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,
2009
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or
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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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(IRS 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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o 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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o (Do
not check if a smaller reporting company)
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Smaller reporting
company o
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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, 2009,
the last business day of the registrants most recently
completed second fiscal quarter, was $108,261,883 (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 March 3, 2010: 27,999,593
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2010 Annual
Meeting are incorporated by reference into Part III hereof.
IMMERSION
CORPORATION
2009
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 Risk Factors and those described
elsewhere in this report , 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 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 market 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 electronics, gaming, and commercial
and industrial devices and controls; medical simulation; and
mobile communications. We manage these application areas under
two operating and reportable segments: 1) the Touch Line of
Business and 2) the Medical Line of Business. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations as well as the notes
to the consolidated financial statements for financial
information for these segments for the past three years.
In some markets, such as video console gaming, consumer
electronics, mobile phones, and automotive controls, we license
our technologies to manufacturers who use them in products sold
under their own brand names. In other markets, such as medical
simulation, we sell products manufactured under our own brand
name through direct sales to end users, distributors, original
equipment manufacturers (OEMs), or value-added
resellers. From time to time, we also engage in development
projects for third parties.
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 800 issued or pending patents in the
U.S. and other countries, covering various aspects of
hardware and software technologies.
Immersion Corporation was incorporated in 1993 in California and
reincorporated in Delaware in 1999. We consummated our initial
public offering on November 12, 1999.
Haptics
and Its Benefits
In the world of computers, consumer electronics, and digital
devices and controls, meaningful haptic (touch) information is
limited or missing. For example, when dialing a number or
entering text on a conventional touchscreen, users feel only the
touchscreen surface, without the subtle, yet confirming
sensation we expect from mechanical switches and keyboards.
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To supply richer, more meaningful haptic feedback
also known as force feedback, touch feedback, or tactile
feedback electronic input/output devices can be made
to generate physical forces. Our programmable haptic
technologies embedded in many types of devices can give users
physical sensations appropriate to the situation. Users can feel
as though they are interacting with different textures and mass,
compliant springs, solid barriers, deep or shallow detents. They
can feel the force or resistance as they push a virtual button,
scroll through a list, or encounter the end of a menu. In a
video or mobile game, users can feel the gun recoil, the engine
rev, or the crack of the bat meeting the ball. When simulating
the placement of cardiac pacing leads, a user can feel the
forces that would be encountered when navigating the leads
through a beating heart, providing a more realistic experience
of performing this procedure. These forces are created by
actuators, such as motors, which are built into devices such as
joysticks, steering wheels, gamepads, personal music players,
mobile phones, and medical training simulators. Actuators can
also be designed into devices used in automotive, industrial,
medical, or retail kiosk and point-of-sale systems, such as
digital switches, rotary controls, touchscreens, and touch
surfaces.
We believe the programmability of our haptic products is a key
differentiator over purely electro-mechanical systems and can
drive the further adoption of cost effective and more reliable
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,
haptic feedback adds a compelling, engaging, meaningful
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. Independent research shows that the
confirmation and navigational cues obtained by programmable
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 the types of
responses that are possible, 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 that 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.
Our
Solutions
Our goal is to improve the way people interact with digital
devices by engaging their sense of touch. Our 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 gamepads, 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-, 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 devices, and then calculates and
applies the output forces in real time based on 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.
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We have developed many software solutions for various operating
systems and computing platforms including Windows-based and
Apple personal computers, automotive, and mobile handset
operating systems. Our inventions include control algorithms for
efficiently driving relevant families of actuators (such as
spinning mass actuators, linear actuators, and piezo-electric
systems) as well as several generations of authoring tools for
creating, visualizing, modifying, archiving, and experiencing
haptic feedback.
Licensed
Solutions
In some markets, such as video console gaming, consumer
electronics, mobile phones, and automotive controls, we license
our technologies to OEMs or their suppliers who then include our
technologies in 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, design
kits for prototyping, 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 and solution deployment
expertise. We offer product development solutions including
product software libraries, design, prototype creation,
technology transfer, actuator selection, component sourcing,
development/integration kits, sample source code, comprehensive
documentation, and other engineering services. In addition, we
help ensure a quality end-user experience by offering testing
and certification services to a number of licensees.
Design Kits for Prototyping We offer several
design kits for customers to use for technology evaluation,
internal evaluation, usability testing, and focus group testing.
The kits include components and documentation that designers,
engineers, and system integrators need for prototyping
TouchSense touch feedback into an existing or sample product.
Authoring Tools We license authoring tools
that enable haptic designers and 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, 2D devices,
and joysticks). 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 or
(APIs) Our APIs provide
haptic-effect generation capability. This allows designers and
software 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 known as
(USB). More generally, our software driver and API
technology has been designed to be easily ported to a variety of
operating systems including Windows, Windows CE, Mac OS X,
BREW/REX (from QUALCOMM), Java (J2SE), various Linux platforms
including Android, Maemo and VxWorks.
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Manufactured
Product Solutions
We produce our products using both contracted and in-house
manufacturing. We manufacture and sell some of our 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 and surgical simulation systems used for training
medical professionals in minimally invasive medical and surgical
procedures including endoscopy, laparoscopy, and endovascular;
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components used in our haptic touchscreen and touch surface
solutions;
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programmable rotary control technology and reference design for
operating a wide range of devices; and
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electronic control boards for wheels and joysticks used in
arcade games, research, and industrial applications.
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We also manufacture some products on a private-label
basis for customers. In addition, we may resell another
manufacturers product into our customer base such as
certain types of medical simulators.
As we previously announced in late 2008, we divested our line of
3D products in 2009. These products included our:
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MicroScribe®
digitizers;
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a 3D interaction product line; and
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SoftMouse®
3D positioning device.
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Touch
Line of Business
Products
and Markets
Gaming Devices We have licensed our
TouchSense intellectual property to Microsoft for use in its
gaming products, to Apple Computer for use in its operating
system, and to Sony Computer Entertainment for use in its legacy
and current PlayStation console gaming products. We have also
licensed our TouchSense intellectual property to over a dozen
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.
In the video game console peripheral market, we have licensed
our intellectual property for use in hundreds of spinning mass
tactile feedback devices and force feedback devices such as
steering wheels and joysticks to various manufacturers including
dreamGear, Gemini, Griffin, Hori, i-CON, Intec, Katana,
Logitech, Mad Catz, Microsoft, NYKO, Performance Designed
Products or (PDP) (formerly Electro Source LLC),
Radica, and Sony. These products are designed to work with one
or more video game consoles including the Xbox and Xbox 360 from
Microsoft; the PlayStation, PlayStation 2, and PlayStation 3
from Sony; and the N64, GameCube, and Wii from Nintendo.
Currently, products sold to consumers using TouchSense
technology include PC joysticks, steering wheels, and gamepads
from various licensees.
For the years ended December 31, 2009, 2008, and 2007,
respectively 19%, 30%, and 24% of our total revenues were
generated from PC and console gaming revenues.
In the arcade entertainment market, our products include
steering wheel and joystick control electronics that provide
industrial strength and quality force feedback that enable very
realistic simulations.
In the casino and bar-top amusement market, we signed an
agreement with 3M Touch Systems in 2005 that allows them to
manufacture and distribute its MicroTouch touch screens with our
TouchSense technology. 3M Touch Systems and seven system
integrators demonstrated this technology in pre-production
touchscreen monitors at the 2008 Global Gaming Expo.
Mobile Communications and Portable Devices We
developed TouchSense solutions for the mobile phone market and a
variety of portable devices.
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The TouchSense Solution for Mobile Phones for handset OEMs,
operators, and application developers includes a TouchSense
Player, a lightweight and powerful vibration playback system
that is embedded in the phone, and a TouchSense software
toolkit, including a PC-based composition tool for creating
haptic effects for inclusion in content and applications. Haptic
effects can be used in alerts,
e-mail,
games, messages, ringtones, touchscreen interactions, and other
user interface features to add information or identification,
signal status or message arrival, and heighten interest or fun.
With a TouchSense-enabled phone, users can send and receive a
wide range of vibro-tactile haptic effects independently from or
in synchronicity with audio, video, and application program
content.
Our licensees currently include the top three makers of mobile
phones by volume in the world: Nokia, Samsung, and LG
Electronics plus others such as Pantech Co., Ltd. and KTF
Technologies Inc. In 2009, approximately 75 million
handsets with TouchSense technology were shipped by our
licensees. Since its launch in the first handset in 2005, our
TouchSense technology has shipped in over 100 million
handsets. In December 2009, we worked with Synaptics and other
market leaders to present a mobile concept phone that
demonstrates new usage models and user experience with
integrated haptics. We intend to expand applications for
TouchSense technologies in new user experiences in mobile phones.
For the years ended December 31, 2009, 2008, and 2007,
respectively 29%, 17%, and 8% of our total revenues were
generated from mobile communications.
TouchSense components include technologies for haptic
touchscreens and programmable haptic rotary controls. In early
2009, Samsung launched its new dual touchscreen Digital Still
Cameras (TL220 and TL225) and P3 personal media player with
Immersion haptic feedback technology for touchscreen
interactions. In 2008 Cue Acoustics announced and began shipping
a premium AM/FM radio and iPod docking station that includes a
TouchSense rotary control module as its primary control
mechanism. In 2007,
CTT-Net of
Korea launched the worlds first personal navigation
devices, (PNDs) to use Immersions TouchSense
technology to provide tactile feedback for touchscreen
interactions in a global positioning system, (GPS).
We intend to expand applications for TouchSense technologies
into a broader range of portable devices, including remote
controls for home entertainment systems, medical diagnostic and
therapeutic equipment, test and measurement equipment, portable
terminals, game devices, and media players.
Automotive We have developed TouchSense
technology for rotary controls, touchscreens, and touch surfaces
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 and touch surface 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 interested in
touch-enabled automobile controls.
We have licensed our TouchSense rotary technology for use in
vehicle controls since 2002. Siemens VDO Automotive (now
Continental) has licensed our technology for use in the high-end
Volkswagen Phaeton sedan and Bentley cars. ALPS Electric, also a
licensee, has produced a haptic rotary control that has been
included in the Mercedes-Benz
S-Class
sedan. ALPS also produced a two-dimensional haptic control
module called the Remote Touch controller in the Lexus RX 350
and 450h. These 2010 Lexus models were announced in November
2008 and launched in the U.S. in February 2009. Other
licensees of TouchSense technology in the automotive industry
include: Methode Electronics, Inc., a global designer and
manufacturer of electronic component and subsystem devices;
Visteon Corporation, a leading global automotive supplier that
designs, engineers, and manufactures innovative climate,
interior, electronic and lighting products for vehicle
manufacturers; Volkswagen, Europes largest automaker; and
SMK Corporation of Tokyo, a global manufacturer of
electromechanical components. Since its launch in the first
vehicle in 2001 our TouchSense technology has shipped in over
2.4 million vehicles.
For the years ended December 31, 2009, 2008, and 2007,
respectively 6%, 9%, and 12% of our total revenues were from
automotive customers.
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3D and Mechanical CAD Design During 2008, we
sold three-dimensional and mechanical computer-aided design
products that allow users to create three-dimensional computer
models directly from physical objects and also to precisely
measure manufactured parts. We also manufactured and sold the
CyberGlove system. In addition, we manufactured and sold
specialized products such as computer peripherals that
incorporate advanced computer peripheral technologies. We
divested these product lines by the second quarter of 2009.
Sales
and Distribution
Sales of our products generally do not experience seasonal
fluctuations, except that royalties from gaming peripherals,
tend to be 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.
In the PC and video console gaming, consumer electronics,
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 TouchSense technology
into certain mobile phone handsets. We have established
relationships with CDMA platform developer QUALCOMM,
Incorporated and with smartphone operating system developer
Symbian, Ltd.
We employ a direct sales force in the United States, Europe, and
Asia to license our TouchSense 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 licensees
may also require our licensees to display the TouchSense
technology logo on their end products.
We sell our touchscreen and touch surface products to OEMs and
system integrators using a worldwide direct sales force. In
addition, the technology is licensed to large system integrators
and OEMs 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 licensed our technology to leading automotive component
suppliers including Methode, ALPS Electric, SMK, and Visteon as
part of our strategy to speed adoption of our TouchSense
technologies across the automotive industry.
In 2009, we began implementing a strategy to broaden and expand
market penetration by licensing our TouchSense technology into
several chip manufacturers, including Atmel, Cypress and IDT,
with the goal that these licensees will broaden their product
offerings with the addition of haptics.
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.
In the Touch line of business, the principal competitive factors
are the strength of the intellectual property underlying the
technology, the technological expertise and design innovation
and the use, reliability and cost-effectiveness of the products.
We believe we compete favorably in all these areas.
Several companies also currently market touch feedback products
that are competitive to ours in non-consumer 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, LG
Electronics, Logitech, Nokia, 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.
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For licensed applications, our competitive position is partially
dependent on the competitive positions of our licensees that pay
a license
and/or
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.
Medical
Line of Business
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 unnecessary.
In addition, organizations 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 include simulation of
venous access, minimally invasive vein harvesting, hysteroscopy,
and aortic valve and pacemaker lead placement.
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 CathLabVR
System, which simulates endovascular interventions including
cardiac pacing, angiography, angioplasty, and carotid and
coronary stent placement; and the LapVR System, which simulates
minimally invasive procedures involving abdominal and pelvic
organs. In addition, we sell an arthroscopy surgical simulator
for certain arthroscopic surgical procedures on knees and
shoulders based on GMVs insightArthroVR system.
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 arterial obstruction. The systems are designed
to 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 of our medical 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
currently have over 25 software modules available that replicate
a range of medical procedures, such as intravenous
catheterization, laparoscopy, bronchoscopy, colonoscopy, cardiac
pacing, and carotid and coronary angioplasty.
In 2009, we entered the robotic surgical market by licensing our
TouchSense technology to MAKO Surgical. We intend to pursue
additional licensees to further expand our licensing business
into this market.
In February 2010, we announced our intention to focus our
medical line of business on licensing opportunities in medical
simulation, robotic surgical devices, and other medical surgical
devices. In March 2010 we entered into an agreement to sell
certain assets of the Endoscopy, Endovascular, and Laparoscopy
medical simulation product lines. See Note 19 of the
consolidated financial statements.
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Sales
and Distribution
Sales of these products may experience seasonal fluctuations
related to teaching hospitals summer residency programs.
The latter may depend on numerous factors including contract
milestones and timing of work performed against the contract.
With respect to medical simulation products, we employ a direct
sales force and a network of international distributors that
sell 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. During
2009, we signed agreements with additional distributors for
sales of our products in Europe, and Asia Pacific regions.
In the robotic surgical market and other medical licensing
markets, we establish licensing relationships through our
business development efforts.
For the years ended December 31, 2009, 2008, and 2007,
respectively 41%, 40%, and 52%, of our total revenues were
generated from the medical line of business. For the year ended
December 31, 2007, 12% of our total revenues consisting of
licensing, product revenue, or development revenues were from
one customer.
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 quality of the simulation for 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 timely ability to invent, improve,
and reduce the cost of our technologies in a timely manner; to
design and develop products to meet specifications based on
research and our understanding of customer needs and
expectations; and to collaborate 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 systems and firmware, control techniques,
software, quality control, haptic content design, and project
and process management. For medical simulations, we have
assembled a 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 design kits. These kits may include actuators, mounting
suggestions, controller boards, software libraries, programming
examples, and documentation. Our application engineers support
customer use of these design kits, including through phone and
e-mail
technical support and onsite training. Our application engineers
and technical support staff may also help install our products,
train customers on their use, and provide ongoing product
support, particularly for medical training simulators.
Licensee Interaction 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 helps ensure that the
10
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, typically
moves on to product planning and design, prototyping, then
alpha, beta, and first-run production development and testing
stages. All of these stages are typically supported by
documentation procedures and tools, design reviews, revision
management, and other quality criteria. This careful, step-wise
process helps us meet our design and quality requirements and to
help make business decisions to continue, modify, or end product
development. For our medical simulation products, we may add
stages to help ensure our systems are very realistic and closely
emulate the real medical procedures.
Research We have a dedicated team of experts
in haptics and multimodal systems focused on investigating the
next generations of haptic products for existing and new
markets. The team has expertise in actuator design, mounting,
control software, and human factors. We are also actively
seeking and establishing worldwide research collaborations to
reinforce our technical leadership and expand our innovative
advancements. In addition, 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, 2009, 2008, and 2007,
research and development expenses were $12.5 million,
$13.1 million, and $10.4 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.
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.
We and our wholly owned subsidiaries hold more than 800 issued
or pending patents in the U.S. and other countries that
cover various aspects of our hardware and software technologies.
Some of our U.S. patents have begun to expire starting in
2007. We amortize our patents over their estimated useful lives,
generally 10 years.
Where we believe it is appropriate, we will protect our
intellectual property rights through the legal system. 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 March 1, 2007,
Immersion and Sony Computer Entertainment announced that the
patent litigation at the U.S. Court of Appeals for the
Federal Circuit was concluded. See Item 3. Legal
Proceedings for further details and discussion of the
litigation proceedings and conclusion.
On April 16, 2008, we announced that our wholly owned
subsidiary, Immersion Medical, Inc., filed lawsuits for patent
infringement in the United States District Court for the Eastern
District of Texas against Mentice AB, Mentice SA, Simbionix USA
Corp., and Simbionix Ltd. We intend to vigorously prosecute this
lawsuit.
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
11
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/corporate governance 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.
Employees
As of December 31, 2009, we had 124 full-time
employees, including 54 in research and development, 29 in sales
and marketing, and 41 in legal, finance, administration, and
operations. As of that date, we also had 17 independent
contractors. None of our employees are 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 9, 2010.
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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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Interim Chief Executive Officer and member of the Board of
Directors
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53
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Henry Hirvela
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Interim Chief Financial Officer
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58
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G. Craig Vachon
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Senior Vice President and General Manager, Touch Line of Business
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46
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Mr. Viegas has served as Interim Chief Executive Officer
since October 2009 and as a member of the Board of Directors
since October 2002. Mr. Viegas was the Companys Chief
Executive Officer from October 2002 through April 2008, and
President from February 2002 through April 2008. Mr. Viegas
was also Chairman of the Board of Directors from October 2007 to
February 2009. Mr. Viegas also served as Chief Financial
Officer until February 2005, having joined the Company 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 B.S. in Accounting and an M.B.A.
from Santa Clara University. Mr. Viegas is also a
Certified Public Accountant (inactive) in the State of
California.
Mr. Hirvela has been serving as Interim Chief Financial
Officer since October 2009 and as a consultant to the Company
since August 2009. From May 2008 to November 2008,
Mr. Hirvela served as executive vice president and Chief
Financial Officer of BRE Properties, Inc., a real estate
investment trust, where he was responsible for all financial
functions including investor relations, SEC and internal
reporting, internal controls, cost accounting, and budgeting and
planning. Prior to that time, Mr. Hirvela served as Chief
Financial Officer of VistaCare, Inc., a medical services
company, from March 2006 to February 2008. Prior to this
engagement, Mr. Hirvela founded Phoenix Management
Partners, LLC in September 2002, during which time he served as
President and CEO of Vigilant Systems, Inc. and served as
Chairman and Director for Three-Five Systems, Inc., an
electronic manufacturing services company, from February 2003 to
September 2006. From 1996 to 2000, Mr. Hirvela served as
Vice President and Chief Financial Officer for Scottsdale-based
Allied Waste Industries, Inc. Prior to this, Mr. Hirvela
held a variety of management positions with Bank of America,
Texas Eastern Corporation and Browning-Ferris Industries. He
holds a bachelors degree from the United States
International University and an M.B.A. from the Johnson Graduate
School of Management at Cornell University.
G. Craig Vachon joined Immersion in September 2008 as Vice
President and General Manager, Mobility Group. Effective
January 12, 2009. Mr. Vachon was promoted to Senior
Vice President and General Manager of the Touch Line of
Business. From February 2006 to September 2008, Mr. Vachon
served as Vice President of Corporate Development of Atrua
Technologies, Inc. where he was charged with identifying and
evaluating organic and
12
inorganic opportunities to expand the business and enhance
shareholder value. From March 2004 to February 2006,
Mr. Vachon served as the CEO and President of Varatouch
Technology, Inc., which was acquired by Atrua Technologies, Inc.
in February 2006. From November 2001 to November 2003, he served
as CEO and Chairman of Sirenic, Inc. Mr. Vachon holds a
B.S. in Communication and an M.S. in Business Communication from
Emerson College.
You should carefully consider the following risks and
uncertainties, as well as other information in this report and
our other SEC filings, in considering our business and
prospects. If any of the following risks or uncertainties
actually occurs, 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.
Company
Risks
If we
fail to establish and maintain proper and effective internal
controls and if we fail to remediate existing internal control
deficiencies, our ability to produce accurate financial
statements on a timely basis could be impaired, which would
adversely affect our consolidated operating results, our ability
to operate our business and our stock price.
In connection with the internal investigation conducted by the
audit committee into revenue recognition of certain transactions
in our Medical line of business, we determined that we did not
have adequate internal financial and accounting controls to
produce accurate and timely financial statements. Among the
material weaknesses identified in our review, we determined that
we had material weaknesses with respect to revenue recognition.
In addition, as set forth in 2007, we determined that we had a
material weakness in controls over accounting for income taxes.
In reviewing our financial statements in preparation for the
restatement we determined that we also had material weaknesses
in our controls over accounting for stock-based compensation,
the adoption of new accounting standards, inventory control
management and accounting for fixed assets. For a further
discussion of these material weaknesses, see Item 9A of
this Report. Although we have begun implementing new processes
and procedures to improve our internal controls, our Interim
Chief Executive Officer and Interim Chief Financial Officer
determined that as of December 31, 2009, our internal
controls over financial reporting were not effective to provide
reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for
external reporting in accordance with generally accepted
accounting principles in the United States.
Ensuring that we have adequate internal financial and accounting
controls and procedures in place to produce accurate financial
statements on a timely basis is a costly and time-consuming
effort that needs to be re-evaluated frequently. Any failure on
our part to remedy identified material weaknesses, or any
additional delays or errors in our financial reporting, whether
or not resulting from the identified material weakness relating
to revenue recognition or any other material weaknesses, could
cause our financial reporting to be unreliable and could have a
material adverse effect on our business, results of operations,
or financial condition and could have a substantial adverse
impact on the trading price of our common stock.
We do not expect that our internal control over financial
reporting will prevent or detect all errors and all fraud. A
control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the
control systems objectives will be met. Because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and
instances of fraud, if any, within our company will have been
detected. As discussed in this
Form 10-K,
management has identified material weaknesses in the past and
may identify additional material weaknesses in the future.
13
We are required to comply with Section 404 of the Sarbanes
Oxley Act of 2002. We have expended significant resources in
developing the necessary documentation and testing procedures
required by Section 404 of the Sarbanes Oxley Act. Our
management has concluded that we did not maintain effective
control over financial reporting as of December 31, 2009
based on the criteria in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. We cannot be certain that the actions we
have taken and are taking to improve our internal controls over
financial reporting will be sufficient or that we will be able
to implement our planned processes and procedures in a timely
manner. In addition, we may be unable to produce accurate
financial statements on a timely basis. Any of the foregoing
could cause investors to lose confidence in the reliability of
our consolidated financial statements, which could cause the
market price of our common stock to decline and make it more
difficult for us to finance our operations and growth.
Our
current litigation is 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 currently a party to various legal proceedings. Due to
the inherent uncertainties of litigation, we cannot accurately
predict how these cases will ultimately be resolved. In
addition, it is possible that as a result of our internal
investigation described elsewhere in this report, we may be
subject to additional litigation and investigations by
government authorities such as the SEC. We anticipate that
currently pending litigation will continue to be costly and that
future litigation or investigations will result in additional
legal expenses, and there can be no assurance that we will be
successful or able to recover the costs we incur in connection
with litigation or investigations. We expense litigation and
investigatory costs as incurred, and only accrue for costs that
have been incurred but not paid to the vendor as of the
financial statement date. Litigation and investigations have
diverted, and are 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 or concluded,
litigation and investigations could adversely affect our
business. Further, any unfavorable outcome could adversely
affect our business. For additional background on this and our
other litigation, please see Notes 11 and 16 to the
consolidated financial statements in Part I and
Item 3. Legal Proceedings of this Part I.
The
uncertain global economic environment could reduce our revenues
and could have an adverse effect on our financial condition and
results of operations.
The current global economic recession could materially hurt our
business in a number of ways including, longer sales and renewal
cycles, delays in adoption of our products or technologies,
increased risk of competition, increased risk of inventory
obsolescence, higher overhead costs as a percentage of revenue,
delays in signing or failing to sign customer agreements, or
signing customer agreements at reduced purchase levels. In
addition, our suppliers, customers, potential customers, and
business partners are facing similar challenges, which could
materially and adversely affect the level of business they
conduct with us or in the level of sales of products that
include our technology. The current economic downturn may lead
to a reduction in corporate, university, or government budgets
for research and development in sectors including the
automotive, aerospace, mobility, and medical sectors, which use
our products. Sales of our products or technology may be
adversely affected by cuts in these research and development
budgets. Furthermore, a prolonged tightening of the credit
markets could significantly impact our ability to liquidate
investments or reduce the rate of return on investments.
We had
an accumulated deficit of $99 million as of
December 31, 2009, have a history of losses, expect to
experience losses in the future, and may not achieve or maintain
profitability in the future.
Since 1997, we have incurred losses in all but four quarters. We
need to generate significant ongoing revenue to return to
profitability. We anticipate that we will continue to incur
expenses as we:
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continue to develop our technologies;
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increase our sales and marketing efforts;
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attempt to expand the market for touch-enabled technologies and
products and change our business;
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protect and enforce our intellectual property;
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pursue strategic relationships;
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incur costs related to pending litigation;
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acquire intellectual property or other assets from
third-parties; and
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invest in systems and processes to manage our business.
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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.
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, 2009, 2008 and 2007, 51%, 51%
and 39%, respectively, of our total revenues were royalty and
license revenues. 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, nor can we control consolidation within an industry
which could either reduce the number of licensing products
available or reduce royalty rates for the combined 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, achieve
commercial acceptance, or otherwise 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. If our licensees products fail to achieve
commercial success or if products are recalled because of
quality control problems, our revenues will not grow and could
decline.
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.
Due to
recent turnover, our executive management team has limited
experience working together and if there are difficulties within
this team, it could impede the execution of our business
strategy.
Recently, we have experienced a number of changes in our
executive team. Our success will depend to a significant extent
on the management teams ability to implement a successful
strategy, to successfully lead and motivate our employees, and
to work effectively together and with the board of directors. If
this leadership team is not successful, our ability to execute
our business strategy would be impeded.
We
have experienced significant change in our business, and we
cannot assure you that these changes will result in increased
revenue or profitability.
Our business has undergone significant changes in recent
periods, including the divestiture of our 3D business, new
management, consolidation of our medical business and personnel
changes and focus on additional target markets. In addition, we
recently announced our intention to transition from the medical
simulation products business. These changes have required, and
will likely in the future require, significant investments of
cash and other resources, as well as managements time and
attention and have placed significant strains on our managerial,
financial, engineering, or other resources. We cannot assure you
that these efforts will result in growing our business
successfully or in increased operating performance.
15
We may
not be able to continue to derive significant revenues from
makers of peripherals for popular video gaming
platforms.
A significant portion of our 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.
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.
Under the terms of our agreement with Sony, Sony receives a
royalty-free license to our worldwide portfolio of patents. This
license permits Sony to make, use, and sell hardware, software,
and services covered by our patents in its PS1, PS2, and PS3
systems for a fixed license payment. The PS3 console system was
launched in late 2006 in the United States and Japan without
force feedback capability. Sony has since released new PS3
controllers with vibration feedback. We do not know to what
extent Sony will allow third-party peripheral makers to make
licensed PS3 gaming products with vibration feedback to
interface with the PS3 console. To the extent Sony selectively
limits their licensing to leading third-party controller makers
to make PS3 controllers with vibration feedback, our licensing
revenue from third-party PS3 peripherals will continue to be
severely limited. Sony continues to sell the PS2, and our third
party licensees continue to sell licensed PS2 peripherals.
However, U.S. sales of PS2 peripherals continue to decline
as more consumers switch to the PS3 console system and other
next-generation console systems like the Nintendo Wii and
Microsoft Xbox 360.
Both the 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. To the extent
Microsoft does not fully license third parties, Microsofts
share of all aftermarket Xbox 360 game controller sales will
likely remain high or increase, which we expect will limit our
gaming royalty revenue. Additionally, Microsoft is now making
touch-enabled steering wheel products covered by their
royalty-free, perpetual, irrevocable license to our worldwide
portfolio of patents that could compete with our licensees
current 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 declined and may further do so 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 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, manufacture, 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
16
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.
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 claims that we have
granted rights to one licensee which are inconsistent with the
rights that we have granted to another licensee.
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.
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 competition we may face 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 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 licenses if the video console
makers choose not to license third parties to make peripherals
for their new consoles; 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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Our
consolidation of and transition from our Medical operations and
other restructurings may not be successful, and may negatively
impact our business.
In May 2009, we moved the operations of our Medical line of
business from Maryland to our headquarters in San Jose,
California and we have also reduced our workforce in recent
periods. Consolidations and business restructurings involve
numerous risks and uncertainties, including, but not limited to:
the potential loss of key employees, customers and business
partners; market uncertainty related to our future business
plans; the incurrence of unexpected expenses or charges;
diversion of management attention from other key areas of our
business; negative impacts on employee morale; and other
potential dislocations and disruptions to the business. In
addition, if our business expands, it may be more difficult for
us to attract additional personnel and develop the resources we
would need to support a larger customer base.
We also intend to transition from our medical simulation
products business which could continue to disrupt our overall
business. For the years ended December 31, 2009, 2008 and
2007, 41%, 40% and 52%, respectively, of our total revenues were
from our medical line of business. Accordingly, if we are unable
to manage this consolidation and transition effectively, our
overall business and operating results could be materially and
adversely affected.
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 difficult to pursue in certain
venues, and distracting to management and potential customers
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 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 may not be able to develop non-infringing technologies or
license the infringed or similar technologies on a timely and
cost-effective basis, our expenses could increase and our
revenues could decrease.
While we attempt to avoid infringing known proprietary rights of
third parties, third parties may hold, or may in the future be
issued, patents that could be infringed by our products or
technologies. Any of these third parties might make a claim of
infringement against us with respect to the products that we
manufacture and the technologies that we license. From time to
time, we have received letters from companies, several of which
have significantly greater financial resources than we do,
asserting that some of our technologies, or those of our
licensees, infringe their intellectual property rights. Certain
of our licensees may receive similar letters from these or other
companies from time to time. 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.
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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 for indemnification.
The legal principles applicable to patents and patent licenses
continue to change and evolve. Legislation and judicial
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.
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. Although we intend to
transition from the medical products business, we could face
product liability claims for products that we have sold or that
any successor may sell in the future. Defending any claims
against us, regardless of merit, 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 addition, if our business liability insurance
coverage proves inadequate or future coverage is unavailable on
acceptable terms or at all, our business, operating results and
financial condition could be adversely affected.
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. While we have not
experienced any product liability claims to date, we could face
such claims in the future, which could harm our business and
reputation. 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.
Our
products are complex and may contain undetected errors, which
could harm our reputation and future product
sales.
Any failure to provide high quality and reliable products,
whether caused by our own failure or failures of our suppliers
or OEM customers, could damage our reputation and reduce demand
for our products. Our products have in the past contained, and
may in the future contain, undetected errors or defects. Some
errors in our products may only be discovered after a product
has been shipped to customers. Any errors or defects discovered
in our products after commercial release could result in loss of
revenue, loss of customers, and increased service and warranty
costs, any of which could adversely affect our business.
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The
nature of some of our products may also subject us to export
control regulation by the U.S. Department of State and the
Department of Commerce. Violations of these regulations can
result in monetary penalties and denial of export
privileges.
Our sales to customers in some areas outside the United States
could be subject to government export regulations or
restrictions that prohibit us from selling to customers in some
countries or that require us to obtain licenses or approvals to
export such products internationally. Delays or denial of the
grant of any required license or approval, or changes to the
regulations, could make it difficult or impossible to make sales
to foreign customers in some countries and could adversely
affect our revenue. In addition, we could be subject to fines
and penalties for violation of these export regulations if we
were found in violation. Such violation could result in
penalties, including prohibiting us from exporting our products
to one or more countries, and could materially and adversely
affect our business.
Compliance
with directives that restrict the use of certain materials may
increase our costs and limit our revenue
opportunities.
Our products and packaging must meet all safety, electrical,
labeling, marking, or other requirements of the countries into
which we ship products or our resellers sell our products. We
have to assess each product and determine whether it complies
with the requirements of local 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 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, Windows XP, and Windows Vista
operating systems, including DirectX, Microsofts
entertainment API. Modifications and new versions of
Microsofts operating system and APIs (including DirectX
and Windows 7) 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.
In addition, Microsoft announced that its new product, Windows
7, will feature a new multi-touch input function, allowing users
to use multiple fingers simultaneously to interact with touch
surfaces. Enabling multi-location touch-feedback will require us
to innovate hardware and software, enable Windows 7 APIs
with multi-touch output support, and work with our licensees and
third parties to integrate such features. There are feasibility
risks with both hardware and software, and there may be
potential delays in the revenue growth of haptically-enabled
multi touch surfaces.
If we
are unable to develop open source compliant products, our
ability to license our technologies and generate revenues would
be impaired.
We have seen, and believe that we will continue to see, an
increase in customers requesting that we develop products that
will operate in an open source environment.
Developing open source compliant products, without imperiling
the intellectual property rights upon which our licensing
business depends, may prove difficult under
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certain circumstances, thereby placing us at a competitive
disadvantage for new product designs. As a result, our revenues
may not grow and could decline.
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 company, 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 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, within and 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
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what we could have achieved in the market with several licensees
or additional products available to sell to a specific set of
customers.
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 or timely. 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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Our ability to achieve revenue growth also 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.
We
have limited engineering, customer service, technical support,
quality assurance and manufacturing resources to design and
fulfill favorable product delivery schedules and 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, customer service, technical support, 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 and customer service. Failure to
provide favorable product and program deliverables and quality
and customer service levels, or provide them at all, may disrupt
channels and customers, harm our brand, 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
devices, 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, Nokia,
Samsung, and Sony have licensed our technologies, the greater
expense of development and production of products containing our
touch-enabling technologies, together with the higher price to
the end customer, may be a significant barrier to their
widespread adoption and sale.
Medical
licensing and certification authorities may not recommend or
require use of our technologies for training and/or testing
purposes and certain legislation that may encourage the use of
simulators may not become law, 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), the American
Board of Surgery (ABS), and the American College of
Cardiology (ACC), have great influence in
recommending particular medical methodologies, including medical
training and testing methodologies, for use by
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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 or products
incorporating our technology in particular, as a training
and/or
testing tool, and in addition in the event that the Enhancing
Simulation Act of 2009 does not pass into law, market
penetration for our products or products incorporating our
technology in the medical market could be significantly and
adversely affected.
The
markets in which we participate or may target in the future are
intensely competitive, and if we do not compete effectively, our
operating results could be harmed.
Our target markets are rapidly evolving and highly competitive.
Many of our competitors and potential competitors are larger and
have greater name recognition, much longer operating histories,
larger marketing budgets, and significantly greater resources
than we do, and with the introduction of new technologies and
market entrants, we expect competition to intensify in the
future. 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.
If we fail to compete effectively, our business will be harmed.
Some of our principal competitors offer their products or
services at a lower price, which has resulted in pricing
pressures. If we are unable to achieve our target pricing
levels, our operating results would be negatively impacted. In
addition, pricing pressures and increased competition generally
could result in reduced sales, reduced margins, losses, or the
failure of our application suite to achieve or maintain more
widespread market acceptance, any of which could harm our
business.
We face competition from internal design teams of existing and
potential OEM customers. In addition, as a result of their
licenses to our patent portfolios, we could face competition
from Microsoft and Sony. Our licensees or other third parties
may also seek to develop products using our intellectual
property or develop alternative designs that attempt to
circumvent our intellectual property or that 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.
Additionally, if haptic technology gains market acceptance, more
research by universities
and/or
corporations or other parties may be performed potentially
leading to strong intellectual property positions by third
parties in certain areas of haptics or the launch of haptics
products before we commercialize our own technology.
Many of our current and potential competitors, including
Microsoft, are able to devote greater resources to the
development, promotion, and sale of their products and services.
In addition, many of our competitors have established marketing
relationships or access to larger customer bases, distributors,
and other business partners. As a result, our competitors might
be able to respond more quickly and effectively than we can to
new or changing opportunities, technologies, standards or
customer requirements. Further, some potential customers,
particularly large enterprises, may elect to develop their own
internal solutions. For all of these reasons, we may not be able
to compete successfully against our current and future
competitors.
Winning
business is subject to a competitive selection process that can
be lengthy and requires us to incur significant expense, and we
may not be selected.
Our primary focus is on winning competitive bid selection
processes, known as design wins, so that haptics
will be included in our customers equipment. These
selection processes can be lengthy and can require us to incur
significant design and development expenditures. We may not win
the competitive selection process and may never generate any
revenue despite incurring significant design and development
expenditures. Because we typically focus on only a few customers
in a product area, the loss of a design win can sometimes result
in our failure to get haptics added to new generation products.
This can result in lost sales and could hurt our position in
future competitive selection processes because we may not be
perceived as being a technology leader.
After winning a product design for one of our customers, we may
still experience delays in generating revenue from our products
as a result of the lengthy development and design cycle. In
addition, a delay or cancellation of a
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customers plans could significantly adversely affect our
financial results, as we may have incurred significant expense
and generated no revenue. Finally, if our customers fail to
successfully market and sell their equipment it could materially
adversely affect our business, financial condition, and results
of operations as the demand for our products falls.
Automobiles
incorporating our touch-enabling technologies are subject to
lengthy product development periods, making it difficult to
predict when and whether we will receive automotive
royalties.
The product development process for automobiles is very lengthy,
sometimes longer than four years. We may not earn 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 choose not to
incorporate, our technologies into its automobiles, making it
difficult for us to predict the 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.
A
limited number of customers account for a significant portion of
our revenue, and the loss of major customers could harm our
operating results.
Our 3 largest customers accounted for approximately 34% of our
total net revenue for 2009. We cannot be certain that customers
that have accounted for significant revenue in past periods,
individually or as a group, will, continue to generate revenue
in any future period. If we lose a major customer or group of
customers, our revenue could decline if we are unable to replace
revenue from other sources.
Our
international expansion efforts subject us to additional risks
and costs.
We intend to expand international activities. International
operations are subject to a number of difficulties and special
costs, including:
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compliance with multiple, conflicting and changing governmental
laws and regulations;
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laws and business practices favoring local competitors;
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foreign exchange and currency risks;
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difficulty in collecting accounts receivable or longer payment
cycles;
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import and export restrictions and tariffs;
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difficulties staffing and managing foreign operations;
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difficulties and expense in enforcing intellectual property
rights;
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business risks, including fluctuations in demand for our
products and the cost and effort to conduct international
operations and travel abroad to promote international
distribution and overall global economic conditions;
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multiple conflicting tax laws and regulations; and
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political and economic instability.
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Our international operations could also increase our exposure to
international laws and regulations. If we cannot comply with
foreign laws and regulations, which are often complex and
subject to variation and unexpected changes, we could incur
unexpected costs and potential litigation. For example, the
governments of foreign countries might attempt to regulate our
products and services or levy sales or other taxes relating to
our activities. In addition, foreign countries may impose
tariffs, duties, price controls, or other restrictions on
foreign currencies or trade barriers, any of which could make it
more difficult for us to conduct our business.
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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. Furthermore, we believe that there are a
limited number of engineering and technical personnel that are
experienced in haptics. 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. Additionally some of our
executive officers and key employees hold stock options with
exercise prices above the current market price of our common
stock or that are largely vested. 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 personnel to
support licensees, enhance existing technologies, and develop
new technologies.
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 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.
Investment
Risks
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;
|
|
|
|
seasonality in the demand for our products or our
licensees products; and
|
|
|
|
our ability to build or ship products on a timely basis.
|
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; stock repurchase activity; 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.
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 board of directors or management, including the
following:
|
|
|
|
|
our board of directors is classified into three classes of
directors with staggered three-year terms;
|
|
|
|
only our chairperson of the board of directors, a majority of
our board of directors or 10% or greater stockholders are
authorized to call a special meeting of stockholders;
|
|
|
|
our stockholders can only take action at a meeting of
stockholders and not by written consent;
|
|
|
|
vacancies on our board of directors can be filled only by our
board of directors and not by our stockholders;
|
|
|
|
our restated certificate of incorporation authorizes
undesignated preferred stock, the terms of which may be
established and shares of which may be issued without
stockholder approval; and
|
|
|
|
advance notice procedures apply for stockholders to nominate
candidates for election as directors or to bring matters before
an annual meeting of stockholders.
|
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.
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.
The pursuit of potential acquisitions may divert the attention
of management and cause us to incur various expenses in
identifying, investigating, and pursuing suitable acquisitions,
whether or not they are consummated.
If we consummate acquisitions through the issuance of our
securities, our stockholders could suffer significant dilution.
Acquisitions could also create risks for us, including:
|
|
|
|
|
unanticipated costs associated with the acquisitions;
|
|
|
|
use of substantial portions of our available cash to consummate
the acquisitions;
|
|
|
|
diversion of managements attention from other business
concerns;
|
26
|
|
|
|
|
difficulties in assimilation of acquired personnel or operations
|
|
|
|
failure to realize the anticipated benefits of acquired
intellectual property or other assets;
|
|
|
|
charges associated with amortization of acquired assets or
potential charges for write-down of assets associated with
unsuccessful acquisitions;
|
|
|
|
potential intellectual property infringement claims related to
newly acquired product lines; and
|
|
|
|
potential costs associated with failed acquisition efforts.
|
Any acquisitions, even if successfully completed, might not
generate significant additional revenue or provide any benefit
to our business.
As our
business grows, such growth may place a significant strain on
our management and operations and, as a result, our business may
suffer.
We plan to continue expanding our business, and any significant
growth could place a significant strain on our management
systems, infrastructure and other resources. We recently
transitioned the preparation of all of our internal reporting to
upgraded management information systems and are in the process
of implementing this system for all of our subsidiaries. If we
encounter problems with the implementation of these systems, we
may have difficulties preparing or tracking internal
information, which could adversely affect our financial results.
We will need to continue to invest the necessary capital to
upgrade and improve our operational, financial and management
reporting systems. If our management fails to manage our growth
effectively, we could experience increased costs, declines in
product quality, or customer satisfaction, which could harm our
business.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
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 Touch operating segment. Products
produced in San Jose include several of our touch interface
products, including rotary encoders, components to enable
tactile feedback in touchscreens, and various arcade gaming
products. The facility is also used for the Medical operating
segment including the sales, marketing, administration, research
and development, manufacturing, and distribution functions for
the Endoscopy AccuTouch System, the CathLab VR System,
Virtual IV System, the Lap VR System, and the
insightArthroVR arthroscopy surgical simulator. The lease for
this property expires in June 2014 and can be extended to June
2018.
We lease a facility in Montreal, Quebec, Canada of approximately
6,416 square feet, for our subsidiary, Immersion Canada,
Inc. The facility is used for research and development and
administration functions. The lease for this property expires in
October 2015.
We lease office space in Seocho-gu, Seoul, Korea. The facility
is used for sales and marketing support and research and
development functions. This lease expires in November 2011.
We lease office space in Espoo, Finland for use by our sales and
technical support function. The lease agreement is cancelable
upon a three month notice.
We believe that our existing facilities are adequate to meet our
current needs.
|
|
Item 3.
|
Legal
Proceedings
|
In re
Immersion Corporation Initial Public Offering Securities
Litigation
We are involved in legal proceedings relating to a class action
lawsuit filed on November 9, 2001 in the U.S. District
Court for the Southern District of New York, 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,
27
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 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 District 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.
In September 2008, all of the parties to the lawsuits reached a
settlement, subject to documentation and approval of the
District Court. The Immersion Defendants would not be required
to contribute to the settlement. Subsequently, an underwriter
defendant filed for bankruptcy and other underwriter defendants
were acquired. On April 2, 2009, final documentation
evidencing the settlement was presented to the District Court
for approval. If the settlement is not approved by the District
Court, we intend to defend the lawsuit vigorously.
Immersion
Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp.,
and Simbionix Ltd.
On April 16, 2008, we announced that our wholly owned
subsidiary, Immersion Medical, Inc., filed lawsuits for patent
infringement in the United States District Court for the Eastern
District of Texas against Mentice AB, Mentice SA, Simbionix USA
Corp., and Simbionix Ltd (collectively the
Defendants), seeking damages and injunctive relief.
On July 11, 2008, Mentice AB and Mentice SA (collectively,
Mentice) 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. On July 11, 2008,
Simbionix USA Corp. and Simbionix Ltd, (collectively,
Simbionix) filed a motion to stay or dismiss the
lawsuit, and a motion to transfer venue for convenience to the
Northern District of Ohio. On September 29, 2009, the court
granted Simbionixs motion to transfer the case. On
December 7, 2009, the case was transferred to the Northern
District of Ohio. The court has not set a trial schedule. We
intend to vigorously prosecute this lawsuit.
In re
Immersion Corporation Securities Litigation
In September and October 2009, various putative shareholder
class action and derivative complaints were filed in federal and
state court against us and certain current and former Immersion
directors and officers.
On September 2, 2009, a securities class action complaint
was filed in the United States District Court for the Northern
District of California against us and certain of our current and
former directors and officers. Over the following five weeks,
four additional class action complaints were filed. (One of
these four actions was later voluntarily dismissed.) The
securities class action complaints name us and certain current
and former Immersion directors and officers as defendants and
allege violations of federal securities laws based on our
issuance of allegedly misleading financial statements. The
various complaints assert claims covering the period from May
2007 through July 2009 and seek compensatory damages allegedly
sustained by the purported class members.
On December 21, 2009, these class actions were consolidated
by the court as In Re Immersion Corporation Securities
Litigation. On the same day, the court appointed a lead
plaintiff and lead plaintiffs counsel. The lead
28
plaintiff will file a consolidated complaint following our
restatement of financial statements to which defendants will
then have an opportunity to file responsive pleadings.
In re
Immersion Corporation Derivative Litigation
On September 15, 2009, a putative shareholder derivative
complaint was filed in the United States District Court for the
Northern District of California, purportedly on behalf of us and
naming certain of our current and former directors and officers
as individual defendants. Thereafter, two additional putative
derivative complaints were filed in the same court.
The derivative complaints arise from the same or similar alleged
facts as the federal securities actions and seek to bring state
law causes of action on behalf of us against the individual
defendants for breaches of fiduciary duty, gross negligence,
abuse of control, gross mismanagement, breach of contract, waste
of corporate assets, unjust enrichment, as well as for
violations of federal securities laws. The federal derivative
complaints seek compensatory damages, corporate governance
changes, unspecified equitable and injunctive relief, the
imposition of a constructive trust, and restitution. On
November 17, 2009, the court consolidated these actions as
In re Immersion Corporation Derivative Litigation and
appointed lead counsel. Plaintiffs will file a consolidated
derivative complaint following our restatement of financial
statements, to which defendants will then have the opportunity
to file responsive pleadings.
Shaw v.
Richardson et al.
On October 7, 2009, a putative shareholder derivative
complaint was filed in the Superior Court of the State of
California for the County of Santa Clara, purportedly on
behalf of us, seeking compensatory damages, equitable and
injunctive relief, and restitution. The complaint names certain
current and former directors and officers of us as individual
defendants. This complaint arises from the same or similar
alleged facts as the federal securities actions and seeks to
bring causes of action on behalf of us against the individual
defendants for breaches of fiduciary duty, waste of corporate
assets and unjust enrichment. The court has issued an order
staying this action.
We cannot predict the ultimate outcome of the above-mentioned
federal and state actions, and we are unable to estimate any
potential liability we may incur.
29
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, 2009
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
4.96
|
|
|
$
|
3.42
|
|
Third Quarter
|
|
$
|
4.66
|
|
|
$
|
3.41
|
|
Second Quarter
|
|
$
|
5.17
|
|
|
$
|
2.80
|
|
First Quarter
|
|
$
|
6.10
|
|
|
$
|
2.31
|
|
Fiscal year ended December 31, 2008
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
6.35
|
|
|
$
|
2.72
|
|
Third Quarter
|
|
$
|
7.92
|
|
|
$
|
5.22
|
|
Second Quarter
|
|
$
|
11.82
|
|
|
$
|
6.43
|
|
First Quarter
|
|
$
|
13.38
|
|
|
$
|
6.61
|
|
On March 3, 2010, the closing price was $4.53 and there
were 142 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.
Issuer
Repurchases of Equity Securities
On November 1, 2007, our Board of Directors authorized a
share repurchase program of up to $50,000,000. This share
repurchase authorization has no expiration date and does not
require us to repurchase a specific number of shares. The timing
and amount of any share repurchase will depend on the share
price, corporate and regulatory requirements, economic and
market conditions, and other factors. The repurchase
authorization may be modified, suspended, or discontinued at any
time. We have currently stopped repurchasing shares under this
share repurchase program.
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.
30
|
|
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,
|
|
|
|
2009
|
|
|
2008(2)
|
|
|
2007(2)
|
|
|
2006(2)
|
|
|
2005(2)
|
|
|
|
(In thousands, except per share data)
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
27,725
|
|
|
$
|
27,981
|
|
|
$
|
30,140
|
|
|
$
|
22,959
|
|
|
$
|
19,683
|
|
Costs and expenses(1)
|
|
|
58,181
|
|
|
|
77,075
|
|
|
|
(93,138
|
)
|
|
|
32,937
|
|
|
|
32,686
|
|
Operating income (loss)
|
|
|
(30,456
|
)
|
|
|
(49,094
|
)
|
|
|
123,278
|
|
|
|
(9,978
|
)
|
|
|
(13,003
|
)
|
Income tax benefit (provision) from continuing operations
|
|
|
310
|
|
|
|
(5,088
|
)
|
|
|
(12,850
|
)
|
|
|
218
|
|
|
|
298
|
|
Income (loss) from continuing operations
|
|
|
(28,856
|
)
|
|
|
(50,258
|
)
|
|
|
116,027
|
|
|
|
(11,087
|
)
|
|
|
(13,732
|
)
|
Gain (loss) from discontinued operations (net of tax)
|
|
|
577
|
|
|
|
(732
|
)
|
|
|
1,059
|
|
|
|
505
|
|
|
|
647
|
|
Net income (loss)
|
|
|
(28,279
|
)
|
|
|
(50,990
|
)
|
|
|
117,086
|
|
|
|
(10,582
|
)
|
|
|
(13,085
|
)
|
Basic net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.03
|
)
|
|
$
|
(1.70
|
)
|
|
$
|
4.19
|
|
|
$
|
(0.45
|
)
|
|
$
|
(0.57
|
)
|
Discontinued operations
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
Total
|
|
$
|
(1.01
|
)
|
|
$
|
(1.72
|
)
|
|
$
|
4.23
|
|
|
$
|
(0.43
|
)
|
|
$
|
(0.54
|
)
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.03
|
)
|
|
$
|
(1.70
|
)
|
|
$
|
3.68
|
|
|
$
|
(0.45
|
)
|
|
$
|
(0.57
|
)
|
Discontinued operations
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
Total
|
|
$
|
(1.01
|
)
|
|
$
|
(1.72
|
)
|
|
$
|
3.71
|
|
|
$
|
(0.43
|
)
|
|
$
|
(0.54
|
)
|
Shares used in calculating net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,973
|
|
|
|
29,575
|
|
|
|
27,662
|
|
|
|
24,556
|
|
|
|
24,027
|
|
Diluted
|
|
|
27,973
|
|
|
|
29,575
|
|
|
|
31,667
|
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
CONSOLIDATED BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and short-term investments
|
|
$
|
63,728
|
|
|
$
|
85,743
|
|
|
$
|
138,112
|
|
|
$
|
32,012
|
|
|
$
|
28,171
|
|
Working capital
|
|
|
61,005
|
|
|
|
82,972
|
|
|
|
143,160
|
|
|
|
33,557
|
|
|
|
28,885
|
|
Total assets
|
|
|
87,834
|
|
|
|
113,587
|
|
|
|
167,931
|
|
|
|
49,623
|
|
|
|
44,760
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,122
|
|
|
|
17,490
|
|
Long-term customer advance from Microsoft
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15,000
|
|
Total stockholders equity (deficit)
|
|
|
55,741
|
|
|
|
79,778
|
|
|
|
142,177
|
|
|
|
(23,385
|
)
|
|
|
(16,795
|
)
|
|
|
|
(1) |
|
Results include litigation settlements, conclusions,and patent
license income (expense) of $(20.8) million,
$134.9 million, and $1.7 million for 2008, 2007, and
2006, respectively. |
|
(2) |
|
Information has been retrospectively restated to present the
results of our 3D product line as a discontinued operation. See
Note 12 Restructuring and Discontinued
Operations in the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this
Form 10K. |
31
|
|
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
U.S. 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,
short-term investments, 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.
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 Accounting Standards Codification
(ASC)
605-10-S99,
Revenue Recognition (ASC
605-10-S99);
ASC 605-25,
Multiple Element Arrangements (ASC
605-25);
and ASC
985-605,
Software-Revenue Recognition (ASC
985-605).
We derive our revenues from three principal sources: royalty and
license fees, product sales, and development contracts. As
described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized
in any accounting period. Material differences may result in the
amount and timing of our revenue for any period based on the
judgments and estimates made by our management. Specifically, in
connection with each transaction involving our products, we must
evaluate whether: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the fee is
fixed or determinable, and (iv) collectibility is probable.
We apply these criteria as discussed below.
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Persuasive evidence of an arrangement
exists: For a license arrangement, we require a
written contract, signed by both the customer and us. For a
stand-alone product sale, we require a purchase order or other
form of written agreement with the customer.
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Delivery has occurred. We deliver software and
product to our customers physically and deliver software also
electronically. For physical deliveries not related to software,
our transfer terms typically include transfer of title and risk
of loss at our shipping location. For electronic deliveries,
delivery occurs when we provide the customer access codes or
keys that allow the customer to take immediate
possession of the software.
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32
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The fee is fixed or determinable. Our
arrangement fee is based on the use of standard payment terms
which are those that are generally extended to the majority of
customers. For transactions involving extended payment terms, we
deem these fees not to be fixed or determinable for revenue
recognition purposes and revenue is deferred until the fees
become due and payable.
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Collectibility is probable. To recognize
revenue, we must judge collectibility of the arrangement fees,
which we do on a
customer-by-customer
basis pursuant to our credit review policy. We typically sell to
customers with whom we have a history of successful collection.
For new customers, we evaluate the customers financial
position and ability to pay. If we determined that
collectibility is not probable based upon our credit review
process or the customers payment history, we recognize
revenue when payment is received.
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Royalty and license revenue We recognize
royalty revenue based on royalty reports or related information
received from the licensee and when collectibility is deemed
reasonably assured. The terms of the royalty agreements
generally require licensees to give us notification of royalties
within 30 to 45 days of the end of the quarter during which
the sales occur. We recognize license fee revenue for licenses
to our intellectual property when earned under the terms of the
agreements. Generally, revenue is recognized on a straight-line
basis over the expected term of the license.
Product sales We recognize revenue from the
sale of products and the license of associated software if any,
and expense all related costs of products sold, once delivery
has occurred and customer acceptance, if required, has been
achieved. We have determined that the license of software for
the medical simulation products is incidental to the product as
a whole. We typically grant our customers a warranty which
guarantees that our products will substantially conform to our
current specifications for generally twelve months from the
delivery date pursuant to the terms of the arrangement.
Historically, warranty-related costs have not been significant.
Extended warranty contract revenues are recognized ratably over
the contractual period.
Development contracts and other revenue
Development contracts and other revenue is comprised of
professional services (consulting services
and/or
development contracts). Professional services revenues are
recognized under the proportional performance accounting method
based on physical completion of the work to be performed or
completed performance method. A provision for losses on
contracts is made, if necessary, in the period in which the loss
becomes probable and can be reasonably estimated. Revisions in
estimates are reflected in the period in which the conditions
become known. To date, such losses have not been significant.
Multiple element arrangements We enter into
multiple element arrangements in which customers purchase a
time-based license which include a combination of software
and/or
intellectual property licenses, professional services and to a
lesser extent, post contract customer support. For arrangements
that include software and professional services, the services
are not essential to the functionality of the software, and
customers typically purchase consulting services to facilitate
the adoption of our technology, but they may also decide to use
their own resources or appoint other professional service
organizations to perform these services. Contract fees for
professional services and post-contract customer support are not
frequently sold on a stand-alone basis and as such, we do not
have sufficient evidence of fair value. For these arrangements,
revenue is recognized over the period of the ongoing obligation
which is generally consistent with the contractual term of the
time-based license.
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.
Stock-based Compensation 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.
33
Valuation and amortization method We use the
Black-Scholes model, single-option approach to determine the
fair value of stock options, and ESPP 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 that impact the expected term
and forfeiture rates, our expected stock price volatility over
the term of the awards, risk-free interest rate, and expected
dividends.
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.
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 ESPP 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 10 to the consolidated financial statements for
further information regarding stock compensation disclosures.
Accounting
for Income Taxes
We use the asset and liability method of accounting for income
taxes. Under this method, income tax expense is recognized for
the amount of taxes payable or refundable for the current year.
In addition, deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of
assets and liabilities, and for operating losses and tax credit
carryforwards. 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.
Our judgments, assumptions, and estimates relative to the
current provision for income tax take into account current tax
laws, our interpretation of current tax laws, and possible
outcomes of current and future audits conducted by foreign and
domestic tax authorities. We have established reserves for
income taxes to address potential exposures involving tax
positions that could be challenged by tax authorities. Although
we believe our judgments, assumptions, and estimates are
reasonable, changes in tax laws or our interpretation of tax
laws and any future tax audits could significantly impact the
amounts provided for income taxes in our consolidated financial
statements.
Our assumptions, judgments, and estimates relative to the value
of a deferred tax asset take into account predictions of the
amount and category of future taxable income, such as income
from operations or capital gains income. Actual operating
results and the underlying amount and category of income in
future years could render inaccurate our current assumptions,
judgments, and estimates of recoverable net deferred taxes. Any
of the assumptions, judgments, and estimates mentioned above
could cause our actual income tax obligations to differ from our
estimates, thus materially impacting our financial position and
results of operations.
Short-term
Investments
Our short-term investments consist primarily of highly liquid
commercial paper and government agency securities purchased with
an original or remaining maturity of greater than 90 days
on the date of purchase. We
34
classify all debt securities with readily determinable market
values as
available-for-sale.
Even though the stated maturity dates of these debt securities
may be one year or more beyond the balance sheet date, we have
classified all debt securities as short-term investments as they
are reasonably expected to be realized in cash or sold within
one year. These investments are carried at fair market value
with unrealized gains and losses considered to be temporary in
nature reported as a separate component of other comprehensive
income (loss) within stockholders equity.
We follow the accounting guidance to assess whether our
investments with unrealized loss positions are other than
temporarily impaired. Realized gains and losses and declines in
value judged to be other than temporary are determined based on
the specific identification method and are reported in the
consolidated statement of operations. Factors considered in
determining whether a loss is temporary include the length of
time and extent to which fair value has been less than the cost
basis, the financial condition and near-term prospects of the
investee, and our intent and ability to hold the investment for
a period of time sufficient to allow for any anticipated
recovery in market value.
Effective January 1, 2008, we adopted the provisions of ASC
820, Fair Value Measurements and Disclosures
(ASC 820), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures
about fair value measurements required under other accounting
pronouncements. ASC 820 clarifies that fair value is an exit
price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants. ASC 820 also requires that a fair
value measurement reflect the assumptions market participants
would use in pricing an asset or liability based on the best
information available. Assumptions include the risks inherent in
a particular valuation technique (such as a pricing model)
and/or the
risks inherent in the inputs to the model.
In February 2008, the FASB revised ASC 820, that delays the
effective date of ASC 820 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a
recurring basis (at least annually) until fiscal years beginning
after November 15, 2008. The delay is intended to allow the
FASB and constituents additional time to consider the effect of
various implementation issues that have arisen, or that may
arise, from the application of ASC 820. The adoption of this
guidance did not have a material impact on the Companys
consolidated results of operations, financial position or cash
flows. Further information about short-term investments may be
found in Note 2 to the consolidated financial statements.
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.
Inventory
Valuation
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.
Intangible
Assets
We have acquired patents and other intangible assets. 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 are issued, 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 the year ended
December 31, 2009, we capitalized costs associated with
patents and trademarks of $2.3 million. Our total
amortization expense for the same period was $829,000.
35
Restructuring
Costs
We calculate our Restructuring costs based upon our estimate of
workforce reduction costs, asset impairment charges, and other
appropriate charges resulting from a restructuring. Based on our
assumptions, judgments, and estimates, we determine whether we
need to record an impairment charge to reduce the value of the
asset carried on our balance sheet to its estimated fair value.
Assumptions, judgments and estimates about future values are
complex and often subjective. They can be affected by a variety
of factors, including external factors such as industry and
economic trends, and internal factors such as changes in our
business strategy.
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.
Results
of Operations
Overview
of 2009
We continued to invest in research, development, sales, and
marketing in our key business segments. Key events in the year
were as follows:
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We believe that our haptics technology is included in
100 million phones worldwide.
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We completed the divestiture of our 3D product line. Operations
of our 3D product line have been retrospectively classified as
discontinued operations in our consolidated statement of
operations.
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In conjunction with moving our medical operating segment to
San Jose, our reduction of workforce from our Montreal
medical business operations, and other workforce reductions in
our Touch segment, we had restructuring costs of
$1.5 million. We had physical inventory write offs of
$593,000 primarily consisting of physical count to book
adjustments of medical equipment parts. We also recognized fixed
asset write offs of demo equipment of $682,000 primarily
resulting from a reconciliation of the fixed asset records to
the physical inventory at the time of the move. In addition we
had inventory obsolescence and scrap expenses of
$1.3 million primarily of medical equipment parts.
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In February, 2010, we announced plans to focus primarily on a
licensing model in the future. In March 2010 we entered into an
agreement to sell certain assets of the Endoscopy, Endovascular,
and Laparoscopy medical simulation product lines.
Correspondingly, we plan to pursue the medical segment via a
licensing approach. Under a licensing approach, we anticipate
that the manufacturing and selling of simulator products to the
medical training industry will not be an ongoing focus for us,
and therefore, we hope to achieve certain cost reductions in
2010. Revenue in 2009 for these product lines was approximately
$6 million. In 2010, we also expect to continue to focus on
the execution of plans in our established businesses to increase
revenue and make selected investments for longer-term growth
areas. Our success could be limited by several factors,
including the current macro-economic climate, the timely release
of our new products and 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.
36
The following table sets forth our statement of operations data
as a percentage of total revenues:
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|
|
|
|
|
|
|
|
|
Years Ended December 31,
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2009
|
|
2008
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
|
51.2
|
%
|
|
|
50.9
|
%
|
|
|
39.4
|
%
|
Product sales
|
|
|
43.0
|
|
|
|
39.7
|
|
|
|
46.9
|
|
Development contracts and other
|
|
|
5.8
|
|
|
|
9.4
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
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|
|
|
|
|
|
|
|
|
|
|
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Cost of product sales (exclusive of amortization of intangibles
shown separately below)
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|
|
29.9
|
|
|
|
26.9
|
|
|
|
24.1
|
|
Sales and marketing
|
|
|
48.1
|
|
|
|
55.3
|
|
|
|
34.1
|
|
Research and development
|
|
|
45.1
|
|
|
|
46.7
|
|
|
|
34.5
|
|
General and administrative
|
|
|
78.3
|
|
|
|
68.8
|
|
|
|
42.1
|
|
Amortization and impairment of intangibles
|
|
|
3.2
|
|
|
|
3.2
|
|
|
|
3.8
|
|
Litigation settlements, conclusions, and patent license
|
|
|
|
|
|
|
74.1
|
|
|
|
(447.6
|
)
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Restructuring costs
|
|
|
5.3
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
209.9
|
|
|
|
275.5
|
|
|
|
(309.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(109.9
|
)
|
|
|
(175.5
|
)
|
|
|
409.0
|
|
Change in fair value of warrant liability
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
2.8
|
|
|
|
15.0
|
|
|
|
22.0
|
|
Interest and other expense
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
|
(105.2
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)
|
|
|
(161.4
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)
|
|
|
427.6
|
|
Benefit (provision) for income taxes
|
|
|
1.1
|
|
|
|
(18.2
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)
|
|
|
(42.6
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(104.1
|
)
|
|
|
(179.6
|
)
|
|
|
385.0
|
|
Discontinued operations, net of provision for income taxes
|
|
|
2.1
|
|
|
|
(2.6
|
)
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(102.0
|
)%
|
|
|
(182.2
|
)%
|
|
|
388.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended December 31, 2009, 2008, and 2007
Revenues
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Royalty and license
|
|
$
|
14,202
|
|
|
|
0
|
%
|
|
$
|
14,254
|
|
|
|
20
|
%
|
|
$
|
11,881
|
|
Product sales
|
|
|
11,924
|
|
|
|
7
|
%
|
|
|
11,110
|
|
|
|
(21
|
)%
|
|
|
14,138
|
|
Development contracts and other
|
|
|
1,599
|
|
|
|
(39
|
)%
|
|
|
2,617
|
|
|
|
(36
|
)%
|
|
|
4,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
27,725
|
|
|
|
(1
|
)%
|
|
$
|
27,981
|
|
|
|
(7
|
)%
|
|
$
|
30,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2009 Compared to Fiscal 2008
Total Revenue Our total revenue for the
year ended December 31, 2009 decreased by $256,000, or 1%,
to $27.7 million, from $28.0 million in 2008.
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 $52,000 or
less than 0.5% from 2008 to 2009. The decrease in royalty and
license revenue was primarily due to a
37
decrease in royalty and license revenue from gaming and
automotive licensees partially offset by increased revenue from
licensees of mobile and medical devices. Revenues from gaming
customers in 2008 which did not recur in 2009 included
previously deferred revenues from ISLLC totaling
$1.1 million which was recognized after we concluded our
litigation with it. In addition, BMW has removed our technology
from certain controller systems, which also caused automotive
royalties to decline in 2009 compared to 2008. We plan on
focusing most of our future business on a licensing model for
both the touch and medical segments.
Based on our litigation conclusion and business agreement
entered into with Sony Computer Entertainment in March 2007, we
are recognizing a minimum of $30.0 million as royalty and
license revenue from March 2007 through March 2017, which amount
to approximately $750,000 per quarter. The revenue from our
third-party peripheral licensees included in royalty and license
revenue has generally continued to decline primarily due to
i) the reduced sales of past generation video console
systems due to the launches of the next-generation console
models from Microsoft Xbox 360, Sony PlayStation 3 (PS3), and
Nintendo Wii, and ii) the decline in third-party market
share of aftermarket game console controllers due to the launch
of next-generation peripherals by manufacturers of console
systems.
Sony has, to date, not yet broadly licensed third parties to
produce peripherals of the PS3 system. To the extent Sony
discourages or impedes third-party controller makers from making
more PS3 controllers with vibration feedback, our licensing
revenue from third-party PS3 peripherals will continue to be
severely limited.
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 broadens its licenses to third-party controller
makers, particularly with respect to wireless controllers for
Xbox 360, our gaming royalty revenue may decline. Additionally,
Microsoft is now making touch-enabled wheels covered by its
royalty-free, perpetual, irrevocable license to our worldwide
portfolio of patents that could compete with our licensees
current or future products for which we earn per unit royalties.
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 broadens its licenses to
third-party controller makers, our gaming royalty revenue may
decline.
Product sales Product sales increased by
$814,000 or 7% from 2008 to 2009. The increase in product sales
was primarily due to an increase in medical product sales of
$983,000 partially offset by a decrease in touch product sales
of $169,000. Increased medical product sales were mainly due to
the recognition of $1.0 million in revenue from an
international medical customer for whom revenues could not be
recognized until the agreement with the customer was terminated
in the third quarter of 2009 partially offset by decreases of
other medical product sales. Touch interface product sales
decreased primarily due to reduced sales of touchscreen and
touch panel components and arcade entertainment products. In
March 2010 we entered into an agreement to sell certain assets
of the Endoscopy, Endovascular, and Laparoscopy medical
simulation product lines. See Note 19 of the consolidated
financial statements. Revenue in 2009 for these product lines
was approximately $6 million. Medical product sales are
expected to significantly decline in the future since we will be
transitioning to a license model and will have only one product
line remaining, the Virtual IV product line.
Development contracts and other
revenue Development contracts and other
revenue decreased by $1.0 million or 39% from 2008 to 2009.
Development contracts and other revenue is comprised of revenue
on commercial contracts. The decrease was mainly attributable to
a decrease in medical contract revenue of $916,000 due to a
lower volume of work performed under medical contracts in 2009
compared to 2008. We continue to transition our engineering
resources from certain commercial development contract efforts
to development efforts that focus on leveraging our existing
sales and channel distribution capabilities. Accordingly, we do
not expect development contract revenue to grow significantly in
the future.
For the year ended December 31, 2009, revenues generated in
North America, Europe, Far East, and Rest of the World
represented 47%, 14%, 37%, and 2%, respectively, compared to
67%, 15%, 15%, and 3%, respectively, for the year ended
December 31, 2008. The shift in revenues among regions was
mainly due to an increase in Touch royalty revenue and Medical
product sales in the Far East; a decrease in Touch royalty
revenue, medical product revenue, and medical contract revenue
in North America; a decrease in Touch royalty revenue from
Europe; and a
38
decrease in medical product sales from the Rest of the World. We
mainly attribute the increase in revenue in the Far East to
increased shipments by licensees of mobile devices, partially
due to the addition of increased international sales and support
personnel in 2008, and recognition of $1.0 million from an
international medical customer as discussed above. The decrease
in Touch royalty revenue in North America is partially
attributable to previously deferred revenues from ISLLC totaling
$1.1 million which was recognized in 2008 after we
concluded our litigation with them. Three customers accounted
for 34% of our sales in 2009 and two customers accounted for 22%
of our sales in 2008. As medical product sales are expected to
decline in the future since these offerings will no longer be a
core strategy, we may see our sales concentrated in fewer large
customers in the future.
Fiscal
2008 Compared to Fiscal 2007
Total Revenue Our total revenue for the
year ended December 31, 2008 decreased by
$2.1 million, or 7%, to $28.0 million, from
$30.1 million in 2007.
Royalty and license revenue Royalty and
license revenue increased by $2.4 million or 20% from 2007
to 2008 and was all from our Touch segment. The increase in
royalty and license revenue was primarily a result of an
increase in mobile device license and royalty revenue of
$2.1 million and an increase in gaming royalties of
$1.2 million, offset in part by a decrease in royalties for
touch interface products of $942,000.
Mobile device license and royalty revenue increased primarily
due to the increase in the shipment of TouchSense enabled phones
by LG Electronics that began in the second quarter of 2007, the
signing of a new license contract with mobile device
manufacturer Nokia at the end of the second quarter of 2007, and
the shipment of additional TouchSense enabled phones by our
licensees in 2008.
The increase in gaming royalties compared to 2007 was mainly due
to previously deferred royalty revenues from ISLLC totaling
$1.0 million which was recognized after we concluded our
litigation with them. There was also an increase in royalty and
license revenue from an increase in sales of new steering wheel
products from Logitech. In addition, there was a full year of
royalty and license revenue from first-party gaming licensee
Sony Computer Entertainment that increased revenue year over
year. Although the revenue from our third-party peripheral
licensees had generally continued to decline primarily due to
i) the reduced sales of past generation video console
systems due to the launches of the next-generation console
models from Microsoft (Xbox 360), Sony (PlayStation 3), and
Nintendo (Wii), and ii) the decline in third-party market
share of aftermarket game console controllers due to the launch
of next-generation peripherals by manufacturers of console
systems, we saw the decline begin to stabilize, as manifested by
the release of new steering wheel products from Logitech for the
PlayStation 3.
Touch interface product royalties decreased mainly due to the
recognition of certain automotive royalty payments in the second
quarter of 2007 that did not recur. In addition, BMW has begun
to remove our technology from certain controller systems, that
also caused automotive royalties to decline.
Product sales Product sales decreased by
$3.0 million or 21% from 2007 to 2008. The decrease in
product sales was primarily due to decreased medical product
sales of $3.1 million, mainly due to decreased sales of our
endoscopy, endovascular, laparoscopy, and Virtual IV
simulator platforms partially offset by increases in our
arthroscopy simulators. These decreases were primarily due to
decreased international sales and delays in new product
introductions. Touch interface products increased by $96,000 due
to additional sales of touchscreen and touch panel components,
rotary modules, and arcade entertainment products.
Development contracts and other
revenue Development contracts and other
revenue decreased by $1.5 million or 36% from 2007 to 2008.
The decrease was mainly attributable to a decrease in medical
contract revenue of $1.3 million due to the completion of
work performed under medical contracts that occurred in 2007
through the first six months of 2008, and decreased touch
interface product contract revenue of $564,000 primarily due to
contracts being completed during the year. Partially offsetting
this, there was increased revenue recognized on mobile device
development contracts and support of $370,000.
39
Cost of
Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
% Change
|
|
2008
|
|
% Change
|
|
2007
|
|
|
($ in thousands)
|
|
Cost of product sales
|
|
$
|
8,289
|
|
|
|
10
|
%
|
|
$
|
7,516
|
|
|
|
3
|
%
|
|
$
|
7,272
|
|
% of product sales
|
|
|
70
|
%
|
|
|
|
|
|
|
68
|
%
|
|
|
|
|
|
|
51
|
%
|
Our cost of product sales consists primarily of materials,
labor, and overhead. It excludes amortization and impairment of
intangibles. There is no cost of product sales associated with
royalty and license revenue or development contract revenue.
Cost of product sales increased by $773,000 or 10% from 2008 to
2009. The increase in cost of product sales was primarily due to
an increase in excess and obsolete inventory provisions and
scrap expense of $873,000, increased physical inventory write
off costs of $601,000, an increase of material and production
costs of $363,000, and increased freight costs of $103,000,
partially offset by decreased overhead costs of
$1.3 million. The increase in obsolescence and inventory
scrap expense was mainly due to additional excess and
obsolescence write-off and inventory scrap mainly from medical
product parts. The physical inventory write off costs primarily
consisted of physical count to book adjustments of medical
equipment parts in the second quarter of 2009. The increase in
direct material costs was mainly a result of increased product
sales. Overhead costs decreased mainly as a result of reduced
salary expense from decreased headcount. Cost of product sales
increased as a percentage of product revenue to 70% in 2009 from
68% in 2008. This increase is mainly due to the increased costs
mentioned above, partially offset by the reduced overhead costs
from decreased headcount mentioned above. In March 2010 we
entered into an agreement to sell certain assets of the
Endoscopy, Endovascular, and Laparoscopy medical simulation
product lines. See Note 19 of the consolidated financial
statements. Cost of product sales for medical products are
expected to decline in the future since we will have only one
product line remaining, the Virtual IV product line.
Cost of product sales increased by $244,000 or 3% from 2007 to
2008. The increase in cost of product sales was primarily due to
an increase of overhead costs of $383,000, an increase in excess
and obsolete inventory provisions of $235,000, increased
provision for warranty and repair costs of $177,000, and
increased royalties of $137,000 partially offset by decreased
material and production costs of $666,000. Overhead costs
increased, in part, as a result of increased salary expense from
additional headcount and other costs of programs to improve
quality processes within our manufacturing operations. The
decrease in direct material costs was mainly a result of
decreased product sales. Royalty costs increased due to
increased sales of certain medical products with associated
royalty costs. Cost of product sales increased as a percentage
of product revenue to 68% in 2008 from 51% in 2007. This
increase is mainly due to reduced sales and the increased
overhead and other costs mentioned above.
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
% Change
|
|
2008
|
|
% Change
|
|
2007
|
|
|
($ in thousands)
|
|
Sales and marketing
|
|
$
|
13,324
|
|
|
|
(14
|
)%
|
|
$
|
15,472
|
|
|
|
51
|
%
|
|
$
|
10,272
|
|
Research and development
|
|
|
12,493
|
|
|
|
(4
|
)%
|
|
|
13,058
|
|
|
|
26
|
%
|
|
|
10,389
|
|
General and administrative
|
|
|
21,719
|
|
|
|
13
|
%
|
|
|
19,249
|
|
|
|
52
|
%
|
|
|
12,683
|
|
Amortization and impairment of intangibles
|
|
|
894
|
|
|
|
1
|
%
|
|
|
888
|
|
|
|
(23
|
)%
|
|
|
1,146
|
|
Litigation conclusions and patent license
|
|
|
|
|
|
|
(100
|
)%
|
|
|
20,750
|
|
|
|
*
|
%
|
|
|
(134,900
|
)
|
Restructuring costs
|
|
|
1,462
|
|
|
|
930
|
%
|
|
|
142
|
|
|
|
*
|
%
|
|
|
|
|
|
|
|
* |
|
Percentage not meaningful. |
Sales and Marketing Our sales and
marketing expenses are comprised primarily of employee
compensation and benefits, sales commissions, advertising, trade
shows, brochures, market development funds, travel, and an
allocation of facilities costs. Sales and marketing expenses
decreased by $2.1 million or 14% in 2009 compared to 2008.
The decrease was primarily due to decreased compensation,
benefits, and overhead of $1.3 million primarily due to
decreased sales and marketing headcount; decreased marketing,
advertising, and public relations costs of $520,000; decreased
employee recruitment expense of $394,000; a decrease in bad debt
expense of $371,000; and
40
decreased sales and marketing travel expense of $89,000;
partially offset by increased write offs of fixed assets of
$506,000 primarily demo equipment resulting from a
reconciliation of fixed asset records to the physical inventory
at the time of the move of our Medical line of business from
Maryland to San Jose. In March 2010 we entered into an
agreement to sell certain assets of the Endoscopy, Endovascular,
and Laparoscopy medical simulation product lines which will
cause some of our sales and marketing expenses to decrease in
the future. See Note 19 of the consolidated financial
statements. We are taking steps to reduce our sales and
marketing expenses, although we expect to continue to focus our
sales and marketing efforts on mobile device, touchscreen, and
medical market licensing opportunities to build greater market
acceptance for our touch technologies.
Sales and marketing expenses increased by $5.2 million or
51% in 2008 compared to 2007. The increase was primarily due to
increased compensation, benefits, and overhead of
$2.2 million, increased marketing, advertising, and public
relations costs of $1.1 million, increased sales and
marketing travel expense of $622,000, increased consulting costs
of $551,000 to supplement our sales and marketing staff,
increased office and facilities expenses of $307,000, an
increase in bad debt expense of $236,000, and increased employee
recruiting costs of $163,000. The increased sales and marketing
expenses were primarily due to an increase in sales and
marketing headcount and the expanding of our sales and marketing
efforts internationally. In addition, the increased
compensation, benefits, and overhead expense was mainly due to
an increase in sales and marketing headcount, increased
compensation for sales and marketing personnel, and increased
non-cash stock based compensation charges.
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 decreased by $565,000 or 4% in 2009
compared to 2008. The decrease was primarily due to decreased
lab and prototyping expenses of $282,000, decreased employee
recruiting expenses of $179,000, and decreased compensation,
benefits, and overhead expense of $125,000. The decreased
compensation, benefits, and overhead expense was primarily due
to decreased research and development headcount. We are taking
steps to reduce our research and development expenses.
Research and development expenses increased by $2.7 million
or 26% in 2008 compared to 2007. The increase was primarily due
to increased compensation, benefits, and overhead expense of
$1.7 million, increased professional and consulting expense
of $585,000 to supplement our engineering staff, and an increase
in lab and prototyping expenses of $277,000 in support of sales
efforts. The increased compensation, benefits, and overhead
expense was primarily due to increased research and development
headcount and increased non-cash stock-based compensation
charges.
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 increased by $2.5 million or
13% in 2009 compared to 2008. The increase was primarily due to
increased legal, professional, and license fee expense of
$1.5 million, increased compensation, benefits, and
overhead of $864,000, and loss on fixed assets of $108,000
partially offset by decreased travel costs of $48,000. The
increased legal, professional, and license fee expenses were
primarily due to increased accounting, audit and legal costs
resulting from our internal investigation and restatement costs
incurred in 2009, offset by reduced litigation costs of
$2.7 million, mainly Microsoft litigation which was settled
in 2008. The increased compensation, benefits, and overhead
expense was primarily due to changes in executive personnel that
resulted in additional costs and increased non-cash stock-based
compensation charges. We expect that the dollar amount of
general and administrative expenses will continue to be a
significant component of our operating expenses. We continued to
incur costs related to the restatement of our historical
financial statements in the first quarter of 2010 and will
continue to incur litigation costs as we assert our intellectual
property and contractual rights and defend lawsuits brought
against us.
General and administrative expenses increased by
$6.6 million or 52% in 2008 compared to 2007. The increase
was primarily due to increased legal, professional, and license
fee expense of $3.4 million, increased compensation,
benefits, and overhead of $2.5 million, increased travel
costs of $274,000, and increased supplies and office and
facilities expense of $183,000. The increased legal,
professional, and license fee expenses were primarily due to
increased litigation and other activities that we were engaged
in, mainly the litigation with Microsoft; increased consulting
costs; and increased recruiting costs due to management changes.
The increased compensation, benefits,
41
and overhead expense was primarily due to changes in executive
personnel that resulted in additional costs, increased general
and administrative headcount, increased compensation for general
and administrative personnel, and increased non-cash stock-based
compensation charges.
Amortization and impairment of
Intangibles Our amortization impairment of
intangibles is comprised primarily of patent amortization and
other intangible amortization along with impairment or write off
of abandoned and expired patents. Amortization and impairment of
intangibles increased slightly by $6,000 or 1% from 2008 to
2009. The increase was primarily attributable to an increase
from the cost and number of new patents being amortized along
with the impairment of certain patents partially offset by some
intangible assets reaching full amortization. Amortization and
impairment of intangibles decreased by $258,000 or 23% from 2007
to 2008. The decrease was primarily attributable to some
intangible assets reaching full amortization partially offset by
an increase from the cost and number of new patents being
amortized.
Litigation Settlements, Conclusions, and Patent
License There were no litigation
settlements, conclusions, and patent license expenses in the
year ended December 31, 2009, which was a decrease of
$20.8 million compared to 2008, all of which related to our
settlement with Microsoft. Litigation settlements, conclusions,
and patent license was $20.8 million of expense for 2008,
compared to income of $134.9 million for the same period in
2007, a change of $155.7 million. For 2007, the
$134.9 million was comprised of $119.9 million related
to Sony Computer Entertainment and $15.0 million related to
the release of the Microsoft long-term customer advance.
Restructuring Restructuring costs
increased by $1.3 million from 2008 to 2009. Restructuring
costs of $1.5 million for the year ended December 31,
2009 consist primarily of severance benefits and move and close
down of facility costs paid in connection with the reduction of
workforce from our Montreal medical business operations and
relocation of the Maryland medical business operations to
San Jose. Restructuring costs in 2009 also included
severance benefits paid as the result of the reduction of
workforce due to business changes in our Touch segment.
Restructuring costs for the year ended December 31, 2008
consist primarily of severance benefits paid as the result of
the reduction of workforce due to business changes in our Touch
segment of $142,000. There were no restructuring charges
incurred for the year ended 2007.
Interest
and Other Income / Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
% Change
|
|
2008
|
|
% Change
|
|
2007
|
|
|
($ in thousands)
|
|
Change in fair value of warrant liability
|
|
$
|
517
|
|
|
|
|
*%
|
|
$
|
|
|
|
|
|
*%
|
|
$
|
|
|
Interest and other income
|
|
|
777
|
|
|
|
(81
|
)%
|
|
|
4,174
|
|
|
|
(37
|
)%
|
|
|
6,623
|
|
Interest and other expense
|
|
|
(4
|
)
|
|
|
(98
|
)%
|
|
|
(250
|
)
|
|
|
(76
|
)%
|
|
|
(1,024
|
)
|
|
|
|
* |
|
Percentage not meaningful. |
Change in fair value of warrant
liability In January 2009, we adopted ASC
815-40,
Contracts in Entitys own Equity. For the year
ended December 31, 2009, we had a gain from the change in
fair value of the warrant liability of $517,000. There was no
gain or loss from the change in fair value of the warrant
liability for the years ended December 31, 2008 or 2007. We
do not expect to have any further charges for a change in the
fair value of the warrant liability since the warrants expired
in December 2009.
Interest and Other Income Interest and
other income consist primarily of interest income and dividend
income from cash and cash equivalents and short-term investments
and gain on sale of short-term investments. Interest and other
income decreased by $3.4 million from 2008 to 2009. This
was primarily the result of decreased interest income due to a
reduction in cash equivalents and short-term investments and
reduced interest rates on cash, cash equivalents, and short-term
investments. In addition, interest income included the accretion
of interest income from Sony Computer Entertainment of $377,000
in 2009 compared to $904,000 in 2008. This interest accretion
was complete at the end of 2009.
Interest and other income decreased by $2.4 million from
2007 to 2008. This was primarily the result of decreased
interest income due to a reduction in cash equivalents and
short-term investments and reduced interest rates on cash, cash
equivalents, and short-term investments.
42
Interest and Other Expense Interest and
other expense consists primarily of interest and accretion
expense on our 5% Senior Subordinated Convertible
Debentures (5% Convertible Debentures) and
accretion and dividend expense on our long-term customer advance
from Microsoft along with impairment losses on long term notes
receivable. Interest and other expense decreased by $246,000
from 2008 to 2009 primarily due to the reduction of impairment
losses on long term notes receivable.
Interest and other expense decreased by $774,000 from 2007 to
2008 due to the elimination of interest expense from the
conversion and redemption of our 5% Convertible Debentures
during the third quarter of 2007 partially offset by impairment
losses on long term notes receivable.
Benefit
(Provision) for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
% Change
|
|
2008
|
|
% Change
|
|
2007
|
|
|
($ in thousands)
|
|
Benefit (provision) for income taxes
|
|
$
|
310
|
|
|
|
106
|
%
|
|
$
|
(5,088
|
)
|
|
|
60
|
%
|
|
$
|
(12,850
|
)
|
Benefit (Provision) for Income Taxes For
the year ended 2009, we recorded a benefit for income taxes of
$310,000 yielding an effective tax rate of 1.1%. The current
year tax benefit is reflective of the recording of a benefit for
the alternative minimum tax and net operating loss carrybacks,
R&D monetization, valuation allowance on specific deferred
tax assets, and foreign withholding tax expense. Accordingly,
the effective tax rate differs from the statutory rate. For the
year ended 2008, we recorded a provision for income taxes of
$5.1 million yielding an effective tax rate of 11.3%. The
tax provision for the year ended 2008 is reflective of the
recording of a full valuation allowance against our entire
deferred tax asset balance in the period due to losses in fiscal
2008, the variability of operating results, and near term
projected losses. Accordingly, the effective tax rate differs
from the statutory rate. For the year ended 2007, we recorded a
provision for income taxes of $12.9 million yielding an
effective tax rate of 10.0%. The 2007 tax provision is primarily
reflective of federal and state tax expense as a result of our
pre-tax income of $128.9 million mainly due to the
litigation conclusions and patent license from Sony Computer
Entertainment, see Note 13 to the consolidated financial
statements. The effective tax rate differs from the statutory
rate primarily due to the significant reduction in our valuation
allowance against deferred tax assets as we used the majority of
our net operating loss carryforwards against current year
taxable income.
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
% Change
|
|
2008
|
|
% Change
|
|
2007
|
|
|
($ in thousands)
|
|
Gain on sale of discontinued operations
|
|
$
|
237
|
|
|
|
|
*%
|
|
$
|
|
|
|
|
|
*%
|
|
$
|
|
|
Gain (loss) from discontinued operations
|
|
$
|
340
|
|
|
|
146
|
%
|
|
$
|
(732
|
)
|
|
|
(169
|
)%
|
|
$
|
1,059
|
|
|
|
|
* |
|
Percentage not meaningful. |
Discontinued Operations In the year
ended December 31, 2009, we ceased operations of the 3D
product line and sold our CyberGlove family of products,
SoftMouse 3D positioning device family of products, and our
Microscribe family of products, and recorded gains on sales of
discontinued operations of $237,000. Accordingly, the operations
of the 3D product line have been classified as discontinued
operations in the consolidated statement of operations. Gain
from discontinued operations, net of tax, increased by
$1.1 million for the year ended December 31, 2009
compared to the same period in 2008, primarily due to the
decrease in activity due to the ceasing of 3D operations in the
quarter ended March 31, 2009. This resulted in reduced
sales volumes and reduced costs and expenses including inventory
and asset impairment charges associated with 3D operations
during 2008. Loss from discontinued operations increased for the
year ended December 31, 2008 compared to 2007, primarily
due to increased costs and expenses, including inventory and
asset impairment charges associated with 3D operations during
2008 offset by a reduction in income tax provision.
Segment Results for the Years Ended December 31, 2009,
2008, and 2007 are as follows:
We have two operating and reportable segments. One segment,
Touch, develops and markets touch feedback technologies that
enable software and hardware developers to enhance realism and
usability in their computing,
43
entertainment, and industrial applications. The second segment,
Medical, develops, manufactures, and markets medical training
simulators that recreate realistic healthcare environments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Touch
|
|
$
|
16,374
|
|
|
|
(3
|
)%
|
|
$
|
16,912
|
|
|
|
16
|
%
|
|
$
|
14,590
|
|
Medical
|
|
|
11,386
|
|
|
|
2
|
%
|
|
|
11,180
|
|
|
|
(29
|
)%
|
|
|
15,639
|
|
Intersegment eliminations
|
|
|
(35
|
)
|
|
|
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,725
|
|
|
|
(1
|
)%
|
|
$
|
27,981
|
|
|
|
(7
|
)%
|
|
$
|
30,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Touch
|
|
$
|
(15,678
|
)
|
|
|
61
|
%
|
|
$
|
(40,289
|
)
|
|
|
(133
|
)%
|
|
$
|
122,771
|
|
Medical
|
|
|
(14,777
|
)
|
|
|
(68
|
)%
|
|
|
(8,808
|
)
|
|
|
(1765
|
)%
|
|
|
529
|
|
Intersegment eliminations
|
|
|
(1
|
)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(30,456
|
)
|
|
|
38
|
%
|
|
$
|
(49,094
|
)
|
|
|
(140
|
)%
|
|
$
|
123,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Segment expenses relating to our corporate operations are not
allocated but are included in the Touch segment 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
2009 Compared to Fiscal 2008
Touch segment Revenues from the Touch
segment decreased by $538,000, or 3% in 2009 compared to 2008.
Royalty and license revenues decreased by $190,000, mainly due
to decreased revenue from gaming and automotive licensees
partially offset by increased revenue from licensees of mobile
devices. Revenues from gaming customers in 2008 which did not
recur in 2009 included previously deferred revenues from ISLLC
totaling $1.1 million which was recognized after we
concluded our litigation with it. In addition, BMW has removed
our technology from certain controller systems, which also
caused automotive royalties to decline in 2009 compared to 2008.
Product sales decreased by $246,000 primarily due to a decrease
in product sales from touch interface products, mainly due to
decreased sales of touchscreen and touch panel components and
decreased sales of commercial gaming products, partially offset
by increased integrated circuit chip sales. Development contract
revenue decreased by $102,000 primarily due to decreased
development contracts and support mainly from our mobility
customers. The segments operating loss decreased by
$24.6 million in 2009 as compared to 2008. The change was
primarily due to the Microsoft settlement expense in 2008 of
$20.8 million; a decrease in general and administrative
expenses of $1.9 million; a decrease in sales and marketing
expenses of $1.5 million; and increased gross margin of
$1.5 million partially offset by an increase in research
and development expenses of $568,000 and increased restructuring
charges of $427,000. General and administrative expense
decreased primarily due to reduced litigation costs, mainly
Microsoft litigation which was settled in 2008. The decreased
sales and marketing expenses were primarily due to reduced
salary expense from a decrease in sales and marketing headcount.
Increased margin was mainly a result of reduced salary expense
from decreased operations headcount.
Medical segment Revenues from Medical
increased by $206,000 or 2%, from 2008 to 2009. Increased
revenues were primarily due to increased product sales of
$983,000 and increased royalty and license revenue of $140,000,
partially offset by decreased development contract revenue of
$916,000. Increased medical product sales were mainly due to the
recognition of $1.0 million in revenue from an
international medical customer for whom revenues could not be
recognized until the agreement with the customer was terminated
in the third quarter of 2009, partially offset by decreases of
other medical product sales. The decrease in medical contract
revenue was mainly attributable to a lower volume of work
performed under medical contracts in 2009 compared to 2008. The
segments operating loss increased by $6.0 million in
2009 as compared to 2008. The increased operating loss was
mainly due to a decrease in gross margin of $2.5 million
primarily due to increased obsolescence and scrap expense
44
and physical inventory write off; increased general and
administrative expenses of $4.4 million; and increased
restructuring costs of $893,000, partially offset by decreased
research and development expenses of $1.1 million and
decreased sales and marketing expenses of $657,000. The increase
in obsolescence and inventory scrap expense was mainly due to
additional excess and obsolescence write-off and inventory scrap
mainly from medical product parts. The physical inventory write
off costs primarily consisted of physical count to book
adjustments of medical equipment parts in the second quarter of
2009. General and administrative expense increased primarily due
to increased accounting, audit and legal costs resulting from
our internal investigation and restatement costs incurred in
2009. The increased restructuring costs were mainly due to the
reduction of workforce of Montreal medical personnel and
relocation of the Maryland medical business operations to
San Jose. The decreased research and development and sales
and marketing expenses were primarily due to reduced salary
expense from a decrease in related headcount. In March 2010 we
entered into an agreement to sell certain assets of the
Endoscopy, Endovascular, and Laparoscopy medical simulation
product lines. See Note 19 of the consolidated financial
statements. Revenue in 2009 for these product lines was
approximately $6 million. Segments results are expected to
decline significantly in the future since we will be
transitioning to a license model and will have only one product
line remaining, the Virtual IV product line.
Fiscal
2008 Compared to Fiscal 2007
Touch segment Revenues from the Touch
segment increased by $2.3 million, or 16% in 2008 compared
to 2007. Royalty and license revenues increased by
$2.4 million, mainly due to an increase in mobile device
license and royalty revenue primarily due to the shipment of
additional TouchSense enabled phones, and an increase in gaming
royalties mainly due to the recognition of previously deferred
revenues from ISLLC and the increase in sales of new steering
wheel products from Logitech offset by a decrease in touch
interface product royalties mainly due to the recognition of
certain automotive royalty payments in the second quarter of
2007 that did not recur. Product sales increased by $134,000
primarily due to an increase in product sales from touch
interface products, mainly due to increased sales of touchscreen
and touch panel components and increased sales of commercial
gaming products. Development contract revenue decreased by
$180,000, primarily due to reduced touch interface product
contract revenue, partially offset by increased revenue on
mobile device development contracts and support. The
segments operating income changed by $163.1 million
to an operating loss in 2008 as compared to an operating profit
in 2007. The change was primarily due to increased litigation
settlements, conclusions, and patent license income of
$134.9 million ($119.9 million from Sony Computer
Entertainment and $15.0 million related to the release of
the Microsoft long-term customer advance) occurring in 2007 and
the Microsoft settlement expense in 2008 of $20.8 million;
an increase in general and administrative expenses of
$4.5 million; an increase in sales and marketing expenses
of $2.9 million; an increase of research and development
expenses of $1.9 million, and increased restructuring
charges of $142,000. The change from income in 2007 to a loss in
2008 was partially offset by increased gross margin of
$1.8 million mainly from increased royalty and license
revenue and decreased amortization and impairment of intangibles
of $255,000.
Medical segment Revenues from Medical
decreased by $4.5 million or 29%, from 2007 to 2008. The
decrease was primarily due to a decrease in medical product
sales of $3.1 million mainly due to decreased sales of our
endoscopy, endovascular, laparoscopy, and Virtual IV
simulator platforms partially offset by increases in our
arthroscopy simulators; and a decrease of $1.3 million in
medical development contract revenue due to work completed under
medical contracts in 2007. The decrease in medical contracts
also represents continued efforts to move away from development
work during the period and concentrate on product sales and
licensing. The decrease in product sales was primarily due to
decreased international sales and delays in new product
introductions. The segments operating income changed by
$9.3 million to a loss in 2008 as compared to a profit in
2007. The loss was mainly due to a decrease in gross margin of
$4.2 million primarily due to decreased sales and a change
in product sales mix, increased sales and marketing expenses of
$2.3 million primarily due to international sales and
marketing efforts, increased general and administrative expenses
of $2.1 million, mainly litigation and legal costs, and
increased research and development expenses of $756,000.
Liquidity
and Capital Resources
Our cash, cash equivalents, and short-term investments consist
primarily of money market funds and highly liquid commercial
paper and government agency securities. All of our short-term
investments are classified as
available-for-sale.
The securities are stated at market value, with unrealized gains
and losses reported as a component of accumulated other
comprehensive income, within stockholders equity.
45
On December 31, 2009, our cash, cash equivalents, and
short-term investments totaled $63.7 million, a decrease of
$22.0 million from $85.7 million on December 31,
2008.
In March 2007, we concluded our patent infringement litigation
against Sony Computer Entertainment and we received
$97.3 million. Furthermore, we entered into a new business
agreement under which, we are to 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. As of December 31, 2009, we had
received eleven of these installments.
On June 18, 2007, Microsoft filed a complaint against us in
the U.S. District Court for the Western District of
Washington alleging one claim for breach of a contract. After
conducting discovery and filing various motions, on
August 25, 2008 the parties agreed to settle all claims.
Under the terms of the settlement, we paid Microsoft
$20.8 million in October 2008.
Net cash used in operating activities during 2009 was
$18.3 million, a change of $12.1 million from the
$30.4 million used in operating activities during 2008.
Cash used in operations during 2009 was primarily the result of
a net loss of $28.3 million, a decrease of
$1.7 million due to a change in accrued compensation and
other current liabilities due to the timing of payments and a
decrease of $1.4 million due to a change in accounts
payable due to the timing of payments. These decreases were
offset by an increase of $3.4 million due to a change in
accounts receivable, an increase of $1.4 million due to a
change in inventories and an increase of $1.4 million due
to a change in deferred revenue and customer advances. Accounts
receivable decreased primarily due to the timing of sales during
the year and increased collection efforts. Inventory decreased
primarily due to the changed forecasts affecting inventory
purchases and inventory obsolescence and scrapping. Cash
provided by operations during 2009 was also impacted by noncash
charges and credits of $6.7 million, including
$4.5 million of noncash stock-based compensation,
$1.6 million in depreciation and amortization, $894,000 in
amortization and impairment of intangibles, an increase to loss
on disposal of equipment of $726,000, partially offset by a
credits from the change in market value of warrant liability of
$517,000 and gain on sales of discontinued operations of
$237,000.
Net cash used in operating activities during 2008 was
$30.4 million, a change of $115.0 million from the
$84.6 million provided by operating activities during 2007.
Cash used in operations during 2008 was primarily the result of
a net loss of $51.0 million, a decrease of
$1.5 million due to a change in other long-term
liabilities, a decrease of $1.3 million due to a change in
prepaid expenses and other current assets, a decrease of
$1.0 million due to a change in accounts receivable, and a
decrease of $415,000 due to a change in income taxes payable.
These decreases were offset by an increase of $7.3 million
due to a change in deferred income taxes, a $6.1 million
increase due to a change in deferred revenue and customer
advances and long-term customer advance from Microsoft, an
increase of $2.4 million due to a change in accrued
compensation and other current liabilities, and an increase of
$1.5 million due to a change in accounts payable. Cash
provided by operations during 2008 was also impacted by noncash
charges and credits of $7.6 million, including
$5.3 million of noncash stock-based compensation,
$1.2 million in depreciation and amortization, $888,000 in
amortization and impairment of intangibles, an increase to
allowance for doubtful accounts of $351,000, partially offset by
a credit of $220,000 from excess tax benefits from stock-based
compensation.
Net cash used in investing activities during 2009 was
$26.9 million, compared to the $25.3 million provided
by investing activities during 2008, a decrease of
$52.2 million. Net cash used in investing activities during
2009 consisted of an increase in proceeds from maturities of
available -for- sale investments of $75.0 million, offset
by purchases of available -for- sale investments of
$98.0 million; $2.6 million used to purchase
intangibles, primarily due to capitalization of external patent
filing and application costs, and a $1.6 million increase
in purchases of property and equipment. Net cash provided by
investing activities during 2008 was $25.3 million,
compared to the $55.2 million used in investing activities
during 2007, an increase of $80.5 million. Net cash
provided by investing activities during the period consisted of
an increase in maturities or sales of short-term investments of
$90.0 million, partially offset by purchases of short-term
investments of $59.2 million; $3.1 million used to
purchase property and equipment, and a $2.4 million
increase in intangibles, primarily due to capitalization of
external patent filing and application costs.
Net cash provided by financing activities during 2009 was
$278,000 compared to $16.6 million used during 2008, or a
$16.9 million decrease from the prior year. Net cash
provided by financing activities for 2009 consisted of issuances
of common stock and exercises of stock options and warrants. Net
cash used in financing activities during
46
2008 was $16.6 million compared to $25.2 million
provided by financing activities during 2007, or a
$41.8 million increase from the prior year. Net cash used
in financing activities for the period consisted primarily of
treasury stock repurchases of $18.4 million, partially
offset by issuances of common stock and exercises of stock
options and warrants in the amount of $1.6 million, and an
increase of $220,000 from excess tax benefits from tax
deductible stock-based compensation.
We believe that our cash and cash equivalents will be sufficient
to meet our working capital needs for at least the next twelve
months. We will continue to protect and defend our extensive
intellectual property portfolio across all business segments.
With our plan to focus on a licensing approach, we hope to
achieve certain cost reductions in 2010. We anticipate that
capital expenditures for the year ended December 31, 2010
will total less than $1,500,000 in connection with anticipated
maintenance and upgrades to operations and infrastructure. Cash
flows from our discontinued operations have been included in our
consolidated statement of cash flows with continuing operations
within each cash flow category. The absence of cash flows from
discontinued operations is not expected to affect our future
liquidity or capital resources. Additionally, if we acquire one
or more businesses, patents, or products, our cash or capital
requirements could increase substantially. 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. Any of these events could result in substantial
dilution to our stockholders. There is no assurance that such
additional capital will be available on terms acceptable to us,
if at all.
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, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
More Than
|
Contractual Obligations
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Operating Leases
|
|
$
|
3,266
|
|
|
$
|
737
|
|
|
$
|
2,036
|
|
|
$
|
493
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 13 to the consolidated financial
statements we adopted new accounting requirements for uncertain
tax benefits on January 1, 2007. At December 31, 2009,
we had a liability for unrecognized tax benefits totaling
$654,000 including interest of $26,000, of which approximately
$225,000 could be payable in cash. Due to the uncertainties
related to these tax matters, we are unable to make a reasonably
reliable estimate when cash settlement with a taxing authority
will occur. Settlement of such amounts could require the
utilization of working capital.
Recent
Accounting Pronouncements
See Note 1 to the consolidated financial statements for
information regarding the effect of new accounting
pronouncements on our financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. Changes in
these factors may cause fluctuations in our earnings and cash
flows. We evaluate and manage the exposure to these market risks
as follows:
Cash Equivalents, Short-term Investments, and Long-Term
Investments We have cash equivalents,
short-term investments, and long-term investments of
$60.6 million as of December 31, 2009. These
securities are subject to interest rate fluctuations. An
increase in interest rates could adversely affect the market
value of our fixed income securities. A hypothetical
100 basis point increase in interest rates would result in
an approximate $345,000 decrease in the fair value of our cash
equivalents, short-term investments, and long-term investments
as of December 31, 2009.
We limit our exposure to interest rate and credit risk by
establishing and monitoring clear policies and guidelines for
our cash equivalents and short-term investment portfolios. The
primary objective of our policies is to preserve principal while
at the same time maximizing yields, without significantly
increasing risk. Our policys guidelines limit exposure to
loss by limiting the sums we can invest in any individual
security and restricting
47
investment to securities that meet certain defined credit
ratings. We do not use derivative financial instruments in our
investment portfolio to manage interest rate risk.
Foreign Currency Exchange Rates A
substantial majority of our revenue, expense, and capital
purchasing activities are transacted in U.S. dollars.
However, we do incur certain operating costs for our foreign
operations in other currencies but these operations are limited
in scope and thus we are not materially exposed to foreign
currency fluctuations. Additionally we have some reliance on
international and export sales that are subject to the risks of
fluctuations in currency exchange rates. Because a substantial
majority of our international and export revenues, as well as
expenses, are typically denominated in U.S. dollars, a
strengthening of the U.S. dollar could cause our products
to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in
that country. We have no foreign exchange contracts, option
contracts, or other foreign currency hedging arrangements.
48
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
IMMERSION
CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Immersion
Corporation:
We have audited the accompanying consolidated balance sheets of
Immersion Corporation and subsidiaries (the Company)
as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders equity
(deficit), and cash flows for each of the three years in the
period ended December 31, 2009. Our audits also included
the financial statement schedule listed in the Index at
Item 15 (a) 2. These financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Immersion Corporation and subsidiaries as of December 31,
2009 and 2008, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2009, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 30, 2010 expressed an adverse opinion on the
effectiveness of the Companys internal control over
financial reporting because of material weaknesses.
/s/ DELOITTE &
TOUCHE LLP
San Jose, California
March 30, 2010
50
IMMERSION
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,828
|
|
|
$
|
64,769
|
|
Short-term investments
|
|
|
43,900
|
|
|
|
20,974
|
|
Accounts receivable (net of allowances for doubtful accounts of:
|
|
|
|
|
|
|
|
|
2009 $207; 2008 $436)
|
|
|
2,988
|
|
|
|
6,114
|
|
Inventories, net
|
|
|
2,001
|
|
|
|
3,757
|
|
Deferred income taxes
|
|
|
248
|
|
|
|
311
|
|
Prepaid expenses and other current assets
|
|
|
4,474
|
|
|
|
4,344
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
73,439
|
|
|
|
100,269
|
|
Property and equipment, net
|
|
|
3,498
|
|
|
|
3,827
|
|
Intangibles and other assets, net
|
|
|
10,897
|
|
|
|
9,491
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
87,834
|
|
|
$
|
113,587
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,382
|
|
|
$
|
2,842
|
|
Accrued compensation
|
|
|
1,387
|
|
|
|
2,920
|
|
Other current liabilities
|
|
|
3,087
|
|
|
|
3,493
|
|
Deferred revenue and customer advances
|
|
|
6,578
|
|
|
|
8,042
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,434
|
|
|
|
17,297
|
|
Long-term deferred revenue
|
|
|
18,851
|
|
|
|
15,989
|
|
Deferred income tax liabilities
|
|
|
248
|
|
|
|
311
|
|
Other long-term liabilities
|
|
|
560
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,093
|
|
|
|
33,809
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 9 and 16)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock and additional paid-in capital
$0.001 par value; 100,000,000 shares authorized;
shares issued: December 31, 2009- 30,786,156 and
December 31, 2008 - 30,674,045; shares outstanding:
December 31, 2009 27,999,593 and
December 31, 2008 27,887,482
|
|
|
172,679
|
|
|
|
167,870
|
|
Warrants
|
|
|
11
|
|
|
|
1,731
|
|
Accumulated other comprehensive income
|
|
|
66
|
|
|
|
109
|
|
Accumulated deficit
|
|
|
(98,626
|
)
|
|
|
(71,543
|
)
|
Treasury stock at cost: December 31, 2009 and
2008 2,786,563 shares
|
|
|
(18,389
|
)
|
|
|
(18,389
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
55,741
|
|
|
|
79,778
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
87,834
|
|
|
$
|
113,587
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
$
|
14,202
|
|
|
$
|
14,254
|
|
|
$
|
11,881
|
|
Product sales
|
|
|
11,924
|
|
|
|
11,110
|
|
|
|
14,138
|
|
Development contracts and other
|
|
|
1,599
|
|
|
|
2,617
|
|
|
|
4,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
27,725
|
|
|
|
27,981
|
|
|
|
30,140
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales (exclusive of amortization and impairment
of intangibles shown separately below)
|
|
|
8,289
|
|
|
|
7,516
|
|
|
|
7,272
|
|
Sales and marketing
|
|
|
13,324
|
|
|
|
15,472
|
|
|
|
10,272
|
|
Research and development
|
|
|
12,493
|
|
|
|
13,058
|
|
|
|
10,389
|
|
General and administrative
|
|
|
21,719
|
|
|
|
19,249
|
|
|
|
12,683
|
|
Amortization and impairment of intangibles
|
|
|
894
|
|
|
|
888
|
|
|
|
1,146
|
|
Litigation settlements, conclusions, and patent license
|
|
|
|
|
|
|
20,750
|
|
|
|
(134,900
|
)
|
Restructuring costs
|
|
|
1,462
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
58,181
|
|
|
|
77,075
|
|
|
|
(93,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(30,456
|
)
|
|
|
(49,094
|
)
|
|
|
123,278
|
|
Change in fair value of warrant liability
|
|
|
517
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
777
|
|
|
|
4,174
|
|
|
|
6,623
|
|
Interest and other expense
|
|
|
(4
|
)
|
|
|
(250
|
)
|
|
|
(1,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
|
(29,166
|
)
|
|
|
(45,170
|
)
|
|
|
128,877
|
|
Benefit (provision) for income taxes
|
|
|
310
|
|
|
|
(5,088
|
)
|
|
|
(12,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(28,856
|
)
|
|
|
(50,258
|
)
|
|
|
116,027
|
|
Discontinued operations (Note 12) :
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of discontinued operations, net of provision for
income taxes of $0
|
|
|
237
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations, net of provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes of $216, $0, and $752
|
|
|
340
|
|
|
|
(732
|
)
|
|
|
1,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(28,279
|
)
|
|
$
|
(50,990
|
)
|
|
$
|
117,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.03
|
)
|
|
$
|
(1.70
|
)
|
|
$
|
4.19
|
|
Discontinued operations
|
|
|
0.02
|
|
|
|
(0.02
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1.01
|
)
|
|
$
|
(1.72
|
)
|
|
$
|
4.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating basic net income (loss) per share
|
|
|
27,973
|
|
|
|
29,575
|
|
|
|
27,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.03
|
)
|
|
$
|
(1.70
|
)
|
|
$
|
3.68
|
|
Discontinued operations
|
|
|
0.02
|
|
|
|
(0.02
|
)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1.01
|
)
|
|
$
|
(1.72
|
)
|
|
$
|
3.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted net income (loss) per share
|
|
|
27,973
|
|
|
|
29,575
|
|
|
|
31,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock and
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
Total
|
|
|
|
Additional Paid-In Capital
|
|
|
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Equity
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Income
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balances at January 1, 2007
|
|
|
24,797,572
|
|
|
$
|
110,501
|
|
|
$
|
3,686
|
|
|
$
|
67
|
|
|
$
|
(137,639
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
(23,385
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,086
|
|
|
|
|
|
|
|
|
|
|
|
117,086
|
|
|
$
|
117,086
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
88
|
|
Unrealized gain (loss) on
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to common stock
|
|
|
2,656,677
|
|
|
|
17,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,257
|
|
|
|
|
|
Issuance of stock for ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchase
|
|
|
56,516
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317
|
|
|
|
|
|
Exercise of stock options
|
|
|
2,609,573
|
|
|
|
12,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,707
|
|
|
|
|
|
Exercise of warrants
|
|
|
269,512
|
|
|
|
832
|
|
|
|
(801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
Expiration of warrants
|
|
|
|
|
|
|
1,154
|
|
|
|
(1,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,446
|
|
|
|
|
|
Tax benefits from stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
|
|
|
|
14,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
30,389,850
|
|
|
$
|
160,862
|
|
|
$
|
1,731
|
|
|
$
|
137
|
|
|
$
|
(20,553
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
142,177
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,990
|
)
|
|
|
|
|
|
|
|
|
|
|
(50,990
|
)
|
|
$
|
(50,990
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
(39
|
)
|
Unrealized gain (loss) on
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(51,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchase
|
|
|
47,158
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
|
|
|
Exercise of stock options
|
|
|
237,037
|
|
|
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,253
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
5,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,327
|
|
|
|
|
|
Tax benefits from stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,786,563
|
|
|
|
(18,389
|
)
|
|
|
(18,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
30,674,045
|
|
|
$
|
167,870
|
|
|
$
|
1,731
|
|
|
$
|
109
|
|
|
$
|
(71,543
|
)
|
|
|
2,786,563
|
|
|
$
|
(18,389
|
)
|
|
$
|
79,778
|
|
|
|
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(1,713
|
)
|
|
|
|
|
|
|
1,196
|
|
|
|
|
|
|
|
|
|
|
|
(517
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,279
|
)
|
|
|
|
|
|
|
|
|
|
|
(28,279
|
)
|
|
$
|
(28,279
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
Unrealized gain (loss) on
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(28,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchase
|
|
|
30,376
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
|
|
Exercise of stock options
|
|
|
71,207
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145
|
|
|
|
|
|
Release of Restricted Stock Units
|
|
|
10,528
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
Expiration of warrants
|
|
|
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
30,786,156
|
|
|
$
|
172,679
|
|
|
$
|
11
|
|
|
$
|
66
|
|
|
$
|
(98,626
|
)
|
|
|
2,786,563
|
|
|
$
|
(18,389
|
)
|
|
$
|
55,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(28,279
|
)
|
|
$
|
(50,990
|
)
|
|
$
|
117,086
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,563
|
|
|
|
1,210
|
|
|
|
911
|
|
Amortization and impairment of intangibles
|
|
|
894
|
|
|
|
888
|
|
|
|
1,146
|
|
Stock-based compensation
|
|
|
4,524
|
|
|
|
5,327
|
|
|
|
3,446
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
(220
|
)
|
|
|
(13,556
|
)
|
Realized gain on short-term investments
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
Change in fair market value of warrant liability
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
Allowance (recovery) for doubtful accounts
|
|
|
(229
|
)
|
|
|
351
|
|
|
|
(54
|
)
|
Interest expense accretion on 5% Convertible
Debenture
|
|
|
|
|
|
|
|
|
|
|
535
|
|
Fair value adjustment of Put Option and Registration Rights
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
Loss on disposal of equipment
|
|
|
726
|
|
|
|
93
|
|
|
|
15
|
|
Gain on sales of discontinued operations
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,355
|
|
|
|
(1,012
|
)
|
|
|
(388
|
)
|
Inventories
|
|
|
1,395
|
|
|
|
(1
|
)
|
|
|
(943
|
)
|
Deferred income taxes
|
|
|
63
|
|
|
|
7,295
|
|
|
|
(7,297
|
)
|
Prepaid expenses and other current assets
|
|
|
(131
|
)
|
|
|
(1,310
|
)
|
|
|
(1,840
|
)
|
Other assets
|
|
|
11
|
|
|
|
12
|
|
|
|
(62
|
)
|
Accounts payable
|
|
|
(1,441
|
)
|
|
|
1,473
|
|
|
|
(618
|
)
|
Accrued compensation and other current liabilities
|
|
|
(1,702
|
)
|
|
|
2,384
|
|
|
|
620
|
|
Income taxes payable
|
|
|
4
|
|
|
|
(415
|
)
|
|
|
15,211
|
|
Deferred revenue and customer advances and long-term customer
advance from
|
|
|
|
|
|
|
|
|
|
|
|
|
Microsoft
|
|
|
1,398
|
|
|
|
6,140
|
|
|
|
(30,607
|
)
|
Other long-term liabilities
|
|
|
285
|
|
|
|
(1,508
|
)
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(18,318
|
)
|
|
|
(30,364
|
)
|
|
|
84,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of
available-for-sale
investments
|
|
|
(97,980
|
)
|
|
|
(59,242
|
)
|
|
|
(96,719
|
)
|
Proceeds from maturities of
available-for-sale
investments
|
|
|
75,000
|
|
|
|
89,978
|
|
|
|
45,110
|
|
Additions to intangibles
|
|
|
(2,589
|
)
|
|
|
(2,394
|
)
|
|
|
(2,199
|
)
|
Purchases of property and equipment
|
|
|
(1,569
|
)
|
|
|
(3,090
|
)
|
|
|
(1,438
|
)
|
Proceeds from sales of discontinued operations
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(26,901
|
)
|
|
|
25,252
|
|
|
|
(55,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
134
|
|
|
|
330
|
|
|
|
317
|
|
Exercise of stock options and warrants
|
|
|
144
|
|
|
|
1,253
|
|
|
|
12,738
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
220
|
|
|
|
13,556
|
|
Payment on long-term debt
|
|
|
|
|
|
|
|
|
|
|
(1,400
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
(18,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
278
|
|
|
|
(16,586
|
)
|
|
|
25,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
|
|
|
|
(26
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(44,941
|
)
|
|
|
(21,724
|
)
|
|
|
54,481
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
64,769
|
|
|
|
86,493
|
|
|
|
32,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
19,828
|
|
|
$
|
64,769
|
|
|
$
|
86,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for taxes
|
|
$
|
(54
|
)
|
|
$
|
(1,586
|
)
|
|
$
|
6,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the conversion of
the 5%
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debentures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts accrued for property and equipment, and intangibles
|
|
$
|
351
|
|
|
$
|
605
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon vesting of restricted stock units
|
|
$
|
64
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
54
IMMERSION
CORPORATION
|
|
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 (GAAP).
Cash
Equivalents
The Company considers all highly liquid instruments purchased
with an original or remaining maturity of less than three months
at the date of purchase to be cash equivalents.
Short-term
Investments
The Companys short-term investments consist primarily of
highly liquid commercial paper and government agency securities
purchased with an original or remaining maturity of greater than
90 days on the date of purchase. The Company classifies
debt securities with readily determinable market values as
available-for-sale.
Even though the stated maturity dates of these debt securities
may be one year or more beyond the balance sheet date, the
Company has classified all debt securities as short-term
investments as they are reasonably expected to be realized in
cash or sold within one year. These investments are carried at
fair market value with unrealized gains and losses considered to
be temporary in nature reported as a separate component of other
comprehensive income (loss) within stockholders equity.
The Company follows the guidance provided by ASC 320 to assess
whether our investments with unrealized loss positions are other
than temporarily impaired. Realized gains and losses and
declines in value judged to be other than temporary are
determined based on the specific identification method and are
reported in the consolidated statement of operations. Factors
considered in determining whether a loss is temporary include
the length of time and extent to which fair value has been less
than the cost basis, the financial condition and near-term
prospects of the investee, and our intent and ability to hold
the investment for a period of time sufficient to allow for any
anticipated recovery in market value.
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.
55
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 years
|
|
Leasehold improvements are amortized over the shorter of the
lease term or their useful life.
Intangible
Assets
Intangible assets with finite useful lives are amortized and
intangible assets with indefinite lives are not amortized but
rather are 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 utilizing
the straight-line method, which approximates the pattern of
consumption over the estimated useful lives of the respective
assets, generally ten years.
Long-lived
Assets
The Company evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of that asset may not be recoverable. An
impairment loss would be recognized when the sum of the
undiscounted future net cash flows expected to result from the
use of the asset and its eventual disposition is less than its
carrying amount. Measurement of an impairment loss for
long-lived assets and certain identifiable intangible assets
that management expects to hold and use is based on the fair
value of the asset.
Product
Warranty
The Company sells its products with warranties ranging from
three to sixty months. The Company records the estimated
warranty costs when the revenue is recognized. Historically,
warranty-related costs have not been significant.
Revenue
Recognition
The Company recognizes revenues in accordance with applicable
accounting standards, including Accounting Standards
Codification (ASC)
605-10-S99,
Revenue Recognition (ASC
605-10-S99);
ASC 605-25,
Multiple Element Arrangements (ASC
605-25);
and ASC
985-605,
Software-Revenue Recognition (ASC
985-605).
The Company derives its revenues from three principal sources:
royalty and license fees, product sales, and development
contracts. As described below, significant management judgments
and estimates must be made and used in connection with the
revenue recognized in any accounting period. Material
differences may result in the amount and timing of revenue for
any period based on the judgments and estimates made by
management. Specifically, in connection with each transaction
involving products, the Company must evaluate whether:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the fee is fixed or
determinable, and (iv) collectibility is probable. The
Company applies these criteria as discussed below.
|
|
|
|
|
Persuasive evidence of an arrangement
exists: For a license arrangement, the Company
requires a written contract, signed by both the customer and the
Company. For a stand-alone product sale, the Company requires a
purchase order or other form of written agreement with the
customer.
|
|
|
|
Delivery has occurred. The Company delivers
software and product to customers physically and delivers
software also electronically. For physical deliveries not
related to software, the transfer terms typically include
transfer of title and risk of loss at the Companys
shipping location. For electronic deliveries,
|
56
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
delivery occurs when the Company provides the customer access
codes or keys that allow the customer to take
immediate possession of the software.
|
|
|
|
|
|
The fee is fixed or determinable. The
Companys arrangement fee is based on the use of standard
payment terms which are those that are generally extended to the
majority of customers. For transactions involving extended
payment terms, the Company deems these fees not to be fixed or
determinable for revenue recognition purposes and revenue is
deferred until the fees become due and payable.
|
|
|
|
Collectibility is probable. To recognize
revenue, the Company must judge collectibility of the
arrangement fees, which is done on a
customer-by-customer
basis pursuant to the credit review policy. The Company
typically sells to customers with whom there is a history of
successful collection. For new customers, the Company evaluates
the customers financial position and ability to pay. If it
is determined that collectibility is not probable based upon the
credit review process or the customers payment history,
revenue is recognized when payment is received.
|
Royalty and license revenue The Company
recognizes royalty revenue based on royalty reports or related
information received from the licensee and when collectibility
is deemed reasonably assured. The terms of the royalty
agreements generally require licensees to give the Company
notification of royalties within 30 to 45 days of the end
of the quarter during which the sales occur. The Company
recognizes license fee revenue for licenses to intellectual
property when earned under the terms of the agreements.
Generally, revenue is recognized on a straight-line basis over
the expected term of the license.
Product sales The Company recognizes revenue
from the sale of products and the license of associated software
if any, and expense all related costs of products sold, once
delivery has occurred and customer acceptance, if required, has
been achieved. The Company has determined that the license of
software for the medical simulation products is incidental to
the product as a whole. The Company typically grants to
customers a warranty which guarantees that products will
substantially conform to the Companys current
specifications for generally twelve months from the delivery
date pursuant to the terms of the arrangement. Historically,
warranty-related costs have not been significant. Extended
warranty contract revenues are recognized ratably over the
contractual period.
Development contracts and other revenue
Development contracts and other revenue is comprised of
professional services (consulting services
and/or
development contracts). Professional services revenues are
recognized under the proportional performance accounting method
based on physical completion of the work to be performed or
completed performance method. A provision for losses on
contracts is made, if necessary, in the period in which the loss
becomes probable and can be reasonably estimated. Revisions in
estimates are reflected in the period in which the conditions
become known. To date, such losses have not been significant.
Multiple element arrangements The Company
enters into multiple element arrangements in which customers
purchase a time-based license which include a combination of
software
and/or
intellectual property licenses, professional services and to a
lesser extent, post contract customer support. For arrangements
that include software and professional services, the services
are not essential to the functionality of the software, and
customers typically purchase consulting services to facilitate
the adoption of the Companys technology, but they may also
decide to use their own resources or appoint other professional
service organizations to perform these services. Contract fees
for professional services and post-contract customer support are
not frequently sold on a stand-alone basis and as such, the
Company does not have sufficient evidence of fair value. For
these arrangements, revenue is recognized over the period of the
ongoing obligation which is generally consistent with the
contractual term of the time-based license.
57
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys revenue recognition policies are significant
because revenues are a key component of the Companys
results of operations. In addition, the Companys revenue
recognition determines 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 $78,000,
$229,000, and $102,000 in 2009, 2008, and 2007, 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 uses the asset and liability method of accounting
for income taxes. Under this method, income tax expense is
recognized for the amount of taxes payable or refundable for the
current year. In addition, deferred tax assets and liabilities
are recognized for the expected future tax consequences of
temporary differences between the financial reporting and tax
bases of assets and liabilities, and for operating losses and
tax credit carryforwards. 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. 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
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. See Note 10 for
further information regarding the Companys stock-based
compensation assumptions and expenses.
58
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive
Income (Loss)
Comprehensive income (loss) includes net income (loss) as well
as other items of comprehensive income. The Companys other
comprehensive income consists of foreign currency translation
adjustments and unrealized gains and losses on
available-for-sale
securities. The components of accumulated other comprehensive
income are as below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net unrealized losses on short-term investments
|
|
$
|
(35
|
)
|
|
$
|
19
|
|
|
$
|
7
|
|
Foreign currency translation adjustment
|
|
|
101
|
|
|
|
90
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
66
|
|
|
$
|
109
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of
Estimates
The preparation of consolidated financial statements and related
disclosures in accordance with GAAP 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. Significant estimates include valuation of
short-term investments, income taxes including uncertain tax
provisions, revenue recognition, stock-based compensation,
contingent liabilities from litigation, and accruals for other
liabilities. 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, cash
equivalents, short term investments, and accounts receivable.
The Company invests primarily in money market accounts and
highly liquid instruments purchased with an original or
remaining maturity of greater than 90 days on the date of
purchase. 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: 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 impact of the global economic downturn; the hiring,
training, and retention of key employees; successful and timely
completion of product and technology development efforts; and
new product or technology introductions by competitors.
Fair
Value of Financial Instruments
Financial instruments consist primarily of cash equivalents,
short-term investments, accounts receivable and accounts
payable. Cash equivalents and short term investments are stated
at fair value based on quoted market
59
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prices. The recorded cost of accounts receivable and accounts
payable approximate the fair value of the respective assets and
liabilities.
Foreign
Currency Translation
The functional currency of the Companys foreign subsidiary
is U.S. dollars. 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 April 2008, the FASB issued ASC
350-30,
Determination of the Useful Life of Intangible
Assets. (ASC
350-30).
ASC 350-30
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset. ASC
350-30 is
effective for fiscal years beginning after December 15,
2008. The adoption of this guidance did not have a material
impact on the Companys consolidated results of operations,
financial position or cash flows.
In April 2009, the FASB issued ASC
320-10,
Recognition and Presentation of
Other-Than-Temporary
Impairments (ASC
320-10).
This ASC amends the other-than temporary impairment guidance for
debt securities to make the guidance more operational and to
improve the presentation and disclosure of
other-than-temporary
impairments in the financial statements. The most significant
change the guidance brings is a revision to the amount of
other-than-temporary
loss of a debt security recorded in earnings. ASC
320-10 is
effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this guidance did not have a
material impact on the Companys consolidated results of
operations, financial position or cash flows.
In April 2009, the FASB issued ASC
820-10,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly
(ASC
820-10).
ASC 820-10
provides guidance for estimating fair value when the volume and
level of activity for the asset or liability have significantly
decreased. This ASC also includes guidance on identifying
circumstances that indicate a transaction is not orderly. This
guidance emphasizes that even if there has been a significant
decrease in the volume and level of activity for the asset or
liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair
value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is,
not a forced liquidation or distressed sale) between market
participants at the measurement date under current market
conditions. ASC
820-10 is
effective for interim and annual reporting periods ending after
June 15, 2009, and is applied prospectively. The adoption
of this guidance did not have a material impact on the
Companys consolidated results of operations, financial
position or cash flows.
In April 2009, the FASB issued ASC
825-10,
Interim Disclosures about Fair Value of Financial
Instruments. (ASC
825-10).
This guidance requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This
guidance also requires those disclosures in summarized financial
information at interim reporting periods. ASC
825-10 is
effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this guidance did not have a
material impact on the Companys consolidated results of
operations, financial position or cash flows.
In May 2009, the FASB issued ASC
855-10,
Subsequent Events (ASC
855-10).
ASC 855-10
provides guidance on managements assessment of subsequent
events and incorporates this guidance into accounting
literature. It also requires entities to disclose the date
through which they have evaluated subsequent events and whether
the date corresponds with the release of their financial
statements. This guidance is effective for all interim and
annual periods ending after June 15, 2009. The adoption of
this guidance did not have a material impact on the
Companys consolidated results of operations or financial
position. In February 2010, the FASB issued Accounting Standards
Update
2010-09
which eliminates the requirement to disclose the date through
which subsequent events
60
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
have been evaluated for SEC filers. This guidance, effective
upon issuance, did not have a material impact on the
Companys results of operations, financial position, or
cash flows.
In September 2009, the FASB ratified Accounting Standards Update
(ASU)
2009-13
(update to ASC 605), Revenue Arrangements with Multiple
Deliverables (ASU
2009-13
(update to ASC 605)). This guidance addresses criteria for
separating the consideration in multiple-element arrangements.
ASU 2009-13
(update to ASC 605) requires companies to allocate the
overall consideration to each deliverable by using a best
estimate of the selling price of individual deliverables in the
arrangement in the absence of vendor-specific objective evidence
or other third-party evidence of the selling price. ASU
2009-13
(update to ASC 605) will be effective prospectively for
revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 and early
adoption will be permitted. The Company is currently evaluating
the potential impact, if any, of the adoption of ASU
2009-13
(update to ASC 605) on its consolidated results of
operations and financial condition.
In September 2009, the FASB also ratified ASU
2009-14
(update to ASC 605), Certain Revenue Arrangements That
Include Software Elements (ASU
2009-14
(update to ASC 605)). ASU
2009-14
(update to ASC 605) provides guidance to exclude
(a) non-software components of tangible products and
(b) software components of tangible products that are sold,
licensed, or leased with tangible products when the software
components and non-software components of the tangible product
function together to deliver the tangible products
essential functionally. ASC
2009-14
(update to ASC 605) has an effective date that is
consistent with ASU
2009-13
(update to ASC 605) above. The Company is currently
evaluating the potential impact, if any, of the adoption of ASC
2009-14
(update to ASC 605) on its consolidated results of
operations and financial condition.
|
|
2.
|
Fair
Value Disclosures
|
Cash
Equivalents, Short-term Investments, and Warrant Derivative
Liabilities
The financial instruments of the Company measured at fair value
on a recurring basis are cash equivalents, short-term
investments, and warrant derivative liabilities. The
Companys cash equivalents and short-term investments are
classified within Level 1 or Level 2 of the fair value
hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency. The Companys
warrant derivative liabilities are classified within
Level 3 of the fair value hierarchy because they are valued
using unobservable inputs which reflect the reporting
entitys own assumptions that market participants would use
in pricing the liability. Unobservable inputs are developed
based on the best information available in the circumstances and
also include the Companys own data.
The types of instruments valued based on quoted market prices in
active markets include most U.S. government agency
securities and most money market securities. Such instruments
are generally classified within Level 1 of the fair value
hierarchy.
The types of instruments valued based on quoted prices in
markets that are less active, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price
transparency and include most investment-grade corporate
commercial papers. Such instruments are generally classified
within Level 2 of the fair value hierarchy.
The types of instruments valued based on unobservable inputs
which reflect the reporting entitys own assumptions that
market participants would use in pricing the liability include
the warrant derivative liability. Such instruments are generally
classified within Level 3 of the fair value hierarchy.
61
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financial instruments measured at fair value on a recurring
basis as of December 31, 2009 and December 31, 2008
are classified based on the valuation technique in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
49,071
|
|
|
$
|
|
|
|
$
|
|
|
|
|
49,071
|
|
Money market accounts
|
|
|
11,546
|
|
|
|
|
|
|
|
|
|
|
|
11,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
60,617
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes $3.1 million of cash held in banks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate commercial paper
|
|
$
|
|
|
|
$
|
24,971
|
|
|
$
|
|
|
|
$
|
24,971
|
|
U.S. government agency securities
|
|
|
23,978
|
|
|
|
|
|
|
|
|
|
|
|
23,978
|
|
Money market accounts
|
|
|
34,429
|
|
|
|
|
|
|
|
|
|
|
|
34,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
58,407
|
|
|
$
|
24,971
|
|
|
$
|
|
|
|
$
|
83,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes $2.4 million of cash held in banks.
The following table provides a summary of changes in fair value
in the Level 3 financial instrument for the twelve months
ending December 31, 2009:
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Fair Value Measurement Using
|
|
Warrant Derivative Liability
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
(In thousands)
|
|
|
Balances, beginning of the period, January 1, 2009
|
|
$
|
517
|
|
Change in fair value
|
|
|
|
|
Included in net loss
|
|
|
(517
|
)
|
|
|
|
|
|
Balances, end of period
|
|
$
|
|
|
|
|
|
|
|
Short-term
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Holding Gains
|
|
|
Holding Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Government agency securities
|
|
$
|
43,935
|
|
|
$
|
2
|
|
|
$
|
(37
|
)
|
|
$
|
43,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,935
|
|
|
$
|
2
|
|
|
$
|
(37
|
)
|
|
$
|
43,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Holding Gains
|
|
|
Holding Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Commercial paper
|
|
$
|
9,980
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
9,981
|
|
Government agency securities
|
|
|
10,975
|
|
|
|
18
|
|
|
|
|
|
|
|
10,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,955
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
20,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of the Companys
available-for-sale
securities on December 31, 2009 and December 31, 2008
were all due in one year or less except for one government
agency security of $5 million at December 31, 2009 due
in two years.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Raw materials and subassemblies
|
|
$
|
1,653
|
|
|
$
|
3,119
|
|
Work in process
|
|
|
45
|
|
|
|
209
|
|
Finished goods
|
|
|
303
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
2,001
|
|
|
$
|
3,757
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Computer equipment and purchased software
|
|
$
|
4,458
|
|
|
$
|
4,735
|
|
Machinery and equipment
|
|
|
1,909
|
|
|
|
3,269
|
|
Furniture and fixtures
|
|
|
1,407
|
|
|
|
1,336
|
|
Leasehold improvements
|
|
|
1,458
|
|
|
|
1,261
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,232
|
|
|
|
10,601
|
|
Less accumulated depreciation
|
|
|
(5,734
|
)
|
|
|
(6,774
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,498
|
|
|
$
|
3,827
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Intangibles
and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Patents and technology
|
|
$
|
19,018
|
|
|
$
|
17,008
|
|
Other assets
|
|
|
145
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
Gross intangibles and other assets
|
|
|
19,163
|
|
|
|
17,164
|
|
Accumulated amortization of patents and technology
|
|
|
(8,266
|
)
|
|
|
(7,673
|
)
|
|
|
|
|
|
|
|
|
|
Intangibles and other assets, net
|
|
$
|
10,897
|
|
|
$
|
9,491
|
|
|
|
|
|
|
|
|
|
|
63
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company amortizes its intangible assets related to patents
and trademarks, over their estimated useful lives, generally
10 years. Amortization of intangibles excluding impairments
during the years ended December 31, 2009, 2008, and 2007
was $827,000, $842,000 and $1.0 million, respectively. The
estimated annual amortization expense for intangible assets as
of December 31, 2009 is $1.2 million in 2010,
$1.3 million in 2011, $1.3 million in 2012,
$1.2 million in 2013, $1.1 million in 2014, and
$4.7 million in total for all years thereafter, assuming no
future acquisitions, write-offs, or impairment charges. For the
years ended December 31, 2009 and 2008, the patents in
process included in Patents and Technology were
$7.0 million and $5.7 million, respectively.
|
|
6.
|
Components
of Other Current Liabilities and Deferred Revenue and Customer
Advances
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accrued legal
|
|
$
|
509
|
|
|
$
|
491
|
|
Income taxes payable
|
|
|
40
|
|
|
|
36
|
|
Other current liabilities
|
|
|
2,538
|
|
|
|
2,966
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
3,087
|
|
|
$
|
3,493
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
6,336
|
|
|
$
|
7,954
|
|
Customer advances
|
|
|
242
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue and customer advances
|
|
$
|
6,578
|
|
|
$
|
8,042
|
|
|
|
|
|
|
|
|
|
|
5% Senior
Subordinated Convertible Debentures (5% Convertible
Debentures)
On December 23, 2004, the Company issued an aggregate
principal amount of $20.0 million of 5% Convertible
Debentures. The 5% Convertible Debentures original maturity
date was December 22, 2009. On July 27, 2007, the
Company announced that it had notified the holders of its
5% Convertible Debentures of its intent to redeem all of
the 5% Convertible Debentures in full, pursuant to the
mandatory redemption provision. Approximately $20.1 million
of principal and accrued interest was then outstanding under the
5% Convertible Debentures. Under the terms of the
5% Convertible Debentures, once the closing bid price of
the Companys common stock exceeded $14.053 per share for
20 consecutive trading days, the Company could redeem the
5% Convertible Debentures at the end of a
30-day
notice period. Prior to the end of the
30-day
period, the holders of the 5% Convertible Debenture could
have elected to convert the principal and accrued interest
outstanding into shares of the Companys common stock at a
conversion price of $7.0265 per share. The 5% Convertible
Debentures ceased to accrue further interest upon the
Companys election to affect the mandatory redemption.
During the notice period, $17.2 million of
5% Convertible Debentures and approximately $67,000 of
accrued interest were converted into 2,656,677 shares of
common stock. At the end of the notice period in 2007,
$1.4 million of 5% Convertible Debentures were
redeemed for cash. Interest expense of approximately $106,000
was incurred from unaccreted interest recognized upon the
redemption of $1.4 million of 5% Convertible
Debentures. Amounts outstanding at both December 31, 2009
and 2008 were $0.
|
|
8.
|
Long-term
Deferred Revenue
|
On December 31, 2009, long-term deferred revenue was
$18.9 million and included approximately $16.8 million
of deferred revenue from Sony Computer Entertainment. On
December 31, 2008, long-term deferred revenue was
$16.0 million and included approximately $14.5 million
of deferred revenue from Sony Computer Entertainment. See
Note 11 for further discussion.
64
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases several of its facilities, vehicles, and some
office equipment under noncancelable operating lease
arrangements that expire at various dates through 2015.
Minimum future lease payments are as follows:
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
737
|
|
2011
|
|
|
721
|
|
2012
|
|
|
649
|
|
2013
|
|
|
666
|
|
2014
|
|
|
397
|
|
Thereafter
|
|
|
96
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
3,266
|
|
|
|
|
|
|
Rent expense was $986,000, $1.2 million, and
$1.2 million in 2009, 2008, and 2007, respectively.
|
|
10.
|
Stock-based
Compensation
|
The Companys equity incentive program is a long-term
retention program that is intended to attract, retain, and
provide incentives for talented employees, consultants,
officers, and directors, and to align stockholder and employee
interests. Essentially all of the Companys employees
participate in the equity incentive program. The Company may
grant options, stock appreciation rights, restricted stock,
restricted stock units (RSUs), performance shares,
performance units, and other stock-based or cash-based awards to
employees, directors, and consultants. Since inception, the
Company has approved programs that allow the recipient the right
to purchase up to 21,095,474 shares of its common stock.
Under these programs, stock options may be granted 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. RSUs generally vest over
3 years. On December 31, 2009, 4,320,277 shares
of common stock were available for grant, and there were
5,041,235 options to purchase shares of common stock
outstanding, as well as 225,055 restricted stock awards and
units outstanding.
On June 6, 2007, the Companys stockholders approved
the Immersion Corporation 2007 Equity Incentive Plan (the
2007 Plan). The 2007 Plan replaced the
Companys 1997 Stock Option Plan (the 1997
Plan). Effective June 6, 2007, the 1997 Plan was
terminated. Under the 2007 Plan, the Company may grant stock
options, stock appreciation rights, restricted stock, RSUs,
performance shares, performance units, and other stock-based or
cash-based awards to employees and consultants. The 2007 Plan
also authorizes the grant of awards of stock options, stock
appreciation rights, restricted stock, and restricted stock
units to non-employee members of the Companys Board of
Directors and deferred compensation awards to officers,
directors, and certain management or highly compensated
employees. The 2007 Plan authorizes the issuance of
2,303,232 shares of the Companys common stock, and up
to an additional 1,000,000 shares subject to awards that
remain outstanding under the 1997 Plan as of June 6, 2007
and which subsequently terminate without having been exercised
or which are forfeited to the Company.
On April 30, 2008, the Companys Board of Directors
approved the issuance of equity awards under the Immersion
Corporation 2008 Employment Inducement Award Plan (the
2008 Plan). Under the 2008 Plan, the Company may
issue awards in the form of stock options, stock appreciation
rights, restricted stock purchase rights, restricted stock
bonuses, RSUs, performance shares, performance units, deferred
compensation awards, and other cash and stock awards. Such
awards may be granted to new employees who had not previously
been a director or
65
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
former employees or directors whose period of service was
followed by a bona-fide period of non-employment. On
February 25, 2009, 1,200,000 additional shares were
reserved for issuance under the 2008 Employment Inducement Award
Plan.
Employee
Stock Purchase Plan
The Company has an Employee Stock Purchase Plan. 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
reserved for the issuance under the ESPP plus an automatic
annual increase on each January 1 hereafter 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, 2009,
428,189 shares had been purchased since the inception of
the ESPP. Under ASC
718-10, the
ESPP is considered a compensatory plan and the Company is
required to recognize compensation cost related to the fair
value of common stock purchased under the ESPP.
On January 1, 2009, 500,000 additional shares were reserved
for issuance upon the exercise of purchase rights that may be
granted under the ESPP Plan.
66
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The following table sets forth the summary of option activity
under the Companys stock option program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of Shares
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
Outstanding at January 1, 2007 (5,403,314 exercisable at a
weighted average price of $7.65 per share)
|
|
|
7,585,423
|
|
|
|
7.40
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $6.43 per share)
|
|
|
1,442,458
|
|
|
|
10.58
|
|
|
|
|
|
|
|
|
|
Exercised(1)
|
|
|
(2,610,856
|
)
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(402,655
|
)
|
|
|
9.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 (3,774,245 exercisable at
a weighted average price of $9.11 per share)
|
|
|
6,014,370
|
|
|
|
9.11
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $4.84 per share)
|
|
|
2,438,775
|
|
|
|
8.43
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(237,037
|
)
|
|
|
5.29
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,206,441
|
)
|
|
|
8.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 (4,055,180 exercisable at
a weighted average price of $9.35 per share)
|
|
|
7,009,667
|
|
|
|
9.13
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $2.1937 per share)
|
|
|
2,066,533
|
|
|
|
3.69
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(71,207
|
)
|
|
|
2.03
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(3,963,758
|
)
|
|
|
7.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
5,041,235
|
|
|
$
|
7.99
|
|
|
|
5.52
|
|
|
$
|
1.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
3,247,607
|
|
|
$
|
9.25
|
|
|
|
3.78
|
|
|
$
|
970,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There were 1,283 options that net settled in 2007. |
The number of shares subject to options expected to vest as of
December 31, 2009 is approximately 4.7 million.
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, 2009. The aggregate intrinsic value of
options exercised under the Companys stock option plans,
determined as of the date of option exercise was $174,200 for
the year ended December 31, 2009.
67
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additional information regarding options outstanding as of
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$
|
1.20
|
$ 3.56
|
|
|
|
545,160
|
|
|
|
5.35
|
|
|
$
|
2.30
|
|
|
|
310,293
|
|
|
$
|
1.67
|
|
|
3.72
|
3.81
|
|
|
|
23,350
|
|
|
|
9.25
|
|
|
|
3.74
|
|
|
|
2,594
|
|
|
|
3.74
|
|
|
3.85
|
3.85
|
|
|
|
600,000
|
|
|
|
9.87
|
|
|
|
3.85
|
|
|
|
25,000
|
|
|
|
3.85
|
|
|
4.03
|
5.60
|
|
|
|
506,831
|
|
|
|
7.22
|
|
|
|
4.72
|
|
|
|
160,740
|
|
|
|
4.61
|
|
|
5.62
|
6.23
|
|
|
|
514,581
|
|
|
|
5.54
|
|
|
|
6.02
|
|
|
|
365,399
|
|
|
|
6.05
|
|
|
6.25
|
6.98
|
|
|
|
599,302
|
|
|
|
3.77
|
|
|
|
6.88
|
|
|
|
586,431
|
|
|
|
6.88
|
|
|
7.00
|
8.09
|
|
|
|
546,439
|
|
|
|
4.18
|
|
|
|
7.29
|
|
|
|
485,289
|
|
|
|
7.27
|
|
|
8.61
|
9.04
|
|
|
|
777,476
|
|
|
|
6.74
|
|
|
|
8.81
|
|
|
|
500,488
|
|
|
|
8.84
|
|
|
9.20
|
15.50
|
|
|
|
541,767
|
|
|
|
2.94
|
|
|
|
11.76
|
|
|
|
467,254
|
|
|
|
11.46
|
|
|
16.57
|
34.75
|
|
|
|
386,329
|
|
|
|
2.31
|
|
|
|
25.41
|
|
|
|
344,119
|
|
|
|
26.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.20
|
$34.75
|
|
|
|
5,041,235
|
|
|
|
5.52
|
|
|
$
|
7.99
|
|
|
|
3,247,607
|
|
|
$
|
9.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
Restricted stock award activity for the twelve months ended
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant Date
|
|
|
|
of Shares
|
|
|
Fair Value
|
|
|
Beginning Outstanding Balance
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
27,000
|
|
|
$
|
2.70
|
|
Released
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Outstanding Balance at December 31, 2009
|
|
|
27,000
|
|
|
$
|
2.70
|
|
|
|
|
|
|
|
|
|
|
68
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock Units
Restricted stock unit activity for the twelve months ended
December 31, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of Shares
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
Outstanding balance at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
34,500
|
|
|
|
|
|
|
|
|
|
Released
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance at December 31, 2008
|
|
|
34,500
|
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
292,287
|
|
|
|
|
|
|
|
|
|
Released
|
|
|
(10,528
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(118,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding balance at December 31, 2009
|
|
|
198,055
|
|
|
|
1.21
|
|
|
$
|
907,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2009
|
|
|
148,206
|
|
|
|
1.21
|
|
|
$
|
678,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the market value
as of the end of the reporting period.
Stock-based
Compensation
Valuation and amortization method The
Company uses the Black-Scholes-Merton option pricing model
(Black-Scholes model), single-option approach to
determine the fair value of stock options and ESPP 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 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 calculating the average term
from the Companys historical stock option exercise
experience. The expected term of ESPP shares is the length of
the offering period. The Company used the simplified method
approved by the SEC to determine the expected term for options
granted prior to December 31, 2007.
Expected volatility The Company estimates
the volatility of its common stock taking into consideration its
historical stock price movement 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.
69
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The assumptions used to value option grants and shares under the
ESPP are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Employee Stock Purchase Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Expected life (in years)
|
|
|
5.5
|
|
|
|
5.5
|
|
|
|
6.25
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Interest rate
|
|
|
2.1
|
%
|
|
|
2.7
|
%
|
|
|
4.5
|
%
|
|
|
0.4
|
%
|
|
|
2.0
|
%
|
|
|
5.1
|
%
|
Volatility
|
|
|
68
|
%
|
|
|
63
|
%
|
|
|
60
|
%
|
|
|
109
|
%
|
|
|
88
|
%
|
|
|
50
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation recognized in the consolidated
statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Income Statement Classifications
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
$
|
162
|
|
|
$
|
209
|
|
|
$
|
109
|
|
Sales and marketing
|
|
|
853
|
|
|
|
1,369
|
|
|
|
905
|
|
Research and development
|
|
|
1,149
|
|
|
|
1,396
|
|
|
|
969
|
|
General and administrative
|
|
|
2,360
|
|
|
|
2,259
|
|
|
|
1,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
4,524
|
|
|
|
5,233
|
|
|
|
3,326
|
|
Discontinued operations
|
|
|
|
|
|
|
94
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,524
|
|
|
$
|
5,327
|
|
|
$
|
3,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The benefits of tax deductions in excess of recognized
compensation expense are required 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 the
years ended December 31, 2009, 2008 and 2007, the Company
recorded $0, $220,000, and $13.6 million, respectively, of
excess tax benefits from stock-based compensation.
The Company had calculated an additional paid-in capital
(APIC) pool. 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. 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, 2009, there was $8.5 million of
unrecognized compensation cost, adjusted for estimated
forfeitures, related to non-vested stock options, restricted
stock awards and restricted stock units granted to the
Companys employees and directors. This cost will be
recognized over an estimated weighted-average period of
approximately 2.88 years for options, 0.17 years for
restricted stock awards and 2.17 years for restricted stock
units. Total unrecognized compensation cost will be adjusted for
future changes in estimated forfeitures.
Stock
Repurchase Program
On November 1, 2007, the Company announced its Board of
Directors authorized the repurchase of up to $50 million of
the Companys common stock. The Company may repurchase its
stock for cash in the open market in accordance with applicable
securities laws. The timing of and amount of any stock
repurchase will depend on share price, corporate and regulatory
requirements, economic and market conditions, and other factors.
The stock repurchase authorization has no expiration date, does
not require the Company to repurchase a specific number of
shares, and may be modified, suspended, or discontinued at any
time.
70
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the twelve months ended December 31, 2008, the
Company repurchased 2.8 million shares for
$18.4 million at an average cost of $6.60 through open
market repurchases. This amount is classified as treasury stock
on the Companys consolidated balance sheet. There were no
stock repurchases in 2009.
Warrants
The Company adopted ASC
815-40,
effective January 1, 2009. ASC
815-40
provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument is
indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
Therefore, warrants to purchase 426,951 shares of the
Companys common stock issued in 2004 that were previously
classified within stockholders equity have been
retroactively restated upon adoption of ASC
815-40 and
classified within Other Current Liabilities due to the presence
of a warrant adjustment feature that allows for a change in the
number of shares subject to issuance and a change in the
exercise price of the warrant under certain circumstances,
including the issuance of stock for cash in a secondary
offering. The warrants expired on December 23, 2009 and
marked to market with changes to fair value recognized in
non-operating income. The Company calculated the fair value of
warrants as of January 1, 2009 using the Black-Scholes
option pricing model, assuming a risk-free rate of 1.6%, a
volatility factor of 66.9% and a contractual life of one year.
Accordingly, a derivative liability was established in the
amount of $517,000 with an offset to warrants of
$1.7 million and the cumulative effect of the change in
accounting principle in the amount of $1.2 million
recognized as an adjustment to the opening balance of retained
earnings as of January 1, 2009. As of December 31,
2009, the Company eliminated the remaining balance of the
warrants derivative liability with a credit to non-operating
income of $25,828 because the warrants expired unexercised.
|
|
11.
|
Litigation
Settlement, Conclusions, and Patent License
|
In 2003, the Company executed a series of agreements with
Microsoft that provided for settlement of its lawsuit against
Microsoft as well as various licensing, sublicensing, and equity
and financing arrangements. Under the terms of these agreements,
in the event that the Company elected to settle the action in
the United States District Court for the Northern District of
California entitled Immersion Corporation v. Sony
Computer Entertainment of America, Inc., Sony Computer
Entertainment Inc. and Microsoft Corporation, Case
No. C02-00710
CW (WDB), as such action pertains to Sony Computer
Entertainment, and grant certain rights, the Company would be
obligated to pay Microsoft a minimum of $15.0 million for
amounts up to $100.0 million received from Sony Computer
Entertainment, plus 25% of amounts over $100.0 million up
to $150.0 million, and 17.5% of amounts over
$150.0 million. The Company determined that the conclusion
of its litigation with Sony Computer Entertainment did not
trigger any payment obligations under its Microsoft agreements.
Accordingly, the liability of $15.0 million that was in the
financial statements at December 31, 2006 was extinguished,
and the Company accounted for this sum during 2007 as litigation
conclusions and patent license income. However, on June 18,
2007, Microsoft filed a complaint against the Company in the
U.S. District Court for the Western District of Washington
alleging one claim for breach of a contract. Microsoft alleged
that the Company breached a Sublicense Agreement
executed in connection with the parties settlement in 2003
of the Companys claims of patent infringement against
Microsoft. The complaint alleged that Microsoft was entitled to
payments that Microsoft contends are due under the Sublicense
Agreement as a result of Sony Computer Entertainments
satisfaction of the judgment in the Companys lawsuit
against Sony Computer Entertainment and payment of other sums to
the Company. In a letter sent to the Company dated May 1,
2007, Microsoft stated that it believed the Company owed
Microsoft at least $27.5 million, an amount that was
subsequently increased to $35.6 million. Although the
Company disputed Microsofts allegations, on
August 25, 2008 the parties agreed to settle all claims.
The Company had made no offers to settle prior to
August 25, 2008. Under the terms of the settlement, the
Company paid Microsoft $20.8 million in October 2008.
In March 2007, the Companys patent infringement litigation
with Sony Computer Entertainment concluded. Sony Computer
Entertainment satisfied the judgment against it from the United
States District Court for the Northern District of California,
which included damages, pre-judgment interest, costs and
interest totaling $97.3 million, along with compulsory
license fees already paid to the Company of $30.6 million
and interest
71
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earned on these fees of $1.8 million. As of March 19,
2007, the Company and Sony Computer Entertainment entered into
an agreement whereby the Company granted Sony Computer
Entertainment and certain of its affiliates a worldwide,
non-transferable, non-exclusive license under the Companys
patents that have issued, may issue, or claim a priority date
before March 2017 for the going forward use, development,
manufacture, sale, lease, importation, and distribution of Sony
Computer Entertainments current and past PlayStation and
related products. The license does not cover adult, foundry,
medical, automotive, industrial, mobility, or gambling products.
Subject to the terms of the agreement, the Company also granted
Sony Computer Entertainment and certain of its affiliates
certain other licenses (relating to PlayStation games, backward
compatibility of future consoles, and the use of their licensed
products with certain third party products), an option to obtain
licenses in the future with respect to future gaming products
and certain releases and covenants not to sue. Sony Computer
Entertainment granted the Company certain covenants not to sue
and agreed to pay the Company 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, and may pay the Company certain other fees and royalty
amounts. In total, the Company will receive a minimum of
$152.2 million through the conclusion of the litigation and
the business agreement. In accordance with the guidance from ASC
605, the Company has allocated the present value of the total
payments, equal to $149.9 million, between each element
based on their relative fair values. Under this allocation, the
Company recorded $119.9 million as litigation conclusions
and patent license income, and the remaining $30.0 million
is allocated to deferred license revenue to the extent payment
is received in advance of revenue recognition. Such deferred
revenue was $16.8 million at December 31, 2009. The
Company recorded $2.4 million, $3.0 million, and
$3.0 million as revenue for the years ended
December 31, 2007, 2008, and 2009, respectively. On
December 31, 2009, the Company had recorded
$8.4 million of the $30.0 million as revenue and will
record the remaining $21.6 million as revenue, on a
straight-line basis, over the remaining capture period of the
patents licensed, ending March 19, 2017. The Company has
accounted for future payments in accordance with ASC 835. Under
ASC 835, the Company determined the present value of the
$22.5 million future payments to equal $20.2 million.
The Company is accounting for the difference of
$2.3 million as interest income as each $1.875 million
quarterly payment installment becomes due. This amount is
accounted for at December 31, 2008 in deferred revenue.
On October 20, 2004, Internet Services LLC
(ISLLC) filed claims against the Company in its
lawsuit against Sony Computer Entertainment in the
U.S. District Court for the Northern District of
California, 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 District Court
issued an order dismissing ISLLCs claims against Sony
Computer Entertainment with prejudice and dismissing
ISLLCs claims against the Company without prejudice to
ISLLC. On January 12, 2005, ISLLC filed Amended
Cross-Claims and Counterclaims against the Company that
contained similar claims. On March 24, 2005, the District
Court again dismissed certain of these claims with prejudice and
dismissed the other claims without prejudice.
On February 8, 2006, ISLLC filed a lawsuit against the
Company in the Superior Court of Santa Clara County.
ISLLCs complaint sought a share of the damages awarded to
the Company in the Sony litigation and of the Microsoft
settlement proceeds, and generally restated the claims already
adjudicated by the District Court. On March 16, 2006, the
Company answered the complaint, cross claimed for declaratory
relief, breach of contract by ISLLC, and for rescission of the
contract, and removed the lawsuit to federal court. The case was
assigned to Judge Wilken in the U.S. District Court for the
Northern District of California as a case related to the
previous proceedings involving Sony Computer Entertainment and
ISLLC. On May 10, 2007, ISLLC filed a motion in the
District Court to remand its latest action to the Superior
Court, or in the alternative, for leave to file an amended
complaint. The Company opposed ISLLCs motion, and
cross-moved for judgment on the pleadings. On June 26,
2007, the District Court ruled on the motions, denying
ISLLCs motion to remand or for leave to file an amended
complaint, and granting in part the Companys motion for
judgment on the pleadings. The District Court also dismissed one
of
72
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ISLLCs claims. However, on May 16, 2008, the District
Court entered an order granting the Companys motion for
summary judgment on all of ISLLCs claims, as well as the
Companys counterclaim for declaratory relief. As a result,
the only claims remaining in the action were the Companys
counterclaims against ISLLC. On August 22, 2008, the
Company settled its counterclaims against ISLLC and amended the
terms of its existing business agreement with ISLLC. On
August 25, 2008, the District Court entered an order
dismissing the Companys counterclaims and closed the case.
For the year ended December 31, 2008, the Company
recognized $1.1 million in royalty and license revenue as
of result of this settlement with ISLLC.
|
|
12.
|
Restructuring
Costs and Discontinued Operations
|
The Company accounts for restructuring costs and discontinued
operations in accordance with ASC 420, Exit or Disposal
Cost Obligations. The following table sets forth the
charges and expenses relating to continuing operations that are
included in the restructuring line on the Companys
consolidated statement of operations for the year ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
|
|
Restructuring
|
|
|
Add
|
|
|
Non-Cash
|
|
|
Net
|
|
|
Deduct Cash
|
|
|
Restructuring
|
|
|
|
Reserve
|
|
|
Charges
|
|
|
Adjustments
|
|
|
Expense
|
|
|
Payments
|
|
|
Reserve
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Medical workforce reductions
|
|
$
|
|
|
|
$
|
570
|
|
|
$
|
(98
|
)
|
|
$
|
472
|
|
|
$
|
(472
|
)
|
|
$
|
|
|
Touch workforce reductions
|
|
|
142
|
|
|
|
558
|
|
|
|
(31
|
)
|
|
|
527
|
|
|
|
(669
|
)
|
|
|
|
|
Medical division location transition
|
|
|
|
|
|
|
463
|
|
|
|
|
|
|
|
463
|
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142
|
|
|
$
|
1,591
|
|
|
$
|
(129
|
)
|
|
$
|
1,462
|
|
|
$
|
(1,604
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
Costs
On March 2, 2009, the Company announced that it was
relocating its Medical business operations from Gaithersburg,
Maryland to San Jose, California. In addition, the Company
closed down the Medical portion of its Montreal operations in
the third quarter of 2009. These Medical workforce reductions
were recorded as Medical segment restructuring charges for the
year ended December 31, 2009. Total costs for the
relocation of the Medical business operations and the workforce
reductions for the year ended December 31, 2009 were
$935,000. All of these restructuring costs have been paid as of
December 31, 2009.
In addition, for the year ended December 31, 2009, there
were reorganizations in the Companys Touch segment due to
business changes causing workforce reductions that have been
recorded as restructuring charges in the statement of operations
for the year ended December 31, 2009. Total costs for these
reorganizations were $527,000 for the year ended
December 31, 2009 and have been paid as of
December 31, 2009.
Results
of discontinued operations
On November 17, 2008, the Company announced that it would
divest its 3D product line which was part of its Touch segment.
The Companys 3D product line consisted of a variety of
products in the area of 3D digitizing, 3D measurement and
inspection, and 3D interaction and included products such as
MicroScribe digitizers, the CyberGlove family of products, and a
SoftMouse 3D positioning device. During the first quarter of
2009, the Company sold its CyberGlove and SoftMouse 3D
positioning device product families including inventory, fixed
assets, and intangibles. Negotiated consideration for the sale
was $900,000 in the form of cash and notes receivable and the
proceeds will be recognized when they are received. In the
second quarter of 2009, the Company sold its MicroScribe device
product family including inventory, fixed assets and
intangibles. Negotiated consideration for the sale was
$1.8 million in the form of cash and notes receivable and
the proceeds will be recognized when they are
73
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
received. Accordingly, the operations of the 3D product line
have been retrospectively restated as discontinued operations,
net of income tax, in the consolidated statement of operations
for all periods presented. The assets sold consisted primarily
of intangible assets that had no carrying value on the
Companys books at the time of sale. The Company recognized
a gain of $237,000 on the sale of these discontinued operations
from payments at the time of sale and payment on notes. Included
in restructuring costs within discontinued operations for the
year ended December 31, 2008 were asset impairment charges
which included reserves taken against capitalized patent costs
of $255,000 and fixed asset write offs of $20,000 due to the
divesting of the 3D product line. The Company had accrued
$105,000 of severance charges relating to the termination of
employment of 13 employees associated with the 3D product
line at December 31, 2008 which has been paid in cash as of
December 31, 2009.
The following is a summary of the components of income (loss)
from discontinued operations included in the consolidated
statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenues
|
|
$
|
714
|
|
|
$
|
4,895
|
|
|
$
|
4,773
|
|
Cost of Revenue
|
|
|
59
|
|
|
|
3,576
|
|
|
|
1,565
|
|
Sales and Marketing
|
|
|
99
|
|
|
|
1,656
|
|
|
|
1,397
|
|
Restructuring costs
|
|
|
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before taxes
|
|
|
556
|
|
|
|
(732
|
)
|
|
|
1,811
|
|
Benefit (provision) for taxes
|
|
|
(216
|
)
|
|
|
|
|
|
|
(752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations (net of tax)
|
|
$
|
340
|
|
|
$
|
(732
|
)
|
|
$
|
1,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009, 2008, and 2007, the
Company recorded benefit (provision) for income taxes of
$310,000, $(5.1) million, and $(12.9) million,
respectively, yielding effective tax rates of 1.1%, (11.3)%, and
(10.0)%, respectively. The 2009 income tax benefit resulted from
recording a benefit for the alternative minimum tax and net
operating loss carrybacks, research and development
monetization, valuation allowance on specific deferred tax
assets, and foreign withholding tax expense. The 2008 provision
for income tax resulted from recording a valuation allowance on
specific deferred tax assets and foreign withholding tax
expense. The 2007 provision for income tax was based on federal
and state regular income tax payable on taxable income and
foreign withholding tax expense.
The Company reported pre-tax book income (loss) from continuing
operations of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Domestic
|
|
$
|
(29,413
|
)
|
|
$
|
(45,456
|
)
|
|
$
|
128,745
|
|
Foreign
|
|
|
247
|
|
|
|
286
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(29,166
|
)
|
|
$
|
(45,170
|
)
|
|
$
|
128,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The benefit (provision) for income taxes from continuing
operations consisted of the following: