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, 2008
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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, 2008,
the last business day of the registrants most recently
completed second fiscal quarter, was $350,475,801 (based on the
closing sales price of the registrants common stock on
that date). Shares of the registrants common stock held by
each officer and director and each person whom owns 5% or more
of the outstanding common stock of the registrant have been
excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a
conclusive determination for other purposes. Number of shares of
common stock outstanding at February 23, 2009: 27,945,484.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2009 Annual
Meeting are incorporated by reference into Part III hereof.
IMMERSION
CORPORATION
2008
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
Forward-looking
Statements
In addition to historical information this Annual Report on
Form 10-K
includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). The forward-looking
statements involve risks and uncertainties. Forward-looking
statements are identified by words such as
anticipates, believes,
expects, intends, may,
will, and other similar expressions. However, these
words are not the only way we identify forward-looking
statements. In addition, any statements which refer to
expectations, projections, or other characterizations of future
events, or circumstances, are forward-looking statements. Actual
results could differ materially from those projected in the
forward-looking statements as a result of a number of factors,
including those set forth below in Managements
Discussion and Analysis of Financial Condition and Results of
Operations Risk Factors and those described
elsewhere in this report , and those described in our other
reports filed with the Securities and Exchange Commission
(SEC). We caution you not to place undue reliance on
these forward-looking statements, which speak only as of the
date of this report, and we undertake no obligation to update
these forward-looking statements after the filing of this
report. You are urged to review carefully and consider our
various disclosures in this report and in our other reports
publicly disclosed or filed with the SEC that attempt to advise
you of the risks and factors that may affect our business.
PART I
Overview
Immersion Corporation was incorporated in 1993 in California and
reincorporated in Delaware in 1999. 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, gaming, and commercial and industrial devices and
controls; medical simulation; and mobile communications. We
manage these application areas under two operating and
reportable segments: 1) the Touch Line of Business and
2) the Medical Line of Business. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations as well as the notes
to the consolidated financial statements for revenue information
for these segments for the past three years.
In some markets, such as video console gaming, consumer
electronics, mobile phones, and automotive controls, we license
our technologies to manufacturers who use them in products sold
under their own brand names. In other markets, such as medical
simulation, we sell products manufactured under our own brand
name through direct sales to end users, distributors, 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
In the world of computers, consumer electronics, and digital
devices and controls, meaningful haptic (touch) information is
limited or missing. For example, when dialing a number or
entering text on a conventional touchscreen, 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
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technologies embedded in many types of devices can give users
physical sensations appropriate to the situation. Users can feel
as though they are interacting with different textures and mass,
compliant springs, solid barriers, deep or shallow detents. They
can feel the force or resistance as they push a virtual button,
scroll through a list, or encounter the end of a menu. In a
video or mobile game, users can feel the gun recoil, the engine
rev, or the crack of the bat meeting the ball. When simulating
the placement of cardiac pacing leads, a user can feel the
forces that would be encountered when navigating the leads
through a beating heart, providing a more realistic experience
of performing this procedure. These forces are created by
actuators, such as motors, which are built into devices such as
joysticks, steering wheels, gamepads, personal music players,
mobile phones, and medical training simulators. Actuators can
also be designed into devices used in automotive, industrial,
medical, or retail kiosk and
point-of-sale
systems, such as digital switches, rotary controls,
touchscreens, and touch surfaces.
We believe the programmability of our haptic products is a key
differentiator over purely electro-mechanical systems and can
drive the further adoption of cost effective and more reliable
digital devices. A programmable device can supply a tactile
response appropriate to the context of operation for systems and
devices of many types. These tactile cues can help users operate
more intuitively or realize a more enjoyable or natural
experience. Used in combination with sight and sound cues,
haptic feedback adds a compelling, engaging, meaningful
multimodal aspect to the user interface. Our haptic products and
technologies can also add a tactile quality to interactions that
have been devoid of tactile confirmation, such as when using a
touchpad or touchscreen. Independent research 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, in upgradeability, in consistent
performance that will not degrade over time, and in the
potential for personalized settings. Multiple mechanical
controls can be consolidated into one versatile programmable
control that can save space and improve ergonomics. Conversely,
one programmable control device can be implemented as many
different types of controls with context-appropriate touch
feedback, which can simplify inventory.
Our
Solutions
Our goal is to improve the way people interact with digital
devices by engaging their sense of touch. Our core competencies
include our understanding of how interactions should feel and
our knowledge of how to use technology to achieve that feeling.
Our strength in both of these areas has resulted in many novel
applications.
We believe that our touch-enabled products and technologies give
users a more complete, intuitive, enjoyable, and realistic
experience. Our patented designs include software elements such
as real-time software algorithms and authoring tools, and
specialized hardware elements, such as motors, sensors,
transmissions, and control electronics. Together, these software
and hardware elements enable tactile sensations that are
context-appropriate within the application.
We have developed haptic systems for many types of hardware
input/output devices such as gamepads, joysticks, mobile phones,
rotary controls, touchscreens, and flexible and rigid endoscopy
devices for medical simulations.
We have developed many mechanisms to convey forces to the
users hands or body. These include vibro-tactile
actuators, direct-, belt-, gear-, or cable-driven mechanisms and
other proprietary devices that supply textures and vibration,
resistance, and damping forces to the user.
To develop our real-time electronic actuator controllers, we had
to address challenges such as size, accuracy, resolution,
frequency, latency requirements, power consumption, and cost.
Our control solutions include both closed-loop and open-loop
control schemes. In closed-loop control, the firmware reads
inputs from the input/output devices, and then calculates and
applies the output forces in real time based on the input data.
In open-loop control, a triggering event will activate the
firmware to calculate and send the output signal to the actuator
in real time.
We have developed many software solutions for various operating
systems and computing platforms including Windows-based and
Apple personal computers, automotive, and mobile handset
operating systems. Our inventions
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include control algorithms for efficiently driving relevant
families of actuators (such as spinning mass actuators, linear
actuators, and piezo-electric systems) as well as several
generations of authoring tools for creating, visualizing,
modifying, archiving, and experiencing haptic feedback.
Licensed
Solutions
In some markets, such as video console gaming, consumer
electronics, mobile phones, and automotive controls, we license
our technologies to 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, design
kits for prototyping, authoring tools, application programming
interfaces, and the development of hardware and software
technologies that are compatible with industry standards.
Turn-key Engineering and Integration Services
We offer engineering assistance including technical and
design assistance and integration services that allow our
licensees to incorporate our touch-enabling products and
technologies into their products at a reasonable cost and in a
shortened time frame. This allows them to get to market quickly
by using our years of haptic development and solution deployment
expertise. We offer product development solutions including
product software libraries, design, prototype creation,
technology transfer, actuator selection, component sourcing,
development/integration kits, sample source code, comprehensive
documentation, and other engineering services. In addition, we
help ensure a quality end-user experience by offering testing
and certification services to a number of licensees.
Design Kits for Prototyping We offer several
design kits for customers to use for technology evaluation,
internal evaluation, usability testing, and focus group testing.
The kits include components and documentation that designers,
engineers, and system integrators need for prototyping
TouchSense touch feedback into an existing or sample product.
Authoring Tools We license authoring tools
that enable haptic designers and software developers to quickly
design and incorporate custom touch feedback into their own
applications. Authoring tools allow designers to create, modify,
experience, and save or restore haptic effects for a haptic
device. The tools are the equivalent of a computer-aided design
application for haptics. Our authoring tools support
vibro-tactile haptic devices (such as mobile phones,
touchscreens, and vibro-tactile gaming peripherals), as well as
kinesthetic haptic devices (such as rotary devices, 2D devices,
and joysticks). Various haptic effect parameters can be defined
and modified, and the result immediately experienced. Our
authoring tools run on mainstream operating systems such as
Microsoft Windows.
Application Programming Interfaces
(APIs) Our APIs provide
haptic-effect generation capability. This allows designers and
software programmers to focus on adding haptic effects to their
applications instead of struggling with the mechanics of
programming real-time algorithms and handling communications
between computers and devices. Some of our haptic APIs are
device independent (for example, they work with scroll wheels,
rotary knobs, 2D joysticks, and other devices) to allow
flexibility and reusability. Others are crafted to meet the
needs of a particular customer or industry.
Compatible with Industry Standards We have
designed our hardware and software technologies for our
licensees to be compatible with industry hardware and software
standards. Our technologies operate across multiple platforms
and comply with such standards as Microsofts entertainment
application programming interface, DirectX, and a standard
communications interface, Universal Serial Bus
(USB). More generally, our software driver and API
technology has been designed to be easily ported to a variety of
operating systems including Windows, Windows CE, Mac OS X,
BREW/REX (from QUALCOMM), Java (J2SE), various Linux platforms
including Android, and VxWorks.
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Manufactured
Product Solutions
We produce our products using both contracted and in-house
manufacturing. We manufacture and sell some of our products
under the Immersion brand name through a combination of direct
sales, distributors, and value-added resellers. These products
include:
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medical and surgical simulation systems used for training
medical professionals in minimally invasive medical and surgical
procedures including endoscopy, laparoscopy, and endovascular;
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components used in our haptic touchscreen and touch surface
solutions;
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programmable rotary control technology and reference design for
operating a wide range of devices; and
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electronic control boards for wheels and joysticks used in
arcade games, research, and industrial applications.
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We also manufacture and private-label some products for
customers under their own brand names. In addition, we may
resell another manufacturers product into our customer
base such as certain types of medical simulators.
On November 17, 2008, we announced our intent to divest our
line of 3D products in 2009. These products include our:
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MicroScribe®
digitizers;
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3D interaction product line; and
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SoftMouse®
3D positioning device.
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Touch
Line of Business
Products
and Markets
We initially licensed our intellectual property for
touch-enabling technologies for consumer gaming peripherals in
1996 and extended beyond gaming to other applications of our
haptics-related products and services.
Gaming Devices We have licensed our
TouchSense intellectual property to Microsoft for use in its
gaming products, to Apple Computer for use in its operating
system, and to Sony Computer Entertainment for use in its legacy
and current PlayStation console gaming products. We have also
licensed our TouchSense intellectual property to over a dozen
gaming peripheral manufacturers and distributors, including
Logitech and Mad Catz, to bring haptic technology to PC
platforms including both Microsoft Windows and Apple operating
systems, as well as to video game consoles.
In the video game console peripheral market, we have licensed
our intellectual property for use in hundreds of spinning mass
tactile feedback devices and force feedback devices such as
steering wheels and joysticks to various manufacturers including
dreamGear, Gemini, Griffin, Hori, i-CON, Intec, Katana,
Logitech, Mad Catz, Microsoft, NYKO, Performance Designed
Products (PDP) (formerly Electro Source LLC),
Radica, and Sony. These products are designed to work with one
or more video game consoles including the Xbox and Xbox 360 from
Microsoft; the PlayStation, PlayStation 2, and PlayStation 3
from Sony; and the N64, GameCube, and Wii from Nintendo.
Currently, products sold to consumers using TouchSense
technology include PC joysticks, steering wheels, and gamepads
from various licensees.
For the years ended December 31, 2008, 2007, and 2006,
respectively 23%, 21%, and 18% of our total revenues were
generated from PC and console gaming revenues.
In the arcade entertainment market, our products include
steering wheel and joystick control electronics that provide
industrial strength and quality force feedback that enable very
realistic simulations.
In the casino and bar-top amusement market, we signed an
agreement with 3M Touch Systems in 2005 that allows manufacture
and distribution of its MicroTouch touch screens with our
TouchSense technology. 3M Touch Systems and seven system
integrators demonstrated this technology in pre-production
touchscreen monitors at the 2008 Global Gaming Expo.
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Mobile Communications and Portable Devices We
have developed TouchSense solutions for the mobile phone market
and a variety of portable devices.
TouchSense components include technologies for haptic
touchscreens and programmable haptic rotary controls. In early
2009, Samsung announced its new P3 personal media player,
currently scheduled to ship in the first half of 2009, with
Immersion haptic feedback technology for touchscreen
interactions. In 2008 Cue Acoustics announced and began shipping
a premium AM/FM radio and iPod docking station that includes a
TouchSense rotary control module as its primary control
mechanism. In 2007,
CTT-Net of
Korea launched the worlds first personal navigation
devices (PNDs) to use Immersions TouchSense
technology to provide tactile feedback for touchscreen
interactions in a global positioning system (GPS).
We intend to expand applications for TouchSense technologies
into a broader range of portable devices, including remote
controls for home entertainment systems, medical diagnostic and
therapeutic equipment, test and measurement equipment, portable
terminals, game devices, and media players.
The TouchSense Solution for Mobile Phones for handset OEMs,
operators, and application developers includes a TouchSense
Player, a lightweight and powerful vibration playback system
that is embedded in the phone, and a TouchSense software
toolkit, including a PC-based composition tool for creating
haptic effects for inclusion in content and applications. Haptic
effects can be used in alerts,
e-mail,
games, messages, ringtones, touchscreen interactions, and other
user interface features to add information or identification,
signal status or message arrival, and heighten interest or fun.
With a TouchSense-enabled phone, users can send and receive a
wide range of vibro-tactile haptic effects independently from or
in synchronicity with audio, video, and application program
content.
Our licensees currently include the top three makers of mobile
phones by volume in the world: Nokia, Samsung, and LG
Electronics plus others such as Pantech Co., Ltd. and KTF
Technologies Inc. In 2008, approximately 33 million
handsets with TouchSense technology were shipped by our
licensees, a nearly six-fold increase over 2007. Since its
launch in the first handset in 2005, our TouchSense technology
has shipped in over 42 million handsets.
For the years ended December 31, 2008, 2007, and 2006,
respectively 13%, 7%, and 1% of our total revenues were
generated from mobile communication revenues.
Automotive We have developed TouchSense
technology for rotary controls, touchscreens, and touch surfaces
appropriate for use in automobiles. TouchSense rotary technology
can consolidate the control of multiple systems into a single
module that provides the appropriate feel for each function.
This allows the driver convenient access to many systems and
supplies context-sensitive cues for operation. TouchSense
touchscreen and touch surface technology provides tactile
feedback for an otherwise unresponsive surface such as an all
digital switch or touchscreen. Programmable haptic touchscreen,
touch surface, and rotary controls of many types can be used to
provide a space-saving, aesthetic look and a confirming response
for the driver that can help reduce glance time.
We have also conducted various funded development efforts and
provided tools and evaluation licenses to several major
automobile manufacturers and suppliers interested in
touch-enabled automobile controls.
We have licensed our TouchSense rotary technology for use in
vehicle controls since 2002. Siemens VDO Automotive (now
Continental) has licensed our technology for use in the high-end
Volkswagen Phaeton sedan and Bentley cars. ALPS Electric, also a
licensee, has produced a haptic rotary control that has been
included in the Mercedes-Benz S Class sedan starting
in the fall of 2005. ALPS also produced a two-dimensional haptic
control module called the Remote Touch controller in the Lexus
RX 350 and 450h. These 2010 Lexus models were announced in
November 2008 and launched in the U.S. in February 2009.
Other licensees of TouchSense technology in the automotive
industry include: Methode Electronics, Inc., a global designer
and manufacturer of electronic component and subsystem devices;
Visteon Corporation, a leading global automotive supplier that
designs, engineers, and manufactures innovative climate,
interior, electronic and lighting products for vehicle
manufacturers; Volkswagen, Europes largest automaker; and
SMK Corporation of Tokyo, a global manufacturer of
electromechanical components. Since its launch in the first
vehicle in 2001 our TouchSense technology has shipped in over
2.4 million vehicles.
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For the years ended December 31, 2008, 2007, and 2006,
respectively 7%, 10%, and 9% of our total revenues were
automotive revenues.
3D and Mechanical CAD Design During 2008 we
sold three-dimensional and mechanical computer-aided design
products that allow users to create three-dimensional computer
models directly from physical objects and also to precisely
measure manufactured parts. We also manufactured and sold the
CyberGlove system, 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. In addition, we manufactured and sold specialized
products such as computer peripherals that incorporate advanced
computer peripheral technologies. On November 17, 2008, we
announced our intent to divest these lines of 3D digitizing
products in 2009. On February 24, 2009, we sold the line of
peripheral products for an immaterial amount.
For the years ended December 31, 2008, 2007, and 2006,
respectively 13%, 14%, and 17% of our total revenues were
generated from 3D and mechanical CAD design revenues.
Sales
and Distribution
Sales of our products generally do not experience seasonal
fluctuations, except that 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.
In the PC and video console gaming, consumer electronics,
mobility, and automotive markets, we establish licensing
relationships through our business development efforts.
In mobility, sales relationships must be established with
operators, handset manufacturers, and content developers
worldwide. We have signed license agreements with mobile handset
manufacturers for the incorporation of TouchSense technology
into certain mobile phone handsets. We have established
relationships with CDMA platform developer QUALCOMM,
Incorporated and with smartphone operating system developer
Symbian, Ltd.
We employ a direct sales force in the United States, Europe, and
Asia to license our TouchSense software products. In gaming, our
sales force is also augmented through co-marketing arrangements.
As part of our strategy to increase our visibility and promote
our touch-enabling technology, our consumer-products license
agreements may require our licensees to display the TouchSense
technology logo on their end products.
We sell our touchscreen and touch surface products to OEMs and
system integrators using a worldwide direct sales force. In
addition, the technology is licensed to large system integrators
and OEMs in automotive and other markets.
In the automotive market, we use a worldwide direct sales force
to work with vehicle manufacturers and component suppliers. We
have licensed our technology to leading automotive component
suppliers including Methode, ALPS Electric, SMK, and Visteon as
part of our strategy to speed adoption of our TouchSense
technologies across the automotive industry.
Competition
With respect to touch-enabled consumer products, we are aware of
several companies that claim to possess touch feedback
technology applicable to the consumer market. In addition, we
are aware of several companies that currently market unlicensed
touch feedback products in consumer markets.
In the Touch line of business, the principal competitive factors
are the strength of the intellectual property underlying the
technology, the technological expertise and design innovation
and the use, reliability and cost-effectiveness of the products.
We believe we compete favorably in all these areas.
Several companies also currently market touch feedback products
that are competitive to ours in non-consumer markets. These
companies could also shift their focus to the consumer market.
In addition, our licensees or other companies may develop
products that compete with products employing our touch-enabling
technologies, but are
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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.
For licensed applications, our competitive position is partially
dependent on the competitive positions of our licensees that pay
a license
and/or
royalty. Our licensees markets are highly competitive. We
believe that the principal competitive factors in our
licensees markets include price, performance, user-centric
design,
ease-of-use,
quality, and timeliness of products, as well as the
manufacturers responsiveness, capacity, technical
abilities, established customer relationships, retail shelf
space, advertising, promotional programs, and brand recognition.
Touch-related benefits in some of these markets may be viewed
simply as enhancements and compete with nontouch-enabled
technologies.
Medical
Line of Business
Products
and Markets
We have developed numerous simulation technologies that can be
used for medical training and testing. By enabling a medical
simulator to more fully engage users sense of touch, our
technologies can support realistic simulations that are
effective in teaching medical students, doctors, and other
health professionals what it feels like to perform a given
procedure. The use of our simulators allows these professionals
to perfect their practice in an environment that poses no risks
to patients, where mistakes have no dire consequences, and where
animal or cadaver use is unnecessary.
In addition, organizations wanting to train customers or sales
staff on medical procedures and on the use of new tools and
medical devices engage us to develop special simulators.
Examples of projects we have completed include simulation of
venous access, minimally invasive vein harvesting, hysteroscopy,
and aortic valve and pacemaker lead placement.
We have four medical simulation product lines: the
Virtual IV system, which simulates needle-based procedures
such as intravenous catheterization and phlebotomy; the
Endoscopy
AccuTouch®
System, which simulates endoscopic procedures, including
bronchoscopy and lower and upper GI procedures; the CathLabVR
System, which simulates endovascular interventions including
cardiac pacing, angiography, angioplasty, and carotid and
coronary stent placement; and the LapVR System, which simulates
minimally invasive procedures involving abdominal and pelvic
organs. In addition, we sell an arthroscopy surgical simulator
for certain arthroscopic surgical procedures on knees and
shoulders based on GMVs insightArthroVR system.
These systems are used for training and educational purposes to
enable health professionals to feel simulated forces that they
would experience during actual medical procedures, such as
encountering an arterial obstruction. The systems are designed
to provide a realistic training environment augmented by
real-time graphics that include anatomic models developed from
actual patient data and high-fidelity sound that includes
simulated patient responses.
All 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.
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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.
With respect to medical simulation products, we employ a direct
sales force and a network of international distributors that
sell simulation systems to hospitals, colleges and universities,
nursing schools, medical schools, emergency medical technician
training programs, the military, medical device companies, and
other organizations involved in procedural medicine. During
2008, we expanded our direct sales force in international
markets and signed agreements with additional distributors for
sales of our products in Europe, Latin America, and Asia Pacific
regions.
For the years ended December 31, 2008, 2007, and 2006,
respectively 41%, 44%, and 51%, of our total revenues were
generated from medical revenues. For the years ended
December 31, 2007 and 2006, respectively 11% and 18% 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 timely ability to invent, improve,
and reduce the cost of our technologies in a timely manner; to
design and develop products to meet specifications based on
research and our understanding of customer needs and
expectations; and to collaborate with our licensees who are
integrating our technologies into theirs.
Immersion Engineering We have assembled a
multi-disciplinary team of highly skilled engineers and
scientists with the experience required for development of
touch-enabling technology. The teams experience includes
skills related to mechanical engineering, electrical
engineering, embedded systems and firmware, control techniques,
software, quality control, haptic content design, and project
and process management. For medical simulations, we have
assembled a team of experts who are skilled at modeling the
anatomy and physiology of various medical cases, creating
graphical renderings, designing haptic feedback, and devising
advanced control algorithms to simulate realistic navigation for
medical procedures, such as through the bodys blood
vessels.
Application Engineering & Technical
Support We may provide application engineering
and technical support during integration of our touch-enabling
technology into customer products. To facilitate the validation
and adoption of touch-enabling technology, we have developed
various design kits. These kits may include actuators, mounting
suggestions, controller boards, software libraries, programming
examples, and documentation. Our application engineers support
customer use of these design kits 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.
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.
10
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
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
collaborations to reinforce our technical leadership and expand
our innovative advancements. In addition, we have entered into
numerous contracts with corporations and government agencies
that help fund advanced research and development. Our government
contracts permit us to retain ownership of the technology
developed under the contracts, provided that we supply the
applicable government agency a license to use the technology for
noncommercial purposes.
For the years ended December 31, 2008, 2007, and 2006,
research and development expenses were $12.6 million,
$10.1 million, and $7.6 million respectively.
Intellectual
Property
We believe that intellectual property protection is crucial to
our business. We rely on a combination of patents, copyrights,
trade secrets, trademarks, nondisclosure agreements with
employees and third parties, licensing arrangements, and other
contractual agreements with third parties to protect our
intellectual property.
Our failure to obtain or maintain adequate protection for our
intellectual property rights for any reason could hurt our
competitive position. There is no guarantee that patents will be
issued from the patent applications that we have filed or may
file. Our issued patents may be challenged, invalidated, or
circumvented, and claims of our patents may not be of sufficient
scope or strength, or issued in the proper geographic regions,
to provide meaningful protection or any commercial advantage.
We and our wholly owned subsidiaries hold more than 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 have begun 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.
On April 16, 2008, we announced that our wholly owned
subsidiary, Immersion Medical, Inc., filed lawsuits for patent
infringement in the United States District Court for the Eastern
District of Texas against Mentice AB, Mentice SA, Simbionix USA
Corp., and Simbionix Ltd. We intend to vigorously prosecute this
lawsuit.
Investor
Information
You can access financial and other information in the Investor
Relations section of our Web site at www.immersion.com. We make
available, on our Web site, free of charge, copies of our annual
report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or
11
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, 2008, we had 184 full-time and
2 part-time employees, including 68 in research and
development, 54 in sales and marketing, and 64 in legal,
finance, administration, and operations. As of that date, we
also had 23 independent contractors. None of our employees are
represented by a labor union, and we consider our employee
relations to be positive.
Executive
Officers
The following table sets forth information regarding our
executive officers as of March 9, 2009.
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Name
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Position with the Company
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Age
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Clent Richardson
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President, Chief Executive Officer, and member of the Board of
Directors
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47
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Stephen Ambler
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Chief Financial Officer
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49
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Daniel Chavez
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Senior Vice President and General Manager, Medical Line of
Business
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51
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G. Craig Vachon
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Senior Vice President and General Manager, Touch Line of Business
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45
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Clent Richardson joined Immersion in April 2008 as President,
Chief Executive Officer and member of the Board of Directors.
From July 2007 through March 2008 Mr. Richardson was Chief
Marketing Officer of TiVo, Inc., a provider of technology and
services for digital video recorders. In April 2004,
Mr. Richardson joined Nortel Networks Inc., a
telecommunications networks and solutions company, as Vice
President of Global Marketing, Enterprise Networks and was
promoted to Chief Marketing Officer in October 2004 and served
in that capacity through February 2006. From August 2003 to
November 2003, Mr. Richardson was a management consultant
for America Online, Inc., an internet services and media
company. From April 2001 to March 2003, Mr. Richardson was
Chief Sales and Marketing Officer and a member of the Board of
Directors of
T-Mobile
U.K., a wireless phone company, and concurrently chairman of
T-Mobile
Retail, Ltd. Mr. Richardson served as Vice President,
Worldwide Developer Relations from December 1997 to March 2001
and also as Vice President, Worldwide Solutions Marketing (from
February 2000 to March 2001) for Apple Computer, Inc., a
consumer electronics and software manufacturer. Prior to
December 1997, Mr. Richardson served as Vice President,
Marketing and Sales for Design Intelligence, Inc.; senior
manager, Evangelism for Apple Computer, Inc.; Vice President and
Director of Sales for Foster Ousley Conley, Inc.; and held
several sales and management positions within GTE Corporation
(now part of Verizon) over a five year period including Group
Manager, Major Accounts in California for GTE Mobilenet, a
subsidiary of GTE Corporation. Mr. Richardson holds a B.A.
in Counseling Psychology from Antioch University.
Stephen Ambler joined Immersion in February 2005 as Chief
Financial Officer. 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.
12
Daniel Chavez joined Immersion in December 2008 as Senior Vice
President and General Manager of the Medical Line of Business.
Mr. Chavez previously served as interim Senior Vice
President and General Manager of Immersions Medical Line
of Business since August 2008. From January 2007 to July 2008,
Mr. Chavez was a health information technology consultant
focused on business planning, strategic alliance development,
product management, and marketing. From September 2001 to
December 2006, Mr. Chavez held various positions at
Availity, LLC, a healthcare transactions company, including
Senior Vice President, Operations, Vice President, Operations,
and Vice President, Business Development. Prior to September
2001, Mr. Chavez held positions with Emstat Corporation,
Computer Sciences Corporation, Stellcom Technologies, Inc.,
Science Applications International Corporation, GTE Corporation
and IBM Corporation. Mr. Chavez holds an M.B.A. from
Stanford University and a B.A. in Economics from San Jose
State University.
G. Craig Vachon joined Immersion in September 2008 as Vice
President and General Manager, Mobility Group. Effective
January 12, 2009. Mr. Vachon was promoted to Senior
Vice President and General Manager of the Touch Line of
Business. From February 2006 to September 2008, Mr. Vachon
served as Vice President of Corporate Development of Atrua
Technologies, Inc. and from March 2004 to February 2006,
Mr. Vachon served as the CEO and President of Varatouch
Technology, Inc., which was acquired by Atrua Technologies, Inc.
in February 2006. From November 2001 to November 2003, he served
as CEO and Chairman of Sirenic, Inc. Mr. Vachon holds a
B.S. in Communication and an M.S. in Business Communication from
Emerson College.
You should carefully consider the following risks and
uncertainties, as well as other information in this report and
our other SEC filings, in considering our business and
prospects. If any of the following risks or uncertainties
actually 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.
Company
Risks
The
uncertain global economic environment could reduce our revenues
and could have an adverse effect on our financial condition and
results of operations.
The current global economic recession could materially hurt our
business in a number of ways including, longer sales and renewal
cycles, delays in adoption of our products, increased risk of
competition for our products, increased risk of inventory
obsolescence, higher overhead costs as a percentage of revenue,
delays in signing or failing to sign customer agreements, or
signing customer agreements at reduced purchase levels. In
addition, our suppliers, customers, potential customers, and
business partners are facing similar challenges, which could
materially and adversely affect the level of business they
conduct with us. The current economic downturn may lead to a
reduction in corporate, university, or government budgets for
research and development in sectors including the automotive,
aerospace, mobility, and medical sectors, which use our
products. Sales of our products may be adversely affected by
cuts in these research and development budgets. Furthermore, a
prolonged tightening of the credit markets could significantly
impact our ability to liquidate investments or reduce the rate
of return on investments.
We had
an accumulated deficit of $68 million as of
December 31, 2008, have a history of losses, expect to
experience losses in the future, and may not achieve or maintain
profitability in the future.
Since 1997, we have incurred losses in all but four recent
quarters. We need to generate significant ongoing revenue to
return to profitability. We anticipate that we will continue to
incur expenses as we:
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continue to develop our technologies;
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increase our sales and marketing efforts;
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attempt to expand the market for touch-enabled technologies and
products and change our business;
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protect and enforce our intellectual property;
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pursue strategic relationships;
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acquire intellectual property or other assets from
third-parties; and
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invest in systems and processes to manage our business.
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If our revenues grow more slowly than we anticipate or if our
operating expenses exceed our expectations, we may not achieve
or maintain profitability.
We
have little or no control or influence on our licensees
design, manufacturing, promotion, distribution, or pricing of
their products incorporating our touch-enabling technologies,
upon which we generate royalty revenue.
A key part of our business strategy is to license our
intellectual property to companies that manufacture and sell
products incorporating our touch-enabling technologies. Sales of
those products generate royalty and license revenue for us. For
the years ended December 31, 2008, 2007 and 2006, 39%, 34%
and 26%, respectively, of our total revenues were royalty and
license revenues. We do not control or influence the design,
manufacture, quality control, promotion, distribution, or
pricing of products that are manufactured and sold by our
licensees, nor can we control consolidation within an industry
which could either reduce the number of licensing products
available or reduce royalty rates for the combined licensees. In
addition, we generally do not have commitments from our
licensees that they will continue to use our technologies in
current or future products. As a result, products incorporating
our technologies may not be brought to market, achieve
commercial acceptance, or otherwise generate meaningful royalty
revenue for us. For us to generate royalty revenue, licensees
that pay us
per-unit
royalties must manufacture and distribute products incorporating
our touch-enabling technologies in a timely fashion and generate
consumer demand through marketing and other promotional
activities. If our licensees products fail to achieve
commercial success or if products are recalled because of
quality control problems, our revenues will not grow and could
decline.
Peak demand for products that incorporate our technologies,
especially in the video console gaming and computer gaming
peripherals market, typically occurs in the fourth calendar
quarter as a result of increased demand during the year-end
holiday season. If our licensees do not ship products
incorporating our touch-enabling technologies in a timely
fashion or fail to achieve strong sales in the fourth quarter of
the calendar year, we may not receive related royalty and
license revenue.
We may
not be able to continue to derive significant revenues from
makers of peripherals for popular video gaming
platforms.
A significant portion of our gaming royalty revenues come from
third-party peripheral makers who make licensed gaming products
designed for use with popular video game console systems from
Microsoft, Sony, and Nintendo. Video game console systems are
closed, proprietary systems, and video game console system
makers typically impose certain requirements or restrictions on
third-party peripheral makers who wish to make peripherals that
will be compatible with a particular video game console system.
If third-party peripheral makers cannot or are not allowed to
obtain or satisfy these requirements or restrictions, our gaming
royalty revenues could be significantly reduced. Furthermore,
should a significant video game console maker choose to omit
touch-enabling capabilities from its console system or somehow
restrict or impede the ability of third parties to make
touch-enabling peripherals, it may very well lead our gaming
licensees to stop making products with touch-enabling
capabilities, thereby significantly reducing our gaming royalty
revenues.
Under the terms of our agreement with Sony, Sony receives a
royalty-free license to our worldwide portfolio of patents. This
license permits Sony to make, use, and sell hardware, software,
and services covered by our patents in
14
its PS1, PS2, and PS3 systems for a fixed license payment. The
PS3 console system was launched in late 2006 in the United
States and Japan without force feedback capability. Sony has
since released new PS3 controllers with vibration feedback. We
do not know to what extent Sony will allow third-party
peripheral makers to make licensed PS3 gaming products with
vibration feedback to interface with the PS3 console. To the
extent Sony selectively limits their licensing to leading
third-party controller makers to make PS3 controllers with
vibration feedback, our licensing revenue from third-party PS3
peripherals will continue to be severely limited. Sony continues
to sell the PS2, and our third party licensees continue to sell
licensed PS2 peripherals. However, U.S. sales of PS2
peripherals continue to decline as more consumers switch to the
PS3 console system and other next-generation console systems
like the Nintendo Wii and Microsoft Xbox 360.
Both the Microsoft Xbox 360 and Nintendo Wii include
touch-enabling capabilities. For the Microsoft Xbox 360 video
console system launched in November 2005, Microsoft has, to
date, not yet broadly licensed third parties to produce
peripherals for its Xbox 360 game console. To the extent
Microsoft does not fully license third parties, Microsofts
share of all aftermarket Xbox 360 game controller sales will
likely remain high or increase, which we expect will limit our
gaming royalty revenue. Additionally, Microsoft is now making
touch-enabled steering wheel products covered by their
royalty-free, perpetual, irrevocable license to our worldwide
portfolio of patents that could compete with our licensees
current products for which we earn per unit royalties.
Because
we have a fixed payment license with Microsoft, our royalty
revenue from licensing in the gaming market and other consumer
markets has declined and may further do so if Microsoft
increases its volume of sales of touch-enabled gaming products
and consumer products at the expense of our other
licensees.
Under the terms of our present agreement with Microsoft,
Microsoft receives a royalty-free, perpetual, irrevocable
license to our worldwide portfolio of patents. This license
permits Microsoft to make, use, and sell hardware, software, and
services, excluding specified products, covered by our patents.
We will not receive any further revenues or royalties from
Microsoft under our current agreement with Microsoft. Microsoft
has a significant share of the market for touch-enabled console
gaming computer peripherals and is pursuing other consumer
markets such as mobile phones, PDAs, and portable music players.
Microsoft has significantly greater financial, sales, and
marketing resources, as well as greater name recognition and a
larger customer base than some of our other licensees. In the
event that Microsoft increases its share of these markets, our
royalty revenue from other licensees in these market segments
might decline.
We
generate revenues from touch-enabling components that are sold
and incorporated into third-party products. We have little or no
control or influence over the design, manufacture, promotion,
distribution, or pricing of those third-party
products.
Part of our business strategy is to sell components that provide
touch feedback capability in products that other companies
design, manufacture, and sell. Sales of these components
generate product revenue. However, we do not control or
influence the design, manufacture, quality control, promotion,
distribution, or pricing of products that are manufactured and
sold by those customers that buy these components. In addition,
we generally do not have commitments from customers that they
will continue to use our components in current or future
products. As a result, products incorporating our components may
not be brought to market, meet quality control standards, or
achieve commercial acceptance. If the customers fail to
stimulate and capitalize upon market demand for their products
that include our components, or if products are recalled because
of quality control problems, our revenues will not grow and
could decline.
The
terms in our agreements may be construed by our licensees in a
manner that is inconsistent with the rights that we have granted
to other licensees, or in a manner that may require us to incur
substantial costs to resolve conflicts over license
terms.
We have entered into, and we expect to continue to enter into,
agreements pursuant to which our licensees are granted rights
under our technology and intellectual property. These rights may
be granted in certain fields of use, or with respect to certain
market sectors or product categories, and may include exclusive
rights or sublicensing rights. We refer to the license terms and
restrictions in our agreements, including, but not limited to,
field of use definitions, market sector, and product category
definitions, collectively as License Provisions.
15
Due to the continuing evolution of market sectors, product
categories, and licensee business models, and to the compromises
inherent in the drafting and negotiation of License Provisions,
our licensees may, at some time during the term of their
agreements with us, interpret License Provisions in their
agreements in a way that is different from our interpretation of
such License Provisions, or in a way that is in conflict with
the rights that we have granted to other licensees. Such
interpretations by our licensees may lead to claims that we have
granted rights to one licensee which are inconsistent with the
rights that we have granted to another licensee.
In addition, after we enter into an agreement, it is possible
that markets
and/or
products, or legal
and/or
regulatory environments, will evolve in a manner that we did not
foresee or was not foreseeable at the time we entered into the
agreement. As a result, in any agreement, we may have granted
rights that will preclude or restrict our exploitation of new
opportunities that arise after the execution of the agreement.
If we
are unable to enter into new licensing arrangements with our
existing licensees and with additional third-party manufacturers
for our touch-enabling technologies, our royalty revenue may not
grow.
Our revenue growth is significantly dependent on our ability to
enter into new licensing arrangements. Our failure to enter into
new or renewal of licensing arrangements will cause our
operating results to suffer. We face numerous risks in obtaining
new licenses on terms consistent with our business objectives
and in maintaining, expanding, and supporting our relationships
with our current licensees. These risks include:
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the lengthy and expensive process of building a relationship
with potential licensees;
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the competition we may face with the internal design teams of
existing and potential licensees;
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difficulties in persuading product manufacturers to work with
us, to rely on us for critical technology, and to disclose to us
proprietary product development and other strategies;
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difficulties with persuading potential licensees who may have
developed their own intellectual property or licensed
intellectual property from other parties in areas related to
ours to license our technology versus continuing to develop
their own or license from other parties;
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challenges in demonstrating the compelling value of our
technologies in new applications like mobile phones, portable
devices, and touchscreens;
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difficulties in persuading existing and potential licensees to
bear the development costs and risks necessary to incorporate
our technologies into their products;
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difficulties in obtaining new [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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Our
recently-announced consolidation of our Medical operations may
not be successful, and may negatively impact our
business
In March 2009, we announced that we are consolidating the
operations of our Medical line of business with the rest of our
business. As a result of this consolidation, we will be moving
the operations of our Medical line of business from Maryland to
our headquarters in San Jose, California. Consolidations
and business restructurings involve numerous risks and
uncertainties, including, but not limited to: the potential loss
of key employees, customers and business partners; market
uncertainty related to our future business plans; the incurrence
of unexpected expenses or charges; diversion of management
attention from other key areas of our business; negative impacts
on employee morale; and other potential dislocations and
disruptions to the business. For 2008, our Medical line of
business represented 41% of our total revenues. Accordingly, if
we are unable to manage this consolidation effectively, our
overall business and operating results could be materially and
adversely affected.
16
Litigation
regarding intellectual property rights could be expensive,
disruptive, and time consuming; could result in the impairment
or loss of portions of our intellectual property; and could
adversely affect our business.
Intellectual property litigation, whether brought by us or by
others against us, has caused us to expend, and may cause us to
expend in future periods, significant financial resources as
well as divert managements time and efforts. From time to
time, we initiate claims against third parties that we believe
infringe our intellectual property rights. We intend to enforce
our intellectual property rights vigorously and may initiate
litigation against parties that we believe are infringing our
intellectual property rights if we are unable to resolve matters
satisfactorily through negotiation. Litigation brought to
protect and enforce our intellectual property rights could be
costly, time-consuming, and difficult to pursue in certain
venues, and distracting to management and potential customers
and could result in the impairment or loss of portions of our
intellectual property. In addition, any litigation in which we
are accused of infringement may cause product shipment delays,
require us to develop non-infringing technologies, or require us
to enter into royalty or license agreements even before the
issue of infringement has been decided on the merits. If any
litigation were not resolved in our favor, we could become
subject to substantial damage claims from third parties and
indemnification claims from our licensees. We could be enjoined
from the continued use of the technologies at issue without a
royalty or license agreement. Royalty or license agreements, if
required, might not be available on acceptable terms, or at all.
If a third party claiming infringement against us prevailed, and
we may not be able to develop non-infringing technologies or
license the infringed or similar technologies on a timely and
cost-effective basis, our expenses could increase and our
revenues could decrease.
While we attempt to avoid infringing known proprietary rights of
third parties, third parties may hold, or may in the future be
issued, patents that could be infringed by our products or
technologies. Any of these third parties might make a claim of
infringement against us with respect to the products that we
manufacture and the technologies that we license. From time to
time, we have received letters from companies, several of which
have significantly greater financial resources than we do,
asserting that some of our technologies, or those of our
licensees, infringe their intellectual property rights. Certain
of our licensees may receive similar letters from these or other
companies from time to time. Such letters or subsequent
litigation may influence our licensees decisions whether
to ship products incorporating our technologies. In addition,
such letters may cause a dispute between our licensees and us
over indemnification for the infringement claim. Any of these
notices, or additional notices that we or our licensees could
receive in the future from these or other companies, could lead
to litigation against us, either regarding the infringement
claim or the indemnification claim.
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.
17
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 currently a party to various legal proceedings. Due to
the inherent uncertainties of litigation, we cannot accurately
predict how these cases will ultimately be resolved. 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 this and our other
litigation, please see Note 11 to the consolidated
financial statements in Part I and Item 1. Legal
Proceedings of this Part II.
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. Defending any claims
against us, regardless of merit, would be time-consuming,
expensive to defend, and distracting to management, and could
result in damages and injure our reputation, the reputation of
our technology and services,
and/or the
reputation of our products, or the reputation of our licensees
or their products. This damage could limit the market for our
and our licensees products and harm our results of
operations. In addition, if our business liability insurance
coverage proves inadequate or future coverage is unavailable on
acceptable terms or at all, our business, operating results and
financial condition could be adversely affected.
In the past, manufacturers of peripheral products including
certain gaming products such as joysticks, wheels, or gamepads,
have been subject to claims alleging that use of their products
has caused or contributed to various types of repetitive stress
injuries, including carpal tunnel syndrome. While we have not
experienced any product liability claims to date, we could face
such claims in the future, which could harm our business and
reputation. Although our license agreements typically contain
provisions designed to limit our exposure to product liability
claims, existing or future laws or unfavorable judicial
decisions could limit or invalidate the provisions.
Our
products are complex and may contain undetected errors, which
could harm our reputation and future product
sales.
Any failure to provide high quality and reliable products,
whether caused by our own failure or failures of our suppliers
or OEM customers, could damage our reputation and reduce demand
for our products. Our products have in the past contained, and
may in the future contain, undetected errors or defects. Some
errors in our products may only be discovered after a product
has been shipped to customers. Any errors or defects discovered
in our products after commercial release could result in loss of
revenue, loss of customers, and increased service and warranty
costs, any of which could adversely affect our business.
The
nature of some of our products may also subject us to export
control regulation by the U.S. Department of State and the
Department of Commerce. Violations of these regulations can
result in monetary penalties and denial of export
privileges.
Our sales to customers in some areas outside the United States
could be subject to government export regulations or
restrictions that prohibit us from selling to customers in some
countries or that require us to obtain licenses or approvals to
export such products internationally. Delays or denial of the
grant of any required license or approval, or changes to the
regulations, could make it difficult or impossible to make sales
to foreign customers in some countries and could adversely
affect our revenue. In addition, we could be subject to fines
and penalties for violation of these export regulations if we
were found in violation. Such violation could result in
penalties, including prohibiting us from exporting our products
to one or more countries, and could materially and adversely
affect our business.
18
Compliance
with directives that restrict the use of certain materials may
increase our costs and limit our revenue
opportunities.
Our products and packaging must meet all safety, electrical,
labeling, marking, or other requirements of the countries into
which we ship products or our resellers sell our products. We
have to assess each product and determine whether it complies
with the requirements of local regulations or whether they are
exempt from meeting the requirements of the regulations. If we
determine that a product is not exempt and does not comply with
adopted regulations, we will have to make changes to the product
or its documentation if we want to sell that product into the
region once the regulations become effective. Making such
changes may be costly to perform and may have a negative impact
on our results of operations. In addition, there can be no
assurance that the national enforcement bodies of the regions
adopting such regulations will agree with our assessment that
certain of our products and documentation comply with or are
exempt from the regulations. If products are determined not to
be compliant or exempt, we will not be able to ship them in the
region that adopts such regulations until such time that they
are compliant, and this may have a negative impact on our
revenue and results of operations.
Because
personal computer peripheral products that incorporate our
touch-enabling technologies currently work with Microsofts
operating system software, our costs could increase and our
revenues could decline if Microsoft modifies its operating
system software.
Our hardware and software technologies for personal computer
peripheral products that incorporate our touch-enabling
technologies are currently compatible with Microsofts
Windows 2000, Windows Me, Windows XP, and Windows Vista
operating systems, including DirectX, Microsofts
entertainment API. Modifications and new versions of
Microsofts operating system and APIs (including DirectX
and Windows 7) may require that we
and/or our
licensees modify the touch-enabling technologies to be
compatible with Microsofts modifications or new versions,
and this could cause delays in the release of products by our
licensees. If Microsoft modifies its software products in ways
that limit the use of our other licensees products, our
costs could increase and our revenues could decline.
In addition, Microsoft announced that its new product, Windows
7, will feature a new multi-touch input function, allowing users
to use multiple fingers simultaneously to interact with touch
surfaces. Enabling multi-location touch-feedback will require us
to innovate hardware and software, enable Windows 7 APIs
with multi-touch output support, and work with our licensees and
third parties to integrate such features. There are feasibility
risks with both hardware and software, and there may be
potential delays in the revenue growth of haptically-enabled
multi touch surfaces.
If we
are unable to develop open source compliant products, our
ability to license our technologies and generate revenues would
be impaired.
We have seen, and believe that we will continue to see, an
increase in customers requesting that we develop products that
will operate in an open source environment.
Developing open source compliant products, without imperiling
the intellectual property rights upon which our licensing
business depends, may prove difficult under certain
circumstances, thereby placing us at a competitive disadvantage
for new product designs. As a result, our revenues may not grow
and could decline.
The
market for certain touch-enabling technologies and touch-enabled
products is at an early stage and if market demand does not
develop, we may not achieve or sustain revenue
growth.
The market for certain of our touch-enabling technologies and
certain of our licensees touch-enabled products is at an
early stage. If we and our licensees are unable to develop
demand for touch-enabling technologies and touch-enabled
products, we may not achieve or sustain revenue growth. We
cannot accurately predict the growth of the markets for these
technologies and products, the timing of product introductions,
or the timing of commercial acceptance of these products.
Even if our touch-enabling technologies and our licensees
touch-enabled products are ultimately widely adopted, widespread
adoption may take a long time to occur. The timing and amount of
royalties and product sales
19
that we receive will depend on whether the products marketed
achieve widespread adoption and, if so, how rapidly that
adoption occurs.
We expect that we will need to pursue extensive and expensive
marketing and sales efforts to educate prospective licensees,
component customers, and end users about the uses and benefits
of our technologies and to persuade software developers to
create software that utilizes our technologies. Negative product
reviews or publicity about our company, our products, our
licensees products, haptic features, or haptic technology
in general could have a negative impact on market adoption, our
revenue,
and/or our
ability to license our technologies in the future.
If we
fail to protect and enforce our intellectual property rights,
our ability to license our technologies and generate revenues
would be impaired.
Our business depends on generating revenues by licensing our
intellectual property rights and by selling products that
incorporate our technologies. We rely on our significant patent
portfolio to protect our proprietary rights. If we are not able
to protect and enforce those rights, our ability to obtain
future licenses or maintain current licenses and royalty revenue
could be impaired. In addition, if a court or the patent office
were to limit the scope, declare unenforceable, or invalidate
any of our patents, current licensees may refuse to make royalty
payments, or they may choose to challenge one or more of our
patents. It is also possible that:
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our pending patent applications may not result in the issuance
of patents;
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our patents may not be broad enough to protect our proprietary
rights; and
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effective patent protection may not be available in every
country in which we or our licensees do business.
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We also rely on licenses, confidentiality agreements, other
contractual agreements, and copyright, trademark, and trade
secret laws to establish and protect our proprietary rights. It
is possible that:
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laws and contractual restrictions may not be sufficient to
prevent misappropriation of our technologies or deter others
from developing similar technologies; and
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policing unauthorized use of our patented technologies,
trademarks, and other proprietary rights would be difficult,
expensive, and time-consuming, within and particularly outside
of the United States of America.
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Certain
terms or rights granted in our license agreements or our
development contracts may limit our future revenue
opportunities.
While it is not our general practice to sign license agreements
that provide exclusive rights for a period of time with respect
to a technology, field of use,
and/or
geography, or to accept similar limitations in product
development contracts, we have entered into such agreements and
may in the future. Although additional compensation or other
benefits may be part of the agreement, the compensation or
benefits may not adequately compensate us for the limitations or
restrictions we have agreed to as that particular market
develops. Over the life of the exclusivity period, especially in
markets that grow larger or faster than anticipated, our revenue
may be limited and less than what we could have achieved in the
market with several licensees or additional products available
to sell to a specific set of customers.
If we
fail to develop new or enhanced technologies for new
applications and platforms, we may not be able to create a
market for our technologies or our technologies may become
obsolete, and our ability to grow and our results of operations
might be harmed.
Our initiatives to develop new and enhanced technologies and to
commercialize these technologies for new applications and new
platforms may not be successful or timely. Any new or enhanced
technologies may not be favorably received by consumers and
could damage our reputation or our brand. Expanding our
technologies could also require significant additional expenses
and strain our management, financial, and operational resources.
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Moreover, technology products generally have relatively short
product life cycles and our current products may become obsolete
in the future. Our ability to generate revenues will be harmed
if:
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we fail to develop new technologies or products;
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the technologies we develop infringe on third-party patents or
other third-party rights;
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our new technologies fail to gain market acceptance; or
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our current products become obsolete or no longer meet new
regulatory requirements.
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Our ability to achieve revenue growth also depends on our
continuing ability to improve and reduce the cost of our
technologies and to introduce these technologies to the
marketplace in a timely manner. If our development efforts are
not successful or are significantly delayed, companies may not
incorporate our technologies into their products and our revenue
growth may be impaired.
We
have limited engineering, customer service, technical support,
quality assurance and manufacturing resources to design and
fulfill favorable product delivery schedules and sufficient
levels of quality in support of our different product areas.
Products and services may not be delivered in a timely way, with
sufficient levels of quality, or at all, which may reduce our
revenue.
Engineering, customer service, technical support, quality
assurance, and manufacturing resources are deployed against a
variety of different projects and programs to provide sufficient
levels of quality necessary for channels and customers. Success
in various markets may depend on timely deliveries and overall
levels of sustained quality and customer service. Failure to
provide favorable product and program deliverables and quality
and customer service levels, or provide them at all, may disrupt
channels and customers, harm our brand, and reduce our revenues.
The
higher cost of products incorporating our touch-enabling
technologies may inhibit or prevent their widespread
adoption.
Personal computer and console gaming peripherals, mobile
devices, touchscreens, and automotive and industrial controls
incorporating our touch-enabling technologies can be more
expensive than similar competitive products that are not
touch-enabled. Although major manufacturers, such as ALPS
Electric Co., BMW, LG Electronics, Logitech, Microsoft, Nokia,
Samsung, and Sony have licensed our technologies, the greater
expense of development and production of products containing our
touch-enabling technologies, together with the higher price to
the end customer, may be a significant barrier to their
widespread adoption and sale.
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. In addition,
customers may be reluctant to purchase these products if no
studies have been published or until a favorable study has been
published, which would negatively impact our revenues from sales
of these products.
21
Medical
licensing and certification authorities may not recommend or
require use of our technologies for training and/or testing
purposes and certain legislation that may encourage the use of
simulators may not become law, significantly slowing or
inhibiting the market penetration of our medical simulation
technologies.
Several key medical certification bodies, including the American
Board of Internal Medicine (ABIM), the American
Board of Surgery (ABS), and the American College of
Cardiology (ACC), have great influence in
recommending particular medical methodologies, including medical
training and testing methodologies, for use by 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, and in addition in the event that the Enhancing
Simulation Act of 2009 does not pass into law, market
penetration for our products in the medical market could be
significantly and adversely affected.
We
have limited distribution channels and resources to market and
sell our 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 our
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
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 are small, specialized companies and may not have
sufficient capital or human resources to support the
complexities of selling and supporting our products. In
addition, many of our distributors do not have exclusive
relationships with us and may not devote sufficient time and
attention to selling 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.
It is
difficult for us to predict the sales volume of our distribution
channels, which makes it difficult for us to forecast our
business.
The sales volumes for our limited distribution channels are
volatile and hard to predict. We consider forecasts in
determining our component needs and our inventory requirements.
If the business in these limited distribution channels fails to
meet expectations, or if we fail to accurately forecast our
customers product demands, we may have inadequate or
excess inventory of our products or components or assets that
are not realizable, which could adversely affect our operating
results.
The
markets in which we participate or may target in the future are
intensely competitive, and if we do not compete effectively, our
operating results could be harmed.
Our target markets are rapidly evolving and highly competitive.
Many of our competitors and potential competitors are larger and
have greater name recognition, much longer operating histories,
larger marketing budgets, and significantly greater resources
than we do, and with the introduction of new technologies and
market entrants, we expect competition to intensify in the
future. We believe that competition in these markets will
continue to be intense and that competitive pressures will drive
the price of our products and our licensees products
downward. These price reductions, if not offset by increases in
unit sales or productivity, will cause our revenues to decline.
If we fail to compete effectively, our business will be harmed.
Some of our principal competitors offer their products or
services at a lower price, which has resulted in pricing
pressures. If we are unable to achieve our target pricing
levels, our operating results would be negatively impacted. In
addition, pricing pressures and increased competition generally
could result in reduced sales, reduced margins, losses, or the
failure of our application suite to achieve or maintain more
widespread market acceptance, any of which could harm our
business.
In the medical simulation market, we face competition from
Simbionix USA Corporation, Mentice Corporation, Medical
Education Technologies, Inc., and Medical Simulation
Corporation. In the mobility and
22
touchscreen markets, we face competition from internal design
teams of existing and potential OEM customers. As a result of
their licenses to our patent portfolios, we could face
competition from Microsoft and Sony.
Our licensees or other third parties may also seek to develop
products using our intellectual property or develop alternative
designs that attempt to circumvent our intellectual property or
that they believe do not require a license under our
intellectual property. These potential competitors may have
significantly greater financial, technical, and marketing
resources than we do, and the costs associated with asserting
our intellectual property rights against such products and such
potential competitors could be significant. Moreover, if such
alternative designs were determined by a court not to require a
license under our intellectual property rights, competition from
such unlicensed products could limit or reduce our revenues.
Additionally, if haptic technology gains market acceptance, more
research by universities
and/or
corporations or other parties may be performed potentially
leading to strong intellectual property positions by third
parties in certain areas of haptics or the launch of haptics
products before we commercialize our own technology.
Many of our current and potential competitors, including
Microsoft, are able to devote greater resources to the
development, promotion, and sale of their products and services.
In addition, many of our competitors have established marketing
relationships or access to larger customer bases, distributors,
and other business partners. As a result, our competitors might
be able to respond more quickly and effectively than we can to
new or changing opportunities, technologies, standards or
customer requirements. Further, some potential customers,
particularly large enterprises, may elect to develop their own
internal solutions. For all of these reasons, we may not be able
to compete successfully against our current and future
competitors.
Winning
business is subject to a competitive selection process that can
be lengthy and requires us to incur significant expense, and we
may not be selected.
Our primary focus is on winning competitive bid selection
processes, known as design wins, so that haptics
will be included in our customers equipment. These
selection processes can be lengthy and can require us to incur
significant design and development expenditures. We may not win
the competitive selection process and may never generate any
revenue despite incurring significant design and development
expenditures. Because we typically focus on only a few customers
in a product area, the loss of a design win can sometimes result
in our failure to get haptics added to new generation products.
This can result in lost sales and could hurt our position in
future competitive selection processes because we may not be
perceived as being a technology leader.
After winning a product design for one of our customers, we may
still experience delays in generating revenue from our products
as a result of the lengthy development and design cycle. In
addition, a delay or cancellation of a customers plans
could significantly adversely affect our financial results, as
we may have incurred significant expense and generated no
revenue. Finally, if our customers fail to successfully market
and sell their equipment it could materially adversely affect
our business, financial condition, and results of operations as
the demand for our products falls.
Automobiles
incorporating our touch-enabling technologies are subject to
lengthy product development periods, making it difficult to
predict when and whether we will receive automotive
royalties.
The product development process for automobiles is very lengthy,
sometimes longer than four years. We may not earn royalty
revenue on our automotive technologies unless and until
automobiles featuring our technologies are shipped to customers,
which may not occur until several years after we enter into an
agreement with an automobile manufacturer or a supplier to an
automobile manufacturer. Throughout the product development
process, we face the risk that an automobile manufacturer or
supplier may delay the incorporation of, or choose not to
incorporate, our technologies into its automobiles, making it
difficult for us to predict the automotive royalties we may
receive, if any. After the product launches, our royalties still
depend on market acceptance of the vehicle or the option
packages if our technology is an option (for example, a
navigation unit), which is likely to be determined by many
factors beyond our control.
23
We
have experienced significant change in our business, and we
cannot assure you that these changes will result in increased
revenue or profitability.
Our business has undergone significant changes in recent
periods, including the proposed divestiture of our 3D business,
new management, consolidation of our touch, gaming, and mobility
businesses and personnel changes and focus on additional target
markets. These changes have required significant investments of
cash and other resources, as well as managements time and
attention and have placed significant strains on our managerial,
financial, engineering, or other resources. We cannot assure you
that these efforts will result in growing our business
successfully or in increased operating performance.
Our
international expansion efforts subject us to additional risks
and costs.
We intend to expand international
activities. International operations are subject
to a number of difficulties and special costs, including:
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compliance with multiple, conflicting and changing governmental
laws and regulations;
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laws and business practices favoring local competitors;
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foreign exchange and currency risks;
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difficulty in collecting accounts receivable or longer payment
cycles;
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import and export restrictions and tariffs;
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difficulties staffing and managing foreign operations;
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difficulties and expense in enforcing intellectual property
rights;
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business risks, including fluctuations in demand for our
products and the cost and effort to conduct international
operations and travel abroad to promote international
distribution and overall global economic conditions;
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multiple conflicting tax laws and regulations; and
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political and economic instability.
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Our international operations could also increase our exposure to
international laws and regulations. If we cannot comply with
foreign laws and regulations, which are often complex and
subject to variation and unexpected changes, we could incur
unexpected costs and potential litigation. For example, the
governments of foreign countries might attempt to regulate our
products and services or levy sales or other taxes relating to
our activities. In addition, foreign countries may impose
tariffs, duties, price controls, or other restrictions on
foreign currencies or trade barriers, any of which could make it
more difficult for us to conduct our business.
Clent
Richardson, our chief executive officer, and other members of
our executive management team are relatively new and if there
are difficulties with this leadership transition it could impede
the execution of our business strategy.
Clent Richardson, our Chief Executive Officer, was hired in
April 2008, and other members of our executive management team
also joined us in 2008. Our success will depend to a significant
extent on their ability to implement a successful strategy, to
successfully lead and motivate our employees, and to work
effectively with other members of our executive management team
and board of directors. If this leadership transition is not
successful, our ability to execute our business strategy would
be impeded.
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
24
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 and award
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.
If our
facilities were to experience catastrophic loss, our operations
would be seriously harmed.
Our facilities could be subject to a catastrophic loss such as
fire, flood, earthquake, power outage, or terrorist activity. A
substantial portion of our research and development activities,
manufacturing, our corporate headquarters, and other critical
business operations are located near major earthquake faults in
San Jose, California, an area with a history of seismic
events. An earthquake at or near our facilities could disrupt
our operations, delay production and shipments of our products
or technologies, and result in large expenses to repair and
replace the facility. While we believe that we maintain
insurance sufficient to cover most long-term potential losses at
our facilities, our existing insurance may not be adequate for
all possible losses. In addition, California has experienced
problems with its power supply in recent years. As a result, we
have experienced utility cost increases and may experience
unexpected interruptions in our power supply that could have a
material adverse effect on our sales, results of operations, and
financial condition.
Investment
Risks
Our
quarterly revenues and operating results are volatile, and if
our future results are below the expectations of public market
analysts or investors, the price of our common stock is likely
to decline.
Our revenues and operating results are likely to vary
significantly from quarter to quarter due to a number of
factors, many of which are outside of our control and any of
which could cause the price of our common stock to decline.
These factors include:
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the establishment or loss of licensing relationships;
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the timing and recognition of payments under fixed
and/or
up-front license agreements;
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the timing of work performed under development agreements;
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the timing of our expenses, including costs related to
litigation, stock-based awards, acquisitions of technologies, or
businesses;
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the timing of introductions and market acceptance of new
products and product enhancements by us, our licensees, our
competitors, or their competitors;
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our ability to develop and improve our technologies;
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our ability to attract, integrate, and retain qualified
personnel;
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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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Our
stock price may fluctuate regardless of our
performance.
The stock market has experienced extreme volatility that often
has been unrelated or disproportionate to the performance of
particular companies. These market fluctuations may cause our
stock price to decline regardless of our performance. The market
price of our common stock has been, and in the future could be,
significantly affected by factors such as: actual or anticipated
fluctuations in operating results; announcements of technical
innovations; announcements regarding litigation in which we are
involved; changes by game console manufacturers to not include
touch-enabling capabilities in their products; new products or
new contracts; sales or the perception in the market of possible
sales of large number of shares of our common stock by insiders
or others; stock repurchase activity; changes in securities
analysts recommendations; changing circumstances regarding
competitors or their customers; governmental regulatory action;
developments with respect to patents or proprietary rights;
inclusion in or exclusion from various stock indices; and
general market conditions. In the past, following periods of
volatility in the market price of a companys securities,
securities class action litigation has been initiated against
that company.
Provisions
in our charter documents and Delaware law could prevent or delay
a change in control, which could reduce the market price of our
common stock.
Provisions in our certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or
changes in our board of directors or management, including the
following:
|
|
|
|
|
our board of directors is classified into three classes of
directors with staggered three-year terms;
|
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|
|
only our chairperson of the board of directors, a majority of
our board of directors or 10% or greater stockholders are
authorized to call a special meeting of stockholders;
|
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|
|
our stockholders can only take action at a meeting of
stockholders and not by written consent;
|
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|
|
vacancies on our board of directors can be filled only by our
board of directors and not by our stockholders;
|
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|
|
our restated certificate of incorporation authorizes
undesignated preferred stock, the terms of which may be
established and shares of which may be issued without
stockholder approval; and
|
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|
|
advance notice procedures apply for stockholders to nominate
candidates for election as directors or to bring matters before
an annual meeting of stockholders.
|
In addition, certain provisions of Delaware law may discourage,
delay, or prevent someone from acquiring or merging with us.
These provisions could limit the price that investors might be
willing to pay in the future for shares.
We may
engage in acquisitions that could dilute stockholders
interests, divert management attention, or cause integration
problems.
As part of our business strategy, we have in the past and may in
the future, acquire businesses or intellectual property that we
feel could complement our business, enhance our technical
capabilities, or increase our intellectual property portfolio.
The pursuit of potential acquisitions may divert the attention
of management and cause us to incur various expenses in
identifying, investigating, and pursuing suitable acquisitions,
whether or not they are consummated.
If we consummate acquisitions through the issuance of our
securities, our stockholders could suffer significant dilution.
Acquisitions could also create risks for us, including:
|
|
|
|
|
unanticipated costs associated with the acquisitions;
|
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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;
|
|
|
|
difficulties in assimilation of acquired personnel or operations;
|
|
|
|
failure to realize the anticipated benefits of acquired
intellectual property or other assets;
|
26
|
|
|
|
|
charges associated with amortization of acquired assets or
potential charges for write-down of assets associated with
unsuccessful acquisitions;
|
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|
|
potential intellectual property infringement claims related to
newly acquired product lines; and
|
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|
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potential costs associated with failed acquisition efforts.
|
Any acquisitions, even if successfully completed, might not
generate significant additional revenue or provide any benefit
to our business.
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.
The Sarbanes-Oxley Act of 2002 requires, among other things,
that we establish and maintain internal control over financial
reporting and disclosure controls and procedures. We must
perform system and process evaluation and testing of our
internal control over financial reporting to allow management to
report on the effectiveness of our internal control over
financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Our independent registered public accounting
firm is also required to report on our internal control over
financing reporting. Our and our auditors testing may
reveal deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses and render
our internal control over financial reporting ineffective. We
have incurred, and we expect to continue to incur, substantial
accounting and auditing expense and expend significant
management time in complying with the requirements of
Section 404. If we are not able to comply with the
requirements of Section 404 in a timely manner, or if we or
our independent registered public accounting firm identify
deficiencies in our internal control over financial reporting
that are deemed to be material weaknesses, the market price of
our stock could decline and we could be subject to
investigations or sanctions by the SEC, The NASDAQ Stock Market,
or NASDAQ, or other regulatory authorities, or become subject to
litigation. To the extent any material weaknesses in our
internal control over financial reporting are identified in the
future, we could be required to expend significant management
time and financial resources to correct such material weaknesses
or to respond to any resulting regulatory investigations or
proceedings.
We
have determined that our internal control over financial
reporting is currently ineffective.
As discussed in Part II, Item 9A, Controls and
Procedures, our management team, under the supervision and
with the participation of our Chief Financial Officer and
current Chief Executive Officer, conducted an evaluation of our
internal controls as of December 31, 2008. Management
concluded that we had a material weakness in internal controls
over financial reporting related to income taxes. We have
subsequently initiated actions that are intended to improve our
accounting for income taxes and the related internal controls.
Due to the continuing presence of this material weakness and the
ongoing implementation of remedial actions for this material
weakness as of December 31, 2008, management concluded that
our internal control over financial reporting was not effective
as of December 31, 2008. Any continuation of this 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.
As our
business grows, such growth may place a significant strain on
our management and operations and, as a result, our business may
suffer.
We plan to continue expanding our business, and any significant
growth could place a significant strain on our management
systems, infrastructure and other resources. We recently
transitioned the preparation of all of our internal reporting to
upgraded management information systems and are in the process
of implementing this system for all of our subsidiaries. If we
encounter problems with the implementation of these systems, we
may have difficulties preparing or tracking internal
information, which could adversely affect our financial results.
We will need to continue to invest the necessary capital to
upgrade and improve our operational, financial and management
reporting systems. If our management fails to manage our growth
effectively, we could experience increased costs, declines in
product quality, or customer satisfaction, which could harm our
business.
27
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We lease a facility in San Jose, California of
approximately 48,000 square feet, which serves as our
corporate headquarters and includes our sales, marketing,
administration, research and development, manufacturing, and
distribution functions for the Touch operating segment. Products
produced in San Jose include several of our touch interface
products, including rotary encoders, components to enable
tactile feedback in touchscreens, and various arcade gaming
products. The lease for this property expires in June 2014.
We lease a facility in Montreal, Quebec, Canada of approximately
9,200 square feet, for our subsidiary, Immersion Canada,
Inc. The facility is used for sales administration, research and
development, and administration 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 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, the Lap VR System, and the
insightArthroVR arthroscopy surgical simulator. The lease for
this property expires in May 2009. As part of our announced
consolidation of our medical operations to our San Jose,
California facilities, we will not renew this lease. 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 Espoo, Finland for use by our sales and
technical support function. The service agreement is cancelable
upon a three month notice.
We believe that our existing facilities are adequate to meet our
current needs.
|
|
Item 3.
|
Legal
Proceedings
|
In re
Immersion Corporation
We are involved in legal proceedings relating to a class action
lawsuit filed on November 9, 2001 in the U.S. District
Court for the Southern District of New York, In re Immersion
Corporation Initial Public Offering Securities Litigation,
No. Civ.
01-9975
(S.D.N.Y.), related to In re Initial Public Offering Securities
Litigation, No. 21 MC 92 (S.D.N.Y.). The named defendants
are Immersion and three of our current or former officers or
directors (the Immersion Defendants), and certain
underwriters of our November 12, 1999 initial public
offering (IPO). Subsequently, two of the individual
defendants stipulated to a dismissal without prejudice.
The operative amended complaint is brought on purported behalf
of all persons who purchased our common stock from the date of
our IPO through December 6, 2000. It alleges liability
under Sections 11 and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, on the grounds that the registration statement for the IPO
did not disclose that: (1) the underwriters agreed to allow
certain customers to purchase shares in the IPO in exchange for
excess commissions to be paid to the underwriters; and
(2) the underwriters arranged for certain customers to
purchase additional shares in the aftermarket at predetermined
prices. The complaint also appears to allege that false or
misleading analyst reports were issued. The complaint does not
claim any specific amount of damages.
Similar allegations were made in other lawsuits challenging over
300 other initial public offerings and follow-on offerings
conducted in 1999 and 2000. The cases were consolidated for
pretrial purposes. On February 19, 2003, the District Court
ruled on all defendants motions to dismiss. The motion was
denied as to claims under the Securities Act of 1933 in the case
involving us as well as in all other cases (except for 10
cases). The motion was denied as to the claim under
Section 10(b) as to us, on the basis that the complaint
alleged that we had made
28
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 September 2005, the District Court granted
preliminary approval of the settlement. The District 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. Thereafter, the District
Court ordered a stay of all proceedings in all of the lawsuits
pending the outcome of plaintiffs petition to the
U.S. Court of Appeals for 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. On March 26, 2008, the
District Court denied in part and granted in part the motions to
dismiss the focus cases on substantially the same grounds as set
forth in its prior opinion.
In September 2008, all of the parties to the lawsuits reached a
settlement, subject to documentation and approval of the
District Court. As before, the Immersion Defendants would not be
required to contribute to the settlement. Subsequently, an
underwriter defendant filed for bankruptcy and other underwriter
defendants were acquired. We believe that the settlement remains
in place, and that final documentation will be presented to the
District Court by April 1, 2009. If the settlement is not
consummated and then approved by the District Court, we intend
to defend the lawsuit vigorously.
Internet
Services LLC Litigation
On October 20, 2004, ISLLC filed claims against us in its
lawsuit against Sony Computer Entertainment in the
U.S. District Court for the Northern District of
California, 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 District Court issued an order dismissing ISLLCs
claims against Sony Computer Entertainment with prejudice and
dismissing ISLLCs claims against us without prejudice to
ISLLC. On January 12, 2005, ISLLC filed Amended
Cross-Claims and Counterclaims against us that contained similar
claims. On March 24, 2005, the District Court again
dismissed certain of these claims with prejudice and dismissed
the other claims without prejudice.
On February 8, 2006, ISLLC filed a lawsuit against us in
the Superior Court of Santa Clara County. ISLLCs
complaint sought a share of the damages awarded to us in the
Sony litigation and of the Microsoft settlement proceeds, and
generally restated the claims already adjudicated by the
District Court. On March 16, 2006, we answered the
complaint, cross claimed for declaratory relief, breach of
contract by ISLLC, and for rescission of the contract, and
removed the lawsuit to federal court. The case was assigned to
Judge Wilken in the U.S. District Court for the Northern
District of California as a case related to the previous
proceedings involving Sony Computer Entertainment and ISLLC. On
May 10, 2007, ISLLC filed a motion in the District Court to
remand its latest action to the Superior Court or in the
alternative for leave to file an amended complaint. We opposed
ISLLCs motion, and cross-moved for judgment on the
pleadings. On June 26, 2007, the District Court ruled on
the motions, denying ISLLCs motion to remand or for leave
to file an amended complaint, and granting in part our motion
for judgment on the pleadings. The District Court also dismissed
one of ISLLCs claims. However, on May 16, 2008, the
District Court entered an order granting our motion for summary
judgment on all of ISLLCs claims, as well as our
counterclaim for declaratory relief. As a result, the only
claims remaining in the action were our counterclaims against
ISLLC. On August 22, 2008, we settled our counterclaims
against ISLLC and amended the terms of our existing business
agreement with ISLLC. On August 25, 2008, the District
Court entered an order dismissing Immersions counterclaims
and closed the case.
29
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 alleged 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).
The complaint alleged that Microsoft was entitled to payments
that Microsoft contends are due under the Sublicense Agreement
as a result of Sony Computer Entertainments satisfaction
of the judgment in our lawsuit against Sony Computer
Entertainment and payment of other sums to us. In a letter sent
to us dated May 1, 2007, Microsoft stated that it believed
we owed Microsoft at least $27.5 million, an amount that
was subsequently increased to $35.6 million. Although we
disputed Microsofts allegations, on August 25, 2008
the parties agreed to settle all claims. The Company had made no
offers to settle prior to August 25, 2008. Under the terms
of the settlement, we paid Microsoft $20.8 million in
October 2008.
Immersion
Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp.,
and Simbionix Ltd.
On April 16, 2008, we announced that our wholly owned
subsidiary, Immersion Medical, Inc., filed lawsuits for patent
infringement in the United States District Court for the Eastern
District of Texas against Mentice AB, Mentice SA, Simbionix USA
Corp., and Simbionix Ltd (collectively the
Defendants), seeking damages and injunctive relief.
On July 11, 2008, Mentice AB and Mentice SA (collectively,
Mentice) answered the complaint by denying the
material allegations and alleging counterclaims seeking a
judicial declaration that the asserted patents were invalid,
unenforceable, or not infringed. On July 11, 2008,
Simbionix USA Corp. and Simbionix Ltd, (collectively,
Simbionix) filed a motion to stay or dismiss the
lawsuit, and a motion to transfer venue for convenience to Ohio.
On August 7, 2008, we filed our opposition to both motions
filed by Simbionix. The court has not ruled on the pending
motions. On December 2, 2008, the court held a status
conference in which it set a trial date for December 5,
2011 and a claim construction hearing for June 5, 2011.
We intend to vigorously prosecute this lawsuit.
|
|
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 2008.
30
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.
|
|
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|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal year ended December 31, 2008
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
6.35
|
|
|
$
|
2.72
|
|
Third Quarter
|
|
$
|
7.92
|
|
|
$
|
5.22
|
|
Second Quarter
|
|
$
|
11.82
|
|
|
$
|
6.43
|
|
First Quarter
|
|
$
|
13.38
|
|
|
$
|
6.61
|
|
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
|
|
On February 23, 2009, the closing price was $3.86 and there
were 142 holders of record of our common stock. Because many of
such shares are held by brokers and other institutions on behalf
of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
Issuer
Repurchases of Equity Securities
Below is a summary of stock repurchases for the quarter ending
December 31, 2008. See Note 10 of our consolidated
financial statements for information regarding our stock
repurchase program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
Average
|
|
|
Value that May
|
|
|
|
Shares
|
|
|
Price per
|
|
|
Yet Be Purchased
|
|
|
|
Repurchased(2)
|
|
|
Share
|
|
|
Under the Program
|
|
|
Program/Period(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning approximate dollar value available to be repurchased
as of September 30, 2008
|
|
|
|
|
|
|
|
|
|
$
|
36,648,689
|
|
October 1 October 31, 2008
|
|
|
920,000
|
|
|
$
|
5.23
|
|
|
|
|
|
November 1 November 30, 2008
|
|
|
40,000
|
|
|
$
|
5.75
|
|
|
|
|
|
December 1 December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
960,000
|
|
|
$
|
5.25
|
|
|
|
5,038,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending approximate dollar value that may be repurchased under
the Program as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
$
|
31,610,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On November 1, 2007, our Board of Directors authorized a
share repurchase program of up to $50,000,000. This share
repurchase authorization has no expiration date and does not
require us to repurchase a specific number of shares. The timing
and amount of any share repurchase will depend on the share
price, corporate and regulatory requirements, economic and
market conditions, and other factors. The repurchase
authorization may be modified, suspended, or discontinued at any
time. We have currently stopped repurchasing shares under this
share repurchase program. |
|
(2) |
|
All shares were repurchased on the open market as part of the
plan publicly announced on November 1, 2007. The
repurchases were effected by a single broker in market
transactions at prevailing market prices pursuant to a trading
plan designed to satisfy the conditions of Rule 10b5-1 under the
Securities and Exchange Act of 1934, as amended. |
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.
31
|
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
STATEMENTS OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
36,535
|
|
|
$
|
34,702
|
|
|
$
|
27,853
|
|
|
$
|
24,277
|
|
|
$
|
23,763
|
|
Cost and expenses(1)
|
|
|
82,842
|
|
|
|
(90,974
|
)
|
|
|
36,806
|
|
|
|
36,177
|
|
|
|
44,155
|
|
Operating income (loss)
|
|
|
(46,307
|
)
|
|
|
125,676
|
|
|
|
(8,953
|
)
|
|
|
(11,900
|
)
|
|
|
(20,392
|
)
|
Net income (loss)
|
|
|
(47,685
|
)
|
|
|
117,018
|
|
|
|
(10,424
|
)
|
|
|
(13,085
|
)
|
|
|
(20,738
|
)
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.61
|
)
|
|
$
|
4.23
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.91
|
)
|
Diluted
|
|
$
|
(1.61
|
)
|
|
$
|
3.71
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.91
|
)
|
Shares used in calculating net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,575
|
|
|
|
27,662
|
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
22,698
|
|
Diluted
|
|
|
29,575
|
|
|
|
31,667
|
|
|
|
24,556
|
|
|
|
24,027
|
|
|
|
22,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and short-term investments
|
|
$
|
85,743
|
|
|
$
|
138,112
|
|
|
$
|
32,012
|
|
|
$
|
28,171
|
|
|
$
|
25,538
|
|
Working capital
|
|
|
84,976
|
|
|
|
143,075
|
|
|
|
33,657
|
|
|
|
28,885
|
|
|
|
23,088
|
|
Total assets
|
|
|
113,191
|
|
|
|
168,368
|
|
|
|
50,015
|
|
|
|
44,760
|
|
|
|
42,250
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
|
|
|
|
18,122
|
|
|
|
17,490
|
|
|
|
16,917
|
|
Long-term customer advance from Microsoft.
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
Total stockholders equity (deficit)
|
|
|
81,423
|
|
|
|
141,787
|
|
|
|
(22,992
|
)
|
|
|
(16,795
|
)
|
|
|
(5,967
|
)
|
|
|
|
(1) |
|
2007 results include litigation settlements, conclusions, and
patent license income of $134.9 million. |
|
|
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.
32
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 collectability
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 either based on 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.
|
33
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 are 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 of fair value do
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 Share-Based Payment
(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 model, single-option approach to determine the
fair value of stock options, and ESPP shares. All share-based
payment awards are amortized on a straight-line basis over the
requisite service periods of the awards, which are generally the
vesting periods. The determination of the fair value of
stock-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective
variables. These variables include actual and projected employee
stock option exercise behaviors which impact the expected term
and forfeiture rates, our expected stock price volatility over
the term of the awards, risk-free interest rate, and expected
dividends.
34
Expected term We estimate the expected term
of options granted by calculating the average term from our
historical stock option exercise experience. We used the
simplified method as prescribed by SAB No. 107 for
options granted prior to January 1, 2008.
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 10 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. 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. 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.
35
Our assumptions, judgments, and estimates relative to the value
of a deferred tax asset take into account predictions of the
amount and category of future taxable income, such as income
from operations or capital gains income. Actual operating
results and the underlying amount and category of income in
future years could render inaccurate our current assumptions,
judgments, and estimates of recoverable net deferred taxes. Any
of the assumptions, judgments, and estimates mentioned above
could cause our actual income tax obligations to differ from our
estimates, thus materially impacting our financial position and
results of operations.
Litigation
Settlements, Conclusions, and Patent License
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 U.S. District Court
for the Northern District of California judgment against it. As
of March 19, 2007, we entered into a new business agreement
with Sony Computer Entertainment. We determined that the
conclusion of our litigation with Sony Computer Entertainment
did 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
seeked 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. On
August 25, 2008, the parties agreed to settle
Microsofts breach of contract claim as well as our
counterclaim. The settlement arrangement provided that we pay
Microsoft $20.8 million, which we paid in October 2008, and
the case was dismissed.
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. 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.
We follow the guidance provided by Financial Accounting
Standards Board (FASB) Staff Position
(FSP) 115-1/124-1 and EITF
No. 03-01
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments to
assess whether our investments with unrealized loss positions
are other than temporarily impaired. Realized gains and losses
and declines in value judged to be other than temporary are
determined based on the specific identification method and are
reported in the consolidated statement of operations. Factors
considered in determining whether a loss is temporary include
the length of time and extent to which fair value has been less
than the cost basis, the financial condition and near-term
prospects of the investee, and our intent and ability to hold
the investment for a period of time sufficient to allow for any
anticipated recovery in market value.
Effective January 1, 2008, we adopted the provisions of
SFAS No. 157, which defines fair value, establishes a
framework for measuring fair value, and expands disclosures
about fair value measurements required under other accounting
pronouncements. SFAS No. 157 clarifies that fair value
is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. SFAS No. 157
also requires that a fair value measurement reflect the
assumptions market participants would use in pricing an asset or
liability based on the best information available. Assumptions
include the risks inherent in a particular valuation technique
(such as a pricing model)
and/or the
risks inherent in the inputs to the model.
SFAS No. 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for
36
identical assets or liabilities (level 1 measurements) and
the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described below:
Level 1: Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical
unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are less active or
financial instruments for which all significant inputs are
observable, either directly or indirectly;
Level 3: Prices or valuations that require inputs that are
both significant to the fair value measurement and unobservable.
A financial instruments level within the fair value
hierarchy is based on the lowest level of any input that is
significant to the fair value measurement.
In February 2008, the Financial FASB issued FSP
No. 157-2
that delays the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually)
until fiscal years beginning after November 15, 2008. The
delay is intended to allow the FASB and constituents additional
time to consider the effect of various implementation issues
that have arisen, or that may arise, from the application of
SFAS No. 157. We continue to assess the impact that
FSP 157-2
may have on our consolidated financial position and results of
operations.
Further information about the application of
SFAS No. 157 may be found in Note 2 to the
consolidated financial statements.
Recovery
of Accounts Receivable
We maintain allowances for doubtful accounts for estimated
losses resulting from our review and assessment of our
customers ability to make required payments. If the
financial condition of one or more of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances might be required. 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 intangible assets. In
addition, we capitalize the external legal and filing fees
associated with patents and trademarks. We assess the
recoverability of our intangible assets, and we must make
assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets
that affect our consolidated financial statements. If these
estimates or related assumptions change in the future, we may be
required to record impairment charges for these assets. We
amortize our intangible assets related to patents and
trademarks, once they 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 2008, we capitalized costs
associated with patents and trademarks of $2.4 million. Our
total amortization expense for the same period for all
intangible assets was $779,000.
37
Restructuring
Costs
We calculate our Restructuring costs based upon our estimate of
workforce reduction costs, asset impairment charges, and other
appropriate charges resulting from a restructuring. The Company
accounts for restructuring costs in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and SFAS No. 146,
Accounting for Costs Associated with Exit of Disposal
Activities Based on our assumptions, judgments, and
estimates, we determine whether we need to record an impairment
charge to reduce the value of the asset carried on our balance
sheet to its estimated fair value. Assumptions, judgments and
estimates about future values are complex and often subjective.
They can be affected by a variety of factors, including external
factors such as industry and economic trends, and internal
factors such as changes in our business strategy.
The above listing is not intended to be a comprehensive list of
all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by GAAP, with no need for managements judgment in their
application. There are also areas in which managements
judgment in selecting any available alternative would not
produce a materially different result.
Results
of Operations
Overview
of 2008
During 2008, we achieved several milestones, including continued
growth in revenues. We continued to invest in research,
development, sales, and marketing across all our key business
segments. Key events in the year were as follows:
|
|
|
|
|
Revenue growth of 5% in 2008 over 2007, and royalty and license
revenue growth of 20% in 2008 over 2007.
|
|
|
|
We continued to have strong growth of Mobility revenues as shown
by the 106% increase in 2008 over 2007.
|
|
|
|
We announced the divestiture of our 3D product line, which we
expect to complete in 2009.
|
|
|
|
In August 2008, we settled our litigation with Microsoft and we
agreed to make a one-time payment to Microsoft in the amount of
$20.8 million, which was recorded in the third quarter of
2008 and paid in October 2008.
|
With our planned divestiture of the 3D product line we hope to
achieve cost reductions that can positively impact our future
financial results. With our plan to move the medical operating
segment to San Jose, we hope to achieve additional cost
reductions in 2009. In 2009, we expect to continue to focus on
the execution of plans in our established businesses to increase
revenue and make selected investments for product-based
solutions for longer-term growth areas. Our success could be
limited by several factors, including the current macro-economic
climate, the timely release of our new products and our
licensees products, continued market acceptance of our
products and technology, the introduction of new products by
existing or new competitors, and the cost of ongoing litigation.
For a further discussion of these and other risk factors, see
Item 1A Risk Factors.
38
The following table sets forth our statement of operations data
as a percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
|
39.0
|
%
|
|
|
34.3
|
%
|
|
|
26.2
|
%
|
Product sales
|
|
|
53.4
|
|
|
|
53.4
|
|
|
|
61.3
|
|
Development contracts and other
|
|
|
7.6
|
|
|
|
12.3
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales (exclusive of amortization of intangibles
shown separately below)
|
|
|
34.0
|
|
|
|
25.4
|
|
|
|
25.8
|
|
Sales and marketing
|
|
|
46.1
|
|
|
|
33.1
|
|
|
|
45.2
|
|
Research and development
|
|
|
34.4
|
|
|
|
29.0
|
|
|
|
27.3
|
|
General and administrative
|
|
|
51.8
|
|
|
|
36.2
|
|
|
|
36.2
|
|
Amortization of intangibles
|
|
|
2.1
|
|
|
|
2.9
|
|
|
|
3.5
|
|
Litigation settlements, conclusions, and patent license
|
|
|
56.8
|
|
|
|
(388.8
|
)
|
|
|
(5.9
|
)
|
Restructuring costs
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
226.7
|
|
|
|
(262.2
|
)
|
|
|
132.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(126.7
|
)
|
|
|
362.2
|
|
|
|
(32.1
|
)
|
Interest and other income
|
|
|
11.1
|
|
|
|
16.9
|
|
|
|
1.0
|
|
Interest and other expense
|
|
|
(0.7
|
)
|
|
|
(3.0
|
)
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(116.3
|
)
|
|
|
376.1
|
|
|
|
(36.9
|
)
|
Provision for income taxes
|
|
|
(14.2
|
)
|
|
|
(38.9
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(130.5
|
)%
|
|
|
337.2
|
%
|
|
|
(37.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended December 31, 2008, 2007, and 2006
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Royalty and license
|
|
$
|
14,254
|
|
|
|
20
|
%
|
|
$
|
11,881
|
|
|
|
63
|
%
|
|
$
|
7,304
|
|
Product sales
|
|
|
19,504
|
|
|
|
5
|
%
|
|
|
18,541
|
|
|
|
9
|
%
|
|
|
17,083
|
|
Development contracts and other
|
|
|
2,777
|
|
|
|
(35
|
)%
|
|
|
4,280
|
|
|
|
23
|
%
|
|
|
3,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
36,535
|
|
|
|
5
|
%
|
|
$
|
34,702
|
|
|
|
25
|
%
|
|
$
|
27,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008 Compared to Fiscal 2007
Total Revenue Our total revenue for the
year ended December 31, 2008 increased by
$1.8 million, or 5%, to $36.5 million, from
$34.7 million in 2007.
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
$2.4 million or 20% from 2007 to 2008 and was all from our
Touch segment. The increase in royalty and license revenue was
primarily a result of an increase in mobile device license and
royalty revenue of $2.1 million and an increase in gaming
royalties of $1.2 million, offset in part by a decrease in
royalties for touch interface products of $942,000.
Mobile device license and royalty revenue increased primarily
due to the increase in the shipment of TouchSense enabled phones
by LG Electronics that began in the second quarter of 2007, the
signing of a new license contract with mobile device
manufacturer Nokia at the end of the second quarter of 2007, and
the shipment of additional TouchSense enabled phones by our
licensees in 2008.
39
The increase in gaming royalties compared to 2007 was mainly due
to previously deferred royalty revenues from ISLLC totaling
$1.0 million which was recognized after we concluded our
litigation with them. There was also an increase in royalty and
license revenue from an increase in sales of new steering wheel
products from Logitech. In addition, there was a full year of
royalty and license revenue from first-party gaming licensee
Sony Computer Entertainment that increased revenue year over
year. Although the revenue from our third-party peripheral
licensees has generally continued to decline primarily due to
i) the reduced sales of past generation video console
systems due to the launches of the next-generation console
models from Microsoft (Xbox 360), Sony (PlayStation 3), and
Nintendo (Wii), and ii) the decline in third-party market
share of aftermarket game console controllers due to the launch
of next-generation peripherals by manufacturers of console
systems, we are seeing the decline begin to stabilize, as
manifested by the release of new steering wheel products from
Logitech for the PlayStation 3.
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.
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 would 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. In April 2008, Sony
released the PS3 DualShock 3 controller in the U.S. and
released a version in Europe in July of 2008. While a very
limited number of third party PS3 vibration and force feedback
products have been announced recently, including various
steering wheel models from Logitech, 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 11 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 $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 for Xbox 360, our gaming royalty
revenue may decline. Additionally, Microsoft is now making
touch-enabled wheels covered by its royalty-free, perpetual,
irrevocable license to our worldwide portfolio of patents that
could compete with our licensees current or future
products for which we earn per unit royalties. For the Nintendo
Wii video console system launched in December 2006, Nintendo
has, to date, not yet broadly licensed third parties to produce
game controllers for its Wii game console. Because our gaming
royalties come mainly from third-party manufacturers, unless
Nintendo broadens its licenses to third-party controller makers,
our gaming royalty revenue may decline.
Touch interface product royalties decreased mainly due to the
recognition of certain automotive royalty payments in the second
quarter of 2007 that did not recur. In addition, BMW has begun
to remove our technology from certain controller systems, that
also caused automotive royalties to decline. We expect that this
removal of our technology from certain controller systems will
cause our automotive royalty revenue to decline in the future,
which may be partially offset by new vehicles from other
manufactures brought to market.
Product sales Product sales increased by
$963,000 or 5% from 2007 to 2008. The increase in product sales
was primarily due to increased medical product sales of
$746,000, mainly due to increased sales of our endoscopy,
laparoscopy, and arthroscopy simulator platforms partially
offset by decreases in our endovascular simulators and a slight
decrease in our Virtual IV simulators. These increases were
primarily due to continued expansion of international sales for
all of our simulation platforms including increased sales of
laparoscopy simulators driven by our increased emphasis on the
laparoscopy platform and modules as well as the launch of an
arthroscopy simulator in the first half of 2008. Touch interface
products increased by $96,000 due to additional sales of
touchscreen and touch panel components, rotary modules, and
arcade entertainment products. 3D product sales increased by
$122,000 due to additional sales of our Microscribe, CyberGrasp,
CyberGlove, and CyberTouch products.
40
Development contracts and other
revenue Development contracts and other
revenue decreased by $1.5 million or 35% from 2007 to 2008.
Development contracts and other revenue is comprised of revenue
on commercial and government contracts. The decrease was mainly
attributable to a decrease in medical contract revenue of
$1.3 million due to the completion of work performed under
medical contracts that occurred in 2007 through the first six
months of 2008, and decreased touch interface product contract
revenue of $564,000 primarily due to contracts being completed
during the year. Partially offsetting this, there was increased
revenue recognized on mobile device development contracts and
support of $370,000. We do not currently have any government
projects in development. We continue to transition our
engineering resources from certain commercial development
contract efforts to product development efforts that focus on
leveraging our existing sales and channel distribution
capabilities.
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 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. In addition,
revenues from our third-party peripheral licensees generally
continued to decline primarily due to reduced sales of past
generation video console systems and the significant decline in
third-party market share of aftermarket game console controllers.
Mobile device license and royalty revenue increased due to the
shipment of more TouchSense 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.
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 $1.1 million
primarily due to the completion of work performed under a
medical government contract in 2006.
41
Cost of
Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Cost of product sales
|
|
$
|
12,441
|
|
|
|
41
|
%
|
|
$
|
8,808
|
|
|
|
22
|
%
|
|
$
|
7,193
|
|
% of product sales
|
|
|
64
|
%
|
|
|
|
|
|
|
48
|
%
|
|
|
|
|
|
|
42
|
%
|
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 $3.6 million or 41% from
2007 to 2008. The increase in cost of product sales was
primarily due to inventory impairment charges and charges
resulting from noncancelable inventory purchase orders due to
the divesting of the 3D product line of $2.1 million, an
increase of overhead costs of $411,000, increased direct
material costs of $402,000, increased provision for warranty and
repair costs of $212,000, an increase in excess and obsolete
inventory provisions of $159,000, and increased royalties of
$133,000. Inventory impairment charges and charges resulting
from non-cancelable purchase orders, was as a result of the
announcement in the fourth quarter of 2008 that the Company is
divesting its 3D product line (see Note 12 to the
consolidated financial statements for more discussion). Overhead
costs increased, in part, as a result of increased salary
expense from additional headcount and other costs of programs to
improve quality processes within our manufacturing operations.
The increase in direct material costs was mainly a result of
increased product sales and a higher percentage of sales of
certain medical products with higher costs. Royalty costs
increased due to increased sales of certain medical products
with associated royalty costs. Cost of product sales increased
as a percentage of product revenue to 64% in 2008 from 48% in
2007. This increase is mainly due to the charges resulting from
our announced divesting of our 3D product discussed above, the
increased overhead costs mentioned above, and sales increase of
certain medical products with higher costs in the product sales
mix. We expect our gross margin to trend upward somewhat during
2009 based on the resulting changes to our product mix due to
reduced lower margin 3D sales.
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
$93,000. The increase in direct material costs was primarily a
result of increased product sales. Overhead costs increased, in
part, as a result of increased salary expense primarily due to
increased headcount to support programs to improve quality
processes as well as other improvements within our manufacturing
operations that we anticipate will continue in 2008. Cost of
product sales increased as a percentage of product revenue to
48% in 2007 from 42% in 2006. This increase is mainly due to the
increased overhead costs mentioned above as well as increased
sales of our lower margin Virtual IV medical simulator
changing the sales mix.
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Sales and marketing
|
|
$
|
16,851
|
|
|
|
47
|
%
|
|
$
|
11,493
|
|
|
|
(9
|
)%
|
|
$
|
12,609
|
|
Research and development
|
|
|
12,555
|
|
|
|
25
|
%
|
|
|
10,056
|
|
|
|
32
|
%
|
|
|
7,609
|
|
General and administrative
|
|
|
18,929
|
|
|
|
51
|
%
|
|
|
12,567
|
|
|
|
25
|
%
|
|
|
10,076
|
|
Amortization of intangibles
|
|
|
779
|
|
|
|
(22
|
)%
|
|
|
1,002
|
|
|
|
3
|
%
|
|
|
969
|
|
Litigation conclusions and patent license
|
|
|
20,750
|
|
|
|
*
|
%
|
|
|
(134,900
|
)
|
|
|
*
|
%
|
|
|
(1,650
|
)
|
Restructuring costs
|
|
|
537
|
|
|
|
*
|
%
|
|
|
|
|
|
|
*
|
%
|
|
|
|
|
|
|
|
* |
|
Percentage not meaningful. |
Sales and Marketing Our sales and
marketing expenses are comprised primarily of employee
compensation and benefits, sales commissions, advertising, trade
shows, brochures, market development funds, travel, and an
allocation of facilities costs. Sales and marketing expenses
increased by $5.4 million or 47% in 2008 compared to 2007.
The increase was primarily due to increased compensation,
benefits, and overhead of $2.2 million, increased
marketing, advertising, and public relations costs of
$1.1 million, increased sales and marketing travel expense
of
42
$599,000, increased consulting costs of $593,000 to supplement
our sales and marketing staff, an increase in bad debt expense
of $384,000, increased office and facilities expenses of
$308,000, and increased employee recruiting costs of $141,000.
The increased sales and marketing expenses were primarily due to
an increase in sales and marketing headcount and the expanding
of our sales and marketing efforts internationally. In addition,
the increased compensation, benefits, and overhead expense was
mainly due to an increase in sales and marketing headcount,
increased compensation for sales and marketing personnel, and
increased non-cash stock based compensation charges. We expect
to continue to focus our sales and marketing efforts on medical
and touch market opportunities to build greater market
acceptance for our technologies as well as continue to 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 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.
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 $2.5 million or 25% in
2008 compared to 2007. The increase was primarily due to
increased compensation, benefits, and overhead expense of
$1.5 million, increased professional and consulting expense
of $585,000 to supplement our engineering staff, and an increase
in lab and prototyping expenses of $277,000 in support of sales
efforts. The increased compensation, benefits, and overhead
expense was primarily due to increased research and development
headcount and increased non-cash stock-based compensation
charges. We expect to move away from custom-engineering projects
and move to product-based solutions and believe that continued
significant investment in research and development is critical
to our future success, and we expect to make significant
investments in areas of research and technology development to
support future growth.
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 caused overall
research and development expenses to increase for the period.
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 $6.4 million or
51% in 2008 compared to 2007. The increase was primarily due to
increased legal, professional, and license fee expense of
$3.4 million, increased compensation, benefits, and
overhead of $2.4 million, increased travel costs of
$274,000, and increased supplies and office and facilities
expense of $183,000. The increased legal, professional, and
license fee expenses were primarily due to increased litigation
and other activities that we were engaged in, mainly the
litigation with Microsoft; increased consulting costs; and
increased recruiting costs due to management changes. The
increased compensation, benefits, and overhead expense was
primarily due to changes in executive personnel that resulted in
additional costs, increased general and administrative
headcount, increased compensation for general and administrative
personnel, and increased non-cash stock-based compensation
charges. 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 assert our
intellectual property rights and defend lawsuits brought against
us.
43
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.
Amortization of Intangibles Our
amortization of intangibles is comprised primarily of patent
amortization and other intangible amortization. Amortization of
intangibles decreased by $223,000 or 22% from 2007 to 2008. The
decrease was primarily attributable to some intangible assets
reaching full amortization partially offset by an increase from
the cost and number of new patents being amortized. 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.
Litigation Settlements, Conclusions, and Patent
License Litigation settlements,
conclusions, and patent license was $20.8 million of
expense for fiscal 2008, all of which related to our settlement
with Microsoft, compared to income of $134.9 million for
the same period in 2007, a change of $155.7 million.
Litigation settlements, conclusions, and patent license
increased by $133.2 million in 2007 compared to 2006. 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 paid to the
Company 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 Sony
Computer Entertainment and certain of its 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 its affiliates certain other licenses (relating to
PlayStation games, backward compatibility of future consoles,
and the use of their licensed products with certain third party
products), an option to obtain licenses in the future with
respect to future gaming products and certain releases and
covenants not to sue. Sony Computer Entertainment granted 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. Such deferred revenue was
$18.4 million as of December 31, 2008. We recorded
$2.4 million and $3.0 million as revenue for the years
ended December 31, 2007, and 2008, respectively. On
December 31, 2008, we had recorded $5.4 million of the
$30.0 million as revenue and will record the remaining
$24.6 million as revenue, on a straight-line basis, over
the remaining capture period of the patents licensed, ending
March 19, 2017. We accounted for future payments in
accordance with Accounting Principles Board Opinion No. 21
(ABP No. 21). Under APB No. 21, we
determined the present value of the $22.5 million future
payments to equal $20.2 million. We are accounting for the
difference of $2.3 million as interest income as each
$1.875 million quarterly payment installment becomes due.
This amount is accounted for at December 31, 2008 in
deferred revenue.
44
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
accounted for this sum during 2007 as litigation conclusions and
patent license income. However, 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. In a letter sent to us dated May 1, 2007,
Microsoft stated that it believed we owed Microsoft at least
$27.5 million, an amount that was subsequently increased to
$35.6 million. Although we disputed Microsofts
allegations, on August 25, 2008 the parties agreed to
settle all claims. We made no offers to settle prior to
August 25, 2008. Under the terms of the settlement, we paid
Microsoft $20.8 million in October 2008.
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 Restructuring costs
consist primarily of severance benefits paid as the result of
the reduction of workforce due to the announced divesting of the
3D product line of $105,000, severance benefits paid as the
result of the reduction of workforce due to business changes in
our Touch segment of $142,000, and reserves taken against
capitalized patent costs of $255,000 and fixed assets of $20,000
due to the proposed divesting of the 3D product line. There were
no restructuring charges incurred in the years ended 2006 or
2007. We do not anticipate any further costs in future periods
relating to these workforce reductions and divesting of the 3D
product line.
Interest
and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Interest and other income
|
|
$
|
4,046
|
|
|
|
(31
|
)%
|
|
$
|
5,854
|
|
|
|
2029
|
%
|
|
$
|
275
|
|
Interest and other expense
|
|
|
(250
|
)
|
|
|
(76
|
)%
|
|
|
(1,024
|
)
|
|
|
(36
|
)%
|
|
|
(1,602
|
)
|
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 decreased by
$1.8 million from 2007 to 2008. This was primarily the
result of decreased interest income due to a reduction in cash
equivalents and short-term investments and reduced interest
rates on cash, cash equivalents, and short-term investments.
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 Expense Interest and
other expense consists primarily of interest and accretion
expense on our 5% Senior Subordinated Convertible
Debentures (5% Convertible Debentures) and
accretion and dividend expense on our long-term customer advance
from Microsoft along with impairment losses on long term notes
receivable. Interest and other expense decreased by $774,000
from 2007 to 2008 due to the elimination of interest
45
expense from the conversion and redemption of our
5% Convertible Debentures during the third quarter of 2007
partially offset by impairment losses on long term notes
receivable. Interest and other expense decreased by $578,000
from 2006 to 2007 due to the conversion and redemption of our
5% Convertible Debentures during the third quarter of 2007.
See Note 7 to the consolidated financial statements.
Provision
for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Provision for income taxes
|
|
$
|
5,174
|
|
|
|
(62
|
)%
|
|
$
|
13,488
|
|
|
|
9267
|
%
|
|
$
|
144
|
|
Provision for Income Taxes For the year
ended 2008, we recorded a provision for income taxes of
$5.2 million yielding an effective tax rate of (12.2)%. The
current year tax provision is reflective of the recording of a
full valuation allowance against our entire deferred tax asset
balance in the period due to losses in fiscal 2008, the
variability of operating results, and near term projected
losses. Accordingly, the effective tax rate differs from the
statutory rate. For the year ended 2007, we recorded a provision
for income taxes of $13.5 million yielding an effective tax
rate of 10.3%. The 2007 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 13 to the consolidated financial statements. The
effective tax rate differs from the statutory rate primarily due
to the significant reduction in our valuation allowance against
deferred tax assets as we used the majority of our net operating
loss carryforwards against current year taxable income. 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 $11.1 million in 2006, are
taxable, thus giving rise to an overall taxable profit. The
effective tax rate differs from the statutory rate primarily due
to the recording of a full valuation allowance against deferred
tax assets.
Segment
Results for the Years Ended December 31, 2008, 2007, and
2006 are as follows:
We have two operating and reportable segments. One segment,
Touch, develops and markets touch feedback technologies that
enable software and hardware developers to enhance realism and
usability in their computing, entertainment, and industrial
applications. The second segment, Medical, develops,
manufactures, and markets medical training simulators that
recreate realistic healthcare environments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Touch
|
|
$
|
21,807
|
|
|
|
13
|
%
|
|
$
|
19,363
|
|
|
|
40
|
%
|
|
$
|
13,810
|
|
Medical
|
|
|
14,839
|
|
|
|
(4
|
)%
|
|
|
15,428
|
|
|
|
9
|
%
|
|
|
14,133
|
|
Intersegment eliminations
|
|
|
(111
|
)
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,535
|
|
|
|
5
|
%
|
|
$
|
34,702
|
|
|
|
25
|
%
|
|
$
|
27,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Touch
|
|
$
|
(41,375
|
)
|
|
|
(136
|
)%
|
|
$
|
116,405
|
|
|
|
1132
|
%
|
|
$
|
(11,278
|
)
|
Medical
|
|
|
(6,313
|
)
|
|
|
(1094
|
)%
|
|
|
635
|
|
|
|
(25
|
)%
|
|
|
845
|
|
Intersegment eliminations
|
|
|
3
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(47,685
|
)
|
|
|
(141
|
)%
|
|
$
|
117,018
|
|
|
|
1223
|
%
|
|
$
|
(10,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Segment assets and expenses relating to our corporate operations
are not allocated but are included in the Touch segment as that
is how they are considered for management evaluation purposes.
As a result, the segment information may not be indicative of
the financial position or results of operations that would have
been achieved had these segments operated as unaffiliated
entities. |
46
Fiscal
2008 Compared to Fiscal 2007
Touch segment Revenues from the Touch
segment increased by $2.4 million, or 13% in 2008 compared
to 2007. Royalty and license revenues increased by
$2.4 million, mainly due to an increase in mobile device
license and royalty revenue primarily due to the shipment of
additional TouchSense enabled phones, and an increase in gaming
royalties mainly due to the recognition of previously deferred
revenues from ISLLC and the increase in sales of new steering
wheel products from Logitech offset by a decrease in touch
interface product royalties mainly due to the recognition of
certain automotive royalty payments in the second quarter of
2007 that did not recur. Product sales increased by $255,000
primarily due to increased 3D product sales mainly from
increased sales of our CyberGlove, CyberGrasp, CyberTouch, and
MicroScribe products and an increase in product sales from touch
interface products, mainly due to increased sales of touchscreen
and touch panel components and increased sales of commercial
gaming products. Development contract revenue decreased by
$179,000 primarily due to reduced touch interface product
contract revenue partially offset by increased revenue on mobile
device development contracts and support. The segments
results changed by $157.8 million to a loss in 2008 as
compared to a profit in 2007. The change was primarily due to
increased litigation settlements, conclusions, and patent
license income of $134.9 million ($119.9 million from
Sony Computer Entertainment and $15.0 million related to
the release of the Microsoft long-term customer advance)
occurring in 2007 and the Microsoft settlement expense in 2008
of $20.8 million; an increase in general and administrative
expenses of $4.3 million; an increase in sales and
marketing expenses of $2.9 million; decreased interest and
other income of $1.8 million; an increase of research and
development expenses of $1.8 million, and increased
restructuring charges of $537,000. The change from income in
2007 to a loss in 2008 was partially offset by a decreased
provision for income taxes of $8.3 million and a decrease
in interest expense of $774,000 primarily due to the conversion
and redemption of our 5% Convertible Debentures. Gross
margin had minimal effect on segment net income as the gross
margin from the increased royalty and license revenue was
primarily offset by inventory impairment charges of
$2.0 million primarily due to the proposed divesting of the
3D product line.
Medical segment Revenues from Medical
decreased by $589,000 or 4%, from 2007 to 2008. The decrease was
primarily due to a decrease of $1.3 million in medical
development contract revenue due to work completed under medical
contracts in 2007, partially offset by an increase in product
sales of $746,000 mainly due to increased sales of our endoscopy
and Virtual IV simulator platforms. The decrease in medical
contracts also represents continued efforts to move away from
development work and concentrate on product sales and licensing.
The 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. The segments
results changed by $6.9 million to a loss in 2008 as
compared to a profit in 2007. The loss was mainly due to
increased sales and marketing expenses of $2.4 million as
the segment expands international sales and marketing efforts,
increased general and administrative expenses of
$2.1 million, mainly litigation and legal costs, a decrease
in gross margin of $1.7 million primarily due to decreased
sales and product sales mix, and increased research and
development expenses of $726,000. With our plan to move the
medical operating segment to San Jose, we hope to achieve
additional cost reductions in 2009.
Fiscal
2007 Compared to Fiscal 2006
Touch segment Revenues from the Touch
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
47
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.
Immersion Medical segment Revenues from
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.
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.
On December 31, 2008, our cash, cash equivalents, and
short-term investments totaled $85.7 million, a decrease of
$52.4 million from $138.1 million on December 31,
2007.
In March 2007, we concluded our patent infringement litigation
against Sony Computer Entertainment and we received
$97.3 million. Furthermore, we entered into a new business
agreement under which, we are to receive twelve quarterly
installments of $1.875 million for a total of
$22.5 million beginning on March 31, 2007 and ending
on December 31, 2009. As of December 31, 2008, we had
received eight of these installments.
On June 18, 2007, Microsoft filed a complaint against us in
the U.S. District Court for the Western District of
Washington alleging one claim for breach of a contract. After
conducting discovery and filing various motions, on
August 25, 2008 the parties agreed to settle all claims.
Under the terms of the settlement, we paid Microsoft
$20.8 million in October 2008.
Net cash used in operating activities during 2008 was
$30.4 million, a change of $114.9 million from the
$84.5 million provided by operating activities during 2007.
Cash used in operations during 2008 was primarily the result of
a net loss of $47.7 million, a decrease of
$1.7 million due to a change in accounts receivables, a
decrease of $1.5 million due to a change in other long-term
liabilities, a decrease of $415,000 due to a change in income
taxes payable, and a decrease of $191,000 due to a change in
prepaid expenses and other current assets. These decreases were
offset by an increase of $7.4 million due to a change in
deferred income taxes, a $3.3 million increase due to a
change in deferred revenue and customer advances and long-term
customer advance from Microsoft, an increase of
$2.5 million due to a change in accrued compensation and
other current liabilities, an increase of $1.5 million due
to a change in accounts payable, and an increase of $360,000 due
to a change in inventories. Cash provided by operations during
2008 was also impacted by noncash charges and credits of
$6.2 million, including $4.1 million of noncash
stock-based compensation, $1.2 million in depreciation and
amortization, $779,000 in amortization of intangibles, an
increase to allowance for doubtful accounts of $351,000,
partially offset by a credit of $200,000 from
48
excess tax benefits from stock-based compensation. 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
$15.2 million due to a change in income taxes payable, an
increase of $960,000 due to a change in other long-term
liabilities, and an increase of 620,000 due to a change in
accrued compensation and other current 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 $263,000 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 $8.4 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 investing activities during 2008 was
$25.3 million, compared to the $55.2 million used in
investing activities during 2007, an increase of
$80.5 million. Net cash provided by investing activities
during the period consisted of an increase in maturities or
sales of short-term investments of $90.0 million, partially
offset by purchases of short-term investments of
$59.2 million; $3.1 million used to purchase property
and equipment, and a $2.4 million increase in intangibles
and other assets, primarily due to capitalization of external
patent filing and application costs. 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 financing activities during 2008 was
$16.6 million compared to $25.2 million provided
during 2007, or a $41.8 million increase from the prior
year. Net cash used in financing activities for the period
consisted primarily of purchases of treasury stock of
$18.4 million, partially offset by issuances of common
stock and exercises of stock options and warrants in the amount
of $1.6 million, and an increase of $200,000 from excess
tax benefits from tax deductible stock-based compensation. 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 Debentures of
$1.4 million with the remainder converted to common stock.
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, 2009 will total approximately $3 million
in connection with anticipated maintenance and upgrades to
operations and infrastructure. 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. 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.
49
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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 and
|
|
|
2012 and
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
2009
|
|
|
2011
|
|
|
2013
|
|
|
2014
|
|
|
Operating Leases
|
|
$
|
3,555
|
|
|
$
|
928
|
|
|
$
|
1,250
|
|
|
$
|
1,094
|
|
|
$
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 13 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, 2008, we had a liability for unrecognized tax
benefits totaling $642,000 including interest of $15,000, of
which approximately $212,000 could be payable in cash. Due to
the uncertainties related to these tax matters, we are unable to
make a reasonably reliable estimate when cash settlement with a
taxing authority will occur. Settlement of such amounts could
require the utilization of working capital.
Recent
Accounting Pronouncements
See Note 1 to the consolidated financial statements for
information regarding the effect of new accounting
pronouncements on our financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. Changes in
these factors may cause fluctuations in our earnings and cash
flows. We evaluate and manage the exposure to these market risks
as follows:
Cash Equivalents and Short-term
Investments We have cash equivalents and
short-term investments of $83.4 million as of
December 31, 2008. 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 $110,000 decrease in the fair
value of our cash equivalents and short-term investments as of
December 31, 2008.
We limit our exposure to interest rate and credit risk by
establishing and monitoring clear policies and guidelines for
our cash equivalents and short-term investment portfolios. The
primary objective of our policies is to preserve principal while
at the same time maximizing yields, without significantly
increasing risk. Our 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 manage
interest rate risk.
Foreign Currency Exchange Rates A
substantial majority of our revenue, expense, and capital
purchasing activities are transacted in U.S. dollars.
However, we do incur certain operating costs for our foreign
operations in other currencies but these operations are limited
in scope and thus we are not materially exposed to foreign
currency fluctuations. Additionally we have some reliance on
international and export sales that are subject to the risks of
fluctuations in currency exchange rates. Because a substantial
majority of our international and export revenues, as well as
expenses, are typically denominated in U.S. dollars, a
strengthening of the U.S. dollar could cause our products
to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in
that country. We have no foreign exchange contracts, option
contracts, or other foreign currency hedging arrangements.
50
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
IMMERSION
CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
51
IMMERSION
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
64,769
|
|
|
$
|
86,493
|
|
Short-term investments
|
|
|
20,974
|
|
|
|
51,619
|
|
Accounts receivable (net of allowances for doubtful accounts of:
|
|
|
|
|
|
|
|
|
2008 $436; 2007 $85)
|
|
|
6,829
|
|
|
|
5,494
|
|
Inventories, net
|
|
|
3,396
|
|
|
|
3,674
|
|
Deferred income taxes
|
|
|
226
|
|
|
|
3,351
|
|
Prepaid expenses and other current assets
|
|
|
3,225
|
|
|
|
3,036
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
99,419
|
|
|
|
153,667
|
|
Property and equipment, net
|
|
|
3,827
|
|
|
|
2,112
|
|
Deferred income tax assets, net
|
|
|
|
|
|
|
4,031
|
|
Intangibles and other assets, net
|
|
|
9,945
|
|
|
|
8,558
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
113,191
|
|
|
$
|
168,368
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,842
|
|
|
$
|
1,657
|
|
Accrued compensation
|
|
|
3,010
|
|
|
|
1,828
|
|
Other current liabilities
|
|
|
3,466
|
|
|
|
2,629
|
|
Deferred revenue and customer advances (Note 6)
|
|
|
5,125
|
|
|
|
4,478
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,443
|
|
|
|
10,592
|
|
Long-term deferred revenue, less current portion
|
|
|
16,887
|
|
|
|
14,269
|
|
Deferred income tax liabilities
|
|
|
226
|
|
|
|
|
|
Other long-term liabilities
|
|
|
212
|
|
|
|
1,720
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,768
|
|
|
|
26,581
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 9 and 16)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock and additional paid-in capital
$0.001 par value; 100,000,000 shares authorized;
shares issued: December 31,
2008 30,674,045 and December 31, 2007 -
30,389,850; shares outstanding: December 31,
2008 27,887,482 and December 31,
2007 30,389,850
|
|
|
165,885
|
|
|
|
160,147
|
|
Warrants
|
|
|
1,731
|
|
|
|
1,731
|
|
Accumulated other comprehensive income
|
|
|
109
|
|
|
|
137
|
|
Accumulated deficit
|
|
|
(67,913
|
)
|
|
|
(20,228
|
)
|
Treasury stock at cost: December 31, 2008
2,786,563 shares and December 31, 2007
0 shares
|
|
|
(18,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
81,423
|
|
|
|
141,787
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
113,191
|
|
|
$
|
168,368
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
52
IMMERSION
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty and license
|
|
$
|
14,254
|
|
|
$
|
11,881
|
|
|
$
|
7,304
|
|
Product sales
|
|
|
19,504
|
|
|
|
18,541
|
|
|
|
17,083
|
|
Development contracts and other
|
|
|
2,777
|
|
|
|
4,280
|
|
|
|
3,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
36,535
|
|
|
|
34,702
|
|
|
|
27,853
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales (exclusive of amortization of intangibles
shown separately below)
|
|
|
12,441
|
|
|
|
8,808
|
|
|
|
7,193
|
|
Sales and marketing
|
|
|
16,851
|
|
|
|
11,493
|
|
|
|
12,609
|
|
Research and development
|
|
|
12,555
|
|
|
|
10,056
|
|
|
|
7,609
|
|
General and administrative
|
|
|
18,929
|
|
|
|
12,567
|
|
|
|
10,076
|
|
Amortization of intangibles
|
|
|
779
|
|
|
|
1,002
|
|
|
|
969
|
|
Litigation settlements, conclusions, and patent license
|
|
|
20,750
|
|
|
|
(134,900
|
)
|
|
|
(1,650
|
)
|
Restructuring costs
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
82,842
|
|
|
|
(90,974
|
)
|
|
|
36,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(46,307
|
)
|
|
|
125,676
|
|
|
|
(8,953
|
)
|
Interest and other income
|
|
|
4,046
|
|
|
|
5,854
|
|
|
|
275
|
|
Interest and other expense
|
|
|
(250
|
)
|
|
|
(1,024
|
)
|
|
|
(1,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(42,511
|
)
|
|
|
130,506
|
|
|
|
(10,280
|
)
|
Provision for income taxes
|
|
|
(5,174
|
)
|
|
|
(13,488
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(47,685
|
)
|
|
$
|
117,018
|
|
|
$
|
(10,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(1.61
|
)
|
|
$
|
4.23
|
|
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating basic net income (loss) per share
|
|
|
29,575
|
|
|
|
27,662
|
|
|
|
24,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(1.61
|
)
|
|
$
|
3.71
|
|
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted net income (loss) per share
|
|
|
29,575
|
|
|
|
31,667
|
|
|
|
24,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
53
IMMERSION
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock and
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
Total
|
|
|
|
Additional Paid-In Capital
|
|
|
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Equity
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Warrants
|
|
|
Income
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balances at January 1, 2006
|
|
|
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
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,685
|
)
|
|
|
|
|
|
|
|
|
|
|
(47,685
|
)
|
|
$
|
(47,685
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
(39
|
)
|
Unrealized gain (loss) on
available-for-sale
securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(47,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for ESPP purchase
|
|
|
47,158
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
|
|
|
Exercise of stock options
|
|
|
237,037
|
|
|
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,253
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
4,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,058
|
|
|
|
|
|
Tax benefits from stock-based compensation
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,786,563
|
|
|
|
(18,389
|
)
|
|
|
(18,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
30,674,045
|
|
|
$
|
165,885
|
|
|
$
|
1,731
|
|
|
$
|
109
|
|
|
$
|
(67,913
|
)
|
|
|
2,786,563
|
|
|
$
|
(18,389
|
)
|
|
$
|
81,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
54
IMMERSION
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(47,685
|
)
|
|
$
|
117,018
|
|
|
$
|
(10,424
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,210
|
|
|
|
911
|
|
|
|
772
|
|
Amortization of intangibles
|
|
|
779
|
|
|
|
1,002
|
|
|
|
969
|
|
Stock-based compensation
|
|
|
4,058
|
|
|
|
2,729
|
|
|
|
2,937
|
|
Excess tax benefits from stock-based compensation
|
|
|
(200
|
)
|
|
|
(13,505
|
)
|
|
|
(36
|
)
|
Realized gain on short-term investments
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
Allowance (recovery) for doubtful accounts
|
|
|
351
|
|
|
|
(54
|
)
|
|
|
(244
|
)
|
Interest expense accretion on 5% Convertible
Debenture
|
|
|
|
|
|
|
535
|
|
|
|
632
|
|
Fair value adjustment of Put Option and Registration Rights
|
|
|
|
|
|
|
(15
|
)
|
|
|
(34
|
)
|
Loss on disposal of equipment
|
|
|
93
|
|
|
|
15
|
|
|
|
15
|
|
Write off of intangibles
|
|
|
|
|
|
|
|
|
|
|
69
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,726
|
)
|
|
|
(263
|
)
|
|
|
(259
|
)
|
Inventories
|
|
|
360
|
|
|
|
(965
|
)
|
|
|
79
|
|
Deferred income taxes
|
|
|
7,382
|
|
|
|
(7,382
|
)
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(191
|
)
|
|
|
(1,842
|
)
|
|
|
(71
|
)
|
Other assets
|
|
|
12
|
|
|
|
(62
|
)
|
|
|
|
|
Accounts payable
|
|
|
1,473
|
|
|
|
(618
|
)
|
|
|
191
|
|
Accrued compensation and other current liabilities
|
|
|
2,474
|
|
|
|
620
|
|
|
|
516
|
|
Income taxes payable
|
|
|
(415
|
)
|
|
|
15,184
|
|
|
|
|
|
Deferred revenue and customer advances and long-term customer
advance from Microsoft.
|
|
|
3,265
|
|
|
|
(29,753
|
)
|
|
|
9,465
|
|
Other long-term liabilities
|
|
|
(1,508
|
)
|
|
|
960
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(30,349
|
)
|
|
|
84,515
|
|
|
|
5,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(59,242
|
)
|
|
|
(96,719
|
)
|
|
|
|
|
Maturities or sales of short-term investments
|
|
|
89,978
|
|
|
|
45,110
|
|
|
|
|
|
Intangibles and other assets
|
|
|
(2,389
|
)
|
|
|
(2,113
|
)
|
|
|
(1,614
|
)
|
Purchases of property and equipment
|
|
|
(3,090
|
)
|
|
|
(1,438
|
)
|
|
|
(1,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
25,257
|
|
|
|
(55,160
|
)
|
|
|
(2,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
330
|
|
|
|
317
|
|
|
|
242
|
|
Exercise of stock options and warrants
|
|
|
1,253
|
|
|
|
12,738
|
|
|
|
1,009
|
|
Excess tax benefits from stock-based compensation
|
|
|
200
|
|
|
|
13,505
|
|
|
|
36
|
|
Payment on long-term debt
|
|
|
|
|
|
|
(1,400
|
)
|
|
|
(5
|
)
|
Purchases of treasury stock
|
|
|
(18,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(16,606
|
)
|
|
|
25,160
|
|
|
|
1,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(26
|
)
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(21,724
|
)
|
|
|
54,481
|
|
|
|
3,841
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
86,493
|
|
|
|
32,012
|
|
|
|
28,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
64,769
|
|
|
$
|
86,493
|
|
|
$
|
32,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for taxes
|
|
$
|
(1,586
|
)
|
|
$
|
6,882
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
572
|
|
|
$
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the conversion of
the 5% Convertible Debentures
|
|
$
|
|
|
|
$
|
17,257
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts accrued for property and equipment, and intangibles
|
|
$
|
605
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
55
IMMERSION
CORPORATION
Years
Ended December 31, 2008, 2007, and 2006
|
|
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 2006 and 2007
presentation to conform to the 2008 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.
56
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 utilizing
the straight-line method, which approximates the pattern of
consumption over the estimated useful lives of the respective
assets, generally ten years.
Long-lived
Assets
The Company evaluates its long-lived assets for impairment 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.
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
(SAB No. 104), 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
57
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
service has been rendered, the fee is fixed and determinable,
and collectability 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 either based on the royalty reports
received or amortized over the license period depending on the
nature of the agreement. Advance payments under license
agreements that also require the Company to provide future
services to the licensee are deferred and recognized over the
service period when vendor-specific objective evidence
(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.
Product sales The Company recognizes revenues
from product sales when the product is shipped, provided the
other revenue recognition criteria are 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.
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
58
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Advertising
Advertising costs (including obligations under cooperative
marketing programs) are expensed as incurred and included in
sales and marketing expense. Advertising expense was $229,000,
$102,000, and $279,000 in 2008, 2007, and 2006, 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.
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
59
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2007, and 2008. See Note 10 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 valuation of
short-term investments, income taxes including uncertain tax
provisions, revenue recognition, stock-based compensation,
contingent liabilities from litigation, and accruals for other
liabilities. Actual results could differ from those estimates.
Concentration
of Credit Risks
Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of cash, cash
equivalents, short term investments, and accounts receivable.
The Company invests primarily in money market accounts and
highly liquid instruments purchased with an original or
remaining maturity of greater than 90 days on the date of
purchase. Deposits held with banks may exceed the amount of
insurance provided on such deposits. Generally, these deposits
may be redeemed upon demand. The Company sells products
primarily to companies in North America, Europe, and the Far
East. To reduce credit risk, management performs periodic credit
evaluations of its customers financial condition. The
Company maintains reserves for estimated potential credit
losses, but historically has not experienced any significant
losses related to individual customers or groups of customers in
any particular industry or geographic area.
Certain
Significant Risks and Uncertainties
The Company operates in a dynamic industry and, accordingly, can
be affected by a variety of factors. For example, management of
the Company believes that changes in any of the following areas
could have a negative effect on the Company in terms of its
future financial position and results of operations: the mix of
revenues; the loss of significant customers; fundamental changes
in the technology underlying the Companys products; market
acceptance of the Companys and its licensees
products under development; the availability of contract
manufacturing capacity; development of sales channels;
litigation or other claims in which the Company is involved; the
ability to successfully assert its patent rights against others;
the impact of the global economic downturn; the hiring,
training, and retention of key employees; successful and timely
completion of product and technology development efforts; and
new product or technology introductions by competitors.
60
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 was effective on January 1, 2008.
The Company did not elect the fair value option for any of its
financial instruments, therefore the adoption of
SFAS No. 159 did not impact the consolidated financial
statements.
In April 2008, the FASB issued FSP
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
No. FAS 142-3).
FSP
No. FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under Statement of
SFAS No. 142, Goodwill and Other Intangible
Assets. FSP
No. FAS 142-3
is effective for fiscal years beginning after December 15,
2008. The Company is currently assessing the impact that FSP
No. FAS 142-3
will have on its results of operations, financial position, or
cash flows.
In December 2007, the FASB issued SFAS No. 141
(revised 2007) (SFAS No. 141(R)),
Business Combinations, which replaces SFAS No
141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in
purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and
development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141(R)
is effective for the Company beginning January 1, 2009 and
will be applied prospectively to business combinations completed
on or after that date. The impact of the adoption of
SFAS No. 141(R) will depend on the nature and extent
of any business combinations occurring on or after
January 1, 2009.
61
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Fair
Value Disclosures
|
Short-term
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Holding Gains
|
|
|
Holding Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Commercial paper
|
|
$
|
9,980
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
9,980
|
|
Government agency securities
|
|
|
10,975
|
|
|
|
18
|
|
|
|
|
|
|
|
10,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,955
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
20,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
securities on December 31, 2008 and December 31, 2007
were all due in one year or less.
Cash
Equivalents and Short-term Investments
The financial assets of the Company measured at fair value on a
recurring basis are cash equivalents and short-term investments.
The Companys cash equivalents and short-term investments
are generally classified within Level 1 or Level 2 of
the fair value hierarchy because they are valued using quoted
market prices, broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency.
The types of instruments valued based on quoted market prices in
active markets, include most U.S. government agency
securities and most money market securities. Such instruments
are generally classified within Level 1 of the fair value
hierarchy.
The types of instruments valued based on quoted prices in
markets that are less active, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price
transparency, include most investment-grade corporate commercial
paper. Such instruments are generally classified within
Level 2 of the fair value hierarchy.
The following table sets forth the Companys cash
equivalents and short-term investments that are measured at fair
value on a recurring basis by level within the fair value
hierarchy as of December 31, 2008. As required by
SFAS No. 157, these are classified based on the lowest
level of input that is significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement using
|
|
|
Assets at
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
fair value
|
|
|
|
(In thousands)
|
|
|
Corporate commercial paper
|
|
$
|
|
|
|
$
|
24,971
|
|
|
$
|
|
|
|
$
|
24,971
|
|
U.S. Government agency securities
|
|
|
23,978
|
|
|
|
|
|
|
|
|
|
|
|
23,978
|
|
Money market accounts
|
|
|
34,429
|
|
|
|
|
|
|
|
|
|
|
|
34,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,407
|
|
|
$
|
24,971
|
|
|
$
|
|
|
|
$
|
83,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The above table excludes $2.4 million of cash held in banks.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Raw materials and subassemblies
|
|
$
|
3,119
|
|
|
$
|
2,843
|
|
Work in process
|
|
|
209
|
|
|
|
179
|
|
Finished goods
|
|
|
68
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
3,396
|
|
|
$
|
3,674
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Computer equipment and purchased software
|
|
$
|
4,735
|
|
|
$
|
3,195
|
|
Machinery and equipment
|
|
|
3,269
|
|
|
|
2,532
|
|
Furniture and fixtures
|
|
|
1,336
|
|
|
|
1,212
|
|
Leasehold improvements
|
|
|
1,261
|
|
|
|
1,267
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,601
|
|
|
|
8,206
|
|
Less accumulated depreciation
|
|
|
(6,774
|
)
|
|
|
(6,094
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,827
|
|
|
$
|
2,112
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Intangibles
and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Patents and technology
|
|
$
|
17,283
|
|
|
$
|
15,105
|
|
Other assets
|
|
|
156
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
Gross intangibles and other assets
|
|
|
17,439
|
|
|
|
15,272
|
|
Accumulated amortization of patents and technology
|
|
|
(7,494
|
)
|
|
|
(6,714
|
)
|
|
|
|
|
|
|
|
|
|
Intangibles and other assets, net
|
|
$
|
9,945
|
|
|
$
|
8,558
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles during the years ended
December 31, 2008, 2007, and 2006 was $779,000,
$1.0 million and $969,000, respectively. The estimated
annual amortization expense for intangible assets as of
December 31, 2008 is $1.3 million in 2009,
$1.2 million in 2010, $1.1 million in 2011,
$1.1 million in 2012, $1.0 million in 2013, and
$4.2 million in total for all years thereafter, assuming no
future acquisitions, write-offs, or impairment charges.
63
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Components
of Other Current Liabilities and Deferred Revenue and Customer
Advances
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accrued legal
|
|
$
|
491
|
|
|
$
|
417
|
|
Income taxes payable
|
|
|
9
|
|
|
|
534
|
|
Other current liabilities
|
|
|
2,966
|
|
|
|
1,678
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
3,466
|
|
|
$
|
2,629
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current
|
|
$
|
5,037
|
|
|
$
|
4,352
|
|
Customer advances
|
|
|
88
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue, current and customer advances
|
|
$
|
5,125
|
|
|
$
|
4,478
|
|
|
|
|
|
|
|
|
|
|
5% Senior Subordinated Convertible Debentures
(5% Convertible Debentures)
On December 23, 2004, the Company issued an aggregate
principal amount of $20.0 million of 5% Convertible
Debentures. The 5% Convertible Debentures original maturity
date was December 22, 2009. On July 27, 2007, the
Company announced that it had notified the holders of its
5% Convertible Debentures of its intent to redeem all of
the 5% Convertible Debentures in full, pursuant to the
mandatory redemption provision. Approximately $20.1 million
of principal and accrued interest was then outstanding under the
5% Convertible Debentures. Under the terms of the
5% Convertible Debentures, once the closing bid price of
the Companys common stock exceeded $14.053 per share for
20 consecutive trading days, the Company could redeem the
5% Convertible Debentures at the end of a
30-day
notice period. Prior to the end of the
30-day
period, the holders of the 5% Convertible Debenture could
have elected to convert the principal and accrued interest
outstanding into shares of the Companys common stock at a
conversion price of $7.0265 per share. The 5% Convertible
Debentures ceased to accrue further interest upon the
Companys election to affect the mandatory redemption.
During the notice period, $17.2 million of
5% Convertible Debentures and approximately $67,000 of
accrued interest were converted into 2,656,677 shares of
common stock. At the end of the notice period, $1.4 million
of 5% Convertible Debentures were redeemed for cash.
Interest expense of approximately $106,000 was incurred from
unaccreted interest recognized upon the redemption of
$1.4 million of 5% Convertible Debentures. Amounts
outstanding at both December 31, 2008 and 2007 were $0.
|
|
8.
|
Long-term
Deferred Revenue
|
On December 31, 2008, long-term deferred revenue was
$16.9 million and included approximately $15.4 million
of deferred revenue from Sony Computer Entertainment. See
Note 11 for further discussion. 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.
The Company leases several of its facilities, vehicles, and some
office equipment under noncancelable operating lease
arrangements that expire at various dates through 2014.
64
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Minimum future lease payments are as follows:
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
928
|
|
2010
|
|
|
695
|
|
2011
|
|
|
555
|
|
2012
|
|
|
539
|
|
2013
|
|
|
555
|
|
Thereafter
|
|
|
283
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
3,555
|
|
|
|
|
|
|
Rent expense was $1.2 million, $1.2 million, and
$1.1 million in 2008, 2007, and 2006, respectively.
|
|
10.
|
Stock-based
Compensation
|
The Companys equity incentive program is a long-term
retention program that is intended to attract, retain, and
provide incentives for talented employees, consultants,
officers, and directors, and to align stockholder and employee
interests. Essentially all of the Companys employees
participate in the equity incentive program. The Company may
grant options, stock appreciation rights, restricted stock,
restricted stock units (RSUs), performance
shares, performance units, and other stock-based or cash-based
awards to employees, directors, and consultants. Since
inception, the Company has approved programs that allow the
recipient the right to purchase up to 19,434,593 shares of
its common stock. Under these programs, stock options may be
granted at prices not less than the fair market value on the
date of grant for incentive stock options and not less than 85%
of fair market value on the date of grant for nonstatutory stock
options. These options generally vest over 4 years.
RSUs generally vest over 3 years and expire
10 years from the date of grant. On December 31, 2008,
2,638,924 shares of common stock were available for grant,
and there were 7,009,667 options to purchase shares of common
stock outstanding, as well as 34,500 RSUs outstanding.
On June 6, 2007, the Companys stockholders approved
the Immersion Corporation 2007 Equity Incentive Plan (the
2007 Plan). The 2007 Plan replaced the
Companys 1997 Stock Option Plan (the 1997
Plan). Effective June 6, 2007, the 1997 Plan was
terminated. Under the 2007 Plan, the Company may grant stock
options, stock appreciation rights, restricted stock,
RSUs, performance shares, performance units, and other
stock-based or cash-based awards to employees and consultants.
The 2007 Plan also authorizes the grant of awards of stock
options, stock appreciation rights, restricted stock, and
restricted stock units to non-employee members of the
Companys Board of Directors and deferred compensation
awards to officers, directors, and certain management or highly
compensated employees. The 2007 Plan authorizes the issuance of
2,303,232 shares of the Companys common stock, and up
to an additional 1,000,000 shares subject to awards that
remain outstanding under the 1997 Plan as of June 6, 2007
and which subsequently terminate without having been exercised
or which are forfeited to the Company.
On April 30, 2008, the Companys Board of Directors
approved the issuance of equity awards under the Immersion
Corporation 2008 Employment Inducement Award Plan (the
2008 Plan). Under the 2008 Plan, the Company may
issue awards in the form of stock options, stock appreciation
rights, restricted stock purchase rights, restricted stock
bonuses, restricted stock units (RSUs),
performance shares, performance units, deferred compensation
awards, and other cash and stock awards. Such awards may be
granted to new employees who had not previously been a director
or former employees or directors whose period of service was
followed by a bona-fide period of non-employment.
65
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
each January 1 hereafter through January 1, 2010 by an
amount equal to the lesser of 500,000 shares per year or a
number of shares determined by the Board of Directors. As of
December 31, 2008, 397,813 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 during the year ended
December 31, 2008.
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, 2006 (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
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(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 (3,774,245 exercisable at
a weighted average price of $9.11 per share)
|
|
|
6,014,370
|
|
|
|
9.11
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $4.84 per share)
|
|
|
2,438,775
|
|
|
|
8.43
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(237,037
|
)
|
|
|
5.29
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,206,441
|
)
|
|
|
8.35
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
7,009,667
|
|
|
$
|
9.13
|
|
|
|
5.49
|
|
|
$
|
1.9 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
4,055,180
|
|
|
$
|
9.35
|
|
|
|
3.48
|
|
|
$
|
1.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There were 1,283 options that net settled in 2007. |
66
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The number of shares subject to options expected to vest as of
December 31, 2008 is approximately 5.9 million.
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underlying awards and the
quoted price of the Companys common stock for the options
that were in-the-money at December 31, 2008. The aggregate
intrinsic value of options exercised under the Companys
stock option plans, determined as of the date of option exercise
was $786,800 for the year ended December 31, 2008.
Additional information regarding options outstanding as of
December 31, 2008 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
|
$ 5.91
|
|
|
|
704,756
|
|
|
|
5.11
|
|
|
$
|
3.23
|
|
|
|
576,713
|
|
|
$
|
2.79
|
|
|
5.92
|
6.79
|
|
|
|
815,212
|
|
|
|
6.45
|
|
|
|
6.22
|
|
|
|
489,468
|
|
|
|
6.32
|
|
|
6.81
|
7.00
|
|
|
|
1,038,774
|
|
|
|
5.33
|
|
|
|
6.97
|
|
|
|
907,081
|
|
|
|
6.98
|
|
|
7.02
|
8.61
|
|
|
|
1,199,991
|
|
|
|
7.25
|
|
|
|
8.18
|
|
|
|
275,706
|
|
|
|
7.85
|
|
|
8.67
|
9.01
|
|
|
|
788,778
|
|
|
|
1.54
|
|
|
|
8.99
|
|
|
|
570,321
|
|
|
|
8.98
|
|
|
9.04
|
9.24
|
|
|
|
772,671
|
|
|
|
5.31
|
|
|
|
9.09
|
|
|
|
471,121
|
|
|
|
9.13
|
|
|
9.47
|
9.81
|
|
|
|
704,000
|
|
|
|
9.11
|
|
|
|
9.81
|
|
|
|
1,000
|
|
|
|
9.47
|
|
|
10.00
|
17.27
|
|
|
|
721,051
|
|
|
|
4.63
|
|
|
|
13.81
|
|
|
|
499,336
|
|
|
|
13.30
|
|
|
23.13
|
34.75
|
|
|
|
239,548
|
|
|
|
1.15
|
|
|
|
31.58
|
|
|
|
239,548
|
|
|
|
31.58
|
|
|
43.25
|
43.25
|
|
|
|
24,886
|
|
|
|
1.28
|
|
|
|
43.25
|
|
|
|
24,886
|
|
|
|
43.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.20
|
$43.25
|
|
|
|
7,009,667
|
|
|
|
5.49
|
|
|
$
|
9.13
|
|
|
|
4,055,180
|
|
|
$
|
9.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
Restricted stock unit activity for the twelve months ended
December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of Shares
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
Beginning balance at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
34,500
|
|
|
|
|
|
|
|
|
|
Released
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at December 31, 2008
|
|
|
34,500
|
|
|
|
1.33
|
|
|
$
|
203,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to Vest
|
|
|
26,098
|
|
|
|
1.33
|
|
|
$
|
153,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the market value
as of the end of the reporting period.
Stock-based
Compensation
Valuation and amortization method The
Company uses the Black-Scholes-Merton option pricing model
(Black-Scholes model), single-option approach to
determine the fair value of stock options and ESPP shares. All
share-based payment awards are amortized on a straight-line
basis over the requisite service periods of the awards, which
are generally the vesting periods. The determination of the fair
value of stock-based payment
67
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards on the date of grant using an option-pricing model is
affected by the Companys stock price as well as
assumptions regarding a number of complex and subjective
variables. These variables include actual and projected employee
stock option exercise behaviors, the Companys expected
stock price volatility over the term of the awards, risk-free
interest rate, and expected dividends.
Expected term The Company estimates the
expected term of options granted by calculating the average term
from the Companys historical stock option exercise
experience. The expected term of ESPP shares is the length of
the offering period. The Company used the simplified method as
prescribed by SAB No. 107 for options granted prior to
December 31, 2007.
Expected volatility The Company estimates
the volatility of its common stock taking into consideration its
historical stock price movement, 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.
The assumptions used to value option grants and shares under the
ESPP are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Employee Stock Purchase Plan
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected life (in years)
|
|
|
5.5
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Interest rate
|
|
|
2.7
|
%
|
|
|
4.5
|
%
|
|
|
4.8
|
%
|
|
|
2.0
|
%
|
|
|
5.1
|
%
|
|
|
4.9
|
%
|
Volatility
|
|
|
63
|
%
|
|
|
60
|
%
|
|
|
62
|
%
|
|
|
88
|
%
|
|
|
50
|
%
|
|
|
51
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation recognized in the consolidated
statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Income Statement Classifications
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
$
|
158
|
|
|
$
|
101
|
|
Sales and marketing
|
|
|
1,073
|
|
|
|
850
|
|
Research and development
|
|
|
893
|
|
|
|
636
|
|
General and administrative
|
|
|
1,933
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,058
|
|
|
$
|
2,729
|
|
|
|
|
|
|
|
|
|
|
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, 2008, and 2007, the Company recorded
$200,000 and $13.5 million, respectively, of excess tax
benefits from stock-based compensation.
68
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2008, there was $10.7 million of
unrecognized compensation cost, adjusted for estimated
forfeitures, related to non-vested stock options and RSUs
granted to the Companys employees and directors. This cost
will be recognized over an estimated weighted-average period of
approximately 2.90 years for options and 2.10 years
for RSUs. Total unrecognized compensation cost will be adjusted
for future changes in estimated forfeitures.
Warrants
On December 23, 2004, the Company, in conjunction with the
5% Convertible Debentures (see Note 7), issued
warrants to purchase an aggregate of 426,951 shares of its
common stock at an exercise price of $7.0265 per share. 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.
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.
During the twelve months ended December 31, 2008, the
Company repurchased 2.8 million shares for
$18.4 million at an average cost of $6.60 through open
market repurchases. This amount is classified as treasury stock
on the Companys consolidated balance sheet.
|
|
11.
|
Litigation
Settlement, Conclusions, and Patent License
|
In 2003, the Company executed a series of agreements with
Microsoft that provided for settlement of its lawsuit against
Microsoft as well as various licensing, sublicensing, and equity
and financing arrangements. Under the terms of these agreements,
in the event that the Company elected to settle the action in
the United States District Court for the Northern District of
California entitled Immersion Corporation v. Sony
Computer Entertainment of America, Inc., Sony Computer
Entertainment Inc. and Microsoft Corporation, Case
No. C02-00710
CW (WDB), as such action pertains to Sony Computer
Entertainment, and grant certain rights, the Company would be
obligated to pay Microsoft a minimum of $15.0 million for
amounts up to $100.0 million received from Sony Computer
Entertainment, plus 25% of amounts over $100.0 million up
to $150.0 million, and 17.5% of amounts over
$150.0 million. The Company determined that the conclusion
of its litigation with Sony Computer Entertainment did not
trigger any payment obligations under its Microsoft agreements.
Accordingly, the liability of $15.0 million that was in the
financial statements at December 31, 2006 was extinguished,
and the Company accounted for this sum during 2007 as litigation
conclusions and patent license income. However, on June 18,
2007, Microsoft filed a complaint against the Company in the
U.S. District Court for the Western District of Washington
alleging one claim for breach of a contract. Microsoft alleged
that the Company breached a Sublicense Agreement
executed in connection with the parties settlement in 2003
of the Companys claims of patent infringement against
Microsoft. The complaint alleged that Microsoft was entitled to
payments that Microsoft contends are due under the Sublicense
Agreement as a result of Sony Computer Entertainments
satisfaction of the judgment in the Companys lawsuit
69
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
against Sony Computer Entertainment and payment of other sums to
the Company. In a letter sent to the Company dated May 1,
2007, Microsoft stated that it believed the Company owed
Microsoft at least $27.5 million, an amount that was
subsequently increased to $35.6 million. Although the
company disputed Microsofts allegations, on
August 25, 2008 the parties agreed to settle all claims.
The Company had made no offers to settle prior to
August 25, 2008. Under the terms of the settlement, the
Company paid Microsoft $20.8 million in October 2008.
In March 2007, the Companys patent infringement litigation
with Sony Computer Entertainment concluded. Sony Computer
Entertainment satisfied the judgment against it from the United
States District Court for the Northern District of California,
which included damages, pre-judgment interest, costs and
interest totaling $97.3 million, along with compulsory
license fees already paid to the Company of $30.6 million
and interest earned on these fees of $1.8 million. As of
March 19, 2007, the Company and Sony Computer Entertainment
entered into an agreement whereby the Company granted Sony
Computer Entertainment and certain of its affiliates a
worldwide, non-transferable, non-exclusive license under the
Companys patents that have issued, may issue, or claim a
priority date before March 2017 for the going forward use,
development, manufacture, sale, lease, importation, and
distribution of Sony Computer Entertainments current and
past PlayStation and related products. The license does not
cover adult, foundry, medical, automotive, industrial, mobility,
or gambling products. Subject to the terms of the agreement, the
Company also granted Sony Computer Entertainment and certain of
its affiliates certain other licenses (relating to PlayStation
games, backward compatibility of future consoles, and the use of
their licensed products with certain third party products), an
option to obtain licenses in the future with respect to future
gaming products and certain releases and covenants not to sue.
Sony Computer Entertainment granted the Company certain
covenants not to sue and agreed to pay the Company twelve
quarterly installments of $1.875 million (for a total of
$22.5 million) beginning on March 31, 2007 and ending
on December 31, 2009, and may pay the Company certain other
fees and royalty amounts. In total, the Company will receive a
minimum of $152.2 million through the conclusion of the
litigation and the business agreement. In accordance with the
guidance from 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 $18.4 million at December 31, 2008. The
Company recorded $2.4 million and $3.0 million as
revenue for the years ended December 31, 2007, and 2008,
respectively. On December 31, 2008, the Company had
recorded $5.4 million of the $30.0 million as revenue
and will record the remaining $24.6 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 Accounting
Principles Board Opinion No. 21 (ABP
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. This amount is accounted for at December 31, 2008 in
deferred revenue.
On October 20, 2004, Internet Services LLC
(ISLLC) filed claims against the Company in its
lawsuit against Sony Computer Entertainment in the
U.S. District Court for the Northern District of
California, alleging that the Company breached a contract with
ISLLC by suing Sony Computer Entertainment for patent
infringement relating to haptically-enabled software whose
topics or images are allegedly age-restricted, for judicial
apportionment of damages between ISLLC and the Company of the
damages awarded by the jury, and for a judicial declaration with
respect to ISLLCs rights and duties under agreements with
the Company. On December 29, 2004, the District Court
issued an order dismissing ISLLCs claims against Sony
Computer Entertainment with prejudice and dismissing
ISLLCs claims against the Company without prejudice to
ISLLC. On January 12, 2005, ISLLC filed Amended
Cross-Claims and Counterclaims against the Company that
contained similar claims. On March 24, 2005, the District
Court again dismissed certain of these claims with prejudice and
dismissed the other claims without prejudice.
On February 8, 2006, ISLLC filed a lawsuit against the
Company in the Superior Court of Santa Clara County.
ISLLCs complaint sought a share of the damages awarded to
the Company in the Sony litigation and of the
70
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Microsoft settlement proceeds, and generally restated the claims
already adjudicated by the District Court. On March 16,
2006, the Company answered the complaint, cross claimed for
declaratory relief, breach of contract by ISLLC, and for
rescission of the contract, and removed the lawsuit to federal
court. The case was assigned to Judge Wilken in the
U.S. District Court for the Northern District of California
as a case related to the previous proceedings involving Sony
Computer Entertainment and ISLLC. On May 10, 2007, ISLLC
filed a motion in the District Court to remand its latest action
to the Superior Court, or in the alternative, for leave to file
an amended complaint. The Company opposed ISLLCs motion,
and cross-moved for judgment on the pleadings. On June 26,
2007, the District Court ruled on the motions, denying
ISLLCs motion to remand or for leave to file an amended
complaint, and granting in part the Companys motion for
judgment on the pleadings. The District Court also dismissed one
of ISLLCs claims. However, on May 16, 2008, the
District Court entered an order granting the Companys
motion for summary judgment on all of ISLLCs claims, as
well as the Companys counterclaim for declaratory relief.
As a result, the only claims remaining in the action were the
Companys counterclaims against ISLLC. On August 22,
2008, the Company settled its counterclaims against ISLLC and
amended the terms of its existing business agreement with ISLLC.
On August 25, 2008, the District Court entered an order
dismissing the Companys counterclaims and closed the case.
For the year ended December 31, 2008, the Company
recognized $1.1 million in royalty and license revenue as
of result of this settlement with ISLLC.
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.
On November 17, 2008, the Company announced that it will
divest its 3D product line which is part of the Touch segment.
The Companys 3D product line consists of a variety of
products in the area of 3D digitizing, 3D measurement and
inspection, and 3D interaction and includes products such as
MicroScribe digitizers, CyberGlove family of products and a
SoftMouse 3D positioning device. The sales price was not
material to our financial condition or results of operations.
The Company intends to cease operations of the 3D product line
by the end of the first quarter of 2009. The Company will
dispose of assets relating to the 3D product line if it is
unable to find an acceptable buyer for any or all of those
assets. Approximately 13 people associated with the 3D
product line have been terminated and will no longer be on the
Companys payroll by the end of the first quarter of 2009.
In addition at the end of the fourth quarter of 2008, there have
been other reorganizations in the Companys Touch segment
causing certain additional workforce reductions.
The Company accounts for restructuring costs in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and SFAS No. 146,
Accounting for Costs Associated with Exit of Disposal
Activities. There were no restructuring charges incurred
in the years ended 2006 or 2007. The following
71
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
table sets forth the one-time charges that are included in the
restructuring line on the Companys Consolidated Statement
of Operations for the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Year Ended December 31, 2008
|
|
|
2008
|
|
|
|
|
|
|
Deduct Cash
|
|
|
Non-Cash
|
|
|
Restructuring
|
|
|
|
Add Charges
|
|
|
Payments
|
|
|
Expense
|
|
|
Reserves
|
|
|
3D Product Workforce Reductions
|
|
$
|
105
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
105
|
|
Other Workforce Reductions
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
Asset Impairments
|
|
|
275
|
|
|
|
|
|
|
|
275
|
|
|
|
|
|
Other
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
537
|
|
|
$
|
|
|
|
$
|
275
|
|
|
$
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
The Company recorded restructuring charges of $105,000
consisting of severance benefits paid as the result of the
reduction of workforce due to the divesting of the 3D product
line. The Company also recorded restructuring charges of
$142,000 consisting of severance benefits paid as the result of
the reduction of workforce due to business changes in the
Companys Touch segment. Workforce reduction costs are
included in accrued compensation on the Companys balance
sheet. All of the severance benefits are expected to be paid in
the first quarter of 2009 with the exception of certain COBRA
costs that will be paid by the end of 2009.
Asset
Impairments
Asset impairments contained in restructuring charges include
reserves taken against capitalized patent costs of $255,000 and
fixed assets write-offs of $20,000 due to the divesting of the
3D product line. The Company also took an additional inventory
impairment charge of $2.0 million of the 3D product
inventory that is included in cost of product sales.
For the years ended December 31, 2008, 2007, and 2006, the
Company recorded provision for income taxes of
$5.2 million, $13.5 million, and $144,000,
respectively, yielding effective tax rates of 12.2%, 10.3%, and
1.4%, respectively. The 2008 provision for income tax resulted
from recording a valuation allowance on specific deferred tax
assets and foreign withholding tax expense. The 2007 provision
for income tax was based on federal and state regular income tax
payable on taxable income and foreign withholding tax expense.
The 2006 provision for income tax was based on federal and state
alternative minimum income tax payable and foreign withholding
tax expense.
For 2008, the Company reported pre-tax book income (loss) of
($42.5) million primarily due to the litigation conclusion
and settlement of its lawsuit against Microsoft. For 2007 and
2006, the Company reported pre-tax book income (loss) of
$130.5 million and ($10.3) million.
The domestic and foreign components of income(loss) before
provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(42,797
|
)
|
|
$
|
130,374
|
|
|
$
|
(8,823
|
)
|
Foreign
|
|
|
286
|
|
|
|
132
|
|
|
|
(1,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(42,511
|
)
|
|
$
|
130,506
|
|
|
$
|
(10,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States federal
|
|
$
|
(2,799
|
)
|
|
$
|
16,471
|
|
|
$
|
70
|
|
Foreign
|
|
|
443
|
|
|
|
126
|
|
|
|
74
|
|
State and local
|
|
|
148
|
|
|
|
4,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(2,208
|
)
|
|
|
20,870
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States federal
|
|
|
6,583
|
|
|
|
(6,583
|
)
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local
|
|
|
799
|
|
|
|
(799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
7,382
|
|
|
|
(7,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,174
|
|
|
$
|
13,488
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys income tax receivable for federal purposes
had been increased by the tax benefits from employee stock
options. The net tax benefits from employee stock option
transactions were $97,000 for 2008 and were 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 2007 were
$14.7 million and for 2006 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 tax assets and liabilities are recognized for the
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes, tax losses, and credit
carryforwards. Significant components of the net deferred tax
assets and liabilities consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
12,083
|
|
|
$
|
1,747
|
|
State income taxes
|
|
|
1
|
|
|
|
781
|
|
Deferred revenue
|
|
|
5,933
|
|
|
|
5,182
|
|
Research and development credits
|
|
|
4,088
|
|
|
|
1,214
|
|
Reserves and accruals recognized in different periods
|
|
|
3,458
|
|
|
|
1,417
|
|
Basis difference in investment
|
|
|
1,255
|
|
|
|
1,276
|
|
Capitalized R&D expenses
|
|
|
1,355
|
|
|
|
1,502
|
|
Other
|
|
|
1
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
28,174
|
|
|
|
13,392
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(3,626
|
)
|
|
|
(2,503
|
)
|
Valuation allowance
|
|
|
(24,548
|
)
|
|
|
(3,507
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
7,382
|
|
|
|
|
|
|
|
|
|
|
73
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, the net operating loss
carryforwards for federal and state income tax purposes were
approximately $28.1 million and $37.2 million,
respectively. The federal net operating losses expire between
2019 and 2028 and the state net operating losses begin to expire
in 2029. As of December 31, 2008, the Company had federal
and state tax credit carryforwards of approximately
$3.4 million and $33,000, respectively, available to offset
future taxable income. The federal credit carryforwards will
expire between 2009 and 2028 and the California tax credits will
carryforward indefinitely. In addition, as of December 31,
2008, the Company has Canadian research and development credit
carryforwards of $1.0 million, which will expire at various
dates through 2028. 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 operating loss and credits carryforwards
have not been reviewed by the relevant tax authorities and could
be subject to adjustment upon examinations.
During 2008, the Company recorded a valuation allowance for the
entire deferred tax asset as a result of uncertainties regarding
the realization of the asset balance due to losses in fiscal
2008, the variability of operating results, and near term
projected results. In the event that the Company determines the
deferred tax asset are realizable, an adjustment to the
valuation allowance may increase income in the period such
determination is made. The valuation allowance does not impact
the Companys ability to utilize the underlying net
operating loss carryforwards.
Utilization of a portion of the Companys federal net
operating loss carryforward is limited in accordance with IRC
Section 382, due to an ownership change that occurred
during 1999. Utilization of these losses is limited to
approximately $1.1 million annually. The remaining unused
loss of $2.8 million will expire between 2019 and 2020, if
not utilized. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal statutory tax rate
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
State taxes, net of federal benefit
|
|
|
(3.5
|
)
|
|
|
3.9
|
|
|
|
(5.8
|
)
|
Non-deductible interest
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
8.8
|
|
Stock compensation expense
|
|
|
0.9
|
|
|
|
0.2
|
|
|
|
4.0
|
|
Other
|
|
|
(0.5
|
)
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
Valuation allowance
|
|
|
50.3
|
|
|
|
(28.8
|
)
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
12.2
|
%
|
|
|
10.3
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the
provision of Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting
for Uncertain Income Taxes An interpretation of FASB
Statement No. 109 (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
74
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2008
|
|
$
|
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, 2008
|
|
$
|
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, 2008, the Company accrued interest or
penalties related to uncertain tax positions in the amount of
$15,000. The Company does not expect any material changes to its
liability for unrecognized income tax benefits during the next
12 months. As of December 31, 2008, the total amount
of unrecognized tax benefits that would affect the
Companys effective tax rate, if recognized, is $212,000.
Because the Company has net operating loss and credit
carryforwards, there are open statutes of limitations in which
federal, state and foreign taxing authorities may examine the
Companys tax returns for all years from 1993 through the
current period.
|
|
14.
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used in computing basic net income (loss) per
share
|
|
$
|
(47,685
|
)
|
|
$
|
117,018
|
|
|
$
|
(10,424
|
)
|
Interest on 5% Convertible Debentures
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used in computing diluted net income (loss)
per share
|
|
$
|
(47,685
|
)
|
|
$
|
117,366
|
|
|
$
|
(10,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of basic net income (loss) per share
(weighted average common shares outstanding)
|
|
|
29,575
|
|
|
|
27,662
|
|
|
|
24,556
|
|
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
|
|
|
29,575
|
|
|
|
31,667
|
|
|
|
24,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(1.61
|
)
|
|
$
|
4.23
|
|
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(1.61
|
)
|
|
$
|
3.71
|
|
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2008 and 2006, 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,
|
|
|
|
2008
|
|
|
2006
|
|
|
Outstanding stock options
|
|
|
7,009,667
|
|
|
|
7,585,423
|
|
Unvested Restricted Stock Units
|
|
|
34,500
|
|
|
|
|
|
Warrants
|
|
|
434,332
|
|
|
|
808,762
|
|
5% Senior Subordinated Convertible Debentures
|
|
|
|
|
|
|
2,846,363
|
|
|
|
15.
|
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. Beginning in January 2008, the Company matched 25% of
the employees contribution up to $2,000 for the year. The
Company contributed approximately $149,000 during the year ended
December 31, 2008. The Company did not make any
contributions during the years ended December 31, 2007 or
2006.
In re
Immersion Corporation
The Company is involved in legal proceedings relating to a class
action lawsuit filed on November 9, 2001 in the
U.S. District Court for the Southern District of New York,
In re Immersion Corporation Initial Public Offering
Securities Litigation, No. Civ.
01-9975
(S.D.N.Y.), related to In re Initial Public Offering Securities
Litigation, 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 District Court
ruled on all defendants motions to dismiss. The motion was
denied as to claims under the Securities Act of 1933 in the case
involving 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.
76
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company and most of the issuer defendants had settled with
the plaintiffs. In September 2005, the District Court granted
preliminary approval of the settlement. The District Court held
a hearing to consider final approval of the settlement on
April 24, 2006, and took the matter under submission.
Subsequently, the U.S. Court of Appeals for the Second
Circuit vacated the class certification of plaintiffs
claims against the underwriters in six cases designated as focus
or test cases. 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. On March 26, 2008, the
District Court denied in part and granted in part the motions to
dismiss the focus cases on substantially the same grounds as set
forth in its prior opinion.
In September 2008, all of the parties to the lawsuits reached a
settlement, subject to documentation and approval of the
District Court. As before, the Immersion Defendants would not be
required to contribute to the settlement. Subsequently, an
underwriter defendant filed for bankruptcy and other underwriter
defendants were acquired. We believe that the settlement remains
in place, and that final documentation will be presented to the
District Court by April 1, 2009. If the settlement is not
consummated and then approved by the District Court, we intend
to defend the lawsuit vigorously.
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.
|
|
17.
|
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) Touch (previously
called Immersion Computing, Entertainment, and Industrial), and
2) 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.
77
IMMERSION
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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:
Touch develops and markets touch feedback technologies that
enable software and hardware developers to enhance realism and
usability in their computing, entertainment, and industrial
applications. Medical develops, manufactures, and markets
medical training simulators that recreate realistic healthcare
environments.
78
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
|
|
|
|
|
|
|
Touch
|
|
|
Medical
|
|
|
Eliminations(4)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|