UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1996
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
__________ to __________.
Commission file number: 0-21808
INTERLINK ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0056625
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
546 Flynn Road, Camarillo, California 93012
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (805) 484-8855
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock (Title of Class) Warrants (Title of Class) Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at March 18, 1997, based on the closing price on such date on
the NASDAQ National Market System: $29,666,793.
Number of shares of Common Stock outstanding as of March 18, 1997:
4,564,122.
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
Proxy Statement for 1997 Annual Part III
Meeting of Shareholders
TABLE OF CONTENTS
Item of Form 10-K Page
- -----------------------------------------------------------------------------
PART I
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 4(a). Executive Officers of the Registrants 13
PART II
Item 5. Market for the Registrant's Common 14
Equity and Related Stockholder Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis 15
of Financial Condition and Results of
Operations
Item 8. Financial Statements and Supplementary 15
Data
Item 9. Changes in and Disagreements with Accountants 15
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of 15
the Registrant
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial 16
Owners and Management
Item 13. Certain Relationships and Related 16
Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules 16
and Reports on Form 8-K
PART I
Item 1. Business
Force Sensing Technology
Interlink Electronics, Inc.'s (the "Company" or "Interlink") force
sensing technology transforms physical pressure applied to a sensor into a
corresponding electronic response. Products incorporating a sensor using
the Company's force sensing resistor ("FSR") devices can react to pressure
when applied by any means--through human touch, a mechanical device, a
fluid, or a gas. With supporting electronics, an FSR sensor can start,
stop, intensify, select, direct, detect, or measure a desired response.
FSR sensors measure relative pressure and, depending on their
configuration and with supporting electronics, can measure the location at
which the pressure is applied. A "basic" FSR sensor, such as the sensor
used in an electronic drum device sold by the Company, detects the pressure
of a drum stick applied to the device and accurately measures the intensity
of the pressure applied, thereby enabling precise control of the drum
sound. A second type of sensor is a "four zone" sensor with four sensors
arranged in a two-by-two square with an actuator placed directly where the
four sensors touch. Toggling the actuator in any direction, an operator can
control the direction and speed of a cursor on a computer screen. A third
type of FSR sensor, known as a touchpad, consists of a two-dimensional grid
capable of measuring the location and intensity of pressure applied at any
set of coordinates on the grid. This type of device is useful for functions
such as handwriting input or computer cursor control. For example, with
appropriate interface electronics, a computer pointing device can be driven
by the movement of a finger on an FSR touchpad, while the "click" function
could be activated by a temporary increase in pressure.
Because FSR sensors can be as thin as one-hundredth of an inch thick
and measure pressure rather than movement, they can be readily incorporated
into sealed systems without moving parts. This makes FSR sensors
particularly well suited to operation in harsh or abusive environments or
where durability and long life are important. FSR sensor systems, when
packaged in sealed environments, are operationally unaffected by most
levels of moisture, environmental contaminants, vibration, or noise. In
tests conducted by the Company, FSR sensors have retained their performance
through tens of millions of actuations, even in adverse environments
involving heat, moisture, and chemical contamination.
FSR sensors can be designed in any shape. The thin profile of an FSR
sensor enables easy integration into a wide variety of mechanical and
electronic devices. An FSR product can contain as many as 256 individual
FSR sensors within a one-half-inch-square area, enabling a precise
measurement of the location at which the pressure is applied.
A force sensing resistor is described scientifically as a polymer
thick film device that exhibits a decreasing electrical resistance with
increasing force applied to the device surface. FSR sensors consist of two
or more layers of plastic film, one or more layers supporting
interdigitating
2
electrodes (conductor patterns) and one or more layers supporting the
proprietary, semiconductive polymer. The two types of substrate layer are
arranged in opposition, and the surface contact between them creates an
electrical connection. The application of pressure on the device increases
the surface area over which the electrical contact occurs thereby
decreasing electrical resistance. Any increase in pressure over a
relatively broad range causes a proportional decrease in electrical
resistance within the circuit that can be measured by standard electronic
measuring devices, thereby translating variances in pressure into
corresponding variances in an electronic signal. The ability of an FSR
sensor to measure variances in pressure is accurate and repeatable in
comparison to comparably priced products, allowing precise correlation
between the amount of pressure applied to the sensor and the result in the
operating system controlled by the sensor. In addition to its patented
technology, the Company has developed a number of manufacturing process
improvements that, while not subject to patent protection, are viewed as
trade secrets by the Company, and are considered to have significant
proprietary value.
Forward-Looking Statements
From time to time the Company may issue forward-looking statements
that involve a number of risks and uncertainties. The following factors are
among the factors that could cause actual results to differ materially from
the forward-looking statements: business conditions and growth in the
electronics industry and general economies, both domestic and
international; lower than expected customer orders, delays in receipt of
orders or cancellation or orders; competitive factors, including increased
competition, new product offerings by competitors and price pressures; the
availability of third party parts and supplies at reasonable prices;
changes in product mix; significant quarterly performance fluctuations due
to the receipt of a significant portion of customer orders and product
shipments in the last month of each quarter; and product shipment
interruptions due to manufacturing problems. The forward-looking statements
contained in this document regarding industry trends, revenue, costs and
margin expectations, product development and introductions and future
business activities should be considered in light of these factors.
Product Applications
General
The capabilities and versatility of the force sensing technology offer
opportunities in numerous markets including computer input, appliances,
consumer electronics, aerospace, automotive, and industrial control and
measurement. While this diversity of applications is viewed by the Company
as an advantage, different kinds of applications call for different
electronic or mechanical support efforts and often require separate sales
and distribution channels. Also, sales volumes and profit margins can vary
significantly from application to application. As a result, the Company has
selected specific targeted applications based on its assessment of market
need and size, effectiveness of distribution channels, support
requirements, and potential profitability to the Company. These
applications are not limited by industry or function but rather are
determined by engineering and economic analysis that shows that force
sensing technology offers a particularly functional, cost-effective or
otherwise attractive solution to the particular product need.
3
Prior to 1992, the Company's principal business was the manufacture
and sale of FSR sensors made to customer specifications. During 1992, the
Company changed its product focus to concentrate on the sale of complete
sensor products and systems and now focuses in two areas, pointing device
products based on the Company's proprietary VersaPoint technology and
Custom Applications.
1. VersaPoint Technology
For computer users, the two most common ways to enter data or give
commands are "keying" (using regular "text entry" keys on a keyboard) and
"pointing" (using a mouse or equivalent device, which may be stand-alone or
installed in a keyboard). As both commercial and industrial computer
systems have moved from text-based to graphics-based user interfaces, the
need for pointing devices has increased. The Company believes that its
force sensing technology is particularly well suited to this application
because of its inherent ability to provide accurate control of both cursor
movement and speed without any requirement for movement of the operator
other than simple finger or thumb pressure. New computer technologies, such
as computerized presentations, multimedia software, and the Internet, also
require or support pointing and other non-text-based interface devices.
Interlink Electronics, Inc.' force sensing technology, featuring a thin
sensor profile, zero travel, and broad dynamic range characteristics,
allows for the design of miniature joysticks, touchpads, and pressure
buttons offering a user-friendly, cost-effective pointing solution and data
entry method.
To address these market opportunities, the Company has developed its
proprietary VersaPoint and semiconductive touchpad technologies. The
VersaPoint technology consists of a four-zone FSR sensor array and
proprietary software and firmware that control cursor direction and speed.
Depending on product design, computer function selection can be provided
either by "clicking" separate buttons on the computer pointing device, or
by sharply increasing pressure on the cursor control button itself. In
November 1996 the Company introduced its semiconductive touchpad
technology, VersaPad. With proprietary software and firmware, the user
controls cursor direction and speed by sliding their fingertip across the
touchpad surface. Clicking is performed by separate buttons or by tapping
the touchpad surface.
Branded Products
In 1992 the Company began the development of various stand-alone
computer pointing devices based on its VersaPoint technology. Of these
products, the SuperMouse device was introduced in November 1992, the
DuraPoint ruggedized pointing device was introduced in February 1993, the
ProPoint pointing device was introduced in February 1994, the RemotePoint
cordless pointing device was introduced in August 1994, and the DeskStick
and RemotePointPlus products were introduced in November 1995.
The Company is continuing to develop distribution channels for its
branded products. Current distribution consists of mass merchandiser
outlets, including Circuit City Stores, Inc.,
4
Fry's Corporation, and Computer City and, distributors, such as Ingram
Micro, catalogs and specialty resellers targeting corporate accounts.
Marketing to these channels is accomplished by direct sales through Company
employees and a network of independent sales representatives which has
recently been established throughout the United States, Japan, Canada, and
Mexico.
SuperMouse The Company has designed and developed the SuperMouse
device, an after-market mouse for the commercial and consumer market. It is
targeted primarily at the notebook and other portable computer market in
which the Company believes it has a competitive advantage as a result of
its small size and its versatility (it can be used as a portable, desktop,
or handheld mouse). The principal solutions offered for this after-sale
market have been the trackball and the traditional mouse.
ProPoint To address the presentation and multimedia market, in
February 1994, the Company began shipping its ProPoint device, a handheld
corded pointing device used to control cursor movement and function
selection. The ProPoint product comes with 12 feet of cable and, with
optional additional connecting cables, its range can be extended to up to
40 feet, making it useful not only as a personal cursor control device, but
also as a presentation assistant for conference room size presentations.
RemotePoint In order to satisfy the need for a cordless, remote
pointing device to control desktop and conference room computer-based
presentations, Interlink introduced its RemotePoint product in August 1994.
The RemotePoint device is a handheld, infrared cordless cursor control
device that has an effective range of up to 40 feet.
RemotePointPlus At the Fall 1995 COMDEX show, Interlink introduced its
RemotePointPlus product, a remote control computer cursor controller. With
programmable buttons (enabling it to handle dozens of different
user-defined functions), and a range of approximately 40 feet, it is
designed to meet the needs of even the most sophisticated presenters.
DeskStick Interlink's newest desktop mouse replacement, the DeskStick
product, couples the advanced pointing stick technology previously
available only in notebook computers with a very attractive price point,
designed to meet the needs both of first time mouse users, and of those
looking for a unique replacement mouse.
DuraPoint Increasingly, industrial, technical and scientific machinery
is being controlled by computers that incorporate pointing devices as a
means of command input. In many of the environments in which such computers
operate, resistance to moisture, chemicals and other contaminants is a
requirement. Both a traditional mouse and trackball are vulnerable to
contamination and malfunction from a variety of substances because they
have exposed moving parts and because they cannot be contained within
sealed systems. Also, machinery used in hospital operating rooms and some
industrial plants must be "scrubbable" as a part of the normal cleaning and
disinfecting process required in those environments.
To address these needs, in February 1993 Interlink, began shipping its
DuraPoint ruggedized pointing device. To the best of the Company's
knowledge, its DuraPoint device was
5
the first cursor control device designed to NEMA 4X, 6P, and 13 standards
(industry association standards relating to the ability of an electronic
device to operate under adverse environmental conditions). Independent
testing to confirm compliance with NEMA standards has not been required by
customers and has not been requested by the Company. The DuraPoint device
can withstand a variety of harsh environments, such as direct water spray,
debris, cleansers or even prolonged submersion. Interlink offers the
DuraPoint device as either a stand-alone product or as a cursor control
module that can be incorporated into an existing or planned control panel
design. Sales channels consist primarily of industrial hardware and
software distributors and bundling arrangements with industrial and medical
equipment manufacturers.
OEM Remote Controls
Since the development of its first hand-held pointing device ProPoint,
Interlink has been selling its remote controls on an OEM basis, i.e. direct
to the system manufacturer. With the introduction of the Interactive Remote
Control ("IRC"), an infrared remote control with VersaPoint pointing
technology and up to 30 additional function buttons, Interlink Electronics,
Inc.' offers many remote control solutions to the OEM. Any of the ProPoint,
RemotePoint, RemotePointPlus and IRC products can be purchased through a
private label arrangement or each has been specifically designed to be
easily customized to customer specifications. Interlink Electronics, Inc.
also offers a circuit board level solution of its remote control/ pointing
device technology.
Keyboard Integration
Interlink offers a variety of alternatives to computer and keyboard
manufacturers to purchase components for a pointing device installed in a
keyboard or panel mounted. Historically, the Company has sold the basic
sensor array for use with electronics supplied by others. More recently,
however, it has focused on the sale of a complete VersaPoint-based sensor
module incorporating both the sensor array and supporting firmware. When
Interlink Electronics, Inc.' proprietary firmware is a part of the package,
the actual electronic components may be sold or the technology may be
licensed to the customer for manufacture by others. The Company's FSR
sensors have been installed in keyboards for a variety of notebook,
desktop, industrial and other computers. A computer pointing device can be
incorporated in a keyboard as a separate component or can be installed
under a regular text-entry or function key. Interlink Electronics, Inc. has
developed a "plug and play" FSR pointing device, marketed under the trade
name "MicroModule", that is available as a standard integrated product for
installation in notebooks or other computers.
Interlink's MicroModule, MicroJoystick and VersaPad computer pointing
devices, and similar OEM systems are designed to be incorporated into
notebook (and smaller) computer applications. Because the required FSR
sensor array can be packaged in an enclosure approximately 0.2" thick, it
can be incorporated at and just below the surface of the keyboard, and
therefore it does not take up significant amounts of space or interfere
with the installation of other components immediately below the keyboard
surface.
6
2. Custom Applications
The Company's Custom Applications Product Line consists of design,
engineering and product development teams that incorporate its proprietary
technology into specific custom products for individual OEM customers.
Interlink's force sensing technology addresses many applications in this
area. Because of the required design and development time, sales cycles
typically range from four to 18 months and can be considerably longer. On
the other hand, the result of a successful custom sale is usually a product
that is regularly reordered by the customer over a considerable period of
time.
The principal advantages of force sensing technology that apply to the
Company's other business areas also apply to its Custom Applications. The
ability to produce sensors in a wide variety of shapes and sizes, detection
of both the location and the intensity of pressure applied to the sensor,
the zero-travel characteristic and the system's resistance to environmental
damage are all attractive features for the Company's Custom Applications.
In some cases, Interlink Electronics, Inc.' customers have determined that
force sensing technology provides the only currently available solution to
their sensor requirements.
The Company has identified and is currently working with a variety of
Custom Applications customers that are presently concentrated in the
industrial and medical device industries: for example, it has developed a
fail-safe sensor system for Varian Associates for use in a medical imaging
device. As the heavy medical imaging device is lowered into contact with
the patient, the FSR sensor functions as a safety bumper to prevent injury
from excessive pressure of the device on the patient by halting the
movement of the device when the selected level of pressure is reached. FSR
sensors developed by Interlink Electronics, Inc. for Baxter Healthcare
Corporation are incorporated in an infusion pump where the FSR sensor
functions as a safety device to ensure proper placement of the intravenous
tube in the pump head.
Sales and Marketing
Historically, the Company sought to establish relationships with
customers that require a sensor system for which its proprietary force
sensing technology offers a particularly attractive solution and market
advantage. As a part of such relationships, the Company would work with the
customer to design an appropriate solution which the Company would then
manufacture and supply. Over the past few years Interlink Electronics,
Inc.' sales and marketing strategy has changed, as the Company has evolved
from being merely a supplier of sensors into its present position as a
designer and manufacturer of complete sensor systems. Today, the Company is
focusing on integrating its patented force sensing technology with added
electronic interfacing and mechanics in order to provide full "plug and
play" solutions. With the introduction of the initial version of its
SuperMouse device in late 1992, Interlink Electronics, Inc. entered the
consumer product market. With its DuraPoint device, introduced the next
year, the Company entered the industrial pointing device market. Its
ProPoint, RemotePoint, DeskStick, and RemotePointPlus products, introduced
in subsequent years, have built upon this foundation. The Company expects
to continue to sell its products directly, as well as through distributors,
value-added resellers, system integrators, mass merchandisers, and others.
7
Computer Pointing Devices. Since 1990, Interlink has worked with a
variety of keyboard and other computer and computer peripheral device
manufacturers to supply sensors or sensor systems for installation in
computers or peripheral devices. Sales cycles for OEM sales are relatively
long--in part because a successful sale requires Interlink's sensors to be
"designed in" to a customer product. Interlink's success with respect to
such OEM sales is also heavily dependent on the business success of its
customers or prospective customers. The Company has from time to time
experienced difficulty, when rapidly falling computer and peripheral prices
put pressure on many hardware manufacturers, including some of the
Company's customers. The Company believes that OEM sales constitute an
important part of its sales and marketing activity, and is devoting
significant management and sales time to exploring OEM opportunities.
In early 1995, Interlink revised its distribution strategy for its
branded products by replacing its former distributor with a direct sales
force consisting of both Company employees and independent sales
representatives. The Company has established a network of sales
representatives which covers the United States, Canada, and Mexico, and
continues to closely monitor the results of their activities. In Europe,
the Company is considering marketing these products through a non-exclusive
master distributor, as well as through regional and local sales
representatives. Interlink Electronics, Inc. is also actively exploring
possible OEM bundling opportunities regarding these products. The Company's
advertising expenditures regarding these products have thus far been
relatively modest, with strong reliance on retailer cooperative
advertising, favorable product reviews in leading computer publications,
and word of mouth.
The Company's DuraPoint ruggedized industrial pointing device, in its
stand-alone configuration, is sold by a direct sales force, as well as
through a network of industrial electronics distributors. Interlink
supports its sales of DuraPoint products primarily through print
advertising in industrial controls magazines, direct mail and
demonstrations at trade shows.
Custom Applications. Interlink sells its custom designed sensors
through a direct sales organization. An integrated marketing approach,
consisting of a direct mail campaign, media advertising, public relation
campaigns, trade show participation, and telemarketing programs is managed
by the Director of Marketing. The sales and marketing group is supported by
a team of customer service specialists and order-entry personnel.
An important part of the sales cycle for custom and modified standard
products typically involves product development and design. In a new market
or product application, there is often a need to design and engineer a
solution for customers prior to entering a period of manufacturing. This
process typically involves a period of four to seven months for turnkey
solutions before volume production can begin. The Company usually charges
the customer for design, development and tooling work during this period.
In an effort to compress development time, the Company develops product
lines that are readily modifiable to meet customer specific requirements.
This, in conjunction with Product and Project Management teams focused on
the Company's targeted business segments, provides an efficiently
responsive process to meet customer specific requirements.
8
International Operations
Interlink Electronics K.K. In April 1994, the Company acquired an 80%
ownership interest in Interlink Electronics K.K. ("IEKK"), a Japanese
company which distributes and performs value added services regarding the
Company's products in Japan. The president of IEKK is a former senior
executive with Mitsubishi Petrochemicals Company, and has a number of years
of experience working with Interlink Electronics, Inc. and its products. In
1996, IEKK's operations accounted for approximately 20% percent of
Interlink Electronics, Inc.' consolidated revenues.
Licensees
International Electronics & Engineering In September 1994, Interlink
entered into several agreements with InvestAR, S.a.r.l., pursuant to which
Interlink Electronics, Inc. transferred its entire ownership interest in
Interlink Electronics, Inc. Europe ("IEE"), a Luxembourg-based joint
venture owned by Interlink Electronics, Inc. and InvestAR, to InvestAR in
exchange for the 510,775 shares of Interlink common stock then held by
InvestAR. These shares, representing approximately 13.3% of the Company's
then-outstanding Common Stock, were returned to the Company, and reverted
to the status of authorized, but unissued, shares. In addition to the stock
transfer, the agreements also provided for continued technological
cooperation between the Company and IEE, and for the payments of technology
license royalties by IEE to the Company for sales by IEE outside of Europe
of certain FSR-based automotive safety related sensors. Royalty revenues
from IEE (which changed its name in 1995 to International Electronics &
Engineering) were not material in 1995 or 1996.
Toshiba Silicone In an agreement entered into in 1989, Toshiba
Silicone Co., K.K. licensed from the Company the right to use Interlink's
Force Sensing Resistor technology in applications for use with musical
instruments. Thus far, the royalties from this license have not been
material to the Company's revenues.
Manufacturing
Production of FSR sensors is a relatively inexpensive and
non-polluting process. The flexibility of the process allows Interlink to
take advantage of changing market opportunities. FSR sensors are
manufactured using screen printing techniques. All proprietary aspects of
the manufacturing process are maintained in-house at Interlink, and at IEE,
its European licensee, to maintain quality and protect the force sensing
technology.
While electronic screen printing is a common process in various
technology industries, the quality and precision of printing required to
make high-quality FSR sensors greatly exceeds the standards applicable in
most other industries. The Company has developed significant expertise in
the manufacture of FSR sensors, and believes this experience would be
difficult to replicate over the short term. In the FSR manufacturing
process, printed sheets of FSR semiconductor material and the corresponding
conductor patterns are laminated to form the FSR
9
sandwich structure using inexpensive sheet adhesives. The assembled sheets
are die cut, and suitable connectors are attached.
Readily available materials (substrates, films, polymer thick film
inks) developed for other industries have proved unsuitable for the FSR
manufacturing process. Interlink has worked closely with a small group of
manufacturers to create new materials optimized for FSR usage; most of
these materials are supplied to the Company on an exclusive basis. The raw
materials are processed into their final form on site, using proprietary
material and methods.
The Company maintains agreements with several computer chip
manufacturers pursuant to which they provide microcontrollers to it at
guaranteed prices for use in or with Interlink's pointing devices. From
time to time in the past, there have been unanticipated shortages in the
number, and/or delays in the availability, of microcontrollers required in
the Company's products. No past shortage has had a material effect upon the
Company's ability to supply its products in commercial quantities. While
the Company has taken a number of steps, including the development of
additional chip suppliers, in order to attempt to reduce its prospective
exposure, there can be no guarantee that a future chip shortage will not
occur, and that, if one occurs, that it would not have an adverse effect
upon the Company's operations.
Interlink manufactures FSR sensors in its facility in Camarillo,
California. This facility is capable of operating on a single, double, or
triple shift basis, as volume dictates. The Company acquires the components
of its FSR-based sensors from a number of sources within the United States.
Some components for its VersaPoint products as well as the manufacture of
some of these products are sourced from manufacturing companies located in
the Far East and Mexico; their cost and availability are dependent upon a
number of factors beyond the Company's control, including future currency
exchange rates, and future political conditions in the countries in which
the vendors are located.
The Company's European licensee, IEE, also has a modern and
well-equipped facility. This facility serves the European Community, and
addresses the Company's customers' need for the security of a second
possible manufacturing source.
Research
Interlink's research effort falls into four categories: Intellectual
Property, Materials and Processes, Prototype and Contract Research, and
Special Applications. The research group continues to expand the Company's
intellectual properties. The Company regularly files patent applications
and continuations thereof to cover both new and improved methods of
manufacturing FSR sensors, and new, non-FSR based technologies developed by
the Company.
Product Development
Product development for the Company is focused on developing custom,
standard, and modified standard products. Custom and modified standard
products are developed very selectively, when they are adequately funded,
and when there are obvious long-term strategic
10
benefits to the Company. Custom and modified standard products are
primarily developed to meet the requirements specified by OEM customers for
their unique applications of sensors using "force sensing resistor"
technology. Standard or Branded product requirements are established using
market analysis, evaluation and assessment to determine product
differentiation and acceptance. Branded products are funded as defined by
the Company's business plan, and developed to contribute to the Company's
short and long-term business objectives. The Company's VersaPoint
technology is used to develop standard products, primarily for computer
pointing devices serving the OEM, consumer, and industrial markets.
Competition
In the computer pointing device market, the Company competes with a
number of sellers, including Microsoft, IBM, and Logitech (although
Logitech is also a customer of the Company for some components (pointing
sticks) of its products). A number of other companies manufacture
touchpads, pointing sticks or remote control input devices, for a wide
variety of applications. Many of the Company's competitors have greater
financial and technological resources than does the Company, and may also
have established relationships with customers, and enjoy economies of
scale, that afford them a competitive advantage.
In a variety of applications incorporating FSR sensors into complete
products, the Company may also compete with the in-house capabilities of
its larger customers to design and manufacture all or portions of FSR
products. In addition, besides the major previously existing computer
cursor pointing technologies (pointing sticks, mice and trackballs), a new
touchpad technology has gained increased market acceptance over the last
few years; several computer manufacturers which formerly used OEM pointing
sticks have switched to OEM touchpads.
The Company's FSR sensors compete with comparable sensors produced
using a variety of other technologies. For applications that require only
"on/off" capability without any force sensing capability, a wide variety of
sensors exist, including membrane switches, capacitive sensors and
mechanical switches, that compete with the Company's sensors in particular
applications. Other kinds of "force sensing" technology include strain
gauges, piezo sensors and conductive rubber. Each of these technologies
have advantages and disadvantages that make it an attractive solution in
certain applications and not in others. Strain gauges are extremely
accurate but relatively expensive. Piezo sensors are generally comparable
in price and accuracy to FSR sensors but measure instantaneous impact
rather than force over a continuing period. Conductive rubber is a widely
established technology but deteriorates more rapidly over time than do
other force sensing technologies. The Company seeks to identify and pursue
applications in which force sensing technology is a particularly attractive
solution. Most sensors that compete with the Company's FSR sensors are
widely available from a variety of sources.
Patents and Proprietary Rights
Aspects of Interlink's technology are protected by more than 55
patents issued or pending in the United States and abroad, as well as trade
secret and proprietary knowledge. Products incorporating the Company's
force sensing technologies are sold under trademarks issued or
11
pending in the United States and various other countries. Of the initial
FSR patents granted (those covering the use of an uneven surface to produce
variable resistance), the last patent granted will expire on February 9,
1999. The Company has continued its efforts to improve the design,
formulation, and manufacture of its sensors; some of these improvements are
maintained as trade secrets, while U.S. and foreign patents have been
applied for with respect to others. Other patents, covering various
apparatus, processes and methods related to the force sensing technology
expire between 1998 and 2015. Various corresponding foreign patents will
expire between this year and 2015. Patents covering various materials and
processes used in the Company's current generation of products, as well as
new devices for angle and displacement sensing, were granted during 1995 by
the U.S. Patent Office. The Company has also filed U.S. and foreign patent
applications regarding the design, and several key operating features, of
its remote control products.
While the Company believes its patents afford it some competitive
advantage, such protection is limited by the resources available to the
Company to identify potential infringements and to defend its rights
against infringement. Furthermore, the extent of the protection offered by
any patent is subject to determinations as to its scope and validity that
would be made only in litigation. Therefore, there is no assurance that the
Company's patents will afford meaningful protection from competition.
The Company has also developed certain manufacturing processes and
other methods of applying its patented technology that it protects as trade
secrets. The Company believes these trade secrets are important for the
effective and efficient use of the patented technology and that a
competitor with a right to use the patented technology would be required to
develop comparable manufacturing and other processes to compete effectively
with the Company. The Company requires its employees to sign nondisclosure
agreements and seeks to limit access to sensitive information to the
greatest practical extent.
Employees
The Company had eighty-five full-time employees in the United States
as of December 31, 1996, eighty at its corporate offices and manufacturing
facilities (including seven members of management), and five sales managers
stationed at regional offices. Its Japan subsidiary had eight employees.
Item 2. Properties
The Company's corporate offices and manufacturing facilities are
located in a 26,000 square foot leased facility in Camarillo, California.
The lease on the Camarillo premises runs until August 1998 and provides for
an average monthly rent payment of $12,772.00. The Company believes that
this facility will be adequate to meet its requirements. Its three regional
sales offices operate out of leased facilities. Its Japan subsidiary,
Interlink Electronics, Inc. K.K., leases office space in Tokyo.
12
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant
Name Age Position with Company
E. Michael Thoben, III 43 Chairman of the Board,
President, Chief Executive
Officer, and Director
David J. Arthur 48 Senior Vice President--
Operations
William A. Yates 45 Senior Vice President--Sales
and Marketing
Paul D. Meyer 37 Chief Financial Officer,
Secretary
Wendell W. Ritchey 57 Vice President--Product
Development/Engineering
- ---------------
E. Michael Thoben, III became Chief Operating Officer and a
director of the Company in March 1990 and has been President of the Company
since June 1990, Chief Executive Officer since February 1994, and Chairman
of its Board of Directors since August 1994. Prior to that time, for 11
years, Mr. Thoben was employed by Polaroid Corporation, most recently as
the manager of one of Polaroid's seven strategic business units on a
worldwide basis. Mr. Thoben holds a B.S. degree from St. Xavier University
and has taken graduate management courses at the Harvard Business School
and The Wharton School of Business.
David J. Arthur has been Interlink Electronics, Inc.' Senior Vice
President--Operations since May, 1995; prior to that, he served as the
Company's Vice President, Manufacturing and Operations. Before joining the
Company in October 1990, he held senior positions in materials, purchasing
and manufacturing management with TRW Inc., North American Philips
Corporation, and Amdahl Corporation. From 1987 to 1990, he served as Vice
President of Manufacturing at Harman Electronics, Inc.
13
William A. Yates became Interlink Electronics, Inc.' Senior Vice
President--Sales and Marketing in May, 1995. Prior to joining the Company
in 1990 as its Vice President, Sales and Marketing in 1990, Mr. Yates had
served for nine years in increasingly senior sales positions with Polaroid
Corporation's Industrial Products Division. Mr. Yates has over 23 years of
sales and marketing experience with both small companies and large
businesses, the latter including Carnation Company and Ortho Pharmaceutical
Corporation. Mr. Yates holds a B.A. degree from the University of
California at Berkeley.
Paul D. Meyer joined Interlink Electronics, Inc. in December 1989
as Controller, became its Vice President--Finance in June, 1994, and its
Chief Financial Officer in December 1996. From May 1988 to December 1989,
he was Controller for Dix-See Sales Company. From September 1985 to May
1988, Mr. Meyer was Corporate Accounting Manager for Bell Industries. Mr.
Meyer was initially employed at Price Waterhouse from 1983 to 1985. Mr.
Meyer holds a B.A. degree in economics from the University of California at
Los Angeles.
Wendell W. Ritchey, the Company's Vice President--Product
Development/Engineering, joined Interlink Electronics, Inc. in March 1994.
Prior to joining the Company, he held senior management positions in
research and development, engineering, and operations with ITT Power
Systems. From 1991 to 1993, he served as Vice President, Engineering with
Digital Sound Corporation, a developer of voice processing computers. Mr.
Ritchey holds a B.S. degree from Tri-State College.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
Historical Market Information. From its initial public offering
on June 7, 1993 until September 14, 1995, the Company's Common Stock and
Warrants were listed under the symbols "LINK" and "LINKW," respectively on
the Nasdaq Small Cap Market. Since September 14, 1995, the Company's
securities have been listed for trading on the Nasdaq National Market
System under the same symbols.
The following table sets forth, for the periods shown, the high and low
Nasdaq sales prices for the Common Stock:
Year Ended December 31, 1996 Low High
First Quarter.............................. $ 4.63 $ 7.25
Second Quarter............................. $ 5.75 $ 8.38
Third Quarter.............................. $ 5.06 $ 7.38
Fourth Quarter............................. $ 4.63 $ 6.31
On February 25, 1997 the last reported sale price of the Common Stock on
Nasdaq National Market was $7.375.
14
Number of Shareholders. As of February 25, 1997, the Company had
approximately 1,600 holders of record. The Company believes that the number
of beneficial owners is substantially greater than the number of record
holders because a large portion of the Company's outstanding Common Stock
is held of record in broker "street names" for the benefit of individual
investors.
Dividend Policy. The Company has never paid cash dividends. It is the
Company's intention to retain earnings, if any, to finance the operation
and expansion of its business and therefore it does not expect to pay cash
dividends in the foreseeable future. Payment of dividends, if any, will be
at the discretion of the Board of Directors after taking into account
various factors, including the Company's financial condition, results of
operations, current and anticipated cash needs, plans for expansion and
restrictions, if any, under the terms of any debt obligations of the
Company or equity securities issued by the Company.
Item 6. Selected Financial Data
The information required by this item is included on page F-1 of this
Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is included at pages F-2 to F-3
of this Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included at pages F-4 to F-16
of this Report on Form 10-K and as listed in Item 14 of Part IV of
this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors of the Company is included under
"Election of Directors" in the Company's definitive proxy statement for its
1997 Annual Meeting of Shareholders filed or to be filed not later than 120
days after the end of the fiscal year covered by this Report and is
incorporated herein by reference. Information with respect to executive
officers of the Company is included under Item 4(a) of Part I of this
Report on Form 10-K. Information with respect to compliance with Section
16(a) of the Securities Exchange Act is included under "Section 16(a)
beneficial ownership reporting compliance" in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders filed or to be
filed not later than 120 days after the end of the fiscal year covered by
this Report and is incorporated herein by reference.
15
Item 11. Executive Compensation
Information with respect to executive compensation is included under
"Executive Compensation" in the Company's definitive proxy statement for
its 1997 Annual Meeting of Shareholders filed or to be filed not later than
120 days after the end of the fiscal year covered by this Report on Form
10-K and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management is included under "Security Ownership Of Certain
Beneficial Owners And Management" in the Company's definitive proxy
statement for its 1997 Annual Meeting of Shareholders filed or to be filed
not later than 120 days after the end of the fiscal year covered by this
Report on Form 10-K and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements and Schedules
The following documents are included in this Report on Form 10-K at
the pages indicated:
Page
Report of Independent Public Accountants F-4
Consolidated Balance Sheets at December 31, 1995 and 1996 F-5
Consolidated Statements of Operations for years ended
December 31, 1994, 1995 and 1996 F-6
Consolidated Statements of Shareholders' Equity for years F-7
ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for years ended
December 31, 1994, 1995 and 1996 F-8
Notes to Consolidated Financial Statements F-9-16
16
No other schedules are included because the required information is
inapplicable or is presented in the financial statements or related notes
thereto.
(a)(2) Exhibits
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1b of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form S-1, Registration No.
33-60380 (the "Form S-1 Registration Statement").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit
3.2a of Post-Effective Amendment No. 8 to Registrant's Form S-1
Registration Statement.
10.1 1988 Stock Option Plan, as amended and restated. Incorporated
by reference to Exhibit 10.1 of the Form S-1 Registration
Statement.**
10.2 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.1a of the Form S-1 Registration Statement.**
10.3 1996 Stock Incentive Plan.**
10.4 Description of Interlink Electronics, Inc. Management
Compensation Program.**
10.5 Form of Promissory Note from Stuart Yaniger dated March 1993.
Incorporated by reference to Exhibit 10.7 of the Form S-1
Registration Statement.
10.6 Form of Amendment to Promissory Note from Stuart Yaniger.
Incorporated by reference to Exhibit 10.7a of the Form S-1
Registration Statement.
10.7 Technology Transfer Agreement between the Registrant and
Franklin Eventoff dated as of December 23, 1987, and amendment
thereto. Incorporated by reference to Exhibit 10.9 of the Form
S-1 Registration Statement.
10.8 Lease Agreement to lease premises in Camarillo, California
dated January 25, 1993. Incorporated by reference to Exhibit
10.11a of the Form S-1 Registration Statement.
10.9 License Agreement between the Registrant and Toshiba Silicone
Co., Ltd. dated March 10, 1989. Incorporated by reference to
Exhibit 10.14 of the Form S-1 Registration Statement.
10.10 Joint Venture Agreement among the Registrant, InvestAR
s.a.r.l., Interlink Electronics, Inc. Europe s.a.r.l. and IEE
Finance s.a.r.l. dated November 7, 1989. Incorporated by
reference to Exhibit 10.15 of the Form S-1 Registration
Statement.
10.11 Exclusive License and Distributor Agreement between the
Registrant and Interlink Electronics, Inc. Europe s.a.r.l.
dated as of November 7, 1989. Incorporated by reference to
Exhibit 10.16 of the Form S-1 Registration Statement.
17
10.12 Manufacturing and Supply Agreement between the Registrant and
Interlink Electronics, Inc. Europe s.a.r.l. dated as of
November 7, 1989. Incorporated by reference to Exhibit 10.17 of
the Form S-1 Registration Statement.
10.13 Letter Agreement between the Registrant and InvestAR s.a.r.l.
dated November 7, 1989. Incorporated by reference to Exhibit
10.18 of the Form S-1 Registration Statement.
10.14 Agreement between the Government of Luxembourg, Interlink
Electronics, Inc. Europe s.a.r.l., IEE Finance s.a.r.l., the
Registrant and InvestAR s.a.r.l. dated December 18, 1989.
Incorporated by reference to Exhibit 10.19 of the Form S-1
Registration Statement.
10.15 Agreement with InvestAR s.a.r.l. and ARBED S.A. (undated).
Incorporated by reference to Exhibit 10.20 of the Form S-1
Registration Statement.
10.16 Agreement among the Registrant, Interlink Electronics, Inc.
Europe s.a.r.l. and InvestAR s.a.r.l. dated as of December 14,
1990. Incorporated by reference to Exhibit 10.21 of the Form
S-1 Registration Statement.
10.17 Ink Technology Transfer Agreement between the Registrant and
InvestAR s.a.r.l. dated December 11, 1992. Incorporated by
reference to Exhibit 10.23 of the Form S-1 Registration
Statement.
10.18 Financing Agreement between the Registrant and InvestAR
s.a.r.l. in relation with the Ink Technology Transfer Agreement
dated December 11, 1992. Incorporated by reference to Exhibit
10.24 of the Form S-1 Registration Statement.
10.19 Form of Confidentiality and Nondisclosure Agreement in relation
with the Ink Technology Transfer Agreement (undated).
Incorporated by reference to Exhibit 10.25 of the Form S-1
Registration Statement.
10.20 Form of Escrow Agreement for Technology in relation with the
Ink Technology Transfer Agreement dated December 11, 1992.
Incorporated by reference to Exhibit 10.26 of the Form S-1
Registration Statement.
10.21 Financing Agreement between the Registrant and InvestAR
s.a.r.l. dated June 15, 1992. Incorporated by reference to
Exhibit 10.27 of the Form S-1 Registration Statement.
10.22 Interlink Europe Financing Agreement between the Registrant and
InvestAR s.a.r.l. dated April 7, 1993. Incorporated by
reference to Exhibit 10.28 of the Form S-1 Registration
Statement.
18
10.23 Agreement between Zilog, Inc. and the Registrant date November
30, 1993. Incorporated by reference to Exhibit 10.34 of the
Form S-1 Registration Statement.*
10.24 Employment Agreement between the Registrant and E. Michael
Thoben, III effective as of April 1, 1996.
10.25 Employment Agreement between the Registrant and William A.
Yates effective as of April 1, 1996.
10.26 Employment Agreement between the Registrant and David J. Arthur
effective as of April 1, 1996.
21.1 Subsidiaries of the Registrant.
24.1 Consent of Arthur Andersen.
25.1 Power of Attorney (see page 20).
27 Financial Data Schedule.
- ------------
* Confidential Treatment for portions of this agreement has been granted
by the Commission.
** This exhibit constitutes a management contract or compensatory plan
or arrangement.
(b) Reports on Form 8-K
Not applicable.
19
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERLINK ELECTRONICS, INC.
By: E. MICHAEL THOBEN, III
------------------------------------
E. Michael Thoben, III
Chairman of the Board, President,
Chief Executive Officer
Dated: March 20, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below appoints E. Michael Thoben, III and Paul D. Meyer as his or
her true and lawful attorneys-in-fact and agents, with full power of
substitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K,
and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents,
or their substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
E. MICHAEL THOBEN, III
- ----------------------------- Chairman of the Board, March 20, 1997
E. Michael Thoben, III President, Chief
Executive Officer
PAUL D. MEYER
- ----------------------------- Chief Financial Officer March 20, 1997
Paul D. Meyer and Secretary
GEORGE GU
- ----------------------------- Director March 20, 1997
George Gu
EUGENE F. HOVANEC
- ----------------------------- Director March 20, 1997
Eugene F. Hovanec
CAROLYN MACDOUGALL
- ----------------------------- Director March 20, 1997
Carolyn MacDougall
MERRITT LUTZ Director March 20, 1997
- -----------------------------
Merritt Lutz
20
INTERLINK ELECTRONICS, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with
the financial statements and the related Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein:
Year Ended December 31,
----------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
Statement Of Operations Data:
Revenues:
Product sales $2,577 $4,362 $7,797 $ 10,741 $ 13,485
Contract development 450 - - - -
-------- ------- ------- ------- -------
Total revenues 3,027 4,362 7,797 10,741 13,485
------- ------- ------- ------- -------
Cost of revenues 1,754 2,657 4,094 5,252 7,028
------- ------- ------- ------- -------
Gross profit 1,273 1,705 3,703 5,489 6,457
------- ------- ------- ------- -------
Operating expenses:
Product development and research 443 782 1,011 897 1,234
Selling, general and administrative 2,564 3,954 3,887 4,524 4,617
------- ------- ------- ------- -------
Total operating expenses 3,007 4,736 4,898 5,421 5,851
------- ------- ------- ------- -------
Operating income (loss) (1,734) (3,031) (1,195) 68 606
------- ------- ------- ------- -------
Other income (expense):
Debt conversion expense - (450) - - -
Units issued in connection with bridge loans - (550) - - -
Interest expense (79) (84) (37) (60) (118)
Minority interest - - - 41 -
Other 496 175 155 101 27
Gain from sale of interest in European
Joint Venture - - 3,380 - -
------- ------- ------- ------- -------
Total other income (expense) 417 (909) 3,498 82 (91)
Net income (loss) $(1,317) $(3,940) $ 2,303 $ 150 $ 515
======= ======= ======= ======= =======
Earnings (loss) per share $ (5.29) $ (1.80) $ .49 $ .04 $ .12
December 31,
----------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
Balance Sheet Data:
Working capital (deficiency) $ (286) $ 3,631 $ 2,140 $ 6,353 $ 8,969
Total assets 2,222 5,871 5,185 10,187 13,185
Short term debt 1,174 36 251 255 403
Deferred licensing income 180 144 - - -
Long term debt and capital lease obligations 530 128 121 672 850
Shareholders' equity (deficit) $ (313) $ 4,454 $ 3,651 $ 7,589 $ 9,969
F-1
INTERLINK ELECTRONICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table presents, as a percentage of total revenues, certain
selected consolidated financial data of each of the three years in the
period ended December 31, 1996.
- -------------------------------------------------------------------------------
1994 1995 1996
- -------------------------------------------------------------------------------
Revenues:
Computer pointing devices 66% 74% 86%
Custom applications 34 26 14
Total revenues 100 100 100
Gross profit 48 51 48
Operating expenses:
Product development and 13 8 9
research
Selling, general and 50 42 34
administrative
Total operating expenses 63 50 43
Operating income(loss) (15) 1 5
Other income (expense) 2 - (1)
Sale of interest in European JV 43 - -
Net income 30 1 4
- -------------------------------------------------------------------------------
Revenues increased 26% from $10.7 million in 1995 to $13.5 million in
1996. As compared to 1994, 1995 revenues grew 38% from $7.8 million in
1994. The revenue growth is a result of the Company's focus on developing
and marketing computer pointing device products based on the Company's
VersaPoint technology. Revenues from this product line grew from $5.2
million in 1994 to $7.9 million in 1995 and to $11.6 million in 1996. The
primary products within this product line are: PortaPoint, introduced in
late 1992 (renamed SuperMouse in early 1994); DuraPoint, introduced in
early 1993, ProPoint, introduced in early 1994, the Integrated Pointing
Stick, introduced in late 1993; the MicroModule, introduced in early 1994;
RemotePoint, introduced in late 1994; RemotePoint Plus, DeskStick and IRC
introduced in late 1995. Because of the Company's focus on pointing device
products, sales in the Custom Applications product line have recorded
nominal growth; growing 10% from $2.6 million in 1994 to $2.8 million in
1995 and recorded a decline of 33% to $1.9 million in 1996. The Company
expects that the Custom Applications product line will continue to show
minimal or negative growth.
The improvement of gross profit to 51% in 1995 from 48% in 1994 was a
reflection of: a) the shift in revenue mix toward the Computer Pointing
Devices product line which carries a relatively higher profit margin; b)
the Company's successful efforts to develop low-cost overseas producers of
the Company's Branded Products, as volume justifies; c) the relatively low
usage of FSR manufacturing capacity, thus as revenue has risen fixed
manufacturing costs have remained relatively constant. In 1996 the gross
profit margin declined to 48% due to a greater mix of high volume, OEM
sales as compared to prior periods. During the periods presented the
Company has not experienced meaningful price erosion in its Computer
Pointing Devices product line.
Product development and research expense decreased from $1 million in
1994 to $897,000 in 1995 and increased in 1996 to $1.2 million. The 1994
expense was spent developing RemotePoint and the
F-2
MicroJoystick. The Company was able to achieve a decrease in the 1995
expense as the products developed in 1995, RemotePoint Plus, IRC and
DeskStick are essentially line extensions to the products developed in the
previous year. In 1996 development costs increased to support greater OEM
sales, which require more engineering resources, and to develop the
touchpad technology.
On a percentage of sales basis, the Company has achieved a decline in
SG&A costs from 50% in 1994, to 42% in 1995 to 34% in 1996. This decline
results from amortization of fixed SG&A costs over a greater base of sales
and the shift in product mix toward OEM sales.
The Company recorded a profit from operations of $68,000 in 1995 and
$606,000 in 1996 versus an operating loss of $1.2 million in 1994. These
improvements were achieved by strong revenue and profit margin growth from
the Company's key focus area, Computer Pointing Devices and successful cost
management of product development and marketing costs.
The revenue growth in the Company's Computer Pointing Device product
line, and operating cost control contributed to achieve 1996 net income of
$515,000, a $365,000 improvement over 1995 net income of $150,000. 1994's
results included a one time gain of $3.4 million associated with the sale
of the Company's interest in IEE. Thus, without that gain, 1995 results
showed a $1.2 million improvement as compared to 1994.
Liquidity and Capital Resources
Working capital at December 31, 1996, was $8.9 million versus $6.4
million at the end of 1995. The $2.5 million increase results from the
positive results from operations and from proceeds of the exercise of
Warrants.
In 1996 operations consumed $1.3 million of available cash due to
increased customer receivables and inventory requirements necessitated by
the revenue growth.
1996's investing activities consisted of purchases of manufacturing
equipment and the upgrade of computer hardware for the Company's management
information system.
In 1996 the Company negotiated an increase in the maximum available on
its bank line of credit to $1.5 million (the line was unused at December
31, 1996). Additionally, the Company has a $1.8 million equipment lease
line from a leasing company of which approximately $1.3 million had been
drawn by year end. A secondary offering of equity securities or the
exercise of outstanding warrants and options are potential sources of
equity capital that may be available to the Company. Management believes
that forecasted cash requirements for the next twelve months can be met
from existing cash and invested cash balances. However, an unforeseen
downturn of results in sufficient magnitude could effect the Company's
ability to meet that forecast.
F-3
Report of Independent Public Accountants
To the Board of Directors of Interlink Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Interlink
Electronics, Inc. (a Delaware corporation) and its subsidiary as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the three years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interlink Electronics,
Inc. and its subsidiary as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for the three years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 12, 1997
F-4
INTERLINK ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31,
1995 1996
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 3,496 $ 3,767
Accounts receivable, less allowance for doubtful
accounts of $233 and $310 in 1995
and 1996, respectively 2,360 3,649
Inventories 2,184 3,634
Prepaid expenses and other current assets 239 285
-------- --------
Total current assets 8,279 11,335
-------- --------
Property and equipment, net 1,160 1,143
Patents and trademarks, less accumulated
amortization of $375 and $453
in 1995 and 1996, respectively 368 439
European marketing rights 225 150
Other assets 155 118
-------- --------
Total assets $ 10,187 $ 13,185
======== ========
Liabilities And Shareholders' Equity
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 255 $ 403
Accounts payable 1,270 1,146
Accrued payroll and expenses 401 817
-------- --------
Total current liabilities 1,926 2,366
-------- --------
Long-term debt, net of current portion 159 235
Capital lease obligations, net of current portion 513 615
Commitments and contingencies -- --
Shareholders' equity:
Common stock (40,000 shares authorized,
4,255 and 4,515 outstanding at December 31,
1995 and 1996, respectively) 18,880 20,768
Accumulated deficit (11,291) (10,799)
-------- --------
Total shareholders' equity 7,589 9,969
-------- --------
Total liabilities and shareholders' equity $ 10,187 $ 13,185
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended December 31,
------------------------------------------
1994 1995 1996
------- ------ ------
Revenues $ 7,797 $ 10,741 $ 13,485
Cost of revenues 4,094 5,252 7,028
----------- ----------- -----------
Gross profit 3,703 5,489 6,457
Operating expenses:
Product development and research 1,011 897 1,234
Selling, general and administrative 3,887 4,524 4,617
----------- ----------- -----------
Total operating expenses 4,898 5,421 5,851
----------- ----------- -----------
Operating income (loss) (1,195) 68 606
----------- ----------- -----------
Other income (expense):
Interest expense (37) (60) (118)
Minority interest - 41 -
Other income 155 101 27
Gain on sale of interest in European
joint venture 3,380 - -
----------- ----------- -----------
Total other income (expense) 3,498 82 (91)
----------- ----------- -----------
Net income $ 2,303 $ 150 $ 515
========== =========== ===========
Earnings per share $ .49 $ .04 $ .12
=========== =========== ===========
Weighted average number of common
shares outstanding 5,810 3,957 4,387
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock Accumulated Total Shareholders'
Shares Amount Deficit Equity
-------- -------- ----------- -------------------
Balance, December 31, 1993 3,760 $ 18,099 $ (13,645) $ 4,454
Issuance of shares upon exercise
of employee stock options 109 315 - 315
Surrender and retirement of shares
in conjunction with sale of
interest in European Joint Venture (511) (3,400) - (3,400)
Cumulative translation adjustment - - (21) (21)
Net income - - 2,303 2,303
----- -------- ----------- --------
Balance, December 31, 1994 3,358 15,014 (11,363) 3,651
Issuance of shares upon exercise
of employee stock options 185 609 - 609
Issuance of shares upon exercise
of stock warrants 12 92 - 92
Proceeds from private placement, net 700 3,165 - 3,165
Cumulative translation adjustment - - (78) (78)
Net income - - 150 150
----- -------- ----------- --------
Balance, December 31, 1995 4,255 18,880 (11,291) 7,589
Issuance of shares upon exercise
of employee stock options 36 152 - 152
Issuance of shares upon exercise
of stock warrants 224 1,736 - 1,736
Cumulative translation adjustment - - (23) (23)
Net income - - 515 515
----- -------- ----------- --------
Balance, December 31, 1996 4,515 $20,768 $ (10,799) $ 9,969
===== ======== =========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
-----------------------------------------
1994 1995 1996
Cash flows from operating activities:
Net income $ 2,303 $ 150 $ 515
Adjustments to reconcile net income to
net cash used for operating activities:
Gain from sale of interest in JV (3,400) - -
Deferred licensing income (144) - -
Provisions for bad debts 95 91 77
Depreciation and amortization 300 445 602
Changes in operating assets and liabilities:
Accounts receivable (179) (938) (1,366)
Inventories (295) (1,339) (1,450)
Prepaid expenses and other current assets (42) (193) (46)
Other assets (15) (41) 37
Accounts payable (420) 711 (124)
Accrued payroll and expenses (2) (202) 416
-------- ------- --------
Net cash used for operating activities (1,799) (1,316) (1,339)
-------- ------- --------
Cash flows from investing activities:
Net sales of marketable securities 1,125 464 -
Purchases of property and equipment (682) (510) (432)
Acquisition, net of cash acquired 78 - -
Costs of patents and trademarks (61) (170) (149)
-------- ------- --------
Net cash (used for) provided by
investing activities 460 (216) (581)
-------- ------- --------
Cash flows from financing activities:
Borrowings on bank line of credit 200 100 -
Payments on bank line of credit - (300) -
Borrowings on note payable to bank 48 97 180
Payments on note payable to bank (4) (18) (57)
Proceeds from sale/leaseback - 788 478
Principal payments on Tech Transfer Agreement (36) (38) (43)
Principal payments on capital lease obligations - (74) (232)
Due from shareholders 85 49 -
Proceeds from issuance of common stock, net 315 3,866 1,888
-------- ------- --------
Net cash provided by financing activities 608 4,470 2,214
-------- ------- --------
Effect of exchange rate changes on cash (21) (78) (23)
-------- ------- --------
Increase (decrease) in cash and cash equivalents (752) 2,860 271
Cash and cash equivalents
at beginning of period 1,388 636 3,496
-------- ------- --------
Cash and cash equivalents
at end of period $ 636 $ 3,496 $ 3,767
======== ======= ========
Supplemental disclosures of cash flow information:
Interest paid 37 60 111
Income taxes paid 1 2 1
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31,1993, 1994 and 1995
1. Summary of Significant Accounting Policies
Interlink Electronics (the "Company") was incorporated in the State of
California on February 27, 1985 and reincorporated in the State of Delaware
on July 10, 1996. The Company is engaged in the development and manufacture
of products and components incorporating Force Sensing Resistors.
Consolidation Policy - The consolidated financial statements include the
accounts of the Company and its majority owned Japanese subsidiary. All
material intercompany accounts and transactions have been eliminated. The
preparation of consolidated financial statements in conformity 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 financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Foreign Currency Transactions - The accounts of the Company's foreign
subsidiary have been translated according to the provisions of Statement of
Financial Accounting Standards No. 52. Gains and losses resulting from
translation of the foreign financial statements are included in
shareholders' equity. Any gain or loss resulting from foreign currency
transactions are reflected in the consolidated statement of operations for
the period in which they occur.
Cash and Cash Equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
Inventories - Inventories are stated at the lower of cost or market and
includes material, labor, and factory overhead. Cost is determined using
the average cost method.
Property and Equipment - Property and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is recorded on the
straight-line basis over the estimated useful lives of the assets which
range from three to ten years. Amortization of leasehold improvements is
made based upon the estimated useful lives of the assets or the term of the
lease, whichever is shorter. Maintenance and repairs are charged to
operations as incurred, while significant improvements are capitalized.
Upon retirement or disposition of property, the asset and related
accumulated depreciation or amortization are removed from the accounts and
any resulting gain or loss is charged to operations.
Patents and Trademarks - The costs of acquiring patents and trademarks are
amortized on a straight-line basis over their estimated useful lives,
ranging from seven to seventeen years. Amortization expense for the years
ended December 31, 1994, 1995 and 1996 was, $52,000, $60,000 $78,000,
respectively.
Income Taxes - The Company accounts for taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under this
statement, deferred tax assets and liabilities represent the tax effects,
calculated at currently effective rates, of future deductible taxable
amounts attributable to events that have been recognized on a cumulative
basis in the financial statements (see Note 12).
Earnings Per Share - Earnings per share is based upon the weighted average
number of shares outstanding and common stock equivalents. (See Note 10)
Accounts Receivable - Increases to the allowance for doubtful accounts
totaled $95,000, $91,000 and 77,000 for the years ended December 31, 1994,
1995 and 1996, respectively. Write-offs against the allowance for doubtful
accounts totaled $27,000, $12,000 and none for the years ended December 31,
1994, 1995 and 1996, respectively.
F-9
Reclassifications - Certain amounts in the 1995 financial statements have
been reclassified to conform with the 1996 presentation.
2. Inventories
Inventories consisted of the following (in thousands):
December 31,
----------------------------
1995 1996
----------- -----------
Raw material $ 1,087 $ 2,120
Work in process 573 529
Finished goods 524 985
--------- ----------
Total inventories $ 2,184 $ 3,634
========= ==========
3. Property And Equipment
Property and equipment consisted of the following (in thousands):
December 31,
--------------------------
1995 1996
--------- ----------
Furniture, machinery and equipment $ 2,172 $ 2,588
Leasehold improvements 127 143
--------- ----------
2,299 2,731
Less accumulated depreciation and amortization (1,139) (1,588)
--------- ----------
Property and equipment, net $ 1,160 $ 1,143
========= ==========
Depreciation and amortization expense charged to operations amounted to
$173,000, $314,000 and 449,000 for the years ended 1994, 1995, and 1996,
respectively. Property and equipment under capital leases had a net book
value of $673,000 and $991,000 at December 31, 1995 and 1996 respectively.
4. Investment In Joint Venture
In November 1989, the Company and a Luxembourg entity ("the JV Partner")
formed a joint venture in Luxembourg for the purpose of manufacturing and
marketing Force Sensing Resistor products in the European Economic
Community. The Company contributed $2 million to Interlink Electronics
Europe (the "JV") in exchange for a 50% ownership interest in the JV.
Simultaneously, the JV purchased the rights to use the Company's technology
in Europe for $2 million. Generally accepted accounting principles required
the deferral of the investment and the related $2 million gain on the sale
of technology because of the Company's continued involvement with the JV.
Accordingly, the investment was recorded at no value.
In June 1992, December 1992, and April 1993, the JV Partner invested an
additional $1.5 million (45,000 shares), $500,000 (15,000 shares) and
$850,000 (30,000 shares) in the JV, respectively, increasing their
ownership percentage to 69%.
The Company's interest in the JV was accounted for under the equity method
of accounting. Summarized financial data for the JV were as follows:
(In Thousands)
December 31,
---------------------------
1992 1993
--------- ---------
Net sales $ 418 $ 920
Net loss (2,114) (2,133)
Working capital (706) (2,298)
Total assets 1,496 1,314
Total liabilities 2,691 4,497
Shareholders' deficit $ (1,195) $ (3,183)
F-10
Because the Company had recorded the investment at no value and the Company
was not liable for the obligations of the JV nor was it otherwise committed
to provide any further financial assistance to the JV, it was not required
to recognize any of the JV's losses.
In December of 1992, the Company sold the JV additional rights to the
technology for $500,000 in cash. Given the Company's 36% ownership interest
in the JV at that time, that portion of the gain ($180,000) was deferred
and was to be amortized over five years. The balance of $320,000 is
included in licensing, royalties and other income in the statement of
operations in 1992. Because of the Company's sale of its interest in the JV
in 1994, the remaining unamortized balance of the deferred gain was
included in other income in 1994.
In 1993, the Company repurchased from the JV the rights to market pointing
device products to the European Community for cash payment of $375,000
which is recorded as an asset and amortized over five years.
On September 26, 1994 the Company sold its interest in the JV to the JV
partner. As payment, the JV partner surrendered its 510,775 common shares
of the Company and agreed to pay a royalty to the Company on certain
product sales by the JV outside of Europe and certain other designated
territories. The shares received, which constituted approximately 13% of
the Company's outstanding shares, were appraised at $3.4 million (after
allowing for a discount for the relatively large number of shares received
in relation to the total outstanding shares) and were immediately retired.
As the Company had carried the investment in the JV at no value, the
Company recorded a gain of $3,380,000 (net of transaction fees). The gain
on the sale of the JV is included in other income (expense) in the
accompanying statement of operations and represents net income of $.58 per
share for the fiscal year ended 1994.
5. Acquisition Of Japanese Subsidiary
On April 1, 1994, the Company acquired an 80% interest in Interlink
Electronics KK for $8,000 in cash. Interlink Electronics KK is located in
Tokyo, Japan and is a distributor and value-added manufacturer of FSR-based
products. The acquisition has been accounted for as a purchase and the
results of Interlink Electronics KK have been included in the accompanying
consolidated financial statements since the date of acquisition. The cost
of the acquisition has been allocated on the basis of the estimated fair
market value of the assets acquired ($428,000) and the liabilities assumed
($476,000). This allocation resulted in goodwill of approximately $58,000
which is being amortized over 15 years. Pro forma results of the
acquisition, assuming it had been made at the beginning of the year, would
not be materially different from the results reported.
6. Short-Term Borrowings
The Company maintains a revolving line of credit agreement with a bank with
a maximum amount of the lessor of $1,500,000 or 70% of eligible accounts
receivable, as defined in the agreement. The loan carries an interest rate
of the bank's interest rate plus 1% (9.25% at December 31, 1996) and
matures in May 1997. The loan is secured by all of the Company's assets and
requires the Company to meet certain financial covenants, all of which were
satisfied at December 31, 1996. At December 31, 1996, the Company was
eligible to utilize $1,300,000 on the loan, of which none had been drawn.
Selected information regarding short-term borrowings are as follows:
Year Ended December 31,
-----------------------
1995 1996
------ ------
Average daily borrowings (000's) $ 106 $ 0
Maximum daily borrowings (000's) $ 300 $ 0
Weighted average interest rate during year 10.7% N/A
F-11
7. Long-Term Debt and Capital Leases
Bank loans - The Company's Japan subsidiary, Interlink Electronics KK,
maintains unsecured small business loans with three banks totaling
$248,000. The loans carry a weighted average interest rate of 2.5% and are
payable in monthly installments through the year 2002. The combined balance
outstanding as of December 31, 1995 and 1996 was $125,000 and $248,000,
respectively.
Technology Transfer Agreement - In December 1987, the Company purchased
certain patents and related technology from its founder. Under the
Technology Transfer Agreement, the Company is obligated to pay the greater
of $4,000 per month or 1% of monthly gross sales of products related to the
purchased technology. The term of the agreement is from January 1988 to
December 1997. Minimum obligations under the agreement have been recorded
at their present value utilizing an interest rate of 8.25% ($88,000 and
$46,000 at December 31, 1995 and 1996, respectively).
Capital lease obligations - The Company has an equipment financing
agreement with a leasing company to provide for the purchase of equipment
of up to $1.8 million. As amounts are drawn on the line, the funded amount
is converted to a note payable with a standard payment schedule of up to 42
months at an imputed interest rate of 11.5%. As of December 31, 1996, the
Company had utilized and converted $1,266,000 of the line to notes payable.
At December 31, 1996, scheduled maturities of long-term debt and capital
lease obligations for the next five years and thereafter are as follows (in
thousands):
Debt Leases
-------- -------
1997 $ 100 $ 436
1998 57 436
1999 58 207
2000 49 35
2001 23 -
There after 27 -
-------- -------
314 1,114
Less amount representing interest (21) (154)
-------- -------
Present value of minimum payments 293 960
Current portion (58) (345)
-------- -------
Long term portion $ 235 $ 615
======== =======
8. Capitalization
Preferred Stock - The Company is authorized to issue up to 10,000,000
shares of Preferred Stock. As of December 31, 1996, none were outstanding.
In the future, the Preferred Stock may be issued in one or more series with
such rights and preference as may be fixed and determined by the Board of
Directors.
Common Stock - The Company is authorized to issue 40,000,000 shares of
Common Stock.
In March 1993, the shareholders approved a 1 for 5 reverse stock split of
the Company's Common Stock. All share and per share data have been
retroactively restated to reflect this change.
In April 1995, the Company completed a private placement of 700,000 shares
of common stock and 46,668 warrants. The warrants are exercisable at $8.25
and expired on June 7, 1996. The Company received gross proceeds of $3.5
million (before offering expenses and placement agent fees totaling
$335,000). In conjunction with the offering, the placement agents also
received 60,000 warrants. These securities were registered with the
Securities and Exchange Commission under an S-3 Registration Statement
effective July 17, 1995.
In June 1996, 223,723 warrants, with an exercise price of $8.25, were
exercised. The Company received net proceeds of $1.74 million after
deducting offering costs. The remaining 1,673,891 warrants from this class
expired in accordance with their terms.
F-12
Units - In June 1993, the Company completed an initial public offering
raising $7,102,000 net of expenses, through the sale of 1,553,000 Units.
Each Unit consisted of one share of Common Stock and one Warrant to
purchase one share of Common Stock at $8.25.
9. Stock Warrants And Stock Options
At December 31, 1996, the Company had the following Common Stock Warrants
outstanding:
Number of Exercise Expiration
Shares Price Date
135,000 $6.60 June 4, 1998
135,000 8.26 June 4, 1998
Under the terms of the Company's Option Plans, officers and key employees
may be granted nonqualified or incentive stock options and outside
directors and independent contractors of the Company may be granted
nonqualified stock options. The aggregate number of shares which may be
issued under the plans is 2,006,000. Outstanding options under the plans
vest in various increments through December, 1997. Information concerning
stock options under the plans is summarized as follows:
(In Thousands)
--------------------------------------
Year Ended December 31,
--------------------------------------
1994 1995 1996
------ ------ ------
Options outstanding, beginning of period 477 1,063 1,219
Options granted (weighted average price of 715 1,236 393
$7.50, $5.19 and $5.76 in 1994, 1995 and
1996, respectively )
Options exercised (weighted average price (109) (185) (36)
of $2.84, $3.29 and $4.23 in 1994, 1995 and
1996, respectively)
Options canceled (20) (895) (144)
--------- -------- --------
Options outstanding, end of period 1,063 1,219 1,432
========= ======== ========
Options exercisable 464 613 958
========= ======== ========
Option price $1.25 to $9.13
The Company accounts for the plan under Accounting Principles Board Opinion
No. 25 under which no compensation cost is recognized for employee stock
option grants. If the Company had recognized compensation cost for
stock-based employee compensation in accordance with SFAS No. 123, the
Company's net income (loss) would have been as follows:
(In Thousands Except Per Share Data)
1995 1996
Net income (loss):
As reported $ 150 $ 515
Pro forma (2,166) (213)
Earnings (loss) per share:
As reported $ .04 $ .12
Pro forma (.55) (.05)
The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following weighted average assumptions
used in 1995 and 1996: risk-free interest rates of 6.3 percent; expected
life of four years; no expected dividend yield; and a volatility measure of
59%.
F-13
10. Earnings Per Share
The computation of earnings per share is based upon the weighted average
number of common shares outstanding during the periods presented plus (in
periods of which they have a dilutive effect) the effect of common shares
contingently issuable from options and warrants.
Common stock equivalents are calculated using the modified treasury stock
method. Under the modified treasury stock method, the proceeds from the
assumed conversion of options and warrants are used first to repurchase up
to a maximum of 20% of the outstanding shares, second to retire debt and
third, invested in government securities. Accordingly, interest expense
and/or interest income is adjusted on a proforma basis.
The following table contains information necessary to calculate earnings
per share:
(In Thousands Except Per Share Data)
-------------------------------------
Year Ended December 31,
-------------------------------------
1994 1995 1996
------ ------ ------
Weighted average common and common equivalent shares:
Weighted average shares outstanding 3,678 3,957 4,388
Weighted average share equivalents 2,132 - (1) -(1)
--------- --------- ---------
Weighted average common and common
equivalent shares 5,810 3,957 4,388
========= ========= =========
Net income for per share calculation:
Net income $ 2,303 $ 150 $ 515
Adjustment per modified treasury stock method
calculation 570 - -
--------- --------- ---------
Net income for per share calculation $ 2,873 $ 150 $ 515
========= ========= =========
Earnings per share $ .49 $ .04 $ .12
========= ========= =========
<FN>
- ------------------------------
(1) Common stock equivalents were anti-dilutive and thus were not included
in the calculation.
</FN>
11. Lease Commitments
The Company leases its main facility and certain equipment under operating
leases expiring through 1999. Rent payments totaled approximately $120,000,
$153,000 and $227,000 in 1994, 1995 and 1996, respectively.
Minimum lease commitments are summarized as follows (in thousands):
Year
- ----
1997 $ 228
1998 109
1999 1
------
$ 338
12. Income Taxes
Under Section 382 of the Internal Revenue Code, net operating losses are
limited when, on a cumulative basis over a three-year period, the holdings
of certain shareholder groups owning more than 5% of the Company have
changed more than 50%. On December 23, 1987, the Company experienced a
greater than 50% change in ownership. As a result, the Company's
utilization of net operating loss carryforwards generated prior to that
date of $1,316,000 is limited to $126,000 per year, for federal income tax
purposes,
F-14
through 1998. Utilization of state net operating losses generated prior to
December 23, 1987 of $706,000 is limited under the same rules. However, for
the tax years 1991 and 1992, the State of California suspended the use of
net operating loss carryforwards. As of December 31, 1996, the Company has
federal and state income tax net operating loss carryforwards of
approximately $10,489,000 expiring through 2009 and $3,544,000 expiring
through 1999, respectively.
On September 26, 1994, the Company sold its interest in Interlink
Electronics Europe (see Note 4). This transaction may have caused an
additional "change of ownership" under Section 382 of the Internal Revenue
Code. In the event that such a change is deemed to have occurred, the
Company's net operating losses will be limited. The Company has research
and development tax credit carryforwards of approximately $200,000 and
$260,000 at December 31, 1995 and 1996, respectively. The Company has total
net deferred tax assets as follows:
(In Thousands)
-------------------
1995 1996
------ ------
Deferred tax assets:
Net operating loss carryforward $ 4,149 $ 3,896
Vacation accrual 67 59
Allowance for bad debts 82 114
Other 114 306
-------- --------
Total deferred tax assets 4,412 4,375
Deferred tax liabilities:
Other, net - -
-------- --------
Total net deferred assets 4,412 4,375
Valuation allowance (4,412) (4,375)
-------- --------
Total $ - $ -
======== ========
A valuation allowance is recorded if the weight of available evidence
suggests it is more likely than not that if some portion or all of the
deferred tax asset will not be recognized. There is no assurance that the
Company will continue to be profitable in future periods, therefore, a
valuation allowance has been recognized for the full amount of the deferred
tax asset for 1995 and 1996.
13. Related Party Transactions
The Company has an agreement with its founder to provide consulting
services to the Company at $48,000 per year through December 1997.
In June 1994, the former Chairman of the Board entered into a consulting
arrangement with the Company, terminating February 1995. Total consulting
expenses amounted to $143,000 in 1994.
F-15
14. Segment Information
Product Line Information
(In Thousands)
---------------------------------
Year Ended December 31,
---------------------------------
1994 1995 1996
------ ------ ------
Revenues:
Computer pointing devices $ 5,221 $ 7,910 $ 11,585
Custom applications 2,576 2,831 1,900
-------- -------- --------
$ 7,797 $ 10,741 $ 13,485
======== ======== ========
Operating income (loss):
Computer pointing devices $ (282) $ 397 $ 1,004
Custom applications (283) 139 164
Corporate expenses (630) (468) (562)
-------- -------- --------
$ (1,195) $ 68 $ 606
======== ======== ========
Assets:
Computer pointing devices $ 2,427 $ 4,206 $ 7,246
Custom applications 1,195 1,478 1,180
Corporate 1,563 4,503 4,759
-------- -------- --------
$ 5,185 $ 10,187 $ 13,185
======== ======== ========
Identifiable assets by product line are those assets that are used in the
Company's operations in each segment. Corporate assets are principally cash
and cash equivalents, marketable securities, patents and trademarks,
European marketing rights, due from shareholders and other assets.
Export Sales - The following table shows the breakdown of the Company's
export sales as a percentage of consolidated revenues.
Year Ended December 31,
----------------------------------
1994 1995 1996
------ ------ ------
Asia 23% 29% 26%
Europe and other (1) 17% 13%
(1) Less than 10%
Major Customers - In 1996, sales to one customer in the computer industry
constituted 15% of the Company's sales. In 1995, sales to one customer in
the medical industry constituted 11% of the Company's sales and in 1994,
sales to one customer in the computer industry constituted 23%.
F-16
EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1b of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form S-1, Registration No.
33-60380 (the "Form S-1 Registration Statement").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2a of
Post-Effective Amendment No. 8 to Registrant's Form S-1 Registration
Statement.
10.1 1988 Stock Option Plan, as amended and restated. Incorporated by
reference to Exhibit 10.1 of the Form S-1 Registration Statement.**
10.2 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.1a of the Form S-1 Registration Statement.**
10.3 1996 Stock Incentive Plan.**
10.4 Description of Interlink Electronics, Inc. Management Compensation
Program.**
10.5 Form of Promissory Note from Stuart Yaniger dated March 1993.
Incorporated by reference to Exhibit 10.7 of the Form S-1
Registration Statement.
10.6 Form of Amendment to Promissory Note from Stuart Yaniger.
Incorporated by reference to Exhibit 10.7a of the Form S-1
Registration Statement.
10.7 Technology Transfer Agreement between the Registrant and Franklin
Eventoff dated as of December 23, 1987, and amendment thereto.
Incorporated by reference to Exhibit 10.9 of the Form S-1
Registration Statement.
10.8 Lease Agreement to lease premises in Camarillo, California dated
January 25, 1993. Incorporated by reference to Exhibit 10.11a of the
Form S-1 Registration Statement.
10.9 License Agreement between the Registrant and Toshiba Silicone Co.,
Ltd. dated March 10, 1989. Incorporated by reference to Exhibit
10.14 of the Form S-1 Registration Statement.
10.10 Joint Venture Agreement among the Registrant, InvestAR s.a.r.l.,
Interlink Electronics, Inc. Europe s.a.r.l. and IEE Finance s.a.r.l.
dated November 7, 1989. Incorporated by reference to Exhibit 10.15
of the Form S-1 Registration Statement.
10.11 Exclusive License and Distributor Agreement between the Registrant
and Interlink Electronics, Inc. Europe s.a.r.l. dated as of November
7, 1989. Incorporated by reference to Exhibit 10.16 of the Form S-1
Registration Statement.
10.12 Manufacturing and Supply Agreement between the Registrant and
Interlink Electronics, Inc. Europe s.a.r.l. dated as of November 7,
1989. Incorporated by reference to Exhibit 10.17 of the Form S-1
Registration Statement.
10.13 Letter Agreement between the Registrant and InvestAR s.a.r.l. dated
November 7, 1989. Incorporated by reference to Exhibit 10.18 of the
Form S-1 Registration Statement.
10.14 Agreement between the Government of Luxembourg, Interlink
Electronics, Inc. Europe s.a.r.l., IEE Finance s.a.r.l., the
Registrant and InvestAR s.a.r.l. dated December 18, 1989.
Incorporated by reference to Exhibit 10.19 of the Form S-1
Registration Statement.
10.15 Agreement with InvestAR s.a.r.l. and ARBED S.A. (undated).
Incorporated by reference to Exhibit 10.20 of the Form S-1
Registration Statement.
10.16 Agreement among the Registrant, Interlink Electronics, Inc. Europe
s.a.r.l. and InvestAR s.a.r.l. dated as of December 14, 1990.
Incorporated by reference to Exhibit 10.21 of the Form S-1
Registration Statement.
10.17 Ink Technology Transfer Agreement between the Registrant and
InvestAR s.a.r.l. dated December 11, 1992. Incorporated by reference
to Exhibit 10.23 of the Form S-1 Registration Statement.
10.18 Financing Agreement between the Registrant and InvestAR s.a.r.l. in
relation with the Ink Technology Transfer Agreement dated December
11, 1992. Incorporated by reference to Exhibit 10.24 of the Form S-1
Registration Statement.
10.19 Form of Confidentiality and Nondisclosure Agreement in relation with
the Ink Technology Transfer Agreement (undated). Incorporated by
reference to Exhibit 10.25 of the Form S-1 Registration Statement.
10.20 Form of Escrow Agreement for Technology in relation with the Ink
Technology Transfer Agreement dated December 11, 1992. Incorporated
by reference to Exhibit 10.26 of the Form S-1 Registration
Statement.
10.21 Financing Agreement between the Registrant and InvestAR s.a.r.l.
dated June 15, 1992. Incorporated by reference to Exhibit 10.27 of
the Form S-1 Registration Statement.
10.22 Interlink Europe Financing Agreement between the Registrant and
InvestAR s.a.r.l. dated April 7, 1993. Incorporated by reference to
Exhibit 10.28 of the Form S-1 Registration Statement.
10.23 Agreement between Zilog, Inc. and the Registrant date November 30,
1993. Incorporated by reference to Exhibit 10.34 of the Form S-1
Registration Statement.*
10.24 Employment Agreement between the Registrant and E. Michael Thoben,
III effective as of April 1, 1996.
10.25 Employment Agreement between the Registrant and William A. Yates
effective as of April 1, 1996.
10.26 Employment Agreement between the Registrant and David J. Arthur
effective as of April 1, 1996.
21.1 Subsidiaries of the Registrant.
24.1 Consent of Arthur Andersen.
25.1 Power of Attorney (see page 20).
27 Financial Data Schedule.
- ------------
* Confidential Treatment for portions of this agreement has been granted
by the Commission.
** This exhibit constitutes a management contract or compensatory plan
or arrangement.