................ 261 375
Long-term customer advance from Microsoft ............................ 8,225 -
Basis difference in investment ....................................... 1,328 923
Capitalized R& D Expenses ............................................ 613 441
-------- --------
Total deferred tax assets ............................................. 33,561 27,563
Deferred tax liabilities:
Depreciation and amortization ........................................ (1,131) (624)
Difference in tax basis of purchased technology ...................... (1,162) (1,712)
Valuation allowance ................................................... (31,268) (25,227)
-------- --------
Net deferred tax assets ............................................... $ - $ -
======== ========
41
The Company's effective tax rate differed from the expected benefit at
the federal statutory tax rate as follows:
2003 2002
------ ------
Federal statutory tax rate .................. (35.0)% (35.0)%
State taxes, net of federal benefit.......... (3.0) (3.0)
Deferred stock compensation.................. 1.8 2.7
Amortization of goodwill and in process R&D.. 0.0 8.0
Other........................................ 5.3 (1.7)
Valuation allowance.......................... 31.8 29.0
------ ------
Effective tax rate........................... 0.9% -%
====== ======
Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.
At December 31, 2003, the Company has federal and state net operating
loss carryforwards of $51.1 million and $17.1 million, respectively, expiring
through 2022 and through 2013, respectively.
Current federal and state tax laws include provisions limiting the
annual use of net operating loss carryforwards in the event of certain defined
changes in stock ownership. The Company's issuances of common and preferred
stock may have resulted in such a change. Accordingly, the annual use of the
Company's net operating loss carryforwards would be limited according to these
provisions. Management has not yet determined the extent of this limitation, and
this limitation may result in the loss of carryforward benefits due to their
expiration.
14. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan under which eligible
employees may elect to have a portion of their salary deferred and contributed
to the 401(k) plan. Contributions may be made by the Company at the discretion
of the Board of Directors. The recorded expenses were $0, $0 and $160,000 for
2003, 2002 and 2001, respectively.
15. GOVERNMENT AUDITS
Billings under certain cost-based government contracts are calculated
using provisional rates that permit recovery of indirect costs. These rates are
subject to audit on an annual basis by the government agencies' audit
department. The cost audit will result in the negotiation and determination of
the final indirect cost rates that the Company may use for the period(s)
audited. The final rates, if different from the provisionals, may create an
additional receivable or liability.
As of December 31, 2003, the Company has not reached final settlements
on indirect rates. The Company has negotiated provisional indirect rates for the
years ended December 31, 2003, 2002 and 2001. The Company periodically reviews
its cost estimates and experience rates, and any needed adjustments are made and
reflected in the period in which the estimates are revised. In the opinion of
management, redetermination of any cost-based contracts for the open years will
not have a material effect on the Company's financial position or results of
operations.
16. RELATED PARTIES
In July 1997, the Company transferred certain patent rights related to
its MicroScribe product to a newly created limited liability corporation,
MicroScribe LLC, in exchange for 1,000 Class 1 Units and 98,999 Class 2 Units.
This investment represents a 99% ownership of MicroScribe LLC. Subsequently, the
Company distributed all Class 2 Units to its then outstanding common, preferred
and vested option holders on a pro rata basis. The Company maintained a 1%
ownership of MicroScribe LLC subsequent to the distribution of the Class 2
Units. There was no
42
recorded value related to these internally-developed patent agreements, and thus
no amount was recognized as a result of the transfer.
During July 1997, the Company also entered into a non-exclusive license
agreement with MicroScribe LLC (the "Agreement") for the right to manufacture,
market and sell products incorporating the MicroScribe technology. Under the
terms of the Agreement, the Company must pay a royalty to MicroScribe LLC based
on a variable percentage of net receipts as defined under the Agreement. Royalty
expense under the Agreement was $0, $103,000 and $167,000 in 2003, 2002, and
2001, respectively.
In 2002, certain disputes arose between the Company and MicroScribe
regarding the Company's relations with MicroScribe, ownership of the
"MicroScribe" name and other matters. To settle the disputes, the Company and
MicroScribe entered into a settlement agreement whereby the Company agreed not
to pursue its claims against MicroScribe in exchange for MicroScribe granting
the Company certain rights, including ownership of the MicroScribe name and the
right to produce new products under that name without payment of further
royalties to MicroScribe. In 2003, MicroScribe LLC assigned and transferred its
interest in the MicroScribe patents and related technology to the Company for
$20,000.
In August 2001, the Company loaned an executive officer $420,000, at 4%
interest per annum to be repaid on January 7, 2003. Any amounts payable to such
officer may be offset against the indebtedness at the option of the Company. The
loan was offset against amounts due the executive officer in March of 2002.
In July of 2003 the Company entered into an independent consulting
agreement with a member of its board of directors to assist with certain
marketing initiatives of its wholly owned subsidiary Immersion Medical. Under
the terms of the consulting agreement the board member will receive $15,000 per
month compensation and reimbursement of out-of-pocket travel expenses. The
initial term of the consulting agreement was six months and is renewable for
subsequent three-month terms unless either party notifies the other in writing
at least ten days prior to the expiration of the then-current term of its
election to terminate the agreement. During 2003 the board member earned
compensation of $90,000. As of March 10, 2004 the consulting agreement had not
been terminated by either party.
17. CONTINGENCIES
IN RE IMMERSION CORPORATION
The Company is involved in legal proceedings relating to a class action
lawsuit filed on November 9, 2001. In re Immersion Corporation Initial Public
Offering Securities Litigation, No. Civ. 01-9975 (S.D.N.Y.), related to In re
Initial Public Offering Securities Litigation, No. 21 MC 92 (S.D.N.Y.). The
named defendants are the Company and three of its current or former officers or
directors (the "Immersion Defendants"), and certain underwriters of the
Company's November 12, 1999 initial public offering ("IPO"). Subsequently, two
of the individual defendants stipulated to a dismissal without prejudice.
The operative amended complaint is brought on purported behalf of all
persons who purchased the common stock of the Company from the date of the IPO
through December 6, 2000. It alleges liability under Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, on the grounds that the registration statement for the IPO did not
disclose that: (1) the underwriters agreed to allow certain customers to
purchase shares in the IPO in exchange for excess commissions to be paid to the
underwriters; and (2) the underwriters arranged for certain customers to
purchase additional shares in the aftermarket at predetermined prices. The
complaint also appears to allege that false or misleading analyst reports were
issued. The complaint does not claim any specific amount of damages.
Similar allegations were made in other lawsuits challenging over 300
other initial public offerings and follow-on offerings conducted in 1999 and
2000. The cases were consolidated for pretrial purposes. On February 19, 2003,
the Court ruled on all defendants' motions to dismiss. The motion was denied as
to claims under the Securities Act of 1933 in the case involving the Company, as
well as in all other cases (except for 10 cases). The motion was denied as to
the claim under Section 10(b) as to the Company, on the basis that the complaint
alleged
43
that the Company had made acquisition(s) following the IPO. The motion was
granted as to the claim under Section 10(b), but denied as to the claim under
Section 20(a), as to the remaining individual defendant.
The Company has decided to accept a settlement proposal presented to
all issuer defendants. In this settlement, plaintiffs will dismiss and release
all claims against the Immersion Defendants, in exchange for a contingent
payment by the insurance companies collectively responsible for insuring the
issuers in all of the IPO cases, and for the assignment or surrender of certain
claims the Company may have against the underwriters. The Immersion Defendants
will not be required to make any cash payments in the settlement, unless the pro
rata amount paid by the insurers in the settlement exceeds the amount of the
insurance coverage, a circumstance which the Company believes is remote. The
settlement will require approval of the Court, which cannot be assured, after
class members are given the opportunity to object to the settlement or opt out
of the settlement.
IMMERSION CORPORATION VS. MICROSOFT CORPORATION, SONY COMPUTER
ENTERTAINMENT INC. AND SONY COMPUTER ENTERTAINMENT OF AMERICA, INC.
On February 11, 2002, the Company filed a complaint against Microsoft
Corporation, Sony Computer Entertainment, Inc., and Sony Computer Entertainment
of America, Inc. in the U.S. District Court for the Northern District Court of
California alleging infringement of U.S. Patent Nos. 5,889,672 and 6,275,213.
The case was assigned to United States District Judge Claudia Wilken. On April
4, 2002, Sony Computer Entertainment and Microsoft answered the complaint by
denying the material allegations and alleging counterclaims seeking a judicial
declaration that the asserted patents were invalid, unenforceable, or not
infringed. Under the counterclaims, the defendants are also seeking damages for
attorneys' fees. The process of discovery and exchanging information and
documents on infringement, invalidity, and damages, is ongoing. On October 8,
2002, the Company filed an amended complaint, withdrawing the claim under the
`672 patent and adding claims under a new patent, U.S. Patent No. 6,424,333.
On October 10, 2002, the Court entered an Amended Case Management Order
that set, among other dates in the case, April 25, 2003 for a hearing to
construe the claims of the asserted patents and April 5, 2004 for the start of
trial. On October 28, 2002, Sony Computer Entertainment and Microsoft answered
the amended complaint and alleged similar counterclaims for declaratory relief
that the asserted patents are invalid, unenforceable, or not infringed. On March
21, 2003, Sony Computer Entertainment filed a motion for summary judgment of
non-infringement. At Immersion's request, the Court ordered this motion
stricken, without prejudice to its being refiled at a later date after the Court
rules on claim construction. On April 25, 2003, the Court held the scheduled
claim construction hearing. On July 9, 2003, the Court issued an Order Modifying
Case Management Order that reset certain scheduled dates in the case, including
setting April 12, 2004 as the start of trial. On October 2, 2003, the Court
issued its Claim Construction Order construing certain terms of the patents
asserted in the lawsuit. On January 16, 2004, Sony Computer Entertainment filed
a motion for summary judgment of invalidity and that Sony Computer Entertainment
Inc. should be dismissed as a party. Immersion filed a motion for summary
judgment seeking to dismiss Sony's defenses that the asserted patents are
unenforceable. On February 27, 2004, the Court held a hearing on these motions.
On March 2, 2004, the Court issued a written ruling on the summary judgment
motions. The Court denied Sony's motion for summary judgment of invalidity. The
Court granted all but one of Immersion's motions and dismissed several Sony
defenses. On March 23, 2004 the court rescheduled the trial from April 12, 2004
to April 19, 2004.
On July 28, 2003, the Company announced that it had settled its legal
differences with Microsoft and Immersion and Microsoft agreed to dismiss all
claims and counterclaims relating to this matter as well as assume financial
responsibility for their respective legal costs with respect to the lawsuit
between Immersion and Microsoft. The Company continues to pursue its claims of
infringement against Sony Computer Entertainment. In the event the Company
settles its lawsuit with Sony Computer Entertainment, the Company will be
obligated to pay certain sums to Microsoft as described in Note 9. If Sony
Computer Entertainment were successful in its counterclaims and the Company's
patents were deemed invalid and unenforceable, the assets relating to the
patents that were deemed invalid would be impaired and the Company may be
required to pay Sony Computer Entertainment's attorneys fees. The case is
scheduled to go to trial in April 2004.
Due to the inherent uncertainties of litigation, the Company cannot
accurately predict the ultimate outcome of the litigation. The Company
anticipates that the litigation will continue to be costly, and there can be no
assurance that the Company will be able to recover the costs it incurs in
connection with the litigation. The
44
Company expenses litigation costs as incurred and only accrues for costs that
have been incurred but not paid to the vendor as of the financial statement
date. The litigation has diverted, and is likely to continue to divert, the
efforts and attention of some of the Company's key management and personnel. As
a result, until such time as it is resolved, the litigation could adversely
affect the Company's business. Further, any unfavorable outcome could adversely
affect the Company's business.
OTHER 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. The Company from time to time is involved in routine legal
matters and contractual disputes incidental to its normal operations. In
management's opinion, the resolution of such matters will not have a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
In the normal course of business, the Company provides indemnifications
of varying scope to customers against claims of intellectual property
infringement made by third parties arising from the use of the Company's
intellectual property, technology or products. Historically, costs related to
these guarantees have not been significant and the Company is unable to estimate
the maximum potential impact of these guarantees on its future results of
operations.
As permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or occurrences while the
officer or director is, or was serving, at our request in such capacity. The
term of the indemnification period is for the officer's or director's lifetime.
The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited; however, we currently have
director and officer insurance coverage that limits our exposure and enables us
to recover a portion of any future amounts paid. We believe the estimated fair
value of these indemnification agreements in excess of applicable insurance
coverage is minimal.
18. SEGMENT REPORTING
The Company designs, develops, produces, markets and licenses products
based on touch-enabling technology. These devices are used in computer
entertainment, personal computing, medical and other professional computing
applications. The Company has two operating and reportable segments. The
Company's chief operating decision maker ("CODM") is the Chief Executive
Officer. The CODM allocates resources to and assesses the performance of each
operating segment using information about their revenue and operating profit
before interest and taxes. A description of the types of products and services
provided by each operating segment is as follows:
Immersion Computing, Entertainment and Industrial develops and markets
TouchSense and force-feedback technology that enables software and hardware
developers to bring realism into their computing and entertainment experience
and industrial applications. Immersion Medical develops, manufactures, and
markets medical simulators that recreate realistic healthcare environments.
Summarized financial information concerning the Company's reportable
segments for the respective years ended December 31 is shown in the following
table (in thousands):
45
IMMERSION
COMPUTING,
ENTERTAINMENT IMMERSION INTERSEGMENT
AND INDUSTRIAL MEDICAL ELIMINATIONS (5) TOTAL
-------------- --------- ---------------- --------
2003
REVENUES FROM EXTERNAL CUSTOMERS
Royalty and license ....................................... $ 4,157 $ 1,931 $ - $ 6,088
Product sale revenues ..................................... 5,994 4,460 (999) 9,455
Development contract revenues ............................. 1,704 3,183 (207) 4,680
-------------- --------- ---------------- --------
TOTAL REVENUES ............................................. $ 11,855 $ 9,574 $ (1,206) $ 20,223
============== ========= ================ ========
Income (loss) from operations ............................. $ (14,995) $ 120 $ 25 $(14,850)
Interest and other income (2) ............................. 109 17 - 126
Interest expense (1) ...................................... (2) (48) - (50)
Depreciation and amortization ............................. 3,244 276 - 3,520
Other expense - write down of investments (4) ............. (1,000) - - (1,000)
Net income (loss) ......................................... (17,100) 101 25 (16,974)
Capital expenditures ...................................... 209 232 - 441
Total assets .............................................. 47,543 5,136 (14,766) 37,913
2002
REVENUES FROM EXTERNAL CUSTOMERS
Royalty and license ....................................... $ 4,960 $ 271 $ - $ 5,231
Product sale revenues ..................................... 5,952 5,020 (249) 10,723
Development contract revenues ............................. 1,639 2,739 (97) 4,281
-------------- --------- ---------------- --------
TOTAL REVENUES ............................................. $ 12,551 $ 8,030 $ (346) $ 20,235
============== ========= ================ ========
Loss from operations ...................................... $ (13,759) $ (1,154) $ (122) $(15,035)
Interest and other income (1) (2) ......................... 188 118 - 306
Interest expense (1) ...................................... (4) (578) - (582)
Depreciation and amortization ............................. 4,051 351 - 4,402
Impairment of goodwill .................................... 3,758 - - 3,758
Other expense - write down of investments (4) ............. (1,200) - - (1,200)
Net loss .................................................. (14,789) (1,619) (122) (16,530)
Capital expenditures ...................................... 244 198 - 442
Total assets .............................................. 36,389 2,919 (14,007) 25,301
2001
REVENUES FROM EXTERNAL CUSTOMERS
Royalty and license ....................................... $ 5,362 $ - $ - $ 5,362
Product sale revenues ..................................... 6,860 3,532 (32) 10,360
Development contract revenues ............................. 1,952 1,558 - 3,510
-------------- --------- ---------------- --------
TOTAL REVENUES ............................................. $ 14,174 $ 5,090 $ (32) $ 19,232
============== ========= ================ ========
Loss from operations ...................................... $ (12,861) $ (4,558) $ (9) $(17,428)
Interest and other income (1) (2) ......................... 1,091 169 (172) 1,088
Interest expense (1) ...................................... (9) (1,022) 172 (859)
Depreciation and amortization (3) ......................... 6,429 86 - 6,515
Other expense - write down of investments (4) ............. (4,539) - - (4,539)
Net loss .................................................. (16,330) (5,411) (5) (21,746)
Capital expenditures ...................................... 362 250 - 612
Total assets .............................................. 41,670 2,990 (7,635) 37,025
46
(1) Includes interest on amounts previously owed from Immersion Medical to
Immersion Computing, Entertainment and Industrial in 2001, and
amortization of notes payable recorded as interest expense.
(2) Includes a noncash fair value adjustment of $2,000, $118,000 and $169,000
in 2003, 2002 and 2001 respectively, related to the warrants issued in
connection with the SECA VII debt for Immersion Medical in 2001.
(3) Includes a noncash fair value adjustment of $202,000 for deferred stock
compensation in connection with options issued by Immersion Medical prior
to the acquisition of Immersion Medical in September 2000.
(4) Includes amounts written off of investments held by Immersion Computing,
Entertainment and Industrial (see Note 6).
(5) Intersegment eliminations consist of eliminations for intercompany sales
and cost of sales and intercompany receivable and payables between
Immersion Computing, Entertainment and Industrial and Immersion Medical
segments.
The Company operates primarily in the United States and in Canada where
it operates through its wholly owned subsidiary, Immersion Canada. Segment
assets and expenses relating to the Company's corporate operations are not
allocated but are included in Immersion Computing, Entertainment and Industrial
as that is how they are considered for management evaluation purposes. As a
result, the segment information may not be indicative of the financial position
or results of operations that would have been achieved had these segments
operated as unaffiliated entities. Management measures the performance of each
segment based on several metrics, including net loss. These results are used, in
part, to evaluate the performance of, and allocate resources, to each of the
segments.
REVENUE BY PRODUCT LINES
Information regarding revenue from external customers by product lines
is as follows (in thousands):
YEARS ENDED
DECEMBER 31,
----------------------------------
2003 2002 2001
-------- -------- --------
Revenues:
Consumer, Computing and Entertainment ........................... $ 3,571 $ 4,324 $ 6,244
3D and Professional Products .................................... 5,026 6,029 6,343
Automotive ...................................................... 1,284 1,157 870
Other ........................................................... 792 695 685
-------- -------- --------
Subtotal Immersion Computing, Entertainment and Industrial ..... 10,673 12,205 14,142
Immersion Medical ............................................... 9,550 8,030 5,090
-------- -------- --------
Total ............................................................ $ 20,223 $ 20,235 $ 19,232
======== ======== ========
REVENUE BY REGION
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:
47
YEARS ENDED
DECEMBER 31,
--------------------------------
2003 2002 2001
------ ------ ------
North America ............................................... 69% 65% 71%
Europe ...................................................... 18% 21% 12%
Far East .................................................... 10% 13% 16%
Rest of the world ........................................... 3% 1% 1%
---- ---- ----
Total .................................................... 100% 100% 100%
==== ==== ====
During the years ended 2003, 2002 and 2001 we derived 68%, 64% and 68%,
respectively of our revenues from the United States. Revenues from other
countries represented less than 10% individually for the periods presented.
SIGNIFICANT CUSTOMERS
Customers comprising 10% or greater of the Company's net revenues are
summarized as follows:
YEARS ENDED
DECEMBER 31,
--------------------------------
2003 2002 2001
Customer A .................................................. * * 14%
Customer B .................................................. 18% 10% *
--- --- -
Total .................................................... 18% 10% 14%
== == ==
* Revenue derived from customer represented less than 10% for the period.
Of the significant customers noted above, Customer B had a balance of
23% of the outstanding accounts receivable at December 31, 2003. Customer A had
a balance of 11% of the outstanding accounts receivable at December 31, 2002.
None of the significant customers listed above had a balance of 10% or greater
of the outstanding accounts receivable at December 31, 2001.
The majority of our long-lived assets were located in the United
States. Long-lived assets included net property and equipment and long-term
investments and other assets. Long-lived assets that were outside the United
States constituted less than 10% of the total at December 31, 2003 and 2002.
19. QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)
The following table presents certain unaudited consolidated statement
of operations data for our eight most recent quarters.
DEC 31, SEPT 30, JUNE 30, MAR 31, DEC 31, SEPT 30, JUNE 30, MAR 31,
2003 (1) 2003 2003 2003 2002 (2) 2002 (3) 2002 2002 (4)
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 8,284 $ 4,061 $ 4,142 $ 3,736 $ 5,492 $ 4,477 $ 5,461 $ 4,805
Gross Profit 6,737 2,900 2,680 2,630 3,998 2,854 3,982 3,520
Operating loss (1,932) (4,848) (4,415) (3,655) (6,386) (3,120) (1,948) (3,581)
Net loss (3,656) (5,217) (4,444) (3,657) (6,373) (4,432) (2,071) (3,654)
Basic and diluted net loss per share $ (0.18) $ (0.26) $ (0.22) $ (0.18) $ (0.32) $ (0.22) $ (0.10) $ (0.19)
Shares used in calculating basic
and diluted net loss per share 20,619 20,384 20,179 20,144 20,134 20,113 20,002 19,351
(1) During the fourth quarter of 2003, operating loss, net loss and basic
and diluted net loss per share included an impairment loss on a cost-method
investment in a privately held company of $1.0 million. Additionally net
loss and basic and diluted net loss per share included a provision for
income taxes of $154,000 related to federal alternative minimum tax.
48
(2) During the fourth quarter of 2002, operating loss, net loss and basic
and diluted net loss per share included a loss due to an impairment of
goodwill of $3.8 million.
(3) During the third quarter of 2002, operating loss, net loss and basic
and diluted net loss per share included an impairment loss on a cost-method
investment in a privately held company of $1.2 million.
(4) During the first quarter of 2002, operating loss, net loss and basic
and diluted net loss per share included a $397,000 charge for severance
payments made in conjunction with a reduction in force during February
2002.
49