-----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, F2vu129rie1MCJwHQBOiddpudjeCpyqcaU2CUxq20qUmHhMegfLGl3dSM5H0WJ+V 0JPqLiTFrDod0gOso5Tdlg== 0000891618-99-005063.txt : 19991115 0000891618-99-005063.hdr.sgml : 19991115 ACCESSION NUMBER: 0000891618-99-005063 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19991112 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: 99747047 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 #5 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999 REGISTRATION NO. 333-86361 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 5 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. [ ] ------------------ 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 PROSPECTUS 4,250,000 SHARES IMMERSION.LOGO COMMON STOCK This is an initial public offering of common stock by Immersion Corporation. ------------------ Our common stock has been approved for quotation on the Nasdaq National Market under the symbol IMMR. ------------------
PER SHARE TOTAL --------- ----- Initial public offering price............................... $12.00 $51,000,000 Underwriting discounts and commissions...................... $ 0.84 $ 3,570,000 Proceeds to Immersion Corporation, before expenses.......... $11.16 $47,430,000
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 November 12, 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.................................................... 31 Management.................................................. 44 Certain Transactions........................................ 54 Principal Stockholders...................................... 58 Description of Capital Stock................................ 61 Shares Eligible for Future Sale............................. 64 Underwriting................................................ 66 Legal Matters............................................... 68 Experts..................................................... 68 Where You Can Find Additional Information................... 68 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. 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 has set the initial suggested retail price of the mouse at $99.95 and 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 on November 3, 1999. 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. 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 initial public offering price of $12.00 per share and after deducting the 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 $50,228 Working capital........................................ 2,622 2,622 49,052 Total assets........................................... 11,935 11,935 58,365 Redeemable convertible preferred stock................. 1,481 -- -- Total stockholders' equity............................. 7,180 8,661 55,091
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 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 7 10 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 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. In the technology product development agreement that we entered into with Logitech in 1998, Logitech estimated that, based upon an assumed production of 100,000 units per year, its target price for its feel-enabled mouse would be $99. Logitech, however, has made no commitments to us regarding the production volume or pricing of its feel-enabled mouse. The fact that the actual initial suggested retail price of Logitech's mouse is $99.95 does not reflect any volume or pricing commitments made to us by Logitech. In addition, we do not know whether Logitech will manufacture and sell 100,000 units or any other minimum number of units per year of the mouse or whether Logitech will choose to maintain the suggested retail price of the mouse at $99.95. 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 FEEL-ENABLED MICE 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 was 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 66 for a more complete discussion of the factors 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 15,665,592 shares if the underwriters' over-allotment is exercised in full. Of these, 11,113,678 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 $46,430,000, at an initial offering price per share of $12.00 and after deducting the 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 initial public offering price of $12.00 per share and after deducting the 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 63,441 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 55,091 ------- ------- ------- Total capitalization.............................. $ 8,661 $ 8,661 55,091 ======= ======= =======
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 initial public offering price of $12.00 per share and after deducting the 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 $50,317,000, or $3.26 per share. This represents an immediate increase in net tangible book value of $2.91 per share to existing stockholders and an immediate dilution of $8.74 per share to the new investors. The following table illustrates this per share dilution: Initial public offering price per share..................... $12.00 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.............................................. 2.91 ----- As adjusted pro forma net tangible book value per share after the offering........................................ 3.26 ------ Dilution per share to new investors......................... $ 8.74 ======
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 initial public offering price of $12.00 per share and before deducting the 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 15.3% $ 0.82 New investors............ 4,250,000 27.5 51,000,000 84.7 $12.00 ---------- ----- ----------- ----- Total.......... 15,441,856 100.0% $60,209,000 100.0% ========== ===== =========== =====
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. Of this amount, we capitalized patents and technology of $3.4 million, net of accumulated amortization of $234,000, associated with the acquisition of patents and technology from Cybernet in March 1999. We are amortizing the Cybernet patents and technology over the estimated useful life of the technology of nine years, resulting in an amortization expense anticipated to be approximately $402,000 per year. In the quarter ended March 31, 1999, we expensed $1.2 million of in-process research and development related to five development projects acquired from Cybernet. 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 21 24 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 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 the fourth quarter of 1999 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, including amortization of deferred revenue of $474,000 during the quarter ended September 30, 1999 resulting from the one time lump sum payment made by Microsoft under the July 1999 Microsoft license agreement. Amortization of deferred revenue will contribute $587,000 to royalty revenue per quarter through July 2000. We do not anticipate receipt in the future of significant revenue from lump sum licensing arrangements, as opposed to per unit royalty arrangements. 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 increased sales of medical products of $473,000, resulting primarily from one large customer order, and increased sales of our processor of $169,000, both of which increases were primarily from increased unit shipments. Changes in average selling prices did not significantly impact product sales. 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. Approximately $141,000 of the increase was due to increased sales of our processor, which has a higher cost of sales as a percentage of product sales than our other products. The remainder was due to other changes in product mix, none of which were individually significant. 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. Cost of processor sales as a percentage of processor sales for the nine months ended September 30, 1999 was approximately 83%. 23 26 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 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 March 1999 acquisition of patents and in-process technology from Cybernet. The patents and technology were acquired in exchange for 1,291,200 shares of our common stock. We capitalized $3.6 million of purchased patents and technology in connection with this acquisition. Strategically, this acquisition allowed us to increase the strength of our intellectual property portfolio by obtaining Cybernet's portfolio of issued patents and pending patent applications relating to hardware mechanisms and software architectures designed to deliver tactile sensations to computer users. It also allowed us to obtain five in-process research and development projects that embody aspects of the acquired intellectual property, and that have potential commercial value. These include a flexible force feedback development environment that allows developers to implement varying levels of force feedback functionality; a three-degree-of-freedom joystick that uses brushless motor and encoder technology; a six-degree-of-freedom hand controller; a flight yoke that realistically simulates the motion and feel of airplane controls; and a device that allows the user to feel three-dimensional objects. 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. 24 27 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 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, partially offset by 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 25 28 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 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. Increases and decreases in product sales within the seven quarters ended September 30, 1999 have been primarily the result of increases and decreases in unit shipments. Changes in average selling prices have not had a significant impact on product sales during these periods. 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 26 29 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; - 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. Deferred revenue at September 30, 1999 of $1.9 million represents the unamortized portion of the $2.35 million license payment received from Microsoft in July 1999. 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 27 30 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 $191,000, and consisted primarily of net proceeds of $190,000 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. 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 28 31 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 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 29 32 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. 30 33 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 has set the initial suggested retail price of the mouse at $99.95 and 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. 31 34 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. 32 35 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. 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] 33 36 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. 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 34 37 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. 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. 35 38 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 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. 36 39 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 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. 37 40 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 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 38 41 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. 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. 39 42 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. 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. 40 43 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 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 41 44 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 tailored specifically for feel technology. Our microprocessors have been optimized to work with low cost sensors used in feel-enabled gaming and peripheral products and to streamline processing of information sent between a personal computer and a feel-enabled gaming or computer peripheral product. We are not aware of any companies other than us that currently market optimized feel processors. 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 42 45 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. 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 2, 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
MicroScribe Agreements. On July 1, 1997, we formed MicroScribe. In July 1997, we entered into an exchange agreement, a patent license agreement and an intellectual property license agreement with MicroScribe. Pursuant to the exchange agreement and patent license agreement, we assigned our patents and associated intellectual property relating to three-dimensional digitizing products and the PinPoint arm, a medical device used for image-guided biopsies whose design is based on our three-dimensional digitizing products, to MicroScribe in exchange for a worldwide, royalty-free, exclusive, irrevocable license and all of the class 1 membership interests and class 2 membership interests in MicroScribe. We retained the class 1 membership interest and distributed the class 2 membership interests to the 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
MicroScribe's sole business is the licensing of its patents and associated intellectual property to us. We pay MicroScribe a formula-based royalty that varies between 5% and 10% of our net receipts from sales of products that incorporate MicroScribe technology. The royalty rate will be fixed at 10% of our net receipts from sales of products that incorporate MicroScribe technology beginning 47 50 in 2002. Distributable cash from its licensing activities 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 and in 1998 was approximately $53,000. Amounts distributed to Dr. Rosenberg, Mr. Schena and Mr. Lacey were based on their percentage interest owned in MicroScribe. 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 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. ..................................... $138,615 72,465 President and Chief Executive Officer Bruce Schena................................................ 121,683 22,819 Vice President, Chief Technology Officer and Director Timothy Lacey............................................... 107,628 26,210 Chief Financial Officer and Director
Mr. Lacey was serving as our chief financial officer as of December 31, 1998. In August 1999, Mr. Lacey resigned as our chief financial officer and was appointed vice president, operations. 48 51 Option Grants in Fiscal Year Ended December 31, 1998. The following table presents information with respect to stock options granted during 1998 to our executive officers listed in the summary compensation table.
POTENTIAL REALIZABLE VALUE NUMBER OF AT ASSUMED ANNUAL RATES SECURITIES PERCENT OF TOTAL OF STOCK APPRECIATION FOR UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM OPTIONS TO EMPLOYEES PRICE EXPIRATION --------------------------- NAME GRANTED(#) DURING PERIOD ($/SHARE) DATE 5% 10% ---- ---------- ---------------- -------------- ---------- ------------ ------------ Louis Rosenberg, Ph.D................... 605 0.13% $0.68 02/24/03 $ 8,854 $ 11,281 605 0.13 0.68 03/03/03 8,854 11,281 1,210 0.25 1.36 03/24/03 16,886 21,739 403 0.08 1.36 03/31/03 5,624 7,240 1,210 0.25 1.36 04/15/03 16,886 21,739 63,591 13.26 1.36 03/16/08 1,156,513 1,892,780 1,210 0.25 0.41 01/15/03 18,036 22,889 3,631 0.76 4.02 11/06/03 41,014 55,577 Bruce Schena........... 605 0.13 0.62 02/24/08 11,451 18,455 605 0.13 0.62 03/03/08 11,451 18,455 21,004 4.38 1.24 03/16/08 384,515 627,703 605 0.13 3.66 11/06/08 9,611 16,616 Timothy Lacey.......... 26,210 5.47 1.36 03/16/03 365,770 470,892
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 the initial public offering price of $12.00. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. In 1998, we granted options to purchase an aggregate of 422,406 shares to employees. The exercise price of each option granted to Dr. Rosenberg and Mr. Lacey was equal to 110% of the fair market value of the common stock on the date of grant as determined by the board of directors. Dr. Rosenberg's option to purchase 63,591 shares of common stock vests as to 1/24 of the shares per month for 24 months. Dr. Rosenberg's option to purchase 605 shares with an expiration date of February 24, 2003 and option to purchase 1,210 shares with an expiration of January 15, 2003 are fully vested. His remaining options vest as to 1/12 of the shares per month for 12 months. Mr. Schena's option to purchase 21,004 shares of common stock vests as to 1/24 of the shares per month for 24 months. His remaining options vest as to 1/12 of the shares per month for 12 months. Mr. Lacey's option to purchase 26,210 shares of common stock vests as to 1/24 of the shares per month for 24 months. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values. The following table presents information for our executive officers listed in the summary compensation table concerning option exercises during 1998 and the value of exercisable and unexercisable options held as of December 31, 1998 by these officers:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES VALUE DECEMBER 31, 1998(#) DECEMBER 31, 1998($) ACQUIRED ON REALIZED ----------------------- ------------------------- NAME EXERCISE(#) ($) VESTED UNVESTED VESTED UNVESTED ---- ----------- ---------- ---------- --------- ----------- ---------- Louis Rosenberg, Ph.D........... 129,120 $1,544,275 985,210 91,089 $11,629,023 $1,014,562 Bruce Schena.................... 80,700 965,172 399,626 34,909 4,736,451 396,800 Timothy Lacey................... 250,947 2,991,551 150,864 35,684 1,755,762 400,713
49 52 The value realized upon exercise of options is calculated based on an initial public offering price of $12.00 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 initial public offering price of $12.00. 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 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 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 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. Our 50 53 stockholders approved these amendments in November 1999. 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 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. 51 54 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 our 1999 employee stock purchase plan. Our stockholders approved the plan in November 1999. 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 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. 52 55 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. 53 56 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 world-wide, irrevocable, non-exclusive 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 gaming 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 54 57 than 200,000 units in subsequent years 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%. We did not derive any royalty revenue from the license agreement in 1997. We derived royalty revenue of $249,000 in 1998 and $552,000 in the nine months ended September 30, 1999 under the license agreement. Other terms of the license agreement include the following: - The term of the license agreement extends until the end of the life of the licensed patents. Currently, the life of the last to expire of these patents continues until 2016. - Logitech will abide by our branding requirements with respect to their feel-enabled gaming products and will mark these products with our patents. - Each party will defend and indemnify the other against legal expenses and liability arising from claims that the indemnifying party's technology infringes a third party's copyrights, trade secrets or patents. This obligation, however, is subject to exceptions, and is limited to the greater of $500,000 or the royalties paid by Logitech to us in the 36-month period before the event giving rise to the obligation to indemnify. - We agree to indemnify Logitech against trademark infringement liability arising from Logitech's compliance with its branding obligations under the agreement. - The agreement contains a "most-favored royalties" clause that entitles Logitech to a matching royalty rate if we grant a third-party a lower royalty rate than that being paid by Logitech for feel-enabled products having functionality similar to the Logitech products. This provision would not apply, however, if a portion of the consideration we receive from that third-party consists of a cross-license under the third-party's patents. - The agreement prohibits either party from recovering from the other party lost profit damages, or special, indirect, incidental or consequential damages, arising from the agreement. Except for damages based on the parties' indemnification obligations with respect to a third-party's copyrights, trade secrets or patents, it also limits the parties' liability to one another to no more than $1.0 million. 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. Under the development agreement, we also agreed that we would not enable a third-party to ship a similar feel-enabled mouse product until October 23, 1999. Pursuant to the license agreement, we granted Logitech an irrevocable, non-exclusive, worldwide license to technology incorporated by Logitech into a feel-enabled mouse product. Pursuant to the license agreement, Logitech is required to pay us a royalty of 5% of the revenue it receives from the sale of feel-enabled mouse products. For the nine months ended September 30, 1999, we have not derived any royalty revenue from the license agreement. Other terms of the license agreement include the following: - The term of the license agreement extends until the end of the life of the licensed patents. Currently, the life of the last to expire of these patents continues until 2016. - Logitech will abide by our branding requirements with respect to their feel-enabled mouse products and will mark these products with our patents. - Each party will defend and indemnify the other against legal expenses and liability arising from claims that the indemnifying party's technology infringes a third party's copyrights, trade secrets or patents. This obligation, however, is subject to exceptions, and is further limited to the greater of $500,000 or the royalties paid by Logitech to us in the 36-month period preceding the event giving rise to the obligation to indemnify. 55 58 - We agree to indemnify Logitech against trademark infringement liability arising from Logitech's compliance with its branding obligations under the agreement. - The agreement contains a "most-favored royalties" clause which entitles Logitech to a matching royalty rate if we grant a third-party a lower royalty rate than that being paid by Logitech for a feel-enabled mouse having similar functionality to the Logitech product. This provision would not apply, however, if a portion of the consideration we receive from such a third-party consists of a cross-license under the third-party's patents. - The agreement prohibits either party from recovering from the other party lost profit damages, or special, indirect, incidental or consequential damages, arising from the agreement. Except for damages based on the parties' indemnification obligations with respect to a third-party's copyrights, trade secrets or patents, it also limits the parties' liability to one another to no more than $1.0 million. We currently anticipate signing a co-marketing agreement with Logitech in the fourth quarter of 1999 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. Directed Share Program. We currently anticipate that up to 250,000 shares of common stock may be sold at the initial public offering price to friends and relatives of our employees, employees, consultants, directors and other persons with business relationships to us. MicroScribe Agreements. On July 1, 1997, we formed MicroScribe. 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 our patents and associated intellectual property relating to three-dimensional digitizing products and the Pin Point arm, a medical device used for image-guided biopsies whose design is based on our three-dimensional digitizing product, to MicroScribe in exchange for a worldwide, royalty-free, exclusive, irrevocable license and all of the class 1 membership interests and class 2 membership interests in MicroScribe. We retained the class 1 membership interest and distributed the class 2 membership interests 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 56 59 MicroScribe of each director, officer and 5% stockholder and each member of the immediate family of such director, officer and 5% stockholder.
PERCENTAGE INTEREST NAME OF BENEFICIAL HOLDER OWNED IN MICROSCRIBE ------------------------- -------------------- 5% STOCKHOLDER Cybernet Systems Corporation................................ --% Intel Corporation........................................... 5.9 Timothy Lacey............................................... 10.78 Bruce Paul.................................................. 5.13 DIRECTOR AND EXECUTIVE OFFICER Steven Blank................................................ 1.0 Kenneth Martin.............................................. 2.0 J. Stuart Mitchell.......................................... -- Louis Rosenberg, Ph.D....................................... 25.94 Jonathan Rubinstein......................................... -- Jennifer Saffo.............................................. -- Bruce Schena................................................ 8.56 Victor Viegas............................................... -- IMMEDIATE FAMILY OF 5% STOCKHOLDER, DIRECTOR AND OFFICER Max and Helen Johnston...................................... .36 Patrick Lacey............................................... .29 Patrick and Nina Lacey...................................... .29 Nellie Lacey................................................ .08 Bruce Paul, custodian for Jason Paul........................ .39 Bruce Paul, custodian for Joanna Paul....................... .79 Bruce Paul, custodian for Matthew Paul...................... .79 Bruce Paul, custodian for Ryan Paul......................... .39 Arlene Paul................................................. .39 Arthur and Marilynn Rosenberg............................... .79 Arthur Rosenberg............................................ .32 Marilynn Rosenberg.......................................... .21
The total distribution paid to these persons pursuant to their percentage interests owned in MicroScribe in 1999 was approximately $55,500. MicroScribe's sole business is the licensing of its patents and associated intellectual property to us. Distributable cash from its licensing activities 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 three-dimensional 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 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. 57 60 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 58 61 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 an additional 223,736 shares of common stock and selling stockholders will sell a total of 413,764 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
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. 59 62 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. 60 63 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists 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 In connection with our reincorporation in the state of Delaware, all outstanding shares of preferred stock were converted into an aggregate of 5,131,100 shares of common stock, and 5,000,000 shares of undesignated preferred stock were authorized for issuance. Our board of directors has 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. 61 64 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. 62 65 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. 63 66 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. 64 67 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. 65 68 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....................................... 1,665,000 Bear, Stearns & Co. Inc. ................................... 832,500 BancBoston Robertson Stephens Inc. ......................... 832,500 Banc of America Securities LLC.............................. 80,000 Deutsche Banc Securities Inc................................ 80,000 Goldman, Sachs & Co. ....................................... 80,000 Morgan Stanley & Co. Incorporated........................... 80,000 Charles Schwab & Co., Inc. ................................. 80,000 S.G. Cowen Securities Corporation........................... 80,000 Warburg Dillon Read LLC..................................... 80,000 Chatsworth Securities LLC................................... 40,000 E*Offering Corp. ........................................... 40,000 First Southwest Company..................................... 40,000 Gerard Klauer Mattison & Co., LLC........................... 40,000 Needham & Company, Inc. .................................... 40,000 Raymond James & Associates, Inc. ........................... 40,000 Stephens Inc. .............................................. 40,000 C. E. Unterberg, Towbin..................................... 40,000 Wit Capital Corporation..................................... 40,000 --------- 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 $0.60 per share. The underwriters may allow and the dealers may reallow a concession not in excess of $0.10 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. 66 69 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................................. 12.00 51,000,000 58,650,000 Underwriting discount and commissions................. .84 3,570,000 4,105,500 Proceeds, before expenses, to Immersion............... 11.16 47,430,000 54,544,500
We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $1.0 million. At our request, the underwriters have reserved up to 250,000 shares of common stock to be sold in the offering and offered for sale, at the public offering price, to friends and relatives of employees, employees, consultants, directors and other persons with business relationships to us. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase the reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. 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 was negotiated among us and the underwriters. Among the factors considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, were 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. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol IMMR. 67 70 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. 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. 68 71 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 72 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 73 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 74 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 75 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 76 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 77 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 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) 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 when vendor specific objective evidence related to the value of the services does not exist. 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. F-8 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) 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 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 F-9 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) terms of its future financial position and results of operations: its ability to obtain additional financing; the mix of revenues; the loss of significant customers; fundamental changes in the technology underlying the 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 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) 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 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) 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 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) 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 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) 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. 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. The Company has offered to assist a significant customer, who is a preferred stockholder, with co-marketing a licensed product. Pursuant to the terms of the proposed agreement, the Company would reimburse the customer for certain marketing related expenses not to exceed $200,000 per quarter for a period of five quarters beginning with the first calendar quarter of 2000. 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. F-14 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) 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. 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 $1.48 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 F-15 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) 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 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 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) 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 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) 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 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) 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 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) 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 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) 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 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) 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 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) 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 94 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 95 ------------------------------------------------------------------------- -------------------------------------------------------------------------- 4,250,000 SHARES IMMERSION.LOGO COMMON STOCK --------------------------- PROSPECTUS --------------------------- HAMBRECHT & QUIST BEAR, STEARNS & CO. INC. ROBERTSON STEPHENS --------------------------- November 12, 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 DECEMBER 8, 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. -------------------------------------------------------------------------- -------------------------------------------------------------------------- 96 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 97 (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 $0.50 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 1,376,928 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 98 (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 99 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.#*
II-4 100
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 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 October 4, 1996.# 10.19 Intellectual Property License Agreement with Logitech, Inc. dated April 13, 1998.# 10.20 Technology Product Development Agreement with Logitech, Inc. dated April 13, 1998.# 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. * Previously filed with Amendment No. 4 to Registrant's Registration Statement on Form S-1 (File No. 333-86361) on November 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-5 101 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-6 102 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 5 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 12th 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. 5 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 12, 1999 - --------------------------------------------- and Chief Executive Officer Louis Rosenberg, Ph.D. (Principal Executive Officer) /s/ VICTOR VIEGAS* Vice President, Finance and Chief November 12, 1999 - --------------------------------------------- Financial Officer (Principal Victor Viegas Financial and Accounting Officer) /s/ BRUCE SCHENA* Vice President, Chief Technology November 12, 1999 - --------------------------------------------- Officer, Secretary and Director Bruce Schena /s/ STEVEN BLANK* Director November 12, 1999 - --------------------------------------------- Steven Blank /s/ JONATHAN RUBINSTEIN* Director November 12, 1999 - --------------------------------------------- Jonathan Rubinstein *By: /s/ LOUIS ROSENBERG --------------------------------------- Louis Rosenberg, Ph.D. Attorney-in-Fact
II-7 103 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-1 104 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-2 105 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.#*
106
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 October 4, 1996.# 10.19 Intellectual Property License Agreement with Logitech, Inc. dated April 13, 1998.# 10.20 Technology Product Development Agreement with Logitech, Inc. dated April 13, 1998.# 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. * Previously filed with Amendment No. 4 to Registrant's Registration Statement on Form S-1 (File No. 333-86361) on November 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-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 IMMERSION CORPORATION 4,250,000 SHARES(1) COMMON STOCK UNDERWRITING AGREEMENT November __, 1999 HAMBRECHT & QUIST LLC Bear, Stearns & Co. Inc. BancBoston Robertson Stephens Inc. c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: Immersion Corporation, a Delaware corporation (herein called the Company), proposes to issue and sell 4,250,000 shares of its authorized but unissued Common Stock, $0.001 par value (herein called the Common Stock) (said 4,250,000 shares of Common Stock being herein called the Underwritten Stock). The Company and the stockholders of the Company named in Schedule II hereto (herein collectively called the Selling Securityholders) propose to grant to the Underwriters (as hereinafter defined) an option to purchase up to 637,500 additional shares of Common Stock (herein called the Option Stock and with the Underwritten Stock herein collectively called the Stock). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company and the Selling Securityholders severally hereby confirm the agreements made with respect to the purchase of the Stock by the several underwriters, for whom you are acting, named in Schedule I hereto (herein collectively called the Underwriters, which term shall also include any underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. REGISTRATION STATEMENT. The Company has filed with the Securities and Exchange Commission (herein called the Commission) a registration statement on Form S-1 (No. 333-86361), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the Securities Act) of the Stock. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. The term Registration Statement as used in this agreement shall mean such registration statement, including all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Stock (herein called a Rule 462(b) registration statement), and, in the event of any amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term Prospectus as used in this Agreement shall mean the prospectus relating to the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as - -------- (1) Plus an option to purchase from the Company and the Selling Securityholders up to 637,500 additional shares to cover over-allotments 2 included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term Preliminary Prospectus as used in this Agreement shall mean each preliminary prospectus included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SECURITYHOLDERS. (a) The Company and each Class I Selling Securityholder in Schedule II hereto hereby represent and warrant as follows: (i) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole). (ii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any materially adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement and the Prospectus. (iii) The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Stock is to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the rules and regulations of the Commission thereunder; on the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which Option Stock is to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this subparagraph (iii) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus. (iv) The Stock is duly and validly authorized, is (or, in the case of shares of the Stock to be sold by the Company, will be, when issued and sold to the Underwriters as provided herein) duly and validly issued, fully paid and nonassessable and conforms to the description thereof in the Prospectus. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the transfer and sale of the Stock to be sold by the Selling Securityholders or the issuance and sale of the Stock as contemplated herein. (v) Except as disclosed in the Prospectus, each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; 2 3 the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not result in a materially adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, that is not otherwise disclosed in the Prospectus; except as disclosed in the Prospectus, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and, except as disclosed in the Prospectus, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a materially adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. Except as disclosed in the Prospectus, there is no claim being made against the Company regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights. The Company and its subsidiaries do not in the conduct of their business as now or proposed to be conducted as described in the Prospectus infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or any of its subsidiaries, which such infringement or conflict is reasonably likely to result in a materially adverse change in the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (vi) The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (herein called the Investment Company Act). The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act. (vii) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Stock. (viii) Substantially all outstanding shares of Common Stock, and all securities convertible into or exercisable or exchangeable for Common Stock, are subject to valid, binding and enforceable agreements to the effect that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, the holder will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock, whether any such transaction described above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the lock-up agreements in effect. (b) Each of the Selling Securityholders, severally and not jointly, hereby represents and warrants as follows: (i) Such Selling Securityholder has good and marketable title to all the shares of Stock to be sold by such Selling Securityholder hereunder, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever, with full right and authority to deliver the same hereunder, subject, in the case of such Selling Securityholder, to the rights of Boston Equiserve, as custodian (herein called the Custodian), and that upon the delivery of and payment for such shares of the Stock hereunder, the several Underwriters will receive good and marketable title thereto, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever. (ii) Such Selling Securityholder has duly authorized, executed and delivered, in the form heretofore furnished to the Underwriters, a Custody Agreement and Power of Attorney (herein called the Custody Agreement and Power of Attorney) appointing Louis B. Rosenberg, Ph.D and Victor A. Viegas 3 4 as attorneys-in-fact (herein collectively called the "Attorneys" and individually called an "Attorney") and appointing Boston Equiserve as Custodian; each of the Custody Agreement and Power of Attorney constitutes a valid and binding agreement on the part of such Selling Securityholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and each of such Selling Securityholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement on behalf of such Selling Securityholder, to determine the purchase price to be paid by the several Underwriters to such Selling Securityholder as provided in Section 3 hereof, to authorize the delivery of the shares of Stock to be sold by such Selling Securityholder under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Stock or a stock power or power with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Securityholder in connection with this Agreement. (iii) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Securityholder of the Custody Agreement and Power of Attorney, the execution and delivery by or on behalf of such Selling Securityholder of this Agreement and the sale and delivery of the shares of Stock to be sold by such Selling Securityholder under this Agreement have been obtained and are in full force and effect; such Selling Securityholder, if other than a natural person, has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Securityholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Custody Agreement and Power of Attorney, and to sell, assign, transfer and deliver the Stock to be sold by such Selling Securityholder under this Agreement. (iv) Certificates in negotiable form for the shares of the Stock to be sold by such Selling Securityholder have been placed in custody under a Custody Agreement for delivery under this Agreement with the Custodian; such Selling Securityholder specifically agrees that the shares of the Stock represented by the certificates so held in custody for such Selling Securityholder are subject to the interests of the several Underwriters and the Company, that the arrangements made by such Selling Securityholder for such custody, including the Power of Attorney provided for in such Custody Agreement, are to that extent irrevocable, and that the obligations of such Selling Securityholder shall not be terminated by any act of such Selling Securityholder or by operation of law, whether by the death or incapacity of such Selling Securityholder (or, in the case of a Selling Securityholder that is not an individual, the dissolution or liquidation of such Selling Securityholder) or the occurrence of any other event; if any such death, incapacity, dissolution, liquidation or other such event should occur before the delivery of such shares of the Stock hereunder, certificates for such shares of the Stock shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity, dissolution, liquidation or other event had not occurred, regardless of whether the Custodian shall have received notice of such death, incapacity, dissolution, liquidation or other event. (v) If such Selling Securityholder is a Class I or Class II Selling Securityholder in Schedule II hereto, such Selling Securityholder has reviewed the Registration Statement and Prospectus and, although such Selling Securityholder has not independently verified the accuracy or completeness of all the information contained therein, nothing has come to the attention of such Selling Securityholder that would lead such Selling Securityholder to believe that on the Effective Date, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus contained and, on the Closing Date and any later date on which Option Stock is to be purchased, contains any untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading except that the representations and warranties set forth in this paragraph 2(b)(v) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company by such Underwriters for use therein. 4 5 (vi) The sale of the Stock by such Selling Securityholder pursuant hereto is not prompted by any material adverse information concerning the Company that is known by such Selling Securityholder and that is not set forth in the Registration Statement and Prospectus. (vii) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Stock. 3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell 4,250,000 shares of the Underwritten Stock to the several Underwriters and each of the Underwriters agrees to purchase from the Company the respective aggregate number of shares of Underwritten Stock set forth opposite its name in Schedule I. The price at which such shares of Underwritten Stock shall be sold by the Company and purchased by the several Underwriters shall be $___ per share. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of shares of the Underwritten Stock specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for the number of shares of the Stock agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the shares of the Stock which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of shares of the Stock which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares of the Stock exceeds 10% of the total number of shares of the Stock which all Underwriters agreed to purchase hereunder. If the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company and the Selling Securityholders shall have the right to postpone the Closing Date determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company and the Selling Securityholders shall make arrangements within the 24-hour periods stated above for the purchase of all the shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company or the Selling Securityholders to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company or the Selling Securityholders. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company and the Selling Securityholders grant an option to the several Underwriters to purchase, severally and not jointly, up to 637,500 shares in the aggregate of the Option Stock from the Company and the Selling Securityholders at the same price per share as the Underwriters shall pay for the Underwritten Stock. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of shares of the Option Stock as to which the several 5 6 Underwriters are exercising the option. Delivery of certificates for the shares of Option Stock, and payment therefor, shall be made as provided in Section 5 hereof. The number of shares of the Option Stock to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Stock to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in such manner as you deem advisable to avoid fractional shares. The number of shares of Option Stock to be sold by each Selling Securityholder is set forth in Schedule II opposite the name of each Selling Securityholder. 4. OFFERING BY UNDERWRITERS. (a) The terms of the initial public offering by the Underwriters of the Stock to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth in the third, thirteenth, fourteenth and fifteenth paragraphs under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 5. DELIVERY OF AND PAYMENT FOR THE STOCK. (a) Delivery of certificates for the shares of the Underwritten Stock and the Option Stock (if the option granted by Section 3(c) hereof shall have been exercised not later than 7:00 A.M., San Francisco time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301-1825, at 7:00 a.m., San Francisco time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company, you and (if Option Stock is to be delivered) the Selling Securityholders. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(c) hereof shall be exercised after 7:00 a.m., San Francisco time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor, shall be made at the office of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301-1825, at 7:00 a.m., San Francisco time, on the third business day after the exercise of such option. (c) Payment for the Stock purchased from the Company shall be made to the Company or its order, and payment for the Stock purchased from the Selling Securityholders shall be made to the Custodian, for the account of the Selling Securityholders, in each case by one or more certified or official bank check or checks or by wire, in either case in same day funds. Such payment shall be made upon delivery of certificates for the Stock to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date, in the case of Underwritten Stock, and at least one business day prior to the purchase thereof, in the case of the Option Stock. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on the business day prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company and the Selling Securityholders for shares to be purchased by any Underwriter whose check shall not have been received by you on the Closing Date or any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6 7 6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS. Each of the Company and the Selling Securityholders (where expressly indicated) respectively covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the rules and regulations of the Commission. (b) The Company will promptly notify each Underwriter in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company and the Selling Securityholders will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Stock, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Stock by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriters such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Stock may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Stock in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. 7 8 (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Stock for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Stock. (g) During a period of five years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with the Commission. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (i) The Company and the Class I and II Selling Securityholders jointly and severally agree to pay all costs and expenses incident to the performance of their obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the National Association of Securities Dealers, Inc. ("NASD") of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of stock certificates, including the transfer agent's fees. The Selling Securityholders will pay any transfer taxes incident to the transfer to the Underwriters of the shares the Stock being sold by the Selling Securityholders. (j) The Company and the Class I and II Selling Securityholders jointly and severally agree to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Stock under state or international securities or blue sky laws and in the review of the offering by the NASD. (k) The provisions of paragraphs (i) and (j) of this Section are intended to relieve the Underwriters from the payment of the expenses and costs which the Company and the Selling Securityholders hereby agree to pay and shall not affect any agreement which the Company and the Selling Securityholders may make, or may have made, for the sharing of any such expenses and costs. (l) The Company and each of the Selling Securityholders hereby agrees that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company or such Selling Securityholder, as the case may be, will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, 8 9 whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Stock to be sold to the Underwriters pursuant to this Agreement. The obligations of the Company under this subsection (l) also shall not apply to (A) shares of Common Stock issued by the Company upon the exercise of options granted under the stock option plans of the Company (the "Option Plans") or upon the exercise of warrants outstanding as of the date hereof, all as described in the introduction to the table under the caption "Capitalization" in the Preliminary Prospectus, (B) options to purchase Common Stock granted under the Option Plans, and (C) shares of Common Stock issued by the Company under its employee stock purchase plan. (m) The Company agrees to use its best efforts to cause all directors, officers, and stockholders to agree that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge, or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock whether any such transaction described above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The Company will not release any of its officers, directors or other stockholders from any lock-up agreements currently existing or hereafter effected without the prior written consent of Hambrecht & Quist LLC. (n) If at any time during the 25-day period after the Registration Statement becomes effective any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price for the Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (o) The Company is familiar with the Investment Company Act of 1940, as amended, and will in the future conduct its affairs, in such a manner to ensure that the Company was not and will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. 7. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to the provisions of paragraph (f) of this Section 7, the Company and the Selling Securityholders jointly and severally agree to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Securities Exchange Act of 1934, as amended (herein called the Exchange Act), or the common law or otherwise, and the Company and the Selling Securityholders jointly and severally agree to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company 9 10 and the Selling Securityholders contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto, (2) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with paragraph (c) of Section 6 hereof, and (3) each Class III Selling Securityholder shall only be liable under this paragraph with respect to (A) information pertaining to such Selling Securityholder furnished by or on behalf of such Selling Securityholder expressly for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto or (B) facts that would constitute a breach of any representation or warranty of such Selling Securityholder set forth in Section 2(b) hereof and (4) notwithstanding anything herein to the contrary, the Underwriters agree that they will not seek indemnification under this Section 7(a) from the Selling Securityholders unless the Underwriters shall have first sought indemnity from the Company under this Section 7(a) and the Company has not agreed to satisfy such request for indemnification in full within 30 days; provided, however, that the Underwriters shall not be required to effect such initial demand upon the Company and wait such 30-day period if it would prejudice their right to indemnification from the Selling Securityholders. The indemnity agreements of the Company and the Selling Securityholders contained in this paragraph (a) and the representations and warranties of the Company and the Selling Securityholders contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, and the Selling Securityholders from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (c) Each party indemnified under the provision of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in 10 11 such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Securityholders on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Stock received by the Company and the Selling Securityholders and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparing to defend or defending against any action or claim which is the 11 12 subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (e) Neither the Company nor the Selling Securityholders will, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (f) The liability of each Selling Securityholder under the indemnity and reimbursement agreements contained in the provisions of this Section 7 and Section 11 hereof and under the representations contained in Section 2(a) and paragraphs (v) and (vi) of Section 2(b) hereof shall be limited to an amount equal to the initial public offering price of the stock sold by such Selling Securityholder to the Underwriters less underwriting discounts and commissions. The Company and the Selling Securityholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company and the Selling Securityholders if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgment, make the offering or delivery of the Stock impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, or The Nasdaq Stock Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company or the Selling Securityholders to the Underwriters and no liability of the Underwriters to the Company or the Selling Securityholders; provided, however, that in the event of any such termination the Company and the Selling Securityholders agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Securityholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Stock shall be subject to the performance by the Company and by the Selling Securityholders of all their respective obligations to be performed hereunder at or prior to the Closing Date or 12 13 any later date on which Option Stock is to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of the Stock hereunder and the validity and form of the certificates representing the Stock, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Fenwick & West LLP, counsel for the Underwriters. (c) You shall have received from Gray Cary Ware & Freidenrich, counsel for the Company and the Selling Securityholders, and from Hickman, Stephens & Coleman LLP, patent counsel for the Company, opinions, addressed to the Underwriters and dated the Closing Date, covering the matters set forth in Annex A and Annex B hereto, respectively, and if Option Stock is purchased at any date after the Closing Date, additional opinions from each such counsel, addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct in all material respects and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) neither the Company nor any of its subsidiaries has any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company or any of its subsidiaries is a party or of which property of the Company or any of its subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable in your reasonable judgment to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Stock is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (vii) of paragraph (d) of this Section 9 are true and correct. 13 14 (f) You shall have received from Deloitte & Touche LLP, a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than three business days prior to the Closing Date or such later date on which Option Stock is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company or any of its subsidiaries which, in your sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. (g) You shall have received from Deloitte & Touche LLP a letter stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as at June 30, 1999, did not disclose any weakness in internal controls that they considered to be material weaknesses. (h) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (f) of Section 6 hereof. (i) Prior to the Closing Date, the Stock to be issued and sold by the Company and the Stock to be sold by the Selling Securityholders shall have been duly authorized for listing by the Nasdaq National Market upon official notice of issuance. (j) On or prior to the Closing Date, you shall have received from all directors and officers and from stockholders holding substantially all of the remaining stock agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating that without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge, or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock whether any such transaction described above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if Fenwick & West LLP, counsel for the Underwriters, shall be satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company and to the Selling Securityholders. Any such termination shall be without liability of the Company or the Selling Securityholders to the Underwriters and without liability of the Underwriters to the Company or the Selling Securityholders; provided, however, that (i) in the event of such termination, the Company and the Selling Securityholders agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Securityholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company or the Selling Securityholders to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 14 15 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders to deliver the Stock shall be subject to the conditions that (a) the Registration Statement shall have become effective and (b) no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. In case either of the conditions specified in this Section 10 shall not be fulfilled, this Agreement may be terminated by the Company and the Selling Securityholders by giving notice to you. Any such termination shall be without liability of the Company and the Selling Securityholders to the Underwriters and without liability of the Underwriters to the Company or the Selling Securityholders; provided, however, that in the event of any such termination the Company and the Selling Securityholders jointly and severally agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company and the Selling Securityholders under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other obligations under Section 7 of this Agreement (and subject, in the case of a Selling Securityholder, to the provisions of paragraph (f) of Section 7), the Company and the Selling Securityholders hereby jointly and severally agree to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 11 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company, the Selling Securityholders and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company, the Selling Securityholders and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Stock from any of the several Underwriters. 13. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104; and if to the Company, shall be mailed, telegraphed or delivered to it at its office, 2158 Paragon Drive, San Jose, California 95131, Attention: Chief Executive Officer; and if to the Selling Securityholders, shall be mailed, telegraphed or delivered to the Selling Securityholders in care of Victor A. Viegas at the above address. All notices given by telegraph shall be promptly confirmed by letter. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or the Selling Securityholders or their respective directors or officers, and (c) delivery and payment for the Stock under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of paragraphs (l), (m) and (n) of Section 6 hereof shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 15 16 Please sign and return to the Company and to the Selling Securityholders in care of the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement among the Company, the Selling Securityholders and the several Underwriters in accordance with its terms. Very truly yours, IMMERSION CORPORATION By_______________________________________ Name:____________________________________ Title:___________________________________ SELLING SECURITYHOLDERS: Adam C. Braun C. Gordon Bell Revocable Trust Dean Chang, Ph.D. Scott Curtis Cybernet Systems Corporation Craig H. Factor Christopher J. Hasser Patrick H. and Nina J. Lacey Timothy Lacey Kenneth M. Martin Nicholas Palevsky Arthur and Marilyn Rosenberg Louis B. Rosenberg, Ph.D Bruce M. Schena Ming-Chang Tsai By:______________________________________ ___________________, Attorney-in-Fact 16 17 The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC BEAR, STEARNS & CO. INC. BANCBOSTON ROBERTSON STEPHENS INC. By Hambrecht & Quist LLC By __________________________ Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 17 18 SCHEDULE I UNDERWRITERS
NUMBER OF SHARES TO BE UNDERWRITERS PURCHASED ------------ ---------- Hambrecht & Quist LLC.......................................... Bear, Stearns & Co. Inc........................................ BancBoston Robertson Stephens Inc.............................. ---------- Total................................................. ==========
18 19 SCHEDULE II SELLING SECURITYHOLDERS
NAME AND CLASS OF NUMBER OF SHARES OF SELLING SECURITYHOLDERS OPTION STOCK TO BE SOLD ----------------------- ----------------------- CLASS I Louis B. Rosenberg, Ph.D............................. 120,000 CLASS II Cybernet Systems Corporation......................... 161,400 Adam C. Braun........................................ 4,035 Dean Chang, Ph.D..................................... 8,000 Craig H. Factor...................................... 8,070 Timothy Lacey........................................ 40,309 Kenneth M. Martin.................................... 8,070 Bruce M. Schena...................................... 8,070 CLASS III C. Gordon Bell Revocable Trust....................... 12,105 Scott Curtis......................................... 10,088 Christopher J. Hasser................................ 565 Patrick H. and Nina J. Lacey......................... 8,070 Nicholas Palevsky.................................... 20,175 Arthur and Marilyn Rosenberg......................... 12,000 Ming-Chang Tsai...................................... 28,245 -------- Total............................................ 457,272 =======
19 20 ANNEX A MATTERS TO BE COVERED IN THE OPINION OF GRAY CARY WARE & FREIDENRICH COUNSEL FOR THE COMPANY AND THE SELLING SECURITYHOLDERS (i) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, is duly qualified as a foreign corporation and in good standing in each state of the United States of America in which its ownership or leasing of property requires such qualification (except where the failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole), and has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; all the issued and outstanding capital stock of each of the subsidiaries of the Company has been duly authorized and validly issued and is fully paid and nonassessable, and, except as disclosed in the Prospectus, is owned by the Company free and clear of all liens, encumbrances and security interests, and to such counsel's knowledge, no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in such subsidiaries are outstanding; (ii) the authorized capital stock of the Company consists of__________shares of Preferred Stock, of which there are outstanding no shares, and________________shares of Common Stock, $0.001 par value, of which there are outstanding__________________________shares (including the Underwritten Stock plus the number of shares of Option Stock issued on the date hereof); proper corporate proceedings have been taken validly to authorize such authorized capital stock; all of the outstanding shares of such capital stock (including the Underwritten Stock and the shares of Option Stock issued, if any) have been duly and validly issued and are fully paid and nonassessable; any Option Stock purchased after the Closing Date, when issued and delivered to and paid for by the Underwriters as provided in the Underwriting Agreement, will have been duly and validly issued and be fully paid and nonassessable; and no preemptive rights of, or rights of refusal in favor of, stockholders exist with respect to the Stock, or the issue and sale thereof, pursuant to the Certificate of Incorporation or Bylaws of the Company and, to the knowledge of such counsel, there are no contractual preemptive rights that have not been waived, rights of first refusal or rights of co-sale which exist with respect to the Stock being sold by the Selling Securityholders or the issue and sale of the Stock; (iii) the Registration Statement has become effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus is in effect and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; (iv) the Registration Statement and the Prospectus (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and with the rules and regulations of the Commission thereunder; (v) the information required to be set forth in the Registration Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and 11(c) of Form S-1 is to such counsel's knowledge accurately and adequately set forth therein in all material respects or no response is required with respect to such Items, and the description of the Company's stock option plans and the options granted and which may be granted thereunder and the options and warrants granted otherwise than under such plans set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to said plans and options and warrants to the extent required by the Securities Act and the rules and regulations of the Commission thereunder; (vi) such counsel do not know of any franchises, contracts, leases, documents or legal proceedings, pending or threatened, which in the opinion of such counsel are of a character required to 20 21 be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not described and filed as required; (vii) the Underwriting Agreement has been duly authorized, executed and delivered by the Company; (viii) the Underwriting Agreement has been duly executed and delivered by or on behalf of the Selling Securityholders and the Custody Agreement between the Selling Securityholders and Boston Equiserve, as Custodian, and the Power of Attorney referred to in such Custody Agreement have been duly executed and delivered by the several Selling Securityholders; (ix) the issue and sale by the Company of the shares of Stock sold by the Company as contemplated by the Underwriting Agreement will not conflict with, or result in a breach of, the Certificate of Incorporation or Bylaws of the Company or any of its subsidiaries or any agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or any applicable law or regulation, or so far as is known to such counsel, any order, writ, injunction or decree, of any jurisdiction, court or governmental instrumentality; (x) to such counsel's knowledge, all holders of securities of the Company having rights to the registration of shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company have waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement; (xi) valid marketable title to the shares of Stock sold by the Selling Securityholders under the Underwriting Agreement, free and clear of all liens, encumbrances, equities, security interests and claims (other than any liens, encumbrances, equities, security interests and claims that result from actions taken against the Underwriters), has been transferred to the Underwriters who have severally purchased such shares of Stock under the Underwriting Agreement, assuming for the purpose of this opinion that the Underwriters purchased the same in good faith without notice of any adverse claims; and (xii) based insofar as factual matters with respect to the stock to be sold by the Selling Securityholders are concerned solely upon certificates of the Selling Securityholders, the accuracy of which such counsel have no reason to question, no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Stock by the Underwriters. In addition to the enumerated opinions, such counsel shall also state that such counsel has no reason to believe that the Registration Statement (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need not express any opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (except as to the financial statements and schedules and other financial data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Stock is purchased), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; ------------------------------------ Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or of the State of California, upon opinions of local counsel satisfactory in form and scope to counsel for the Underwriters. Copies of any opinions so relied upon shall be delivered to the Representatives and to counsel for the Underwriters and the foregoing opinion shall also state that counsel knows of no reason the Underwriters are not entitled to rely upon the opinions of such local counsel. 21 22 ANNEX B MATTERS TO BE COVERED IN THE OPINION OF HICKMAN, STEPHENS & COLEMAN PATENT COUNSEL FOR THE COMPANY Such counsel are familiar with the technology used by the Company in its business and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents, trade secrets, trademarks, service marks or other proprietary information or materials and: (i) such counsel have no reason to believe that the Registration Statement or the Prospectus (A) contains any untrue statement of a material fact with respect to patents, trade secrets, trademarks, service marks or other proprietary information or materials owned or used by the Company or any of its subsidiaries, or the manner of its use thereof, or any allegation of which such counsel have knowledge, on the part of any person that the Company or any of its subsidiaries is infringing any patent rights, trade secrets, trademarks, service marks or other proprietary information or materials of any such person or (B) omits to state any material fact relating to patents, trade secrets, trademarks, service marks or other proprietary information or materials owned or used by the Company or any of its subsidiaries, or the manner of its use thereof, or any allegation of which such counsel have knowledge, that is required to be stated in the Registration Statement or the Prospectus or is necessary to make the statements therein not misleading; (ii) to the best of such counsel's knowledge and except as set forth in the Prospectus under the caption "Intellectual Property," there are no legal or governmental proceedings pending relating to patent rights, trade secrets, trademarks, service marks or other proprietary information or materials of the Company or any of its subsidiaries, and to the best of such counsel's knowledge no such proceedings are threatened or contemplated by governmental authorities or others; (iii) such counsel do not know of any contracts or other documents, relating to the Company's or any subsidiary's patents, trade secrets, trademarks, service marks or other proprietary information or materials of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus that are not filed or described as required; (iv) except as set forth in the Prospectus, to the best of such counsel's knowledge, neither the Company nor any of its subsidiaries is infringing or otherwise violating any patents, trade secrets, trademarks, service marks or other proprietary information or materials of others, and to the best of such counsel's knowledge there are no infringements by others of any of the Company's or any subsidiary's patents, trade secrets, trademarks, service marks or other proprietary information or materials which in the judgment of such counsel could affect materially the use thereof by the Company or any of its subsidiaries; and (v) to the best of such counsel's knowledge, the Company owns or possesses sufficient licenses or other rights to use all patents, trade secrets, trademarks, service marks or other proprietary information or materials necessary to conduct the business now being or proposed to be conducted by the Company as described in the Prospectus. 22 EX-10.12 3 AGREEMENT DRAFT FOR ASIC DESIGN AND DEV 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 "AOX Modifications" shall mean modifications made by AOX 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 "AOX Preexisting Technology" shall mean AOX 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. 1 3 1.6 "AXIS Chip Agreement" shall mean the written agreement between KLSI and AOX 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. 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 AOX 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 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 AOX Preexisting Technology, the AOX 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. 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 AOX 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 AOX and KLSI agrees that KLSI's and AOX's use of the Immersion Requested Revisions shall be limited to the licenses granted herein. 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 AOX for AOX 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 AOX for AOX 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 AOX for AOX 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 AOX, 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 AOX'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 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 AOX 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. 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 17 IMMERSION ASIC SPECIFICATION [****] *All information in this forty page exhibit has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 1-40 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/AOX "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 43 21 STATEMENT OF WORK REV. 1.4
- ----------------------------------------------------------------------------------------------------------------------------------- NO TASK DATE/ WHO DESCRIPTION TIME ------------------------------- IMMERSION AOX KLSI - ----------------------------------------------------------------------------------------------------------------------------------- 1 Function 4/21/97 X X X Immersion, AOX, 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, AOX, 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 AOX 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 AOX sign off on base wafer Master slice sign-off - ----------------------------------------------------------------------------------------------------------------------------------- 8 VHDL X AOX completes VHDL functional code, simulates the result and assures that the design agrees with the detailed specification. - ----------------------------------------------------------------------------------------------------------------------------------- 9 Pre-layout X AOX 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 AOX 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 AOX provides preliminary ROM code - ----------------------------------------------------------------------------------------------------------------------------------- 13 simulation 7/3/97 X AOX simulates the design and makes sure that the design with the detailed specification - ----------------------------------------------------------------------------------------------------------------------------------- 14 second sign 7/3/97 X X AOX 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 AOX with prototype Joystick system joystick - ----------------------------------------------------------------------------------------------------------------------------------- 17 KLSI 7/25/97 X KLSI delivers Xx ceramic prototypes delivers prototypes - ----------------------------------------------------------------------------------------------------------------------------------- 18 Integration X X AOX 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. - -----------------------------------------------------------------------------------------------------------------------------------
44 22
- ----------------------------------------------------------------------------------------------------- DATE/ NO TASK TIME WHO DESCRIPTION --------------------------- IMMERSION AOX 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 - -----------------------------------------------------------------------------------------------------
45 EX-10.18 4 INTELLECTUAL PROPERTY LICENSE AGRMT WITH LOGITECH 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: The Joystick Product shall be a two degree of freedom joystick style interface with active force feedback functionality. It must be compatible with Intel based personal computers running Microsoft Windows 95 operating system. It must connect to the PC through a universal Serial Bus ("USB") interface using the USB communication protocol for "PID" class devices. The completed work must include hose drivers, firmware and electromechanical hardware that work together to allow force feedback sensations to be generated by a processor on-board the Joystick Product. Said sensations must be appropriately coordinated with events running in host gaming applications. The programming of coordination between force sensations and gaming events will be achieved using a high-level Application Programming Interface ("API") that allows game developers to command force feedback sensations from their applications. The Windows API will use the "Direct-X" force feedback implementations as its core and the Joystick Product must have compatible firmware that locally produces all key features supported by the current Direct-X 5.0 (Direct-Input) specification. The API will also enable advanced features not directly specified by Direct-X. The API will be functional within Windows 95, DOS-Box, and Windows 97 environments. The Joystick Product will be an "all digital" implementation. 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: Handle: Logitech to provide the design. The handle will be based on the Wingman Extreme Digital handle industrial design with possible modifications to allow the main handle shaft to be strengthened. A deadman switch is not required from Immersion but may be included. Gimbal: Immersion to provide the design concept. The gimbal must provide two rotary degrees of freedom of the joystick handle with respect to two grounded actuators. The cost shall be kept under [****] each. Transmission: Immersion to provide the design concept. The transmission will be a low backlash method of conveying mechanical power from motors to the gimbal while creating a mechanical advantage. Actuators: Immersion to make the motor recommendation and suggest vendors. Primary goals will be low cost (less than [****] each) and minimal cogging. *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 CONFIDENTIAL TREATMENT REQUESTED - EDITED COPY Base Enclosure: Bridge Design to provide the industrial design. Immersion must provide Bridge with envelope requirements. Spring Centering: Immersion to provide spring centering concept with similar force profile to other commercial Logitech joysticks. Power Electronics: Immersion must provide the initial design. There will be an external power source (brick). Combined cost will be under [****]. Microprocessor and Interface Electronics: Immersion must provide the microprocessor board design and the firmware to create local force feedback sensations. Design will be USB high speed compatible. It will allow for a maximum of eight (8) switches and one (1) throttle control. Combined cost will be under [****] in volume. Sensors: Immersion must provide recommendation and design implementation for sensors that monitor the motion of the gimbal and report such data back to the host across the USB via the microprocessor. Embedded Software: Immersion must provide. The embedded software will be Direct-X and I-Force 2.0 compatible and USB enabled. Host Software: Immersion must provide drivers that allow force feedback interaction from DOS Box, Windows 95, and Windows 97. (Logitech will provide an LES control panel). Switches and Buttons: In addition to the buttons provided within the Logitech designed handle, the joystick will contain the following: Three Position Switch: This button will provide three levels of force feedback. Off, standard play levels, and a maximum or "turbo" mode for demo purposes. In the off mode the joystick must function as a standard joystick without external power. Base Buttons: The base shall allow for 4 to 8 buttons for the user to program. Throttle Control: The base shall allow for a single throttle control. Product Details: The product must perform as follows: Range of Motion: at least [****] degrees in both axes of gimbal Force Output: A minimum of [****] in each axis Dimensions: The size shall be minimized within the constraints of packaging. Weight: 2 to 3 lbs. Power Consumption: 10 to 40 watts *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. 25 26 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. 26 27 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 28 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. 28 EX-10.19 5 INTELLECTUAL PROPERTY LICENSE AGRMT WITH LOGITECH 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 EXHIBIT A SPECIFICATION Immersion shall develop a Mouse Product to conform to the following basic specifications: The Mouse Product shall be a two degree of freedom mouse controller with active force feedback functionality along each of the two displacement axes. The Mouse Product will be fixed by a linkage to a mouse pad that houses the actuators and sensors. The Mouse Product will allow both absolute position data and relative position data to be reported to the host computer. The Mouse Product must be compatible with Intel based personal computers (or equivalent) running Microsoft Windows 98 and NT operating systems. It must connect to the PC through a universal Serial Bus ("USB") interface using the USB communication protocol for "HID" and/or "PID" class devices (or HID equivalent). In addition to receiving position data and button press data from the Mouse Product across the USB, the host computer will command force sensations on the Mouse Product by sending a high level force command with command parameters across the USB. The completed work must include host drivers, firmware and electromechanical hardware that work together to allow cursor related force feedback sensations to be generated by a processor on-board the Mouse Product (for example, physical detent sensations when traversing a menu item). Said sensations must be appropriately coordinated with events running in host software applications. The programming of coordination between force sensations and software events will be achieved using a high-level Application Programming Interface ("API") that allows software developers to command force feedback sensations from their applications. For gaming applications, the Windows API will use the "DirectX" force feedback implementation as its core and the Mouse Product must have compatible firmware that locally produces all key features supported by the then current DirectX 6.0 (Direct-Input) specification. For non-gaming applications, API will also enable advanced features not necessarily specified by DirectX as included in the current FEELit API specification. The device must be able to provide mouse functionality (no force feedback) when powered by USB only, in low power mode (4.4V, 100 mA) to comply with the USB Specification at power up. 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: Mouse Handle: Logitech to provide the design. A deadman switch is not currently provided from Immersion but may be included by Logitech if it proves necessary. Base Enclosure/Support: Immersion to provide the basic mouse pad housing concept and recommendations. Logitech to provide the industrial design. Logitech to do detailed design with input from Immersion. The support must carry the mouse loads, both user loads and force feedback loads, without introducing excessive friction or binding. The support must include a hard stop around the peripheral of the mouse workspace. Range of motion provided for the Mouse Product is specified at the end of this section. Transmission: Immersion to provide a parallel linkage design. The transmission will be a five-bar linkage structure that conveys mechanical power from actuators to the Mouse Handle. 23 24 Actuator: Immersion to provide the full design of custom flat actuators (voice coils) optimized for the Mouse Product embodiment. Logitech will produce the actuator coils but Immersion will supply the Magnet Assembly as a separate component governed by a separate Component Supply Agreement. Spring Centering: Physical springs are not needed for this product. All spring centering for gaming applications will be simulated by the local processor. Power Electronics: Immersion must provide the initial design. There will be an external power source (brick) in the initial product. [****] Product will draw non-force feedback power from USB. Microprocessor and Interface Electronics: Immersion must provide the board design for controller electronics, to be industrialised by Logitech. Immersion will supply the FEELit Chip processor under a separate OEM agreement, said processor including firmware to create local force feedback sensations. Design will be USB high speed compatible. It is currently estimated that the COG for the die-shrink version of the FEELit Chip in production volumes (100,000 units per year) will be [****] or less. Sensors: Immersion provides recommendation and design implementation for sensors that monitor the motion of the mouse and report such data back to the host across USB via the microprocessor. It is currently estimated that the COG for the sensing electronics will be less than [****]. Sensitivity: Mouse to support basic mouse ballistic scaling algorithms wherein mouse position sensitivity is varied with velocity of mouse movement. [****]. Embedded Software: Immersion must provide the HEX code. The embedded software will be Direct-X and FEELit compatible and USB enabled. Logitech will not have access to any parts of the source code (including but not limited to the force feedback core) except as provided in Section 2.2.1 ("Firmware Source Code"). [****] After the final firmware is delivered, Immersion will provide access to several sections of the firmware including those related to [****] Host Software: Immersion will provide drivers that manage force feedback of the device in Windows 98 and NT. The driver will support the DirectInput API and the FeelIt API. A custom interface may be needed to communicate with existing Logitech MouseWare drivers. This custom interface would be developed between Logitech and Immersion. The general breakdown of the software should be such that Immersion manages the Force Feedback components, and Logitech's MouseWare manages the button programmability, wheel support, port management, and sensor and button reporting for cursor movement control as well as gaming movement control through DirectX. *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 Switches and Buttons: The product will support three standard moue buttons plus [****], all processed by the FEELit Chip if possible. Compliance: The Immersion/Logitech design must comply with 761325-0000 Rev A Logitech EMI standard. Exceptions to this standard must be duly approved by Logitech. GOI-740329-00 Rev B is the current generic reference for reliability. Applicable standards are the following: Drop: 90 cm Light immunity: 100 kLux Environmental: -40.. +70C (non Operating, 53 Hours cycle) 0C (operating, 8 hours) +40C (operating, 90% RH, 8 hours) +40C (operating, 10% RH, 8 hours) Vibration: refer to GOI-740329-00 Shock: refer to GOI-740329-00 Product Details: The product must perform as follows: Range of Motion: No less than [****] Force Output: A minimum of [****] grams (peak) Dimensions: The size shall be minimized within the constraints of packaging. Power Consumption: No more than [****] watts peak. Tracking: Allows [****]. Target Cost: Logitech desires a product with a suggested retail price of $99 assuming China based labor costs, approximately [****] Logitech margin, and approximately [****] in nine-level costs. While many of the component costs, labor costs, and other factors that affect Logitech's ability to hit any given price target are not related to Immersion's obligations under this contract, there are currently unknown component costs that do depend upon Immersion's design. These unknown component costs are the cost of goods for the sensor electronics and actuator subsystem. At the present time, the preliminary sensor electronics component costs are estimated at [****] and the preliminary actuator component costs are estimated at [****]. Based upon the current specification, Immersion has informed Logitech that it expects that [****] to [****] can be cut from the combined component costs of the sensor electronics and actuator subsystem. Note: all costs are based upon the production volume target of 100,000 units per year. *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. 25 26 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] 26 EX-10.20 6 TECHNOLOGY PRODUCT DEVELOPMENT AGRMT WITH LOGITECH 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. 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: The Mouse Product shall be a two degree of freedom mouse controller with active force feedback functionality along each of the two displacement axes. The Mouse Product will be fixed by a linkage to a mouse pad that houses the actuators and sensors. The Mouse Product will allow both absolute position data and relative position data to be reported to the host computer. The Mouse Product must be compatible with Intel based personal computers (or equivalent) running Microsoft Windows 98 and NT operating systems. It must connect to the PC through a universal Serial Bus ("USB") interface using the USB communication protocol for "HID" and/or "PID" class devices (or HID equivalent). In addition to receiving position data and button press data from the Mouse Product across the USB, the host computer will command force sensations on the Mouse Product by sending a high level force command with command parameters across the USB. The completed work must include host drivers, firmware and electromechanical hardware that work together to allow cursor related force feedback sensations to be generated by a processor on-board the Mouse Product (for example, physical detent sensations when traversing a menu item). Said sensations must be appropriately coordinated with events running in host software applications. The programming of coordination between force sensations and software events will be achieved using a high-level Application Programming Interface ("API") that allows software developers to command force feedback sensations from their applications. For gaming applications, the Windows API will use the "DirectX" force feedback implementation as its core and the Mouse Product must have compatible firmware that locally produces all key features supported by the then current DirectX 6.0 (Direct-Input) specification. For non-gaming applications, API will also enable advanced features not necessarily specified by DirectX as included in the current FEELit API specification. The device must be able to provide mouse functionality (no force feedback) when powered by USB only, in low power mode (4.4V, 100 mA) to comply with the USB Specification at power up. 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: Mouse Handle: Logitech to provide the design. A deadman switch is not currently provided from Immersion but may be included by Logitech if it proves necessary. Base Enclosure/Support: Immersion to provide the basic mouse pad housing concept and recommendations. Logitech to provide the industrial design. Logitech to do detailed design with input from Immersion. The support must carry the mouse loads, both user loads and force feedback loads, without introducing excessive friction or binding. The support must include a hard stop around the peripheral of the mouse workspace. Range of motion provided for the Mouse Product is specified at the end of this section. Transmission: Immersion to provide a parallel linkage design. The transmission will be a five-bar linkage structure that conveys mechanical power from actuators to the Mouse Handle. 27 28 Actuator: Immersion to provide the full design of custom flat actuators (voice coils) optimized for the Mouse Product embodiment. Logitech will produce the actuator coils but Immersion will supply the Magnet Assembly as a separate component governed by a separate Component Supply Agreement. Spring Centering: Physical springs are not needed for this product. All spring centering for gaming applications will be simulated by the local processor. Power Electronics: Immersion must provide the initial design. There will be an external power source (brick) in the initial product. [****] Product will draw non-force feedback power from USB. Microprocessor and Interface Electronics: Immersion must provide the board design for controller electronics, to be industrialised by Logitech. Immersion will supply the FEELit Chip processor under a separate OEM agreement, said processor including firmware to create local force feedback sensations. Design will be USB high speed compatible. It is currently estimated that the COG for the die-shrink version of the FEELit Chip in production volumes (100,000 units per year) will be [****] or less. Sensors: Immersion provides recommendation and design implementation for sensors that monitor the motion of the mouse and report such data back to the host across USB via the microprocessor. It is currently estimated that the COG for the sensing electronics will be less than [****]. Sensitivity: Mouse to support basic mouse ballistic scaling algorithms wherein mouse position sensitivity is varied with velocity of mouse movement. [****]. Embedded Software: Immersion must provide the HEX code. The embedded software will be Direct-X and FEELit compatible and USB enabled. Logitech will not have access to any parts of the source code (including but not limited to the force feedback core) except as provided in Section 2.2.1 ("Firmware Source Code"). [****] After the final firmware is delivered, Immersion will provide access to several sections of the firmware including those related to [****] Host Software: Immersion will provide drivers that manage force feedback of the device in Windows 98 and NT. The driver will support the DirectInput API and the FeelIt API. A custom interface may be needed to communicate with existing Logitech MouseWare drivers. This custom interface would be developed between Logitech and Immersion. The general breakdown of the software should be such that Immersion manages the Force Feedback components, and Logitech's MouseWare manages the button programmability, wheel support, port management, and sensor and button reporting for cursor movement control as well as gaming movement control through DirectX. *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 Switches and Buttons: The product will support three standard moue buttons plus [****], all processed by the FEELit Chip if possible. Compliance: The Immersion/Logitech design must comply with 761325-0000 Rev A Logitech EMI standard. Exceptions to this standard must be duly approved by Logitech. GOI-740329-00 Rev B is the current generic reference for reliability. Applicable standards are the following: Drop: 90 cm Light immunity: 100 kLux Environmental: -40.. +70C (non Operating, 53 Hours cycle) 0C (operating, 8 hours) +40C (operating, 90% RH, 8 hours) +40C (operating, 10% RH, 8 hours) Vibration: refer to GOI-740329-00 Shock: refer to GOI-740329-00 Product Details: The product must perform as follows: Range of Motion: No less than [****] Force Output: A minimum of [****] grams (peak) Dimensions: The size shall be minimized within the constraints of packaging. Power Consumption: No more than [****] watts peak. Tracking: Allows [****]. Target Cost: Logitech desires a product with a suggested retail price of $99 assuming China based labor costs, approximately [****] Logitech margin, and approximately [****] in nine-level costs. While many of the component costs, labor costs, and other factors that affect Logitech's ability to hit any given price target are not related to Immersion's obligations under this contract, there are currently unknown component costs that do depend upon Immersion's design. These unknown component costs are the cost of goods for the sensor electronics and actuator subsystem. At the present time, the preliminary sensor electronics component costs are estimated at [****] and the preliminary actuator component costs are estimated at [****]. Based upon the current specification, Immersion has informed Logitech that it expects that [****] to [****] can be cut from the combined component costs of the sensor electronics and actuator subsystem. Note: all costs are based upon the production volume target of 100,000 units per year. *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. 29 30 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
30 31 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: ---------------------------- -------------------------------- 31 32 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. 32 33 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] 33 EX-23.1 7 CONSENT OF DELOITTE & TOUCHE LLP 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. 5 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 10, 1999 -----END PRIVACY-ENHANCED MESSAGE-----