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, 2007
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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 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, 2007,
the last business day of the registrants most recently
completed second fiscal quarter, was $353,709,603 (based on the
closing sales price of the registrants common stock on
that date). Shares of the registrants common stock held by
each officer and director and each person whom owns 5% or more
of the outstanding common stock of the registrant have been
excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a
conclusive determination for other purposes. Number of shares of
common stock outstanding at February 22, 2008: 30,510,898.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2008 Annual
Meeting are incorporated by reference into Part III hereof.
IMMERSION
CORPORATION
2007
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
Forward-looking
Statements
In addition to historical information this Annual Report on
Form 10-K
includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). The forward-looking
statements involve risks and uncertainties. Forward-looking
statements are identified by words such as
anticipates, believes,
expects, intends, may,
will, and other similar expressions. However, these
words are not the only way we identify forward-looking
statements. In addition, any statements which refer to
expectations, projections, or other characterizations of future
events, or circumstances, are forward-looking statements. Actual
results could differ materially from those projected in the
forward-looking statements as a result of a number of factors,
including those set forth below in Managements Discussion
and Analysis of Financial Condition and Results of Operations,
those described elsewhere in this report including Risk Factors,
and those described in our other reports filed with the
Securities and Exchange Commission (SEC). We caution
you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report, and
we undertake no obligation to update these forward-looking
statements after the filing of this report. You are urged to
review carefully and consider our various disclosures in this
report and in our other reports publicly disclosed or filed with
the SEC that attempt to advise you of the risks and factors that
may affect our business.
PART I
Overview
Immersion Corporation was founded in 1993, and we consummated
our initial public offering on November 12, 1999. Our
common stock trades on the Nasdaq Global Market under the symbol
IMMR. Immersion Corporation is a leading provider of haptic
technologies that allow people to use their sense of touch more
fully when operating a wide variety of digital devices. To
achieve this heightened interactivity, we develop and
manufacture or license a wide range of hardware and software
technologies and products. While we believe that our
technologies are broadly applicable, we are currently focusing
our marketing and business development activities on the
following target application areas: automotive, consumer
electronics, entertainment, gaming, and commercial and
industrial controls; medical simulation; mobile communications;
and three-dimensional design and interaction. We manage these
application areas under two operating and reportable segments:
1) Immersion Computing, Entertainment, and Industrial and
2) Immersion Medical.
In some markets, such as video console gaming, 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 and 3D
design and interaction, we sell products manufactured under our
own brand name through direct sales to end users, distributors,
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 700 issued or pending patents in the
U.S. and other countries, covering various aspects of
hardware and software technologies.
Haptics
and Its Benefits
The sense
of touch is a critical sense
Our senses provide immediate qualitative information, such as
that we recognize an object or the environment to be warm, soft,
red, loud, salty, fragrant, etc. Human senses perform
specialized tasks complementary and redundant to each other that
allow us to perceive the world.
Unlike sight, hearing, taste, and smell, which are solely input
systems, the touch sensory system is coupled with motor
capabilities that allow us to both feel (take in information)
and manipulate (have an effect on something). Without the sense
of touch, any motor action such as grasping an egg, walking,
sewing, typing, peeling
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an orange, and opening a door would be extremely difficult.
Indeed, the sense of touch providing both tactile
and kinesthetic information is a critical part of
our ability to interact with the world. The science of haptics
refers to this tactile and kinesthetic information. Tactile
information, perceived through stimulation of the skin, can be
produced using vibro-tactile technologies. Kinesthetic
information, perceived through the position of body parts and
their movement, can be produced using force feedback
technologies.
Computer
input peripherals with programmable haptic feedback
In the world of computers, consumer electronics, and digital
devices and controls, meaningful haptic information is limited
or missing. For example, when dialing a number or entering text
on a conventional touchscreen, we feel only the touchscreen
surface, without the subtle, yet confirming sensation we expect
from mechanical switches and keyboards.
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. These forces are
created by actuators, such as motors, which are built into
devices such as joysticks, steering wheels, gamepads, and mobile
phones. Actuators can also be designed into more sophisticated
devices used in automotive, industrial, medical, or retail kiosk
and
point-of-sale
systems, such as digital switches, rotary control modules,
touchscreens, and touch surfaces.
Haptic
feedback controlled by software and algorithms
As a user operates a haptic device, such as a joystick,
actuators within the device apply computer-generated forces that
resist, assist, and enhance the manipulations. These forces are
generated based on software algorithms and mathematical models
designed to produce appropriate sensations. For example, when
simulating the feel of interacting with a solid wall, a computer
program can signal motors within a force feedback joystick to
apply forces that emulate the impenetrability of the wall,
making the simulation more realistic. The harder the user
pushes, the harder the motors push back. When simulating the
placement of cardiac pacing leads, a computer program can signal
actuators to apply forces that would be encountered when
navigating the leads through a beating heart, giving the user a
more realistic experience of performing this procedure. These
forces can be synchronized with appropriate simulations of an
electrocardiogram, blood pressure, heart rate, and fluoroscopy
displays. When simulating the feel of pressing a button, a
computer program can signal actuators attached to a touchscreen
to apply forces that emulate the buttons particular press
and release characteristics, supplying more engaging
interactivity, even though the user touches a screen that is
seamless and flat.
Our
VibeTonz®
technology gives mobile handset user interfaces and applications
the ability to precisely control a phones vibration
actuator, providing a rich palette of tactile sensations that
can enhance operation and make content more engaging. The
VibeTonz System can be used to provide confirming feedback when
pressing virtual buttons on a handsets touchscreen; advise
users of the identity of an incoming caller or alert; supply
vibrations signifying an emotion in a text message; provide
tactile alerts for call progress and message status; and aid in
general navigation and operation. Ringtones can also be
haptically enhanced, allowing users to feel the rhythm of a
particular song. Mobile games are made more engaging and
enjoyable by adding vibro-tactile effects to particular events
such as explosions, car crashes, and bowling strikes.
The mathematical models that control actuators may be simple
modulating forces based on a function of time. These forces can
produce jolts and vibrations, for example. More complex forces
can emulate surfaces, textures, springs, and damping. All forces
can be synchronized with audio and video and controlled through
application program logic. For example, a series of individual
simulated forces can be combined to give the seamless feel of a
complex interaction, like driving a sports car, which might
include the centrifugal forces in the steering wheel, the
vibration of the road surface, the revving of the engine, and
the bass beat of a song.
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Value of
the programmability of haptics
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 now 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 (such as nonlinear or dynamic
qualities), in upgradeability, in consistent performance that
will not degrade over time, and in the potential for
personalized settings. Multiple mechanical controls can be
consolidated into one versatile programmable control 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.
Industry
Background
Haptic systems were first used in applications like military
flight simulators. In the 1960s, combat pilots honed their
flight skills in training simulators that replicated the feel of
flying actual planes. Motors and actuators pushed, pulled, and
shook the flight yoke, throttle, rudder pedals, and cockpit
shell, reproducing many of the tactile and kinesthetic cues of
real flight. Though advanced for their time, these systems were
limited by the then available technology and were therefore
relatively crude and low fidelity by todays standards.
They also cost at least hundreds of thousands, if not millions
of dollars, and therefore were not within the grasp of consumers
or even most businesses.
By the early 1980s, computing power reached the point where rich
color graphics and high-quality audio were possible. Computers
evolved from primitive command-prompt, text-based systems with
monochrome displays to powerful systems capable of rendering
colorful graphics and animations and of playing music and sound
effects. These advancements spawned entirely new businesses in
the late 1980s and early 1990s.
To the consumer, this multimedia revolution opened new
possibilities. Flight simulation moved from a professional
pilot-only activity to a PC-based hobby for millions of real and
aspiring pilots. The graphics and sound these hobbyists
experienced were far superior to what the combat pilots in the
1960s had in their expensive flight simulator systems.
The multimedia revolution also made the medical simulation
business possible. By the 1990s, high-end workstations enabled
renderings of the human anatomy to be displayed with new
realism. Companies were founded to harness this new technology
and turn it into safer and more effective teaching aides for
medical personnel.
However, the multimedia revolution also highlighted a
shortcoming in simulation products. Even though medical graphics
and animations looked incredibly realistic, they could not
convey what it feels like to break through a venal wall with a
needle or cut through the tissue surrounding the gall bladder.
In the case of flight simulation, graphics and sound could not
realistically convey what it actually feels like to fight the
flight yoke or flight stick out of a steep dive or through a
sharply banked turn. Only hands-on experience provided this
critical component of learning.
By the mid 1990s, these new industrial and consumer multimedia
products were in need of enhanced haptic technology that could
provide sensations similar to an actual hands-on experience.
Immersion Corporation was founded in 1993 to bring the critical
sense of touch back into the users experience. By
combining 1) the basic concepts used in the military flight
simulators of the 1960s,
2) state-of-the-art
advancements in robotic controls, 3) advancements in the
understanding of how the human sense of touch works, and
4) advancements in computing power, we were able to
significantly reduce the cost and size of haptic solutions while
increasing the quality of the
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simulated forces. Some of our early technology was used in the
worlds first consumer force feedback peripherals for
computer video games, such as flight sticks and steering wheels.
These products not only looked and sounded more realistic, they
allowed users to feel haptic effects that simulated, for
example, textures, bouncing and hitting a ball, and vibrations
from gun fire. In addition, with our technology, sophisticated
medical simulators offered medical professionals the ability to
practice and enhance their surgical and other procedural skills
in a way not previously possible.
Continued advancements in size, power, and cost reductions have
pushed the adoption of haptics technology even further into
those industries, as well as into new ones. Our
TouchSense®
proprietary technology is now incorporated into computer and
console gaming systems such as Sonys PlayStation products
and Microsofts Xbox products, and PC and Apple computer
systems. It is also incorporated into gaming peripherals such as
joysticks, game pads, and steering wheels manufactured by Sony,
Microsoft, and other Immersion licensees. Further, more than
2,000 Immersion Medical simulators have been deployed at
hospitals and medical schools throughout the United States and
abroad, including Beth Israel Deaconess Medical Center, Johns
Hopkins University, Mayo Clinic (Rochester, MN), Northwestern
University, Rush University Medical Center, St. Marys
Hospital (London), and Stanford University.
Demand for our VibeTonz technology that adds haptic feedback to
mobile handset interfaces and applications has been driven by
several factors. With advances in processing power, data
bandwidth, memory, and audio and graphic fidelity, the handset
has become capable of serving as a primary messaging, web
browsing, and entertainment terminal. This applications
convergence has caused mobile user interfaces to become
increasingly complex, and haptics can help mitigate the
associated usability problems by leveraging the otherwise
underutilized bandwidth of our sense of touch. Furthermore,
tactile feedback can enhance the perceived immersiveness and
quality of the mobile multimedia and gameplay experience and
provide unmistakable confirmations of touchscreen interactions.
As of today, over 10 million VibeTonz-enabled mobile phones
have been shipped by our licensees.
Although the first touchscreens were introduced in the early
1970s, their broad acceptance and proliferation didnt
occur until the mid to late 1990s. Since their introduction,
advancements in computing power, operating systems, graphical
user interfaces, and multimedia software, combined with gradual
cost reductions, have today made the touchscreen the user
interface technology of choice for many applications. In 2005,
we announced a TouchSense technology solution to enable enhanced
tactile cues for providing a more intuitive, personal, and
natural experience for the user. We adapted this solution for
small, portable touchscreens devices in 2007. With TouchSense
tactile feedback, instead of just feeling a passive touchscreen
surface, users perceive that buttons press and release, just as
mechanical buttons and switches do, creating a class of devices
that could be called active touchscreens.
Our haptic technologies are also now used by corporate
industrial designers and by researchers from the National
Aeronautics and Space Administration (NASA), Stanford
University, and the Massachusetts Institute of Technology (MIT).
Automobiles manufactured by BMW, Mercedes-Benz, Rolls Royce, and
Volkswagen have used programmable haptic controls powered by
Immersion technology. In addition, we offer 3D design and
interaction products to help game developers, mechanical
designers, animators, and other professionals reduce production
time and streamline the workflow process. Today, we believe that
as computing power increases and pushes multimedia capabilities
into new areas, even more opportunities will be created for our
programmable haptic technologies.
Our
Solutions
Our goal is to improve the way people interact with digital
devices by engaging their sense of touch. Core competencies
include our understanding of how interactions should feel and
our knowledge of how to use technology to achieve that feeling.
Our strength in both of these areas has resulted in many novel
applications.
We believe that our touch-enabled products and technologies give
users a more complete, intuitive, enjoyable, and realistic
experience. Our patented designs include software elements such
as real-time software algorithms and authoring tools, and
specialized hardware elements, such as motors, sensors,
transmissions, and control electronics. Together, these software
and hardware elements enable tactile sensations that are
context-appropriate within the application.
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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.
We have developed many software solutions for various operating
systems and computing platforms including PC, Apple, automotive,
and mobile handset operating systems. Our inventions include
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, mobile phones,
and automotive controls, we license our technologies to original
equipment manufacturers (OEM) or their suppliers who include
them 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,
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.
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, joysticks,
and medical training systems). Various haptic effect parameters
can be defined and modified, and the result immediately
experienced. Our authoring tools run on mainstream operating
systems such as Microsoft Windows.
Application Programming Interfaces
(APIs) Our APIs provide
haptic-effect generation capability. This allows designers and
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
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platforms and comply with such standards as Microsofts
entertainment application programming interface, DirectX, and a
standard communications interface, Universal Serial Bus
(USB). More generally, our software driver and API
technology has been designed to be platform independent and
ported to a variety of operating systems including Windows,
Windows CE, Windows Mobile, Mac OS X, BREW/REX (from QUALCOMM),
Java (J2SE), Linux, and VxWorks.
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 simulation systems used for training medical
professionals in minimally invasive medical procedures including
endoscopy, laparoscopy, and endovascular;
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components used in our tactile touchscreen and touch surface
solutions;
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programmable rotary control modules for operating a wide range
of devices;
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digitizers used to construct detailed 3D computer models and to
perform accurate part inspections;
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a 3D interaction product line consisting of hardware and
software solutions for animating hand movements and allowing
users to manipulate virtual objects with their hands; and
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electronic control boards and force feedback devices for arcade
games, research, and industrial applications.
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We also manufacture and private-label some products for
customers under their own brand names.
Our
Strategy
We intend to maintain and enhance our position as a leading
provider of touch-enabling technology by employing the following
strategies:
Pursue Royalty-based Licensing Model for High Volume
Applications of Our Technologies We believe that
the most effective way to proliferate our touch-enabling
technologies in some markets is to license and embed it in high
volume applications. We have licensed our intellectual property
to numerous manufacturers of joysticks, gamepads, and steering
wheels, and to manufacturers of video console gaming systems. In
addition, our technologies have been licensed to automotive
manufacturers and automotive parts suppliers for use in
automotive controls. We have licensed our software products that
create touch feedback effects in mobile handsets to
manufacturers of mobile phones, wireless operators, and content
developers. We intend to continue expanding the number and scope
of our licensing relationships in the future.
In general, our licenses permit manufacturers to produce only a
particular category of product within a specified field of use.
Our licensing model typically includes an up-front license fee
and/or a
per-unit
royalty paid by the manufacturer that may be a fixed fee or a
percentage of the selling price of the final touch-enabled
product.
Pursue Product Sales in Lower-volume Applications through
Multiple Channels For lower-volume products,
such as medical simulation and three-dimensional and design
systems, our strategy is to sell products under our own brand
name through direct sales to end users, distributors, OEMs, and
value-added resellers. Occasionally, we may design, manufacture,
and sell products for private-label resale or resell a
third-party product under the manufacturers or
Immersions brand name. The Immersion Computing,
Entertainment, and Industrial segment sells products that
consist primarily of digitizers, such as the
MicroScribe®
line; specialized whole-hand sensing gloves and software, such
as the
CyberGlove®
II wireless glove,
CyberGrasp®
system, and
CyberForce®
armature that permit simulated interaction with
three-dimensional environments; and TouchSense components and
software for our touchscreen and rotary control solutions. Our
Immersion Medical segment currently sells medical simulation
devices that simulate vascular access, endovascular
interventions, and intravenous, laparoscopic, and endoscopic
procedures.
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Secure Licensees and Customers in New Markets for
Touch-enabling Technology and Software Products
We believe that our touch-enabling technologies can be used in
virtually all areas of computing and communication. We initially
focused on computer gaming applications for personal computers
and dedicated game consoles, an area in which key companies have
accepted our technologies. We have broadened our applications
focus to areas such as automotive controls, industrial equipment
controls, and mobile phones and other portable devices, and we
secured several new licensees. Furthermore, we intend to pursue
additional applications for our technologies.
Facilitate Development of Touch-enabled
Products Our success depends on the development
of touch-enabled products by our licensees and customers. To
enable that development, we offer design packages that include
sample hardware, software, firmware, and related documentation,
and offer our technical expertise on a consulting basis. We will
continue to devote significant resources to facilitate the
development of touch-enabled products by our licensees and
customers.
Expand Software Support for Our Touch-enabling
Technologies In addition to licensing our
intellectual property or software products and supporting
licensee product development efforts, we have focused on
expanding software support for our touch-enabling technologies.
For example, we license authoring and programming tools to
customers in support of vibro-tactile haptic devices (such as
mobile phones, vibro-tactile gaming peripherals, and
touchscreens) as well as kinesthetic haptic devices (such as
rotary devices, joysticks, and steering wheels). Using our
authoring tools, various haptic-effect parameters can be defined
and modified, and the result can be immediately experienced on
the target device.
Our APIs and authoring tools provide an extensive
haptic-generation capability and allow designers and programmers
to focus on enabling their target applications with haptic
effects instead of struggling with the mechanics of programming
real-time algorithms and handling communications between
computers and devices. One focus of our marketing efforts is to
promote the adoption of our touch-enabling technologies by
software developers in certain markets. We have developed the
VibeTonz Software Development Kit (SDK) and
TouchSense SDK that contain items such as programming or
authoring tools, documentation, tutorials, and software files
containing sample touch effects. Our software support staff also
works closely with developers to assist them in developing
compelling touch-enabled applications. For example, we worked
closely with Microsoft on the Microsoft DirectX SDK,
contributing to the API specification and offering our own
authoring tools, documentation, tutorials, and sample program.
Expand Market Awareness We promote adoption
of our touch-enabling technologies by increasing market
awareness as appropriate in our various market segments. We
believe that it is important to increase awareness among
potential customers and, in some markets, end users. We have
brand visibility on packaging or in documentation or software
applications for some of these products. In addition, we
participate in industry tradeshows, maintain ongoing contact
with industry press, and provide product information on our Web
site. We also execute marketing campaigns specific to each
market. These campaigns may include public relations, direct
mail, Internet marketing, advertising, tradeshows,
and/or
public speaking at industry events.
Develop and Protect Touch-enabling Technology
Our success depends in part on our ability to license and
commercialize our intellectual property and to continue to
expand our intellectual property portfolio. We devote
substantial resources to research and development and are
engaged in projects focused on expanding the scope and
application of our technologies with particular emphasis on
mobile phone, tactile touchscreen, and medical simulation
product offerings. We have also secured technology by
acquisition and may do so again in the future. We intend to
continue to invest in technology development and potential
acquisitions and to protect our intellectual property rights
across all of our businesses.
Immersion
Computing, Entertainment, and Industrial Segment
Products
and Markets
We initially licensed our intellectual property for
touch-enabling technologies for consumer gaming peripherals in
1996 under the I-FORCE trademark. We have transitioned our
branding to the TouchSense trademark, which extends beyond
gaming to other applications of our haptics-related products and
services.
9
Gaming and Other Consumer 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 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. For the years ended
December 31, 2007, 2006, and 2005, respectively 7%, 6%, and
11% of total revenues were from Logitech.
Currently, there are consumer PC joysticks sold using TouchSense
technology, including the Force 3D Pro from Logitech; the Cyborg
Evo Force from Saitek; and the Top Gun Afterburner Force
Feedback Joystick from ThrustMaster. There are also PC steering
wheel gaming peripherals licensed under the TouchSense brand,
including the G25 Racing and MOMO Racing from Logitech; the RGT
Force Feedback Pro Clutch Edition from Guillemot; and the R660GT
Force Feedback Wheel from Saitek. There are PC gamepads that use
TouchSense technology, including the Cordless Rumblepad 2 and
Rumblepad 2 from Logitech; the T-Mini 2-in-1 Wireless Rumble
Force from ThrustMaster; and the Cyborg and P3200 from Saitek.
In the video game console peripheral market, we have licensed
our patents for use in hundreds of spinning mass tactile
feedback devices and force feedback devices from various
manufacturers including Gemini, Griffin, Hori, i-CON, Intec,
Joytech, Katana, Logitech, Mad Catz, Microsoft, NYKO,
Performance Designed Products (PDP) (formerly
Electro Source LLC), Radica, Saitek 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 and
GameCube from Nintendo. Examples of licensed products include
Logitechs DriveFX steering wheel for Xbox 360 and Cordless
Action gamepad for PS2; Microsofts Xbox 360 Wireless
Racing Wheel and Xbox 360 Wireless Controller gamepad; Mad
Catzs PS2 NFL Wireless Control Pad Pro gamepad; and
PDPs Predator Wireless Controller gamepad for PS2.
For the years ended December 31, 2007, 2006, and 2005,
respectively 21%, 18%, and 27% of our total revenues were
generated from PC and console gaming revenues.
In June 2006, we introduced next-generation TouchSense vibration
technology to match the realism expected of next-generation
video console gaming systems. The new technology provides a
wider range of vibration effects that simulate the physical
world. The new TouchSense technology also provides improved
synchronization with audio and onscreen graphic events, backward
compatibility for vibration effects in current games, authoring
tools that allow developers to create a much wider range of
effects in less time, and the ability to work alongside motion
control and tilt sensing all without cost, power
consumption, weight, or space increases for most systems.
In the arcade entertainment market, our products include
steering wheel control electronics that provide industrial
strength and quality force feedback that enable very realistic
simulations. Our commercial-quality joystick provides a similar
user experience and has been used in theme-park attractions and
flight-training applications.
In the casino and bar-top amusement market, we signed an
agreement with 3M Touch Systems in 2005 that allows manufacture
and distribution of its MicroTouch touch screens with our
TouchSense technology. 3M Touch Systems and some of its
customers demonstrated pre-production touchscreens and
integrated gaming systems at the 2007 Global Gaming Expo.
Early in 2008, Cue Acoustics announced a premium AM/FM radio and
iPod docking station that includes a TouchSense rotary control
module as its primary control mechanism.
Mobile Communications and Portable Devices We
have developed TouchSense solutions for a variety of portable
devices and the VibeTonz System for the mobile phone market.
TouchSense components include a programmable haptic rotary
control module and several products and technologies for
including vibro-tactile response in portable devices. 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).
Applications for TouchSense technologies may be expanded into a
broader range of portable devices, including remote controls for
home
10
entertainment systems, medical diagnostic and therapeutic
equipment, test and measurement equipment, portable terminals,
game devices, and media players.
The VibeTonz System, for mobile phone OEMs, operators, and
application developers, includes the VibeTonz Mobile Player, a
lightweight and powerful vibration playback system that is
embedded in the phone, and VibeTonz SDK, including a PC-based
composition tool for creating VibeTonz effects for inclusion in
content and applications. VibeTonz 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 VibeTonz-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.
In 2007, greater market acceptance of our VibeTonz System for
mobile phones was marked by:
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LG Electronics and Samsung each offering nine new phone models
with VibeTonz technology. Many of these were popular mass market
phones such as the Muziq, Chocolate 2, Viewty, Voyager, Venus,
and Prada by LG and the SGH-i710, Armani (SGH-P520), and
SGH-F700 by Samsung. During 2007, there were over 15
VibeTonz-enabled phones launched and over 5.5 million units
shipped worldwide.
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The worlds leading mobile device manufacturer, Nokia
Corporation, obtaining a long-term, worldwide license for the
VibeTonz System.
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The trade and consumer media more frequently mentioning the
benefits of tactile feedback, especially our VibeTonz System.
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Automotive In recent years there has been a
proliferation of automotive
sub-systems,
which are directly accessed by drivers and passengers. These
include telephone, navigation, climate control, personal
comfort, and audio, video, and satellite radio entertainment
systems. As a result, there has been an increase in the number
of physical control devices in the automotive center stack and
console, creating space and driver distraction problems.
We have developed TouchSense technology for 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 who have expressed
interest in touch-enabled automobile controls.
BMW was the first automobile manufacturer to license our
TouchSense rotary technology for use in vehicle controls
starting with its 2002 7 Series sedan model. BMW has also
included our technology in the Rolls Royce and in some models of
its 5 Series and 6 Series starting in 2003 and 3 Series in 2005.
Siemens VDO Automotive (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 starting in the fall of
2005. Methode Electronics, Inc., a global designer and
manufacturer of electronic component and subsystem devices, and
Volkswagen, Europes largest automaker, have both licensed
TouchSense technology for use in vehicles.
In 2006, SMK Corporation of Tokyo, a global manufacturer of
electromechanical components, licensed TouchSense technology for
use in its touch panels, including for the automotive market.
For the years ended December 31, 2007, 2006, and 2005,
respectively 10%, 9%, and 8% of our total revenues were
automotive revenues.
3D and Mechanical CAD Design Our
three-dimensional and mechanical computer-aided design products
allow users to create three-dimensional computer models directly
from physical objects and also to precisely measure manufactured
parts. These products include the MicroScribe product line,
which contains sensor and
11
microprocessor technologies that allow users to measure or
digitize physical objects simply by tracing their contours with
a stylus. Third-party software records the three-dimensional
measurements or geometry of the object and reproduces it on the
screen as a three-dimensional computer model. In another
application, third-party software compares the desired
dimensions to three-dimensional measurements of an actual part
to determine if it is within tolerance. Taken together, these
capabilities support high-accuracy parts inspection, reverse
engineering, game development, animation, filmmaking, tube
bending, and some medical applications.
We manufacture and sell the CyberGlove system, a fully
instrumented glove that measures the movement of a users
hand and, used in conjunction with our software, maps the
movement to a graphical hand on the computer screen. Users can
reach in and manipulate digital objects similar to
physical objects. The
CyberTouchtm
system is a CyberGlove product with a TouchSense vibro-tactile
feedback option that provides users with appropriate feedback
when individual fingers contact digital objects. The CyberGrasp
system is an option for the CyberGlove product that adds
TouchSense kinesthetic force feedback to the fingertips. With a
CyberGrasp system, users can actually feel the shape and
malleability of 3D graphical objects. The CyberForce product is
an enhanced, grounded, force feedback product. Incorporating our
TouchSense technologies, a CyberForce system allows users to
experience sensations similar to the CyberGrasp, but with
whole-arm, whole-hand, as well as fingertip interactions.
Our software products for our whole-hand interfaces include
VirtualHand®
SDK, VirtualHand for MotionBuilder, and VirtualHand for V5.
VirtualHand SDK is a software toolkit that helps users integrate
our whole-hand glove-based interface products into specific
applications. VirtualHand for MotionBuilder lets users acquire,
edit, and blend motion animation in AutoDesks
MotionBuilder real-time capture software. VirtualHand for V5
leverages our relationship with Dassault Systemes by bringing
our glove-based products directly into the CATIA V5 and ENOVIA
V5 environments, allowing for real-time interaction with digital
prototypes for the evaluation of ergonomics, assembly, and
maintainability of products. Users may develop multiple
digital-design iterations to replace the need for physical
prototypes, thereby reducing costs and time to market.
In addition to these 3D products, we manufacture and sell
specialized products such as computer peripherals that
incorporate advanced computer peripheral technologies. These
specialized peripherals include the
SoftMouse®,
a high performance, mouse optimized for manipulating 3D data and
used in geographic information systems and mapmaking.
For the years ended December 31, 2007, 2006, and 2005,
respectively 14%, 17%, and 17% of our total revenues were
generated from 3D and mechanical CAD design revenues.
Sales
and Distribution
Sales of these products generally do not experience seasonal
fluctuations, except for royalties from gaming peripherals,
which tend to be higher during the year-end holiday shopping
season. However, there may be variations in the timing of
revenue recognition from development contracts depending on
numerous factors including contract milestones and operations
scheduling. Our products typically incorporate readily available
commercial components. There are no unusual working capital
requirements in the Computing, Entertainment, and Industrial
segment. See Managements Discussion and Analysis of
Financial Condition and Results of Operations as well as
the notes to the consolidated financial statements for revenue
information for the past three years.
In the PC and video console gaming, mobility, and automotive
markets, we establish licensing relationships through our
business development efforts.
In mobility, sales relationships must be established with
operators, handset manufacturers, and content developers
worldwide. We have signed license agreements with mobile handset
manufacturers for the incorporation of the VibeTonz System into
certain mobile phone handsets. We have established relationships
with CDMA platform developer QUALCOMM, Incorporated and with
smartphone operating system developer Symbian, Ltd. Discussions
are ongoing with other handset manufacturers, operators, and
content developers in the United States, Europe, and Asia.
We employ a direct sales force in the United States, Europe, and
Asia to license our VibeTonz software products. In gaming, our
sales force is also augmented through co-marketing arrangements.
As part of our strategy
12
to increase our visibility and promote our touch-enabling
technology, our consumer-products license agreements may require
our licensees to display the TouchSense or VibeTonz technology
logo on their end products.
We sell our touchscreen and touch surface products to OEMs and
system integrators, such as 3M Touch Systems, Advanced Input
Systems, and StacoSwitch, using a worldwide direct sales force.
In addition, the technology is licensed to large 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, and SMK, as part of
our strategy to speed adoption of our TouchSense technologies
across the automotive industry.
The MicroScribe product line, along with first- and third-party
hardware accessories and companion software, is sold through an
international network of over 75 resellers. In addition to
direct sales, our 3D whole-hand interaction products are
distributed, sold, and supported by a worldwide network of
approximately 20 international and domestic resellers. We have
marketing relationships or contracts with leading 3D CAD/CAM and
interaction companies, including Dassault Systemes, a worldwide
leader in product lifecycle management software.
Competition
With respect to touch-enabled consumer products, we are aware of
several companies that claim to possess touch feedback
technology applicable to the consumer market. In addition, we
are aware of several companies that currently market unlicensed
touch feedback products in consumer markets.
Several companies also currently market touch feedback products
that are competitive to ours in nonconsumer markets. These
companies could also shift their focus to the consumer market.
In addition, our licensees or other companies may develop
products that compete with products employing our touch-enabling
technologies, but are based on alternative technologies, or
develop technologies that are similar or superior to our
technologies, duplicate our technologies, or design around our
patents. Many of our licensees, including Microsoft, 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.
With respect to our MicroScribe product line, we believe the G2
model, aimed primarily at the design, animation, and reverse
engineering markets, competes favorably with other digitizing
technologies, such as laser scanning and sonic systems, and with
other articulated arm models, which are all of higher accuracy
and higher price than these markets generally require. The
MicroScribe MX model, aimed at high-accuracy manufactured parts
inspection and reverse engineering markets, competes favorably
on price to other portable coordinate measurement machine
(CMM) models manufactured by Faro Technologies and Romer
CimCore, which is a part of Hexagon AB. It also competes
favorably with these competitors for many types of projects
where accuracy measurement tolerances are greater than
0.004-inch.
SensAble Technologies currently sells high-end 3D sculpting and
design products that employ haptics. We believe that
SensAbles products compete on some level with our 3D
interaction products. Competitors to our CyberGlove data glove
include Fifth Dimension Technologies, Measurand, Motion Analysis
Corporation, and Phoenix Technologies. Haption sells a product
that competes with our CyberForce system.
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.
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
13
have filed or may file. Our issued patents may be challenged,
invalidated, or circumvented, and claims of our patents may not
be of sufficient scope or strength, or issued in the proper
geographic regions, to provide meaningful protection or any
commercial advantage.
Immersion
Medical
Products
and Markets
We have developed numerous simulation technologies that can be
used for medical training and testing. By enabling a medical
simulator to more fully engage users sense of touch, our
technologies can support realistic simulations that are
effective in teaching medical students, doctors, and other
health professionals what it feels like to perform a given
procedure. The use of our simulators allows these professionals
to perfect their practice in an environment that poses no risks
to patients, where mistakes have no dire consequences, and where
animal or cadaver use is unnecessary.
In addition, corporations wanting to train customers or sales
staff on medical procedures and on the use of new tools and
medical devices engage us to develop special simulators.
Examples of projects we have completed 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
CathLabVRtm
System, which simulates endovascular interventions including
cardiac pacing, angiography, angioplasty, and carotid and
coronary stent placement; and the
LapVRtm
System, which simulates minimally invasive procedures involving
abdominal and pelvic organs.
These systems are used for training and educational purposes to
enable health professionals to feel simulated forces that they
would experience during actual medical procedures, such as
encountering an unexpected obstruction in an artery. The systems
provide a realistic training environment augmented by real-time
graphics that include anatomic models developed from actual
patient data and high-fidelity sound that includes simulated
patient responses.
All our products are comprised of a hardware system, an
interface device, and software modules that include several
cases of increasing difficulty, allowing users to develop their
skills by experiencing a broad range of pathologies in differing
anatomical conditions.
We design each product line to maximize the number of procedures
that can be simulated with minimal additional customer hardware
investment. These systems then enable potential additional sales
of software to the installed base of hardware systems. We
believe the relatively low price of our software modules
provides an opportunity for repeat sales. We currently have over
25 various software modules available that replicate such
medical procedures as intravenous catheterization, laparoscopy,
bronchoscopy, colonoscopy, cardiac pacing, and carotid and
coronary angioplasty.
Sales
and Distribution
Sales of these products may experience seasonal fluctuations
related to teaching hospitals summer residency programs.
In addition, there may be variations in timing of revenue
recognition from the sale of systems with upgrade rights and
from development contracts. The latter may depend on numerous
factors including contract milestones and timing of work
performed against the contract. Most raw materials used in the
manufacturing of our products are readily available commercial
components. There are no unusual working capital requirements in
the Medical segment. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
as well as the notes to the consolidated financial statements
for revenue information for the past three years.
With respect to medical simulation products, we employ a direct
sales force in the U.S. that markets simulation systems to
hospitals, colleges and universities, nursing schools, medical
schools, emergency medical technician training programs, the
military, medical device companies, and other organizations
involved in procedural
14
medicine. As of December 31, 2007, we had seven regional
medical sales representatives in the United States, one
independent sales representative in Europe, and have begun the
process of expanding our international selling capabilities by
hiring staff and establishing facilities outside of United
States.
For the years ended December 31, 2007, 2006, and 2005,
respectively 44%, 51%, and 40%, of our total revenues were
generated from medical revenues. For the years ended
December 31, 2007, 2006, and 2005, respectively 11%, 18%,
and 11% of our total revenues consisted of licensing, product
revenue, or development revenues from Medtronic.
Competition
There are several companies that currently sell simulation
products to medical customers. Some simulators target the same
minimally invasive procedures as do ours, while others sell
mannequin-based systems for emergency response training. All
simulators compete at some level for the same funding in medical
institutions. Competitors include Simbionix USA Corporation,
Mentice Corporation, Medical Education Technologies, Inc., and
Medical Simulation Corporation. The principal competitive
factors are the type of medical procedure being simulated,
technological sophistication, and price. We believe we compete
favorably on all three.
Research
and Development
Our success depends on our ability to invent, improve, and
reduce the cost of our technologies; 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 unique team of experts who are skilled at modeling
the anatomy and physiology of various medical cases, creating
graphical renderings, designing haptic feedback, and devising
advanced control algorithms to simulate realistic navigation for
medical procedures, such as through the bodys blood
vessels.
Application Engineering & Technical
Support We may provide application engineering
and technical support during integration of our touch-enabling
technology into customer products. To facilitate the validation
and adoption of touch-enabling technology, we have developed
various integration kits. These kits may include actuators or
actuator references, mounting samples, controller boards or
schematics, software libraries and source code samples, and
documentation. Our application engineers support customer use of
these integration kits through phone and
e-mail
technical support, onsite workshops, or other means. Our
application engineers and technical support staff may also help
install our products, train customers on their use, and provide
ongoing product support, particularly for medical training
simulators and 3D products.
Licensee Interaction To support the
successful design and adoption of our technology in a
licensees product, we make efforts to ensure clear
communication with our customers. Typically, collaborative
development efforts are structured using a four-phase approach
including Product Definition, Concept Development, Detail
Design, and Production Design phases. This four-phase design
process is typically used for designing new systems when the
solution is not known beforehand. Each phase includes formal
design reviews and documentation. The continuation of our
development effort is contingent upon successful completion and
acceptance of prior phases. This method ensures that the
customers financial risk is minimized and that project
deliverables remain consistent with the goals established in the
Product Definition phase.
Product Development Process For product
development, we follow a product design process based on ISO
9001 guidance. This process starts with the typical marketing
and product requirement stages, and once approved, 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
15
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 solid expertise in actuator design,
mounting, control software, and human factors. We are also
actively seeking and establishing worldwide research
collaboration relationships 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, 2007, 2006, and 2005,
research and development expenses were $10.1 million,
$7.6 million, and $6.0 million respectively.
Intellectual
Property
We believe that intellectual property protection is crucial to
our business. We rely on a combination of patents, copyrights,
trade secrets, trademarks, nondisclosure agreements with
employees and third parties, licensing arrangements, and other
contractual agreements with third parties to protect our
intellectual property.
We and our wholly owned subsidiaries hold more than 700 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 began to expire starting in 2007.
Where we believe it is appropriate, we will engage the legal
system to protect our intellectual property rights. For example,
we filed a complaint against Sony Computer Entertainment, Inc.
and Sony Computer Entertainment of America, Inc. (collectively
Sony Computer Entertainment) on February 11,
2002 in the U.S. District Court for the Northern District
Court of California. On 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.
Investor
Information
You can access financial and other information in the Investor
Relations section of our Web site at www.immersion.com. We make
available, on our Web site, free of charge, copies of our annual
report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically
or otherwise furnishing it to the SEC.
The charters of our audit committee, our compensation committee,
and our nominating/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, 2007, we had 152 full-time and
3 part-time employees, including 57 in research and
development, 40 in sales and marketing, and 58 in legal,
finance, administration, and operations. As of that date, we
also had 11 independent contractors. None of our employees are
represented by a labor union, and we consider our employee
relations to be positive.
16
Executive
Officers
The following table sets forth information regarding our
executive officers as of March 1, 2007.
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Name
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Position With the Company
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Age
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Victor Viegas
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President, Chief Executive Officer, and Chairman of the Board of
Directors
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50
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Stephen Ambler
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Chief Financial Officer and Vice President, Finance
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48
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Richard Vogel
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Senior Vice President and General Manager, Immersion Medical
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54
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Mr. Victor Viegas has served as Immersions Chairman
of the Board since October 31, 2007; Chief Executive
Officer and member of the board of directors since October 2002;
and President since February 2002. He was Chief Financial
Officer and Vice President, Finance from August 1999, when he
joined Immersion, until February 2005. From June 1996 to August
1999, he served as Vice President, Finance and Administration
and Chief Financial Officer of Macrovision Corporation, a
developer and licensor of video and software copy protection
technologies. From October 1986 to June 1996, he served as Vice
President of Finance and Chief Financial Officer of Balco
Incorporated, a manufacturer of advanced automotive service
equipment. He holds a Bachelor of Science degree in Accounting
and a Master of Business Administration degree from
Santa Clara University. Mr. Viegas is also a Certified
Public Accountant in the State of California.
Mr. Stephen Ambler joined Immersion in February 2005 as
Chief Financial Officer and Vice President, Finance responsible
for finance and operations. From April 2001 to January 2005,
Mr. Ambler served as Chief Financial Officer and Vice
President, Finance of Bam! Entertainment, Inc., a producer of
interactive video games. From April 1994 to March 2001, he
served as Director of Finance and Administration for Europe and
then Chief Financial Officer, Secretary, and Senior Vice
President, Finance of Insignia Solutions PLC, a wireless
solutions software company. From December 1992 to March 1994, he
served as Financial Controller and Company Secretary for Ampex
Great Britain Limited, a producer of recording equipment and
magnetic tape for the television and defense industries. From
May 1988 to December 1992, he served as Financial Controller and
then Finance Director of Carlton Cabletime Limited, a supplier
of cable television equipment. Mr. Ambler holds a diploma
in Accounting Studies from Oxford Polytechnic in England and is
qualified as a Chartered Accountant in England and Wales.
Mr. Richard Vogel joined Immersion in March 2004 as Senior
Vice President and General Manager of our wholly owned
subsidiary, Immersion Medical, in Gaithersburg, Maryland. From
September 2000 to February 2004, Mr. Vogel served as
President and Chief Executive Officer of SpectraLife, a medical
device company specializing in products for the management of
diabetes. From July 1996 to August 2000, he served as Senior
Vice President and General Manager of the New Technologies
Division of Kinetic Concepts, Inc., a manufacturer of electronic
medical devices and specialty surfaces for surgery and wound
care. From November 1989 to February 1996, he served as Vice
President, European Operations and Chief Operating Officer of
Vestar, Inc. a biopharmaceutical company specializing in
anti-infectives and oncology products. From August 1983 to
November 1989, Mr. Vogel served in a variety of general
managerial positions of increasing responsibility for the
Lederle (pharmaceuticals) and Davis & Geck (medical
devices) divisions of the American Cyanamid Company.
Mr. Vogel holds a Bachelor of Arts degree from Middlebury
College in Vermont and a Master of Business Administration
degree from the Harvard Business School.
You should carefully consider the following risks and
uncertainties, as well as other information in this report and
our SEC filings, before you invest in our common stock.
Investing in our common stock involves risk. If any of the
following risks or uncertainties actually occur, our business,
financial condition, or results of operations could be
materially adversely affected. The following risks and
uncertainties are not the only ones facing us. Additional risks
and uncertainties of which we are unaware or that we currently
believe are immaterial could also materially adversely affect
our business, financial condition, or results of operations. In
any case, the trading price of our common stock could decline,
and you could lose all or part of your investment. See also the
Forward-looking Statements discussion in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
17
Factors
That May Affect Future Results
Company
Risks
We had
an accumulated deficit of $20 million as of
December 31, 2007, have a history of losses, may experience
losses in the future, and may not achieve or maintain
profitability in the future.
Since 1997, we have incurred losses in all but the four most
recent quarters. We need to generate significant ongoing revenue
to maintain profitability. We anticipate that our expenses will
increase in the foreseeable future 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;
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protect and enforce our intellectual property;
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pursue strategic relationships;
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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.
Microsoft
Corporation (Microsoft) disputes our assessment that
we are not obligated to make any payment under our agreement
with them relating to the conclusion of our litigation with Sony
Computer Entertainment. Defending our position may be expensive,
disruptive, and time consuming, and regardless of whether we are
successful, could adversely affect our business.
In 2003, we executed a series of agreements with Microsoft as
described in Note 9 to the consolidated financial
statements that provided for settlement of our lawsuit against
Microsoft as well as various licensing, sublicensing, and equity
and financing arrangements under the Microsoft agreements. In
accordance with the sublicense agreement, in the event that we
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, we 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. In March 2007, we announced the conclusion
of our patent infringement litigation against Sony Computer
Entertainment at the U.S. Court of Appeals for the Federal
Circuit. Sony Computer Entertainment satisfied the District
Court judgment against it. As of March 19, 2007, we and
Sony Computer Entertainment entered into a new business
agreement. We have determined that we are not obligated under
our agreements with Microsoft to make any payment to it relating
to the conclusion of our litigation with Sony Computer
Entertainment. However, in a letter sent to us dated May 1,
2007, Microsoft disputed our position and stated that it
believes we owe Microsoft at least $27.5 million, which it
increased to $35.6 million at a court ordered mediation
meeting on December 11, 2007. Further, on June 18,
2007, Microsoft filed a complaint against us in the
U.S. District Court for the Western District of Washington
alleging we are in breach of our contract with Microsoft, and
that it is entitled to a share of the judgment monies and other
sums we received from Sony Computer Entertainment. We dispute
Microsofts allegations and intend to vigorously defend
ourselves in the lawsuit. The results of any litigation are
inherently uncertain, and there can be no assurance that our
position will prevail.
18
Our
current litigation undertakings are expensive, disruptive, and
time consuming, and will continue to be, until resolved, and
regardless of whether we are ultimately successful, could
adversely affect our business.
We are involved in litigation with Internet Services, LLC
(ISLLC) involving claims for breach of contract and rescission
against ISLLC in the U.S. District Court for the Northern
District of California.
We are also involved in litigation against Microsoft, as noted
above.
We are involved in legal proceedings relating to a class action
lawsuit filed on November 9, 2001, related to In re Initial
Public Offering Securities Litigation. The named defendants are
Immersion and three of our current or former officers or
directors and certain underwriters of our November 12, 1999
IPO. Subsequently, two of the individual defendants stipulated
to a dismissal without prejudice. We and most of the issuer
defendants had settled with the plaintiffs. However, the
settlement offer has subsequently been withdrawn.
Due to the inherent uncertainties of litigation, we cannot
accurately predict how these cases will ultimately be resolved.
We anticipate that the litigation will continue to be costly,
and there can be no assurance that we will be successful or able
to recover the costs we incur in connection with the litigation.
We expense litigation costs as incurred, and only accrue for
costs that have been incurred but not paid to the vendor as of
the financial statement date. Litigation has diverted, and is
likely to continue to divert, the efforts and attention of some
of our key management and personnel. As a result, until such
time as it is resolved, litigation could adversely affect our
business. Further, any unfavorable outcome could adversely
affect our business. For additional background on litigation,
please see Note 18 to the consolidated financial statements
and the section titled Item 3. Legal
Proceedings.
Litigation
regarding intellectual property rights could be expensive,
disruptive, and time consuming; could result in the impairment
or loss of portions of our intellectual property; and could
adversely affect our business.
Intellectual property litigation, whether brought by us or by
others against us, has caused us to expend, and may cause us to
expend in future periods, significant financial resources as
well as divert managements time and efforts. From time to
time, we initiate claims against third parties that we believe
infringe our intellectual property rights. We intend to enforce
our intellectual property rights vigorously and may initiate
litigation against parties that we believe are infringing our
intellectual property rights if we are unable to resolve matters
satisfactorily through negotiation. Litigation brought to
protect and enforce our intellectual property rights could be
costly, time-consuming, and distracting to management and could
result in the impairment or loss of portions of our intellectual
property. In addition, any litigation in which we are accused of
infringement may cause product shipment delays, require us to
develop non-infringing technologies, or require us to enter into
royalty or license agreements even before the issue of
infringement has been decided on the merits. If any litigation
were not resolved in our favor, we could become subject to
substantial damage claims from third parties and indemnification
claims from our licensees. We 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.
We attempt to avoid infringing known proprietary rights of third
parties. However, third parties may hold, or may in the future
be issued, patents that could be infringed by our products or
technologies. Any of these third parties might make a claim of
infringement against us with respect to the products that we
manufacture and the technologies that we license. From time to
time, we have received letters from companies, several of which
have significantly greater financial resources than we do,
asserting that some of our technologies, or those of our
licensees, infringe their intellectual property rights. Certain
of our licensees 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.
19
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.
We are
subject to the risk of additional litigation in connection with
the restatement of our consolidated financial statements and the
potential liability from any such litigation could materially
and adversely affect our business.
We have announced that we will be restating our consolidated
financial statements for the quarterly periods ended
March 31, 2007, June 30, 2007, and September 30,
2007. This restatement is reflected in the presentation of
quarterly financial information contained in this report. We
plan to restate the 2007 first, second, and third quarter
condensed consolidated financial statements prospectively when
we file our 2008 first, second, and third quarter condensed
consolidated financial statements on
Form 10-Q.
As a result of the restatement of our consolidated financial
statements, we could become subject to purported class action,
derivative, or other securities litigation. As of the date
hereof, we are not aware of any such litigation having been
commenced against us related to these matters, but we cannot
predict whether any such litigation will be commenced or, if it
is, the outcome of any such litigation. The initiation of any
such securities litigation may harm our business and financial
condition.
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.
20
Product
liability claims could be time-consuming and costly to defend
and could expose us to loss.
Our products or our licensees products may have flaws or
other defects that may lead to personal or other injury claims.
If products that we or our licensees sell cause personal injury,
property injury, financial loss, or other injury to our or our
licensees customers, the customers or our licensees may
seek damages or other recovery from us. Any claims against us
would be time-consuming, expensive to defend, and distracting to
management, and could result in damages and injure our
reputation, the reputation of our technology and services,
and/or the
reputation of our products, or the reputation of our licensees
or their products. This damage could limit the market for our
and our licensees products and harm our results of
operations.
In the past, manufacturers of peripheral products including
certain gaming products such as joysticks, wheels, or gamepads,
have been subject to claims alleging that use of their products
has caused or contributed to various types of repetitive stress
injuries, including carpal tunnel syndrome. We have not
experienced any product liability claims to date. Although our
license agreements typically contain provisions designed to
limit our exposure to product liability claims, existing or
future laws or unfavorable judicial decisions could limit or
invalidate the provisions.
If 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.
Industry
and Technology Risks
We
have little or no control or influence on our licensees
design, manufacturing, promotion, distribution, or pricing of
their products incorporating our touch-enabling technologies,
upon which we generate royalty revenue.
A key part of our business strategy is to license our
intellectual property to companies that manufacture and sell
products incorporating our touch-enabling technologies. Sales of
those products generate royalty and license revenue for us. For
the years ended December 31, 2007, 2006, and 2005, 34%, 26%
and 37%, respectively, of our total revenues were royalty and
license revenues. However, we do not control or influence the
design, manufacture, quality control, promotion, distribution,
or pricing of products that are manufactured and sold by our
licensees, 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, meet quality
control standards, achieve commercial acceptance, or generate
meaningful royalty revenue for us. For us to generate royalty
revenue, licensees that pay us
per-unit
royalties must manufacture and distribute products incorporating
our touch-enabling technologies in a timely fashion and generate
consumer demand through marketing and other promotional
activities. Products incorporating our touch-enabling
technologies are generally more difficult to design and
manufacture, which may cause product introduction delays or
quality control problems. If our licensees fail to stimulate and
capitalize upon market demand for products that generate
royalties for us, or if products are recalled because of quality
control problems, our revenues will not grow and could decline.
Alternatively, if a product that incorporates our touch-
enabling technologies achieves widespread market acceptance, the
product manufacturer may elect to stop paying
21
us, attempt to design around our intellectual property,
challenge our intellectual property, or stop making it rather
than pay us royalties based on sales of the product.
Peak demand for products that incorporate our technologies,
especially in the video console gaming and computer gaming
peripherals market, typically occurs in the fourth calendar
quarter as a result of increased demand during the year-end
holiday season. If our licensees do not ship products
incorporating our touch-enabling technologies in a timely
fashion or fail to achieve strong sales in the fourth quarter of
the calendar year, we may not receive related royalty and
license revenue.
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.
These requirements and restrictions could be in the form of
hardware technical specifications, software technical
specifications, security specifications or other security
mechanisms, component vendor specifications, licensing fees
and/or terms
and conditions, or other forms. If third-party peripheral makers
cannot or are not allowed to obtain or satisfy these
requirements or restrictions, our gaming royalty revenues could
be significantly reduced. Furthermore, should a significant
video game console maker choose to omit touch-enabling
capabilities from its console system or somehow restrict or
impede the ability of third parties to make touch-enabling
peripherals, it may very well lead our gaming licensees to stop
making products with touch-enabling capabilities, thereby
significantly reducing our gaming royalty revenues.
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 an update to
the PS3 that offers limited vibration and force feedback support
for some older PS1 and PS2 games and PS1 and PS2 rumble and
force feedback controllers only. Sony also announced in
September 2007 that it will fully restore the same vibration
feedback features for the PS3 console system, PS3 games, and a
new PS3 controller that were standard in the PS2 console system,
PS2 games, and PS2 controllers. The new PS3 controllers with
vibration feedback were released in Japan in November 2007 and
are expected to be released in Europe and the United States in
the spring of 2008. 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 does not license market-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, 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
22
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 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.
Laerdal
Medical Corporation (Laerdal) accounts for a
significant portion of our revenues and a reduction in sales to
Laerdal may reduce our total revenue.
Laerdal accounts for a significant portion of our revenue. For
the years ended December 31, 2007, 2006, and 2005, 11%, 7%,
and 0%, respectively, of our total revenues were derived from
Laerdal. If our product sales to Laerdal decline, then our total
revenue may decline.
Medtronic
accounts for a significant portion of our revenues and a
reduction in sales to Medtronic, or a reduction in development
work for Medtronic, may reduce our total revenue.
Medtronic accounts for a significant portion of our revenue. For
the years ended December 31, 2007, 2006, and 2005, 11%,
18%, and 11%, respectively, of our total revenues were derived
from Medtronic. If our product sales to Medtronic decline,
and/or
Medtronic reduces the development activities we perform, then
our total revenue may decline.
Touch
interface product royalties will be reduced if BMW were to
abandon its iDrive system or remove our technology from the
iDrive.
Our largest royalty stream from touch interface products is
currently from BMW for its iDrive controller. Press reviews of
this system have been largely negative and critical of the
systems complex user interface, which we did not design.
Nevertheless, this negative press may cause BMW to abandon the
iDrive controller or to redesign it
and/or
remove our technology from it at any time. If our technology is
not incorporated in BMW vehicles our business may suffer.
We
depend on third-party suppliers, and our revenue and/or results
of operations could suffer if we fail to manage supplier issues
properly.
Our operations depend on our ability to anticipate our needs for
components and products for a wide variety of systems, products,
and services, and on our suppliers ability to deliver
sufficient quantities of quality components, products, and
services at reasonable prices in time for us to meet critical
schedules. We may experience a shortage of, or a delay in
receiving, certain supplies as a result of strong demand,
capacity constraints, supplier financial weaknesses, disputes
with suppliers, political instability, other problems
experienced by suppliers, or problems faced during the
transition to new suppliers. If shortages or delays persist, the
price of these supplies may increase, we may be exposed to
quality issues, or the supplies may not be available at all. We
may not be able to secure enough supplies at reasonable prices
or of acceptable quality to build products or provide services
in a timely manner in the quantities or according to the
specifications needed. We could lose time-sensitive sales, incur
23
additional freight costs, or be unable to pass on price
increases to our customers. If we cannot adequately address
supply issues, we might have to reengineer some products or
service offerings, resulting in further costs and delays. We
purchase certain products from a limited source in China. If the
supply of these products is delayed or constrained, or is of
insufficient quality, our ability to ship these products could
be delayed, which could harm our business, financial condition,
and operating results.
Additionally, our use of single source suppliers for certain
components could exacerbate our supplier issues. We obtain a
significant number of components from single sources due to
technology, availability, price, quality, or other
considerations. In addition, new products that we introduce may
use custom components obtained from only one source initially,
until we have evaluated whether there is a need for additional
suppliers. The performance of such single source suppliers may
affect the quality, quantity, and price of supplies to us.
Accordingly, our revenue
and/or
results of operations could be adversely impacted by such events.
Compliance
with new directives that restrict the use of certain materials
may increase our costs and limit our revenue
opportunities.
On July 1, 2006, the European Unions RoHS Directive
became effective. This Directive eliminates most uses of lead,
cadmium, hexavalent-chromium, mercury, and certain fire
retardants in electronics placed on the market after the
effective date. Since the introduction of the European
Unions RoHS Directive, other regions of the world have
announced or implemented similar regulations. In order to sell
products into regions that adopt these or similar regulations,
we have to assess each product and determine whether they comply
with the requirements of the regulations or whether they are
exempt from meeting the requirements of the regulations. If we
determine that a product is not exempt and does not comply with
adopted regulations, we will have to make changes to the product
or its documentation if we want to sell that product into the
region once the regulations become effective. Making such
changes may be costly to perform and may have a negative impact
on our results of operations. In addition, there can be no
assurance that the national enforcement bodies of the regions
adopting such regulations will agree with our assessment that
certain of our products and documentation comply with or are
exempt from the regulations. If products are determined not to
be compliant or exempt, we will not be able to ship them in the
region that adopts such regulations until such time that they
are compliant, and this may have a negative impact on our
revenue and results of operations.
In addition, our products or packaging may not meet all safety,
electrical, labeling, marking, or other requirements of all
countries into which we ship products or our resellers sell our
products. We attempt to comply with all known laws and
regulations governing product sales into the countries we ship
products. However, if products are determined not to be
compliant or exempt, we will not be able to ship them in the
region that has such regulations until such time that they are
compliant, and this may have a negative impact on our revenue
and results of operations. There is also the possibility of
fines and legal costs as well as costs associated with a product
recall if products or packaging are found not to meet the
requirements.
Because
personal computer peripheral products that incorporate our
touch-enabling technologies currently must work with
Microsofts operating system software, our costs could
increase and our revenues could decline if Microsoft modifies
its operating system software.
Our hardware and software technologies for personal computer
peripheral products that incorporate our touch-enabling
technologies are currently compatible with Microsofts
Windows 2000, Windows Me, and Windows XP operating systems,
including DirectX, Microsofts entertainment API.
Modifications and new versions of Microsofts operating
system and APIs (including DirectX and Windows Vista launched in
early 2007) may require that we
and/or our
licensees modify the touch-enabling technologies to be
compatible with Microsofts modifications or new versions,
and this could cause delays in the release of products by our
licensees. If Microsoft modifies its software products in ways
that limit the use of our other licensees products, our
costs could increase and our revenues could decline.
24
Reduced
spending by corporate or university research and development
departments may adversely affect sales of our three-dimensional
products.
Any economic downturn could lead to a reduction in corporate or
university budgets for research and development in sectors,
including the automotive and aerospace sectors, which use our
three-dimensional and professional products. Sales of our
three-dimensional and professional products, including our
CyberGlove line of whole-hand sensing products and our
MicroScribe line of digitizers, could be adversely affected by
cuts in corporate research and development budgets.
Competition
between our products and our licensees products may reduce
our revenue.
Rapid technological change, short product life cycles, cyclical
market patterns, declining average selling prices, and
increasing foreign and domestic competition characterize the
markets in which we and our licensees compete. We believe that
competition in these markets will continue to be intense and
that competitive pressures will drive the price of our products
and our licensees products downward. These price
reductions, if not offset by increases in unit sales or
productivity, will cause our revenues to decline.
We face competition from unlicensed products as well. Our
licensees or other third parties may seek to develop products
using our intellectual property or develop alternative designs
that attempt to circumvent our intellectual property 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.
The
market for certain touch-enabling technologies and touch-enabled
products is at an early stage and if market demand does not
develop, we may not achieve or sustain revenue
growth.
The market for certain of our touch-enabling technologies and
certain of our licensees touch-enabled products is at an
early stage. If we and our licensees are unable to develop
demand for touch-enabling technologies and touch-enabled
products, we may not achieve or sustain revenue growth. We
cannot accurately predict the growth of the markets for these
technologies and products, the timing of product introductions,
or the timing of commercial acceptance of these products.
Even if our touch-enabling technologies and our licensees
touch-enabled products are ultimately widely adopted, widespread
adoption may take a long time to occur. The timing and amount of
royalties and product sales that we receive will depend on
whether the products marketed achieve widespread adoption and,
if so, how rapidly that adoption occurs.
We expect that we will need to pursue extensive and expensive
marketing and sales efforts to educate prospective licensees,
component customers, and end users about the uses and benefits
of our technologies and to persuade software developers to
create software that utilizes our technologies. Negative product
reviews or publicity about our products, our licensees
products, haptic features, or haptic technology in general could
have a negative impact on market adoption, our revenue,
and/or our
ability to license our technologies in the future.
If we
fail to increase sales of our medical simulation devices, our
financial condition and operations may suffer.
Many medical institutions do not budget for simulation devices.
To increase sales of our simulation devices, we must, in
addition to convincing medical institution personnel of the
usefulness of the devices, persuade them to include a
significant expenditure for the devices in their budgets. If
these medical institutions are unwilling to budget for
simulation devices or reduce their budgets as a result of
cost-containment pressures or other factors, we may not be able
to increase or maintain sales of medical simulators at a
satisfactory rate. A decrease in sales or any failure to
increase sales of our medical simulation products will harm our
business.
25
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 automotive licensees for yet-to-be
commercialized technology because their suppliers may not be
ready to meet stringent quality and parts availability
requirements;
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inability to sign new gaming 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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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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26
Certain
terms or rights granted in our license agreements or our
development contracts may limit our future revenue
opportunities.
While it is not our general practice to sign license agreements
that provide exclusive rights for a period of time with respect
to a technology, field of use,
and/or
geography, or to accept similar limitations in product
development contracts, we have entered into such agreements and
may in the future. Although additional compensation or other
benefits may be part of the agreement, the compensation or
benefits may not adequately compensate us for the limitations or
restrictions we have agreed to as that particular market
develops. Over the life of the exclusivity period, especially in
markets that grow larger or faster than anticipated, our revenue
may be limited and less than what we could have achieved in the
market with several licensees or additional products available
to sell to a specific set of customers.
If we
are unable to continually improve and reduce the cost of our
technologies, companies may not incorporate our technologies
into their products, which could impair our revenue
growth.
Our ability to achieve revenue growth depends on our continuing
ability to improve and reduce the cost of our technologies and
to introduce these technologies to the marketplace in a timely
manner. If our development efforts are not successful or are
significantly delayed, companies may not incorporate our
technologies into their products and our revenue growth may be
impaired.
If we
fail to develop new or enhanced technologies for new
applications and platforms, we may not be able to create a
market for our technologies or our technologies may become
obsolete, and our ability to grow and our results of operations
might be harmed.
Our initiatives to develop new and enhanced technologies and to
commercialize these technologies for new applications and new
platforms may not be successful. Any new or enhanced
technologies may not be favorably received by consumers and
could damage our reputation or our brand. Expanding our
technologies could also require significant additional expenses
and strain our management, financial, and operational resources.
Moreover, technology products generally have relatively short
product life cycles and our current products may become obsolete
in the future. Our ability to generate revenues will be harmed
if:
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we fail to develop new technologies or products;
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the technologies we develop infringe on third-party patents or
other third-party rights;
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our new technologies fail to gain market acceptance; or
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our current products become obsolete or no longer meet new
regulatory requirements.
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We
have limited engineering, customer service, 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, 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 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
27
development and production of products containing our
touch-enabling technologies may be a significant barrier to
their widespread adoption and sale.
Third-party
validation studies may not demonstrate all the benefits of our
medical training simulators, which could affect customer
motivation to buy.
In medical training, validation studies are generally used to
confirm the usefulness of new techniques, devices, and training
methods. For medical training simulators, several levels of
validation are generally tested: content, concurrent, construct,
and predictive. A validation study performed by a third party,
such as a hospital, a teaching institution, or even an
individual healthcare professional, could result in showing
little or no benefit for one or more types of validation for our
medical training simulators. Such validation study results
published in medical journals could impact the willingness of
customers to buy our training simulators, especially new
simulators that have not previously been validated. Due to the
time generally required to complete and publish additional
validation studies (usually more than a year), the negative
impact on sales revenue could be significant.
Medical
licensing and certification authorities may not recommend or
require use of our technologies for training and/or testing
purposes, significantly slowing or inhibiting the market
penetration of our medical simulation
technologies.
Several key medical certification bodies, including the American
Board of Internal Medicine (ABIM) and the American
College of Cardiology (ACC), have great influence in
recommending particular medical methodologies, including medical
training and testing methodologies, for use by medical
professionals. In the event that the ABIM and the ACC, as well
as other, similar bodies, do not endorse medical simulation
products in general, or our products in particular, as a
training
and/or
testing tool, market penetration for our products could be
significantly and adversely affected.
We
have limited distribution channels and resources to market and
sell our medical simulators, touch interface products, and
three-dimensional simulation and digitizing products, and if we
are unsuccessful in marketing and selling these products, we may
not achieve or sustain product revenue growth.
We have limited resources for marketing and selling medical
simulation, touch interface, or three-dimensional simulation and
digitizing products, either directly or through distributors. To
achieve our business objectives, we must build a balanced
mixture of sales through a direct sales channel and through
qualified distribution channels. The success of our efforts to
sell medical simulation, touch interface, and three-dimensional
simulation products will depend upon our ability to retain and
develop a qualified sales force and effective distribution
channels. We may not be successful in attracting and retaining
the personnel necessary to sell and market our products. A
number of our distributors represent small, specialized
companies and may not have sufficient capital or human resources
to support the complexities of selling and supporting our
products. There can be no assurance that our direct selling
efforts will be effective, distributors or OEMs will market our
products successfully or, if our relationships with distributors
or OEMs terminate, that we will be able to establish
relationships with other distributors or OEMs on satisfactory
terms, if at all. Any disruption in the distribution, sales, or
marketing network for our products could have a material adverse
effect on our product revenues.
Competition
in the medical market may reduce our revenue.
If the medical simulation market develops as we anticipate, we
believe that we will have increased competition. As in many
developing markets, acquisitions, or consolidations may occur
that could lead to larger competitors with more resources or
broader market penetration. This increased competition may
result in the decline of our revenue and may cause us to reduce
our selling prices.
Competition
in the mobility or touchscreen markets may increase our costs
and reduce our revenue.
If the mobility or touchscreen markets develop as we anticipate,
we believe that we will face a greater number of competitors,
possibly including the internal design teams of existing and
potential OEM customers. These potential competitors may have
significantly greater financial and technical resources than we
do, and the costs associated with
28
competing with such potential competitors could be significant.
Additionally, increased competition may result in the reduction
of our market share
and/or cause
us to reduce our prices, which may result in a decline in our
revenue.
Automobiles
incorporating our touch-enabling technologies are subject to
lengthy product development periods, making it difficult to
predict when and whether we will receive 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.
We
have experienced significant change in our business, and our
failure to manage the complexities associated with the changing
economic environment and technology landscape could harm our
business.
Any future periods of rapid economic and technological change
may place significant strains on our managerial, financial,
engineering, or other resources. Further economic weakness, in
combination with our complex technologies, may demand an
unusually high level of managerial effectiveness in
anticipating, planning, coordinating, and meeting our
operational needs as well as the needs of our licensees. Our
failure to effectively manage these resources during periods of
rapid economic or technological change may harm our business.
We
might be unable to retain or recruit necessary personnel, which
could slow the development and deployment of our
technologies.
Our ability to develop and deploy our technologies and to
sustain our revenue growth depends upon the continued service of
our management and other key personnel, many of whom would be
difficult to replace. Management and other key employees may
voluntarily terminate their employment with us at any time upon
short notice. The loss of management or key personnel could
delay product development cycles or otherwise harm our business.
We believe that our future success will also depend largely on
our ability to attract, integrate, and retain sales, support,
marketing, and research and development personnel. Competition
for such personnel is intense, and we may not be successful in
attracting, integrating, and retaining such personnel. Given the
protracted nature of if, how, and when we collect royalties on
new design contracts, it may be difficult to craft compensation
plans that will attract and retain the level of salesmanship
needed to secure these contracts. Our stock option program is a
long-term retention program that is intended to attract, retain,
and provide incentives for talented employees, officers and
directors, and to align stockholder and employee interests.
Additionally some of our executive officers and key employees
hold stock options with exercise prices above the current market
price of our common stock. Each of these factors may impair our
ability to retain the services of our executive officers and key
employees. Our technologies are complex and we rely upon the
continued service of our existing personnel to support
licensees, enhance existing technologies, and develop new
technologies.
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.
29
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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litigation or claims regarding our restatement, internal
controls, or other matters;
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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;
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seasonality in the demand for our products or our
licensees products; and
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our ability to build or ship products on a timely basis.
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Issuance
of the shares of common stock upon exercise of stock options and
exercise of warrants will dilute the ownership interest of
existing stockholders and could adversely affect the market
price of our common stock.
The issuance of shares of common stock in the following
circumstances will dilute the ownership interest of existing
stockholders: (i) upon exercise of some or all of the stock
options, and (ii) upon exercise of some or all of the
warrants. Any sales in the public market of the common stock
issuable upon such exercises could adversely affect prevailing
market prices of our common stock. In addition, the existence of
these stock options and warrants may encourage short selling by
market participants.
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; the timing and magnitude of purchases of our common
stock pursuant to our stock repurchase program and any cessation
of the program; changes in securities analysts
recommendations; changing circumstances regarding competitors or
their customers; governmental regulatory action; developments
with respect to patents or proprietary rights; inclusion in or
exclusion from various stock indices; and general market
conditions. In the past, following periods of volatility in the
market price of a companys securities, securities class
action litigation has been initiated against that company, such
as the suit currently pending against us.
Our
stock repurchase program could affect our stock price and add
volatility.
Any repurchases pursuant to our stock repurchase program could
affect our stock price and add volatility. The repurchase
program is at our discretion, and thus there can be no assurance
that any repurchases will actually be made under the program,
nor is there any assurance that a sufficient number of shares of
our common stock will be repurchased to satisfy the
markets expectations. Furthermore, there can be no
assurance that any repurchases conducted under the plan will be
made at the best possible price. The existence of a stock
repurchase program could also cause our stock price to be higher
than it would be in the absence of such a program and could
potentially
30
reduce the market liquidity for our stock. Additionally, we are
permitted to and could discontinue our stock repurchase program
at any time and any such discontinuation could cause the market
price of our stock to decline.
Our
president and chief executive officer has announced his intent
to transition to the role of chairman of the board, and our
ability to recruit a replacement president and chief executive
officer may negatively impact our future success.
On October 31, 2007, Mr. Viegas recommended a
leadership transition plan whereby we will hire a new chief
executive officer and Mr. Viegas will serve as the chairman
of our board of directors. Mr. Viegas will continue to
serve in his present capacities during the candidate search and
transition period. We have retained the services of an executive
search firm and a search for his replacement is currently
underway. We may encounter difficulties recruiting a suitable
replacement for Mr. Viegas. We are conducting an extensive
national search to select a qualified candidate, and may incur
significant costs in locating and attracting a suitable
replacement. If we are unable to recruit a suitable replacement
president and chief executive officer, or if the process takes
longer than expected, our future success may be negatively
impacted.
Our
major stockholders retain significant control over us, which may
lead to conflicts with other stockholders over corporate
governance matters and could also affect the volatility of our
stock price.
We currently have, have had in the past, and may have in the
future, stockholders who retain greater than 10% of our
outstanding stock. Acting together, these stockholders would be
able to exercise significant influence over matters that our
stockholders vote upon, including the election of directors and
mergers or other business combinations, which could have the
effect of delaying or preventing a third party from acquiring
control over or merging with us. Further, if any individuals in
this group elect to sell a significant portion or all of their
holdings of our common stock, the trading price of our common
stock could experience volatility.
Provisions
in our charter documents and Delaware law could prevent or delay
a change in control, which could reduce the market price of our
common stock.
Provisions in our certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or
changes in our management. In addition, certain provisions of
Delaware law may discourage, delay, or prevent someone from
acquiring or merging with us. These provisions could limit the
price that investors might be willing to pay in the future for
shares.
We may
engage in acquisitions that could dilute stockholders
interests, divert management attention, or cause integration
problems.
As part of our business strategy, we have in the past and may in
the future, acquire businesses or intellectual property that we
feel could complement our business, enhance our technical
capabilities, or increase our intellectual property portfolio.
If we consummate acquisitions through cash
and/or an
exchange of our securities, our stockholders could suffer
significant dilution. Acquisitions could also create risks for
us, including:
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unanticipated costs associated with the acquisitions;
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use of substantial portions of our available cash to consummate
the acquisitions;
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diversion of managements attention from other business
concerns;
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difficulties in assimilation of acquired personnel or operations;
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failure to realize the anticipated benefits of acquired
intellectual property or other assets;
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charges for write-down of assets associated with unsuccessful
acquisitions; and
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potential intellectual property infringement claims related to
newly acquired product lines.
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Any acquisitions, even if successfully completed, might not
generate significant additional revenue or provide any benefit
to our business. In addition to acquisitions, we may also
consider making strategic divestitures. With any divestiture,
there are risks that future operating results could be
unfavorably impacted.
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Failure
to maintain effective internal controls in accordance with
section 404 of the Sarbanes-Oxley Act could have a material
adverse effect on our business and stock price.
If we fail to maintain the adequacy of our internal controls, as
standards are modified, supplemented, or amended from time to
time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Failure to maintain an effective internal
control environment could have a material adverse effect on our
business and stock price.
We
have determined that our internal controls relating to income
taxes are currently ineffective.
As discussed in Item 9A, Controls and Procedures,
our management team, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the
design and operation of our internal controls. They concluded
that our internal controls over financial reporting as they
relate to income taxes were ineffective as of December 31,
2007. We have subsequently initiated actions that are intended
to improve our accounting for income taxes and the related
internal controls. Any material weakness in our internal
controls over the accounting for income taxes could impair our
ability to report our financial position and results of
operations accurately and in a timely manner.
We
have identified a material weakness in our internal controls
related to the accounting for income taxes as of
December 31, 2007 that, if not properly remediated, could
result in material misstatements in our financial statements in
future periods.
Based on an evaluation of our disclosure controls and procedures
as of December 31, 2007, due to the existence of a
deficiency in the operation of our internal controls related to
the accounting for income taxes, which constituted a material
weakness in our internal control over financial reporting, our
management has concluded that such disclosure controls and
procedures were not effective as of such date. A material
weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or
detected on a timely basis. The identified deficiency pertained
to controls which were not adequately designed to ensure proper
accounting and disclosure of income taxes. These inadequate
controls resulted in adjustments to our previously reported
quarterly unaudited financial results as of March 31, 2007
and the cumulative loss amounts for quarterly unaudited
financial results as of June 30, 2007 and
September 30, 2007.
Because of this material weakness, there is risk that a material
misstatement of our annual or quarterly financial statements
will not be prevented or detected. We are currently in the
process of designing and implementing control procedures to
remediate the material weakness. We cannot guarantee, however,
that such remediation efforts will correct the material weakness
such that our internal control over financial reporting will be
effective. In the event that we do not adequately remedy this
material weakness, or if we fail to maintain effective internal
controls in future periods, our operating results, financial
position and stock price could be adversely affected.
Legislative
actions, higher insurance cost, and potential new accounting
pronouncements are likely to impact our future financial
position and results of operations.
There have been regulatory changes and new accounting
pronouncements including the Sarbanes-Oxley Act of 2002, and
Statement of Financial Accounting Standard SFAS
No. 123R, Share-Based Payment,
(SFAS No. 123R) which have had an effect
on our financial position and results of operations. Under
SFAS No. 123R, we have been required since
January 1, 2006, to adopt a different method of determining
the compensation expense of our employee stock options.
SFAS No. 123R has had a significant adverse effect on
our reported financial conditions and may impact the way we
conduct our business.
There may potentially be new accounting pronouncements or
additional regulatory rulings that also have an impact on our
future financial position and results of operations. These and
other potential changes could materially increase the expenses
we report under generally accepted accounting principles in the
United States of America (GAAP), and adversely
affect our operating results.
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Audits
from taxing authorities such as the Internal Revenue Service
could impact our future financial position and results of
operations.
Our fiscal 2004 income tax return is currently under a routine
examination by the Internal Revenue Service. The results of this
audit or other audits could adversely affect our financial
position or operating results.
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Item 1B.
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Unresolved
Staff Comments
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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 Immersion Computing,
Entertainment, and Industrial operating segment. Products
produced in San Jose include our MicroScribe G2 and MX
digitizers, our CyberGlove line of whole-hand sensing gloves and
three-dimensional software products, the SoftMouse, and several
of our touch interface products, including rotary encoders,
components to enable tactile feedback in touchscreens, and
various arcade gaming products. The lease for this property
expires in June 2010.
We lease a facility in Montreal, Quebec, Canada of approximately
6,400 square feet, for our subsidiary, Immersion Canada,
Inc. The facility is used for administration and research and
development functions. The lease for this property expires in
October 2010.
We lease a facility in Gaithersburg, Maryland of approximately
18,900 square feet, for the Immersion Medical operating
segment. The facility is used for sales, marketing,
administration, research and development, manufacturing, and
distribution functions for the Endoscopy AccuTouch System, the
CathLab VR System, Virtual IV System, and the Lap VR
System. The lease for this property expires in May 2009. We also
lease storage space in Gaithersburg, Maryland of approximately
1,460 square feet, and this lease expires in October 2010.
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 2009.
We lease office space in Red Bank, New Jersey to be used by our
sales function. The service agreement expires in June 2008.
We lease office space in Espoo, Finland for use by our sales and
technical support function. The service agreement expires in
October 2008.
We believe that our existing facilities are adequate to meet our
current needs.
|
|
Item 3.
|
Legal
Proceedings
|
In re
Immersion Corporation
We are involved in legal proceedings relating to a class action
lawsuit filed on November 9, 2001, In re Immersion
Corporation Initial Public Offering Securities Litigation,
No. Civ.
01-9975
(S.D.N.Y.), related to In re Initial Public Offering Securities
Litigation, No. 21 MC 92 (S.D.N.Y.). The named defendants
are Immersion and three of our current or former officers or
directors (the Immersion Defendants), and certain
underwriters of our 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.
33
Similar allegations were made in other lawsuits challenging over
300 other initial public offerings and follow-on offerings
conducted in 1999 and 2000. The cases were consolidated for
pretrial purposes. On February 19, 2003, the Court ruled on
all defendants motions to dismiss. The motion was denied
as to claims under the Securities Act of 1933 in the case
involving us as well as in all other cases (except for 10
cases). The motion was denied as to the claim under
Section 10(b) as to us, on the basis that the complaint
alleged that we had made acquisition(s) following the IPO. The
motion was granted as to the claim under Section 10(b), but
denied as to the claim under Section 20(a), as to the
remaining individual defendant.
We and most of the issuer defendants had settled with the
plaintiffs. In this settlement, plaintiffs would have dismissed
and released all claims against the Immersion Defendants, in
exchange for a contingent payment by the insurance companies
collectively responsible for insuring the issuers in all of the
IPO cases, and for the assignment or surrender of certain claims
we may have against the underwriters. The Immersion Defendants
would not have been required to make any cash payments in the
settlement, unless the pro rata amount paid by the insurers in
the settlement exceeded the amount of the insurance coverage, a
circumstance that we believed was remote. In September 2005, the
Court granted preliminary approval of the settlement. The Court
held a hearing to consider final approval of the settlement on
April 24, 2006 and took the matter under submission.
Subsequently, the Second Circuit vacated the class certification
of plaintiffs claims against the underwriters in six cases
designated as focus or test cases. Miles v. Merrill
Lynch & Co. (In re Initial Public Offering Securities
Litigation, 471 F.3d 24 (2d Cir. 2006). Thereafter, the
District Court ordered a stay of all proceedings in all of the
lawsuits pending the outcome of plaintiffs petition to the
Second Circuit for rehearing en banc and resolution of the class
certification issue. On April 6, 2007, the Second Circuit
denied plaintiffs petition for rehearing, but clarified
that the plaintiffs may seek to certify a more limited class in
the District Court. Accordingly, the parties withdrew the prior
settlement, and plaintiffs filed an amended complaint in attempt
to comply with the Second Circuits ruling. There is no
guarantee that an amended or renegotiated settlement will be
reached, and if reached, approved.
Internet
Services LLC Litigation
On October 20, 2004, ISLLC filed claims against us in its
lawsuit against Sony Computer Entertainment, alleging that we
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 us of the damages awarded by the jury, and for a
judicial declaration with respect to ISLLCs rights and
duties under agreements with us. On December 29, 2004, the
Court issued an order dismissing ISLLCs claims against
Sony Computer Entertainment with prejudice and dismissing
ISLLCs claims against us without prejudice to ISLLC filing
a new complaint if it can do so in good faith without
contradicting, or repeating the deficiency of, its
complaint.
On January 12, 2005, ISLLC filed Amended Cross-Claims and
Counterclaims against us that contained similar claims. ISLLC
also realleged counterclaims against Sony Computer
Entertainment. On January 28, 2005, we filed a motion to
dismiss ISLLCs Amended Cross-Claims and a motion to strike
ISLLCs Counterclaims against Sony Computer Entertainment.
On March 24, 2005 the Court issued an order dismissing
ISLLCs claims with prejudice as to ISLLCs claim
seeking a declaratory judgment that it is an exclusive licensee
under the 213 and 333 patents and as to ISLLCs
claim seeking judicial apportionment of the damages
verdict in the Sony Computer Entertainment case. The
Courts order further dismissed ISLLCs claims without
prejudice as to ISLLCs breach of contract and unjust
enrichment claims.
ISLLC filed a notice of appeal of the District Court orders with
the United States Court of Appeals for the Federal Circuit on
April 18, 2005. On April 4, 2007, the Federal Circuit
issued its opinion, affirming the District Court orders.
On February 8, 2006, ISLLC filed a lawsuit against us in
the Superior Court of Santa Clara County. ISLLCs
complaint seeks a share of the damages awarded to us in the
March 24, 2005 Judgment and of the Microsoft settlement
proceeds, and generally restates the claims already adjudicated
by the District Court. On March 16, 2006, we answered the
complaint, cross claimed for breach of contract by ISLLC and for
rescission of the contract, and removed the lawsuit to federal
court. The case was assigned to Judge Wilken as a case related
to the previous proceedings involving Sony Computer
Entertainment and ISLLC. ISLLC filed its answer to our cross
claims on April 27, 2006. ISLLC also moved to remand the
case to Superior Court. On July 10, 2006, Judge Wilken
issued an order denying ISLLCs motion to remand. On
September 5, 2006, Judge Wilken granted the stipulated
request by the parties to stay discovery and other proceedings
in the case pending the disposition of ISLLCs appeal from
the
34
Courts previous orders. The case was stayed from
December 1, 2006 pending the Federal Circuits
disposition on the appeal. As noted above, the Federal Circuit
issued its opinion on April 4, 2007, and entered a judgment
affirming the District Courts previous orders.
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 to remove
the declaratory relief claim. We opposed ISLLCs motion,
and cross-moved for judgment on the pleadings, on the grounds
that ISLLCs claims are barred by res judicata and
collateral estoppel. On June 26, 2007, the Court ruled on
the motions, denying ISLLCs motion to remand, or for leave
to file an amended complaint, and granting, in part, our motion
for judgment on the pleadings. The Court dismissed ISLLCs
claim for declaratory relief. ISLLCs claims for breach of
contract, promissory fraud, and constructive trust, to the
extent not inconsistent with the Courts previous rulings,
remain. The parties are currently in the process of conducting
discovery.
We intend to defend ourselves vigorously against ISLLCs
allegations.
Microsoft
Corporation v. Immersion Corporation
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.
Microsoft alleges that we breached a Sublicense
Agreement executed in connection with the parties
settlement in 2003 of our claims of patent infringement against
Microsoft in Immersion Corporation v. Microsoft
Corporation, Sony Computer Entertainment Inc. and Sony Computer
Entertainment America, Inc., United States District Court
for the Northern District of California, Case
No. 02-0710-CW
(see discussion above). The complaint alleges that Microsoft is
entitled to a share of the judgment monies and other sums
received from Sony Computer Entertainment. In a letter sent to
us dated May 1, 2007, Microsoft stated that it believes we
owe Microsoft at least $27.5 million, which it increased to
$35.6 million at a court ordered mediation meeting on
December 11, 2007. We were served with the complaint on
July 6, 2007. On September 4, 2007, we filed our
Answer, Affirmative Defenses and Counterclaims alleging that
Microsoft breached its confidentiality obligations by publicly
disclosing previously confidential the terms of our business
agreement with Sony. Discovery is proceeding. The parties
participated in a court ordered mediation on December 11,
2007, but were unsuccessful in resolving the matter. We dispute
Microsofts allegations and intend to vigorously defend
ourselves.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders in the
fourth quarter of fiscal 2007.
35
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, 2007
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
18.60
|
|
|
$
|
12.01
|
|
Third Quarter
|
|
$
|
20.68
|
|
|
$
|
12.00
|
|
Second Quarter
|
|
$
|
15.28
|
|
|
$
|
8.80
|
|
First Quarter
|
|
$
|
9.90
|
|
|
$
|
6.71
|
|
Fiscal year ended December 31, 2006
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
7.39
|
|
|
$
|
6.49
|
|
Third Quarter
|
|
$
|
7.16
|
|
|
$
|
5.03
|
|
Second Quarter
|
|
$
|
9.11
|
|
|
$
|
5.49
|
|
First Quarter
|
|
$
|
8.68
|
|
|
$
|
6.21
|
|
On February 22, 2008, the closing price was $8.67 and there
were 151 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
We did not repurchase any of our equity securities during the
quarter ended December 31, 2007.
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.
36
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
STATEMENTS OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
34,702
|
|
|
$
|
27,853
|
|
|
$
|
24,277
|
|
|
$
|
23,763
|
|
|
$
|
20,223
|
|
Cost and expenses
|
|
|
(90,974
|
)
|
|
|
36,806
|
|
|
|
36,177
|
|
|
|
44,155
|
|
|
|
35,073
|
|
Operating income (loss)
|
|
|
125,676
|
|
|
|
(8,953
|
)
|
|
|
(11,900
|
)
|
|
|
(20,392
|
)
|
|
|
(14,850
|
)
|
Net income (loss)
|
|
|
117,018
|
|
|
|
(10,424
|
)
|
|
|
(13,085
|
)
|
|
|
(20,738
|
)
|
|
|
(16,974
|
)
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.23
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(0.83
|
)
|
Diluted
|
|
$
|
3.71
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.91
|
)
|
|
$
|
(0.83
|
)
|
Shares used in calculating net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,662
|
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
22,698
|
|
|
|
20,334
|
|
Diluted
|
|
|
31,667
|
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
22,698
|
|
|
|
20,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and short-term investments
|
|
$
|
138,112
|
|
|
$
|
32,012
|
|
|
$
|
28,171
|
|
|
$
|
25,538
|
|
|
$
|
21,738
|
|
Working capital
|
|
|
143,075
|
|
|
|
33,657
|
|
|
|
28,885
|
|
|
|
23,088
|
|
|
|
22,032
|
|
Total assets
|
|
|
168,368
|
|
|
|
50,015
|
|
|
|
44,760
|
|
|
|
42,250
|
|
|
|
37,913
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
18,122
|
|
|
|
17,490
|
|
|
|
16,917
|
|
|
|
16
|
|
Long-term customer advance from Microsoft.
|
|
|
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
27,050
|
|
Total stockholders equity (deficit)
|
|
|
141,787
|
|
|
|
(22,992
|
)
|
|
|
(16,795
|
)
|
|
|
(5,967
|
)
|
|
|
(1,219
|
)
|
|
|
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.
37
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 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 SEC Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition
(SAB No. 104), Emerging Issues Task Force
(EITF)
No. 00-21
(EITF
No. 00-21),
Accounting for Revenue Arrangements with Multiple
Deliverables, American Institute of Certified Public
Accountants (AICPA) Statement of Position
(SOP)
81-1
Accounting for Performance for Construction-Type and
Certain Production-Type contracts
(SOP 81-1),
and AICPA
SOP 97-2,
Software Revenue Recognition
(SOP 97-2),
as amended. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or service has been
rendered, the fee is fixed and determinable, and collectibility
is probable. We derive our revenues from three principal
sources: royalty and license fees, product sales, and
development contracts.
Royalty and license revenue We recognize
royalty and license revenue based on royalty reports or related
information received from the licensee as well as time-based
licenses of our intellectual property portfolio. Up-front
payments under license agreements are deferred and recognized as
revenue based on either the royalty reports received or
amortized over the license period depending on the nature of the
agreement. Advance payments under license agreements that also
require us to provide future services to the licensee are
deferred and recognized over the service period when
vendor-specific objective evidence (VSOE) related to
the value of the services does not exist.
We generally recognize revenue from our licensees under one or a
combination of the following license models:
|
|
|
License revenue model
|
|
Revenue recognition
|
|
Perpetual license of intellectual property portfolio based on
per unit royalties, no services contracted.
|
|
Based on royalty reports received from licensees. No further
obligations to licensee exist.
|
Time-based license of intellectual property portfolio with
up-front payments and/or annual minimum royalty requirements, no
services contracted. Licensees have certain rights to updates to
the intellectual property portfolio during the contract period.
|
|
Based on straight-line amortization of annual minimum/up-front
payment recognized over contract period or annual minimum period.
|
Perpetual license of intellectual property portfolio or
technology license along with contract for development work.
|
|
Based on cost-to-cost percentage-of-completion accounting method
over the service period or completed contract method. Obligation
to licensee exists until development work is complete.
|
License of software or technology, no modification necessary, no
services contracted.
|
|
Up-front revenue recognition based on SOP 97-2 criteria or EITF
No. 00-21, as applicable.
|
38
Individual contracts may have characteristics that do not fall
within a specific license model or may have characteristics of a
combination of license models. Under those circumstances, we
recognize revenue in accordance with SAB No. 104, EITF
No. 00-21,
SOP 81-1,
and
SOP 97-2,
as amended, to guide the accounting treatment for each
individual contract. See also the discussions regarding
Multiple element arrangements below. If the
information received from our licensees regarding royalties is
incorrect or inaccurate, our revenues in future periods may be
adversely affected. To date, none of the information we have
received from our licensees has caused any material reduction in
future period revenues.
Product sales We recognize revenues from
product sales when the product is shipped, provided the other
revenue recognition criteria is met, including that collection
is determined to be probable and no significant obligation
remains. We sell our products with warranties ranging from three
to sixty months. We record the estimated warranty costs during
the quarter the revenue is recognized. Historically,
warranty-related costs and related accruals have not been
significant. We offer a general right of return on the
MicroScribe product line for 14 days after purchase. We
recognize revenue at the time of shipment of a MicroScribe
digitizer and provide an accrual for potential returns based on
historical experience. We offer no other general right of return
on our products.
Development contracts and other
revenue Development contracts and other
revenue is comprised of professional services (consulting
services
and/or
development contracts), customer support, and extended warranty
contracts. Development contract revenues are recognized under
the
cost-to-cost
percentage-of-completion
accounting method based on physical completion of the work to be
performed or completed contract method. Losses on contracts are
recognized when determined. Revisions in estimates are reflected
in the period in which the conditions become known. Customer
support and extended warranty contract revenue is recognized
ratably over the contractual period.
Multiple element arrangements We enter
into revenue arrangements in which the customer purchases a
combination of patent, technology,
and/or
software licenses, products, professional services, support, and
extended warranties (multiple element arrangements). When VSOE
of fair value exists for all elements, we allocate revenue to
each element based on the relative fair value of each of the
elements. If vendor specific objective evidence does not exist,
the revenue is generally recorded over the term of the contract.
Our revenue recognition policies are significant because our
revenues are a key component of our results of operations. In
addition, our revenue recognition determines the timing of
certain expenses, such as commissions and royalties. Revenue
results are difficult to predict, and any shortfall in revenue
or delay in recognizing revenue could cause our operating
results to vary significantly from quarter to quarter and could
result in greater or future operating losses.
Stock-based
Compensation
We account for stock-based compensation in accordance with
SFAS No. 123R. We elected the modified-prospective
method, under which prior periods are not revised for
comparative purposes. Under the fair value recognition
provisions of this statement, stock-based compensation cost is
measured at the grant date based on the fair value of the award
and is recognized as expense on a straight-line basis over the
requisite service period, which is the vesting period.
Valuation and amortization method We use
the Black-Scholes-Merton option pricing model
(Black-Scholes model), single-option approach to
determine the fair value of stock options and Employee Stock
Purchase Plan (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, our expected stock price volatility over the
term of the awards, risk-free interest rate, and expected
dividends.
Expected term We estimate the expected
term of options granted by using the simplified method as
prescribed by SAB No. 107.
39
Expected volatility We estimate the
volatility of our common stock taking into consideration our
historical stock price movement, the volatility of stock prices
of companies of similar size with similar businesses, if any,
and our expected future stock price trends based on known or
anticipated events.
Risk-free interest rate We base the
risk-free interest rate that we use in the option pricing model
on U.S. Treasury zero-coupon issues with remaining terms
similar to the expected term on the options.
Expected dividend We do not anticipate
paying any cash dividends in the foreseeable future and
therefore use an expected dividend yield of zero in the option
pricing model.
Forfeitures We are required to estimate
future forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ
from those estimates. We use historical data to estimate
pre-vesting option forfeitures and record stock-based
compensation expense only for those awards that are expected to
vest. Changes in estimated forfeitures will be recognized
through a cumulative
catch-up
adjustment in the period of change and will also impact the
amount of compensation expense to be recognized in future
periods.
If factors change and we employ different assumptions for
estimating stock-based compensation expense in future periods,
or if we decide to use a different valuation model, the future
periods may differ significantly from what we have recorded in
the current period and could materially affect our operating
results.
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 11 to the consolidated financial statements for
further information regarding the SFAS No. 123R
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. Management must make assumptions, judgments, and
estimates to determine our current provision for income taxes
and also our deferred tax assets and liabilities and any
valuation allowance to be recorded against a deferred tax asset.
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
40
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.
Long-term
Customer Advance from Microsoft and Litigation
In 2003, we executed a series of agreements with Microsoft, as
described in Note 9 to the consolidated financial
statements, that provided for settlement of our lawsuit against
Microsoft as well as various licensing, sublicensing, and equity
and financing arrangements. We accounted for the proceeds
received under the agreements as a long-term customer advance
based on certain provisions that would result in payment of
funds to Microsoft. Upon Microsofts election in 2004 to
convert its shares of our Series A Preferred Stock into
common stock, we reduced the long-term customer advance from
Microsoft to the minimum amount we would be obligated to pay
Microsoft upon a settlement of the Sony Computer Entertainment
Lawsuit as set forth in our agreements with Microsoft. The
remainder of the consideration was transferred to common stock
in 2004. Per the conditions as set forth in our agreements with
Microsoft, in the event that we 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, we would be obligated to pay Microsoft a minimum
of $15.0 million for amounts up to $100.0 million
received from Sony Computer Entertainment on account of our
granting certain rights, plus 25% of amounts over
$100.0 million up to $150.0 million, and 17.5% of
amounts over $150.0 million.
In March 2007, we announced the conclusion of our patent
infringement litigation against Sony Computer Entertainment at
the U.S. Court of Appeals for the Federal Circuit. Sony
Computer Entertainment satisfied the District Court judgment
against it. As of March 19, 2007, we entered into a new
business agreement with Sony Computer Entertainment. We have
determined that the conclusion of our litigation with Sony
Computer Entertainment does not trigger any payment obligations
under our Microsoft agreements. However, on June 18, 2007,
Microsoft filed a complaint against us in the United States
District Court for the Western District of Washington alleging
breach of our Sublicense Agreement dated
July 25, 2003 and seeks damages, specific performance,
declaratory judgment, and attorneys fees and costs. At a
court ordered mediation meeting on December 11, 2007,
Microsoft indicated they believe the amount owed to be
$35.6 million. We believe that we are not obligated under
the Sublicense Agreement with Microsoft to make any
payment to Microsoft relating to the conclusion of our
litigation with Sony Computer Entertainment. We intend to defend
this lawsuit vigorously. The results of any litigation are
inherently uncertain, and there can be no assurance that our
position will prevail.
Our judgments and assessments related to the accounting of these
liabilities could differ from actual results.
Long-term
Deferred Revenue
In addition to normal items of deferred revenue due after one
year, on December 31, 2006 and before, we had included Sony
Computer Entertainment compulsory license fees and interest
earned thereon in long-term deferred revenue due to the
contingent nature of the court-ordered payments (see Note 8
to the consolidated financial statements). Upon the conclusion
of our patent litigation at the U.S. Court of Appeals for
the Federal Circuit, the contingency on these funds lapsed.
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 classify all debt securities with
readily determinable market values as
available-for-sale
in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities
(SFAS No. 115). 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 in accordance with
Accounting Research Bulletin No. 43, Chapter 3A,
Working Capital Current Assets and Current
Liabilities, as they are reasonably expected to be
realized in cash or sold during our normal operating cycle.
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 (deficit). We review all
investments for reductions in fair
41
value that are
other-than-temporary.
When such reductions occur, the cost of the investment is
adjusted to fair value through loss on investments on the
consolidated statement of operations. Gains and losses on
investments are calculated on the basis of specific
identification.
Recovery
of Accounts Receivable
We maintain allowances for doubtful accounts for estimated
losses resulting from our review and assessment of our
customers ability to make required payments. If the
financial condition of one or more of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances might be required. To date such
estimated losses have been within our expectations.
Inventory
Reserves
We reduce our inventory value for estimated obsolete and slow
moving inventory in an amount equal to the difference between
the cost of inventory and the net realizable value based upon
assumptions about future demand and market conditions. If actual
future demand and market conditions are less favorable than
those projected by management, additional inventory write-downs
may be required.
Product
Return and Warranty Reserves
We provide for estimated costs of future anticipated product
returns and warranty obligations based on historical experience
when related revenues are recognized, and we defer
warranty-related revenue over the related warranty term.
Intangible
Assets
We have acquired patents and other intangibles. In addition, we
capitalize the external legal and filing fees associated with
patents and trademarks. We assess the recoverability of our
intangible assets, and we must make assumptions regarding
estimated future cash flows and other factors to determine the
fair value of the respective assets that affect our consolidated
financial statements. If these estimates or related assumptions
change in the future, we may be required to record impairment
charges for these assets. We amortize our intangible assets
related to patents and trademarks, once they issue, over their
estimated useful lives, generally 10 years. Future changes
in the estimated useful life could affect the amount of future
period amortization expense that we will incur. During 2007, we
capitalized costs associated with patents and trademarks of
$2.0 million. Our total amortization expense for the same
period for all intangible assets was $1.0 million.
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 2007
During 2007, we achieved several milestones, including growth in
revenues from all of our key market areas, and the conclusion of
our litigation against Sony Computer Entertainment. We continued
to invest in research, development, sales, and marketing across
all our key business segments. Key achievements in the year were
as follows:
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Revenue growth of 25% in 2007 over 2006, and net income in each
of the four quarters of 2007.
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We signed Nokia as a mobile device licensee. LG Electronics
shipped their first VibeTonz-enabled phones. Combined, Samsung
and LG shipped over 15 new VibeTonz-enabled models and in excess
of 5.5 million units during 2007.
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Market acceptance of medical simulation increased, and our
medical revenues grew 9% in 2007 over 2006. During the year, we
upgraded our laparoscopic product and introduced several new
modules for our products.
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42
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Revenue from our Touch Interface Product business grew 33% in
2007 over 2006. We expect that 3M Touch Systems will package our
TouchSense system with its touchscreens and market and sell the
resulting product to manufacturers of casino gaming and bar-top
amusement equipment.
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In March 2007, we announced the conclusion of our patent
infringement litigation with Sony Computer Entertainment and
received $129.7 million in past damages, compulsory license
fees, pre judgment costs, and interest. In March 2007, we also
entered into an agreement with Sony Computer Entertainment
whereby we granted them and certain of their affiliates a
worldwide, non-transferable, non-exclusive license under our
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 its
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, we also granted Sony Computer Entertainment and
certain of their 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 us
certain covenants not to sue and agreed to pay us 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. We received the first four of these
payments in 2007.
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In 2008, we expect to continue to focus on the execution of
sales and marketing plans in our established businesses to
increase revenue and make selected investments in product and
technology development for longer-term growth areas. Our success
could be limited by several factors, including the timely
release of our new products or our licensees products,
continued market acceptance of our products and technology, the
introduction of new products by existing or new competitors, and
the cost of ongoing litigation. For a further discussion of
these and other risk factors, see Item 1A
Risk Factors.
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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2007
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2006
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2005
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Revenues:
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Royalty and license
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34.3
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%
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26.2
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%
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36.6
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%
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Product sales
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53.4
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61.3
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52.6
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Development contracts and other
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12.3
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12.5
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10.8
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Total revenues
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100.0
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100.0
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100.0
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Costs and expenses:
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Cost of product sales (exclusive of amortization of intangibles
shown separately below)
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25.4
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25.8
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26.5
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Sales and marketing
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33.1
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45.2
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48.0
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Research and development
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29.0
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27.3
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24.7
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General and administrative
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36.2
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36.2
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43.8
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Amortization of intangibles
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2.9
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3.5
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5.2
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Litigation conclusions and patent license
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(388.8
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)
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(5.9
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)
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Restructuring costs
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0.8
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Total costs and expenses
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(262.2
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)
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132.1
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149.0
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Operating income (loss)
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362.2
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(32.1
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)
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(49.0
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)
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Interest and other income
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16.9
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1.0
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2.0
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Interest and other expense
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(3.0
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)
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(5.8
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)
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(6.2
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)
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Income (loss) before provision for income taxes
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376.1
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(36.9
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)
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(53.2
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)
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Provision for income taxes
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(38.9
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)
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(0.5
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)
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(0.7
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)
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Net income (loss)
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337.2
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%
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(37.4
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)%
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(53.9
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)%
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43
Comparison
of Years Ended December 31, 2007, 2006, and 2005
Revenues
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2007
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% Change
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2006
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% Change
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2005
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($ In thousands)
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Royalty and license
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$
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11,881
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63
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%
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$
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7,304
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(18
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)%
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$
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8,888
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Product sales
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18,541
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9
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%
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17,083
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34
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%
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12,762
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Development contracts and other
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4,280
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23
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%
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3,466
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32
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%
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2,627
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|
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|
|
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Total revenue
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$
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34,702
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25
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%
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$
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27,853
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15
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%
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$
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24,277
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|
|
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|
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|
|
|
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|
|
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Fiscal
2007 Compared to Fiscal 2006
Total Revenue Our total revenue for the
year ended December 31, 2007 increased by $6.8 million
or 25% to $34.7 million, from $27.9 million in 2006.
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 increased by
$4.6 million or 63% from 2006 to 2007. The increase in
royalty and license revenue was primarily a result of an
increase in gaming royalties of $2.4 million, an increase
in mobile device license and royalty revenue of
$1.3 million, and an increase in touch interface product
royalties of $1.0 million, offset in part by a decrease in
medical license fees of $147,000.
The increase in gaming royalties compared to 2006 was mainly due
to new royalty and license revenue from first-party gaming
licensee Sony Computer Entertainment. During 2007, we recognized
$2.4 million of revenue from Sony Computer Entertainment.
Sony Computer Entertainment became a licensee in March 2007, and
accordingly there was no license revenue from Sony Computer
Entertainment in the prior year comparative period. Revenues
from our third-party peripheral licensees have 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
significant decline in third-party market share of aftermarket
game console controllers due to the launch of peripherals by
next-generation console manufacturers.
The market share shift to first-party peripheral makers in
combination with other actions by Microsoft, Sony, and Nintendo
has caused our gaming revenue from existing third-party
peripheral licensees to decline. Sony announced on May 8,
2006 that the vibration feature that is currently available on
PlayStation (PS1) and PlayStation 2 (PS2) console systems would
be removed from the new PlayStation 3 (PS3) console system. The
PS3 console system was launched in late 2006 in the United
States and Japan without native vibration or any force feedback
capability of any kind. This course of action by Sony has had
material adverse consequences on our current gaming royalty
revenues from third-party peripheral licensees since our gaming
royalties have primarily been from licensed third-party
controller products with vibration or force feedback
capabilities that require some degree of vibration
and/or force
feedback support or compatibility in the video console system to
be viable products. In the first quarter of 2007, Sony released
an update to the PS3 console system that offered limited
vibration and force feedback support for some older PS1 and PS2
games and controllers. In September 2007, Sony announced that it
will fully restore vibration feedback features for the PS3
console system. The new PS3 DualShock 3 controllers with
vibration feedback were released in Japan in November 2007 as
standalone products sold separately from the PS3 console system
with special console/game/controller bundles due out in June
2008. Sony has announced a release date for the DualShock 3
controller of April 2008 in the U.S. and spring of 2008 in
Europe. While a very limited number of third party PS3 vibration
and force feedback products have been announced recently, we do
not know to what extent Sony will foster the market for other
third-party PS3 gaming peripherals with vibration feedback. 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.
Based on our litigation conclusion and new business agreement
entered into with Sony Computer Entertainment in March 2007 (see
Note 12 to the consolidated financial statements for more
discussion), we will recognize a minimum of $30.0 million
as royalty and license revenue from March 2007 through March
2017, approximately
44
$750,000 per quarter. 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, our gaming royalty revenue may continue to
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 continue to decline.
Mobile device license and royalty revenue increased due to the
shipment of more VibeTonz enabled phones by Samsung and LG
Electronics, and the signing of a new license contract with
mobile device manufacturer Nokia at the end of the second
quarter of 2007. Touch interface product royalties increased due
to increased licensee revenue from additional products licensed
in the automotive market and the recognition of certain one-time
royalty payments in the second quarter of 2007. The decrease in
medical royalty and license revenue was primarily due to a
decrease in license revenue from our license and development
agreements with Medtronic.
Product sales Product sales increased by
$1.5 million or 9% from 2006 to 2007. The increase in
product sales was primarily due to increased medical product
sales of $1.1 million, mainly due to increased sales of our
endoscopy and Virtual IV simulator platforms. This increase
in product sales was a result of pursuing a product growth
strategy for our medical business, which includes leveraging our
industry alliances, resulting in significant increases in the
sales of our Virtual IV platform and expanding
international sales, resulting in additional increases in
revenue from our endoscopy platform. Sales of our touch
interface products increased by $390,000 including increased
sales of touchscreen and touch panel components, force feedback
electronics for arcade gaming, and rotary modules. The increase
in touch interface products is attributable to the successful
introduction of a customers product in which our arcade
gaming boards are used as well as increased shipments of our
rotary modules as a result of design wins.
Development contracts and other
revenue Development contracts and other
revenue increased by $814,000 or 23% from 2006 to 2007.
Development contracts and other revenue is comprised of revenue
on commercial and government contracts. Commercial contract
revenue increased by $1.8 million due to increased medical
contract revenue primarily from Medtronic for four new
development contracts completed in 2007, increased contract
revenue from the completion of one mobile device development
contract, and increased revenue from new and continuing mobile
device development contracts, partially offset by a decrease in
touch interface product contract revenue. Partially offsetting
the increase in commercial contract revenue was a decrease in
government contract work of $1.1 million primarily due to
the completion of work performed under a medical government
contract in 2006. We do not currently have any government
projects in development.
Fiscal
2006 Compared to Fiscal 2005
Total Revenue Our total revenue for 2006
increased by $3.6 million or 15% to $27.9 million from
$24.3 million in 2005.
Royalty and license revenue Royalty and
license revenue decreased by $1.6 million or 18% from 2005
to 2006. The decrease in royalty and license revenue was
primarily a result of a decrease in gaming royalties of
$1.6 million, a decrease in medical royalties and licensee
revenue of $535,000, offset in part by an increase in touch
interface product royalties of $447,000, and an increase in
mobile device royalties and license revenue of $114,000.
The decrease in gaming royalties was mainly due to decreased
sales by our licensees of royalty bearing gaming peripherals.
This decrease in sales was primarily due to i) the
continued decline in sales of past generation video console
systems with the launches of the next-generation console models
from Sony (PlayStation 3) and Nintendo (Wii), and
ii) the significant decline in third-party market share of
aftermarket game console controllers as market share shifted to
first-party peripheral makers due to the launch of the
next-generation console models.
45
The decrease in medical royalty and license revenue in 2006
compared to 2005 was primarily due to a reduction in license
revenue recognized on our license and development agreements
with Medtronic. Revenue recognition on the license and
development agreements with Medtronic is based on
cost-to-cost
percentage-of-completion;
a decrease in activity on these contracts results in a decrease
in revenue recognized. Touch interface product royalties
increased in 2006 due to increased licensee revenue from signing
a new licensee in late 2005, and royalties from an increased
number of vehicles manufactured with our technology incorporated
in them.
Product sales Product sales increased by
$4.3 million or 34% from 2005 to 2006. The increase in
product sales was primarily due to increased medical product
sales of $3.8 million, mainly due to increased sales of our
endovascular, vascular access, and endoscopy simulators. This
increase in product sales was a result of pursuing a product
growth strategy for our medical business, which includes
developing new products, leveraging our industry alliances, and
expanding international sales. Additionally, during the fourth
quarter of 2006, we completed and shipped a new endovascular
simulator product and fulfilled a large order with Medtronic.
Our 3D product sales increased by $747,000, primarily due to
increased sales of our MicroScribe and CyberForce products.
Partially offsetting this increase was a decrease in product
sales from touch interface products of $186,000 including
decreased sales of force feedback electronics for arcade gaming
due to a continued reduction in sales of our customers
product which incorporated this solution as a result of their
products lifecycle.
Development contracts and other
revenue Development contracts and other
revenue increased by $839,000 or 32% from 2005 to 2006.
Government contract revenue increased by $476,000 primarily due
to increased work performed under medical government contracts
that were completed during the third quarter of 2006. Commercial
contract revenue increased by $314,000 mainly due to an increase
in development contract revenue recognized from increased work
on development contracts with Medtronic.
Cost of
Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
|
($ In thousands)
|
|
|
Cost of product sales
|
|
$
|
8,808
|
|
|
|
22
|
%
|
|
$
|
7,193
|
|
|
|
12
|
%
|
|
$
|
6,446
|
|
% of product sales
|
|
|
48
|
%
|
|
|
|
|
|
|
42
|
%
|
|
|
|
|
|
|
51
|
%
|
Our cost of product sales (exclusive of amortization of
intangibles) consists primarily of materials, labor, and
overhead. There is no cost of product sales associated with
royalty and license revenue or development contract revenue.
Cost of product sales increased by $1.6 million or 22% from
2006 to 2007. The increase in cost of product sales was
primarily due to an increase of overhead costs of $925,000,
increased direct material costs of $594,000, and increased
freight of $163,000, partially offset by decreased variances of
$93,000. The increase in direct material costs was primarily a
result of increased product sales. Overhead costs increased, in
part, as a result of increased salary expense primarily due to
increased headcount to support programs to improve quality
processes as well as other improvements within our manufacturing
operations that we anticipate will continue in 2008. Cost of
product sales increased as a percentage of product revenue to
48% in 2007 from 42% in 2006. This increase is mainly due the
increased overhead costs mentioned above as well as increased
sales of our lower margin Virtual IV medical simulator
changing the sales mix.
The cost of product sales increased by $747,000 or 12% from 2005
to 2006. This increase was mainly due to increased product sales
of 34% and the corresponding increase in direct material costs
as well as increased overhead costs and variances. Direct
material costs increased by $496,000 or 10% due to increased
volume. Overhead costs increased by $209,000 mainly due to costs
of programs to improve quality processes within our
manufacturing operations and stock-based compensation charges
due to the adoption of SFAS No. 123R in the first
quarter of 2006. Price and cost variances increased by $125,000
mainly due to the introduction of a new endovascular simulator
product. These increases were offset, in part by a decrease in
write offs for physical inventory adjustments of $80,000. Cost
of product sales decreased as a percentage of product revenue to
42% in 2006 from 51% in 2005. This decrease is mainly due to a
favorable shift in the mix of products sold during the year and
improved margins on our endoscopy and endovascular simulator
products. Our higher margin medical products were a more
significant portion of the overall product revenue mix during
2006. In addition, product margins on our medical products
improved due in part to price increases and cost reductions due
to product modifications.
46
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
|
($ In thousands)
|
|
|
Sales and marketing
|
|
$
|
11,493
|
|
|
|
(9
|
)%
|
|
$
|
12,609
|
|
|
|
8
|
%
|
|
$
|
11,649
|
|
Research and development
|
|
|
10,056
|
|
|
|
32
|
%
|
|
|
7,609
|
|
|
|
27
|
%
|
|
|
6,003
|
|
General and administrative
|
|
|
12,567
|
|
|
|
25
|
%
|
|
|
10,076
|
|
|
|
(5
|
)%
|
|
|
10,638
|
|
Amortization of intangibles
|
|
|
1,002
|
|
|
|
3
|
%
|
|
|
969
|
|
|
|
(23
|
)%
|
|
|
1,256
|
|
Litigation conclusions and patent license
|
|
|
(134,900
|
)
|
|
|
8076
|
%
|
|
|
(1,650
|
)
|
|
|
*
|
%
|
|
|
|
|
Restructuring costs
|
|
|
|
|
|
|
*
|
%
|
|
|
|
|
|
|
*
|
%
|
|
|
185
|
|
|
|
|
* |
|
Percentage not meaningful |
Sales and Marketing Our sales and
marketing expenses are comprised primarily of employee
compensation and benefits, advertising, trade shows, brochures,
market development funds, travel, and an allocation of
facilities costs. Sales and marketing expenses decreased by
$1.1 million or 9% in 2007 compared to 2006. The decrease
was mainly the result of reduced compensation, benefits, and
overhead expense of $837,000; decreased advertising and
marketing expenses including, collateral, product marketing, and
public relations costs of $275,000; and decreased sales and
marketing travel expense of $237,000, offset in part by a change
in bad debt expense of $154,000 and an increase in professional
and consulting expenses of $126,000 primarily due to increased
employee recruitment fees. The decreased compensation, benefits,
and overhead expense was primarily due to a reduction in
headcount and decreased stock-based compensation expense offset
in part by an increase in variable compensation earned on
increased sales and contracts signed during the period. We
expect to continue to focus our sales and marketing efforts on
medical, mobile communication, and touchscreen market
opportunities to build greater market acceptance for our touch
technologies as well as expand our sales and marketing presence
internationally. We will continue to invest in sales and
marketing in future periods to exploit market opportunities for
our technology.
Sales and marketing expenses increased by $1.0 million or
8% in 2006 compared to 2005. The increase was mainly the result
of increased compensation, benefits, and overhead expense of
$1.7 million and increased advertising and public relations
expense of $121,000, offset in part by a reduction in bad debt
expense of $447,000 due to reversal of provisions for bad debts,
decreased shows and exhibits expense of $229,000, decreased
professional and consulting expense of $84,000 primarily due to
reduced employee recruitment fees, and decreased office expenses
of $86,000. The increased compensation, benefits, and overhead
expense was primarily due to increased stock-based compensation
expense of $1.2 million due to the adoption of
SFAS No. 123R in the first quarter of 2006, increased
salary expense, and an increase in variable compensation due to
increased sales.
Research and Development Our research
and development expenses are comprised primarily of employee
compensation and benefits, consulting fees, tooling and
supplies, and an allocation of facilities costs. Research and
development expenses increased by $2.4 million or 32% in
2007 compared to 2006. The increase was primarily due to
increased compensation, benefits, and overhead expense of
$2.1 million, increased professional and consulting expense
of $214,000 to supplement our engineering staff, and an increase
in travel of $143,000 in support of sales efforts, offset in
part by a decrease in prototyping expenses of $114,000. The
increased compensation, benefits, and overhead expense was
primarily due to increased research and development headcount.
Additionally, environmental regulation compliance has caused
overall research and development expenses to increase for the
period, and we anticipate we will need to expend further costs
and resources to meet new compliance regulations in the future.
Research and development expenses increased by $1.6 million
or 27% in 2006 compared to 2005. The increase was primarily due
to increased compensation, benefits, and overhead expense of
$1.0 million, increased professional and consulting expense
of $337,000 to supplement our engineering staff, an increase in
prototyping expenses of $163,000, and an increase in materials
needed for technical support of $51,000. The increased
compensation, benefits, and overhead expense was primarily due
to increased stock-based compensation expense of $492,000 due to
the adoption of SFAS No. 123R in the first quarter of
2006 and increased salary expense of $382,000 due to increased
engineering headcount.
47
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
25% in 2007 compared to 2006. The increase was mainly due to
increased legal and professional fee expenses of
$2.0 million, increased compensation, benefits, and
overhead expense of $263,000, increased public company expense
of $70,000, and increased bank and investment fees of $56,000.
The increased legal and professional fee expenses were primarily
due to increased audit, tax, and accounting fees due to the
accounting and valuation for Sony Computer Entertainment
litigation conclusion and patent license, resolution of a
routine SEC review of our prior periodic filings, and income tax
related issues; increased general legal and patent costs; and
increased consulting costs related to long term strategic
planning. The increased compensation, benefits, and overhead
expense was primarily due to increased headcount and increased
bonus and incentive compensation. We expect that the dollar
amount of general and administrative expenses to continue to be
a significant component of our operating expenses. We will
continue to incur costs related to litigation as we continue to
defend our intellectual property and defend lawsuits brought
against us.
General and administrative expenses decreased by $562,000 or 5%
in 2006 compared to 2005. The decrease was mainly due to reduced
legal and professional fees of $2.4 million primarily due
to a reduction in litigation expenses attributable to the Sony
Computer Entertainment litigation; partially offset by increased
compensation, benefits, and overhead of $1.8 million; and
increased public company expense of $74,000. The increased
compensation, benefits, and overhead expense was primarily due
to increased stock-based compensation expense of
$1.1 million due to the adoption of SFAS No. 123R
in the first quarter of 2006.
Amortization of Intangibles Our
amortization of intangibles is comprised primarily of patent
amortization and other intangible amortization. Amortization of
intangibles increased by $33,000 or 3% from 2006 to 2007. The
increase was primarily attributable to the increased cost and
number of patents being amortized offset in part by some
intangible assets reaching full amortization. Amortization of
intangibles decreased by $287,000 or 23% from 2005 to 2006. The
decrease was primarily attributable to some intangible assets
reaching full amortization.
Litigation Conclusions and Patent License For
fiscal 2007, the $134.9 million is 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. The $1.7 million in fiscal 2006
related to a patent infringement case against PDP.
In March 2007, we concluded our patent infringement litigation
against Sony Computer Entertainment at the U.S. Court of
Appeals for the Federal Circuit. In satisfaction of the Amended
Judgment, we received funds totaling $97.3 million,
inclusive of the award for past damages, pre-judgment interest
and costs, and post-judgment interest. Additionally, we retained
$32.4 million of compulsory license fees and interest
thereon previously paid to us by Sony Computer Entertainment
pursuant to Court Orders. As of March 19, 2007, both
parties entered into an agreement whereby we granted them and
certain of their affiliates a worldwide, non-transferable,
non-exclusive license under our 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 its 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, we also granted Sony Computer
Entertainment and certain of their 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 us certain covenants not to sue and agreed to pay us
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 us certain
other fees and royalty amounts. In total, we will receive a
minimum of $152.2 million through the conclusion of the
litigation and the separate patent license. In accordance with
the guidance from EITF
No. 00-21,
we 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, we recorded
$119.9 million as litigation conclusions and patent license
income and the remaining $30.0 million was allocated to
deferred license revenue. We recorded $2.4 million as
revenue for 2007. We will record the remaining
$27.6 million as revenue, on a straight-line basis, over
the remaining capture period of the patents licensed, ending
March 19, 2017. We have accounted for future payments in
accordance with APB No. 21. Under APB No. 21, we
determined the present value of the $22.5 million
48
future payments to equal $20.2 million. We account for the
difference of $2.3 million as interest income as each
$1.875 million quarterly payment installment becomes due.
Under the terms of a series of agreements that we entered into
with Microsoft in 2003, in the event we had 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, we 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 patent infringement litigation with
Sony Computer Entertainment was concluded in March 2007 at the
U.S. Court of Appeals for the Federal Circuit without
settlement. We determined that the conclusion of our litigation
with Sony Computer Entertainment did not trigger any payment
obligations under our Microsoft agreements. Accordingly, the
liability of $15.0 million that was in the financial
statements at December 31, 2006 was extinguished, and we
have accounted for this sum during 2007 as litigation
conclusions and patent license income. However, in a letter sent
to us dated May 1, 2007, Microsoft disputed our position
and stated that it believes we owe Microsoft at least
$27.5 million, which it increased to $35.6 million at
a court ordered mediation meeting on December 11, 2007. 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. We
dispute Microsofts allegations and intend to vigorously
defend ourselves. See Contingencies Note 18 to the
consolidated financial statements. The results of any litigation
are inherently uncertain, and there can be no assurance that our
position will prevail.
In February 2006, we announced that we had settled our legal
differences in our complaint for patent infringement against PDP
and that both parties had agreed to dismiss all claims and
counterclaims relating to this matter. In addition to the
Confidential Settlement Agreement, PDP entered into a worldwide
license to our patents for vibro-tactile devices in the consumer
gaming peripheral field of use. According to the terms of the
agreement, PDP will make royalty payments to us based on sales
by PDP of spinning mass vibro-tactile gamepads, steering wheels,
and other game controllers for dedicated gaming consoles, such
as the Sony PS1 and PS2, the Nintendo GameCube, and the
Microsoft Xbox and Xbox 360. For the year ended
December 31, 2006 PDP paid us $1.7 million, and we
recorded that amount as litigation conclusions and patent
license income.
Restructuring Costs We did not incur any
restructuring costs in 2006 or 2007. Restructuring costs were
$185,000 for 2005. The costs consisted of severance benefits
paid as a result of our reduction in force in the first quarter
of 2005. Employees from manufacturing, sales and marketing,
research and development, and general and administrative were
included in the reduction in force. We did not incur any
additional charges related to this reduction in force and do not
anticipate any further costs in future periods related to this
reduction in force.
Interest
and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
|
($ In thousands)
|
|
|
Interest and other income
|
|
$
|
5,854
|
|
|
|
2029
|
%
|
|
$
|
275
|
|
|
|
(44
|
)%
|
|
$
|
490
|
|
Interest and other expense
|
|
|
(1,024
|
)
|
|
|
(36
|
)%
|
|
|
(1,602
|
)
|
|
|
6
|
%
|
|
|
(1,517
|
)
|
Interest and Other Income Interest and other
income consists primarily of interest income and dividend income
from cash, cash equivalents, and short-term investments.
Interest and other income increased by $5.6 million from
2006 to 2007 as a result of increased interest income earned on
increased cash, cash equivalents, and short-term investments
invested after the receipt of the judgment from Sony Computer
Entertainment in March 2007. Interest income earned on the
payments from Sony Computer Entertainment up until the judgment
became final had been included in deferred revenue.
Interest and other income decreased by $215,000 from 2005 to
2006 as a result of decreased cash and cash equivalents
invested, exclusive of monies received from Sony Computer
Entertainment. Interest income earned on the payments from Sony
Computer Entertainment were included in long-term deferred
revenue as of December 31, 2006.
49
Interest and Other Expense Interest and other
expense consists primarily of interest and accretion expense on
our 5% Senior Subordinated Convertible Debentures
(5% Convertible Debenture) and accretion and
dividend expense on our long-term customer advance from
Microsoft. Interest and other expense decreased by $578,000 from
2006 to 2007 due to the conversion and redemption of our
5% Convertible Debentures during the third quarter of 2007.
See Note 7 to the consolidated financial statements. The
increase in interest and other expense of $85,000 from 2005 to
2006 was primarily due to increased accretion expense on our
5% Convertible Debentures.
Provision
for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
|
($ In thousands)
|
|
|
Provision for income taxes
|
|
$
|
13,488
|
|
|
|
9267
|
%
|
|
$
|
144
|
|
|
|
(9
|
)%
|
|
$
|
158
|
|
Provision for Income Taxes For the year ended
2007, we recorded a provision for income taxes of
$13.5 million yielding an effective tax rate of 10.3%. The
current year tax provision is primarily reflective of federal
and state tax expense as a result of our pre-tax income of
$130.5 million mainly due to the litigation conclusions and
patent license from Sony Computer Entertainment, see
Note 12 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. For the
year ended 2006, we recorded a provision for income taxes of
$144,000, yielding an effective tax rate of (1.4%). The
provision for income tax was based on federal and state
alternative minimum income tax payable on taxable income and
foreign withholding tax expense. Although we incurred a pre-tax
loss of $10.3 million, sums received from Sony Computer
Entertainment and interest thereon included in long-term
deferred revenue, approximating $11.1 million in 2006, are
taxable, thus giving rise to an overall taxable profit. The
effective tax rate differs from the statutory rate primarily due
to the recording of a full valuation allowance of
$47.9 million against deferred tax assets. For the year
ended 2005, we recorded a provision for income taxes of
$158,000, yielding an effective tax rate of (1.2%). Although we
incurred a pre-tax loss of $12.9 million, sums received
from Sony Computer Entertainment and interest thereon included
in long-term deferred revenue, approximating $16.8 million
in 2005, are taxable, thus giving rise to an overall taxable
profit. The effective tax rate differs from the statutory rate
primarily due to the recording of a full valuation allowance of
$44.7 million against deferred tax assets.
Segment
Results for the Years Ended December 31, 2007, 2006, and
2005 are as follows:
We have two operating and reportable segments. One segment,
Immersion Computing, Entertainment, and Industrial, develops and
markets touch feedback technologies that enable software and
hardware developers to enhance realism and usability in their
computing, entertainment, and industrial applications. The
second segment, Immersion Medical, develops, manufactures, and
markets medical training simulators that recreate realistic
healthcare environments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
% Change
|
|
|
2005
|
|
|
|
($ In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immersion Computing, Entertainment, and Industrial
|
|
$
|
19,363
|
|
|
|
40
|
%
|
|
$
|
13,810
|
|
|
|
(7
|
)%
|
|
$
|
14,840
|
|
Immersion Medical
|
|
|
15,428
|
|
|
|
9
|
%
|
|
|
14,133
|
|
|
|
45
|
%
|
|
|
9,760
|
|
Intersegment eliminations
|
|
|
(89
|
)
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,702
|
|
|
|
25
|
%
|
|
$
|
27,853
|
|
|
|
15
|
%
|
|
$
|
24,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immersion Computing, Entertainment, and Industrial
|
|
$
|
116,405
|
|
|
|
1132
|
%
|
|
$
|
(11,278
|
)
|
|
|
(9
|
)%
|
|
$
|
(10,306
|
)
|
Immersion Medical
|
|
|
635
|
|
|
|
(25
|
)%
|
|
|
845
|
|
|
|
130
|
%
|
|
|
(2,842
|
)
|
Intersegment eliminations
|
|
|
(22
|
)
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
117,018
|
|
|
|
1223
|
%
|
|
$
|
(10,424
|
)
|
|
|
20
|
%
|
|
$
|
(13,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
* |
|
Segment assets and expenses relating to our corporate operations
are not allocated but are included in Immersion Computing,
Entertainment, and Industrial as that is how they are considered
for management evaluation purposes. As a result, the segment
information may not be indicative of the financial position or
results of operations that would have been achieved had these
segments operated as unaffiliated entities. |
Fiscal
2007 Compared to Fiscal 2006
Immersion Computing, Entertainment, and Industrial
segment Revenues from the Immersion Computing,
Entertainment, and Industrial segment increased by
$5.6 million, or 40% in 2007 compared to 2006. Royalty and
license revenue increased by $4.7 million, mainly due to
increased gaming royalties primarily from Sony Computer
Entertainment, increased mobile device license and royalty
revenue, and increased royalties and license fees from our touch
interface product licensees. Product sales increased by
$368,000, mainly due to increased sales of our touch interface
products including touchscreen and touch panel components, force
feedback electronics for arcade gaming, and rotary modules.
Development contract revenue increased by $460,000, primarily
due to continued revenue from mobile device development
contracts, partially offset by a decrease in touch interface
product contract revenue. The segments net income for 2007
increased by $127.7 million as compared to 2006. The
increase was primarily due to the litigation conclusions and
patent license income of $134.9 million
($119.9 million from Sony Computer Entertainment and
$15.0 million from Microsoft); increased interest and other
income of $5.6 million due to increased cash, cash
equivalents, and short-term investments; increased gross margin
of $4.3 million primarily due to increased sales; a
decrease in sales and marketing expenses of $796,000; and a
decrease in interest expense of $573,000 due to the conversion
and redemption of our 5% Convertible Debentures. The
increases were partially offset by increased provision for
income taxes of $13.3 million; an increase in general and
administrative expenses of $3.0 million primarily due to
increased legal and professional fees; the reduction of
litigation settlements of $1.7 million from PDP in 2006;
and an increase of research and development expenses of
$471,000. We expect that the dollar amount of general and
administrative expenses to continue to be a significant
component of our operating expenses. We will continue to incur
costs related to litigation as we continue to defend our
intellectual property and defend lawsuits brought against us.
Also, we anticipate sales and marketing costs in this segment
will continue to be significant in future periods as we continue
to invest in the mobile communications, touchscreen, and other
markets to exploit opportunities for our technologies.
Immersion Medical segment Revenues from
Immersion Medical increased by $1.3 million, or 9% from
2006 to 2007. The increase was primarily due to an increase of
$1.1 million in product sales and an increase of $370,000
in development contract revenue, partially offset by a decrease
of $147,000 in royalty and license revenue. Product sales
increased primarily due to increased sales of our endoscopy and
our Virtual IV simulator platforms. This increase in
product sales was a result of pursuing a product growth strategy
for our medical business, which includes leveraging our industry
alliances, resulting in significant increases in the sales of
our Virtual IV platform; and expanding international sales,
resulting in additional increases in the sales of our endoscopy
platform. Increased contract revenue recognized from our
contracts with Medtronic contributed to the increase in
development contract revenue. Segment net income for 2007 was
$635,000, a decrease of $210,000 from the net income of $845,000
for 2006. The reduction in net income was mainly due to
increased operating expenses of $1.2 million offset by
increased gross margin of $986,000. The increased operating
expenses included increased research and development expenses of
$2.0 million primarily due to increased headcount, offset
in part by decreased general and administrative expenses of
$463,000 and reduced sales and marketing expenses of $320,000.
The increased gross margin was primarily due to increased
product sales and increased development contracts primarily from
Medtronic.
Fiscal
2006 Compared to Fiscal 2005
Immersion Computing, Entertainment, and Industrial
segment Revenues from the Immersion Computing,
Entertainment, and Industrial segment decreased by
$1.0 million, or 7% in 2006 compared to 2005. Royalty and
license revenue decreased by $1.0 million, mainly due to
decreased royalties from our licensees that sell console and PC
gaming peripheral products, partially offset by increased
royalties and license fees from our touch interface product
licensees; development contract revenue decreased by $435,000,
primarily due to reduced government contracts; and product sales
increased by $453,000, mainly due to increased sales of our 3D
products partially offset
51
by a decrease in touch interface product sales. The
segments net loss for 2006 increased by $1.0 million
or 9% as compared to 2005. The increase was primarily due to a
reduction in gross margin of $1.5 million mainly due to
reduced royalty and development contract revenue, and decreased
interest and other income of $215,000, due to decreased cash
invested. This increase was partially offset by decreased
operating expenses of $806,000. The reduced operating expenses
are comprised of the litigation settlement received from PDP;
decreased general and administrative expenses, mainly reduced
litigation expenses; and reduced amortization of intangibles;
offset in part by increased sales and marketing expenses and
increased research and development expenses.
Immersion Medical segment Revenues from
Immersion Medical increased by $4.4 million, or 45% from
2005 to 2006. The increase was primarily due to an increase of
$3.8 million in product sales and an increase of
$1.1 million in development contract revenue, partially
offset by a decrease of $535,000 in royalty and license revenue.
Product sales increased primarily due to increased sales of our
endovascular, vascular access, and endoscopy simulator
platforms. This increase in product sales was a result of
pursuing a product growth strategy which includes developing new
products, leveraging our industry alliances, and expanding
international sales. Increased work performed under government
contracts which were completed during the third quarter of 2006
and contract revenue recognized from our contracts with
Medtronic contributed to the increase in development contract
revenue. Segment net income for 2006 was $845,000, an increase
of $3.7 million from the net loss of $2.8 million for
2005. The improvement was mainly due to increased gross margin
of $4.3 million primarily due to increased product sales
and increased government contract revenue offset by increased
operating expenses of $563,000, primarily the result of
increased research and development and general and
administrative expenses, offset in part by reduced sales and
marketing expenses.
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 under the
provisions of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The
securities are stated at market value, with unrealized gains and
losses reported as a component of accumulated other
comprehensive income, within stockholders equity (deficit).
On December 31, 2007, our cash, cash equivalents, and
short-term investments totaled $138.1 million, an increase
of $106.1 million from $32.0 million on
December 31, 2006.
In March 2007, we concluded our patent infringement litigation
against Sony Computer Entertainment at the U.S. Court of
Appeals for the Federal Circuit. In satisfaction of the Amended
Judgment, we received funds totaling $97.3 million,
inclusive of the award for past damages, pre-judgment interest
and costs, and post-judgment interest. Additionally, we retained
$32.4 million of compulsory license fees and interest
thereon previously paid to us by Sony Computer Entertainment
pursuant to Court Orders. Furthermore, we entered into a new
business agreement. Under the new business agreement 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,
2007, we have received four of these installments.
We determined that the conclusion of our litigation with Sony
Computer Entertainment did not trigger any payment obligations
under our Microsoft agreements as noted in Note 9 to the
consolidated financial statements. Accordingly, the liability of
$15.0 million that was in the financial statements at
December 31, 2006 had been extinguished, and we have
accounted for this sum during 2007 as litigation conclusions and
patent license income. However, in a letter sent to us dated
May 1, 2007, Microsoft disputed our position and stated
that it believes we owe Microsoft at least $27.5 million,
which it increased to $35.6 million at a court ordered
mediation meeting on December 11, 2007. 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. We dispute
Microsofts allegations and intend to vigorously defend
ourselves. See Contingencies Note 18 to the consolidated
financial statements. The results of any litigation are
inherently uncertain, and there can be no assurance that our
position will prevail.
Net cash provided by operating activities during 2007 was
$84.5 million, a change of $79.2 million from the
$5.3 million provided by operating activities during 2006.
Cash provided by operations during 2007 was primarily the result
of our net income of $117.0 million, an increase of
$15.8 million due to a change in accrued compensation
52
and other current liabilities primarily due to a change in
income taxes payable, and an increase of $960,000 due to a
change in other long-term liabilities. These increases were
offset by a $29.8 million decrease due to a change in
deferred revenue and customer advances mainly related to the
conclusion of our patent litigation with Sony Computer
Entertainment and the extinguishment of the customer advance
from Microsoft, a decrease of $7.4 million due to a change
in deferred income taxes, a decrease of $1.8 million due to
a change in prepaid expenses and other current assets, a
decrease of $965,000 due to a change in inventories, a decrease
of $618,000 due to a change in accounts payable due to the
timing of payments to vendors, and a decrease of $317,000 due to
a change in accounts receivable. Cash provided by operations
during 2007 was also impacted by noncash charges and credits
resulting in a net credit of $8.3 million including a
credit of $13.5 million from excess tax benefits from
stock-based compensation, partially offset by $2.7 million
of noncash stock-based compensation, $1.0 million in
amortization of intangibles, $911,000 in depreciation and
amortization, and $535,000 in accretion expenses on our
5% Convertible Debentures. Net cash provided by operating
activities during 2006 was $5.3 million, a change of
$3.1 million from the $2.2 million provided by
operating activities during 2005. Cash provided by operations
during 2006 was primarily the result of a $9.5 million
increase due to a change in deferred revenue and customer
advances mainly related to compulsory license fee payments
received and interest thereon from Sony Computer Entertainment
of $11.1 million. Cash provided by operations was also
impacted by noncash charges and credits of $5.3 million,
including $2.9 million of stock-based compensation,
$1.0 million in amortization of intangibles, $772,000 in
depreciation and amortization, and $632,000 in accretion
expenses on our 5% Convertible Debentures, as well as an
increase of $760,000 due to a change in other long-term
liabilities, an increase of $516,000 due to a change in accrued
compensation and other current liabilities, an increase of
$191,000 due to a change in accounts payable due to the timing
of payments to vendors, and an increase of $79,000 due to a
change in inventories. These increases were offset by our
$10.4 million net loss, a decrease of $503,000 due to a
change in accounts receivable, and a decrease of $71,000 due to
a change in prepaid expenses and other current assets.
Net cash used in investing activities during 2007 was
$55.2 million, compared to the $2.7 million used in
investing activities during 2006, an increase of
$52.5 million. Net cash used in investing activities during
2007 consisted of an increase in purchases of short-term
investments of $96.7 million, a $2.1 million increase
in intangibles and other assets, primarily due to capitalization
of external patent filing and application costs, and
$1.4 million used to purchase property and equipment,
offset in part by $45.1 million of maturities or sales of
short-term investments. Net cash used in investing activities
during 2006 was $2.7 million, compared to the
$2.0 million used in investing activities during 2005, a
change of $757,000. Net cash used in investing activities during
2006 consisted of a $1.6 million increase in intangibles
and other assets, primarily due to capitalization of external
patent filing and application costs and $1.1 million used
to purchase property and equipment.
Net cash provided by financing activities during 2007 was
$25.2 million compared to $1.3 million provided during
2006, or a $23.9 million increase from the prior year. Net
cash provided by financing activities during 2007 consisted
primarily of an increase of $13.5 million from excess tax
benefits from tax deductible stock-based compensation, and
issuances of common stock and exercises of stock options and
warrants in the amount of $13.1 million, offset in part by
the partial redemption of our 5% Convertible Debenture of
$1.4 million with the remainder converted to common stock.
Net cash provided by financing activities during 2006 was
$1.3 million compared to $2.2 million provided during
2005, or a $902,000 change from the prior year. Net cash
provided by financing activities during 2006 consisted primarily
of issuances of common stock and exercises of stock options in
the amount of $1.3 million.
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. We
anticipate that capital expenditures for the year ended
December 31, 2008 will total approximately
$2.0 million in connection with anticipated maintenance and
upgrades to operations and infrastructure. On November 1,
2007, we announced that our Board of Directors authorized the
repurchase of up to $50 million of our common stock.
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.
53
Although we expect to be able to raise additional capital if
necessary, there is no assurance that such additional capital
will be available on terms acceptable to us, if at all.
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, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 and
|
|
|
2011 and
|
|
Contractual Obligations
|
|
Total
|
|
|
2008
|
|
|
2010
|
|
|
2012
|
|
|
|
(In thousands)
|
|
|
Operating leases
|
|
$
|
2,300
|
|
|
$
|
1,100
|
|
|
$
|
1,191
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 14 to the consolidated financial
statements, effective January 1, 2007, we adopted the
provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, (FIN 48). At
December 31, 2007, we had a liability for unrecognized tax
benefits totaling $628,000. 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:
Fixed Income Investments We have an
investment portfolio of fixed income securities, including those
classified as cash equivalents and short-term investments of
$135.6 million as of December 31, 2007. 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 $250,000 decrease in the fair value of our fixed
income available-for-sale securities as of December 31,
2007.
We limit our exposure to interest rate and credit risk by
establishing and monitoring clear policies and guidelines for
our fixed income portfolios. The primary objective of our
policies is to preserve principal while at the same time
maximizing yields, without significantly increasing risk. Our
investment policy limits the maximum weighted average duration
of all invested funds to 12 months. Our policys
guidelines also limit exposure to loss by limiting the sums we
can invest in any individual security and restricting investment
to securities that meet certain defined credit ratings. We do
not use derivative financial instruments in our investment
portfolio to mange 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,
fluctuations in currency exchange rates 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.
54
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
IMMERSION
CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
55
IMMERSION
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
86,493
|
|
|
$
|
32,012
|
|
Short-term investments
|
|
|
51,619
|
|
|
|
|
|
Accounts receivable (net of allowances for doubtful accounts of:
|
|
|
|
|
|
|
|
|
2007 $85; 2006 $139)
|
|
|
5,494
|
|
|
|
5,153
|
|
Inventories, net
|
|
|
3,674
|
|
|
|
2,639
|
|
Deferred income taxes
|
|
|
3,351
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
3,036
|
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
153,667
|
|
|
|
40,983
|
|
Property and equipment, net
|
|
|
2,112
|
|
|
|
1,647
|
|
Deferred income tax assets, net
|
|
|
4,031
|
|
|
|
|
|
Intangibles and other assets, net
|
|
|
8,558
|
|
|
|
7,385
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
168,368
|
|
|
$
|
50,015
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,657
|
|
|
$
|
2,334
|
|
Accrued compensation
|
|
|
1,828
|
|
|
|
1,526
|
|
Other current liabilities
|
|
|
2,629
|
|
|
|
1,750
|
|
Deferred revenue, current and customer advances
|
|
|
4,478
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,592
|
|
|
|
7,326
|
|
Long-term debt
|
|
|
|
|
|
|
18,122
|
|
Long-term deferred revenue, less current portion
|
|
|
14,269
|
|
|
|
31,784
|
|
Long-term customer advance from Microsoft
|
|
|
|
|
|
|
15,000
|
|
Other long-term liabilities
|
|
|
1,720
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,581
|
|
|
|
73,007
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 10 and 18)
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock and additional paid-in capital
$0.001 par value; 100,000,000 shares authorized;
shares issued and outstanding: 2007 30,389,850;
2006 24,797,572
|
|
|
160,147
|
|
|
|
110,501
|
|
Warrants
|
|
|
1,731
|
|
|
|
3,686
|
|
Accumulated other comprehensive income
|
|
|
137
|
|
|
|
67
|
|
Accumulated deficit
|
|
|
(20,228
|
)
|
|
|
(137,246
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
141,787
|
|
|
|
(22,992
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
168,368
|
|
|
$
|
50,015
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
56
IMMERSION
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
$
|
11,881
|
|
|
$
|
7,304
|
|
|
$
|
8,888
|
|
Product sales
|
|
|
18,541
|
|
|
|
17,083
|
|
|
|
12,762
|
|
Development contracts and other
|
|
|
4,280
|
|
|
|
3,466
|
|
|
|
2,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
34,702
|
|
|
|
27,853
|
|
|
|
24,277
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales (exclusive of amortization of intangibles
shown separately below)
|
|
|
8,808
|
|
|
|
7,193
|
|
|
|
6,446
|
|
Sales and marketing
|
|
|
11,493
|
|
|
|
12,609
|
|
|
|
11,649
|
|
Research and development
|
|
|
10,056
|
|
|
|
7,609
|
|
|
|
6,003
|
|
General and administrative
|
|
|
12,567
|
|
|
|
10,076
|
|
|
|
10,638
|
|
Amortization of intangibles
|
|
|
1,002
|
|
|
|
969
|
|
|
|
1,256
|
|
Litigation conclusions and patent license (Note 12)
|
|
|
(134,900
|
)
|
|
|
(1,650
|
)
|
|
|
|
|
Restructuring costs
|
|
|
|
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
(90,974
|
)
|
|
|
36,806
|
|
|
|
36,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
125,676
|
|
|
|
(8,953
|
)
|
|
|
(11,900
|
)
|
Interest and other income
|
|
|
5,854
|
|
|
|
275
|
|
|
|
490
|
|
Interest and other expense
|
|
|
(1,024
|
)
|
|
|
(1,602
|
)
|
|
|
(1,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
130,506
|
|
|
|
(10,280
|
)
|
|
|
(12,927
|
)
|
Provision for income taxes
|
|
|
(13,488
|
)
|
|
|
(144
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
117,018
|
|
|
$
|
(10,424
|
)
|
|
$
|
(13,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
4.23
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating basic net income (loss) per share
|
|
|
27,662
|
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
3.71
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted net income (loss) per share
|
|
|
31,667
|
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
57
IMMERSION
CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock and
|
|
|
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
Total
|
|
|
|
Additional Paid-In Capital
|
|
|
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balances at January 1, 2005
|
|
|
23,526,067
|
|
|
$
|
104,027
|
|
|
$
|
3,686
|
|
|
$
|
(2
|
)
|
|
$
|
59
|
|
|
$
|
(113,737
|
)
|
|
$
|
(5,967
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,085
|
)
|
|
|
(13,085
|
)
|
|
$
|
(13,085
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for ESPP purchase
|
|
|
55,967
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233
|
|
|
|
|
|
Exercise of stock options
|
|
|
778,393
|
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,017
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
24,360,427
|
|
|
$
|
106,277
|
|
|
$
|
3,686
|
|
|
$
|
|
|
|
$
|
64
|
|
|
$
|
(126,822
|
)
|
|
$
|
(16,795
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,424
|
)
|
|
|
(10,424
|
)
|
|
$
|
(10,424
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for ESPP purchase
|
|
|
47,335
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
|
|
|
|
Exercise of stock options
|
|
|
389,810
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,009
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
2,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,937
|
|
|
|
|
|
Tax benefits from stock-based compensation
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
24,797,572
|
|
|
$
|
110,501
|
|
|
$
|
3,686
|
|
|
$
|
|
|
|
$
|
67
|
|
|
$
|
(137,246
|
)
|
|
$
|
(22,992
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,018
|
|
|
|
117,018
|
|
|
$
|
117,018
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
88
|
|
|
|
88
|
|
Unrealized gain (loss) on available-for-sale securities, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
2,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,729
|
|
|
|
|
|
Tax benefits from stock-based compensation
|
|
|
|
|
|
|
14,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
30,389,850
|
|
|
$
|
160,147
|
|
|
$
|
1,731
|
|
|
$
|
|
|
|
$
|
137
|
|
|
$
|
(20,228
|
)
|
|
$
|
141,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
IMMERSION
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
117,018
|
|
|
$
|
(10,424
|
)
|
|
$
|
(13,085
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
911
|
|
|
|
772
|
|
|
|
730
|
|
Amortization of intangibles
|
|
|
1,002
|
|
|
|
969
|
|
|
|
1,256
|
|
Stock-based compensation
|
|
|
2,729
|
|
|
|
2,937
|
|
|
|
2
|
|
Excess tax benefits from stock-based compensation
|
|
|
(13,505
|
)
|
|
|
(36
|
)
|
|
|
|
|
Interest expense accretion on 5% Convertible
Debenture
|
|
|
535
|
|
|
|
632
|
|
|
|
634
|
|
Fair value adjustment of Put Option and Registration Rights
|
|
|
(15
|
)
|
|
|
(34
|
)
|
|
|
(128
|
)
|
Loss on disposal of equipment
|
|
|
15
|
|
|
|
15
|
|
|
|
10
|
|
Write off of intangibles
|
|
|
|
|
|
|
69
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(317
|
)
|
|
|
(503
|
)
|
|
|
791
|
|
Inventories
|
|
|
(965
|
)
|
|
|
79
|
|
|
|
(814
|
)
|
Deferred income taxes
|
|
|
(7,382
|
)
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(1,842
|
)
|
|
|
(71
|
)
|
|
|
149
|
|
Other assets
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(618
|
)
|
|
|
191
|
|
|
|
(2,087
|
)
|
Accrued compensation and other current liabilities
|
|
|
15,804
|
|
|
|
516
|
|
|
|
(709
|
)
|
Deferred revenue and customer advances and long-term customer
advance from Microsoft
|
|
|
(29,753
|
)
|
|
|
9,465
|
|
|
|
15,461
|
|
Other long-term liabilities
|
|
|
960
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
84,515
|
|
|
|
5,337
|
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(96,719
|
)
|
|
|
|
|
|
|
|
|
Maturities or sales of short-term investments
|
|
|
45,110
|
|
|
|
|
|
|
|
|
|
Intangibles and other assets
|
|
|
(2,113
|
)
|
|
|
(1,614
|
)
|
|
|
(1,025
|
)
|
Purchases of property and equipment
|
|
|
(1,438
|
)
|
|
|
(1,130
|
)
|
|
|
(967
|
)
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(55,160
|
)
|
|
|
(2,744
|
)
|
|
|
(1,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
317
|
|
|
|
242
|
|
|
|
233
|
|
Exercise of stock options and warrants
|
|
|
12,738
|
|
|
|
1,009
|
|
|
|
2,017
|
|
Excess tax benefits from stock-based compensation
|
|
|
13,505
|
|
|
|
36
|
|
|
|
|
|
Payment on long-term debt and capital leases
|
|
|
(1,400
|
)
|
|
|
(5
|
)
|
|
|
(11
|
)
|
Increase in issuance cost of 5% Convertible Debenture
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
25,160
|
|
|
|
1,282
|
|
|
|
2,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
54,481
|
|
|
|
3,841
|
|
|
|
2,633
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
32,012
|
|
|
|
28,171
|
|
|
|
25,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
86,493
|
|
|
$
|
32,012
|
|
|
$
|
28,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
6,882
|
|
|
$
|
28
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
572
|
|
|
$
|
1,004
|
|
|
$
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the conversion of
the 5% Convertible Debentures
|
|
$
|
17,257
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
59
IMMERSION
CORPORATION
Years
Ended December 31, 2007, 2006, and 2005
|
|
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).
Reclassifications
Certain reclassifications have been made to the 2005 and 2006
presentation to conform to the 2007 presentation.
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 all
debt securities with readily determinable market values as
available-for-sale in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115). 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 in
accordance with Accounting Research Bulletin No. 43,
Chapter 3A, Working Capital Current
Assets and Current Liabilities, as they are reasonably
expected to be realized in cash or sold during the normal
operating cycle of the Company. 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
(deficit). The Company reviews all investments for reductions in
fair value that are other-than-temporary. When such reductions
occur, the cost of the investment is adjusted to fair value
through loss on investments on the consolidated statement of
operations. Gains and losses on investments are calculated on
the basis of specific identification.
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.
60
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories
Inventories are stated at the lower of cost (principally on a
standard cost basis which approximates FIFO) or market. The
Company reduces its inventory value for estimated obsolete and
slow moving inventory in an amount equal to the difference
between the cost of inventory and the net realizable value based
upon assumptions about future demand and market conditions.
Property
and Equipment
Property is stated at cost and is generally depreciated using
the straight-line method over the estimated useful life of the
related asset. The estimated useful lives are as follows:
|
|
|
|
|
Computer equipment and purchased software
|
|
|
3 years
|
|
Machinery and equipment
|
|
|
3-5 years
|
|
Furniture and fixtures
|
|
|
5-7 years
|
|
Leasehold improvements are amortized over the shorter of the
lease term or their useful life.
Intangible
Assets
The Company accounts for its intangible assets in accordance
with SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142).
SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142
provides that intangible assets with finite useful lives will be
amortized and that goodwill and intangible assets with
indefinite lives will not be amortized but rather will be tested
at least annually for impairment.
In addition to purchased intangible assets the Company
capitalizes the external legal and filing fees associated with
its patents and trademarks. These costs are amortized once the
patent or trademark is issued.
For intangibles with definite useful lives, amortization is
recorded utilizing the straight-line method, which approximates
the pattern of consumption over the estimated useful lives of
the respective assets, generally two to ten years.
Long-lived
Assets
The Company evaluates its long-lived assets for impairment in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, whenever
events or changes in circumstances indicate that the carrying
amount of that asset may not be recoverable. An impairment loss
would be recognized when the sum of the undiscounted future net
cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount.
Measurement of an impairment loss for long-lived assets and
certain identifiable intangible assets that management expects
to hold and use is based on the fair value of the asset. As of
December 31, 2007, management believes that no impairment
losses are required.
Product
Warranty
The Company sells its products with warranties ranging from
three to sixty months. The Company records the estimated
warranty costs during the quarter 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 Securities and Exchange
Commission (SEC) Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition
61
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(SAB No. 104), Emerging Issues Task Force
(EITF)
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables (EITF
No. 00-21),
Statement of Position (SOP)
81-1
Accounting for Performance for Construction-Type and
Certain Production-Type contracts
(SOP 81-1),
and
SOP 97-2,
Software Revenue Recognition
(SOP 97-2),
as amended. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or service has been
rendered, the fee is fixed and determinable, and collectibility
is probable. The Company derives its revenues from three
principal sources: royalty and license fees, product sales, and
development contracts.
Royalty and license revenue The Company
recognizes royalty and license revenue based on royalty reports
or related information received from the licensee as well as
time-based licenses of its intellectual property portfolio.
Up-front payments under license agreements are deferred and
recognized as revenue based on either the royalty reports
received or amortized over the license period depending on the
nature of the agreement. Advance payments under license
agreements that also require the Company to provide future
services to the licensee are deferred and recognized over the
service period when VSOE related to the value of the services
does not exist.
The Company generally recognizes revenue from its licensees
under one or a combination of the following models:
|
|
|
License Revenue Model
|
|
Revenue Recognition
|
|
Perpetual license of intellectual property portfolio based on
per unit royalties, no services contracted.
|
|
Based on royalty reports received from licensees. No further
obligations to licensee exist.
|
Time-based license of intellectual property portfolio with
up-front payments and/or annual minimum royalty requirements, no
services contracted. Licensees have certain rights to updates to
the intellectual property portfolio during the contract period.
|
|
Based on straight-line amortization of annual minimum/up-front
payment recognized over contract period or annual minimum period.
|
Perpetual license of intellectual property portfolio or
technology license along with contract for development work.
|
|
Based on cost-to-cost percentage-of-completion accounting method
over the service period or completed contract method. Obligation
to licensee exists until development work is complete.
|
License of software or technology, no modification necessary, no
services contracted.
|
|
Up-front revenue recognition based on SOP 97-2 criteria or EITF
No. 00-21, as applicable.
|
Individual contracts may have characteristics that do not fall
within a specific license model or may have characteristics of a
combination of license models. Under those circumstances, the
Company recognizes revenue in accordance with
SAB No. 104, EITF
No. 00-21,
SOP 81-1,
and
SOP 97-2,
as amended, to guide the accounting treatment for each
individual contract. See also the discussion regarding
Multiple element arrangements below. If the
information received from the Companys licensees regarding
royalties is incorrect or inaccurate, the Companys
revenues in future periods may be adversely affected. To date,
none of the information the Company has received from its
licensees has caused any material adjustment to period revenues.
Product sales The Company recognizes revenues
from product sales when the product is shipped, provided the
other revenue recognition criteria is met, including that
collection is determined to be probable and no significant
obligation remains. The Company sells the majority of its
products with warranties ranging from three to sixty months. The
Company records the estimated warranty costs during the quarter
the revenue is recognized. Historically, warranty-related costs
and related accruals have not been significant. The Company
offers a general right of return on the MicroScribe product line
for 14 days after purchase. The Company recognizes revenue
at the time of shipment of a MicroScribe digitizer and provides
an accrual for potential returns based on historical experience.
The Company offers no other general right of return on its
products.
62
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Development contracts and other revenue
Development contracts and other revenue is comprised of
professional services (consulting services
and/or
development contracts), customer support, and extended warranty
contracts. Development contract revenues are recognized under
the cost-to-cost percentage-of-completion accounting method
based on physical completion of the work to be performed or
completed contract method. Losses on contracts are recognized
when determined. Revisions in estimates are reflected in the
period in which the conditions become known. Customer support
and extended warranty contract revenue is recognized ratably
over the contractual period.
Multiple element arrangements The Company
enters into revenue arrangements in which the customer purchases
a combination of patent, technology,
and/or
software licenses, products, professional services, support, and
extended warranties (multiple element arrangements). When VSOE
of fair value exists for all elements, the Company allocates
revenue to each element based on the relative fair value of each
of the elements. The price charged when the element is sold
separately generally determines the fair value or VSOE.
The Companys revenue recognition policies are significant
because the Companys revenues are a key component of its
results of operations. In addition, the Companys revenue
recognition policies determine the timing of certain expenses,
such as commissions and royalties.
Advertising
Advertising costs (including obligations under cooperative
marketing programs) are expensed as incurred and included in
sales and marketing expense. Advertising expense was $102,000,
$279,000, and $179,000 in 2007, 2006, and 2005, respectively.
Research
and Development
Research and development costs are expensed as incurred. The
Company has generated revenues from development contracts with
the United States government and other commercial customers that
have enabled it to accelerate its own product development
efforts. Such development revenues have only partially funded
the Companys product development activities, and the
Company generally retains ownership of the products developed
under these arrangements. As a result, the Company classifies
all development costs related to these contracts as research and
development expenses.
Income
Taxes
The Company provides for income taxes using the asset and
liability approach defined by SFAS No. 109
Accounting for Income Taxes
(SFAS No. 109). Deferred tax assets and
liabilities are recognized for the expected tax consequences
between the tax bases of assets and liabilities and their
reported amounts. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be realized and are reversed at such time that realization is
believed to be more likely than not.
Software
Development Costs
Certain of the Companys products include software. Costs
for the development of new software products and substantial
enhancements to existing software products are expensed as
incurred until technological feasibility has been established,
at which time any additional costs would be capitalized in
accordance with SFAS No. 86, Computer Software
to be Sold, Leased or Otherwise Marketed. The Company
considers technological feasibility to be established upon
completion of a working model of the software and the related
hardware. Because the Company believes its current process for
developing software is essentially completed concurrently with
the establishment of technological feasibility, no costs have
been capitalized to date.
63
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-based
Compensation
On January 1, 2006, the Company adopted the provisions of,
and accounted for stock-based compensation in accordance with,
SFAS No. 123R, Share-Based Payment
(SFAS No. 123R) which replaced
SFAS No. 123 Accounting for Stock-Based
Compensation, (SFAS No. 123), and
supersedes APB No. 25. Under the fair value recognition
provisions of SFAS No. 123R, 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.
The valuation provisions of SFAS No. 123R apply to new
grants and to grants that were outstanding as of the effective
date and are subsequently modified. Estimated compensation for
grants that were outstanding as of the effective date will be
recognized over the remaining service period using the
compensation cost estimated for the SFAS No. 123 pro
forma disclosures.
With respect to its adoption of SFAS No. 123R, the
Company elected the modified-prospective method, under which
prior periods are not revised for comparative purposes. The
adoption of SFAS No. 123R had a material impact on the
Companys consolidated financial position, results of
operations, and cash flows for the year ended December 31,
2006 and 2007. See Note 11 for further information
regarding the Companys stock-based compensation
assumptions and expenses, including pro forma disclosures as if
the Company had recorded stock-based compensation expense for
prior periods.
Comprehensive
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. Total comprehensive income (loss)
and the components of accumulated other comprehensive income are
presented in the accompanying Consolidated Statements of
Stockholders Equity (Deficit).
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 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.
64
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 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.
Supplier
Concentrations
The Company depends on a number of single source suppliers to
produce some of its medical simulators and certain other
products and components. While the Company seeks to maintain a
sufficient level of supply and endeavors to maintain ongoing
communications with these suppliers to guard against
interruptions or cessation of supply, any disruption in the
manufacturing process from its sole source suppliers could
adversely affect the Companys ability to deliver its
products and ensure quality workmanship and could result in a
reduction of the Companys product sales.
Fair
Value of Financial Instruments
Financial instruments consist primarily of cash equivalents,
short-term investments, accounts receivable, accounts payable,
and long-term debt. Cash equivalents and short term investments
are stated at fair value based on quoted market prices. The
recorded cost of accounts receivable, accounts payable, and
long-term debt approximate the fair value of the respective
assets and liabilities.
Foreign
Currency Translation
The functional currency of the Companys foreign subsidiary
is its local currency. Accordingly, gains and losses from the
translation of the financial statements of the foreign
subsidiary are reported as a separate component of accumulated
other comprehensive income. Foreign currency transaction gains
and losses are included in earnings.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued FIN 48, Accounting for
Uncertainty in Income Taxes. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109 Accounting for Income Taxes.
FIN 48 prescribes a two-step process to determine the
amount of benefit to be recognized. First, the tax position must
be evaluated to determine the likelihood that it will be
sustained upon examination. If the tax position is deemed
more-likely-than-not to be sustained, the tax
position is then measured to determine the amount of benefit to
recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate
settlement. The Company adopted the provisions of FIN 48 on
January 1, 2007. The adoption of FIN 48 resulted in no
adjustment to beginning retained earnings as the Company had a
full valuation allowance on the deferred tax assets as of the
adoption date. See Note 14.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements,
(SFAS No. 157). SFAS No. 157
establishes a framework for measuring fair value by providing a
standard definition for fair value as it applies to assets and
liabilities. SFAS No. 157, which does not require any
new fair value measurements, clarifies the application of other
accounting pronouncements that require or permit fair value
measurements. The
65
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
effective date for the Company is January 1, 2008. In
November 2007, the FASB proposed to defer the effective date of
SFAS No. 157 for all nonfinancial assets and
liabilities, except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis, until
years beginning after November 15, 2008. The Company
believes the adoption of SFAS No. 157 will not have a
material impact on its financial position and results of
operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159). The new
Statement allows entities to choose, at specified election
dates, to measure eligible financial assets and liabilities at
fair value in situations in which they are not otherwise
required to be measured at fair value. If a company elects the
fair value option for an eligible item, changes in that
items fair value in subsequent reporting periods must be
recognized in current earnings. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
draw comparison between entities that elect different
measurement attributes for similar assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permitted
subject to specific requirements outlined in the new Statement.
The Company believes the adoption of SFAS No. 159 will
not have a material impact on its financial position and results
of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations.
(SFAS No. 141R). SFAS No. 141(R)
establishes principles and requirements for how the acquirer of
a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statement to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company
believes the adoption of SFAS No. 141(R) will not have
a material impact on its financial position and results of
operations.
|
|
2.
|
Short-term
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Holding Gains
|
|
|
Holding Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Commercial paper
|
|
$
|
41,740
|
|
|
$
|
|
|
|
$
|
(34
|
)
|
|
$
|
41,706
|
|
Government agency securities
|
|
|
9,871
|
|
|
|
42
|
|
|
|
|
|
|
|
9,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,611
|
|
|
$
|
42
|
|
|
$
|
(34
|
)
|
|
$
|
51,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of the Companys
available-for-sale maturities at December 31, 2007 were all
due one year or less. As of December 31, 2006, there were
no short-term investments.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Raw materials and subassemblies
|
|
$
|
2,843
|
|
|
$
|
2,267
|
|
Work in process
|
|
|
179
|
|
|
|
110
|
|
Finished goods
|
|
|
652
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
3,674
|
|
|
$
|
2,639
|
|
|
|
|
|
|
|
|
|
|
66
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
4.
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Computer equipment and purchased software
|
|
$
|
3,195
|
|
|
$
|
2,980
|
|
Machinery and equipment
|
|
|
2,532
|
|
|
|
2,817
|
|
Furniture and fixtures
|
|
|
1,212
|
|
|
|
1,280
|
|
Leasehold improvements
|
|
|
1,267
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,206
|
|
|
|
7,901
|
|
Less accumulated depreciation
|
|
|
(6,094
|
)
|
|
|
(6,254
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,112
|
|
|
$
|
1,647
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Intangibles
and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Patents and technology
|
|
$
|
15,105
|
|
|
$
|
13,011
|
|
Other assets
|
|
|
167
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
Gross intangibles and other assets
|
|
|
15,272
|
|
|
|
13,116
|
|
Accumulated amortization of patents and technology
|
|
|
(6,714
|
)
|
|
|
(5,731
|
)
|
|
|
|
|
|
|
|
|
|
Intangibles and other assets, net
|
|
$
|
8,558
|
|
|
$
|
7,385
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles during the years ended
December 31, 2007, 2006, and 2005 was $1.0 million,
$969,000 and $1.3 million, respectively. The estimated
annual amortization expense for intangible assets as of
December 31, 2007 is $665,000 in 2008, $1.0 million in
2009, $946,000 in 2010, $892,000 in 2011, $862,000 in 2012, and
$4.0 million in total for all years thereafter.
|
|
6.
|
Components
of Other Current Liabilities and Deferred Revenue and Customer
Advances
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accrued legal
|
|
$
|
417
|
|
|
$
|
256
|
|
Income taxes payable
|
|
|
534
|
|
|
|
|
|
Other current liabilities
|
|
|
1,678
|
|
|
|
1,494
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
2,629
|
|
|
$
|
1,750
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current
|
|
$
|
4,352
|
|
|
$
|
1,646
|
|
Customer advances
|
|
|
126
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue, current and customer advances
|
|
$
|
4,478
|
|
|
$
|
1,716
|
|
|
|
|
|
|
|
|
|
|
67
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
5%
|
Senior
Subordinated Convertible Debenture (5% Convertible
Debenture)
|
On December 23, 2004, the Company issued an aggregate
principal amount of $20.0 million of 5% Convertible
Debentures. The 5% Convertible Debentures 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, $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. Amount
outstanding at December 31, 2007 and 2006 was $0 and
$18.1 million, respectively.
Warrants
On December 23, 2004, in connection with the issuance of
the 5% Convertible Debentures, the Company issued warrants
to purchase an aggregate of 426,951 shares of its common
stock at an exercise price of $7.0265. The warrants may be
exercised at any time prior to 5:00 p.m. Eastern time,
on December 23, 2009. Any warrants not exercised prior to
such time will expire. The exercise price will be reduced in
certain instances where shares of common stock are sold or
deemed to be sold at a price less than the applicable exercise
price, including the issuance of certain options, the issuance
of convertible securities, or the change in exercise price or
rate of conversion for option or convertible securities. The
exercise price will be proportionately adjusted if the Company
subdivides (by stock split, stock dividend, recapitalization, or
otherwise) or combines (by combination, reverse stock split, or
otherwise) one or more classes of its common stock.
Registration
Rights
On April 18, 2005, the Companys registration
statement relating to the 5% Convertible Debentures and the
shares of common stock issuable upon conversion of the
debentures and exercise of the warrants was declared effective
by the SEC. The Company is obligated to keep this registration
statement effective until the earlier of (i) such time as
all of the shares covered by the prospectus have been disposed
of pursuant to and in accordance with the registration
statement, or (ii) the date on which the shares may be sold
pursuant to Rule 144(k) of the Securities Act.
The Company incurred approximately $1.3 million in issuance
costs and other expenses in connection with the offering. This
amount had been deferred and was being amortized to interest
expense over the term of the 5% Convertible Debenture until
the 5% Convertible Debentures were either converted or
redeemed. Additionally, the Company evaluated the various
instruments included in the agreements entered into on
December 22, 2004 and allocated the relative fair values to
be as follows: warrants $1.7 million, Put
Option $0.1 million, Registration
Rights $0.1 million, issuance costs
$1.3 million, 5% Convertible Debenture
$16.8 million. The 5% Convertible Debentures would be
accreted to $20.0 million over their five-year life,
resulting in additional interest expense. The value of the
warrants has been included in Stockholders Equity
(Deficit); the value of the Put Option and Registration Rights
had been recorded as a liability and were subject to future
value adjustments; and the value of the 5% Convertible
Debentures had been recorded as long-term debt.
68
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
8.
|
Long-term
Deferred Revenue
|
On December 31, 2007, long-term deferred revenue was
$14.3 million and included approximately $11.7 million
of deferred revenue from Sony Computer Entertainment. On
December 31, 2006, long-term deferred revenue was
$31.8 million and included approximately $27.9 million
of compulsory license fees and interest from Sony Computer
Entertainment pursuant to Court orders dated January 10 and
February 9, 2005. See Note 12 for further discussion.
|
|
9.
|
Long-term
Customer Advance from Microsoft
|
On July 25, 2003, the Company contemporaneously executed a
series of agreements with Microsoft that (1) settled the
Companys lawsuit against Microsoft, (2) granted
Microsoft a worldwide royalty-free, irrevocable license to the
Companys portfolio of patents (the License
Agreement) in exchange for a payment of
$19.9 million, (3) provided Microsoft with sublicense
rights to pursue certain license arrangements directly with
third parties including Sony Computer Entertainment which, if
consummated, would result in payments to the Company (the
Sublicense Rights), and conveyed to Microsoft the
right to a payment of cash in the event of a settlement within
certain parameters of the Companys patent litigation
against Sony Computer Entertainment of America Inc. and Sony
Computer Entertainment Inc. (the Participation
Rights) in exchange for a payment of $0.1 million,
(4) issued Microsoft shares of the Companys
Series A Redeemable Convertible Preferred Stock
(Series A Preferred Stock) for a payment of
$6.0 million, and (5) granted the Company the right to
sell up to $9.0 million of debentures to Microsoft under
the terms and conditions established in newly authorized
7% Debentures with annual draw down rights over a
48-month
period. The sublicense rights provided to Microsoft to contract
directly with Sony Computer Entertainment expired in July 2005.
Under these agreements, in the event that the Company elects 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 grants 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. As of December 31, 2006, the Company
reflected a liability of $15.0 million in its financial
statements, being the minimum amount the Company would be
obliged to pay to Microsoft upon a settlement with Sony Computer
Entertainment.
In March 2007, the Company concluded its patent infringement
litigation against Sony Computer Entertainment at the
U.S. Court of Appeals for the Federal Circuit.
Additionally, the Company and Sony Computer Entertainment
entered into a new business agreement. The Company has
determined that the conclusion of its litigation with Sony
Computer Entertainment does not trigger any payment obligations
under its Microsoft agreements. Accordingly, the liability of
$15.0 million that was in the Companys financial
statements at December 31, 2006 has been extinguished and
the Company has accounted for this sum during 2007 as litigation
conclusions and patent license income. See Note 18,
Contingencies. As the patent infringement litigation with Sony
Computer Entertainment has concluded, the Companys right
to sell 7% Debentures has expired.
The Company leases several of its facilities, vehicles, and some
office equipment under noncancelable operating lease
arrangements that expire at various dates through 2012.
69
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Minimum future lease payments are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
|
(In thousands)
|
|
|
2008
|
|
$
|
1,100
|
|
2009
|
|
|
845
|
|
2010
|
|
|
346
|
|
2011
|
|
|
5
|
|
2012
|
|
|
4
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
2,300
|
|
|
|
|
|
|
Rent expense was $1.2 million, $1.1 million, and
$1.1 million in 2007, 2006, and 2005, respectively.
|
|
11.
|
Stock-based
Compensation
|
Stock
Options and Awards
The Companys stock option program is a long-term retention
program that is intended to attract, retain, and provide
incentives for talented employees, officers, and directors, and
to align stockholder and employee interests. Essentially all of
the Companys employees participate. Since inception, under
the Companys stock option plans, the Company may grant
options to purchase up to 17,577,974 shares of its common
stock to employees, directors, and consultants at prices not
less than the fair market value on the date of grant for
incentive stock options and not less than 85% of fair market
value on the date of grant for nonstatutory stock options. These
options generally vest over 4 years and expire
10 years from the date of grant. At December 31, 2007,
options to purchase 2,566,639 shares of common stock were
available for grant, and options to purchase
6,014,370 shares of common stock were outstanding.
On June 6, 2007, the Companys stockholders approved
the Immersion Corporation 2007 Equity Incentive Plan (the
2007 Plan). The 2007 Plan replaces 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, restricted
stock units, 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.
70
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Employee
Stock Purchase Plan
The Company has an ESPP. Under the ESPP, eligible employees may
purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the
Companys stock at the beginning of the offering period or
the purchase date. Participants may not purchase more than
2,000 shares in a six-month offering period or purchase
stock having a value greater than $25,000 in any calendar year
as measured at the beginning of the offering period. A total of
500,000 shares of common stock are reserved for the
issuance under the ESPP plus an automatic annual increase on
January 1, 2001 and on each January 1 thereafter through
January 1, 2010 by an amount equal to the lesser of
500,000 shares per year or a number of shares determined by
the Board of Directors. As of December 31, 2007,
350,655 shares had been purchased since the inception of
the ESPP. Under SFAS No. 123R, 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.
The Company did not modify its ESPP in the year ended
December 31, 2007.
General
Stock Option Information
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, 2005 (4,126,485 exercisable at a
weighted average price of $8.33 per share)
|
|
|
7,594,627
|
|
|
$
|
6.84
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $3.43 per share)
|
|
|
1,158,400
|
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(778,393
|
)
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(633,838
|
)
|
|
|
7.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 (4,595,431 exercisable at
a weighted average price of $8.03 per share)
|
|
|
7,340,796
|
|
|
|
7.24
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $4.31 per share)
|
|
|
1,224,453
|
|
|
|
6.90
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(389,810
|
)
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(590,016
|
)
|
|
|
7.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 (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
|
|
|
6,014,370
|
|
|
$
|
9.11
|
|
|
|
6.00
|
|
|
$
|
29.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
3,774,245
|
|
|
$
|
9.11
|
|
|
|
4.38
|
|
|
$
|
20.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There were 1,283 options that net settled in 2007. |
The expected to vest share balance as of December 31, 2007
is 5,079,462.
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, 2007. The aggregate
intrinsic value of options exercised under the Companys
stock option plans, determined as of the date of option exercise
was $16.7 million for the year ended December 31, 2007.
71
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Additional information regarding options outstanding as of
December 31, 2007 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 $5.60
|
|
|
|
635,670
|
|
|
|
4.85
|
|
|
$
|
2.50
|
|
|
|
591,657
|
|
|
$
|
2.33
|
|
|
5.62 6.48
|
|
|
|
637,739
|
|
|
|
5.92
|
|
|
|
6.14
|
|
|
|
482,716
|
|
|
|
6.13
|
|
|
6.53 6.95
|
|
|
|
744,221
|
|
|
|
7.92
|
|
|
|
6.89
|
|
|
|
298,298
|
|
|
|
6.89
|
|
|
6.96 7.00
|
|
|
|
756,693
|
|
|
|
6.41
|
|
|
|
6.99
|
|
|
|
617,796
|
|
|
|
6.99
|
|
|
7.02 8.98
|
|
|
|
1,042,149
|
|
|
|
3.40
|
|
|
|
8.44
|
|
|
|
884,743
|
|
|
|
8.63
|
|
|
9.04 9.04
|
|
|
|
845,113
|
|
|
|
9.18
|
|
|
|
9.04
|
|
|
|
|
|
|
|
|
|
|
9.11 12.38
|
|
|
|
629,790
|
|
|
|
5.40
|
|
|
|
10.21
|
|
|
|
459,290
|
|
|
|
9.81
|
|
|
12.91 31.88
|
|
|
|
685,009
|
|
|
|
5.40
|
|
|
|
21.16
|
|
|
|
401,759
|
|
|
|
24.92
|
|
|
33.50 34.75
|
|
|
|
13,100
|
|
|
|
2.29
|
|
|
|
33.56
|
|
|
|
13,100
|
|
|
|
33.56
|
|
|
43.25 43.25
|
|
|
|
24,886
|
|
|
|
2.28
|
|
|
|
43.25
|
|
|
|
24,886
|
|
|
|
43.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.20 $43.25
|
|
|
|
6,014,370
|
|
|
|
6.00
|
|
|
$
|
9.11
|
|
|
|
3,774,245
|
|
|
$
|
9.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
Compensation
Valuation and amortization method The Company
uses 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. Prior to the adoption of
SFAS No. 123R, the Company used the Black-Scholes
model, multiple-option approach to determine the fair value of
stock options and ESPP shares and amortization of resulting
stock-based compensation amounts included in its pro forma
disclosures of SFAS No. 123. The determination of the
fair value of stock-based payment awards on the date of grant
using an option-pricing model is affected by the Companys
stock price as well as assumptions regarding a number of complex
and subjective variables. These variables include actual and
projected employee stock option exercise behaviors, the
Companys expected stock price volatility over the term of
the awards, risk-free interest rate, and expected dividends.
Expected term The Company estimates the
expected term of options granted by using the simplified method
as prescribed by SAB No. 107. The expected term of
ESPP shares is the length of the offering period.
Expected volatility The Company estimates the
volatility of its common stock taking into consideration its
historical stock price movement, the volatility of stock prices
of companies of similar size with similar businesses, if any,
and its expected future stock price trends based on known or
anticipated events.
Risk-free interest rate The Company bases the
risk-free interest rate that it uses in the option pricing model
on U.S. Treasury zero-coupon issues with remaining terms
similar to the expected term on the options.
Expected dividend The Company does not
anticipate paying any cash dividends in the foreseeable future
and therefore uses an expected dividend yield of zero in the
option-pricing model.
Forfeitures The Company is required to
estimate future forfeitures at the time of grant and revise
those estimates in subsequent periods if actual forfeitures
differ from those estimates. The Company uses historical data to
estimate pre-vesting option forfeitures and records stock-based
compensation expense only for those awards that are expected to
vest.
72
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The assumptions used to value option grants and shares under the
employee stock purchase plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Employee Stock Purchase Plan
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected life (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
4.00
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Interest rate
|
|
|
4.5
|
%
|
|
|
4.8
|
%
|
|
|
4.1
|
%
|
|
|
5.1
|
%
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
Volatility
|
|
|
60
|
%
|
|
|
62
|
%
|
|
|
63
|
%
|
|
|
50
|
%
|
|
|
51
|
%
|
|
|
33
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation recognized in the consolidated
statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Income Statement Classifications
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
$
|
101
|
|
|
$
|
70
|
|
Sales and marketing
|
|
|
850
|
|
|
|
1,230
|
|
Research and development
|
|
|
636
|
|
|
|
492
|
|
General and administrative
|
|
|
1,142
|
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,729
|
|
|
$
|
2,937
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123R requires the benefits of tax deductions
in excess of recognized compensation expense to be reported as a
financing cash flow, rather than as an operating cash flow. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. For the year
ended December 31, 2007, and 2006, the Company recorded
$13.5 million and $36,000, respectively, of excess tax
benefits from stock-based compensation.
The Company has calculated an additional paid-in capital
(APIC) pool pursuant to the provisions of
SFAS No. 123R. The APIC pool represents the excess tax
benefits related to stock-based compensation that are available
to absorb future tax deficiencies. The Company includes only
those excess tax benefits that have been realized in accordance
with SFAS No. 109, Accounting for Income
Taxes. If the amount of future tax deficiencies is greater
than the available APIC pool, the Company will record the excess
as income tax expense in its consolidated statements of
operations.
As of December 31, 2007, there was $6.3 million of
unrecognized compensation cost, adjusted for estimated
forfeitures, related to non-vested stock options granted to the
Companys employees and directors. This cost will be
recognized over an estimated weighted-average period of
approximately 2.6 years. Total unrecognized compensation
cost will be adjusted for future changes in estimated
forfeitures.
73
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table sets forth the pro forma amounts of net loss
and net loss per share, for the year ended December 31,
2005 that would have resulted if the Company had accounted for
its employee stock plans under the fair value recognition
provisions of SFAS No. 123:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Net loss as reported
|
|
$
|
(13,085
|
)
|
Add: Stock-based employee compensation included in reported net
loss, net of related tax effects
|
|
|
2
|
|
Less: Stock-based compensation expense determined using fair
value method, net of tax
|
|
|
(5,088
|
)
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(18,171
|
)
|
|
|
|
|
|
Basic and diluted loss per common share as reported
|
|
$
|
(0.54
|
)
|
Basic and diluted loss per common share pro forma
|
|
$
|
(0.76
|
)
|
Warrants
On December 23, 2004, the Company, in conjunction with the
5% Convertible Debentures, issued an aggregate of 426,951
warrants to purchase shares of its common stock at an exercise
price of $7.0265. The warrants may be exercised at any time
prior to 5:00 p.m. Eastern time, on December 23,
2009. Any warrants not exercised prior to such time will expire.
The Company allocated $1.7 million of the
5% Convertible Debenture proceeds to the warrant and will
amortize the amount to interest expense over the five-year term
of the 5% Convertible Debentures. See Note 7.
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. As of
December 31, 2007, there had been no repurchases.
|
|
12.
|
Litigation
Conclusions and Patent License
|
In March 2007, the Companys patent infringement litigation
with Sony Computer Entertainment concluded. Sony Computer
Entertainment satisfied the District Court judgment against it,
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 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.
74
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 EITF
No. 00-21,
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 $14.7 million at December 31, 2007. The
Company recorded $2.4 million as revenue for the year ended
December 31, 2007. The Company will record the remaining
$27.6 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 APB No. 21. Under APB
No. 21, 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.
In 2003, the Company executed a series of agreements with
Microsoft as described in Note 8 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 elects 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 has determined that the
conclusion of its litigation with Sony Computer Entertainment
does 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
has been extinguished, and the Company has accounted for this
sum during 2007 as litigation conclusions and patent license
income. However, in a letter sent to the Company dated
May 1, 2007, Microsoft disputed the Companys position
and stated that it believes the Company owes Microsoft at least
$27.5 million, which it increased to $35.6 million at
a court ordered mediation meeting on December 11, 2007. 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. The
Company disputes Microsofts allegations and intends to
vigorously defend itself. See Contingencies Note 18. The
results of any litigation are inherently uncertain, and there
can be no assurance that the Companys position will
prevail.
On September 24, 2004, the Company filed in the United
States District Court for the Northern District of California a
complaint for patent infringement against Performance Designed
Products (PDP) (formerly Electro Source LLC). On
February 28, 2006, the Company announced that it had
settled its legal differences with PDP and the Company and PDP
agreed to dismiss all claims and counterclaims relating to this
matter. In addition to the Confidential Settlement Agreement,
PDP entered into a worldwide license to the Companys
patents for vibro-tactile devices in the consumer gaming
peripheral field of use under which PDP makes royalty payments
to the Company based on sales by PDP of spinning mass
vibro-tactile gamepads, steering wheels, and other game
controllers for dedicated gaming consoles. During 2006, PDP paid
the Company $1.7 million which was recorded as litigation
conclusions and patent license income.
The Company accounts for restructuring costs in accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit of Disposal Activities. There were no
restructuring costs incurred in the years ended
December 31, 2007 or 2006. Restructuring costs of $185,000
incurred and paid in the year ended December 31,
75
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2005 consisted of severance benefits paid as a result of a
reduction in workforce. Employees from manufacturing, sales and
marketing, research and development, and general and
administrative were included in the 2005 reduction in force. The
Company did not incur any additional charges related to the
aforementioned reduction in force and management does not
anticipate any further costs in future periods related to this
reduction in force.
For the years ended December 31, 2007, 2006, and 2005, the
Company recorded a provision for income taxes of
$13.5 million, $144,000, and $158,000, respectively,
yielding effective tax rates of 10.3%, 1.4%, and 1.2%,
respectively. 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 2006 and 2005
provisions for income tax were based on federal and state
alternative minimum income tax payable on taxable income and
foreign withholding tax expense. For 2007, the Company reported
pre-tax book income of $130.5 million primarily due to the
litigation conclusion and patent license income received from
Sony Computer Entertainment, see Note 12.
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States federal
|
|
$
|
16,471
|
|
|
$
|
70
|
|
|
$
|
90
|
|
Foreign
|
|
|
126
|
|
|
|
74
|
|
|
|
53
|
|
State and local
|
|
|
4,273
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
20,870
|
|
|
|
144
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States federal
|
|
|
(6,583
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local
|
|
|
(799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(7,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,488
|
|
|
$
|
144
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys income taxes payable for federal and state
purposes has been reduced by the tax benefits from employee
stock options. The net tax benefits from employee stock option
transactions were $14.7 million for 2007 and are reflected
as an increase to additional paid-in capital in the Consolidated
Statements of Stockholders Equity (Deficit). The net tax
benefits from employee stock options for the years 2006 and 2005
were insignificant. The Company includes only the direct tax
effects of employee stock incentive plans in calculating this
increase to additional paid-in capital.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
76
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Significant components of the net deferred tax assets and
liabilities for federal and state income taxes consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,747
|
|
|
$
|
26,124
|
|
State income taxes
|
|
|
781
|
|
|
|
|
|
Deferred revenue
|
|
|
5,182
|
|
|
|
13,524
|
|
Research and development credits
|
|
|
1,214
|
|
|
|
1,665
|
|
Reserves and accruals recognized in different periods
|
|
|
1,417
|
|
|
|
1,315
|
|
Long-term customer advance from Microsoft
|
|
|
|
|
|
|
6,112
|
|
Basis difference in investment
|
|
|
1,276
|
|
|
|
1,328
|
|
Capitalized R&D expenses
|
|
|
1,502
|
|
|
|
487
|
|
Other
|
|
|
273
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
13,392
|
|
|
|
50,582
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(2,503
|
)
|
|
|
(2,532
|
)
|
Difference in tax basis of purchased technology
|
|
|
|
|
|
|
(191
|
)
|
Valuation allowance
|
|
|
(3,507
|
)
|
|
|
(47,859
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
7,382
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2007 the Company significantly reduced its
valuation allowance recorded against deferred tax assets. The
release of the valuation allowance was largely due to the
utilization of federal and state net operating losses to offset
income related to the litigation conclusion and patent license
income from Sony Computer Entertainment.
At December 31, 2007, the Company has recorded
$7.4 million of net deferred tax assets. The Company
determined based on current years results of operations and
anticipated profit levels in future periods, that it is more
likely than not that its domestic deferred tax assets will be
realized in the future and that it was appropriate to release
the valuation allowance previously recorded against these
deferred tax assets. The Company has recorded a valuation
allowance of $3.5 million which relates to capital loss
carryforwards, state net operating loss carryforwards, and
capitalized research and development expenses and research and
development credits in Canada. The realization of these assets
is dependent on the Company generating sufficient taxable income
in the respective jurisdictions in future periods. The
realization of the capital loss carryforward requires that the
Company have capital gain income in the future. The Company does
not currently anticipate such income and therefore has concluded
that this asset is not currently realizable.
At December 31, 2007, the Company has U.S. federal and
state loss carryforwards of approximately $2.8 million and
$11.3 million, respectively. These federal carryforwards
will expire between 2019 and 2020, if not utilized. The state
carryforwards will expire between 2018 and 2025, if not
utilized. At December 31, 2007, the Company has
U.S. federal tax credit carryforwards of $176,000 which
will expire between 2016 and 2020, if not utilized. In addition,
as of December 31, 2007, the Company has Canadian research
and development credit carryforwards of $1.0 million, which
will expire at various dates through 2017. Approximately
$126,000 of the state net operating loss carryforwards represent
the stock option deduction arising from activity under the
companys stock option plan, the benefit of which will
increase additional paid-in capital when realized. These net
operating
77
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
losses and tax credit carryforwards have not been reviewed by
the relevant tax authorities and could be subject to adjustment
on examination.
Utilization of the Companys remaining $2.8 million in
federal net operating losses is limited due to an ownership
change that occurred during 1999. Utilization of these losses is
limited to approximately $1.1 million annually. During
2005, the Company evaluated ownership changes from 1999 to 2004
and determined that there were no further limitations on the
Companys net operating loss carryforwards.
For purposes of the reconciliation between the provision for
(benefit from) income taxes at the statutory rate and the
effective tax rate, a national U.S. 35% rate is applied as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State taxes, net of federal benefit
|
|
|
3.9
|
|
|
|
(5.8
|
)
|
|
|
(6.1
|
)
|
Non-deductible interest
|
|
|
0.3
|
|
|
|
8.8
|
|
|
|
1.4
|
|
Stock compensation expense
|
|
|
0.2
|
|
|
|
4.0
|
|
|
|
|
|
Other
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
|
|
1.4
|
|
Valuation allowance
|
|
|
(28.8
|
)
|
|
|
30.1
|
|
|
|
39.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
10.3
|
%
|
|
|
1.4
|
%
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of the Companys foreign
subsidiaries are considered to be indefinitely reinvested and
accordingly, no provision for federal and state income taxes has
been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to various
foreign countries.
Effective January 1, 2007, the Company adopted FIN 48.
FIN 48 prescribes a comprehensive model for how companies
should recognize, measure, present and disclose in their
financial statements uncertain tax positions taken or expected
to be taken on a tax return. Under FIN 48, tax positions
must initially be recognized in the financial statements when it
is more likely than not the position will be sustained upon
examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of
tax benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement with the tax authority
assuming full knowledge of the position and relevant facts. The
adoption of FIN 48 did not have an impact on
stockholders equity as the Company had a full valuation
allowance at the time of adoption. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
Tax Benefits
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2007
|
|
$
|
628
|
|
Gross increases for tax positions of prior years
|
|
|
|
|
Gross decreases for tax positions of prior years
|
|
|
|
|
Settlements
|
|
|
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
628
|
|
|
|
|
|
|
The unrecognized tax benefits relate primarily to federal and
state research and development credits. The Companys
policy is to account for interest and penalties related to
uncertain tax positions as a component of income tax expense. As
of December 31, 2007, the Company has not accrued interest
or penalties related to uncertain tax positions as it has
determined none would currently be applicable. The Company does
not expect any material changes to its liability for
unrecognized income tax benefits during the next 12 months.
The total amount of
78
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
unrecognized tax benefits that would affect the Companys
effective tax rate, if recognized, is $628,000 as of both
January 1, 2007 and December 31, 2007.
Because the Company has net operating loss and credit
carryforwards, there are open statutes of limitation in which
federal, state, and foreign taxing authorities may examine the
Companys tax returns for all years from 1996 through the
current period. Additionally, the Company is currently under
examination by the Internal Revenue Service for 2004. The
Company currently does not believe this examination will result
in the need for an additional income tax accrual.
|
|
15.
|
Net
Income (Loss) Per Share
|
The following is a reconciliation of the numerators and
denominators used in computing basic and diluted net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used in computing basic net income (loss) per
share
|
|
$
|
117,018
|
|
|
$
|
(10,424
|
)
|
|
$
|
(13,085
|
)
|
Interest on 5% Convertible Debentures
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used in computing diluted net income (loss)
per share
|
|
$
|
117,366
|
|
|
$
|
(10,424
|
)
|
|
$
|
(13,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of basic net income (loss) per share
(weighted average common shares outstanding)
|
|
|
27,662
|
|
|
|
24,556
|
|
|
|
24,027
|
|
Dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,989
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
305
|
|
|
|
|
|
|
|
|
|
5% Convertible Debentures
|
|
|
1,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of diluted net income (loss) per share
|
|
|
31,667
|
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
4.23
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
3.71
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, options and warrants
to purchase approximately 1.4 million shares of common
stock with exercise prices greater than the average fair market
value of the Companys stock of $12.39 were not included in
the calculation because the effect would have been anti-dilutive.
As of December 31, 2006 and 2005, the Company had
securities outstanding that could potentially dilute basic
earnings per share in the future, but were excluded from the
computation of diluted net loss per share in the periods
presented since their effect would have been anti-dilutive.
These outstanding securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Outstanding stock options
|
|
|
7,585,423
|
|
|
|
7,340,796
|
|
Warrants
|
|
|
808,762
|
|
|
|
808,762
|
|
5% Senior Subordinated Convertible Debentures
|
|
|
2,846,363
|
|
|
|
2,846,363
|
|
79
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
16.
|
Employee
Benefit Plan
|
The Company has a 401(k) tax-deferred savings plan under which
eligible employees may elect to have a portion of their salary
deferred and contributed to the 401(k) plan. Contributions may
be made by the Company at the discretion of the Board of
Directors. The Company did not make any contributions during the
years ended December 31, 2007, 2006, or 2005.
Billings under certain cost-based government contracts are
calculated using provisional rates that permit recovery of
indirect costs. These rates are subject to audit on an annual
basis by the government agencies audit department. The
cost audit will result in the negotiation and determination of
the final indirect cost rates that the Company may use for the
period(s) audited. The final rates, if different from the
provisionals, may create an additional receivable or liability.
As of December 31, 2007, the Company has not reached final
settlements on indirect rates. The Company has negotiated
provisional indirect rates for the years ended December 31,
2006, and 2005. The Company periodically reviews its cost
estimates and experience rates, and any needed adjustments are
made and reflected in the period in which the estimates are
revised. In the opinion of management, redetermination of any
cost-based contracts for the open years will not have a material
effect on the Companys financial position or results of
operations.
In re
Immersion Corporation
The Company is involved in legal proceedings relating to a class
action lawsuit filed on November 9, 2001, In re Immersion
Corporation Initial Public Offering Securities Litigation,
No. Civ.
01-9975
(S.D.N.Y.), related to In re Initial Public Offering Securities
Litigation, No. 21 MC 92 (S.D.N.Y.). The named defendants
are the Company and three of its current or former officers or
directors (the Immersion Defendants), and certain
underwriters of its November 12, 1999 initial public
offering (IPO). Subsequently, two of the individual
defendants stipulated to a dismissal without prejudice.
The operative amended complaint is brought on purported behalf
of all persons who purchased the Companys common stock
from the date of the Companys IPO through December 6,
2000. It alleges liability under Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, on the grounds that the
registration statement for the IPO did not disclose that:
(1) the underwriters agreed to allow certain customers to
purchase shares in the IPO in exchange for excess commissions to
be paid to the underwriters; and (2) the underwriters
arranged for certain customers to purchase additional shares in
the aftermarket at predetermined prices. The complaint also
appears to allege that false or misleading analyst reports were
issued. The complaint does not claim any specific amount of
damages.
Similar allegations were made in other lawsuits challenging over
300 other initial public offerings and follow-on offerings
conducted in 1999 and 2000. The cases were consolidated for
pretrial purposes. On February 19, 2003, the Court ruled on
all defendants motions to dismiss. The motion was denied
as to claims under the Securities Act of 1933 in the case
involving Immersion as well as in all other cases (except for 10
cases). The motion was denied as to the claim under
Section 10(b) as to the Company, on the basis that the
complaint alleged that the Company had made acquisition(s)
following the IPO. The motion was granted as to the claim under
Section 10(b), but denied as to the claim under
Section 20(a), as to the remaining individual defendant.
The Company and most of the issuer defendants had settled with
the plaintiffs. In this settlement, plaintiffs would have
dismissed and released all claims against the Immersion
Defendants, in exchange for a contingent payment by the
insurance companies collectively responsible for insuring the
issuers in all of the IPO cases, and for the assignment or
surrender of certain claims the Company may have against the
underwriters. The Immersion
80
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Defendants would not have been required to make any cash
payments in the settlement, unless the pro rata amount paid by
the insurers in the settlement exceeded the amount of the
insurance coverage, a circumstance that the Company believed was
remote. In September 2005, the Court granted preliminary
approval of the settlement. The Court held a hearing to consider
final approval of the settlement on April 24, 2006 and took
the matter under submission. Subsequently, the Second Circuit
vacated the class certification of plaintiffs claims
against the underwriters in six cases designated as focus or
test cases. Miles v. Merrill Lynch & Co. (In re
Initial Public Offering Securities Litigation), 471 F.3d 24 (2d
Cir. 2006). Thereafter, the District Court ordered a stay of all
proceedings in all of the lawsuits pending the outcome of
plaintiffs petition to the Second Circuit for rehearing en
banc and resolution of the class certification issue. On
April 6, 2007, the Second Circuit denied plaintiffs
petition for rehearing, but clarified that the plaintiffs may
seek to certify a more limited class in the District Court.
Accordingly, the parties withdrew the prior settlement, and
plaintiffs filed an amended complaint in attempt to comply with
the Second Circuits ruling. There is no guarantee that an
amended or renegotiated settlement will be reached, and if
reached, approved.
Internet
Services LLC Litigation
On October 20, 2004, ISLLC filed claims against the Company
in its lawsuit against Sony Computer Entertainment, alleging
that the Company breached a contract with ISLLC by suing Sony
Computer Entertainment for patent infringement relating to
haptically-enabled software whose topics or images are allegedly
age-restricted, for judicial apportionment of damages between
ISLLC and the Company of the damages awarded by the jury, and
for a judicial declaration with respect to ISLLCs rights
and duties under agreements with the Company. On
December 29, 2004, the Court issued an order dismissing
ISLLCs claims against Sony Computer Entertainment with
prejudice and dismissing ISLLCs claims against the Company
without prejudice to ISLLC filing a new complaint if it
can do so in good faith without contradicting, or repeating the
deficiency of, its complaint.
On January 12, 2005, ISLLC filed Amended Cross-Claims and
Counterclaims against the Company that contained similar claims.
ISLLC also realleged counterclaims against Sony Computer
Entertainment. On January 28, 2005, the Company filed a
motion to dismiss ISLLCs Amended Cross-Claims and a motion
to strike ISLLCs Counterclaims against Sony Computer
Entertainment. On March 24, 2005 the Court issued an order
dismissing ISLLCs claims with prejudice as to ISLLCs
claim seeking a declaratory judgment that it is an exclusive
licensee under the 213 and 333 patents and as to
ISLLCs claim seeking judicial apportionment of
the damages verdict in the Sony Computer Entertainment case. The
Courts order further dismissed ISLLCs claims without
prejudice as to ISLLCs breach of contract and unjust
enrichment claims.
ISLLC filed a notice of appeal of the District Court orders with
the United States Court of Appeals for the Federal Circuit on
April 18, 2005. On April 4, 2007, the Federal Circuit
issued its opinion, affirming the District Court orders.
On February 8, 2006, ISLLC filed a lawsuit against the
Company in the Superior Court of Santa Clara County.
ISLLCs complaint seeks a share of the damages awarded to
the Company in the March 24, 2005 Judgment and of the
Microsoft settlement proceeds, and generally restates the claims
already adjudicated by the District Court. On March 16,
2006, the Company answered the complaint, cross claimed for
breach of contract by ISLLC and for rescission of the contract,
and removed the lawsuit to federal court. The case was assigned
to Judge Wilken as a case related to the previous proceedings
involving Sony Computer Entertainment and ISLLC. ISLLC filed its
answer to the Companys cross claims on April 27,
2006. ISLLC also moved to remand the case to Superior Court. On
July 10, 2006, Judge Wilken issued an order denying
ISLLCs motion to remand. On September 5, 2006, Judge
Wilken granted the stipulated request by the parties to stay
discovery and other proceedings in the case pending the
disposition of ISLLCs appeal from the Courts
previous orders. The case was stayed from December 1, 2006
pending the Federal Circuits disposition on the appeal. As
noted above, the Federal Circuit issued its opinion on
April 4, 2007 and entered a judgment affirming the District
Courts previous orders.
81
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 to remove
the declaratory relief claim. The Company opposed ISLLCs
motion, and cross-moved for judgment on the pleadings, on the
grounds that ISLLCs claims are barred by res judicata and
collateral estoppel. On June 26, 2007, the 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 Court
dismissed ISLLCs claim for declaratory relief.
ISLLCs claims for breach of contract, promissory fraud,
and constructive trust, to the extent not inconsistent with the
Courts previous rulings, remain. The parties are currently
in the process of conducting discovery.
The Company intends to defend itself vigorously against
ISLLCs allegations.
Microsoft
Corporation v. Immersion Corporation
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 alleges 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 in Immersion
Corporation v. Microsoft Corporation, Sony Computer
Entertainment Inc. and Sony Computer Entertainment America,
Inc., United States District Court for the Northern District
of California, Case
No. 02-0710-CW
(see discussion above). The complaint alleges that Microsoft is
entitled to a share of the judgment monies and other sums
received from Sony Computer Entertainment. In a letter sent to
the Company dated May 1, 2007, Microsoft stated that it
believes the Company owes Microsoft at least $27.5 million,
which it increased to $35.6 million at a court ordered
mediation meeting on December 11, 2007. The Company was
served with the complaint on July 6, 2007. On
September 4, 2007, the Company filed its Answer,
Affirmative Defenses and Counterclaims alleging that Microsoft
breached its confidentiality obligations by publicly disclosing
previously confidential the terms of the Companys business
agreement with Sony. Discovery is proceeding. The parties
participated in a court ordered mediation on December 11,
2007, but were unsuccessful in resolving the matter. The Company
disputes Microsofts allegations and intends to vigorously
defend itself.
Other
Contingencies
From time to time, the Company receives claims from third
parties asserting that the Companys technologies, or those
of its licensees, infringe on the other parties
intellectual property rights. Management believes that these
claims are without merit. Additionally, periodically, the
Company is involved in routine legal matters and contractual
disputes incidental to its normal operations. In
managements opinion, the resolution of such matters will
not have a material adverse effect on the Companys
consolidated financial condition, results of operations, or
liquidity.
In the normal course of business, the Company provides
indemnifications of varying scope to customers against claims of
intellectual property infringement made by third parties arising
from the use of the Companys intellectual property,
technology, or products. Historically, costs related to these
guarantees have not been significant, and the Company is unable
to estimate the maximum potential impact of these guarantees on
its future results of operations.
As permitted under Delaware law, the Company has agreements
whereby it indemnifies its officers and directors for certain
events or occurrences while the officer or director is, or was,
serving at its request in such capacity. The term of the
indemnification period is for the officers or
directors lifetime. The maximum potential amount of future
payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company
currently has director and officer insurance coverage that
limits its exposure and enables it to recover a portion of any
future amounts paid. Management believes the estimated fair
value of these indemnification agreements in excess of
applicable insurance coverage is indeterminable.
82
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. Segment
Reporting, Geographic Information, and Significant
Customers
The Company develops, manufactures, licenses, and supports a
wide range of hardware and software technologies that more fully
engage users sense of touch when operating digital
devices. The Company focuses on the following target application
areas: automotive, consumer electronics, entertainment, gaming,
and commercial and industrial controls; medical simulation;
mobile communications; and three-dimensional design and
interaction. The Company manages these application areas under
two operating and reportable segments: 1) Immersion
Computing, Entertainment, and Industrial, and 2) Immersion
Medical. The Company determines its reportable segments in
accordance with criteria outlined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information.
The Companys chief operating decision maker
(CODM) is the Chief Executive Officer. The CODM
allocates resources to and assesses the performance of each
operating segment using information about its revenue and
operating profit before interest and taxes. A description of the
types of products and services provided by each operating
segment is as follows:
Immersion Computing, Entertainment, and Industrial develops and
markets touch feedback technologies that enable software and
hardware developers to enhance realism and usability in their
computing, entertainment, and industrial applications. Immersion
Medical develops, manufactures, and markets medical training
simulators that recreate realistic healthcare environments.
83
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Summarized financial information concerning the Companys
reportable segments for the respective years ended December 31
is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immersion
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing,
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment,
|
|
|
Immersion
|
|
|
Intersegment
|
|
|
|
|
|
|
and Industrial
|
|
|
Medical
|
|
|
Eliminations(4)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
$
|
11,880
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
11,881
|
|
Product sales
|
|
|
5,716
|
|
|
|
12,897
|
|
|
|
(72
|
)
|
|
|
18,541
|
|
Development contracts and other
|
|
|
1,767
|
|
|
|
2,530
|
|
|
|
(17
|
)
|
|
|
4,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
19,363
|
|
|
$
|
15,428
|
|
|
$
|
(89
|
)
|
|
$
|
34,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations(1)
|
|
$
|
125,056
|
|
|
$
|
642
|
|
|
$
|
(22
|
)
|
|
$
|
125,676
|
|
Interest and other income
|
|
|
5,850
|
|
|
|
4
|
|
|
|
|
|
|
|
5,854
|
|
Interest and other expense(2)
|
|
|
(1,024
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,024
|
)
|
Depreciation and amortization
|
|
|
1,294
|
|
|
|
619
|
|
|
|
|
|
|
|
1,913
|
|
Net income (loss)(1)
|
|
|
116,405
|
|
|
|
635
|
|
|
|
(22
|
)
|
|
|
117,018
|
|
Long-lived assets: capital expenditures and capitalized patent
fees
|
|
|
3,066
|
|
|
|
485
|
|
|
|
|
|
|
|
3,551
|
|
Deferred income tax assets, net
|
|
|
7,382
|
|
|
|
|
|
|
|
|
|
|
|
7,382
|
|
Total assets
|
|
|
181,860
|
|
|
|
6,552
|
|
|
|
(20,044
|
)
|
|
|
168,368
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|