e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
Number 000-27969
Immersion Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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94-3180138
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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801 Fox Lane
San Jose, California 95131
(Address of principal executive
offices, zip code)
(408) 467-1900
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on which Registered
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Common Stock, $0.001 par value
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The Nasdaq Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in
Rule 12b-2
of the Act).
Large accelerated
filer o Accelerated
filer
þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant on June 30, 2006,
the last business day of the registrants most recently
completed second fiscal quarter, was $96,354,146 (based on the
closing sales price of the registrants common stock on
that date). Shares of the registrants common stock held by
each officer and director and each person whom owns 5% or more
of the outstanding common stock of the registrant have been
excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a
conclusive determination for other purposes. Number of shares of
common stock outstanding at February 23, 2007: 25,237,395
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statements for the 2007 Annual
Meeting are incorporated by reference into Part III hereof.
IMMERSION
CORPORATION
2006
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
Forward-looking
Statements
In addition to historical information this Annual Report on
Form 10-K
includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). The forward-looking
statements involve risks and uncertainties. Forward-looking
statements are identified by words such as
anticipates, believes,
expects, intends, may,
will, and other similar expressions. However, these
words are not the only way we identify forward-looking
statements. In addition, any statements which refer to
expectations, projections, or other characterizations of future
events, or circumstances, are forward-looking statements. Actual
results could differ materially from those projected in the
forward-looking statements as a result of a number of factors,
including those set forth below in Managements Discussion
and Analysis of Financial Condition and Results of Operations,
those described elsewhere in this report including Risk Factors,
and those described in our other reports filed with the
Securities and Exchange Commission (SEC). We caution
you not to place undue reliance on these
forward-looking
statements, which speak only as of the date of this report, and
we undertake no obligation to update these forward-looking
statements after the filing of this report. You are urged to
review carefully and consider our various disclosures in this
report and in our other reports publicly disclosed or filed with
the SEC that attempt to advise you of the risks and factors that
may affect our business.
PART I
Overview
Immersion Corporation was founded in 1993, and we consummated
our initial public offering on November 12, 1999. Our
common stock trades on the Nasdaq Global Market under the symbol
IMMR. Immersion Corporation is a leading provider of haptic
technologies that allow people to use their sense of touch more
fully when operating a wide variety of digital devices. To
achieve this heightened interactivity, we develop and
manufacture or license a wide range of hardware and software
technologies and products. While we believe that our
technologies are broadly applicable, we are currently focusing
our marketing and business development activities on the
following target application areas: automotive, consumer,
entertainment, industrial, medical simulation, mobile
communications, and three-dimensional design and simulation. We
manage these application areas under two operating and
reportable segments: 1) Immersion Computing, Entertainment,
and Industrial and 2) Immersion Medical.
In markets where our touch technologies are a small piece of a
larger system, such as mobile phones and controls for automotive
interfaces, we license our technologies or software products to
manufacturers who integrate them into their products and sell
the end product(s) under their own brand names. In some markets,
we have brand visibility on consumer packaging, end-user
documentation, and in software applications. In other markets,
such as medical simulation, touchscreen input devices, and
three-dimensional computer-aided design, we sell products
manufactured by us or others under our own Immersion brand name
through direct sales to end users, distributors, OEMs, and
value-added resellers. At other times, we may design and
manufacture products that are sold to other companies on a
private label or Immersion branded basis to resell.
In all market areas, we also engage in development projects for
third parties and government agencies from time to time.
Our objective is to drive adoption of our touch technologies
across markets and applications to improve the user experience
with digital devices and systems. We and our wholly owned
subsidiaries hold more than 600 issued or pending patents in the
U.S. and other countries, covering various aspects of hardware
and software technologies.
Haptics
and Its Benefits
The science of haptics refers to tactile and kinesthetic
information that supplies a tangible representation of the
environment to the human sensory system. The term force
feedback has often been used to mean haptics in general,
though haptics is actually comprised of two types of sensing and
two types of technologies. Tactile sensing
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refers to an awareness through stimulation of the skin, which
can be accessed through vibro-tactile technologies. Kinesthetic
sensing refers to an awareness through the position of body
parts and their movement, which can be accessed using force
feedback technologies. Without our perception of haptic
information, it would be hard to believe that something is
tangible. Unlike sight and hearing, which are mainly input
systems, touch is bi-directional, allowing us to both feel (take
in information) and manipulate (have an effect on something).
All human senses are complementary, contributing to our
perception of the environment. Without one of them, our
perception would change and without touch, any motor
action, such as typing, peeling an orange, or opening a door
would be extremely difficult. A persons sense of touch and
the haptic information it interprets is a critical part of our
interactions with the world.
In the world of computers and digital devices and controls,
haptic feedback is often lost. To replace the lost sensation of
touch, input/output devices can create the physical forces,
known as haptic feedback, force feedback, touch feedback, or
tactile feedback. These forces are exerted by actuators, such as
motors, which are built into devices such as joysticks, steering
wheels, gamepads, and mobile phones. Actuators can also be
designed into more sophisticated devices used in automotive,
industrial, medical, or retail kiosk and
point-of-sale
systems, such as digital switches, rotary controls, and
touchscreens. Our programmable haptic technologies embedded in
touch-enabled
devices can give users the physical sensations of interacting
with rough textures, smooth surfaces, viscous liquids, compliant
springs, solid barriers, deep or shallow detents, jarring
vibrations, heavy masses, and rumbling engines.
As a user operates a touch-enabled device, such as a joystick,
actuators within the device apply computer-modulated forces that
resist, assist, and enhance the manipulations. These forces are
generated based on software algorithms and mathematical models
built to produce appropriate sensations. For example, when
simulating the feel of interacting with a solid wall or barrier,
a computer program can signal motors within a force feedback
joystick to apply forces that emulate the impenetrability of the
wall. The harder the user pushes, the harder the motors push
back. When simulating the placement of cardiac pacing leads, a
computer program can signal actuators to apply forces that would
be encountered when navigating coronary pacing leads through a
beating heart. These forces can be synchronized with appropriate
simulations of an electrocardiogram, blood pressure, heart rate,
and fluoroscopy displays. When simulating the feel of pressing a
button, a computer program can signal actuators attached to a
touchscreen to apply forces that emulate the buttons
particular press and release characteristics. Even though the
user touches a screen that is flat, our technology delivers the
perception that the button is pushed inward.
Our VibeTonz technology gives mobile handset user interfaces and
applications the ability to precisely control a phones
vibration motor, providing a rich palette of tactile sensations
that can enhance handset operation and make content more
engaging. It can be used to provide confirming feedback when
pressing virtual buttons on a touchscreen; to advise users of
the identity of an incoming caller; to supply vibrations
signifying an emotion in a text message; provide tactile alerts
for call progress and message status; and to aid in general
navigation and operation. Ringtones can also be haptically
enhanced, allowing users to feel the beat of a particular song.
Mobile games are made more engaging and enjoyable by adding
vibro-tactile effects to particular events such as explosions,
car crashes, and bowling strikes.
The mathematical models that control actuators may be simple
modulating forces based on a function of time. These forces can
produce jolts and vibrations, for example. More complex forces
can emulate surfaces, textures, springs, and damping. All forces
can be synchronized with audio, video, or application program
logic. For example, a series of individual simulated forces can
be combined to give the seamless feel of a complex interaction,
like driving a sports car, which might include the centrifugal
forces in the steering wheel, the vibration of the road surface,
the revving of the engine, and the bass beat of a song.
We believe the programmability of our haptic products is a key
differentiator over purely electro-mechanical systems and can
drive the further adoption of digital devices. A programmable
device can supply a tactile response appropriate to the context
of operation for systems and devices of many types. These
tactile cues can help users operate more intuitively or realize
a more enjoyable or natural experience. Used in combination with
sight and sound cues, touch feedback adds a compelling,
engaging, multimodal aspect to the user interface. Our haptic
products and technologies can also add a tactile quality to
interactions that have been devoid of tactile confirmation, such
as when using a touchpad or touchscreen. The confirmation and
navigational cues obtained by programmable
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haptics can aid in performance and accuracy and increase user
satisfaction. The addition of programmable haptics can help in
the conversion from purely mechanical rotary controls to digital
devices or from a mechanical keyboard, switch, or button
interface to an electronic touchscreen.
Programmability also supplies more flexibility in terms of the
types of responses that are possible (such as nonlinear or
dynamic qualities), in upgradeability, in consistent performance
that will not degrade over time, and in the potential for
personalized settings.
Multiple mechanical controls can be consolidated into one
versatile programmable control, which can save space and improve
ergonomics. Conversely, one programmable control device can be
implemented as many different types of controls with
context-appropriate touch feedback, which can simplify inventory.
Industry
Background
Haptic systems were first used in applications like military
flight simulators. In the 1960s, combat pilots honed their
flight skills in training simulators that replicated the feel of
flying actual planes. Motors and actuators pushed, pulled, and
shook the flight yoke, throttle, rudder pedals, and cockpit
shell, reproducing many of the tactile and kinesthetic cues of
real flight. Though advanced for their time, these systems were
limited by the then available technology and were therefore
relatively crude and low fidelity by todays standards.
They also cost at least hundreds of thousands, if not millions
of dollars, and therefore were not within the grasp of consumers
or even most businesses.
By the late 1970s and early 1980s, computing power reached the
point where rich color graphics and
high-quality
audio were possible. Computers evolved from primitive
command-prompt, text-based systems with monochrome displays to
powerful systems capable of rendering colorful graphics and
animations and of playing music and sound effects. These
advancements spawned entirely new businesses in the late 1980s
and early 1990s.
To the consumer, this multimedia revolution opened new
possibilities. Flight simulation moved from a professional
pilot-only activity to a PC-based hobby for millions of real and
aspiring pilots. The graphics and sound these hobbyists
experienced were far superior to what the combat pilots in the
1960s had in their expensive flight simulator systems.
The multimedia revolution also made the medical simulation
business possible. By the 1990s, high-end workstations enabled
renderings of the human anatomy to be displayed with never
before possible realism. Companies were founded to harness this
new technology and turn it into safer and more effective
teaching aides for medical personnel.
However, the multimedia revolution also highlighted a
shortcoming in simulation products. Even though medical graphics
and animations looked incredibly realistic, they could not
convey what it feels like to break through a venal wall with a
needle or cut through the tissue surrounding the gall bladder.
In the case of flight simulation, graphics and sound could not
realistically convey what it actually feels like to fight the
flight yoke or flight stick out of a steep dive or through a
sharply banked turn. Only hands-on experience provided this
critical component of learning.
So by the mid 1990s, these new industrial and consumer
multimedia products were in need of enhanced haptic technology
that could provide the sensations similar to an actual hands-on
experience. We were founded in 1993 to bring the critical sense
of touch back into the users experience. By combining
1) the basic concepts used in the military flight
simulators of the 1960s,
2) state-of-the-art
advancements in robotic controls, 3) advancements in the
understanding of how the human sense of touch works, and
4) advancements in computing power, we were able to
significantly reduce the cost and size of haptic solutions while
increasing the quality of the simulated forces. Some of our
early technology was used in the worlds first consumer
force feedback peripherals for computer video games, such as
flight sticks and steering wheels. These products not only
looked and sounded more realistic, they allowed users to feel
haptic effects that simulated, for example, textures, bouncing
and hitting a ball, and vibrations from gun fire. In addition,
with our technology, sophisticated medical simulators offered
medical professionals the ability to practice and enhance their
surgical and other procedural skills in a way not previously
possible.
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Continued advancements in size, power, and cost reductions have
pushed the adoption of haptics technology even further into
those industries, as well as into new ones. Our
TouchSense®
intellectual property is now incorporated into computer and
console gaming systems, and in products such as gamepads,
joysticks, and steering wheels for Sonys PlayStation and
PlayStation 2, Microsofts Xbox and Xbox 360, and PC
and Apple computers. Furthermore, more than 1,500 Immersion
Medical simulators have been deployed at hospitals and medical
schools throughout the United States and abroad, including Johns
Hopkins University, Beth Israel Deaconess Medical Center, Mayo
Clinic (Rochester, MN), Northwestern University, Rush University
Medical Center, St. Marys Hospital (London), and
Stanford University.
Demand for our VibeTonz technology for adding haptic feedback to
mobile handset interfaces and applications has been driven by
several converging factors. With advances in processing power,
data bandwidth, memory, and audio and graphic fidelity, the
handset has become capable of serving as a primary messaging and
entertainment terminal for many users. This has caused mobile
user interfaces to become increasingly complex, even while the
form factor of the underlying devices has shrunk. Haptics can
help mitigate usability problems in small, visually and
mechanically dense interfaces by leveraging the otherwise
underutilized bandwidth of our sense of touch. Furthermore,
tactile effects can greatly enhance the perceived quality and
immersiveness of the mobile multimedia and gameplay experience.
Although the first touchscreens were introduced in the early
1970s, their broad acceptance and proliferation didnt
occur until the mid to late 1990s. Since their introduction,
advancements in computing power, operating systems, graphical
user interfaces, and multimedia software, combined with gradual
cost reductions, have today made the touchscreen the user
interface device of choice for many applications. In 2005, we
announced a TouchSense technology solution to enable enhanced
tactile cues for providing a more intuitive, personal, and
natural experience for the user. Instead of just feeling the
passive touchscreen surface, users perceive that buttons press
and release, just as physical buttons and switches do, creating
a class of products we call active touchscreens.
Our haptic technologies are also now used by corporate
industrial designers and by researchers from the National
Aeronautics and Space Administration (NASA), Stanford
University, and the Massachusetts Institute of Technology (MIT).
Automobiles manufactured by BMW, Mercedes-Benz, Rolls Royce, and
Volkswagen use programmable haptic controls powered by Immersion
technology. In addition, we offer 3D capture and interaction
products to help game developers, mechanical designers,
animators, and other professionals reduce production time and
streamline the workflow process. Today, we believe that as
computing power increases and pushes multimedia capabilities
into new areas, even more opportunities will be created for our
programmable haptic technologies.
Our
Solutions
Our goal is to change the way people interact with digital
devices by engaging their sense of touch. Core competencies
include our understanding of how interactions should feel and
our knowledge of how to use technology to achieve that feeling.
Our strength in both of these areas has resulted in many novel
applications.
We believe that our touch-enabled products and technologies give
users a more complete, intuitive, enjoyable, and realistic
experience. Our patented designs include software elements such
as real-time software algorithms and authoring tools, and
specialized hardware elements, such as motors, sensors,
transmissions, and control electronics. Together, these software
and hardware elements enable tactile sensations that are
context-appropriate within the application.
We have developed haptic systems for many types of hardware
input/output devices such as computer mice, joysticks, mobile
phones, rotary controls, touchscreens, and flexible and rigid
endoscopy devices for medical simulations.
We have developed many mechanisms to convey forces to the
users hands or body. These include vibro-tactile
actuators, direct drive, belt, gear, or cable driven mechanisms,
and other proprietary devices that supply textures and
vibration, resistance, and damping forces to the user.
To develop our real-time electronic actuator controllers, we had
to address challenges such as size, accuracy, resolution,
frequency, latency requirements, power consumption, and cost.
Our control solutions include both closed-loop and open-loop
control schemes. In closed-loop control, the firmware reads
inputs from the input/output
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devices, and then calculates and applies the output forces in
real time based upon the input data. In open-loop control, a
triggering event will activate the firmware to calculate and
send the output signal to the actuator in real time.
We have developed many software solutions for various operating
systems and computing platforms including PC, Apple, automotive,
and mobile handset operating systems. Our inventions include
many generations of authoring tools for creating, visualizing,
modifying, archiving, and experiencing haptic feedback.
Licensed
Solutions
In markets where our touch technology is a small piece of a
larger system (such as mobile phones and controls for automotive
interfaces), we license our technologies or software products to
manufacturers who integrate them into their products sold under
their own brand names.
We offer our expertise to our licensees to help them design and
integrate touch effects into their products. This expertise
includes turn-key engineering and integration services,
authoring tools, application programming interfaces, and the
development of hardware and software technologies that are
compatible with industry standards.
Turn-key Engineering and Integration
Services. We offer engineering assistance
including technical and design assistance and integration
services that allow our licensees to incorporate our
touch-enabling products and technologies into their products at
a reasonable cost and in a shortened time frame. This allows
them to get to market quickly by using our years of haptic
development expertise. We offer product development solutions
including product software libraries, design, prototype
creation, technology transfer, component sourcing,
development/integration kits, sample source code, comprehensive
documentation, and other engineering services. In addition, we
ensure a quality end-user experience by offering testing and
certification services to a number of licensees.
Authoring Tools. We license authoring tools
that enable software developers to quickly design and
incorporate custom touch feedback into their own applications.
Authoring tools allow designers to create, modify, experience,
and save or restore haptic effects for a haptic device. The
tools are the equivalent of a computer-aided design application
for haptics. Our authoring tools support vibro-tactile haptic
devices (such as mobile phones, touchscreens, and vibro-tactile
gaming peripherals), as well as kinesthetic haptic devices (such
as rotary devices, joysticks, and medical training systems).
Various haptic effect parameters can be defined and modified and
the result immediately experienced. Our authoring tools run on
mainstream operating systems such as Microsoft Windows.
Application Programming Interfaces
(APIs). Our APIs provide
haptic-effect generation capability. This allows designers and
programmers to focus on adding haptic effects to their
applications instead of struggling with the mechanics of
programming real-time algorithms and handling communications
between computers and devices. Some of our haptic APIs are
device independent (for example, they work with scroll wheels,
rotary knobs, 2D joysticks, and other devices) to allow
flexibility and reusability. Others are crafted to meet the
needs of a particular customer or industry.
Compatible with Industry Standards. We have
designed our hardware and software technologies for our
licensees to be compatible with industry hardware and software
standards. Our technologies operate across multiple platforms
and comply with such standards as Microsofts entertainment
application programming interface DirectX and a standard
communications interface, Universal Serial Bus
(USB). More generally, our software driver and API
technology has been designed to be platform independent and
ported to a variety of operating systems including Windows,
Windows CE, Mac OS X, BREW/REX (from QUALCOMM), Java (J2SE), and
VxWorks.
Manufactured
Product Solutions
We produce our products using both contracted and in-house
manufacturing capabilities. In some markets, we manufacture and
sell products under the Immersion brand name through a
combination of direct sales, distributors, and value-added
resellers. These products include:
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medical simulation systems used for training medical
professionals in minimally invasive medical procedures including
vascular access, endoscopy, laparoscopy, and endovascular;
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components used in our touchscreen solutions;
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programmable rotary control modules for operating a wide range
of devices;
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digitizers used to construct detailed 3D computer models and to
perform accurate part inspections;
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a 3D interaction product line consisting of hand-centric
hardware and software solutions for animating hand movements and
allowing users to manipulate virtual objects with their
hands; and
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electronics and force feedback devices for arcade games,
university research, and other industrial applications.
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Our
Strategy
We intend to maintain and enhance our position as a leading
provider of touch-enabling technology by employing the following
strategies:
Pursue Royalty-based Licensing Model for High Volume
Applications of Our Technologies. We believe that
the most effective way to proliferate our touch-enabling
technologies, where touch is a small part of a larger system, is
to license and embed it in high volume applications. We have
licensed our intellectual property to numerous manufacturers of
joysticks, gamepads, and steering wheels, and to manufacturers
of video console gaming systems, all of which are targeted at
consumers. In addition, our technologies have been licensed to
automotive manufacturers and automotive parts suppliers for use
in automotive controls. We have licensed our software products
that create touch feedback effects in mobile handsets to
manufacturers of mobile phones, wireless operators, and content
developers. We intend to expand the number and scope of our
licensing relationships in the future.
In general, our licenses permit manufacturers to produce only a
particular category of product within a specified field of use.
Our licensing model includes an up-front license fee
and/or a
per-unit
royalty paid by the manufacturer that may be a fixed fee or a
percentage of the selling price of the final touch-enabled
product. In addition, our consumer-products licensees
generally have branding obligations. The prominent display of
our TouchSense or VibeTonz technology logo on retail packaging
generates customer awareness for our technologies.
Pursue Product Sales in Lower-volume Applications through
Multiple Channels. For lower-volume emerging
applications of our technologies, such as medical simulation
systems, active touchscreens, and
three-dimensional
and design products, our strategy is to sell products
manufactured by us or others under our own Immersion brand name
through direct sales to end users, distributors, OEMs, and
value-added resellers. At other times, we may design and
manufacture products that are sold to other companies on a
private label or Immersion branded basis to resell. The
Immersion Computing, Entertainment, and Industrial segment sells
products that consist primarily of digitizers, such as the
MicroScribe®
line; specialized whole-hand sensing gloves and software, such
as the
CyberGlove® II
wireless glove,
CyberGrasp®
system, and
CyberForce®
armature that permit simulated interaction with
three-dimensional environments; and TouchSense components and
software for our touchscreen and rotary control solutions. Our
Immersion Medical segment currently sells medical simulation
devices that simulate intravenous catheterization, endovascular
interventions, and laparoscopic and endoscopic procedures.
Secure Licensees and Customers in New Markets for
Touch-enabling Technology and Software
Products. We believe that our touch-enabling
technologies can be used in virtually all areas of computing and
communication. We initially focused on computer gaming
applications for personal computers and dedicated game consoles,
an area in which key companies have accepted our technologies.
We have broadened our focus in additional applications including
automotive controls; industrial equipment controls; mobile
phones; and fixed and mobile touchscreen devices, such as remote
controls and portable navigation systems; and secured several
new licensees in these areas. Furthermore, we intend to pursue
additional applications for our technologies.
Facilitate Development of Touch-enabled
Products. Our success depends on the development
of
touch-enabled
products by our licensees and customers. To enable that
development, we offer design packages that include sample
hardware, software, firmware, and related documentation, and
offer our technical expertise on a consulting basis. We will
continue to devote significant resources to facilitate the
development of touch-enabled products by our licensees and
customers.
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Expand Software Support for Our Touch-enabling
Technologies. In addition to licensing our
intellectual property or software products and supporting
licensee product development efforts, we have focused on
expanding software support for our touch-enabling technologies.
For example, we license authoring and programming tools to
customers in support of vibro-tactile haptic devices (such as
mobile phones, vibro-tactile gaming peripherals, and
touchscreens) as well as kinesthetic haptic devices (such as
rotary devices, joysticks, and steering wheels). Using our
authoring tools, various haptic-effect parameters can be defined
and modified, and the result can be immediately experienced on
the target device.
Our APIs provide an extensive haptic-generation capability and
allow designers and programmers to focus on enabling their
target applications with haptic effects instead of struggling
with the mechanics of programming real-time algorithms and
handling communications between computers and devices. One focus
of our marketing efforts is to promote the adoption of our
touch-enabling technologies by software developers in certain
markets. We have developed the VibeTonz Software Development Kit
(SDK) and TouchSense SDK that contain items such as
programming or authoring tools, documentation, tutorials, and
software files containing sample touch effects. Our software
support staff also works closely with developers to assist them
in developing compelling touch-enabled applications. We also
worked closely with Microsoft on the Microsoft DirectX SDK,
contributing to the API specification and offering our own
authoring tools, documentation, tutorials, and sample program to
supplement the DirectX SDK.
Expand Market Awareness. We promote adoption
of our touch-enabling technologies by increasing market
awareness as appropriate in our various market segments. We
believe that it is important to increase awareness among
potential customers and, in some markets, end users. As a part
of many of our consumer-product license agreements, we require
our licensees to use our trademarks and logos to create brand
awareness among consumers. To generate awareness of our
technologies and our licensees products, we participate in
industry tradeshows, maintain ongoing contact with industry
press, and provide product information on our Web site. To
generate increased awareness and sales leads, we execute
marketing campaigns specific to each market. These campaigns for
a specific market may include public relations, direct mail,
Internet marketing, advertising, tradeshows,
and/or
public speaking at industry events.
Develop and Protect Touch-enabling
Technology. Our success depends in part on our
ability to license and commercialize our intellectual property
and to continue to expand our intellectual property portfolio.
We devote substantial resources to research and development and
are engaged in projects focused on expanding the scope and
application of our technologies with particular emphasis on
mobile-phone, tactile-touchscreen, and
medical-simulation
product offerings. We have also secured technology by
acquisition and may do so again in the future. We intend to
continue to invest in technology development and potential
acquisitions and to protect our intellectual property rights
across all of our businesses.
Immersion
Computing, Entertainment, and Industrial Segment
Products
and Markets
We initially licensed our intellectual property for
touch-enabling technologies for consumer gaming peripherals in
1996 under the I-FORCE trademark. We have transitioned our
branding to the TouchSense trademark, which extends beyond
gaming to other applications of our haptics-related products and
services.
Gaming
We have licensed our TouchSense intellectual property to
Microsoft for use in its products and to Apple Computer for use
in its Apple operating system. We have also licensed our
TouchSense intellectual property to over 20 gaming peripheral
manufacturers and distributors, including Logitech and Mad Catz,
to bring haptic technology to PC platforms including both
Microsoft Windows and Apple operating systems, as well as to
video game consoles, such as the Microsoft Xbox 360. For the
years ended December 31, 2006, 2005, and 2004, 6%, 11%, and
10%, respectively, of total revenues were from Logitech.
Currently, there are consumer PC joysticks sold using TouchSense
technology, including the Wingman Force 3D Pro from Logitech;
the Cyborg evo Force from Saitek; and the Top Gun Afterburner
Force Feedback Joystick from ThrustMaster. There are also PC
steering wheel gaming peripherals licensed under the TouchSense
brand,
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including the G25 Racing and MOMO Racing from Logitech; the RGT
Force Feedback Pro Clutch Edition from Guillemot; and the R440
Force Feedback Wheel from Saitek. There are PC gamepads that use
TouchSense technology, including the Cordless Rumblepad 2 and
Rumblepad 2 from Logitech; the T-Mini
2-in-1
Wireless Rumble Force from ThrustMaster; and the P2500 from
Saitek.
In the video game console peripheral market, we have licensed
our patents for use in hundreds of spinning mass tactile
feedback devices and force feedback devices from various
manufacturers including Logitech, Mad Catz, Pelican, Intec,
Joytech, Radica, NYKO, i-CON, Saitek, Hori, Gemini, and Griffin.
These products are designed to work with one or more video game
consoles including the Xbox and Xbox 360 from Microsoft; the
PlayStation and PlayStation 2 from Sony; and the GameCube and
N64 from Nintendo.
For the years ended December 31, 2006, 2005, and 2004, 18%,
27%, and 24%, respectively, of our total revenues were generated
from PC and console gaming revenues.
In June 2006, we introduced next-generation TouchSense vibration
technology to match the realism expected of next-generation
video console gaming systems. The new technology provides a
wider range of vibration effects that simulate the physical
world. The new TouchSense technology also provides improved
synchronization with audio and onscreen graphic events, backward
compatibility for vibration effects in current games, authoring
tools that allow developers to create a much wider range of
effects in less time, and the ability to work alongside motion
control and tilt sensing all without cost, power
consumption, weight, or space increases for most systems.
In the arcade entertainment market, our products include
steering wheel control electronics that provide industrial
strength and quality force feedback that enable very realistic
simulations. Our commercial-quality joystick provides a similar
user experience and has been used in theme-park attractions and
flight-training applications.
In the casino and bar-top amusement market, we signed an
agreement with 3M Touch Systems in 2005 that allows manufacture
and distribution of its MicroTouch touch screens with our
TouchSense technology. Early prototypes of gaming systems with
the MicroTouch touch screens were released and exhibited in
November 2006 at the Global Gaming Expo (G2E).
Mobile
Communications and Portable Devices
We have developed the VibeTonz System, an integrated,
programmable vibro-tactile application development and runtime
environment for handset OEMs, mobile operators, and application
developers. The VibeTonz System enables mobile handset users to
send and receive a wide range of vibro-tactile haptic effects
independently from or in synchronicity with audio, video, and
application program content. The VibeTonz System consists of
VibeTonz Mobile Player, a lightweight and powerful vibration
playback system that is embedded in the phone, and VibeTonz
SDK, including a PC-based composition tool for creating
VibeTonz effects for inclusion in content and applications such
as ringtones, games, and user interface enhancements.
Of particular note, in 2006, we expanded the capabilities of the
VibeTonz System to provide tactile confirmation to the user that
their finger or stylus press on a device touchscreen was
accepted as input. This application of our technology may be
expanded into a broad range of portable devices, including
global positioning/navigation systems, remote controls for home
entertainment systems, medical diagnostic and therapeutic
equipment, test and measurement equipment, portable terminals,
and game devices and media players.
Greater market acceptance of our products for mobile phones was
marked by:
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Verizon Wireless offering two VibeTonz-enabled handsets for the
North American mass market, the
feature-rich
SCH-A930 and the value-inspired SCH-A870. The launching by SK
Telecom and China Unicom of the first handsets using VibeTonz
technology to add tactile feedback to touchscreen interactions.
The handsets launched by these two operators were SCH-B550 and
SCH-W559, respectively. By the end of 2006, there were thirteen
VibeTonz-enabled phones launched and approximately
4 million units shipped worldwide. In addition, new
developer agreements were signed with leading mobile games
publishers Punch Entertainment, SkyZone Entertainment, and Sonic
Branding Solutions.
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Oranges offering of the first mobile phone in Europe with
our VibeTonz System, the Samsung E770, which is also the first
VibeTonz enabled phone for a GSM network. The phone includes
four VibeTonz-enabled games from four developers, allowing
built-in exposure of our vibration capabilities for mobile
gaming.
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Koreas leading mobile phone operator, SK Telecom,
launching a multimedia phone service based entirely on
VibeTonz-enhanced content. Offered to its 20 million
subscribers, VibeBell provides music clips
synchronized with VibeTonz vibrations. Two handsets, Samsung
SCH-B450 and SCH-B550, have shipped with support for VibeBell
touch-enabled media. SK Telecom subscribers who have these
handsets can browse a catalog of over 1,000 vibration-enhanced
Korean and Western popular song clips and download them to use
as custom ringtones.
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LG Electronics, the worlds top manufacturer of CDMA mobile
handsets and fourth in the number of handsets sold worldwide,
obtaining a worldwide license for VibeTonz technology.
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Wireless content provider GeoTel signing a license agreement for
the VibeTonz System to create
touch-enabled
games, ringtones, music, and other content for KTF, the second
largest wireless carrier in Korea.
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Automotive
In recent years there has been a proliferation of automotive
sub-systems,
which are directly accessed by drivers and passengers. These
include telephone, navigation, climate controls, personal
comfort, and audio, video, and satellite radio entertainment
systems. As a result, there has been an increase in the number
of physical control devices in the automotive center stack and
console, creating space and driver distraction problems.
We have developed TouchSense technology for both rotary controls
and touchscreens appropriate for use in automobiles. TouchSense
rotary technology can consolidate the control of multiple
systems into a single module that provides the appropriate feel
for each function. This allows the driver convenient access to
many systems and supplies context-sensitive cues for operation.
TouchSense touchscreen technology provides tactile feedback for
an otherwise unresponsive surface such as an all digital switch
or touchscreen. Programmable haptic touchscreen, touch surface,
and rotary controls of many types can be used to provide a
space-saving, aesthetic look, and a confirming response for the
driver that can help reduce glance time.
We have also conducted various funded development efforts and
provided tools and evaluation licenses to several major
automobile manufacturers and suppliers who have expressed
interest in touch-enabled automobile controls.
BMW was the first automobile manufacturer to license our
TouchSense rotary technology for use in controls starting with
its 2002 7 Series sedan model. BMW has also included our
technology in the Rolls Royce and in some models of its 5 Series
and 6 Series starting in 2003 and 3 Series in 2005. Siemens VDO
Automotive has licensed our technology for use in the high-end
Volkswagen Phaeton sedan. ALPS Electric, also a licensee, has
produced a haptic rotary control that has been included in the
Mercedes-Benz S class sedan starting in the fall of 2005.
Methode Electronics, Inc., a global designer and manufacturer of
electronic component and subsystem devices, and Volkswagen,
Europes largest automaker, have both licensed TouchSense
technology for use in vehicles.
In 2006, SMK Corporation of Tokyo, a global manufacturer of
electromechnical components, licensed TouchSense technology for
use in its touch panels, including for the automotive market.
For the years ended December 31, 2006, 2005, and 2004, 9%,
8%, and 8%, respectively, of our total revenues were automotive
revenues.
3D and
Mechanical CAD Design
Our three-dimensional and mechanical computer-aided design
products allow users to create
three-dimensional
computer models directly from physical objects and also to
precisely measure manufactured
11
parts. These products include the MicroScribe product line,
which contains sensor and microprocessor technologies that allow
users to measure or digitize physical objects simply by tracing
their contours with a stylus. Third-party software records the
three-dimensional measurements or geometry of the object and
reproduces it on the screen as a three-dimensional computer
model. In another application, third-party software compares the
desired dimensions to three-dimensional measurements of an
actual part to determine if it is within tolerance. Taken
together, these capabilities support high-accuracy parts
inspection, reverse engineering, game development, animation,
filmmaking, tube bending, and some medical applications.
We manufacture and sell the CyberGlove system, a fully
instrumented glove that accurately measures the movement of a
users hand and, used in conjunction with our software,
maps the movement to a graphical hand on the computer screen.
Users can reach in and manipulate digital objects
similar to physical objects. The
CyberTouchtm
system is a CyberGlove product with a vibro-tactile feedback
option that provides users with appropriate feedback when
individual fingers contact digital objects. The CyberGrasp
system is an option for the CyberGlove product that adds
kinesthetic force feedback to the fingertips. With a CyberGrasp
system, users can actually feel the shape and malleability of 3D
graphical objects being held in the fingertips and manipulated
on the screen. The CyberForce product is an enhanced, grounded,
force feedback product. Incorporating our TouchSense
technologies, a CyberForce system allows users to experience
sensations similar to the CyberGrasp, but with whole-arm,
whole-hand, as well as fingertip interactions.
Our software products for our whole-hand interfaces include
VirtualHand®
SDK, VirtualHand for MotionBuilder, and VirtualHand for V5.
VirtualHand SDK is a software toolkit that helps users integrate
our whole-hand glove-based interface products into specific
applications. VirtualHand for MotionBuilder lets users acquire,
edit, and blend motion animation in Alias MotionBuilder
real-time capture software. VirtualHand for V5 leverages our
relationship with Dassault Systemes by bringing our glove-based
products directly into the CATIA V5 and ENOVIA V5 environments,
allowing for real-time interaction with digital prototypes for
the evaluation of ergonomics, assembly, and maintainability of
products. Users may develop multiple digital-design iterations
to replace the need for physical prototypes, thereby reducing
costs and time to market.
In addition to these 3D products, we manufacture and sell
specialized products such as computer peripherals that are not
touch-enabled, but incorporate related advanced computer
peripheral technologies. These specialized peripherals include
the
SoftMouse®,
a high performance, nonhaptic mouse optimized for use in
geographic information systems and mapmaking.
For the years ended December 31, 2006, 2005, and 2004, 17%,
17%, and 19%, respectively, of our total revenues were generated
from 3D and mechanical CAD design revenues.
Sales
and Distribution
Sales of these products generally do not experience seasonal
fluctuations, except for royalties from gaming peripherals,
which tend to be significantly higher during the year-end
holiday shopping season. However, there may be variations in the
timing of revenue recognition from development contracts
depending on numerous factors including contract milestones and
operations scheduling. Our products typically incorporate
readily available commercial components. There are no unusual
working capital requirements in the Computing, Entertainment,
and Industrial segment. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations as well as the notes to the consolidated
financial statements for revenue information for the past three
years.
In the PC and video console gaming, mobility, and automotive
markets, we establish licensing relationships through our
business development efforts.
In mobility, sales relationships must be established with
operators, handset manufacturers, and content developers
worldwide. We have signed license agreements with mobile handset
manufacturers for the incorporation of the VibeTonz System into
certain mobile phone handsets. We have established relationships
with CDMA platform developer QUALCOMM, Incorporated and with
smartphone operating system developer Symbian, Ltd. Discussions
are ongoing with other handset manufacturers, operators, and
content developers in the United States, Europe, and Asia.
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We employ a direct sales force in the United States, Europe, and
Asia to license our VibeTonz software products. In gaming, our
sales force is also augmented through co-marketing arrangements.
As part of our strategy to increase our visibility and promote
our touch-enabling technology, our consumer-products license
agreements generally require our licensees to display the
TouchSense or VibeTonz technology logo on their end products.
We sell our touchscreen products to OEMs and system integrators,
such as 3M Touch Systems, Advanced Input Systems, and
StacoSwitch, using a worldwide direct sales force. In addition,
the technology is licensed to large customers in automotive and
other markets.
In the automotive market, we use a worldwide direct sales force
to work with vehicle manufacturers and component suppliers. We
have also licensed our technology to Methode, ALPS Electric, and
SMK, leading automotive component suppliers, as part of our
strategy to speed adoption of our TouchSense technologies across
the automotive industry.
The MicroScribe product line, along with first- and third-party
hardware accessories and companion software, is sold through an
international network of over 75 resellers. In addition to
direct sales, our 3D whole-hand interaction products are
distributed, sold, and supported by a growing worldwide network
of over 20 international and domestic resellers. We have
marketing relationships or contracts with leading 3D CAD/CAM and
interaction companies, including Dassault Systemes, a worldwide
leader in product lifecycle management software.
Competition
With respect to touch-enabled consumer products, we are aware of
several companies that claim to possess touch feedback
technology applicable to the consumer market. In addition, we
are aware of several companies that currently market unlicensed
touch feedback products in consumer markets. We have been
engaged in litigation with one of these companies (see
Item 3. Legal Proceedings).
Several companies also currently market touch feedback products
that are competitive to ours in nonconsumer markets. These
companies could also shift their focus to the consumer market.
In addition, our licensees or other companies may develop
products that compete with products employing our touch-enabling
technologies, but are based on alternative technologies, or
develop technologies that are similar or superior to our
technologies, duplicate our technologies, or design around our
patents. Many of our licensees, including Microsoft, Logitech,
Samsung, and others have greater financial and technical
resources upon which to draw in attempting to develop computer
peripheral or mobile phone technologies that do not make use of
our touch-enabling technologies.
With respect to our MicroScribe product line, we believe the G2
model, aimed primarily at the design, animation, and reverse
engineering markets, competes favorably with other digitizing
technologies, such as laser scanning and sonic systems, and with
other articulated arm models, which are all of higher accuracy
and higher price than these markets generally require. The
MicroScribe MX model, aimed at high-accuracy manufactured parts
inspection and reverse engineering markets, competes favorably
on price to other coordinate measurement machine
(CMM) models manufactured by Faro Technologies and Romer
CimCore, which is a part of Hexagon AB. It also competes
favorably with these competitors for many types of projects
where accuracy measurement tolerances are greater than
0.004-inch.
SensAble Technologies currently sells high-end 3D sculpting and
design products that employ haptics. We believe that
SensAbles products compete on some level with our 3D
interaction products. Competitors to our CyberGlove data glove
include Fifth Dimension Technologies, Measurand, Motion Analysis
Corporation, and Phoenix Technologies.
For licensed applications, our competitive position is partially
dependent on the competitive positions of our licensees that pay
a per-unit
royalty. Our licensees markets are highly competitive. We
believe that the principal competitive factors in our
licensees markets include price, performance, user-centric
design,
ease-of-use,
quality, and timeliness of products, as well as the
manufacturers responsiveness, capacity, technical
abilities, established customer relationships, retail shelf
space, advertising, promotional programs, and brand recognition.
Touch-related benefits in some of these markets may be viewed
simply as enhancements and compete with nontouch-enabled
technologies.
13
Our failure to obtain or maintain adequate protection for our
intellectual property rights for any reason could hurt our
competitive position. There is no guarantee that patents will be
issued from the patent applications that we have filed or may
file. Our issued patents may be challenged, invalidated, or
circumvented, and claims of our patents may not be of sufficient
scope or strength, or issued in the proper geographic regions,
to provide meaningful protection or any commercial advantage.
Immersion
Medical
Products
and Markets
We have developed numerous simulation technologies that can be
used for medical training and testing. By enabling a medical
simulator to more fully engage users sense of touch, our
technologies can support realistic simulations that are
effective in teaching medical students, doctors, and other
health professionals what it feels like to perform a given
procedure. The use of our simulators allows these professionals
to perfect their practice in an environment that poses no risks
to patients, where mistakes have no dire consequences, and where
animal or cadaver use is minimized.
In addition, corporations wanting to train customers or sales
staff on medical procedures and on the use of new tools and
medical devices engage us to develop special simulators.
Examples of projects we have completed for Medtronic, Inc.,
Laerdal Medical AS, Terumo Cardiovascular Systems Corporation
and others include simulation of venous access, minimally
invasive vein harvesting, hysteroscopy, and aortic valve and
pacemaker implantation.
We have four medical simulation product lines: the
Virtual IV system, which simulates needle-based procedures
such as intravenous catheterization and phlebotomy; the
Endoscopy
AccuTouch®
System, which simulates endoscopic procedures, including
bronchoscopy and lower and upper GI procedures; the
CathLabVRtm
System, which simulates endovascular interventions including
cardiac pacing, angiography, angioplasty, and carotid and
coronary stent placement; and the
LapVRtm
System, which simulates minimally invasive procedures involving
abdominal and pelvic organs.
These systems are used for training and educational purposes to
enable health professionals to feel simulated forces that they
would experience during actual medical procedures, such as
encountering an unexpected obstruction in an artery. The systems
provide a realistic training environment augmented by real-time
graphics that include anatomic models developed from actual
patient data and high-fidelity sound that includes simulated
patient responses.
All our products are comprised of a hardware system, an
interface device, and software modules that include several
cases of increasing difficulty, allowing users to develop their
skills by experiencing a broad range of pathologies in differing
anatomical conditions.
We design each product line to maximize the number of procedures
that can be simulated with minimal additional customer hardware
investment. These systems then enable potential additional sales
of software to the installed base of hardware systems. We
believe the relatively low price of our software modules
provides an opportunity for repeat sales. We currently have over
25 various software modules available that replicate such
medical procedures as intravenous catheterization, peripherally
inserted central catheters (PICC), bronchoscopy, colonoscopy,
cardiac pacing, and carotid and coronary angioplasty.
Sales
and Distribution
Sales of these products may experience seasonal fluctuations
related to teaching hospitals summer residency programs.
In addition, there may be variations in timing of revenue
recognition from the sale of systems with upgrade rights and
from development contracts. The latter may depend on numerous
factors including contract milestones and timing of work
performed against the contract. Most raw materials used in the
manufacturing of our products are readily available commercial
components. There are no unusual working capital requirements in
the Medical segment. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
as well as the notes to the consolidated financial statements
for revenue information for the past three years.
14
With respect to medical simulation products, we employ a direct
sales force in the U.S. that markets simulation systems to
hospitals, colleges and universities, nursing schools, medical
schools, emergency medical technician training programs, the
military, medical device companies, and other organizations
involved in procedural medicine. We have seven regional medical
sales representatives in the United States. We also have one
independent sales representative in Europe and 28 resellers
outside the U.S.
For the years ended December 31, 2006, 2005, and 2004, 51%,
40%, and 42%, respectively, of our total revenues were generated
from medical revenues. For the years ended December 31,
2006, 2005, and 2004, 18%, 11%, and 17%, respectively, of our
total revenues consisted of licensing, product revenue, or
development revenues from Medtronic.
Competition
There are several companies that currently sell simulation
products to medical customers. Some simulators target the same
minimally invasive procedures as do ours, while others sell
mannequin-based systems for emergency response training. All
simulators compete at some level for the same funding in medical
institutions. Competitors include Simbionix USA Corporation,
Mentice Corporation, Medical Education Technologies, Inc., and
Medical Simulation Corporation. The principal competitive
factors are the type of medical procedure being simulated,
technological sophistication, and price. We believe we compete
favorably on all three.
Research
and Development
Our success depends on our ability to invent, improve, and
reduce the cost of our technologies, design and develop products
to meet specifications based on research and our understanding
of customer needs and expectations, and interact with our
licensees who are integrating our technologies into theirs.
Immersion Engineering. We have assembled a
multi-disciplinary team of highly skilled engineers and
scientists with the experience required for development of
touch-enabling technology. The teams experience includes
skills related to mechanical engineering, electrical
engineering, embedded system and firmware, control techniques,
software, quality control, haptic content design, and project
and process management. For medical simulations, we have
assembled a unique team of experts who are skilled at modeling
the anatomy and physiology of various medical cases, creating
graphical renderings, designing haptic feedback, and devising
advanced control algorithms to simulate realistic navigation for
medical procedures, such as through the bodys blood
vessels.
Application Engineering & Technical
Support. We may provide application engineering
and technical support during integration of our touch-enabling
technology into customer products. To facilitate the validation
and adoption of touch-enabling technology, we have developed
various integration kits. These kits may include actuators or
actuator references, mounting samples, controller boards or
schematics, software libraries and source code samples, and
documentation. Our application engineers support customer use of
these integration kits through phone and
e-mail
technical support, onsite workshops, or other means. Our
application engineers and technical support staff may also help
install Immersion products, train customers on their use, and
provide ongoing product support, particularly for the medical
training simulators and 3D products.
Licensee Interaction. To support the
successful design and adoption of our technology in a
licensees product, we make efforts to ensure clear
communication with our customers. Typically, collaborative
development efforts are structured using a four-phase approach
including Product Definition, Concept Development, Detail
Design, and Production Design phases. This four-phase design
process is typically used for designing new systems when the
solution is not known beforehand. Each phase includes formal
design reviews and documentation. The continuation of our
development effort is contingent upon successful completion and
acceptance of prior phases. This method ensures that the
customers financial risk is minimized and that project
deliverables remain consistent with the goals established in the
Product Definition phase.
Product Development Process. For product
development, we follow a product design process based on ISO
9001 guidance. This process starts with the typical marketing
and product requirement stages, and once approved, moves on to
product planning and design, prototyping, then alpha, beta, and
first-run production development and testing stages. All these
stages are supported by documentation procedures and tools,
design reviews, revision
15
management, and other quality criteria. This process helps us to
decide to continue product development to reach the end product
and to meet our published quality requirement, and also matches
the quality and development expectations of our large accounts.
Our research and development efforts have been focused on
technology development, including hardware, software, control
algorithms, and design. We have entered into numerous contracts
with corporations and government agencies that help fund
advanced research and development. Our government contracts
permit us to retain ownership of the technology developed under
the contracts, provided that we supply the applicable government
agency a license to use the technology for noncommercial
purposes.
For the years ended December 31, 2006, 2005, and 2004, our
research and development expenses were $7.6 million,
$6.0 million, and $8.0 million, respectively.
Intellectual
Property
We believe that intellectual property protection is crucial to
our business. We rely on a combination of patents, copyrights,
trade secrets, trademarks, nondisclosure agreements with
employees and third-parties, licensing arrangements, and other
contractual agreements with third parties to protect our
intellectual property.
We and our wholly owned subsidiaries hold more than 600 issued
or pending patents in the U.S. and other countries covering
various aspects of our hardware and software technologies. Some
of our current U.S. patents begin to expire starting in
2007.
Where we feel it is appropriate, we will engage the legal system
to protect our intellectual property rights. For example, we
filed a complaint against Sony Computer Entertainment, Inc. and
Sony Computer Entertainment of America, Inc. (collectively
Sony Computer Entertainment) on February 11,
2002 in the U.S. District Court for the Northern District
Court of California. On September 21, 2004, a jury returned
a verdict favorable to us in our patent infringement suit
against Sony Computer Entertainment. Judgment was entered in our
favor and we were awarded $82.0 million in past damages,
and pre-judgment interest in the amount of $8.9 million,
for a total of $90.9 million. Additionally, the Court
issued a permanent injunction (stayed pending appeal) against
the manufacture, use, sale, or import into the United States of
the infringing Sony PlayStation system. Sony Computer
Entertainment had appealed the judgment to the United States
Court of Appeals for the Federal Circuit. On March 1, 2007,
Immersion and Sony Computer Entertainment announced that the
companies agreed to conclude their patent litigation at the
U.S. Court of Appeals for the Federal Circuit. They also
agreed to enter into a new business agreement to explore the
inclusion of our technology in PlayStation format products. See
Item 3. Legal Proceedings for further details
and discussion of the litigation proceedings and resolution.
Investor
Information
You can access financial and other information in the Investor
Relations section of our Web site at www.immersion.com. We make
available, on our Web site, free of charge, copies of our annual
report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically
or otherwise furnishing it to the SEC.
The charters of our audit committee, our compensation committee,
and our nominating committee, and our code of Business Conduct
and Ethics (including code of ethics provisions that apply to
our principal executive officer, principal financial officer,
controller, and senior financial officers) are also available at
our Web site under Corporate Governance. These items
are also available to any stockholder who requests them by
calling +1 408.467.1900.
The SEC maintains an Internet site that contains reports, proxy,
and information statements, and other information regarding
issuers that file electronically with the SEC at
www.sec.gov.
16
Employees
As of December 31, 2006, we had 140 full-time and
5 part-time employees, including 54 in research and
development, 42 in sales and marketing, and 49 in legal,
finance, administration, and operations. As of that date, we
also had 11 independent contractors. None of our employees is
represented by a labor union, and we consider our employee
relations to be positive.
Executive
Officers
The following table sets forth information regarding our
executive officers as of March 1, 2007.
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Name
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Position with the Company
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Age
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Victor Viegas
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President, Chief Executive
Officer, and Director
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49
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Stephen Ambler
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Chief Financial Officer and Vice
President, Finance
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47
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Richard Vogel
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Senior Vice President and General
Manager,
Immersion Medical
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53
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Mr. Victor Viegas has served as our Chief Executive
Officer, President, and member of the Board of Directors since
October 2002. From February 2002 to February 2005, he also
served as President, Chief Operating Officer, and Chief
Financial Officer having joined Immersion in August 1999 as
Chief Financial Officer, Vice President, Finance. From June 1996
to August 1999, he served as Vice President, Finance and
Administration and Chief Financial Officer of Macrovision
Corporation, a developer and licensor of video and software copy
protection technologies. From October 1986 to June 1996, he
served as Vice President of Finance and Chief Financial Officer
of Balco Incorporated, a manufacturer of advanced automotive
service equipment. He holds a Bachelor of Science degree in
Accounting and a Master of Business Administration degree from
Santa Clara University. Mr. Viegas is also a Certified
Public Accountant in the State of California.
Mr. Stephen Ambler joined Immersion in February 2005 as
Chief Financial Officer and Vice President, Finance responsible
for finance, operations, and human resources. From April 2001 to
January 2005, Mr. Ambler served as Chief Financial Officer
and Vice President, Finance of Bam! Entertainment, Inc., a
producer of interactive video games. From April 1994 to March
2001, he served as Director of Finance and Administration for
Europe and then Chief Financial Officer, Secretary, and Senior
Vice President, Finance of Insignia Solutions PLC, a wireless
solutions software company. From December 1992 to March 1994, he
served as Financial Controller and Company Secretary for Ampex
Great Britain Limited, a producer of recording equipment and
magnetic tape for the television and defense industries. From
May 1988 to December 1992, he served as Financial Controller and
then Finance Director of Carlton Cabletime Limited, a supplier
of cable television equipment. Mr. Ambler holds a diploma
in Accounting Studies from Oxford Polytechnic in England and is
qualified as a Chartered Accountant in England and Wales.
Mr. Richard Vogel joined Immersion in March 2004 as Senior
Vice President and General Manager of our wholly owned
subsidiary, Immersion Medical, in Gaithersburg, Maryland. From
September 2000 to February 2004, Mr. Vogel served as
President and Chief Executive Officer of SpectraLife, a medical
device company specializing in products for the management of
diabetes. From July 1996 to August 2000, he served as Senior
Vice President and General Manager of the New Technologies
Division of Kinetic Concepts, Inc., a manufacturer of electronic
medical devices and specialty surfaces for surgery and wound
care. From November 1989 to February 1996, he served as Vice
President, European Operations and Chief Operating Officer of
Vestar, Inc. a biopharmaceutical company specializing in
anti-infectives and oncology products. From August 1983 to
November 1989, Mr. Vogel served in a variety of general
managerial positions of increasing responsibility for the
Lederle (pharmaceuticals) and Davis & Geck (medical
devices) divisions of the American Cyanamid Company.
Mr. Vogel holds a Bachelor of Arts degree from Middlebury
College in Vermont and a Master of Business Administration
degree from the Harvard Business School.
17
Item 1A. Risk
Factors
You should carefully consider the following risks and
uncertainties, as well as other information in this report and
our SEC filings, before you invest in our common stock.
Investing in our common stock involves risk. If any of the
following risks or uncertainties actually occur, our business,
financial condition, or results of operations could be
materially adversely affected. The following risks and
uncertainties are not the only ones facing us. Additional risks
and uncertainties of which we are unaware or that we currently
believe are immaterial could also materially adversely affect
our business, financial condition, or results of operations. In
any case, the trading price of our common stock could decline,
and you could lose all or part of your investment. See also the
Forward-looking Statements discussion in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Factors
That May Affect Future Results
Company
Risks
We had
an accumulated deficit of $137 million as of
December 31, 2006, have a history of losses, will
experience losses in the future, and may not achieve or maintain
profitability.
Since 1997, we have incurred losses in every fiscal quarter. We
will need to generate significant ongoing revenue to achieve and
maintain profitability. We anticipate that our expenses will
increase in the foreseeable future as we:
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protect and enforce our intellectual property;
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continue to develop our technologies;
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attempt to expand the market for touch-enabled technologies and
products;
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increase our sales and marketing efforts; and
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pursue strategic relationships.
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If our revenues grow more slowly than we anticipate or if our
operating expenses exceed our expectations, we may not achieve
or maintain profitability.
Our
current litigation undertakings are expensive, disruptive, and
time consuming, and will continue to be, until resolved, and
regardless of whether we are ultimately successful, could
adversely affect our business.
We are involved in litigation with Internet Services LLC
(ISLLC), a cross-claim defendant in the lawsuit
against Sony Computer Entertainment. ISLLCs appeal from
the lawsuit judgment had been consolidated with
Sony Computer Entertainments appeal of the lawsuit
judgment against it at the United States Court of Appeals for
the Federal Circuit. We are also litigating a separate lawsuit
involving claims for breach of contract and rescission against
ISLLC in the U.S. District Court for the Northern District
of California.
In addition, we are involved in litigation with Mr. Craig
Thorner in the U.S. District Court for the Northern
District of California relating to our allegations of breach of
contract with respect to Thorners license to a third party
of U.S. Patent No. 5,684,722 and his allegations of
breach of contract, breach of the implied covenant of good faith
and fair dealing, promissory fraud, breach of fiduciary duty,
negligent misrepresentation, and rescission.
Due to the inherent uncertainties of litigation, we cannot
accurately predict how these cases will ultimately be resolved.
We anticipate that the litigation will continue to be costly,
and there can be no assurance that we will be able to recover
the costs we incur in connection with the litigation. We expense
litigation costs as incurred, and only accrue 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 our key management and personnel. As a result, until such
time as it is resolved, the litigation could adversely affect
our business. Further, any unfavorable outcome could adversely
affect our business. For additional background on litigation,
please see Note 19 to the condensed consolidated financial
statements and the section titled Item 3. Legal
Proceedings.
18
Litigation
regarding intellectual property rights could be expensive,
disruptive, and time consuming; could result in the impairment
or loss of portions of our intellectual property; and could
adversely affect our business.
Intellectual property litigation, whether brought by us or by
others against us, has caused us to expend, and may cause us to
expend in future periods, significant financial resources as
well as divert managements time and efforts. From time to
time, we initiate claims against third parties that we believe
infringe our intellectual property rights. We intend to enforce
our intellectual property rights vigorously and may initiate
litigation against parties that we believe are infringing our
intellectual property rights if we are unable to resolve matters
satisfactorily through negotiation. Litigation brought to
protect and enforce our intellectual property rights could be
costly, time-consuming, and distracting to management and could
result in the impairment or loss of portions of our intellectual
property. In addition, any litigation in which we are accused of
infringement may cause product shipment delays, require us to
develop non-infringing technologies, or require us to enter into
royalty or license agreements even before the issue of
infringement has been decided on the merits. If any litigation
were not resolved in our favor, we could become subject to
substantial damage claims from third parties and indemnification
claims from our licensees. We and our licensees could be
enjoined from the continued use of the technologies at issue
without a royalty or license agreement. Royalty or license
agreements, if required, might not be available on acceptable
terms, or at all. If a third party claiming infringement against
us prevailed, and we could not develop non-infringing
technologies or license the infringed or similar technologies on
a timely and cost-effective basis, our expenses would increase
and our revenues could decrease.
We attempt to avoid infringing known proprietary rights of third
parties. However, third parties may hold, or may in the future
be issued, patents that could be infringed by our products or
technologies. Any of these third parties might make a claim of
infringement against us with respect to the products that we
manufacture and the technologies that we license. From time to
time, we have received letters from companies, several of which
have significantly greater financial resources than we do,
asserting that some of our technologies, or those of our
licensees, infringe their intellectual property rights. Certain
of our licensees have received similar letters from these or
other companies. Such letters or subsequent litigation may
influence our licensees decisions whether to ship products
incorporating our technologies. In addition, such letters may
cause a dispute between our licensees and us over
indemnification for the infringement claim. Any of these
notices, or additional notices that we or our licensees could
receive in the future from these or other companies, could lead
to litigation against us, either regarding the infringement
claim or the indemnification claim.
We have acquired patents from third parties and also license
some technologies from third parties. We must rely upon the
owners of the patents or the technologies for information on the
origin and ownership of the acquired or licensed technologies.
As a result, our exposure to infringement claims may increase.
We generally obtain representations as to the origin and
ownership of acquired or licensed technologies and
indemnification to cover any breach of these representations.
However, representations may not be accurate and indemnification
may not provide adequate compensation for breach of the
representations. Intellectual property claims against our
licensees, or us, whether or not they have merit, could be
time-consuming to defend, cause product shipment delays, require
us to pay damages, harm existing license arrangements, or
require us or our licensees to cease utilizing the technologies
unless we can enter into licensing agreements. Licensing
agreements might not be available on terms acceptable to us or
at all. Furthermore, claims by third parties against our
licensees could also result in claims by our licensees against
us under the indemnification provisions of our licensees
agreements with us.
The legal principles applicable to patents and patent licenses
continues to change and evolve. Decisions that make it easier
for patent licensees to challenge the validity, enforceability,
or infringement of patents, or make it more difficult for patent
licensors to obtain a permanent injunction, obtain enhanced
damages for willful infringement, or to obtain or enforce
patents, may adversely affect our business and the value of our
patent portfolio. Furthermore, our prospects for future revenue
growth through our royalty and licensing based businesses could
be diminished.
19
The
terms in our agreements may be construed by our licensees in a
manner that is inconsistent with the rights that we have granted
to other licensees, or in a manner that may require us to incur
substantial costs to resolve conflicts over license
terms.
We have entered into, and we expect to continue to enter into,
agreements pursuant to which our licensees are granted rights
under our technology and intellectual property. These rights may
be granted in certain fields of use, or with respect to certain
market sectors or product categories, and may include exclusive
rights or sublicensing rights. We refer to the license terms and
restrictions in our agreements, including, but not limited to,
field of use definitions, market sector, and product category
definitions, collectively as License Provisions.
Due to the continuing evolution of market sectors, product
categories, and licensee business models, and to the compromises
inherent in the drafting and negotiation of License Provisions,
our licensees may, at some time during the term of their
agreements with us, interpret License Provisions in their
agreements in a way that is different from our interpretation of
such License Provisions, or in a way that is in conflict with
the rights that we have granted to other licensees. Such
interpretations by our licensees may lead to (a) claims
that we have granted rights to one licensee which are
inconsistent with the rights that we have granted to another
licensee,
and/or
(b) claims by one licensee against another licensee that
may result in our incurring indemnification or other obligations
or liabilities.
In addition, after we enter into an agreement, it is possible
that markets
and/or
products, or legal
and/or
regulatory environments, will evolve in a manner that we did not
foresee or was not foreseeable at the time we entered into the
agreement. As a result, in any agreement, we may have granted
rights that will preclude or restrict our exploitation of new
opportunities that arise after the execution of the agreement.
Product
liability claims could be time-consuming and costly to defend
and could expose us to loss.
Our products or our licensees products may have flaws or
other defects that may lead to personal or other injury claims.
If products that we or our licensees sell cause personal injury,
property injury, financial loss, or other injury to our or our
licensees customers, the customers or our licensees may
seek damages or other recovery from us. Any claims against us
would be time-consuming, expensive to defend, and distracting to
management, and could result in damages and injure our
reputation, the reputation of our technology and services,
and/or the
reputation of our products, or the reputation of our licensees
or their products. This damage could limit the market for our
and our licensees products and harm our results of
operations.
In the past, manufacturers of peripheral products including
certain gaming products such as joysticks, wheels, or gamepads,
have been subject to claims alleging that use of their products
has caused or contributed to various types of repetitive stress
injuries, including carpal tunnel syndrome. We have not
experienced any product liability claims to date. Although our
license agreements typically contain provisions designed to
limit our exposure to product liability claims, existing or
future laws or unfavorable judicial decisions could limit or
invalidate the provisions.
If the
settlement on our current class action lawsuit falls through,
the continuing lawsuit could be expensive, disruptive, and time
consuming to defend against, and if we are not successful, could
adversely affect our business.
We are involved in legal proceedings relating to a class action
lawsuit filed on November 9, 2001, related to In re Initial
Public Offering Securities Litigation. The named defendants are
Immersion and three of our current or former officers or
directors and certain underwriters of our November 12, 1999
IPO. Subsequently, two of the individual defendants stipulated
to a dismissal without prejudice. We and most of the issuer
defendants have settled with the plaintiffs. However, the
settlement requires approval by the Court, which cannot be
assured, after class members are given the opportunity to object
to the settlement or opt out of the settlement.
If our
facilities were to experience catastrophic loss, our operations
would be seriously harmed.
Our facilities could be subject to a catastrophic loss such as
fire, flood, earthquake, power outage, or terrorist activity. A
substantial portion of our research and development activities,
manufacturing, our corporate headquarters, and other critical
business operations are located near major earthquake faults in
San Jose, California, an area with a history of seismic
events. An earthquake at or near our facilities could disrupt
our operations, delay
20
production and shipments of our products or technologies, and
result in large expenses to repair and replace the facility.
While we believe that we maintain insurance sufficient to cover
most long-term potential losses at our facilities, our existing
insurance may not be adequate for all possible losses. In
addition, California has experienced problems with its power
supply in recent years. As a result, we have experienced utility
cost increases and may experience unexpected interruptions in
our power supply that could have a material adverse effect on
our sales, results of operations, and financial condition.
Industry
and Technology Risks
We
have little or no control or influence on our licensees
design, manufacturing, promotion, distribution, or pricing of
their products incorporating our touch-enabling technologies,
upon which we generate royalty revenue.
A key part of our business strategy is to license our
intellectual property to companies that manufacture and sell
products incorporating our touch-enabling technologies. Sales of
those products generate royalty and license revenue for us. For
the years ended December 31, 2006, 2005, and 2004, 26%,
37%, and 37%, respectively, of our total revenues were royalty
and license revenues. However, we do not control or influence
the design, manufacture, quality control, promotion,
distribution, or pricing of products that are manufactured and
sold by our licensees. In addition, we generally do not have
commitments from our licensees that they will continue to use
our technologies in current or future products. As a result,
products incorporating our technologies may not be brought to
market, meet quality control standards, achieve commercial
acceptance, or generate meaningful royalty revenue for us. For
us to generate royalty revenue, licensees that pay us
per-unit
royalties must manufacture and distribute products incorporating
our touch-enabling technologies in a timely fashion and generate
consumer demand through marketing and other promotional
activities. Products incorporating our touch-enabling
technologies are generally more difficult to design and
manufacture, which may cause product introduction delays or
quality control problems. If our licensees fail to stimulate and
capitalize upon market demand for products that generate
royalties for us, or if products are recalled because of quality
control problems, our revenues will not grow and could decline.
Alternatively, if a product that incorporates our touch-enabling
technologies achieves widespread market acceptance, the product
manufacturer may elect to stop making it rather than pay us
royalties based on sales of the product.
Peak demand for products that incorporate our technologies,
especially in the video console gaming and computer gaming
peripherals market, typically occurs in the fourth calendar
quarter as a result of increased demand during the year-end
holiday season. If our licensees do not ship products
incorporating our touch-enabling technologies in a timely
fashion or fail to achieve strong sales in the fourth quarter of
the calendar year, we may not receive related royalty and
license revenue.
Most of our current gaming royalty revenues come from
third-party peripheral makers who make licensed gaming products
designed for use with popular video game console systems from
Microsoft, Sony, and Nintendo. Video game console systems are
closed, proprietary systems, and video game console system
makers typically impose certain requirements or restrictions on
third-party peripheral makers who wish to make peripherals that
will be compatible with a particular video game console system.
These requirements and restrictions could be in the form of
hardware technical specifications, software technical
specifications, security specifications or other security
mechanisms, component vendor specifications, licensing terms and
conditions, or other forms. If third-party peripheral makers
cannot or are not allowed to obtain or satisfy these
requirements or restrictions, our gaming royalty revenues could
be significantly reduced. Furthermore, should a significant
video game console maker choose to omit touch-enabling
capabilities from its console system or somehow restrict or
impede the ability of third parties to make touch-enabling
peripherals, it may very well lead our gaming licensees to stop
making products with touch-enabling capabilities, thereby
significantly reducing our gaming royalty revenues. Sony removed
the vibration feature that was available on the PlayStation and
PlayStation 2 systems from the new PlayStation 3 system. This
course of action by Sony may have material adverse consequences
on our current and future gaming royalty revenues since our
gaming royalties have primarily been from licensed third-party
controller products with vibration or force feedback
capabilities that require some degree of vibration
and/or force
feedback support or compatibility in the video console system to
be viable products. We do not know if this situation might
21
change in the life of the PlayStation 3 console system, or
whether or to what extent the PlayStation 3 console will be
compatible with third-party peripherals containing force
feedback capability in the future.
Both the recently launched Microsoft Xbox 360 and Nintendo Wii
include touch-enabling capabilities. For the Microsoft Xbox 360
video console system launched in November 2005, Microsoft has,
to date, not yet broadly licensed third parties to produce
peripherals for its Xbox 360 game console and has excluded third
parties from producing Xbox 360 wireless controllers. Wireless
game controllers account for a significant portion of our
royalty revenue, including revenue from Logitech and Mad Catz.
To the extent Microsoft does not license these rights to third
parties, Microsofts share of all aftermarket game
controller sales will likely remain high or increase, which we
expect will result in a decrease in our gaming royalty revenue.
Additionally, Microsoft is now making touch-enabled wheels
covered by their royalty-free, perpetual, irrevocable license to
our worldwide portfolio of patents that are in competition with
our licensees products for which we earn per unit
royalties.
Because
we have a fixed payment license with Microsoft, our royalty
revenue from licensing in the gaming market and other consumer
markets has and may further decline if Microsoft increases its
volume of sales of touch-enabled gaming products and consumer
products at the expense of our other licensees.
Under the terms of our present agreement with Microsoft,
Microsoft receives a royalty-free, perpetual, irrevocable
license to our worldwide portfolio of patents. This license
permits Microsoft to make, use, and sell hardware, software, and
services, excluding specified products, covered by our patents.
We also granted to Microsoft a limited right, under our patents
relating to touch technologies, to sublicense specified rights,
excluding rights to excluded products and peripheral devices, to
third-party customers of Microsofts or Microsofts
subsidiaries products (other than Sony Corporation, Sony
Computer Entertainment Inc., Sony Computer Entertainment of
America Inc., and their subsidiaries). In exchange, for the
grant of these rights and the rights included in a separate
Sublicense Agreement, Microsoft paid us a one-time payment of
$20.0 million. We will not receive any further revenues or
royalties from Microsoft under our current agreement with
Microsoft. Microsoft has a significant share of the market for
touch-enabled console gaming computer peripherals and is
pursuing other consumer markets such as mobile phones, PDAs, and
portable music players Microsoft has significantly greater
financial, sales, and marketing resources, as well as greater
name recognition and a larger customer base than some of our
other licensees. In the event that Microsoft increases its share
of these markets, our royalty revenue from other licensees in
these market segments might decline.
We
generate revenues from touch-enabling components that are sold
and incorporated into third- party products. We have little or
no control or influence over the design, manufacturing,
promotion, distribution, or pricing of those third- party
products.
Part of our business strategy is to sell components that provide
touch feedback capability in products that other companies
design, manufacture, and sell. Sales of these components
generate product revenue. However, we do not control or
influence the design, manufacture, quality control, promotion,
distribution, or pricing of products that are manufactured and
sold by those customers that buy these components. In addition,
we generally do not have commitments from customers that they
will continue to use our components in current or future
products. As a result, products incorporating our components may
not be brought to market, meet quality control standards, or
achieve commercial acceptance. If the customers fail to
stimulate and capitalize upon market demand for their products
that include our components, or if products are recalled because
of quality control problems, our revenues will not grow and
could decline.
Medtronic
accounts for a significant portion of our revenues and a
reduction in sales to Medtronic, or a reduction in development
work for Medtronic, may reduce our total revenue.
Medtronic accounts for a significant portion of our revenue. For
the years ended December 31, 2006, 2005, and 2004, 18%,
11%, and 17%, respectively, of our total revenues were derived
from Medtronic. If our product sales to Medtronic decline,
and/or
Medtronic reduces the development activities we perform, then
our total revenue may decline.
22
Logitech
accounts for a significant portion of our revenue and the
failure of Logitech to achieve sales volumes for its gaming
peripheral products that incorporate our touch-enabling
technologies may reduce our total revenue.
Logitech accounts for a significant portion of our revenue.
Logitech is a supplier of aftermarket game console controllers,
joysticks, and steering wheels, many of which incorporate our
technology. In the past, during transitions to next-generation
console systems, sales of aftermarket game console controllers
have dropped significantly, reducing licensing royalties we
earn. The gaming industry is currently transitioning to the
latest next-generation console systems, and we have experienced
a significant decline in revenues we earn from Logitech since
this transition commenced. For the years ended December 31,
2006, 2005, and 2004, 6%, 11%, and 10%, respectively, of our
total revenues were derived from Logitech. Revenues from
Logitech may decline further if its aftermarket game console
peripheral sales decline further, or if it is unable to obtain
or expand its license rights to sell touch-enabled controllers,
steering wheels, or joysticks for the Sony PlayStation 3,
the Nintendo Wii, or the Microsoft Xbox 360. Also, competition
with Microsoft may dampen demand for Logitech products. Any
decrease in sales of aftermarket peripherals that include our
technology by Logitech will reduce our gaming royalty revenues.
Sonys decision not to include certain vibration features
in the PlayStation 3 system may significantly adversely affect
Logitechs ability or desire to include our technologies in
products compatible with the PlayStation 3, which in return
may materially adversely affect our royalty revenue from
Logitech.
Touch
interface product royalties will be reduced if BMW were to
abandon its iDrive system or remove our technology from the
iDrive.
Our largest royalty stream from touch interface products is
currently from BMW for its iDrive controller. Press reviews of
this system have been largely negative and critical of the
systems complex user interface, which we did not design.
Nevertheless, this negative press may cause BMW to abandon the
iDrive controller or to redesign it
and/or
remove our technology from it at any time. If our technology is
not incorporated in the BMW vehicles our business may suffer.
We
depend on third-party suppliers, and our revenue
and/or
results of operations could suffer if we fail to manage supplier
issues properly.
Our operations depend on our ability to anticipate our needs for
components and products for a wide variety of systems, products,
and services, and on our suppliers ability to deliver
sufficient quantities of quality components, products, and
services at reasonable prices in time for us to meet critical
schedules. We may experience a shortage of, or a delay in
receiving, certain supplies as a result of strong demand,
capacity constraints, supplier financial weaknesses, disputes
with suppliers, other problems experienced by suppliers, or
problems faced during the transition to new suppliers. If
shortages or delays persist, the price of these supplies may
increase, we may be exposed to quality issues, or the supplies
may not be available at all. We may not be able to secure enough
supplies at reasonable prices or of acceptable quality to build
products or provide services in a timely manner in the
quantities or according to the specifications needed. We could
lose time-sensitive sales, incur additional freight costs, or be
unable to pass on price increases to our customers. If we cannot
adequately address supply issues, we might have to reengineer
some products or service offerings, resulting in further costs
and delays. We intend to purchase certain products from a
limited source in China. If the supply of these products were to
be delayed or constrained, or of insufficient quality, we may be
unable to find a new supplier on acceptable terms, or at all, or
our ability to ship these new products could be delayed, any of
which could harm our business, financial condition, and
operating results.
Additionally, our use of single source suppliers for certain
components could exacerbate our supplier issues. We obtain a
significant number of components from single sources due to
technology, availability, price, quality, or other
considerations. In addition, new products that we introduce may
use custom components obtained from only one source initially,
until we have evaluated whether there is a need for additional
suppliers. The performance of such single source suppliers may
affect the quality, quantity, and price of supplies to us.
Accordingly, our revenue
and/or
results of operations could be adversely impacted by such events.
23
Compliance
with new directives that restrict the use of certain materials
may increase our costs and limit our revenue
opportunities.
On July 1, 2006, the European Unions RoHS Directive
became effective. This Directive eliminates most uses of lead,
cadmium, hexavalent-chromium, mercury, and certain fire
retardants in electronics placed on the market after the
effective date. Since the introduction of the European
Unions RoHS Directive, other regions of the world have
announced or implemented similar regulations. In order to sell
products into regions that adopt these or similar regulations,
we have to assess each product and determine whether they comply
with the requirements of the regulations or whether they are
exempt from meeting the requirements of the regulations. If we
determine that a product is not exempt and does not comply with
adopted regulations, we will have to make changes to the product
or its documentation if we want to sell that product into the
region once the regulations become effective. Making such
changes may be costly to perform and may have a negative impact
on our results of operations. In addition, there can be no
assurance that the national enforcement bodies of the regions
adopting such regulations will agree with our assessment that
certain of our products and documentation comply with or are
exempt from the regulations. If products are determined not to
be compliant or exempt, we will not be able to ship them in the
region that adopts such regulations until such time that they
are compliant, and this may have a negative impact on our
revenue and results of operations.
Because
personal computer peripheral products that incorporate our
touch-enabling technologies currently must work with
Microsofts operating system software, our costs could
increase and our revenues could decline if Microsoft modifies
its operating system software.
Our hardware and software technologies for personal computer
peripheral products that incorporate our
touch-enabling
technologies are currently compatible with Microsofts
Windows 2000, Windows Me, and Windows XP operating systems,
including DirectX, Microsofts entertainment API.
Modifications and new versions of Microsofts operating
system and APIs (including DirectX and the Windows Vista
launched in early 2007) may require that we
and/or our
licensees modify the touch-enabling technologies to be
compatible with Microsofts modifications or new versions,
and this could cause delays in the release of products by our
licensees. If Microsoft modifies its software products in ways
that limit the use of our other licensees products, our
costs could increase and our revenues could decline.
Reduced
spending by corporate or university research and development
departments may adversely affect sales of our three-dimensional
products.
Any economic downturn could lead to a reduction in corporate or
university budgets for research and development in sectors,
including the automotive and aerospace sectors, which use our
three-dimensional and professional products. Sales of our
three-dimensional and professional products, including our
CyberGlove line of whole-hand sensing gloves and our MicroScribe
line of digitizers, could be adversely affected by cuts in
corporate research and development budgets.
Competition
between our products and our licensees products may reduce
our revenue.
Rapid technological change, short product life cycles, cyclical
market patterns, declining average selling prices, and
increasing foreign and domestic competition characterize the
markets in which we and our licensees compete. We believe that
competition in these markets will continue to be intense and
that competitive pressures will drive the price of our products
and our licensees products downward. These price
reductions, if not offset by increases in unit sales or
productivity, will cause our revenues to decline.
We face competition from unlicensed products as well. Our
licensees or other third parties may seek to develop products
using our intellectual property or develop alternative designs
that attempt to circumvent our intellectual property, which they
believe do not require a license under our intellectual
property. These potential competitors may have significantly
greater financial, technical, and marketing resources than we
do, and the costs associated with asserting our intellectual
property rights against such products and such potential
competitors could be significant. Moreover, if such alternative
designs were determined by a court not to require a license
under our intellectual property rights, competition from such
unlicensed products could limit or reduce our revenues.
24
We
have experienced significant change in our business, and our
failure to manage the complexities associated with the changing
economic environment and technology landscape could harm our
business.
Any future periods of rapid economic and technological change
may place significant strains on our managerial, financial,
engineering, and other resources. Our failure to effectively
manage these resources during periods of rapid economic or
technological change may harm our business.
The
market for certain touch-enabling technologies and touch-enabled
products is at an early stage and if market demand does not
develop, we may not achieve or sustain revenue
growth.
The market for certain of our touch-enabling technologies and
certain of our licensees touch-enabled products is at an
early stage. If we and our licensees are unable to develop
demand for touch-enabling technologies and touch-enabled
products, we may not achieve or sustain revenue growth. We
cannot accurately predict the growth of the markets for these
technologies and products, the timing of product introductions,
or the timing of commercial acceptance of these products.
Even if our touch-enabling technologies and our licensees
touch-enabled products are ultimately widely adopted, widespread
adoption may take a long time to occur. The timing and amount of
royalties and product sales that we receive will depend on
whether the products marketed achieve widespread adoption and,
if so, how rapidly that adoption occurs.
We expect that we will need to pursue extensive and expensive
marketing and sales efforts to educate prospective licensees,
component customers, and end users about the uses and benefits
of our technologies and to persuade software developers to
create software that utilizes our technologies. Negative product
reviews or publicity about our products, our licensees
products, haptic features, or haptic technology in general could
have a negative impact on market adoption, our revenue,
and/or our
ability to license our technologies in the future.
If we
fail to increase sales of our medical simulation devices, our
financial condition and operations may suffer.
Many medical institutions do not budget for simulation devices.
To increase sales of our simulation devices, we must, in
addition to convincing medical institution personnel of the
usefulness of the devices, persuade them to include a
significant expenditure for the devices in their budgets. If
these medical institutions are unwilling to budget for
simulation devices or reduce their budgets as a result of
cost-containment pressures or other factors, we may not be able
to increase or maintain sales of medical simulators at a
satisfactory rate. A decrease in sales or any failure to
increase sales of our medical simulation products will harm our
business.
If we
are unable to enter into new licensing arrangements with our
existing licensees, and with additional third-party
manufacturers for our touch-enabling technologies, our royalty
revenue may not grow.
Our revenue growth is significantly dependent on our ability to
enter into new licensing arrangements. Our failure to enter into
new or renewal of licensing arrangements will cause our
operating results to suffer. We face numerous risks in obtaining
new licenses on terms consistent with our business objectives
and in maintaining, expanding, and supporting our relationships
with our current licensees. These risks include:
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the lengthy and expensive process of building a relationship
with potential licensees;
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the fact that we may compete with the internal design teams of
existing and potential licensees;
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difficulties in persuading product manufacturers to work with
us, to rely on us for critical technology, and to disclose to us
proprietary product development and other strategies;
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difficulties with persuading potential licensees who may have
developed their own intellectual property or licensed
intellectual property from other parties in areas related to
ours to license our technology versus continuing to develop
their own or license from other parties;
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challenges in demonstrating the compelling value of our
technologies in new applications like mobile phones, portable
devices, and touchscreens;
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difficulties in persuading existing and potential licensees to
bear the development costs and risks necessary to incorporate
our technologies into their products;
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difficulties in obtaining new automotive licensees for
yet-to-be
commercialized technology because their suppliers may not be
ready to meet stringent quality and parts availability
requirements;
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inability to sign new gaming licensees if the video console
makers choose not to license third parties to make peripherals
for their new consoles;
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difficulty in signing new gaming licensees given the fact that
Sony has not included vibration features in the PlayStation 3 or
related products; and
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reluctance of content developers, mobile phone manufacturers,
and service providers to sign license agreements without a
critical mass of other such inter-dependent supporters of the
mobile phone industry also having a license, or without enough
phones in the market that incorporate our technologies.
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A majority of our current royalty revenue has been derived from
the licensing of our portfolio of
touch-enabling
technologies for video game console and personal computer gaming
peripherals, such as gamepads, joysticks, and steering wheels.
Though substantially smaller than the market for dedicated
gaming console peripherals, the market for gamepads, joysticks,
and steering wheels for use with personal computers is declining
and is characterized by declining average selling prices. If the
console peripheral market also experiences declines in sales and
selling prices, we may not achieve royalty revenue growth.
If we
fail to protect and enforce our intellectual property rights,
our ability to license our technologies and generate revenues
would be impaired.
Our business depends on generating revenues by licensing our
intellectual property rights and by selling products that
incorporate our technologies. We rely on our significant patent
portfolio to protect our proprietary rights. If we are not able
to protect and enforce those rights, our ability to obtain
future licenses or maintain current licenses and royalty revenue
could be impaired. In addition, if a court or the patent office
were to limit the scope, declare unenforceable, or invalidate
any of our patents, current licensees may refuse to make royalty
payments, or they may choose to challenge one or more of our
patents. It is also possible that:
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our pending patent applications may not result in the issuance
of patents;
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our patents may not be broad enough to protect our proprietary
rights; and
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effective patent protection may not be available in every
country in which we or our licensees do business.
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We also rely on licenses, confidentiality agreements, other
contractual agreements, and copyright, trademark, and trade
secret laws to establish and protect our proprietary rights. It
is possible that:
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laws and contractual restrictions may not be sufficient to
prevent misappropriation of our technologies or deter others
from developing similar technologies; and
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policing unauthorized use of our patented technologies,
trademarks, and other proprietary rights would be difficult,
expensive, and time-consuming, particularly outside of the
United States of America.
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Certain
terms or rights granted in our license agreements or our
development contracts may limit our future revenue
opportunities.
While it is not our general practice to sign license agreements
that provide exclusive rights for a period of time with respect
to a technology, field of use,
and/or
geography, or to accept similar limitations in product
development contracts, we have entered into such agreements and
may in the future. Although additional compensation or other
benefits may be part of the agreement, the compensation or
benefits may not adequately compensate us for the limitations or
restrictions we have agreed to as that particular market
develops. Over the life of the exclusivity period, especially in
markets that grow larger or faster than anticipated, our revenue
may be limited and less than what we could have achieved in the
market with several licensees or additional products available
to sell to a specific set of customers.
26
If we
are unable to continually improve and reduce the cost of our
technologies, companies may not incorporate our technologies
into their products, which could impair our revenue
growth.
Our ability to achieve revenue growth depends on our continuing
ability to improve and reduce the cost of our technologies and
to introduce these technologies to the marketplace in a timely
manner. If our development efforts are not successful or are
significantly delayed, companies may not incorporate our
technologies into their products and our revenue growth may be
impaired.
If we
fail to develop new or enhanced technologies for new
applications and platforms, we may not be able to create a
market for our technologies or our technologies may become
obsolete, and our ability to grow and our results of operations
might be harmed.
Our initiatives to develop new and enhanced technologies and to
commercialize these technologies for new applications and new
platforms may not be successful. Any new or enhanced
technologies may not be favorably received by consumers and
could damage our reputation or our brand. Expanding our
technologies could also require significant additional expenses
and strain our management, financial, and operational resources.
Moreover, technology products generally have relatively short
product life cycles and our current products may become obsolete
in the future. Our ability to generate revenues will be harmed
if:
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we fail to develop new technologies or products;
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the technologies we develop infringe on third-party patents or
other third-party rights;
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our new technologies fail to gain market acceptance; or
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our current products become obsolete or no longer meet new
regulatory requirements.
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We
have limited engineering, quality assurance and manufacturing
resources to design and fulfill timely product deliverables and
deliver sufficient levels of quality in support of our different
product areas. Products and services may not be delivered in a
timely way, with sufficient levels of quality, or at all, which
may reduce our revenue.
Engineering, quality assurance, and manufacturing resources are
deployed against a variety of different projects and programs to
provide sufficient levels of quality necessary for channels and
customers. Success in various markets may depend on timely
deliveries and overall levels of sustained quality. Failure to
provide product and program deliverables and quality levels in a
timely way, or at all, may disrupt channels and customers and
reduce our revenues.
The
higher cost of products incorporating our touch-enabling
technologies may inhibit or prevent their widespread
adoption.
Personal computer and console gaming peripherals, mobile phones,
touchscreens, and automotive and industrial controls
incorporating our touch-enabling technologies can be more
expensive than similar competitive products that are not
touch-enabled. Although major manufacturers, such as ALPS
Electric Co., BMW, LG Electronics, Logitech, Microsoft, and
Samsung have licensed our technologies, the greater expense of
development and production of products containing our
touch-enabling technologies may be a significant barrier to
their widespread adoption and sale.
Third-party
validation studies may not demonstrate all the benefits of our
medical training simulators, which could affect customer
motivation to buy.
In medical training, validation studies are generally used to
confirm the usefulness of new techniques, devices, and training
methods. For medical training simulators, several levels of
validation are generally tested: content, concurrent, construct,
and predictive. A validation study performed by a third party,
such as a hospital, a teaching institution, or even an
individual healthcare professional, could result in showing
little or no benefit for one or more types of validation for our
medical training simulators. Such validation study results
published in medical journals could impact the willingness of
customers to buy our training simulators, especially new
simulators that have not
27
previously been validated. Due to the time generally required to
complete and publish additional validation studies (usually more
than a year), the negative impact on sales revenue could be
significant.
Medical
licensing and certification authorities may not recommend or
require use of our technologies for training
and/or
testing purposes, significantly slowing or inhibiting the market
penetration of our medical simulation
technologies.
Several key medical certification bodies, including the American
Board of Internal Medicine (ABIM) and the American
College of Cardiology (ACC), have great influence in
recommending particular medical methodologies, including medical
training and testing methodologies, for use by medical
professionals. In the event that the ABIM and the ACC, as well
as other, similar bodies, do not endorse medical simulation
products in general, or our products in particular, as a
training
and/or
testing tool, market penetration for our products could be
significantly and adversely affected.
We
have limited distribution channels and resources to market and
sell our medical simulators, touch interface products, and
three-dimensional simulation and digitizing products, and if we
are unsuccessful in marketing and selling these products, we may
not achieve or sustain product revenue growth.
We have limited resources for marketing and selling medical
simulation, touch interface, or three-dimensional simulation and
digitizing products, either directly or through distributors. To
achieve our business objectives, we must build a balanced
mixture of sales through a direct sales channel and through
qualified distribution channels. The success of our efforts to
sell medical simulation, touch interface, and three-dimensional
simulation products will depend upon our ability to retain and
develop a qualified sales force and effective distribution
channels. We may not be successful in attracting and retaining
the personnel necessary to sell and market our products. A
number of our distributors represent small, specialized
companies and may not have sufficient capital or human resources
to support the complexities of selling and supporting our
products. There can be no assurance that our direct selling
efforts will be effective, distributors or OEMs will market our
products successfully or, if our relationships with distributors
or OEMs terminate, that we will be able to establish
relationships with other distributors or OEMs on satisfactory
terms, if at all. Any disruption in the distribution, sales, or
marketing network for our products could have a material adverse
effect on our product revenues.
Competition
in the medical market may reduce our revenue.
If the medical simulation market develops as we anticipate, we
believe that we will have increased competition. As in many
developing markets, acquisitions, or consolidations may occur
that could lead to larger competitors with more resources or
broader market penetration. This increased competition may
result in the decline of our revenue and may cause us to reduce
our selling prices.
Competition
in the mobility or touchscreen markets may increase our costs
and reduce our revenue.
If the mobility or touchscreen markets develop as we anticipate,
we believe that we will face a greater number of competitors,
possibly including the internal design teams of existing and
potential OEM customers. These potential competitors may have
significantly greater financial and technical resources than we
do, and the costs associated with competing with such potential
competitors could be significant. Additionally, increased
competition may result in the reduction of our market share
and/or cause
us to reduce our prices, which may result in a decline in our
revenue.
Automobiles
incorporating our touch-enabling technologies are subject to
lengthy product development periods, making it difficult to
predict when and whether we will receive per unit automotive
royalties.
The product development process for automobiles is very lengthy,
sometimes longer than four years. We do not earn per unit
royalty revenue on our automotive technologies unless and until
automobiles featuring our technologies are shipped to customers,
which may not occur until several years after we enter into an
agreement with an automobile manufacturer or a supplier to an
automobile manufacturer. Throughout the product development
process, we face the risk that an automobile manufacturer or
supplier may delay the incorporation of, or
28
choose not to incorporate, our technologies into its
automobiles, making it difficult for us to predict the per unit
automotive royalties we may receive, if any. After the product
launches, our royalties still depend on market acceptance of the
vehicle or the option packages if our technology is an option
(for example, a navigation unit), which is likely to be
determined by many factors beyond our control.
We
might be unable to retain or recruit necessary personnel, which
could slow the development and deployment of our
technologies.
Our ability to develop and deploy our technologies and to
sustain our revenue growth depends upon the continued service of
our management and other key personnel, many of whom would be
difficult to replace. Management and other key employees may
voluntarily terminate their employment with us at any time upon
short notice. The loss of management or key personnel could
delay product development cycles or otherwise harm our business.
We believe that our future success will also depend largely on
our ability to attract, integrate, and retain sales, support,
marketing, and research and development personnel. Competition
for such personnel is intense, and we may not be successful in
attracting, integrating, and retaining such personnel. Given the
protracted nature of if, how, and when we collect royalties on
new design contracts, it may be difficult to craft compensation
plans that will attract and retain the level of salesmanship
needed to secure these contracts. Our stock option program is a
long-term retention program that is intended to attract, retain,
and provide incentives for talented employees, officers and
directors, and to align stockholder and employee interests. Our
stock option plan expires in June of 2007. The adoption of a new
stock plan requires stockholder approval. Additionally some of
our executive officers and key employees hold stock options with
exercise prices considerably above the current market price of
our common stock. Each of these factors may impair our ability
to retain the services of our executive officers and key
employees. Our technologies are complex and we rely upon the
continued service of our existing engineering personnel to
support licensees, enhance existing technologies, and develop
new technologies.
Investment
Risks
Our
convertible debentures provide for various events of default and
change of control transactions that would entitle the selling
stockholders to require us to repay the entire amount owed in
cash. If an event of default or change of control occurs, we may
be unable to immediately repay the amount owed, and any
repayment may leave us with little or no working capital in our
business.
Our convertible debentures provide for various events of
default, such as the termination of trading of our common stock
on the Nasdaq Global Market and specified change of control
transactions. If an event of default or change of control occurs
prior to maturity, we may be required to redeem all or part of
the convertible debentures, including payment of applicable
interest and penalties. Some of the events of default include
matters over which we may have some, little, or no control. Many
other events of default are described in the agreements we
executed when we issued the convertible debentures. If an event
of default or a change of control occurs, we may be required to
repay the entire amount, plus liquidated damages, in cash. Any
such repayment could leave us with little or no working capital
for our business. We have not established a sinking fund for
payment of our outstanding convertible debentures, nor do we
anticipate doing so.
Our
quarterly revenues and operating results are volatile, and if
our future results are below the expectations of public market
analysts or investors, the price of our common stock is likely
to decline.
Our revenues and operating results are likely to vary
significantly from quarter to quarter due to a number of
factors, many of which are outside of our control and any of
which could cause the price of our common stock to decline.
These factors include:
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the establishment or loss of licensing relationships;
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the timing and recognition of payments under fixed
and/or
up-front license agreements;
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the timing of work performed under development agreements;
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the timing of our expenses, including costs related to
litigation, stock-based awards, acquisitions of technologies, or
businesses;
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the timing of introductions and market acceptance of new
products and product enhancements by us, our licensees, our
competitors, or their competitors;
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our ability to develop and improve our technologies;
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our ability to attract, integrate, and retain qualified
personnel; and
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seasonality in the demand for our products or our
licensees products.
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Our
stock price may fluctuate regardless of our
performance.
The stock market has experienced extreme volatility that often
has been unrelated or disproportionate to the performance of
particular companies. These market fluctuations may cause our
stock price to decline regardless of our performance. The market
price of our common stock has been, and in the future could be,
significantly affected by factors such as: actual or anticipated
fluctuations in operating results; announcements of technical
innovations; announcements regarding litigation in which we are
involved; changes by game console manufacturers to not include
touch-enabling capabilities in their products; new products or
new contracts; sales or the perception in the market of possible
sales of large number of shares of our common stock by insiders
or others; changes in securities analysts recommendations;
changing circumstances regarding competitors or their customers;
governmental regulatory action; developments with respect to
patents or proprietary rights; inclusion in or exclusion from
various stock indices; and general market conditions. In the
past, following periods of volatility in the market price of a
companys securities, securities class action litigation
has been initiated against that company, such as the suit
currently pending against us.
Provisions
in our charter documents and Delaware law could prevent or delay
a change in control, which could reduce the market price of our
common stock.
Provisions in our certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or
changes in our management. In addition, certain provisions of
Delaware law may discourage, delay, or prevent someone from
acquiring or merging with us. These provisions could limit the
price that investors might be willing to pay in the future for
shares.
Issuance
of the shares of common stock upon conversion of debentures,
exercise of stock options, and exercise of warrants will dilute
the ownership interest of existing stockholders and could
adversely affect the market price of our common
stock.
The issuance of shares of common stock in the following
circumstances will dilute the ownership interest of existing
stockholders: (i) upon conversion of some or all of the
convertible debentures (ii) upon exercise of some or all of
the stock options, and (iii) upon exercise of some or all
of the warrants. Any sales in the public market of the common
stock issuable upon such conversion or upon such exercises,
respectively, could adversely affect prevailing market prices of
our common stock. In addition, the existence of these
convertible debentures, stock options, and warrants may
encourage short selling by market participants.
Our
major stockholders retain significant control over us, which may
lead to conflicts with other stockholders over corporate
governance matters and could also affect the volatility of our
stock price.
We currently have, have had in the past, and may have in the
future, stockholders who retain greater than 10%, or in some
cases greater than 20%, of our outstanding stock. Acting
together, these stockholders would be able to exercise
significant influence over matters that our stockholders vote
upon, including the election of directors and mergers or other
business combinations, which could have the effect of delaying
or preventing a third party from acquiring control over or
merging with us. Further, if any individuals in this group elect
to sell a significant portion or all of their holdings of our
common stock, the trading price of our common stock could
experience volatility.
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We may
engage in acquisitions that could dilute stockholders
interests, divert management attention, or cause integration
problems.
As part of our business strategy, we have in the past and may in
the future, acquire businesses or intellectual property that we
feel could complement our business, enhance our technical
capabilities, or increase our intellectual property portfolio.
If we consummate acquisitions through cash
and/or an
exchange of our securities, our stockholders could suffer
significant dilution. Acquisitions could also create risks for
us, including:
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unanticipated costs associated with the acquisitions;
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use of substantial portions of our available cash to consummate
the acquisitions;
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diversion of managements attention from other business
concerns;
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difficulties in assimilation of acquired personnel or
operations; and
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potential intellectual property infringement claims related to
newly acquired product lines.
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Any acquisitions, even if successfully completed, might not
generate significant additional revenue or provide any benefit
to our business.
If we
fail to comply with Nasdaq Stock Market maintenance criteria for
continued listing on the Nasdaq Global Market, our common stock
could be delisted.
To maintain the listing of our common stock on the Nasdaq Global
Market, we are required to comply with one of two sets of
maintenance criteria for continued listing. Under the first set
of criteria, among other things, we must maintain
stockholders equity of at least $10 million, the
market value of our publicly held common stock
(excluding shares held by our affiliates) must be at least
$5 million, and the minimum bid price for our common stock
must be at least $1.00 per share. Under the second set of
criteria, among other things, the market value of our common
stock must be at least $50 million or we must have both
$50 million in assets and $50 million in revenues, the
market value of our publicly held shares must be at
least $15 million, and the minimum bid price for our common
stock must be at least $1.00 per share. As of
December 31, 2006, our most recent balance sheet date, we
had a deficit in stockholders equity, and therefore would
not have been in compliance with the first set of listing
criteria as of that date. Although we were in compliance with
the second set of criteria, should the price of our common stock
decline to the point where the aggregate value of our
outstanding common stock falls below $50 million, the value
of our publicly held shares falls below
$15 million, or the bid price of our common stock falls
below $1.00 per share, our shares could be delisted from
the Nasdaq Global Market. If we are unable to comply with the
applicable criteria and our common stock is delisted from the
Nasdaq Global Market, it would likely be more difficult to
affect trades and to determine the market price of our common
stock. In addition, delisting of our common stock could
materially affect the market price and liquidity of our common
stock and our future ability to raise necessary capital.
Failure
to maintain effective internal controls in accordance with
section 404 of the Sarbanes-Oxley Act could have a material
adverse effect on our business and stock price.
If we fail to maintain the adequacy of our internal controls, as
standards are modified, supplemented, or amended from time to
time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Failure to maintain an effective internal
control environment could have a material adverse effect on our
business and stock price.
Legislative
actions, higher insurance cost, and potential new accounting
pronouncements are likely to impact our future financial
position and results of operations.
There have been regulatory changes and new accounting
pronouncements including the Sarbanes-Oxley Act of 2002, and the
recently enacted Statement of Financial Accounting Standards
(SFAS) No. 123 revised 2004
(SFAS No. 123R), Share-Based
Payment, which have had an effect on our financial
position and results of operations. Under
SFAS No. 123R, we have been required since
January 1, 2006, to adopt a different method of
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determining the compensation expense of our employee stock
options. SFAS No. 123R has had a significant adverse
effect on our reported financial conditions and may impact the
way we conduct our business.
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes. FIN 48 clarifies the application
of Statement No. 109, Accounting for Income
Taxes, (SFAS No. 109) by
defining criteria that must be met for any part of a benefit
related to an individual tax position to be recognized in the
financial statements. FIN 48 also provides guidance on
measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition and is effective for us beginning January 1,
2007. We are currently evaluating the effect that the adoption
of FIN 48 will have on our financial position and results
of operations.
There may potentially be new accounting pronouncements or
additional regulatory rulings that also have an impact on our
future financial position and results of operations. These and
other potential changes could materially increase the expenses
we report under generally accepted accounting principles, and
adversely affect our operating results.
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Item 1B.
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Unresolved
Staff Comments
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We have received comment letters from the staff of the Division
of Corporation Finance of the SEC relating to a routine review
of our periodic and current reports under the Exchange Act. The
letters dated August 2, 2006 and December 20, 2006
pertain to our Annual Report on
Form 10-K
for the year ended December 31, 2005, and
Form 8-K
dated May 4, 2006 previously filed under the Exchange Act.
We are in the process of responding to and resolving these SEC
comments. We cannot ultimately predict the date of resolution of
the unresolved comments, the results of the SEC staff review, or
the resulting impact of additional review, if any, to our SEC
filings.
We lease a facility in San Jose, California of
approximately 48,000 square feet, which serves as our
corporate headquarters and includes our sales, marketing,
administration, research and development, manufacturing, and
distribution functions for the Immersion Computing,
Entertainment, and Industrial operating segment. Products
produced in San Jose include our MicroScribe G2 and MX
digitizers, our CyberGlove line of whole-hand sensing gloves and
three-dimensional software products, the SoftMouse, and several
of our professional and industrial products, including rotary
encoders, components to enable tactile feedback in touchscreens,
and various arcade products. The lease for this property expires
in June 2010.
We lease a facility in Montreal, Quebec, Canada of approximately
6,400 square feet, for our subsidiary, Immersion Canada,
Inc. The facility is used for administration and research and
development functions. The lease for this property expires in
October 2010.
We lease a facility in Gaithersburg, Maryland of approximately
18,900 square feet, for the Immersion Medical operating
segment. The facility is used for sales, marketing,
administration, research and development, manufacturing, and
distribution functions for the Endoscopy AccuTouch System, the
CathLab VR System, Virtual IV System, and the Lap VR
System. The lease for this property expires in May 2009.
We lease office space in Kangnam-Ku, Seoul, Korea. The facility
is used for sales and marketing support and research and
development functions. This lease expires in September 2007.
We believe that our existing facilities are adequate to meet our
current needs.
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Item 3.
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Legal
Proceedings
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In re
Immersion Corporation
We are 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 Immersion and three of our current or former officers or
directors (the Immersion Defendants), and certain
underwriters of our
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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 our common stock from the date of
our 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 us 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 us, on the basis that the complaint
alleged that we 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.
We and most of the issuer defendants have settled with the
plaintiffs. In this settlement, plaintiffs have dismissed and
released 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
we 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 we believe 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.
In September 2005, the Court granted preliminary approval of the
settlement. The Court held a hearing to consider final approval
of the settlement on April 24, 2006, and took the matter
under submission. The court will resume consideration of whether
to grant final approval to the settlement following further
appellate review, if any, of the decision in In re Initial
Public Offering Securities Litigation, 471 F.3d 24, 2006 WL
3499937 (2d Cir. Dec. 5, 2006).
Immersion Corporation vs. Microsoft Corporation, Sony
Computer Entertainment Inc. and Sony Computer Entertainment of
America, Inc.
On February 11, 2002, we 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 were also seeking
damages for attorneys fees. On October 8, 2002, we
filed an amended complaint, withdrawing the claim under the
U.S. Patent No. 5,889,672 and adding claims under a
new patent, U.S. Patent No. 6,424,333.
On July 28, 2003, we announced that we had settled our
legal differences with Microsoft, and both parties 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 us and Microsoft.
On August 16, 2004, the trial against Sony Computer
Entertainment commenced. On September 21, 2004, the jury
returned its verdict in favor of us. The jury found all the
asserted claims of the patents valid and infringed. The jury
awarded us damages in the amount of $82.0 million. On
January 10, 2005, the Court awarded us prejudgment interest
on the damages the jury awarded at the applicable prime rate.
The Court further ordered Sony Computer Entertainment to pay us
a compulsory license fee at the rate of 1.37%, the ratio of the
verdict amount to the amount of sales of infringing products,
effective as of July 1, 2004 and through the date of
Judgment. On February 9, 2005,
33
the Court ordered that Sony Computer Entertainment provide us
with sales data 15 days after the end of each quarter and
clarified that Sony Computer Entertainment will make the ordered
payment 45 days after the end of the applicable quarter.
Sony Computer Entertainment has made quarterly payments to us
pursuant to the Courts orders.
On February 9, 2005, Sony Computer Entertainment filed a
Notice of Appeal to the United States Court of Appeals for the
Federal Circuit to appeal the Courts January 10, 2005
order, and on February 10, 2005 Sony Computer Entertainment
filed an Amended Notice of Appeal to include an appeal from the
Courts February 9, 2005 order.
On January 5 and 6, 2005, the Court held a bench trial on
Sony Computer Entertainments remaining allegations that
the 333 patent was not enforceable due to alleged
inequitable conduct. On March 24, 2005, the Court resolved
this issue, entering a written order finding in our favor.
On March 24, 2005, Judge Wilken also entered judgment in
our favor and awarded us $82.0 million in past damages, and
pre-judgment interest in the amount of $8.9 million, for a
total of $90.9 million. We were also awarded certain court
costs. Court costs do not include attorneys fees.
Additionally, the Court issued a permanent injunction against
the manufacture, use, sale, or import into the United States of
the infringing Sony Computer Entertainment PlayStation system
consisting of the PlayStation consoles, Dual Shock controllers,
and the 47 games found by the jury to infringe our patents. The
Court stayed the permanent injunction pending appeal to the
United States Court of Appeals for the Federal Circuit. The
Court further ordered Sony Computer Entertainment to pay a
compulsory license fee at the rate of 1.37% for the duration of
the stay of the permanent injunction at the same rate and
conditions as previously awarded in its interim January 10,
2005 and February 9, 2005 Orders. On April 7, 2005,
pursuant to a stipulation of the parties, the Court entered an
Amended Judgment to clarify that the Judgment in favor of us and
against Sony Computer Entertainment also encompassed Sony
Computer Entertainments counterclaims for declaratory
relief on invalidity and unenforceability, as well as
non-infringement.
Sony Computer Entertainment had filed further motions seeking
judgment as a matter of a law (JMOL) or for a new
trial, and a motion for a stay of an accounting and execution of
the Judgment. On May 17, 2005, Judge Wilken denied these
motions.
On April 27, 2005, the Court granted Sony Computer
Entertainments request to approve a supersedeas bond,
secured by a cash deposit with the Court in the amount of
$102.5 million, to obtain a stay of enforcement of the
Courts Amended Judgment pending appeal. On May 17,
2005, the Court issued a minute order stating that in lieu of
the supersedeas bond the Court would allow Sony Computer
Entertainment to place the funds on deposit with the Court in an
escrow account subject to acceptable escrow instructions. The
parties negotiated escrow instructions, and on June 12,
2006, the Court granted the parties stipulated request to
withdraw the funds from the Court and deposit them in an escrow
account with JP Morgan Chase. Sony Computer Entertainment has
withdrawn the funds from the Court and deposited them in the
JP Morgan Chase escrow account.
On June 16, 2005, Sony Computer Entertainment filed a
Notice of Appeal from the District Court Judgment to the United
States Court of Appeals for the Federal Circuit. The appeals of
the January and February orders regarding the compulsory license
have been consolidated with the appeal of the Judgment. Sony
Computer Entertainments Opening Brief was filed on
October 21, 2005; we filed an Opposition Brief on
December 5, 2005. Due to the cross appeal by ISLLC (see
below), the Federal Circuit allowed us to file a Substitute
Opposition Brief on February 17, 2006 responding to the
briefs filed by both Sony Computer Entertainment and ISLLC. On
March 15, 2006, we filed a further substitute brief in
response to a Federal Circuit order clarifying the maximum
number of words we were allowed given ISLLCs cross appeal.
Sony Computer Entertainment filed its Reply Brief on
April 27, 2006 and ISLLCs Reply Brief was filed on
May 15, 2006. On October 3, 2006, a hearing for oral
argument was held before a three-judge panel of the United
States Court of Appeals for the Federal Circuit.
On July 21, 2005, Sony Computer Entertainment filed a
motion in the District Court before Judge Wilken seeking relief
from the final judgment under Rule 60(b) of the Federal
Rules of Civil Procedure on the grounds of alleged fraud and
newly discovered evidence of purported prior art,
which Sony Computer Entertainment contends we concealed and
withheld attributable to Mr. Craig Thorner, a named
inventor on three patents that Sony Computer Entertainment urged
as a basis for patent invalidity during the trial. A hearing on
this motion was held before Judge Wilken on January 20,
2006. On March 8, 2006, the Court entered an Order which
denied Sony
34
Computer Entertainments motion pursuant to Rule 60(b)
of the Federal Rules of Civil Procedure in its entirety. On
April 7, 2006, Sony Computer Entertainment filed a Notice
of Appeal to the United States Court of Appeals for the Federal
Circuit to appeal this ruling and filed its opening brief on
June 16, 2006. Our opposition brief was filed on
August 30, 2006, and Sony Computer Entertainment filed its
reply brief on October 2, 2006. On January 8, 2007, a
hearing for oral argument was held before a three-judge panel of
the United States Court of Appeals for the Federal Circuit.
On May 17, 2005, Sony Computer Entertainment filed a
Request for Inter Partes Reexamination of the 333 Patent
with the United States Patent and Trademark Office
(PTO). On May 19, 2005, Sony Computer
Entertainment filed a similar Request for reexamination of the
213 Patent. On July 6, 2005, we filed a Petition to
dismiss, stay, or alternatively to suspend both of the requests
for reexamination, based at least on the grounds that a final
judgment has already been entered by a United States District
Court, and that the PTOs current inter partes
reexamination procedures deny due process of law. The PTO denied
the first petition, and we filed a second petition on
September 9, 2005. On November 17, 2005, the PTO
granted our petition, and suspended the inter partes
reexaminations until such time as the parallel court proceedings
warrant termination or resumption of the PTO examination and
prosecution proceedings. On December 13, 2005, Sony
Computer Entertainment filed a third petition requesting
permission to file an additional inter partes reexamination on
the claims of the 333 and 213 Patents for which
reexamination was not requested in Sony Computer
Entertainments original requests for reexamination. The
PTO dismissed this third petition on March 22, 2006. On
December 13, 2005, Sony Computer Entertainment also filed
ex parte reexamination requests on a number of claims of the
213 and 333 patents, including all of the claims
litigated in the District Court action, in addition to others.
On March 13, 2006, the PTO granted the ex parte reexam
request only with respect to the requested claims that were not
litigated, and the ex parte reexamination is proceeding with
respect to the claims that were not the subject of litigation.
On April 11, 2006, Sony Computer Entertainment filed a
fourth petition to the PTO requesting that the currently
suspended inter partes proceeding and the ex parte proceeding be
merged into a single proceeding. We filed our opposition to this
petition on May 3, 2006, and the PTO denied the fourth
petition on July 3, 2006.
On December 13, 2005, Sony Computer Entertainment filed a
lawsuit against the PTO in the U.S. District Court for the
Eastern District of Virginia claiming that the PTO erred in
suspending the inter partes reexamination on November 17,
2005. The case was assigned to U.S. District Judge Ellis.
We moved to intervene in the lawsuit, and on March 31,
2006, the Court granted our motion to intervene of
right. The Court entered a scheduling order which
precluded discovery and set an expedited briefing schedule for
motions for summary judgment. After briefing, Judge Ellis held a
hearing on the summary judgment motions on April 21, 2006.
The Court granted summary judgment in our and the PTOs
favor on all grounds on May 22, 2006. Sony Computer
Entertainment has not appealed this judgment.
On March 1, 2007, Sony Computer Entertainment withdrew and
moved to dismiss its appeals from the District Courts
April 7, 2005, Amended Judgment (and all interlocutory
orders merged in the Amended Judgment). On March 2, 2007,
Sony Computer Entertainment withdrew and moved to dismiss its
appeal from the District Courts March 8, 2006, order
denying Sony Computer Entertainments motion for relief
from final judgment under Rule 60(b) of the Federal Rules
of Civil Procedure. On March 8, 2007, the Federal Circuit
dismissed the Sony Computer Entertainment Rule 60(b)
appeal. On March 14, 2007 the Federal Circuit dismissed the
Sony Computer Entertainment appeal of Amended Judgment (and all
interlocutory orders merged in the Amended Judgment). In
accordance with the Amended Judgment we will receive funds
totaling approximately $97.2 million inclusive of the award
for past damages for sales and other activities with respect to
the infringing Sony Computer Entertainment PlayStation system
consisting of the PlayStation consoles, Dual Shock controllers,
and the 47 games found by the jury to infringe our patents,
pre-judgment interest and costs, and post-judgment interest.
Additionally, we will retain the $32.3 million of
compulsory license fees and interest thereon previously paid to
us by Sony Computer Entertainment ($27.9 million in
long-term deferred revenue at December 31, 2006 and
$4.4 million received subsequent to year end).
Internet
Services LLC Litigation
On October 20, 2004, ISLLC, our licensee and the
cross-claim defendant against whom Sony Computer Entertainment
had filed a claim seeking declaratory relief, filed claims
against us in our lawsuit against Sony Computer
Entertainment, alleging that we breached a contract with ISLLC
by suing Sony Computer
35
Entertainment for patent infringement relating to
haptically-enabled software whose topics or images are allegedly
age-restricted, for judicial apportionment of damages between
ISLLC and us of the damages awarded by the jury and for a
judicial declaration with respect to ISLLCs rights and
duties under agreements with us. On December 29, 2004, the
Court issued an order dismissing ISLLCs claims against
Sony Computer Entertainment with prejudice and dismissing
ISLLCs claims against us without prejudice to ISLLC filing
a new complaint if it can do so in good faith without
contradicting, or repeating the deficiency of, its
complaint.
On January 12, 2005, ISLLC filed Amended Cross-Claims and
Counterclaims against us that contained similar claims. ISLLC
also realleged counterclaims against Sony Computer
Entertainment. On January 28, 2005, we filed a motion to
dismiss ISLLCs Amended Cross-Claims and a motion to strike
ISLLCs Counterclaims against Sony Computer Entertainment.
On March 24, 2005 the Court issued an order dismissing
ISLLCs claims with prejudice as to ISLLCs claim
seeking a declaratory judgment that it is an exclusive licensee
under the 213 and 333 patents and as to ISLLCs
claim seeking judicial apportionment of the damages
verdict in the Sony Computer Entertainment case. The
Courts order further dismissed ISLLCs claims without
prejudice as to ISLLCs breach of contract and unjust
enrichment claims.
ISLLC filed a notice of appeal of those orders with the United
States Court of Appeals for the Federal Circuit on
April 18, 2005. ISLLCs appeal has been consolidated
with Sony Computer Entertainments appeal. ISLLC filed its
Opening Brief in December 2005. As noted above, the United
States Court of Appeals for the Federal Circuit allowed us to
file a Substitute Opposition Brief on March 15, 2006
responding to the briefs filed by both Sony Computer
Entertainment and ISLLC. Briefing for the appeal was completed
upon ISLLCs filing of its Reply Brief on May 15,
2006. As noted above, on October 3, 2006, a hearing for
oral argument was held before a three-judge panel of the United
States Court of Appeals for the Federal Circuit. The matter was
taken under submission, pending a decision.
On February 8, 2006, ISLLC filed a lawsuit against us in
the Superior Court of Santa Clara County. ISLLCs
complaint seeks a share of the damages awarded to us in the
March 24, 2005 Judgment and of the Microsoft settlement
proceeds, and generally restates the claims already adjudicated
by the District Court. On March 16, 2006, we answered the
complaint, cross claimed for breach of contract by ISLLC and
rescission of the contract, and removed the lawsuit to federal
court. The case was assigned to Judge Wilken as a case related
to the previous proceedings involving Sony Computer
Entertainment and ISLLC. ISLLC filed its answer to our cross
claims on April 27, 2006. ISLLC also moved to remand the
case to Superior Court. On July 10, 2006, Judge Wilken
issued an order denying ISLLCs motion to remand. On
September 5, 2006, Judge Wilken granted the stipulated
request by the parties to stay discovery and other proceedings
in the case pending the disposition of ISLLCs appeal from
the Courts previous orders. On December 1, 2006, the
parties again stipulated to continue the stay and reschedule the
Case Management conference until April 13, 2007, pending
the Federal Circuits disposition on the appeal.
We intend to defend ourselves vigorously against ISLLCs
allegations. The parties participated in a court-ordered
mediation on March 12, 2007, but were unsuccessful in
resolving the matter.
Immersion
Corporation vs. Thorner
On March 24, 2006, we filed a lawsuit against
Mr. Craig Thorner in Santa Clara County Superior Court. The
complaint alleges claims for breach of contract with respect to
Thorners license to a third party of U.S. Patent
No. 5,684,722, which we have alleged is in violation of
contractual obligations to it. The case was removed to federal
court by Mr. Thorner, and has been assigned to Judge Jeremy
Fogel. On May 1, 2006, Mr. Thorner filed an answer to
our claims and asserted counterclaims against us seeking, among
other things, a portion of the proceeds from our license with
Microsoft, under theories of alleged breach of contract, breach
of the implied covenant of good faith and fair dealing, fraud,
promissory fraud, breach of fiduciary duty, and negligent
misrepresentation. On July 28, 2006, we filed a motion for
judgment on the pleadings seeking the dismissal of
Mr. Thorners breach of contract and fraud claims
which allege a right to a portion of the proceeds from our
license with Microsoft. On September 1, 2006, the Court
held a hearing on our motion. On September 12, 2006, the
Court issued an order granting our motion for judgment on the
pleadings as to Mr. Thorners alleged claims for
breach of contract and fraud. The Court dismissed
Mr. Thorners breach of contract and fraud claims, and
allowed Mr. Thorner leave to
36
amend his claim for alleged breach of contract with respect to
alleged violations of our reporting requirements that do not
flow from the failure to report the Microsoft Settlement
Agreement.
The parties participated in a court-ordered mediation on
November 7, 2006, but were not successful in resolving the
matter. The parties are in the process of conducting discovery.
On November 22, 2006, Thorner brought a motion for summary
judgment arguing that our breach of contract claim was barred by
the doctrine of judicial estoppel as a result of a statement
made in connection with the Sony Computer Entertainment
Rule 60 (b) motion. On January 26, 2007, the
Court held a hearing on Thorners motion. On
January 29, 2007, the Court issued an order denying
Thorners summary judgment motion, ruling that our breach
of contract claim was not barred by judicial estoppel. On
February 5, 2007, with leave of Court, we filed a First
Amended Complaint in the action to add Thorners company,
Virtual Reality Feedback Corporation (VRF), as a
party-defendant. On February 9, 2007, Thorner filed an
Amended Answer and Counterclaims. The Amended Counterclaims
against us dropped the previously-dismissed counterclaims based
on Thorners claims for a share of our settlement with
Microsoft, but alleged other counterclaims for alleged Breach of
Contract, Breach of the Implied Covenant of Good Faith and Fair
Dealing, Promissory Fraud, Breach of Fiduciary Duty, Negligent
Misrepresentation and Rescission. Thorner alleged in part that
we breached our agreement with Thorner by failing to pay
royalties for Vibetonz Studio SDK and Immersion Studio for
Gaming; that we breached alleged duties to Thorner to license
the 722 patent; and that Thorners agreement with us
should be rescinded. Thorners Amended Counterclaim does
not specify an amount of damages sought but alleges that Thorner
has been damaged in an amount to be proven at trial. We dispute
Thorners allegations and intend to vigorously oppose them.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders in the
fourth quarter of fiscal 2006.
37
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is traded on the Nasdaq Global Market under the
symbol IMMR. The following table sets forth, for the
periods indicated, the high and low sales prices for our common
stock on such market.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal year ended
December 31, 2006
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
7.39
|
|
|
$
|
6.49
|
|
Third Quarter
|
|
$
|
7.16
|
|
|
$
|
5.03
|
|
Second Quarter
|
|
$
|
9.11
|
|
|
$
|
5.49
|
|
First Quarter
|
|
$
|
8.68
|
|
|
$
|
6.21
|
|
Fiscal year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
7.50
|
|
|
$
|
6.11
|
|
Third Quarter
|
|
$
|
7.13
|
|
|
$
|
5.23
|
|
Second Quarter
|
|
$
|
6.34
|
|
|
$
|
4.87
|
|
First Quarter
|
|
$
|
7.93
|
|
|
$
|
5.45
|
|
On February 23, 2007, the closing price was $7.58 and there
were 174 holders of record of our common stock. Because many of
such shares are held by brokers and other institutions on behalf
of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
Dividend
Policy
We have never declared or paid any cash dividends on our common
stock and we do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain any earnings
to fund future growth, product development, and operations.
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data is qualified
in its entirety by, and should be read in conjunction with,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and notes thereto included elsewhere in
this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
STATEMENTS OF OPERATIONS
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
27,853
|
|
|
$
|
24,277
|
|
|
$
|
23,763
|
|
|
$
|
20,223
|
|
|
$
|
20,235
|
|
Cost and expenses(1)
|
|
|
36,806
|
|
|
|
36,177
|
|
|
|
44,155
|
|
|
|
35,073
|
|
|
|
35,270
|
|
Operating loss(1)
|
|
|
(8,953
|
)
|
|
|
(11,900
|
)
|
|
|
(20,392
|
)
|
|
|
(14,850
|
)
|
|
|
(15,035
|
)
|
Net loss(1)(2)
|
|
|
(10,424
|
)
|
|
|
(13,085
|
)
|
|
|
(20,738
|
)
|
|
|
(16,974
|
)
|
|
|
(16,530
|
)
|
Basic and diluted net loss per
share
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(0.83
|
)
|
Shares used in calculating basic
and diluted net loss per share
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
22,698
|
|
|
|
20,334
|
|
|
|
19,906
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,012
|
|
|
$
|
28,171
|
|
|
$
|
25,538
|
|
|
$
|
21,738
|
|
|
$
|
8,717
|
|
Working capital
|
|
|
33,657
|
|
|
|
28,885
|
|
|
|
23,088
|
|
|
|
22,032
|
|
|
|
8,898
|
|
Total assets
|
|
|
50,015
|
|
|
|
44,760
|
|
|
|
42,250
|
|
|
|
37,913
|
|
|
|
25,301
|
|
Long-term debt, less current
portion
|
|
|
18,122
|
|
|
|
17,490
|
|
|
|
16,917
|
|
|
|
16
|
|
|
|
51
|
|
Long-term customer advance from
Microsoft
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
27,050
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(22,992
|
)
|
|
|
(16,795
|
)
|
|
|
(5,967
|
)
|
|
|
(1,219
|
)
|
|
|
13,948
|
|
|
|
|
(1) |
|
Includes a charge for impairment of goodwill of
$3.8 million related to Immersion Computing, Entertainment,
and Industrial operating segment in 2002. |
|
(2) |
|
Includes amounts written off of cost-method investments of
$1.2 million in 2002. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
the consolidated financial statements and notes thereto.
This Managements Discussion and Analysis of Financial
Condition and Results of Operations includes forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The forward-looking
statements involve risks and uncertainties. Forward-looking
statements are identified by words such as
anticipates, believes,
expects, intends, may,
will, and other similar expressions. However, these
words are not the only way we identify forward-looking
statements. In addition, any statements, which refer to
expectations, projections, or other characterizations of future
events or circumstances, are forward-looking statements. Actual
results could differ materially from those projected in the
forward-looking statements as a result of a number of factors,
including those set forth in Item 1A,Risk
Factors, those described elsewhere in this report, and
those described in our other reports filed with the SEC. We
caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report, and
we undertake no obligation to release the results of any
revisions to these forward-looking statements that could occur
after the filing of this report.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP). The preparation of these
consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses, and related disclosure
of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates and assumptions, including those related
to revenue recognition, stock-based compensation, bad debts,
inventory reserves, warranty obligations, patents and intangible
assets, contingencies, and litigation. We base our estimates and
assumptions on historical experience and on various other
factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates and assumptions.
39
We believe the following are our most critical accounting
policies as they require our significant judgments and estimates
in the preparation of our consolidated financial statements:
Revenue
Recognition
We recognize revenues in accordance with applicable accounting
standards, including Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition, Emerging Issues
Task Force (EITF) Issue
No. 00-21
(EITF No. 00-21),
Accounting for Revenue Arrangements with Multiple
Deliverables, and American Institute of Certified Public
Accountants (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. We
derive our revenues from three principal sources: royalty and
license fees, product sales, and development contracts.
Royalty and license revenue We recognize
royalty and license revenue based on royalty reports or related
information received from the licensee as well as time-based
licenses of our 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 us to provide future services to the licensee are
deferred and recognized over the service period when
vendor-specific objective evidence (VSOE) related to
the value of the services does not exist.
We generally recognize revenue from our licensees under one or a
combination of the following license models:
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License Revenue Model
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|
Revenue Recognition
|
|
Perpetual license of intellectual
property portfolio based on per unit royalties, no services
contracted.
|
|
Based on royalty reports received
from licensees. No further obligations to licensee exist.
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|
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Time-based license of intellectual
property portfolio with up-front payments
and/or
annual minimum royalty requirements, no services contracted.
Licensees have certain rights to updates to the intellectual
property portfolio during the contract period.
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Based on straight-line
amortization of annual minimum/up-front payment recognized over
contract period or annual minimum period.
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Perpetual license of intellectual
property portfolio or technology license along with contract for
development work.
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|
Based on
cost-to-cost
percentage-of-completion
accounting method over the service period. Obligation to
licensee exists until development work is complete.
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|
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License of software or technology,
no modification necessary, no services contracted.
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Up-front revenue recognition based
on
SOP 97-2
criteria or EITF No. 00-21, as applicable.
|
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, we
recognize revenue in accordance with SAB No. 104, EITF
No. 00-21,
and
SOP 97-2,
as amended, to guide the accounting treatment for each
individual contract. See also the discussions regarding
Multiple element arrangements below. If the
information received from our licensees regarding royalties is
incorrect or inaccurate, our revenues in future periods may be
adversely affected. To date, none of the information we have
received from our licensees has caused any material reduction in
future period revenues.
Product sales We recognize revenues from
product sales when the product is shipped, provided collection
is determined to be probable and no significant obligation
remains. We sell the majority of our products with warranties
ranging from three to twenty-four months. We record the
estimated warranty costs during the quarter the revenue is
recognized. Historically, warranty-related costs and related
accruals have not been significant. We offer a general right of
return on the MicroScribe product line for 14 days after
purchase. We recognize revenue at the time of shipment of a
MicroScribe digitizer and provide an accrual for potential
returns based on historical experience. We offer no other
general right of return on our products.
40
Development contracts and other revenue
Development contracts and other revenue is comprised of
professional services (consulting services
and/or
development contracts), customer support, and extended warranty
contracts. 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. Customer support and extended warranty
contract revenue is recognized ratably over the contractual
period.
Multiple element arrangements We enter into
revenue arrangements in which the customer purchases a
combination of patent, technology,
and/or
software licenses, products, professional services, support, and
extended warranties (multiple element arrangements). When VSOE
of fair value exists for all elements, we allocate revenue to
each element based on the relative fair value of each of the
elements.
Our revenue recognition policies are significant because our
revenues are a key component of our results of operations. In
addition, our revenue recognition determines the timing of
certain expenses, such as commissions and royalties. Revenue
results are difficult to predict, and any shortfall in revenue
or delay in recognizing revenue could cause our operating
results to vary significantly from quarter to quarter and could
result in greater or future operating losses.
Stock-based
Compensation
We account for stock-based compensation in accordance with
SFAS No. 123R. We adopted the provisions of
SFAS No. 123R on January 1, 2006. We elected the
modified-prospective method, under which prior periods are not
revised for comparative purposes. Under the fair value
recognition provisions of this statement, stock-based
compensation cost is measured at the grant date based on the
fair value of the award and is recognized as expense on a
straight-line basis over the requisite service period, which is
the vesting period.
Valuation and amortization method We use the
Black-Scholes-Merton option-pricing model (Black-Scholes
model), single-option approach to determine the fair value
of stock options and employee stock purchase plan shares. All
share-based payment awards are amortized on a straight-line
basis over the requisite service periods of the awards, which
are generally the vesting periods. The determination of the fair
value of stock-based payment awards on the date of grant using
an option-pricing model is affected by our stock price as well
as assumptions regarding a number of complex and subjective
variables. These variables include actual and projected employee
stock option exercise behaviors, our expected stock price
volatility over the term of the awards, risk-free interest rate,
and expected dividends.
Expected term We estimate the expected term
of options granted by using the simplified method as prescribed
by SAB No. 107.
Expected volatility We estimate the
volatility of our common stock taking into consideration our
historical stock price movement, the volatility of stock prices
of companies of similar size with similar businesses, if any,
and our expected future stock price trends based on known or
anticipated events.
Risk-free interest rate We base the risk-free
interest rate that we use in the option pricing model on
U.S. Treasury zero-coupon issues with remaining terms
similar to the expected term on the options.
Expected dividend We do not anticipate paying
any cash dividends in the foreseeable future and therefore use
an expected dividend yield of zero in the option pricing model.
Forfeitures We are required to estimate
future forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ
from those estimates. We use historical data to estimate
pre-vesting option forfeitures and record stock-based
compensation expense only for those awards that are expected to
vest. Changes in estimated forfeitures will be recognized
through a cumulative
catch-up
adjustment in the period of change and will also impact the
amount of compensation expense to be recognized in future
periods.
If factors change and we employ different assumptions for
estimating stock-based compensation expense in future periods,
or if we decide to use a different valuation model, the future
periods may differ significantly from what we have recorded in
the current period and could materially affect our operating
results.
41
The Black-Scholes model was developed for use in estimating the
fair value of traded options that have no vesting restrictions
and are fully transferable, characteristics not present in our
option grants and employee stock purchase plan shares. Existing
valuation models, including the Black-Scholes and lattice
binomial models, may not provide reliable measures of the fair
values of our stock-based compensation. Consequently, there is a
risk that our estimates of the fair values of our stock-based
compensation awards on the grant dates may bear little
resemblance to the actual values realized upon the exercise,
expiration, early termination, or forfeiture of those
stock-based payments in the future. Certain stock-based
payments, such as employee stock options, may expire and be
worthless or otherwise result in zero intrinsic value as
compared to the fair values originally estimated on the grant
date and reported in our financial statements. Alternatively,
value may be realized from these instruments that are
significantly higher than the fair values originally estimated
on the grant date and reported in our financial statements.
There currently is no market-based mechanism or other practical
application to verify the reliability and accuracy of the
estimates stemming from these valuation models, nor is there a
means to compare and adjust the estimates to actual values.
See Note 11 to the consolidated financial statements for
further information regarding the SFAS No. 123R
disclosures.
Long-term
Liabilities
In 2003, we executed a series of agreements with Microsoft as
described in Note 9 to the consolidated financial
statements that provided for settlement of our lawsuit against
Microsoft as well as various licensing, sublicensing, and equity
and financing arrangements. We accounted for the proceeds
received under the agreements as a long-term customer advance
based on certain provisions that would result in payment of
funds to Microsoft. Upon Microsofts election to convert
its shares of our Series A Preferred Stock into common
stock, we reduced the long-term customer advance from Microsoft
to the minimum amount we would be obligated to pay Microsoft
upon a settlement with Sony Computer Entertainment. The
remainder of the consideration was transferred to common stock
in 2004. Under a settlement with Sony Computer Entertainment, we
would be obligated to pay Microsoft a minimum of
$15.0 million for any amounts received from Sony up to
$100.0 million, plus 25% of any amounts over
$100.0 million up to $150.0 million, and 17.5% of any
amounts over $150.0 million. We believe that we are not
obligated under our agreements with Microsoft to make any
payment to Microsoft relating to the conclusion of our patent
litigation with Sony Computer Entertainment. However, it is
uncertain that Microsoft will accept our position or that we
will ultimately prevail with our position.
In December 2004, we executed a series of agreements as
described in Note 7 to the consolidated financial
statements that provided for the issuance of 5% Senior
Subordinated Convertible Debentures (5% Convertible
Debenture), and warrants, and that granted certain
registration rights to the holders of the 5% Convertible
Debentures. We accounted for the issuance of our
5% Convertible Debentures and related warrants in
accordance with EITF
No. 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios and other related accounting guidance. We estimated
the relative fair value of the various instruments included in
the agreements entered into in December 2004 and allocated the
relative fair values to be as follows: warrants
$1.7 million, Put Option $0.1 million,
Registration Rights $0.1 million, issuance
costs $1.3 million, 5% Convertible
Debentures $16.8 million. The
5% Convertible Debentures are being accreted to
$20.0 million over their five-year life, resulting in
additional interest expense. The value of the warrants is
included in Stockholders Deficit, the value of the Put
Option and Registration Rights are recorded as liabilities and
are subject to future value adjustments, and the value of the
5% Convertible Debentures is recorded as long-term debt.
Long-term
Deferred Revenue
In addition to normal items of deferred revenue due after one
year, we have included Sony Computer Entertainment compulsory
license fees and interest earned thereon in long-term deferred
revenue due to the contingent nature of the court-ordered
payments (see Note 8 to the consolidated financial
statements). Upon the conclusion of our patent litigation at the
U.S. Court of Appeals for the Federal Circuit the
contingency on these funds has lapsed. We are currently
evaluating the impact of this on our consolidated statement of
operations and consolidated balance sheets.
42
Recovery
of Accounts Receivable
We maintain allowances for doubtful accounts for estimated
losses resulting from our review and assessment of our
customers ability to make required payments. If the
financial condition of one or more of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances might be required. To date such
estimated losses have been within our expectations.
Inventory
Reserves
We reduce our inventory value for estimated obsolete and slow
moving inventory in an amount equal to the difference between
the cost of inventory and the net realizable value based upon
assumptions about future demand and market conditions. If actual
future demand and market conditions are less favorable than
those projected by management, additional inventory write-downs
may be required.
Product
Return and Warranty Reserves
We provide for estimated costs of future anticipated product
returns and warranty obligations based on historical experience
when related revenues are recognized, and we defer
warranty-related revenue over the related warranty term.
Intangible
Assets
We have acquired patents and other intangibles. In addition, we
capitalize the external legal and filing fees associated with
patents and trademarks. We assess the recoverability of our
intangible assets, and we must make assumptions regarding
estimated future cash flows and other factors to determine the
fair value of the respective assets that affect our consolidated
financial statements. If these estimates or related assumptions
change in the future, we may be required to record impairment
charges for these assets. We amortize our intangible assets
related to patents and trademarks, once they issue, over their
estimated useful lives, generally 10 years. Future changes
in the estimated useful life could affect the amount of future
period amortization expense that we will incur. During 2006, we
capitalized costs associated with patents and trademarks of
$1.6 million. Our total amortization expense for the same
period for all intangible assets was $969,000.
The above listing is not intended to be a comprehensive list of
all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by GAAP, with no need for managements judgment in their
application. There are also areas in which managements
judgment in selecting any available alternative would not
produce a materially different result.
43
Results
of Operations
Overview
of 2006
During 2006, we achieved several milestones, including growth in
all of our key market areas, except gaming. This growth was due,
in part, to changing our medical business to a product sales
based business model and our continued investment in a
strengthened and more focused sales and marketing effort across
our business segments. In addition,
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|
As market acceptance of medical simulation has increased, our
medical product sales grew 47% in 2006 over the year ended
December 31, 2005 and accounted for 84% of total Immersion
Medical revenue for the year. This growth is also a result of
increases in business with Medtronic and Laerdal, and the
release of new products and modules.
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In 2006, we signed a new handset licensee, LG Electronics. In
addition, we saw the first commercial shipment of a VibeTonz
enabled touchscreen phone during the fourth quarter of 2006.
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|
Revenue for the touch interface product business grew 11% in
2006 over the year ended December 31, 2005. It is expected
that 3M Touch Systems will integrate our TouchSense system into
its touchscreens and market and sell the resulting product to
manufacturers of casino gaming and bar-top amusement equipment.
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|
We announced that we had settled our legal differences with
Electro Source LLC (Electro Source) and granted them
a worldwide license to our patents for vibro-tactile devices in
the consumer gaming peripheral field of use. In exchange for the
license Electro Source will make royalty payments to us based on
sales by Electro Source of spinning mass vibro-tactile gamepads,
steering wheels, and other game controllers for dedicated gaming
consoles, such as the Sony PlayStation and PlayStation 2,
the Nintendo GameCube, and the Microsoft Xbox and Xbox 360.
Additionally, payments of $1.7 million were made to us
during 2006 and classified as litigation settlement.
|
In 2007, we expect to continue to focus on the execution of
sales and marketing plans in our established businesses to
increase revenue and make selected investments in product and
technology development for longer-term new growth areas. We
expect litigation expenses to continue to be significant in 2007
and have budgeted to continue to protect and defend our
extensive intellectual property portfolio across all business
segments. Our success could be limited by several factors,
including the timely release of our new products or our
licensees products, continued market acceptance of our
products and technology, the introduction of new products by
existing or new competitors, and the cost of ongoing litigation.
For a further discussion of these and other risk factors, see
Item 1A Risk Factors.
44
The following table sets forth our statement of operations data
as a percentage of total revenues:
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|
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|
|
|
|
|
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Years Ended December 31,
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2006
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|
2005
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|
|
2004
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
|
26.2
|
%
|
|
|
36.6
|
%
|
|
|
36.9
|
%
|
Product sales
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|
|
61.3
|
|
|
|
52.6
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|
|
|
49.0
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|
Development contracts and other
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|
12.5
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|
|
|
10.8
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|
|
|
14.1
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
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|
|
|
|
|
|
|
|
|
|
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|
Cost of product sales
|
|
|
25.8
|
|
|
|
26.5
|
|
|
|
26.3
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|
Sales and marketing
|
|
|
45.2
|
|
|
|
48.0
|
|
|
|
47.6
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|
Research and development
|
|
|
27.3
|
|
|
|
24.7
|
|
|
|
33.6
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|
General and administrative
|
|
|
36.2
|
|
|
|
43.8
|
|
|
|
72.1
|
|
Amortization of intangibles
|
|
|
3.5
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|
|
|
5.2
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|
|
|
6.2
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|
Litigation Settlement
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
132.1
|
|
|
|
149.0
|
|
|
|
185.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(32.1
|
)
|
|
|
(49.0
|
)
|
|
|
(85.8
|
)
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Interest and other income
|
|
|
1.0
|
|
|
|
2.0
|
|
|
|
0.7
|
|
Interest expense
|
|
|
(5.8
|
)
|
|
|
(6.2
|
)
|
|
|
(0.2
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(2.6
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit (provision)
for income taxes
|
|
|
(36.9
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)
|
|
|
(53.2
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)
|
|
|
(87.9
|
)
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Benefit (provision) for income
taxes
|
|
|
(0.5
|
)
|
|
|
(0.7
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(37.4
|
)%
|
|
|
(53.9
|
)%
|
|
|
(87.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
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|
Comparison
of Years Ended December 31, 2006, 2005, and 2004
Revenues
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
% Change
|
|
|
2004
|
|
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|
($ in thousands)
|
|
|
Royalty and license
|
|
$
|
7,304
|
|
|
|
(18
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)%
|
|
$
|
8,888
|
|
|
|
1
|
%
|
|
$
|
8,778
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|
Product sales
|
|
|
17,083
|
|
|
|
34
|
%
|
|
|
12,762
|
|
|
|
10
|
%
|
|
|
11,644
|
|
Development contracts and other
|
|
|
3,466
|
|
|
|
32
|
%
|
|
|
2,627
|
|
|
|
(21
|
)%
|
|
|
3,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
27,853
|
|
|
|
15
|
%
|
|
$
|
24,277
|
|
|
|
2
|
%
|
|
$
|
23,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006 Compared to Fiscal 2005
Total Revenue. Our total revenue for the year
ended December 31, 2006 increased by $3.6 million or
15% to $27.9 million from $24.3 million in 2005.
Royalty and license revenue. Royalty and
license revenue is comprised of royalties earned on sales by our
licensees and license fees charged for our intellectual property
portfolio. Royalty and license revenue decreased by
$1.6 million or 18% from 2005 to 2006. The decrease in
royalty and license revenue was primarily a result of a decrease
in gaming royalties of $1.6 million, a decrease in medical
royalties and licensee revenue of $535,000, offset in part by an
increase in touch interface product royalties of $447,000, and
an increase in mobility royalties and license revenue of
$114,000.
45
The decrease in gaming royalties was mainly due to decreased
sales by our licensees of royalty bearing gaming peripherals.
This decrease in sales was primarily due to i) the
continued decline in sales of past generation video console
systems with the recent launches of the next-generation console
models from Sony (PlayStation 3) and Nintendo (Wii), and
ii) the significant decline in third-party market share of
aftermarket game console controllers as market share shifted to
first-party peripheral makers due to the launch of the
next-generation console models.
Sony announced on May 8, 2006 that the vibration feature
that is currently available on controllers for PlayStation and
PlayStation 2 would be removed from the new PlayStation 3
controller. The PlayStation 3 console system was launched in
late 2006 in the United States and Japan without vibration or
any force feedback capability of any kind. This course of action
by Sony has had material adverse consequences on our current and
future gaming royalty revenues since our gaming royalties have
primarily been from licensed third-party controller products
with vibration or force feedback capabilities that require some
degree of vibration
and/or force
feedback support or compatibility in the video console system to
be viable products. We do not know if this situation might
change at some point in the life of the PlayStation 3 console
system, or whether or to what extent the PlayStation 3 console
will be compatible with third-party peripherals containing force
feedback capability in the future.
For the Microsoft Xbox 360 video console system launched in
November 2005, Microsoft has, to date, not broadly licensed
third parties to produce game controllers. Because our gaming
royalties come mainly from third-party manufacturers, unless
Microsoft licenses additional third-parties, our gaming royalty
revenue will continue to decline. For the Nintendo Wii video
console system launched in December 2006, Nintendo has, to date,
not yet broadly licensed third parties to produce game
controllers for its Wii game console. Because our gaming
royalties come mainly from third-party manufacturers, unless
Nintendo licenses additional third-party licensees, our gaming
royalty revenue will continue to decline.
The decrease in medical royalty and license revenue in 2006
compared to 2005 was primarily due to a reduction in license
revenue recognized on our license and development agreements
with Medtronic. Revenue recognition on the license and
development agreements with Medtronic is based on
cost-to-cost
percentage-of-completion;
a decrease in activity on these contracts results in a decrease
in revenue recognized. Touch interface product royalties
increased in 2006 due to increased licensee revenue from signing
a new licensee in late 2005, and royalties from an increased
number of vehicles manufactured with our technology incorporated
in them.
Product sales. Product sales increased by
$4.3 million or 34% from 2005 to 2006. The increase in
product sales was primarily due to increased medical product
sales of $3.8 million, mainly due to increased sales of our
endovascular, needle-based, and endoscopy simulators. This
increase in product sales was a result of pursuing a product
growth strategy for our medical business, which includes
developing new products, leveraging our industry alliances, and
expanding international sales. Additionally, during the fourth
quarter of 2006, we completed and shipped a new endovascular
simulator product and fulfilled a large order with Medtronic.
Our 3D product sales increased by $747,000, primarily due to
increased sales of our MicroScribe and CyberForce products.
Partially offsetting this increase was a decrease in product
sales from touch interface products of $186,000 including
decreased sales of force feedback electronics for arcade gaming
due to a continued reduction in sales of our customers
product which incorporated this solution as a result of their
products lifecycle.
Development contracts and other
revenue. Development contracts and other revenue
increased by $839,000 or 32% from 2005 to 2006. Development
contracts and other revenue is comprised of revenue on
commercial and government contracts. Government contract revenue
increased by $476,000 primarily due to increased work performed
under medical government contracts that were completed during
the third quarter of 2006. Commercial contract revenue increased
by $314,000 mainly due to an increase in development contract
revenue recognized from increased work on development contracts
with Medtronic.
Fiscal
2005 Compared to Fiscal 2004
Total Revenue. Our total revenue for the year
ended December 31, 2005 increased by $514,000 or 2% to
$24.3 million from $23.8 million in 2004.
Royalty and license revenue. Royalty and
license revenue increased by $110,000 or 1% from 2004 to 2005.
The increase in royalty and license revenue was primarily a
result of an increase in gaming royalties of $678,000 and
46
an increase in automotive royalties and licensee revenue of
$399,000, offset by a decrease in medical royalty and license
revenue of $1.1 million. The increase in gaming royalties
was mainly due to increased third-party market share of
aftermarket game console controllers, increased growth in the
game console controller market, and royalties from new licensees
signed in late 2004 and early 2005. In the console peripheral
business, many of our third-party licensees from whom we earn
per unit royalties enjoyed the benefits of strong sales of
premium products and significant market share growth in 2005 at
the expense of first-party peripheral makers (i.e., Sony,
Microsoft, and Nintendo.) Third-party peripheral makers
market share tends to increase as consoles near end of life.
Microsofts Xbox 360 next-generation video console system
was introduced in November 2005, and additional next-generation
consoles were expected to be introduced in late 2006 by Sony and
Nintendo. In the PC gaming peripheral business, the overall
industry again declined, but this decline was more than offset
by the aforementioned gains in the console peripheral business.
Automotive royalties increased in 2005 due to increased licensee
revenue from signing a new licensee in 2005 and royalties from
an increased number of vehicles manufactured with our technology
incorporated in them. The decrease in medical royalty and
license revenue in 2005 compared to 2004 was primarily due to a
decrease in license revenue from our license and development
agreements with Medtronic.
Product sales. Product sales increased by
$1.1 million or 10% from 2004 to 2005. The increase in
product sales was primarily due to increased medical product
sales of $1.8 million, in particular, increased sales of
our needle-based, endovascular, and laparoscopic simulator
platforms. This increase was a result of focusing sales force
resources on selling training simulator products to hospitals
and teaching institutions as well as targeted marketing programs
and improved reseller performance. Offsetting this was a
decrease of $703,000 in product sales mainly from our 3D, touch
interface products, and microprocessors. This decrease was
primarily due to reduced sales of our 3D products such as our
CyberGlove and CyberTouch devices caused by the delay in
upgrades to this product line and increased competition,
decreased sales of our force feedback electronics for arcade
gaming due to the timing of product introductions by our
customers, and reduced sales of microprocessors based on a
decision to eliminate the sales effort related to this lower
margin product line.
Development contracts and other
revenue. Development contracts and other revenue
decreased by $714,000 or 21% from 2004 to 2005. The decrease in
this category was primarily due to decreases in both medical
government and commercial development contract revenues, but was
partially offset by an increase in development contracts in the
industrial market. The decrease in medical development contract
revenue was due to a decrease in revenue recognized on our
license and development agreements with Medtronic and the
continued transition of our medical engineering resources from
government grants and certain commercial development contract
efforts to product development efforts that focus on leveraging
our existing sales and channel distribution capabilities.
Cost
of Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
% Change
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Cost of product sales
|
|
$
|
7,193
|
|
|
|
12
|
%
|
|
$
|
6,446
|
|
|
|
3
|
%
|
|
$
|
6,255
|
|
% of product sales
|
|
|
42
|
%
|
|
|
|
|
|
|
51
|
%
|
|
|
|
|
|
|
54
|
%
|
Our cost of product sales consists primarily of materials,
labor, and overhead. There is no cost of product sales
associated with royalty and license revenue or development
contract revenue. Cost of product sales increased by $747,000 or
12% from 2005 to 2006. This increase was mainly due to increased
product sales of 34% and the corresponding increase in direct
material costs as well as increased overhead costs and
variances. Direct material costs increased by $496,000 or 10%
due to increased volume; overhead costs increased by $209,000
mainly due to costs of programs to improve quality processes
within our manufacturing operations and stock-based compensation
charges due to the adoption of SFAS No. 123R in the
first quarter of 2006; and price and cost variances increased by
$125,000 mainly due to the introduction of a new endovascular
simulator product. These increases were offset, in part by a
decrease in write offs for physical inventory adjustments of
$80,000. Cost of product sales decreased as a percentage of
product revenue to 42% in 2006 from 51% in 2005. This decrease
is mainly due to a favorable shift in the mix of products sold
during the year and improved margins on our endoscopy and
endovascular simulator products. Our higher margin medical
products were a more significant portion of the overall product
revenue mix during 2006. In addition, product margins on our
medical products improved due in part to price increases and
cost reductions due to product modifications.
47
The cost of product sales increased by $191,000 or 3% from 2004
to 2005. This increase was mainly due to increased product sales
of 10% and the corresponding increased direct materials, freight
costs to customers, and royalties, as well as increased
inventory write offs, offset in part by decreased overhead and
decreased price and cost variances. Increased volume related
expense such as increased direct materials, increased freight
costs, and increased royalties accounted for $130,000 of the
increase in cost of product sales from 2004 to 2005. Of the
aforementioned amount, direct materials only increased by
$22,000 due to favorable product mix shifts resulting from
increased sales of higher margin products such as our vascular
access training simulators and reduced sales of our lower margin
microprocessors. Additionally during 2005, we experienced
increased physical inventory write offs, scrap charges, and
increased reserves for excess and obsolete inventory of $173,000
due to some product and process transitions during the period.
These increases were offset in part by reduced overhead costs
and reduced price and cost variances of $112,000. Cost of
product sales as percentage of revenue declined to 51% in 2005
as compared to 54% in 2004 due to the aforementioned favorable
product mix shifts.
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
% Change
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Sales and marketing
|
|
$
|
12,609
|
|
|
|
8
|
%
|
|
$
|
11,649
|
|
|
|
3
|
%
|
|
$
|
11,312
|
|
Research and development
|
|
|
7,609
|
|
|
|
27
|
%
|
|
|
6,003
|
|
|
|
(25
|
)%
|
|
|
7,985
|
|
General and administrative
|
|
|
10,076
|
|
|
|
(5
|
)%
|
|
|
10,638
|
|
|
|
(38
|
)%
|
|
|
17,133
|
|
Amortization of intangibles
|
|
|
969
|
|
|
|
(23
|
)%
|
|
|
1,256
|
|
|
|
(15
|
)%
|
|
|
1,470
|
|
Litigation settlement
|
|
|
(1,650
|
)
|
|
|
*
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
Restructuring costs
|
|
|
|
|
|
|
*
|
%
|
|
|
185
|
|
|
|
*
|
%
|
|
|
|
|
|
|
|
* |
|
Percentage not meaningful |
Sales and Marketing. Our sales and marketing
expenses are comprised primarily of employee compensation and
benefits, advertising, trade shows, brochures, market
development funds, travel, and an allocation of facilities
costs. Sales and marketing expenses increased by
$1.0 million or 8% in 2006 compared to 2005. The increase
was mainly the result of increased compensation, benefits, and
overhead expense of $1.7 million and increased advertising
and public relations expense of $121,000, offset in part by a
reduction in bad debt expense of $447,000 due to reversal of
provisions for bad debts, decreased shows and exhibits expense
of $229,000, decreased professional and consulting expense of
$84,000 primarily due to reduced employee recruitment fees, and
decreased office expenses of $86,000. The increased
compensation, benefits, and overhead expense was primarily due
to increased stock-based compensation expense of
$1.2 million due to the adoption of SFAS No. 123R
in the first quarter of 2006, increased salary expense, and an
increase in variable compensation due to increased sales. We
expect to continue to focus our sales and marketing efforts on
medical, mobile phone, and touchscreen market opportunities to
build greater market acceptance for our touch technologies. We
anticipate sales and marketing costs will continue to be
significant in future periods as we continue our investment to
exploit market opportunities for our technologies.
Sales and marketing expenses increased by $337,000 or 3% in 2005
compared to 2004. The increase was primarily the result of
increased travel of $369,000, an increase in bad debt expense of
$232,000, and an increase in office expenses of $148,000
resulting from the ongoing execution of sales and marketing
plans in our established businesses. These increases were offset
by cost savings from a reduction in professional and consulting
fees of $309,000 due to reduced employee recruitment fees, and a
reduction in market research expense of $115,000.
Research and Development. Our research and
development expenses are comprised primarily of employee
compensation and benefits, consulting fees, tooling and
supplies, and an allocation of facilities costs. Research and
development expenses increased by $1.6 million or 27% in
2006 compared to 2005. The increase was primarily due to
increased compensation, benefits, and overhead of
$1.0 million, increased professional and consulting expense
of $337,000 to supplement our engineering staff, an increase in
prototyping expenses of $163,000, and an increase in materials
needed for technical support of $51,000. The increased
compensation, benefits, and overhead expense was primarily due
to increased stock-based compensation expense of $492,000 due to
the adoption of
48
SFAS No. 123R in the first quarter of 2006 and
increased salary expense of $382,000 due to increased
engineering headcount. We believe that continued investment in
research and development is critical to our future success, and
we expect research and development expense to increase in 2007
from targeted investments in areas of product and technology
development to support future growth.
Research and development expenses decreased by $2.0 million
or 25% in 2005 compared to 2004. The decrease was mainly due to
an increased focus on targeted development work, leading to a
reduction in general development contract work, which led to a
reduction in headcount and related compensation, benefits,
overhead, and travel, totaling $1.5 million, a decrease in
consulting expense of $243,000, a reduction in supplies and
materials and prototyping expenses of $162,000, and a decrease
in demonstration unit expenses of $85,000.
General and Administrative. Our general and
administrative expenses are comprised primarily of employee
compensation and benefits, legal and professional fees, office
supplies, travel, and an allocation of facilities costs. General
and administrative expenses decreased by $562,000 or 5% in 2006
compared to 2005. The decrease was mainly due to reduced legal
and professional fees of $2.4 million primarily due to a
reduction in litigation expenses attributable to the Sony
Computer Entertainment litigation; partially offset by increased
compensation, benefits, and overhead of $1.8 million; and
increased public company expense of $74,000. The increased
compensation, benefits, and overhead expense was primarily due
to increased stock-based compensation expense of
$1.1 million due to the adoption of SFAS No. 123R
in the first quarter of 2006. We expect that general and
administrative expenses will continue to be a substantial
component of our operating expenses. We expect to continue to
incur significant litigation costs as we defend our intellectual
property. In addition, we anticipate costs associated with
maintaining compliance with the Sarbanes-Oxley Act of 2002 and
Nasdaq Stock Market listing requirements will continue to be
significant.
General and administrative expenses decreased by
$6.5 million or 38% in 2005 compared to 2004. The decrease
was primarily attributable to a decrease in legal and
professional fees of $6.6 million, mostly related to the
litigation against Sony Computer Entertainment. The decrease was
partially offset by an increase in supplies and office expense
of $91,000.
Amortization of Intangibles. Our amortization
of intangibles is comprised primarily of patent amortization and
other intangible amortization. Amortization of intangibles
decreased by $287,000 or 23% from 2005 to 2006. Amortization of
intangibles decreased by $214,000 or 15% from 2004 to 2005. The
decreases were primarily attributable to some intangible assets
reaching full amortization.
Litigation Settlement. Litigation settlement
benefits from Electro Source were $1.7 million for 2006. No
litigation settlement benefits were received in 2005. In
February 2006, we announced that we had settled our legal
differences in our complaint for patent infringement against
Electro Source and that both parties had agreed to dismiss all
claims and counterclaims relating to this matter. In addition to
the Confidential Settlement Agreement, Electro Source entered
into a worldwide license to our patents for vibro-tactile
devices in the consumer gaming peripheral field of use.
According to the terms of the agreement, Electro Source is
required to make royalty payments to us based on sales by
Electro Source of spinning mass vibro-tactile gamepads, steering
wheels, and other game controllers for dedicated gaming
consoles, such as the Sony PlayStation and PlayStation 2,
the Nintendo GameCube, and the Microsoft Xbox and Xbox 360.
Restructuring Costs. We did not incur any
restructuring costs in 2006. Restructuring costs were $185,000
for 2005. The costs consisted of severance benefits paid as a
result of our reduction in force in the first quarter of 2005.
Employees from manufacturing, sales and marketing, research and
development, and general and administrative were included in the
reduction in force. We did not incur any additional charges
related to this reduction in force and do not anticipate any
further costs in future periods related to this reduction in
force.
49
Interest
and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
% Change
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
$
|
275
|
|
|
|
(44
|
)%
|
|
$
|
490
|
|
|
|
192
|
%
|
|
$
|
168
|
|
Interest expense
|
|
|
1,602
|
|
|
|
6
|
%
|
|
|
1,506
|
|
|
|
3573
|
%
|
|
|
41
|
|
Other expense
|
|
|
|
|
|
|
*
|
%
|
|
|
11
|
|
|
|
(98
|
)%
|
|
|
624
|
|
|
|
|
* |
|
Percentage not meaningful |
Interest and Other Income. Interest and other
income consists primarily of interest income and dividend income
from cash and cash equivalents. Interest and other income
decreased by $215,000 from 2005 to 2006 as a result of decreased
cash and cash equivalents invested, exclusive of monies received
from Sony Computer Entertainment. Interest income earned on the
payments from Sony Computer Entertainment has been included in
long-term deferred revenue as of December 31, 2006.
Interest and other income increased by $322,000 from 2004 to
2005 as a result of higher interest rates and increased cash and
cash equivalents primarily due to the $20.0 million we
received in December 2004 from the sale of our
5% Convertible Debentures.
Interest Expense. Interest expense consists
primarily of interest expense on our 5% Convertible
Debentures and notes payable. The increase in interest expense
of $96,000 from 2005 to 2006 was primarily due to increased
accretion expense on our 5% Convertible Debentures. The
increase in interest expense of $1.5 million from 2004 to
2005 was primarily due to interest and accretion expense on our
5% Convertible Debentures. We expect interest expense to
continue to be significant while our 5% Convertible
Debentures remain outstanding.
Other Expense. Other expense consists
primarily of accretion and dividend expense on our long-term
customer advance from Microsoft. Other expense was $0 in 2006,
$11,000 in 2005, and $624,000 in 2004. Other expense in 2004
consisted primarily of accretion of $500,000 on our long-term
customer advance from Microsoft and dividend expense on our
Series A Preferred Stock of $98,000.
Provision
for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
% Change
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Benefit (provision) for income
taxes
|
|
$
|
(144
|
)
|
|
|
(9
|
)%
|
|
$
|
(158
|
)
|
|
|
(205
|
)%
|
|
$
|
151
|
|
Benefit (Provision) for Income Taxes. For the
year ended 2006, we recorded a provision for income taxes of
$144,000, yielding an effective tax rate of (1.4%). The
provision for income tax was based on federal and state
alternative minimum income tax payable on taxable income and
foreign withholding tax expense. Although we incurred a pre-tax
loss of $10.3 million, sums received from Sony Computer
Entertainment and interest thereon included in long-term
deferred revenue, approximating $11.1 million in 2006, are
taxable, thus giving rise to an overall taxable profit. The
effective tax rate differs from the statutory rate primarily due
to the recording of a full valuation allowance of
$47.9 million against deferred tax assets. For the year
ended 2005, we recorded a provision for income taxes of
$158,000, yielding an effective tax rate of (1.2%). Although we
incurred a pre-tax loss of $12.9 million, sums received
from Sony Computer Entertainment and interest thereon included
in long-term deferred revenue, approximating $16.8 million
in 2005, are taxable, thus giving rise to an overall taxable
profit. The effective tax rate differs from the statutory rate
primarily due to the recording of a full valuation allowance of
$44.7 million against deferred tax assets. For the year
ended 2004, we reversed the tax provision that had been recorded
in 2003. No tax provision was required for the year ended
December 31, 2004 due to a net loss in that period.
Subsequent to December 31, 2003, in May 2004, Revenue
Procedure
2004-34
(Rev. Proc.
2004-34)
was issued by the Internal Revenue Service. This revenue
procedure allows taxpayers a limited deferral beyond the taxable
year of receipt for certain advance payments. Qualifying
taxpayers generally may defer to the next succeeding year the
inclusion in gross income for federal income tax purposes of
advance payments to the extent the advance payments are not
recognized (or, in certain cases, are not earned) in the taxable
year of receipt. Under Rev. Proc.
2004-34 we
were able to defer a significant amount of the Microsoft payment
during 2003 when calculating
50
our federal taxable income and therefore were not subject to
federal alternative minimum income tax for the year ended
December 31, 2003.
Segment
Results for the Years Ended December 31, 2006, 2005, and
2004 are as follows:
We have two operating and reportable segments. One segment,
Immersion Computing, Entertainment, and Industrial, develops and
markets touch feedback technologies that enable software and
hardware developers to enhance realism and usability for their
computing, entertainment, and industrial applications. The
second segment, Immersion Medical, develops, manufactures, and
markets medical simulators that recreate realistic healthcare
environments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
% Change
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immersion Computing,
Entertainment, and Industrial
|
|
$
|
13,810
|
|
|
|
(7
|
)%
|
|
$
|
14,840
|
|
|
|
6
|
%
|
|
$
|
13,972
|
|
Immersion Medical
|
|
|
14,133
|
|
|
|
45
|
%
|
|
|
9,760
|
|
|
|
(2
|
)%
|
|
|
9,966
|
|
Intersegment eliminations
|
|
|
(90
|
)
|
|
|
|
|
|
|
(323
|
)
|
|
|
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,853
|
|
|
|
15
|
%
|
|
$
|
24,277
|
|
|
|
2
|
%
|
|
$
|
23,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immersion Computing,
Entertainment, and Industrial
|
|
$
|
(11,278
|
)
|
|
|
9
|
%
|
|
$
|
(10,306
|
)
|
|
|
(42
|
)%
|
|
$
|
(17,805
|
)
|
Immersion Medical
|
|
|
845
|
|
|
|
(130
|
)%
|
|
|
(2,842
|
)
|
|
|
(4
|
)%
|
|
|
(2,949
|
)
|
Intersegment eliminations
|
|
|
9
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(10,424
|
)
|
|
|
(20
|
)%
|
|
$
|
(13,085
|
)
|
|
|
(37
|
)%
|
|
$
|
(20,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Segment assets and expenses relating to our 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. |
Fiscal
2006 Compared to Fiscal 2005
Immersion Computing, Entertainment, and Industrial
segment. Revenues from the Immersion Computing,
Entertainment, and Industrial segment decreased by
$1.0 million, or 7% in 2006 compared to 2005. Royalty and
license revenue decreased by $1.0 million, mainly due to
decreased royalties from our licensees that sell console and PC
gaming peripheral products, partially offset by increased
royalties and license fees from our touch interface product
licensees; development contract revenue decreased by $435,000,
primarily due to reduced government contracts; and product sales
increased by $453,000, mainly due to increased sales of our 3D
products partially offset by a decrease in touch interface
product sales. The segments net loss for 2006 increased by
$1.0 million or 9% as compared to 2005. The increase was
primarily due to a reduction in gross margin of
$1.5 million mainly due to reduced royalty and development
contract revenue, and decreased interest and other income of
$215,000, due to decreased cash invested. This increase was
partially offset by decreased operating expenses of $806,000.
The reduced operating expenses are comprised of the litigation
settlement received from Electro Source; decreased general and
administrative expenses, mainly reduced litigation expenses; and
reduced amortization of intangibles; offset in part by increased
sales and marketing expenses and increased research and
development expenses. We expect to continue to incur significant
litigation costs related to litigation against other parties as
we defend our intellectual property. Also, we anticipate sales
and marketing costs in this segment will continue to be
significant in future periods as we increase our investment in
the mobile phone, touchscreen, and other markets to exploit
opportunities for our technologies.
51
Immersion Medical segment. Revenues from
Immersion Medical increased by $4.4 million, or 45% from
2005 to 2006. The increase was primarily due to an increase of
$3.8 million in product sales and an increase of
$1.1 million in development contract revenue, partially
offset by a decrease of $535,000 in royalty and license revenue.
Product sales increased primarily due to increased sales of our
endovascular, needle-based, and endoscopy simulator platforms.
This increase in product sales was a result of pursuing a
product growth strategy which includes developing new products,
leveraging our industry alliances, and expanding international
sales. Increased work performed under government contracts which
were completed during the third quarter of 2006 and contract
revenue recognized from our contracts with Medtronic contributed
to the increase in development contract revenue. Segment net
income for 2006 was $845,000, an increase of $3.7 million
from the net loss of $2.8 million for 2005. The improvement
was mainly due to increased gross margin of $4.3 million
primarily due to increased product sales and increased
government contract revenue offset by increased operating
expenses of $563,000, primarily the result of increased research
and development and general and administrative expenses, offset
in part by reduced sales and marketing expenses.
Fiscal
2005 Compared to Fiscal 2004
Immersion Computing, Entertainment, and Industrial
segment. Revenues from the Immersion Computing,
Entertainment, and Industrial segment increased $868,000, or 6%
from 2004 to 2005. The increase was primarily attributable to
increased royalty and license revenue of $1.2 million from
our licensees that sell console and PC gaming peripheral
products, and increased royalties and license fees from our
touch interface product licensees, as well as increased
development contract revenue of $270,000, primarily from touch
interface product customers. This increase was offset in part by
a reduction in product sales of $609,000, primarily due to
decreased sales of our 3D products and lower sales of
microprocessors. Segment net loss for 2005 decreased by
$7.5 million or 42% as compared to 2004. The decrease was
primarily due to reduced operating expenses of
$7.2 million, mainly due to reduced litigation costs
associated with our litigation against Sony Computer
Entertainment and increased gross margin of $1.2 million,
primarily due to increased revenue and higher margin royalty and
license revenues accounting for a larger percentage of the
revenue mix, offset in part by increased non-operating expenses
of $864,000, mainly due to increased interest expense on our
5% Convertible Debentures.
Immersion Medical segment. Revenues from
Immersion Medical decreased $206,000, or 2% from 2004 to 2005.
The decrease was due primarily to a decrease of
$1.1 million in royalty and license revenue, and a decrease
of $930,000 in development contract revenue, offset in part by
an increase of $1.8 million in product sales primarily due
to increased sales of our needle-based, endovascular, and
laparoscopic simulator platforms. Royalty and license revenue
and development contract revenue decreased primarily due to a
reduction in revenue recognized on our license and development
agreements with Medtronic. Decreased work performed on
government contracts also contributed to the decrease in
development contract revenue. The product sales increase was a
result of focusing sales force resources on selling training
simulator products to hospitals and teaching institutions as
well as targeted marketing programs and improved reseller
performance. Segment net loss for 2005 was $2.8 million, a
decrease of $107,000 from the net loss of $2.9 million for
2004. The decrease in net loss was mainly due to decreased
operating expenses of $936,000, primarily the result of reduced
research and development spending due to the transition from
development contract efforts to product sales, offset in part by
decreased gross margin of $855,000 due to a change in revenue
mix, including the reduction of higher margin license and
development contract revenue.
Liquidity
and Capital Resources
Our cash and cash equivalents consist primarily of money market
funds. At December 31, 2006, our cash and cash equivalents
totaled $32.0 million, up $3.8 million from
$28.2 million at December 31, 2005.
During 2003, we entered into a series of agreements with
Microsoft in connection with the settling of our lawsuit against
Microsoft. As part of these agreements, we may require
Microsoft, at our discretion, to buy up to $4.0 million of
our 7% Debentures, at a rate of $2.0 million per annum
plus any amounts not purchased in the prior 12 months, for
the year ending July 2007. As of December 31, 2006, we had
not sold any of these 7% Debentures to Microsoft.
52
In December 2004, we issued an aggregate principal amount of
$20.0 million of 5% Convertible Debentures. The
5% Convertible Debentures will mature on December 22,
2009. The amount payable at maturity of each 5% Convertible
Debenture is the initial principal plus all accrued but unpaid
interest thereon, to the extent such principal amount and
interest has not been converted into common shares or previously
paid in cash. Commencing on the date the 5% Convertible
Debentures were issued, interest accrues daily on the principal
amount of the 5% Convertible Debenture at a rate of
5% per year. Interest will cease to accrue on that portion
of the 5% Convertible Debenture that is converted or paid,
including pursuant to conversion right or redemption. The holder
of a 5% Convertible Debenture has the right to convert the
outstanding principal amount and accrued and unpaid interest in
whole or in part into shares of our common shares at a price of
$7.0265 per common share.
On March 1, 2007, Immersion and Sony Computer Entertainment
announced that the companies agreed to conclude their patent
litigation at the U.S. Court of Appeals for the Federal
Circuit. On March 14, 2007 the Federal Circuit dismissed
the Sony Computer Entertainment appeal of Amended Judgement (and
all interlocutory orders merged in the Amended Judgment). In
accordance with the Amended Judgment we will receive funds
totaling approximately $97.2 million inclusive of past
damages for sales and other activities with respect to the
infringing Sony Computer Entertainment PlayStation system
consisting of the PlayStation consoles, Dual Shock controllers,
and the 47 games found by the jury to infringe our patents,
pre-judgment interest and costs, and post-judgment interest.
Additionally we will retain the $32.3 million of compulsory
license fees and interest thereon previously paid to us by Sony
Computer Entertainment ($27.9 million in long-term deferred
revenue at December 31, 2006 and $4.4 million received
subsequent to year end.) Furthermore we announced that we will
enter into a new business agreement to explore the inclusion of
our technology in PlayStation format products. Under the new
business agreement we will also receive twelve quarterly
installments of $1.875 million (for a total of
$22.5 million) beginning on March 31, 2007 and ending
on December 31, 2009.
Under our agreements with Microsoft, in the event of a
settlement with Sony Computer Entertainment, we are obligated to
pay Microsoft a minimum of $15.0 million for any amounts
received from Sony up to $100.0 million, plus 25% of any
amounts over $100.0 million up to $150.0 million, and
17.5% of any amounts over $150.0 million. We believe that
we are not obligated under our agreements with Microsoft to make
any payment to Microsoft relating to the conclusion of our
patent litigation with Sony Computer Entertainment. However, it
is uncertain that Microsoft will accept our position or that we
will ultimately prevail with our position.
Net cash provided by operating activities during 2006 was
$5.3 million, a change of $3.1 million from the
$2.2 million provided by operating activities during 2005.
Cash provided by operations during the year ended
December 31, 2006 was primarily the result of a
$9.5 million increase due to a change in deferred revenue
and customer advances mainly related to compulsory license fee
payments received and interest thereon from Sony Computer
Entertainment of $11.1 million. Cash provided by operations
was also impacted by noncash charges and credits of
$5.3 million, including $2.9 million of stock-based
compensation, $1.0 million in amortization of intangibles,
$772,000 in depreciation, and $632,000 in accretion expenses on
our 5% Convertible Debentures, as well as an increase of
$760,000 due to a change in other long-term liabilities, an
increase of $516,000 due to a change in accrued compensation and
other current liabilities, an increase of 191,000 due to a
change in accounts payable due to the timing of payments to
vendors, and an increase of $79,000 due to a change in
inventories. These increases were offset by our
$10.4 million net loss, a decrease of $503,000 due to a
change in accounts receivable, and a decrease of $71,000 due to
a change in prepaid expenses and other current assets. Net cash
provided by operating activities during 2005 was
$2.2 million, a change of $17.8 million from the
$15.6 million used during 2004. Cash provided by operations
during the year ended December 31, 2005 was primarily the
result of a $15.5 million increase due to a change in
deferred revenue and customer advances primarily related to
compulsory license fee payments received and interest thereon
from Sony Computer Entertainment of $16.8 million and
noncash charges and credits of $2.5 million, including
$1.3 million in amortization of intangibles, $730,000 in
depreciation, and $634,000 in accretion expenses on our
5% Convertible Debenture. Additionally, cash provided by
operations during 2005 was also impacted by an increase of
$791,000 due to a change in accounts receivable and an increase
of $149,000 due to a change in prepaid expenses and other
current assets. These increases were offset by our
$13.1 million net loss, a decrease of $2.1 million due
to a change in accounts payable due to the timing of payments to
vendors, a decrease of $814,000 due to a change in inventories,
and a decrease of $709,000 due to a change in accrued
compensation and other current liabilities.
53
Net cash used in investing activities during 2006 was
$2.7 million, compared to the $2.0 million used in
investing activities during 2005, a change of $757,000. Net cash
used in investing activities during 2006 consisted of a
$1.6 million increase in other assets, primarily due to
capitalization of external patent filing and application costs
and $1.1 million used to purchase capital equipment. Net
cash used in investing activities during 2005 was
$2.0 million, compared to $2.5 million used in
investing activities during 2004, a change of $554,000. Net cash
used in investing activities during 2005 consisted of a
$1.0 million increase in other assets, primarily due to
capitalization of external patent filing and application costs,
and $967,000 used to purchase capital equipment.
Net cash provided by financing activities during 2006 was
$1.3 million compared to $2.2 million provided during
2005, or a $902,000 change from the prior year. Net cash
provided by financing activities during 2006 consisted primarily
of issuances of common stock and exercises of stock options in
the amount of $1.3 million. Net cash provided by financing
activities during 2005 was $2.2 million compared to
$21.4 million provided during 2004, or a $19.2 million
change from the prior year. Net cash provided by financing
activities during 2005 consisted primarily of issuances of
common stock and exercises of stock options in the amount of
$2.2 million.
We believe that our cash and cash equivalents will be sufficient
to meet our working capital needs and our continued litigation
costs for at least the next twelve months. We have taken
measures to control our costs and will continue to monitor these
efforts. We will continue to incur additional expenses
associated with pending litigation and any new efforts to
protect our intellectual property during 2007. We anticipate
that capital expenditures for the year ended December 31,
2007 will total approximately $1.0 million in connection
with anticipated upgrades to operations and infrastructure.
Additionally, although we have no current plans to do so, if we
acquire one or more businesses, patents, or products, our cash
or capital requirements could increase. In the event of such an
acquisition, or should any unanticipated circumstances arise
that significantly increase our capital requirements, we may
elect to raise additional capital through debt or equity
financing. All of these events could result in substantial
dilution to our stockholders. Although we expect to be able to
raise additional capital if necessary, there is no assurance
that such additional capital will be available on terms
acceptable to us, if at all.
Our 5% Convertible Debentures accrue interest at
5% per annum. Accordingly, we are required to make interest
payments in the amount of $1.0 million per annum until such
time as the 5% Convertible Debentures are either converted
to common stock or mature. If the daily volume-weighted average
price of our common shares is at or above 200% of the Conversion
Price for at least 20 consecutive trading days, and certain
other conditions are met, we have the right to (i) require
the holder of a 5% Convertible Debenture to convert the 5%
Convertible Debenture in whole, including interest, into shares
of our common stock at a price of $7.0265 per common share,
as may be adjusted under the debenture, as set forth and subject
to the conditions in the 5% Convertible Debenture, or
(ii) redeem the 5% Convertible Debenture. If we make
either of the foregoing elections with respect to any
5% Convertible Debenture, we must make the same election
with respect to all 5% Convertible Debentures.
Summary
Disclosures about Contractual Obligations and Commercial
Commitments
The following table reflects a summary of our contractual cash
obligations and other commercial commitments as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 and
|
|
|
2010 and
|
|
Contractual Obligations
|
|
Total
|
|
|
2007
|
|
|
2009
|
|
|
2011
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Long-term debt and interest
|
|
$
|
22,975
|
|
|
$
|
1,000
|
|
|
$
|
21,975
|
|
|
$
|
|
|
Operating leases
|
|
|
2,951
|
|
|
|
994
|
|
|
|
1,638
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
25,926
|
|
|
$
|
1,994
|
|
|
$
|
23,613
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With regard to our 5% Convertible Debentures, in the event
of a change of control of us, a holder may require us to redeem
all or a portion of their 5% Convertible Debenture (Put
Option). The redeemed portion shall be redeemed at a price
equal to the redeemed amount multiplied by 100% of the principal
amount of the 5% Convertible Debenture. The Conversion
Price will be reduced in certain instances where shares of
common stock are sold or deemed to be sold at a price less than
the applicable Conversion Price, including the issuance of
certain options, the issuance of convertible securities, or the
change in exercise price or rate of conversion for options or
convertible securities. The Conversion Price will be
proportionately adjusted if we subdivide (by stock split, stock
54
dividend, recapitalization, or otherwise) or combine (by
combination, reverse stock split, or otherwise) one or more
classes of our common stock. So long as any 5% Convertible
Debentures are outstanding, we will not, nor will we permit any
of our subsidiaries to, directly or indirectly, incur or
guarantee, assume or suffer to exist any indebtedness other than
permitted indebtedness under the 5% Convertible Debenture
agreement. If an event of default occurs, and is continuing with
respect to any of our 5% Convertible Debentures, the holder may,
at its option, require us to redeem all or a portion of the
5% Convertible Debenture.
Recent
Accounting Pronouncements
In June 2006, the FASB issued FIN 48. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a two-step
process to determine the amount of benefit to be recognized.
First, the tax position must be evaluated to determine the
likelihood that it will be sustained upon examination. If the
tax position is deemed more-likely-than-not to be
sustained, the tax position is then measured to determine the
amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that
is greater than 50 percent likely of being realized upon
ultimate settlement. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We are currently
evaluating the effect that the adoption of FIN 48 will have
on our financial position and results of operations.
In September 2006, the SEC issued SAB No. 108,
regarding the process of quantifying financial statement
misstatements. SAB No. 108 states that
registrants should use both a balance sheet approach and an
income statement approach when quantifying and evaluating the
materiality of a misstatement. The interpretations in
SAB No. 108 contain guidance on correcting errors
under the dual approach as well as provide transition guidance
for correcting errors. This interpretation does not change the
requirements within SFAS No. 154, Accounting
Changes and Error Corrections a replacement of APB
No. 20 and SFAS No. 3, for the correction
of an error on financial statements. SAB No. 108 is
effective for annual financial statements covering the first
fiscal year ending after November 15, 2006. The adoption of
SAB No. 108 had no material effect on our consolidated
financial statements.
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements,
(SFAS No. 157). SFAS No. 157
establishes a framework for measuring fair value by providing a
standard definition of fair value as it applies to assets and
liabilities. SFAS No. 157, which does not require any
new fair value measurements, clarifies the application of other
accounting pronouncements that require or permit fair value
measurements. The effective date for us is January 1, 2008.
We are currently evaluating the effect that the adoption of
SFAS No. 157 will have on our financial position and
results of operations.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159). The new
Statement allows entities to choose, at specified election
dates, to measure eligible financial assets and liabilities at
fair value in situations in which they are not otherwise
required to be measured at fair value. If a company elects the
fair value option for an eligible item, changes in that
items fair value in subsequent reporting periods must be
recognized in current earnings. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
draw comparison between entities that elect different
measurement attributes for similar assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permitted
subject to specific requirements outlined in the new Statement.
We are currently evaluating the effect that the adoption of
SFAS 159 will have on our financial position and results of
operations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We have limited exposure to financial market risks, including
changes in interest rates. The fair value of our investment
portfolio or related income would not be significantly impacted
by a 100 basis point increase or decrease in interest rates
due mainly to the short-term nature of the major portion of our
investment portfolio. An increase or decrease in interest rates
would not significantly increase or decrease interest expense on
debt obligations due to the fixed nature of our debt
obligations. Our foreign operations are limited in scope and
thus we are not materially exposed to foreign currency
fluctuations.
55
As of December 31, 2006, we had outstanding
$20.0 million of fixed rate long-term convertible
debentures. The holder of a 5% Convertible Debenture has
the right to convert the outstanding principal amount, and
accrued and unpaid interest, in whole or in part into our common
shares at a price of $7.0265 per common share, the
Conversion Price. In the event of a change of control, a holder
may require us to redeem all or a portion of their
5% Convertible Debenture. This is referred to as the Put
Option. The redeemed portion shall be redeemed at a price equal
to the redeemed amount multiplied by 100% of the principal
amount of the 5% Convertible Debenture. If the daily
volume-weighted average price of our common shares is at or
above 200% of the Conversion Price for at least 20 consecutive
trading days and certain other conditions are met, we have the
right to (i) require the holder of a 5% Convertible
Debenture to convert the debenture in whole, including interest,
into shares of our common stock at a price of $7.0265 per
common share, as may be adjusted under the debenture, as set
forth and subject to the conditions in the 5% Convertible
Debenture, or (ii) redeem the 5% Convertible
Debenture. If we make either of the foregoing elections with
respect to any 5% Convertible Debenture, we must make the
same election with respect to all 5% Convertible Debentures.
56
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
IMMERSION
CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
57
IMMERSION
CORPORATION
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,012
|
|
|
$
|
28,171
|
|
Accounts receivable (net of
allowances for doubtful accounts of:
|
|
|
|
|
|
|
|
|
2006, $139; and 2005, $383)
|
|
|
5,153
|
|
|
|
4,650
|
|
Inventories, net
|
|
|
2,639
|
|
|
|
2,655
|
|
Prepaid expenses and other current
assets
|
|
|
1,179
|
|
|
|
1,131
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
40,983
|
|
|
|
36,607
|
|
Property and equipment, net
|
|
|
1,647
|
|
|
|
1,366
|
|
Intangibles and other assets, net
|
|
|
7,385
|
|
|
|
6,787
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
50,015
|
|
|
$
|
44,760
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,334
|
|
|
$
|
2,179
|
|
Accrued compensation
|
|
|
1,526
|
|
|
|
1,193
|
|
Other current liabilities
|
|
|
1,750
|
|
|
|
1,604
|
|
Deferred revenue and customer
advances
|
|
|
1,716
|
|
|
|
2,741
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,326
|
|
|
|
7,722
|
|
Long-term debt, less current
portion
|
|
|
18,122
|
|
|
|
17,490
|
|
Long-term deferred revenue, less
current portion
|
|
|
31,784
|
|
|
|
21,294
|
|
Long-term customer advance from
Microsoft (Note 9)
|
|
|
15,000
|
|
|
|
15,000
|
|
Other long-term liabilities
|
|
|
775
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
73,007
|
|
|
|
61,555
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Notes 9, 10, and 19)
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Common stock and additional
paid-in capital $0.001 par value;
100,000,000 shares authorized; shares issued and
outstanding: 2006, 24,797,572; 2005 24,360,427
|
|
|
110,501
|
|
|
|
106,277
|
|
Warrants
|
|
|
3,686
|
|
|
|
3,686
|
|
Accumulated other comprehensive
income
|
|
|
67
|
|
|
|
64
|
|
Accumulated deficit
|
|
|
(137,246
|
)
|
|
|
(126,822
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(22,992
|
)
|
|
|
(16,795
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders deficit
|
|
$
|
50,015
|
|
|
$
|
44,760
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
IMMERSION
CORPORATION
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
$
|
7,304
|
|
|
$
|
8,888
|
|
|
$
|
8,778
|
|
Product sales
|
|
|
17,083
|
|
|
|
12,762
|
|
|
|
11,644
|
|
Development contracts and other
|
|
|
3,466
|
|
|
|
2,627
|
|
|
|
3,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
27,853
|
|
|
|
24,277
|
|
|
|
23,763
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales (exclusive
of amortization of intangibles shown separately below)
|
|
|
7,193
|
|
|
|
6,446
|
|
|
|
6,255
|
|
Sales and marketing
|
|
|
12,609
|
|
|
|
11,649
|
|
|
|
11,312
|
|
Research and development
|
|
|
7,609
|
|
|
|
6,003
|
|
|
|
7,985
|
|
General and administrative
|
|
|
10, 076
|
|
|
|
10,638
|
|
|
|
17,133
|
|
Amortization of intangibles
|
|
|
969
|
|
|
|
1,256
|
|
|
|
1,470
|
|
Litigation settlement
|
|
|
(1,650
|
)
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
36 ,806
|
|
|
|
36,177
|
|
|
|
44,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(8,953
|
)
|
|
|
(11,900
|
)
|
|
|
(20,392
|
)
|
Interest and other income
|
|
|
275
|
|
|
|
490
|
|
|
|
168
|
|
Interest expense
|
|
|
(1,602
|
)
|
|
|
(1,506
|
)
|
|
|
(41
|
)
|
Other expense
|
|
|
|
|
|
|
(11
|
)
|
|
|
(624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit (provision)
for income taxes
|
|
|
(10,280
|
)
|
|
|
(12,927
|
)
|
|
|
(20,889
|
)
|
Benefit (provision) for income
taxes
|
|
|
(144
|
)
|
|
|
(158
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,424
|
)
|
|
$
|
(13,085
|
)
|
|
$
|
(20,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating basic
and diluted net loss per share
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
22,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
59
IMMERSION
CORPORATION
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and
|
|
|
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Additional Paid-In Capital
|
|
|
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
Loss
|
|
|
Balances at January 1, 2004
|
|
|
20,670,541
|
|
|
$
|
89,903
|
|
|
$
|
1,974
|
|
|
$
|
(130
|
)
|
|
$
|
33
|
|
|
$
|
(92,999
|
)
|
|
$
|
(1,219
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,738
|
)
|
|
|
(20,738
|
)
|
|
$
|
(20,738
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of series A
redeemable preferred stock to common stock
|
|
|
2,185,792
|
|
|
|
12,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,367
|
|
|
|
|
|
Issuance of stock for ESPP purchase
|
|
|
49,524
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
|
|
|
|
|
|
Exercise of stock options
|
|
|
620,210
|
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,712
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
23,526,067
|
|
|
$
|
104,027
|
|
|
$
|
3,686
|
|
|
$
|
(2
|
)
|
|
$
|
59
|
|
|
$
|
(113,737
|
)
|
|
$
|
(5,967
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,085
|
)
|
|
|
(13,085
|
)
|
|
$
|
(13,085
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for ESPP purchase
|
|
|
55,967
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233
|
|
|
|
|
|
Exercise of stock options
|
|
|
778,393
|
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,017
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
24,360,427
|
|
|
$
|
106,277
|
|
|
$
|
3,686
|
|
|
$
|
|
|
|
$
|
64
|
|
|
$
|
(126,822
|
)
|
|
$
|
(16,795
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,424
|
)
|
|
|
(10,424
|
)
|
|
$
|
(10,424
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for ESPP purchase
|
|
|
47,335
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
|
|
|
|
Exercise of stock options
|
|
|
389,810
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,009
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,937
|
|
|
|
|
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
24,797,572
|
|
|
$
|
110,501
|
|
|
$
|
3,686
|
|
|
$
|
|
|
|
$
|
67
|
|
|
$
|
(137,246
|
)
|
|
$
|
(22,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
60
IMMERSION
CORPORATION
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,424
|
)
|
|
$
|
(13,085
|
)
|
|
$
|
(20,738
|
)
|
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
772
|
|
|
|
730
|
|
|
|
874
|
|
Amortization of intangibles
|
|
|
969
|
|
|
|
1,256
|
|
|
|
1,470
|
|
Stock-based compensation
|
|
|
2,937
|
|
|
|
2
|
|
|
|
128
|
|
Excess tax benefits from
stock-based compensation
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
Interest expense
accretion on 5% Convertible Debenture (Note 7)
|
|
|
632
|
|
|
|
634
|
|
|
|
15
|
|
Interest and other
expense Microsoft (Note 9)
|
|
|
|
|
|
|
|
|
|
|
598
|
|
Fair value adjustment of Put Option
and Registration Rights
|
|
|
(34
|
)
|
|
|
(128
|
)
|
|
|
|
|
Loss on disposal of equipment
|
|
|
15
|
|
|
|
10
|
|
|
|
4
|
|
Write off of intangibles
|
|
|
69
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(503
|
)
|
|
|
791
|
|
|
|
(500
|
)
|
Inventories
|
|
|
79
|
|
|
|
(814
|
)
|
|
|
293
|
|
Prepaid expenses and other current
assets
|
|
|
(71
|
)
|
|
|
149
|
|
|
|
(154
|
)
|
Accounts payable
|
|
|
191
|
|
|
|
(2,087
|
)
|
|
|
805
|
|
Accrued compensation and other
current liabilities
|
|
|
516
|
|
|
|
(709
|
)
|
|
|
432
|
|
Deferred revenue and customer
advances
|
|
|
9,465
|
|
|
|
15,461
|
|
|
|
1,223
|
|
Other long-term liabilities
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
5,337
|
|
|
|
2,210
|
|
|
|
(15,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles and other assets
|
|
|
(1,614
|
)
|
|
|
(1,025
|
)
|
|
|
(1,918
|
)
|
Purchases of property and equipment
|
|
|
(1,130
|
)
|
|
|
(967
|
)
|
|
|
(623
|
)
|
Proceeds from the sale of property
and equipment
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(2,744
|
)
|
|
|
(1,987
|
)
|
|
|
(2,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 5% Convertible Debenture
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Increase in issuance cost of 5%
Convertible Debenture (Note 7)
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
242
|
|
|
|
233
|
|
|
|
170
|
|
Exercise of stock options
|
|
|
1,009
|
|
|
|
2,017
|
|
|
|
1,587
|
|
Excess tax benefits from
stock-based compensation
|
|
|
36
|
|
|
|
|
|
|
|
|
|
Dividends paid on Series A
Redeemable Convertible Preferred Stock (Note 9)
|
|
|
|
|
|
|
|
|
|
|
(281
|
)
|
Payment on notes payable and
capital leases
|
|
|
(5
|
)
|
|
|
(11
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
1,282
|
|
|
|
2,184
|
|
|
|
21,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
and cash equivalents
|
|
|
(34
|
)
|
|
|
226
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
3,841
|
|
|
|
2,633
|
|
|
|
3,800
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
28,171
|
|
|
|
25,538
|
|
|
|
21,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
32,012
|
|
|
|
28,171
|
|
|
|
25,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
28
|
|
|
$
|
55
|
|
|
$
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,004
|
|
|
$
|
1,026
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to common stock of
long-term customer advance from Microsoft (Note 9)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants
in connection with the issuance of the 5% Convertible Debentures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to debt issuance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
61
IMMERSION
CORPORATION
Years
Ended December 31, 2006, 2005, and 2004
|
|
1.
|
Significant
Accounting Policies
|
Description of Business Immersion Corporation
(the Company) was incorporated in 1993 in California
and reincorporated in Delaware in 1999 and develops,
manufactures, licenses, and supports a wide range of hardware
and software technologies and products that enhance digital
devices with touch interaction.
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. The Company has prepared the accompanying
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America.
Reclassifications Certain reclassifications
have been made to prior year balances in order to conform to the
current year presentation. These reclassifications had no effect
on net loss or stockholders 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.
Allowance for Doubtful Accounts The Company
maintains an allowance for doubtful accounts for estimated
losses resulting from its review and assessment of its
customers ability to make required payments. The Company
reviews its trade receivables by aging categories to identify
significant customers with known disputes or collection issues.
For accounts not specifically identified, the Company provides
reserves based on historical levels of credit losses and
reserves.
Inventories Inventories are stated at the
lower of cost (principally on a standard cost basis which
approximates FIFO) or market. The Company reduces its inventory
value for estimated obsolete and slow moving inventory in an
amount equal to the difference between the cost of inventory and
the net realizable value based upon assumptions about future
demand and market conditions.
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 The Company accounts for
its intangible assets in accordance with 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.
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.
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
62
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 is based on the fair value of the asset. As of
December 31, 2006, 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 SAB No. 104, Revenue
Recognition, EITF
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, and the AICPA
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.
Royalty and license revenue 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 VSOE related to the value of the services
does not exist.
The Company generally recognizes revenue from its licensees
under one or a combination of the following models:
|
|
|
License Revenue Model
|
|
Revenue Recognition
|
|
Perpetual license of intellectual
property portfolio based on per unit royalties, no services
contracted.
|
|
Based on royalty reports received
from licensees. No further obligations to licensee exist.
|
|
|
|
Time-based license of intellectual
property portfolio with up-front payments
and/or
annual minimum royalty requirements, no services contracted.
Licensees have certain rights to updates to the intellectual
property portfolio during the contract period.
|
|
Based on straight-line
amortization of annual minimum/up-front payment recognized over
contract period or annual minimum period.
|
|
|
|
Perpetual license of intellectual
property portfolio or technology license along with contract for
development work.
|
|
Based on
cost-to-cost
percentage-of-completion
accounting method over the service period. Obligation to
licensee exists until development work is complete.
|
|
|
|
License of software or technology,
no modification necessary, no services contracted.
|
|
Up-front revenue recognition based
on
SOP 97-2
criteria or EITF
No. 00-21,
as applicable.
|
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
No. 00-21,
and
SOP 97-2,
as amended, to guide the accounting treatment for each
individual contract. See also the discussion regarding
Multiple element arrangements below. If the
information received from the Companys licensees regarding
royalties is incorrect or inaccurate, the Companys
revenues in future periods may be adversely affected. To date,
none of the information the Company has received from its
licensees has caused any material adjustment to period revenues.
Product sales The Company recognizes revenues
from product sales when the product is shipped, provided that
collection is determined to be probable and no significant
obligation remains. The Company sells the majority of its
products
63
with warranties ranging from 3 to 24 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®
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. The Company offers no other general right
of return on its products.
Development contracts and other revenue
Development contracts and other revenue is comprised of
professional services (consulting services
and/or
development contracts), customer support, and extended warranty
contracts. 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. Customer support and extended warranty
contract revenue is recognized ratably over the contractual
period.
Multiple element arrangements The Company
enters into revenue arrangements in which the customer purchases
a combination of patent, technology,
and/or
software licenses, products, professional services, support, and
extended warranties (multiple element arrangements). When VSOE
of fair value exists for all elements, the Company allocates
revenue to each element based on the relative fair value of each
of the elements. The price charged when the element is sold
separately generally determines the fair value or VSOE.
The Companys revenue recognition policies are significant
because the Companys revenues are a key component of its
results of operations. In addition, the Companys revenue
recognition policies determine the timing of certain expenses,
such as commissions and royalties.
Advertising Advertising costs (including
obligations under cooperative marketing programs) are expensed
as incurred and included in sales and marketing expense.
Advertising expense was $279,000, $179,000, and $166,000 in
2006, 2005, and 2004, respectively.
Research and Development Research and
development costs are expensed as incurred. The Company has
generated revenues from development contracts with the United
States government and other commercial customers that have
enabled it to accelerate its own product development efforts.
Such development revenues have only partially funded the
Companys 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
Companys 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 On January 1,
2006, the Company adopted the provisions of, and accounted for
stock-based compensation in accordance with,
SFAS No. 123R, Share-Based Payment which
replaced SFAS No. 123
(SFAS No. 123), Accounting for
Stock-Based Compensation and supersedes Accounting
Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees. Under the
fair value recognition provisions of SFAS No. 123R,
stock-based compensation cost is measured at the grant date
based on the
64
fair value of the award and is recognized as expense on a
straight-line basis over the requisite service period, which is
the vesting period. The valuation provisions of
SFAS No. 123R apply to new grants and to grants that
were outstanding as of the effective date and are subsequently
modified. Estimated compensation for grants that were
outstanding as of the effective date will be recognized over the
remaining service period using the compensation cost estimated
for the SFAS No. 123 pro forma disclosures. Prior to
the adoption of SFAS No. 123R, the Company used the
Black-Scholes model, multi-option approach to determine the fair
value of stock options and employee stock purchase plan shares
for pro forma disclosures.
With respect to its adoption of SFAS No. 123R, the
Company elected the modified-prospective method, under which
prior periods are not revised for comparative purposes. The
adoption of SFAS No. 123R had a material impact on the
Companys consolidated financial position, results of
operations, and cash flows for the year ended December 31,
2006. See Note 11 for further information regarding the
Companys stock-based compensation assumptions and
expenses, including pro forma disclosures as if the Company had
recorded stock-based compensation expense for prior periods.
Comprehensive Loss Comprehensive loss
includes net loss as well as other items of comprehensive
income. The Companys other comprehensive income consists
of foreign currency translation adjustments. Total comprehensive
loss and the components of accumulated other comprehensive
income are presented in the accompanying Consolidated Statement
of Stockholders 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 Companys 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 and accounts receivable. The Company invests
primarily in money market accounts. 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
estimated 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 Companys products; market acceptance of the
Companys and its licensees products under
development; the availability of contract manufacturing
capacity; development of sales channels; litigation or other
claims in which the Company is involved; 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.
The Company has incurred net losses each year since 1997
including losses of $10.4 million in 2006,
$13.1 million in 2005, and $20.7 million in 2004. As
of December 31, 2006, the Company had an accumulated
deficit of $137.2 million. The Company believes its cash
and cash equivalents are sufficient to meet its anticipated cash
needs for working capital and capital expenditures through at
least December 31, 2007.
65
Supplier Concentrations The Company depends
on a number of single source suppliers to produce some of its
medical simulators and certain other components. While the
Company seeks to maintain a sufficient level of supply and
endeavors to maintain ongoing communications with these
suppliers to guard against interruptions or cessation of supply,
any disruption in the manufacturing process from its sole source
suppliers could adversely affect the Companys ability to
deliver its products and ensure quality workmanship and could
result in a reduction of the Companys product sales.
Fair Value of Financial Instruments Financial
instruments consist primarily of cash equivalents, accounts
receivable, accounts payable, and long-term debt. Cash
equivalents 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 Companys 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. Foreign currency transaction gains and losses are
included in earnings.
Recent Accounting Pronouncements In June
2006, the FASB issued FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a two-step
process to determine the amount of benefit to be recognized.
First, the tax position must be evaluated to determine the
likelihood that it will be sustained upon examination. If the
tax position is deemed more-likely-than-not to be
sustained, the tax position is then measured to determine the
amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that
is greater than 50 percent likely of being realized upon
ultimate settlement. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently
evaluating the effect that the adoption of FIN 48 will have
on its financial position and results of operations.
In September 2006, the SEC issued SAB No. 108,
regarding the process of quantifying financial statement
misstatements. SAB No. 108 states that
registrants should use both a balance sheet approach and an
income statement approach when quantifying and evaluating the
materiality of a misstatement. The interpretations in
SAB No. 108 contain guidance on correcting errors
under the dual approach as well as provide transition guidance
for correcting errors. This interpretation does not change the
requirements within SFAS No. 154, Accounting
Changes and Error Corrections a replacement of APB
No. 20 and SFAS No. 3, for the correction
of an error on financial statements. SAB No. 108 is
effective for annual financial statements covering the first
fiscal year ending after November 15, 2006. The adoption of
SAB No. 108 had no material effect on the
Companys consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157.
SFAS No. 157 establishes a framework for measuring
fair value by providing a standard definition for fair value as
it applies to assets and liabilities. SFAS No. 157,
which does not require any new fair value measurements,
clarifies the application of other accounting pronouncements
that require or permit fair value measurements. The effective
date for the Company is January 1, 2008. The Company is
currently evaluating the effect that the adoption of
SFAS No. 157 will have on its financial position and
results of operations.
In February 2007, the FASB issued SFAS No. 159. The
new Statement allows entities to choose, at specified election
dates, to measure eligible financial assets and liabilities at
fair value in situations in which they are not otherwise
required to be measured at fair value. If a company elects the
fair value option for an eligible item, changes in that
items fair value in subsequent reporting periods must be
recognized in current earnings. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
draw comparison between entities that elect different
measurement attributes for similar assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permitted
subject to specific requirements outlined in the new Statement.
The Company is currently evaluating the effect that the adoption
of SFAS No. 159 will have on its financial position
and results of operations.
66
|
|
2.
|
Cash and
Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash
|
|
$
|
2,146
|
|
|
$
|
1,847
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
|
|
25
|
|
|
|
25
|
|
Money market funds
|
|
|
29,841
|
|
|
|
26,299
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
$
|
29,866
|
|
|
$
|
26,324
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
32,012
|
|
|
$
|
28,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Raw materials and subassemblies
|
|
$
|
2,267
|
|
|
$
|
2,369
|
|
Work in process
|
|
|
110
|
|
|
|
55
|
|
Finished goods
|
|
|
262
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
2,639
|
|
|
$
|
2,655
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Computer equipment and purchased
software
|
|
$
|
2,980
|
|
|
$
|
2,974
|
|
Machinery and equipment
|
|
|
2,817
|
|
|
|
2,235
|
|
Furniture and fixtures
|
|
|
1,280
|
|
|
|
1,229
|
|
Leasehold improvements
|
|
|
824
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,901
|
|
|
|
7,236
|
|
Less accumulated depreciation
|
|
|
(6,254
|
)
|
|
|
(5,870
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,647
|
|
|
$
|
1,366
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Intangibles
and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Patents and technology
|
|
$
|
13,011
|
|
|
$
|
11,478
|
|
Other assets
|
|
|
105
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Gross intangibles and other assets
|
|
|
13,116
|
|
|
|
11,561
|
|
Accumulated amortization of
patents and technology
|
|
|
(5,731
|
)
|
|
|
(4,774
|
)
|
|
|
|
|
|
|
|
|
|
Intangibles and other assets, net
|
|
$
|
7,385
|
|
|
$
|
6,787
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles during the years ended
December 31, 2006, 2005, and 2004 was $969,000,
$1.3 million, and $1.5 million, respectively. The
estimated annual amortization expense for intangible assets as
of December 31, 2006 is $904,000 in 2007, $909,000 in 2008,
$790,000 in 2009, $719,000 in 2010, $677,000 in 2011, and
$3.3 million in total for all years thereafter.
67
|
|
6.
|
Components
of Other Current Liabilities and Deferred Revenue and Customer
Advances
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Accrued legal
|
|
$
|
256
|
|
|
$
|
307
|
|
Other current liabilities
|
|
|
1,494
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
1,750
|
|
|
$
|
1,604
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
1,646
|
|
|
$
|
2,702
|
|
Customer advances
|
|
|
70
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue and
customer advances
|
|
$
|
1,716
|
|
|
$
|
2,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
5% Senior Subordinated
Convertible Debenture
|
|
$
|
18,122
|
|
|
$
|
17,490
|
|
Other
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,122
|
|
|
|
17,495
|
|
Current portion
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
18,122
|
|
|
$
|
17,490
|
|
|
|
|
|
|
|
|
|
|
5% Senior Subordinated Convertible Debenture
(5% Convertible Debenture) On
December 23, 2004, the Company issued an aggregate
principal amount of $20.0 million of 5% Convertible
Debentures. The 5% Convertible Debentures will mature on
December 22, 2009. The amount payable at maturity of each
5% Convertible Debenture is the initial principal plus all
accrued but unpaid interest thereon, to the extent such
principal amount and interest have not been converted into
common shares or previously paid in cash. The Company cannot
prepay the 5% Convertible Debenture except as described
below in Mandatory Conversion and Mandatory Redemption of
5% Convertible Debentures at the Companys
Option. Interest accrues daily on the principal amount of
the 5% Convertible Debenture at a rate of 5% per year and
is payable on the last day of each calendar quarter. Interest
will cease to accrue on that portion of the 5% Convertible
Debenture that is converted or paid, including pursuant to
conversion rights or rights of redemption. The holder of a
5% Convertible Debenture has the right to convert the
outstanding principal amount and accrued and unpaid interest, in
whole or in part, into the Companys common shares at a
price of $7.0265 per common share, the Conversion Price. In
the event of a change of control, a holder may require the
Company to redeem all or a portion of its 5% Convertible
Debenture. This is referred to as the Put Option. The redeemed
portion shall be redeemed at a price equal to the redeemed
amount multiplied by 100% of the principal amount of the
5% Convertible Debenture. The Conversion Price will be
reduced in certain instances when the Company sells, or is
deemed to have sold shares of common stock at a price less than
the applicable Conversion Price, including the issuance of
certain options, the issuance of convertible securities, or the
change in exercise price or rate of conversion for options or
convertible securities. The Conversion Price will be
proportionately adjusted if the Company subdivides (by stock
split, stock dividend, recapitalization, or otherwise) or
combines (by combination, reverse stock split, or otherwise) one
or more classes of its common stock. So long as any
5% Convertible Debentures are outstanding, the Company will
not, nor will the Company permit any of its subsidiaries to
directly or indirectly incur or guarantee, assume or suffer to
exist, any indebtedness other than permitted indebtedness under
the 5% Convertible Debenture agreement. If an event of
default occurs, and is continuing with respect to any of the
Companys 5% Convertible Debentures, the holder may, at its
option, require the Company to redeem all or a portion of the
5% Convertible Debenture.
Mandatory Conversion and Mandatory Redemption of
5% Convertible Debentures at the Companys
Option If the daily volume-weighted average
price of the Companys common shares is at or above 200% of
the Conversion Price for at least 20 consecutive trading days
and certain other conditions are met, the Company
68
has the right to (i) require the holder of a
5% Convertible Debenture to convert the 5% Convertible
Debenture in whole, including interest, into shares of the
Companys common stock at a price of $7.0265 per
common share, as may be adjusted under the debenture, as set
forth and subject to the conditions in the 5% Convertible
Debenture, or (ii) redeem the 5% Convertible
Debenture. If the Company makes either of the foregoing
elections with respect to any 5% Convertible Debenture, the
Company must make the same election with respect to all
5% Convertible Debentures.
Warrants On December 23, 2004, in
connection with the issuance of the 5% Convertible Debentures,
the Company issued warrants to purchase an aggregate of
426,951 shares of its common stock at an exercise price of
$7.0265. The warrants may be exercised at any time prior to
5:00 p.m. Eastern time, on December 23, 2009. Any
warrants not exercised prior to such time will expire. The
exercise price will be reduced in certain instances where shares
of common stock are sold or deemed to be sold at a price less
than the applicable exercise price, including the issuance of
certain options, the issuance of convertible securities, or the
change in exercise price or rate of conversion for option or
convertible securities. The exercise price will be
proportionately adjusted if the Company subdivides (by stock
split, stock dividend, recapitalization, or otherwise) or
combines (by combination, reverse stock split, or otherwise) one
or more classes of its common stock.
Registration Rights On April 18, 2005,
the Companys registration statement relating to the
5% Convertible Debentures and the shares of common stock
issuable upon conversion of the debentures and exercise of the
warrants was declared effective by the SEC. The Company expects
to keep this registration statement effective until the earlier
of (i) such time as all of the shares covered by the
prospectus have been disposed of pursuant to and in accordance
with the registration statement, or (ii) the date on which
the shares may be sold pursuant to Rule 144(k) of the
Securities Act.
The Company incurred approximately $1.3 million in issuance
costs and other expenses in connection with the offering. This
amount has been deferred and is being amortized to interest
expense over the term of the 5% Convertible Debenture.
Additionally, the Company evaluated the various instruments
included in the agreements entered into on December 22,
2004 and allocated the relative fair values to be as follows:
warrants $1.7 million, Put Option
$0.1 million, Registration Rights
$0.1 million, issuance costs $1.3 million,
5% Convertible Debenture $16.8 million.
The 5% Convertible Debentures will be accreted to
$20.0 million over their five-year life, resulting in
additional interest expense. The value of the warrants has been
included in Stockholders Deficit; the value of the Put
Option and Registration Rights have been recorded as a liability
and are subject to future value adjustments; and the value of
the 5% Convertible Debentures has been recorded as
long-term debt.
Annual maturities of long-term debt as of December 31, 2006
are $20.0 million in fiscal year 2009.
|
|
8.
|
Long-term
Deferred Revenue
|
Long-term deferred revenue included payments totaling
approximately $27.9 million and $16.8 million as of
December 31, 2006 and 2005, respectively, of compulsory
license fees and interest from Sony Computer Entertainment
pursuant to Court orders dated January 10 and February 9,
2005. Due to the contingent nature of the court-ordered payments
made by Sony Computer Entertainment, the Company will not record
any revenue or interest associated with these payments as
revenue or income until such time as the contingency lapses. See
Note 22 regarding subsequent event.
|
|
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 Companys
lawsuit against Microsoft, (2) granted Microsoft a
worldwide royalty-free, irrevocable license to the
Companys 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 Companys patent litigation
against Sony Computer Entertainment of America Inc. and Sony
Computer Entertainment Inc. (the Participation
Rights) in exchange
69
for a payment of $0.1 million, (4) issued Microsoft
shares of the Companys Series A Redeemable
Convertible Preferred Stock (Series A Preferred
Stock) for a payment of $6.0 million, and
(5) granted the Company the right to sell up to
$9.0 million of debentures to Microsoft under the terms and
conditions established in newly authorized 7% Debentures with
annual draw down rights over a
48-month
period. The sublicense rights provided to Microsoft to contract
directly with Sony Computer Entertainment have now expired. The
Company has not sold any 7% Debentures, of which
$4.0 million were available for sale at December 31,
2006.
Under these agreements, in the event of a settlement of the Sony
Computer Entertainment litigation, the Company is obligated to
pay Microsoft a minimum of $15.0 million for any amounts
received from Sony up to $100.0 million, plus 25% of any
amounts over $100.0 million up to $150.0 million, and
17.5% of any amounts over $150.0 million. On March 1,
2007, the Company and Sony Computer Entertainment announced that
the companies agreed to conclude their patent litigation at the
U.S. Court of Appeals for the Federal Circuit, and
additionally agreed to enter into a new business agreement to
explore the inclusion of the Companys technology in
PlayStation format products. See Note 22 regarding
subsequent event. The Company believes that it is not obligated
under its agreements with Microsoft to make any payment to
Microsoft relating to the conclusion of the patent litigation
with Sony Computer Entertainment. However, it is uncertain that
Microsoft will accept the Companys position or that the
Company will ultimately prevail with its position.
The Company leases several of its facilities, vehicles, and some
office equipment under noncancelable operating lease
arrangements that expire at various dates through 2010.
Minimum future lease payments are as follows:
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
994
|
|
2008
|
|
|
925
|
|
2009
|
|
|
713
|
|
2010
|
|
|
319
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
2,951
|
|
|
|
|
|
|
Rent expense was $1.1 million, $1.1 million, and
$1.0 million in 2006, 2005, and 2004, respectively.
|
|
11.
|
Stock-based
Compensation and Stockholders Deficit
|
Stock
Options
The Companys stock option program is a long-term retention
program that is intended to attract, retain, and provide
incentives for talented employees, officers, and directors, and
to align stockholder and employee interests. The Company
considers its option programs critical to its operation and
productivity; essentially all of its employees participate.
Under the Companys stock option plans, the Company may
grant options to purchase up to 16,338,095 shares of its
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 vest over 4 years and expire
10 years from the date of grant. On December 31, 2006,
options to purchase 2,468,798 shares of common stock were
available for grant, and options to purchase
7,585,423 shares of common stock were outstanding.
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
Companys 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 purchase
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
70
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,
2006, 294,139 shares had been purchased under the ESPP.
Under SFAS No. 123R, the ESPP is considered a
compensatory plan and the Company is required to recognize
compensation cost for sales made under the ESPP.
The Company did not modify its stock option or employee stock
purchase plans in the year ended December 31, 2006.
General
Stock Option Information
The following table sets forth the summary of option activity
under our stock option program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of Shares
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at January 1,
2004 (3,470,621 exercisable at a weighted average price of $9.61
per share)
|
|
|
7,336,908
|
|
|
$
|
6.40
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair
value of $4.91 per share)
|
|
|
2,124,310
|
|
|
|
6.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(620,210
|
)
|
|
|
2.56
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,246,381
|
)
|
|
|
6.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004 (4,126,485 exercisable at a weighted average price of $8.33
per share)
|
|
|
7,594,627
|
|
|
|
6.84
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair
value of $3.43 per share)
|
|
|
1,158,400
|
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(778,393
|
)
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(633,838
|
)
|
|
|
7.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005 (4,595,431 exercisable at a weighted average price of $8.03
per share)
|
|
|
7,340,796
|
|
|
|
7.24
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair
value of $4.31 per share)
|
|
|
1,224,453
|
|
|
|
6.90
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(389,810
|
)
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(590,016
|
)
|
|
|
7.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
7,585,423
|
|
|
$
|
7.40
|
|
|
|
6.30
|
|
|
$
|
11.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
5,403,314
|
|
|
$
|
7.65
|
|
|
|
5.41
|
|
|
$
|
9.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected to vest balance as of December 31, 2006 is
equal to the outstanding balance at that date without
consideration of forfeitures.
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underlying awards and the
quoted price of the Companys common stock for the options
that were
in-the-money
at December 31, 2006. The aggregate intrinsic value of
options exercised under the Companys stock option plans,
determined as of the date of option exercise was
$1.7 million for the year ended December 31, 2006.
71
Additional information regarding options outstanding as of
December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Exercise
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Prices
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.64 - $ 1.76
|
|
|
1,178,373
|
|
|
|
5.89
|
|
|
$
|
1.49
|
|
|
|
1,154,126
|
|
|
$
|
1.49
|
|
1.79 - 6.00
|
|
|
779,011
|
|
|
|
6.58
|
|
|
|
4.18
|
|
|
|
556,040
|
|
|
|
3.76
|
|
6.02 - 6.20
|
|
|
966,750
|
|
|
|
6.72
|
|
|
|
6.13
|
|
|
|
786,749
|
|
|
|
6.13
|
|
6.23 - 6.95
|
|
|
1,251,769
|
|
|
|
8.54
|
|
|
|
6.78
|
|
|
|
264,703
|
|
|
|
6.52
|
|
6.96 - 7.00
|
|
|
1,035,086
|
|
|
|
7.57
|
|
|
|
6.99
|
|
|
|
615,183
|
|
|
|
6.99
|
|
7.02 - 8.98
|
|
|
1,241,949
|
|
|
|
4.85
|
|
|
|
8.38
|
|
|
|
962,778
|
|
|
|
8.58
|
|
9.24 - 17.13
|
|
|
852,353
|
|
|
|
4.43
|
|
|
|
11.67
|
|
|
|
783,603
|
|
|
|
11.89
|
|
23.13 - 33.50
|
|
|
249,747
|
|
|
|
3.19
|
|
|
|
31.34
|
|
|
|
249,747
|
|
|
|
31.34
|
|
34.75 - 34.75
|
|
|
5,499
|
|
|
|
3.09
|
|
|
|
34.75
|
|
|
|
5,499
|
|
|
|
34.75
|
|
43.25 - 43.25
|
|
|
24,886
|
|
|
|
3.28
|
|
|
|
43.25
|
|
|
|
24,886
|
|
|
|
43.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.64 - $43.25
|
|
|
7,585,423
|
|
|
|
6.30
|
|
|
$
|
7.40
|
|
|
|
5,403,314
|
|
|
$
|
7.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
Compensation
On January 1, 2006, the Company adopted the provisions of
SFAS No. 123R. See Note 1 for a description of
the Companys adoption of SFAS No. 123R.
Valuation and amortization method The Company
uses the Black-Scholes model, single-option approach to
determine the fair value of stock options and employee stock
purchase plan shares. All share-based payment awards are
amortized on a straight-line basis over the requisite service
periods of the awards, which are generally the vesting periods.
Prior to the adoption of SFAS No. 123R, the Company
used the Black-Scholes model, multiple-option approach to
determine the fair value of stock options and employee stock
purchase plan shares and amortization of resulting stock-based
compensation amounts included in its pro forma disclosures of
SFAS No. 123. The determination of the fair value of
stock-based payment awards on the date of grant using an
option-pricing model is affected by the Companys stock
price as well as assumptions regarding a number of complex and
subjective variables. These variables include actual and
projected employee stock option exercise behaviors, the
Companys expected stock price volatility over the term of
the awards, risk-free interest rate, and expected dividends.
Expected term The Company estimates the
expected term of options granted by using the simplified method
as prescribed by SAB No. 107. The expected term of
employee stock purchase plan shares is the length of the
offering period.
Expected volatility The Company estimates the
volatility of its common stock taking into consideration its
historical stock price movement, the volatility of stock prices
of companies of similar size with similar businesses, if any,
and its expected future stock price trends based on known or
anticipated events.
Risk-free interest rate The Company bases the
risk-free interest rate that it uses in the option pricing model
on U.S. Treasury zero-coupon issues with remaining terms
similar to the expected term on the options.
Expected dividend The Company does not
anticipate paying any cash dividends in the foreseeable future
and therefore uses an expected dividend yield of zero in the
option-pricing model.
Forfeitures The Company is required to
estimate future forfeitures at the time of grant and revise
those estimates in subsequent periods if actual forfeitures
differ from those estimates. The Company uses historical data to
estimate pre-vesting option forfeitures and records stock-based
compensation expense only for those awards that are expected to
vest.
72
The assumptions used to value option grants and shares under the
employee stock purchase plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Employee Stock Purchase Plan
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected life (in years)
|
|
|
6.25
|
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Interest rate
|
|
|
4.8
|
%
|
|
|
4.1
|
%
|
|
|
2.8
|
%
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
|
|
1.4
|
%
|
Volatility
|
|
|
62
|
%
|
|
|
63
|
%
|
|
|
107
|
%
|
|
|
51
|
%
|
|
|
33
|
%
|
|
|
92
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation recognized in the consolidated
statements of operations is as follows:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
Income Statement Classifications
|
|
(In thousands)
|
|
|
Cost of product sales
|
|
$
|
70
|
|
Sales and marketing
|
|
|
1,230
|
|
Research and development
|
|
|
492
|
|
General and administrative
|
|
|
1,145
|
|
|
|
|
|
|
Total
|
|
$
|
2,937
|
|
|
|
|
|
|
SFAS No. 123R requires the benefits of tax deductions
in excess of recognized compensation expense to be reported as a
financing cash flow, rather than as an operating cash flow. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. For year
ended December 31, 2006, the Company recorded $36,000 of
excess tax benefits from stock-based compensation. Total cash
flow under the new accounting rules is the same as under the old
accounting rules.
The Company has calculated an additional paid-in capital
(APIC) pool pursuant to the provisions of
SFAS No. 123R. The APIC pool represents the excess tax
benefits related to stock-based compensation that are available
to absorb future tax deficiencies. The Company includes only
those excess tax benefits that have been realized in accordance
with SFAS No. 109, Accounting for Income
Taxes. If the amount of future tax deficiencies is greater
than the available APIC pool, the Company will record the excess
as income tax expense in its consolidated statements of
operations.
As of December 31, 2006, there was $3.2 million of
unrecognized compensation cost, adjusted for estimated
forfeitures, related to non-vested stock options granted to the
Companys employees and directors. This cost will be
recognized over an estimated weighted-average period of
approximately 1.2 years. Total unrecognized compensation
cost will be adjusted for future changes in estimated
forfeitures.
73
The following table sets forth the pro forma amounts of net loss
and net loss per share, for the years ended December 31,
2005 and 2004, that would have resulted if the Company had
accounted for its employee stock plans under the fair value
recognition provisions of SFAS No. 123:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net loss as reported
|
|
$
|
(13,085
|
)
|
|
$
|
(20,738
|
)
|
Add: Stock-based employee
compensation included in reported net loss, net of related tax
effects
|
|
|
2
|
|
|
|
128
|
|
Less: Stock-based compensation
expense determined using fair value method, net of tax
|
|
|
(5,088
|
)
|
|
|
(6,663
|
)
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(18,171
|
)
|
|
$
|
(27,273
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common
share as reported
|
|
$
|
(0.54
|
)
|
|
$
|
(0.91
|
)
|
Basic and diluted loss per common
share pro forma
|
|
$
|
(0.76
|
)
|
|
$
|
(1.20
|
)
|
Warrants. On December 23, 2004, the
Company, in conjunction with the 5% Convertible Debentures,
issued an aggregate of 426,951 warrants to purchase shares of
its common stock at an exercise price of $7.0265. The warrants
may be exercised at any time prior to 5:00 p.m. Eastern
time, on December 23, 2009. Any warrants not exercised
prior to such time will expire. The Company allocated
$1.7 million of the 5% Convertible Debenture proceeds
to the warrant and will amortize the amount to interest expense
over the five-year term of the 5% Convertible Debentures.
See Note 7.
|
|
12.
|
Litigation
Settlement
|
On September 24, 2004, the Company filed in the United
States District Court for the Northern District of California a
complaint for patent infringement against Electro Source. On
February 28, 2006, the Company announced that it had
settled its legal differences with Electro Source and the
Company and Electro Source agreed to dismiss all claims and
counterclaims relating to this matter. In addition to the
Confidential Settlement Agreement, Electro Source entered into a
worldwide license to the Companys patents for
vibro-tactile devices in the consumer gaming peripheral field of
use under which Electro Source makes royalty payments to the
Company based on sales by Electro Source of spinning mass
vibro-tactile gamepads, steering wheels, and other game
controllers for dedicated gaming consoles, such as the Sony
PlayStation and PlayStation 2, the Nintendo GameCube, and
the Microsoft Xbox and Xbox 360. Both companies also have agreed
to explore the possibility of working together in technology or
engineering related assignments. For the year ended
December 31, 2006, Electro Source paid the Company
litigation settlement payments of $1.7 million. The Company
and Electro Source each assumed financial responsibility for
their respective legal costs with respect to this lawsuit.
The Company accounts for restructuring costs in accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit of Disposal Activities. There were no
restructuring costs incurred in the year ended December 31,
2006. Restructuring costs of $185,000 incurred in the year ended
December 31, 2005 consisted of severance benefits paid as a
result of a reduction in workforce. Employees from
manufacturing, sales and marketing, research and development,
and general and administrative were included in the 2005
reduction in force. The Company did not incur any additional
charges related to the aforementioned reduction in force and
management does not anticipate any further costs in future
periods related to this reduction in force.
74
Restructuring costs for the year ended December 31, 2005
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
costs expensed
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
|
Restructuring
|
|
|
in the Year
|
|
|
costs paid
|
|
|
costs unpaid as
|
|
|
|
costs unpaid as
|
|
|
Ended
|
|
|
through
|
|
|
of
|
|
|
|
of December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Nature of Restructuring Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in Force
|
|
$
|
|
|
|
$
|
185
|
|
|
$
|
185
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005, and 2004, the
Company recorded a provision (benefit) for income taxes of
$144,000, $158,000 and $(151,000), respectively, yielding
effective tax rates of 1.4%, 1.2%, and (0.7)%, respectively. The
provisions for income tax were based on federal and state
alternative minimum income tax payable on taxable income and
foreign withholding tax expense. Although the Company incurred
pre-tax losses, sums received from Sony Computer Entertainment
and interest thereon included in long-term deferred revenue,
approximating $11.1 million and $16.8 million for the
years ended December 31, 2006, and 2005, respectively,
created alternative minimum taxable income. For the year ended
December 31, 2004, the Company reversed the tax provision
that had been recorded in 2003 due to the non-recognition of
deferred revenues for 2003 tax return purposes.
Significant components of the net deferred tax assets and
liabilities for federal and state income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
26,124
|
|
|
$
|
28,111
|
|
Deferred revenue
|
|
|
13,524
|
|
|
|
8,922
|
|
Deferred rent
|
|
|
27
|
|
|
|
21
|
|
Research and development credits
|
|
|
1,665
|
|
|
|
1,611
|
|
Reserves and accruals recognized
in different periods
|
|
|
1,315
|
|
|
|
560
|
|
Long-term customer advance from
Microsoft
|
|
|
6,112
|
|
|
|
6,112
|
|
Basis difference in investment
|
|
|
1,328
|
|
|
|
1,328
|
|
Capitalized R&D expenses
|
|
|
487
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
50,582
|
|
|
|
47,187
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(2,532
|
)
|
|
|
(2,106
|
)
|
Difference in tax basis of
purchased technology
|
|
|
(191
|
)
|
|
|
(355
|
)
|
Valuation allowance
|
|
|
(47,859
|
)
|
|
|
(44,726
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
75
The Companys effective tax rate differed from the expected
benefit at the federal statutory tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory tax rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State taxes, net of federal benefit
|
|
|
(5.8
|
)
|
|
|
(6.1
|
)
|
|
|
(3.0
|
)
|
Non-deductible interest
|
|
|
8.8
|
|
|
|
1.4
|
|
|
|
|
|
Stock compensation expense
|
|
|
4.0
|
|
|
|
|
|
|
|
0.2
|
|
Other
|
|
|
(0.7
|
)
|
|
|
1.4
|
|
|
|
(0.2
|
)
|
Valuation allowance
|
|
|
30.1
|
|
|
|
39.5
|
|
|
|
37.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
1.4
|
%
|
|
|
1.2
|
%
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the Companys loss from operations for
all periods presented is generated from domestic operations.
At December 31, 2006, the Company has federal and state net
operating loss carryforwards of $72.4 million and
$23.8 million, respectively, expiring from 2011 through
2026 and from 2007 through 2016, respectively.
Approximately $4.0 million and $2.0 million of federal
and state net operating loss carryforwards were generated prior
to 1999. These losses can be used to offset future taxable
income. Usage is limited to approximately $16.4 million
annually, due to an ownership change that occurred during 1999.
Approximately $10.6 million of federal and state net
operating loss carryforwards related to pre-acquisition losses
from acquired subsidiaries can be used to offset future taxable
income. Usage of pre-acquisition losses will be limited to
approximately $1.1 million annually. During 2005, the
Company evaluated ownership changes from 1999 to 2004 and
determined that there were no further limitations on the
Companys net operating loss carryforwards.
Undistributed earnings of the Companys foreign
subsidiaries are considered to be indefinitely reinvested and
accordingly, no provision for federal and state income taxes has
been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to various
foreign countries.
The following is a reconciliation of the numerators and
denominators used in computing basic and diluted net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,424
|
)
|
|
$
|
(13,085
|
)
|
|
$
|
(20,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation, basic
and diluted (weighted average common shares outstanding)
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
22,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and
diluted
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Outstanding stock options
|
|
|
7,585,423
|
|
|
|
7,340,796
|
|
|
|
7,594,627
|
|
Warrants
|
|
|
808,762
|
|
|
|
808,762
|
|
|
|
808,762
|
|
5% Senior Subordinated
Convertible Debentures
|
|
|
2,846,363
|
|
|
|
2,846,363
|
|
|
|
2,846,363
|
|
|
|
16.
|
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 Company did not make any contributions during the
years ended December 31, 2006, 2005, or 2004.
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, 2006, the Company has not reached final
settlements on indirect rates. The Company has negotiated
provisional indirect rates for the years ended December 31,
2006, 2005, and 2004. 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 Companys financial position or results of
operations.
In July 2003 the Company entered into a 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 received $15,000 per month compensation and
reimbursement of
out-of-pocket
travel expenses. The initial term of the consulting agreement
was six months and was renewable for subsequent three-month
terms unless either party notified the other of its election to
terminate the agreement. The consulting agreement was terminated
in April 2004. During the year ended December 31, 2004 the
board member earned compensation of $50,000.
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 Companys 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
77
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 Immersion 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 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 and most of the issuer defendants have settled with
the plaintiffs. In this settlement, plaintiffs have dismissed
and released 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.
In September 2005, the Court granted preliminary approval of the
settlement. The Court held a hearing to consider final approval
of the settlement on April 24, 2006, and took the matter
under submission. The court will resume consideration of whether
to grant final approval to the settlement following further
appellate review, if any, of the decision in In re Initial
Public Offering Securities Litigation, 471 F.3d 24, 2006 WL
3499937 (2d Cir. Dec. 5, 2006).
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 were also seeking damages for
attorneys fees. On October 8, 2002, the Company filed
an amended complaint, withdrawing the claim under the
U.S. Patent No. 5,889,672 and adding claims under a
new patent, U.S. Patent No. 6,424,333.
On July 28, 2003, the Company announced that it had settled
its legal differences with Microsoft, and both parties 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 the Company and
Microsoft.
On August 16, 2004, the trial against Sony Computer
Entertainment commenced. On September 21, 2004, the jury
returned its verdict in favor of the Company. The jury found all
the asserted claims of the patents valid and infringed. The jury
awarded the Company damages in the amount of $82.0 million.
On January 10, 2005, the Court awarded the Company
prejudgment interest on the damages the jury awarded at the
applicable prime rate. The Court further ordered Sony Computer
Entertainment to pay the Company a compulsory license fee at the
rate of 1.37%, the ratio of the verdict amount to the amount of
sales of infringing products, effective as of July 1, 2004
and through the date of Judgment. On February 9, 2005, the
Court ordered that Sony Computer Entertainment provide the
Company with sales data 15 days after the end of each
quarter and clarified that Sony Computer Entertainment will make
the ordered payment 45 days after the end of the applicable
quarter. Sony Computer Entertainment has made quarterly payments
to the Company pursuant to the Courts orders.
78
On February 9, 2005, Sony Computer Entertainment filed a
Notice of Appeal to the United States Court of Appeals for the
Federal Circuit to appeal the Courts January 10, 2005
order, and on February 10, 2005 Sony Computer Entertainment
filed an Amended Notice of Appeal to include an appeal from the
Courts February 9, 2005 order.
On January 5 and 6, 2005, the Court held a bench trial on
Sony Computer Entertainments remaining allegations that
the 333 patent was not enforceable due to alleged
inequitable conduct. On March 24, 2005, the Court resolved
this issue, entering a written order finding in the
Companys favor.
On March 24, 2005, Judge Wilken also entered judgment in
the Companys favor and awarded the Company
$82.0 million in past damages, and pre-judgment interest in
the amount of $8.9 million, for a total of
$90.9 million. The Company was also awarded certain court
costs. Court costs do not include attorneys fees.
Additionally, the Court issued a permanent injunction against
the manufacture, use, sale, or import into the United States of
the infringing Sony PlayStation system consisting of the
PlayStation consoles, Dual Shock controllers, and the
47 games found by the jury to infringe the Companys
patents. The Court stayed the permanent injunction pending
appeal to the United States Court of Appeals for the Federal
Circuit. The Court further ordered Sony Computer Entertainment
to pay a compulsory license fee at the rate of 1.37% for the
duration of the stay of the permanent injunction at the same
rate and conditions as previously awarded in its interim
January 10, 2005 and February 9, 2005 Orders. On
April 7, 2005, pursuant to a stipulation of the parties,
the Court entered an Amended Judgment to clarify that the
Judgment in favor of the Company and against Sony Computer
Entertainment also encompassed Sony Computer
Entertainments counterclaims for declaratory relief on
invalidity and unenforceability, as well as non-infringement.
Sony Computer Entertainment had filed further motions seeking
judgment as a matter of a law (JMOL) or for a new
trial, and a motion for a stay of an accounting and execution of
the Judgment. On May 17, 2005, Judge Wilken denied these
motions.
On April 27, 2005, the Court granted Sony Computer
Entertainments request to approve a supersedeas bond,
secured by a cash deposit with the Court in the amount of
$102.5 million, to obtain a stay of enforcement of the
Courts Amended Judgment pending appeal. On May 17,
2005, the Court issued a minute order stating that in lieu of
the supersedeas bond the Court would allow Sony Computer
Entertainment to place the funds on deposit with the Court in an
escrow account subject to acceptable escrow instructions. The
parties negotiated escrow instructions, and on June 12,
2006, the Court granted the parties stipulated request to
withdraw the funds from the Court and deposit them in an escrow
account with JP Morgan Chase. Sony Computer Entertainment has
withdrawn the funds from the Court and deposited them in the
JP Morgan Chase escrow account.
On June 16, 2005, Sony Computer Entertainment filed a
Notice of Appeal from the District Court Judgment to the United
States Court of Appeals for the Federal Circuit. The appeals of
the January and February orders regarding the compulsory license
have been consolidated with the appeal of the Judgment. Sony
Computer Entertainments Opening Brief was filed on
October 21, 2005; the Company filed an Opposition Brief on
December 5, 2005. Due to the cross appeal by ISLLC (see
below), the Federal Circuit allowed the Company to file a
Substitute Opposition Brief on February 17, 2006 responding
to the briefs filed by both Sony Computer Entertainment and
ISLLC. On March 15, 2006, the Company filed a further
substitute brief in response to a Federal Circuit order
clarifying the maximum number of words the Company was allowed
given ISLLCs cross appeal. Sony Computer Entertainment
filed its Reply Brief on April 27, 2006 and ISLLCs
Reply Brief was filed on May 15, 2006. On October 3,
2006, a hearing for oral argument was held before a three-judge
panel of the United States Court of Appeals for the Federal
Circuit.
On July 21, 2005, Sony Computer Entertainment filed a
motion in the District Court before Judge Wilken seeking relief
from the final judgment under Rule 60(b) of the Federal
Rules of Civil Procedure on the grounds of alleged fraud and
newly discovered evidence of purported prior art,
which Sony Computer Entertainment contends the Company concealed
and withheld attributable to Mr. Craig Thorner, a named
inventor on three patents that Sony Computer Entertainment urged
as a basis for patent invalidity during the trial. A hearing on
this motion was held before Judge Wilken on January 20,
2006. On March 8, 2006, the Court entered an Order which
denied Sony Computer Entertainments motion pursuant to
Rule 60(b) of the Federal Rules of Civil Procedure in its
entirety. On April 7, 2006, Sony Computer Entertainment
filed a Notice of Appeal to the United States Court of
79
Appeals for the Federal Circuit to appeal this ruling and filed
its opening brief on June 16, 2006. The Companys
opposition brief was filed on August 30, 2006, and Sony
Computer Entertainment filed its reply brief on October 2,
2006. On January 8, 2007, a hearing for oral argument was
held before a three-judge panel of the United States Court of
Appeals for the Federal Circuit.
On May 17, 2005, Sony Computer Entertainment filed a
Request for Inter Partes Reexamination of the 333 Patent
with the United States Patent and Trademark Office
(PTO). On May 19, 2005, Sony Computer
Entertainment filed a similar Request for reexamination of the
213 Patent. On July 6, 2005, the Company filed a
Petition to dismiss, stay, or alternatively to suspend both of
the requests for reexamination, based at least on the grounds
that a final judgment has already been entered by a United
States District Court, and that the PTOs current inter
partes reexamination procedures deny due process of law. The PTO
denied the first petition, and the Company filed a second
petition on September 9, 2005. On November 17, 2005,
the PTO granted the Companys petition, and suspended the
inter partes reexaminations until such time as the parallel
court proceedings warrant termination or resumption of the PTO
examination and prosecution proceedings. On December 13,
2005, Sony Computer Entertainment filed a third petition
requesting permission to file an additional inter partes
reexamination on the claims of the 333 and 213
Patents for which reexamination was not requested in Sony
Computer Entertainments original requests for
reexamination. The PTO dismissed this third petition on
March 22, 2006. On December 13, 2005, Sony Computer
Entertainment also filed ex parte reexamination requests on a
number of claims of the 213 and 333 patents,
including all of the claims litigated in the District Court
action, in addition to others. On March 13, 2006, the PTO
granted the ex parte reexam request only with respect to the
requested claims that were not litigated, and the ex parte
reexamination is proceeding with respect to the claims that were
not the subject of litigation. On April 11, 2006, Sony
Computer Entertainment filed a fourth petition to the PTO
requesting that the currently suspended inter partes proceeding
and the ex parte proceeding be merged into a single proceeding.
The Company filed its opposition to this petition on May 3,
2006, and the PTO denied the fourth petition on July 3,
2006.
On December 13, 2005, Sony Computer Entertainment filed a
lawsuit against the PTO in the U.S. District Court for the
Eastern District of Virginia claiming that the PTO erred in
suspending the inter partes reexamination on November 17,
2005. The case was assigned to U.S. District Judge Ellis.
The Company moved to intervene in the lawsuit, and on
March 31, 2006, the Court granted the Companys motion
to intervene of right. The Court entered a
scheduling order which precluded discovery and set an expedited
briefing schedule for motions for summary judgment. After
briefing, Judge Ellis held a hearing on the summary judgment
motions on April 21, 2006. The Court granted summary
judgment in the Companys and the PTOs favor on all
grounds on May 22, 2006. Sony Computer Entertainment has
not appealed this judgment.
On March 1, 2007, Sony Computer Entertainment withdrew and
moved to dismiss its appeals from the District Courts
April 7, 2005, Amended Judgment (and all interlocutory
orders merged in the Amended Judgment). On March 2, 2007,
Sony Computer Entertainment withdrew and moved to dismiss its
appeal from the District Courts March 8, 2006, order
denying Sony Computer Entertainments motion for relief
from final judgment under Rule 60(b) of the Federal Rules
of Civil Procedure. On March 8, 2007, the Federal Circuit
ordered the dismissal of the Sony Computer Entertainment
Rule 60(b) appeal. On March 14, 2007, the Federal
Circuit dismissed the Sony Computer Entertainment appeal of the
Amended Judgment (and all interlocutory orders merged in the
Amended Judgment). See Note 22 regarding subsequent event
for further discussion.
Internet
Services LLC Litigation
On October 20, 2004, ISLLC, the Companys licensee and
the cross-claim defendant against whom Sony Computer
Entertainment had filed a claim seeking declaratory relief,
filed claims against the Company in its lawsuit against Sony
Computer Entertainment, alleging that the Company breached a
contract with ISLLC by suing Sony Computer Entertainment for
patent infringement relating to haptically-enabled software
whose topics or images are allegedly age-restricted, for
judicial apportionment of damages between ISLLC and the Company
of the damages awarded by the jury and for a judicial
declaration with respect to ISLLCs rights and duties under
agreements with the Company. On December 29, 2004, the
Court issued an order dismissing ISLLCs claims against
Sony Computer Entertainment with prejudice and dismissing
ISLLCs claims against the Company without prejudice to
ISLLC filing a new complaint if it can do so in good faith
without contradicting, or repeating the deficiency of, its
complaint.
80
On January 12, 2005, ISLLC filed Amended Cross-Claims and
Counterclaims against the Company that contained similar claims.
ISLLC also realleged counterclaims against Sony Computer
Entertainment. On January 28, 2005, the Company filed a
motion to dismiss ISLLCs Amended Cross-Claims and a motion
to strike ISLLCs Counterclaims against Sony Computer
Entertainment. On March 24, 2005 the Court issued an order
dismissing ISLLCs claims with prejudice as to ISLLCs
claim seeking a declaratory judgment that it is an exclusive
licensee under the 213 and 333 patents and as to
ISLLCs claim seeking judicial apportionment of
the damages verdict in the Sony Computer Entertainment case. The
Courts order further dismissed ISLLCs claims without
prejudice as to ISLLCs breach of contract and unjust
enrichment claims.
ISLLC filed a notice of appeal of those orders with the United
States Court of Appeals for the Federal Circuit on
April 18, 2005. ISLLCs appeal has been consolidated
with Sony Computer Entertainments appeal. ISLLC filed its
Opening Brief in December 2005. As noted above, the United
States Court of Appeals for the Federal Circuit allowed the
Company to file a Substitute Opposition Brief on March 15,
2006 responding to the briefs filed by both Sony Computer
Entertainment and ISLLC. Briefing for the appeal was completed
upon ISLLCs filing of its Reply Brief on May 15,
2006. As noted above, on October 3, 2006, a hearing for
oral argument was held before a three-judge panel of the United
States Court of Appeals for the Federal Circuit. The matter was
taken under submission, pending a decision.
On February 8, 2006, ISLLC filed a lawsuit against the
Company in the Superior Court of Santa Clara County.
ISLLCs complaint seeks a share of the damages awarded to
the Company in the March 24, 2005 Judgment and of the
Microsoft settlement proceeds, and generally restates the claims
already adjudicated by the District Court. On March 16,
2006, the Company answered the complaint, cross claimed for
breach of contract by ISLLC and rescission of the contract, and
removed the lawsuit to federal court. The case was assigned to
Judge Wilken as a case related to the previous proceedings
involving Sony Computer Entertainment and ISLLC. ISLLC filed its
answer to the Companys cross claims on April 27,
2006. ISLLC also moved to remand the case to Superior Court. On
July 10, 2006, Judge Wilken issued an order denying
ISLLCs motion to remand. On September 5, 2006, Judge
Wilken granted the stipulated request by the parties to stay
discovery and other proceedings in the case pending the
disposition of ISLLCs appeal from the Courts
previous orders. On December 1, 2006, the parties again
stipulated to continue the stay and reschedule the Case
Management conference until April 13, 2007, pending the
Federal Circuits disposition on the appeal.
The Company intends to defend itself vigorously against
ISLLCs allegations. The parties participated in a
court-ordered mediation on March 12, 2007, but were
unsuccessful in resolving the matter.
Immersion
Corporation vs. Thorner
On March 24, 2006, the Company filed a lawsuit against
Mr. Craig Thorner in Santa Clara County Superior
Court. The complaint alleges claims for breach of contract with
respect to Thorners license to a third party of
U.S. Patent No. 5,684,722, which the Company has
alleged is in violation of contractual obligations to it. The
case was removed to federal court by Mr. Thorner, and has
been assigned to Judge Jeremy Fogel. On May 1, 2006,
Mr. Thorner filed an answer to the Companys claims
and asserted counterclaims against the Company seeking, among
other things, a portion of the proceeds from the Companys
license with Microsoft, under theories of alleged breach of
contract, breach of the implied covenant of good faith and fair
dealing, fraud, promissory fraud, breach of fiduciary duty, and
negligent misrepresentation. On July 28, 2006, the Company
filed a motion for judgment on the pleadings seeking the
dismissal of Mr. Thorners breach of contract and
fraud claims which allege a right to a portion of the proceeds
from the Companys license with Microsoft. On
September 1, 2006, the Court held a hearing on the
Companys motion. On September 12, 2006, the Court
issued an order granting the Companys motion for judgment
on the pleadings as to Mr. Thorners alleged claims
for breach of contract and fraud. The Court dismissed
Mr. Thorners breach of contract and fraud claims, and
allowed Mr. Thorner leave to amend his claim for alleged
breach of contract with respect to alleged violations of the
Companys reporting requirements that do not flow from the
failure to report the Microsoft Settlement Agreement.
The parties participated in a court-ordered mediation on
November 7, 2006, but were not successful in resolving the
matter. The parties are in the process of conducting discovery.
81
On November 22, 2006, Thorner brought a motion for summary
judgment arguing that the Companys breach of contract
claim was barred by the doctrine of judicial estoppel as a
result of a statement made in connection with the Sony Computer
Entertainment Rule 60 (b) motion. On January 26,
2007, the Court held a hearing on Thorners motion. On
January 29, 2007, the Court issued an order denying
Thorners summary judgment motion, ruling that the
Companys breach of contract claim was not barred by
judicial estoppel. On February 5, 2007, with leave of
Court, the Company filed a First Amended Complaint in the action
to add Thorners company, Virtual Reality Feedback
Corporation (VRF), as a party-defendant. On
February 9, 2007, Thorner filed an Amended Answer and
Counterclaims. The Amended Counterclaims against the Company
dropped the previously-dismissed counterclaims based on
Thorners claims for a share of the Companys
settlement with Microsoft, but alleged other counterclaims for
alleged Breach of Contract, Breach of the Implied Covenant of
Good Faith and Fair Dealing, Promissory Fraud, Breach of
Fiduciary Duty, Negligent Misrepresentation and Rescission.
Thorner alleged in part that the Company breached its agreement
with Thorner by failing to pay royalties for Vibetonz Studio SDK
and Immersion Studio for Gaming; that the Company breached
alleged duties to Thorner to license the 722 patent; and
that Thorners agreement with the Company should be
rescinded. Thorners Amended Counterclaim does not specify
an amount of damages sought but alleges that Thorner has been
damaged in an amount to be proven at trial. The Company disputes
Thorners allegations and intends to vigorously oppose them.
Other
Contingencies
From time to time, the Company receives claims from third
parties asserting that the Companys technologies, or those
of its licensees, infringe on the other parties
intellectual property rights. Management believes that these
claims are without merit. Additionally, periodically, the
Company is involved in routine legal matters and contractual
disputes incidental to its normal operations. In
managements opinion, the resolution of such matters will
not have a material adverse effect on the Companys
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 Companys 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. The Company has received a
claim from one of its major licensees requesting indemnification
from a patent infringement allegation. The Company has reviewed
this demand and believes that it is without merit. The Company
has not received communication from this licensee with respect
to this claim since June 2005. Such claim, however, could result
in litigation, which could be costly and time-consuming to
defend. Further, the Companys business could be adversely
affected if the Company was unsuccessful in defending against
the claim.
As permitted under Delaware law, the Company has agreements
whereby it indemnifies its officers and directors for certain
events or occurrences while the officer or director is, or was,
serving at its request in such capacity. The term of the
indemnification period is for the officers or
directors lifetime. The maximum potential amount of future
payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company
currently has director and officer insurance coverage that
limits its exposure and enables it to recover a portion of any
future amounts paid. Management believes the estimated fair
value of these indemnification agreements in excess of
applicable insurance coverage is minimal.
See also Note 7 regarding contingencies relating to the
5% Senior Subordinated Convertible Debenture.
|
|
20.
|
Segment
Reporting, Geographic Information, and Significant
Customers
|
The Company develops, manufactures, licenses, and supports a
wide range of hardware and software technologies that more fully
engages users sense of touch when operating digital
devices. The Company focuses on five application
areas gaming, mobility, 3D, touch interface, and
medical. The Company manages these application areas under two
operating and reportable segments: 1) Immersion Computing,
Entertainment, and Industrial, and 2) Immersion Medical.
The Company determines its reporting segments in accordance with
criteria outlined in SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information.
The gaming,
82
mobility, 3D, and touch interface areas do not individually meet
the criteria for segment reporting as set out in
SFAS No. 131.
The Companys 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 its 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 touch feedback technologies that enable software and
hardware developers to enhance realism and usability in their
computing, entertainment, and industrial applications. Immersion
Medical develops, manufactures, and markets medical training
simulators that recreate realistic healthcare environments.
Summarized financial information concerning the Companys
reportable segments for the respective years ended
December 31 is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immersion
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing,
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment,
|
|
|
Immersion
|
|
|
Intersegment
|
|
|
|
|
|
|
and Industrial
|
|
|
Medical
|
|
|
Eliminations(3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
$
|
7,156
|
|
|
$
|
148
|
|
|
$
|
|
|
|
$
|
7,304
|
|
Product sales
|
|
|
5,348
|
|
|
|
11,825
|
|
|
|
(90
|
)
|
|
|
17,083
|
|
Development contracts and other
|
|
|
1,306
|
|
|
|
2,160
|
|
|
|
|
|
|
|
3,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
13,810
|
|
|
$
|
14,133
|
|
|
$
|
(90
|
)
|
|
$
|
27,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(9,812
|
)
|
|
$
|
850
|
|
|
$
|
9
|
|
|
$
|
(8,953
|
)
|
Interest and other income
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
Interest expense(1)
|
|
|
(1,598
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(1,602
|
)
|
Depreciation and amortization
|
|
|
1,218
|
|
|
|
523
|
|
|
|
|
|
|
|
1,741
|
|
Net income (loss)
|
|
|
(11,278
|
)
|
|
|
845
|
|
|
|
9
|
|
|
|
(10,424
|
)
|
Long-lived assets: capital
expenditures and
capitalized patent fees
|
|
|
1,798
|
|
|
|
946
|
|
|
|
|
|
|
|
2,744
|
|
Total assets
|
|
|
64,280
|
|
|
|
7,494
|
|
|
|
(21,759
|
)
|
|
|
50,015
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immersion
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing,
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment,
|
|
|
Immersion
|
|
|
Intersegment
|
|
|
|
|
|
|
and Industrial
|
|
|
Medical
|
|
|
Eliminations(3)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
$
|
8,205
|
|
|
$
|
683
|
|
|
$
|
|
|
|
$
|
8,888
|
|
Product sales
|
|
|
4,894
|
|
|
|
8,066
|
|
|
|
(198
|
)
|
|
|
12,762
|
|
Development contracts and other
|
|
|
1,741
|
|
|
|
1,011
|
|
|
|
(125
|
)
|
|
|
2,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
14,840
|
|
|
$
|
9,760
|
|
|
$
|
(323
|
)
|
|
$
|
24,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations(2)
|
|
$
|
(9,118
|
)
|
|
$
|
(2,845
|
)
|
|
$
|
63
|
|
|
$
|
(11,900
|
)
|
Interest and other income
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
490
|
|
Interest expense(1)
|
|
|
(1,506
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,506
|
)
|
Depreciation and amortization
|
|
|
1,654
|
|
|
|
334
|
|
|
|
|
|
|
|
1,988
|
|
Net income (loss)(2)
|
|
|
(10,306
|
)
|
|
|
(2,842
|
)
|
|
|
63
|
|
|
|
(13,085
|
)
|
Long-lived assets: capital
expenditures and
capitalized patent fees
|
|
|
1,378
|
|
|
|
614
|
|
|
|
|
|
|
|
1,992
|
|
Total assets
|
|
|
60,457
|
|
|
|
6,166
|
|
|
|
(21,863
|
)
|
|
|
44,760
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
$
|
6,997
|
|
|
$
|
1,781
|
|
|
$
|
|
|
|
$
|
8,778
|
|
Product sales
|
|
|
5,503
|
|
|
|
6,244
|
|
|
|
(103
|
)
|
|
|
|