-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jhoqm670FbDJJRk5M0C5iKlEWHnAH5mwO4SwWHRsiEa+PLXvto2+xH6acAe1kh39 1ZmX3T5ozLSNMD6Hj1Cqtg== 0000891618-99-004919.txt : 19991108 0000891618-99-004919.hdr.sgml : 19991108 ACCESSION NUMBER: 0000891618-99-004919 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19991105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMMERSION CORP CENTRAL INDEX KEY: 0001058811 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 943180138 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-86361 FILM NUMBER: 99742480 BUSINESS ADDRESS: STREET 1: 2158 PARAGON DR CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084671900 MAIL ADDRESS: STREET 1: 2158 PARAGON DR CITY: SAN JOSE STATE: CA ZIP: 95131 S-1/A 1 AMENDMENT #4 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1999 REGISTRATION NO. 333-86361 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 IMMERSION CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3577 94-3180138 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
2158 PARAGON DRIVE SAN JOSE, CALIFORNIA 95131 (408) 467-1900 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------ LOUIS B. ROSENBERG CHIEF EXECUTIVE OFFICER IMMERSION CORPORATION 2158 PARAGON DRIVE SAN JOSE, CALIFORNIA 95131 (408) 467-1900 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: BRUCE SCHAEFFER, ESQ. LAIRD H. SIMONS, III, ESQ. TOM FURLONG, ESQ. KATHERINE TALLMAN SCHUDA, ESQ. PAMELA B. BURKE, ESQ. CYNTHIA E. GARABEDIAN, ESQ. GRAY CARY WARE & FREIDENRICH LLP FENWICK & WEST LLP 400 HAMILTON AVENUE TWO PALO ALTO SQUARE PALO ALTO, CALIFORNIA 94301-1825 PALO ALTO, CALIFORNIA 94306 (650) 328-6561 (650) 494-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] ------------------ CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTERED(1) SHARE(2) PRICE REGISTRATION FEE(3) - ---------------------------------------------------------------------------------------------------------------------- Common Stock ($0.001 par value)...................... 4,887,500 $11.00 $53,762,500 $14,946 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
(1) Includes 637,500 shares which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(a) promulgated under the Securities Act. (3) Previously paid in connection with the filing of Immersion's Registration Statement on Form S-1 (File No. 333-86361) on September 1, 1999. ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES, IN ANY STATE WHERE SUCH AN OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1999 PROSPECTUS 4,250,000 SHARES IMMERSION.LOGO COMMON STOCK This is an initial public offering of common stock by Immersion Corporation. The estimated initial public offering price is between $9.00 and $11.00 per share. ------------------ We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol IMMR. ------------------
PER SHARE TOTAL --------- ----- Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Immersion Corporation, before expenses.......... $ $
Immersion Corporation and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to 637,500 additional shares of common stock. ------------------ INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------ Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. HAMBRECHT & QUIST BEAR, STEARNS & CO. INC. ROBERTSON STEPHENS , 1999 3 COVER PAGE ART [Art: Rendition of a human hand reaching out to touch a computer cursor] Headline Above the Illustration: "Immersion currently focuses on licensing its TouchSense technology in the entertainment and personal computer markets. In the entertainment market, our licensees manufacture products such as the joystick, steering wheel and gamepad shown on the following pages. To target the mouse market, we have licensed Logitech to manufacture the first computer mouse enabled with our technology which Logitech recently began shipping. We have historically derived a majority of our revenues and will continue to derive revenues from product sales, including sales of digitizing, medical simulation and industrial products. Headline Below the Illustration: "Engaging the Sense of Touch' ------------------------ GATE FOLD Headline Across the Gate Fold: "Immersion licenses its TouchSense technology to manufacturers of computer and medical devices. Our TouchSense technology enables these devices to provide compelling tactile sensations for more natural interaction, enhanced productivity and a more engaging experience." FIRST GATE FOLD (LEFT) [Art: Windows desktop with Yahoo home page and a smaller simulated Web page advertisement for tennis racquet] [Surrounding the Yahoo home page, a series of call-outs describing how Immersion technology adds feel to particular aspects of the home page: Call-out from Web page "Search" button: Web page buttons have dimensionality that can be felt as well as seen, making them easier to activate. Call-out from hyperlink: "Like a Magnet, the cursor snaps to links on a Web page, enabling faster and easier navigation." Call-out from menu: "Feeling the cursor click over each item in a pull-down menu improves accuracy, resulting in fewer incorrect selections." Call-out from lower-right corner of Web page window: "Resize the window by pulling the edge and feel it stretch." Call-out from folder icon: "Feel the cursor engage an icon with a tactile snap. Drag an icon and feel its weight." Call-out from simulated Web page advertisement for tennis racquet: "Enhancing online experiences. TouchSense technology lets users feel physical sensations such as textures, surfaces, springs, liquids, and vibrations. With TouchSense technology in the Wingman Mouse users can automatically feel the standard desktop icons. Using Immersion's TouchSense authoring tool, web developers can create custom sensations. This simulated advertisement is an example of how shopping online can be enhanced by interacting with TouchSense authored attributes that let users feel the physical characteristics of products prior to purchase." Headline at bottom of page "With TouchSense technology users can automatically feel standard desktop icons and hyperlinks." SECOND GATE FOLD (RIGHT) [Art: At top of page, a photo of a gamepad with the caption "HammerHead Fx"] 4 Text in middle of page: "Adding realistic physical sensations to medical training. Immersion TouchSense technology enables doctors and students to practice surgical procedures in training environments that feel real. For example, as the user manipulates the Endoscopic Sinus Surgery Simulator (pictured below), the computer tracks the position and orientation of the device. As the user interacts with the virtual organs and tissue, simulated physical sensations create the feeling of operating on an actual patient. Evolving the games industry. From flight simulation to action games, our TouchSense technology helps create more compelling, realistic interactions. The vibrations of turbulence in flight, the recoil from a weapon, and the impact of hitting a wall are all sensations that users can feel. Action games can be energized by jolts and blasts. Driving games can add the roughness of the road and the force of moving around tight turns. Whether using a mouse, a joystick, or a steering wheel, computer game enthusiasts can experience compelling tactile sensations. [Art: At right of page, a photo of a force feedback joystick with the caption "WingMan Force"] [Art: At bottom left of page, a photo of a stethoscope, a sinus surgery simulator and a globe with a caption by the globe "Compress an Object and feel it flex"] INSIDE BACK PAGE Headline at top left of page "Immersion licenses its TouchSense technology to manufacturers of computer devices. The products depicted on this page are manufactured by Logitech, one of our licensees." [Art: Below text: a picture of a computer mouse with the caption "Logitech(R) WingMan(R) Force Feedback Mouse Logitech recently began shipping the mouse, which incorporates our TouchSense technology."] [Art: At center top of page: a picture of a steering wheel with the caption "WingMan Formula Force."] Text to right of steering wheel: "Computer game enthusiasts can experience compelling tactile sensations." Text in center of page: "Patented technology makes it possible. A powerful patent portfolio, Immersions intellectual property includes 37 patents issued and over 125 applications pending." [Art: At center bottom of page: a picture of Immersion logo, which is an artist's representation of a hand with the caption "Immersion"] Small text on bottom right of page: (C)1999 Immersion Corporation. HammerHead FX is a product of InterAct Accessories and 3Dfx Interactive. Immersion and the Immersion logo are trademarks of Immersion Corporation. Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or registered trademarks of Logitech. Yahoo! and the Yahoo! logo are trademarks of Yahoo! Inc. All other trademarks are the property of their respective owners. All rights reserved. 5 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 4 Risk Factors................................................ 7 Forward-Looking Statements.................................. 16 Use of Proceeds............................................. 16 Dividend Policy............................................. 16 Capitalization.............................................. 17 Dilution.................................................... 18 Selected Consolidated Financial Data........................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 Business.................................................... 30 Management.................................................. 44 Certain Transactions........................................ 53 Principal Stockholders...................................... 57 Description of Capital Stock................................ 60 Shares Eligible for Future Sale............................. 63 Underwriting................................................ 65 Legal Matters............................................... 67 Experts..................................................... 67 Where You Can Find Additional Information................... 67 Index to Consolidated Financial Statements.................. F-1
------------------------ All brand names and trademarks appearing in this prospectus are the property of their respective holders. 3 6 PROSPECTUS SUMMARY You should read this summary together with the more detailed information, our financial statements and the related notes and the risks of investing in our common stock discussed under "Risk Factors" before making an investment decision. Except as otherwise noted, all information in this prospectus assumes the conversion of all outstanding shares of preferred stock into common stock, no exercise of the underwriters' over-allotment option and our reincorporation in Delaware prior to the date of this prospectus. IMMERSION CORPORATION We develop hardware and software technologies that enable users to interact with computers using their sense of touch. Our patented technologies, which we call TouchSense, enable computer peripheral devices, such as joysticks, mice and steering wheels, to deliver tactile sensations that correspond to on-screen events. We currently focus on licensing our intellectual property for these feel-enabling technologies to manufacturers of computer peripherals in the computer gaming and general purpose personal computer markets. For the nine months ended September 30, 1999, royalty revenue accounted for 23% of our total revenues and royalty revenue from the sale by our licensees of gaming peripherals used with personal computers accounted for 99% of our royalty revenue. Logitech, a licensee of our intellectual property, began manufacturing its computer mouse incorporating our feel-enabling technologies in commercial quantities during the fourth quarter of 1999. It has begun shipping the mouse to its distribution centers and recently commenced initial shipments and sales of the mouse to distributors and retail customers. Logitech expects commercial quantities of the product to be available for purchase by consumers in the fourth quarter of 1999. We have recorded no royalty revenue from the sale of computer mice incorporating our feel-enabling technologies for the nine months ended September 30, 1999. Our objective is to proliferate our TouchSense technologies across markets, platforms and applications so that feel becomes as common as graphics and sound in the modern computer user interface. Early computers had crude user interfaces that only displayed text and numbers. In the 1980s, computers began to use graphics and sound to engage users' perceptual senses more naturally, leading to the popularization of the video game, the graphical user interface and the Web. While most modern computers realistically present information to the senses of sight and sound, they still lack the ability to convey content through the sense of touch. We hold 37 U.S. patents covering various aspects of our hardware and software technologies and have over 125 patent applications pending in the U.S. and abroad. Our patented designs incorporate specialized hardware elements such as motors, control electronics and mechanisms into computer peripheral devices. Driven by sophisticated software algorithms, these hardware elements direct tactile sensations to the user's hand. We offer a complete technical solution that allows our licensees to incorporate our patented feel-enabling technologies into their peripheral device products and that allows software programmers and Web site developers to add feel-enabling elements to their applications. Our technologies comply with leading hardware and software standards including Universal Serial Bus (USB) and Microsoft's DirectX application programming interface. In 1996, we introduced feel technology designed for computer gaming peripherals such as joysticks, steering wheels and gamepads. To date, we have licensed intellectual property for our feel-enabling technologies to more than 16 companies, including Microsoft, Logitech and InterAct. To target the general purpose personal computer market, we have developed hardware and software technologies designed for cursor control products such as mice and trackballs. The first feel-enabled computer mouse manufactured by Logitech, incorporates these technologies. Logitech includes copies of our FEELit Desktop and FEELtheWEB software with each of its feel-enabled mice. FEELit Desktop, which works with Windows 98-compatible software, automatically adds feel to many of the basic Windows controls, such as icons, menus and buttons. FEELtheWEB, which 4 7 works with Internet Explorer and Netscape Navigator, automatically adds feel to the standard interface elements of Web pages, such as hyperlinks, check boxes and menus. Historically we have derived the majority of our revenues from the sale of products that we manufacture. The products that we manufacture include devices used to create three-dimensional computer images of small objects, a specialized computer mouse used for mapmaking, feel-enabled joysticks and steering wheels designed specifically for use in the arcade and location-based entertainment market and specialized medical products for simulation, training and clinical applications. For the nine months ended September 30, 1999, product sales accounted for 58% of total revenues and the products we manufactured accounted for 89% of our product sales. We have also derived revenues from development contracts under which we assist our licensees in the development of their feel-enabled products and from development contracts with government agencies for feel-enabling technologies. For the nine months ended September 30, 1999, revenues from these commercial and government development projects accounted for 19% of our total revenues. We expect that product sales and development contract revenues will decline as a percentage of revenues if our royalty-based licensing model proves to be successful. At September 30, 1999, we had an accumulated deficit of approximately $7.9 million. Logitech accounted for 15% of our total revenues for the nine months ended September 30, 1999 and 11% of our total revenues in 1998. The U.S. Government accounted for 9% of our total revenues for the nine months ended September 30, 1999, 10% of our total revenues in 1998, 24% of our total revenues in 1997 and 16% of our total revenues in 1996. Key elements of our strategy are to: - pursue a royalty-based licensing model; - facilitate development of feel-enabled hardware products; - expand software support for our feel technology; - utilize the Internet to create market demand for feel-enabled products; - expand market awareness of our technologies and brands; - secure licensees in new markets for feel technology; and - continue to develop and protect our intellectual property. We were incorporated in California in May 1993 and reincorporated in Delaware prior to the date of this prospectus. Our headquarters are located at 2158 Paragon Drive, San Jose, California 95131, and our telephone number is (408) 467-1900. Our Web site address is www.immersion.com. Information contained on our Web site is not part of this prospectus. 5 8 THE OFFERING Common stock offered by us................ 4,250,000 shares Common stock to be outstanding after this offering.................................. 15,441,856 shares Use of proceeds........................... For working capital and other general corporate purposes. Proposed Nasdaq National Market symbol.... IMMR ------------------------ The number of shares of common stock to be outstanding after this offering is based on 11,191,856 shares outstanding as of September 30, 1999. This number excludes 4,379,465 shares of common stock issuable upon exercise of stock options outstanding as of September 30, 1999 with a weighted average exercise price of $3.18 per share and 498,593 shares of common stock issuable upon exercise of warrants outstanding as of September 30, 1999 with a weighted average exercise price of $2.72. This number also excludes 2,015,594 shares of common stock available for future issuance under our 1997 Stock Option Plan and 500,000 shares reserved for sale under our 1999 Employee Stock Purchase Plan. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The pro forma numbers in the consolidated balance sheet data reflect the automatic conversion of all shares of preferred stock into common stock upon the closing of this offering. The pro forma as adjusted numbers in the consolidated balance sheet data reflect the receipt of the net proceeds from the sale of the 4,250,000 shares of common stock offered by us at an assumed initial public offering price of $10.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ------------------ 1996 1997 1998 1998 1999 ------ ------- ------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................................... $2,737 $ 4,332 $ 5,021 $ 3,408 $ 5,585 Costs and expenses....................... 2,846 4,909 6,868 4,961 9,399 Operating loss........................... (109) (577) (1,847) (1,553) (3,814) Net loss................................. (81) (527) (1,673) (1,418) (3,722) Basic and diluted net loss per share..... $(0.03) $ (0.17) $ (0.43) $ (0.37) $ (0.71) Shares used in calculating basic and diluted net loss per share............ 2,825 3,162 3,909 3,876 5,234 Pro forma basic and diluted net loss per share................................. $ (0.19) $ (0.36) Shares used in calculating pro forma basic and diluted net loss per share................................. 8,630 10,365
SEPTEMBER 30, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ------------ CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................ $ 3,798 $ 3,798 $42,323 Working capital........................................ 2,622 2,622 41,147 Total assets........................................... 11,935 11,935 50,460 Redeemable convertible preferred stock................. 1,481 -- -- Total stockholders' equity............................. 7,180 8,661 47,186
6 9 RISK FACTORS Any investment in our common stock involves a high degree of risk. You should consider the risks described below carefully and all of the information contained in this prospectus before deciding whether to purchase our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock could decline, and you might lose all or part of your investment in our common stock. THE MARKET FOR OUR FEEL-ENABLING TECHNOLOGIES IS AT AN EARLY STAGE AND, IF MARKET DEMAND DOES NOT DEVELOP, WE MAY NOT ACHIEVE OR SUSTAIN REVENUE GROWTH The consumer market for feel technology is at an early stage, and if we and our licensees are unable to develop consumer demand for our licensees' products we may not achieve or sustain revenue growth. To date, consumer demand for our technologies has been limited to the computer gaming peripherals market, and sales of joysticks and steering wheels incorporating our feel-enabling technologies in that market began only in late 1996 and 1998, respectively. Logitech began manufacturing its computer mouse incorporating our feel-enabling technologies in commercial quantities during the fourth quarter of 1999. It has begun shipping the mouse to its distribution centers and recently commenced initial shipments and sales of the mouse to distributors and retail customers. Logitech expects commercial quantities of the product to be available for purchase by consumers in the fourth quarter of 1999. Feel-enabled mice may not achieve commercial acceptance or generate significant royalty revenue for us. In addition, software developers may elect not to create additional games or other applications that support our feel technology. Even if our technologies are ultimately widely adopted by consumers, widespread adoption may take a long time to occur. The timing and amount of royalties that we receive will depend on whether the products marketed by our licensees 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 and consumers about the uses and benefits of our technologies and to persuade software developers to create software that utilizes our technologies. WE HAD AN ACCUMULATED DEFICIT OF $7.9 MILLION AS OF SEPTEMBER 30, 1999, WILL EXPERIENCE LOSSES IN THE FUTURE AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY Since 1997, we have incurred losses in every fiscal quarter, and we expect losses through at least 2000. We will need to generate significant revenue to achieve and maintain profitability. We may not achieve, sustain or increase profitability in the future. We anticipate that our expenses will increase substantially in the foreseeable future as we: - attempt to expand the market for feel-enabled products; - increase our sales efforts; - continue to develop our technologies; - pursue strategic relationships; and - protect and enforce our intellectual property. If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations, we may not achieve or maintain profitability. OUR HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT OUR PRIMARY BUSINESS STRATEGY FOR ACHIEVING REVENUE GROWTH THROUGH ROYALTY PAYMENTS FROM SALES BY OUR LICENSEES OF COMPUTER PERIPHERAL PRODUCTS INCORPORATING OUR FEEL-ENABLING TECHNOLOGIES, A STRATEGY FROM WHICH HISTORICALLY WE HAVE DERIVED LESS THAN ONE-QUARTER OF OUR REVENUES 7 10 We cannot predict our future revenues based on our historical financial information. Historically, we derived the majority of our revenues from product sales, including sales of devices used to create three dimensional computer images of small objects, medical simulation products and a specialized non-feel enabled computer mouse used for map making. Historically, we have also derived revenues from contracts with our licensees to assist in the development of our licensees' feel-enabled products and from development contracts with government agencies for feel-enabling technology. The majority of our historical product sales resulted from sales of products that did not utilize our feel technology but utilized related advanced computer peripheral technologies. We currently concentrate our marketing, research and development activities on licensing our feel technology in the computer entertainment and general purpose personal computer markets. For 1998, we derived only 6% of our total revenues from royalty revenue and for the nine months ended September 30, 1999, we derived 23% of our total revenues from royalty revenue. We anticipate that royalty revenue from licensing our technologies will constitute an increasing portion of our revenues. Accordingly, our historical results should not be relied upon as an indicator of our future performance. OUR BUSINESS STRATEGY FOR ACHIEVING REVENUE GROWTH RELIES SIGNIFICANTLY ON ROYALTY PAYMENTS FROM SALES BY LOGITECH OF ITS FEEL-ENABLED MOUSE, A PRODUCT WHICH BEGAN SHIPPING TO DISTRIBUTION CENTERS ONLY IN MID-OCTOBER 1999. Our primary business strategy for achieving revenue growth relies significantly on royalty payments from sales by Logitech of its computer mouse incorporating our feel-enabling technologies. Logitech began manufacturing its computer mouse incorporating our feel-enabling technologies in commercial quantities during the fourth quarter of 1999. It has begun shipping the mouse to its distribution centers and recently commenced initial shipments and sales of the product to distributors and retail customers. Logitech expects commercial quantities of the product to be available for purchase by consumers in the fourth quarter of 1999. If Logitech's feel-enabled mouse does not achieve commercial acceptance or if production or other difficulties that sometimes occur when a new product is introduced interfere with sales of the Logitech mouse, our ability to achieve revenue growth could be significantly impaired. WE DO NOT CONTROL OR INFLUENCE OUR LICENSEES' MANUFACTURING, PROMOTION, DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING OUR FEEL-ENABLING TECHNOLOGIES, UPON WHICH WE ARE DEPENDENT TO GENERATE ROYALTY REVENUE Our primary business strategy is to license our intellectual property to companies that manufacture and sell products incorporating our feel technologies. The sale of those products generates royalty revenue for us. In the nine months ended September 30, 1999, 23% of our total revenues was royalty revenue, and we expect royalty revenue will be an increasing portion of our total revenues in the future. However, we do not control or influence the manufacture, promotion, distribution or pricing of products that are manufactured and sold by our licensees and that incorporate our feel-enabling technologies. As a result, products incorporating our technologies may not be brought to market, achieve commercial acceptance or generate meaningful royalty revenue for us. For us to generate royalty revenue, our licensees must manufacture and distribute products incorporating our feel-enabling technologies in a timely fashion and generate consumer demand through marketing and other promotional activities. Products incorporating our feel-enabling technologies are generally more difficult to design and manufacture than products that do not incorporate our feel-enabling technologies, and these difficulties may cause product introduction delays. If our licensees fail to stimulate and capitalize upon market demand for products that generate royalties for us, our revenues will not grow. Peak demand for products that incorporate our technologies, especially in the computer gaming peripherals market, typically occurs in the third and fourth calendar quarters as a result of increased demand during the year-end holiday season. If our licensees do not ship licensed products in a timely fashion or fail to achieve strong sales in the second half of the calendar year, we would not receive related royalty revenue. Most of 8 11 our gaming device licensees have at least part of their manufacturing operations located in Taiwan, which experienced a severe earthquake on September 21, 1999. As a result of the earthquake, several of our licensees have indicated that they have had temporary production difficulties. BECAUSE LOGITECH IS CURRENTLY OUR ONLY LICENSED MANUFACTURER OF FEEL-ENABLED MICE, OUR ROYALTY REVENUE FROM FEEL-ENABLED MICE WILL BE SIGNIFICANTLY REDUCED IF LOGITECH DOES NOT EFFECTIVELY MANUFACTURE AND MARKET OUR PRODUCTS Logitech is currently the only licensed manufacturer of feel-enabled mice. If Logitech does not effectively manufacture, market and distribute its feel-enabled mouse product, our royalty revenue from feel-enabled mice would be significantly reduced. In addition, a lack of market acceptance of the Logitech feel-enabled mouse might dissuade other potential licensees from licensing our technologies for feel-enabled mice and other products. IF WE FAIL TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY TO LICENSE OUR TECHNOLOGIES AND TO 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. If we are not able to protect and enforce those rights, our ability to obtain future licenses and royalty revenue could be impaired. In addition, if a court were to limit the scope of, declare unenforceable or invalidate any of our patents, current licensees may refuse to make royalty payments or may themselves choose to challenge one or more of our patents. Also it is possible that: - our pending patent applications may not result in the issuance of patents; - our patents may not be broad enough to protect our proprietary rights; - effective patent protection may not be available in every country in which our licensees do business. We also rely on licenses, confidentiality agreements and copyright, trademark and trade secret laws to establish and protect our proprietary rights. It is possible that: - laws and contractual restrictions may not be sufficient to prevent misappropriation of our technologies or deter others from developing similar technologies; and - policing unauthorized use of our products and trademarks would be difficult, expensive and time-consuming, particularly overseas. IF WE ARE UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH OUR EXISTING LICENSEES AND WITH ADDITIONAL THIRD-PARTY MANUFACTURERS FOR OUR FEEL TECHNOLOGY, OUR ROYALTY REVENUE MAY NOT GROW Our revenue growth depends on our ability to enter into new licensing arrangements. Our failure to enter into new 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: - the lengthy and expensive process of building a relationship with potential licensees; - the fact that we may compete with the internal design teams of existing and potential licensees; - difficulties in persuading consumer product manufacturers to work with us, to rely on us for critical technology and to disclose to us proprietary product development and other strategies; and - difficulties in persuading existing and potential licensees to bear the development costs necessary to incorporate our technologies into their products. 9 12 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: - the establishment or loss of licensing relationships; - the timing of our expenses, including costs related to acquisitions of technologies or businesses; - the timing of introductions of new products and product enhancements by our licensees and their competitors; - our ability to develop and improve our technologies; - our ability to attract, integrate and retain qualified personnel; and - seasonality in the demand for our licensees' products. Accordingly, we believe that period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance. In addition, because a high percentage of our operating expenses is fixed, a shortfall of revenues can cause significant variations in operating results from period to period. THE HIGHER COST OF GAMING AND CURSOR CONTROL PERIPHERAL PRODUCTS INCORPORATING OUR FEEL-ENABLING TECHNOLOGIES AS COMPARED TO NON FEEL-ENABLED GAMING AND CURSOR CONTROL PERIPHERALS MAY INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND SALE OF PRODUCTS INCORPORATING OUR TECHNOLOGIES Joysticks, steering wheels, gamepads and computer mice incorporating our feel-enabling technologies are more expensive than similar competitive products that are not feel-enabled. Although major providers of computer peripheral devices, such as Logitech, Microsoft and InterAct, have licensed our technology, the greater expense of products containing our feel-enabling technologies as compared to non feel-enabled products may be a significant barrier to the widespread adoption and sale of their feel-enabled products in consumer markets. IF OUR TECHNOLOGIES ARE UNABLE TO GAIN MARKET ACCEPTANCE OTHER THAN IN FEEL-ENABLED JOYSTICKS AND STEERING WHEELS, OUR REVENUE GROWTH WILL BE LIMITED Substantially all of our royalty revenue is derived from the licensing of I-FORCE, our portfolio of feel technology for personal computer gaming peripherals such as joysticks and steering wheels. Our I-FORCE royalty revenue was $321,000 for 1998 and $1,270,000 for the nine months ended September 30, 1999. I-FORCE royalty revenue represented 100% and 99% of our royalty revenue in 1998 and 1999, respectively. The market for joysticks and steering wheels for use with personal computers is a substantially smaller market than either the mouse market or the dedicated gaming console market and is characterized by declining average selling prices. If we are unable to gain market acceptance beyond the personal computer gaming peripherals market, we may not achieve revenue growth. COMPETITION IN COMPUTER PERIPHERAL PRODUCTS IN BOTH THE GENERAL PURPOSE COMPUTING AND COMPUTER GAMING MARKETS COULD LEAD TO REDUCTIONS IN THE SELLING PRICE OF PERIPHERAL PRODUCTS OF OUR LICENSEES, WHICH WOULD REDUCE OUR ROYALTY REVENUE The general purpose computing and computer gaming markets in which our licensees sell peripheral products are highly competitive and are characterized by rapid technological change, short product life cycles, cyclical market patterns, a trend of declining average selling prices and 10 13 increasing foreign and domestic competition. We believe that competition among computer peripheral manufacturers will continue to be intense, and that competitive pressures will drive the price of our licensees' products downward. Any reduction in our royalties per unit that is not offset by corresponding increases in unit sales will cause our revenues to decline. LOGITECH ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE AND THE FAILURE OF LOGITECH TO ACHIEVE SALES VOLUMES FOR ITS GAMING AND CURSOR CONTROL PERIPHERAL PRODUCTS THAT INCORPORATE OUR FEEL-ENABLING TECHNOLOGIES MAY REDUCE OUR ROYALTY REVENUE We derived 15% of our total revenues and 43% of our royalty revenue for the nine months ended September 30, 1999 from Logitech. We expect that a significant portion of our total revenues will continue to be derived from Logitech. If Logitech fails to achieve anticipated sales volumes for its computer peripheral products that incorporate our technologies, our royalty revenue would be reduced. BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE OUR FEEL-ENABLING TECHNOLOGIES CURRENTLY MUST WORK WITH MICROSOFT'S OPERATING SYSTEM SOFTWARE, OUR COSTS COULD INCREASE AND OUR REVENUES COULD DECLINE IF MICROSOFT MODIFIES ITS OPERATING SYSTEM SOFTWARE Our hardware and software technology for personal computer peripheral products that incorporate our feel-enabling technologies is currently compatible with Microsoft's operating system software, including DirectX, Microsoft's entertainment applications programming interface. If Microsoft modifies its operating system, including DirectX, we may need to modify our technologies 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 be increased and our revenues could decline. THIRD-PARTY CLAIMS OF INFRINGEMENT OF THEIR PROPRIETARY RIGHTS COULD RESULT IN EXPENSIVE, TIME-CONSUMING LITIGATION, WHICH COULD ADVERSELY AFFECT OUR BUSINESS Any intellectual property litigation, whether brought by us or by others, could result in the expenditure of significant financial resources and the diversion of management's time and efforts. In addition, litigation in which we are accused of infringement may cause product shipment delays, require us to develop non-infringing technology or require us to enter into royalty or license agreements even before the issue of infringement has been decided on the merits. If any litigation were not resolved in our favor, we could become subject to substantial damage claims from third parties and indemnification claims from our licensees. We and our licensees could be enjoined from the continued use of the technology at issue without a royalty or license agreement. Royalty or license agreements, if required, might not be available on acceptable terms, or at all. If a third party claiming infringement against us prevailed and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our expenses would increase and our revenues could decrease. We attempt to avoid infringing known proprietary rights of third parties. We have not, however, conducted and do not conduct comprehensive patent searches to determine whether aspects of our technology infringe patents held by 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. Between May 1995 and June 1999, we received letters from four 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. Although none of these matters has resulted in litigation to date, any of these notices, or additional notices that we could receive in the future from these or other companies, could lead to litigation. We might also elect to enforce our patents and other intellectual property rights against third parties, which could result in litigation. 11 14 WE DEPEND ON KAWASAKI LSI TO PRODUCE OUR I-FORCE AND FEELIT MICROPROCESSORS AND MAY LOSE CUSTOMERS IF KAWASAKI LSI DOES NOT MEET OUR REQUIREMENTS Kawasaki LSI is the sole supplier of our custom I-FORCE and FEELit microprocessors, which we develop, license and sell to improve the performance and to help reduce the cost of computer peripheral products, such as joysticks and mice, incorporating our feel technology. Because Kawasaki LSI manufactures and tests our processors, we have limited control over delivery schedules, quality assurance, manufacturing capacity, yields, costs and misappropriation of our intellectual property. Although Kawasaki LSI warrants that microprocessors it supplies to us or to our customers will conform to our specifications and be free from defects in materials and workmanship for a period of one year from delivery, any delays in delivery of the processor, quality problems or cost increases could cause us to lose customers and could damage our relationships with our licensees. IF WE ARE UNABLE TO CONTINUALLY IMPROVE, AND REDUCE THE COST OF, OUR TECHNOLOGIES, COMPANIES MAY NOT INCORPORATE OUR TECHNOLOGIES INTO THEIR PRODUCTS, WHICH COULD IMPAIR OUR REVENUE GROWTH Our ability to achieve revenue growth depends on our continuing ability to improve, and reduce the cost of, our technologies and to introduce these technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, companies may not incorporate our technologies into their products and our revenue growth may be impaired. THREE KEY MEMBERS OF OUR MANAGEMENT TEAM HAVE RECENTLY JOINED US AND THEY MAY NOT BE EFFECTIVELY INTEGRATED INTO OUR COMPANY, WHICH COULD IMPEDE THE EXECUTION OF OUR BUSINESS STRATEGY Our Chief Financial Officer, Vice President of Marketing and Vice President of Business Development each joined us in July or August 1999. Accordingly, each of these individuals has limited experience with our business. Our success will depend to a significant extent on the ability of our new officers to integrate themselves into our daily operations, to gain the trust and confidence of other employees and to work effectively as a team. If any of them fails to do so, our ability to execute our business strategy would be impeded. COMPETITION FROM PRODUCTS THAT DO NOT INCORPORATE OUR TECHNOLOGIES COULD LEAD TO REDUCED PRICES AND SALES VOLUMES OF PRODUCTS INCORPORATING OUR TECHNOLOGIES THAT ARE MANUFACTURED BY OUR LICENSEES, WHICH COULD LIMIT OUR REVENUES OR CAUSE OUR REVENUES TO DECLINE Our licensees may seek to develop products that are based on alternative technologies that do not require a license under our intellectual property. We did not invent the concept of force feedback, a field in which there is a substantial history of prior art. Several companies currently market products that incorporate more expensive variations of feel technology for scientific and industrial use and may shift their focus to consumer markets if those markets continue to grow. These or other potential competitors may have significantly greater financial, technical and marketing resources. If existing or potential licensees do not license technology or intellectual property from us, our revenue growth could be limited or revenues could decline. COMPETITION TO OUR I-FORCE AND FEELIT MICROPROCESSORS MAY LEAD TO REDUCED PRICES AND SALES VOLUMES OF OUR MICROPROCESSORS To date, the market for our I-FORCE and FEELit microprocessors has been small. If the market grows, we expect more companies to compete in this market. Increased competition could result in significant price erosion, reduced revenues or loss of market share, any of which would have an adverse effect on our business and operating results. Currently, semiconductor companies, including Intel and Mitsubishi, manufacture products that compete with our microprocessors. Although the products of these semiconductor companies have not been optimized for the specific requirements of feel technology, in the future, Intel, Mitsubishi or other companies may elect to 12 15 enter the market for optimized feel microprocessors. These companies may have greater financial, technical, manufacturing, distribution and other resources, greater name recognition and market presence, longer operating histories, lower cost structures and larger customer bases than we do. Accordingly, we may not be able to compete successfully against either current or future competitors. BECAUSE WE HAVE A FIXED PAYMENT LICENSE WITH MICROSOFT, OUR ROYALTY REVENUE FROM LICENSING JOYSTICKS AND STEERING WHEELS IN THE GAMING MARKET MIGHT DECLINE IF MICROSOFT INCREASES ITS VOLUME OF SALES OF FEEL-ENABLED JOYSTICKS AND STEERING WHEELS AT THE EXPENSE OF OUR OTHER LICENSEES Under the terms of our present agreement with Microsoft, Microsoft receives a perpetual, worldwide, irrevocable, non-exclusive license under our patents for its SideWinder Force Feedback Pro Joystick and its SideWinder Force Feedback Wheel, and for a future replacement version of these specific SideWinder products having essentially similar functional features. Instead of an ongoing royalty on Microsoft's sales of licensed products, the agreement provides for payment of a fixed amount regardless of Microsoft's sales volume. At the present time, we do not have a license agreement with Microsoft for products other than the SideWinder joystick and steering wheel. Microsoft has a significant share of the market for feel-enabled joysticks and steering wheels for personal computers. Microsoft has significantly greater financial, sales and marketing resources, as well as greater name recognition and a larger customer base, than our other licensees. In the event that Microsoft increases its share of this market, our royalty revenue from other licensees in this market segment might decline. WE MIGHT BE UNABLE TO RECRUIT OR RETAIN 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 executive officers and other key personnel and upon hiring additional key personnel. We intend to hire additional sales, support, marketing and research and development personnel in the remainder of calendar 1999 and in 2000. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain additional highly qualified personnel in the future. In addition, our technologies are complex and we rely upon the continued service of our existing engineering personnel to support licensees, enhance existing technology and develop new technologies. WE HAVE EXPERIENCED RAPID GROWTH AND CHANGE IN OUR BUSINESS, AND OUR FAILURE TO MANAGE THIS AND ANY FUTURE GROWTH COULD HARM OUR BUSINESS We are increasing the number of our employees rapidly. Our business may be harmed if we do not integrate and train our new employees quickly and effectively. We also cannot be sure that our revenues will continue to grow at a rate sufficient to support the costs associated with an increasing number of employees. Any future periods of rapid growth may place significant strains on our managerial, financial, engineering and other resources. The rate of any future expansion, in combination with our complex technologies, may demand an unusually high level of managerial effectiveness in anticipating, planning, coordinating and meeting our operational needs as well as the needs of our licensees. PRODUCT LIABILITY CLAIMS, INCLUDING CLAIMS RELATING TO ALLEGED REPETITIVE STRESS INJURIES, COULD BE TIME-CONSUMING AND COSTLY TO DEFEND, AND COULD EXPOSE US TO LOSS Claims that consumer products have flaws or other defects that lead to personal or other injury are common in the computer peripherals industry. If products that we or our licensees sell cause personal injury, financial loss or other injury to our or our licensees' customers, the customers or our licensees may seek damages or other recovery from us. Any claims against us would be time- consuming, expensive to defend and distracting to management and could result in substantial 13 16 damages and damage our reputation or the reputation of our licensees or their products. This damage could limit the market for our licensees' feel-enabled products and harm our results of operations. In the past, manufacturers of peripheral products, such as computer mice, have been subject to claims alleging that use of their products has caused or contributed to various types of repetitive stress injuries, including carpal tunnel syndrome. We have not experienced any product liability claims to date. Although our license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could limit or invalidate the provisions. IF WE FAIL TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW COMPUTER APPLICATIONS AND PLATFORMS, WE MAY NOT BE ABLE TO CREATE A MARKET FOR OUR TECHNOLOGIES AND OUR ABILITY TO GROW AND OUR RESULTS OF OPERATIONS MIGHT BE HARMED Our initiatives to develop new and enhanced technologies and to license technologies for new applications and new platforms may not be successful. Any new or enhanced technologies may not be favorably received by consumers and could damage our reputation or our brand. Expanding our technology could also require significant additional expenses and strain our management, financial and operational resources. The lack of market acceptance of these efforts or our inability to generate additional revenues sufficient to offset the associated costs could harm our results of operations. WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE STOCKHOLDER VALUE, DIVERT MANAGEMENT ATTENTION OR CAUSE INTEGRATION PROBLEMS As part of our business strategy, we have in the past acquired, and might in the future acquire, businesses or intellectual property that we feel could complement our business, enhance our technical capabilities or increase our intellectual property portfolio. If we consummate acquisitions through an exchange of our securities, our stockholders could suffer significant dilution. Acquisitions could create risks for us, including: - unanticipated costs associated with the acquisitions; - use of substantial portions of our available cash, including the proceeds of this offering, to consummate the acquisitions; - diversion of management's attention from other business concerns; and - difficulties in assimilation of acquired personnel or operations. Any future acquisitions, even if successfully completed, might not generate any additional revenue or provide any benefit to our business. YEAR 2000 COMPLIANCE COSTS AND RISKS ARE DIFFICULT TO ASSESS AND COULD RESULT IN DELAY OR LOSS OF REVENUES, DAMAGE TO OUR REPUTATION AND DIVERSION OF DEVELOPMENT RESOURCES Many computer programs and embedded date-reliant systems use two digits rather than four to define the applicable year. Programs and systems that record only the last two digits of the calendar year may not be able to distinguish whether "00" means 1900 or 2000. If not corrected, date-related information and data could cause these programs or systems to fail or to generate erroneous information. To the extent that any third-party product with which our technology is associated is not Year 2000 compliant, our reputation may be harmed. Our revenue and operating results could become subject to unexpected fluctuations if our licensees encounter Year 2000 compliance problems that affect their ability to distribute licensed products. In addition, a delay or failure by our critical suppliers to be Year 2000 compliant could interrupt our business. 14 17 OUR STOCK MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us. The market price of our common stock after the offering may vary from the initial public offering price. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. In addition, 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. You should read the "Underwriting" section beginning on page 65 for a more complete discussion of the factors to be considered in determining the initial public offering price of our common stock. OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL RETAIN SIGNIFICANT CONTROL OVER US AFTER THIS OFFERING, WHICH MAY LEAD TO CONFLICTS WITH OTHER STOCKHOLDERS OVER CORPORATE GOVERNANCE MATTERS We anticipate that our current directors, officers and more than 5% stockholders will, as a group, beneficially own a majority of our outstanding common stock after this offering. Acting together, these stockholders would be able to control all matters that our stockholders vote upon, including the election of directors and mergers or other business combinations, which could have the effect of delaying or preventing a third party from acquiring control over or merging with us. PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. In addition, certain provisions of Delaware law may discourage, delay or prevent someone from acquiring or merging with us. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. For more information, see "Description of Capital Stock." MANAGEMENT COULD SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH OUR STOCKHOLDERS MAY NOT AGREE We plan to use the proceeds from this offering for working capital and other general corporate purposes. We may use the proceeds in ways with which you do not agree or that prove to be disadvantageous to our stockholders. We may not be able to invest the proceeds of this offering, in our operations or external investments, to yield a favorable return. THERE ARE A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK Sales of substantial numbers of shares of our common stock in the public market after this offering, or the perception that sales may be made, could cause the market price of our common stock to decline. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional equity securities. Based on shares outstanding as of September 30, 1999, following this offering, we will have 15,441,856 shares of common stock outstanding or 15,630,154 shares if the underwriters' over-allotment is exercised in full. Of these, 11,103,186 shares will become available for sale 180 days following the date of this prospectus upon the expiration of lock-up agreements, subject to the restrictions imposed by the federal securities laws on sales by affiliates. Hambrecht & Quist LLC, however, may waive the lock-up restrictions at its sole discretion. 15 18 FORWARD-LOOKING STATEMENTS This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These risks and other factors include those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue," the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risks Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations. USE OF PROCEEDS We estimate that our net proceeds from the sale of the 4,250,000 shares of common stock offered by us will be approximately $38,525,000, at an assumed initial offering price per share of $10.00 and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The principal purposes of the offering are to obtain additional working capital, establish a public market for our common stock and facilitate our future access to public capital markets. We currently expect to use the net proceeds from this offering for working capital and other general corporate purposes. We have not yet determined our expected use of these proceeds, but we currently anticipate that we will incur at least $3.5 million in research and development expenses and $6.0 million in sales and marketing expenses through the end of the year 2000. Actual expenditures may vary substantially from these estimates. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our development efforts and marketing and sales activities and the amount of cash generated by our operations. We may find it necessary or advisable to use portions of the proceeds for other purposes. We may also use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We have no current commitments or agreements with respect to any acquisition or investment. Pending these uses, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently expect to retain earnings, if any, to finance the growth and development of our business. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future. The decision whether to pay dividends will be made by our board of directors from time to time in light of conditions then existing including, among other things, our results of operations, financial condition and capital expenditure requirements. 16 19 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999. The pro forma information reflects the conversion of all outstanding shares of our preferred stock into 5,131,100 shares of common stock upon the closing of the offering. The pro forma as adjusted information reflects the sale of shares of common stock offered by us at an assumed initial public offering price of $10.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The common stock outstanding as of September 30, 1999 excludes: - 7,991,975 shares reserved for issuance under our stock option plans, of which 4,379,465 shares were subject to outstanding options, with a weighted average exercise price of $3.18 per share; - 498,593 shares subject to outstanding warrants, with a weighted average exercise price of $2.72 per share; and - 500,000 shares reserved for issuance under our 1999 Employee Stock Purchase Plan.
SEPTEMBER 30, 1999 --------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Redeemable convertible preferred stock, $0.001 par value; 863,778 shares designated, 863,771 shares issued and outstanding, actual; none authorized, issued or outstanding, pro forma or pro forma as adjusted........... $ 1,481 $ -- $ -- ------- ------- ------- Stockholders' equity: Convertible preferred stock, $0.001 par value; 10,215,716 shares authorized, actual; 4,267,329 shares issued and outstanding, actual; 5,000,000 shares authorized and none issued or outstanding, pro forma or pro forma as adjusted............................................... 6,955 -- -- Common stock, $0.001 par value; 100,000,000 shares authorized and 6,060,756 shares issued and outstanding, actual; 100,000,000 shares authorized, pro forma and pro forma as adjusted; 11,191,856 shares issued and outstanding, pro forma; 15,441,856 shares issued and outstanding, pro forma as adjusted..................... 8,575 17,011 55,536 Warrants.................................................... 893 893 893 Deferred stock compensation................................. (1,287) (1,287) (1,287) Accumulated other comprehensive loss........................ -- -- -- Note receivable from stockholder............................ (17) (17) (17) Accumulated deficit......................................... (7,939) (7,939) (7,939) ------- ------- ------- Total stockholders' equity............................. 7,180 8,661 47,186 ------- ------- ------- Total capitalization.............................. $ 8,661 $ 8,661 $47,186 ======= ======= =======
17 20 DILUTION Our pro forma net tangible book value as of September 30, 1999 was $3,887,000, or $0.35 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets (total assets excluding purchased patents and technology) less the amount of our total liabilities and divided by the total number of shares of common stock outstanding after conversion of all outstanding shares of preferred stock into common stock. Taking into account the sale of the 4,250,000 shares of common stock offered by us at an assumed initial public offering price of $10.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses and receipt of the net proceeds, our adjusted pro forma net tangible book value as of September 30, 1999 would have been approximately $42,412,000, or $2.75 per share. This represents an immediate increase in net tangible book value of $2.40 per share to existing stockholders and an immediate dilution of $7.25 per share to the new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $10.00 Pro forma net tangible book value per share as of September 30, 1999.................................................... $0.35 Increase in net tangible book value attributable to new investors.............................................. 2.40 ----- As adjusted pro forma net tangible book value per share after the offering........................................ 2.75 ------ Dilution per share to new investors......................... $ 7.25 ======
The following table sets forth, on a pro forma basis as of September 30, 1999, the difference between the number of shares of common stock purchased, the total consideration paid and the average price per share paid by the existing stockholders and by the new investors purchasing shares in this offering, at an assumed initial public offering price of $10.00 per share and before deducting the estimated underwriting discounts and commissions and estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ----------- ------- --------- Existing stockholders.... 11,191,856 72.5% $ 9,209,000 17.8% $ 0.82 New investors............ 4,250,000 27.5 42,500,000 82.2 $10.00 ---------- ----- ----------- ----- Total.......... 15,441,856 100.0% $51,709,000 100.0% ========== ===== =========== =====
The above tables exclude 8,491,975 shares of common stock reserved for issuance under our stock option and stock purchase plans, of which 4,379,465 shares were subject to outstanding options as of September 30, 1999 with a weighted average price of $3.18 per share, and 498,593 shares of common stock were subject to outstanding warrants with a weighted average price of $2.72 per share. New investors will experience further dilution if any additional shares of our common stock are issued upon the exercise of these options or warrants. 18 21 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 1996, 1997 and 1998 and the consolidated balance sheet data as of December 31, 1997 and 1998 are derived from the audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 1996 are derived from audited consolidated financial statements not included in this prospectus. The selected consolidated financial data as of and for the years ended December 31, 1994 and 1995 are derived from unaudited financial statements not included in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 1998 and 1999 and the consolidated balance sheet data as of September 30, 1999 are derived from unaudited consolidated financial statements included elsewhere in this prospectus. We believe that the unaudited consolidated financial statements contain all adjustments necessary to present fairly the information included in those statements, and that the adjustments consist only of normal recurring adjustments. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year.
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ----------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 1998 1999 ------ ------ ------ ------ ------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Royalty revenue........................ $ -- $ -- $ -- $ 14 $ 321 $ 8 $ 1,279 Product sales.......................... 444 1,068 2,022 2,908 3,725 2,584 3,259 Development contracts and other........ 117 285 715 1,410 975 816 1,047 ------ ------ ------ ------ ------- ------- ------- Total revenues.................... 561 1,353 2,737 4,332 5,021 3,408 5,585 ------ ------ ------ ------ ------- ------- ------- Costs and expenses: Cost of product sales.................. 210 540 947 1,186 1,507 1,072 1,451 Sales and marketing.................... 87 224 422 658 656 536 1,040 Research and development............... 216 393 710 1,515 1,817 1,278 1,593 General and administrative............. 55 267 766 1,550 2,677 2,025 3,255 Amortization of intangibles and deferred stock compensation.......... -- -- 1 -- 211 50 870 In-process research and development.... -- -- -- -- -- -- 1,190 ------ ------ ------ ------ ------- ------- ------- Total costs and expenses.......... 568 1,424 2,846 4,909 6,868 4,961 9,399 ------ ------ ------ ------ ------- ------- ------- Operating loss........................... (7) (71) (109) (577) (1,847) (1,553) (3,814) Other income............................. 2 14 28 50 174 135 92 ------ ------ ------ ------ ------- ------- ------- Net loss................................. $ (5) $ (57) $ (81) $ (527) $(1,673) $(1,418) $(3,722) ====== ====== ====== ====== ======= ======= ======= Basic and diluted net loss per share..... $(0.01) $(0.02) $(0.03) $(0.17) $ (0.43) $ (0.37) $ (0.71) ====== ====== ====== ====== ======= ======= ======= Shares used in calculating basic and diluted net loss per share............. 2,653 2,468 2,825 3,162 3,909 3,876 5,234 ====== ====== ====== ====== ======= ======= ======= Pro forma basic and diluted net loss per share.................................. $ (0.19) $ (0.36) ======= ======= Shares used in calculating pro forma basic and diluted net loss per share... 8,630 10,365 ======= =======
DECEMBER 31, ---------------------------------------------- SEPTEMBER 30, 1994 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ ------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................... $ 156 $ 37 $ 324 $ 490 $2,592 $ 3,798 Working capital................................... 149 779 1,151 2,080 3,975 2,622 Total assets...................................... 308 963 1,562 2,900 5,959 11,935 Redeemable convertible preferred stock............ -- -- -- 1,471 1,476 1,481 Total stockholders' equity........................ 157 876 1,383 944 3,773 7,180
19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our consolidated financial statements and the notes thereto beginning on page F-1 of this prospectus and the Selected Consolidated Financial Data above. Except for historical information, the discussion in this prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include the risks discussed in the section titled "Risk Factors." OVERVIEW Immersion was founded in 1993 to develop technologies that help improve human to computer interaction. Historically, we have derived most of our revenues from sales of products and from development contracts. We began generating royalty revenue in the first quarter of 1997 and anticipate that royalty revenue will become an increasing percentage of our total revenues. We began developing feel-enabled computer peripherals in 1993. In 1995, we introduced our Impulse Engine line of high-end feel-enabled devices for industrial, research and education markets. We manufacture and sell these products directly to our customers. In 1996, we introduced I-FORCE, our first branded portfolio of feel technology for consumer markets. We license I-FORCE, generally on a per unit royalty basis, to computer gaming peripheral manufacturers. Also in 1996, the first computer joystick incorporating I-FORCE was introduced. We introduced FEELit, a technology for feel-enabled cursor control products, such as mice and trackballs, in 1997. In 1998, we licensed FEELit to Logitech, which began shipping the first mouse to distribution centers in mid-October 1999. We have developed a custom processor for feel-enabled products that is manufactured by Kawasaki LSI, and we began selling this processor in September 1998. In addition to selling the processors ourselves, we granted Kawasaki LSI a limited royalty-bearing license to sell these processors to Logitech for use in its feel-enabled computer mouse. We currently sell products in the industrial and professional markets. We developed our first three-dimensional digitizer product, which is used to create three-dimensional computer images of small objects, in 1994 and currently sell this product under the name MicroScribe-3D. We began developing our Softmouse product, a specialized computer mouse used for mapmaking, in 1994. This mouse product is sold to original equipment manufacturers. We began developing technology and products for the medical market in 1993. We derive revenues from selling medical training and simulation products. In June 1999, we also began to license technologies for the medical training and simulation market. We have entered into numerous contracts with government agencies and corporations since 1993. Government contracts help fund advanced research and development, are typically less than two years in duration, are usually for a fixed price or for our costs plus a fixed fee, and allow the government agency to license the resulting technology for government applications specifically excluding any commercial activity. Corporate contracts are typically for product development consulting, are for a fixed fee and are also less than two years in duration. Logitech accounted for 15% of our total revenues for the nine months ended September 30, 1999 and 11% of our total revenues in 1998. The U.S. Government accounted for 9% of our total revenues for the nine months ended September 30, 1999, 10% of our total revenues in 1998, 24% of our total revenues in 1997 and 16% of our total revenues in 1996. Since inception, we have completed a number of acquisitions of patents and technology. We capitalize the cost of patents and technology and license agreements, except for amounts relating to acquired in-process research and development for which there is no alternative future use. As of 20 23 September 30, 1999, we had capitalized patents and technology of $4.8 million, net of accumulated amortization of $568,000. We are amortizing these patents and technology over the estimated useful life of the technology of nine years. In the quarter ended March 31, 1999, we expensed $1.2 million of acquired in-process research and development related to five development projects. The first of these projects is a flexible force feedback development environment that allows developers to choose the level of complexity/functionality that fits their needs. At the time of acquisition, the development was 81% completed and the estimated cost to complete this development was $438,000. Management expects to ship products using this software beginning in September 2001. The second of these projects, a three-degree-of-freedom joystick, gives the operator smooth, intuitive movement and feedback along three axes -- roll, pitch and yaw -- using brushless motor and encoder technology. At the time of acquisition, the development was 36% completed and the estimated cost to complete this development was $109,000. Management expects products based on this technology to become available in December 2000. The third of these projects is a six degree-of-freedom hand controller, a small back drivable robot that moves in six degrees of freedom, three linear positions and attitudes. At the time of acquisition, the development was 70% completed and the estimated cost to complete this development was $88,000. Management expects to complete development of a product based on this technology and begin shipping it in fiscal 2000. The fourth project is a Flight Yoke, which provides the intuitive motion and feel of an airplane control yoke. It translates in and out to control the pitch, rotates for roll control, and provides the corresponding feel along these axes of motion. At the time of acquisition, the development was 49% completed and the estimated cost to complete this development was $175,000. Management expects that licensees will ship licensed products using this technology in fiscal 2001. The fifth development project is a device that allows the user to reach inside the computer monitor and feel three-dimensional objects. At the time of acquisition, the development was 11% completed and the estimated cost to complete this development was $248,000. Management expects that a product based on this technology will become available for sale in fiscal 2000. We will begin to benefit from the acquired research and development of these products once they begin shipping. Failure to reach successful completion of these projects could result in impairment of the associated capitalized intangible assets and could require us to accelerate the time period over which the intangibles are being amortized, which could have a material adverse effect on our business, financial condition and results of operation. Significant assumptions used to determine the value of in-process research and development include the following: (i) forecast of net cash flows that were expected to result from the development effort using projections prepared by us and the seller's management; (ii) the portion of the projects completed estimated by considering a number of factors, including the costs invested to date relative to total costs of the development effort and the amount of development completed as of the acquisition date, on a technological basis, relative to the overall technological achievements required to achieve the functionality of the eventual product. The technological issues were addressed by engineering representatives from both us and the seller, and when estimating the value of the technology, the projected financial results of the acquired assets were estimated on a stand-alone basis without any consideration of potential synergistic benefits or "investment value" related to the acquisition. As there were no existing products acquired, separate projected cash flows were prepared for the existing and the in-process projects. These projected results were based on the number of units sold times the average selling price less the associated costs. After preparing the estimated cash flows from the products being developed, a portion of these cash flows were attributed to the existing technology, which was embodied in the in-process product lines and enabled a quicker and more cost-effective development of these products. When estimating the value of the in-process technologies, a discount rate of 30% was used. The discount rate considered both the status and risks associated with the cash flows at the acquisition date. Projected revenues from the in-process products are 21 24 expected to commence in 2000 and 2001 as the products are completed and begin to ship. Initial annual revenue growth rates after introduction are projected to exceed 50% and decline to less than 15% by 2005. Gross margins from these products are anticipated to be consistent with the gross margins from our other products. We record revenues from product sales upon shipment. We recognize fixed-fee contract revenue under the cost-to-cost percentage-of-completion accounting method based on the actual physical completion of work performed and the ratio of costs incurred to total estimated costs to complete the contract. We recognize allowable fees under cost-reimbursement contracts as costs are incurred. Losses on contracts are recognized when determined. Revisions in estimates are reflected in the period in which the conditions become known. We recognize royalty revenue based on royalty reports or related information received from the licensee. On July 19, 1999, we entered into an irrevocable, perpetual, non-exclusive, worldwide license agreement with Microsoft under which Microsoft paid us a lump sum of $2.35 million to cover all shipments of its SideWinder Force Feedback Wheel and its SideWinder Force Feedback Pro Joystick and a replacement version of these specific SideWinder products having essentially similar functional features. Under the terms of the agreement, the Company is to provide marketing services related to feel-enabling technology and related products for a twelve-month period following the effective date of the agreement. Accordingly, we will recognize the license payment as revenue over this twelve-month period. Our cost of product sales consists primarily of materials, labor and overhead. There is no cost of sales associated with royalty revenue or development contract revenue. Our research and development expenses are comprised primarily of headcount and related compensation and benefits, consulting fees, costs of acquired technology, tooling and supplies and an allocation of facilities costs. Our sales and marketing expenses are comprised primarily of employee headcount and related compensation and benefits, advertising, trade shows, brochures, travel and an allocation of facilities costs. Our general and administrative expenses are comprised primarily of employee headcount and related compensation and benefits, legal and professional fees, office supplies, recruiting, travel and an allocation of facilities costs. We currently anticipate signing a co-marketing agreement with Logitech in which we would agree to assist Logitech with the launch and promotion of its feel-enabled mice. Under the terms of the proposed agreement, for a period of five calendar quarters, beginning in the first calendar quarter of 2000, we would reimburse Logitech for certain marketing related expenses not to exceed $200,000 per quarter, an expense that would be funded with working capital. Only third-party marketing services that are targeted at promoting Logitech's feel-enabled mice would be eligible for reimbursement. In addition, all promotional activities would have to be approved by us in advance. In order to remain eligible for reimbursement, Logitech would have to include our brand and slogan on all its marketing materials that reference feel-enabled functionality or products, and commit to other conditions regarding its feel-enabled mice. We recorded deferred stock compensation of $1.5 million during the nine months ended September 30, 1999 from the issuance of employee stock options. We are amortizing the deferred stock compensation over the terms of the related option agreements, which range up to four years. 22 25 HISTORICAL RESULTS OF OPERATIONS The following table sets forth our statement of operations data as a percentage of total revenues.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------- ------------------ 1996 1997 1998 1998 1999 ----- ----- ----- ------- ------- Revenues: Royalty revenue................................... --% 0.3% 6.4% 0.3% 22.9% Product sales................................... 73.9 67.1 74.2 75.8 58.4 Development contracts and other................. 26.1 32.6 19.4 23.9 18.7 ----- ----- ----- ------ ------ Total revenues.......................... 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ------ ------ Costs and expenses: Cost of product sales........................... 34.6 27.4 30.0 31.5 26.0 Sales and marketing............................. 15.4 15.2 13.1 15.7 18.6 Research and development........................ 25.9 35.0 36.2 37.5 28.5 General and administrative...................... 28.0 35.8 53.3 59.4 58.3 Amortization of intangibles and deferred stock compensation................................. -- -- 4.2 1.5 15.6 In-process research and development............. -- -- -- -- 21.3 ----- ----- ----- ------ ------ Total costs and expenses................ 103.9 113.4 136.8 145.6 168.3 ----- ----- ----- ------ ------ Operating loss.................................... (3.9) (13.4) (36.8) (45.6) (68.3) Other income...................................... 1.0 1.2 3.5 4.0 1.6 ----- ----- ----- ------ ------ Net loss.......................................... (2.9)% (12.2)% (33.3)% (41.6)% (66.7)% ===== ===== ===== ====== ======
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 Total Revenues. Our total revenues increased by 64% from $3.4 million for the nine months ended September 30, 1998 to $5.6 million for the nine months September 30, 1999. Royalty revenue increased by $1.3 million from $8,000 to $1.3 million due to higher royalty revenue received from our I-FORCE licensees. Product sales increased by $675,000 from $2.6 million for the nine months ended September 30, 1998 to $3.3 million for the nine months ended September 30, 1999. The increase was primarily due to an increase in medical products sold of $473,000 and increased sales of our Softmouse product of $129,000. Development contracts and other revenue increased by $231,000 from $816,000 to $1.0 million due to new government and commercial contracts entered into in mid-1998 that were in progress during 1999. Cost of Product Sales. Cost of product sales increased from $1.1 million for the nine months ended September 30, 1998 to $1.5 million for the nine months ended September 30, 1999. Cost of product sales as a percentage of product sales increased from 41% for the nine months ended September 30, 1998 to 45% for the nine months ended September 30, 1999. The increase in cost of product sales as a percentage of product sales was primarily due to increased sales of our processor, which has a higher cost of sales than our other products. Sales and Marketing. Sales and marketing expenses increased by 94% or $504,000 from $536,000 for the nine months ended September 30, 1998 to $1.0 million for the nine months ended September 30, 1999. The increase was primarily a result of increased headcount and related compensation and benefits of $271,000 and corporate identity and web development costs of $121,000. We expect sales and marketing expenses to increase significantly in absolute dollars due to planned growth of our sales and marketing organization. These planned increases include higher employee headcount and related compensation and increased advertising and marketing expenses. Research and Development. Research and development expenses increased by 25% or $315,000 from $1.3 million for the nine months ended September 30, 1998 to $1.6 million for the nine months 23 26 ended September 30, 1999. Research and development expenses increased due primarily to increases in employee headcount and related compensation and benefits of $281,000. We believe that continued investment in research and development is critical to our future success, and we expect these expenses to increase in absolute dollars in future periods. General and Administrative. General and administrative expenses increased by 61% or $1.2 million from $2.0 million for the nine months ended September 30, 1998 to $3.3 million for the nine months ended September 30, 1999. The increase was primarily the result of increased headcount and related compensation and benefits of $361,000 and an increase in recruiting expenses of $770,000. The recruiting expenses result from the cash and stock compensation given to a recruiter for identifying and employing three senior members of our management team. We expect that the dollar amount of general and administrative expenses will increase in the future as we incur the significant additional costs related to being a public company. Amortization of Intangibles and Deferred Stock Compensation. Amortization of intangibles and deferred stock compensation increased $820,000 from $50,000 for the nine months ended September 30, 1998 to $870,000 for the nine months ended September 30, 1999. In-Process Research and Development. During the nine months ended September 30, 1999, we incurred a charge of $1.2 million for in-process research and development resulting from the acquisition of technology from Cybernet Haptic Systems. Other Income. Other income consists primarily of interest income, dividend income and capital gains from cash and cash equivalents and short-term investments. Other income decreased from $135,000 for the nine months ended September 30, 1998 to $92,000 for the nine months ended September 30, 1999 primarily due to a decrease in cash and cash equivalents and short-term investments. Income Taxes. We have not recorded provisions for income taxes other than minimum state taxes because we have experienced net losses since our inception. COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Total Revenues. Our total revenues increased 58% from $2.7 million in 1996 to $4.3 million in 1997 and an additional 16% to $5.0 million in 1998. The increase from 1996 to 1997 was primarily the result of an $886,000 increase in product sales, principally from our MicroScribe-3D and industrial products, and a $695,000 increase in development contract revenue, relating primarily to an increase in government contract revenue. The increase from 1997 to 1998 was principally the result of an $817,000 increase in product sales, primarily from our MicroScribe-3D and industrial products, and a $307,000 increase in royalty revenue due to increased sales by our I-FORCE licensees in 1998. The increase in product sales and royalty revenue was partially offset by a $435,000 decrease in contract revenue. Cost of Product Sales. Cost of product sales were $947,000 in 1996, $1.2 million in 1997 and $1.5 million in 1998. Cost of product sales as a percentage of product sales was 47% in 1996, 41% in 1997 and 40% in 1998. Cost of product sales as a percentage of product sales decreased from 1996 to 1997 and 1998 primarily due to increased sales of higher margin industrial products and manufacturing efficiencies resulting from higher unit sales. Sales and Marketing. Sales and marketing expenses increased 56% from $422,000 in 1996 to $658,000 in 1997 and remained constant at $656,000 in 1998. The increase from 1996 to 1997 was primarily a result of increased trade show expenses of $156,000 and increased employee headcount and related compensation and benefits of $59,000. Research and Development. Research and development expenses increased 113% from $710,000 in 1996 to $1.5 million in 1997 and by 20% from 1997 to $1.8 million in 1998. The increase from 1996 to 1997 was due to a $436,000 increase in employee compensation, a $262,000 increase in consulting 24 27 services and a $132,000 increase in supplies. The increase from 1997 to 1998 was principally due to an increase in employee headcount and related compensation of $424,000 and a decrease in consulting services of $142,000. General and Administrative. General and administrative expenses increased 102% from $766,000 in 1996 to $1.6 million in 1997 and by 73% from 1997 to $2.7 million in 1998. The increase from 1996 to 1997 was due to an increase of $309,000 in employee headcount and related compensation expenses and an increase of $290,000 in legal and professional fees. The increase from 1997 to 1998 was principally due to an increase in employee headcount and related compensation and benefits of $584,000, an increase in legal and professional fees of $147,000 and an increase in consulting services of $109,000. Amortization of Intangibles and Stock Compensation. Amortization of intangibles and stock compensation expense was $211,000 in 1998, representing amortization of licenses and patents acquired in 1998. Other Income. Other income consists primarily of interest income, dividend income and capital gains from cash and cash equivalents and short-term investments. Other income was $28,000 in 1996, $50,000 in 1997 and $174,000 in 1998. These increases were due to increases in cash and cash equivalents and short-term investments in each of those years. QUARTERLY RESULTS OF OPERATIONS The following table presents certain unaudited consolidated statement of operations data for our seven most recent quarters. This information has been derived from our unaudited consolidated financial statements. In our opinion, this unaudited information has been prepared on the same basis as the annual consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. This information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. Historical results for any quarter are not necessarily indicative of the results to be expected for any future period.
THREE MONTHS ENDED ------------------------------------------------------------------------------ MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1998 1998 1998 1998 1999 1999 1999 --------- -------- --------- -------- --------- -------- --------- (IN THOUSANDS) Revenues: Royalty revenue......................... $ 5 $ 3 $ -- $ 313 $ 481 $ 141 $ 657 Product sales......................... 720 884 980 1,141 1,085 1,048 1,126 Development contracts and other....... 314 251 251 159 310 438 299 ------ ------ ------ ------ ------- ------ ------- Total revenues................. 1,039 1,138 1,231 1,613 1,876 1,627 2,082 ------ ------ ------ ------ ------- ------ ------- Costs and expenses: Cost of product sales................. 293 348 431 435 494 476 481 Sales and marketing................... 136 225 175 120 187 272 581 Research and development.............. 379 454 445 539 458 599 536 General and administrative............ 561 708 756 652 752 796 1,707 Amortization of intangibles and deferred stock compensation......... 2 19 29 161 118 345 407 In-process research and development... -- -- -- -- 1,190 -- -- ------ ------ ------ ------ ------- ------ ------- Total costs and expenses....... 1,371 1,754 1,836 1,907 3,199 2,488 3,712 ------ ------ ------ ------ ------- ------ ------- Loss from operations.................... (332) (616) (605) (294) (1,323) (861) (1,630) Other income............................ 24 55 56 39 40 26 26 ------ ------ ------ ------ ------- ------ ------- Net loss................................ $ (308) $ (561) $ (549) $ (255) $(1,283) $ (835) $(1,604) ====== ====== ====== ====== ======= ====== =======
In each of the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998, we had only one licensee that was shipping a feel-enabled joystick. Due to our licensee's limited success in the market, we received negligible royalty revenue in the quarters ended March 31, 1998 and 25 28 June 30, 1998 and no royalty revenue in the quarter ended September 30, 1998. Royalty revenue in the quarter ended December 31, 1998 increased to $313,000 from no revenue in the quarter ended September 30, 1998 due to the commencement of sales by Logitech, Anko Electronics, Thrustmaster, ACT Labs, LMP and SC&T International of feel-enabled steering wheels and the commencement of the sale by Logitech of its feel-enabled joystick. This increase resulted from our licensees introducing a number of new products for the 1998 holiday season. Royalty revenue in this period was adversely affected by the later than anticipated introduction of a feel-enabled steering wheel by Logitech. Logitech did not ship this product in commercial quantities to retail outlets until December 1998. Royalty revenue in the quarter ended June 30, 1999 decreased to $141,000 from $481,000 in the quarter ended March 31, 1999. This decline was due primarily to a decrease in revenues from our licensing partners following the holiday season. Our royalty revenue for the six quarterly periods beginning with the quarter ended March 31, 1998 were adversely affected by competition from Microsoft, which was not one of our licensees during any of these periods. Royalty revenue in the quarter ended September 30, 1999 increased by $516,000 from $141,000 in the quarter ended June 30, 1999 primarily due to a license to Microsoft resulting in revenue of $474,000 during the quarter. Development contracts and other revenue in the quarter ended March 31, 1999 increased to $310,000 from $159,000 in the quarter ended December 31, 1998. This increase was partially due to a new government contract signed in late 1998, which began generating revenues in the quarter ended March 31, 1999. Sales and marketing expenses decreased from $175,000 in the quarter ended September 30, 1998 to $120,000 in the quarter ended December 31, 1998 due primarily to trade show expenses of $71,000 in the quarter ended September 30, 1998 and the absence of any significant trade show expenses in the quarter ended December 31, 1998. Sales and marketing expenses increased from $120,000 in the quarter ended December 31, 1998 to $187,000 in the quarter ended March 31, 1999 due primarily to the trade show expenses of a game developer conference we attended in March 1999. Sales and marketing expenses increased from $272,000 in the quarter ended June 30, 1999 to $581,000 in the quarter ended September 30, 1999, primarily due to increased headcount and related compensation and benefits of $140,000 and corporate identity and web development costs of $120,000. Research and development expenses decreased in the quarter ended March 31, 1999 due to a temporary drop in the number of employees and a reduction in consulting expenses. General and administrative expenses decreased from $756,000 in the quarter ended September 30, 1998 to $652,000 in the quarter ended December 31, 1998. This decrease was primarily due to a $52,000 decrease in legal fees and a $41,000 decrease in consulting fees, associated with less transaction-related activity and related consultations and assistance. General and administrative expenses increased to $752,000 in the quarter ended March 31, 1999 as transaction-related activity and related legal and consulting expenses increased. General and administrative expenses increased from $796,000 in the quarter ended June 30, 1999 to $1.7 million in the quarter ended September 30, 1999, primarily due to an increase in recruiting expenses of $759,000 related to the recruitment of key members of the senior management team. Because our historical financial information does not reflect our primary business strategy for the future, we cannot forecast future revenues based on historical results. We base our expenses in part on future revenue projections. Most of our expenses are fixed in nature, and we may not be able to reduce spending quickly if revenue is lower than we have projected. We expect that our business, operating results and financial condition would be harmed if revenues do not meet expectations. 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 our control and any of which could cause the price of our common stock to decline. These factors include: - the mix of product sales, development contracts and royalty revenue; - the establishment or loss of licensing relationships; - the timing of our expenses; 26 29 - the timing of announcements and introductions of new products and product enhancements by our licensees and their competitors; - our ability to develop and improve our technologies; - our ability to attract, integrate and retain qualified personnel; - costs related to acquisitions of technologies or businesses; and - seasonality in the demand for our licensees' products. Because a high percentage of our operating expenses is fixed, a shortfall of revenues can cause significant variations in operating results from period to period. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operations primarily from the sale of preferred stock. As of September 30, 1999, we had an accumulated deficit of $7.9 million and working capital of $2.6 million, including cash and cash equivalents of $3.8 million. Net cash provided by operating activities for the nine months ended September 30, 1999 was $1.9 million, primarily attributable to noncash charges of $2.9 million, a $1.9 million increase in deferred revenue and increases in accounts payable and accrued liabilities of $687,000, partially offset by a net loss of $3.7 million. In 1998, net cash used in operating activities was $1.8 million, primarily attributable to a net loss of $1.7 million, an increase of $592,000 in accounts receivable and an increase of $186,000 in inventories. In 1997, net cash used in operating activities was $237,000, primarily attributable to a net loss of $527,000, largely offset by an increase in accounts payable of $189,000. In 1996, net cash use in operating activities was $208,000, attributable primarily to a net loss of $81,000, an increase of $131,000 in accounts receivable and an increase of $94,000 in inventories, offset by an increase of $75,000 in accrued liabilities. Net cash used in investing activities for the nine months ended September 30, 1999 was $924,000, and primarily consisted of $1.2 million of purchases of property and other assets, offset by $401,000 from sales of short-term investments. In 1998, net cash provided by investing activities was $237,000, attributable to $3.8 million from sales of short-term investments primarily offset by $2.9 million of purchases of short-term investments and $434,000 for purchases of patents and technology. In 1997, net cash used in investing activities was $1.2 million, and was attributable to $1.5 million of purchases of short-term investments and $205,000 of purchases of property, offset by $538,000 from sales of short-term investments. In 1996, net cash used in investing activities was $107,000, and was attributable to $325,000 of purchases of short-term investments and $181,000 of purchases of property, offset by $399,000 from sales of short-term investments. In order to improve our rate of return on cash and still provide short-term liquidity, we periodically purchase or sell short-term investments, which typically are interest-bearing, investment-grade securities with a maturity of greater than 90 days and less than one year. Net cash provided by financing activities for the nine months ended September 30, 1999 was $190,000, and consisted primarily of net proceeds of $189,000 from the exercise of stock options. In 1998, net cash provided by financing activities was $3.7 million and was attributable primarily to net proceeds of $5.4 million from the sale of preferred stock, offset by the repurchase of $1.8 million of stock. In 1997, net cash provided by financing activities was $1.6 million and was attributable primarily to the proceeds of $1.5 million from the sale of preferred stock. In 1996, net cash provided by financing activities was $596,000 and was attributable primarily to net proceeds of $590,000 from the sale of preferred stock. We believe that the net proceeds of this offering, together with our cash, cash equivalents and short-term investments, will be sufficient to meet our working capital needs for at least the next 12 months. We anticipate that capital expenditures for the remainder of 1999 and for the full year ended December 31, 2000 will total approximately $1.0 million. 27 30 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity. Our operating results have not been sensitive to changes in the general level of U.S. interest rates, particularly because most of our cash equivalents are invested in short-term debt instruments. If market interest rates were to change immediately and uniformly by 10% from levels at September 30, 1999, the fair value of our cash equivalents would not change by a significant amount. Foreign Currency Fluctuations. We have not had any significant transactions in foreign currencies, nor did we have any significant balances that were due or payable in foreign currencies at September 30, 1999. Therefore, a hypothetical 10% change in foreign currency rates would not have a significant impact on our financial position and results of operations. We do not hedge any of our foreign currency exposure. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which requires an enterprise to report, by major components and as a single total, the change in its net assets during the period from nonowner sources. Accumulated other comprehensive income at December 31, 1998 is comprised of unrealized gains on short-term investments of $1,000. The FASB also issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. We currently operate in one reportable segment under SFAS No. 131. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for us beginning in 2001. We believe that this statement will not have a significant impact on our financial condition and results of operations. YEAR 2000 Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As a result, software that records only the last two digits of the calendar year may not be able to distinguish whether "00" means 1900 or 2000. This may result in software failures or the creation of erroneous results. We have reviewed the current versions of our products to determine Year 2000 readiness. Based on our review and the results of our tests, we believe that our products, when configured properly and used in accordance with our instructions, will function properly during the transition and into the next century. We have not tested and do not plan to test the Year 2000 compatibility of prior versions of our products that have not been sold within the last two years. These products are functionally similar to current products that we have tested and determined are Year 2000 compliant. Accordingly, based on this review, we do not believe that there will be any material Year 2000 failures associated with prior versions of our products. We have tested third-party software that is used with our products. Despite testing by us and by customers, and assurances from developers of products sold to operate with our products, these products may contain undetected errors or defects associated with the Year 2000 date functions. In addition, because our products are used in complex computer environments, they may directly or indirectly interact with a number of other hardware and software systems with uncertain results. We are unable to predict to what extent our business may be affected if our products or technologies should experience Year 2000 related problems. Known or unknown errors or defects that affect the operation of our products could result in delay or loss of revenues, diversion of 28 31 development resources, damage to our reputation or increased service and warranty costs, any of which could harm our business. Our internal systems include our information technology systems and non-information technology systems. We have completed an initial assessment of our information technology systems and non-information technology systems. We have purchased the majority of our software and hardware within the last 24 months. Purchases have mostly been the latest software versions and the latest commercially available hardware. To the extent that we have not tested the technology provided by third-party vendors, we are seeking assurances from these vendors that their systems are Year 2000 compliant and anticipate completing this assessment by November 30, 1999. Vendors of the majority of our software and hardware have represented the Year 2000 compliance of their products. Based on our review to date, we have determined that our telephone voice messaging systems will require an upgrade to be Year 2000 compliant. We are not currently aware of any material operational issues associated with preparing our information technology systems and non-information technology systems for the Year 2000. However, we may experience unanticipated problems or additional costs caused by undetected errors or defects in the technology used in our internal information technology systems and non-information technology systems. We have identified our significant suppliers and service providers to determine the extent to which we are vulnerable to their failures to address Year 2000 issues. Many of these suppliers have indicated through publicly available information or through its Web site that the supplier believes its applications are Year 2000 compliant. We are seeking written assurances from all our significant suppliers and anticipate completing this assessment by November 30, 1999. We are continuing to monitor the progress of third parties that are critical to our business. We cannot be certain that the representations of these third parties are accurate or that they will reach Year 2000 compliance in a timely manner. If we determine that the progress of specific suppliers or service providers toward Year 2000 compliance is insufficient, we intend to change to other suppliers and service providers that have demonstrated Year 2000 readiness. We may not find alternative suppliers or service providers. In the event that any of our significant suppliers or significant service providers do not achieve Year 2000 compliance in a timely manner, and we are unable to replace them with alternate sources, our business would be harmed. In addition, governmental agencies, utility companies, third-party service providers and others outside of our control might not be Year 2000 compliant. The failure by these entities to be Year 2000 compliant could result in a systemic failure beyond our control, for example, a prolonged telecommunications or electrical failure. We believe the primary business risks, in the event of these failures, would include: - loss of telecommunication tools to support our licensees; - lost revenue; - increased operating costs; and - claims of mismanagement, misrepresentation or breach of contract. To date, we have not incurred any material costs directly associated with our Year 2000 compliance efforts, except for compensation expense associated with our salaried employees who have devoted some of their time to our Year 2000 assessment and remediation efforts. We do not expect the total cost of Year 2000 problems to be material to our business, financial condition and operating results. We have and will continue to expense all costs arising from Year 2000 issues, funding them from working capital. 29 32 BUSINESS OVERVIEW We develop hardware and software technologies that enable users to interact with computers using their sense of touch. Our patented technologies, which we call TouchSense, enable computer peripheral devices, such as joysticks, mice and steering wheels, to deliver tactile sensations that correspond to on-screen events. We currently focus on licensing our intellectual property for these feel-enabling technologies to manufacturers of computer peripherals in the computer entertainment and general purpose personal computing markets. Our objective is to proliferate our TouchSense technologies across markets, platforms and applications so that feel becomes as common as graphics and sound in the modern computer user interface. We hold 37 U.S. patents covering various aspects of our hardware and software technologies and have over 125 patent applications pending in the U.S. and abroad. To date, we have licensed our intellectual property to more than 16 companies, including Microsoft, Logitech and InterAct, which incorporate our patented feel-enabling technologies, together with other technologies necessary for computer gaming peripherals, into joysticks, gamepads and steering wheels that they manufacture. For the nine months ended September 30, 1999, royalty revenue accounted for 23% of our total revenues, and royalty revenue from the sale of gaming peripherals by our licensees accounted for 99% of our royalty revenue. To target the computer mouse market, we have licensed our intellectual property to Logitech to manufacture the first feel-enabled computer mouse incorporating our hardware and software technologies. Logitech began manufacturing its computer mouse incorporating our feel-enabling technologies in commercial quantities during the fourth quarter of 1999. It has begun shipping the mouse to its distribution centers and recently commenced initial shipments and sales of the product to distributors and retail customers. Logitech expects commercial quantities of the product to be available for purchase by consumers in the fourth quarter of 1999. As a result, we have recorded no royalty revenue from the sale of feel-enabled mouse products for the nine months ended September 30, 1999. Historically we have derived the majority of our revenues from the sale of products that we manufacture. The products that we manufacture include devices used to create three-dimensional computer images of small objects, a specialized computer mouse used for mapmaking, feel-enabled joysticks and steering wheels designed specifically for use in the arcade and location-based entertainment market and specialized medical products for simulation, training and clinical applications. For the nine months ended September 30, 1999, product sales accounted for 58% of total revenues and the products we manufactured accounted for 89% of our product sales. We have also derived revenues from development contracts under which we assist our licensees in the development of their feel-enabled products and from development contracts with government agencies for feel-enabling technologies. For the nine months ended September 30, 1999, revenues from these commercial and government development projects accounted for 19% of our total revenues. We expect that product sales and development contract revenues will continue to decline as a percentage of revenues if our royalty-based licensing model proves to be successful. INDUSTRY BACKGROUND Early computers had crude user interfaces that only displayed text and numbers. These machines, commonly known as "green screen" computers, were effective at processing data but did not communicate information in an engaging and intuitive manner. As a result, computing was used primarily in selected scientific and business applications. In the early 1980s, computers began to use graphics and sound to engage users' perceptual senses more naturally. Graphics technologies brought pictures, charts, diagrams and animation to the computer screen. Audio technologies enabled sound and music. 30 33 By the late 1980s, graphics and audio technologies had spread to consumer markets, initially through computer gaming applications. By the early 1990s, the penetration of graphics and sound into consumer markets had expanded beyond gaming into mainstream productivity applications, largely due to the introduction of the Windows 3.0 graphical user interface. By the late 1990s, the proliferation of graphics and audio content helped transform the Internet into a highly interactive and popular medium for communication, commerce and entertainment. The evolution from alphanumeric characters to the modern user interface is widely considered to be one of the great advances in computing. By presenting content in ways that engage the senses more fully, computers were "humanized," becoming more personal, less intimidating and easier to use. These improvements helped expand the audience for computer technologies, encouraging people to use software for business, home and entertainment applications. Today, graphics and audio technologies are standard features of most computer systems. While most modern computers realistically present information to the senses of sight and sound, they still lack the ability to convey content through the sense of touch. The absence of touch is a substantial barrier to making computer use more natural and intuitive. For example, current computing environments do not allow online shoppers to feel physical attributes of products prior to purchase and do not permit students to feel physical concepts like gravity and magnetism. Software designers strive to develop compelling applications for users to see and hear, but do not provide applications that users can feel. As a result, software is not as engaging and informative as it would be if tactile sensations were conveyed. The absence of touch and feel in modern computers also limits user productivity. The Windows interface, for example, is based on a physical metaphor: users must move the cursor on a screen to drag, drop, stretch and click. However, users must manipulate graphical elements without the benefit of tactile feedback. As a result, using a cursor is visually taxing. Selecting an icon, clicking on a hyperlink or grabbing the edge of a window are common tasks that would be easier to perform if users could feel the engagement of their cursor with the intended target. Like sight and sound, touch is critical for interacting with and understanding our physical surroundings. Technology that brings the sense of touch to computing has the potential to further humanize the computer and increase the ease, usefulness and enjoyment of computing. OUR SOLUTION We develop and license technologies that allow computer users to touch and feel computer content. In diverse applications like computer gaming, business productivity, medical simulation and surfing the Web, our technologies enable software applications to engage a user's sense of touch through common peripheral devices such as joysticks, steering wheels, gamepads and mice. Joysticks, steering wheels and gamepads incorporating our technology are currently manufactured and sold by our licensees. We have licensed our intellectual property to Logitech which has incorporated our feel-enabling technologies into a computer mouse that it manufactures. Logitech began shipping the first feel-enabled computer mouse to distribution centers in mid-October 1999. Logitech is currently marketing the mouse for use in gaming and Web applications. Our hardware and software technologies work together to enable peripheral devices to present touch and feel sensations. Our patented designs include specialized hardware elements such as motors, control electronics and mechanisms, which are incorporated into common computer peripheral devices such as mice and joysticks. Driven by sophisticated software algorithms, these hardware elements direct tactile sensations corresponding to on-screen events to the user's hand. For example, when a feel-enabled mouse is used to lift a "heavy" object within the computer application, software directs the mouse's motors to apply resistance to that motion to create a realistic simulation of weight. By contrast, when the cursor is moved against a "soft" object, the motors apply gradations of force to simulate the soft compliance of the object. 31 34 Key benefits of our solution include: Complete Solution. We offer a complete technical solution that allows our licensees to incorporate our feel-enabling technologies into their computer peripheral device products such as mice, joysticks, steering wheels and gamepads at a reasonable cost and in a reasonable time frame. Our technical solution also allows software programmers and Web site developers to add feel-enabling elements to their applications. Our software automatically enables users to feel the basic user interface features of software applications running on Windows 98 without additional developer support. Our software also enables users to feel basic Web page features represented through standard Hypertext Markup Language (HTML), Java and ActiveX protocols. In addition, we provide authoring tools that permit software developers to quickly design and incorporate custom feel sensations into their own applications. Compatible with Industry Standards. We have designed our hardware and software technologies to be compatible with leading hardware and software standards. Our technologies operate across multiple platforms and comply with such standards as DirectX, Microsoft's entertainment application programming interface, and USB (Universal Serial Bus). Cost-Effective Solution. We have developed component technologies that permit peripheral device manufacturers to design and manufacture peripheral devices that incorporate our feel-enabling technologies more cost effectively than would otherwise be possible. We have also developed and licensed sophisticated software drivers and firmware that permit our licensees to avoid substantial development costs and accelerate product introduction. Presents Information to the Sense of Touch. It is difficult to communicate physical properties such as texture, compliance, weight and friction solely through words or pictures. Our technologies allow computer users to use their sense of touch to perceive these physical properties in a way that is instantly understandable and intuitively accessible. Our technologies significantly improve the ability of software to communicate to users the physical features of a product, the physical properties of a scientific or engineering principle or the physical response of an object in a simulated gaming environment. 32 35 Improves User Productivity in Cursor Manipulation Tasks. Computer users routinely select items on the screen using a cursor. This task involves precisely positioning a cursor on a desired target like a menu or a hyperlink, and then pressing a button to indicate that the target should be selected. With a traditional mouse, users can confirm only through visual feedback that the correct item has been selected. This task demands significant visual attention, slows execution and distracts the user from other activities. With a feel-enabled mouse, the user can feel each encounter between the cursor and an item on the screen. For example, the edge of a window feels like a groove carved into a desktop; when the cursor slides into the groove, users feel a distinct physical engagement. Users interpret these sensations intuitively because of their similarity to real-world encounters. When selecting icons, scrolling through a menu or clicking on a hyperlink on a Web page, the ability to feel the encounter greatly facilitates interaction. [FEELIT GRAPHIC] Increases Satisfaction and Enjoyment of the Computing Experience. By engaging the user's sense of touch, our technologies have the potential to make a variety of software applications more interesting, engaging and satisfying. In the computer gaming market, our licenses, such as Logitech, Microsoft and InterAct, are currently manufacturing and selling products incorporating our intellectual property. We believe that our technologies will increase user satisfaction across many additional applications, including business productivity, engineering, education and e-commerce. Enhances the Effectiveness of Simulation and Training Applications. Some computer applications, such as medical training, require realism to be effective. Companies and institutions have begun to replace traditional means of surgical training with more accessible and versatile simulation systems for training doctors to perform surgical procedures. Our technologies increase the effectiveness of these systems by providing tactile feedback that simulates what a doctor would feel when performing an actual procedure. Our technologies are used in training systems for laparoscopic surgery, endoscopic surgery and catheter insertion. STRATEGY Our objective is to proliferate our TouchSense technologies across markets, platforms and applications so that feel becomes as common as graphics and sound in the modern computer interface. We intend to maintain and enhance our position as the leading provider of feel technology in consumer markets by employing the following strategies: Pursue A Royalty-Based Licensing Model. We believe that the most effective way to proliferate our feel technology is to license our intellectual property to computer peripheral device manufacturers. We have licensed our intellectual property to manufacturers of joysticks and steering wheels targeted at game consumers and have recently licensed our intellectual property to Logitech to incorporate our feel-enabling technologies into a computer mouse that it manufactures. We have also licensed our intellectual property to companies that make industrial products, such as medical simulation hardware and arcade systems. We intend to expand the number and scope of our licensing relationships and expect that licensing royalties will constitute an increasingly significant portion of our revenues in the future. 33 36 Facilitate Development of Feel-Enabled Products. We will continue to devote significant resources to facilitate the development and manufacture by our licensees of products incorporating our feel-enabling technologies. We offer complete design packages that include sample hardware, software, firmware and related documentation, and offer our technical expertise on a consulting basis. To facilitate development of products incorporating our feel-enabling technologies, we sell specialized microprocessors for controlling the motors in mice, joysticks and steering wheels. We will continue to invest in research and development to improve our technologies, with a particular emphasis on reducing the cost of feel-enabled products. Expand Software Support for Our Feel Technology. In addition to licensing our intellectual property to computer peripheral device manufacturers and supporting their product development efforts, we have focused on expanding software support for our feel technology. We have developed software that enables users to automatically feel icons, menus and other objects in software running in Windows 98 applications or on Web pages. We offer specialized authoring tools that simplify adding feel to software applications and Web pages. We also are promoting an efficient file format, called ".ifr," to facilitate the creation and storage of custom feel sensations. Utilize the Internet to Create Market Demand for Feel-Enabled Products. We believe that adding feel sensations to Web pages will provide on-line advertisers with a new means to attract and keep customers on their sites. We intend to promote this benefit to Web developers and to encourage them to incorporate feel content into their Web pages. When software developers add feel content to a Web site using our FEELtheWEB Designer authoring tool, they are required by license to include an active link from their Web page to our Web site, www.immersion.com. We are modifying our Web site to enable users to buy feel-enabled products by linking our Web site to our licensees' Web sites, such as Logitech's e-commerce Web site, www.buylogitech.com. Expand Market Awareness. We promote adoption of our feel technology by increasing market awareness among peripheral device manufacturers, software developers and consumers. We devote significant resources to working directly with our licensees to encourage and assist their product development efforts. We encourage software developers to add feel content to their applications by providing them with our authoring tools and technical support. As part of our license agreements, we require our licensees to use our trademarks and logos to create brand awareness among consumers. We intend to devote significant resources in the future to expand market awareness of our feel technology and our brands. Secure Licensees in New Markets for Feel Technology. We believe that our feel technology can be used in virtually all areas of computing. We initially focused on the computer gaming market where we have experienced rapid acceptance of our technologies by key licensees. We have recently broadened our focus to include mainstream computing and have licensed our feel-enabling technologies for use in computer mice. We intend to expand our market opportunities by addressing new platforms such as dedicated game consoles and set-top boxes, small computer appliances that plug into a television set enabling it to access the Internet. Develop and Protect Feel Technology. We hold 37 U.S. patents and have more than 125 patent applications pending in the U.S. and abroad covering our feel technology. Our success depends on our ability to license and commercialize our intellectual property and to continue to expand our intellectual property portfolio. We devote substantial resources to research and development and are engaged in projects focused on expanding the scope and application of our technologies. We have also secured technology by acquisition. We intend to continue to invest in technology development and potential acquisitions and to protect our intellectual property rights. 34 37 MARKET APPLICATIONS While we believe that our technologies are broadly applicable, we are focusing our initial marketing and business development activities on the following target markets: Computer Gaming. We initially licensed our intellectual property for feel-enabling technologies for consumer gaming peripherals in 1996 and branded this technology under the name I-FORCE. We have licensed our I-FORCE intellectual property to 16 manufacturers, including Logitech, Microsoft and InterAct. According to PC Data, feel-enabled joysticks accounted for approximately 3% of domestic PC joystick sales by unit volume in 1997 and doubled to approximately 6% of the domestic PC joystick sales by unit volume in 1998. In addition, we have developed I-FORCE technologies for gaming applications designed specifically for arcade and location-based entertainment markets. We intend to expand our I-FORCE licensing business to include new product categories for the PC platform, such as gamepads, which are hand-held controllers for gaming consoles, and flight yokes, which are game controllers that simulate the controls of an airplane, and to target additional gaming platforms. General Purpose Personal Computers. In order to bring feel technology to every desktop, we have targeted the general purpose computer market. To address this large opportunity, we developed FEELit, a feel technology designed for cursor control products that enables all the basic functionality of a traditional mouse but also presents information to the sense of touch. In 1998, we entered into a license with Logitech under which Logitech will manufacture mice incorporating our feel technology. We plan to expand the FEELit licensing business with new types of controllers and platforms. Medical and Other Professional Computing. We have identified and addressed demand for our feel technology in various industrial, medical and scientific markets. We currently have both product manufacturing and product licensing business relationships in these markets. TECHNOLOGY LICENSING AND PRODUCTS Technology Licensing We currently license our intellectual property to manufacturers which produce peripheral devices incorporating our feel-enabling technologies. In general, our licenses permit manufacturers to produce only a particular category of product within a specified field of use. We recently introduced our TouchSense brand, which covers all of our feel technologies. We grant licenses for gaming products, such as joysticks, steering wheels and game pads, under the I-FORCE brand. We grant licenses for cursor control products, such as mice or trackballs, and into medical simulation devices under the FEELit brand. We make our reference designs available to our licensees for an additional fee. A reference design is a package consisting of a technology binder, an electronic database and a hardware prototype that can be used in the development of a feel-enabled product. Our basic licensing model includes a per unit royalty paid by the manufacturer that is a percentage of the wholesale selling price of the feel-enabled product. In addition, each licensee 35 38 must abide by a branding obligation. The prominent display of I-FORCE and FEELit logos on retail packaging generates customer awareness for our technologies. I-FORCE.LOGO FEELit.LOGO Consumer Products. We license our intellectual property to manufacturers which incorporate our feel-enabling technologies into joysticks, steering wheel and gamepad peripherals targeted at the PC platform. Currently, there are three consumer joysticks sold under the I-FORCE brand: the Wingman Force Feedback Joystick from Logitech, the Sidewinder Force Feedback Joystick from Microsoft and the Force-FX Joystick from CH Products. Currently, there are ten I-FORCE steering wheel gaming peripherals licensed under the I-FORCE brand, including the Wingman Formula Force from Logitech, the Force GT from Thrustmaster, the Sidewinder Force Feedback Wheel from Microsoft and the V4 Force Feedback Racing Wheel and FX Force Feedback Racing Wheel from InterAct. Currently, there is one I-FORCE gamepad peripheral licensed under the I-FORCE brand, the Hammerhead FX from InterAct. Logitech began shipping the first feel-enabled computer mouse to distribution centers in mid-October 1999. This mouse, to be called the Wingman Force Feedback Mouse, will automatically allow users to feel many of the basic desktop controls in Windows 98 and standard interface elements of Web pages. Logitech is currently marketing the mouse for use in gaming and Web applications. Medical Products. We license our intellectual property for our feel-enabling technologies to HT Medical Systems for use in three medical simulation products, CathSim, PreOp Endoscopic Simulator and PreOp Endovascular Simulator. These devices are used for training purposes and enable clinicians to feel simulations of sensations experienced during medical procedures, such as encountering an unexpected obstruction in an artery. Arcade and Location-Based Entertainment Products. In order to help increase consumer awareness of feel technology in gaming applications, we license our feel technology to manufacturers of joystick and steering wheel arcade units. Software and Developer Products Demand for computer peripheral devices incorporating our feel-enabling technologies depends on the existence of software applications and Web pages that take advantage of these devices. The development of such software likewise depends on the existence of an installed base of feel-enabled hardware devices. We have addressed this interdependency of hardware and software solutions in two ways. First, we have developed end-user software that will be included with Logitech's feel-enabled mouse at no additional cost, and which automatically adds feel to many of the basic Windows 98 controls. Second, we have developed and provide to developers and end users software authoring tools that help programmers add feel content to software applications and Web pages. We have developed an efficient file format, called an ".ifr" file, for representing, storing and 36 39 transmitting feel sensations. This file format allows the development of feel sensation libraries that facilitate the development of feel-enabled applications software. We currently make I-FORCE Studio, FEELit Studio and FEELtheWEB Designer available to developers and FEELit Desktop and FEELtheWEB available to end users free of charge. We have licensed a limited number of copies of I-FORCE Studio to persons other than developers but have not generated significant revenues from these licenses. Automatic Support - FEELit Desktop adds feel to many of the basic Windows 98 controls, such as icons, menus, buttons, sliders and windows. It immediately makes any application running under Windows 98 more interesting and enhances productivity during mouse use. It includes a control panel that gives users the ability to customize the feel of their desktop. We expect that this product will be bundled with each feel-enabled mouse. - FEELtheWEB adds feel to web pages accessed through Internet Explorer and Netscape Navigator. In conjunction with FEELit Desktop, it allows users to feel the standard interface elements of Web pages such as hyperlinks, check boxes and menus. It also allows users to feel custom sensations that have been added to Web pages. We expect that this product will be bundled with each feel-enabled mouse. Authoring Tools - I-FORCE Studio is a fully animated graphical environment that allows game developers to design feel sensations for their software titles by adjusting physical parameters and feel sensations. Each software file describing the feel sensation that a developer creates can be saved into an ".ifr" file and then can be quickly inserted into gaming applications and Web pages during the development process. - FEELit Studio is an authoring tool that allows developers of mainstream productivity, Web and gaming software to design feel sensations into their software titles. Like I-FORCE Studio, it employs an intuitive graphical interface that allows feel sensations to be designed rapidly, implemented and saved as ".ifr" files. - FEELtheWEB Designer is an easy-to-use authoring tool that allows Web developers to add feel sensations to Web pages. They can load any HTML Web page into the tool and modify it to support feel sensations. Custom Microprocessors Many feel-enabled peripheral devices utilize commercially available microprocessors that process instructions needed to deliver force sensations to the user. These microprocessors have not been tailored for the specific requirements of feel-enabled products. We have developed our custom I-FORCE and FEELit microprocessors to improve the performance and to help to reduce the cost of gaming and peripheral products manufactured by our licensees. For example, our microprocessors contain circuitry to work with low cost sensors used in feel-enabled gaming and peripheral products and have been designed to streamline processing of information sent between a personal computer and a feel-enabled gaming or computer peripheral product. We believe that these microprocessors are cost-effective components that allow our licensees to reduce their costs of goods and the amount of custom development that they must perform to bring a product to market, speeding their development cycle. We have invested in this technology because we believe it is important as an enabling technology for low-cost feel-enabled devices. By incorporating commonly used components on a single piece of silicon, our microprocessors reduce the number of discrete components required on a printed circuit board and can help lower overall system costs for our licensees. This level of 37 40 integration simplifies the manufacture of feel-enabled products while increasing performance and reliability. Our I-FORCE and FEELit microprocessors are manufactured for us solely by Kawasaki LSI, with which we have entered into an ASIC Design and Development Agreement that remains in effect until cancelled by either party. We purchase the I-FORCE microprocessors from Kawasaki LSI and sell them to those licensees incorporating our feel technology in their gaming products that want to use the microprocessors in their gaming products. We permit Kawasaki to sell our FEELit microprocessor directly to Logitech for use in its feel-enabled computer mouse. Kawasaki pays a royalty to us on the sales of the FEELit microprocessors to Logitech. We generally warrant our microprocessors to conform to our specifications and to be free from defects in materials and workmanship for a period of one year from delivery, and Kawasaki extends a similar warranty to us. Specialty Products Medical Simulation and Other Medical Equipment. We have developed numerous technologies that can be used for medical training and simulation. By allowing computers to deliver feel sensations to users, our technologies can support realistic simulations that are effective in teaching medical students and doctors what it feels like to perform a given procedure. Currently, we manufacture and sell a number of low volume specialized medical products, including: - Virtual Laparoscopic Interface, a fully integrated tool designed to let developers, researchers and educators simulate minimally invasive surgical procedures; - Laparoscopic Impulse Engine, a three-dimensional interface for virtual reality simulations of laparoscopic and endoscopic surgical procedures that allows users to feel actual surgical tools as if they were performing these procedures; - PinPoint, a stereotactic arm manufactured for Picker International, Inc., which is integrated with Picker CT scanners to enable image-guided biopsies and radiation therapy; and - Endoscopic Sinus Surgery Simulation Trainer, an electro-mechanical system that recreates an operating room environment to simulate endoscopic procedures. Arcade and Location-Based Entertainment Products. We manufacture versions of feel-enabled joysticks and steering wheel products with enhanced durability specifically for the arcade and location-based entertainment markets. We sell, and expect to continue to sell, these products directly to entertainment companies that operate entertainment centers. While these products are higher priced than the joysticks and wheel products sold by licensees that incorporate our technologies into computer peripherals used for entertainment, the arcade and location-based market is a relatively small market when compared to the consumer markets served by our licensees. Automotive Applications. We are currently engaged in the second phase of an engineering development project for a major automobile manufacturer regarding a feel-enabled control device for use in automobiles. We have no commitment from the automobile manufacturer as to when or whether such a feel-enabled control device may be incorporated into a shipping automobile model. MicroScribe-3D. Our MicroScribe-3D product allows users to create three-dimensional computer models directly from physical objects. It contains sensor and microprocessor technologies that allow users to digitize physical objects simply by tracing their contours with a stylus. The computer records the three-dimensional geometry of the object and reproduces it on the screen as a three-dimensional computer model. MicroScribe-3D is designed to support the needs of game developers, engineers, animators, film makers, industrial designers and other professionals who need to create realistic three-dimensional computer images quickly and easily. 38 41 Softmouse. We also manufacture a high performance non-feel-enabled mouse for geographic information systems and the map-making industry. This product has a two-handed interface with ten buttons and a rotary thumbwheel. We currently sell this product to several major manufacturers, including Intergraph, Vision International and LH Systems. End users of Softmouse include the U.S. Geological Survey, NASA and the U.S. Department of Defense. TECHNOLOGY Feel simulation, also known as force feedback, haptic feedback or force reflection, refers to the technique of adding feel sensations to computer software by imparting physical forces upon the user's hand. These forces are imparted by actuators, usually motors, that are incorporated into consumer peripheral devices such as mice, joysticks, steering wheels or gamepads, or into more sophisticated interfaces designed for industrial, medical or scientific applications. Feel-enabled peripheral devices can impart to users physical sensations like rough textures, smooth surfaces, viscous liquids, compliant springs, jarring vibrations, heavy masses and rumbling engines. As a user manipulates a feel-enabled device, such as a mouse, motors within the device apply computer-modulated forces that either resist or assist the manipulations. These forces are generated based on mathematical models that simulate the desired sensations. For example, when simulating the feel of a rigid wall with a force feedback mouse, motors within the mouse apply forces that simulate the feel of encountering the wall. As the user moves the mouse to penetrate the wall, the motors apply a force that resists the penetration. The harder the user pushes, the harder the motors push back. The end result is a sensation that feels like a physical encounter with an obstacle. FEEL-ENABLED PRODUCT ARCHITECTURE [DIAGRAM] The mathematical models that control the motors may be simple modulating forces based on a function of time, such as jolts and vibrations, or may be more complex modulating forces based on user manipulations such as surfaces, textures, springs and liquids. Complex sensations can be created by combining a number of simpler sensations. For example, a series of simulated surfaces can be combined to give the seamless feel of a complex object like a sports car or a telephone. Textures can be added to these complex surfaces so that the windshield of the sportscar feels smooth and its tires feel rubbery. 39 42 To simplify the process of generating feel sensations, we have developed a parallel processing architecture in which a dedicated processor resides within the peripheral device and performs the complex mathematics. The dedicated processor offloads the processing burden from the host computer. This distributed processing architecture, along with specialized software, provides a software developer with an easy-to-use high-level application programming interface that abstracts feel programming into a perceptual rather than mathematical level. The application programming interface allows programmers to define and initiate feel sensations with software routines that have descriptive physical names such as "wall," "vibration" or "liquid." Programmers can easily adjust multiple parameters to customize different types of sensations. We have developed two application programming interfaces, one for gaming markets and one for productivity markets. The gaming application programming interface is called the I-FORCE API. The productivity application programming interface is called the FEELit API. Both allow software developers to incorporate feel sensations into software applications quickly. In 1997, Microsoft included support for our I-FORCE API into DirectX, Microsoft's standard gaming device application programming interface for the Windows platform. Most computer interface devices, such as mice and joysticks, are input-only devices, meaning that they track a user's physical manipulations but provide no manual feedback. As a result, information flows in only one direction, from the peripheral to the computer. Feel-enabled devices are input-output devices, meaning that they track a user's physical manipulations (input) and provide realistic physical sensations coordinated with on-screen events (output). The computer and the device need to communicate quickly in order to present realistic sensations. We have developed efficient processing techniques to minimize the amount of information that needs to be communicated between the computer and the peripheral. We use dedicated processors in the device to produce feel sensations in response to high-level commands from the computer. Our control architecture has the added benefit of performing force feedback computations in parallel with the computer's execution of a software application. SALES, MARKETING AND SUPPORT We establish licensing relationships and sell a number of our products through our direct sales efforts. We also sell some of our products indirectly through distributors and value-added resellers. Consistent with our intellectual property licensing strategy, we have focused our marketing activities on developing relationships with potential licensees and on participating with existing licensees in their marketing and sales efforts. To generate awareness of our technologies and our licensees' products, we participate in industry trade shows, maintain ongoing contact with industry press, provide product information over our Web site and advertise in entertainment and game industry publications. Another focus of our marketing efforts is to promote the adoption of our feel technology by software and Web developers to facilitate the implementation of feel sensations into software applications. We have developed the Feel Foundation Classes Software Development Kits, which contain our software authoring tools, as well as documentation, tutorials and software files containing sample feel sensations. We currently distribute this software to software developers at no cost. Our software support staff also works closely with developers to assist them in developing compelling feel-enabled applications. We provide sample feel sensations to developers through our Web site and through our I-FORCE Studio and FEELtheWEB Designer authoring tools. We intend to devote substantial resources to supporting software developers and Web page designers in the creation of feel-enabled software applications, including hiring additional software engineers and other technical personnel. We anticipate allocating substantially more resources to sales and marketing to proliferate our technology and to support the sales of our licensed products. To date, we have not focused on 40 43 marketing to end users of our licensees' products. However, we believe that it is important to increase awareness of our feel technology among potential end users. As part of our strategy to increase our visibility and promote our feel technology, our license agreements generally require our licensees to display the TouchSense, I-FORCE or FEELit logos on licensed products they distribute. In addition, we intend to substantially increase our advertising and marketing efforts to end users. Our sales and marketing expenses were approximately $422,000 in 1996, $658,000 in 1997, $656,000 in 1998 and $1.0 million in the nine months ended September 30, 1999. We currently anticipate that we will incur at least $6.0 million in sales and marketing expenses through the end of the year 2000. RESEARCH AND DEVELOPMENT Our success depends on our ability to improve, and reduce the costs of, our technologies in a timely manner. We have assembled a team of highly skilled engineers who possess experience in the disciplines required for feel technology development, including mechanical engineering, electrical engineering and computer science. Our research and development expenses were approximately $710,000 in 1996, $1.5 million in 1997, $1.8 million in 1998 and $1.6 million in the nine months ended September 30, 1999. We currently anticipate that we will incur at least $3.5 million in research and development expenses through the end of the year 2000. Our research and development efforts have been focused on technology development, including hardware, software and designs. We have entered into numerous contracts with government agencies and corporations 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 provide the applicable government agency a license to use the technology for non-commercial purposes. Although we expect to continue to invest substantially in research and development activities, we expect government-sponsored research activity to decline. COMPETITION We are aware of several companies that claim to possess feel technology applicable to the consumer market, but we do not believe that these companies or their licensees have introduced feel-enabled products. Several companies also currently market force feedback products to non-consumer markets and could shift their focus to the consumer market. In addition, our licensees may develop products that compete with products employing our feel technology but are based on alternative technologies. Many of our licensees, including Microsoft and Logitech, and other potential competitors have greater financial and technical resources upon which to draw in developing computer peripheral technologies that do not make use of our feel technology. Our competitive position is partially dependent on our licensees' competitive positions. 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 manufacturer's responsiveness, capacity, technical abilities, established customer relationships, retail shelf space, advertising, promotion programs and brand recognition. Feel-related benefits may be viewed simply as enhancements, and products incorporating our feel technology might face competition from computer peripheral devices that are not feel-enabled as well as from peripheral devices that use simple vibration technology, sometimes referred to as "dual shock" or "rumble pak." Semiconductor companies, including Intel and Mitsubishi, manufacture products that compete with the I-FORCE and FEELit processors but which have not been optimized specifically for feel technology. We are not aware of any companies that currently produce optimized feel processors. 41 44 There are several companies that currently sell high-end simulation products that compete with our professional and medical products. The principal bases for competition in these markets are technological sophistication and price. We believe we compete favorably on these bases. INTELLECTUAL PROPERTY We rely on a combination of patents, copyrights, trade secrets, trademarks, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property. We consider our ability to protect our intellectual property to be critical to our success. We hold 37 U.S. patents and have more than 125 pending patent applications, both domestic and foreign, covering feel technology. These patents and patent applications cover a variety of hardware and software innovations relating primarily to force feedback. Our current U.S. patents expire between the years 2011 and 2016. Our failure to obtain or maintain adequate protection for our intellectual property rights for any reason could hurt our competitive position. Patents may not issue 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. In addition, others may develop technologies that are similar or superior to our technologies, duplicate our technologies or design around our patents. Effective intellectual property protection may be unavailable or limited in some foreign countries. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise use aspects of our methods and devices that we regard as proprietary. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for our technologies, or be unable to persuade or require companies to enter into royalty-bearing license arrangements. 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 technology 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. From time to time, we have received claims from third parties that our technologies, or those of our licensees, infringe the intellectual property rights of these third parties. Between May 1995 and June 1999, we received four such letters. After examination of these claims and consultation with counsel, we believe that these claims are without merit. To date, none of these companies has filed a legal action against us. However, these or other matters might lead to litigation costs in the future. Intellectual property claims, whether or not they have merit, could be time-consuming to defend, cause product shipment delays, require us to pay damages against us, or require us to cease utilizing the technology unless we can enter into royalty or licensing agreements. Royalty or licensing agreements might not be available on terms acceptable to us or at all. Furthermore, claims could also result in claims from our licensees under the indemnification provisions of their agreements with us. From time to time, we initiate claims against third parties that we believe infringe our intellectual property rights. To date, these claims have not led to any litigation. However, any litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property assets. 42 45 EMPLOYEES As of September 30, 1999, we had 53 full-time employees, including 25 in research and development, 11 in sales and marketing and 17 in finance, administration and operations. As of that date, we also employed one independent contractor. None of our employees is represented by a labor union, and we consider our employee relations to be good. Competition for qualified personnel in our industry is extremely intense, particularly for engineers and technical staff. Our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. FACILITIES We have 16,280 square feet of office space in San Jose, California. Apart from the I-FORCE and FEELit microprocessors which are manufactured by Kawasaki LSI, all of the products that we sell are manufactured in our San Jose office. Our lease for this building expires on October 31, 2002. We anticipate that we may need to add office space over the next year in order to accommodate new employees. LEGAL MATTERS We are not currently involved in any legal or arbitration proceedings, nor have we been involved in any such proceedings during the past 12 months. 43 46 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES The following table sets forth information regarding our executive officers, directors and other key employees as of September 30, 1999:
NAME AGE POSITION ---- --- -------- EXECUTIVE OFFICERS AND DIRECTORS Louis Rosenberg, Ph.D.................... 30 Chairman of the board, President and Chief Executive Officer Victor Viegas............................ 42 Vice President, Finance and Chief Financial Officer J. Stuart Mitchell....................... 46 Vice President, Business Development Bruce Schena............................. 35 Vice President, Chief Technology Officer, Secretary and Director Jennifer Saffo........................... 45 Vice President, Marketing Kenneth Martin........................... 34 Director of Product Development Steven Blank............................. 45 Director Jonathan Rubinstein...................... 42 Director KEY EMPLOYEES Richard Abramson......................... 43 Director of Litigation and Intellectual Property Adam Braun............................... 28 Director of Embedded Systems Dean Chang, Ph.D......................... 32 Director of Platforms and Applications Craig Factor............................. 31 General Counsel Timothy Lacey............................ 29 Vice President, Operations Michael Levin............................ 34 Director of Professional and Industrial Products
Dr. Louis Rosenberg is a founder of Immersion and has served as Chairman of our board of directors and as President and Chief Executive Officer since May 1993. Since April 1997, Dr. Rosenberg has also served as a manager of MicroScribe LLC, a licensing company in which we hold a membership interest. Dr. Rosenberg holds bachelor of science, master of science and doctorate degrees in mechanical engineering from Stanford University. Mr. Victor Viegas has served as our Chief Financial Officer and Vice President, Finance since August 1999. From June 1996 to August 1999, he served as vice president, finance and administration and chief financial officer of Macrovision Corporation, a developer and licensor of video and software copy protection technologies. From October 1986 to June 1996, he served as vice president of finance and chief financial officer of Balco Incorporated, a manufacturer of advanced automotive service equipment. He holds a bachelor of science degree in accounting and a master of business administration degree from Santa Clara University. Mr. Viegas is also a certified public accountant in the State of California. Mr. J. Stuart Mitchell has served as our Vice President, Business Development since August 1999. From February 1987 to February 1999, Mr. Mitchell served as vice president of sales and marketing, systems products division and vice president of worldwide technology licensing business for Adobe Systems, Inc., a technology licensing desktop publishing and graphics software company. From May 1982 to January 1987, Mr. Mitchell served in various sales and marketing management positions for Zentec Corporation, a computer systems and display terminal company and, from April 1977 to April 1982, Mr. Mitchell served in various sales and marketing positions for Xerox Corporation, an information technology and document systems company. Mr. Mitchell holds a bachelor of science degree in engineering physics with a minor in business from the University of Colorado, Boulder. Mr. Bruce Schena has served as our Vice President, Chief Technology Officer, Secretary, and a member of our board of directors since January 1995. Since April 1997, Mr. Schena has also served 44 47 as a manager of MicroScribe LLC, a licensing company in which we hold a membership interest. From June 1993 to December 1994, Mr. Schena consulted for Pandemonium Product Development, a product design company owned by Mr. Schena. Mr. Schena holds bachelor of science and master of science degrees in mechanical engineering from Massachusetts Institute of Technology and a degree of engineer in mechanical engineering from Stanford University. Ms. Jennifer Saffo has served as our Vice President, Marketing since July 1999. From January 1991 to July 1999, Ms. Saffo owned and operated a sole proprietorship marketing company delivering strategic marketing advice to Internet and software companies. From 1987 to 1990, Ms. Saffo served as director of marketing for Adobe Systems, Inc., a technology licensing desktop publishing and graphics software company. From 1984 to 1987, Ms. Saffo was a founder and director of Aldus Corporation, a desktop publishing company, and from 1981 to 1984, she served as national accounts manager at Microsoft Corporation, a software company. Ms. Saffo holds a bachelor of arts degree in linguistics from University of Colorado, Boulder. Mr. Kenneth Martin has served as our Director of Product Development since April 1996. From June 1994 to April 1996, Mr. Martin served as a design engineer at IDEO Product Development Inc., a product design company. Since 1994, Mr. Martin also has served as a lecturer in the design division in the mechanical engineering department of Stanford University. Mr. Martin holds a bachelor of applied science degree from the University of Toronto and a master of science degree in manufacturing systems engineering from Stanford University. Mr. Steven Blank has served as a member of our board of directors since October 1996. From November 1996 to August 1999, Mr. Blank served as executive vice president of marketing for E.piphany, an enterprise software company that Mr. Blank co-founded. From February 1993 to October 1996, he served as chief executive officer of Rocket Science Games, a video game software company. From February 1990 to January 1993, Mr. Blank served as vice president of marketing of SuperMac, a supplier of Macintosh peripherals. Mr. Jonathan Rubinstein has served as a member of our board of directors since October , 1999. Since February 1997, Mr. Rubinstein has served as senior vice president of hardware engineering at Apple Computer, Inc., a personal computer company. From August 1993 to August 1997, Mr. Rubinstein was executive vice president and chief operating officer of Fire Power Systems, a developer and manufacturer of Power PC-based computer systems. Mr. Rubinstein has a bachelors and masters of science degree in electrical engineering from Cornell University and a master of science degree in computer science from Colorado State University. Mr. Richard Abramson has served as our Director of Litigation and Intellectual Property since February 1999. Since 1998, Mr. Abramson also has served as an adjunct professor at the University of California at Berkeley, Boalt Hall School of Law. From September 1991 to February 1999, Mr. Abramson was a litigation partner at the law firm of Heller Ehrman White & McAuliffe, specializing in patent and other intellectual property litigation. From August 1984 to 1991, Mr. Abramson was a litigation associate and partner at the law firm of Irell & Manella. Mr. Abramson holds a bachelor of arts degree from Claremont McKenna College and a juris doctorate degree from the University of California at Berkeley, Boalt Hall School of Law. Mr. Adam Braun has served as our Director of Embedded Systems since September 1995. From May 1994 to September 1995, Mr. Braun was an embedded systems engineer at Autonomous Effects Inc., a consulting company. Mr. Braun holds a bachelor of science degree in mechanical engineering from Brown University and a master of science degree in mechanical engineering from Stanford University. Dr. Dean Chang has served as our Director of Platforms and Applications since July 1995. From 1989 to July 1995, Dr. Chang was completing his master of science and doctorate degrees at Stanford University. Dr. Chang holds a bachelor of science degree from the Massachusetts Institute 45 48 of Technology and master of science and doctorate degrees in mechanical engineering from Stanford University. Mr. Craig Factor has served as our General Counsel since September 1997. From January 1995 to January 1997, Mr. Factor was an associate at the law firm of Wilson Sonsini Goodrich & Rosati. From September 1993 to January 1995, Mr. Factor was an associate at the law firm of Wiley, Rein & Fielding. Mr. Factor holds a bachelor of arts degree in social studies from Harvard University and a juris doctorate degree from the Duke University School of Law. Mr. Timothy Lacey is a founder of Immersion and has served as our Vice President, Operations since August 1999. From May 1993 to August 1999, Mr. Lacey served as our chief financial officer and from May 1993 to October 1999 as a member of our board of directors. Since April 1997, Mr. Lacey has served as a manager of MicroScribe LLC, a licensing company in which we hold a membership interest. Mr. Lacey holds bachelor of science and master of science degrees in mechanical engineering from Stanford University. Mr. Michael Levin has served as our Director of Professional and Industrial Products since July 1995. From July 1990 to May 1995, Mr. Levin served as manager of automation at Merck & Co., Inc., a pharmaceutical company. Mr. Levin holds a bachelor of science degree in aeronautics and astronautics and a master of science degree in mechanical engineering from Massachusetts Institute of Technology. BOARD COMPOSITION Our board of directors currently consists of four members. Our board of directors is divided into three classes, with each director serving a three-year term and one class being elected at each year's annual meeting of stockholders. Messrs. Blank and Schena will be in the class of directors whose term expires at the 2000 annual meeting of stockholders. Mr. Rubinstein will be in the class of directors whose term expires at the 2001 annual meeting of stockholders. Dr. Rosenberg will be in the class of directors whose term expires at the 2002 annual meeting of stockholders. ELECTION OF DIRECTORS AND EXECUTIVE OFFICERS At each annual meeting of the stockholders, the successors to each class of directors will be elected to serve for three year terms from the time of election and qualification until the next annual meeting at which the director's class stands for election. Executive officers are elected by the board of directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors or officers. BOARD COMMITTEES Audit Committee. The board of directors has established an audit committee consisting of Mr. Blank and Mr. Rubinstein. The audit committee reviews with our independent auditors the scope and timing of their audit services and any other services that they are asked to perform, the auditors' report on our consolidated financial statements following completion of their audit, and our policies and procedures with respect to internal accounting and financial controls. In addition, the audit committee makes annual recommendations to our board of directors regarding the appointment of independent auditors for the upcoming year. Compensation Committee. The board of directors established a compensation committee in October 1999 consisting of Mr. Blank and Mr. Rubinstein. The compensation committee makes recommendations to the board concerning salaries and incentive compensation for our officers and employees and administers our employee benefit plans. Prior to the formation of the compensation committee, the duties customarily performed by a compensation committee were the responsibility of our board of directors, consisting of Dr. Rosenberg, Mr. Lacey, Mr. Schena and Mr. Blank during 46 49 1998. Dr. Rosenberg and Messrs. Lacey and Schena were also executive officers during 1998. Directors who were also officers abstained from voting on their own compensation. DIRECTOR COMPENSATION Our directors do not receive cash compensation for their services as directors. Under our 1997 stock option plan, nonemployee directors are eligible to receive stock option grants at the discretion of the board of directors. In November 1996, we issued an option to purchase 80,700 shares of common stock at an exercise price of $0.17 per share to Mr. Blank. This option contains a provision providing Mr. Blank with the right to maintain his percentage interest of stock in our company. This right will terminate upon the closing of this offering. Pursuant to this provision, we have granted to Mr. Blank additional options to purchase shares of our common stock as follows:
SHARES SUBJECT EXERCISE PRICE DATE OF GRANT TO OPTION PER SHARE ------------- -------------- -------------- June 18, 1997 18,157 $0.25 December 12, 1997 6,052 0.37 March 16, 1998 20,336 1.24 April 22, 1999 20,175 3.66 June 21, 1999 3,228 3.66
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1998, the duties customarily performed by a compensation committee were the responsibility of our board of directors. The members of our board of directors who were also officers or employees are Dr. Rosenberg, Mr. Lacey and Mr. Schena. Share Repurchase. In May 1998, we repurchased 502,014 shares of our common stock at $3.66 per share from stockholders who elected to participate in the repurchase, including:
NUMBER OF STOCKHOLDER SHARES SOLD CONSIDERATION PAID ----------- ----------- ------------------ Louis Rosenberg, Ph.D................... 257,838 $942,531 Bruce Schena............................ 79,922 292,159 Timothy Lacey........................... 107,190 391,837
Micro Scribe Agreements. In July 1997, we entered into an exchange agreement, a patent license agreement and an intellectual property license agreement with MicroScribe LLC. Pursuant to the exchange agreement and patent license agreement, we assigned certain of our patents to MicroScribe in exchange for a worldwide, royalty-free, exclusive, irrevocable license and all of the class 1 membership interests in MicroScribe. All of the class 2 membership interests in MicroScribe were distributed to stockholders of our company at the time of the exchange agreement, including:
PERCENTAGE INTEREST NAME OF BENEFICIAL HOLDER OWNED IN MICROSCRIBE ------------------------- --------------------- Louis Rosenberg, Ph.D............................ 25.9% Bruce Schena..................................... 8.6 Timothy Lacey.................................... 10.8
Distributable cash from normal business operations of MicroScribe is distributed 99% to the class 2 members and 1% to us, as the sole class 1 member. The aggregate amount paid to Dr. Rosenberg, Mr. Schena and Mr. Lacey in 1999 was approximately $49,241. Neither of the members currently serving on our compensation committee has at any time since our formation been one of our officers or employees, and neither had a material interest in the transactions described under "Certain Transactions." None of our executive officers currently serves or in the past has served as a member of a compensation committee or board of directors of 47 50 any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee. EXECUTIVE COMPENSATION Summary Compensation Table. The following table presents information concerning compensation received during the year ended December 31, 1998 by our chief executive officer and each of our two other executive officers whose total salary and bonus earned during that year exceeded $100,000. In accordance with the rules of the Securities and Exchange Commission, the compensation described in this table does not include perquisites and other personal benefits received by these executive officers that do not exceed the lesser of $50,000 or 10% of the total salary and bonus reported for these officers.
LONG-TERM COMPENSATION AWARDS ANNUAL ------------ COMPENSATION SECURITIES ------------ UNDERLYING NAME AND PRINCIPAL POSITIONS SALARY OPTIONS(#) ---------------------------- ------------ ------------ Louis Rosenberg, Ph.D. ..................................... $138,615 72,465 President and Chief Executive Officer Bruce Schena................................................ 121,683 22,819 Vice President, Chief Technology Officer and Director Timothy Lacey............................................... 107,628 26,210 Chief Financial Officer and Director
Mr. Lacey was serving as our chief financial officer as of December 31, 1998. In August 1999, Mr. Lacey resigned as our chief financial officer and was appointed vice president, operations. Option Grants in Fiscal Year Ended December 31, 1998. The following table presents information with respect to stock options granted during 1998 to our executive officers listed in the summary compensation table.
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF STOCK SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION UNDERLYING OPTIONS GRANTED EXERCISE TERM OPTIONS TO EMPLOYEES PRICE EXPIRATION ----------------------- NAME GRANTED(#) DURING PERIOD ($/SHARE) DATE 5% 10% ---- ---------- ---------------- -------------- ---------- --------- ----------- Louis Rosenberg, Ph.D.... 605 0.14% $0.68 02/24/03 $ 9,443 $ 15,281 605 0.14 0.68 03/03/03 9,443 15,281 1,210 0.29 1.36 03/24/03 18,064 29,739 403 0.10 1.36 03/31/03 6,016 9,905 1,210 0.29 1.36 04/15/03 18,064 29,739 63,591 15.05 1.36 03/16/08 949,347 1,562,903 1,210 0.29 0.41 01/15/03 19,214 30,888 3,631 0.86 4.02 11/06/03 44,549 79,582 Bruce Schena............. 605 0.14 0.62 02/24/08 9,480 15,317 605 0.14 0.62 03/03/08 9,480 15,317 21,004 4.97 1.24 03/16/08 316,088 518,745 605 0.14 3.66 11/06/08 7,641 13,478 Timothy Lacey............ 26,210 6.20 1.36 03/16/03 391,288 644,174
The potential realizable value represents the hypothetical gains of the options granted based on assumed annual compound stock appreciation rates of 5% and 10% over an assumed initial public offering price of $10.00. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. In 1998, we granted options to purchase an aggregate of 422,406 shares to employees. 48 51 The exercise price of each option granted to Dr. Rosenberg and Mr. Lacey was equal to 110% of the fair market value of the common stock on the date of grant as determined by the board of directors. Dr. Rosenberg's option to purchase 63,591 shares of common stock vests as to 1/24 of the shares per month for 24 months. Dr. Rosenberg's option to purchase 605 shares with an expiration date of February 24, 2003 and option to purchase 1,210 shares with an expiration of January 15, 2003 are fully vested. His remaining options vest as to 1/12 of the shares per month for 12 months. Mr. Schena's option to purchase 21,004 shares of common stock vests as to 1/24 of the shares per month for 24 months. His remaining options vest as to 1/12 of the shares per month for 12 months. Mr. Lacey's option to purchase 26,210 shares of common stock vests as to 1/24 of the shares per month for 24 months. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values. The following table presents information for our executive officers listed in the summary compensation table concerning option exercises during 1998 and the value of exercisable and unexercisable options held as of December 31, 1998 by these officers:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES VALUE DECEMBER 31, 1998(#) DECEMBER 31, 1998($) ACQUIRED ON REALIZED ----------------------- ------------------------ NAME EXERCISE(#) ($) VESTED UNVESTED VESTED UNVESTED ---- ----------- ---------- ---------- --------- ----------- --------- Louis Rosenberg, Ph.D.............. 129,120 $1,286,035 985,210 91,089 $9,658,603 $832,384 Bruce Schena....................... 80,700 803,772 399,626 34,909 3,937,199 326,982 Timothy Lacey...................... 250,947 2,488,859 150,864 35,684 1,454,034 329,345
The value realized upon exercise of options is calculated based on an assumed initial public offering price of $10.00 less the exercise price. It does not necessarily indicate that the option holder sold the stock for the amount listed. The value of unexercised in-the-money options represents the positive difference between the exercise price of the stock options and an assumed initial public offering price of $10.00. CHANGE OF CONTROL AND EMPLOYMENT ARRANGEMENTS The options granted to Mr. Viegas accelerate in the event of a change in our control, if he resigns due to a material reduction in his duties or if we move his principal office more than 60 miles from San Jose. If the event occurs within 18 months of his start date, vesting will be accelerated by 12 months and if the event occurs more than 18 months after his start date, 50% of the unvested shares will become vested. In addition, if we terminate Mr. Viegas' employment other than for cause, we will pay him a severance payment equal to six months of base salary (or, if lesser, the number of months before he finds other employment) and a portion of his options will also accelerate. If the termination occurs before the first anniversary of his start date, 37.5% of the shares will become vested, and if the termination occurs after his first anniversary but within 18 months of his start date, vesting will be accelerated by 12 months. The options granted to Mr. Mitchell accelerate in the event that we move his principal office more than 60 miles from San Jose within 12 months of his start date, there is a change in our control that results in his termination of employment or if he resigns due to a material reduction in his duties. If one of the events occurs, vesting will be accelerated by 12 months. In addition, if we terminate Mr. Mitchell's employment other than for cause, we will pay him a severance payment equal to three months of base salary (or, if lesser, the number of months before he finds other employment) and the vesting of his options will be accelerated by three months. The options granted to Ms. Saffo accelerate in the event of a change in our control that results in her termination of employment, if she resigns due to a material reduction in her duties or if we move her principal office more than 60 miles from San Jose within 12 months of her start date. If 49 52 one of these events occurs, vesting will be accelerated by 12 months. In addition, if we terminate Ms. Saffo's employment other than for cause, we will pay her a severance payment equal to three months of base salary (or, if lesser, the number of months before she finds other employment) and the vesting of her options will be accelerated by three months. Our 1994 stock option plan provides that, in the event of a change in control, our board of directors may either: - arrange with the acquiring corporation that outstanding options be assumed or that equivalent options be substituted by the acquiring corporation; or - provide that any unexercisable or unvested portion of the outstanding option shall be immediately exercisable and vested in full. The options terminate if they are not assumed, substituted or exercised prior to a change of control. EMPLOYEE BENEFIT PLANS 1997 Stock Option Plan. Our 1997 stock option plan was adopted by our board of directors in June 1997 and approved by our stockholders in July 1997. We are authorized to issue under this plan up to 3,166,793 shares of common stock. The number of shares may be increased with the approval of our stockholders. In August 1999, subject to stockholder approval, our board of directors approved an increase in the number of shares that we are authorized to issue under the plan to 5,166,793. In addition, in August 1999, subject to stockholder approval, our board of directors approved an amendment to the stock option plan which provides that, without any need for stockholder and board approval, the share reserve will automatically be increased on January 1 of each year beginning January 1, 2001 by an amount equal to 5% of the number of shares of our common stock that were issued and outstanding on the last day of the preceding year. The 1997 option plan is currently administered by the board of directors. The plan allows grants of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, to employees, including officers and employee directors. In addition, it allows grants of nonstatutory stock options to employees, non-employee directors and consultants. Incentive stock options may not be granted after June 2007, although the plan may be terminated sooner by the board of directors. The exercise price of incentive stock options granted under the 1997 stock option plan must not be less than the fair market value of the common stock on the date of grant. In the case of nonstatutory stock options, the exercise price must not be less than 85% of fair market value. With respect to any option holder who owns stock representing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option must be equal to at least 110% of the fair market value of the common stock on the date of grant, and the term of the option may not exceed five years. The terms of all other options may not exceed ten years. The aggregate fair market value of the common stock for which an incentive stock option may become exercisable for the first time may not exceed $100,000 in any calendar year. The fair market value will be determined as of the date of the option grant. The board of directors or any committee administering the 1997 stock option plan has discretion to determine exercise schedules and vesting requirements, if any, of all options granted under the plan. In the event of a change in control, the acquiring or successor corporation may assume or substitute for the outstanding options granted under our 1997 stock option. The outstanding options will terminate to the extent that they are neither exercised nor assumed or substituted for by the acquiring or successor corporation. As of September 30, 1999, 304,276 shares of common stock had been issued upon exercise of options outstanding under this plan. Options to purchase 2,846,923 shares of common stock, at a weighted average exercise price of $4.76, were outstanding, and 2,015,594 shares remained available for future grants. 1994 Stock Option Plan. Our 1994 stock option plan was adopted by our board of directors in August 1994 and approved by our stockholders in August 1994. Prior to the adoption of the 1997 50 53 stock option plan, a total of 2,381,330 shares of common stock were reserved for issuance under the 1994 stock option plan. In July 1997, upon the adoption of the 1997 stock option plan, our board of directors terminated the 1994 stock option plan. While no additional options will be granted under that plan, options to purchase 1,149,217 shares of common stock are outstanding and remain subject to the provisions of the 1994 stock option plan. The plan is administered by the board of directors. The 1994 stock option plan allowed the grant of incentive stock options and nonstatutory stock options. The exercise price of incentive stock options granted under the plan had to be at least equal to the fair market value of the common stock on the date of grant. With respect to any option holder who owned stock representing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any stock option had to be at least equal to 110% of the fair market value of the common stock on the date of grant and the term of the option may not exceed five years. The terms of all other options could not exceed ten years. The aggregate fair market value of the common stock for which an incentive stock option may become exercisable for the first time may not exceed $100,000 in any calendar year. In the event of a change in control, our board of directors may either: - arrange with the acquiring corporation that outstanding options be assumed or that equivalent options be substituted by the acquiring corporation; or - provide that any unexercisable or unvested position of the outstanding option be immediately exercisable and vested in full. The outstanding options will terminate to the extent that they are neither exercised nor assumed or substituted for by the acquiring or successor corporation. As of September 30, 1999, 1,232,099 shares of common stock had been issued upon exercise of options outstanding under this plan, options to purchase 1,149,217 shares of common stock, at a weighted average exercise price of $0.10, were outstanding and 14 shares remained available for future grant. 1999 Employee Stock Purchase Plan. In August 1999, our board of directors adopted, subject to approval by our stockholders, our 1999 employee stock purchase plan. We have reserved a total of 500,000 shares of common stock for issuance under the 1999 employee stock purchase plan, none of which has been issued as of the effective date of this offering. The share reserve will automatically be increased on January 1, 2001 and on each subsequent January 1 through January 1, 2010, by 500,000 shares per year or a lesser number of shares determined by our board of directors. The employee stock purchase plan is intended to qualify under Section 423 of the Internal Revenue Code. Employees, including officers and employee directors, of us or any subsidiary designated by the board for participation in the plan are eligible to participate in the plan if they are customarily employed for more than 20 hours per week and more than five months per year. Eligible employees may begin participating at the start of any offering period. The first offering period will run for approximately 24 months and will be divided into four consecutive purchase periods of approximately six months. The first offering period and the first purchase period will commence on the date of this offering. The first offering period will terminate on the last day of January 2002. The first purchase period will terminate on the last day of January 2000. Subsequent purchase periods will generally have a duration of approximately six months. Purchasing periods after the initial purchase period will commence on the first day of February and August of each year. The board may change the dates or duration of one or more offering periods, but no offering period may exceed 27 months. Participants will purchase shares on the last day of each purchase period of the initial offering period and on the last day of each subsequent six month offering period. The employee stock purchase plan permits eligible employees to purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value of the 51 54 common stock on the first day of the offering period, or the purchase date. Participants generally may not purchase more than 1,000 shares on any purchase date or stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period. In the event of a change in control, the board may accelerate the purchase date of the then-current offering period to a date prior to the change in control, unless the acquiring or successor corporation assumes or replaces the purchase rights outstanding under the employee stock purchase plan. Our board of directors may amend or terminate the 1999 employee stock purchase plan at any time, as long as such amendment or termination does not impair outstanding purchase rights. 401(k) Plan. We have a 401(k) retirement and deferred savings plan covering all eligible employees that is intended to qualify as a tax-qualified plan under the Internal Revenue Code. Employees are eligible to participate in the plan after completing one month of service with us. Employees may participate in the plan beginning on the first day of the calendar quarter immediately following satisfaction of the eligibility requirement. The plan provides that each participant may contribute up to 15% of his or her pre-tax gross compensation, up to a statutory limit, which was $10,000 in the 1998 calendar year. All amounts contributed by participants and earnings on these contributions are immediately vested. We may contribute an amount up to 6% of the participant's annual compensation if that amount is less than or equal to the amount of the participant's contribution that will vest on the last day of the plan year for employees employed on that date. We may also make discretionary non-matching contributions. These contributions would vest ratably over six years or seven years depending on the nature of the contribution. Continued employment is a condition of vesting. To date, we have made no contributions to the 401(k) plan. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF DIRECTORS' LIABILITY Our certificate of incorporation limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: - any breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - any transaction from which they derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers and may indemnify other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity, regardless of whether Delaware law would permit indemnification. In addition to indemnification provisions in our bylaws, we have entered into agreements to indemnify our directors and executive officers. These agreements provide for indemnification of our directors and executive officers for some types of expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by persons in any action or proceeding, including any action by or in the right of Immersion, arising out of their services as our director or executive officer. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. 52 55 CERTAIN TRANSACTIONS Since January 1, 1996, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeds $60,000 and in which any of our directors, executive officers or holders of more than 5% of our capital stock had or will have a direct or indirect material interest other than: - the salaries, options, share repurchase and other agreements that are described in "Management;" and - the transactions described below. FINANCING TRANSACTIONS In November 1996, we issued 394,760 shares of Series B preferred stock to individuals for an aggregate purchase price of $590,004. Of these shares, we issued 20,175 shares to Bruce Paul, a holder of more than 5% of our capital stock. In November 1996, we also issued Mr. Paul a warrant to purchase 32,280 shares of Series B preferred stock at an exercise price of $1.49 per share. In December 1996, we issued Mr. Paul a warrant to purchase 40,350 shares of Series B preferred stock at an exercise price of $1.49 per share. We amended these warrants in September 1998 to extend their term from two years to five years. In connection with these extensions, we recognized a consulting expense during 1998 in the amount of $41,100. In June 1997, we issued 864,642 shares of Series C preferred stock for an aggregate purchase price of $1,500,005. Of these shares, we issued 518,788 shares to Intel, a holder of more than 5% of our capital stock. In connection with this sale of Series C preferred stock to Intel, we issued Intel a warrant to purchase 91,191 shares of common stock at an exercise price of $0.19 per share. In connection with this sale, we agreed to provide the holders of Series C preferred stock with registration rights with respect to the common stock issuable upon conversion of the Series C preferred stock and upon exercise of Intel's warrant. In April 1998, we issued shares of our Series D preferred stock to Intel and Logitech, each a holder of more than 5% of our capital stock. Intel purchased 179,599 shares and Logitech purchased 1,197,329 shares of our Series D preferred stock at a purchase price of $4.17 per share for an aggregate purchase price of $5,750,002. In connection with this sale, we agreed to provide each of Intel and Logitech with registration rights with respect to the common stock issuable upon conversion of this Series D preferred stock. OTHER TRANSACTIONS Share Repurchase. In May 1998, we repurchased 502,014 shares of our common stock at $3.66 per share from stockholders who elected to participate in the repurchase, including Dr. Rosenberg, Mr. Schena and Mr. Lacey. For more information, please see "Compensation Committee Interlocks and Insider Participation." Logitech Agreements. In addition to Logitech being a holder of more than 10% of our capital stock, Logitech is a licensee which accounts for a large portion of our licensing revenue. In October 1996, we entered into a royalty-based license agreement and a technology product development agreement with Logitech. The license agreement grants Logitech a license under our patents for feel-enabled gaming products. Pursuant to the technology product development agreement, we provided Logitech consulting services with respect to the development of a feel-enabled joystick for which Logitech paid us approximately $270,000 and a feel-enabled steering wheel for which Logitech paid us approximately $159,000. Pursuant to the license agreement, Logitech is required to pay us a royalty of 5% of the revenue it receives when it sells a product incorporating our technology to third parties. If Logitech ships more than 100,000 units in a single year without a modification in technical specifications, the royalty for that product will be reduced by 0.66% for the following year. If Logitech ships more than 200,000 units in subsequent years 53 56 without a modification in technical specifications, the royalty will be reduced in each subsequent year by a further 0.66%. However, the royalty rate may not drop below 3%. In addition, Logitech is required to mark its products with our relevant patents and abide by our product branding requirements. The duration of this license agreement is the life of any patents owned or licensable by us whose scope extends to the gaming peripheral products that incorporate our feel-enabling technologies licensed by Logitech. Currently, the life of the last to expire of these patents continues until 2016. The agreement also contains indemnification provisions relating to copyright, trade secret and patent infringement pursuant to which each party, subject to a number of exceptions, and further subject to a limitation of liability to the greater of (i) $500,000 or (ii) royalties paid by Logitech to us during the 36-month period preceding the event giving rise to the obligation to indemnify, agrees to defend and indemnify the other for liability arising from claims that the indemnifying party's technology infringes a third party's copyrights, trade secrets or patents. We also agreed to indemnify Logitech against trademark infringement liability arising from Logitech's compliance with its branding obligations under the agreement. The license agreement also contains a "most favorable royalties" clause that, in the event we grant a license at a lower royalty rate to a third party for feel-enabled gaming products having similar functionality to the Logitech products, would (unless a portion of the consideration we receive consists of a cross-license under the other party's patents) entitle Logitech to a matching reduction in its royalty rate. In addition, the license agreement prohibits either party from recovering from the other party lost profit damages, or special, indirect, incidental or consequential damages, arising from the agreement and, except for damages recoverable based on the parties' indemnification obligations, which are treated separately as described above, limits the parties' liability to one another to no more than $1.0 million. We did not derive any royalty revenue from the agreements in 1997. We derived royalty revenue of $249,000 in 1998 and $552,000 in the nine months ended September 30, 1999 from this license agreement. In April 1998, we entered into a royalty-based license agreement and a technology product development agreement with Logitech. Pursuant to the technology product development agreement, we provided Logitech consulting services with respect to the development of a feel-enabled mouse for which Logitech paid us approximately $351,000. In addition, pursuant to the license agreement, we licensed to Logitech technology incorporated by Logitech into a feel-enabled mouse product. Under the development agreement, we agreed that we would not enable a third-party to ship a similar feel-enabled mouse product until October 23, 1999. The duration of the license agreement is the life of any patents owned or licensable by us whose scope extends to the mouse technology licensed by us to Logitech. Currently, the life of the last to expire of these patents continues until 2016. The agreement calls for Logitech to pay us 5% of its revenues from the sale of feel-enabled mouse products, to abide by our branding requirements with respect to such products and their packaging, and to mark these products with our patents. It also contains indemnification provisions relating to copyright, trade secret and patent infringement pursuant to which each party, subject to a number of exceptions, and further subject to a limitation of liability to the greater of (i) $500,000 or (ii) royalties paid by Logitech to us during the 36-month period preceding the event giving rise to the obligation to indemnify, agrees to defend and indemnify the other for liability arising from claims that the indemnifying party's technology infringes a third party's copyrights, trade secrets or patents. We also agreed to indemnify Logitech against trademark infringement liability arising from Logitech's compliance with its branding obligations under the agreement. The license agreement also contains a "most favorable royalties" clause that, in the event we grant a license at a lower royalty rate to a third party for a feel-enabled mouse having similar functionality to the Logitech product, would (unless a portion of the consideration we receive consists of a cross-license under the other party's patents) entitle Logitech to a matching reduction in its royalty rate. In addition, the license agreement prohibits either party from recovering from the other party lost profit damages, or special, indirect, incidental or consequential damages, arising from the agreement and, except for damages recoverable based on the parties' indemnification obligations, which are treated 54 57 separately as described above, limits the parties' liability to one another to no more than $1.0 million. For the nine months ended September 30, 1999, we have not derived any royalty revenue from the license agreement. We currently anticipate signing a co-marketing agreement with Logitech in which we would agree to assist Logitech with the launch and promotion of its feel-enabled mice. Under the terms of the proposed agreement, for a period of five calendar quarters, beginning in the first calendar quarter of 2000, we would reimburse Logitech for certain marketing related expenses not to exceed $200,000 per quarter. Only third-party marketing services that are targeted at promoting Logitech's feel-enabled mice would be eligible for reimbursement. In addition, all promotional activities would have to be approved by us in advance. In order to remain eligible for reimbursement, Logitech would have to include our brand and slogan on all its marketing materials that reference feel-enabled functionality or products, and commit to other conditions regarding its feel-enabled mice. MicroScribe Agreements. In July 1997, we entered into an exchange agreement, a patent license agreement and an intellectual property license agreement with MicroScribe LLC. MicroScribe LLC is a privately-held limited liability company with two types of outstanding membership interests -- class 1 membership interests and class 2 membership interests. Pursuant to the exchange agreement and the patent license agreement, we assigned certain of our patents to MicroScribe in exchange for a worldwide, royalty-free, exclusive, irrevocable license and all of the class 1 membership interests in MicroScribe. All of the class 2 membership interests were distributed to stockholders of our company in a one-time distribution based on their proportionate share ownership in our company at the time of the distribution. There are no membership interests in MicroScribe LLC other than the class 1 and class 2 membership interests. MicroScribe LLC has not issued any additional membership interests other than the initial issuance of the class 1 and class 2 membership interests to us. Accordingly, stockholders who have acquired shares of our company after the one-time distribution do not own any membership interests in MicroScribe. The following table presents information regarding the percentage interest in MicroScribe of each person listed individually in our principal stockholders table on page 57.
PERCENTAGE INTEREST NAME OF BENEFICIAL HOLDER OWNED IN MICROSCRIBE ------------------------- -------------------- Cybernet System Corporation.................... --% Logitech International S.A..................... -- Intel Corporation.............................. 5.9 Bruce Paul..................................... 7.5 Louis Rosenberg................................ 25.9 Bruce Schena................................... 8.6 Timothy Lacey.................................. 10.8 Steven Blank................................... 1.0 Jonathan Rubinstein............................ --
The aggregate amount paid to these persons in 1999 was approximately $62,000. Distributable cash from normal business operations of MicroScribe is distributed 99% to the class 2 members and 1% to us, as the sole class 1 member. Pursuant to the terms of the license agreement, MicroScribe granted us rights to use intellectual property of MicroScribe for the development and distribution of 3D digitizing products. Under the intellectual property license agreement, we pay MicroScribe a formula-based royalty that varies between 5% and 10% of the net receipts we receive from selling products incorporating MicroScribe technology. We paid MicroScribe $116,000 in 1998 and $99,000 for the nine months ended September 30, 1999. The agreement, which has a term of ten years and is scheduled to expire in 2007, also provides that beginning in 2002 the royalty rate will be set at 10% for the remainder of the license term. Products for which we currently pay MicroScribe a royalty include our MicroScribe-3D digitizing product and the PinPoint arm, a medical device used for image-guided biopsies whose design is based upon 55 58 the MicroScribe-3D. The agreement also requires MicroScribe to indemnify us against claims that the technology it has delivered to us infringes a third party's intellectual property rights. Cybernet Agreements. In March 1999, we acquired patents and in-process technology from Cybernet Systems Corporation in exchange for 1,291,200 shares of our common stock. In addition, we entered into a consulting services agreement with Cybernet, under which we issued Cybernet a warrant to purchase 322,800 shares of common stock at an exercise price of $3.66 and agreed to pay Cybernet $300,000. We paid $150,000 of this amount in March 1999 and must pay $75,000 in January 2000 and $75,000 in January 2001. In connection with this acquisition and consulting arrangement, we agreed to provide Cybernet with registration rights with respect to their common stock and the common stock issuable upon exercise of this warrant. As a result of these transactions, Cybernet is a holder of more than 10% of our capital stock. 56 59 PRINCIPAL STOCKHOLDERS The following table presents information regarding the beneficial ownership of our common stock as of September 30, 1999, and as adjusted to reflect the sale of the 4,250,000 shares of common stock offered by us, by: - each stockholder known by us to beneficially own more than five percent of our common stock; - each of the executive officers listed in our summary compensation table on page 48; - each director; and - all executive officers and directors as a group.
SHARES OF COMMON STOCK BENEFICIALLY PERCENTAGE OF COMMON STOCK OWNED BENEFICIALLY OWNED ------------ --------------------------------- NAME OF BENEFICIAL OWNER NUMBER BEFORE OFFERING AFTER OFFERING ------------------------ ------------ --------------- -------------- 5% STOCKHOLDERS Cybernet Systems Corporation..................... 1,557,510 13.5% 9.9% 727 Airport Boulevard Ann Arbor, Michigan 48108-1639 Logitech International S.A. ..................... 1,197,329 10.7 7.8 6505 Kaiser Drive Fremont, California 94555-3615 Timothy Lacey.................................... 1,083,821 9.5 6.6 c/o Immersion Corporation 2158 Paragon Drive San Jose, California 95131 Intel Corporation................................ 789,578 7.0 5.1 2200 Mission College Boulevard M&A Portfolio Manager, RN 6-46 Santa Clara, California 95052 Bruce Paul....................................... 781,781 6.9 5.0 One Hampton Road Purchase, NY 10577 EXECUTIVE OFFICERS AND DIRECTORS Louis Rosenberg, Ph.D. .......................... 2,543,408 20.8 15.4 Bruce Schena..................................... 869,475 7.5 5.5 Steven Blank..................................... 146,093 1.3 0.9 Jonathan Rubinstein.............................. 14,795 0.1 0.1 All executive officers and directors as a group (8 persons).................................... 3,776,656 29.5 22.1
Heidi Jacobus, the principal stockholder of Cybernet Systems Corporation, and Charles Jacobus constitute a majority of the board of directors of Cybernet Systems Corporation and exercise dispositive and voting power on behalf of Cybernet Systems Corporation. Logitech International S.A. is a large public company managed by its board of directors consisting of Mr. Daniel V. Borel, also a principal stockholder of Logitech, Mr. Guerrino De Luca, Mr. Kwong Soon Chay, Mr. Pier Carlo Falotti, Mr. Jean-Louis Gassee and Mr. Frank Gill. As of September 30, 1999, there were 11,191,856 shares of common stock outstanding, assuming conversion of all shares of preferred stock into common stock. Following completion of this offering, there will be 15,441,856 shares of common stock outstanding, assuming no exercise of the 57 60 underwriters' over-allotment option. The column that shows the percentage of shares outstanding after the offering assumes that the underwriters' over-allotment option is not exercised. If the over-allotment option is exercised in full, we will sell a total of 218,736 shares of common stock and selling stockholders will sell a total of 418,764 shares of common stock. The following table presents information regarding the beneficial ownership of our common stock as of September 30, 1999, assuming the exercise of the over-allotment option in full, as adjusted to reflect the sale of common stock offered by each selling stockholder:
SHARES OF COMMON STOCK SHARES OF COMMON STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING ----------------------- ------------------------ NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE ------------------------ --------- ---------- ---------- ---------- Adam C. Braun.................................. 145,687 1.3% 141,652 0.9% C. Gordon Bell Revocable Trust................. 53,802 0.5 38,802 0.2 Dean Chang, Ph.D............................... 128,639 1.1 120,639 0.8 Cybernet Systems Corporation................... 1,557,510 13.5 1,396,110 8.7 Craig H. Factor................................ 150,550 1.3 142,480 0.9 Christopher J. Hasser.......................... 85,783 0.8 85,218 0.5 Patrick H. and Nina J. Lacey................... 30,262 0.3 22,192 0.1 Timothy Lacey.................................. 1,083,821 9.5 1,043,512 6.6 Kenneth Martin................................. 202,885 1.8 194,815 1.2 Nicholas Palevsky.............................. 20,175 0.2 0 0.0 Arthur and Marilyn Rosenberg................... 85,541 0.8 73,541 0.5 Louis Rosenberg, Ph.D. ........................ 2,543,408 20.8 2,423,408 14.5 Bruce M. Schena................................ 869,475 7.5 861,405 5.4 Ming-Chang Tsai................................ 28,245 0.3 23,245 0.1
Beneficial ownership is determined under the rules of the Securities and Exchange Commission. All of the shares of common stock subject to options currently exercisable or exercisable within 60 days after September 30, 1999 are treated as outstanding and beneficially owned by the person holding them for the purpose of computing the number of shares beneficially owned by and the percentage of ownership of that person. They are not, however, treated as outstanding and beneficially owned for the purpose of computing the percentage ownership of any other person. Except where indicated and subject to applicable community property laws, based on information provided by the persons named in the table, these persons have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Shares listed as held by Cybernet consist of 1,246,008 shares and 311,502 shares issuable upon exercise of warrants exercisable within 60 days of September 30, 1999. Shares listed as held by Timothy Lacey consist of 881,153 shares and 202,668 shares issuable upon exercise of options within 60 days of September 30, 1999. Shares listed as held by Intel consist of 698,387 shares and 91,191 shares issuable upon exercise of warrants exercisable within 60 days of September 30, 1999. Shares listed as held by Bruce Paul include 467,051 shares and 72,630 shares issuable upon exercise of warrants exercisable within 60 days of September 30, 1999. In addition, Mr. Paul's shares include 242,100 shares held by Mr. Paul as custodian for his minor children under the California Uniform Transfers to Minors Act. Mr. Paul disclaims beneficial ownership of these shares. 58 61 Shares listed as held by executive officers, directors and selling stockholders listed in the tables above include shares subject to options exercisable within 60 days of September 30, 1999 as follows:
SHARES SUBJECT TO OPTIONS HELD BY EXECUTIVE OFFICERS AND DIRECTORS - --------------------------------- Louis Rosenberg, Ph.D....................................... 1,044,408 Bruce M. Schena............................................. 432,718 Steven Blank................................................ 61,358 Jonathan Rubinstein......................................... 6,725 All directors and executive officers as a group (8 persons).................................................... 1,624,523 SHARES SUBJECT TO OPTIONS HELD BY SELLING STOCKHOLDERS - --------------------------------- Adam C. Braun............................................... 46,352 C. Gordon Bell Revocable Trust.............................. 20,175 Dean Chang, Ph.D............................................ 60,851 Craig H. Factor............................................. 75,002 Christopher J. Hasser....................................... 10,230 Timothy Lacey............................................... 202,668 Kenneth Martin.............................................. 79,314 Louis Rosenberg, Ph.D....................................... 1,044,408 Bruce M. Schena............................................. 432,718
In addition, Mr. Schena's shares include 2,734 shares held by Rita Schena, as custodian for Mr. Schena's minor child under the California uniform transfers to minors act. Mr. Schena disclaims beneficial ownership of these shares. 59 62 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. The following summary of provisions of the common stock and preferred stock is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws and by the provisions of applicable law. COMMON STOCK As of September 30, 1999, there were 11,191,856 shares of common stock outstanding held by approximately 108 stockholders of record. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that the board from time to time may determine in its sole discretion. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not authorized by our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption. If we liquidate, dissolve or wind-up our business, the holders of common stock would be entitled to share ratably in all assets remaining after payment of liabilities and the liquidation of any preferred stock. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering upon payment will be, duly and validly issued, fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any shares of preferred stock, that we may issue in the future. PREFERRED STOCK Before the closing of this offering and in connection with our reincorporation in the state of Delaware, all outstanding shares of preferred stock will be converted into an aggregate of 5,131,100 shares of common stock, and 5,000,000 shares of undesignated preferred stock will be authorized for issuance. Our board of directors will have the authority, without further action by the stockholders, to issue this undesignated preferred stock in one or more series. In addition, the board may: - fix the designations, powers, preferences, privileges and relative participating, optional or special rights of this preferred stock; and - set the qualifications, limitations or restrictions of this preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. Any or all of these rights may be greater than the rights of the common stock. As a result, the board of directors, without stockholder approval, may issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in our control or make removal of our management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the common stock. We have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Some of our stockholders have registration rights under the Securities Act. Piggyback Registration. If we elect to register any of our shares of stock for an underwritten public offering, the holders of 4,505,589 shares of our common stock and 402,693 shares of common stock issuable upon exercise of warrants, or their permitted transferees, will be entitled to include their securities in the registration, subject to the ability of underwriters to limit the number of shares included in the offering. 60 63 Form S-3 Registration. If we qualify for registration on Form S-3, holders of 2,240,707 shares of our common stock and 91,191 shares of common stock issuable upon exercise of warrants, or their permitted transferees, may request that we register these securities on Form S-3, provided that at least 121,050 shares are to be registered. Demand Registration. The holders of 2,240,707 shares of our common stock and 91,191 shares of common stock issuable upon exercise of warrants, or their permitted transferees, upon the vote of 50% of these securities, may demand on two occasions that we file a registration statement for an underwritten public offering covering some or all of these securities. The underwriters may reduce the number of shares proposed to be registered in view of market conditions. We will pay all expenses in connection with any of these registrations, other than underwriting discounts, fees or commissions or fees of legal counsel for the holders. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult the acquisition of our company by means of a tender offer, a proxy contest or other means, or the removal of incumbent officers and directors. We expect these provisions to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of our company to negotiate first with our board of directors. We believe that the benefits provided by our ability to negotiate with the proponent of an unfriendly or unsolicited proposal outweigh the disadvantages of discouraging these proposals. We believe the negotiation of an unfriendly or unsolicited proposal could result in an improvement of its terms. We are subject to section 203 of the Delaware General Corporation Law. This provision generally prohibits any Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date the stockholder became an interested stockholder, unless: - prior to that date, the board of directors approved either the business combination or the transaction that resulted in the stockholder's becoming an interested stockholder; - upon completion of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock outstanding at the time the transaction began; or - on or following that date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines a business combination to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation in a transaction involving the interested stockholder; - subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; - any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. 61 64 In general, section 203 defines an interested stockholder as an entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by that entity or person. Our certificate of incorporation provides that our board of directors will be divided into three classes of directors, with each class serving a three-year term. The term of the first class of directors expires at the 2000 annual meeting. The term of the second class expires at the 2001 annual meeting. The term of the third class expires at the 2002 annual meeting. We believe that a classified board of directors will help to assure the continuity and stability of the board of directors and our business strategies and policies as determined by the board of directors, since a majority of the directors at any given time will have had prior experience as directors of our company. We believe that this, in turn, will permit the board of directors to represent the interests of stockholders more effectively. With a classified board of directors, at least two annual meetings of stockholders will generally be required to effect a change in the majority of the board of directors. As a result, a classified board of directors may discourage proxy contests for the election of directors or purchases of a substantial block of our common stock because it could prevent obtaining control of the board of directors in a relatively short period of time. The classification provision could also have the effect of discouraging a third party from making a tender offer or attempting to obtain control of our company in some other manner. Under the Delaware General Corporation Law, a director on a classified board may be removed by the stockholders of the corporation only for cause. Our certificate of incorporation does not provide for cumulative voting in the election of directors. The amendment of the provisions relating to the classified board requires approval by 66 2/3% or more of the outstanding common stock. Further, provisions of our certificate of incorporation and bylaws prevent our stockholders from taking action by means of written consent and require our stockholders to provide advance notice before nominating directors and bringing stockholder proposals. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is BankBoston, N.A. 62 65 SHARES ELIGIBLE FOR FUTURE SALE Prior to this initial public offering, there has not been a public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the trading price of the common stock. Upon completion of this offering, we will have outstanding 15,441,856 shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants to purchase common stock subsequent to September 30, 1999. Of these shares, the 4,250,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act, whose sales would be subject to the limitations and restrictions described below. The remaining 11,191,856 shares of common stock outstanding upon completion of this offering will be "restricted securities" as defined in Rule 144. These securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below. Sales of these restricted securities in the public market, or the availability of these shares for sale, could adversely affect the trading price of our common stock. The number of restricted securities that will be available for sale in the public market, subject in some cases to the volume limitations and other restrictions of Rule 144, will be as follows: - no shares will be eligible for immediate sale as of the date of this prospectus; - approximately 11,113,678 additional shares will be eligible for sale beginning 181 days after the date of this prospectus pursuant to Rules 144 and 701 upon expiration of the lock-up agreements; and - approximately 78,178 shares will be eligible for sale beginning July 2000. Following the completion of this offering, warrants to purchase 498,593 shares will be outstanding, which, if exercised pursuant to net-exercise provisions, would be immediately salable without restriction upon the expiration of the 180 day lock-up period. Lock-up Agreements. All of our officers and directors and substantially all of our stockholders have signed lock-up agreements that prohibit them from offering, selling or otherwise disposing of any shares of common stock, options or warrants to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock owned by them without the prior written consent of Hambrecht & Quist LLC during the 180-day period following date of this prospectus. Hambrecht & Quist LLC may choose to release some of these shares from these restrictions prior to the expiration of this 180-day period, although it has no current intention to do so. Rule 144. In general, under Rule 144, beginning 90 days after the date of this prospectus, a person, or persons whose shares are aggregated, who has beneficially owned restricted securities for at least one year, including the holding period of any prior owner except our affiliates, would be entitled to sell within any three-month period a number of shares not to exceed the greater of: - one percent of the number of outstanding shares of our common stock, which will equal approximately 154,418 shares immediately after this offering, or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to certain manner-of-sale and notice requirements, as well as to the availability of current public information about us. 63 66 Rule 144(k). Under Rule 144(k), a person who has not been considered our affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner except our affiliates, is entitled to sell these shares without complying with the manner-of-sale, public information, volume limitation or notice provisions of Rule 144. Rule 701. Shares issued upon exercise of options granted by us prior to the date of this prospectus will be available for sale in the public market under Rule 701 of the Securities Act. Rule 701 permits resales of these shares in reliance upon Rule 144 but without compliance with various restrictions, including the holding period requirement, imposed under Rule 144. Stock Options. We have reserved a total of 6,491,975 shares of common stock for issuance pursuant to our stock option plans and our stock purchase plan. As of September 30, 1999, options to purchase a total of 4,379,465 shares of common stock were outstanding under our stock option plans. We intend to file registration statements on Form S-8 under the Securities Act approximately 180 days after the date of this prospectus to register a total of 6,895,058 shares of common stock outstanding and reserved for issuance under the stock option plans and the purchase plan. Shares of common stock issued under these plans after the filing of the registration statement will be freely tradable in the public market, subject to the Rule 144 limitations in the case of our affiliates, the lock-up agreements and vesting restrictions imposed by us. 64 67 UNDERWRITING Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives Hambrecht & Quist LLC, Bear, Stearns & Co. Inc. and BancBoston Robertson Stephens Inc., have severally agreed to purchase from us the following respective numbers of shares of our common stock:
NUMBER OF NAME SHARES ---- ---------- Hambrecht & Quist LLC....................................... Bear, Stearns & Co. Inc. ................................... BancBoston Robertson Stephens Inc. ......................... ---------- Total....................................................... 4,250,000 ==========
The underwriting agreement provides that the obligations of the underwriters are subject to conditions, including the absence of any material adverse change in our business and the receipt of certificates, opinions and letters from us, our counsel and our independent auditors. The nature of the underwriters' obligations requires that they purchase all shares of common stock offered in this offering if they purchase any of the shares in this offering. The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The underwriters may allow and the dealers may reallow a concession not in excess of $ per share to other dealers. After the public offering of the shares, the underwriters may change the offering price and other selling terms. The representatives have advised us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the shares of common stock offered by this prospectus. We and certain selling stockholders have granted to the underwriters an option, exercisable no later than 30 days after the effective date of this offering, to purchase up to 637,500 additional shares of common stock at the initial public offering price, less the underwriting discount and commissions set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each underwriter will have a firm commitment to purchase approximately the same percentage that the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of common stock offered in this offering. We and the selling stockholders will be obligated to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of common stock offered in this offering. The following table shows the per share and total public offering price, the underwriting discount and commissions and the proceeds before expenses to us.
TOTAL ---------------------- WITHOUT WITH OVER- OVER- ALLOTMENT ALLOTMENT PER SHARE OPTION OPTION --------- --------- --------- Public offering price..................................... Underwriting discount and commissions..................... Proceeds, before expenses, to Immersion...................
65 68 We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $1.0 million. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. We and, if the underwriters' over-allotment option is exercised, the selling stockholders, have agreed to indemnify the underwriters against liabilities connected to this offering, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of those liabilities. Substantially all of our stockholders, including all of our executive officers and directors and the selling stockholders, who will own in the aggregate 11,191,856 shares of common stock after the offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock owned by them during the 180-day period following the date of this prospectus. We have agreed that we will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock during the 180-day period following the date of this prospectus, except that we may issue shares upon the exercise of options granted before the date of this prospectus, and may grant additional options under our stock option plans, provided that, without the prior written consent of Hambrecht & Quist LLC, the additional options will not be exercisable during the 180-day period. Before this offering, there has been no public market for our shares. The initial public offering price will be negotiated among us and the underwriters. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of our business potential and earnings prospects, an assessment of management and the consideration of the above factors in relation to market valuations of companies in related businesses. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol IMMR. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discounts and commissions received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short-covering transactions. These activities by the underwriters may stabilize, maintain or affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. 66 69 LEGAL MATTERS Gray Cary Ware & Freidenrich LLP, Palo Alto, California will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. Fenwick & West LLP, Palo Alto, California will pass upon legal matters for the underwriters. EXPERTS The consolidated financial statements as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998, included in this prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte and Touche LLP, independent auditors, as stated in their reports appearing in this prospectus and elsewhere in the registration statement, and have been so included in reliance upon the reports of that firm given upon their authority as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement. Some of that information is contained in exhibits to the registration statement as permitted by the rules and regulations of the Securities and Exchange Commission. For further information with respect to us and our common stock being offered by this prospectus, please see the registration statement and related exhibits. Statements made in this prospectus concerning the contents of any document referred to in this prospectus are not necessarily complete. With respect to each document filed with the Securities and Exchange Commission as an exhibit to the registration statement, please see the exhibit for a more complete description of the matter involved. The registration statement, and related exhibits may be inspected without charge at the principal office of the Securities and Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part of these documents may be obtained from the Securities and Exchange Commission's public reference rooms at the same location and at the Securities and Exchange Commission's regional offices located at Seven World Trade Center, New York, New York 10048 and Citicorp Center, 5000 West Madison Street, Chicago, Illinois 60661 upon payment of the fees prescribed by them. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with them. The address of that web site is http://www.sec.gov. 67 70 IMMERSION CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999...................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999 (unaudited)................... F-4 Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1999 (unaudited)............................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999 (unaudited)................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 71 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Immersion Corporation: We have audited the accompanying consolidated balance sheets of Immersion Corporation and its subsidiary (the Company) as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive loss and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Immersion Corporation and its subsidiary at December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California October 20, 1999 (November 3, 1999 as to Note 14) F-2 72 IMMERSION CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, PRO FORMA ---------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 ------ ------- ------------- ------------- (UNAUDITED) (UNAUDITED) Current assets: Cash and cash equivalents............................... $ 490 $ 2,592 $ 3,798 Short-term investments................................ 1,212 402 -- Accounts receivable (net of allowances for doubtful accounts of: 1997, $38; 1998, $92; and 1999, $118)............................................... 519 1,111 841 Inventories........................................... 295 481 606 Prepaid expenses and other assets..................... 49 99 651 ------ ------- ------- Total current assets........................... 2,565 4,685 5,896 Property--net........................................... 334 329 426 Purchased patents and technology........................ -- 945 4,774 Other assets............................................ 1 -- 839 ------ ------- ------- Total assets................................... $2,900 $ 5,959 $11,935 ====== ======= ======= LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................... $ 288 $ 410 $ 763 Accrued compensation.................................. 125 171 319 Other accrued liabilities............................. 5 82 268 Deferred revenue...................................... -- -- 1,876 Customer advances..................................... 64 46 47 Income taxes payable.................................. 3 1 1 ------ ------- ------- Total current liabilities...................... 485 710 3,274 ------ ------- ------- Commitments and contingencies (Notes 6 and 13) Redeemable convertible preferred stock, Series C--$0.001 par value; 863,778 shares designated; shares issued and outstanding: 1997, 864,642; 1998 and 1999, 863,771; pro forma, none (liquidation preference $1,500,005)........................................... 1,471 1,476 1,481 ------ ------- ------- Stockholders' equity: Convertible preferred stock, $0.001 par value; authorized, 10,215,716 shares actual; pro forma, 5,000,000: Series A--$0.001 par value; 2,495,648 shares designated; shares issued and outstanding: 1997, 2,465,384; 1998 and 1999, 2,495,644; pro forma, none (liquidation preference $244,400)............ 976 1,012 1,012 Series B--$0.001 par value; 467,390 shares designated; shares issued and outstanding: 1997, 396,778; 1998 and 1999, 394,757; pro forma, none (liquidation preference $590,004)................. 569 566 566 Series D--$0.001 par value; 1,388,901 shares designated; shares issued and outstanding: 1997, none; 1998 and 1999, 1,376,928; pro forma, none (liquidation preference $5,750,002)............... -- 5,377 5,377 Common stock--$0.001 par value; 100,000,000 shares authorized, actual and pro forma; shares issued and outstanding: 1997, 3,418,495; 1998, 4,164,231; 1999, 6,060,756; pro forma, 11,191,856.................... 57 961 8,575 $17,011 Warrants.............................................. 33 85 893 893 Deferred stock compensation........................... -- -- (1,287) (1,287) Accumulated other comprehensive loss.................. 2 1 -- -- Note receivable from stockholder...................... -- (17) (17) (17) Accumulated deficit................................... (693) (4,212) (7,939) (7,939) ------ ------- ------- ------- Total stockholders' equity..................... 944 3,773 7,180 $ 8,661 ------ ------- ------- ======= Total liabilities, redeemable convertible preferred stock and stockholders' equity........................ $2,900 $ 5,959 $11,935 ====== ======= =======
See notes to consolidated financial statements. F-3 73 IMMERSION CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED SEPTEMBER 30, ------------------------- ------------------------- 1996 1997 1998 1998 1999 ------ ------ ------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Royalty revenue................................. $ -- $ 14 $ 321 $ 8 $ 1,279 Product sales................................. 2,022 2,908 3,725 2,584 3,259 Development contracts and other............... 715 1,410 975 816 1,047 ------ ------ ------- ------- ------- Total revenues........................ 2,737 4,332 5,021 3,408 5,585 ------ ------ ------- ------- ------- Costs and expenses: Cost of product sales......................... 947 1,186 1,507 1,072 1,451 Sales and marketing........................... 422 658 656 536 1,040 Research and development...................... 710 1,515 1,817 1,278 1,593 General and administrative.................... 766 1,550 2,677 2,025 3,255 Amortization of intangibles and deferred stock compensation............................... 1 -- 211 50 870 In-process research and development........... -- -- -- -- 1,190 ------ ------ ------- ------- ------- Total costs and expenses.............. 2,846 4,909 6,868 4,961 9,399 ------ ------ ------- ------- ------- Operating loss.................................. (109) (577) (1,847) (1,553) (3,814) Other income.................................... 28 50 174 135 92 ------ ------ ------- ------- ------- Net loss........................................ (81) (527) (1,673) (1,418) (3,722) Redeemable convertible preferred stock accretion..................................... -- 3 6 5 5 ------ ------ ------- ------- ------- Net loss applicable to common stockholders...... $ (81) $ (530) $(1,679) $(1,423) $(3,727) ====== ====== ======= ======= ======= Basic and diluted net loss per share............ $(0.03) $(0.17) $ (0.43) $ (0.37) $ (0.71) ====== ====== ======= ======= ======= Shares used in calculating basic and diluted net loss per share................................ 2,825 3,162 3,909 3,876 5,234 ====== ====== ======= ======= ======= Pro forma basic and diluted net loss per share (Note 1)...................................... $ (0.19) $ (0.36) ======= ======= Shares used in calculating pro forma basic and diluted net loss per share (Note 1)........... 8,630 10,365 ======= =======
See notes to consolidated financial statements. F-4 74 IMMERSION CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE ACCUMULATED PREFERRED STOCK COMMON STOCK DEFERRED OTHER ------------------ ------------------ STOCK COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION INCOME (LOSS) --------- ------ --------- ------ -------- ------------ ------------- Balances at January 1, 1996.......... 2,344,331 $ 910 3,311,334 $ 28 $ 12 $ -- $15 Net loss............................. Change in net unrealized gains from short-term investments............ (10) Comprehensive loss.................. Issuance of Series B convertible preferred stock, net of issuance costs of $21...................... 396,778 569 21 Issuance of warrant................. (6) 6 Collection of stockholder note receivable........................ Exercise of stock options........... 2,017 -- Stock compensation.................. 1 --------- ------ --------- ------ ---- ------- --- Balances at December 31, 1996........ 2,741,109 1,473 3,313,351 29 39 -- 5 Net loss............................ Change in net unrealized gains from short-term investments............ (3) Comprehensive loss.................. Issuance of warrants in connection with issuance of Series C redeemable convertible preferred stock............................. 6 Exercise of Series A preferred stock warrant........................... 121,050 72 (12) Exercise of stock options........... 105,144 23 Issuance of stock options for license agreement................. 5 Preferred stock accretion........... --------- ------ --------- ------ ---- ------- --- Balances at December 31, 1997........ 2,862,159 1,545 3,418,495 57 33 -- 2 Net loss............................ Change in net unrealized gains from short-term investments............ (1) Comprehensive loss.................. Issuance of Series D convertible preferred stock, net of issuance costs of $374..................... 1,376,928 5,376 17 Exercise of Series A preferred stock warrants.......................... 30,260 36 (6) Exercise of common stock warrants... 85,945 4 Extension of Series B preferred stock warrants.................... 41 Exercise of stock options........... 1,024,615 114 Issuance of common stock and options for patents....................... 137,190 720 Issuance of stock options for consulting services............... 68 Repurchase of stock................. (2,018) (2) (502,014) (2) Preferred stock accretion........... --------- ------ --------- ------ ---- ------- --- Balances at December 31, 1998........ 4,267,329 $6,955 4,164,231 $ 961 $ 85 $ -- $ 1 Net loss*........................... Change in net unrealized gains from short-term investments*........... (1) Comprehensive loss*................. Issuance of common stock and options for services*..................... 76,665 729 Exercise of common stock warrants*......................... 7,061 1 Warrants issued for services*....... 808 Exercise of stock options*.......... 432,829 190 Issuance of common stock and options for patents*...................... 1,379,970 5,092 Issuance of stock options for license agreement*................ 129 Deferred stock compensation*........ 1,473 (1,473) Amortization of stock compensation*..................... 186 Preferred stock accretion*.......... --------- ------ --------- ------ ---- ------- --- Balances at September 30, 1999*...... 4,267,329 $6,955 6,060,756 $8,575 $893 $(1,287) $-- ========= ====== ========= ====== ==== ======= === *(Unaudited) NOTE RECEIVABLE TOTAL FROM ACCUMULATED COMPREHENSIVE STOCKHOLDER DEFICIT TOTAL LOSS ----------- ----------- ------- ------------- Balances at January 1, 1996.......... $ (6) $ (82) $ 877 Net loss............................. (81) (81) $ (81) Change in net unrealized gains from short-term investments............ (10) (10) ------- Comprehensive loss.................. $ (91) ======= Issuance of Series B convertible preferred stock, net of issuance costs of $21...................... 590 Issuance of warrant................. -- Collection of stockholder note receivable........................ 6 6 Exercise of stock options........... -- Stock compensation.................. 1 ---- ------- ------- Balances at December 31, 1996........ -- (163) 1,383 Net loss............................ (527) (527) $ (527) Change in net unrealized gains from short-term investments............ (3) (3) ------- Comprehensive loss.................. $ (530) ======= Issuance of warrants in connection with issuance of Series C redeemable convertible preferred stock............................. 6 Exercise of Series A preferred stock warrant........................... 60 Exercise of stock options........... 23 Issuance of stock options for license agreement................. 5 Preferred stock accretion........... (3) (3) ---- ------- ------- Balances at December 31, 1997........ -- (693) 944 Net loss............................ (1,673) (1,673) $(1,673) Change in net unrealized gains from short-term investments............ (1) (1) ------- Comprehensive loss.................. $(1,674) ======= Issuance of Series D convertible preferred stock, net of issuance costs of $374..................... 5,393 Exercise of Series A preferred stock warrants.......................... 30 Exercise of common stock warrants... 4 Extension of Series B preferred stock warrants.................... 41 Exercise of stock options........... (17) 97 Issuance of common stock and options for patents....................... 720 Issuance of stock options for consulting services............... 68 Repurchase of stock................. (1,840) (1,844) Preferred stock accretion........... (6) (6) ---- ------- ------- Balances at December 31, 1998........ $(17) $(4,212) $ 3,773 Net loss*........................... (3,722) (3,722) $(3,722) Change in net unrealized gains from short-term investments*........... (1) (1) ------- Comprehensive loss*................. $(3,723) ======= Issuance of common stock and options for services*..................... 729 Exercise of common stock warrants*......................... 1 Warrants issued for services*....... 808 Exercise of stock options*.......... 190 Issuance of common stock and options for patents*...................... 5,092 Issuance of stock options for license agreement*................ 129 Deferred stock compensation*........ -- Amortization of stock compensation*..................... 186 Preferred stock accretion*.......... (5) (5) ---- ------- ------- Balances at September 30, 1999*...... $(17) $(7,939) $(7,180) ==== ======= ======= *(Unaudited)
See notes to consolidated financial statements. F-5 75 IMMERSION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED NINE MONTHS DECEMBER 31, ENDED SEPTEMBER 30, ------------------------- ------------------------- 1996 1997 1998 1998 1999 ----- ------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss.................................................... $ (81) $ (527) $(1,673) $(1,418) $(3,722) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 44 102 142 106 131 Amortization of intangibles............................. -- -- 211 49 676 Amortization of deferred stock compensation............. 1 -- -- -- 186 In-process research and development..................... -- -- -- -- 1,190 Stock and options issued for consulting services and other................................................. -- -- 68 36 729 Stock options issued for license agreement.............. -- 5 -- -- -- Extension of warrants for consulting services........... -- -- 41 41 -- Changes in assets and liabilities: Accounts receivable................................... (131) (100) (592) (221) 270 Inventories........................................... (94) (25) (186) (80) (125) Prepaid expenses and other assets..................... (38) 2 (50) (29) 40 Accounts payable...................................... 75 189 122 22 353 Accrued liabilities................................... 14 52 123 62 334 Deferred revenue...................................... -- -- -- -- 1,876 Customer advances..................................... -- 64 (18) (13) 1 Income taxes payable.................................. 2 1 (2) (1) -- ----- ------- ------- ------- ------- Net cash provided by (used in) operating activities........................................ (208) (237) (1,814) (1,446) 1,939 ----- ------- ------- ------- ------- Cash flows from investing activities: Purchases of short-term investments....................... (325) (1,487) (2,943) -- -- Sales and maturities of short-term investments............ 399 538 3,752 974 401 Purchases of property..................................... (181) (205) (138) (119) (228) Purchase of patents and technology........................ -- -- (434) (420) (150) Other assets.............................................. -- -- -- -- (947) ----- ------- ------- ------- ------- Net cash provided by (used in) investing activities........................................ (107) (1,154) 237 435 (924) ----- ------- ------- ------- ------- Cash flows from financing activities: Issuance of Series D convertible preferred stock and warrants, net........................................... -- -- 5,393 5,393 -- Issuance of Series C redeemable convertible preferred stock, net.............................................. -- 1,474 (1) (1) -- Issuance of Series B convertible preferred stock, net..... 590 -- -- -- -- Exercise of stock options................................. -- 23 97 91 190 Repurchase of stock....................................... -- -- (1,844) (1,844) -- Exercise of warrants...................................... -- 60 34 34 1 Collection of stockholder note............................ 6 -- -- -- -- ----- ------- ------- ------- ------- Net cash provided by financing activities........... 596 1,557 3,679 3,673 191 ----- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ 281 166 2,102 2,662 1,206 Cash and cash equivalents: Beginning of year......................................... 43 324 490 490 2,592 ----- ------- ------- ------- ------- End of year............................................... $ 324 $ 490 $ 2,592 $ 3,152 $ 3,798 ===== ======= ======= ======= ======= Supplemental disclosure of cash flow information - Cash paid for taxes....................................... $ -- $ 12 $ 1 $ 1 $ 1 ===== ======= ======= ======= ======= Noncash activities: Change in net unrealized gains from short-term investments............................................. $ (10) $ (3) $ (1) $ -- $ 1 ===== ======= ======= ======= ======= Issuance of equity instruments for patents, technology and licenses................................................ $ -- $ -- $ 720 $ 617 $ 5,221 ===== ======= ======= ======= ======= Issuance of warrants...................................... $ -- $ 6 $ -- $ -- $ 808 ===== ======= ======= ======= ======= Accretion of redeemable preferred stock................... $ -- $ 3 $ 6 $ 5 $ 5 ===== ======= ======= ======= ======= Exercise of stock option for note receivable.............. $ -- $ -- $ 17 $ 17 $ -- ===== ======= ======= ======= =======
See notes to consolidated financial statements. F-6 76 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Description of Business--Immersion Corporation was originally incorporated in May 1993 in California and provides technologies that enable users to interact with computers using their sense of touch. Principles of Consolidation--The consolidated financial statements include the accounts of Immersion Corporation and its wholly-owned subsidiary (the "Company"). All intercompany transactions and balances have been eliminated in consolidation. Cash Equivalents--The Company considers all highly liquid debt or equity instruments purchased with an original maturity at the date of purchase of 90 days or less to be cash equivalents. Short-Term Investments--Short-term investments consist primarily of highly liquid debt instruments purchased with an original maturity at the date of purchase of greater than 90 days and investments in mutual funds. Short-term investments are classified as available for sale securities and are stated at market value with unrealized gains and losses reported as a component of accumulated other comprehensive loss within stockholders' equity. Inventories--Inventories are stated at the lower of cost (first-in, first-out basis) or market. Property--Property is stated at cost and is depreciated using the straight-line method over the estimated useful life of the related asset. The estimated useful lives are as follows: Computer equipment................................ 3 years Machinery and equipment........................... 5 years Furniture and fixtures............................ 5 years
Leasehold improvements are amortized over the shorter of the lease term or their useful life. Purchased Patents and Technology--Purchased patents and technology are stated at cost and are amortized over the shorter of the remaining life of the patent or the estimated useful life of the technology, generally nine years. Accumulated amortization was none, $221,000 and $568,000 at December 31, 1997 and 1998 and September 30, 1999, respectively. Long-Lived Assets--The Company reviews for the impairment of a long-lived asset 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. Product Warranty--The Company sells the majority of its products with warranties ranging from three to 12 months. Historically, warranty-related costs have been immaterial. Note Receivable from Stockholder--The note receivable from stockholder was issued in exchange for common stock, bears interest at 5.39% per annum and is due March 2001. Revenue Recognition--Revenues from product sales are recorded upon shipment. Revenues from development contracts with the U.S. Government and other commercial customers are derived from either fixed price or reimbursement of costs contracts. Contract revenues are recognized F-7 77 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) under the cost-to-cost percentage-of-completion accounting method based on the actual physical completion of work performed and the ratio of costs incurred to total estimated costs to complete the contract. Losses on contracts are recognized when determined. Revisions in estimates are reflected in the period in which the conditions become known. Allowable fees under cost-reimbursement contracts are recognized as costs are incurred. The Company recognizes royalty revenue based on royalty reports or related information received from the licensee. 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. At September 30, 1999, the Company has no obligation to repay amounts received under development contracts with the U.S. government or other commercial customers. Advertising--Advertising costs are expensed as incurred and included in sales and marketing expense. Advertising expense was $129,000, $164,000, $147,000 and $115,000 in 1996, 1997, 1998 and the nine months ended September 30, 1999, respectively. Research and Development--Research and development costs are expensed as incurred. The Company has generated revenues from development contracts with the U.S. Government and other commercial customers that have enabled it to accelerate its own product development efforts. Such development revenues have only partially funded the Company's product development activities, and the Company generally retains ownership of the products developed under these arrangements. As a result, the Company classifies all development costs related to these contracts as research and development expenses. Income Taxes--The Company provides for income taxes using the asset and liability approach defined by Statement of Financial Accounting Standards ("SFAS") No. 109. Software Development Costs--Certain of the Company's products include software. Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with SFAS No 86, Computer Software to be Sold, Leased or Otherwise Marketed. The Company considers technological feasibility to be established upon completion of a working model of the software and the related hardware. Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date. Stock-Based Compensation--The Company accounts for its stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Comprehensive Income--In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income, which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources. The Company adopted this statement in 1998 and has presented its total comprehensive loss in the statements of stockholders' equity. Accumulated other comprehensive loss during 1997 and 1998 and the nine months ended September 30, 1999 is comprised of unrealized gains on short-term investments of $2,000, $1,000 and none, respectively. Unaudited Pro Forma Information--Upon the closing of the initial public offering, each of the outstanding shares of Series D convertible preferred stock and Series C redeemable convertible F-8 78 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) preferred stock will convert into 0.807 shares of common stock and each of the outstanding shares of Series A and Series B convertible preferred stock will convert into 4.035 shares of common stock. The pro forma balance sheet presents the Company's balance sheet as if this had occurred at September 30, 1999. Unaudited Interim Financial Information--The interim financial information for the nine months ended September 30, 1998 and 1999 is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, this unaudited financial information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Net Loss per Share--Basic net loss per share excludes dilution and is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding for the period (excluding shares subject to repurchase). Diluted net loss per common share was the same as basic net loss per common share for all periods presented since the effect of any potentially dilutive securities is excluded as they are anti-dilutive because of the Company's net losses. Pro Forma Net Loss per Share--Pro forma basic and diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of common shares outstanding for the period (excluding shares subject to repurchase) and the weighted average number of common shares resulting from the assumed conversion of outstanding shares of redeemable convertible preferred stock and convertible preferred stock. Use of Estimates--The preparation of consolidated financial statements in accordance with generally accepted accounting principles 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. These management estimates include the allowance for doubtful accounts and the net realizable value of inventory. Actual results could differ from those estimates. Concentration of Credit Risks--Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, short-term investments and accounts receivable. The Company invests primarily in mutual funds of large U.S. securities firms and debt securities of U.S. Government agencies. The Company sells products primarily to companies in North America, Europe and the Far East. A majority of these sales are to customers in the personal computer industry. To reduce credit risk, management performs periodic credit evaluations of its customers' financial condition. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. Certain Significant Risks and Uncertainties--The Company operates in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a negative effect on the Company in terms of its future financial position and results of operations: its ability to obtain additional financing; the mix of revenues; the loss of significant customers; fundamental changes in the F-9 79 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) technology underlying the Company's products; market acceptance of the Company's and its licensees' products under development; the availability of foundry capacity; development of sales channels; litigation or other claims against the Company; the hiring, training and retention of key employees; successful and timely completion of product and technology development efforts; and new product or technology introductions by competitors. Fair Value of Financial Instruments--Financial instruments consist primarily of cash equivalents and short-term investments. Cash equivalents and short-term investments are stated at fair value based on quoted market prices. Recently Issued Accounting Standards--In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. The Company currently operates in one reportable segment under SFAS No. 131. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's year ending December 31, 2001. The management believes that this statement will not have a material impact on the Company's financial position or results of operations. Reclassifications--Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net loss or stockholders' equity. 2. PURCHASED PATENTS AND TECHNOLOGY During 1998, the Company entered into a license agreement and acquired various patents relating to feel technology. In connection with these agreements, the Company paid $434,000, issued 137,190 shares of common stock and issued an option to purchase 242,100 shares of common stock at $3.66 per share (see Note 7). The Company has recorded the estimated fair value of the aggregate consideration of $1,154,000 as purchased patents and technology. In February 1999, the Company acquired certain patents and related materials pertaining to feel technology from another company in exchange for $25,000 in cash and 88,770 shares of the Company's common stock. In addition, the Company is required to issue an additional 16,140 shares of common stock to the seller if the Company is successful in obtaining either a reissue or a foreign version of at least one of the patents. The Company's stock issued in this transaction is being held in escrow until the successful reissue of at least one of the patents and the earlier to occur of five years or certain defined liquidity events of the Company (such as an initial public offering meeting specified criteria). If such conditions are not met at the end of five years and the stock is therefore still held in escrow, the seller has the right to put the shares back to the Company for $3.72 per share. The existence of the put option has the effect of increasing the value assigned to the shares issued to $3.72 per share. As a result, the estimated value of $355,000 (representing 88,770 shares at $3.72 per share plus $25,000) has been recorded as purchased patents and technology. F-10 80 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) In March 1999, the Company acquired certain additional feel patents and in-process research and development from another company in exchange for 1,291,200 shares of the Company's common stock with an estimated fair value of $4,720,000. The seller has the option to put 807,000 of the shares back to the Company after five years and to require the Company to return the patents, subject to the Company's retaining a non-exclusive license to the patents. This put option expires upon an initial public offering meeting certain criteria, a sale of the Company or certain defined changes in control. The Company has included in the aggregate purchase price of the purchased patents and in-process research and development the estimated fair value of $42,000 for the put option and $45,000 of direct acquisition costs. The aggregate purchase price of $4,807,000 has been allocated $3,617,000 to purchased patents and technology and $1,190,000 to acquired in-process research and development. The purchased patents and technology are being amortized over the estimated useful life of nine years. The allocation of the purchase price to the respective intangibles was based on management's estimates of the after-tax cash flows and gave explicit consideration to the Securities and Exchange Commission's views on purchased in-process research and development as set forth in its September 9, 1998 letter to the American Institute of Certified Public Accountants. Specifically, the valuation gave consideration to the following: (i) the employment of a fair market value premise excluding any Company-specific considerations that could result in estimates of investment value for the subject assets; (ii) comprehensive due diligence concerning all potential intangible assets; (iii) the determination that none of the technology development had been completed at the time of acquisition; and (iv) the allocation to in-process research and development based on a calculation that considered only the efforts completed as of the transaction date, and only the cash flow associated with these completed efforts for one generation of the products currently in process. As indicated above, the Company recorded a one-time charge of $1,190,000 upon the acquisition in March 1999 for purchased in-process research and development related to five development projects. The charge related to the portion of these products that had not reached technological feasibility, had no alternative future use and for which successful development was uncertain. Management's conclusion that the in-process development effort had no alternative future use was reached in consultation with the engineering personnel from both the Company and the seller. The first of these projects is a flexible force feedback development environment that allows developers to choose the level of complexity/functionality that fits their needs. At the time of acquisition, the development was 81% complete and the estimated cost to complete this development was $438,000. Management expects to complete this development of this product and begin shipping it in September 2001. The second of these projects, a three-degree-of-freedom joystick, gives the operator smooth, intuitive movement and feedback along three axes-roll, pitch and yaw-using brushless motor and encoder technology. At the time of acquisition, the development was 36% complete and the estimated cost to complete this development was $109,000. Management expects products based on this technology to become available in December 2000. The third of these projects, a six-degree-of-freedom hand controller, is a small back drivable robot that moves in six degrees of freedom, three linear positions and attitudes. At the time of acquisition, the development was 70% completed and the estimated cost to complete this development was $88,000. Management expects to complete development of this product and begin shipping it in June 2001. The fourth project is a Flight Yoke, which provides the intuitive motion and feel of an airplane control yoke. It translates in and out to control the pitch, rotates for roll control, and provides the corresponding feel along these axes of motion. At the time of acquisition, the development was 49% completed and the estimated cost to complete this development was $175,000. Management expects F-11 81 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) that licensees will ship products in fiscal 2001. The fifth development project is a device that allows the user to reach inside the computer monitor and feel three-dimensional objects. At the time of acquisition, the development was 11% completed and the estimated cost to complete this development was $248,000. Management expects that the product will become available for sale in fiscal 2000. The Company will begin to benefit from the acquired research and development of these products once they begin shipping. Failure to reach successful completion of these projects could result in impairment of the associated capitalized intangible assets and could require the Company to accelerate the time period over which the intangibles are being amortized, which could have a material adverse effect on the Company's business, financial condition and results of operation. Significant assumptions used to determine the value of in-process research and development, include the following: (i) forecast of net cash flows that were expected to result from the development effort using projections prepared by the Company's and the seller's management; (ii) the portion of the projects estimated by considering a number of factors, including the costs invested to date relative to total cost of the development effort and the amount of progress completed as of the acquisition date, on a technological basis, relative to the overall technological achievements required to achieve the functionality of the eventual product. The technological issues were addressed by engineering representatives from both the Company and the seller, and when estimating the value of the technology, the projected financial results of the acquired assets were estimated on a stand-alone basis without any consideration to potential synergistic benefits or "investment value" related to the acquisition. As there were no existing products acquired, separate projected cash flows were prepared for the existing and the in-process projects. These projected results were based on the number of units sold times the average selling price less the associated costs. After preparing the estimated cash flows from the products being developed, a portion of these cash flows were attributed to the existing technology, which was embodied in the in-process product lines and enabled a quicker and more cost-effective development of these products. When estimating the value of the in-process technologies, a discount rate of 30% was used. The discount rate considered both the status and risks associated with the cash flows at the acquisition date. Projected revenues from the in-process products are expected to commence in 2000 and 2001 as the products are completed and begin to ship. Initial annual revenue growth rates after introduction are projected to exceed 50% and decline to less than 15% by 2005. Gross margins from these products are anticipated to be consistent with the gross margins from its other products. The technology was acquired in a transaction that was tax-free to the seller and, as a result, the Company has a minimal tax basis in the acquired technology. Accordingly, a deferred tax liability of $1,410,000 has been recorded for the difference in the book and tax bases of the acquired assets. This resulted in the concurrent recognition of previously reserved deferred tax assets of an equal amount. Also, in connection with this acquisition, the Company entered into a consulting arrangement with the seller to provide consulting services related to the development of various platforms of feel technology, and collaborate with the Company, in executing development agreements with the U.S. government and other commercial customers for a three year period. In consideration for certain consulting services and rights, the Company granted to the seller a warrant to purchase 322,800 shares of the Company's common stock at $3.66 per share (see Note 7), paid the seller $150,000, and is obligated to pay an additional $75,000 in 2000 and 2001. The consideration for the consulting services of $1,108,000, including the estimated fair value of the warrant ($808,000), has been recorded as prepaid expenses and noncurrent other assets. The F-12 82 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) consideration for the consulting service will be amortized over the two-year estimated period of benefit of the consulting services. The warrants were fully vested at the date of grant. Accordingly, the fair value of the warrants was determined at the date of grant using the methods specified by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), with the following assumptions: expected life, 10 years; risk free interest rate, 5.7%; volatility, 50% and no dividends during the expected term. Also during 1999, in consideration for a technology license agreement, the Company issued an option to purchase 20,175 shares of common stock at an exercise price of $3.66 per share. The Company has recorded the estimated fair value of the option of $129,000 as purchased patents and technology at September 30, 1999 (see Note 7). 3. SHORT-TERM INVESTMENTS Short-term investments included the following equity securities and gross unrealized holding gains and losses as of December 31, 1997 and 1998 and September 30, 1999 (in thousands):
UNREALIZED UNREALIZED AMORTIZED MARKET HOLDING HOLDING COST VALUE GAINS LOSSES --------- ------ ---------- ---------- (IN THOUSANDS) DECEMBER 31, 1997 Mutual funds..................................... $1,210 $1,212 $ 2 $-- ====== ====== === === DECEMBER 31, 1998 Mutual funds..................................... $ 401 $ 402 $ 1 $-- ====== ====== === === SEPTEMBER 30, 1999 Mutual funds..................................... $ -- $ -- $-- $-- ====== ====== === ===
The Company realized gains on the sales of securities of $19,000, $14,000, $56,000 and none in 1996, 1997, 1998 and the nine months ended September 30, 1999, respectively, while realizing losses of $1,000 in 1996, 1997, 1998 and for the nine months ended September 30, 1999, respectively. 4. INVENTORIES Inventories consisted of:
DECEMBER 31, -------------- SEPTEMBER 30, 1997 1998 1999 ---- ---- ------------- (IN THOUSANDS) Raw materials and subassemblies............................ $223 $378 $436 Work in process............................................ 16 37 34 Finished goods............................................. 56 66 136 ---- ---- ---- Total...................................................... $295 $481 $606 ==== ==== ====
F-13 83 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) 5. PROPERTY Property consisted of:
DECEMBER 31, -------------- SEPTEMBER 30, 1997 1998 1999 ----- ----- ------------- (IN THOUSANDS) Computer equipment....................................... $ 208 $ 314 $ 422 Machinery and equipment.................................. 172 177 200 Furniture and fixtures................................... 110 123 191 Leasehold improvements................................... -- 13 42 ----- ----- ----- Total.................................................... 490 627 855 Less accumulated depreciation and amortization........... (156) (298) (429) ----- ----- ----- Property, net............................................ $ 334 $ 329 $ 426 ===== ===== =====
6. LEASE COMMITMENTS The Company leases its manufacturing and office facilities under a noncancelable operating lease that expires in October 2002. Minimum future operating lease payments are as follows:
PERIODS ENDING DECEMBER 31, --------------------------- (IN THOUSANDS) 1999........................................................ $230 2000........................................................ 243 2001........................................................ 255 2002........................................................ 263 ---- Total minimum lease payments................................ $991 ====
Rent expense was approximately $94,000, $117,000, $169,000 and $192,000 in 1996, 1997, 1998 and the nine months ended September 30, 1999, respectively. 7. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Preferred Stock--During June 1997, the Company issued a total of 864,642 shares of Series C redeemable convertible preferred stock ("Series C preferred stock") to investors for gross proceeds of $1,500,005. At the option of the stockholders, at any time on or after June 4, 2002, the Series C preferred stockholders can require the Company to pay them the price originally paid plus an amount equal to the declared but unpaid dividends. These payments will be made in four equal installments on June 4, 2002 and every six months thereafter. Issuance costs are being amortized over five years to accrete the carrying value of the stock to $1,500,005 on June 4, 2002. During June 1993 and May 1995, the Company issued a total of 2,344,331 shares of Series A convertible preferred stock to investors for gross proceeds of $922,000. During November 1996, the Company issued 396,778 shares of Series B convertible preferred stock to investors for gross proceeds of $590,004. During April 1998, the Company issued 1,376,928 shares of Series D convertible preferred stock to investors for gross proceeds of $5,750,002. F-14 84 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) The significant terms of the redeemable convertible preferred stock and the convertible preferred stock are as follows: - Each share of preferred stock is convertible into one share of common stock (subject to adjustments for events of dilution). - Each share of Series A and B preferred stock will automatically convert in the event of a public offering in which the Company receives proceeds equal to or greater than $5,000,000. Each share of Series C and D preferred stock will automatically convert in the event of a public offering in which the Company receives proceeds equal to or greater than $10,000,000. - Each share of Series A, B, C and D preferred stock has voting rights equivalent to the number of shares of common stock into which it is convertible. In addition, the Series C and D preferred stock have certain protective voting rights with respect to corporate matters. - In the event of liquidation, dilution or winding up of the Company, the holders of Series C and Series D preferred stock will receive first, and in preference to any distribution to the holders of Series A and Series B preferred stock and common stock, an amount equal to $1.73 per share of Series C preferred stock and $4.18 per share of Series D preferred stock plus all declared but unpaid dividends. Upon satisfaction of the Series C and Series D liquidation preferences, the holders of Series A and Series B preferred stock will receive $0.10 and $1.49 per share plus all declared but unpaid dividends, respectively. Upon satisfaction of the Series A and Series B liquidation preferences, the holders of Series C and Series D preferred stock will receive an additional $1.73 and $2.50 per share, respectively, and will be entitled to receive with the common stock stockholders on a pro rata basis the remaining assets of the Company, based on the number of shares of common stock into which their shares are convertible. - In the event the Board of Directors declares dividends payable on the then outstanding common stock, Series A, B, C and D preferred stockholders will receive $0.005, $0.01, $0.17 and $0.41 per share, respectively. The right to these dividends is not cumulative. Preferred Stock Warrants--In connection with the Series A preferred stock offering, the Company issued warrants to purchase 121,050 and 30,260 shares of Series A preferred stock at exercise prices of $0.50 and $0.99, respectively, to a Series A preferred stock investor. During 1997, the warrant to purchase 121,050 shares was exercised. During 1998, the remaining warrant was exercised. The estimated fair values of these warrants of $12,000 and $6,000, respectively, were accounted for as reductions to the Series A preferred stock financing proceeds. In connection with the Series B offering, the Company issued warrants to purchase 40,350 and 32,280 shares of Series B preferred stock at an exercise price of $6.00 to a Series B preferred stock investor. These warrants were originally issued with a two-year term, expiring in 1998. The estimated fair values of these warrants of $12,000 and $9,000, respectively, were accounted for as reductions to the Series B preferred stock financing proceeds. During 1998, upon the expiration of the original warrant, terms the Company extended the term of these exercisable warrants for three additional years through 2001 in consideration for prior strategic planning consulting services. The estimated fair value of the extension of the warrants of $41,000 was accounted for as a consulting expense. The fair value of the extension of the warrants was determined at the date of the grant extension using the methods specified by SFAS 123 with the following assumptions: risk free F-15 85 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) interest rate, 5.5%; volatility, 50%; and no dividends during the expected term. An expected life of three years is based on the remaining contractual life of the warrant agreements. In connection with the Series D preferred stock offering, the Company issued warrants to purchase 11,972 shares of Series D preferred stock at an exercise price of $4.18 to an investment banker. The estimated fair value of these warrants of $17,000 has been accounted for as a reduction to the Series D preferred stock financing proceeds. Common Stock Warrants--During 1995, the Company issued to two former employees warrants to purchase 85,945 and 7,061 shares of the Company's common stock, each at an exercise price of $0.04 for past services to the Company. During 1998, the warrant to purchase 85,945 shares was exercised. During 1999, the remaining warrant was exercised. The estimated fair value of these warrants was not considered material. During June 1997, the Company issued a warrant to purchase 91,191 shares of the Company's common stock at an exercise price of $0.19 per share to a Series C preferred investor. The warrant is exercisable through 2002. The estimated fair value of this warrant of $6,000 has been accounted for as a reduction to the Series C preferred stock financing proceeds. As discussed in Note 2, during March 1999, the Company issued a warrant to purchase 322,800 shares of the Company's common stock at an exercise price of $3.66 per share for consulting services. The warrant is exercisable through 2009. The estimated fair value of the warrant of $808,000 has been recorded as prepaid consulting services and is being amortized over the service period of two years. Stock Options--Under the Company's stock option plans, the Company may grant options to purchase up to 7,991,975 shares of common stock to employees, directors and consultants at prices not less than the fair market value on the date of grant for incentive stock options and not less than 85% of fair market value on the date of grant for nonstatutory stock options. These options generally expire ten years from the date of grant. The Company has granted immediately exercisable options as well as options that become exercisable over periods ranging from three months to four years. F-16 86 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) Details of activity under the option plans are as follows:
WEIGHTED NUMBER AVERAGE OF EXERCISE SHARES PRICE ---------- -------- Outstanding, January 1, 1996................................ 1,471,846 $0.06 Granted (weighted average fair value of $0.01).............. 925,629 $0.16 Exercised................................................. (2,017) $0.17 Canceled.................................................. -- $ -- ---------- Outstanding, December 31, 1996 (1,620,720 exercisable at a weighted average price of $0.10).......................... 2,395,458 $0.10 Granted (weighted average fair value of $0.04)............ 1,022,860 $0.30 Exercised................................................. (105,144) $0.21 Canceled.................................................. (168) $0.19 ---------- Outstanding, December 31, 1997 (2,871,999 exercisable at a weighted average price of $0.16).......................... 3,313,006 $0.16 Granted (weighted average fair value of $0.38)............ 721,976 $1.31 Exercised................................................. (1,024,615) $0.11 Canceled.................................................. (88,484) $3.59 ---------- Outstanding, December 31, 1998.............................. 2,921,883 $0.36 Granted................................................... 1,915,556 $6.85 Exercised................................................. (432,827) $0.44 Canceled.................................................. (25,147) $2.35 ---------- Outstanding, September 30, 1999............................. 4,379,465 $3.18 ==========
Additional information regarding options outstanding as of December 31, 1998 is as follows:
OPTIONS OUTSTANDING ------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - -------------------------------- ----------- ------------ -------- ----------- -------- December 31, 1998: $0.04 - $0.14................... 1,099,568 3.80 $0.07 1,010,500 $0.07 0.17 - 0.37.................... 1,139,540 6.71 0.26 1,059,832 0.26 0.41 - 1.24.................... 545,356 7.72 0.67 545,356 0.67 1.36 - 4.02.................... 137,419 5.91 2.12 106,692 1.67 --------- ---- ----- --------- ----- $0.04 - $4.03................... 2,921,883 5.73 $0.35 2,722,380 $0.32 ========= ==== ===== ========= =====
At December 31, 1998 and September 30, 1999, the Company had 754,379 and 2,015,594 shares, respectively, available for future grants under the option plans. Additional Stock Plan Information--As discussed in Note 1, the Company accounted for its stock-based awards using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees and its related interpretations. F-17 87 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), requires the disclosure of pro forma net loss had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though these models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the minimum value method with the following weighted average assumptions: expected life, 18 months following vesting; risk free interest rate, 5.5%, 6.0% and 5.3% in 1996, 1997 and 1998, respectively; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the awards issued in 1996, 1997 and 1998 had been amortized to expense over the vesting periods of the awards, pro forma net loss would have been $90,000 ($0.04 net loss per share), $545,000 ($0.17 net loss per share) and $1,885,000 ($0.48 net loss per share) in 1996, 1997 and 1998, respectively. The Company had outstanding nonstatutory stock options to consultants to purchase 104,182, 153,570 and 203,604 shares of common stock at December 31, 1997 and 1998 and September 30, 1999, respectively. Compensation expense of none, $5,000, $68,000 and $138,000 was recognized as result of these options in 1996, 1997, 1998 and the nine months ended September 30, 1999, respectively. The fair value of the unvested portion of these options is being amortized over the vesting period. The fair value attributable to the unvested portion of these options is subject to adjustment based upon the future value of the Company's common stock. The fair values of these options were determined at the date of vesting using the methods specified by SFAS 123 with the following weighted average assumptions during 1996, 1997, 1998 and the nine months ended September 30, 1999, respectively: expected life, 10 years; risk free interest rate, 5.5%, 6.0%, 5.3% and 5.2%; volatility, 50%; and no dividends during the expected term. Forfeitures are recognized as they occur. In addition, the Company granted nonstatutory stock options to purchase 242,100 and 20,175 shares of common stock in 1998 and the nine months ended September 30, 1999, respectively, in connection with the acquisition of patents and the licensing of technology (see Note 2). The estimated fair value of these options of $219,000 and $129,000, respectively, has been recorded as purchased patents and technology. These options were fully vested at the date of grant. Accordingly, the fair value of the options was determined at the date of grant using the methods specified by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), with the following assumptions during 1998 and 1999, respectively: expected life, 10 years; risk free interest rate, 5.5% and 5.0%; volatility, 25% and 50%; and no dividends during the expected term. Common Stock--Common stock issued to the founders and certain other employees is subject to repurchase agreements under which the Company has the option to repurchase the unvested shares upon termination of employment at the original issue price. The Company's repurchase right generally lapses over four years. At December 31, 1998, 23,537 shares of common stock were subject to repurchase by the Company. At September 30, 1999, the Company's repurchase rights had lapsed. During 1998, the Company issued 137,190 shares of common stock in connection with purchases of patents. The fair value of the common stock of $501,000 was recorded as purchased F-18 88 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) patents and technology. During 1999, the Company issued 1,379,970 shares of common stock in connection with purchases of patents and technology (see Note 2) and 68,595 shares of common stock with a fair value of $562,000 for recruiting services. Deferred Stock Compensation In connection with grants of certain stock options to employees and directors in the nine months ended September 30, 1999, the Company recorded $1,473,000 for the difference between the deemed fair value for accounting purposes and the stock price as determined by the Board of Directors on the date of grant. This amount has been presented as a reduction of stockholders' equity and is being amortized to expense over the vesting period of the related stock options (generally four years). Amortization of deferred stock compensation for the nine months ended September 30, 1999 was $185,000. Common Stock Reserved for Issuance The Company had reserved shares of common stock for issuance as follows: At December 31, 1998 Conversion of preferred stock............................... 5,131,100 Exercise of options....................................... 3,676,262 Exercise of warrants...................................... 182,854 ---------- Total............................................. 8,990,216 ========== At September 30, 1999 Conversion of preferred stock............................. 5,131,100 Exercise of options....................................... 6,395,059 Exercise of warrants...................................... 498,593 ---------- Total............................................. 12,024,752 ==========
F-19 89 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) 8. NET LOSS PER SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands):
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ------------------------- 1996 1997 1998 1998 1999 ------ ------ ------- ----------- ----------- (UNAUDITED) (UNAUDITED) Numerator: Net loss................................... $ (81) $ (527) $(1,673) $(1,418) $(3,722) Redeemable convertible preferred stock accretion............................. -- 3 6 5 5 ------ ------ ------- ------- ------- Net loss applicable to common stockholders............................. $ (81) $ (530) $(1,679) $(1,423) $(3,727) ====== ====== ======= ======= ======= Denominator: Weighted average common shares outstanding........................... 3,311 3,338 3,970 3,951 5,305 Weighted average common shares held in escrow................................ -- -- -- -- (71) Weighted average common shares outstanding subject to repurchase..... (486) (176) (61) (75) -- ------ ------ ------- ------- ------- Shares used in calculating basic and diluted net loss per share............ 2,825 3,162 3,909 3,876 5,234 ====== ====== ======= ======= ======= Basic and diluted net loss per share....... $(0.03) $(0.17) $ (0.43) $ (0.37) $ (0.71) ====== ====== ======= ======= =======
The Company's computation of net loss per share excludes 88,770 shares held in escrow as discussed in Note 2, as the conditions required to release these shares from escrow had not been satisfied as of September 30, 1999. F-20 90 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) For the above-mentioned periods, the Company had securities outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share in the periods presented since their effect would have been antidilutive. These outstanding securities consisted of the following:
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------ ------------------------- 1996 1997 1998 1998 1999 ---------- ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Redeemable convertible preferred stock.......................... -- 864,642 863,771 863,771 863,771 Convertible preferred stock...... 2,741,109 2,862,159 4,267,329 4,237,074 4,267,329 Shares of common stock subject to repurchase..................... 343,176 125,813 23,537 75,096 -- Outstanding options.............. 2,395,458 3,313,006 2,921,883 3,025,929 4,379,465 Warrants......................... 195,899 287,087 182,854 213,117 498,593 ---------- ---------- ---------- ---------- ----------- Total............................ 5,675,642 7,452,701 8,259,374 8,414,987 10,009,158 ========== ========== ========== ========== =========== Weighted average exercise price of options..................... $ 0.10 $ 0.16 $ 0.36 $ 0.42 $ 1.13 ========== ========== ========== ========== =========== Weighted average exercise price of warrants.................... $ 0.72 $ 0.56 $ 0.95 $ 0.97 $ 3.18 ========== ========== ========== ========== ===========
9. INCOME TAXES No provision for federal income taxes was required for the years ended December 31, 1996, 1997 and 1998 due to the Company's net losses in these periods. Significant components of the net deferred tax assets for federal and state income taxes consisted of:
DECEMBER 31, ---------------- 1997 1998 ----- ------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards............................ $ 173 $ 830 Research and development credits.......................... 13 130 Reserves and accruals recognized in different periods..... 39 75 Depreciation and amortization............................. -- 2 ----- ------- Total deferred tax assets................................... 225 1,037 Valuation reserve........................................... (225) (1,037) ----- ------- Net deferred tax assets..................................... $ -- $ -- ===== =======
F-21 91 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) The Company's effective tax rate differed from the expected benefit at the federal statutory tax rate as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 1998 ----- ----- ----- Federal statutory tax rate.................................. (35.0)% (35.0)% (35.0)% State taxes, net of federal benefit......................... (6.0) (6.0) (6.0) Stock compensation.......................................... -- -- -- Other....................................................... 1.7 0.6 0.6 Valuation allowance......................................... 39.3 40.4 40.4 ----- ----- ----- Effective tax rate.......................................... --% --% --% ===== ===== =====
Substantially all of the Company's loss from operations for all periods presented is generated from domestic operations. At December 31, 1998, the Company has federal and state net operating loss carryforwards of approximately $1,926,000 and $967,000, respectively, expiring through 2018 and through 2003, respectively. Current federal and state tax laws include provisions limiting the annual use of net operating loss carryforwards in the event of certain defined changes in stock ownership. The Company's issuances of common and preferred stock may have resulted in such a change. Accordingly, the annual use of the Company's net operating loss carryforwards would be limited according to these provisions. Management has not yet determined the extent of this limitation, and this limitation may result in the loss of carryforward benefits due to their expiration. 10. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS The Company operates in one business segment, which is the design, development, production, marketing and licensing of products based on feel technology. These devices are used in computer entertainment, personal computing, medical and other professional computing applications. The Company operates entirely in North America and does not maintain operations in other countries. The following is a summary of revenues within geographic areas. Revenues are broken out geographically by the ship-to location of the customer.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------- ------------- 1996 1997 1998 1999 ------ ------ ------ ------------- (IN THOUSANDS) North America................................... $1,867 $3,325 $3,363 $3,962 Europe.......................................... 533 648 950 817 Far East........................................ 239 347 597 704 Rest of the world............................... 98 12 111 102 ------ ------ ------ ------ $2,737 $4,332 $5,021 $5,585 ====== ====== ====== ======
F-22 92 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) Significant Customers In 1996, one unrelated customer accounted for 16% of total revenues. In 1997, one unrelated customer accounted for 24% of total revenues. In 1998, a preferred stockholder and an unrelated customer accounted for 11% and 10% of total revenues, respectively. For the nine months ended September 30, 1999, a preferred stockholder and a unrelated customer accounted for 15% and 9% of total revenues, respectively. Receivables due from two unrelated customers were $158,000 and $57,000, respectively, at December 31, 1997. Receivables due from a preferred stockholder were $387,000 at December 31, 1998. Receivables due from two unrelated parties were $103,000 and $96,000, respectively, at September 30, 1999. 11. 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. No contributions by the Company have been made to the 401(k) plan since its inception. 12. RELATED PARTIES In July 1997, the Company transferred certain patent rights related to its MicroScribe product to a newly created limited liability corporation, MicroScribe LLC, in exchange for 1,000 Class 1 Units and 98,999 Class 2 Units. This investment represents a 99% ownership of MicroScribe LLC. Subsequently, the Company distributed all Class 2 Units to its then outstanding common, preferred and vested option holders on a pro rata basis. The Company maintains a 1% ownership of MicroScribe LLC subsequent to the distribution of the Class 2 Units. There was no recorded value related to these internally-developed patent agreements, and thus no amount was recognized as a result of the transfer. During July 1997, the Company also entered into an exclusive ten-year license agreement with MicroScribe LLC (the "Agreement") for the right to manufacture, market and sell the related MicroScribe technology. Under the terms of the Agreement, the Company must pay a royalty to MicroScribe LLC based on a variable percentage of net receipts as defined under the Agreement. Royalty expense under the Agreement was $49,000, $116,000 and $99,000 in 1997 and 1998 and the nine months ended September 30, 1999, respectively. As discussed in Note 10, a preferred stockholder accounted for $249,000 and $552,000 of royalty revenue in 1998 and the nine months ended September 30, 1999, respectively, and $316,000 and $270,000 of development contract revenue in 1998 and the nine months ended September 30, 1999, respectively. 13. CONTINGENCIES The Company has received claims from third parties asserting that the Company's technologies, or those of its licensees, infringe on the other parties' intellectual property rights. Management believes that these claims are without merit and, with respect to each, has obtained or is in the F-23 93 IMMERSION CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) process of obtaining written non-infringement and/or patent invalidity opinions from outside patent counsel. Accordingly, in the opinion of management, the outcome of such claims will not have a material effect on the financial statements of the Company. 14. SUBSEQUENT EVENTS In June 1999, the Board of Directors approved an amendment to the 1997 Stock Option Plan to increase the number of shares reserved for issuance by 1,149,975. On November 3, 1999, the stockholders approved the following: - Reincorporation of the Company in the state of Delaware and a concurrent 0.807-for-one reverse common and Series C and D preferred stock split and 4.035-for-one reverse Series A and B preferred stock split. - Adoption of the Company's 1999 Employee Stock Purchase Plan (the "ESPP"). The ESPP becomes effective upon the closing of the Company's initial public offering. Under the ESPP, eligible employees may purchase common stock through payroll deductions. Participants may not purchase more than 1,000 shares in a six-month offering period or stock having a value greater than $25,000 in any calendar year as measured at the beginning of the offering period. A total of 500,000 shares of common stock are reserved for issuance under the ESPP plus an automatic annual increase on January 1, 2000 and on each January 1 thereafter through January 1, 2010 by an amount equal to the lesser of 500,000 shares per year or a number of shares determined by the Board of Directors. - Amendment of the Company's 1997 Stock Option Plan to increase the number of shares authorized for issuance under the plan by 2,000,000 shares and to provide for an automatic increase in the shares reserved for issuance on January 1 of each year, beginning on January 1, 2001, by an amount equal to 5% of the number of shares of common stock which were issued and outstanding on the last day of the preceding year. F-24 94 ------------------------------------------------------------------------- -------------------------------------------------------------------------- 4,250,000 SHARES IMMERSION.LOGO COMMON STOCK --------------------------- PROSPECTUS --------------------------- HAMBRECHT & QUIST BEAR, STEARNS & CO. INC. ROBERTSON STEPHENS --------------------------- , 1999 --------------------------- YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION. UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. -------------------------------------------------------------------------- -------------------------------------------------------------------------- 95 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all costs and expenses, other than the underwriting discounts and commissions payable by the Registrant in connection with the sale and distribution of the Common Stock being registered. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market application fee. Securities and Exchange Commission registration fee......... $ 14,946 NASD filing fee............................................. 5,877 Nasdaq National Market application fee...................... 90,000 Blue sky qualification fees and expenses.................... 10,000 Printing and engraving expenses............................. 150,000 Legal fees and expenses..................................... 400,000 Accounting fees and expenses................................ 320,000 Transfer agent and registrar fees........................... 5,000 Miscellaneous expenses...................................... 4,177 ---------- Total............................................. $1,000,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits indemnification of officers, directors and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's Certificate of Incorporation and Bylaws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant has entered into separate indemnification agreements (Exhibit 10.3) with its directors and officers which require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from willful misconduct of a culpable nature). The Registrant also intends to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant has sold and issued the following unregistered securities: (1) From inception to September 30, 1999, we have issued options to purchase an aggregate of 3,038,372 shares of common stock under the 1994 stock option plan, of which 1,232,099 have been exercised, and 3,254,842 shares of common stock under the 1997 stock option plan, of which 304,276 have been exercised. (2) On November 3, 1996, November 4, 1996, November 20, 1996, November 26, 1996 and November 27, 1996, the Registrant sold an aggregate of 396,778 shares of Series B preferred stock to accredited investors for an aggregate purchase price of $590,004. II-1 96 (3) In November 1996, the Registrant issued an option to purchase 80,700 shares of common stock to Steven Blank at an exercise price of $0.17 per share. (4) In November 1996, the Registrant issued a warrant to purchase 32,280 shares of Series B preferred stock to Bruce Paul at an exercise price of $1.48 per share. (5) From November 1996 through June 1999, the Registrant issued options to purchase an aggregate of 154,648 shares of common stock to Steven Blank at exercise prices ranging between $0.173 per share and $3.66 per share. These options may be exercised at any time within ten years after their date of issuance. (6) In December 1996, the Registrant issued a warrant to purchase 40,350 shares of Series B preferred stock to Bruce Paul at an exercise price of $1.48 per share. (7) In March 1997, the Registrant issued 121,050 shares of Series A preferred stock to Bruce Paul pursuant to an exercise of a warrant dated April 1995 at an exercise price of $0.49 per share. (8) On June 3, 1997, the Registrant sold an aggregate of 864,642 shares of Series C preferred stock to accredited investors for an aggregate purchase price of $1,500,005.40. (9) On June 3, 1997, the Registrant issued a warrant to purchase 91,191 shares of common stock to an accredited investor at an exercise price of $0.19 per share. (10) In December 1997, the Registrant issued an option to purchase 80,700 shares of common stock to Washington Research Foundation at an exercise price of $0.37 per share in consideration of consulting services. This option may be exercised at any time within ten years after its issuance. (11) In February 1998, the Registrant issued an option to purchase 20,175 shares of common stock to Asia Pacific Ventures Co. at an exercise price of $0.37 in consideration of consulting services. This option may be exercised at any time within ten years after its issuance. (12) In March 1998, the Registrant issued an option to purchase 242,100 shares of common stock to Lex Computer Management at an exercise price of $0.62 per share in consideration of consulting services. (13) In March 1998, the Registrant issued 60,525 shares of common stock to Steven Blank pursuant to an exercise of an option dated November 1996 at an exercise price of $0.17 per share. The consideration was paid by the company in exchange for a promissory note from Mr. Blank. (14) In March 1998, the Registrant issued 28,245 shares of common stock to Craig Culver with a fair market value of $3.66 per share in consideration for an assignment of a patent. (15) On April 13, 1998, the Registrant sold an aggregate of 1,376,929 shares of Series D preferred stock to accredited investors for an aggregate purchase price of $5,750,928. (16) On April 13, 1998, the Registrant issued a warrant to purchase 11,972 shares of Series D preferred stock to BancAmerica Robertson Stephens at an exercise price of $4.18 per share. (17) In June 1998, the Registrant issued 80,700 shares of common stock to Digital Equipment Corporation with a fair market value of $3.66 per share in consideration of consulting services and assignment of a patent. II-2 97 (18) In June 1998, the Registrant issued 85,945 shares of common stock to Bernie G. Jackson pursuant to an exercise of a warrant dated June 1995 at an exercise price of $0.04 per share. (19) In July 1998, the Registrant issued 28,245 shares of common stock to Ming-Chang Tsai and Gemintek Corporation at a price of $3.66 per share in consideration of an assignment of the patent. (20) In August 1998, the Registrant issued 30,260 shares of Series A preferred stock to Bruce Paul pursuant to an exercise of a warrant dated August 1996 at an exercise price of $0.99 per share. (21) In February 1999, the Registrant issued 8,070 shares of common stock to Washington Research Foundation in consideration for a patent license. (22) In February 1999, the Registrant issued 88,770 shares of common stock to the University of British Columbia for consideration of the sale and transfer of a patent. (23) On March 4, 1999, the Registrant issued an aggregate of 1,291,200 shares of common stock to Cybernet Systems Corporation with a fair market value of $3.66 pursuant to an Agreement and Plan of Reorganization. (24) On March 4, 1999, the Registrant issued a warrant to purchase 322,800 shares of common stock to Cybernet Systems Corporation at an exercise price of $3.66 in consideration for certain consulting services. (25) In May 1999, the Registrant issued 7,061 shares of common stock to Richard Brent Gillespie pursuant to an exercise of a warrant dated August 1995 at an exercise price of $0.04 per share. (26) In June 1999, the Registrant issued an option to purchase 20,175 shares of common stock at an exercise price of $3.66 per share to Coactive Drive Corporation in consideration for a technology licensing agreement. This option may be exercised at any time within ten years after its issuance. (27) In July 1999, the Registrant issued 68,595 shares of common stock to Michael Reich and Associates in consideration of services. There were no underwriters employed in connection with any of the transactions set forth in Item 15. Certain issuances described in this Item 15 were deemed exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and/or Rules 504, 505 or 506 promulgated under the Securities Act as transactions by an issuer not involving a public offering. Certain issuances described in this Item 15 were deemed exempt from registration under the Securities Act in reliance on Section 4(2) or Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each of these transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about us or had access, through employment or other relationships, to that information. II-3 98 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1 Form of Underwriting Agreement.* 2.1 Agreement and Plan of Reorganization with Cybernet Systems Corporation ("Cybernet"), its wholly-owned subsidiary and our wholly-owned subsidiary dated March 4, 1999.*** 3.1 Amended and Restated Articles of Incorporation of Immersion, as amended to date.*** 3.2 Certificate of Incorporation of Immersion.* 3.3 Form of Amended and Restated Certificate of Incorporation of Immersion (to be filed with the Delaware Secretary of State prior to the date of this prospectus).* 3.4 Certificate of Designations of Immersion (to be filed with the Delaware Secretary of State prior to the date of this prospectus).* 3.5 Agreement and Plan of Merger (to be executed prior to the date of this prospectus).* 3.6 Certificate of Elimination of Immersion (to be filed with the Delaware Secretary of State upon completion of the offering).* 3.7 Certificate of Amendment of Restated Certificate of Incorporation of Immersion (to be filed with the Delaware Secretary of State upon completion of the offering).* 3.8 Bylaws of Immersion.*** 3.9 Form of Bylaws.** 4.1 Information and Registration Rights Agreement dated April 13, 1998.*** 4.2 Immersion Corporation Cybernet Registration Rights Agreement dated March 5, 1999.*** 4.3 Common Stock Grant and Purchase Agreement and Plan with Michael Reich & Associates dated July 6, 1999.*** 4.4 Common Stock Agreement with Digital Equipment Corporation dated June 12, 1998.*** 5.1 Opinion of Gray Cary Ware & Freidenrich LLP.* 10.1 1994 Stock Option Plan and form of Incentive Stock Option Agreement and form of Nonqualified Stock Option Agreement.*** 10.2 1997 Stock Option Plan and form of Incentive Stock Option Agreement and form of Nonqualified Stock Option Agreement. 10.3 Form of Indemnity Agreement.** 10.4 Immediately Exercisable Nonstatutory Stock Option Agreement with Steven G. Blank dated November 1, 1996.*** 10.5 Common Stock Purchase Warrant issued to Cybernet Systems Corporation dated March 5, 1999.*** 10.6 Consulting Services Agreement with Cybernet Systems Corporation dated March 5, 1999.*** 10.7 Amendment to Warrant to Purchase Shares of Series B Preferred Stock to Bruce Paul amending warrant to purchase 32,280 shares of Series B Preferred Stock dated September 22, 1998.*** 10.8 Amendment to Warrant to Purchase Shares of Series B Preferred Stock to Bruce Paul amending warrant to purchase 40,350 shares of Series B Preferred Stock dated September 22, 1998.*** 10.9 Operating Agreement with MicroScribe, LLC dated July 1, 1997.*** 10.10 Exchange Agreement with MicroScribe, LLC dated July 1, 1997.*** 10.11 Lease with Spieker Properties, L.P. dated October 26, 1998.** 10.12 Agreement Draft for ASIC Design and Development with Kawasaki LSI, U.S.A., Inc., dated October 16, 1997.# 10.13 Patent License Agreement with Microsoft Corporation dated July 19, 1999.# 10.14 Semiconductor Device Component Purchase Agreement with Kawasaki LSI, U.S.A., Inc., dated August 17, 1998.# 10.15 Amendment No. 1 to Semiconductor Device Component Purchase Agreement with Kawasaki LSI, U.S.A., Inc. dated April 27, 1999.# 10.16 Intercompany Intellectual Property License Agreement with MicroScribe, LLC dated July 1, 1997.
II-4 99
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.17 Patent License Agreement with MicroScribe, LLC dated July 1, 1997. 10.18 Intellectual Property License Agreement with Logitech, Inc. dated .# 10.19 Intellectual Property License Agreement with Logitech, Inc. dated .# 10.20 Technology Product Development Agreement with Logitech, Inc. dated .# 10.21 1999 Employee Stock Purchase Plan and form of subscription agreement thereunder.* 21.1 Subsidiaries of Immersion.*** 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).* 24.1 Power of Attorney (included on page II-5).*** 27.1 Financial Data Schedule (EDGAR filed version only).***
- --------------- *** Previously filed with Registrant's Registration Statement on Form S-1 (File No. 333-86361) on September 1, 1999. ** Previously filed with Amendment No. 1 to Registrant's Registration Statement on Form S-1 (File No. 333-86361) on September 13, 1999. * Previously filed with Amendment No. 2 to Registrant's Registration Statement on Form S-1 (File No. 333-86361) on October 5, 1999. # Certain information has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. (B) FINANCIAL STATEMENT SCHEDULES. The following are filed herewith: Independent Auditors' Report on Schedule. Schedule II Valuation and Qualifying Accounts. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 100 The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-6 101 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 4 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 5th day of November, 1999 IMMERSION CORPORATION By: /s/ LOUIS ROSENBERG ------------------------------------ Louis Rosenberg, Ph.D. Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Act, this Amendment No. 4 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ LOUIS ROSENBERG Chairman of the Board, President November 5, 1999 - --------------------------------------------- and Chief Executive Officer Louis Rosenberg, Ph.D. (Principal Executive Officer) /s/ VICTOR VIEGAS* Vice President, Finance and Chief November 5, 1999 - --------------------------------------------- Financial Officer (Principal Victor Viegas Financial and Accounting Officer) /s/ BRUCE SCHENA* Vice President, Chief Technology November 5, 1999 - --------------------------------------------- Officer, Secretary and Director Bruce Schena /s/ STEVEN BLANK* Director November 5, 1999 - --------------------------------------------- Steven Blank /s/ JONATHAN RUBINSTEIN* Director November 5, 1999 - --------------------------------------------- Jonathan Rubinstein *By: /s/ LOUIS ROSENBERG --------------------------------------- Louis Rosenberg, Ph.D. Attorney-in-Fact
II-7 102 INDEPENDENT AUDITORS' REPORT ON SCHEDULE To the Board of Directors and Stockholders of Immersion Corporation: We have audited the consolidated financial statements of Immersion Corporation (the Company) as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated October 20, 1999 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California October 20, 1999 S-1 103 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COST AND DEDUCTIONS/ END OF OF PERIOD EXPENSES WRITE-OFFS PERIOD ---------- ---------- ----------- ---------- Year ended December 31, 1996 Allowance for doubtful accounts.............. $ 5 $40 $37 $ 8 Year ended December 31, 1997 Allowance for doubtful accounts............ $ 8 $39 $ 9 $ 38 Year ended December 31, 1998 Allowance for doubtful accounts............ $38 $57 $ 3 $ 92 Nine months ended September 30, 1999* Allowance for doubtful accounts............ $92 $46 $20 $118
- --------------- *Unaudited. S-2 104 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1 Form of Underwriting Agreement.* 2.1 Agreement and Plan of Reorganization with Cybernet Systems Corporation ("Cybernet"), its wholly-owned subsidiary and our wholly-owned subsidiary dated March 4, 1999.*** 3.1 Amended and Restated Articles of Incorporation of Immersion, as amended to date.*** 3.2 Certificate of Incorporation of Immersion.* 3.3 Form of Amended and Restated Certificate of Incorporation of Immersion (to be filed with the Delaware Secretary of State prior to the date of this prospectus).* 3.4 Certificate of Designations of Immersion (to be filed with the Delaware Secretary of State prior to the date of this prospectus).* 3.5 Agreement and Plan of Merger (to be executed prior to the date of this prospectus).* 3.6 Certificate of Elimination of Immersion (to be filed with the Delaware Secretary of State upon completion of the offering).* 3.7 Certificate of Amendment of Restated Certificate of Incorporation of Immersion (to be filed with the Delaware Secretary of State upon completion of the offering).* 3.8 Bylaws of Immersion.*** 3.9 Form of Bylaws.** 4.1 Information and Registration Rights Agreement dated April 13, 1998.*** 4.2 Immersion Corporation Cybernet Registration Rights Agreement dated March 5, 1999.*** 4.3 Common Stock Grant and Purchase Agreement and Plan with Michael Reich & Associates dated July 6, 1999.*** 4.4 Common Stock Agreement with Digital Equipment Corporation dated June 12, 1998.*** 5.1 Opinion of Gray Cary Ware & Freidenrich LLP.* 10.1 1994 Stock Option Plan and form of Incentive Stock Option Agreement and form of Nonqualified Stock Option Agreement.*** 10.2 1997 Stock Option Plan and form of Incentive Stock Option Agreement and form of Nonqualified Stock Option Agreement. 10.3 Form of Indemnity Agreement.** 10.4 Immediately Exercisable Nonstatutory Stock Option Agreement with Steven G. Blank dated November 1, 1996.*** 10.5 Common Stock Purchase Warrant issued to Cybernet Systems Corporation dated March 5, 1999.*** 10.6 Consulting Services Agreement with Cybernet Systems Corporation dated March 5, 1999.*** 10.7 Amendment to Warrant to Purchase Shares of Series B Preferred Stock to Bruce Paul amending warrant to purchase 32,280 shares of Series B Preferred Stock dated September 22, 1998.*** 10.8 Amendment to Warrant to Purchase Shares of Series B Preferred Stock to Bruce Paul amending warrant to purchase 40,350 shares of Series B Preferred Stock dated September 22, 1998.*** 10.9 Operating Agreement with MicroScribe, LLC dated July 1, 1997.*** 10.10 Exchange Agreement with MicroScribe, LLC dated July 1, 1997.*** 10.11 Lease with Spieker Properties, L.P. dated October 26, 1998.** 10.12 Agreement Draft for ASIC Design and Development with Kawasaki LSI, U.S.A., Inc., dated October 16, 1997.# 10.13 Patent License Agreement with Microsoft Corporation dated July 19, 1999.# 10.14 Semiconductor Device Component Purchase Agreement with Kawasaki LSI, U.S.A., Inc., dated August 17, 1998.#
105
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.15 Amendment No. 1 to Semiconductor Device Component Purchase Agreement with Kawasaki LSI, U.S.A., Inc. dated April 27, 1999.# 10.16 Intercompany Intellectual Property License Agreement with MicroScribe, LLC dated July 1, 1997. 10.17 Patent License Agreement with MicroScribe, LLC dated July 1, 1997. 10.18 Intellectual Property License Agreement with Logitech, Inc. dated.# 10.19 Intellectual Property License Agreement with Logitech, Inc. dated.# 10.20 Technology Product Development Agreement with Logitech, Inc. dated.# 10.21 1999 Employee Stock Purchase Plan and form of subscription agreement thereunder.* 21.1 Subsidiaries of Immersion.*** 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).* 24.1 Power of Attorney (included on page II-5).*** 27.1 Financial Data Schedule (EDGAR filed version only).***
- --------------- *** Previously filed with Registrant's Registration Statement on Form S-1 (File No. 333-86361) on September 1, 1999. ** Previously filed with Amendment No. 1 to Registrant's Registration Statement on Form S-1 (File No. 333-86361) on September 13, 1999. * Previously filed with Amendment No. 2 to Registrant's Registration Statement on Form S-1 (File No. 333-86361) on October 5, 1999. # Certain information has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.2 2 AMENDED 1997 STOCK OPTION PLAN 1 EXHIBIT 10.2 IMMERSION CORPORATION AMENDED 1997 STOCK OPTION PLAN 1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN. 1.1. ESTABLISHMENT. The Immersion Corporation 1997 Stock Option Plan (the "PLAN") was established effective as of June 2, 1997. On August 30, 1999, the Plan was amended and retitled the "Amended 1997 Stock Option Plan," effective as of the date the Company first registers its Stock under Section 12 of the Exchange Act. 1.2. PURPOSE. The purpose of the Plan is to advance the interests of the Participating IMMERSION Group and its shareholders by providing an incentive to attract, retain and reward persons performing services for the Participating IMMERSION Group and by motivating such persons to contribute to the growth and profitability of the Participating IMMERSION Group. 1.3. TERM OF PLAN. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options granted under the Plan have lapsed. However, all Incentive Stock Options shall be granted, if at all, within ten (10) years from June 2, 1997. 2. DEFINITIONS AND CONSTRUCTION. 2.1. DEFINITIONS. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "BOARD" means the Board of Directors of IMMERSION. If one or more Committees have been appointed by the Board to administer the Plan, "Board" also means such Committee(s). (b) "CODE" means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder. (c) "COMMITTEE" means the Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted herein, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law. (d) "COMPANY" means Immersion Corporation, a California corporation, or any successor corporation thereto. (e) "CONSULTANT" means any person, including an advisor, engaged by a Participating IMMERSION to render services other than as an Employee or a Director. 2 (f) "DIRECTOR" means a member of the Board or of the board of directors of any other Participating IMMERSION. (g) "EMPLOYEE" means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating IMMERSION; provided, however, that neither service as a Director nor payment of a director's fee shall be sufficient to constitute employment for purposes of the Plan. (h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (i) "FAIR MARKET VALUE" means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by IMMERSION, in its sole discretion, if such determination is expressly allocated to IMMERSION herein, subject to the following: (i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as IMMERSION deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion. (ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse. (j) "INCENTIVE STOCK OPTION" means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code. (k) "INSIDER" means an officer or a Director of IMMERSION or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act. (l) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option. (m) "OPTION" means a right to purchase Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms and conditions of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option. (n) "OPTION AGREEMENT" means a written agreement between IMMERSION and an Optionee setting forth the terms, conditions and restrictions of the Option granted to the Optionee and any shares acquired upon the exercise thereof. 3 (o) "OPTIONEE" means a person who has been granted one or more Options. (p) "PARENT CORPORATION" means any present or future "parent corporation" of IMMERSION, as defined in Section 424(e) of the Code. (q) "PARTICIPATING COMPANY" means IMMERSION or any Parent Corporation or Subsidiary Corporation. (r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all corporations collectively which are then Participating Companies. (s) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation. (t) "Section 162(m)" means Section 162(m) of the Code and the regulation promulgated thereunder. (u) "STOCK" means the common stock, without par value, of IMMERSION, as adjusted from time to time in accordance with Section 4.2. (v) "SUBSIDIARY CORPORATION" means any present or future "subsidiary corporation" of IMMERSION, as defined in Section 424(f) of the Code. (w) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an Option is granted to the Optionee, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating IMMERSION within the meaning of Section 422(b)(6) of the Code. 2.2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 3. ADMINISTRATION. 3.1. ADMINISTRATION BY THE BOARD. The Plan shall be administered by the Board. All questions of interpretation of the Plan or of any Option shall be determined by the Board, and such determinations shall be final and binding upon all persons having an interest in the Plan or such Option. Any officer of a Participating IMMERSION shall have the authority to act on behalf of IMMERSION with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to IMMERSION herein, provided the officer has apparent authority with respect to such matter, right obligation, determination or election. 4 3.2. ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to participation by Insiders in the Plan, at any time that any class of equity security of IMMERSION is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3. 3.3. POWERS OF THE BOARD. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Board shall have the full and final power and authority, in its sole discretion: (a) to determine the persons to whom, and the time or times at which, Options shall be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options; (c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the Option, (ii) the method of payment for shares purchased upon the exercise of the Option, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the Option or such shares, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the Option or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the Option, (vi) the effect of the Optionee's termination of employment or service with the Participating IMMERSION Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the Option or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, or renew, or grant a new Option in substitution for, any Option or to waive any restrictions or conditions applicable to any Option or any shares acquired upon the exercise thereof; (g) to amend the exercisability of any Option or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following an Optionee's termination of employment or service with the Participating IMMERSION Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt supplements to, or alternative versions of, the Plan, including, without limitation, as the Board deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted Options; and (i) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement and to make all other determinations and take 5 such other actions with respect to the Plan or any Option as the Board may deem advisable to the extent consistent with the Plan and applicable law. 3.4. COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating Company is a "publicly held corporation" within the meaning of Section 162(m), the Board may establish a Committee of "outside directors" within the meaning of Section 162(m) to approve the grant of any Option which might reasonably be anticipated to result in the payment of employee remuneration that would otherwise exceed the limit on employee remuneration deductible for income tax purposes pursuant to Section 162(m). 4. SHARES SUBJECT TO PLAN. 4.1. MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided by Section 4.2, the maximum aggregate number of shares of stock that may be issued under the Plan shall be five million one hundred sixty-six thousand seven hundred and ninety-three (5,166,793) and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof (the "Share Reserve"). The Share Reserve will automatically be increased on the first day of each fiscal year of the Company beginning on or after January 1, 2001 by a number of shares equal to five percent (5%) of the number of shares of Stock issued and outstanding on the last day of the preceding fiscal year. In addition, except as adjusted pursuant to Section 4.2, in no event shall more than five million one hundred and sixty-six thousand seven hundred ninety-three (5,166,793) shares of Stock be cumulatively available for issuance pursuant to the exercise of Incentive Stock Options (the "ISO Share Issuance Limit"). If an outstanding Option for any reason expires or is terminated or canceled or shares of Stock acquired, subject to repurchase, upon the exercise of an Option are repurchased by IMMERSION, the shares of Stock allocable to the unexercised portion of such Option, or such repurchased shares of Stock, shall again be available for issuance under the Plan. 4.2. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of IMMERSION, appropriate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Options and in the exercise price per share of any outstanding Options. If a majority of the shares which are of the same class as the shares that are subject to outstanding Options are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event, as defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to provide that such Options are exercisable for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding Options shall be adjusted in a fair and equitable manner as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 4.2 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the exercise price of any Option be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 4.2 shall be final, binding and conclusive. 5. ELIGIBILITY AND OPTION LIMITATIONS. 5.1. PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to Employees, Consultants, and Directors. For purposes of the foregoing sentence, "Employees," "Consultants" and "Directors" shall include prospective Employees, prospective Consultants and prospective Directors to whom Options are granted in connection with written offers of employment or other service relationship with the Participating IMMERSION Group. Eligible persons may be granted more than one (1) Option. 5.2. OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective Employee upon the condition that such person become an Employee shall be deemed granted effective on the date such person commences service with a Participating IMMERSION, with an exercise price determined as of such date in accordance with Section 6.1. 6 5.3. FAIR MARKET VALUE LIMITATION. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating IMMERSION Group, including the Plan) become exercisable by an Optionee for the first time during any calendar year for stock having an aggregate Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 5.3, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 5.3, the Optionee may designate which portion of such Option the Optionee is exercising. In the absence of such designation, the Optionee shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. 6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish. Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions: 6.1. EXERCISE PRICE. The exercise price for each Option shall be established in the sole discretion of the Board; provided, however, that (a) the exercise price per share for an Incentive Stock Option shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option, (b) the exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option, and (c) no Option granted to a Ten Percent Owner Optionee shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code. 6.2. EXERCISE PERIOD. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria, and restrictions as shall be determined by the Board and set forth in the Option Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option, and (c) no Option granted to a prospective Employee, prospective Consultant or prospective Director may become exercisable prior to the date on which such person commences service with a Participating IMMERSION. 6.3. PAYMENT OF EXERCISE PRICE. 7 (A) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to IMMERSION of shares of Stock owned by the Optionee having a Fair Market Value (as determined by IMMERSION without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for IMMERSION) not less than the exercise price, (iii) by the assignment of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by the Optionee's recourse promissory note in a form approved by IMMERSION, (v) by such other consideration as may be approved by the Board from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Board may at any time or from time to time, by adoption of or by amendment to the standard forms of Option Agreement described in Section 7, or by other means, grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration. (B) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not be exercised by tender to IMMERSION of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of IMMERSION's stock. Unless otherwise provided by the Board, an Option may not be exercised by tender to IMMERSION of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from IMMERSION. (C) CASHLESS EXERCISE. The IMMERSION reserves, at any and all times, the right, in IMMERSION's sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise. (D) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law. Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted. The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to IMMERSION. Unless otherwise provided by the Board, if IMMERSION at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with IMMERSION's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. 6.4. TAX WITHHOLDING. The IMMERSION shall have the right, but not the obligation, to deduct from the shares of Stock issuable upon the exercise of an Option, or to accept from the Optionee the tender of, a number of whole shares of Stock having a Fair Market 8 Value, as determined by IMMERSION, equal to all or any part of the federal, state, local and foreign taxes, if any, required by law to be withheld by the Participating IMMERSION Group with respect to such Option or the shares acquired upon the exercise thereof. Alternatively or in addition, in its sole discretion, IMMERSION shall have the right to require the Optionee, through payroll withholding, cash payment or otherwise, including by means of a Cashless Exercise, to make adequate provision for any such tax withholding obligations of the Participating IMMERSION Group arising in connection with the Option or the shares acquired upon the exercise thereof. The IMMERSION shall have no obligation to deliver shares of Stock or to release shares of Stock from an escrow established pursuant to the Option Agreement until the Participating IMMERSION Group's tax withholding obligations have been satisfied by the Optionee. 7. STANDARD FORMS OF OPTION AGREEMENT. 7.1. GENERAL. Unless otherwise provided by the Board at the time the Option is granted, an Option shall comply with and be subject to the terms and conditions set forth in the standard form of Option Agreement adopted by the Board concurrently with its adoption of the Plan and as amended from time to time. 7.2. STANDARD TERM OF OPTIONS. Except as otherwise provided in Section 6.2 or by the Board in the grant of an Option, any Option granted hereunder shall have a term of ten (10) years from the effective date of grant of the Option. 7.3. AUTHORITY TO VARY TERMS. The Board shall have the authority from time to time to vary the terms of the standard form of Option Agreement described in this Section 7 either in connection with the grant or amendment of an individual Option or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Option Agreement are not inconsistent with the terms of the Plan. 8. TRANSFER OF CONTROL. 9 8.1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to IMMERSION: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of IMMERSION of more than fifty percent (50%) of the voting stock of IMMERSION; (ii) a merger or consolidation in which IMMERSION is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of IMMERSION; or (iv) a liquidation or dissolution of IMMERSION. (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the shareholders of IMMERSION immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of IMMERSION's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of IMMERSION or the corporation or corporations to which the assets of IMMERSION were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own IMMERSION or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of IMMERSION or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2. EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume IMMERSION's rights and obligations under outstanding Options or substitute for outstanding Options substantially equivalent options for the Acquiring Corporation's stock. For purposes of this Section 8.2, an Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. Any Options which are neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control shall terminate and cease to be outstanding effective as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of an Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of the Option Agreement evidencing such Option except as otherwise provided in such Option Agreement. Furthermore, notwithstanding the foregoing, if 10 the corporation the stock of which is subject to the outstanding Options immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding Options shall not terminate unless the Board otherwise provides in its sole discretion. 9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee or the Optionee's guardian or legal representative. No Option shall be assignable or transferable by the Optionee, except by will or by the laws of descent and distribution. 10. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as members of the Board or officers or employees of the Participating IMMERSION Group, members of the Board and any officers or employees of the Participating IMMERSION Group to whom authority to act for the Board or IMMERSION is delegated shall be indemnified by IMMERSION against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by IMMERSION) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to IMMERSION, in writing, the opportunity at its own expense to handle and defend the same. 11. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the Plan at any time. However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of IMMERSION's shareholders there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of IMMERSION's shareholders under any applicable law, regulation or rule. In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option or any unexercised portion thereof, without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule. 11 12. SHAREHOLDER APPROVAL. The Plan or any increase in the maximum number of shares of Stock issuable thereunder as provided in Section 4.1 (the "MAXIMUM SHARES") shall be approved by the shareholders of IMMERSION within twelve (12) months of the date of adoption thereof by the Board. Options granted prior to shareholder approval of the Plan or in excess of the Maximum Shares previously approved by the shareholders shall become exercisable no earlier than the date of shareholder approval of the Plan or such increase in the Maximum Shares, as the case may be. 12 EXHIBIT A THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. IMMERSION CORPORATION INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of ___________, 199_, by and Immersion Corporation and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the Immersion Corporation 1997 Stock Option Plan (the "PLAN") an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). The Option shall in all respects be subject to the terms and conditions of the Plan, the provisions of which are incorporated herein by reference. 1. DEFINITIONS AND CONSTRUCTION. 1.1. DEFINITIONS. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Plan. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means _________________, 199_. (b) "NUMBER OF OPTION SHARES" means __________ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $________ per share of Stock, as adjusted from time to time pursuant to Section 9. 1 13 (d) "INITIAL VESTING DATE" means the date occurring one (1) year after (check one): -- the Date of Option Grant. -- __________________ , 199_, the date the Optionee's Service commenced. (e) "VESTED RATIO" means, on any relevant date, the ratio determined as follows:
Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, provided the 1/4 Optionee's Service has not terminated prior to such date Plus For each full month of the Optionee's 1/48 continuous Service from the Initial Vesting Date until the Vested Ratio equals 1/1, an additional
(f) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (g) "COMPANY" means Immersion Corporation, a California corporation, or any successor corporation thereto. (h) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. (i) "SECURITIES ACT" means the Securities Act of 1933, as amended. (j) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety 2 14 (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. 1.2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX STATUS OF OPTION. This Option is intended to be an Incentive Stock Option within the meaning of Section 422(b) of the Code, but the Company does not represent or warrant that this Option qualifies as such. The Optionee should consult with the Optionee's own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options held by the Optionee (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than One Hundred Thousand Dollars ($100,000), the Optionee should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.) 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1. RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the Vested Ratio less the number of shares previously acquired upon exercise of the Option, subject to the Optionee's agreement that any shares purchased upon exercise are subject to the Company's repurchase rights set forth in Section 11. In no event shall the Option be exercisable for more shares than the number of Option Shares. 3 15 4.2. METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by (i) full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed copy, if required herein, of the then current forms of escrow and security agreement referenced below. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such executed agreements. 4.3. PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the Company's sole discretion at the time the Option is exercised, by the Optionee's recourse promissory note for the aggregate Exercise Price, or (v) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if an exercise of the Option using a promissory note would be a violation of any law. 4 16 The promissory note permitted in clause (iv) of Section 4.3(a) shall be a full recourse note in a form satisfactory to the Company, with principal payable no more than four (4) years after the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of Stock acquired pursuant to the then current form of security agreement as approved by the Company. At any time the Company is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's Service with the Participating Company Group for any reason, with or without cause. 4.4. TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein. 4.5. CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF Shares. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the 5 17 Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7. FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Transfer of Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1. OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (NOTE: If the Option is exercised more than three (3) months after the date on which the Optionee's Service as an Employee terminated as a result of a Disability other than a permanent and total disability as defined in Section 22(e)(3) of the Code, the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.) 6 18 (b) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 7.2. ADDITIONAL LIMITATION ON OPTION EXERCISE. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to Section 7.1 following termination of the Optionee's Service may not be made by delivery of a promissory note as provided in Section 4.3(a). 7.3. EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences to the Optionee of any such delayed exercise. 7.4. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. The Company makes no representation as to the tax consequences of any such delayed exercise. The Optionee should consult with the Optionee's own tax advisor as to the tax consequences to the Optionee of any such delayed exercise. 7 19 8. TRANSFER OF CONTROL. 8.1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2. EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control. Notwithstanding the foregoing, shares 8 20 acquired upon exercise of the Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. RIGHT OF FIRST REFUSAL. 11.1. GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section 11.7 below, in the event the Optionee, the Optionee's legal representative, or other holder of shares 9 21 acquired upon exercise of the Option proposes to sell, exchange, transfer, pledge, or otherwise dispose of any shares acquired upon exercise of the option (the "TRANSFER SHARES") to any person or entity, including, without limitation, any shareholder of the Participating Company Group, the Company shall have the right to repurchase the Transfer Shares under the terms and subject to the conditions set forth in this Section 11 (the "RIGHT OF FIRST REFUSAL"). 11.2. NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER NOTICE") to the Company describing fully the proposed transfer, including the number of Transfer Shares, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer price, and containing such information necessary to show the bona fide nature of the proposed transfer. In the event of a bona fide gift or involuntary transfer, the proposed transfer price shall be deemed to be the Fair Market Value of the Transfer Shares, as determined by the Board in good faith. If the Optionee proposes to transfer any Transfer Shares to more than one Proposed Transferee, the Optionee shall provide a separate Transfer Notice for the proposed transfer to each Proposed Transferee. The Transfer Notice shall be signed by both the Optionee and the Proposed Transferee and must constitute a binding commitment of the Optionee and the Proposed Transferee for the transfer of the Transfer Shares to the Proposed Transferee subject only to the Right of First Refusal. 11.3. BONA FIDE TRANSFER. If the Company determines that the information provided by the Optionee in the Transfer Notice is insufficient to establish the bona fide nature of a proposed voluntary transfer, the Company shall give the Optionee written notice of the Optionee's failure to comply with the procedure described in this Section 11, and the Optionee shall have no right to transfer the Transfer Shares without first complying with the procedure described in this Section 11. The Optionee shall not be permitted to transfer the Transfer Shares if the proposed transfer is not bona fide. 11.4. EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines the proposed transfer to be bona fide, the Company shall have the right to purchase all, but not less than all, of the Transfer Shares (except as the Company and the Optionee otherwise agree) at the purchase price and on the terms set forth in the Transfer Notice by delivery to the Optionee of a notice of exercise of the Right of First Refusal within thirty (30) days after the date the Transfer Notice is delivered to the Company. The Company's exercise or failure to exercise the Right of First Refusal with respect to any proposed transfer described in a Transfer Notice shall not affect the Company's right to exercise the Right of First Refusal with respect to any proposed transfer described in any other Transfer Notice, whether or not such other Transfer Notice is issued by the Optionee or issued by a person other than the Optionee with respect to a proposed transfer to the same Proposed Transferee. If the Company exercises the Right of First Refusal, the Company and the Optionee shall thereupon consummate the sale of the Transfer Shares to the Company on the terms set forth in the Transfer Notice within sixty (60) days after the date the Transfer Notice is delivered to the Company (unless a longer period is offered by the Proposed Transferee); provided, however, that in the event the Transfer Notice provides for the payment for the Transfer Shares other than in cash, the Company shall have the option of paying for the Transfer Shares by the present value cash equivalent of the consideration described in the Transfer Notice as reasonably determined by the Company. For purposes of the foregoing, cancellation of any 10 22 indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. 11.5. FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails to exercise the Right of First Refusal in full (or to such lesser extent as the Company and the Optionee otherwise agree) within the period specified in Section 11.4 above, the Optionee may conclude a transfer to the Proposed Transferee of the Transfer Shares on the terms and conditions described in the Transfer Notice, provided such transfer occurs not later than ninety (90) days following delivery to the Company of the Transfer Notice. The Company shall have the right to demand further assurances from the Optionee and the Proposed Transferee (in a form satisfactory to the Company) that the transfer of the Transfer Shares was actually carried out on the terms and conditions described in the Transfer Notice. No Transfer Shares shall be transferred on the books of the Company until the Company has received such assurances, if so demanded, and has approved the proposed transfer as bona fide. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in this Section 11. 11.6. TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer Shares or any interest therein, other than the Company, shall be required as a condition of such transfer to agree in writing (in a form satisfactory to the Company) that such transferee shall receive and hold such Transfer Shares or interest therein subject to all of the terms and conditions of this Option Agreement, including this Section 11 providing for the Right of First Refusal with respect to any subsequent transfer. Any sale or transfer of any shares acquired upon exercise of the Option shall be void unless the provisions of this Section 11 are met. 11.7. TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of First Refusal shall not apply to any transfer or exchange of the shares acquired upon exercise of the Option if such transfer or exchange is in connection with an Ownership Change Event. If the consideration received pursuant to such transfer or exchange consists of stock of a Participating Company, such consideration shall remain subject to the Right of First Refusal unless the provisions of Section 11.9 below result in a termination of the Right of First Refusal. 11.8. ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the right to assign the Right of First Refusal at any time, whether or not there has been an attempted transfer, to one or more persons as may be selected by the Company. 11.9. EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other provisions of this Option Agreement notwithstanding, the Right of First Refusal shall terminate and be of no further force and effect upon (a) the occurrence of a Transfer of Control, unless the Acquiring Corporation assumes the Company's rights and obligations under the Option or substitutes a substantially equivalent option for the Acquiring Corporation's stock for the Option, or (b) the existence of a public market for the class of shares subject to the Right of First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Exchange Act) or (ii) such stock is traded on the 11 23 over-the-counter market and prices therefor are published daily on business days in a recognized financial journal. 12. ESCROW. 12.1. ESTABLISHMENT OF ESCROW. To ensure that shares subject to the Right of First Refusal or securing any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate evidencing the shares which the Optionee purchases upon exercise of the Option with an escrow agent designated by the Company under the terms and conditions of escrow and security agreements approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of shares of Stock acquired upon exercise of the Option that remain, following such Ownership Change Event or change described in Section 9, subject to the Right of First Refusal or any security interest held by the Company shall be immediately subject to the escrow to the same extent as such shares of Stock immediately before such event. The Company shall bear the expenses of the escrow. 12.2. DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the expiration of the Right of First Refusal and after full repayment of any promissory note secured by the shares or other property in escrow, but not more frequently than twice each calendar year, the escrow agent shall deliver to the Optionee the shares and any other property no longer subject to such restriction and no longer securing any promissory note. 12.3. NOTICES AND PAYMENTS. In the event the shares and any other property held in escrow are subject to the Company's exercise of the Right of First Refusal, the notices required to be given to the Optionee shall be given to the escrow agent, and any payment required to be given to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the Company, the escrow agent shall deliver the shares and any other property which the Company has purchased to the Company and shall deliver the payment received from the Company to the Optionee. 13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split or other change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to the Right of First Refusal and any security interest held by the Company with the same force and effect as the shares subject to the Right of First Refusal and such security interest immediately before such event. 12 24 14. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, the Optionee shall promptly notify the Chief Financial Officer of the Company if the Optionee disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Optionee exercises all or part of the Option or within two (2) years after the Date of Option Grant and shall provide the Company with a description of the terms and circumstances of such disposition. Until such time as the Optionee disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Optionee shall hold all shares acquired pursuant to the Option in the Optionee's name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Option Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company's stock to notify the Company of any such transfers. The obligation of the Optionee to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence. 15. LEGENDS. The Company may at any time place legends referencing the Right of First Refusal and any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: 15.1. "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT." 15.2. Any legend required to be placed thereon by the Commissioner of Corporations of the State of California. 15.3. "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 13 25 15.4. "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("ISO"). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO ___________. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE." 16. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any underwritten public offering of stock, including an initial public offering of stock, made by the Company pursuant to an effective registration statement filed under the Securities Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any short sale of, or otherwise dispose of any shares of stock of the Company or any rights to acquire stock of the Company for such period of time from and after the effective date of such registration statement as may be established by the underwriter for such public offering; provided, however, that such period of time shall not exceed one hundred eighty (180) days from the effective date of the registration statement to be filed in connection with such public offering. The foregoing limitation shall not apply to shares registered in the public offering under the Securities Act. The Optionee shall be subject to this Section provided and only if the officers and directors of the Company are also subject to similar arrangements. 17. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement, and any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 18. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 19. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Transfer of Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation or is 14 26 required to enable the Option to qualify as an Incentive Stock Option. No amendment or addition to this Option Agreement shall be effective unless in writing. 20. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 21. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 22. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. IMMERSION CORPORATION By: ------------------------------- Title: ------------------------------- Address: 2158 Paragon Drive San Jose, CA 95131 15 27 The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, including the Right of First Refusal set forth in Section 11 and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. The undersigned acknowledges receipt of a copy of the Plan. OPTIONEE Date: ------------- ----------------------------------------- Optionee's Address and Phone Number: ----------------------------------------- ----------------------------------------- ( ) ----------------------------------------- 16 28 EXHIBIT B THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. IMMERSION CORPORATION NONSTATUTORY STOCK OPTION AGREEMENT THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and entered into as of ___________, 199_, by and between Immersion Corporation and ___________________________ (the "OPTIONEE"). The Company has granted to the Optionee pursuant to the Immersion Corporation 1997 Stock Option Plan (the "PLAN") an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the "OPTION"). The Option shall in all respects be subject to the terms and conditions of the Plan, the provisions of which are incorporated herein by reference. 1. DEFINITIONS AND CONSTRUCTION. 1.1. DEFINITIONS. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Plan. Whenever used herein, the following terms shall have their respective meanings set forth below: (a) "DATE OF OPTION GRANT" means __________, 199_. (b) "NUMBER OF OPTION SHARES" means ______ shares of Stock, as adjusted from time to time pursuant to Section 9. (c) "EXERCISE PRICE" means $_____ per share of Stock, as adjusted from time to time pursuant to Section 9. (d) "INITIAL VESTING DATE" means the date occurring one (1) year after (check one): 1 29 _____ the Date of Option Grant. ________________ , 199_, the date the Optionee's Service commenced. (e) "VESTED RATIO" means, on any relevant date, the ratio determined as follows:
Vested Ratio ------------ Prior to Initial Vesting Date 0 On Initial Vesting Date, provided the 1/4 Optionee's Service has not terminated prior to such date Plus For each full month of the Optionee's 1/48 continuous Service from the Initial Vesting Date until the Vested Ratio equals 1/1, an additional
(f) "OPTION EXPIRATION DATE" means the date ten (10) years after the Date of Option Grant. (g) "COMPANY" means Immersion Corporation, a California corporation, or any successor corporation thereto. (h) "DISABILITY" means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee's position with the Participating Company Group because of the sickness or injury of the Optionee. (i) "SECURITIES ACT" means the Securities Act of 1933, as amended. (j) "SERVICE" means the Optionee's employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee's Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee's Service. Furthermore, the Optionee's Service with the Participating Company Group shall not be deemed to have terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee's Service shall be deemed to have terminated unless the Optionee's right to return to Service with the Participating Company 2 30 Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee's Vested Ratio. The Optionee's Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee's Service has terminated and the effective date of such termination. 1.2. CONSTRUCTION. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise. 2. TAX STATUS OF OPTION. This Option is intended to be a Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code. 3. ADMINISTRATION. All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election. 4. EXERCISE OF THE OPTION. 4.1. RIGHT TO EXERCISE. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the Vested Ratio less the number of shares previously acquired upon exercise of the Option, subject to the Optionee's agreement that any shares purchased upon exercise are subject to the Company's repurchase rights set forth in Section 11. In no event shall the Option be exercised for more shares than the number of Option Shares. 4.2. METHOD OF EXERCISE. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee's investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by (i) full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed copy, if required herein, of the then current forms of escrow and 3 31 security agreement referenced below. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such executed agreements. 4.3. PAYMENT OF EXERCISE PRICE. (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), (iv) in the Company's sole discretion at the time the Option is exercised, by the Optionee's recourse promissory note for the aggregate Exercise Price, or (v) by any combination of the foregoing. (b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company. (c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company's sole and absolute discretion, to decline to approve or terminate any such program or procedure. (d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted if an exercise of the Option using a promissory note would be a violation of any law. The promissory note permitted in clause (iv) of Section 4.3(a) shall be a full recourse note in a form satisfactory to the Company, with principal payable no more than four (4) years after the date the Option is exercised. Interest on the principal balance of the promissory note shall be payable in annual installments at the minimum interest rate necessary to avoid imputed interest pursuant to all applicable sections of the Code. Such recourse promissory note shall be secured by the shares of Stock acquired pursuant to the then current form of security agreement as approved by the Company. At any time the Company is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company's securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable 4 32 regulations. Except as the Company in its sole discretion shall determine, the Optionee shall pay the unpaid principal balance of the promissory note and any accrued interest thereon upon termination of the Optionee's Service with the Participating Company Group for any reason, with or without cause. 4.4. TAX WITHHOLDING. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the Optionee may not be able to exercise the Option when desired even though the Option is vested, and the Company shall have no obligation to issue a certificate for such shares or release such shares from any escrow provided for herein. 4.5. CERTIFICATE REGISTRATION. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, in the names of the heirs of the Optionee. 4.6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF Shares. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should be directed to the Chief Financial Officer of the Company. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company's legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the 5 33 Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. 4.7. FRACTIONAL SHARES. The Company shall not be required to issue fractional shares upon the exercise of the Option. 5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by the Optionee's legal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. 6. TERMINATION OF THE OPTION. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee's Service as described in Section 7, or (c) a Transfer of Control to the extent provided in Section 8. 7. EFFECT OF TERMINATION OF SERVICE. 7.1. OPTION EXERCISABILITY. (a) DISABILITY. If the Optionee's Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee (or the Optionee's guardian or legal representative at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. (b) DEATH. If the Optionee's Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee's Service terminated, may be exercised by the Optionee's legal representative or other person who acquired the right to exercise the Option by reason of the Optionee's death at any time prior to the expiration of twelve (12) months after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. The Optionee's Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee's termination of Service. (c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee's Service terminated, may be exercised by the Optionee within three (3) months (or such other longer period of time as determined by the Board, in its sole discretion) after the date on which the Optionee's Service terminated, but in any event no later than the Option Expiration Date. 6 34 7.2. ADDITIONAL LIMITATION ON OPTION EXERCISE. Except as the Company and the Optionee otherwise agree, exercise of the Option pursuant to Section 7.1 following termination of the Optionee's Service may not be made by delivery of a promissory note as provided in Section 4.3(a). 7.3. EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date. 7.4. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 7.1 of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee's termination of Service, or (iii) the Option Expiration Date. 8. TRANSFER OF CONTROL. 8.1. DEFINITIONS. (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of more than fifty percent (50%) of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company. (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a series of related Ownership Change Events (collectively, the "TRANSACTION") wherein the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company's voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting stock of the Company or the corporation or corporations to which the assets of the Company were transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting stock of one or more corporations 7 35 which, as a result of the Transaction, own the Company or the Transferee Corporation(s), as the case may be, either directly or through one or more subsidiary corporations. The Board shall have the right to determine whether multiple sales or exchanges of the voting stock of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive. 8.2. EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a Transfer of Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the Company's rights and obligations under the Option or substitute for the Option a substantially equivalent option for the Acquiring Corporation's stock. For purposes of this Section 8.2, the Option shall be deemed assumed if, following the Transfer of Control, the Option confers the right to purchase in accordance with its terms and conditions, for each share of Stock subject to the Option immediately prior to the Transfer of Control, the consideration (whether stock, cash or other securities or property) to which a holder of a share of Stock on the effective date of the Transfer of Control was entitled. The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control. Notwithstanding the foregoing, shares acquired upon exercise of the Option prior to the Transfer of Control and any consideration received pursuant to the Transfer of Control with respect to such shares shall continue to be subject to all applicable provisions of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding the foregoing, if the corporation the stock of which is subject to the Option immediately prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a Transfer of Control is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the Option shall not terminate unless the Board otherwise provides in its sole discretion. 9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded up or down to the nearest whole number, as determined by the Board, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Board pursuant to this Section 9 shall be final, binding and conclusive. 8 36 10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9. If the Optionee is an Employee, the Optionee understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Optionee, the Optionee's employment is "at will" and is for no specified term. Nothing in this Option Agreement shall confer upon the Optionee, whether an Employee or Consultant, any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Optionee's Service as an Employee or Consultant, as the case may be, at any time. 11. RIGHT OF FIRST REFUSAL. 11.1. GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section 11.7 below, in the event the Optionee, the Optionee's legal representative, or other holder of shares acquired upon exercise of the Option proposes to sell, exchange, transfer, pledge, or otherwise dispose of any shares acquired upon exercise of the option (the "TRANSFER SHARES") to any person or entity, including, without limitation, any shareholder of the Participating Company Group, the Company shall have the right to repurchase the Transfer Shares under the terms and subject to the conditions set forth in this Section 11 (the "RIGHT OF FIRST REFUSAL"). 11.2. NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER NOTICE") to the Company describing fully the proposed transfer, including the number of Transfer Shares, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer price, and containing such information necessary to show the bona fide nature of the proposed transfer. In the event of a bona fide gift or involuntary transfer, the proposed transfer price shall be deemed to be the Fair Market Value of the Transfer Shares, as determined by the Board in good faith. If the Optionee proposes to transfer any Transfer Shares to more than one Proposed Transferee, the Optionee shall provide a separate Transfer Notice for the proposed transfer to each Proposed Transferee. The Transfer Notice shall be signed by both the Optionee and the Proposed Transferee and must constitute a binding commitment of the Optionee and the Proposed Transferee for the transfer of the Transfer Shares to the Proposed Transferee subject only to the Right of First Refusal. 11.3. BONA FIDE TRANSFER. If the Company determines that the information provided by the Optionee in the Transfer Notice is insufficient to establish the bona fide nature of a proposed voluntary transfer, the Company shall give the Optionee written notice of the Optionee's failure to comply with the procedure described in this Section 11, and the Optionee shall have no right to transfer the Transfer Shares without first complying with the procedure described in this Section 11. The Optionee shall not be permitted to transfer the Transfer Shares if the proposed transfer is not bona fide. 9 37 11.4. EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines the proposed transfer to be bona fide, the Company shall have the right to purchase all, but not less than all, of the Transfer Shares (except as the Company and the Optionee otherwise agree) at the purchase price and on the terms set forth in the Transfer Notice by delivery to the Optionee of a notice of exercise of the Right of First Refusal within thirty (30) days after the date the Transfer Notice is delivered to the Company. The Company's exercise or failure to exercise the Right of First Refusal with respect to any proposed transfer described in a Transfer Notice shall not affect the Company's right to exercise the Right of First Refusal with respect to any proposed transfer described in any other Transfer Notice, whether or not such other Transfer Notice is issued by the Optionee or issued by a person other than the Optionee with respect to a proposed transfer to the same Proposed Transferee. If the Company exercises the Right of First Refusal, the Company and the Optionee shall thereupon consummate the sale of the Transfer Shares to the Company on the terms set forth in the Transfer Notice within sixty (60) days after the date the Transfer Notice is delivered to the Company (unless a longer period is offered by the Proposed Transferee); provided, however, that in the event the Transfer Notice provides for the payment for the Transfer Shares other than in cash, the Company shall have the option of paying for the Transfer Shares by the present value cash equivalent of the consideration described in the Transfer Notice as reasonably determined by the Company. For purposes of the foregoing, cancellation of any indebtedness of the Optionee to any Participating Company shall be treated as payment to the Optionee in cash to the extent of the unpaid principal and any accrued interest canceled. 11.5. FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails to exercise the Right of First Refusal in full (or to such lesser extent as the Company and the Optionee otherwise agree) within the period specified in Section 11.4 above, the Optionee may conclude a transfer to the Proposed Transferee of the Transfer Shares on the terms and conditions described in the Transfer Notice, provided such transfer occurs not later than ninety (90) days following delivery to the Company of the Transfer Notice. The Company shall have the right to demand further assurances from the Optionee and the Proposed Transferee (in a form satisfactory to the Company) that the transfer of the Transfer Shares was actually carried out on the terms and conditions described in the Transfer Notice. No Transfer Shares shall be transferred on the books of the Company until the Company has received such assurances, if so demanded, and has approved the proposed transfer as bona fide. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by the Optionee, shall again be subject to the Right of First Refusal and shall require compliance by the Optionee with the procedure described in this Section 11. 11.6.TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer Shares or any interest therein, other than the Company, shall be required as a condition of such transfer to agree in writing (in a form satisfactory to the Company) that such transferee shall receive and hold such Transfer Shares or interest therein subject to all of the terms and conditions of this Option Agreement, including this Section 11 providing for the Right of First Refusal with respect to any subsequent transfer. Any sale or transfer of any shares acquired upon exercise of the Option shall be void unless the provisions of this Section 11 are met. 11.7. TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of First Refusal shall not apply to any transfer or exchange of the shares acquired upon exercise of the 10 38 Option if such transfer or exchange is in connection with an Ownership Change Event. If the consideration received pursuant to such transfer or exchange consists of stock of a Participating Company, such consideration shall remain subject to the Right of First Refusal unless the provisions of Section 11.9 below result in a termination of the Right of First Refusal. 11.8. ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the right to assign the Right of First Refusal at any time, whether or not there has been an attempted transfer, to one or more persons as may be selected by the Company. 11.9. EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other provisions of this Option Agreement notwithstanding, the Right of First Refusal shall terminate and be of no further force and effect upon (a) the occurrence of a Transfer of Control, unless the Acquiring Corporation assumes the Company's rights and obligations under the Option or substitutes a substantially equivalent option for the Acquiring Corporation's stock for the Option, or (b) the existence of a public market for the class of shares subject to the Right of First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is listed on a national securities exchange (as that term is used in the Exchange Act) or (ii) such stock is traded on the over-the-counter market and prices therefor are published daily on business days in a recognized financial journal. 12. ESCROW. 12.1. ESTABLISHMENT OF ESCROW. To ensure that shares subject to the Right of First Refusal or securing any promissory note will be available for repurchase, the Company may require the Optionee to deposit the certificate evidencing the shares which the Optionee purchases upon exercise of the Option with an escrow agent designated by the Company under the terms and conditions of escrow and security agreements approved by the Company. If the Company does not require such deposit as a condition of exercise of the Option, the Company reserves the right at any time to require the Optionee to so deposit the certificate in escrow. Upon the occurrence of an Ownership Change Event or a change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of the Optionee's ownership of shares of Stock acquired upon exercise of the Option that remain, following such Ownership Change Event or change described in Section 9, subject to the Right of First Refusal or any security interest held by the Company shall be immediately subject to the escrow to the same extent as such shares of Stock immediately before such event. The Company shall bear the expenses of the escrow. 12.2. DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the expiration of the Right of First Refusal and after full repayment of any promissory note secured by the shares or other property in escrow, but not more frequently than twice each calendar year, the escrow agent shall deliver to the Optionee the shares and any other property no longer subject to such restriction and no longer securing any promissory note. 12.3. NOTICES AND PAYMENTS. In the event the shares and any other property held in escrow are subject to the Company's exercise of the Right of First Refusal, the notices 11 39 required to be given to the Optionee shall be given to the escrow agent, and any payment required to be given to the Optionee shall be given to the escrow agent. Within thirty (30) days after payment by the Company, the escrow agent shall deliver the shares and any other property which the Company has purchased to the Company and shall deliver the payment received from the Company to the Optionee. 13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to time, there is any stock dividend, stock split or other change, as described in Section 9, in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of this Option Agreement, then in such event any and all new, substituted or additional securities to which the Optionee is entitled by reason of the Optionee's ownership of the shares acquired upon exercise of the Option shall be immediately subject to the Right of First Refusal, and any security interest held by the Company with the same force and effect as the shares subject to the Right of First Refusal and such security interest immediately before such event. 14. LEGENDS. The Company may at any time place legends referencing the Right of First Refusal and any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following: 14.1. "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT." 14.2. Any legend required to be placed thereon by the Commissioner of Corporations of the State of California. 14.3. "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION." 15. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any underwritten public offering of stock, including an initial public offering of stock, made by the 12 40 Company pursuant to an effective registration statement filed under the Securities Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate, grant any option to purchase or make any short sale of, or otherwise dispose of any shares of stock of the Company or any rights to acquire stock of the Company for such period of time from and after the effective date of such registration statement as may be established by the underwriter for such public offering; provided, however, that such period of time shall not exceed one hundred eighty (180) days from the effective date of the registration statement to be filed in connection with such public offering. The foregoing limitation shall not apply to shares registered in the public offering under the Securities Act. The Optionee shall be subject to this Section provided and only if the officers and directors of the Company are also subject to similar arrangements. 16. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon exercise of the Option may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Optionee), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Option Agreement, and any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any shares which will have been transferred in violation of any of the provisions set forth in this Option Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares will have been so transferred. 17. BINDING EFFECT. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. 18. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8.2 in connection with a Transfer of Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to comply with any applicable law or government regulation. No amendment or addition to this Option Agreement shall be effective unless in writing. 19. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party's signature or at such other address as such party may designate in writing from time to time to the other party. 20. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein or therein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein or therein. To the extent contemplated herein or therein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect. 13 41 21. APPLICABLE LAW. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California. IMMERSION CORPORATION By: ---------------------------------- Title: ---------------------------------- The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement, including the Right of First Refusal set forth in Section 11 and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. The undersigned acknowledges receipt of a copy of the Plan. OPTIONEE Date: --------- ----------------------------------------- Optionee Address and Phone Number: ----------------------------------------- ----------------------------------------- ( ) ----------------------------------------- 14 EX-10.12 3 AGREEMENT DRAFT, IMMERSION/KAWASAKI 1 EXHIBIT 10.12 *Certain information in this document has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. AGREEMENT DRAFT FOR ASIC DESIGN AND DEVELOPMENT BY AND BETWEEN IMMERSION CORPORATION AND KAWASAKI LSI U.S.A., INC. 2 AGREEMENT FOR ASIC DESIGN AND DEVELOPMENT This Agreement for ASIC Design and Development ("Agreement") is entered into and is effective as of this 16th day of October 1997 (the "Effective Date") by and between Immersion Corporation, a California corporation having its principal place of business at 2158 Paragon Drive, San Jose, CA 95131 (hereinafter referred to as "Immersion") and Kawasaki LSI U.S.A., Inc., a California corporation having its principal place of business at 2570 North First Street, Suite 301, San Jose, CA 95131 (hereinafter referred to as "KLSI"). RECITALS Immersion wishes to have KLSI design and develop for Immersion and KLSI desires to design and develop for Immersion an integrated circuit device as specified more fully herein. AGREEMENT 1. DEFINITIONS 1.1 "A/D Converter" shall mean the A/D converter described in Exhibit A ("Specifications"). 1.2 "[****] Modifications" shall mean modifications made by [****] in the course of performance under the AXIS Chip Agreement to the USB Microcode and the Clock Generation and General Purpose I/O and the related Intellectual Property Rights. 1.3 "[****] Preexisting Technology" shall mean [****] technology and the related Intellectual Property Rights in existence prior to the Effective Date and used in the AXIS Chip, consisting of the "QT Engine" Core Logic, the ROM BIOS, the Boot Loader Microcode, the USB Controller, the USB Microcode, the Timer Subsection, the Memory Controller, and the Clock Generation and General Purpose I/O. 1.4 "AXIS Chip" shall mean an integrated circuit device which is designed to provide an optimized version of the force-feedback functions delivered by the Immersion force feedback firmware. 1.5 "AXIS-derived Chip" shall mean an integrated circuit device which consists of the same or derivative base wafer, metal 1 and metal 2 layers as the AXIS Chip and which (i) does not contain the same ROM Mask Layer as the AXIS Chip, (ii) does not contain any portion of the Force Feedback Microcode, (iii) does not incorporate firmware that provides Force Feedback Functionality, to the best of KLSI's knowledge, as determined by KLSI by making a reasonable inquiry, and (iv) does have the Shaft Encoder Logic present but disabled through a means disclosed and described to Immersion in writing and approved by Immersion in writing. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 1 3 1.6 "AXIS Chip Agreement" shall mean the written agreement between KLSI and [****] regarding the development of the AXIS Chip and the ownership and licensing of certain technology and the related Intellectual Property Rights used in the AXIS Chip. 1.7 "Boot Loader Microcode" shall mean the boot loader microcode described in Exhibit A ("Specifications"). 1.8 "Clock Generation and General Purpose I/O" shall mean the clock generation and general purpose I/O described in Exhibit A ("Specifications"). 1.9 "Confidential Information" shall mean: (i) the Specifications, the Product, the PLSSOP, the Prototype Units, the Shaft Encoder Logic, the Force Feedback Microcode, the Immersion Requested Revisions ("IRR") and any trade secrets related to any of the foregoing, including but not limited to any information relating to either party's product plans, costs, prices and names, finances, marketing plans, business opportunities, personnel, research, development or know-how; (ii) any information designated by the disclosing party as confidential in writing or, if disclosed orally, reduced to writing within thirty (30) days, provided, however, that "Confidential Information" shall not include information that (i) is or becomes generally known or available by publication, commercial use or otherwise through no fault of the receiving party; (ii) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (iii) is independently developed by the receiving party by individuals who do not have access to the same information from the disclosing party; (iv) is lawfully obtained from a third party who has the right to make such disclosure; or (v) is released for publication by the disclosing party in writing. 1.10 "Deliverables" shall mean the PLSSOP, the testable Prototype Units, the First Articles and Documentation. 1.11 "DMA Controller" shall mean the DMA controller described in Exhibit A ("Specifications") 1.12 "Development and Payment Schedule" shall mean the time for the parties' performance under this Agreement, as set forth in Exhibit B ("Development and Payment Schedule"). 1.13 "Documentation" shall mean the Specification, the VHDL File for the AXIS Chip, and other documentation that would reasonably accompany the Deliverables. 1.14 "Errors" shall mean: (i) in the case of acceptance under the terms of Section 4.2 ("Acceptance"), defects in the Prototype Units which cause such Prototype Units not to operate in conformance with the requirements of this Agreement, and, in the case of warranty under the terms of Section 7.1 ("Warranties"), defects in the Deliverables which cause such Deliverables not to operate in conformance with Exhibit A ("Specifications"); (ii) defects in the Products which cause such Products not to operate in conformance with Exhibit A ("Specifications"); and (iii) defects in the Documentation which render it inaccurate, erroneous or otherwise unreliable. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 4 1.15 "Final Mask ROM" shall mean the final mask ROM described in Exhibit A ("Specifications"). 1.16 "First Articles" shall mean a limited number of units of the Product, as mutually agreed upon by the parties, which are manufactured as a test run for review and acceptance by Immersion prior to full production of the Product. 1.17 "Force Feedback Functionality" shall mean the basic functions required by a local processor for use in a force feedback product. These functions include (a) sending and receiving commands from a host computer, (b) generating tactile sensations felt by a user by reading local sensors and controlling local actuators based upon embedded mathematical relations between sensor data and actuator output, and (c) generating said tactile sensations in response to said commands from said host computer. 1.18 "Force Feedback Microcode" shall mean the Immersion microcode designed to implement the Force Feedback Functionality. 1.19 "Immersion Preexisting Technology" shall mean the Immersion technology and related Intellectual Property Rights in existence prior to the Effective Date and used in the AXIS Chip, consisting of the Shaft Encoder Logic and the Force Feedback Microcode. 1.20 "Immersion Requested Revisions" shall mean the technology modifications and related Intellectual Property Rights created by KLSI in the course of the performance under this Agreement and/or the technology modifications and related Intellectual Property Rights created by [****] in the course of performance under the AXIS Chip Agreement, consisting of (i) modifications to the Shaft Encoder Logic and the Force Feedback Microcode and (ii) modifications, which are specifically implemented to facilitate and support the implementation of the Force Feedback Functionality which are made to the "QT Engine" Core Logic, the ROM BIOS, the Boot Loader Microcode, the USB Controller, the UART, the Time Subsection, the DMA Controller, the Memory Controller, the PWM Generation Logic, the Watchdog Timer Logic and the Final Mask ROM. 1.21 "Intellectual Property Rights" shall mean all worldwide patents and other patent rights (such as continuations, continuations in part and reissues), utility models, copyrights and mask work rights, including without limitation, all applications and registrations with respect thereto and rights in trade secrets and know-how. 1.22 "Invention" shall mean any Invention or discovery which is or may be patentable or otherwise protectable under Title 35 of the United States Code. 1.23 "Inventions" shall mean all ideas, creations, works, processes, designs and methods (whether or not patentable, copyrightable or registrable as a mask work) incorporated in the design or function of the Prototype Unit, and all documentation associated therewith, which are created or discovered as part of the Services; provided, however, that *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 5 Inventions shall not include any discoveries, improvements or ideas made solely by KLSI regarding methods of designing, structuring or producing products generally. 1.24 "KLSI Modifications" shall mean modifications made by KLSI in the course of performance under this Agreement to the USB Transceiver and the A/D Converter and the related Intellectual Property Rights. 1.25 "KLSI Preexisting Technology" shall mean KLSI technology and the related Intellectual Property Rights in existence prior to the Effective Date and used in the AXIS Chip, consisting of the USB Transceiver, the A/D Converter and the Phase Lock Loop. 1.26 "Memory Controller" shall mean the memory controller described in Exhibit A ("Specifications"). 1.27 "Non-Immersion Technology" shall mean the [****] Preexisting Technology, the [****] Modifications, the KLSI Preexisting Technology and the KLSI Modifications. 1.28 "Phase Lock Loop" shall mean the phrase lock loop described in Exhibit A ("Specifications"). 1.29 "Product" shall mean the Axis Chip as more fully described in the Specifications. 1.30 "Post Layout Simulation Sign Off Package" or "PLSSOP" shall mean the computer generated simulation of the Prototype Unit that is a model of the Prototype Unit and that is used to review the features and functionality which will be present in the Prototype Unit. 1.31 "Prototype Units" shall mean initial working testable units of the Products that conform to the PLSSOP and the Specifications. 1.32 "Purchase Agreement" shall mean the agreement to be entered into by Immersion and KLSI under which KLSI will produce AXIS Chips and Immersion will purchase the AXIS Chips. 1.33 "PWM Generation Logic" shall mean the PWM generation logic described in Exhibit A ("Specifications"). 1.34 "`QT Engine' Core Logic" shall mean the QT engine core logic described in Exhibit A ("Specifications"). 1.35 "ROM BIOS" shall mean the ROM BIOS described in Exhibit A ("Specifications"). 1.36 "Second Source" shall mean an alternative foundry for the AXIS Chip licensed by Immersion to produce the AXIS Chip for Immersion. 1.37 "Services" shall mean the design and development of the Prototype Units and the fabrication and assembly of the Prototype Units. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4 6 1.38 "Shaft Encoder Logic" shall mean the Immersion custom gate array that extracts position, velocity and other relevant information from shaft encoder signals. 1.39 "Specifications" shall mean the initial technical and design specifications for the Product set forth in Exhibit A ("Specifications"). 1.40 "Timer Subsection" shall mean the timer subsection described in Exhibit A ("Specifications"). 1.41 "UART" shall mean the UART described in Exhibit A ("Specifications"). 1.42 "USB Controller" shall mean the USB controller described in Exhibit A ("Specifications"). 1.43 "USB Microcode" shall mean the USB microcode described in Exhibit A ("Specifications"). 1.44 "USB Transceiver" shall mean the USB transceiver described in Exhibit A ("Specifications"). 1.45 "Watchdog Timer Logic" shall mean the watchdog timer logic described in Exhibit A ("Specifications"). 2. SCOPE OF WORK 2.1 Services. Based on the terms and conditions set forth in this Agreement, KLSI agrees to perform the Services in accordance with the Development and Payment Schedule. Except for the design and development functions of system definition, logic design and breadboard definition and construction (which will be provided by Immersion), KLSI will be responsible for obtaining all the technology, labor, material, tooling and facilities necessary for such design and development of the Prototype Unit. 2.2 Progress Reports. KLSI will provide Immersion with written progress reports, as requested by Immersion, starting one week after the Effective Date and ending on the date of Immersion's final acceptance of the Prototype Unit and receipt of all Deliverables. Each report shall indicate progress as follows: (a) Status of progress toward the next scheduled milestone; (b) Short description of problems in meeting such milestone, if any; (c) Proposed recover method to meet the next milestone, if necessary; (d) Probability of meeting the next milestone; (e) Any changes in KLSI's estimate of recurring manufacturing costs for the Prototype Unit or First Articles. 5 7 3. DESIGN REVIEW AND SPECIFICATION CHANGES 3.1 Design Review. Immersion is entitled to conduct periodic design reviews to ensure its satisfaction with the Services. Upon reasonable notice, KLSI shall allow Immersion during normal business hours, to visit its places of business for development and manufacturing to discuss and inspect the status of the development of the Product. 3.2 Changes to the Specification. Immersion is entitled to request modifications in the form of changes or additions to the Specifications at anytime time during the term of this Agreement. Such requests shall be submitted by Immersion to KLSI in writing. If any such modification of the Specifications materially increases or decreases the cost or time of performance of the Services, the parties will negotiate an equitable adjustment to this Agreement. Upon receipt of Immersion's written approval, KLSI will proceed with the implementation of the prescribed changes and the Specifications and other exhibits to the Agreement shall be modified in writing accordingly to reflect such agreed upon changes and signed by both parties. 4. DELIVERABLES: DELIVERY; ACCEPTANCE; AND REJECTION 4.1 Deliverables KLSI agrees to deliver the Deliverables in accordance with the Development and Payment Schedule. Deliverables shall be delivered to the Immersion Project Manager accompanied by a written statement listing the items delivered and stating that they are ready for Immersion's acceptance testing. All Deliverables shall be sent to Immersion F.O.B. Immersion's facility at the address stated above. KLSI's liability for loss shall cease upon delivery to the F.O.B. point and title to the Deliverables shall shift to Immersion without any effect on the intellectual property rights in such Deliverables. 4.2 Acceptance (a) Immersion, with the assistance of KLSI if requested by Immersion, shall examine and test the PLSSOP and the Prototype Unit and examine each other Deliverable upon delivery to determine whether the PLSSOP and the Prototype Unit and each other Deliverable conforms to the Specification and that the Prototype Unit conforms to the PLSSOP. (b) Within the acceptance period for each Deliverable specified in Exhibit B ("Development and Payment Schedule"), Immersion shall provide KLSI with written acceptance of such Deliverable or a written statement of Errors (the "Statement of Errors") to be corrected prior to Immersion's payment of the amount due upon Immersion's acceptance of such Deliverables, if any. Immersion will examine the Deliverables received against the list in Exhibit C ("Deliverables") to confirm that all such Deliverables have, in fact, been delivered and will notify KLSI if any items are missing. KLSI will promptly deliver any Deliverables that are missing upon notification by Immersion. 6 8 (c) KLSI will correct the Errors in any Deliverable set forth in the Statement of Errors and redeliver the Deliverable to Immersion. The parties will negotiate a reasonable time period for each Error correction depending on the nature of the Errors. The following will serve as reasonable guidelines for Error correction: (i) seven (7) calendar days unless reprocessing of prototypes, remasking or redesign is required, (ii) twenty-one (21) calendar days if reprocessing of prototypes is required, (iii) twenty-five (25) calendar days if remasking is required, and (iv) thirty-five (35) calendar days if redesign (new tape) is required. (d) Immersion will, within thirty (30) calendar days after any such redelivery, provide KLSI with written acceptance or another Statement of Errors. The procedure set forth in this Section 4.2 will be repeated until Immersion accepts the Deliverables or terminates this Agreement pursuant to Section 4.3 ("Rejection"). 4.3 Rejection. Should any Prototype Unit fail to conform to the PLSSOP and/or the Specification either (i) after the second redelivery of such Prototype Unit pursuant to Section 4.2(b) or (ii) after any delivery or redelivery which is late, then KLSI will be deemed to be in material breach of this Agreement and Immersion may terminate the Agreement pursuant to Section 10.1 ("Termination for Cause by Either Party"). 5. INTELLECTUAL PROPERTY RIGHT 5.1 Disclosure. KLSI will promptly and fully disclose and describe to Immersion in writing any Inventions which are conceived or reduced to practice during the term of this Agreement and within the scope of the development of the Immersion Requested Revisions. 5.2 Ownership. (a) Ownership by Immersion. The parties agree that Immersion owns and will solely own all Immersion Preexisting Technology and Immersion Requested Revisions. Nothing in this Agreement is intended to affect or restrict Immersion's rights in the Immersion Preexisting Technology or Immersion Requested Revisions. KLSI hereby assigns to Immersion all right, title and interest in the Immersion Requested Revisions. KLSI represents and warrants and agrees to insure that under the terms of the AXIS Chip Agreement, all Immersion Requested Revisions created by [****] will be assigned to Immersion, through KLSI. KLSI agrees that in no case will Immersion be required to assign any Immersion Preexisting Technology to KLSI or [****] and KLSI agrees that KLSI's and [****]'s use of the Immersion Requested Revisions shall be limited to the licenses granted herein. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7 9 (b) Ownership by KLSI. KLSI owns and will own all KLSI Preexisting Technology. Nothing in this Agreement is intended to affect or restrict KLSI's rights in the KLSI Preexisting Technology. Immersion agrees that in no case will KLSI be required to assign any KLSI Preexisting Technology to Immersion and that assignment of the Immersion Requested Revisions will not in any way grant Immersion rights in the KLSI Preexisting Technology except as licensed to Immersion under the terms of this Agreement. (c) Cooperation. KLSI agrees to assist Immersion, and will make appropriate contractual arrangements with [****] for [****] to assist Immersion, in any reasonable manner to maintain and enforce Immersion's Intellectual Property Rights in the Immersion Requested Revisions for Immersion's benefit in any and all countries, and KLSI agrees to execute, and to make appropriate contractual arrangements with [****] for [****] to execute, when requested by Immersion, applications for and assignments to Immersion and any other documents necessary to effectuate the ownership provisions applicable to the Intellectual Property Rights in the Immersion Requested Revisions. KLSI represents and agrees and will make appropriate contractual arrangements with [****] for [****] to represent and agree, that all persons who perform work on the Immersion Requested Revisions will have signed written agreements which vest all Intellectual Property Rights in KLSI, or [****], as applicable, for assignment to Immersion. 5.3 Licenses. (a) License by KLSI to Immersion. KLSI hereby grants Immersion a worldwide nonexclusive license, under KLSI's and [****]'s Intellectual Property Rights in the Non-Immersion Technology (i) to have KLSI manufacture the AXIS Chip and to have a Second Source manufacture the AXIS Chip if KLSI cannot accommodate Immersion and Immersion's designated parties' requests in terms of volume production of the AXIS Chip due to lack of wafer capacity or allotment of wafer fabrication capacity, and (ii) to distribute and sell the AXIS Chip through Immersion's channels of distribution. (b) License by Immersion to KLSI. Immersion hereby grants KLSI a worldwide nonexclusive license, without a right to sublicense, under Immersion's Intellectual Property Rights in the Shaft Encoder Logic, the Immersion Requested Revisions and the Force Feedback Microcode (i) to use and modify the Shaft Encoder Logic, the Immersion Requested Revisions and the Force Feedback Microcode in developing, prototyping and manufacturing the AXIS Chip and (ii) to distribute and sell the AXIS Chip to Immersion and Immersion designated parties, as provided in the Purchase Agreement. In addition, Immersion hereby grants KLSI a license under Immersion's Intellectual Property Rights in the Shaft Encoder Logic and the Immersion Requested Revisions (i) to use and modify the Immersion Requested Revisions and to include the Shaft Encoder Logic (but to *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 10 disable such Shaft Encoder Logic) in developing, prototyping and manufacturing the AXIS-derived Chip and (ii) to distribute and sell the AXIS-derived Chip. (c) Prohibitions. KLSI expressly agrees that it will not, during the term of this Agreement or thereafter, without Immersion's prior written consent: (i) knowingly design, simulate, sell or otherwise distribute a prototype device identical to the Prototype Unit, either for KLSI's account or for any third party, or assist any third party in so doing; or (ii) unless for Immersion, knowingly develop, utilizing any Confidential Information regarding the Prototype Unit obtained by KLSI from Immersion, a prototype for a semiconductor device that is pin-compatible with the Prototype Unit, or assist any third party in so doing. 6. PAYMENTS Immersion shall make payments to KLSI in accordance with the Development and Payment Schedule, subject to completion of the applicable milestones and acceptance of the applicable Deliverables by Immersion. Such payments shall be due net thirty (30) days from Immersion's receipt of KLSI invoices. 7. WARRANTIES AND INDEMNIFICATION 7.1 Warranties KLSI warranties that: (i) all Deliverables delivered to Immersion hereunder will conform to the Specifications for a period of ninety (90) days after acceptance by Immersion; (ii) in connection with KLSI performance of the Services, KLSI will not knowingly infringe any patent, copyright, trade secret, mask work right, or any other proprietary right of any third party; (iii) KLSI has not previously granted and will not grant any rights in the Product or any Inventions to any third party which grant is inconsistent with the rights granted to Immersion herein; and (iv) all Products delivered to Immersion hereunder will conform to the Specifications for a period of ninety (90) days after acceptance by Immersion. In the event that the Products delivered to Immersion do not conform to the Specifications, KLSI will repair or replace the nonconforming Products. 7.2 Infringement Indemnity. (a) KLSI shall, at its expense and at Immersion's request, defend any claim or action brought against Immersion, and Immersion's subsidiaries, affiliates, directors, officers, employees, agents and independent contractors, to the extent it is based on a claim that the Product provided under this Agreement infringes or violates any patent, copyright, trademark, trade secret or other proprietary right of a third party, and shall indemnify and hold harmless from and against any costs, damages and fees reasonably incurred by Immersion including but not limited to fees of attorneys and other professionals that are attributable to such claim; provided, 9 11 however, that: (i) Immersion gives KLSI reasonably prompt notice in writing of any such suit and permits KLSI through counsel of its choice, to answer the charge of infringement and defend such claim or suit; (ii) Immersion provides KLSI with information, assistance and authority, at KLSI's expense, to enable KLSI to defend such suit; and (iii) KLSI shall not be responsible for any settlement made by Immersion without KLSI's written permission. In the event Immersion agrees to settle the suit, Immersion agrees not to publicize the settlement nor to permit the party claiming infringement to publicize the settlement without first obtaining KLSI's written permission. (b) KLSI shall have no liability under this Section 7.2 ("Infringement Indemnity") to the extent that such claim or suit could have been avoided but for (i) the combination, operation, or use of the Product with equipment, logic, software or products not supplied by KLSI, (ii) any alteration or modification made to the Products after delivery by KLSI to Immersion or (iii) the use by KLSI of specifications or requirements provided by Immersion. 7.3 Duty to Correct. Notwithstanding Section 7.2 (a), should the Product become the subject of a claim of infringement of a third party's proprietary right, KLSI shall, at KLSI's expense: (i) procure for Immersion the past right to make, use and sell and the future right to continue to make, use and sell the Product; (ii) replace or modify the Product to make such non-infringing, provided that the same function is performed by the replacement or modified Product to Immersion satisfaction; or (iii) if the past and future rights to continue to make, use and sell cannot be procured or the Product cannot be replaced or modified at reasonable expense, reimburse Immersion for the total amount paid under this Agreement. 7.4 General Indemnity. KLSI shall, at KLSI's expense, indemnify, hold Immersion harmless and, at Immersion's request, defend Immersion and Immersion's subsidiaries, affiliates, directors, officers, employees, agents and independent contractors, from and against any and all loss, cost, liability or expense (including costs and reasonable fees of attorneys and other professionals) arising out of or in connection with KLSI performance under this Agreement to the extent caused by, in whole or in part, any negligent act or omission or willful misconduct of KLSI or KLSI employees, agent or independent contractors, including but not limited to any act or omission that contributes to : (i) any personal injury, sickness, disease or death; (ii) any damage to or destruction of property of Immersion or any loss of use resulting therefrom; (iii) any violation of any statute, ordinance or regulation. 8. CONFIDENTIALITY AND PROPRIETARY NOTICE 8.1 Each party acknowledges that by reason of its relationship to the other hereunder, it will access to other party's Confidential Information. Each party agrees that it shall not use in any way for its account or the account of any third party, nor disclose to any third party any Confidential Information revealed to it by the other party. Neither party shall use the 10 12 Confidential Information of the other party for purposes other than those necessary to directly further the purposes of this Agreement. Each party shall take every necessary precaution to protect the confidentiality of all Confidential Information. 8.2 Any breach of the restrictions contained in this Section 8 is a breach of this Agreement which will cause irreparable harm to the other party entitling the other party to injunctive relief in addition to all legal remedies. 8.3 KLSI will cause the outside package and top level metal mask work layer of the Product to bear a mask work and copyright notice for Immersion's benefit. 9. TERM This Agreement will commence on the Effective Date and will continue until terminated as provided in this Agreement. 10. TERMINATION 10.1 Termination for Cause By Either Party. Either party shall have the right to terminate this Agreement immediately upon written notice at any time if: (a) the other party is in material breach of any warranty, term, condition or covenant of this Agreement other than those contained in Section 8 and fails to cure that breach within sixty (60) days after written notice of that breach; (b) the other party is in material breach of any warranty, term, condition or covenant of Section 8; or (c) the other party: (i) becomes insolvent; (ii) falls to pay its debts or perform its obligations in the ordinary course of business as they mature; (iii) admits in writing its insolvency or inability to pay its debts or perform its obligations as they mature or (iv) makes any assignment for the benefit of creditors. 10.2 Effect of Termination. Upon termination of this Agreement, each party shall be released from all obligations and liabilities to the other occurring or arising after the date of such termination, except that any termination of this Agreement will not relieve obligations under Sections 5, 7, 8 and 12 hereof, nor will any such termination relieve Immersion or KLSI from any liability arising from any breach of this Agreement. Neither party will be liable to the other for damages of any sort solely as a result of terminating this Agreement in accordance with its terms. Termination of this Agreement will be without prejudice to any other right or remedy of either party. Upon any termination of this Agreement, KLSI will immediately deliver to Immersion all work in process on the Deliverables, in whole or in part and will confirm in writing the assignment of all related Intellectual Property Rights. 11 13 10.3 Payment by Immersion. Upon any termination of this Agreement pursuant to the provisions of Section 10.1 above, Immersion's monetary obligation to KLSI will be to pay for all milestones completed and accepted by Immersion as set forth in the Development and Payment Schedule, and to pay KLSI pro rata (based on the ratio (equal to 1:1)) of the number of calendar days elapsed since completion of the last payment milestone and the number of days between such milestone and the next subsequent milestone in the Development and Payment Schedule) for work done by KLSI towards the next subsequent milestone, including any costs, previously approved by Immersion in writing, that are reasonably incurred for materials related to any subsequent milestones. In no event, however, shall Immersion's liability exceed the amounts set forth in the Development and Payment Schedule. 11. DISCLAIMER OF CONSEQUENTIAL DAMAGES IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES FOR BREACH OF OR FAILURE TO PERFORM UNDER THIS AGREEMENT, EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 12. GENERAL 12.1 Force Majeure. Neither party shall be liable for any failure or delay in its performance under this Agreement due to causes, including, but not limited to, acts of God, acts of civil or military authority, fires, epidemics, floods, earthquakes, riots, wars, sabotage, labor shortages or disputes, and governmental actions, which are beyond its reasonable control; provided that the delayed party: (i) gives the other party written notice of such cause promptly, and in any event within fifteen (15) days of discovery thereof, and (ii) uses its reasonable efforts to correct such failure or delay in its performance. The delayed party time for performance or cure under this Section 12.1 shall be extended for a period equal to the duration of the cause or sixty (60) days, whichever is less. Notwithstanding the above provisions in this Section 12.1, the obligations to make payments under this Agreement which are due and owing shall not be deferred, excused or otherwise affected by Force Majeure or any other reasons whether or not foreseen or foreseeable so long as the services, Deliverables or Products for which the payment is due are received. 12.2 Relationship of Parties. KLSI is an independent contractor. Neither each party nor its employees, consultants, contractors or agents are agents, employees or joint ventures of other party nor do they have any authority to bind the other party by contract or otherwise to any obligation. They will not represent to the contrary, either expressly, implicitly, by appearance or otherwise. 12.3 Personnel. KLSI employees, consultants, contractors and agents who work on Immersion premises will be required to observe Immersion regulations applying to non-Immersion personnel working on Immersion premises. 12 14 12.4 Employment Taxes and Benefits It will be KLSI's obligation to report as income all compensation received by KLSI pursuant to this Agreement and pay all taxes due on such compensation. 12.5 Other Tax Implications. The purpose of development of the Deliverables under this Agreement is to demonstrate that the Product developed hereunder will conform to the Specifications. The Deliverables have no intrinsic value as an item. As such, no value added, sales, or use taxes have been assessed or are anticipated to be required as a result of the Services performed under this Agreement. To the extent any such taxes are ultimately assessed to Immersion as a retailer, Immersion shall have responsibility to discharge the claim. 12.6 Assignment. The rights and liabilities of the parties hereto will bind and inure to the benefit of their respective successors, executors and administrators, as the case may be. Each party may not assign or delegate its rights or obligations under this Agreement either in whole or in part, without the prior written consent of the other party except that Immersion may assign this Agreement in the case of a merger, acquisition or sale of assets. Any attempted assignment in violation of the provisions of this Section 12.6 will be void. Immersion agrees that KLSI may use [****] as a subcontractor to perform the Services. 12.7 Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California as applied to agreements entered into and to be performed entirely within California between California residents. 12.8 Jurisdiction and Venue. The parties hereby submit to the jurisdiction of, and waive any venue objections against, the United States District Court for the Northern District of California, the Superior Court of the State of California for the County of Santa Clara, the Santa Clara Municipal Court, and any mutually agreed to alternative dispute resolution proceeding taking place in Santa Clara County, California, in any litigation arising out of this Agreement. 12.9 Severability. If for any reason a court of competent jurisdiction rinds any provision of this Agreement, or portion thereof, to be unenforceable, that provision of this Agreement shall be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement shall continue in full force and effect. 12.10 Notices. All notices required or permitted under this Agreement shall be in writing, and be deemed given when: (i) delivered personally; (ii) when sent by confirmed telex or facsimile; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) day after deposit with a commercial overnight carrier, with written verification of receipt. All communications will be sent to the addresses first above written. Either party may change its address by giving notice pursuant to this Section 12.10. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 13 15 12.11 No Waiver. Failure by either party to enforce any provision of this Agreement shall not be deemed a waiver of future enforcement of that or any other provision. 12.12 No Rights in Third Parties Rights. This Agreement is made for the benefit of Immersion and KLSI and their respective subsidiaries and affiliates, if any, and not for the benefit of any third parties. 12.13 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original. 12.14 Headings and References. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 12.15 Construction. This Agreement has been negotiated by the parties and their respective counsel. This Agreement will be fairly interpreted in accordance with its terms and without any strict construction in favor of or against either party. 12.16 Complete Agreement. This Agreement, including all Exhibits, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter hereof. In the case of any conflict between the terms of this Agreement and any of the Exhibits, the terms of the Agreement shall govern and control. No amendment to or modification of this Agreement shall be binding unless in writing and signed by a duly authorized representative of both parties. To the extent any terms and conditions of this Agreement conflict with the terms and conditions of any invoice, purchase order or purchase order acknowledgment placed hereunder, the terms and conditions of this Agreement shall govern and control. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. KAWASAKI LSI U.S.A. INC. IMMERSION CORPORATION By: /s/ Masanori Kodama By: /s/ Louis Rosenberg ---------------------------- ---------------------------- (Signature) (Signature) Masanori Kodama Louis Rosenberg ---------------------------- ---------------------------- (Print Name) (Print Name) President President ---------------------------- ---------------------------- (Title) (Title) 10/15/97 10/16/97 ---------------------------- ---------------------------- (Date) (Date) 14 16 EXHIBIT A SPECIFICATIONS Immersion ASIC Specification dated October 16, 1997 15 17 IMMERSION ASIC SPECIFICATION [****] *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 16 18 EXHIBIT B DEVELOPMENT AND PAYMENT SCHEDULE 41 19 IMMERSION CORPORATION - ------------------------------------------------------------------------------- To KLSI c/o Brooks Technical Group April 24, 1997 10080 N. Wolfe Rd. SW3-100 Cupertino, CA 950114 408-257-3880 x 1307 408-252-4434 fax PURCHASE ORDER NO: 10499 Description of Purchased Item: Design and development KLSI/[****] "Processor Plus" ASIC to be developed in conjunction with Immersion personnel. Total NRE Charges: $198,000 USD Payment Schedule: 1) Design award/initiation - $15,000 USD 2) Technical transfer completion - $55,000 USD (action scheduled for completion prior to 5/15/1997) 3) Design sign-off - $80,000 4) Ceramic sample delivery - $48,000 USD This program will be run according to a Design and Development Agreement that outlines the program in detail, itemizes each action step, who is assigned to what action, and the completion date for each action. This plan will be developed within 1 week of this purchase order date. Bruce Schena V.P./C.T.O. _________________________ Tim Lacey V.P./C.F.O. _________________________ Thanks for your time. I look forward to hearing from you. BRUCE SCHENA, CTO IMMERSION 42 20 EXHIBIT C DELIVERABLES 44 21 STATEMENT OF WORK REV. 1.4
- ----------------------------------------------------------------------------------------------------------------------------------- NO TASK DATE/ WHO DESCRIPTION TIME ------------------------------- IMMERSION [****] KLSI - ----------------------------------------------------------------------------------------------------------------------------------- 1 Function 4/21/97 X X X Immersion, [****], and KLSI agree to functional block spec. sign-off specification and interface specification - ----------------------------------------------------------------------------------------------------------------------------------- 2 Issue P.O. 4/21/97 X Immersion issues formal Purchase Order number (1st payment $15K) - ----------------------------------------------------------------------------------------------------------------------------------- 3 Detailed 6/12 X X X Immersion, [****], and KLSI agree to detailed specification spec. sign-off defines internal implementation of the chip. This document add some details that are not well defined in the function specification. - ----------------------------------------------------------------------------------------------------------------------------------- 4 Code 5/15/97 X Immersion transfers Intel 930 microcode to [****] transfer - ----------------------------------------------------------------------------------------------------------------------------------- 5 Code 5/15/97 X - Immersion transfers all available date on shaft encoder transfer - ----------------------------------------------------------------------------------------------------------------------------------- 6 Place & 6/18 X Trial place and route complete route -------------------------------------------------------------------------------------------------------------- 7 Base water 5/18/97 X X KLSI and [****] sign off on base wafer Master slice sign-off - ----------------------------------------------------------------------------------------------------------------------------------- 8 VHDL X [****] completes VHDL functional code, simulates the result and assures that the design agrees with the detailed specification. - ----------------------------------------------------------------------------------------------------------------------------------- 9 Pre-layout X [****] synthesizes the VHDL code, simulates the design resulting level netlist, and assures that the design agrees with the specification. - ----------------------------------------------------------------------------------------------------------------------------------- 10 Pre-layout 6/12/97 X X [****] and KLSI agree that the pre-layout simulation simulation result is satisfactory. 1st sign off - ----------------------------------------------------------------------------------------------------------------------------------- 11 post layout 6/19/97 X KLSI-placement generate post-layout file. - ----------------------------------------------------------------------------------------------------------------------------------- 12 ROM code 6/26/97 X [****] provides preliminary ROM code - ----------------------------------------------------------------------------------------------------------------------------------- 13 simulation 7/3/97 X [****] simulates the design and makes sure that the design with the detailed specification - ----------------------------------------------------------------------------------------------------------------------------------- 14 second sign 7/3/97 X X [****] and KLSI agree that the post-layout simulation off result is satisfactory, second sign off - ----------------------------------------------------------------------------------------------------------------------------------- 15 KLSI fabs X KLSI fabricates ceramic and plastic prototypes - ----------------------------------------------------------------------------------------------------------------------------------- 16 proto X Immersion provides [****] with prototype Joystick system joystick - ----------------------------------------------------------------------------------------------------------------------------------- 17 KLSI 7/25/97 X KLSI delivers Xx ceramic prototypes delivers prototypes - ----------------------------------------------------------------------------------------------------------------------------------- 18 Integration X X [****] and Immersion integrate system - ----------------------------------------------------------------------------------------------------------------------------------- 19 marking X X Immersion and KLSI agrees to the marking specification. marking will be based on KLSI's standard marking with positive modifications to it depending on Immersion's requirement. - -----------------------------------------------------------------------------------------------------------------------------------
*Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 45 22
- ----------------------------------------------------------------------------------------------------- DATE/ NO TASK TIME WHO DESCRIPTION --------------------------- IMMERSION [****] KLSI - ----------------------------------------------------------------------------------------------------- 20 plastic 8/8/97 X KLSI delivers 12 plastic prototypes prototypes - ----------------------------------------------------------------------------------------------------- 21 approval X Immersion approves prototype - ----------------------------------------------------------------------------------------------------- 22 ROM final X Immersion finalizes ROM code - ----------------------------------------------------------------------------------------------------- 23 Production X Immersion places first mass production order order with 10 weeks time - -----------------------------------------------------------------------------------------------------
*Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 46 EX-10.13 4 PATENT LICENSE AGREEMENT 1 EXHIBIT 10.13 * Certain information in this document has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. PATENT LICENSE AGREEMENT This Patent License Agreement (the "Agreement") is between Microsoft Corporation ("Microsoft"), a Washington corporation, having a place of business at One Microsoft Way, Redmond, Washington 98052, and Immersion Corporation ("Immersion"), a California corporation, having a place of business at 2158 Paragon Drive, San Jose, California 95131, each a "party" and collectively the "parties". The effective date of this Agreement is the date last signed below (the "Effective Date"). WHEREAS, Immersion is a technology development business with expertise and patent rights in the field of force feedback (FF) technologies; and WHEREAS, Microsoft is also an innovator in and has expertise and patent rights in the field of FF technologies, and has contributed to the creation of a substantial market for FF gaming devices; and WHEREAS, to resolve present patent issues, the parties wish to enter into a license agreement as set forth herein; NOW, THEREFORE, in consideration of the payments and promises made hereunder, the sufficiency of which the parties acknowledge, the parties agree as follows: 1. DEFINITIONS 1.05 DIRECTINPUT refers to the dinput.dll, dinput.vxd, pid.dll, dinput.h and dinputd.h files contained in either Version 6 or in Version 7 of DirectX, as they exist as of the Effective Date, and future versions of such files to the extent (but only to the extent) they do not contain additional or modified FF-related functionality. For purposes of this Agreement, the version of DirectInput contained in DX7 which exists as of the Effective Date is build 4.07.00.0201. 1.06 END-USER means a consumer who purchases and uses DirectInput, or software or hardware into which DirectInput is integrated or with which DirectInput is bundled, solely for his or her own enjoyment or personal use. END-USERS do not include developers who use DirectInput to create commercial products such as hardware devices, software products or webpages. 1.1 FF is an abbreviation for Force Feedback. FORCE FEEDBACK means the simulation of feel or tactile sensations. 1.2 IMMERSION FF PATENT PORTFOLIO means (i) all FF-related claims in any utility patents and utility patent applications owned or acquired by, or licensed to, Immersion or its Subsidiaries (which, in the case of patents licensed to Immersion or its Subsidiaries, are permitted to be sublicensed) -1- MICROSOFT AND IMMERSION CONFIDENTIAL 2 and that are filed as of the Effective Date of this Agreement or during the term of this Agreement, and (ii) all subsequent FF-related claims in any utility patents (i.e. divisional, continuation, continuation-in-part, reissue, reexaminations and foreign patents/applications) that claim priority based on such patents or patent applications described in (i) above. A listing of the currently-issued patents comprising the Immersion FF Patent Portfolio as of the Effective Date is attached as Exhibit A ("Immersion FF Patent Portfolio"). 1.3 IMMERSION FF PATENT PORTFOLIO LICENSEE means any person that has been or subsequently is licensed by Immersion or its Subsidiaries to practice at least some of the inventions claimed in the Immersion FF Patent Portfolio. 1.4 IMMERSION LICENSEE PRODUCT(s) means FF hardware devices of any kind shipped in commercial quantities by or on behalf of Immersion Patent Portfolio Licensees on or before December 31, 1999 (the "Immersion Licensee Current Version"), as well as all substantially similar future versions of such devices. A device is "substantially similar" within the meaning of the foregoing sentence if it has substantially the same appearance, performance, feature set and architecture as the Immersion Licensee Current Version, notwithstanding (i) firmware and driver changes made to ensure compatibility with future versions of Microsoft operating system software; (ii) changes related to adding USB support; and (iii) cost reductions to the electronics or existing mechanical design. 1.5 IMMERSION PRODUCT(s) means FF hardware devices of any kind shipped in commercial quantities by Immersion or its Subsidiaries on or before December 31, 1999 (the "Immersion FF Current Version"), and any future replacement FF hardware devices marketed and sold by Immersion or its Subsidiaries which are substantially similar to the Immersion FF Current Version. A device is "substantially similar" within the meaning of the foregoing sentence if it has substantially the same appearance, performance, feature set and architecture as the Immersion FF Current Version, notwithstanding (i) firmware and driver changes made to ensure compatibility with future versions of Microsoft operating system software; (ii) changes related to adding USB support; (iii) cost reductions to the electronics or existing mechanical design. 1.6 MICROSOFT FF PATENT PORTFOLIO means (i) all FF-related claims in any utility patents and utility patent applications owned or acquired by, or licensed to, Microsoft or its Subsidiaries (which, in the case of patents licensed to Microsoft or its Subsidiaries, are permitted to be sublicensed) and that are filed as of the Effective Date of this Agreement, and (ii) all subsequent FF-related patent claims in any utility patents (i.e. divisional, continuation, continuation-in-part, reissue, reexaminations and foreign patents/applications) that claim priority based on such patents or patent -2- MICROSOFT AND IMMERSION CONFIDENTIAL 3 applications described in (i) above. A listing of the currently-issued patents comprising the Microsoft FF Patent Portfolio as of the Effective Date is attached as Exhibit B ("Microsoft FF Patent Portfolio") 1.7 MICROSOFT PRODUCTS refers collectively to the Sidewinder Force Feedback Joystick, Sidewinder Force Feedback Wheel and R-4 Force Feedback Wheel products. 1.8 R-4 FORCE FEEDBACK WHEEL means the FF user interface device manufactured by or for Saitek Ltd. which bears the "R-4 Force Feedback Wheel" product name as the primary trademark, as such product exists as of March 1, 1999 (the "R-4 Current Version") and any future versions of such product which are substantially similar to the R-4 Current Version, are introduced into the commercial marketplace in commercial quantities by October 31, 1999, and are branded with "R-4 Force Feedback Wheel" as the primary trademark. 1.9 SAITEK LICENSE means the Force Feedback technology license agreement between Saitek Ltd. and Microsoft as such license agreement exists as of the Effective Date or as it is amended as set forth in this Agreement. 1.10 SIDEWINDER FORCE FEEDBACK JOYSTICK means (a) the FF joystick product sold as of May 1, 1999 by Microsoft under the "Sidewinder Force Feedback Joystick" product name; (b) a replacement FF joystick product (however named or labeled) with Substantially Similar Functional Characteristics which is shipped by Microsoft or its Subsidiaries in commercial volumes on or before October 31, 2000 (devices qualifying under (a) or (b) shall hereinafter be referred to as the "Sidewinder Joystick Current Version"); and (c) any future replacement FF joystick products marketed and sold by Microsoft or its Subsidiaries which are substantially similar to the Sidewinder Joystick Current Version. A product is "substantially similar" within the meaning of (c) above if it has substantially the same appearance, performance, feature set and architecture as the Sidewinder Joystick Current Version, notwithstanding (i) firmware and driver changes made to ensure compatibility with future versions of Microsoft operating system software; (ii) changes related to adding USB support; (iii) cost reductions to the electronics or existing mechanical design. 1.11 SIDEWINDER FORCE FEEDBACK WHEEL means (a) the FF steering wheel product sold as of May 1, 1999 by Microsoft under the "Sidewinder Force Feedback Steering Wheel" product name; (b) a replacement FF steering wheel product (however named or labeled) with Substantially Similar Functional Characteristics which is shipped by Microsoft or its Subsidiaries in commercial volumes on or before October 31, 2000 (devices qualifying under (a) or (b) shall hereinafter be referred to as the "Sidewinder Wheel Current Version"); and (c) any future replacement FF steering wheel -3- MICROSOFT AND IMMERSION CONFIDENTIAL 4 products marketed and sold by Microsoft or its Subsidiaries which are substantially similar to the Sidewinder Wheel Current Version. A product is "substantially similar" within the meaning of (c) above if it has substantially the same appearance, performance, feature set and architecture as the Sidewinder Wheel Current Version, notwithstanding (i) firmware and driver changes made to ensure compatibility with future versions of Microsoft operating system software; (ii) changes related to adding USB support; (iii) cost reductions to the electronics or existing mechanical design. 1.12 SIDEWINDER PRODUCTS means the collective term for the Sidewinder Force Feedback Joystick and Sidewinder Force Feedback Wheel products. 1.13 SUBSIDIARY means a corporation, company or other entity: a) more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, as of the Effective Date, owned or controlled, directly or indirectly, by a party, but such corporation, company, or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists; or b) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but more than fifty percent (50%) of whose ownership interest representing the right to make the decisions for such corporation, company or other entity is, as of the Effective Date, owned or controlled, directly or indirectly, by a party, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists. 1.14 SUBSTANTIALLY SIMILAR FUNCTIONAL CHARACTERISTICS means that a current version of a given product and its replacement version (e.g., a currently shipping FF joystick product and its replacement FF joystick product) bear the following relationship to each other: the replacement product has substantially the same functionality and feature set as the current version, notwithstanding that, for example, one or more of the ancillary buttons, knobs or sliders in the current version may be changed to a different mechanical form in the replacement product, and notwithstanding the addition of a mechanism whereby one or more additional peripherals could be added or attached to the replacement version by the end-user as a plug-in (whether or not the device is shipped with such additional peripherals actually plugged-in), provided that any such additional peripherals would not include FF capabilities, and notwithstanding that the drive mechanism has been changed in the replacement version. -4- MICROSOFT AND IMMERSION CONFIDENTIAL 5 2. IMMERSION LICENSE TO MICROSOFT 2.1 SIDEWINDER PRODUCT PATENT LICENSE: In consideration for the one-time payment made in Section 5.1 ("Microsoft One-Time Payment to Immersion") and the license and covenant-not-to-sue set forth in Section 3.2 ("License and Covenant-Not-To-Sue Under Microsoft FF Patent Portfolio"), Immersion and its Subsidiaries grant Microsoft and its Subsidiaries a worldwide, nonexclusive license under the Immersion FF Patent Portfolio (which license shall become irrevocable, perpetual, non-terminable and fully paid-up upon Immersion's receipt of Microsoft's one-time payment required under Section 5.1) to make, have made, use, have used, import and have imported, sell, have sold, and offer for sale Sidewinder Products, subject to the limitation that, except for reasonable product transition overlap (including possible manufacturing overlap as well as marketing efforts to clear the distribution channels of one product while its replacement product is being introduced), the foregoing license shall extend to only one Sidewinder Force Feedback Joystick product and one Sidewinder Force Feedback Wheel product being manufactured or marketed by or for Microsoft or its Subsidiaries at any one time. Such license shall apply to Sidewinder Products without regard to whether such Sidewinder Products are marketed in a bundle with other separate products. 2.2 MICROSOFT SUBLICENSING RIGHTS: Immersion and its Subsidiaries grant to Microsoft and its Subsidiaries a worldwide, nonexclusive license under the Immersion FF Patent Portfolio (which license shall become irrevocable, perpetual, non-terminable and fully paid-up upon Immersion's receipt of Microsoft's one-time payment required under Section 5.1) (i) to sublicense third parties to manufacture Sidewinder Products on behalf of Microsoft or its Subsidiaries for sale by Microsoft or its Subsidiaries under the licenses granted herein, and (ii) to sublicense Saitek to make, have made, use, have used, import and have imported, sell and have sold and offer for sale R-4 Force Feedback Wheels, solely to the extent the Saitek License, by its terms, permits such activities as of the Effective Date. No further sublicensing rights are granted to Microsoft or its Subsidiaries by this Section 2.2 ("Microsoft Sublicensing Rights") except as expressly granted herein and to the extent the Saitek License grants to Saitek more extensive rights than those granted by Immersion to Microsoft or its Subsidiaries for sublicense to Saitek hereunder, no license by Immersion is implied. Microsoft hereby agrees that any amendments or modifications it agrees to make to the Saitek License after the Effective Date shall not in any way affect the scope of products licensed pursuant to that Agreement. 2.3 MICROSOFT REFERENTIAL USE OF IMMERSION BRANDING: During the term of this Agreement, Microsoft agrees to make referential use of the I-FORCE trademarks by including in each Microsoft Product (excluding the R-4 Force Feedback Wheel) the following reference: "Microsoft is a licensee of -5- MICROSOFT AND IMMERSION CONFIDENTIAL 6 Immersion Corporation, the exclusive licensor, under the [INSERT I-FORCE LOGO] logo, of I-FORCE force-feedback patents and technology." Specifically, Microsoft agrees to incorporate the foregoing reference along with a reference (and, to the extent technically feasible, a hyper-text link) to Immersion's then-current corporate web site (www.force-feedback.com) in the About Box for the associated driver software control panel or comparable location. Microsoft also agrees to place or have placed on the underside (exterior) of the Sidewinder Products the following notice: "Microsoft is a licensee of Immersion Corporation, the exclusive licensor of I-FORCE force-feedback patents and technology." Microsoft agrees to exercise its commercially reasonable best efforts to implement the foregoing references into Microsoft Products (excluding the R-4 Force Feedback Wheel) manufactured by or for Microsoft as promptly as possible, and commits to doing so by no later than ninety (90) days from the Effective Date. Notwithstanding the referential use described in this Section 2.3 ("Microsoft Referential Use of Immersion Branding"), no trademark license is granted to Microsoft hereunder to use the Immersion trademarks or to sublicense such Immersion trademarks to third parties. Immersion hereby agrees to defend, indemnify and hold Microsoft, its Subsidiaries, distributors and licensees harmless from and against any and all claims that Microsoft's including such reference violates a third party's trademarks or other proprietary rights. In the event Microsoft receives such a third party claim ("Indemnification Claim"), Microsoft agrees to promptly notify Immersion in writing of the Indemnification Claim and to cooperate with Immersion at Immersion's expense in defending the Indemnification Claim. Immersion's obligations under the foregoing indemnity provision, shall, however, be subject to a total dollar limit of 50% of all payments by Microsoft to Immersion hereunder (the "Indemnification Cap"); provided that in the event Immersion does not within sixty (60) days of receiving notice from Microsoft of an Indemnification Claim (or within three (3) days of such notice if the third-party claim is accompanied by a motion for preliminary injunction or temporary restraining order that would if granted prevent Microsoft from shipping product which contains such reference) agree in writing to fully and completely indemnify and hold Microsoft harmless with respect to the Indemnification Claim without regard to the Indemnification Cap, then Microsoft in its sole discretion may elect to discontinue all future referential use of the I-FORCE trademarks as set forth in this Section 2.3 in conjunction with the product sku associated with the region in which the claim is raised. At such time as the third-party claim is settled or otherwise resolved in a manner which permits Microsoft to referentially use the I-FORCE trademarks, Immersion may request, in writing, that Microsoft resume referential use of the I-Force trademark as set forth in this Section 2.3 and Microsoft agrees to do so, provided that Immersion pays Microsoft's reasonable costs and allows Microsoft a commercially reasonable amount of time to make the change. Subject to Microsoft's -6- MICROSOFT AND IMMERSION CONFIDENTIAL 7 right to protect its own trademarks, tradenames and servicemarks, Immersion may request, in writing, that Microsoft substitute alternative tradenames, trademarks or servicemarks which may be substituted for those referred to above or that Microsoft substitute a different Immersion corporate web site (i.e., different from www.force-feedback.com) and Microsoft agrees to do so, provided that Immersion pays Microsoft's reasonable costs and allows Microsoft a commercially reasonable amount of time to make the substitution. Immersion agrees that Microsoft's obligations to include a hyper-text link under Sections 2.3 and 6.2 shall not apply to any link to a site which on a consistent basis (as opposed to the normal featuring of new products, product reviews, etc.) features a product sold by a Microsoft competitor more prominently than a product sold by Microsoft. 2.4 SAITEK BRANDING REQUIREMENT: Microsoft agrees to use its commercially reasonable best efforts to require Saitek to use the I-FORCE trademarks and to incorporate them on the bottom of the R-4 Force Feedback Wheel. In addition, Microsoft agrees to use its commercially reasonable best efforts to require Saitek to include the I-FORCE logo in the About Box or comparable location on the driver software control panel associated with the R-4 Force Feedback Wheel, or if there is no About Box, in the associated product manual. Microsoft agrees to use commercially reasonable best efforts to require Saitek to implement the foregoing trademark requirements by September 15, 1999. Microsoft agrees to use commercially reasonable best efforts to impose on Saitek the obligation to include the I-FORCE logo on the product packaging for R-4 Force Feedback Wheels and in connection with advertising or promotional materials associated with the R-4 Force Feedback Wheels. Microsoft agrees to use commercially reasonable best efforts to require Saitek to permit Immersion to cite Saitek as an Immersion FF Patent Portfolio Licensee and to list Saitek in all materials that list other Immersion FF Patent Portfolio Licensees. 2.5 LIMITED SOFTWARE LICENSE: Immersion hereby grants Microsoft and its Subsidiaries a worldwide, non-exclusive license under the Immersion FF Patent Portfolio (which license shall become irrevocable, perpetual, non-terminable and fully paid-up upon Immersion's receipt of Microsoft's one-time payment required under Section 5.1): (a) to manufacture, sell, offer for sale, import and use DirectInput; and (b) to manufacture, sell, offer for sale, import and use Microsoft's FF-capable gaming software products listed in Exhibit C (all of which Microsoft represents have been distributed by Microsoft to third parties in commercial quantities on or before May 1, 1999), and to manufacture, sell, import and use successor versions of such gaming software products. -7- MICROSOFT AND IMMERSION CONFIDENTIAL 8 Microsoft and its Subsidiaries and End-Users shall not be liable to Immersion or its Subsidiaries as a contributory infringer under 35 U.S.C. Section 271(c) (or the foreign law equivalent thereof), or for inducing infringement under 35 U.S.C. Section 271(b) (or the foreign law equivalent thereof), based solely on their manufacture, importation, offer for sale, use or sale of DirectInput in combination with third-party software and/or hardware products, nor shall they be liable for direct infringement under 35 U.S.C. Section 271(a) (or the foreign equivalent thereof) based solely on their combination of DirectInput with unlicensed Microsoft or third-party hardware or software if no force feedback element of the claim or claims asserted against them is contributed by the Microsoft or third-party hardware or software which they combine with DirectInput. Except as specifically provided above, this Section 2.5 shall not be construed to immunize Microsoft or its Subsidiaries from liability under 35 U.S.C. Section 271(a)-(c), or under any other provision of Title 35 of the United States Code, either expressly, by implication, by estoppel, or otherwise. However, injunctive relief in patent infringement actions brought by Immersion or its Subsidiaries based on Microsoft's or Microsoft's Subsidiaries' unlicensed hardware or software products, or the combination thereof with each other or with DirectInput, shall, unless product integration and/or bundling make it impractical, be directed to such unlicensed products, and not to DirectInput itself. 3. LICENSE AND COVENANT-NOT-TO-SUE UNDER MICROSOFT FF PATENT PORTFOLIO. 3.1 In consideration for the licenses granted herein by Immersion and its Subsidiaries, the favorable one-time royalty payment for the licenses granted them herein with respect to the Immersion FF Patent Portfolio, and the force feedback evangelism services provided for in Section 6.6, Microsoft and its Subsidiaries hereby grant Immersion and its Subsidiaries a royalty-free, worldwide, non-exclusive license (which license shall be irrevocable and non-terminable during the term set forth in Section 3.3 upon Immersion's receipt of Microsoft's one-time payment required under Section 5.1), under the Microsoft FF Patent Portfolio, to make, have made, use, have used, import and have imported, sell, have sold and offer for sale Immersion Product(s), subject to the limitation that, except for reasonable product transition overlap (including possible manufacturing overlap as well as marketing efforts to clear the distribution channels of one product while its replacement product is being introduced), the foregoing license shall extend to only one version of a given FF hardware device being manufactured or marketed by or for Immersion or its Subsidiaries at any one time (i.e., Immersion will not have a given Immersion FF Current Version and its replacement version being manufactured or marketed at the same time, but may have two or more different Immersion FF hardware devices on the market at a given time). -8- MICROSOFT AND IMMERSION CONFIDENTIAL 9 3.2 In further consideration for the licenses granted herein by Immersion and its Subsidiaries, the favorable one-time royalty payment for the licenses granted them herein with respect to the Immersion FF Patent Portfolio, and the force feedback evangelism services provided for in Section 6.6, Microsoft and its Subsidiaries hereby grant all present and future Immersion FF Patent Portfolio Licensees a covenant-not-to-sue such Immersion FF Patent Portfolio Licensees under the Microsoft FF Patent Portfolio with respect to Immersion Licensee Product(s), subject to the limitation that, except for reasonable product transition overlap (including possible manufacturing overlap as well as marketing efforts to clear the distribution channels of one product while its replacement product is being introduced), the foregoing covenant shall extend to only one version of a given FF hardware device being manufactured or marketed by or for Immersion FF Patent Portfolio Licensees at any one time (i.e., a given Immersion FF Patent Portfolio Licensee will not have a given Immersion FF Patent Portfolio Licensee Current Version and its replacement version being manufactured or marketed at the same time, but may have two or more different Immersion FF Patent Portfolio Licensee hardware devices on the market at a given time). Microsoft warrants that no third party has or will be granted the right, as an exclusive licensee or patent assignee of Microsoft or otherwise, to assert any claim as to which Microsoft has granted the covenant-not-to-sue described above. No third party against whom Microsoft has a pending infringement claim subsequent to the Effective Date with respect to the Microsoft FF Patent Portfolio will be granted the above-described covenant-not-to-sue in the event such third party becomes an Immersion FF Patent Portfolio Licensee after Microsoft has made a claim against such third party. 3.3 The term of the license provided to Immersion under Section 3.1, and of the covenant-not-to-sue provided to Immersion's licensees under Section 3.2, shall commence on the Effective Date and end: 3.3.1 With respect to FF joysticks and steering wheels, the later of (a) April 30, 2002; or (b) the final date on which Microsoft or any Subsidiary or sublicensee of Microsoft exercises any right pursuant to Sections 2.1 or 2.2 above; 3.3.2 With respect to all other FF hardware products, on December 31, 2000. 3.4 The covenant-not-to-sue granted in Section 3.2 above shall be terminable upon written notice by Microsoft, with respect to any particular Immersion licensee, in the event such licensee (a) files suit against Microsoft or its Subsidiaries alleging infringement of any FF-related patent or other intellectual property right; (b) files suit against a Microsoft distributor, reseller or end user alleging infringement of any FF-related patent or other intellectual property right with respect to a Microsoft FF product; or (c) -9- MICROSOFT AND IMMERSION CONFIDENTIAL 10 engages in a course of conduct which, under applicable Federal Circuit Court of Appeals case law, gives rise to a reasonable apprehension by Microsoft of such suit. 3.5 As set forth in Sections 3.1 and 3.2 above, Microsoft's license to Immersion and its Subsidiaries and its covenant not to sue Immersion's Patent Portfolio Licensees are granted by Microsoft on a royalty or fee free basis. If Microsoft or its Subsidiaries have entered or do enter into a license agreement with a third party with respect to that third party's FF related claims in patents and patent applications and such license rights are sublicensable by Microsoft or its Subsidiaries such that they become part of the Microsoft FF Patent Portfolio (hereinafter, "Third Party Patents"), then: (i) if the Third Party Patents are sublicensable by Microsoft or its Subsidiaries on a royalty free or one-time lump sum fee basis, then Immersion, its Subsidiaries and the Immersion Patent Portfolio Licensees shall immediately receive rights to such Third Party Patents pursuant to Sections 3.1 and 3.2 as the case may be and Immersion, its Subsidiaries and the Immersion Patent Portfolio Licensees shall not owe Microsoft or its Subsidiaries any compensation for receiving such rights; (ii) if the Third Party Patents are sublicensable by Microsoft or its Subsidiaries solely on a royalty bearing basis, then Microsoft shall notify Immersion of the Third Party Patent license and Immersion may elect on behalf of itself, its Subsidiaries and the Immersion Patent Portfolio Licensees to take a royalty bearing sublicense (or covenant not to sue as the case may be) to such Third Party Patents subject to the terms of Sections 3.1 and 3.2 hereof (provided the parties acknowledge that such a license for Third Party Patents may not necessarily be irrevocable and non-terminable nor may they run for the term set forth in Section 3.3), in which event, Immersion, its Subsidiaries and the Immersion Patent Portfolio Licensees shall be entitled to receive, as to such Third Party Patents, the lowest royalties and best terms and conditions as compared to those paid by Microsoft, its Subsidiaries or any of their sublicensees. 4. NO MICROSOFT TRADEMARK LICENSE. No trademark license is granted to Immersion hereunder to use the Microsoft trademarks or to sublicense such Microsoft trademarks to third parties. 5. MICROSOFT ONE-TIME PAYMENT TO IMMERSION 5.1 ONE-TIME PAYMENT: Within forty (40) days after the Effective Date and Microsoft's receipt of an invoice from Immersion, Microsoft shall make a one-time payment of Two Million Three Hundred Fifty Thousand Dollars ($2,350,000) to Immersion for the licenses granted to Microsoft and its Subsidiaries by Immersion and its Subsidiaries with respect to the Microsoft Products under the terms of Section 2.1 ("Sidewinder Product Patent License") and Section 2.2 ("Microsoft Sublicensing Rights"). If Immersion or its Subsidiaries have entered or do enter into a license -10- MICROSOFT AND IMMERSION CONFIDENTIAL 11 agreement with a third party with respect to that third party's FF related claims in patents and patent applications and such license rights are sublicensable by Immersion or its Subsidiaries such that they become part of the Immersion Patent Portfolio (hereinafter, "Third Party Patents"), then: (i) if the Third Party Patents are sublicensable by Immersion or its Subsidiaries on a royalty free or one-time lump sum fee basis, then Microsoft and its Subsidiaries shall immediately receive rights to such Third Party Patents pursuant to Sections 2.1 and 2.2 and shall not owe Immersion or its Subsidiaries any compensation over that referenced in the first sentence of this Section 5.1 for receiving such rights; (ii) if the Third Party Patents are sublicensable by Immersion or its Subsidiaries solely on a royalty bearing basis, then Immersion shall notify Microsoft of the Third Party Patent license and Microsoft may elect on behalf of itself and its Subsidiaries to take a royalty bearing sublicense to such Third Party Patents subject to the terms of Sections 2.1, 2.2 and 2.5 hereof (provided the parties acknowledge that such a license for Third Party Patents may not necessarily be irrevocable, non-terminable and/or perpetual), in which event, Microsoft and its Subsidiaries shall be entitled to receive, as to such Third Party Patents, the lowest royalties and best terms and conditions as compared to those paid by Immersion, its Subsidiaries or any of their sublicensees. 5.2 MOST FAVORED ROYALTIES AND TERMS ON FUTURE PRODUCT LICENSES: As further consideration for entering into this Agreement, Immersion agrees as follows: 5.2.1 In any future non-exclusive patent license agreement entered into between the Parties after the Effective Date for FF hardware devices other than the Microsoft Products ("New Agreement"), Microsoft shall, subject to the limitations imposed in Sections 5.2.2 and 5.2.5 below, be entitled to the most favorable running royalty rate and/or lump-sum payment term granted by Immersion (either before or after the date of the New Agreement) for a non-exclusive license covering, at least, comparable products (e.g., a joystick is comparable to a joystick, a wheel is comparable to a wheel, a laparoscopic surgical simulator is comparable to a laparoscopic surgical simulator) in a similar field-of-use. The consumer, arcade and industrial markets are examples of fields of use. Such other license agreement shall hereinafter be referred to as the "Other Immersion Agreement." 5.2.2 In order to qualify for royalty terms contained in an Other Immersion Agreement and at its option, Microsoft shall (a) agree to each of the basic license provisions as set forth in Sections 2.3, 6.1, 6.2, 7.1, 7.2, and 8.1 of this Agreement; and (b) with respect to all other material terms of such Other Immersion Agreement, either (i) match all material terms of such Other Immersion Agreement, or (ii) with respect to any material terms of such Other Immersion Agreement -11- MICROSOFT AND IMMERSION CONFIDENTIAL 12 it cannot or will not match (except for sales volume over time requirements, which must be matched), negotiate a reasonable economic equivalent to such non-matched terms, or if such an agreement cannot be reached by the Parties, expeditiously submit such issue to binding arbitration before a single arbitrator acceptable to both Immersion and Microsoft. 5.2.3 Microsoft shall have the right from time to time, at its own expense, to have reasonable audits of Immersion's license agreements performed by an independent auditor, who shall be under an obligation to preserve the confidentiality of those agreements. In the event such an audit reveals Immersion patent license grants covering comparable products in a similar field of use as the grants included in the proposed New Agreement or New Agreements, and which have a lower running royalty rate or lump-sum payment term than the proposed New Agreement or New Agreements, the terms of such license agreements (but not the identity of Immersion's licensee) shall be disclosed to Microsoft pursuant to the terms of a mutually-acceptable confidentiality agreement. 5.2.4 In no event shall the most favorable running royalty rate used in Section 5.2.1 above exceed [****] of net receipts, so long as the FF hardware device covered by the New Agreement is a computer peripheral intended for consumer markets. In determining the net receipts to which this Section shall apply, Microsoft shall be entitled to the most favorable definition contained in an Other Immersion Agreement whose royalty rate is [****] or less. Where Microsoft bundles unlicensed (and non-infringing with respect to the Immersion FF Patent Portfolio) hardware or software products with the licensed FF product, the maximum royalty ("Max Royalty") on the licensed product shall be [****] 5.2.5 Notwithstanding the above, this Section 5.2 shall not apply to any license agreement entered into as part of a settlement of pending litigation between Immersion or its Subsidiaries, on the one hand, and Microsoft or its Subsidiaries, on the other; except that this exception shall not apply if Immersion fails to notify Microsoft of Microsoft's or its Subsidiaries' alleged infringement, and engage in license discussions, prior to filing suit. Microsoft agrees that after receiving such notice, it will not file any action or proceeding contesting the validity, enforceability or non-infringement of the patent or patents with respect to which Immersion has given it notice until after the parties have failed, despite their good faith efforts, to reach agreement on a license agreement and in no event earlier than forty-five (45) days following Microsoft's receipt of Immersion's notice. Similarly, Immersion agrees that it will not file any action or proceeding alleging infringement of the patent or * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. -12- MICROSOFT AND IMMERSION CONFIDENTIAL 13 patents until after the parties have failed, despite their good faith efforts, to reach agreement on a license agreement and in no event earlier than thirty-five (35) days following Microsoft's receipt of Immersion's notice. In addition, statements regarding intellectual property claims made by Immersion or its Subsidiaries in connection with threatened or actual litigation with a third-party with whom Immersion has entered into an Other Immersion Agreement shall not be admissible in any arbitration conducted pursuant to Section 5.2.2 above. 6. OTHER TERMS AND CONDITIONS 6.1 PRESS RELEASE: The parties shall jointly prepare a press release announcing this Agreement, consisting of mutually agreed-upon text, press date, and city or cities of origin. Neither party shall issue any other press release, sales or marketing, promotional material, advertisements, or similar materials discussing such party's relationship to the other party, except as may be expressly authorized or required in this Agreement or with the other party's prior written agreement to the content and distribution of any such material or information. Immersion shall be free to cite Microsoft as an Immersion FF Patent Portfolio Licensee and to list Microsoft in all materials that list other Immersion FF Patent Portfolio Licensees. 6.2 PATENT MARKING: As soon as possible after the Effective Date, and in no event later than ninety (90) days thereafter, Microsoft shall mark all newly-manufactured Sidewinder Products with (a) a label notifying purchasers that the product may be governed by one or more patents enumerated in the "About Box" or comparable location of the software component of the Product; (b) a statement in the "About Box" or comparable location that - -------------------------------------------------------------------------------- This product may be subject to one or more of the following patents owned by Immersion Corporation: ______________________ - -------------------------------------------------------------------------------- (where the blank has been filled in with the numbers of the patents set forth in Exhibit A, as such list is amended by Immersion from time to time); and (c) a reference to Immersion's then-current corporate web site (www.force-feedback.com) in the About Box for the associated driver software control panel or comparable location (which reference shall, to the extent technically feasible, be a hyperlink). Changes made by Microsoft to the list of patents based on an amendment of such list by Immersion shall be made within a commercially reasonable amount of time, and Immersion agrees to compensate Microsoft for its reasonable costs necessary to make such changes. -13- MICROSOFT AND IMMERSION CONFIDENTIAL 14 6.3 NO ADMISSION: Microsoft's and its Subsidiaries' license of the Immersion FF Patent Portfolio and/or payment of the one-time payment under Section 5.1 ("Microsoft One-Time Payment to Immersion") and/or Immersion's and its Subsidiaries' license of the Microsoft FF Patent Portfolio from Microsoft shall not be deemed to be evidence or an admission that a product infringes any patent of the other party, or that any patent of a party is valid or enforceable. 6.4 TAXES: (a) The amounts to be paid (or deemed paid) by either party to the other do not include any foreign, U.S. federal, state, local, municipal or other governmental taxes, duties, levies, fees, excises or tariffs, arising as a result of or in connection with the transactions contemplated under this Agreement including, without limitation, (i) any state or local sales or use taxes or any value added tax or business transfer tax now or hereafter imposed on the provision of any services to the other party under this Agreement, (ii) taxes imposed or based on or with respect to or measured by any net or gross income or receipts of either party, (iii) any franchise taxes, taxes on doing business, gross receipts taxes or capital stock taxes (including any minimum taxes and taxes measured by any item of tax preference), (iv) any taxes imposed or assessed after the date upon which this Agreement is terminated, (v) taxes based upon or imposed with reference to either parties' real and/or personal property ownership and (vi) any taxes similar to or in the nature of those taxes described in (i), (ii), (iii), (iv) or (v) above, now or hereafter imposed on either party (or any third parties with which either party is permitted to enter into agreements relating to its undertakings hereunder) (all such amounts, together with any penalties, interest or any additions thereto, collectively "Taxes"). Neither party is liable for any of the other party's Taxes incurred in connection with or related to the sale of goods and services under this Agreement, and all such Taxes shall be the financial responsibility of the party obligated to pay such taxes as determined by the applicable law, provided that both parties shall pay to the other the appropriate Collected Taxes in accordance with subsection (b) below. Each party agrees to indemnify, defend and hold the other party harmless from any Taxes (other than Collected Taxes) or claims, causes of action, costs (including, without limitation, reasonable attorneys' fees) and any other liabilities of any nature whatsoever related to such Taxes to the extent such Taxes relate to amounts paid under this Agreement. (b) Any sales or use taxes described in (a)(i) above that (i) are owed by either party solely as a result of entering into this Agreement and the payment of the fees hereunder, (ii) are required to be collected -14- MICROSOFT AND IMMERSION CONFIDENTIAL 15 from that party under applicable law, and (iii) are based solely upon the amounts payable (or deemed payable) under this Agreement (such taxes the "Collected Taxes"), shall be stated separately as applicable on payee's invoices and shall be remitted by the other party to the payee, upon request payee shall remit to the other party official tax receipts indicating that such Collected Taxes have been collected and paid by the payee. Either party may provide the other party an exemption certificate acceptable to the relevant taxing authority (including without limitation a resale certificate) in which case payee shall not collect the taxes covered by such certificate. Each party agrees to take such commercially reasonable steps as are requested by the other party to minimize such Collected Taxes in accordance with all relevant laws and to cooperate with and assist the other party, in challenging the validity of any Collected Taxes or taxes otherwise paid by the payor party. Each party agrees to equally share the cost of any successful other party-initiated ruling and/or appeal or other determination that concludes that a Collected Tax is not owing in whole or in part under this Agreement. Each party shall indemnify and hold the other party harmless from any Collected Taxes, penalties, interest, or additions to tax arising from amounts paid by one party to the other under this Agreement, that are asserted or assessed against one party to the extent such amounts relate to amounts that are paid to or collected by one party from the other under this Section. If any taxing authority refunds any tax to a party which the other party originally paid, or a party otherwise becomes aware that any tax was incorrectly and/or erroneously collected from the other party, then that party shall promptly remit to the other party an amount equal to such refund, or incorrect collection as the case may be plus any interest thereon. (c) If taxes are required to be withheld on any amounts otherwise to be paid by one party to the other, the paying party will deduct such taxes from the amount otherwise owed and pay them to the appropriate taxing authority. At a party's written request and expense, the parties will use reasonable efforts to cooperate with and assist each other in obtaining tax certificates or other appropriate documentation evidencing such payment, provided, however, that the responsibility for such documentation shall remain with the payee party. (d) This Section 6.4 shall govern the treatment of all taxes arising as a result of or in connection with this Agreement notwithstanding any other Section of this Agreement. -15- MICROSOFT AND IMMERSION CONFIDENTIAL 16 6.5 ESCALATION: In the event of any dispute arising under this Agreement, authorized representatives of each of the parties shall meet or communicate by phone or otherwise no later than ten (10) working days after receipt of notice by either party of a request for dispute resolution and shall enter into good faith negotiations aimed at resolving the dispute. If the representatives are unable to resolve the dispute in a mutually satisfactory manner within the next five (5) working days after the initial meeting or phone communication described above, the dispute shall be referred to the top management level for FF-related matters in each party, and each party shall designate a top management executive with authority to resolve the dispute to meet in good faith in an attempt to resolve the dispute within thirty (30) days after receipt of the initial notice. This Section 6.5 ("Escalation") shall not limit either party's ability, after referring the dispute to the top management levels of the parties and expiration of the thirty (30) day period following receipt of the initial notice, to seek an injunction or other equitable relief for breach of obligations related to intellectual property or as may otherwise be necessary to protect any other rights of either party. 6.6 FORCE FEEDBACK EVANGELISM SERVICES: Immersion agrees that for a period of twelve (12) months following the Effective Date, it shall provide at least fifty (50) hours per month of force feedback evangelism services. "Force feedback evangelism services," as used in this Section 6.6, means marketing services directed to convincing and/or assisting developers to create force feedback-capable software products. 7. TERM & TERMINATION 7.1 TERM: The term of this Agreement shall be for a period of time up through the expiration of the last of the patents in the Microsoft FF Patent Portfolio and Immersion FF Patent Portfolio. 7.2 TERMINATION FOR CAUSE: If either party materially breaches any obligation contained in this Agreement, the other party may terminate this Agreement upon sixty (60) days' written notice; provided, however, that cure of such material breach within such sixty (60) day notice period shall bar termination on account of such material breach. 7.3 EFFECT OF TERMINATION: In the event of termination of this Agreement for any reason, except non-payment of the one-time payment described in Section 5.1 ("One-Time Payment"), the provisions of Section 2 ("Immersion License to Microsoft"), Section 3 ("License and Covenant-Not-To-Sue Under Microsoft FF Patent Portfolio"), Section 6.2 ("Patent Marking"), Section 6.3 ("No Admission"), Section 7 ("Term & Termination"), Section 8 ("Confidentiality") and Section 9 ("Miscellaneous") shall remain in force and shall survive any termination. -16- MICROSOFT AND IMMERSION CONFIDENTIAL 17 8. CONFIDENTIALITY. 8.1 CONFIDENTIALITY: All terms and conditions of this Agreement shall be deemed Confidential Information as defined herein. The parties expressly undertake to retain in confidence all information and know-how transmitted to one party ("Receiving Party") by the other party ("Disclosing Party") that the Disclosing Party has designated as proprietary and/or confidential or that, by the nature of the circumstances surrounding the disclosure, ought in good faith to be treated as proprietary and/or confidential ("Confidential Information"). Confidential Information includes all information relating to payments and terms under this Agreement. The parties will make no use of Confidential Information except under the terms and during the existence of this Agreement. Confidential Information shall not include any information that: (i) is or subsequently becomes publicly available without the Receiving Party's breach of any obligation owed the Disclosing Party; (ii) became known to Receiving Party from a source other than Disclosing Party other than by the breach of an obligation of confidentiality owed to Disclosing Party; (iii) is independently developed by Receiving Party. Nothing herein shall prevent a Receiving Party's disclosure of Confidential Information as required by applicable statutory or regulatory requirement (including, without limitation, disclosure to comply with reporting obligations associated with a legitimate corporate transaction), or of such terms as directly affect a party's licensee to said licensee in the event such licensee receives a notice of infringement from the other party hereto, or pursuant to a subpoena or document request. If a Receiving Party is subject to a subpoena or document request calling for the production of a Disclosing Party's Confidential Information, the Receiving Party shall notify the Disclosing Party as soon as practicable to permit the Disclosing Party to endeavor to minimize disclosure by obtaining a protective order or otherwise. Receiving Party's obligation under this Section 8 with respect to any particular information shall extend to the earlier of such time as such information is publicly available through no fault of Receiving Party or ten (10) years following termination of this Agreement. 9. MISCELLANEOUS 9.1 SUFFICIENT RIGHTS: Each party represents and warrants that it has all legal right and power to grant the other party the license rights granted in this Agreement, and that its execution and performance of this Agreement will not violate any law or agreement. 9.2 NOTICE: Any written notice under this Agreement shall be sent by certified mail, return receipt requested, or its equivalent, addressed as follows: FOR NOTICES TO MICROSOFT: FOR NOTICES TO IMMERSION: VICE PRESIDENT, HARDWARE LOUIS ROSENBERG, PRESIDENT MICROSOFT CORPORATION IMMERSION CORPORATION ONE MICROSOFT WAY 2158 PARAGON DRIVE -17- MICROSOFT AND IMMERSION CONFIDENTIAL 18 REDMOND, WASHINGTON 98052 SAN JOSE, CALIFORNIA, 95131 WITH A COPY TO: WITH A COPY TO: MICROSOFT GENERAL COUNSEL STACY A. SNOWMAN, ESQ. LAW & CORPORATE AFFAIRS GRAY CARY WARE & FREIDENRICH MICROSOFT CORPORATION 139 TOWNSEND STREET, SUITE 400 ONE MICROSOFT WAY SAN FRANCISCO, CA 94107 REDMOND, WASHINGTON 98052 9.3 SEVERABILITY: If any part of this Agreement is found to be in violation of any law, or is found to be unenforceable, contrary to public policy, or otherwise legally defective, the Agreement shall be construed and interpreted without reference to that part. 9.4 ASSIGNMENT: This Agreement is not assignable or transferable except in the case of a merger, acquisition or assignment or transfer of all or substantially all of the assets of the Microsoft Hardware Group of Microsoft or of Immersion and only if the successor (in the case of a merger or acquisition) or assignee or transferee (in the case of an asset sale) has agreed in writing to be bound hereby to the same extent as was the predecessor entity. Any other attempt to assign or transfer this Agreement without the prior written consent of the other party shall be void. 9.5 NO OBLIGATION TO ENFORCE: Neither party shall have any obligation to enforce its patent rights against third parties. 9.6 NO INDEMNITY: Except as provided in Sections 2.3 and 9.12 hereof, neither party shall be liable to indemnify, defend, or hold harmless the other party against charges of patent infringement, trade secret infringement, trademark infringement, trade dress infringement, or the like, arising out of the subject matter of this Agreement. 9.7 DISCLAIMER: BOTH PARTIES DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, EXCEPT AS PARTICULARLY DETAILED HEREIN. THE PARTIES DO NOT WARRANT THAT THE MANUFACTURE, USE, SALE, IMPORT OR LICENSE OF THEIR PATENTED INVENTIONS ARE FREE FROM INFRINGEMENT OF THIRD PARTY PATENT OR OTHER RIGHTS. 9.8 RELEASE - IMMERSION TO MICROSOFT: Immersion and its Subsidiaries hereby fully and forever release and discharge Microsoft and its Subsidiaries, and their manufacturers, importers and distributors, licensees and users from any and all damages, liability, suits, claims and causes of action of any kind, whether known or unknown, suspected or unsuspected, arising out of patent infringement or alleged patent infringement of the Immersion FF Patent Portfolio by: -18- MICROSOFT AND IMMERSION CONFIDENTIAL 19 (a) the manufacture, sale, offer for sale, importation and use of the Sidewinder Products prior to the Effective Date; (b) the manufacture, sale, offer for sale, importation and use of the R-4 Force Feedback Wheels manufactured and sold by or for Microsoft's sublicensee, Saitek, prior to the Effective Date; and (c) any activities occurring prior to the Effective Date that would have been licensed under Section 2.5 had they occurred after the Effective Date. 9.9 MODIFICATION OF DIRECTINPUT: In consideration for the releases granted by Immersion above, Microsoft on behalf of itself and its Subsidiaries hereby agrees that they will not modify DirectInput so as to disadvantage Immersion Products or Immersion Licensee Products being commercially distributed by or for Immersion or Immersion Licensees as of the Effective Date as compared to competitive Sidewinder Products being commercially distributed by or for Microsoft or its Subsidiaries as of the Effective Date, and further agrees that DirectInput will support Immersion Products and Immersion Licensee Products being commercially distributed by Immersion or Immersion Product Licensees as of the Effective Date for a period of at least three years from the Effective Date. For purposes of satisfying these modification and support obligations, Microsoft will be deemed to be in compliance if (a) it refrains from modifying DirectInput so as to disadvantage the Wingman Force and Wingman Formula Force products currently being shipped by Logitech as compared to competitive Sidewinder Products being commercially shipped by or for Microsoft or its Subsidiaries as of the Effective Date; and (b) for the above-referenced three year period, DirectInput supports at least the Wingman Force and Wingman Formula Force products currently being shipped by Logitech. 9.10 RELEASE - MICROSOFT TO IMMERSION: Microsoft and its Subsidiaries hereby fully and forever release and discharge Immersion and its Subsidiaries, and their manufacturers, importers and distributors, licensees and users from any and all damages, liability, suits, claims, and causes of action of any kind, whether known or unknown, suspected or unsuspected, arising out of patent infringement or alleged patent infringement of the Microsoft FF Patent Portfolio by any and all FF devices manufactured, used, sold or imported by Immersion or its Subsidiaries prior to the Effective Date, which products are listed in Exhibit D hereto. 9.11 NEW INFORMATION: In connection with the waiver and relinquishment of the matters set forth in Sections 9.8 and 9.9 (hereinafter the "Released Matters"), each of the parties acknowledges that it is aware that it or its attorneys or accountants may hereafter discover claims or facts in addition to or different from those which it now knows or believes to exist with respect to the Released Matters or the other party hereto, but that it is its -19- MICROSOFT AND IMMERSION CONFIDENTIAL 20 intention hereby fully, finally and forever to settle and release all of the Released Matters, which now exist, may exist or heretofore have existed between Immersion and Microsoft. In furtherance of this intention, the releases herein given shall be and remain in effect as full and complete mutual releases as to the Released Matters notwithstanding the discovery or existence of any such additional or different claim or fact. 9.12 ASSIGNMENT OF RELEASED MATTERS: Immersion and Microsoft each warrant and represent to the other that as of the Effective Date it is the sole and lawful owner of all right, title and interest in and to all of the respective Released Matters and that it has not heretofore voluntarily, by operation of law or otherwise, assigned or transferred or purported to assign or transfer to any person whomsoever any Released Matter or any part or portion thereof of any claim, demand or right against the other. Immersion and Microsoft shall indemnify and hold harmless the other from and against any claim, demand, damage, debt, liability, account, reckoning, obligation, cost, expense, lien, action or cause of action (including payment of attorneys' fees and costs actually incurred whether or not litigation be commenced) based on or in connection with or arising out of any such assignment or transfer or purported or claimed assignment or transfer. 9.13 BENEFICIARIES: Except with respect to the license rights, covenant-not-to-sue and releases granted by this Agreement to Saitek and/or to Immersion Product Licensees, this Agreement is not for the benefit of any person who is not a party signatory hereto or specifically named a beneficiary in this paragraph or elsewhere in this Agreement. The provisions of this Agreement and the releases contained herein shall extend to and inure to the benefit of and be binding upon, in addition to Immersion and Microsoft and their Subsidiaries, just as if they had executed this Agreement: the respective legal successors and assigns of each of Immersion and Microsoft solely as permitted under the terms of Section 9.4 ("Assignment"). 9.13 REPRESENTATION: Each party acknowledges to the other party that it has been represented by independent legal counsel of its own choice throughout all of the negotiations which preceded the execution of this Agreement and that it has executed this Agreement with the consent and on the advice of such independent legal counsel. Each party further acknowledges that it and its counsel have had adequate opportunity to make whatever investigation or inquiry they may deem necessary or desirable in connection with the subject matter of this Agreement prior to the execution hereof and the delivery and acceptance of the consideration specified herein. 9.14 INDEPENDENT CONTRACTOR: Each party shall at all times act as an independent entity, and shall be solely responsible for any and all social -20- MICROSOFT AND IMMERSION CONFIDENTIAL 21 security, unemployment, Workers' Compensation and other withholding taxes for any and all of its employees. Nothing in this Agreement shall be construed as creating a partnership, joint venture or agency relationship between the parties. Neither party has authority to make, assume or create any representation, warranty, agreement, guarantee, claim or settlement on behalf of the other party with respect to the subject matter of this Agreement or otherwise. Each party shall defend, indemnify and hold the other party, its officers, directors, and employees harmless from all claims, costs, expenses, fines, fees and damages resulting from any claim arising out of or related to a breach of the provisions of this paragraph by such party. 9.15 NO WAIVER: Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. 9.16 GOVERNING LAW: The interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Washington. 9.17 AMBIGUITY: This Agreement has been drafted by both Microsoft and Immersion, and no ambiguity shall be resolved against either of them by virtue of its role in drafting this Agreement. 9.18 PERSONAL INJURY AND PROPERTY DAMAGE CLAIMS: Each party or its Subsidiaries who manufactures or sells any product ("Manufacturer") shall indemnify, protect, defend and hold the other party ("Licensor") harmless from any claims, damages, liabilities, judgments, settlements, losses, costs and expenses (including court costs and reasonable attorneys' and experts' fees) (collectively, "Costs") suffered or incurred by the Licensor in respect of any third party claim to the extent such third party claim or threatened claim arises from a personal or alleged personal injury or damage or alleged damage to property arising out of the third party's use of an FF product manufactured or sold by the Manufacturer, notwithstanding any license or covenant-not-to-sue granted the Manufacturer by the Licensor hereunder. 9.19 NEGATION OF WARRANTIES AND OTHER OBLIGATIONS: Nothing in this Agreement shall be construed: (i) as a warranty or representation by a party as to the validity or scope of any patents; (ii) as granting by implication, estoppel or otherwise any licenses or rights under patents or other intellectual property rights of a party other than expressly granted herein; (iii) to require a party to file any patent application relating to Force Feedback; -21- MICROSOFT AND IMMERSION CONFIDENTIAL 22 (iv) as a warranty that a party will be successful in securing the grant of any patent relating to Force Feedback or any reissue or extensions thereof; or (v) to require a party to pay any maintenance fees or take any other steps to maintain such party's patent rights relating to Force Feedback. 9.20 ENTIRE AGREEMENT: This Agreement embodies the entire understanding of the parties regarding the subject matter of this document and supersedes all prior or contemporaneous understandings and agreements, whether written or oral, and can be modified only by a writing signed by both parties, or their successors. 9.21 SUGGESTIONS AND FEEDBACK: Either party may from time to time provide suggestions, comments or other feedback to the other party with respect to Confidential Information provided originally by the other party (hereinafter "Feedback"). Both parties agree that all Feedback is and shall be entirely voluntary and shall not, absent separate agreement, create any confidentiality obligation for the receiving party. However, the receiving party shall not disclose the source of any feedback without the providing party's consent. Feedback shall be clearly designated as such and, except as otherwise provided herein, each party shall be free to disclose and use such Feedback as it sees fit, entirely without obligation of any kind to the other party. The foregoing shall not, however, affect either party's obligations hereunder with respect to Confidential Information of the other party. 9.22 COUNTERPARTS: This Agreement may be executed in counterparts, which when taken together shall constitute a single, binding agreement between the parties. -22- MICROSOFT AND IMMERSION CONFIDENTIAL 23 THEREFORE, the authorized representatives of the parties have executed this Agreement in duplicate originals. MICROSOFT CORPORATION IMMERSION CORPORATION Signed: /s/ D. Stuart Ashman Signed: /s/ Louis Rosenberg --------------------------- --------------------------- Name: D. Stuart Ashman Name: Louis Rosenberg --------------------------- --------------------------- Title: GM Hardware Title: President --------------------------- --------------------------- Date: 7/19/99 Date: 7/19/99 --------------------------- --------------------------- -23- MICROSOFT AND IMMERSION CONFIDENTIAL 24 Exhibit A Immersion FF Patent Portfolio
U.S. Patent Number Issue Date Title ------------------ ---------- ----- 4,823,634 4/89 Multifunction Tactile Manipulative Control 5,185,561 2/9/93 Torque Motor as a Tactile Feedback Device in a Computer System 5,220,260 6/15/93 Actuator Having Electronically Controllable Tactile Responsiveness 5,389,865 2/14/95 Method and System for Providing a Tactile Virtual Manipulator Defining an Interface Device Therefor 5,414,337 5/9/95 Actuator Having Electronically Controllable Tactile Responsiveness 5,459,382 10/17/95 Method and System for Providing a Tactile Virtual Reality 5,513,100 4/30/96 Velocity Controller with Force Feedback 5,559,412 9/24/96 Actuator Having Electronically Controllable Tactile Responsiveness 5,576,727 11/19/96 Electromechanical Human-Computer Interface With Force Feedback 5,589,854 12/31/96 Touching Feedback Device 5,629,594 5/13/97 Force Feedback System 5,691,898 11/25/97 Safe and Low Cost Computer Peripherals With Force Feedback for Consumer Applications 5,701,140 12/23/97 Method and Apparatus for Providing a Cursor Control Interface With Force Feedback 5,721,566 2/24/98 Method and Apparatus for Providing Damping Force Feedback
-24- MICROSOFT AND IMMERSION CONFIDENTIAL 25 3/21/98 Method and Apparatus for 5,731,804 Providing High Noise Mechanical I/O for Computer Systems 5,734,373 3/31/98 Method and Apparatus for Controlling Force Feedback Interface Systems Utilizing a Host Computer 5,739,811 4/14/98 Method and Apparatus for Controlling Human Interface Systems Providing Force Feedback 5,769,640 6/23/98 Method and System for Simulating Medical Procedures including Virtual Reality and Control Method and System for Use Therein 5,754,023 5/19/98 Gyro-Stabilized Platforms for Force-Feedback B1 5,459,382 6/9/98 Method and System for Providing a Tactile Virtual Manipulator Defining an Interface Device Therefor 5,767,839 6/16/98 Method and Apparatus for Providing Passive Human-Computer Interface Systems 5,790,108 8/4/98 Controller 5,805,140 9/8/98 High Bandwidth Force Feedbck Interface Using Voice Coils and Flexures 5,821,920 10/13/98 Control Input Device for Interfacing an Elongated Flexible Object With a Computer System 5,825,308 10/20/98 Force Feedback Interface Having Isotonic and Isometric Functionality 5,828,197 10/27/98 Mechanical Interface Having Multiple Grounded Actuators 5,831,408 11/3/98 Force Feedback System 5,844,392 12/1/98 Haptic Browsing 5,872,438 2/16/99 Whole-Body Kinesthetic Display
-25- MICROSOFT AND IMMERSION CONFIDENTIAL 26 3/9/99 Three-Dimensional Cursor 5,880,714 Control Interface With Force Feedback 5,889,670 3/30/99 Method and Apparatus for Tactilely Responsive User Interface 5,889,672 3/30/99 Tactilely Responsive User Interface Device and Method Therefor 5,907,487 5/25/99 Force Feedback Device With Safety Feature
-26- MICROSOFT AND IMMERSION CONFIDENTIAL 27 Exhibit B Microsoft FF Patent Portfolio US Patent No. 5,643,087, issued 07/01/97 and entitled "Input Device Including Digital Force Feedback Apparatus." US Patent No. 5,709,219, issued 01/20/98 and entitled "Method and Apparatus to Create a Complex Tactile Sensation." US Patent No. 5,742,278, issued 04/21/98 and entitled "Force Feedback Joystick with Digital Signal Processor Controlled by Host Processor." -27- MICROSOFT AND IMMERSION CONFIDENTIAL 28 Exhibit C Microsoft FF-Capable Gaming Products Combat Flight Simulator Flight Simulator 98 (and prior versions thereof) Cart Precision Racing Midtown Madness Motor Cross Madness Monster Truck Madness 2 (and predecessor) Mech Warrior 3 (and predecessors) Starlancer Urban Assault Baseball Version 3D Fighter Ace (online version only) Allegiance (online version only) -28- MICROSOFT AND IMMERSION CONFIDENTIAL 29 Exhibit D Released Immersion Products Impulse Engine 1000 (CIE-1000) Impulse Engine 2000 (CIE-2000) Impulse Engine 3000 (CIE-3000) Impulse Engine 2000 w/passive actuators (CIE-2000B) Impulse Stick-Impulse Engine based (CIS-SYS) Impulse Stick I-Force based (CIS-SYS-IF) Laparoscopic Impulse Engine (CIE-LAPARO) Virtual Laparoscopic Interface Catheter Insertion Simulator Bronchoscope Simulator Hysteroscope Simulator Ureteroscope Simulator Endoscope Simulator Sinus Surgery Simulator Needle Insertion Simulator- single axis, active Needle Insertion Simulator- three axis, passive Needle Insertion Simulator- three axis, active, virtual pivot point Knob Controller Knob Controller with hat switch and push button Video Editing Knob Controller I-Force 1.5 Arcade System (IPCB-6030) I-Force 2.0 Arcade System (Axis)(COEM-6050) I-Force 2.0 Arcade System (930) (IPCB-6031) Impulse Engine - 2 axis (COEM-6012-IE) Impulse Engine - 3 axis (IPCB-6035) Impulse Engine Two Axis ISA (CIE-6010) Impulse Engine ISA 2.1 (CIE-6015) Impulse Engine 3GM (CIE-3GM) Impulse Engine PCI (CIE-6017) Axis I Release System (TPG-001) Axis II Release System (TPG-010) Axis II Release System (TPF-001) Picker PinPoint (CPP-ASSY) Yoke with I-Force 1.5 (DisneyQuest) Xulu Impulse Stick PER-Force Controller (Cybernet) Stylin' 3D (Cybernet) SpacePen (Cybernet) FingerForcer (Cybernet) Locomotion Simulator (Cybernet) CyberImpact Stick (Cybernet) CyberImpact Wheel (Cybernet) CyberImpact Yoke (Cybernet) -29- MICROSOFT AND IMMERSION CONFIDENTIAL EX-10.14 5 SEMICONDUCTOR DEVICE COMPONENT PURCHASE AGREEMENT 1 EXHIBIT 10.14 * Certain information in this document has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. SEMICONDUCTOR DEVICE COMPONENT PURCHASE AGREEMENT This Semiconductor Device Component Purchase Agreement (the "Agreement") is entered into by and between Immersion Corporation, a California corporation, having its principal place of business at 2158 Paragon Drive, San Jose, California (hereinafter "Immersion") and Kawasaki LSI U.S.A. Inc., a California corporation, having its principal place of business at 2570 North First Street, Suite 301, San Jose, California 95131 (hereinafter "KLSI"). The effective date of this Agreement will be the date last signed below ("Effective Date"). RECITALS WHEREAS, Immersion and KLSI have entered into an Agreement for ASIC Design and Development, effective as of October 16, 1997 (the "ASIC Design Agreement") under which the parties have designed and developed an integrated circuit device which provides an optimized version of the force-feedback functions delivered by the Immersion proprietary force feedback firmware; and WHEREAS, KLSI has agreed to manufacture and sell such integrated circuit devices to Immersion, on an exclusive basis, for resale by Immersion under the licenses and terms and conditions set forth herein. NOW, THEREFORE, in consideration of the promises and agreements set forth below and the other consideration cited herein, the parties agree as follows: 1. DEFINITIONS. In this Agreement, the following words and expressions shall have the following meanings: 1.1. "AFFILIATE" means any corporation or business entity which is controlled by, controls, or is under common control of an Immersion customer. For this purpose, the meaning of the word "control" shall include, without limitation, direct or indirect ownership of more than fifty percent (50%) of the voting shares of interest of such corporation or business entity. 1.2. "COMPONENT" means the "AXIS Chip" which is an integrated circuit device designed to provide an optimized version of the force-feedback functions delivered by the Immersion proprietary force feedback firmware. The AXIS Chip was designed and developed under the terms of the ASIC Design Agreement by KLSI and Immersion and is further described in the Specification, but does not include any firmware or hexcode to be loaded or loaded into such devices. The Components will be produced in a .5 CBA format, a .35 CBA format and a .35 standard cell format. 2 1.3. "DEFECT" means (i) with respect to the Components, defects in such Components which cause such Components not to operate in conformance with the Specification and/or a defect in the materials and/or workmanship of the Component and/or (ii) with respect to the Documentation, defects in the Documentation which render the Documentation inaccurate, erroneous or otherwise unreliable. 1.4. "DELIVERABLES" shall mean the PLSSOP, the testable Prototype Units, the First Articles and Documentation, as defined and developed under the terms of the ASIC Design Agreement. 1.5. "DOCUMENTATION" means the Specification, the VHDL File for the AXIS Chip and other documentation that accompanied the Deliverables provided by KLSI to Immersion as required under the ASIC Design Agreement. 1.6. "FIRST ARTICLES" shall mean a limited number of units of the Components, in a given format (.5 CBA, .35 CBA or .35 standard cell) as mutually agreed upon by the parties, which are manufactured as a test run for review and acceptance by Immersion prior to full production of the Component for sale to Immersion under the terms of this Agreement. 1.7. "POST LAYOUT SIMULATION SIGN OFF PACKAGE" or "PLSSOP" shall mean the computer generated simulation of the Prototype Unit that is a model of the Prototype Unit and that is used to review the features and functionality which will be present in the Prototype Unit, as defined and developed under the terms of the ASIC Design Agreement. 1.8. "PROTOTYPE UNITS" shall mean initial working testable units of the Components that conform to the PLSSOP and the Specifications, as defined and developed under the terms of the ASIC Design Agreement. 1.9. "SECOND SOURCE" means an alternative silicon provider licensed by KLSI to produce a specific format (.35 CBA or .35 standard cell) of the Component for KLSI, as a "back-up" resource for KLSI's manufacturing obligations or licensed by Immersion to produce the Component for Immersion. 1.10. "SPECIFICATION" means the Component specification in Exhibit A ("Specification") for each of the .5 CBA, .35 CBA and .35 standard cell formats. 2. PURCHASE OF COMPONENTS. 2.1. PURCHASE OF COMPONENTS BY IMMERSION. 2.1.1. COMPONENTS. The parties will agree upon a limited number of units of the Components to be manufactured as First Articles and which will serve as a test run for review and acceptance by Immersion prior to full production of 2 3 each of the formats (.5 CBA, .35 CBA or .35 standard cell) of the Components under the terms of this Agreement. KLSI will not make any changes to the design, materials, manufacturing (including source and location) or processes without Immersion's prior written consent. KLSI agrees to manufacture and sell to Immersion and Immersion agrees to purchase from KLSI (by means of purchase orders issued by Immersion to KLSI) the production units of the Components, under the terms of this Agreement, for use by Immersion and resale by Immersion to Immersion's customers and to the Affiliates. KLSI will be the exclusive manufacturer of such Components except as provided herein and the Components will be sold exclusively to Immersion. Immersion makes no representation or guarantee as to the quantity of Components that Immersion may purchase under this Agreement. KLSI represents that KLSI has the manufacturing capacity to fulfill, on a timely basis, all Immersion orders for the Components and agrees to make good faith efforts to increase capacity in order to fulfill Immersion's requirements. Upon request by Immersion, KLSI will disclose information to Immersion as necessary to demonstrate KLSI's production readiness and ability to achieve steady cost effective production. 2.1.2. HEXCODE. Prior to shipment of the Components to Immersion or an Immersion customer or Affiliate, hexcode or firmware code will need to be incorporated into each Component. KLSI and Immersion agree that Immersion (in the case of Components to be shipped to Immersion) or Immersion's customers or the Affiliates (in the case of Components to be shipped to such customers or Affiliates) will supply the required hexcode or firmware code directly to KLSI for incorporation into the applicable Component. KLSI will cause such firmware or hexcode and a vendor identification number (which is supplied by Immersion or Immersion's customer or the Affiliates, as applicable, directly to KLSI) to be loaded into specified Components prior to delivery of such Components to Immersion, Immersion's customers or the Affiliates, as applicable. Subsequently, for each new release of firmware or hexcode which is requested by Immersion or Immersion's customer or the Affiliates to be implemented in Components to be purchased (by Immersion for Immersion's use or for resale to Immersion's customer or the Affiliates, as applicable) Immersion or Immersion's customer or the Affiliates, as applicable, will provide such firmware or hexcode to KLSI. Immersion will impose an obligation on each Immersion customer and Affiliate, by means of the contract between Immersion and such customer or Affiliate, under which each such customer or Affiliate will be required to provide the firmware or hexcode to KLSI in compliance with KLSI's required lead time for Component orders involving new masks so as to allow sufficient time for the new mask to be created and implemented in such Components. Immersion and KLSI agree that the lead time for orders 3 4 involving new masks will be two (2) weeks longer than the usual six (6) week lead time described in Section 4 ("Lead Times and Minimum Order Quantities") for the particular format (.5 CBA, .35 CBA or .35 standard cell). KLSI will provide ceramic prototypes within two (2) to three (3) weeks of a ROM spin. 2.2. SECOND SOURCE. 2.2.1. SECOND SOURCE SILICON PROVIDER OBLIGATION. KLSI will enter into contractual relationships with certain silicon providers under which each such silicon provider will stand ready to act as a "back-up" Second Source for KLSI ("the Second Source Silicon Provider Agreement") for the Components. Two different Component designs will require a Second Source: (i) Components without an analog to digital converter; and (ii) Components with an analog to digital converter. 2.2.1.1. COMPONENTS WITHOUT AN ANALOG TO DIGITAL CONVERTER. Under the terms of the Purchase Order No. 11305 dated June 30, 1998 (executed July 2, 1998), KLSI is obligated to migrate the .35 CBA Component to a .35 standard cell Component without the analog to digital converter. Therefore, KLSI will enter into a Second Source Silicon Provider Agreement to produce a .35 standard cell Component as a back-up for both: (i) the .35 standard cell Component without the analog to digital converter; and (ii) the .35 CBA Component for those Component orders which do not require the .35 CBA Component with an analog to digital converter. KLSI further agrees that the Second Source for the .35 standard cell without the analog to digital converter will be capable of producing such Components within thirty (30) days after the completion of the migration from the .35 CBA to the .35 standard cell without an analog to digital converter. For purposes of the previous sentence, the migration shall be deemed complete upon Immersion's acceptance of the .35 standard cell prototypes. 2.2.1.2. COMPONENTS WITH AN ANALOG TO DIGITAL CONVERTER. If Immersion's orders for the .35 CBA with the analog to digital converter reach 100,000 units per month, or Logitech is designing a Logitech force feedback gaming product that uses a Component requiring an analog to digital converter (each a "Migration Trigger Event"), then, within thirty (30) days of receiving notification of a Migration Trigger Event from Immersion, KLSI shall begin the migration of the .35 CBA Component with an analog to digital converter to a .35 standard cell Component with an analog to digital converter. KLSI shall 4 5 complete the migration within six (6) months from the date of such notification. KLSI shall bear all costs and expenses of the migration, but the parties acknowledge that KLSI may recover the actual, documented costs of the migration by not lowering the unit price of the .35 standard cell Components until such costs have been recovered, or until the date eighteen months following the first sale of the .35 standard cell Component with an analog to digital converter to Immersion, whichever is earlier. KLSI will enter into a Second Source Silicon Provider Agreement to produce a .35 standard cell Component with an analog to digital converter within thirty (30) days after it begins the migration of the .35 CBA Component to the .35 standard cell Component with an analog to digital converter. KLSI further agrees that the Second Source for the .35 standard cell Components with the analog to digital converter will be capable of producing such Components within thirty (30) days after the completion of the migration from the .35 CBA to the .35 standard cell with an analog to digital converter. For purposes of the previous sentence, the migration shall be deemed complete upon Immersion's acceptance of the .35 standard cell prototypes. 2.2.1.3. SECOND SOURCE PROCEDURES. In any case where the Die Bank System die are used as a resource by such .35 standard cell Second Source to source .35 CBA format Components, in KLSI's discretion, the die used will be credited to Immersion's Die Bank System account and replenished by KLSI at no charge to Immersion. KLSI will provide an entire manufacturing package of all of the Deliverables, specifications, technology and other materials which will be needed by each such Second Source Silicon provider in order to manufacture the applicable Components. Although it is the intent of the parties that KLSI will manufacture the Components as the primary silicon provider, it is understood and agreed that KLSI may subcontract the manufacture of Components to such Second Sources, on a periodic basis, as necessary for KLSI to be in compliance with its obligations hereunder. KLSI will determine, in the case of each Component order, whether such Components will be manufactured by KLSI or by the applicable Second Source silicon provider. KLSI will be in the role of "governing seller" and therefore, Immersion will purchase all Components from KLSI (including the Components which are manufactured by the Second Source silicon providers), except that under a specified set of circumstances described in Section 2.2.5 ("Trigger Events") Immersion may, in its discretion, purchase Components directly from KLSI's Second Source silicon providers. Prior to 5 6 execution of each Second Source Silicon Provider Agreement, KLSI will identify each Second Source silicon provider to Immersion. 2.2.2. TECHNOLOGY LICENSE TO THE SECOND SOURCE. Immersion hereby grants KLSI a limited license, to sublicense each Second Source silicon provider to utilize the Immersion Preexisting Technology and Immersion Requested Revisions (as defined in the ASIC Design Agreement) solely to manufacture the Components under the terms of the applicable Second Source Silicon Provider Agreement. In addition, KLSI will license the Non-Immersion Technology (as defined in the ASIC Design Agreement) to each Second Source silicon provider so as to permit manufacture of the Components by the applicable Second Source silicon provider. 2.2.3. TERMS TO BE IMPOSED ON THE SECOND SOURCE SILICON PROVIDER. KLSI will subcontract with each Second Source silicon provider, under the terms of the Second Source Silicon Provider Agreement, to obtain the applicable Components from such Second Source silicon provider and Immersion will be a third party beneficiary of each subcontract between KLSI and KLSI's designated Second Source silicon providers. KLSI, under the terms of each Second Source Silicon Provider Agreement, will require each such Second Source silicon provider to comply with the lead times, cancellation and rescheduling terms and minimum order quantities that are included in this Agreement and the Quality Requirements included in any Ancillary Agreements between KLSI and Immersion's customers or Affiliates. KLSI will impose an obligation on each Second Source silicon provider to sign an Ancillary Agreement (which is identical to the KLSI Ancillary Agreement) directly with Immersion's customers or the Affiliates in any case where KLSI has entered into such an agreement. 2.2.4. ESCROW ACCOUNT. KLSI recognizes that certain breaches of KLSI's obligations under the terms of this Agreement and/or the Ancillary Agreements may require prompt implementation of business solutions to remedy such breaches, including but not limited to, solutions which allow Immersion and Immersion's customers or the Affiliates (through purchases from Immersion) to obtain the Components from an alternative source. KLSI agrees to deposit all of the Deliverables (excluding First Articles) specifications, technology and other materials which would be needed by a Second Source silicon provider to manufacture the Components (the "Second Source Device Deposit") into an escrow account held by an escrow agent, mutually agreed upon by the parties. The Second Source Device Deposit can be accessed by Immersion for delivery to a Second Source silicon provider, of Immersion's choice, upon the occurrence of certain events ("Trigger Events"). The occurrence of the Trigger Events will be identified by Immersion by written notice to the 6 7 escrow agent in accordance with the terms of Section 2.2.6 ("Trigger Event Process"). Such escrow agreement (the "Second Source Device Deposit Escrow Agreement") will be between KLSI, Immersion and the escrow agent and will be attached hereto as Exhibit D ("Second Source Device Deposit Escrow Agreement"). KLSI will be required, under the terms of the Second Source Device Deposit Escrow Agreement to promptly deposit any future updates or revisions to the Second Source Device Deposit with the escrow agent. 2.2.5. TRIGGER EVENTS. The parties agree that in the following situations described in (i), (ii) and (iii) below, Immersion will be entitled to take certain steps to mitigate KLSI's breach: (i) If KLSI is not in compliance with the Quality Requirements directly imposed by Immersion's customers or the Affiliates on KLSI under the terms of the Ancillary Agreements, (ii) if KLSI is in material breach of its delivery obligations to Immersion for orders placed by Immersion for Immersion's use or orders placed by Immersion for resale to Immersion's customers or the Affiliates (and Immersion therefore may be in breach of its obligations to its customers or the Affiliates under the terms of the agreements between Immersion and Immersion's customers or the Affiliates, or (iii) if the Components delivered to Immersion for Immersion's use or for sale to Immersion's customers or the Affiliates by Immersion exceed the warranty defect frequency levels permitted under the terms of Section 0 ("Warranty Defect Frequency Levels"). If any of the events described in (i), (ii) or (iii) above occur and are not cured within the thirty (30) day notice period described in Section 2.2.6 ("Trigger Event Process"), such event will be deemed to be a "Trigger Event" under the Second Source Device Deposit Escrow Agreement. 2.2.6. TRIGGER EVENT PROCESS. On the basis of Immersion customer or Affiliate input, or in the case where the Components purchased by Immersion are exhibiting warranty defect frequency levels in excess of those permitted under the terms of Section 5.3 ("Warranty Defect Frequency Levels"), Immersion may, in Immersion's discretion, send a written notice to KLSI, the applicable Second Source silicon provider and the escrow agent for the Second Source Device Deposit escrow account, advising KLSI that if the noncompliance with the Quality Requirements, material breach of the delivery obligations to Immersion or excessive warranty defect frequency levels, as applicable, are not cured within thirty (30) days from receipt of Immersion's notice, that the noncompliance with the Quality Requirements, material breach of the delivery obligations to Immersion or excessive warranty defect levels, as applicable, will be deemed to be a "Trigger Event" under the Second Source Device Deposit Escrow Agreement. The Second Source Device Deposit will be released by the escrow agent to Immersion for delivery to a Second Source silicon 7 8 provider of Immersion's choice upon the occurrence of a Trigger Event. Notwithstanding the foregoing, Immersion will still have the right, but not the obligation, to purchase the Components from KLSI after occurrence of the Trigger Event and although the rescheduling rules described in Exhibit B ("Cancellation and Rescheduling Polices and Fees") will still be in effect, Immersion may cancel orders without obligation to pay cancellation fees or base wafer maintenance invoices after the Trigger Event (and KLSI will credit any base wafer maintenance fees or die bank fees already paid, which are not applied to base wafers actually used, to Immersion's account within thirty (30) days of the Trigger Event). 2.2.7. IMMERSION'S SECOND SOURCE. Immersion may choose, in Immersion's sole discretion, to designate any of KLSI's Second Source silicon providers as Immersion's Second Source silicon providers after occurrence of the Trigger Event. Immersion will notify KLSI as to the Second Source silicon providers selected by Immersion. KLSI hereby grants Immersion a limited license to sublicense the Second Source silicon providers selected by Immersion to utilize the Non-Immersion Technology after a Trigger Event so as to permit manufacture of the Components by such Second Source silicon providers. 2.3. PURCHASE OF COMPONENTS BY IMMERSION'S CUSTOMER'S AFFILIATES. KLSI acknowledges that Immersion's customers may be permitted, under the terms of the agreement between Immersion and each of Immersion's customers, to submit purchase orders for the Components from the customer's Affiliates (on behalf of one or more of such Affiliates) and KLSI further acknowledges that Immersion may agree to process such orders as though the order was an Immersion customer Component purchase order (i.e., receive orders directly from the Affiliate, drop ship directly to the Affiliate, invoice the Affiliate and handle returns and warranty returns directly with the Affiliate). Immersion will require Immersion's customer by contract, to impose on each Affiliate, by means of a written agreement, prior to the placement of the first Component order to Immersion by any Affiliate, all obligations imposed on Immersion's customer under the terms of this Agreement and the applicable Ancillary Agreement, if any. KLSI agrees to enter into Ancillary Agreements with such Affiliates and in response to Immersion's purchase orders, to ship Components directly to such Affiliates under the same terms imposed upon KLSI by this Agreement with respect to the Immersion customers. 2.4. SPECIFICATION ESCROW. KLSI acknowledges that in addition to the Second Source Device Deposit escrow account which is for the benefit of Immersion, Immersion's customers (or the Affiliates) may request Immersion to escrow the Specification for the Components for the benefit of Immersion's customers (or the Affiliates). KLSI shall promptly provide to Immersion any future updates or revisions to the Specification for deposit by Immersion with the escrow agent. 8 9 3. ORDERING PROCEDURE. 3.1. FORECASTING. Immersion will require, by contract, that Immersion's customers and/or Affiliates provide Immersion with a written nonbinding six (6) month rolling forecast, updated by the first day of each month, which describes the quantity of each Component, by format (.5 CBA, .35 CBA or .35 standard cell), by part number, proposed to be purchased by each Immersion customer and Affiliates, by month. Immersion will provide a copy of such forecasts directly to KLSI, accompanied by a written nonbinding six (6) month rolling forecast for Immersion's own usage of Components, by the fifteenth of each month. Immersion may, in its discretion, integrate such forecast information into a single forecast. Such forecasts will be invalid unless placed by Immersion's designated purchasing agent. 3.2. PURCHASE ORDERS. 3.2.1. PURCHASE ORDER PROCESS. Immersion will issue purchase orders to KLSI, specifying the end customer, the shipping address, the Components by part number and designating the hexcode or firmware to be loaded into the Components. Such purchase orders may be submitted by written, faxed or electronic means. KLSI will accept Immersion's purchase orders and acknowledge such orders in writing, to Immersion, within five (5) days of receipt. Such purchase orders will be invalid unless placed by Immersion's designated purchasing agent. The terms and conditions of this Agreement shall apply to all orders submitted by Immersion to KLSI and supersede any different or additional terms on Immersion's or KLSI's purchase orders, order acknowledgments or invoices, as applicable. 3.2.2. SHIPMENT AND DELIVERY. KLSI will ship all components to Immersion, Immersion's customers and the Affiliates, FOB Narita, Japan. KLSI will provide Immersion with KLSI's standard packaging specifications for Immersion's prior approval. All Components will be shipped in accordance with such standard packaging specifications unless otherwise agreed to by KLSI and Immersion in writing, in advance. KLSI will provide Immersion with all documents that Immersion, Immersion's customers or the Affiliates need to receive possession of the Components and to ship, import and export the Components. KLSI shall use best efforts to make deliveries to Immersion, Immersion's customers and the Affiliates of orders so accepted, promptly and within three (3) days of (before or after) scheduled delivery dates. For purposes of this Agreement, a "scheduled delivery date" is the date the shipment leaves KLSI's dock FOB Narita, Japan. 3.2.3. LATE DELIVERIES. KLSI will promptly notify Immersion of any possible delays and Immersion may elect in writing to cancel any orders which 9 10 KLSI (i) advises will not be delivered as scheduled (and will be more than ten (10) days late) or (ii) which are not delivered as scheduled (and are more than ten (10) days late) and (iii) in either case, the cause of the late delivery was attributable solely to KLSI, KLSI's Second Source and/or other KLSI suppliers. Such cancellations by Immersion will not be subject to the cancellation rules and fees described in Exhibit B ("Cancellation and Rescheduling Policies and Fees"). If Immersion does not cancel a late order (meaning the shipment will be received more than ten (10) days after the scheduled delivery date), KLSI will pay the premium transportation charges necessary to meet Immersion's delivery obligations, or to mitigate the delay. Allowing Immersion to cancel late orders and payment of premium shipping are remedies intended to mitigate KLSI's breach of its delivery obligations and Immersion's acceptance of any such remedies in no way waives Immersion's right to all other available remedies. Orders which will not be delivered or are not delivered in accordance with the scheduled delivery date and which are canceled by Immersion will nevertheless be counted as purchased for purposes of quantity discounts, if any. Immersion shall not be liable to Immersion's customers or the Affiliates for any damages to Immersion's customers or the Affiliates or to any other person for KLSI's failure to fill any orders, or for any delay in delivery or error in filling any orders for any reason whatsoever. KLSI agrees to indemnify, defend and hold Immersion harmless from any claim by any Immersion customer or Affiliate which is based on KLSI's failure to fill any orders or for any delay in delivery or error in filling any orders for any reason whatsoever. 3.2.4. EARLY DELIVERIES. KLSI will not ship Components to Immersion, Immersion's customers or the Affiliates more than five (5) days prior to the scheduled delivery date without Immersion's prior written consent. Immersion, Immersion's customers and the Affiliates will be entitled to return any Components delivered more than five (5) days in advance of the scheduled delivery date at KLSI's risk and expense and Immersion's account will be credited. 3.3. ACCEPTANCE OF COMPONENT ORDERS BY IMMERSION AND IMMERSION'S CUSTOMERS AND AFFILIATES. 3.3.1. ACCEPTANCE PROCESS. Immersion agrees that the Components purchased by Immersion from KLSI for Immersion's own use will be deemed accepted within fifteen (15) days of receipt from KLSI, unless Immersion, by means of written notice, notifies KLSI of a Defect, which has been verified by a means mutually agreed upon between KLSI and Immersion, which means may include, but will not be limited to, Defect Test Suites as described below, within such period. Immersion will require, under the terms of the contract with each Immersion customer and each Affiliate, 10 11 that the Components will be deemed accepted by Immersion's customer or the Affiliate within a specified number of days from receipt unless Immersion's customer or the Affiliate, by means of written notice, notifies Immersion of a Defect, which has been verified by a means mutually agreed upon between Immersion and such customer, and which may include, but will not be limited to, Defect Test Suites as described below, within such period. 3.3.2. DEFECT TEST SUITES. Immersion and KLSI may develop and mutually agree upon a Defect Test Suite which will test the Components, excluding the hexcode or firmware code supplied by Immersion or the Immersion customer, using specified test vectors to identify Defects. The Defect Test Suites may be supplied to each Immersion customer and Affiliate by Immersion for use as the basis for acceptance or rejection of the Components (excluding the hexcode or firmware code portion). 3.3.3. FIRST LEVEL INTERFACE. Immersion agrees to perform the role of the first level interface with the Immersion customers and the Affiliates and to verify whether there is a Defect. Once Immersion has notified KLSI as to Immersion's conclusion that the existence of a Defect has been verified, by whatever means mutually agreed upon between Immersion and the Immersion customer, KLSI will work directly with the Immersion customers and the Affiliates in compliance with the sample reject/failure mode criteria and RMA procedure which have been agreed upon between KLSI and such Immersion customer or Affiliate under the terms of the Ancillary Agreement. The Immersion customers and Affiliates will be permitted to return the Components to KLSI for replacement within five (5) days of KLSI's return approval notification. In such case KLSI will ship the replacement Components to Immersion's customer or the Affiliate on a priority basis. 3.3.4. HEXCODE DEFECTS. KLSI and each Immersion customer or Affiliate will mutually agree upon, in writing, under the terms of the Ancillary Agreement, an appropriate test suite for use by the Immersion customer or Affiliate as the basis for acceptance or rejection of the hexcode or firmware code portion of the Components. 3.3.5. IMMERSION AS A CUSTOMER. Once Immersion has notified KLSI that Immersion has verified the existence of a Defect in Components purchased by Immersion for Immersion's use, KLSI and Immersion will coordinate return of the defective Component units under the terms of the reject/failure mode criteria and RMA procedure described in Exhibit E ("KLSI RMA Procedures"). Immersion will be permitted to return the Components to KLSI for replacement within five (5) days of KLSI's return approval notification. KLSI will ship the replacement Components 11 12 to Immersion on a priority basis. In addition, KLSI and Immersion will mutually agree upon, in writing, an appropriate test suite for use by Immersion as the basis for acceptance or rejection of the hexcode or firmware code portion of the Components ordered by Immersion for Immersion's use. 3.4. CHANGE ORDERS. Cancellation and rescheduling of Immersion's Component orders will be governed by the cancellation and rescheduling policies and fees described in Exhibit B ("Cancellation and Rescheduling Policies and Fees"). All cancellation and/or rescheduling requests will be submitted to Immersion by Immersion's customers and will be incorporated by Immersion into a cancellation and/or rescheduling request which will be submitted by Immersion to KLSI. 3.5. ANCILLARY AGREEMENT. Immersion agrees and acknowledges that Immersion's customers will be permitted to negotiate with KLSI to directly impose quality requirements on KLSI under the terms of a separate, executed agreement (the "Ancillary Agreement") and to mutually agree upon RMA procedures and hexcode or firmware code loading and spin charges. 4. LEAD TIMES AND MINIMUM ORDER QUANTITIES. The parties agree that the lead time for orders placed by Immersion to KLSI for the .5 CBA and .35 CBA format Components will be six (6) weeks from receipt of the Immersion purchase order by KLSI, subject to implementation of a Base Wafer Maintenance Purchase Order System as described in Section 0 ("Base Wafer Maintenance Purchase Order System"). The parties agree that the lead time for orders placed by Immersion to KLSI for the .35 standard cell will be six (6) weeks from receipt of the Immersion purchase order by KLSI, subject to implementation of a Die Bank System as described in Section 0 ("Die Bank System"). Some exceptions may be taken to the six (6) week lead time in the case of factory/subcontractor holiday periods, however, KLSI shall notify Immersion of any shutdown impact and will define the additional lead time necessary for ordering purposes on a case by case basis at the time the order first appears in the forecast (within five (5) days of receipt of the forecast from Immersion). The minimum order quantity requirement is 5000 Component units per Immersion purchase order, however Components aggregated on a single purchase order may be designated to be shipped to multiple Immersion customer and Affiliate locations. 5. WARRANTY. 5.1. WARRANTY BY KLSI TO IMMERSION. KLSI acknowledges that although Immersion may purchase Components for Immersion's use, for the most part Immersion is purchasing the Components for resale to Immersion's customers and that Immersion will be making a warranty to each of Immersion's customers that for a period of one (1) year from delivery of each quantity of the Components to Immersion's customer, the Components, excluding the hexcode or firmware code, will conform to the Specification and will be free from defects in materials and 12 13 workmanship. KLSI warrants to Immersion that for a period of one (1) year from delivery of each quantity of the Components to Immersion or directly to Immersion's customers or the Affiliates, the Components, excluding the hexcode or firmware code, will conform to the Specification and will be free from defects in materials and workmanship. 5.2. WARRANTY PROCEDURES. 5.2.1. WARRANTY PROCESS. KLSI further agrees that in any instance where Immersion's customer or an Affiliate has asserted a claim under the warranty provided by Immersion to the customer or the Affiliate (during the one (1) year warranty period) that a Component, excluding the hexcode or firmware code, does not conform to the Specification and/or is not free from defects in material and workmanship, Immersion will identify the nature of the claim through direct communication with the customer or the Affiliate and will conduct Defect verification tests using the means, including but not limited to Defect Test Suites, that has been mutually agreed upon between Immersion and KLSI in accordance with Section 3.3.2 ("Defect Test Suites"). Immersion will obtain an appropriate sample of Component units, prior to notifying KLSI of the customer or the Affiliate warranty claim. For Components purchased by Immersion for Immersion's use, Immersion will conduct verification tests using the means, including but not limited to Defect Test Suites that has been mutually agreed upon between Immersion and KLSI in accordance with the terms of Section 3.3.2 ("Defect Test Suites") on an appropriate sample of Components following the same procedures. 5.2.2. KLSI RESPONSIBILITIES. If Immersion determines, on the basis of the verification criteria that the sample Component units are defective, KLSI agrees that KLSI will accept receipt of Immersion's test data and sample Component units and will treat such delivery of test data and sample Component units from Immersion as a warranty claim by Immersion under the warranty provided by KLSI to Immersion under the terms of this Agreement. If Immersion presents KLSI with a warranty claim which involves Components which have been shipped to an Immersion customer or Affiliate, KLSI will contact the customer or Affiliate under KLSI's Return Authorization Program within ten (10) days of receipt of Immersion's test data and sample Component units and will accept defective Component units back directly from Immersion's customers or the Affiliates. KLSI will provide replacement Component units directly to Immersion's customers or the Affiliates on a one to one basis for each defective Component returned by Immersion's customer or an Affiliate to KLSI, as described above, within thirty (30) days of receipt of Immersion's test data and sample Component units. If Immersion presents KLSI with a warranty claim for Components which have been shipped to 13 14 Immersion, KLSI will contact Immersion within ten (10) days of receipt of Immersion's test data and sample Component units and will accept defective Component units back from Immersion. KLSI will provide replacement Component units directly to Immersion on a one to one basis for each defective Component returned by Immersion, as described above, within thirty (30) days of receipt of Immersion's test data and sample Component units. KLSI agrees to be responsible for all insurance and shipping costs incurred by Immersion and by Immersion's customers and the Affiliates in returning defective Component units to KLSI. Immersion may, in its sole discretion, instruct KLSI to accept return of the defective Component units from Immersion, Immersion's customers or the Affiliates, as applicable, and to credit Immersion's account for the purchase price of such units, instead of providing replacement units to Immersion, Immersion's customers or the Affiliates, as applicable. 5.2.3. PURPOSE OF THE WARRANTY. Although this warranty extends only to Immersion and not to Immersion's customers, KLSI agrees and acknowledges that the purpose of this warranty is to cause KLSI to provide warranty replacement units to Immersion's customer or an Affiliate in each instance where Immersion's customer or an Affiliate asserts a warranty claim to Immersion under the one (1) year warranty provided by Immersion to Immersion's customers and the Affiliates. KLSI further acknowledges and agrees that it is Immersion's intent to avoid a situation where Immersion is responsible under Immersion's warranty to Immersion's customer or an Affiliate for defective Components and Immersion is without recourse from KLSI to obtain replacement Component units under the warranty provided by KLSI to Immersion. 5.3. WARRANTY DEFECT FREQUENCY LEVELS. 5.3.1. PROCESS IMPROVEMENT. Immersion and KLSI agree that the Components manufactured by KLSI should be free from Defects and that the Components should be manufactured under a stable manufacturing process that is capable of producing high-quality reliable components in volume. The acceptance procedure as described in Section 3.3 ("Acceptance of Component Orders by Immersion and Immersion's Customers and Affiliates) and the warranty procedures described in Section 5.1 ("Warranty by KLSI to Immersion") and 5.2 ("Warranty Procedures") are intended to identify Defects and to allow Immersion, the Immersion customers and the Affiliates to return Defective Components to KLSI. Notwithstanding the acceptance and warranty procedures, KLSI and Immersion recognize that if the frequency level of Defects in the Components exceeds certain parameters, the acceptance and warranty procedures will become expensive and time consuming. As a result, the 14 15 parties agree that KLSI will conduct a quality and reliability improvement program on an ongoing basis and use the Defect data obtained through the acceptance and warranty procedures to document, analyze and implement a program to constantly reduce the Defect frequency levels of the Components towards a zero Defect standard. 5.3.2. RECORD KEEPING AND DOCUMENTATION. KLSI will maintain records of corrective actions indicating the frequency of Defects during fabrication of the Components, the proposed corrective process change, evaluation of effectiveness of the corrective process and the effective date of implementation of corrective measures. KLSI will make such records available to Immersion upon request. KLSI will provide documentation with each shipment of Components which indicates that the Components shipped have been tested and inspected by KLSI and have a defect rate no greater than 100 dpm. 5.3.3. CORRECTIVE ACTION. KLSI will implement and maintain a corrective action system, including failure analysis, for addressing and correcting Defects reported under the acceptance and warranty procedures. The parties agree that any time the Defect rate in Components purchased by Immersion on a rolling basis or in any shipment or consecutive series of shipments exceeds 100 dpm and such Defects are traceable to a single failure mode, Immersion will be entitled to notify KLSI that the Defect levels are unacceptable and KLSI will respond by preparing and proposing a Corrective Action Plan within ten (10) business days of KLSI's confirmation of unacceptable Defects levels. KLSI will confirm the unacceptable Defect levels within five (5) days of receipt of Immersion's notice. The Corrective Action Plan will address implementation and procedure milestones and timeframes for remedying the unacceptable Defect levels. 5.3.4. SUSPENSION BY IMMERSION. Immersion will be permitted to delay and/or postpone manufacturing and deliveries of Components which have been ordered as well as future orders (a "Suspension") by written notice to KLSI, pending correction of the excessive Defect levels under the Corrective Action Plan. The Suspension status invoked by Immersion's written notice will temporarily relieve KLSI of its obligation to ship Components, will relieve Immersion customers and the Affiliates of any obligation to receive shipment of Components, and will not be treated as a cancellation or rescheduling by Immersion under the terms of this Agreement. KLSI will develop a remedy for the Defects under the Corrective Action Plan at KLSI's sole expense and will demonstrate to Immersion the effectiveness of such remedy. If Immersion, in its discretion, approves the remedy, Immersion will cancel the Suspension and KLSI will (i) incorporate such remedy into all subsequent 15 16 Components manufactured, (ii) replace all Component units in Immersion, Immersion's customers' and/or the Affiliates' inventory, and (iii) reimburse Immersion, the Immersion customers and/or the Affiliates for any expenses and/or costs associated with implementation of such remedy. If KLSI is unable to propose and implement a remedy as described above, Immersion will be entitled to treat such failure as a Trigger Event under Section 2.2 ("Second Source") upon thirty (30) days written notice and receive a refund for all defective Components in Immersion, Immersion's customers' and the Affiliates' inventories. 5.4. DISCLAIMER. EXCEPT FOR THE EXPRESS WARRANTIES CONTAINED HEREIN, KLSI MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 6. INDEMNIFICATION. 6.1. INDEMNIFICATION BY KLSI. 6.1.1. SCOPE OF KLSI'S INDEMNITY. Subject to prompt notification by Immersion, cooperation by Immersion and control of all litigation and/or settlement by KLSI, KLSI shall indemnify, defend and hold Immersion, Immersion's customers and the Affiliates harmless from and against any and all damages, costs and expenses ("Costs") suffered or incurred by Immersion, Immersion's customers and the Affiliates as a result of any third party claim that the Components, as delivered by KLSI (whether manufactured by KLSI or KLSI's Second Source silicon provider) to Immersion, Immersion's customers or the Affiliates, but excluding any firmware or hexcode loaded onto any Components and further excluding the Immersion Preexisting Technology and Immersion Requested Revisions (as defined in the ASIC Design Agreement), infringe any patent, copyright or misappropriates any trade secret of any third party. 6.1.2. MITIGATION BY KLSI. In the case of any third party claim involving the Components which is covered by the indemnity described in Section 6.1.1 ("Scope of KLSI's Indemnity"), KLSI may, in its sole discretion (i) provide Immersion with a modified version of the Components which comply with the functionality and features of the Specification so that the Components become noninfringing (as a replacement for Components in Immersion, Immersion's customer's and the Affiliates inventory and for future sales), (ii) provide Immersion other components which are functionally equivalent (as a replacement for Components in Immersion, Immersion's customer's and the Affiliates inventory and for future sales), (iii) procure for Immersion a license to continue to use and sell the Components, or, (iv) in the alternative, if none of the foregoing 16 17 alternatives are commercially reasonable, accept return of the infringing Components in Immersion's, Immersion's customer's and/or the Affiliate's inventory and refund to Immersion the purchase price paid for such inventory. Each party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in Section 6.1.1 ("Scope of KLSI's Indemnity") may apply. If notified in writing of any action or claim for which KLSI is to provide indemnity, KLSI shall defend those actions or claims at KLSI's expense and pay the Costs awarded against Immersion, Immersion's customers and/or Affiliates in any such action, or pay any settlement of such action or claim entered into by KLSI. 6.1.3. EXCEPTIONS TO KLSI'S INDEMNITY OBLIGATION. The foregoing indemnity by KLSI will not apply to any infringement claim to the extent it arises from (i) any modification of any Component by parties other than KLSI or KLSI subcontractors under contract with KLSI, or (ii) an infringement which would not occur in the Component but which does occur when the Component is incorporated into the devices. 6.2. INDEMNIFICATION BY IMMERSION. 6.2.1. SCOPE OF IMMERSION'S INDEMNITY. Subject to prompt notification by KLSI, cooperation by KLSI and control of all litigation and/or settlement by Immersion, Immersion shall indemnify, defend and hold KLSI harmless from and against any and all damages, costs and expenses ("Costs") suffered or incurred by KLSI as a result of any third party claim that the Immersion Preexisting Technology and Immersion Requested Revisions (as defined in the ASIC Design Agreement) as incorporated into the Components as manufactured under the terms of this Agreement, but excluding any firmware or hexcode loaded onto any Components, infringe any patent, copyright or misappropriate any trade secret of any third party. 6.2.2. MITIGATION BY IMMERSION. In the case of any third party claim involving the Components which is covered by the indemnity described in Section 0 ("Scope of Immersion's Indemnity"), Immersion may, in its sole discretion, (i) provide KLSI with a modification to the Immersion Preexisting Technology and/or Immersion Requested Revisions for use in the Components, or (ii) procure for Immersion a license to continue to use the Immersion Preexisting Technology and/or Immersion Requested Revisions in the Components. Each party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in Section 6.2.1 ("Scope of Immersion's Indemnity") may apply. If notified in writing of any action or claim for which Immersion is to provide indemnity, Immersion shall defend those actions or claims at Immersion's expense and pay the Costs awarded against KLSI in any such action, or pay any settlement of such action or claim entered into by Immersion. 17 18 6.2.3. EXCEPTIONS TO IMMERSION'S INDEMNITY OBLIGATION. The foregoing indemnity by Immersion will not apply to any infringement claim to the extent it arises from (i) any modification of the Immersion Preexisting Technology and/or Immersion Requested Revisions by parties other than Immersion or Immersion subcontractors under contract with Immersion, or (ii) an infringement which would not occur in the Immersion Preexisting Technology and/or Immersion Requested Revisions but which does occur when the Immersion Preexisting Technology and/or Immersion Requested Revisions are incorporated into the Components. 7. FINANCIAL TERMS. 7.1. PRICE. The pricing for the Components will be in U.S. dollars and shall be as set forth in Exhibit C ("Pricing"). KLSI has advised Immersion that there is a [****] CBA ROM spin charge per each new (or new revision of) hexcode or firmware implemented in the Components. Such charge will be paid by Immersion within thirty (30) days of KLSI's invoice in the case of Components ordered by Immersion for Immersion's use. Such charge will be invoiced by KLSI directly to the Immersion customers or the Affiliates, as applicable, in the case of Components ordered by Immersion for shipment to Immersion's customers or the Affiliates, since the hexcode or firmware will be provided to KLSI directly by the Immersion customers or the Affiliates, as applicable. KLSI will not reserve or retain a security interest in the Components. In any case where the respin is due to KLSI's failure to perform, such respin will be expedited at no charge. 7.2. PAYMENT. KLSI will invoice Immersion for all Components shipped to Immersion, the Immersion customers or the Affiliates, as applicable and will invoice the Immersion customers and Affiliates for any ROM spin charges. The invoice from KLSI to Immersion for each shipment of Components will be due and payable to KLSI within forty-five (45) days after acceptance of the Components by Immersion, Immersion's customer or the Affiliates as described in Section 3.2.2 ("Deemed Acceptance by Immersion"). KLSI shall not require a letter of credit or prepayment as precondition to manufacturing Components for sale to Immersion or delivering Components to Immersion, Immersion's customers or the Affiliates. 7.3. TAXES AND DUTIES. In addition to any payments due to KLSI under this Agreement, Immersion shall pay amounts equal to any taxes, duties, or other amounts, however designated, which are levied or based upon such payments, or upon this Agreement, provided, however, that Immersion shall not be liable for taxes based on KLSI's net income. 7.4. BASE WAFER MAINTENANCE PURCHASE ORDER SYSTEM. KLSI and Immersion agree that in order for KLSI to maintain the six (6) week lead time required under the terms of this Agreement with respect to the .5 CBA and .35 CBA format * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 18 19 Components, as well as the flexibility requested in the reschedule and cancellation windows described in Exhibit B ("Cancellation and Rescheduling Policies and Fees"), it will be necessary for KLSI to implement a Base Wafer Maintenance program. Under the program, KLSI will manufacture a "maintenance quantity" of Component base wafers which have been manufactured up to the metalization phase and set aside for use exclusively to produce Components in fulfillment of Immersion's purchase orders. The "maintenance quantity" will be determined on a monthly basis by KLSI and will be calculated using the upcoming month's quantity of Components as reflected in the Immersion rolling six (6) month forecast for .5 CBA and .35 CBA format Components submitted to KLSI. To facilitate the program, Immersion agrees to issue an open rolling purchase order for .5 CBA and .35 CBA format Components. If Immersion cancels or discontinues the Base Wafer Maintenance program without providing KLSI three (3) months notice and if such cancellation or discontinuation is due to no fault of KLSI for either non-delivery or quality issues, then Immersion will be responsible for the amount of the Base Wafer Maintenance purchase order which is equal to one month's average usage (based on the average purchase order quantity for the previous six months) at thirty percent (30%) of the applicable current unit price. An invoice will be sent by KLSI to Immersion within thirty (30) business days of Immersion's cancellation or discontinuation of the program and will be due and payable by Immersion within thirty (30) days after receipt. KLSI agrees that KLSI is obligated to use up the base wafer "maintenance quantity" prior to any termination of this Agreement and that the rolling open purchase order will be deemed to be canceled upon notice of such termination. 7.5. DIE BANK SYSTEM. KLSI and Immersion agree that in order for KLSI to maintain the six (6) week lead time required under the terms of this Agreement with respect to the .35 standard cell format Components, as well as the flexibility requested in the reschedule and cancellation windows described in Exhibit B ("Cancellation and Rescheduling Policies and Fees"), it will be necessary for KLSI to implement a Die Bank System program. Under the program, KLSI will manufacture a "maintenance quantity" of Component die which have been manufactured up to the finished die phase and set aside for use exclusively to produce Components in fulfillment of Immersion's purchase orders. The "maintenance quantity" will be determined on a monthly basis by KLSI and will be calculated using the upcoming month's quantity of Components as reflected in the Immersion rolling six (6) month forecast for .35 standard cell format Components submitted to KLSI. To facilitate the program, Immersion agrees to issue an open rolling purchase order for .35 standard cell format Components. If Immersion cancels or discontinues the Die Bank System program without providing KLSI three (3) months notice and if such cancellation or discontinuation is due to no fault of KLSI for either non-delivery or quality issues, then Immersion will be responsible for the amount of the Die Bank System purchase order which is equal to one month's average usage (based on the average purchase order quantity for the previous six months) at seventy-five percent (75%) of the applicable current unit 19 20 price. An invoice will be sent by KLSI to Immersion within thirty (30) business days of Immersion's cancellation or discontinuation of the program and will be due and payable by Immersion within thirty (30) days after receipt. KLSI agrees that KLSI is obligated to use up the die "maintenance quantity" prior to any termination of this Agreement and that the rolling open purchase order will be deemed to be canceled upon notice of such termination. 8. TERMINATION. 8.1. TERM. The initial term of this Agreement shall be for a period of five (5) years commencing on the Effective Date, unless otherwise earlier terminated by the parties according to the terms of this Agreement. Thereafter, this Agreement shall automatically renew for subsequent one-year periods, unless either party terminates the Agreement by written notice at least thirty (30) days prior to the end of the initial term or any renewal term. 8.2. TERMINATION WITHOUT CAUSE. Immersion may terminate this Agreement without cause upon ninety (90) days prior written notice. 8.3. TERMINATION FOR CAUSE. Either party may terminate this Agreement by written notice if the other party materially breaches the terms of this Agreement. Such termination shall become effective upon thirty (30) days written notice of breach, provided the breaching party fails to cure its breach within the notice period. 8.4. EFFECT OF TERMINATION. 8.4.1. GENERALLY. Upon termination of this Agreement, Immersion's obligation to pay KLSI for Components delivered to Immersion, Immersion's customers and/or Affiliates, as applicable, up through the effective date of termination shall survive and Immersion will pay for all such Components in accordance with the terms of this Agreement, subject to all rights of acceptance and rejection and warranty returns and credits. 8.4.2. LIMITATION. EXCEPT FOR DIRECT DAMAGES RESULTING FROM A BREACH OF THE TERMS OF THIS AGREEMENT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY SORT, DIRECT OR INDIRECT, INCLUDING LOST PROFITS, AS A RESULT OF TERMINATING THIS AGREEMENT IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT. 9. PERSONAL INJURY AND PROPERTY DAMAGE CLAIMS. Neither party shall have any obligation to indemnify, protect, defend and hold the other party harmless from any Costs suffered or incurred by the other party to the extent such third party claim or threatened claim arises from a personal or alleged personal injury or damage or alleged damage to property arising out of the third party's use of the Components or the devices containing the Components. 20 21 10. CONFIDENTIALITY AND PROPRIETARY NOTICES. 10.1. OBLIGATIONS. During the course of this Agreement, each party may be a disclosing party (hereinafter called "Discloser") for transmitting certain proprietary information to the other party (hereinafter called "Recipient"). Recipient agrees to treat as confidential all such proprietary information, including all information, written or oral, relating thereto, including, but not limited to, know how, concepts, techniques, drawings, specifications, processes, computer programs, firmware, hexcode, designs and systems, manufacturing and marketing information, received from Discloser, and Recipient agrees not to publish such information or disclose same to others except to those employees, subcontractors and sublicensees to whom disclosure is necessary to order to carry out the purpose for which such information is supplied. Recipient shall inform such employees, subcontractors and sublicensees of the confidential nature of such information and of their obligation to keep same confidential. Recipient further agrees not to use such proprietary information for Recipient's own benefit or for the benefit of others, other than in accordance with this Agreement, without Discloser's prior written consent, and that all tangible materials, including written material, photographs, discs or other documentation embodying such proprietary information shall remain the sole property of Discloser and shall be delivered to Discloser upon Discloser's request. Upon Discloser's request, the Receiving party shall return any and all copies of Discloser's confidential information or, at Discloser's option, the Receiving party shall destroy such copies and notify Discloser in writing when such copies have been destroyed. 10.2. EXCEPTIONS. The foregoing obligations of confidentiality do not apply to information which was previously known to Recipient, is rightfully received from a third party by Recipient, or becomes publicly known or available without breach of this Agreement by Recipient. 10.3. PROPRIETARY NOTICES. KLSI will cause the outside package and top level metal mask work layer of the Components to bear a mask work and copyright notice for Immersion's benefit. 11. LIMITATION OF LIABILITY. 11.1. CONSEQUENTIAL DAMAGES. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF THE PARTIES HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 21 22 11.2. LIMITATIONS OF LIABILITY OTHER THAN INDEMNITY OBLIGATIONS. EXCEPT WITH RESPECT TO EITHER PARTY'S OBLIGATIONS OF INDEMNITY, INCLUDING, BUT NOT LIMITED TO, COSTS OF DEFENSE AND "COSTS" (AS DEFINED ABOVE) SET FORTH IN SECTION 6 ("INDEMNIFICATION") IN NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY OR OBLIGATIONS UNDER THE TERMS OF OR ARISING OUT OF THIS AGREEMENT EXCEED $1,000,000. 12. GENERAL PROVISIONS. 12.1. SUCCESSION AND ASSIGNMENT. Neither party may assign this Agreement unless the other party consents in advance in writing to the assignment, provided, however, that the Agreement may be assigned to a corporate successor in interest in the case of a merger or acquisition or in the case of a sale of assets without the prior approval of the other party. Any attempt to assign this Agreement in violation of the provisions of this Section 12.1 ("Succession and Assignment") shall be void. 12.2. NOTICES. Notices required under this Agreement shall be addressed as follows, except as otherwise revised by written notice:
TO IMMERSION: TO KLSI: ------------- -------- Louis B. Rosenberg, Ph.D. _______________ President _______________ Immersion Corporation Kawasaki LSI USA Inc. 2158 Paragon Drive 2570 North First Street San Jose, CA 95131 Suite 301 U.S.A. San Jose, CA 95131 U.S.A.
12.3. GOVERNING LAW. The validity, interpretation and performance of this Agreement shall be governed by the substantive laws of the State of California, without the application of any principle that leads to the application of the laws of any other jurisdiction. 12.4. NO AGENCY. Neither party is to be construed as the agent or to be acting as the agent of the other party hereunder in any respect. 12.5. MULTIPLE COUNTERPARTS. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single Agreement between the parties. 12.6. NO WAIVER. No delay or omission by either party hereto to exercise any right or power occurring upon any noncompliance or default by the other party with respect to any of the terms of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either of the parties hereto of 22 23 any of the covenants, conditions, or agreements to be performed by the other shall not be construed to be a waiver of any succeeding breach thereof or of any covenant, condition, or agreement herein contained. Unless stated otherwise, all remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 12.7. SEVERABILITY. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 12.8. AMENDMENTS IN WRITING. Any amendment to this Agreement shall be in writing and signed by both parties hereto. 12.9. INTERPRETATION. Since this Agreement was prepared by both parties hereto, it shall not be construed against any one party as the drafting party. 12.10. SURVIVAL. Sections 2.2 ("Second Source"), 5 ("Warranty"), 6 ("Indemnification"), 7.4 ("Base Wafer Maintenance Purchase Order System"), 7.5 ("Die Bank System"), 8 ("Termination"), 9 ("Personal Injury and Property Damage Claims"), 10 ("Confidentiality and Proprietary Notices"), 11 ("Limitation of Liability") and 12 ("General Provisions") will survive and continue after the expiration or termination of this Agreement. 12.11. DISPUTE RESOLUTION. Except in the case of a breach of an obligation related to a party's intellectual property rights, in the event either party concludes that it is in its best interest to file any legal action against the other, the party shall contact the other party's management and at least two (2) senior managers from each party shall meet without legal counsel or interruption for a minimum amount of three (3) eight (8) hour periods and diligently attempt to resolve all disputed matters. If the parties are unable to resolve their difference and either party desires to file a legal action against the other, at least two (2) senior managers from each party and their respective counsels shall meet for three (3) eight (8) hour periods and diligently attempt to resolve all disputed matters. Either party may request that an independent third party bound to mutually agreed upon obligations of confidentiality attend such meeting in order to assist the parties in reaching a reasonable resolution. All oral and written information exchanged in these meetings shall be exchanged in an effort to settle all disputed matters. If either party still desires to file a legal action against the other after these prescribed meetings, such party may file a legal action against the other party as allowed by applicable law in Santa Clara County state court or in the federal court. The parties agree that if a party does not attend all of the prescribed meetings it waives its rights to any monetary damages in the legal action(s) it files. 23 24 12.12. FORCE MAJEURE. Neither party shall be liable for any failure or delay in its performance under this Agreement due to causes, including, but not limited to, acts of God, acts of civil or military authority, fires, epidemics, floods, earthquakes, riots, wars, sabotage, court orders and governmental actions, which are beyond its reasonable control ("Force Majeure"); provided that the delayed party: (i) gives the other party written notice of such cause promptly; and (ii) uses its best efforts to correct such failure or delay in its performance. Notwithstanding the foregoing, KLSI agrees that failure to deliver the Components to Immersion or Immersion's customers will have a significant effect on Immersion's ability to comply with Immersion's contractual obligations to its customers. As such, KLSI agrees that delays in production of the Components in a single silicon facility, with respect to a particular format, whether at KLSI or a Second Source, including but not limited to, process problems, availability of materials, or other such manufacturing delays, shall not constitute a Force Majeure. Accordingly, KLSI will take all reasonable measures to establish, maintain and qualify Second Source capability so as to insure a continuous supply of the Components. 12.13. ENTIRE AGREEMENT. This Agreement, with the exception of the ASIC Design Agreement, constitutes the complete agreement of the parties, and supersedes any other agreements, written or oral, concerning the subject matter hereof, with the exception of the ASIC Design Agreement. IN WITNESS WHEREOF, the authorized representatives of the parties hereto have signed this Agreement as of the date and year last set forth below. KLSI: IMMERSION: KAWASAKI LSI USA. IMMERSION CORPORATION By: /s/ Hakuo Watanabe By: /s/ Louis Rosenberg -------------------------------- ------------------------------------- Print Name: Hakuo Watanabe Print Name: Louis Rosenberg ------------------------ ----------------------------- Title: CFO Title: President ----------------------------- ---------------------------------- Date: 8/17/98 Date: Aug. 17, 1998 ------------------------------ ----------------------------------- 24 25 EXHIBIT A Specification AXIS Chip: 48 MHz RISC processor that has been optimized for force feedback functionality and allows both serial and/or USB interface capability. 25 26 EXHIBIT B Cancellation and Rescheduling Policies and Fees I. Base Wafer Maintenance PO System: Rescheduling. Immersion may reschedule the scheduled delivery date for .5 CBA and .35 CBA Components as follows: - If the scheduled delivery date is more than forty-five (45) days away at the time Immersion submits a written reschedule request, Immersion may reschedule the order for any date outside of such forty-five (45) day window, at no charge. - If the scheduled delivery date is thirty (30) days or more (but forty-five (45) days or less) away at the time Immersion submits a written reschedule request, Immersion may reschedule the order for any date within sixty (60) days of such written reschedule request, at no charge. - If the scheduled delivery date is less than thirty (30) days away at the time Immersion desires to submit a written reschedule request, Immersion will not be permitted to reschedule. Cancellation. Immersion may cancel orders for the .5 CBA and .35 CBA Components as follows: - If the cancellation is for Components with a scheduled delivery date more than forty-five (45) days away at the time Immersion submits a written cancellation request, Immersion may cancel such order without charge and the base wafer units and/or remaining base wafer maintenance fees, if any, allocated to produce the canceled Component units will be applied/credited to the next month's base wafer needs, or base wafer maintenance invoice, as applicable. - If the cancellation is for Components with a scheduled delivery date which is forty-five (45) days or less away at the time Immersion submits a written cancellation request, Immersion may cancel such order by paying a cancellation fee based on the status of the Components in the manufacturing process as follows: (i) if the Components are probed wafer/die (ROM code integrated) -- 75% of the applicable unit price (ii) if the Components have been final tested/FG -- 100% of the applicable unit price 26 27 II. Die Bank System: Rescheduling. Immersion may reschedule the scheduled delivery date for .35 standard cell Components as follows: - If the scheduled delivery date is more than forty-five (45) days away at the time Immersion submits a written reschedule request, Immersion may reschedule the order for any date outside of such forty-five (45) day window, at no charge. - If the scheduled delivery date is thirty (30) days or more (but forty-five (45) days or less) away at the time Immersion submits a written reschedule request, Immersion may reschedule the order for any date within sixty (60) days of such written reschedule request, at no charge. - If the scheduled delivery date is less than thirty (30) days away at the time Immersion desires to submit a written reschedule request, Immersion will not be permitted to reschedule. Cancellation. Immersion may cancel orders for the .35 standard cell Components as follows: - If the cancellation is for Components with a scheduled delivery date more than forty-five (45) days away at the time Immersion submits a written cancellation request, Immersion may cancel such order without charge and the base wafer units and/or remaining base wafer maintenance fees, if any, allocated to produce the canceled Component units will be applied/credited to the next month's base wafer needs, or base wafer maintenance invoice, as applicable. - If the cancellation is for Components with a scheduled delivery date which is forty-five (45) days or less away at the time Immersion submits a written cancellation request, Immersion may cancel such order by paying a cancellation fee based on the status of the Components in the manufacturing process as follows: (iii) if the Components are probed wafer/die (ROM code integrated) -- 75% of the applicable unit price (iv) if the Components have been final tested/FG -- 100% of the applicable unit price 27 28 EXHIBIT C Pricing KLSI/IMMERSION PRICING ATTACHMENT TIME PERIOD Q3-98 TO Q4-2K
- ------------------------------------------------------------------------------- Device Estimated Usage Timeframe* Unit Price - ------------------------------------------------------------------------------- Axis (0.5u CBA) 250K Q3-98 to Q4-98 [****] [****] [****] Axis II (0.35u CBA) 1.0M Q1-99 to Q4-99 [****] Axis IISC (0.35u Std Cell) 2.0M Q1-2K to Q4-2K [****] - -------------------------------------------------------------------------------
*Crossover timeframes may vary based on customer schedules to qualify migration versions. ORDER AGREEMENT This agreement does not constitute a purchase order for devices; it is for the NRE portion only. Releases against this agreement will be made via purchase orders released from Immersion and/or Immersion authorized parties only. Except as otherwise provided in this Agreement, the terms and conditions specified in Immersion Purchase Orders and KLSI Sales Order acknowledgements shall continue to govern the purchase of the Products contemplated in this Agreement. PRICING Prices and payments shall be made in US dollars and as indicated above. To the extent that Immersion does not purchase the volume specified therein and such failure is not due to delivery or quality problems then KLSI reserves the right, as its' sole remedy, to renegotiate prices in any subsequent period. ORDER MINIMUMS The minimum order size is 10K in any given month. Individual quantities per purchase order may vary per Immersion designated ship to location. At no time shall individual purchase orders be issued for a quantity less than 5K pieces unless designated for pre-production purposes. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 28 29 EXHIBIT D Second Source Device Deposit Escrow Agreement 29 30 EXHIBIT E KLSI RMA Procedures Kawasaki LSI/Immersion RMA Procedure 1) Immersion reports failure to KLSI-US Contact: Lisa Van Valkenburg Kawasaki LSI 2570 N. First St., Ste. 301 Tel: 408-570-0555 x403 Fax: 408-570-0567 e-mail: lisavanv@klsi.com 2) KLSI issues RMA number for reject sample return and advises destination for reject samples i.e. KLSI-Japan or KLSI-US (1 day from Immersion notification). 3) KLSI will confirm receipt of samples upon arrival. KLSI provides initial results of reject sample analysis and issues RMA# for full return of rejects for credit or replace if sample rejects found valid (3 days from KLSI receipt of reject samples). 4) KLSI will make a best effort to provide a final report 10 days from receipt of samples, dependent on the level of detail provided in the failure mode report from Immersion, and the condition of the reject samples supplied. Samples that are damaged as a result of removal from boards may delay an accurate validation of failure and/or identification of failure cause. KLSI will provide daily status report until final report is issued. 30 EX-10.15 6 AMEND.#1 TO SEMICONDUCTOR DEVICE PURCHASE AGMT. 1 EXHIBIT 10.15 * Certain information in this document has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. AMENDMENT NO. 1 TO SEMICONDUCTOR DEVICE PURCHASE AGREEMENT This Amendment (the "Amendment") No. 1 to the Semiconductor Device Component Purchase Agreement dated August 17, 1998, by and between Immersion Corporation, a California corporation, having its principal place of business at 2158 Paragon Drive, San Jose, California (hereinafter "Immersion") and Kawasaki LSI U.S.A. Inc., a California Corporation, having its principal place of business at 2570 North First Street, Suite 301, San Jose, California 95131 (hereinafter "KLSI"), modifies and amends the Semiconductor Device Component Purchase Agreement (the "Agreement") in certain respects as follows: 1. The parties desire to amend the Agreement to permit KLSI to sell the "Components" directly to certain designated customers, and therefore Paragraph 2.1.3, entitled "KLSI Sales to Direct Customers" as described below is hereby added to the Agreement. 2. Paragraph 2.1.3.1, entitled "In General": The following Paragraph 2.1.3.1 is hereby added to the Agreement: The parties agree that Paragraph 2.1.1 ("Components") of the Agreement requires that the Components will be sold exclusively to Immersion. Notwithstanding the foregoing, Immersion may from time to time desire that KLSI sell certain designated Components ("Specific Components") directly to certain designated customers ("Direct Customers"). In such case, Immersion will issue a Direct Customer Authorization Form substantially in the form attached hereto as Schedule 1 ("Direct Customer Authorization Form") to KLSI. Upon execution by Immersion and KLSI of each Direct Custom Authorization Form, KLSI may negotiate directly with such Direct Customer to enter into a component purchase agreement under terms mutually agreed upon by KLSI and the Direct Customer. Subject to the limitations described in Section 2.1.3.4 ("Limitations") and Section 2.1.3.7 ("Second Source Limitation"), KLSI and each Direct Customer will be free to address lead times, pricing, hexcode deliveries, quality requirements and other relevant terms as mutually agreed upon by KLSI and such Direct Customer. 3. Paragraph 2.1.3.2, entitled "Direct Customer Royalty": The following Paragraph 2.1.3.2 is hereby added to the Agreement: KLSI agrees to compensate Immersion by means of a royalty which will be due and owing for each unit of the Specific Components sold to a Direct Customer. The specific royalty due for sales of Specific Components to each Direct Customer will be described in the applicable Direct Customer Authorization Form. KLSI agrees to pay the royalties due to Immersion for each shipment of Specific Components to a Direct Customer within sixty (60) days of acceptance of the Specific Components by the Direct Customer. 2 4. Paragraph 2.1.3.3, entitled "Mitigation Trigger Events": The following Paragraph 2.1.3.3 is hereby added to the Agreement: Orders from Direct Customers shall be counted toward Immersion's orders for purposes of reaching the 100,000 units per month. 5. Paragraph 2.1.3.4, entitled "Die Bank and Base Wafer": The following Paragraph 2.1.3.4 is hereby added to the Agreement: Immersion's Die Bank System and Base Wafer Maintenance Program will not be used for Direct Customers. 6. Paragraph 2.1.3.5, entitled "Second Source Limitation": The following Paragraph 2.1.3.5 is hereby added to the Agreement: KLSI may use its Second Source to produce Specific Components for resale by KLSI to Direct Customers but KLSI may not grant Direct Customers the right to buy directly from the KLSI Second Source. 7. Paragraph 2.2.3 entitled "Terms to be Imposed on the Second Source Silicon Provider": The following language shall be added to the end of the existing paragraph 2.2.3: The parties agree that under certain circumstances where KLSI has entered into an agreement with a Direct Customer in accordance with the terms of Section 2.1.3.1 ("In General"), KLSI may be required, by the Direct Customer, to agree that in the case of a material breach by KLSI of Quality Requirements or delivery obligations, KLSI will permit the Direct Customer, as a limited remedy, to enter into a direct purchase arrangement with KLSI's Second Source for the Specific Components. Immersion hereby grants KLSI the right to enter into such an arrangement to permit Direct Customers to purchase the Specific Components under the circumstances described above, so long as KLSI imposes an obligation for the Second Source silicon provider to compensate Immersion by means of the specific royalty applicable to the Specific Components as described in the applicable Direct Customer Authorization Form within sixty (60) days of delivery of the Specific Components by the Second Source to the Direct Customer. KLSI also agrees to insure that the obligation to pay Immersion on a timely basis is an obligation enforceable by Immersion as a third party beneficiary of the Second Source Silicon Provider Agreement. In consideration for granting KLSI the Direct Customer rights described above, KLSI agrees not to design, develop and/or manufacture any integrated circuit devices for "force feedback" applications for any third party during the time period for which KLSI is exercising Direct Customer rights. For purposes of this Agreement the term "force feedback" shall mean simulation of feel or tactile sensations using at least one actuator controlled by one or more microprocessors such that modulation of said actuator creates feel or tactile sensations. -2- 3 8. Schedule 1 ("Direct Customer Authorization Form") attached hereto is hereby added to the Agreement as Exhibit F thereto. 9. In the event of inconsistencies between the Agreement and this Amendment, the terms and conditions of this Amendment shall be controlling. Unless specifically modified or changed by the terms of this Amendment, all terms of the Agreement shall remain in effect and shall apply fully as described and set forth in the Agreement. Capitalized terms used and not defined herein are used with the meanings set forth in the Agreement. IMMERSION: KLSI: IMMERSION CORPORATION: KAWASAKI LSI U.S.A., INC.: By: /s/ Louis Rosenberg By: /s/ Hakuo Watanabe ---------------------------- ---------------------------- Print Name: Louis Rosenberg Print Name: Hakuo Watanabe -------------------- -------------------- Title: President Title: Chief Financial Officer ------------------------- ------------------------- Date: April 26, 1999 Date: April 27, 1999 -------------------------- -------------------------- -3- 4 Schedule 1 Direct Customer Authorization Form This Direct Customer Authorization Form No. 1 contains the special terms and conditions applicable to the Direct Customer described below and will be incorporated by reference into the Semiconductor Device Component Purchase Agreement (the "Agreement") between Immersion and KLSI effective as of 6/4/99 for a term of twenty-four months. This Direct Customer Authorization Form shall be effective on the date last executed below. All terms used in this Direct Customer Authorization Form shall retain the same meaning as defined in the Agreement and such definitions are incorporated herein by reference. 1. Name of Proposed Direct Customer: Logitech, Inc. 2. Royalty to be paid to Immersion: For Annual Quantities of Less Than 500,000 Units [****] for each production unit with a tested analog-to-digital converter [****] for each pre-production unit with a tested analog-to-digital converter For Annual Quantities of Greater Than 500,000 Units [****] for each production unit with a tested analog-to-digital converter [****] for each pre-production unit with a tested analog-to-digital converter 3. Name of Specific Component (and AXIS II only in the .35 CBA format number, if applicable) part # TPF-001 IN WITNESS HEREOF, the parties hereto have duly caused this Direct Customer Authorization Form to be signed by their duly authorized representatives. IMMERSION: KLSI: IMMERSION CORPORATION: KAWASAKI LSI U.S.A., INC.: By: /s/ Louis Rosenberg By: /s/ H. Watanabe ---------------------------- ---------------------------- Print Name: Louis Rosenberg Print Name: Hakuo Watanabe -------------------- ---------------------- Title: President Title: Chief Financial Officer ------------------------- ------------------------- Date: May 27, 1999 Date: June 4, 1999 -------------------------- -------------------------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.16 7 INTERCOMPANY INTELLECTUAL PROPERTY LICENSE AGMT. 1 EXHIBIT 10.16 INTERCOMPANY INTELLECTUAL PROPERTY LICENSE AGREEMENT IMMERSION CORPORATION AND MICROSCRIBE, LLC This Intercompany Intellectual Property License Agreement (the "Agreement") is by and between Immersion Corporation, a California corporation, with an office at 2158 Paragon Drive, San Jose, California (hereinafter "Immersion") and MicroScribe, LLC, a California limited liability company, with offices in San Jose, California (hereinafter "Licensor"), is entered into effective as of July 1, 1997 (the "Effective Date"). RECITALS A. Licensor is the owner of certain intellectual property rights related to 3D digitizing. B. The parties desire that Licensor grant a license to Immersion for the MicroScribe Technology under the MicroScribe Intellectual Property Rights to enable Immersion to manufacture, market and sell 3D digitizing technology products, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the promises and agreements set forth below and the other consideration cited herein, the parties agree as follows. AGREEMENT 1. DEFINITIONS In this Agreement the following words and expressions shall have the following meanings: 1.1 AFFILIATES means any corporation or business entity which is controlled by, controls, or is under common control of a party. For this purpose, the meaning of the word "control" shall include, without limitation, direct or indirect ownership of more than fifty percent (50%) of the voting shares of interest of such corporation or business entity. 1.2 MICROSCRIBE INTELLECTUAL PROPERTY RIGHTS means the patents, copyrights, trademarks, trade secrets, know-how, mask work rights and all other intellectual property rights related to the MicroScribe Technology, including without limitation the issued patents and patent applications described in Exhibit A ("MicroScribe Intellectual Property"), and any continuations, continuations in-part, divisional applications, revisions and/or re-examinations based on the foregoing. 1.3 MICROSCRIBE TECHNOLOGY means certain three dimensional ("3D") digitizing technology, including but not limited to, a mechanical digitizing arm used to input three dimensional data into a computer, and related digitizing software applications (including InScribe and Vertisketch for Lightwave) and digitizing software drivers, in object code and source code form, which technology is currently used commercially in a product line sold under the MicroScribe trademark as such product is further described in Exhibit B ("MicroScribe Technology"). 1 2 1.4 NET RECEIPTS means the gross receipts received by Immersion upon any sales of Royalty Bearing Products to unaffiliated third parties, less any actual returns and/or credits. Net Receipts shall not include freight, insurance and taxes. No other costs incurred in the manufacture, sale, distribution, or exploitation of Royalty Bearing Products shall be deducted from gross receipts in the calculation of Net Receipts. If Royalty Bearing Products are bundled with other items sold by Immersion and are not invoiced separately, royalties will be paid based on Immersion's then-current average sales price for each such Royalty Bearing Product when sold as a separate item (averaged for the applicable Quarter in which the Net Receipts are received by Immersion for the country in which the sale was made) in like quantities in arms length transactions to unrelated third parties. 1.5 ROYALTY BEARING PRODUCT means a 3D digitizing technology product which either incorporates or utilizes the MicroScribe Technology and/or would otherwise infringe the MicroScribe Design Patent D 377,932 without a license. 2. DELIVERY AND GRANT OF LICENSES 2.1 DELIVERY. Licensor will deliver the MicroScribe Technology within five (5) days of the Effective Date of this Agreement. 2.2 GRANT OF LICENSE. Subject to the terms of this Agreement, Licensor grants to Immersion a worldwide, nonexclusive license under any MicroScribe Intellectual Property Rights owned or licensable by Licensor, to use, reproduce, modify, and create derivative works based upon the MicroScribe Technology in order to develop, use, make, and have made 3D digitizing technology products, and to sell, offer to sell, lease, license, import, demonstrate, perform, display, market and distribute such 3D digitizing technology products, with the further right to sublicense such rights through multiple tiers of sublicenses. 2.3 TRADEMARK LICENSE. Licensor hereby grants to Immersion a nonexclusive, worldwide license, to use in connection with marketing Royalty Bearing Products, the trademark(s) used by Licensor ("Marks") to identify the MicroScribe Technology and Immersion agrees to use such Marks on and in connection with the Royalty Bearing Products. Immersion acknowledges that all use of the Marks will inure to the benefit of Licensor. At Licensor's reasonable request, Immersion shall provide Licensor with samples of Immersion's use of Licensor's trademarks. Immersion agrees to abide by Licensor's reasonable written trademark policies as issued and provided to Immersion from time to time. In any case where the Marks are not used in compliance with Licensor's trademark policies and such use has been approved in writing by Licensor, upon receipt of written notice from Licensor, Immersion will promptly correct the non-compliance and submit samples of compliant use to Licensor for approval. 3. ROYALTIES 3.1 ROYALTY. Immersion shall pay Licensor a royalty based on a percentage of the Net Receipts for each Royalty Bearing Product sold by Immersion to unrelated third parties in arms -2- 3 length transactions, in accordance with the royalty schedule attached as Exhibit C ("Royalty Schedule"). 3.2 PAYMENTS AND REPORTS. The royalties to be paid by Immersion to Licensor hereunder shall be due forty-five (45) days after the close of each calendar quarter. Royalty reports setting forth the royalty calculation shall be included with such payments. 3.3 AUDIT RIGHTS OF ROYALTY PAYMENTS. Licensor shall have the right, at Licensor's expense, to have an independent auditor mutually agreed upon by Licensor and Immersion audit the Net Receipts and the royalty payments of Immersion on an annual basis, unless such audit reveals any underpayment of royalties in an amount greater than seven and one-half percent (7.5%) of actual royalties due for any Year, in which case Immersion shall promptly remit an amount equal to the underpayment and shall pay the reasonable costs of such audit. Such audit shall be preceded by at least thirty (30) business days advance written notice and shall be performed during normal business hours by the auditor. The auditor shall have access to only those books and records of Immersion which are reasonably necessary to determine the relevant royalties due for Royalty Bearing Products. 4. TERM AND TERMINATION 4.1 TERM. Unless earlier terminated in accordance with the provisions of this Agreement, this Agreement will remain in force for ten (10) years. The parties agree that upon a Change of Control of Licensor, this Agreement will terminate, except that the parties may, by mutual written agreement, waive such termination or mutually agree on a later termination date. For purposes of this Agreement, the term "Change of Control of Licensor" shall mean the occurrence of (i) a transaction pursuant to which any person (or group of persons) other than Immersion or its affiliates (a "Third Party") acquires more than 50% of the outstanding units of Licensor, (ii) a merger or other business combination involving Licensor pursuant to which any Third Party acquires more than 50% of the outstanding units of Licensor or the entity surviving such merger or business combination or (iii) any other transaction pursuant to which any Third Party acquires control of assets of Licensor having a fair market value (as determined by Immersion in good faith) equal to more than 50% of the fair market value of all the assets of Licensor immediately prior to such transaction. 4.2 TERMINATION FOR BREACH. This Agreement may be terminated by either party upon written notice to the breaching party, if the breaching party materially breaches this Agreement and fails to remedy the breach within thirty (30) days after being given written notice thereof. 4.3 EFFECT OF TERMINATION. Notwithstanding any termination of this Agreement for any reason, Immersion agrees to pay Licensor for royalties due under this Agreement. Upon any termination of this Agreement, Immersion shall have one hundred and twenty (120) days to distribute any remaining inventory in process and/or in existence as of the effective date of the termination, subject to the obligation for Immersion to pay royalties hereunder for any such distribution by Immersion. -3- 4 5. WARRANTY OF TITLE Licensor represents and warrants that Licensor either has ownership of, or sufficient rights in, the MicroScribe Technology and MicroScribe Intellectual Property to enter into this Agreement and to grant all the rights set forth herein. 6. INDEMNIFICATION 6.1 INFRINGEMENT. Subject to prompt notification by Immersion, cooperation by Immersion and control of all litigation and/or settlement by Licensor, Licensor shall indemnify, defend and hold harmless Immersion from and against any and all costs and damages suffered or incurred by Immersion as a result of any third party claim that any MicroScribe Technology as delivered by Licensor infringes upon any third party intellectual property right. Each party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in this Section 6 ("Indemnification") may apply. If notified in writing of any action or claim for which Licensor is to provide indemnity, Licensor shall defend those actions or claims at its expense and pay the costs and damages awarded against Immersion in any such action, or pay any settlement of such action or claim entered into by Licensor. 6.2 PERSONAL INJURY AND PROPERTY DAMAGE CLAIMS. Neither party shall have any obligation to indemnify, protect, defend and hold the other party harmless from any costs or damages suffered or incurred by the other party to the extent such third party claim or threatened claim arises from a personal or alleged personal injury or damage or alleged damage to property arising out of the third party's use of the 3D digitizing technology. 7. LIMITATION OF LIABILITY 7.1 DISCLAIMER OF CERTAIN TYPES OF DAMAGES. IN NO EVENT WILL LICENSOR OR IMMERSION BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF LICENSOR AND IMMERSION HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 7.2 LIMITATION. EXCEPT WITH RESPECT TO MICROSCRIBE'S OBLIGATIONS OF INDEMNITY, IN NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY OR OBLIGATIONS UNDER THE TERMS OF OR ARISING OUT OF THIS AGREEMENT EXCEED THE ROYALTIES PAID BY IMMERSION TO MICROSCRIBE. 7.3 NEGATION OF WARRANTIES AND OTHER OBLIGATIONS. 7.3.1 Nothing in this Agreement shall be construed: -4- 5 (i) as a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement by patents, copyrights, trade secrets, trademarks, or other rights of third parties; (ii) as granting by implication, estoppel or otherwise any licenses or rights under patents or other intellectual property rights of Licensor other than expressly granted herein; or (iii) (a) to require Licensor to file any patent application relating to any 3D digitizing technology and (b) a warranty that Licensor will be successful in securing the grant of any patent relating to any 3D digitizing technology or any reissue or extensions thereof. 7.3.2 Except for Licensor's obligations of indemnity set forth herein, Licensor does not assume any responsibility for the manufacture of the 3D digitizing technology products, or use of any 3D digitizing technology products manufactured or sold by or for Immersion under the licenses granted herein. All warranties in connection with such products shall be made by Immersion as manufacturer or seller of such products and such warranties shall not directly or by implication obligate Licensor in any way. 8. GENERAL 8.1 ENTIRE AGREEMENT. This Agreement constitutes the complete agreement of the parties and supersedes any other agreements, written or oral concerning the subject matter hereof. 8.2 SUCCESSION AND ASSIGNMENT. Neither party may assign this Agreement without the prior written consent of the other party except that either party may assign this Agreement to a corporate successor in interest in the case of a merger or acquisition or in the case of a sale of assets without the prior approval of the other party. Any attempt to assign this Agreement in violation of the provisions of this Section 8.2 ("Succession and Assignment") shall be void. 8.3 NOTICES. Notices required under this Agreement shall be addressed as follows, except as otherwise revised by written notice: TO IMMERSION: TO MICROSCRIBE: Louis B. Rosenberg, Ph.D. Tim Lacey President MicroScribe LLC Immersion Corporation 2158 Paragon Drive 2158 Paragon Drive San Jose, CA 95131 San Jose, CA 95131 8.4 GOVERNING LAW. The validity, interpretation and performance of this Agreement shall be governed by the substantive laws of the State of California, without the application of any principle that leads to the application of the laws of any other jurisdiction. -5- 6 8.5 NO AGENCY. Neither party is to be construed as the agent, partner, or joint venturer or to be acting as the agent, partner or joint venturer of the other party hereunder in any respect, solely by reason of this Agreement. 8.6 MULTIPLE COUNTERPARTS. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single Agreement between the parties. 8.7 NO WAIVER. No delay or omission by either party hereto to exercise any right or power occurring upon any noncompliance or default by the other party with respect to any of the terms of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either of the parties hereto of any of the covenants, conditions, or agreements to be performed by the other shall not be construed to be a waiver of any succeeding breach thereof or of any covenant, condition, or agreement herein contained. Unless stated otherwise, all remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 8.8 SEVERABILITY. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 8.9 AMENDMENTS IN WRITING. Any amendment to this Agreement shall be in writing and signed by both parties hereto. 8.10 INTERPRETATION. Since this Agreement was prepared by both parties hereto, it shall not be construed against any one party as the drafting party. 8.11 SURVIVAL. Sections 3.1 ("Royalties"), 3.2 ("Payments and Reports"), 4.3 ("Effect of Termination"), 6 ("Indemnification"), 7 ("Limitation of Liability") and 8 ("General") shall survive any termination or expiration of this Agreement. IN WITNESS WHEREOF, the authorized representatives of the parties hereto have signed this Agreement as of the date and year last set forth below. IMMERSION CORPORATION, MICROSCRIBE, LLC, a California corporation a California limited liability company By: /s/ Louis Rosenberg By: /s/ Timothy A. Lacey ---------------------------- ---------------------------- Name: Louis Rosenberg Name: Tim Lacey --------------------------- --------------------------- Title: President Title: Manager -------------------------- -------------------------- Date: Date: ---------------------------- ---------------------------- -6- 7 EXHIBIT A MICROSCRIBE INTELLECTUAL PROPERTY Licensed Patents: MicroScribe Design Patent D 377,932 (issued Feb. 11, 1997) Pending Patent Serial Number: 08/512,084 Pending Patent Serial Number: 08/741,190 Pending Patent Serial Number: 08/744,725 Pending Patent Serial Number: 08/739,454 MicroScribe PCT Patent Application IMM1P010.P Trademarks: MicroScribe-3D Personal Digitizer -7- 8 EXHIBIT B MICROSCRIBE TECHNOLOGY MicroScribe Technology includes the items listed below: (1) the following Microscribe software and source code: (a) Microscribe firmware; (b) Microscribe calibration software; (c) Inscribe; (d) Alias Driver; (e) Vertisketch; and (f) SDK (software development kit); (2) the following Microscribe manufacturing documentation: (a) Microscribe bill of materials; (b) Microscribe drawings and database; (c) Microscribe schematics; and (d) Microscribe layout files and electronics; (3) Microscribe fabrication tooling; (4) Microscribe calibration, production fixtures, and test electronics; (5) Microscribe reseller contact information; (6) Microscribe user documentation; and (7) a copy of the Microscribe calibration files. -8- 9 EXHIBIT C ROYALTY SCHEDULE Royalties shall be based on the following formula: A) 5% of the portion of annual Net Receipts up to the Threshold Amount, as defined below; and B) 10% of the portion of annual Net Receipts exceeding the Threshold Amount. The Threshold Amount for Net Receipts shall be equal to the following: 1) $1,000,000 for calendar year 1997; 2) $2,500,000 for calendar year 1998; 3) $3,125,000 for calendar year 1999; 4) $2,500,000 for calendar year 2000; 5) $1,250,000 for calendar year 2001; and 6) $0 (zero) for all years thereafter. -9- EX-10.17 8 PATENT LICENSE AGREEMENT 1 EXHIBIT 10.17 PATENT LICENSE AGREEMENT This Patent License Agreement (the "Agreement") is by and between Immersion Corporation, a California corporation, with an office at 2158 Paragon Drive, San Jose, California (hereinafter "Immersion") and MicroScribe, LLC, a California limited liability company, with an office in San Jose, California (hereinafter "Licensor"). This Agreement is entered into effective as of July 1, 1997 (the "Effective Date"). RECITALS A. Licensor is the owner of certain patents and patent applications which may have applicability to Immersion's force feedback products. B. The parties desire that Licensor grant an exclusive license for applications and implementations involving force feedback functionality under the patents and patent applications. NOW, THEREFORE, in consideration of the promises and agreements set forth below and the other considerations cited herein, the parties agree as follows. AGREEMENT 1. Definitions. In this Agreement, the following words and expressions shall have the following meanings: 1.1 Affiliates means any corporation or business entity which is controlled by, controls, or is under common control of a party. For this purpose, the meaning of the word "Control" shall include, without limitation, direct or indirect ownership of more than fifty percent (50%) of the voting shares of interest of such corporation or business entity. 1.2 Licensed Patents means the patent continuation applications described in Exhibit A ("Licensed Patents") and any issued patents, continuations, continuations-in-part, or divisional applications derived from the foregoing, and any divisions, reissues and re-examinations based on any of the foregoing. 1.3 Force Feedback Field of Use means applications and implementations involving a human to computer interactive interface that provides controlled resistance, force sensations, or computer simulated tactile sensations to the human operator during manipulation. 2. Grant of License . Licensor grants to Immersion a worldwide, royalty free, exclusive, irrevocable, perpetual (for the duration of each Licensed Patent) license under the Licensed Patents to make, have made, use, sell, offer to sell and import products in the Force Feedback Field of Use and to sublicense such rights to Affiliates and to third parties, through multiple tiers of sublicenses. 1 2 3. Consideration. Immersion assigned the Licensed Patents to Licensor in exchange for 1,000 Class 1 Units and 98,999 Class 2 Units of Licensor pursuant to the terms of an Exchange Agreement dated effective as of July 1, 1997, subject to Licensor's grant of the license granted in Section 2 ("Grant of License and Limitations"). 4. Term. This Agreement will remain in force and effect up until the expiration of the last to expire of the Licensed Patents. 5. Warranty of Title. Licensor represents and warrants that Licensor is the owner of the Licensed Patents and has sufficient rights to grant the rights granted herein. 6. Limitation of Liability. IN NO EVENT WILL LICENSOR OR IMMERSION BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF LICENSOR AND IMMERSION HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 7. Negation of Warranties and Other Obligations. Nothing in this Agreement shall be construed: (i) as a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement by patents, copyrights, trade secrets, trademarks, or other rights of third parties; (ii) as granting by implication, estoppel or otherwise any licenses or rights under patents or other intellectual property rights of Licensor other than expressly granted herein; (iii) (a) to require Licensor to file any patent application relating to any technology or (b) a warranty that Licensor will be successful in securing the grant of any patent relating to any technology or any reissue or extensions thereof; or (iv) to require Licensor to assume any responsibility for the manufacture of any products manufactured or sold by or for Immersion under the license granted herein. All warranties in connection with such products shall be made by Immersion, the Immersion Affiliates or other licensees as manufacturers or sellers of such products and such warranties shall not directly or by implication obligate Licensor in any way. 2 3 8. General. 8.1 Entire Agreement. This Agreement constitutes the complete agreement of the parties and supersedes any other agreements, written or oral concerning the subject matter hereof. 8.2 Succession and Assignment. Neither party may assign this Agreement without the prior written consent of the other party except that either party may assign this Agreement to a corporate successor in interest in the case of a merger or acquisition or in the case of a sale of assets without the prior approval of the other party. Any attempt to assign this Agreement in violation of the provisions of this Section 8.2 ("Succession and Assignment") shall be void. 8.3 Notices. Notices required under this Agreement shall be addressed as follows, except as otherwise revised by written notice: To Immersion: To MicroScribe: Louis B. Rosenberg, Ph.D. Tim Lacey President MicroScribe LLC Immersion Corporation 2158 Paragon Drive 2158 Paragon Drive San Jose, CA 95131 San Jose, CA 95131 8.4 Governing Law. The validity, interpretation and performance of this Agreement shall be governed by the substantive laws of the State of California, without the application of any principle that leads to the application of the laws of any other jurisdiction. 8.5 No Agency. Neither party is to be construed as the agent, partner, or joint venturer or to be acting as the agent, partner or joint venturer of the other party hereunder in any respect, solely by reason of this Agreement. 8.6 Multiple Counterparts. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single Agreement between the parties. 8.7 No Waiver. No delay or omission by either party hereto to exercise any right or power occurring upon any noncompliance or default by the other party with respect to any of the terms of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either of the parties hereto of any of the covenants, conditions, or agreements to be performed by the other shall not be construed to be a waiver of any succeeding breach thereof or of any covenant, condition, or agreement herein contained. Unless stated otherwise, all remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 3 4 8.8 Severability. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 8.9 Amendments in Writing. Any amendment to this Agreement shall be in writing and signed by both parties hereto. 8.10 Interpretation. Since this Agreement was prepared by both parties hereto, it shall not be construed against any one party as the drafting party. 4 5 IN WITNESS WHEREOF, the authorized representatives of the parties hereto have signed this Agreement. IMMERSION CORPORATION, MICROSCRIBE, LLC, a California corporation a California limited liability company By: /s/ Louis Rosenberg By: /s/ Timothy A. Lacey ---------------------------- ---------------------------- Name: Louis Rosenberg Name: Timothy A. Lacey -------------------------- -------------------------- Title: President Title: Manager ------------------------- ------------------------- Date: Date: -------------------------- -------------------------- 5 6 Exhibit A The Licensed Patents include the following: (1) MicroScribe Technology Patents (pending patents 08/512,084; 08/741,190; 08/744,725; and 08/739,454). (2) MicroScribe PCT Patent Application (IMM1P010.P). 6 EX-10.18 9 INTELLECTUAL PROPERTY LICENSE AGREEMENT, EDITED 1 EXHIBIT 10. 18 * Certain information in this document has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. INTELLECTUAL PROPERTY LICENSE AGREEMENT IMMERSION CORPORATION AND LOGITECH, INC. This Intellectual Property License Agreement (the "Agreement") between Immersion Corporation, a California corporation, with principal offices in San Jose, California (hereinafter "Immersion") and Logitech Inc., a California corporation, with principal offices in Fremont, California (hereinafter "Logitech"), is entered into as of October 4, 1996 (the "Effective Date"). RECITALS A. Immersion is the owner of several United States patent applications and one issued United States patent relating to certain force-feedback technology. B. Concurrently with this Agreement, Immersion and Logitech are entering into a Technology Product Development Agreement dated the same date as this Agreement. Pursuant to the Technology Product Development Agreement, Immersion will develop and deliver to Logitech certain deliverables which are covered by copyrights and trade secret rights owned by Immersion, as well as patents now held or that may issue to Immersion in the future. C. Logitech intends to develop "Gaming Devices" (as defined below) which may or may not incorporate or utilize the deliverables to be delivered under the Technology Product Development Agreement. D. The parties desire that Immersion grant a license to Logitech under the foregoing intellectual property rights of Immersion to develop and distribute Gaming Devices, whether or not they incorporate or utilize the deliverables to be delivered under the Technology Product Development Agreement, all on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the promises and agreements set forth below and the other consideration cited herein, the parties agree as follows. 1. DEFINITIONS In this Agreement the following words and expressions shall have the following meanings: 1.1 AFFILIATES. This means any corporation or business entity which is controlled by, controls, or is under common control of a Party. For this purpose, the meaning of the word "control" shall include, without limitation, direct or indirect 1 2 ownership of more than fifty percent (50%) of the voting shares of interest of such corporation or business entity. 1.2 DEFECT. This means, with respect to any non-software Deliverable, failure to materially conform to the applicable then-current Specifications for such non-software Deliverable. 1.3 DEFECT CORRECTION. This means either a modification or addition that eliminates or works around a Defect in a non-software Deliverable so as to cause the non-software Deliverable to comply with the applicable then-current Specification. 1.4 DELIVERABLES. This means the various deliverables, which are tangible implementations or items including interim deliverables or final prototype deliverables, identified as such and described in any development schedule to the Development Agreement and delivered to Logitech thereunder. 1.5 DEVELOPMENT AGREEMENT. This means the Technology Product Development Agreement between Immersion and Logitech dated the same date as this Agreement. 1.6 ENHANCEMENT OR ENHANCEMENTS. This means any force-feedback modification or addition made by Immersion, under the terms of Section 6.7 ("Other Development") and Section 7.2 ("Enhancements by Immersion") of the Development Agreement for the Gaming Field of Use, and which is a tangible implementation other than a Defect Correction or Error Correction, that when incorporated into the Gaming Device, materially reduces product costs of a Gaming Device or materially changes the functional capability or form factor (e.g., joystick to steering wheel). 1.7 ERROR. This means, with respect to any software Deliverable, failure of any such software Deliverable to materially conform to the applicable then-current Specification for such software Deliverable. 1.8 ERROR CORRECTION. This means either a modification or addition that eliminates or works around an Error in the software Deliverable so as to cause the software Deliverable to comply with the then-current Specification. 1.9 FINAL PROTOTYPE. This means a Deliverable which is the final functional form of the Gaming Device, if any, including software and hardware, produced by Immersion under a development schedule to the Development Agreement, which prototype serves as a model for the final production version of the Gaming Device, if any, and which conforms to the applicable Specification. 1.10 GAMING DEVICE(s). This means the consumer gaming computer input peripherals marketed for entertainment applications, including but not limited to the Joystick Product, other joysticks, steering wheels, flight yokes and other similar devices. 2 3 1.11 GAMING FIELD OF USE. This means the consumer gaming computer peripherals market, which does not include the market for medical, industrial, business, scientific and arcade products and applications. 1.12 IMMERSION PRODUCT MODEL TECHNOLOGY. This means that subset of Immersion Technology delivered as a Deliverable under the terms of a development schedule of the Development Agreement, or as an Enhancement or New Technology, which is actually utilized in or in connection with and/or embedded in the final production version of the Joystick Product, any subsequent Product Model of the Joystick Product or any Product Model of any Gaming Device. 1.13 IMMERSION SOFTWARE. This means the driver software and computer firmware subset of the Immersion Product Model Technology actually utilized in or in connection with and/or embedded in the final production version of the Joystick Product, any subsequent Product Model of the Joystick Product or any Product Model of any Gaming Device that acts as an interface to and controls the Joystick Product, any subsequent Product Model of the Joystick Product or any Gaming Device. 1.14 IMMERSION TECHNOLOGY. This means any and all technology created or acquired by Immersion, or licensed to Immersion by third parties, including but not limited to software created by employees or consultants of Immersion, (i) first developed or reduced to practice before or after the Effective Date solely by Immersion independent of the scope of the work under the Development Agreement or (ii) first developed or reduced to practice after the Effective Date and within the scope of a Deliverable developed solely by Immersion (a) under a development schedule in effect under the terms of the Development Agreement, (b) as an Enhancement or (c) as New Technology. 1.15 INTELLECTUAL PROPERTY RIGHTS. This means the Licensed Patents and utility models, copyrights and mask work rights, including without limitation all applications and registrations with respect thereto, rights in trade secrets, know-how, and all other intellectual property rights, excluding trademarks and tradenames and patents other than the Licensed Patents. 1.16 JOYSTICK PRODUCT. This means the final production version of the joystick described in the Specification in the first Exhibit A ("Specifications") of the Development Agreement which utilizes and/or contains Immersion Product Model Technology, including but not limited to the applicable Immersion Software, documentation, Defect Corrections and Error Corrections thereto. 1.17 LICENSED PATENTS. This means (i) United States patent no. 5,576,727, titled "Electricalmechnical Human-Computer Interface with Force Feedback", (ii) all patents that may issue based upon any of the United States patent applications listed in Schedule A1 and A2 hereto or upon any corresponding foreign patent applications that have been or may be filed, or upon any continuations, continuations-in-part, or divisional 3 4 applications related to any of the foregoing that have been or may be filed, and (iii) any divisions, reissues and reexaminations based on any of the foregoing. 1.18 NET RECEIPTS. This means the gross receipts received by Logitech and its Affiliates without taking into account any foreign withholding taxes that may apply to transfers between Logitech and its affiliates upon any sales of Royalty Bearing Products to unaffiliated third parties, less any actual returns and/or credits actually credited to a customer's account in accordance with Logitech's standard accounting practices applied in good faith. Net Receipts shall not include freight, insurance and taxes. No other costs incurred in the manufacture, sale, distribution, or exploitation of Royalty Bearing Products shall be deducted from gross receipts in the calculation of Net Receipts. If Royalty Bearing Products are bundled with other items sold by Logitech or its Affiliates and are not invoiced separately, royalties will be paid based on Logitech's (or if no Logitech averages sales price exists, the applicable Affiliate average sales price) then-current average sales price for each such Royalty Bearing Product when sold as a separate item (averaged for the applicable Quarter in which the Net Receipts are received by Logitech or its Affiliates, as applicable, for the country in which the sale was made) in like quantities in arms length transactions to unrelated third parties other than Logitech or Logitech Affiliates). 1.19 NEW TECHNOLOGY. This means any force-feedback technology modification or addition made by Immersion, for the Gaming Field of Use, other than a Defect Correction or Error-Correction, that when incorporated into the Joystick Product or other Gaming Device, materially changes the utility, efficiency, market value, functional capability or application, and which is developed by Immersion on a non-exclusive basis and made "generally available" for use in Gaming Devices in the Gaming Field of Use and which is delivered by Immersion to Logitech as a tangible implementation pursuant to the terms of Section 7.4 ("New Technology") of the Development Agreement. For purposes of this definition, "generally available" shall mean offered under nonexclusive license to any one unaffiliated third party (other than the original third party for whom the technology, modification or addition was originally developed) for use in Gaming Devices in the Gaming Field of Use. 1.20 OEM OR OEMS. This means any third party (not including Affiliates) that does not manufacture Gaming Devices and that wishes to purchase finished Gaming Devices for sale in the Gaming Field of Use under its own brand name. 1.21 PARTY OR PARTIES. This means Immersion and/or Logitech. 1.22 PRODUCT LAUNCH. This means the date on which first commercial-level shipping of the Joystick Product or any Product Model commences to third party unaffiliated customers of Logitech or a Logitech Affiliate. 1.23 PRODUCT MODEL. This means a single model of the Joystick Product or any other Gaming Device. "Product Model" shall mean each variation of a Joystick 4 5 Product or Gaming Device which (i) differs by virtue of addition of or alteration through an Enhancement or (ii) constitutes a change in form factor (e.g. joystick to steering wheel) or (iii) incorporates a material change in force-feedback functionality made by a party other than Immersion. Purely cosmetic alterations (e.g., color or styling) to the physical appearance of the Joystick Product or a Gaming Device, or changes that do not alter the force-feedback functionality but reduce manufacturing costs shall not be deemed a Product Model. 1.24 ROYALTY BEARING PRODUCT. This means a Gaming Device which either (1) incorporates or utilizes Immersion Product Model Technology that is not otherwise made generally available to the public by Immersion without charge or (2) is covered (a) by a Licensed Patent or (b) by a copyright of Immersion embodied in any Immersion Product Model Technology that is not otherwise made generally available to the public by Immersion without charge. 1.25 QUARTER OR QUARTERS. This means Logitech's yearly fiscal quarters. Specifically, Logitech's yearly fiscal quarters begin and end on the following dates: first quarter, April 1 - June 30; second quarter, July 1 - September 30; third quarter, October 1 - December 31; and fourth quarter, January 1 - March 31. 1.26 SPECIFICATION(s). This means the Joystick Product specification attached as the original Exhibit A ("Specification") to the Development Agreement and each Gaming Device specification associated with a development schedule which is attached by amendment to the Development Agreement. 1.27 YEAR. This means any full four-Quarter period. 1.28 Any reference to the words "PURCHASE," "SALE," or "SELL," when used in connection with intellectual property, shall mean license. 2. GRANT OF LICENSES 2.1 GRANT WITH RESPECT TO THE LICENSED PATENTS. Subject to the terms of this Agreement, Immersion grants to Logitech a worldwide, nonexclusive license under the Licensed Patents to develop, make, have made, use, sell, lease, license, demonstrate, market and distribute Gaming Devices in the Gaming Field of Use. Except as provided in Section 2.3 ("Right to Sublicense"), no right to sublicense the Licensed Patents is granted by Immersion to Logitech. 2.2 GRANT WITH RESPECT TO THE IMMERSION PRODUCT MODEL TECHNOLOGY. Subject to the terms of this Agreement, Immersion grants to Logitech a worldwide, nonexclusive license under any Intellectual Property Rights owned or licensable by Immersion that cover the Immersion Product Model Technology, excluding the New Technology except as separately licensed by Immersion to Logitech in accordance with 5 6 the terms of Section 7.4 ("New Technology") of the Development Agreement, to use, copy, modify, and create derivative works based upon the Immersion Product Model Technology and in order to develop, make, and have made Gaming Devices in the Gaming Field of Use, and to sell, lease, license, demonstrate, perform, market and distribute such Gaming Devices in the Gaming Field of Use. No access rights or license to the source code for the Immersion Software are granted to Logitech except as provided under the terms of Section 13 ("Source Code Escrow") of the Development Agreement. Logitech and its Affiliates have no right and Logitech agrees not to disassemble or decompile any portion of the software portions of the Immersion Product Model Technology. 2.3 RIGHT TO SUBLICENSE. Subject to the terms of Section 2.6 ("Trademark License from Immersion"), Immersion grants to Logitech the right to sublicense any of the rights set forth in Sections 2.1 and 2.2 above subject to the limitations of this Agreement: (i) to any Affiliate of Logitech and (ii) to any non-Affiliate third party of Logitech solely for the purpose of assisting Logitech in the design or development of Gaming Devices in the Gaming Field of Use. Logitech agrees that any act or omission by a Logitech Affiliate that is inconsistent with Logitech's obligations under the terms of this Agreement shall be deemed to be an act or omission by Logitech and a breach of this Agreement by Logitech. 2.4 DURATION. Subject to the obligation to pay royalties, the licenses set forth above will extend to the full end of the term for which any Licensed Patent is issued or any other Intellectual Property Right of Immersion licensed hereunder is in force, unless sooner terminated as provided in this Agreement. 2.5 LABEL REQUIREMENTS. Subject to the terms of Section 2.6 ("Trademark License for Immersion") and Section 2.7 ("Administration Procedure"), Logitech shall place belly labels on Gaming Devices which are Royalty Bearing Products which shall include the language and related logo: "I-Force(TM) Force Feedback Technology Licensed from Immersion Corporation" (hereinafter the "Legend"). Logitech shall also place or have placed the Legend on retail manuals and boxes as designated in Exhibit B ("Immersion Package Labeling Specification"). If OEM customers object to belly label marking, the Parties will mutually agree upon a reasonable solution in writing in advance. Logitech shall not remove Immersion's copyright notices from any copies of the Immersion Software. 2.6 TRADEMARK LICENSE FROM IMMERSION. Subject to the procedures set forth in subsection 2.7 below and Immersion's prior written approval, Immersion hereby grants to Logitech a nonexclusive, nontransferable, worldwide license, to use in connection with marketing the Joystick Product or any Gaming Device, the trademark(s) used by Immersion ("Marks") to identify the Immersion Product Model Technology and/or Licensed Patents and Logitech agrees to use such Marks on and in connection with Royalty Bearing Products except in the case of OEM products where, if the OEM customer objects, the parties will mutually agree upon a reasonable solution in writing, in 6 7 advance. Logitech acknowledges that all use of the Marks will inure to the benefit of Immersion. Logitech shall not register Immersion's Marks in any jurisdiction and will not adopt any trademark for use on the Joystick Product or Gaming Device which is confusingly similar to any trademark of Immersion or which includes a prominent portion of any trademark of Immersion. At Immersion's reasonable request, Logitech shall provide Immersion with samples of Logitech's use of Immersion trademarks. Logitech agrees to abide by Immersion's reasonable written trademark policies as issued and provided to Logitech from time to time. In any case where the Marks are not used in compliance with Immersion's trademark policies and such use has been approved in writing by Immersion, upon receipt of written notice from Immersion, Logitech will promptly correct the non-compliance and submit samples of compliant use to Immersion for approval. 2.7 ADMINISTRATIVE PROCEDURES. The Parties agree that in order to provide Immersion with appropriate information necessary for the orderly administration of the Licensed Patents and Marks, Logitech will provide Immersion with prompt written notice prior to Product Launch of each Product Model and will enclose an information package which contains two prototypes or production units of the Product Model sufficient to enable Immersion to determine which of the Licensed Patents cover the Product Model and to review and approve the use of the Marks. If in any case Immersion believes that the quality of the Product Model does not meet Immersion's commercially reasonable standards, Logitech will not be permitted to ship the Product Model with the Marks until the quality issue is resolved, but Logitech may in is discretion ship such Product Model without the Marks and shall be relieved of its obligation to use the Marks on that Product Model. 2.8 GRANT WITH RESPECT TO KNOW-HOW. Subject to the terms of this Agreement, each party grants to the other a worldwide, nonexclusive license to use any know-how of such party disclosed to the other party pursuant to the Development Agreement. 3. ROYALTIES 3.1 NEW TECHNOLOGY ROYALTIES. As provided in Section 9.6 ("New Technology") of the Development Agreement, New Technology will be provided to Logitech subject to royalties which are mutually agreed upon in writing by Immersion and Logitech. 3.2 PER PRODUCT MODEL ROYALTY. Except as provided by Section 3.1 above, Logitech shall pay Immersion a royalty based on a percentage of the Net Receipts for each Product Model of a Royalty Bearing Product sold by Logitech or any Logitech Affiliates to unrelated third parties (other than Logitech or Logitech Affiliates) in arms length transactions, in accordance with the following. The royalty percentage for each Product Model shall be five percent (5%) for all units of a Royalty Bearing Product sold 7 8 during the first twelve month period following the Product Launch of such Product Model. At each annual anniversary of the initial Product Launch for such Product Model thereafter, Logitech will determine the total number of all Product Models of all Royalty Bearing Product units sold during the previous four complete Quarters. If such total number of all Product Models of all Royalty Bearing Product units exceeds the applicable threshold number of total units set forth below, the royalty rate for that Product Model will be reduced by two-thirds of one percent (0.66%) for the next twelve month period, but in no event below a royalty rate of three percent (3%). If the total number does not exceed the applicable threshold, the royalty rate for that Product Model will remain the same for the next twelve month period. For purposes of this Section 3.2, the applicable threshold number of total units to be used for each Product Model for computing whether a royalty rate reduction should take place at the end of the first twelve month period following the Product Launch of each such Product Model is one hundred thousand (100,000) units. The applicable threshold number of total units to be used for each Product Model for computing whether a royalty rate reduction should take place at the end of each subsequent twelve (12) month period on each annual anniversary of the initial Product Launch thereafter is two hundred thousand (200,000) units. Shipments of Royalty Bearing Products between Logitech and the Logitech Affiliates or between Logitech Affiliates will not be considered to be sold or otherwise transferred until sold to an unrelated customer of Logitech or a Logitech Affiliate. 3.3 MOST FAVORABLE ROYALTIES. Immersion agrees that, in the event that the royalty rates contained in any license agreement entered into by Immersion and any third party governing the license of substantially similar Immersion Technology for use in any joystick Gaming Device in the Gaming Field of Use that has substantially similar force feedback functionality to the Joystick Product, are less than the applicable rates for the Joystick Product herein, Immersion hereby agrees that it will advise Logitech of such lesser royalty rates as of the date such lesser royalties became effective for such other third party. Such comparison will be on the basis of cash royalty rates only and will not apply in situations where part of the consideration is a cross-license which is taken into account in setting the cash royalty. Logitech shall have the right to have an independent auditor mutually agreed upon by Logitech and Immersion audit Immersion business records related to the performance of its obligations under this Section 3.3 on an annual basis. Logitech shall pay the costs of such audit, unless such audit reveals that Immersion is not in compliance with this Section 3.3, in which case other than termination Logitech's sole and exclusive remedy will be, at Logitech's option, Immersion shall promptly credit Logitech's account or repay any overpayment, the parties will amend the Agreement to reflect the most favorable Royalty Rate and Immersion shall pay the reasonable costs of such audit. Such audit shall be preceded by at least five (5) business days advance written notice and shall be performed during normal business hours by the auditor. The auditor shall have access to only those books and records of Immersion that are reasonably necessary to determine the compliance by Immersion with this Section 3.3. Any and all non-public information related to Immersion or its business revealed in the course of such audit shall be kept confidential by the auditor and by Logitech, and shall not be disclosed by the auditor to anyone other than employees or professional 8 9 advisors of Logitech who have a reasonable need to know in connection with such audit, or used for any purpose, except to the extent reasonably necessary to determine whether Immersion is in compliance with this Section 3.3. 3.4 PAYMENTS AND REPORTS. The royalties to be paid by Logitech to Immersion hereunder shall be due forty-five (45) days after the close of each Quarter. Royalty reports setting forth the royalty calculation by Product Model and identifying whether the sales were made by Logitech or Logitech Affiliates shall be included with such payments. Logitech will pay and account to Immersion for royalties due hereunder with respect to sales or other disposition of Royalty Bearing Products by any Logitech Affiliates, and for that purpose, sales of Royalty Bearing Products by any Logitech Affiliate (other than sales or other disposition by an Affiliate to Logitech or to another Logitech Affiliate) will be deemed to be sales by Logitech. 3.5 AUDIT RIGHTS OF ROYALTY PAYMENTS. Immersion shall have the right to have an independent auditor mutually agreed by Logitech and Immersion audit the method used to calculate the average sales price, as well as the sales data pursuant to Section 1.19 ("Net Receipts") and the royalty payments of Logitech for itself and its Affiliates on an annual basis, but shall pay the costs of such audit, unless such audit reveals any underpayment of royalties in an amount greater than five percent (5%) of actual royalties due for any Year, in which case Logitech shall promptly remit an amount equal to the underpayment and shall pay the reasonable costs of such audit. Such audit shall be preceded by at least five (5) business days advance written notice and shall be performed during normal business hours by the auditor. The auditor shall have access to only those books and records of Logitech which are reasonably necessary to determine the relevant sales royalties due for Royalty Bearing Products for Logitech itself and its Affiliates and the correctness of the royalty payments hereunder. Any and all non-public information related to Logitech, its Affiliates, or their business revealed in the course of such audit shall be kept confidential by the auditor and by Immersion, and shall not be disclosed by the auditor to anyone other than employees or professional advisors of Immersion who have a reasonable need to know in connection with such audit, or used for any purpose, except to the extent reasonably necessary to determine the correctness of royalty payments made hereunder. 4. TERM AND TERMINATION 4.1 TERM. Unless earlier terminated in accordance with the provisions of this Agreement, this Agreement will extend until the last to expire of the Licensed Patents or any other Intellectual Property Right of Immersion licensed hereunder. 4.2 TERMINATION BY LOGITECH. 4.2.1 TERMINATION WITHOUT CAUSE. Logitech may terminate this Agreement without cause upon ninety (90) days written notice, and such written notice 9 10 under the terms of this Agreement shall also serve as written notice of the termination of the Development Agreement, if such Agreement is still in effect at such time, and the Development Agreement will then terminate within sixty (60) days of such notice pursuant to the terms of Section 12.1 ("Termination by Logitech Without Cause") and such termination shall be deemed to be a termination without cause by Logitech and will be construed in accordance with the terms of Section 12.3 ("Effect of Termination") therein. 4.2.2 TERMINATION WITH CAUSE. Logitech may terminate this Agreement by written notice to Immersion if Immersion has materially breached the terms of this Agreement and fails to cure the breach after written notice of breach to Immersion and a thirty (30) day time period to cure. 4.3 TERMINATION BY IMMERSION FOR FAILURE TO PAY ROYALTIES. Immersion may terminate this Agreement by written notice to Logitech in the event that Logitech or any Logitech Affiliate breaches the terms of Section 3 ("Royalties") including but not limited to any failure to pay any royalties due and payable by Logitech and/or any of the Logitech Affiliates under this Agreement and Logitech fails to cure such breach after written notice of breach and a thirty (30) day time period to cure. If Immersion issues a written notice of termination to Logitech under the terms of this Section 4.3 ("Termination by Immersion for Failure to Pay Royalties") such notice shall also serve as written notice of termination for cause by Immersion under the terms of Section 12.2 ("Termination for Cause") of the Development Agreement, if such Agreement is still in effect at such time. If the breach described in the aforementioned written notice of termination is not cured in accordance with the terms of this Section 4.3 ("Termination by Immersion for Failure to Pay Royalties"), the Development Agreement will then terminate within thirty (30) days of such notice pursuant to the terms of Section 12.2 ("Termination for Cause") and such termination will be deemed to be a termination for cause by Immersion for purposes of Section 12.3 ("Effect of Termination") and the effects of termination will be construed in accordance with the terms of Section 12.3 ("Effects of Termination") therein. 4.4 TERMINATION BY IMMERSION FOR BREACH OF PATENT LICENSE. Immersion may terminate this Agreement in the event that Logitech engages in activity which exceeds the scope of the patent license granted in Section 2.1 or breaches the labeling requirement of Section 2.5 and fails to cure the breach after written notice of breach and a sixty (60) day time period to cure. Except as set forth in this Section 4.4 or Section 4.3, the patent license granted in Section 2.1 shall not be terminable by Immersion. If Immersion issues a written notice of termination to Logitech under the terms of this Section 4.4 ("Termination by Immersion for Breach") such notice shall also serve as written notice of termination for cause by Immersion under the terms of Section 12.2 ("Termination for Cause") of the Development Agreement, if such Agreement is still in effect at such time. If the breach described in the aforementioned written notice of termination is not cured in accordance with the terms of this Section 4.4 ("Termination by Immersion for Breach"), the Development Agreement will then terminate within 10 11 sixty (60) days of such notice pursuant to the terms of Section 12.2 ("Termination for Cause") and such termination will be deemed to be a termination for cause by Immersion for purposes of Section 12.3 ("Effect of Termination") and the effects of termination will be construed in accordance with the terms of Section 12.3 ("Effects of Termination") therein. 4.5 TERMINATION OF LICENSES TO IMMERSION PRODUCT MODEL TECHNOLOGY BY IMMERSION FOR BREACH. Immersion may terminate the licenses granted with respect to Immersion Product Model Technology in Section 2.2 above in the event that Logitech engages in activity which exceeds the scope of such license or breaches the terms of Section 2.3 or the labeling requirement of Section 2.5 and fails to cure the breach after written notice of breach and a sixty (60) day time period to cure. Termination of the licenses with respect to the Immersion Product Model Technology shall not affect the patent licenses granted hereunder. Except as set forth in this Section 4.5 or Section 4.3, the licenses granted in Section 2.2 shall not be terminable by Immersion. 4.6 EFFECT OF TERMINATION. Notwithstanding any termination of this Agreement for any reason, Logitech agrees to pay Immersion for royalties due under this Agreement from Logitech or any Logitech Affiliate. Upon a termination of this Agreement for cause or without cause, Logitech and each Affiliate shall have one hundred and twenty (120) days to distribute any remaining inventory in process and in existence as of the effective date of the termination, subject to the obligation for Logitech to pay royalties hereunder for any such distribution by Logitech and/or any Logitech Affiliates. EXCEPT FOR DIRECT DAMAGES RESULTING FROM A BREACH OF THE TERMS OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO A BREACH BY LOGITECH OR ANY LOGITECH AFFILIATE OF SECTION 2 ("GRANT OF LICENSES"), NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY SORT AS A RESULT OF TERMINATING THIS AGREEMENT IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT. 5. WARRANTY Immersion represents and warrants that Immersion either has ownership of, or sufficient rights in, the Immersion Product Model Technology to be delivered under the terms of the Development Agreement and the Licensed Patents to enter into this Agreement and grant all the rights set forth herein. As of the Effective Date of the Agreement, Immersion is not aware of and has not received any notice of any claim by a third party that the copyrights, patents, trade secrets, trademarks or other intellectual property rights of any third party are infringed by the Immersion Product Model Technology that Immersion, in its sole discretion intends to, as of the Effective Date, use to comply with Immersion's development obligations under the terms of the Development Agreement, except as disclosed to Logitech in writing prior to the date of this Agreement. Immersion further represents and warrants that (i) it neither holds nor has applied for a patent that is dominant to the Licensed Patents and (ii) that Schedule A 11 12 contains all patent applications filed or contemplated to be filed as of the Effective Date that relate to force-feedback technology. 6. INDEMNIFICATION 6.1 TRADEMARK INFRINGEMENT INDEMNIFICATION BY IMMERSION. Subject to the limitations on cumulative liability under Section 7.1 ("Disclaimers of Certain Types of Damages") and Section 7.3 ("Limitations of Liability with Respect to Indemnity Obligations"), and Immersion's approval for Logitech to use the Legend and the Marks pursuant to Section 2.5 ("Label Requirements"), Section 2.6 ("Trademark License") and Section 2.7 ("Administrative Procedures") and further subject to prompt notification by Logitech, cooperation by Logitech and control of all litigation and/or settlement by Immersion, Immersion shall indemnify, defend and hold Logitech harmless from and against any and all claims, damages, liabilities, judgments, settlements, losses, costs and expenses (including court costs and reasonable attorneys' and experts' fees) (collectively, "Costs") suffered or incurred by Logitech arising out of a claim of infringement of any Immersion Mark or Legend used by Logitech on a Gaming Device in the Gaming Field of Use which is based on Logitech's use under the labeling requirement of Section 2.5 ("Label Requirements") and/or the terms of Section 2.6 ("Trademark License") and Section 2.7 ("Administrative Procedures"). In the case of an infringement or alleged infringement by any such Immersion Mark or Legend used by Logitech on a Gaming Device in the Gaming Field of Use: (i) Logitech will have the right to remove such Marks and/or Legend from Logitech Gaming Devices while any dispute or litigation concerning the same is pending, and shall begin using such marks again only after such infringement claims or disputes have been settled or dismissed with prejudice, and (ii) Immersion will have the right to require Logitech to stop using such Marks and/or Legend and will provide a new trademark to be used in connection with the Immersion Product Model Technology and/or Licensed Patents, as applicable. Each party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in this Section 6.1 may apply. If notified in writing of any action or claim for which Immersion is to provide indemnity, Immersion shall defend, subject to the limitations of liability set forth in Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of Liability With Respect to Indemnity Obligations"), those actions or claims at Immersion's expense and pay the Costs awarded against Logitech in any such action, or pay any settlement of such action or claim entered into by Immersion. 6.2 COPYRIGHT INFRINGEMENT AND TRADE SECRET MISAPPROPRIATION INDEMNIFICATION BY IMMERSION. 6.2.1 SCOPE. Subject to the limitations of cumulative liability under Section 7.1 ("Disclaimer of Certain Types of Damages") and Section 7.3 ("Limitations of Liability With Respect to Indemnity Obligations") and further subject to prompt notification by Logitech, cooperation by Logitech and control of all litigation and/or settlement by Immersion, Immersion shall indemnify, defend and hold Logitech harmless from and against any and all Costs suffered or incurred by Logitech as a result of any 12 13 third party claim that any Immersion Product Model Technology delivered by Immersion to Logitech infringes any copyright or misappropriates any trade secret of any third party. In the case of any third party claim involving the Immersion Software portion of the Immersion Product Model Technology, Immersion may, in its sole discretion, provide Logitech with a modification to the affected Immersion Software so that the Immersion Software portion of the Immersion Product Model Technology becomes noninfringing or in the alternative, may provide Logitech other software which is functionally equivalent. Each party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in this Section 6.2 ("Copyright Infringement and Trade Secret Misappropriation Indemnification by Immersion") may apply. If notified in writing of any action or claim for which Immersion is to provide indemnity, Immersion shall defend, subject to the limitations of liability set forth in Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of Liability With Respect to Indemnity Obligations"), those actions or claims at Immersion's expense and pay the Costs awarded against Logitech in any such action, or pay any settlement of such action or claim entered into by Immersion. 6.2.2 EXCEPTIONS. The foregoing indemnity will not apply to any infringement claim to the extent it arises from (i) any modification of any Immersion Product Model Technology by parties other than Immersion or Immersion subcontractors under contract with Immersion, (ii) use of any Immersion Product Model Technology in conjunction with other non-Immersion products or components where there would be no infringement absent such use with such other products or components or (iii) an infringement which would not occur in the Immersion Product Model Technology or any Final Prototype in which such Immersion Product Model Technology is incorporated but which does occur in the final production version of a Gaming Device. 6.3 PERSONAL INJURY AND PROPERTY DAMAGE CLAIMS. Neither party shall have any obligation to indemnify, protect, defend and hold the other party harmless from any Costs suffered or incurred by the other party to the extent such third party claim or threatened claim arises from a personal or alleged personal injury or damage or alleged damage to property arising out of the third party's use of Gaming Devices. 6.4 PRODUCT LIABILITY INSURANCE. The Parties agree that they shall each secure insurance covering product liability. Such insurance shall provide coverage of at least ONE MILLION DOLLARS ($1,000,000) per occurrence and shall remain in effect during the term of this Agreement. Each party will promptly cause the other party to be named as an additional insured. 6.5 PATENT INFRINGEMENT INDEMNIFICATION BY IMMERSION. 6.5.1 SCOPE. Subject to the limitations of cumulative liability under Section 7.1 ("Disclaimer of Certain Types of Damages") and Section 7.3 ("Limitations of Liability With Respect to Indemnity Obligations"), and further subject to prompt notification by Logitech, cooperation by Logitech and control of all litigation and/or 13 14 settlement by Immersion, Immersion shall indemnify, defend and hold harmless Logitech from and against any and all Costs (except as provided in Section 6.5.3 below) suffered or incurred by Logitech as a result of any third party claim that any Immersion Product Model Technology delivered by Immersion (for which Logitech is currently paying royalties) infringes upon any United States patent. Each Party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in this Section 6.5 may apply. If notified in writing of any action or claim for which Immersion is to provide indemnity, Immersion shall defend, subject to the limitations of liability set forth in Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of Liability With Respect to Indemnity Obligations") and the provisions of Section 6.5.3 below, those actions or claims at its expense and pay the Costs awarded against Logitech in any such action, or pay any settlement of such action or claim entered into by Immersion. In any such action, Logitech will make available to Immersion all defenses against such action or claim known or available to Logitech. 6.5.2 EXCEPTIONS TO THE SCOPE OF THE INDEMNITY. Immersion shall have no liability or obligation with respect to any claim of patent infringement to the extent it arises from (a) Immersion's compliance with the Specifications in Exhibit A of the Development Agreement for a Gaming Device, to the extent such infringement would not have arisen but for compliance with such Specifications, (b) use of Immersion Product Model Technology by Logitech or its customers, subcontractors or any third party in or with an application, embodiment or environment other than that for which the Immersion Product Model Technology was designed as set forth in the applicable Specifications; (c) modification of Immersion Product Model Technology by Logitech or its customers, subcontractors or any third party; (d) the operation or use of any Immersion Product Model Technology in combination with any Gaming Device, equipment or technology not delivered by Immersion or recommended by Immersion pursuant to a specific written obligation in the Specifications in Exhibit A of the Development Agreement to make a recommendation; or (e) Immersion's compliance with a Specification or any aspects or portions of the Specification which "inherently" (as defined below) infringes any patent. For the purposes of this Agreement "inherently" means that any device or aspect or portion of a device which was in conformance with the Specification would infringe such patent. 6.5.3 EXCEPTIONS WITH RESPECT TO PATENTS ISSUED AFTER THE EFFECTIVE DATE. The provisions of this Section 6.5.3 shall apply only with respect to a United States patent issued after the Effective Date (an "After-Issued Patent"). (a) NOTICE BY IMMERSION AND SUPPLY OF MODIFIED OR SUBSTITUTE TECHNOLOGY. Logitech agrees to promptly notify Immersion if Logitech becomes aware of an After-Issued Patent which Logitech reasonably believes is infringed by any Immersion Product Model Technology that is the subject of an indemnity obligation by Immersion hereunder. If upon receipt of notice from Logitech or independently, Immersion becomes aware of an After-Issued Patent which Immersion reasonably believes is infringed by any Immersion Product Model Technology that is the 14 15 subject of an indemnity obligation by Immersion hereunder, then Immersion will notify Logitech in writing of such patent (the date of such notice being referred to as the "Notice Date"). Within fifteen (15) days after the Notice Date, Immersion shall supply Logitech with a written description and cost estimate of a proposed redesign of the infringing Immersion Product Model Technology to avoid the infringement. As reasonably promptly thereafter as possible, Immersion shall supply Logitech with a modification to the affected Immersion Product Model Technology so that the incorporated Immersion Product Model Technology becomes noninfringing or substitute for the infringing Immersion Product Model Technology other technology that conforms to the Specifications in Exhibit A of the Development Agreement (which shall itself be deemed to be Immersion Product Model Technology) or, if neither of the foregoing are reasonably possible, procure for Logitech the right to continue to use such Immersion Product Model Technology. If Immersion is unable to procure for Logitech the right to continue to use such Immersion Product Model Technology under commercially reasonable terms, as determined by Immersion, Immersion may, in the alternative, refund to Logitech all royalties received by Immersion under the Agreement relating to the allegedly infringing Immersion Product Model Technology (reflecting any discounts granted to Logitech, less an amount for depreciation calculated in a straight-line basis over an assumed useful life of three (3) years). (b) COSTS NOT COVERED BY INDEMNITY FOR AFTER-ISSUED PATENTS. Immersion shall have no obligation to indemnify Logitech for infringement of such After-Issued Patents with respect to any units of a Gaming Device which are distributed or used by Logitech after the Notice Date. Immersion shall have no liability hereunder to reimburse Logitech for any lost inventory, retooling or other manufacturing costs incurred by Logitech that result from Logitech's incorporation of such modified or substitute technology in order to avoid infringement of an After-Issued Patent. (c) ELECTION BY LOGITECH OF ALTERNATIVE REMEDY. Notwithstanding the foregoing provisions, in any instance in which Immersion is prepared and capable of supplying to Logitech modified or substitute technology to avoid infringement of an After-Issued Patent, Logitech may, within a reasonable time after receiving Immersion's written description and cost estimate of Immersion's proposed redesign, elect either (i) to request, in writing, that Immersion pursue a license under the After-Issued Patents on behalf of Logitech to continue using the affected Immersion Product Model Technology, in which event if such license would cost Immersion more than the cost estimate provided by Immersion to Logitech, under the terms of (a) above, to supply modified or substitute technology to avoid infringement, then Logitech shall pay the difference between such costs, or (ii) to request, in writing, that Logitech be allowed to continue to use the Immersion Product Model Technology in unaltered form, in which event Immersion shall have no obligations of indemnity or defense hereunder with respect to any infringement of the After-Issued Patents resulting from copies of Gaming Devices incorporating the unaltered Immersion Product Model Technology used or distributed by Logitech after the Notice Date. If Immersion pursues the license 15 16 described in (i) above, and is unable to procure such a license, Immersion will not be in breach of this Agreement. 6.6 REMEDIES IN THE EVENT OF PROHIBITION OF USE. The provisions and remedies set forth in Section 6.6 shall continue to be applicable with respect to any copyright infringement or trade secret misappropriation under the terms of Section 6.2 ("Copyright Infringement and Trade Secret Misappropriation"), and any After-Issued Patents for which Immersion does not supply written notice to Logitech in accordance with Section 6.5.3(a) above and any U.S. Patents issued prior to the Effective Date of this Agreement. If a preliminary or final judgment shall be obtained against Logitech's use, sale or distribution of a Gaming Device that incorporates any Immersion Product Model Technology based infringement within the scope of the indemnity set forth in Section 6.1, 6.2 or 6.5 (subject to the exceptions set forth therein), or if any Immersion Product Model Technology is, or in Immersion's opinion, is likely to become, subject to a claim for such infringement, then Immersion shall, at its expense, either (a) modify the Immersion Product Model Technology so that the incorporated Immersion Product Model Technology becomes noninfringing, or (b) procure for Logitech the right to continue to use such Immersion Product Model Technology, or (c) substitute for the infringing Immersion Product Model Technology other technology that conforms to the Specifications in Exhibit A of the development agreement (which shall itself be deemed to be Immersion Product Model Technology). If (a), (b) or (c) are not commercially reasonable alternatives in Immersion's opinion, Immersion shall refund to Logitech all royalties received by Immersion under the Agreement relating to the allegedly infringing Immersion Product Model Technology (reflecting any discounts granted to Logitech, less an amount for depreciation calculated in a straight-line basis over an assumed useful life of three (3) years). 6.7 INDEMNITY BY LOGITECH. Subject to the limitations of liability set forth in Section 7 below, and subject to prompt notification by Immersion, cooperation by Immersion and control of all litigation and/or settlement by Logitech, Logitech shall indemnify, defend and hold harmless Immersion from and against any and all Costs suffered or incurred by Immersion to the extent such Costs are suffered or incurred by Immersion in the situations listed in the exceptions (i) through (iii) enumerated in Section 6.2.2 above, and in the exceptions (a) through (e) enumerated in Section 6.5.2 above, and/or in the situation where Logitech and Immersion agree that Logitech will be allowed to continue to use the Immersion Product Model Technology in unaltered form in accordance with subsection (ii) of Section 6.5.3 (c) ("Election by Logitech of Alternative Remedy"), provided that such situations arise because of Logitech's, its subcontractors' or affiliates' use and modifications. 7. LIMITATIONS OF LIABILITY 7.1 DISCLAIMER OF CERTAIN TYPES OF DAMAGES. IN NO EVENT WILL LOGITECH OR IMMERSION BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL, 16 17 INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF LOGITECH AND IMMERSION HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 7.2 LIMITATIONS OF LIABILITY OTHER THAN INDEMNITY OBLIGATIONS. EXCEPT WITH RESPECT TO THE PARTIES' OBLIGATIONS OF INDEMNITY, INCLUDING, BUT NOT LIMITED TO COSTS OF DEFENSE AND "COSTS" (AS DEFINED ABOVE) SET FORTH IN SECTION 6 ABOVE WHICH ARE LIMITED BY THE TERMS OF SECTION 7.3 ("LIMITATIONS OF LIABILITY WITH RESPECT TO INDEMNITY OBLIGATIONS") AND WITH RESPECT TO ANY ROYALTIES DUE AND PAYABLE BY LOGITECH HEREUNDER, IN NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY OR OBLIGATIONS UNDER THE TERMS OF OR ARISING OUT OF THIS AGREEMENT EXCEED $1,000,000. 7.3 LIMITATIONS OF LIABILITY WITH RESPECT TO INDEMNITY OBLIGATIONS. IN NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY WITH RESPECT TO ITS OBLIGATIONS OF INDEMNITY INCLUDING, BUT NOT LIMITED TO COSTS OF DEFENSE AND "COSTS" (AS DEFINED ABOVE) UNDER SECTION 6 ABOVE EXCEED THE GREATER OF (i) $500,000 OR (ii) ROYALTIES PAID OR PAYABLE BY LOGITECH TO IMMERSION HEREUNDER FOR THE THIRTY-SIX (36) MONTHS PRECEDING THE EVENT FIRST GIVING RISE TO SUCH OBLIGATIONS. 7.4 NEGATION OF WARRANTIES AND OTHER OBLIGATIONS. 7.4.1 Nothing in this Agreement shall be construed: (i) as a warranty or representation by Immersion as to the validity or scope of any Licensed Patents; (ii) as a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement by patents, copyrights, trade secrets, trademarks, or other rights of third parties; (iii) as granting by implication, estoppel or otherwise any licenses or rights under patents or other Intellectual Property Rights of Immersion other than expressly granted herein, regardless of whether such patents are dominant or subordinate to any Licensed Patents, or 17 18 (iv) (a) to require Immersion to file any patent application relating to force-feedback in Gaming Devices, (b) a warranty that Immersion will be successful in securing the grant of any patent relating to force-feedback in Gaming Devices or any reissue or extensions thereof, and (c) to require Immersion to pay any maintenance fees or take any other steps to maintain Immersion's patent rights relating to force feedback in Gaming Devices, provided, however, that in the event Immersion elects not to pay any maintenance fee or take any step to maintain such patents, Immersion shall so notify Logitech a reasonable period in advance and Logitech may, at its option, pay such maintenance fee or take such steps. 7.4.2 Except for Immersion's obligations of indemnity set forth herein, Immersion does not assume any responsibility for the definition of the Specifications, the manufacture of the Gaming Devices, or use of any Gaming Device which is manufactured or sold by or for Logitech or the Logitech Affiliates under the Licensed Patent licenses granted herein. All warranties in connection with such Gaming Devices shall be made by Logitech or the Logitech Affiliates as manufacturers or sellers of such Gaming Devices and such warranties shall not directly or by implication obligate Immersion in any way. 8. THIRD PARTY ENFORCEMENT Immersion shall not have any obligation or duty under this Agreement to any party, including but not limited to Logitech, to enforce any patents or Licensed Patents against any third party infringing any claim or claims of any patent and/or the Licensed Patents provided, however, that should Logitech become aware of any actual infringement of the Licensed Patents by a Gaming Device distributed in the Gaming Field of Use by a third party, which Gaming Device directly competes (e.g. Joystick to Joystick or wheel to wheel) with a Gaming Device currently shipped by Logitech which is covered by the Licensed Patents, Logitech will promptly communicate the details to Immersion. Immersion shall thereupon have the right to take no action or whatever action Immersion deems necessary, including cease and desist letters, negotiation, the filing of lawsuits, and/or settlement to terminate such infringement and the strategy and/or conclusion of such action or settlement shall be within Immersion's sole discretion. Logitech shall cooperate with Immersion if Immersion takes any such action but all expenses of Immersion shall be borne by Immersion. If Immersion recovers any damages or compensation for any action Immersion takes hereunder, including any settlement, Immersion shall retain one hundred percent (100%) of such damages. If Immersion does not elect to take any action hereunder within sixty (60) days of being made aware of such infringement by Logitech, then Logitech shall have the right, but not the obligation, to provide Immersion with a Patent Enforcement Justification, as defined below, and if the 18 19 proposed enforcement action meets the Patent Enforcement Justification criteria, Logitech may take and control any such action, subject to Immersion's absolute right to control any and all assertions or admissions which relate to the scope or validity of Immersion's Licensed Patents. For purposes of this Section 8, a Patent Enforcement Justification is a written report prepared by Logitech which includes: (i) the name and address of the entity manufacturing the Gaming Device that is allegedly infringing the Licensed Patents and the names and addresses of any entities distributing such Gaming Device, (ii) an analysis of which of the Licensed Patent claims are infringed, (iii) a comparison of the allegedly infringing Gaming Device and the affected Gaming Device distributed by Logitech with which such allegedly infringing Gaming Device competes (which comparison analyzes the competitive threat as to (a) feature and function, (b) positioning, and (c) price point), (iv) the number of units of the Gaming Device sold by Logitech in the most recent four (4) full Quarters and, if known or reasonably estimable, the number or estimate of the number of units of the allegedly infringing Gaming Device sold in the most recent four (4) full Quarters, on a geographic area basis. The criteria which must be met by such report, in order to permit Logitech to "justify" and to go forward with an infringement action, as are follows: (i) Logitech must be selling over 50,000 units of the affected Gaming Device in the market in which the infringement is occurring during the most recent four (4) full Quarters or, if the Product Launch occurred during the most recent four (4) full Quarters, Logitech reasonably estimates in good faith that it will sell over 50,000 units of the affected Gaming Device in the market in which the infringement is occurring during the next four (4) full Quarters; (ii) the allegedly infringing Gaming Device must be substantially similar to the affected Gaming Device as to features and functions such that the allegedly infringing Gaming Device is having or reasonably will have a serious impact on the sales of the affected Logitech Gaming Device; (iii) the Licensed Patents to be enforced against the allegedly infringing Gaming Device also cover the affected Logitech Gaming Device; and (iv) the number of units of the allegedly infringing Gaming Device sold in the market in which the infringement is occurring in the most recent four (4) full Quarters or reasonably estimated in good faith to be sold in the next four (4) full Quarters must meet or exceed 50,000 units. If the aforementioned criteria are met, Immersion will cooperate with Logitech, at Logitech's expense, including but not limited to joining any legal proceedings as a named plaintiff to the extent required to confer jurisdiction, and all of Logitech's expenses will be borne by Logitech. Immersion may elect to have counsel of its own choosing participate at Immersion's sole expense in any legal proceedings instituted by Logitech, but Logitech shall retain one hundred percent (100%) of any damages Logitech recovers for any such proceedings including any settlement, provided however that (i) Logitech 19 20 shall first reimburse Immersion for Immersion's Costs to participate in such action out of any recovery which exceeds Logitech's Costs for such action. Immersion must agree to any settlement of any infringement or of any action brought hereunder by Logitech, which consent will not be unreasonably withheld. 9. GENERAL 9.1 ENTIRE AGREEMENT. This Agreement and its Appendices, together with the Development Agreement and its Exhibits, constitutes the complete agreement of the parties and supersedes any other agreements, written or oral (including all correspondence, emails and the letter regarding Phase 0 dated October 4, 1996 and the letter regarding Phase 1 dated November 8, 1996, and the two letters each dated January 29, and a letter dated February 21, 1997 regarding extension of the November 8, 1996 letter and continued business relationship between the Parties and all such subsequent extension letters) concerning the subject matter hereof and such materials do not have any effect upon the rights and obligations of the Parties under this Agreement. 9.2 SUCCESSION AND ASSIGNMENT. Either party may assign this Agreement provided that the other party has consented in writing to the assignment or delegation and provided, further, that the rights and obligations of the parties may be assigned to a corporate successor in interest in the case of a merger or acquisition or in the case of a sale of assets without the prior approval of the other party. Any attempt to assign this Agreement in violation of the provisions of this Section 9.2 shall be void. 9.3 NOTICES. Notices required under this Agreement shall be addressed as follows, except as otherwise revised by written notice: TO IMMERSION: TO LOGITECH: Louis B. Rosenberg, Ph. D. General Counsel President Logitech, Inc. Immersion Corporation 6505 Kaiser Drive 2158 Paragon Drive Fremont, CA 94555-3615 San Jose, CA 95131 9.4 GOVERNING LAW. The validity, interpretation and performance of this Agreement shall be governed by the substantive laws of the State of California, without the application of any principle that leads to the application of the laws of any other jurisdiction. 9.5 NO AGENCY. Neither party is to be construed as the agent, partner, or joint venturer or to be acting as the agent, partner or joint venturer of the other party hereunder in any respect. 20 21 9.6 NO RECRUITMENT. During the term of this Agreement and for one (1) year after the termination or expiration of this Agreement, each Party agrees not to recruit any employee of the other Party. 9.7 MULTIPLE COUNTERPARTS. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single Agreement between the parties. 9.8 NO WAIVER. No delay or omission by either Party hereto to exercise any right or power occurring upon any noncompliance or default by the other Party with respect to any of the terms of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either of the Parties hereto of any of the covenants, conditions, or agreements to be performed by the other shall not be construed to be a waiver of any succeeding breach thereof or of any covenant, condition, or agreement herein contained. Unless stated otherwise, all remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 9.9 SEVERABILITY. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 9.10 AMENDMENTS IN WRITING. Any amendment to this Agreement shall be in writing and signed by both parties hereto. 9.11 INTERPRETATION. Since this Agreement was prepared by both parties hereto, it shall not be construed against any one party as the drafting party. 9.12 DISPUTE RESOLUTION. Except in the case of a breach of an obligation related to a Party's Intellectual Property Rights, in the event either Party concludes that it is in its best interest to file any legal action against the other, the Party shall contact the other Party's management and at least two (2) senior managers from each Party shall meet without legal counsel or interruption for a minimum amount of three (3) eight (8) hour periods and diligently attempt to resolve all disputed matters. If the Parties are unable to resolve their difference and either Party desires to file a legal action against the other, at least two (2) senior managers from each Party and their respective counsels shall meet for three (3) eight (8) hour periods and diligently attempt to resolve all disputed matters. Either Party may request that an independent third party bound to mutually agreed upon obligations of confidentiality attend such meeting in order to assist the Parties in reaching a reasonable resolution. All oral and written information exchanged in these meetings shall be exchanged in an effort to settle all disputed matters. If either Party still desires to file a legal action against the other after these prescribed meetings, such Party may file a legal action against the other Party as allowed by applicable law in Santa Clara County state court or in the federal court. The Parties agree that if a Party does not attend all of 21 22 the prescribed meetings it waives its rights to any monetary damages in the legal action(s) it files. 9.13 SURVIVAL. Sections 3.2, 3.4, 3.5, 4.6, 5, 7 and 9 shall survive any termination or expiration of this Agreement. In addition, the provisions of Sections 6.1, 6.2, 6.5, 6.6 and 6.7 shall survive with respect to any units of a Product Model of Royalty Bearing Products sold or otherwise distributed by Logitech before the termination or expiration of this Agreement, provided, however, that Immersion's obligations of indemnity under Sections 6.1, 6.2, 6.5 and 6.6 shall not survive in the event Immersion terminates this Agreement for cause, including but not limited to, failure by Logitech to pay royalties due hereunder. 9.14 FORCE MAJEURE. With the exception of the obligation to pay monies due and owing, each Party hereto shall be excused from performance hereunder for any period and to the extent that it is prevented from performing any services pursuant hereto, in whole or in part, as a result of delays caused by the other Party or an act of God, war, civil disturbance, court order, governmental action, laws, orders, regulations, directions or requests, or as a result of events such as acts of public enemies, earthquakes, fires, floods, strikes or other labor disturbances of the other Party or any third party, or other cause beyond its reasonable control and which it could not have prevented by reasonable precautions, and such nonperformance shall not be a default hereunder or a ground for termination hereof. 9.15 RESTRICTED USE OF SCHEDULE A. Logitech agrees to keep the serial numbers of the pending patent applications set forth in Schedules A1 and A2 confidential until such applications issue or such information is otherwise made available to the public by Immersion, and agrees not to use the information in Schedule A for any purpose other than the performance or enforcement of this Agreement, including but not limited to using the information to initiate interference proceedings. Upon execution of this Agreement, Schedule A1 shall be supplied by Immersion to Logitech in an envelope marked "IMMERSION CONFIDENTIAL INFORMATION SCHEDULE A1 TO INTELLECTUAL PROPERTY LICENSE AGREEMENT. TO BE SEEN BY LOGITECH INC. PRESIDENT, CHAIRMAN OF THE BOARD, GENERAL COUNSEL AND OUTSIDE COUNSEL ONLY." Schedule A1 shall include the serial numbers (for issued License Patents) and the application numbers (of pending Licensed Patent applications), and the jurisdictions where such patents have issued and where such applications have been filed. Schedule A1 may only be reviewed by Logitech Inc.'s President, Chairman, General Counsel and outside lawyers. Schedule A1 shall be maintained in a sealed envelope in a secure location with Logitech. Upon execution of the Agreement, Schedule A2 shall be supplied by Immersion to Logitech in a sealed envelope marked "IMMERSION CONFIDENTIAL INFORMATION SCHEDULE A2 TO INTELLECTUAL PROPERTY LICENSE AGREEMENT. TO BE SEEN BY LOGITECH INC. PRESIDENT, CHAIRMAN OF 22 23 THE BOARD, GENERAL COUNSEL AND OUTSIDE COUNSEL ONLY." Schedule A2 shall include all the information included in Schedule A1 as well as the titles and filing dates of the applications. Schedule A2 will not be opened except as may be necessary to perform or enforce this Agreement. Schedule A2 shall be maintained in a sealed envelope in a secure location within Logitech. IN WITNESS WHEREOF, the authorized representatives of the parties hereto have signed this Agreement as of the date and year last set forth below. LOGITECH, INC. IMMERSION CORPORATION By: /s/ B. Zwarenstein By: /s/ Louis Rosenberg ------------------------- ----------------------------- Name: B. Zwarenstein Name: Louis Rosenberg ------------------------- ----------------------------- Title: CFO Title: President/CEO ------------------------- ----------------------------- Date: 4/2/97 Date: 4/2/97 --------------------------- ------------------------------- 23 24 EXHIBIT A Specification Immersion shall develop a Joystick Product to conform to the following specifications: [****] Requirement Overview: The Joystick Product must be a high quality, premium joystick capable of reproducing realistic feedback during action gaming. It must be manufactured at a reasonable cost for the mass market. The product must consist of the following subsystems: [****] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 24 25 EXHIBIT B Immersion Packaging Labeling Specification Logitech must place or have placed the following notice or other similar mark, at Immersion's request, on the underside (exterior) of those products which incorporate Licensed Technology as well as on the packaging and manuals for such products: "I-Force(TM) Force Feedback Technology Licensed from Immersion Corporation" Logitech must also place or have placed the following I-FORCE logo (or future derivative of the mark as reasonably approved by Logitech) at Immersion's request, prominently on retail packaging and manuals provided that the logo is clearly legible and occupies a rectangular area of no less than one square inch. The mark must be displayed on at least two surfaces of the retail packaging, including the front surface and specifically not including the bottom surface. 25 26 Immersion Corporation Confidential SCHEDULE A1
ID Where Serial Number -- ----- ------------- 1 P003 USA 08/275,120 2 P004 USA 08/344/148 3 P004-P PCT PCT/15301 4 P005 USA 08/374,288 5 P006 USA 08/400,233 6 P006-P PCT PCT/00701 7 P007A USA 08/784,198 8 P007US USA 08/583,032 9 P007-P PCT PCT/07851 10 P007-C Canada 2,167,304 11 P008 USA 08/489,068 12 P008-P PCT PCT/09664 13 P012 USA 08/534,791 14 P013 USA 08/560,091 15 P014 USA 08/566,282 16 P014P PCT PCT/15373 17 P015 USA [****] 18 P015P PCT PCT/01441 19 P016 USA 08/623,660 20 P016P PCT PCT/15350 21 P017 USA [****] 22 P018 USA [****] 23 P019 USA [****] 24 P020 USA 08/691,852 25 P022 USA 08/747,841 26 ISSUE-1 USA 5,576,727
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 27 Immersion Corporation Confidential SCHEDULE A2
ID Where Serial Number Date Title -- ----- ------------- ---- ----- 1 P003 USA 08/275,120 07/14/97 Method and Apparatus for Providing Mechanical I/O for Computer Systems 2 P004 USA 08/344/148 10/23/94 Method and Apparatus for Providing Mechanical I/O for Computer Systems 3 P004-P PCT PCT/15301 10/22/95 Method and Apparatus for Providing Mechanical I/O for Computer Systems 4 P005 USA 08/374,288 01/18/95 Method and Apparatus for Providing High Bandwidth Low Noise Force Feedback 5 P006 USA 08/400,233 03/03/95 Method and Apparatus for Providing Passive Force Feedback 6 P006-P PCT PCT/00701 01/17/96 Method and Apparatus for Providing High Bandwidth Low Noise Force Feedback 7 P007A USA 08/784,198 01/15/97 Multi Degree of Freedom Interface with Force Feedback 8 P007US USA 08/583,032 02/16/96 Electromechanical Human Interface with Force Feedback 9 P007-P PCT PCT/07851 07/12/94 Electromechanical Human Interface with Force Feedback 10 P007-C Canada 2,167,304 07/12/94 Electromechanical Human Interface with Force Feedback 11 P008 USA 08/489,068 06/07/97 Method and Apparatus for Passive Fluid Feedback 12 P008-P PCT PCT/09664 06/07/96 Method and Apparatus for Passive Fluid Force Feedback 13 P012 USA 08/534,791 09/27/95 Method and Apparatus for Controlling Human Computer Interaction 14 P013 USA 08/560,091 10/17/95 Method and Apparatus for Providing Low Cost Force Feedback 15 P014 USA 08/566,282 12/01/95 Method and Apparatus for Controlling Force Feedback 16 P014P PCT PCT/15373 09/25/96 Method and Apparatus for Controlling Force Feedback 17 PO15 USA [****] [****] [****] 18 P015P PCT PCT/01441 10/26/96 Method and Apparatus for Providing Force Feedback for a 19 P016 USA 08/623,660 03/28/96 Safe and Low Cost Computer Peripherals with Force Feedback 20 P016P PCT PCT/15350 09/25/95 Safe and Low Cost Computer Peripherals with Force Feedback 21 PO17 USA [****] [****] [****] 22 PO18 USA [****] [****] [****] 23 PO19 USA [****] [****] [****] 24 P020 USA 08/691,852 08/01/96 Method and Apparatus for Providing Force Feedback Over a Network 25 P022 USA 08/747,841 11/13/96 Method and Apparatus for Shaping Force Signals 26 ISSUE-1 USA 5,576,727 10/19/96 Electromechanical Human Interface with Force Feedback
* Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-10.19 10 INTELLECTUAL PROPERTY LICENSE AGREEMENT 1 EXHIBIT 10.19 *Certain information in this document has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. INTELLECTUAL PROPERTY LICENSE AGREEMENT IMMERSION CORPORATION AND LOGITECH, INC. This Intellectual Property License Agreement (the "Agreement") between Immersion Corporation, a California corporation, with principal offices in San Jose, California (hereinafter "Immersion") and Logitech Inc., a California corporation, with principal offices in Fremont, California (hereinafter "Logitech"), is entered into as of April 13, 1998 (the "Effective Date"). RECITALS A. Immersion is the owner of several United States patent applications and several issued United States patents relating to certain force-feedback technology. B. Concurrently with this Agreement, Immersion and Logitech are entering into a Technology Product Development Agreement and an OEM Purchase Agreement, each of which are dated the same date as this Agreement. Pursuant to the Technology Product Development Agreement, Immersion will develop and deliver to Logitech certain deliverables which are covered by copyrights and trade secret rights owned by Immersion, as well as patents now held or that may issue to Immersion in the future. Pursuant to the OEM Purchase Agreement, Immersion will supply certain components to Logitech to be used in peripheral devices produced by Logitech. C. Logitech intends to develop "Planar Force Feedback Cursor Control Devices" (as defined below) which may or may not incorporate or utilize the deliverables to be delivered under the Technology Product Development Agreement. D. The parties desire that Immersion grant a license to Logitech under the foregoing intellectual property rights of Immersion to develop and distribute Planar Force Feedback Cursor Control Devices, which incorporate or utilize the deliverables to be delivered under the Technology Product Development Agreement, all on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the promises and agreements set forth below and the other consideration cited herein, the parties agree as follows. 1. DEFINITIONS In this Agreement the following words and expressions shall have the following meanings: 1.1 AFFILIATES. This means any corporation or business entity which is controlled by, controls, or is under common control of a Party. For this purpose, the meaning of the word "control" shall include, without limitation, direct or indirect ownership of more than fifty percent (50%) of the voting shares of interest of such corporation or business entity. 2 1.2 DEFECT CORRECTION. This means either a modification or addition that eliminates or works around a Defect in a non-software Deliverable so as to cause the non-software Deliverable to comply with the applicable then-current Specification. 1.3 DEFECT. This means, with respect to any non-software Deliverable, failure to materially conform to the applicable then-current Specifications for such non-software Deliverable. 1.4 DELIVERABLES. This means the various deliverables, which are tangible implementations or items including interim deliverables or final prototype deliverables, identified as such and described in any development schedule to the Development Agreement and delivered to Logitech thereunder. 1.5 DEVELOPMENT AGREEMENT. This means the Technology Product Development Agreement between Immersion and Logitech dated the same date as this Agreement. 1.6 ENHANCEMENT OR ENHANCEMENTS. This means any force-feedback modification or addition made by Immersion, under the terms of Section 6.7 ("Other Development") and Section 7.2 ("Enhancements by Immersion") of the Development Agreement for the Planar Force Feedback Cursor Control Field of Use, and which is a tangible implementation other than a Defect Correction or Error Correction, that when incorporated into the Planar Force Feedback Cursor Control Device, materially reduces product costs of a Planar Force Feedback Cursor Control Device or materially changes the functional capability or form factor. 1.7 ERROR CORRECTION. This means either a modification or addition that eliminates or works around an Error in the software Deliverable so as to cause the software Deliverable to comply with the then-current Specification. 1.8 ERROR. This means, with respect to any software Deliverable, failure of any such software Deliverable to materially conform to the applicable then-current Specification for such software Deliverable. 1.9 FEELIT MOUSE PRODUCT. This means the final production version of the mouse product described in the Specification in the first Exhibit A ("Specifications") of the Development Agreement which utilizes and/or contains Immersion Product Model Technology, including but not limited to the applicable Immersion Software, documentation, Defect Corrections and Error Corrections thereto. 1.10 FINAL PROTOTYPE. This means a Deliverable which is the final functional form of the Planar Force Feedback Cursor Control Device, if any, including software and hardware, produced by Immersion under a development schedule to the Development Agreement, which prototype serves as a model for the final production version of the Planar Force Feedback Cursor Control Device, if any, and which conforms to the applicable Specification. 1.11 IMMERSION PRODUCT MODEL TECHNOLOGY. This means that subset of Immersion Technology delivered as a Deliverable under the terms of a development schedule of the 2 3 Development Agreement, or as an Enhancement or New Technology, which is actually utilized in or in connection with and/or embedded in the final production version of the FEELit Mouse Product, any subsequent Product Model of the FEELit Mouse Product or any Product Model of any Planar Force Feedback Cursor Control Device. 1.12 IMMERSION SOFTWARE. This means the driver software and computer firmware subset of the Immersion Product Model Technology actually utilized in or in connection with and/or embedded in the final production version of the FEELit Mouse Product, any subsequent Product Model of the FEELit Mouse Product or any Product Model of any Planar Force Feedback Cursor Control Device that acts as an interface to and controls the FEELit Mouse Product, any subsequent Product Model of the FEELit Mouse Product or any Planar Force Feedback Cursor Control Device. 1.13 IMMERSION TECHNOLOGY. This means any and all technology created or acquired by Immersion, or licensed to Immersion by third parties, including but not limited to software created by employees or consultants of Immersion, (i) first developed or reduced to practice before or after the Effective Date solely by Immersion independent of the scope of the work under the Development Agreement or (ii) first developed or reduced to practice after the Effective Date and within the scope of a Deliverable developed solely by Immersion (a) under a development schedule in effect under the terms of the Development Agreement, (b) as an Enhancement or (c) as New Technology. 1.14 INTELLECTUAL PROPERTY RIGHTS. This means the Licensed Patents and utility models, copyrights and mask work rights, including without limitation all applications and registrations with respect thereto, rights in trade secrets, know-how, and all other intellectual property rights, excluding trademarks and tradenames and patents other than the Licensed Patents. 1.15 LICENSED PATENTS. This means any and all patents owned or licensable by Immersion at any time during the term of this Agreement containing one or more claims which cover any Planar Force Feedback Cursor Control Device. 1.16 PLANAR FORCE FEEDBACK CURSOR CONTROL FIELD OF USE. This means the market for Planar Force Feedback Cursor Control Devices which are not targeted for use in specific applications or designed for specific applications. The Planar Force Feedback Cursor Device Field of Use does not include the market for products specifically targeted for use in gaming, medical, industrial, human disabilities, military, automotive, scientific and arcade products and applications. 1.17 PLANAR FORCE FEEDBACK CURSOR CONTROL DEVICE(S). This means (i) a force feedback computer cursor control device having the capability of tracking position of an endpoint in a two dimensional plane and applying two dimensional planar forces upon the user through said endpoint and (ii) one dimensional force feedback cursor control embodiments, including but not limited to a force feedback roller for "roller mouse" cursor control embodiments. Planar Force Feedback Cursor Control Devices include but are not limited to the FEELit Mouse Product. The endpoint may be a mouse handle, stylus, finger tip receptacle, ball, 3 4 or other manipulandum that can be moved by the user in two dimensional plane. A Planar Force Feedback Cursor Control Device can be mounted in any housing including but not limited to a housing shared by a keyboard, track ball or other interface peripheral that provides additional functionality. Planar Force Feedback Cursor Control Devices specifically do not include (i) devices that can apply three dimensional forces through the device or (ii) a "Gaming Device" as that term is defined in the Intellectual Property License Agreement between Immersion and Logitech dated April 2, 1997. 1.18 NET RECEIPTS. This means the gross receipts received by Logitech and its Affiliates without taking into account any foreign withholding taxes that may apply to transfers between Logitech and its affiliates upon any sales of Royalty Bearing Products to unaffiliated third parties, less any actual returns and/or credits actually credited to a customer's account in accordance with Logitech's standard accounting practices applied in good faith. Net Receipts shall not include freight, insurance and taxes. No other costs incurred in the manufacture, sale, distribution, or exploitation of Royalty Bearing Products shall be deducted from gross receipts in the calculation of Net Receipts. If Royalty Bearing Products are bundled with other items sold by Logitech or its Affiliates and are not invoiced separately, royalties will be paid based on Logitech's then-current average sales price for each such Royalty Bearing Product (or if no Logitech averages sales price exists, the applicable Affiliate average sales price) when sold as a separate item (averaged for the applicable Quarter in which the Net Receipts are received by Logitech or its Affiliates, as applicable, for the country in which the sale was made) in like quantities in arms length transactions to unrelated third parties other than Logitech or Logitech Affiliates). 1.19 NEW TECHNOLOGY. This means any force-feedback technology modification or addition made by Immersion, for the Planar Force Feedback Cursor Control Field of Use, other than a Defect Correction or Error Correction, that when incorporated into the FEELit Mouse Product or other Planar Force Feedback Cursor Control Device, materially changes the utility, efficiency, market value, functional capability or application, and which is developed by Immersion on a non-exclusive basis and made "generally available" for use in Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use and which is delivered by Immersion to Logitech as a tangible implementation pursuant to the terms of Section 7.4 ("New Technology") of the Development Agreement. For purposes of this definition, "generally available" shall mean offered under nonexclusive license to any one unaffiliated third party (other than the original third party for whom the technology, modification or addition was originally developed) for use in Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use. 1.20 OEM OR OEMS. This means any third party (not including Affiliates) that does not manufacture Planar Force Feedback Cursor Control Devices and that wishes to purchase finished Planar Force Feedback Cursor Control Devices for sale in the Planar Force Feedback Cursor Control Field of Use under its own brand name. 1.21 PARTY OR PARTIES. This means Immersion and/or Logitech. 4 5 1.22 PRODUCT LAUNCH. This means the date on which first commercial-level shipping of the FEELit Mouse Product or any Product Model commences to third party unaffiliated customers of Logitech or a Logitech Affiliate. 1.23 PRODUCT MODEL. This means a single model of the FEELit Mouse Product or any other Planar Force Feedback Cursor Control Device. "Product Model" shall mean each variation of a FEELit Mouse Product or Planar Force Feedback Cursor Control Device which (i) differs by virtue of addition of or alteration through an Enhancement or (ii) constitutes a change in form factor or (iii) incorporates a material change in force-feedback functionality made by a party other than Immersion. Purely cosmetic alterations (e.g., color or styling) to the physical appearance of the FEELit Mouse Product or a Planar Force Feedback Cursor Control Device, or changes that do not alter the force-feedback functionality but reduce manufacturing costs shall not be deemed a Product Model. 1.24 QUARTER OR QUARTERS. This means Logitech's yearly fiscal quarters. Specifically, Logitech's yearly fiscal quarters begin and end on the following dates: first quarter, April 1 - June 30; second quarter, July 1 - September 30; third quarter, October 1 - December 31; and fourth quarter, January 1 - March 31. 1.25 ROYALTY BEARING PRODUCT. This means a Planar Force Feedback Cursor Control Device which either (1) incorporates or utilizes Immersion Product Model Technology that is not otherwise made generally available to the public by Immersion without charge or (2) is covered (a) by a Licensed Patent or (b) by a copyright of Immersion embodied in any Immersion Product Model Technology that is not otherwise made generally available to the public by Immersion without charge. 1.26 SPECIFICATION(S). This means the FEELit Mouse Product specification attached as the original Exhibit A ("Specification") to the Development Agreement and each Planar Force Feedback Cursor Control Device specification associated with a development schedule which is attached by amendment to the Development Agreement. 1.27 YEAR. This means any full four-Quarter period. 1.28 Any reference to the words "PURCHASE," "SALE," or "SELL," when used in connection with intellectual property, shall mean license. 2. GRANT OF LICENSES 2.1 GRANT WITH RESPECT TO THE LICENSED PATENTS. Subject to the terms of this Agreement, Immersion grants to Logitech a worldwide, nonexclusive license under the Licensed Patents to develop, make, have made, use, sell, lease, license, demonstrate, market and distribute the FEELit Mouse Product and any other Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Device Field of Use. Except as provided in Section 2.3 ("Right to Sublicense"), no right to sublicense the Licensed Patents is granted by Immersion to Logitech. 5 6 2.2 GRANT WITH RESPECT TO THE IMMERSION PRODUCT MODEL TECHNOLOGY. Subject to the terms of this Agreement, Immersion grants to Logitech a worldwide, nonexclusive license under any Intellectual Property Rights owned or licensable by Immersion that cover the Immersion Product Model Technology, excluding the New Technology except as separately licensed by Immersion to Logitech in accordance with the terms of Section 7.4 ("New Technology") of the Development Agreement, to use, copy, modify, and create derivative works based upon the Immersion Product Model Technology and in order to develop, make, and have made Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use, and to sell, lease, license, demonstrate, perform, market and distribute such Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use. No access rights or license to the source code for the Immersion Software are granted to Logitech except (i) as provided under the terms of Section 13 ("Source Code Escrow") of the Development Agreement and (ii) as provided under the terms of Section 2.2.1 ("Firmware Source Code"). Logitech and its Affiliates have no right and Logitech agrees not to disassemble or decompile any portion of the software portions of the Immersion Product Model Technology. 2.2.1 FIRMWARE SOURCE CODE. Immersion may elect, from time to time, and in its sole discretion, to (i) disclose portions of the Immersion firmware to Logitech in source code form solely for informational purposes and as Confidential Information under the terms of Section 16 ("Confidentiality") of the Technology Product Development Agreement and (ii) to deliver portions of the Immersion firmware (which is Immersion Product Model Technology and delivered as a Deliverable or an Enhancement under the terms of the Technology Product Development Agreement) to Logitech in source code form solely for informational purposes and as Confidential Information under the terms of Section 16 ("Confidentiality"). Such firmware source code, if delivered to Logitech, will not be used by Logitech for other than informational purposes unless Immersion notifies Logitech, in writing, that such specific firmware source code is classified as "Authorized For Modification." With respect to firmware source code which has been designated by Immersion as "Authorized For Modification," Immersion grants to Logitech a worldwide, nonexclusive license under any Intellectual Property Rights owned or licensable by Immersion that cover the firmware source code, to use, copy, modify, create derivative works based upon the firmware source code, and to create an object code version of such firmware derivative work for license as Immersion Product Model Technology under the terms of Section 2.2 ("Grant With Respect to the Immersion Product Model Technology"). No license to distribute the firmware source code in source code form is granted herein. 2.3 RIGHT TO SUBLICENSE. Subject to the terms of Section 2.6 ("Trademark License from Immersion"), Immersion grants to Logitech the right to sublicense any of the rights set forth in Section 2.1 ("Grant With Respect to the Licensed Patents") and Section 2.2 ("Grant With Respect to the Immersion Product Model Technology") above subject to the limitations of this Agreement: (i) to any Affiliate of Logitech and (ii) to any non-Affiliate third party of Logitech solely for the purpose of assisting Logitech in the design or development of Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use. Logitech agrees that any act or omission by a Logitech Affiliate that is inconsistent with Logitech's obligations under the terms of this Agreement shall be deemed to be an act or omission by Logitech and a breach of this Agreement by Logitech. 6 7 2.4 DURATION. Subject to the obligation to pay royalties, the licenses set forth above will extend to the full end of the term for which any Licensed Patent is issued or any other Intellectual Property Right of Immersion licensed hereunder is in force, unless sooner terminated as provided in this Agreement. 2.5 LABEL REQUIREMENTS. Subject to the terms of Section 2.6 ("Trademark License for Immersion") and Section 2.7 ("Administration Procedure"), Logitech shall place belly labels on Force Feedback Cursor Control Devices which are Royalty Bearing Products which shall include the language and related logo: "FEELitTM Force Feedback Technology Licensed from Immersion Corporation" (hereinafter the "Legend"). Logitech shall also place or have placed the Legend on retail manuals and boxes as designated in Exhibit B ("Immersion Package Labeling Specification"). Logitech shall not remove Immersion's copyright notices from any copies of the Immersion Software. The parties agree that in the case of each Planar Force Feedback Cursor Control Device noticed by Logitech to Immersion under the terms of Section 2.7 ("Administrative Procedures"), Immersion will provide Logitech with a list of applicable Licensed Patents which will identify the "Key Licensed Patents" which will be identified on the belly label of the particular device and will also identify the "Document Patents" which will be identified in the product documentation included with the device. The language on the belly label for the Key Licensed Patents will read as follows: "{List Key License Patents} and other patents listed in associated documentation." If OEM customers object to belly label marking or the inclusion of patents in the documentation as described above, the Parties will mutually agree upon a reasonable solution in writing in advance. 2.6 TRADEMARK LICENSE FROM IMMERSION. Subject to the procedures set forth in Section 2.7 ("Administrative Procedures") below and Immersion's prior written approval, Immersion hereby grants to Logitech a nonexclusive, nontransferable, worldwide license, to use in connection with marketing the FEELit Mouse Product or any Planar Force Feedback Cursor Control Device, the trademark(s) used by Immersion ("Marks") to identify the Immersion Product Model Technology and/or Licensed Patents and Logitech agrees to use such Marks on and in connection with Royalty Bearing Products except in the case of OEM products where, if the OEM customer objects, the parties will mutually agree upon a reasonable solution in writing, in advance. Logitech acknowledges that all use of the Marks will inure to the benefit of Immersion. Logitech shall not register Immersion's Marks in any jurisdiction and will not adopt any trademark for use on the FEELit Mouse Product or Planar Force Feedback Cursor Control Device which is confusingly similar to any trademark of Immersion or which includes a prominent portion of any trademark of Immersion. At Immersion's reasonable request, Logitech shall provide Immersion with samples of Logitech's use of Immersion trademarks. Logitech agrees to abide by Immersion's reasonable written trademark policies as issued and provided to Logitech from time to time. In any case where the Marks are not used in compliance with Immersion's trademark policies and such use has been approved in writing by Immersion, upon receipt of written notice from Immersion, Logitech will promptly correct the non-compliance and submit samples of compliant use to Immersion for approval. 2.7 ADMINISTRATIVE PROCEDURES. The Parties agree that in order to provide Immersion with appropriate information necessary for the orderly administration of the Licensed 7 8 Patents and Marks, Logitech will provide Immersion with prompt written notice prior to Product Launch of each Product Model and will enclose an information package which contains two prototypes or production units of the Product Model sufficient to enable Immersion to determine which of the Licensed Patents cover the Product Model and to review and approve the use of the Marks. If in any case Immersion believes that the quality of the Product Model does not meet Immersion's commercially reasonable standards, Logitech will not be permitted to ship the Product Model with the Marks until the quality issue is resolved, but Logitech may in is discretion ship such Product Model without the Marks and shall be relieved of its obligation to use the Marks on that Product Model. 2.8 GRANT WITH RESPECT TO KNOW-HOW. Subject to the terms of this Agreement, each party grants to the other a worldwide, nonexclusive license to use any know-how of such party disclosed to the other party pursuant to the Development Agreement. 3. ROYALTIES 3.1 NEW TECHNOLOGY ROYALTIES. As provided in Section 9.2 ("New Technology Royalties") of the Development Agreement, New Technology will be provided to Logitech subject to royalties which are mutually agreed upon in writing by Immersion and Logitech. 3.2 PER PRODUCT MODEL ROYALTY. Except as provided by Section 3.1 ("New Technology Royalties"), Logitech shall pay Immersion a royalty based on a percentage of the Net Receipts for each Product Model of a Royalty Bearing Product sold by Logitech or any Logitech Affiliates to unrelated third parties (other than Logitech or Logitech Affiliates) in arms length transactions, in accordance with the following. The royalty percentage for each Product Model shall be five percent (5%) for all units of a Royalty Bearing Product sold. Shipments of Royalty Bearing Products between Logitech and the Logitech Affiliates or between Logitech Affiliates will not be considered to be sold or otherwise transferred until sold to an unrelated customer of Logitech or a Logitech Affiliate. 3.3 MOST FAVORABLE ROYALTIES. Immersion agrees that, in the event that the royalty rates contained in any license agreement entered into by Immersion and any third party governing the license of substantially similar Immersion Product Model Technology for use in any Planar Force Feedback Cursor Control Device in the Planar Force Feedback Cursor Control Field of Use that has substantially similar force feedback functionality to a Planar Force Feedback Cursor Control Device commercially released by Logitech, are less than the applicable rates for such Planar Force Feedback Cursor Control Device herein, Immersion hereby agrees that it will advise Logitech of such lesser royalty rates as of the date such lesser royalties became effective for such other third party. Such comparison will be on the basis of cash royalty rates only and will not apply in situations where part of the consideration is a cross-license which is taken into account in setting the cash royalty. Logitech shall have the right to have an independent auditor mutually agreed upon by Logitech and Immersion audit Immersion business records related to the performance of its obligations under this Section 3.3 on an annual basis. Logitech shall pay the costs of such audit, unless such audit reveals that Immersion is not in compliance with this Section 3.3, in which case other than termination Logitech's sole and 8 9 exclusive remedy will be, at Logitech's option, Immersion shall promptly credit Logitech's account or repay any overpayment, the parties will amend the Agreement to reflect the most favorable Royalty Rate and Immersion shall pay the reasonable costs of such audit. Such audit shall be preceded by at least five (5) business days advance written notice and shall be performed during normal business hours by the auditor. The auditor shall have access to only those books and records of Immersion that are reasonably necessary to determine the compliance by Immersion with this Agreement. Any and all non-public information related to Immersion or its business revealed in the course of such audit shall be kept confidential by the auditor and by Logitech, and shall not be disclosed by the auditor to anyone other than employees or professional advisors of Logitech who have a reasonable need to know in connection with such audit, or used for any purpose, except to the extent reasonably necessary to determine whether Immersion is in compliance with this Agreement. 3.4 PAYMENTS AND REPORTS. The royalties to be paid by Logitech to Immersion hereunder shall be due forty-five (45) days after the close of each Quarter. Royalty reports setting forth the royalty calculation by Product Model and identifying whether the sales were made by Logitech or Logitech Affiliates shall be included with such payments. Logitech will pay and account to Immersion for royalties due hereunder with respect to sales or other disposition of Royalty Bearing Products by any Logitech Affiliates, and for that purpose, sales of Royalty Bearing Products by any Logitech Affiliate (other than sales or other disposition by an Affiliate to Logitech or to another Logitech Affiliate) will be deemed to be sales by Logitech. 3.5 AUDIT RIGHTS OF ROYALTY PAYMENTS. Immersion shall have the right to have an independent auditor mutually agreed by Logitech and Immersion audit the method used to calculate the average sales price, as well as the sales data pursuant to Section 1.19 ("Net Receipts") and the royalty payments of Logitech for itself and its Affiliates on an annual basis, but shall pay the costs of such audit, unless such audit reveals any underpayment of royalties in an amount greater than five percent (5%) of actual royalties due for any Year, in which case Logitech shall promptly remit an amount equal to the underpayment and shall pay the reasonable costs of such audit. Such audit shall be preceded by at least five (5) business days advance written notice and shall be performed during normal business hours by the auditor. The auditor shall have access to only those books and records of Logitech which are reasonably necessary to determine the relevant sales royalties due for Royalty Bearing Products for Logitech itself and its Affiliates and the correctness of the royalty payments hereunder. Any and all non-public information related to Logitech, its Affiliates, or their business revealed in the course of such audit shall be kept confidential by the auditor and by Immersion, and shall not be disclosed by the auditor to anyone other than employees or professional advisors of Immersion who have a reasonable need to know in connection with such audit, or used for any purpose, except to the extent reasonably necessary to determine the correctness of royalty payments made hereunder. 4. TERM AND TERMINATION 4.1 TERM. Unless earlier terminated in accordance with the provisions of this Agreement, this Agreement will extend until the last to expire of the Licensed Patents or any other Intellectual Property Right of Immersion licensed hereunder. 9 10 4.2 TERMINATION BY LOGITECH. 4.2.1 TERMINATION WITHOUT CAUSE. Logitech may terminate this Agreement without cause upon ninety (90) days written notice, and such written notice under the terms of this Agreement shall also serve as written notice of the termination of the Development Agreement, if such Agreement is still in effect at such time, and the Development Agreement will then terminate within sixty (60) days of such notice pursuant to the terms of Section 12.1 ("Termination by Logitech Without Cause") and such termination shall be deemed to be a termination without cause by Logitech and will be construed in accordance with the terms of Section 12.3 ("Effect of Termination") therein. 4.2.2 TERMINATION WITH CAUSE. Logitech may terminate this Agreement by written notice to Immersion if Immersion has materially breached the terms of this Agreement and fails to cure the breach after written notice of breach to Immersion and a thirty (30) day time period to cure. 4.3 TERMINATION BY IMMERSION FOR FAILURE TO PAY ROYALTIES. Immersion may terminate this Agreement by written notice to Logitech in the event that Logitech or any Logitech Affiliate breaches the terms of Section 3 ("Royalties") including but not limited to any failure to pay any royalties due and payable by Logitech and/or any of the Logitech Affiliates under this Agreement and Logitech fails to cure such breach after written notice of breach and a thirty (30) day time period to cure. If Immersion issues a written notice of termination to Logitech under the terms of this Section 4.3 ("Termination by Immersion for Failure to Pay Royalties") such notice shall also serve as written notice of termination for cause by Immersion under the terms of Section 12.2 ("Termination for Cause") of the Development Agreement, if such Agreement is still in effect at such time. If the breach described in the aforementioned written notice of termination is not cured in accordance with the terms of this Section 4.3 ("Termination by Immersion for Failure to Pay Royalties"), the Development Agreement will then terminate within thirty (30) days of such notice pursuant to the terms of Section 12.2 ("Termination for Cause") and such termination will be deemed to be a termination for cause by Immersion for purposes of Section 12.3 ("Effect of Termination") and the effects of termination will be construed in accordance with the terms of Section 12.3 ("Effect of Termination") therein. 4.4 TERMINATION BY IMMERSION FOR BREACH OF PATENT LICENSE. Immersion may terminate this Agreement in the event that Logitech engages in activity which exceeds the scope of the patent license granted in Section 2.1 ("Grant With Respect to the Licensed Patents") or breaches the labeling requirement of Section 2.5 ("Label Requirements") and fails to cure the breach after written notice of breach and a sixty (60) day time period to cure. Except as set forth in this Section 4.4 or Section 4.3 ("Termination by Immersion for Failure to Pay Royalties"), the patent license granted in Section 2.1 ("Grant With Respect to the Licensed Patents") shall not be terminable by Immersion. If Immersion issues a written notice of termination to Logitech under the terms of this Section 4.4 ("Termination by Immersion for Breach") such notice shall also serve as written notice of termination for cause by Immersion under the terms of Section 12.2 10 11 ("Termination for Cause") of the Development Agreement, if such Development Agreement is still in effect at such time. If the breach described in the aforementioned written notice of termination is not cured in accordance with the terms of this Section 4.4 ("Termination by Immersion for Breach"), the Development Agreement will then terminate within sixty (60) days of such notice pursuant to the terms of Section 12.2 ("Termination for Cause") and such termination will be deemed to be a termination for cause by Immersion for purposes of Section 12.3 ("Effect of Termination") and the effects of termination will be construed in accordance with the terms of Section 12.3 ("Effects of Termination") therein. 4.5 TERMINATION OF LICENSES TO IMMERSION PRODUCT MODEL TECHNOLOGY BY IMMERSION FOR BREACH. Immersion may terminate the licenses granted with respect to Immersion Product Model Technology in Section 2.2 ("Grant With Respect to the Licensed Patents") in the event that Logitech engages in activity which exceeds the scope of such license or breaches the terms of Section 2.3 ("Right to Sublicense") or the labeling requirement of Section 2.5 ("Label Requirements") and fails to cure the breach after written notice of breach and a sixty (60) day time period to cure. Termination of the licenses with respect to the Immersion Product Model Technology shall not affect the patent licenses granted hereunder. Except as set forth in this Section 4.5 ("Termination of Licenses to Immersion Product Model Technology by Immersion for Breach") or Section 4.3 ("Termination by Immersion for Failure to Pay Royalties"), the licenses granted in Section 2.2 ("Grant With Respect to the Licensed Patents") shall not be terminable by Immersion. 4.6 EFFECT OF TERMINATION. Notwithstanding any termination of this Agreement for any reason, Logitech agrees to pay Immersion for royalties due under this Agreement from Logitech or any Logitech Affiliate. Upon a termination of this Agreement for cause or without cause, Logitech and each Affiliate shall have one hundred and twenty (120) days to distribute any remaining inventory in process and in existence as of the effective date of the termination, subject to the obligation for Logitech to pay royalties hereunder for any such distribution by Logitech and/or any Logitech Affiliates. EXCEPT FOR DIRECT DAMAGES RESULTING FROM A BREACH OF THE TERMS OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO A BREACH BY LOGITECH OR ANY LOGITECH AFFILIATE OF SECTION 2 ("GRANT OF LICENSES"), NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY SORT AS A RESULT OF TERMINATING THIS AGREEMENT IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT. 5. WARRANTY Immersion represents and warrants that Immersion either has ownership of, or sufficient rights in, the Immersion Product Model Technology to be delivered under the terms of the Development Agreement and the Licensed Patents to enter into this Agreement and grant all the rights set forth herein. As of the Effective Date of the Agreement, Immersion is not aware of and has not received any notice of any claim by a third party that the copyrights, patents, trade secrets, trademarks or other intellectual property rights of any third party are infringed by the Immersion Product Model Technology that Immersion, in its sole discretion intends to, as of the Effective Date, use to comply with Immersion's development obligations under the terms of the 11 12 Development Agreement, except as disclosed to Logitech in writing prior to the date of this Agreement. Immersion further represents and warrants that it neither holds nor has applied for a patent that is dominant to the Licensed Patents. 6. INDEMNIFICATION 6.1 TRADEMARK INFRINGEMENT INDEMNIFICATION BY IMMERSION. Subject to the limitations on cumulative liability under Section 7.1 ("Disclaimers of Certain Types of Damages") and Section 7.3 ("Limitations of Liability with Respect to Indemnity Obligations"), and Immersion's approval for Logitech to use the Legend and the Marks pursuant to Section 2.5 ("Label Requirements"), Section 2.6 ("Trademark License") and Section 2.7 ("Administrative Procedures") and further subject to prompt notification by Logitech, cooperation by Logitech and control of all litigation and/or settlement by Immersion, Immersion shall indemnify, defend and hold Logitech harmless from and against any and all claims, damages, liabilities, judgments, settlements, losses, costs and expenses (including court costs and reasonable attorneys' and experts' fees) (collectively, "Costs") suffered or incurred by Logitech arising out of a claim of infringement of any Immersion Mark or Legend used by Logitech on a Planar Force Feedback Cursor Control Device in the Planar Force Feedback Cursor Control Field of Use which is based on Logitech's use under the labeling requirement of Section 2.5 ("Label Requirements") and/or the terms of Section 2.6 ("Trademark License") and Section 2.7 ("Administrative Procedures"). In the case of an infringement or alleged infringement by any such Immersion Mark or Legend used by Logitech on a Planar Force Feedback Cursor Control Device in the Planar Force Feedback Cursor Control Field of Use: (i) Logitech will have the right to remove such Marks and/or Legend from Logitech Planar Force Feedback Cursor Control Devices while any dispute or litigation concerning the same is pending, and shall begin using such marks again only after such infringement claims or disputes have been settled or dismissed with prejudice, and (ii) Immersion will have the right to require Logitech to stop using such Marks and/or Legend and will provide a new trademark to be used in connection with the Immersion Product Model Technology and/or Licensed Patents, as applicable. Each party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in this Section 6.1 ("Trademark Infringement indemnification by Immersion") may apply. If notified in writing of any action or claim for which Immersion is to provide indemnity, Immersion shall defend, subject to the limitations of liability set forth in Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of Liability With Respect to Indemnity Obligations"), those actions or claims at Immersion's expense and pay the Costs awarded against Logitech in any such action, or pay any settlement of such action or claim entered into by Immersion. 6.2 COPYRIGHT INFRINGEMENT AND TRADE SECRET MISAPPROPRIATION INDEMNIFICATION BY IMMERSION. 6.2.1 SCOPE. Subject to the limitations of cumulative liability under Section 7.1 ("Disclaimer of Certain Types of Damages") and Section 7.3 ("Limitations of Liability With Respect to Indemnity Obligations") and further subject to prompt notification by Logitech, cooperation by Logitech and control of all litigation and/or settlement by Immersion, Immersion shall indemnify, defend and hold Logitech harmless from and against any and all Costs suffered 12 13 or incurred by Logitech as a result of any third party claim that any Immersion Product Model Technology delivered by Immersion to Logitech infringes any copyright or misappropriates any trade secret of any third party. In the case of any third party claim involving the Immersion Software portion of the Immersion Product Model Technology, Immersion may, in its sole discretion, provide Logitech with a modification to the affected Immersion Software so that the Immersion Software portion of the Immersion Product Model Technology becomes noninfringing or in the alternative, may provide Logitech other software which is functionally equivalent. Each party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in this Section 6.2 ("Copyright Infringement and Trade Secret Misappropriation Indemnification by Immersion") may apply. If notified in writing of any action or claim for which Immersion is to provide indemnity, Immersion shall defend, subject to the limitations of liability set forth in Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of Liability With Respect to Indemnity Obligations"), those actions or claims at Immersion's expense and pay the Costs awarded against Logitech in any such action, or pay any settlement of such action or claim entered into by Immersion. 6.2.2 EXCEPTIONS. The foregoing indemnity will not apply to any infringement claim to the extent it arises from (i) any modification of any Immersion Product Model Technology by parties other than Immersion or Immersion subcontractors under contract with Immersion, (ii) use of any Immersion Product Model Technology in conjunction with other non-Immersion products or components where there would be no infringement absent such use with such other products or components or (iii) an infringement which would not occur in the Immersion Product Model Technology or any Final Prototype in which such Immersion Product Model Technology is incorporated but which does occur in the final production version of a Planar Force Feedback Cursor Control Device. 6.3 PERSONAL INJURY AND PROPERTY DAMAGE CLAIMS. Neither party shall have any obligation to indemnify, protect, defend and hold the other party harmless from any Costs suffered or incurred by the other party to the extent such third party claim or threatened claim arises from a personal or alleged personal injury or damage or alleged damage to property arising out of the third party's use of Planar Force Feedback Cursor Control Devices. 6.4 PRODUCT LIABILITY INSURANCE. The Parties agree that they shall each secure insurance covering product liability. Such insurance shall provide coverage of at least ONE MILLION DOLLARS ($1,000,000) per occurrence and shall remain in effect during the term of this Agreement. Each party will promptly cause the other party to be named as an additional insured. 6.5 PATENT INFRINGEMENT INDEMNIFICATION BY IMMERSION. 6.5.1 SCOPE. Subject to the limitations of cumulative liability under Section 7.1 ("Disclaimer of Certain Types of Damages") and Section 7.3 ("Limitations of Liability With Respect to Indemnity Obligations"), and further subject to prompt notification by Logitech, cooperation by Logitech and control of all litigation and/or settlement by Immersion, Immersion shall indemnify, defend and hold harmless Logitech from and against any and all Costs (except 13 14 as provided in Section 6.5.3 ("Exceptions With Respect to Patents Issued After the Effective Date")) suffered or incurred by Logitech as a result of any third party claim that any Immersion Product Model Technology delivered by Immersion (for which Logitech is currently paying royalties) infringes upon any United States patent. Each Party agrees to notify the other promptly of any matters in respect to which the foregoing indemnity in this Section 6.5 ("Patent Infringement Indemnification by Immersion") may apply. If notified in writing of any action or claim for which Immersion is to provide indemnity, Immersion shall defend, subject to the limitations of liability set forth in Section 7.1 ("Disclaimer of Certain Types of Damages") and 7.3 ("Limitations of Liability With Respect to Indemnity Obligations") and the provisions of Section 6.5.3 ("Exceptions With Respect to Patents Issued After the Effective Date"), those actions or claims at its expense and pay the Costs awarded against Logitech in any such action, or pay any settlement of such action or claim entered into by Immersion. In any such action, Logitech will make available to Immersion all defenses against such action or claim known or available to Logitech. 6.5.2 EXCEPTIONS TO THE SCOPE OF THE INDEMNITY. Immersion shall have no liability or obligation with respect to any claim of patent infringement to the extent it arises from (a) Immersion's compliance with the Specifications in Exhibit A of the Development Agreement for a Planar Force Feedback Cursor Control Device, to the extent such infringement would not have arisen but for compliance with such Specifications, (b) use of Immersion Product Model Technology by Logitech or its customers, subcontractors or any third party in or with an application, embodiment or environment other than that for which the Immersion Product Model Technology was designed as set forth in the applicable Specifications; (c) modification of Immersion Product Model Technology by Logitech or its customers, subcontractors or any third party; (d) the operation or use of any Immersion Product Model Technology in combination with any Planar Force Feedback Cursor Control Device, equipment or technology not delivered by Immersion or recommended by Immersion pursuant to a specific written obligation in the Specifications in Exhibit A of the Development Agreement to make a recommendation; or (e) Immersion's compliance with a Specification or any aspects or portions of the Specification which "inherently" (as defined below) infringes any patent. For the purposes of this Agreement "inherently" means that any device or aspect or portion of a device which was in conformance with the Specification would infringe such patent. 6.5.3 EXCEPTIONS WITH RESPECT TO PATENTS ISSUED AFTER THE EFFECTIVE DATE. The provisions of this Section 6.5.3 ("Exceptions With Respect to Patents Issued After the Effective Date") shall apply only with respect to a United States patent issued after the Effective Date (an "After-Issued Patent"). (a) NOTICE BY IMMERSION AND SUPPLY OF MODIFIED OR SUBSTITUTE TECHNOLOGY. Logitech agrees to promptly notify Immersion if Logitech becomes aware of an After-Issued Patent which Logitech reasonably believes is infringed by any Immersion Product Model Technology that is the subject of an indemnity obligation by Immersion hereunder. If upon receipt of notice from Logitech or independently, Immersion becomes aware of an After-Issued Patent which Immersion reasonably believes is infringed by any Immersion Product Model Technology that is the subject of an indemnity obligation by Immersion hereunder, then 14 15 Immersion will notify Logitech in writing of such patent (the date of such notice being referred to as the "Notice Date"). Within fifteen (15) days after the Notice Date, Immersion shall supply Logitech with a written description and cost estimate of a proposed redesign of the infringing Immersion Product Model Technology to avoid the infringement. As reasonably promptly thereafter as possible, Immersion shall supply Logitech with a modification to the affected Immersion Product Model Technology so that the incorporated Immersion Product Model Technology becomes noninfringing or substitute for the infringing Immersion Product Model Technology other technology that conforms to the Specifications in Exhibit A of the Development Agreement (which shall itself be deemed to be Immersion Product Model Technology) or, if neither of the foregoing are reasonably possible, procure for Logitech the right to continue to use such Immersion Product Model Technology. If Immersion is unable to procure for Logitech the right to continue to use such Immersion Product Model Technology under commercially reasonable terms, as determined by Immersion, Immersion may, in the alternative, refund to Logitech all royalties received by Immersion under the Agreement relating to the allegedly infringing Immersion Product Model Technology (reflecting any discounts granted to Logitech, less an amount for depreciation calculated in a straight-line basis over an assumed useful life of three (3) years). (b) COSTS NOT COVERED BY INDEMNITY FOR AFTER-ISSUED PATENTS. Immersion shall have no obligation to indemnify Logitech for infringement of such After-Issued Patents with respect to any units of a Planar Force Feedback Cursor Control Device which are distributed or used by Logitech after the Notice Date. Immersion shall have no liability hereunder to reimburse Logitech for any lost inventory, retooling or other manufacturing costs incurred by Logitech that result from Logitech's incorporation of such modified or substitute technology in order to avoid infringement of an After-Issued Patent. (c) ELECTION BY LOGITECH OF ALTERNATIVE REMEDY. Notwithstanding the foregoing provisions, in any instance in which Immersion is prepared and capable of supplying to Logitech modified or substitute technology to avoid infringement of an After-Issued Patent, Logitech may, within a reasonable time after receiving Immersion's written description and cost estimate of Immersion's proposed redesign, elect either (i) to request, in writing, that Immersion pursue a license under the After-Issued Patents on behalf of Logitech to continue using the affected Immersion Product Model Technology, in which event if such license would cost Immersion more than the cost estimate provided by Immersion to Logitech, under the terms of (a) above, to supply modified or substitute technology to avoid infringement, then Logitech shall pay the difference between such costs, or (ii) to request, in writing, that Logitech be allowed to continue to use the Immersion Product Model Technology in unaltered form, in which event Immersion shall have no obligations of indemnity or defense hereunder with respect to any infringement of the After-Issued Patents resulting from units of Planar Force Feedback Cursor Control Devices incorporating the unaltered Immersion Product Model Technology used or distributed by Logitech after the Notice Date. If Immersion pursues the license described in (i) above, and is unable to procure such a license, Immersion will not be in breach of this Agreement. 15 16 6.6 REMEDIES IN THE EVENT OF PROHIBITION OF USE. The provisions and remedies set forth in this Section 6.6 ("Remedies In the Event of Prohibition of Use") shall continue to be applicable with respect to any copyright infringement or trade secret misappropriation under the terms of Section 6.2 ("Copyright Infringement and Trade Secret Misappropriation"), and any After-Issued Patents for which Immersion does not supply written notice to Logitech in accordance with Section 6.5.3 (a) ("Notice by Immersion and Supply of Modified or Substitute Technology") and any U.S. Patents issued prior to the Effective Date of this Agreement. If a preliminary or final judgment shall be obtained against Logitech's use, sale or distribution of a Planar Force Feedback Cursor Control Device that incorporates any Immersion Product Model Technology based infringement within the scope of the indemnity set forth in Section 6.1 ("Trademark Infringement indemnification by Immersion"), 6.2 ("Copyright Infringement and Trade Secret Misappropriation Indemnification by Immersion") or 6.5 (Patent Infringement Indemnification by Immersion") (subject to the exceptions set forth therein), or if any Immersion Product Model Technology is, or in Immersion's opinion, is likely to become, subject to a claim for such infringement, then Immersion shall, at its expense, either (a) modify the Immersion Product Model Technology so that the incorporated Immersion Product Model Technology becomes noninfringing, or (b) procure for Logitech the right to continue to use such Immersion Product Model Technology, or (c) substitute for the infringing Immersion Product Model Technology other technology that conforms to the Specifications in Exhibit A of the Development Agreement (which shall itself be deemed to be Immersion Product Model Technology). If (a), (b) or (c) above are not commercially reasonable alternatives in Immersion's opinion, Immersion shall refund to Logitech all royalties received by Immersion under this Agreement relating to the allegedly infringing Immersion Product Model Technology (reflecting any discounts granted to Logitech, less an amount for depreciation calculated in a straight-line basis over an assumed useful life of three (3) years). 6.7 INDEMNITY BY LOGITECH. Subject to the limitations of liability set forth in Section 7 ("Limitations of Liability"), and subject to prompt notification by Immersion, cooperation by Immersion and control of all litigation and/or settlement by Logitech, Logitech shall indemnify, defend and hold harmless Immersion from and against any and all Costs suffered or incurred by Immersion to the extent such Costs are suffered or incurred by Immersion in the situations listed in the exceptions (i) through (iii) enumerated in Section 6.2.2 ("Exceptions"), and in the exceptions (a) through (e) enumerated in Section 6.5.2 ("Exceptions to the Scope of Indemnity"), and/or in the situation where Logitech and Immersion agree that Logitech will be allowed to continue to use the Immersion Product Model Technology in unaltered form in accordance with subsection (ii) of Section 6.5.3 (c) ("Election by Logitech of Alternative Remedy"), provided that such situations arise because of Logitech's, its subcontractors' or affiliates' use and modifications. 7. LIMITATIONS OF LIABILITY 7.1 DISCLAIMER OF CERTAIN TYPES OF DAMAGES. IN NO EVENT WILL LOGITECH OR IMMERSION BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS 16 17 AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF LOGITECH AND IMMERSION HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 7.2 LIMITATIONS OF LIABILITY OTHER THAN INDEMNITY OBLIGATIONS. EXCEPT WITH RESPECT TO THE PARTIES' OBLIGATIONS OF INDEMNITY, INCLUDING, BUT NOT LIMITED TO COSTS OF DEFENSE AND "COSTS" (AS DEFINED ABOVE) SET FORTH IN SECTION 6 ("INDEMNIFICATION") WHICH ARE LIMITED BY THE TERMS OF SECTION 7.3 ("LIMITATIONS OF LIABILITY WITH RESPECT TO INDEMNITY OBLIGATIONS") AND WITH RESPECT TO ANY ROYALTIES DUE AND PAYABLE BY LOGITECH HEREUNDER, IN NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY OR OBLIGATIONS UNDER THE TERMS OF OR ARISING OUT OF THIS AGREEMENT EXCEED $1,000,000. 7.3 LIMITATIONS OF LIABILITY WITH RESPECT TO INDEMNITY OBLIGATIONS. IN NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY WITH RESPECT TO ITS OBLIGATIONS OF INDEMNITY INCLUDING, BUT NOT LIMITED TO COSTS OF DEFENSE AND "COSTS" (AS DEFINED ABOVE) UNDER SECTION 6 ("INDEMNIFICATION") EXCEED THE GREATER OF (i) $500,000 OR (ii) ROYALTIES PAID OR PAYABLE BY LOGITECH TO IMMERSION HEREUNDER FOR THE THIRTY-SIX (36) MONTHS PRECEDING THE EVENT FIRST GIVING RISE TO SUCH OBLIGATIONS. 7.4 NEGATION OF WARRANTIES AND OTHER OBLIGATIONS. 7.4.1 Nothing in this Agreement shall be construed: (i) as a warranty or representation by Immersion as to the validity or scope of any Licensed Patents; (ii) as a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement by patents, copyrights, trade secrets, trademarks, or other rights of third parties; (iii) as granting by implication, estoppel or otherwise any licenses or rights under patents or other Intellectual Property Rights of Immersion other than expressly granted herein, regardless of whether such patents are dominant or subordinate to any Licensed Patents, or (iv) (a) to require Immersion to file any patent application relating to force-feedback in Planar Force Feedback Cursor Control Devices, (b) a warranty that Immersion will be successful in securing the grant of any patent relating to force- feedback in Planar Force 17 18 Feedback Cursor Control Devices or any reissue or extensions thereof, and (c) to require Immersion to pay any maintenance fees or take any other steps to maintain Immersion's patent rights relating to force feedback in Planar Force Feedback Cursor Control Devices, provided, however, that in the event Immersion elects not to pay any maintenance fee or take any step to maintain such patents, Immersion shall so notify Logitech a reasonable period in advance and Logitech may, at its option, pay such maintenance fee or take such steps. 7.4.2 Except for Immersion's obligations of indemnity set forth herein, Immersion does not assume any responsibility for the definition of the Specifications, the manufacture of the Planar Force Feedback Cursor Control Devices, or use of any Planar Force Feedback Cursor Control Device which is manufactured or sold by or for Logitech or the Logitech Affiliates under the Licensed Patent licenses granted herein. All warranties in connection with such Planar Force Feedback Cursor Control Devices shall be made by Logitech or the Logitech Affiliates as manufacturers or sellers of such Planar Force Feedback Cursor Control Devices and such warranties shall not directly or by implication obligate Immersion in any way. 8. THIRD PARTY ENFORCEMENT Immersion shall not have any obligation or duty under this Agreement to any party, including but not limited to Logitech to enforce any patents or Licensed Patents against any third party infringing any claim or claims of any patent and/or the Licensed Patents provided, however, that should Logitech become aware of any actual infringement of the Licensed Patents by a Planar Force Feedback Cursor Control Device distributed in the Planar Force Feedback Cursor Control Field of Use by a third party, which Planar Force Feedback Cursor Control Device directly competes with a Planar Force Feedback Cursor Control Device currently shipped by Logitech as a formal product release which is covered by the Licensed Patents, Logitech will promptly communicate the details to Immersion. Immersion shall thereupon, within thirty (30) days of being made aware by Logitech of such infringement, send copies of the relevant Licensed Patents to such third party, however, Immersion shall have the right to take no further action or whatever action Immersion deems necessary, including cease and desist letters, negotiation, the filing of lawsuits, and/or settlement to terminate such infringement and the strategy and/or conclusion of such action or settlement shall be within Immersion's sole discretion. Logitech shall cooperate with Immersion if Immersion takes any such action but all expenses of Immersion shall be borne by Immersion. If Immersion recovers any damages or compensation for any action Immersion takes hereunder, including any settlement, Immersion shall retain one hundred percent (100%) of such damages. If Immersion does not elect to take such further action hereunder within ninety (90) days of being made aware of such infringement by Logitech, then Logitech shall have the right, but not the obligation, to provide Immersion with a Patent Enforcement Justification, as defined below, and if the proposed enforcement action meets the Patent Enforcement Justification criteria, Logitech may take and control any such action, subject to Immersion's absolute right to control any and all assertions or admissions 18 19 which relate to the scope or validity of Immersion's Licensed Patents. For purposes of this Section 8 ("Third Party Enforcement"), a Patent Enforcement Justification is a written report prepared by Logitech which includes: (i) the name and address of the entity manufacturing the Planar Force Feedback Cursor Control Device that is allegedly infringing the Licensed Patents and the names and addresses of any entities distributing such Planar Force Feedback Cursor Control Device, (ii) an analysis of which of the Licensed Patent claims are infringed, (iii) a comparison of the allegedly infringing Planar Force Feedback Cursor Control Device and the affected Planar Force Feedback Cursor Control Device distributed by Logitech with which such allegedly infringing Planar Force Feedback Cursor Control Device competes (which comparison analyzes the competitive threat as to (a) feature and function, (b) positioning, and (c) price point), (iv) the number of units of the Planar Force Feedback Cursor Control Device sold by Logitech in the most recent four (4) full Quarters and, if known or reasonably estimable, the number or estimate of the number of units of the allegedly infringing Planar Force Feedback Cursor Control Device sold in the most recent four (4) full Quarters, on a geographic area basis. The criteria which must be met by such report, in order to permit Logitech to "justify" and to go forward with an infringement action, as are follows: (i) Logitech must be selling over 150,000 units of the affected Planar Force Feedback Cursor Control Device in the market in which the infringement is occurring during the most recent four (4) full Quarters or, if the Product Launch occurred during the most recent four (4) full Quarters, Logitech reasonably estimates in good faith that it will sell over 150,000 units of the affected Planar Force Feedback Cursor Control Device in the market in which the infringement is occurring during the next four (4) full Quarters; (ii) the allegedly infringing Planar Force Feedback Cursor Control Device must be substantially similar to the affected Planar Force Feedback Cursor Control Device as to features and functions such that the allegedly infringing Planar Force Feedback Cursor Control Device is having or reasonably will have a serious impact on the sales of the affected Logitech Planar Force Feedback Cursor Control Device; (iii) the Licensed Patents to be enforced against the allegedly infringing Planar Force Feedback Cursor Control Device also cover the affected Logitech Planar Force Feedback Cursor Control Device; (iv) the number of units of the allegedly infringing Planar Force Feedback Cursor Control Device sold in the market in which the infringement is occurring in the most recent four (4) full Quarters or reasonably estimated in good faith to be sold in the next four (4) full Quarters must meet or exceed 150,000 units; and (v) Logitech has included the applicable Licensed Patent numbers on the affected Planar Force Feedback Cursor Control Device in accordance with the terms of Section 2.5 ("Label Requirements"). If the aforementioned criteria are met, Immersion will cooperate with Logitech, at Logitech's expense, including but not limited to joining any legal proceedings as a named plaintiff to the extent required to confer jurisdiction, and all of Logitech's expenses will be borne by Logitech. 19 20 Immersion may elect to have counsel of its own choosing participate at Immersion's sole expense in any legal proceedings instituted by Logitech, but Logitech shall retain one hundred percent (100%) of any damages Logitech recovers for any such proceedings including any settlement, provided however that (i) Logitech shall first reimburse Immersion for Immersion's Costs to participate in such action out of any recovery which exceeds Logitech's Costs for such action. Immersion must agree to any settlement of any infringement or of any action brought hereunder by Logitech, which consent will not be unreasonably withheld. 9. GENERAL 9.1 ENTIRE AGREEMENT. This Agreement, together with the Development Agreement and its Exhibits, constitutes the complete agreement of the parties and supersedes any other agreements, written or oral (including all correspondence, emails and the letter regarding Phase 0 dated February 20, 1998 concerning the subject matter hereof and such materials do not have any effect upon the rights and obligations of the Parties under this Agreement. This Agreement and the Development Agreement in no way supersede or affect the Intellectual Property License Agreement between Immersion and Logitech dated April 2, 1997 and/or the Technology Product Development Agreement between Immersion and Logitech dated April 2, 1997. 9.2 SUCCESSION AND ASSIGNMENT. Either party may assign this Agreement provided that the other party has consented in writing to the assignment or delegation and provided, further, that the rights and obligations of the parties may be assigned to a corporate successor in interest in the case of a merger or acquisition or in the case of a sale of assets without the prior approval of the other party. In the case of any permissible assignment of this Agreement by Immersion, the obligation for Logitech to include the phrase "from Immersion Corporation" at the end of the Legend will be waived. Any attempt to assign this Agreement in violation of the provisions of this Section 9.2 ("Succession and Assignment") shall be void. 9.3 NOTICES. Notices required under this Agreement shall be addressed as follows, except as otherwise revised by written notice: TO IMMERSION: TO LOGITECH: Louis B. Rosenberg, Ph. D. General Counsel President Logitech, Inc. Immersion Corporation 6505 Kaiser Drive 2158 Paragon Drive Fremont, CA 94555-3615 San Jose, CA 95131 9.4 GOVERNING LAW. The validity, interpretation and performance of this Agreement shall be governed by the substantive laws of the State of California, without the application of any principle that leads to the application of the laws of any other jurisdiction. 9.5 NO AGENCY. Neither party is to be construed as the agent, partner, or joint venturer or to be acting as the agent, partner or joint venturer of the other party hereunder in any respect. 20 21 9.6 NO RECRUITMENT. During the term of this Agreement and for one (1) year after the termination or expiration of this Agreement, each Party agrees not to recruit any employee of the other Party. 9.7 MULTIPLE COUNTERPARTS. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single Agreement between the parties. 9.8 NO WAIVER. No delay or omission by either Party hereto to exercise any right or power occurring upon any noncompliance or default by the other Party with respect to any of the terms of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either of the Parties hereto of any of the covenants, conditions, or agreements to be performed by the other shall not be construed to be a waiver of any succeeding breach thereof or of any covenant, condition, or agreement herein contained. Unless stated otherwise, all remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 9.9 SEVERABILITY. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 9.10 AMENDMENTS IN WRITING. Any amendment to this Agreement shall be in writing and signed by both parties hereto. 9.11 INTERPRETATION. Since this Agreement was prepared by both parties hereto, it shall not be construed against any one party as the drafting party. 9.12 DISPUTE RESOLUTION. Except in the case of a breach of an obligation related to a Party's Intellectual Property Rights, in the event either Party concludes that it is in its best interest to file any legal action against the other, the Party shall contact the other Party's management and at least two (2) senior managers from each Party shall meet without legal counsel or interruption for a minimum amount of three (3) eight (8) hour periods and diligently attempt to resolve all disputed matters. If the Parties are unable to resolve their difference and either Party desires to file a legal action against the other, at least two (2) senior managers from each Party and their respective counsels shall meet for three (3) eight (8) hour periods and diligently attempt to resolve all disputed matters. Either Party may request that an independent third party bound to mutually agreed upon obligations of confidentiality attend such meeting in order to assist the Parties in reaching a reasonable resolution. All oral and written information exchanged in these meetings shall be exchanged in an effort to settle all disputed matters. If either Party still desires to file a legal action against the other after these prescribed meetings, such Party may file a legal action against the other Party as allowed by applicable law in Santa Clara County state court or in the federal court. The Parties agree that if a Party does not attend all of the prescribed meetings it waives its rights to any monetary damages in the legal action(s) it files. 21 22 9.13 SURVIVAL. Sections 3.2 ("Per Product Model Royalty"), 3.4 ("Payments and Reports"), 3.5 ("Audit Rights of Royalty Payment"), 4.6 ("Effect of Termination"), 5 ("Warranty"), 7 ("Limitations of Liability") and 9 ("General") shall survive any termination or expiration of this Agreement. In addition, the provisions of Sections 6.1 ("Trademark Infringement Indemnification by Immersion"), 6.2 ("Copyright Infringement and Trade Secret Misappropriation Indemnification by Immersion"), 6.5 ("Patent Infringement Indemnification by Immersion"), 6.6 ("Remedies In the Event of Prohibition of Use") and 6.7 ("Indemnity by Logitech") shall survive with respect to any units of a Product Model of Royalty Bearing Products sold or otherwise distributed by Logitech before the termination or expiration of this Agreement, provided, however, that Immersion's obligations of indemnity under Sections 6.1 ("Trademark Infringement Indemnification by Immersion"), 6.2 ("Copyright Infringement and Trade Secret Misappropriation Indemnification by Immersion"), 6.5 ("Patent Infringement Indemnification by Immersion"), and 6.6 ("Remedies In the Event of Prohibition of Use") shall not survive in the event Immersion terminates this Agreement for cause, including but not limited to, failure by Logitech to pay royalties due hereunder. FORCE MAJEURE. With the exception of the obligation to pay monies due and owing, each Party hereto shall be excused from performance hereunder for any period and to the extent that it is prevented from performing any services pursuant hereto, in whole or in part, as a result of delays caused by the other Party or an act of God, war, civil disturbance, court order, governmental action, laws, orders, regulations, directions or requests, or as a result of events such as acts of public enemies, earthquakes, fires, floods, strikes or other labor disturbances of the other Party or any third party, or other cause beyond its reasonable control and which it could not have prevented by reasonable precautions, and such nonperformance shall not be a default hereunder or a ground for termination hereof. IN WITNESS WHEREOF, the authorized representatives of the parties hereto have signed this Agreement as of the date and year last set forth below. Logitech: Immersion: LOGITECH, INC. IMMERSION CORPORATION By: /s/ By: /s/ Louis Rosenberg -------------------------------- ---------------------------------- Title: S.V.P./ G.M. Title: President ----------------------------- -------------------------------- Date: April 13, 1998 Date: April 13, 1998 ------------------------------ -------------------------------- 22 23 CONFIDENTIAL TREATMENT REQUESTED - EDITED COPY EXHIBIT A SPECIFICATION Immersion shall develop a Mouse Product to conform to the following basic specifications: [****] Requirement Overview: The Mouse Product must be a high quality, premium cursor control peripheral capable of providing accurate positioning data and producing realistic force feedback sensations. The product must consist of the following subsystems: [****] *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 23 24 EXHIBIT B Immersion Packaging Labeling Specification Logitech must place or have placed the following notice or other similar mark, at Immersion's request, on the underside (exterior) of those products which incorporate Licensed Technology as well as on the packaging and manuals for such products: "FEELit(TM) Force Feedback Technology Licensed from Immersion Corporation". Logitech must also place or have placed the following FEELit Mouse logo (or future derivative of the mark as reasonably approved by Logitech) at Immersion's request, prominently on retail packaging and manuals such that the logo is clearly legible and occupies a rectangular area of no less than 0.70 inches by 0.825 inches. The mark must be displayed on at least two surfaces of the retail packaging, including the front surface and specifically not including the bottom surface. [FEELit LOGO] [DIAGRAM] EX-10.20 11 TECHNOLOGY PRODUCT DEVELOPMENT AGREEMENT, EDITED 1 EXHIBIT 10.20 *Certain information in this document has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. CONFIDENTIAL TREATMENT REQUESTED - EDITED COPY TECHNOLOGY PRODUCT DEVELOPMENT AGREEMENT IMMERSION CORPORATION AND LOGITECH, INC. This Technology Product Development Agreement (the "Agreement") between Immersion Corporation, a California corporation, with principal offices in San Jose, California (hereinafter "Immersion") and Logitech Inc., a California corporation, with principal offices in Fremont, California (hereinafter "Logitech"), is entered into as of April 13, 1998 (the "Effective Date"). RECITALS WHEREAS, Logitech and Immersion desire to establish a mutually beneficial business relationship and to develop, verify and launch under their best efforts high quality and competitively priced "FEELit Mouse" force-feedback Planar Force Feedback Cursor Control Devices; and, WHEREAS, Immersion is in the business of developing certain computer peripheral force feedback industrial, business, gaming, arcade and medical devices, and represents it is the owner and/or licensee of certain know-how, trade secrets and issued or pending patents; and, WHEREAS, Logitech is in the business of developing, manufacturing and distributing software and electrical computer peripheral devices such as input data, gaming, and control devices including, but not limited to, Planar Force Feedback Cursor Control Devices, and represents it is the owner and/or licensee of certain know-how, trade secrets and issued or pending patents; and, WHEREAS, Logitech desires to develop internally and with third parties, use, manufacture and distribute Planar Force Feedback Cursor Control Devices which utilize FEELit Mouse technology. NOW, THEREFORE, in consideration of the promises and agreements set forth below and the other consideration cited herein, the parties agree as follows: 1. PURPOSE AND SCOPE OF THE AGREEMENT 1.1 PURPOSE. The purpose of this Agreement is to expressly define the terms and conditions of Logitech's and Immersion's business relationship with respect to force-feedback Planar Force Feedback Cursor Control Device projects. 2 1.2 SCOPE. The scope of this Agreement encompasses Immersion's and Logitech's respective development, service and support rights and obligations regarding Planar Force Feedback Cursor Control Device projects provided for herein. 2. DEFINITIONS In this Agreement, including the Exhibits hereto, the following words and expressions shall have the following meanings: 2.1 AFFILIATES. This means any corporation or business entity which is controlled by, controls, or is under common control of a Party. For this purpose, the meaning of the word "control" shall include, without limitation, direct or indirect ownership of more than fifty percent (50%) of the voting shares of interest of such corporation or business entity. 2.2 DEFECT. This means, with respect to any non-software Deliverable, failure to materially conform to the applicable then-current Specifications for such non-software Deliverable. 2.3 DEFECT CORRECTION. This means either a modification or addition that eliminates or works around a Defect in a non-software Deliverable so as to cause the non-software Deliverable to comply with the applicable then-current Specification. 2.4 DELIVERABLES. This means the various deliverables, which are tangible implementations or items, including interim deliverables or final prototype deliverables, identified as such and described in Exhibit B ("Development Schedule"), or any subsequent development schedule attached hereto by amendment. 2.5 ENHANCEMENT OR ENHANCEMENTS. This means any force-feedback modification or addition made by Immersion under the terms of Section 6.7 ("Other Development") and Section 7.2 ("Enhancements by Immersion"), for the Planar Force Feedback Cursor Control Field of Use, and which is a tangible implementation, other than a Defect Correction or Error Correction, that when incorporated into the Planar Force Feedback Cursor Control Device, materially reduces the product cost of a Planar Force Feedback Cursor Control Device, or materially changes the functional capability, or form factor. 2.6 ERROR. This means, with respect to any software Deliverable, failure of any such software Deliverable to materially conform to the applicable then-current Specification for such software Deliverable. 2 3 2.7 ERROR CORRECTION. This means either a modification or addition that eliminates or works around an Error in the software Deliverable so as to cause the software Deliverable to comply with the then-current Specification. 2.8 FEELIT MOUSE PRODUCT. This means the final production version of the mouse described in the first Exhibit A ("Specifications") which utilizes and/or contains Immersion Product Model Technology, including but not limited to the applicable Immersion Software, documentation, Defect Corrections and Error Corrections thereto. 2.9 FINAL PROTOTYPE. This means a Deliverable which is the final functional form of the Planar Force Feedback Cursor Control Device, if any, including software and hardware, produced by Immersion under a development schedule, which prototype serves as a model for the final production version of the Planar Force Feedback Cursor Control Device, if any, and which conforms to the applicable Specification. 2.10 IMMERSION PRODUCT MODEL TECHNOLOGY. This means that subset of Immersion Technology delivered as a Deliverable under the terms of a development schedule, or as an Enhancement or New Technology, which is actually utilized in or in connection with and/or embedded in the final production version of the FEELit Mouse Product, any subsequent Product Model of the FEELit Mouse Product or any Product Model of any Planar Force Feedback Cursor Control Device. 2.11 IMMERSION SOFTWARE. This means the driver software and computer firmware subset of the Immersion Product Model Technology actually utilized in or in connection with and/or embedded in the final production version of the FEELit Mouse Product, any subsequent Product Model of the FEELit Mouse Product or any Product Model of any Planar Force Feedback Cursor Control Device that acts as an interface to and controls the FEELit Mouse Product, any subsequent Product Model of the FEELit Mouse Product or any Planar Force Feedback Cursor Control Device. 2.12 IMMERSION TECHNOLOGY. This means any and all technology created or acquired by Immersion, or licensed to Immersion by third parties, including but not limited to software created by employees or consultants of Immersion, (i) first developed or reduced to practice before or after the Effective Date solely by Immersion independent of the scope of the work under this Agreement or (ii) first developed or reduced to practice after the Effective Date and within the scope of a Deliverable developed solely by Immersion (a) under a development schedule in effect under the terms of this Agreement, (b) as an Enhancement or (c) as New Technology. 3 4 2.13 INTELLECTUAL PROPERTY LICENSE AGREEMENT. This means the Intellectual Property License Agreement between Immersion and Logitech dated the same date as this Agreement. 2.14 JOINT TECHNOLOGY. This means any and all technology created and/or invented jointly by Immersion and Logitech employees or consultants after the Effective Date and within the scope of development of the FEELit Mouse Product or any Planar Force Feedback Cursor Control Device and/or any Enhancements under the terms of this Agreement. The term "Joint Technology" specifically excludes Immersion Technology and Logitech Technology. 2.15 LOGITECH PRODUCT MODEL TECHNOLOGY. This means that subset of Logitech Technology which is actually utilized in or in connection with and/or embedded in the final production version of the FEELit Mouse Product, any subsequent Product Model of the FEELit Mouse Product or any Product Model of any Planar Force Feedback Cursor Control Device. 2.16 LOGITECH TECHNOLOGY. This means any and all technology created or acquired by Logitech, or licensed to Logitech by third parties, including but not limited to software created by employees or consultants of Logitech (i) first developed or reduced to practice before or after the Effective Date solely by Logitech independent of the scope of the work under this Agreement or (ii) first developed or reduced to practice after the Effective Date solely by Logitech and within the scope of a development schedule in effect under the terms of this Agreement. 2.17 PLANAR FORCE FEEDBACK CURSOR CONTROL FIELD OF USE. This means the market for Planar Force Feedback Cursor Control Devices which are not targeted for use in specific applications or designed for specific applications. The Planar Force Feedback Cursor Device Field of Use does not include the market for products specifically targeted for use in gaming, medical, industrial, human disabilities, military, automotive, scientific and arcade products and applications. 2.18 PLANAR FORCE FEEDBACK CURSOR CONTROL DEVICE(S). This means (i) a force feedback computer cursor control device having the capability of tracking position of an endpoint in a two dimensional plane and applying two dimensional planar forces upon the user through said endpoint and (ii) one-dimensional force feedback cursor control embodiments, including but not limited to a force feedback roller for "roller mouse" cursor control embodiments. Planar Force Feedback Cursor Control Devices include but are not limited to the FEELit Mouse Product. The endpoint may be a mouse handle, stylus, finger tip receptacle, ball, or other manipulandum that can be moved by the user in two dimensional plane. A Planar Force Feedback Cursor Control Device can be mounted in any housing including but not limited to a housing shared by a 4 5 keyboard, track ball or other interface peripheral that provides additional functionality. Planar Force Feedback Cursor Control Devices specifically do not include (i) devices that can apply three dimensional forces through the device or (ii) a "Gaming Device" as that term is defined in the Intellectual Property License Agreement between Immersion and Logitech dated April 2, 1997. 2.19 NEW TECHNOLOGY. This means any force-feedback technology modification or addition made by Immersion, for the Planar Force Feedback Cursor Control Field of Use, other than a Defect Correction or Error-Correction, that when incorporated into a Planar Force Feedback Cursor Control Device, materially changes the utility, efficiency, market value, functional capability or application, and which is developed by Immersion on a non-exclusive basis and made "generally available" for use in Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use and which is delivered by Immersion to Logitech as a tangible implementation pursuant to the terms of Section 7.4 ("New Technology"). For purposes of this definition, "generally available" shall mean offered under nonexclusive license to any one unaffiliated third party (other than the original third party for whom the technology, modification or addition was originally developed) for use in Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use. 2.20 OEM OR OEMS. This means any third party (not including Affiliates) that does not manufacture Planar Force Feedback Cursor Control Devices and that wishes to purchase finished Planar Force Feedback Cursor Control Devices for sale in the Planar Force Feedback Cursor Control Field of Use under its own brand name. 2.21 PARTY OR PARTIES. This means Immersion and/or Logitech. 2.22 PRODUCT LAUNCH. This means the date on which first commercial-level shipping of the FEELit Mouse Product or any Product Model commences to third party unaffiliated customers of Logitech or a Logitech Affiliate. 2.23 PRODUCT MODEL. This means a single model of the FEELit Mouse Product or any other Planar Force Feedback Cursor Control Device. "Product Model" shall mean each variation of a FEELit Mouse Product or Planar Force Feedback Cursor Control Device which (i) differs by virtue of addition of or alteration through an Enhancement or (ii) constitutes a change in form factor or (iii) incorporates a material change in force-feedback functionality made by a party other than Immersion. Purely cosmetic alterations (e.g., color or styling) to the physical appearance of the FEELit Mouse Product or a Planar Force Feedback Cursor Control Device, or changes that do not alter the force-feedback functionality but reduce manufacturing costs shall not be deemed a Product Model. 5 6 2.24 QUARTER OR QUARTERS. This means Logitech's yearly fiscal quarters. Specifically, Logitech's yearly fiscal quarters begin and end on the following dates: first quarter, April 1 - June 30; second quarter, July 1 - September 30; third quarter, October 1 - December 31; and fourth quarter, January 1 - March 31. 2.25 ROYALTY BEARING PRODUCT. This means a Planar Force Feedback Cursor Control Device which either (1) incorporates or utilizes Immersion Product Model Technology that is not otherwise made generally available to the public by Immersion without charge or (2) is covered by a Licensed Patent as defined in the Intellectual Property License Agreement or by a copyright of Immersion embodied in any Immersion Product Model Technology that is not otherwise made generally available to the public by Immersion without charge generally. 2.26 SPECIFICATION(S). This means the FEELit Mouse Product specification attached hereto as Exhibit A ("Specification") and each Planar Force Feedback Cursor Control Device specification associated with a development schedule which is attached by amendment to this Agreement. 2.27 YEAR. This means any full four-Quarter period. 2.28 Any reference to the words "PURCHASE," "SALE," or "SELL," when used in connection with intellectual property, shall mean license. 3. EXHIBITS The following Exhibits shall be attached hereto and incorporated in their entirety by this reference. EXHIBIT A ("Specification"), the Specification, contains the description of the FEELit Mouse Product. EXHIBIT B ("Development Schedule"), the Development Schedule, contains the Milestones, Deliverables and Deliverable Due Dates. The parties agree to complete Exhibit B within thirty (30) days of the Effective Date and add such Exhibit B to this Agreement by written amendment within such time period. EXHIBIT C ("Change Order Form"), is the Change Order Form. EXHIBIT D ("Software License Agreement") is the end user software license agreement. EXHIBIT E ("Immersion Packaging Labeling Specification") is the Immersion Packaging Labeling specification. 6 7 4. TERM The initial term of this Agreement shall be for a period of five (5) years commencing on the Effective Date, unless otherwise earlier terminated by the Parties according to the terms of this Agreement. Thereafter, this Agreement shall automatically renew for subsequent two-year periods, unless either party terminates the Agreement by written notice at least one hundred eighty (180) days prior to the end of the initial term or any renewal term. 5. ENGAGEMENT OF SERVICES 5.1 PROJECT ASSIGNMENT. Subject to the terms of this Agreement, Immersion and Logitech will render the services and develop the Deliverables described in Exhibit B ("Development Schedule"), based upon Exhibit A ("Specifications"), which development schedule and/or Specification may be modified by the Parties from time to time in accordance with the procedures described in Section 6.6 ("Modification of Specification"). Immersion shall dedicate full-time employees of sufficient technical and professional caliber to define, develop, complete and verify the Planar Force Feedback Cursor Control Device it develops with Logitech in accordance with Exhibit B ("Development Schedule"), based on Exhibit A ("Specifications"), and will assist Logitech in launching and supporting the resulting Planar Force Feedback Cursor Control Device in accordance with the terms of Section 7.1 ("Technical Service and Support"). 5.2 PERFORMANCE OF SERVICES. Logitech has selected Immersion to perform the services described in this Agreement based upon Logitech receiving Immersion's personal services. Immersion may not, therefore, subcontract or otherwise assign and delegate its obligations under this Agreement without Logitech's prior written consent. 5.3 PRESS RELEASE. Each of the Parties agree to credit appropriately the other Party in all press releases, promotions, advertisement and announcements that mention the force feedback Planar Force Feedback Cursor Control Devices. Prior to a Party releasing any information that references the other Party, the publishing Party shall obtain the other Party's prior written approval. The parties shall announce their FEELit Mouse partnership within six months of the Effective Date. 6. PLANAR FORCE FEEDBACK CURSOR CONTROL DEVICE DEVELOPMENT 6.1 FUNDING. Logitech shall fund all costs related to its internal development of the Planar Force Feedback Cursor Control Devices. In consideration of the duties and obligations of Immersion with respect to its development obligations hereunder for Logitech, Logitech will pay Immersion on a reasonable time and material basis. Immersion will be liable for all taxes levied against Immersion which arise 7 8 in connection with Immersion's performance under this Agreement and the payments received from Logitech. Any payment designated as due and payable based upon completion of development of a specified Deliverable(s) and acceptance by Logitech shall not be payable until Logitech's acceptance thereof. 6.1.1 FEELit MOUSE PRODUCT FUNDING. In consideration of the duties and obligations of Immersion with respect to development pursuant to Exhibit B ("Development Schedule") by Immersion, Logitech will pay Immersion a total amount of three hundred and sixty two thousand dollars ($362,000) (US Dollars) ("Development Fee"), which sum is in addition to the eight thousand dollars ($8,000) to be paid by Logitech to Immersion under the terms of the Parties' Phase 0 Term Sheet, receipt of which previous payment is hereby acknowledged by Immersion. The Development Fee will be payable based on a segmented development schedule with scheduled deliverables as described in Exhibit B ("Development Schedule"). 6.2 DEVELOPMENT MILESTONES. Immersion's development obligation under the terms of this Agreement as described in Exhibit B ("Development Schedule") shall be conducted on a first priority basis. The FEELit Mouse Product development schedule is described with particularity in Exhibit B ("Development Schedule") and the schedule is divided into milestones ("Milestones"), each of which require the delivery of one or more Deliverables on specific Deliverable due dates ("Deliverable Due Dates"). Upon completion of each Milestone associated with a Deliverable under Exhibit B ("Development Schedule") as amended in writing by the Parties from time to time, Immersion shall promptly deliver to Logitech the applicable Deliverable called for under such Milestone. Logitech agrees to promptly complete and deliver to Immersion Deliverables required to be completed and delivered by Logitech pursuant to the terms of Exhibit B ("Development Schedule"). 6.3 DELIVERY AND ACCEPTANCE OF DELIVERABLES BY LOGITECH. Upon completion of each Deliverable, Immersion shall deliver to Logitech such Deliverable, including documentation, if included as part of the Deliverable requirement, for evaluation by Logitech. Logitech shall review, test, and evaluate each Deliverable and where indicated in the Development Schedule, accept or reject each Deliverable in accordance with Exhibit B ("Development Schedule") and make the associated payment, if any, for accepted Deliverables. Logitech shall provide Immersion with written acceptance of each Deliverable (for which acceptance is indicated as a requirement in the Development Schedule), or a written statement of Defects and/or Errors to be corrected within ten (10) business days after such delivery unless a different acceptance time period for a Deliverable is described in Exhibit B ("Development Schedule") or as otherwise mutually agreed upon in a 8 9 writing signed by the Parties. Immersion shall promptly correct such Defects and/or Errors and return the corrected Deliverables for retesting and reevaluation, and unless otherwise provided for in Exhibit B ("Development Schedule"), Logitech shall within ten (10) business days after such redelivery provide Immersion with written acceptance or a statement of Defects and/or Errors to be corrected. The foregoing procedure shall be repeated until Logitech accepts the Deliverable or finally rejects the Deliverable and either terminates the Agreement or the development project related to the unacceptable Deliverable pursuant to Section 12 ("Termination"). 6.4 PROGRAM MANAGERS. Immersion and Logitech shall each appoint a program manager ("Program Manager"). Each Party reserves the right to change such Program Manager, at any time, upon written notice to the other Party. Immersion's appointed Program Manager as of the Effective Date is Ken Martin. Logitech's appointed Program Manager as of the Effective Date is Laurent Plancherel. 6.5 STATUS MEETINGS. The Parties shall notify each other of any anticipated problems and any indication of delay in fixed or tentative schedules. At least once each month, the Parties shall conference, as mutually agreed, for progress discussions describing in detail the status of the work performed and discussion of possible resolution of any problems which have arisen. 6.6 MODIFICATION OF SPECIFICATION. Logitech may modify the Specifications at any time during development after consulting with Immersion. If any such modification requires an increase in the time or cost to perform by Immersion, an equitable adjustment shall be negotiated and mutually agreed upon in writing by Immersion and Logitech. Such changes will be implemented only pursuant to a change order form in the form of Exhibit C ("Change Order Form"), signed by both Parties. Such changes will become effective and will be deemed incorporated into the Agreement as an amendment to the applicable exhibit or section of the Agreement. This procedure is used to control the technical configuration of the Deliverables, as well as to control and document costs and schedules. Logitech shall not be liable for any work performed by Immersion which differs from the then-current Specification and/or development schedule prior to such work being authorized in a signed Change Order Form. 6.7 OTHER DEVELOPMENT. Should Logitech desire to have Immersion design other Planar Force Feedback Cursor Control Devices after the FEELit Mouse Product and/or Enhancements, the Parties will mutually agree in writing upon a supplemental development schedule substantially in the form of Exhibit B ("Development Schedule"), and reasonable associated development fees, and an accompanying Exhibit A ("Specifications") and shall amend this Agreement to 9 10 incorporate such project. Except as provided in Section 7.4 ("New Technology"), all terms and conditions of this Agreement, and the Intellectual Property License Agreement including royalty rates set forth in the Intellectual Property License Agreement, Section 3 ("Royalties"), shall apply to any Planar Force Feedback Cursor Control Device developed under this Agreement unless otherwise mutually agreed in writing. 7. IMMERSION'S POST-DEVELOPMENT OBLIGATIONS 7.1 TECHNICAL SERVICE AND SUPPORT. Immersion shall provide Logitech with ongoing engineering and technical support up to at least sixty (60) hours per week for the Planar Force Feedback Cursor Control Device, as reasonably requested by Logitech. So long as Logitech has "preferred customer status," Immersion will provide such ongoing engineering and technical support on a first priority basis. If Logitech does not have "preferred customer status", Immersion will continue to provide such ongoing engineering and technical support on an as-available basis without the sixty (60) hour per week minimum commitment. In consideration of any such support, whether on a priority or as-available basis, Logitech shall pay Immersion at a reasonable time and materials rate. 7.1.1 EXCEPTION. Immersion shall promptly provide Error Corrections without charge for any Errors, including software Errors in any Immersion Software including any firmware. 7.2 ENHANCEMENTS BY IMMERSION. So long as Logitech has "preferred customer status," and in accordance with Section 6.7 ("Other Development") above, an Enhancement project shall be scheduled on a first priority basis. If Logitech does not have "preferred customer status", Immersion may agree to provide Enhancements under the terms of this Section 7.2 ("Enhancements by Immersion") on a case by case and time available basis but Immersion will be under no obligation to accept an Enhancement project. 7.3 OEM REFERRAL. Should an OEM contact Immersion concerning manufacture of a Planar Force Feedback Cursor Control Device for the Planar Force Feedback Cursor Control Field of Use, Immersion agrees to direct such OEM to contact Logitech with respect to manufacturing such Planar Force Feedback Cursor Control Device. The obligation of Immersion to direct OEMs to Logitech is independent of Logitech having "preferred customer status" and is not required for such referrals. Logitech agrees that when contacted by any OEM referred by Immersion, Logitech will include Immersion Product Model Technology and/or technology covered by the Licensed Patents as defined in the Intellectual Property License Agreement in any initial proposals or designs for manufacturing a Planar Force Feedback Cursor Control Device for such OEM. If Logitech's proposal or 10 11 design incorporating Immersion Product Model Technology and/or technology covered by the Licensed Patents as defined in the Intellectual Property License Agreement is accepted, Logitech agrees to make good faith efforts to utilize Immersion Product Model Technology and/or technology covered by the Licensed Patents as defined in the Intellectual Property License Agreement in the Planar Force Feedback Cursor Control Device manufactured for such OEM and to pay royalties therefor to Immersion in accordance with this Agreement. If the OEM in its own discretion elects to reject Logitech's proposal and/or design which incorporates Immersion Product Model Technology and/or technology covered by the Licensed Patents as defined in the Intellectual Property License Agreement, then (i) Immersion agrees and acknowledges that Logitech may manufacture a Planar Force Feedback Cursor Control Device for the OEM without incorporating Immersion Product Model Technology and/or technology covered by the Licensed Patents and (ii) Logitech agrees and acknowledges that Immersion may enter into an agreement with the OEM with respect to Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use. 7.4 NEW TECHNOLOGY. So long as Logitech has "preferred customer status", if Immersion develops and decides to make "generally available" and to license, on a nonexclusive basis, to any one unaffiliated third party (other than the original third party for whom the New Technology was originally developed) any New Technology for use in Planar Force Feedback Cursor Control Devices in the Planar Force Feedback Cursor Control Field of Use, Immersion shall provide Logitech with an opportunity to license such New Technology, under the terms of a separate agreement, on a nonexclusive basis and on terms at least as favorable as those upon which such New Technology is offered by Immersion to others, which royalty terms may or may not be as favorable as the royalty terms in the Intellectual Property License Agreement Section 3 ("Royalties"). If Logitech does not have "preferred customer status", Immersion may decide to offer New Technology under the terms of this Section 7.4 ("New Technology") but is not obligated to do so. 7.5 NOTICE OF IMMERSION MANUFACTURE. Immersion shall provide Logitech with twelve (12) months' written notice prior to commencement by Immersion of distribution of a Planar Force Feedback Cursor Control Device for the Planar Force Feedback Cursor Control Field of Use to be manufactured by Immersion or manufactured by a third party on Immersion's behalf for distribution by Immersion under Immersion's name. Upon expiration of this notice period, Immersion may, but shall no longer be obligated to offer Logitech Enhancements in accordance with Section 7.2 ("Enhancements by Immersion"), may but shall no longer be obligated to offer OEMs to Logitech in accordance with Section 7.3 11 12 ("OEM Referral"), and may but shall no longer be obligated to provide New Technology under Section 7.4 ("New Technology"). 7.6 LOGITECH PREEMPTION PROTECTION. Provided that Logitech is in compliance with its development obligations under the terms of this Agreement, which will be measured by Logitech making substantial progress toward meeting its milestones as indicated in Exhibit B ("Development Schedule"), Immersion agrees not to enter into an agreement with any third party manufacturer which will permit such third party manufacturer to ship a mouse product for the Planar Force Feedback Cursor Control Field of Use which incorporates similar Immersion Technology as incorporated into the FEELit Mouse Product (a "Similar Product") on or before three (3) months after the Product Launch Commitment Date as defined in Section 8.4 ("Product Launch Commitment"). 7.7 ADVISEMENT PERIOD. Although Immersion's development relationship with Logitech under the terms of this Agreement is not exclusive, Immersion agrees, during the Advisement Period (as defined below), to provide Logitech with written notice if Immersion enters into an agreement with a third party manufacturer which will permit such third party manufacturer to produce a Similar Product that is scheduled or planned to ship during calendar 1999. Such notice will not identify the third party manufacturer and will not provide details regarding the Similar Product but will simply advise Logitech that such an agreement has been signed. For purposes of this Agreement, the Advisement Period shall be a period which commences on the Effective Date of this Agreement and ends three (3) months after the Product Launch Commitment Date. 8. LOGITECH'S OBLIGATIONS 8.1 DEVELOPMENT. Logitech shall (i) work with Immersion to produce each set of Exhibit A ("Specifications") which shall include product features, performance and design criteria, power requirements, schematics, quality requirements, and the preliminary component summary; and Exhibit B ("Development Schedule"), including technical assistance in the development thereof; (ii) review, test and evaluate the Immersion Deliverables for conformance with the applicable Specification, and (iii) deliver the Logitech Deliverables to Immersion for use in development in accordance with Exhibit B ("Development Schedule"). Immersion agrees not to disclose or copy for any purpose Logitech's Specifications and Deliverables without the express written consent of Logitech or in fulfillment of Immersion's obligations under this Agreement. 12 13 8.2 PREFERRED CUSTOMER STATUS. 8.2.1 REQUIREMENTS. Logitech shall have "preferred customer status" during the first four quarter period (the "Initial Period") following the Product Launch. If the Product Launch falls within the first half of a Quarter, such Quarter will be counted as the first such Quarter. If the Product Launch falls in the second half of a Quarter, the next Quarter will be counted as the first such Quarter. Thereafter, except as provided in Section 7.5 ("Notice of Immersion Manufacture"), for so long as (i) Logitech continues to timely pay royalties to Immersion according to the Intellectual Property License Agreement Section 3 ("Royalties") in an amount equal to at least three hundred twenty thousand dollars ($320,000) ("Minimum Annual Revenue Requirement") per four Quarter period (a "Revenue Period") beginning at the expiration of the Initial Period, payable on a quarterly basis as set forth in Section 8.2.2 ("Minimum Annual Revenue Requirement"); and (ii) Logitech is not distributing (directly or through OEMs) any force-feedback Planar Force Feedback Cursor Control Device which is not a Royalty Bearing Product, Immersion agrees to grant Logitech "preferred customer status." Notwithstanding the foregoing, Logitech may, by written notice given at least thirty (30) days prior to the first day of any given Revenue Period terminate the "preferred customer status" for the upcoming Revenue Period. Upon termination of "preferred customer status" as described herein all of the obligations of Immersion and Logitech, and any provisions in this Agreement, which are contingent upon "preferred customer status" shall be null and void and of no further force or effect upon expiration of the then current four Quarter period. If Logitech does not send a termination notice as permitted herein, the "preferred customer status" will continue for the duration of the upcoming Revenue Period, except as otherwise provided herein. If Immersion does not receive a termination notice from Logitech as provided herein, Immersion will send a notice to Logitech, confirming that no termination notice has been received, within thirty (30) days after the subject Revenue Period commences; however a failure by Immersion to send such notice will not be a material breach and will in no way change Logitech's "preferred customer status." 8.2.2 MINIMUM ANNUAL REVENUE REQUIREMENT. Each Minimum Annual Revenue Requirement shall consist of four (4) payments of eighty thousand dollars ($80,000) each. Each quarterly payment shall be referred to as a "Quarterly Payment". Each such Quarterly Payment shall be due on the last day of each Quarter ("Preferred Status Quarter") and is payable within forty-five (45) days after the end of each Preferred Status Quarter. Royalties accrued in each Preferred Status Quarter as provided in the 13 14 Intellectual Property License Agreement Section 3 ("Royalties") shall be credited toward the Quarterly Payments due for such Preferred Status Quarter. If the actual royalties due for the Preferred Status Quarter are less than the Quarterly Payment due, Logitech will submit the actual royalty payment and Logitech will pay the difference between the Quarterly Payment due and the actual royalties due for the Preferred Status Quarter. If the actual royalties due for the Preferred Status Quarter are greater than the Quarterly Payment due, such excess amount shall be credited toward future Quarterly Payments within the same Revenue Period. Actual royalties paid in excess of the Minimum Annual Revenue Requirement for a given Revenue Period will not be applied as a credit toward Quarterly Payments due for Preferred Status Quarters in a later Revenue Period. Should Logitech not timely pay any required Quarterly Payment and fail to make such payment within ten (10) days of receiving written notice from Immersion and unless otherwise agreed to in writing by the Parties, preferred customer status benefits as described in Sections 7.1 ("Technical Services and Support"), 7.2 ("Enhancement by Immersion") and 7.4 ("New Technology") shall no longer be in force or effect, effective as of the date on which such Quarterly Payment was due. 8.2.3 TERMINATION OF PREFERRED CUSTOMER STATUS. If Logitech terminates its "preferred customer status" by distributing (either directly or through OEMs) a force-feedback Planar Force Feedback Cursor Control Device in the Planar Force Feedback Cursor Control Field of Use which is not a Royalty Bearing Product, Logitech agrees to provide Immersion with six (6) months' prior written notice. Upon expiration of such notice period, (i) Logitech shall no longer be obligated to pay the Quarterly Payments starting on the date the next Quarterly Payment would have come due after the expiration of the six (6) month notice, however, Logitech will submit a pro rata Quarterly Payment for the portion of the Quarter in which the "preferred customer status" was in effect prior to the expiration date of the six (6) month notice which shall be applied in accordance with Section 8.2.2 ("Minimum Annual Revenue Requirement") and (ii) all of the obligations of Immersion and Logitech, and any provisions in this Agreement which are contingent upon "preferred customer status" shall be null and void and of no further force or effect upon expiration of the notice period. 8.3 DEVELOPER UNITS. Subject to the timely completion of Immersion's development obligations under the terms of this Agreement, Logitech agrees to produce one hundred (100) FEELit Mouse units (PVT) at least six (6) months prior to the Product Launch. Immersion shall be responsible for providing such units to software developers in a timely manner. 14 15 8.4 PRODUCT LAUNCH COMMITMENT. Logitech agrees to use reasonable efforts to launch the FEELit Mouse Product with a "Product Availability Date" or "PAD" on or before July 23, 1999 (such date (and not the actual shipment date) shall be referred to as the "Product Launch Commitment Date"). Immersion recognizes that the actual shipment date may be adjusted to a later date due to unforeseen events, manufacturing issues, and/or sourcing issues and that Logitech, by way of this provision, is merely confirming Logitech's commitment of the resources and priority level to make Product Launch by July 23, 1999 a strong possibility. The parties have designated a date in the milestone schedule in Exhibit B ("Milestone Schedule") as the "Design Freeze" date, after which Immersion shall not be responsible for schedule delays resulting from subsequent Logitech changes to the design specification of the FEELit Mouse. Immersion acknowledges that Immersion may be responsible for several time sensitive and critical steps in a given milestone schedule which will need to be completed prior to the Design Freeze date. The parties agree that the Product Launch Commitment Date of July 23, 1999 is dependent upon this Design Freeze date identified in the milestone schedule in Exhibit B ("Milestone Schedule") being met. Therefore, the parties agree that for each day that the Design Freeze is adjusted to a later date substantially due to Immersion's failure to complete milestones which are substantially Immersion's responsibility to complete and substantially within Immersion's control and upon which the Design Freeze date is dependent, the Product Launch Commitment Date will be moved back one day not including weekends. 8.5 OEM SOLE SOURCE INITIATIVE. The parties intend to negotiate in good faith to sign an OEM Purchase Agreement under which, for the first eighteen (18) months of such agreement, Logitech agrees to purchase all of its peripheral device components requirements which can be met by certain FEELit Mouse Controller Chip and Custom Actuator Core components as defined in the OEM Purchase Agreement. 9. FINANCIAL TERMS 9.1 DEVELOPMENT FEES. Development of the FEELit Mouse Product will be funded in accordance with the terms of Section 6.1 ("Funding") and any subsequent development will be funded as provided under the terms of Section 6.7 ("Other Development"). 9.2 NEW TECHNOLOGY ROYALTIES. New Technology will be provided under royalties which are subject to the terms of Section 7.4 ("New Technology") and which are mutually agreed upon in writing by Immersion and Logitech. 15 16 10. OWNERSHIP OF TECHNOLOGY 10.1 IMMERSION TECHNOLOGY. Immersion shall retain ownership of all Immersion Technology (and Immersion Product Model Technology). 10.2 LOGITECH TECHNOLOGY. Logitech shall retain ownership of all Logitech Technology (and Logitech Product Model Technology). 10.3 JOINT TECHNOLOGY. All Joint Technology shall be jointly owned by Immersion and Logitech. Exploitation of and subsequent development of Joint Technology, including commercial development and/or licensing, will be by each Party without financial accounting to, or the consent of, the other Party. Each Party agrees to assist the other Party in any reasonable manner to obtain and enforce intellectual property rights with respect to the Joint Technology for the requesting Party's benefit in any and all countries, and each Party agrees to execute, when requested, applications and assignments to the requesting Party and any other lawful documents deemed necessary by the requesting Party to carry out the ownership provisions of this Agreement. If called upon to render assistance under this Section 10.3 ("Joint Technology"), a Party will be entitled to a fair and reasonable fee, in addition to reimbursement of expenses incurred, at the prior written request of the other Party. 10.4 JOINT TECHNOLOGY COPYRIGHTS. Each Party agrees to execute, upon written request of the other Party, a signed transfer of an undivided one-half interest in any Joint Technology copyright to the other Party (so that the Parties are joint owners of the copyright). 10.5 JOINT TECHNOLOGY INVENTIONS. Immersion and Logitech will determine whether any Joint Technology inventions were conceived or first actually or constructively reduced to practice within the scope of development of the FEELit Mouse Product, or any Planar Force Feedback Cursor Control Device and/or any Enhancements during the term of the Agreement, and the Parties will discuss the circumstances of the invention. The Parties will discuss whether a patent application should be filed for a particular Joint Technology invention or, in the alternative, the Joint Technology invention should be kept as a trade secret by the Parties. If the Parties mutually agree to file a patent for a particular Joint Technology invention, the Parties will discuss the patent filing details, including but not limited to which Party shall file and prosecute the U.S. and any foreign patent applications. The cost of such filing and prosecution shall be evenly distributed between the Parties. If the Parties cannot mutually agree to file for a patent for a particular Joint Technology invention, such Joint Invention shall be treated as a trade secret by both Parties provided, however, such treatment shall not prevent either party from shipping a product based upon such trade secret. In 16 17 any case where the Parties mutually agree to file for a patent, the application shall include all inventors and the Parties shall jointly own the patent. Should both Parties agree not to file for a patent such Joint Invention shall be treated as a trade secret by both Parties, provided, however, such treatment shall not prevent either party from shipping a product based upon such trade secret. Assignment of patent(s) issuing from application(s) for Joint Technology inventions shall be made jointly to Immersion and Logitech. 10.6 SURVIVAL OF JOINT TECHNOLOGY OBLIGATIONS. The obligations set forth in this Section 10 ("Ownership of Technology") shall survive the expiration or termination of this Agreement. 11. LOGITECH DEVELOPMENT LICENSE TO IMMERSION Logitech grants Immersion a non-exclusive license to use the Logitech Technology under Logitech's intellectual property rights, provided to Immersion hereunder for purposes of performing Immersion's development obligations under any development schedule attached to this Agreement, to have and distribute internally Logitech Technology and to modify or copy the materials exclusively for the purpose of performing the development activities required under this Agreement. Immersion's intellectual property license to Logitech with respect to all Deliverables delivered hereunder and all development performed under the terms of this Agreement, with the exception of Joint Technology is described and subject to the terms and conditions of the Intellectual Property License Agreement. 12. TERMINATION 12.1 TERMINATION BY LOGITECH WITHOUT CAUSE. Logitech may terminate this Agreement and/or any development project without cause upon sixty (60) days written notice. 12.2 TERMINATION FOR CAUSE. Immersion may terminate this Agreement and/or any development project by written notice if Logitech materially breaches Section 16 ("Confidentiality") or if Logitech fails to make development payments as provided in this Agreement and any Exhibit B ("Development Schedule"). Immersion's termination shall become effective upon thirty (30) days written notice of breach, provided Logitech fails to cure its breach within the notice period. Logitech may terminate this Agreement upon thirty (30) days written notice if Immersion materially breaches this Agreement and fails to cure its breach during the notice period. 12.3 EFFECT OF TERMINATION. If either Party terminates this Agreement and/or a development project hereunder, both Parties will stop all work in progress and minimize all related costs (e.g. pending materials orders). If a Party 17 18 independently elects to proceed with its work in progress it shall be solely responsible for related costs. If Logitech requests that Immersion complete work in progress, Logitech shall be responsible for related costs according to the applicable Exhibit B ("Development Schedule"). If Immersion terminates the Agreement as provided in Section 12.2 ("Termination for Cause"), or Logitech terminates the Agreement or an Exhibit B ("Development Schedule") without cause Logitech shall pay Immersion for Deliverables due and delivered up to the effective date of termination and Logitech shall also pay for development fees then owing under this Agreement based upon a pro rata portion of the number of calendar days elapsed since completion of the last Deliverable for which payment was due and the number of the days between such Deliverable and the next sequent Deliverable for work done for such deliverable. If Logitech terminates this Agreement or an Exhibit B ("Development Schedule") for cause, no further payments shall be due under this Agreement except for Deliverables accepted up to the date of termination. In no event, however, will either Party's liability under this Agreement for any development project of a Planar Force Feedback Cursor Control Device exceed the amounts set forth in the applicable Exhibit B ("Development Schedule"). NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY SORT AS A RESULT OF TERMINATING THIS AGREEMENT IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT. 12.4 THIRD PARTY ACQUISITION OF IMMERSION. 12.4.1 SPECIAL HANDLING PROVISIONS. In the case of a merger or acquisition where Immersion is not the surviving entity or in the case of a sale of assets by Immersion in accordance with the terms of Section 18.2 ("Succession and Assignment"), Immersion is not required to obtain Logitech's prior approval to assign this Agreement, however, Immersion will provide Logitech with written notice as soon as possible, consistent with and subject to Immersion's obligations of confidentiality with respect to such merger, acquisition or sale of assets transaction. Immersion recognizes that Logitech may have concerns with respect to the assignee of this Agreement ("Assignee") if such Assignee is viewed by Logitech to be a competitor, however, notwithstanding competitive concerns, Logitech may not desire to terminate this Agreement. Immersion therefore agrees to permit Logitech to be able to require that the following "special handling" provisions described in this Section 12.4 ("Third Party Acquisition of Immersion") be implemented if so requested by Logitech, in writing. 12.4.2 CONFIDENTIAL INFORMATION SPECIAL HANDLING. If Logitech desires to prevent the Assignee from accessing Logitech's confidential information 18 19 after assignment of this Agreement because such Assignee is viewed by Logitech as a competitor, Logitech may so notify Immersion in writing and Immersion will implement special procedures to keep the Logitech confidential information separate from the Assignee's information and will limit disclosure of the Logitech confidential information to those employees who had previously had access prior to the assignment of the Agreement. In such case, the Logitech confidential information will be stored and used in a separate area in order to limit access to only those former Immersion employees who are authorized to work with such Logitech confidential information. If invoked, such special procedures will be observed for at least ninety (90) days from the date of notice by Logitech so as to give Logitech time to assess the situation, however, Logitech must cancel the special procedures or terminate this Agreement in accordance with Section 12.1 ("Termination by Logitech Without Cause"), effective one year from the date of the written notice which invoked the special procedures unless the Assignee, in its sole discretion, agrees in writing to continue the special procedures, for the mutual benefit of the Parties. Upon Logitech's request Immersion shall return any and all copies of Logitech's confidential information or, at Logitech's option, Immersion shall destroy such copies and notify Logitech in writing when such copies have been destroyed, however if Logitech requests such return or destruction, immersion shall be released from all obligations under this Agreement which Immersion is unable to perform without access to such confidential information, if any. 12.4.3 TERMINATION OF OBLIGATIONS. After receipt by Logitech of notice from Immersion as described in Section 12.4.1 ("Special Handling Provisions"), Immersion may but shall no longer be obligated to refer OEMs to Logitech in accordance with Section 7.3 ("OEM Referral") and (iii) provide New Technology under Section 7.4 ("New Technology"). For six (6) months after receipt of such notice, Immersion shall continue to provide to End User in accordance with Section 7.2 ("Enhancements by Immersion") on a reasonable (versus priority) commercial basis. 13. SOURCE CODE ESCROW. Logitech may request Immersion to deposit Source Code materials and if so, then Immersion shall promptly provide to a mutually agreeable escrow agent, under the terms of a mutually agreeable escrow agreement, all Immersion Software source code, drawings, specifications, and other information necessary for Logitech to continue development or support of each Final Prototype or Deliverable described in the applicable Exhibit B ("Development Schedule") ("Source Code Materials"), which is being developed under Exhibit B ("Development Schedule"). Immersion shall promptly deposit any future updates or revisions with the escrow agent. Under the terms of the escrow agreement, the escrow agent shall be instructed to deliver 19 20 such Source Code Materials to Logitech upon a certification from Logitech that Immersion has become bankrupt and is unable to perform any of its material software development obligations relating to software, including firmware, pursuant to Exhibit B ("Development Schedule") prior to completion of the Final Prototype of any Planar Force Feedback Cursor Control Device and acceptance by Logitech pursuant to the terms of this Agreement and/or fails to perform any of its material software development obligations relating to software, including firmware, pursuant to Exhibit B ("Development Schedule") prior to completion of the Final Prototype of any Planar Force Feedback Cursor Control Device and acceptance by Logitech pursuant to the terms of this Agreement or Logitech terminates the Agreement for cause based on Immersion's failure to perform any of its material software development obligations relating to software, including firmware, pursuant to Exhibit B ("Development Schedule") prior to completion of the Final Prototype of any Planar Force Feedback Cursor Control Device and acceptance by Logitech pursuant to the terms of this Agreement. If Logitech elects to disclose Source Code materials (other than firmware source code designated by Immersion as "Authorized For Modification" pursuant to Section 2.2.1 of the Intellectual Property License Agreement) to any Affiliate and prior to any disclosure, Logitech shall enter into a written agreement with such Affiliate and such written agreement shall contain terms similar to subsections (i)-(v) below. Logitech will not disclose Source Code material (other than firmware source code designated by Immersion as "Authorized For Modification" pursuant to Section 2.2.1 of the Intellectual Property License Agreement) to any third parties without Immersion's prior written consent. Such disclosures, if any, shall be upon terms similar to subsections (i)-(v) below. The escrow agreement will include the following minimum terms and conditions, which shall not be applicable to the firmware source code that is designated by Immersion as "Authorized For Modification" pursuant to Section 2.2.1 of the Intellectual Property License Agreement, use of which is governed by the Intellectual Property License Agreement: (i) Immersion will grant Logitech the right to use the Source Code Materials solely for the purpose of maintaining object code versions of the Immersion Software portion of the Immersion Product Model Technology in the Planar Force Feedback Cursor Control Devices or to continue development or support of the Planar Force Feedback Cursor Control Devices. (ii) Logitech will acknowledge and agree that use of the Source Code Materials is furnished to Logitech on a confidential and secret basis for the sole and exclusive use of Logitech, and not for copying, distribution, sale, sublicense or disclosure to third parties except as provided under the Intellectual Property License Agreement signed by the Parties. In the event that Logitech obtains the Source Code Materials pursuant to the terms of the escrow agreement, Logitech will agree that it will not publish, disclose or otherwise divulge the Immersion Source Code to any person, except officers, employees and independent contractors of Logitech who have entered into non-disclosure agreements and need access to the Immersion Source Code Materials to perform their duties. Logitech may make one 20 21 (1) machine-readable copy of the Immersion Source Code Materials solely for backup and archival purposes. Logitech agrees to reproduce and include all copyright and other proprietary notices appearing in or on any and all Immersion Source Code Materials provided to Logitech by the escrow agent on any copy made by Logitech. (iii) Logitech will agree to take all necessary steps to prevent unauthorized disclosure of the Immersion Source Code Materials, including but not limited to the following: (a) The building in which Logitech uses the Immersion Source Code Materials shall have restricted access twenty-four (24) hours a day; (b) The Immersion Source Code Materials shall be used only in a location within such building to which access is further restricted to persons authorized to use the Immersion Source Code; (c) Logitech shall prevent telephone or other remote access to the Immersion Source Code Materials from other locations; and (d) The Immersion Source Code Materials shall be installed only on a single computer system which is password protected, and all Immersion Source Code Materials files will be password protected. (iv) Logitech shall be liable to Immersion or its successor company for all direct and indirect, consequential, special and incidental damages resulting from any unauthorized disclosure by Logitech of the Immersion source code. To the extent, if any this Section 13 ("Source Code Escrow") is inconsistent or conflicts with any provision of this Agreement, this Section 13 ("Source Code Escrow") shall be controlling. (v) The obligations of this Section 13 ("Source Code Escrow") shall survive any termination or expiration of the escrow agreement. 14. LOGITECH WARRANTY. Logitech represents and warrants that it will not knowingly provide to Immersion any data, specifications, designs or similar information that infringe upon or violate any intellectual property rights of a third party. 15. TRADEMARK INFRINGEMENT INDEMNIFICATION BY IMMERSION Subject to prompt notification by Logitech, cooperation by Logitech and control of all litigation and/or settlement by Immersion, Immersion shall indemnify, defend and hold Logitech harmless from and against any and all claims, damages, liabilities, judgments, settlements, costs and expenses (including reasonable attorneys' fees) suffered or incurred by Logitech arising out of a claim of infringement of any Immersion trademark, service 21 22 mark, or trade name resulting from the labeling requirement of Intellectual Property License Agreement Section 2.5 ("Label Requirements"). In the case of an infringement or alleged infringement of any such Immersion trademark, service mark, or trade name, Immersion will have the right to require Logitech to stop using such trademark, service mark, or trade name and will provide a new trademark to be used in connection with the Immersion Product Model Technology. 16. CONFIDENTIALITY. 16.1 OBLIGATIONS. During the course of this Agreement, each Party may be a disclosing Party (hereinafter called Discloser) for transmitting certain proprietary information to the other Party (hereinafter called Recipient). Recipient agrees to treat as confidential all such proprietary information, including all information, written or oral, relating thereto, including, but not limited to, know how, concepts, techniques, drawings, specifications, processes, computer programs, designs and systems, manufacturing and marketing information, received from Discloser, and Recipient agrees not to publish such information or disclose same to others except to those employees, subcontractors and sublicensees to whom disclosure is necessary to order to carry out the purpose for which such information is supplied. Recipient shall inform such employees, subcontractors and sublicensees of the confidential nature of such information and of their obligation to keep same confidential. Recipient further agrees not to use such proprietary information for Recipient's own benefit or for the benefit of others, other than in accordance with this Agreement, without Discloser's prior written consent, and that all tangible materials, including written material, photographs, discs or other documentation embodying such proprietary information shall remain the sole property of Discloser and shall be delivered to Discloser upon Discloser's request. Upon Discloser's request a Receiving party shall return any and all copies of Discloser's confidential information or, at Discloser's option, the Receiving party shall destroy such copies and notify Discloser in writing when such copies have been destroyed. 16.2 EXCEPTIONS. The foregoing obligations of confidentiality do not apply to information which was previously known to Recipient, is rightfully received from a third party by Recipient, or becomes publicly known or available without breach of this Agreement by Recipient. 17. LIMITATION OF LIABILITY. 17.1 EXCEPT AS PROVIDED IN SECTION 13 ("SOURCE CODE ESCROW"), IN NO EVENT WILL LOGITECH OR IMMERSION BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY 22 23 THEORY OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF LOGITECH AND IMMERSION HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 17.2 EXCEPT WITH RESPECT TO THE PARTIES' OBLIGATIONS SET FORTH IN SECTION 13 ("SOURCE CODE ESCROW") AND WITH RESPECT TO ANY QUARTERLY PAYMENTS DUE AND PAYABLE BY LOGITECH HEREUNDER, IN NO CASE WILL EITHER PARTY'S TOTAL CUMULATIVE LIABILITY OR OBLIGATIONS UNDER THE TERMS OF OR ARISING OUT OF THIS AGREEMENT EXCEED ONE MILLION U.S. DOLLARS ($1,000,000). 18. GENERAL PROVISIONS 18.1 ENTIRE AGREEMENT. This Agreement and its exhibits, together with the Intellectual Property License Agreement, constitutes the complete agreement of the parties and supersedes any other agreements, written or oral (including all correspondence, emails, such as but not limited to the letter regarding Phase 0 dated February 20, 1998 concerning the subject matter hereof and such materials do not have any effect upon the rights and obligations of the Parties under this Agreement. This Agreement and the Intellectual Property License Agreement in no way supersede or affect the Intellectual Property License Agreement between Immersion and Logitech dated April 2, 1997 and/or the Technology Product Development Agreement between Immersion and Logitech dated April 2, 1997. 18.2 SUCCESSION AND ASSIGNMENT. Either party may assign this Agreement provided that the other party has consented in writing to the assignment or delegation and provided, further, that the rights and obligations of the parties may be assigned to a corporate successor in interest in the case of a merger or acquisition or in the case of a sale of assets without the prior approval of the other party. Any attempt to assign this Agreement in violation of the provisions of this Section 18.2 ("Succession and Assignment") shall be void. 18.3 NOTICES. Notices required under this Agreement shall be addressed as follows, except as otherwise revised by written notice: 23 24 TO IMMERSION: TO LOGITECH: Louis B. Rosenberg, Ph.D. General Counsel President Logitech, Inc. Immersion Corporation 6505 Kaiser Drive 2158 Paragon Drive Fremont, CA 94555-3615 San Jose, CA 95131 18.4 GOVERNING LAW. The validity, interpretation and performance of this Agreement shall be governed by the substantive laws of the State of California, without the application of any principle that leads to the application of the laws of any other jurisdiction. 18.5 NO AGENCY. Neither party is to be construed as the agent or to be acting as the agent of the other party hereunder in any respect. 18.6 NO RECRUITMENT. During the term of this Agreement and for one (1) year after the termination or expiration of this Agreement, each Party agrees not to recruit any employee of the other Party. 18.7 MULTIPLE COUNTERPARTS. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single Agreement between the parties. 18.8 NO WAIVER. No delay or omission by either Party hereto to exercise any right or power occurring upon any noncompliance or default by the other party with respect to any of the terms of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either of the parties hereto of any of the covenants, conditions, or agreements to be performed by the other shall not be construed to be a waiver of any succeeding breach thereof or of any covenant, condition, or agreement herein contained. Unless stated otherwise, all remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 18.9 SEVERABILITY. If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.10 AMENDMENTS IN WRITING. Any amendment to this Agreement shall be in writing and signed by both parties hereto. 18.11 INTERPRETATION. Since this Agreement was prepared by both parties hereto, it shall not be construed against any one party as the drafting party. 24 25 18.12 DISPUTE RESOLUTION. Except in the case of a breach of an obligation related to a Party's intellectual property rights, in the event either Party concludes that it is in its best interest to file any legal action against the other, the Party shall contact the other Party's management and at least two (2) senior managers from each Party shall meet without legal counsel or interruption for a minimum amount of three (3) eight (8) hour periods and diligently attempt to resolve all disputed matters. If the Parties are unable to resolve their difference and either Party desires to file a legal action against the other, at least two (2) senior managers from each Party and their respective counsels shall meet for three (3) eight (8) hour periods and diligently attempt to resolve all disputed matters. Either Party may request that an independent third party, bound to mutually agreed upon legations of confidentially, attend such meeting in order to assist the Parties in reaching a reasonable resolution. All oral and written information exchanged in these meetings shall be exchanged in an effort to settle all disputed matters. If either Party still desires to file a legal action against the other after these prescribed meetings such Party may file a legal action against the other Party as allowed by applicable law in Santa Clara County state court or in the Federal Circuit. The Parties agree that if a Party does not attend all of the prescribed meetings it waives its rights to any monetary damages in the legal action(s) it files. 18.13 SURVIVAL. Sections 6.1 ("Funding"), 6.1.1 ("FEELit Mouse Product Funding"), 10 ("Ownership of Technology"), 12.3 ("Effect of Termination"), 12.4 ("Third Party Acquisition of Immersion"), 13 ("Source Code Escrow"), 14 ("Logitech Warranty"), 15 ("Trademark Infringement Indemnification by Immersion"), 16 ("Confidentiality"), 17 ("Limitation of Liability") and 18 ("General Provisions") will continue after the expiration or termination of this Agreement. 18.14 FORCE MAJEURE. With the exception of the obligation to pay monies due and owing, each Party hereto shall be excused from performance hereunder for any period and to the extent that it is prevented from performing any services pursuant hereto, in whole or in part, as a result of delays caused by the other Party or an act of God, war, civil disturbance, court order, governmental action, laws, orders, regulations, directions or requests, or as a result of events such as acts of public enemies, earthquakes, fires, floods, strikes or other labor disturbances of the other Party or any third party, or other cause beyond its reasonable control and which it could not have prevented by reasonable precautions, and such nonperformance shall not be a default hereunder or a ground for termination hereof. 25 26 IN WITNESS WHEREOF, the authorized representatives of the parties hereto have signed this Agreement as of the date and year last set forth below. LOGITECH: IMMERSION: LOGITECH, INC. IMMERSION CORPORATION By: /s/ W. H. Hausen By: /s/ Louis Rosenberg -------------------------- -------------------------------- Name: W. H. Hausen Name: Louis Rosenberg ------------------------ ------------------------------- Title: SVP/GM Title: President ----------------------- ------------------------------- Date: 4/13/98 Date: April 13, 1998 ------------------------ ------------------------------- 26 27 EXHIBIT A SPECIFICATION Immersion shall develop a Mouse Product to conform to the following basic specifications: [****] Requirement Overview: The Mouse Product must be a high quality, premium cursor control peripheral capable of providing accurate positioning data and producing realistic force feedback sensations. The product must consist of the following subsystems: [****] *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 27 28 EXHIBIT B MILESTONE SCHEDULE
PAYMENT MILESTONES AMOUNT APPROX DATE - ------------------ ------ ----------- DESIGN STAGE (Q2) Actuator design has been approved PAO PWA transferred to Logitech, and approved by Logitech TOTAL 75k AUG 98 EVT PREPARATION (Q3) Actuator ready for qualification EVT actuators available in TWN FW available for EVT TOTAL 75k NOV-DEC 98 EVT EXIT - DVT ENTRY (Q4) EVT completed successfully DVT actuators available in TWN FWQA1 completed TOTAL 75k MAR 99 DVT EXIT - PVT ENTRY (Q1) DVT completed successfully PVT actuators available in TWN FWQA2 completed successfully TOTAL 40k APR-MAY 99 PVT EXIT (Q2) PVT completed successfully MP started TOTAL 20k JULY 99 SW ACTIVITIES: To be planned according to SW milestones ...> Jim McCarthy 85k
28 29 EXHIBIT C Change Order Form Date: Change Control Form No.: Description of Change: Reason for Change: Man Hours: Impact on Schedule: Affect on Cost: Accepted by Logitech: Accepted by Immersion: LOGITECH, INC. IMMERSION CORPORATION By: By: ------------------------------ ---------------------------------- Name: Name: ---------------------------- -------------------------------- Title: Title: --------------------------- ------------------------------- Date: Date: ---------------------------- -------------------------------- 29 30 EXHIBIT D Software License Agreement SOFTWARE LICENSE AGREEMENT. LOGITECH IS WILLING TO LICENSE THE ENCLOSED SOFTWARE TO YOU ONLY ON THE CONDITION THAT YOU ACCEPT ALL OF THE TERMS CONTAINED IN THIS LICENSE AGREEMENT. This is a legal agreement between (either an individual end-user or an entity) and Logitech. By opening the software package, you are agreeing to be bound by the terms and conditions of the Agreement. If you do not agree to the terms of this Agreement, promptly return the software package and other items that are part of this product in their original package with your payment receipt to your point of purchase for a full refund. GRANT OF LICENSE. Logitech and its suppliers grant you a nonexclusive license to use one copy of the enclosed software program ("Software") on one computer only with the Logitech product you have purchased. No other rights are granted. The Software is in use if it is loaded on the computer's permanent or temporary memory. For backup purposes only, you may make one copy of the Software. You must include on the backup copy all copyright and other notices included on the Software as supplied by Logitech. Installation on a network server for the sole purpose of your internal distribution of the Software is permitted only if you have purchased an individual Software package for each networked computer to which the Software is distributed. RESTRICTIONS. Logitech and its suppliers retain ownership of the Software. You shall not decompile, disassemble, reverse-engineer, or modify the Software in any way. You may not transmit the Software over a network (except as expressly permitted by above), by telephone, or electronically using any means. You may not transfer the software except upon a permanent transfer of the enclosed Logitech product provided that all software updates are included in the transfer, you do not retain a copy of the Software, and the transferee agrees to be bound by the terms and conditions in the license. Upon any violation of the provisions of this Agreement, rights to use the Software shall automatically terminate and the Software must be returned to Logitech or all copies of the Software destroyed. 30 31 EXHIBIT E Immersion Packaging Labeling Specification Logitech must place or have placed the following notice or other similar mark, at Immersion's request, on the underside (exterior) of those products which incorporate Licensed Technology as well as on the packaging and manuals for such products: "FEELit(TM) Force Feedback Technology Licensed from Immersion Corporation". Logitech must also place or have placed the following FEELit Mouse logo (or future derivative of the mark as reasonably approved by Logitech) at Immersion's request, prominently on retail packaging and manuals such that the logo is clearly legible and occupies a rectangular area of no less than 0.70 inches by 0.825 inches. The mark must be displayed on at least two surfaces of the retail packaging, including the front surface and specifically not including the bottom surface. [LOGO] [DIAGRAM] 31 EX-23.1 12 DELOITTE & TOUCHE CONSENT 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of Immersion Corporation: We consent to the use in this Amendment No. 4 to Registration Statement No. 333-86361 of Immersion Corporation of our report dated October 20, 1999 (November 3, 1999 as to Note 14) appearing in the Prospectus, which is part of this Registration Statement, and of our report dated October 20, 1999 relating to the financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP San Jose, California November 4, 1999 -----END PRIVACY-ENHANCED MESSAGE-----