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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 0-19657
INTERLINK ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0056625
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
546 FLYNN ROAD
CAMARILLO, CALIFORNIA 93012
(Address of principal executive (Zip Code)
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 484-8855
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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 EACH 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. / /
As of March 20, 2000 the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was $719,151,101.25. Solely for
purposes of this calculation, the registrant has treated its Board of Directors
and executive officers as affiliates.
As of March 20, 2000, the number of shares of the registrant's Common Stock
outstanding was 8,673,866.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.
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INTERLINK ELECTRONICS, INC.
TABLE OF CONTENTS
ITEM PAGE
NO. NO.
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PART I
1. Business.................................................... 2
2. Properties.................................................. 11
3. Legal Proceedings........................................... 11
4. Submission of Matters to a Vote of Security Holders......... 11
4(A). Executive Officers of the Registrant........................ 11
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 12
6. Selected Financial Data..................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................ 14
8. Financial Statements and Supplemental Data.................. 19
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 19
PART III
10. Directors and Executive Officers of the Registrant.......... 19
11. Executive Compensation...................................... 19
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 19
13. Certain Relationships and Related Transactions.............. 19
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 20
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that constitute
"forward-looking statements" within the meaning of section 27A of the Securities
Act of 1933 and section 21E of the Securities Exchange Act of 1934. These
forward-looking statements may be adversely affected by a number of factors.
These factors may include the following:
- Our new business plan being based on assumptions that could prove to be
incorrect.
- Our inability to predict the amount or timing of growth in markets where
we expect our future revenue growth to occur.
- Our operating results continuing to fluctuate and not meeting published
analyst forecasts.
- Our sales being concentrated with one or more customers or in limited
market or geographic areas.
- Our new business strategy of developing products for the home
entertainment and e-transactions markets not being successfully
implemented.
- International sales and manufacturing risks.
- Fluctuations in the value of foreign currencies.
- Our inability to develop and introduce new products to respond to evolving
industry requirements in a timely manner.
- The home entertainment and e-transactions markets not adopting our
technology.
- Our markets being intensely competitive and many of our potential
competitors having resources that exceed our own.
- Failure to attract and retain qualified individuals for critical
positions.
- Failure to manage our growth effectively.
- Our inability to overcome price advantages of low-cost remote products.
- Changing standards or regulations.
- Interruption of our contract manufacturing arrangements.
- Interruption in the supply of any significant FSR sensor or other
component causing us to miss shipment deadlines.
- Performance, reliability or quality problems with our products.
- Federal, state and international legislation and regulations affecting
e-commerce.
- Failure to protect our intellectual property.
- Proprietary technologies of our competitors creating barriers to entry.
- Adoption of technologies and standards by electronics manufacturers and
service providers.
- Risks associated with manufacturing certain of our products at a single
facility.
- Reliance on others for significant aspects of our technology development.
- Industry downturns in the markets we serve.
- Volatility in our stock price.
1
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leader in the development of intuitive interface devices for a
variety of home and business applications. Our products enable a user to
wirelessly control and communicate with various products such as digital set-top
boxes, digital televisions and other electronic products, which we refer to as
appliances, by providing an intuitive device on which the user can remotely
input a variety of commands. Our products incorporate patented sensor and
wireless communication technologies and proprietary applications and ergonomic
designs. We have recently begun to use our collection of intuitive interface
technologies, which were originally designed for our business presentation
products, to create products for two new markets: home entertainment and
electronic transactions. By building partnerships with providers of
complementary software and hardware technologies, we expect to market these
products for use with appliances as digital interface technology is incorporated
into them.
We have recently completed development of a prototype device that will
enable users to easily control the various applications emerging in the home
entertainment market, such as interactive television. For the workflow
automation and business-to-business electronic commerce markets, which we refer
to collectively as the e-transactions market, we have also recently introduced
our EPAD electronic signature capture device. The EPAD captures signatures
electronically and permits these signatures to be bound to an electronic
document, allowing a recipient to verify that an electronic document has not
been tampered with since the signature was recorded. We are the leading supplier
of intuitive interface devices and components for the business presentation
market, where we sell both to OEMs and directly to consumers through reseller
channels. Our OEM customers include computer, computer peripheral and
presentation appliance manufacturers, such as inFocus, Inc., Koninklijke Philips
Electronics N.V., NEC Corporation, Sharp Corporation, Sony Corporation and
Toshiba Corporation. We also design, manufacture and sell a broad variety of
specialty components incorporating our technologies, such as pointing devices
and industrial sensor products for the computer, automotive and medical device
markets.
MARKET BACKGROUND
The widespread adoption of the Internet and the proliferation of business
and home computing, information and entertainment appliances have prompted an
increase in the amount of interactive content and the number of entertainment
and business applications available in the home and business environments. The
emergence of new technologies and the appliances that support them is enabling
business and home users to use high-speed communications to access media and
interactive services, such as entertainment program guides, e-commerce, chat,
games, e-mail and interactive television. These technologies are expanding the
infrastructure for viewing content and interacting with applications beyond the
television and the personal computer. Business and home users currently interact
with these applications and access content through an array of appliances,
including digital set-top boxes, game consoles, DVD players and business
presentation projectors.
CONVERGENCE OF TELEVISION, COMPUTER TECHNOLOGY AND THE INTERNET. The
Internet has grown rapidly over the past several years and is now used by
millions of people for entertainment, education and e-commerce. Jupiter
Communications projects that by 2002, more than 60 million U.S. households will
have access to the Internet. The increasing popularity of the Internet and the
established popularity of television have led a growing number of home computer
users to simultaneously access Internet content while they watch television.
This convergence of television and computer technologies has enabled a wide
range of new communication and entertainment applications. Digital cable
networks will be able to offer consumers electronic program guides, voice
telephony, e-mail, e-commerce and other services through the television. For
example, a television viewer may, after viewing a movie, wish to order a copy on
DVD, or the viewer of a news program or television commercial may wish to obtain
additional information by visiting a related
2
Website. These new applications are creating a need for interactive appliances
in the home entertainment, e-transactions and business communication markets.
HOME ENTERTAINMENT MARKET. We believe that the home entertainment market
offers a new large market opportunity for multi-functional, intuitive interface
devices. The advent of digital cable, satellite TV and similar broadband
delivery systems is increasing programming choices. It is widely anticipated
that computer and television technologies will continue to converge and that the
consumer will be able, through a single electronic appliance, to view television
programming, control other entertainment components, access the Internet,
participate in on-line commerce, send and receive e-mail and participate in
audio and video telephone calls.
We believe the market for intuitive interface devices will develop as cable
subscribers have increased access to digital set-top boxes. Forrester
Research, Inc. estimates that 15.3% of U.S. households will have digital set-top
boxes by year-end 2000, growing to 26.5% in 2002 and 55.3% in 2005. We believe
that, as digital set-top boxes are deployed and broadband services such as
Internet access become available, consumers will seek new control devices that
are more sophisticated, flexible, and intuitive than traditional television
remotes or the combination of a remote and wireless keyboard.
E-TRANSACTIONS MARKET. The rapid growth of the workflow automation and
business-to-business e-commerce markets has created a need for electronic
document and approval authentication methods that can serve as an electronic
substitute for the signature on paper documents. For the recipient of an
electronic document to have confidence that the document was approved in the
form in which it appears on his or her computer screen, it is necessary to have
a reliable mechanism that captures a signature, binds the signature to the
document, and verifies the identity of the approving person and the integrity of
the document in the form in which it was approved.
We believe there is a sizeable market for an e-transactions product in
workflow automation applications, particularly in large business organizations
where there is a need to rapidly circulate documents for approval by one or a
series of people. We expect that e-transactions products will be deployed in
this market as the dollar value of business-to-business e-commerce grows from
$406 billion in 2000 to $2.7 trillion in 2004, as forecast by Forrester.
BUSINESS COMMUNICATIONS MARKET. As computer technology has replaced
traditional presentation devices such as slide and overhead projectors, the need
to control the presentation process has undergone a similar evolution. According
to Pacific Media Associates, the business communication market is growing at an
average annual rate of 23% with unit volumes expected to increase from 540,000
units in 1998 to 1.5 million units in 2003. Our OEM customers have recently
introduced business communication hardware that will significantly reduce the
size and weight and increase the resolution and brightness of presentation
devices such as projectors and the processing power of computers that support
them. Increased portability will enable many users to travel with a complete
presentation system capable of fitting in a standard computer bag.
THE NEED FOR INTUITIVE INTERFACE DEVICES
In recent years the number and types of computing, information and
entertainment appliances both in the home and in business have increased
dramatically. For example, a typical household may contain separate control
devices for the television, cable set-top box, DVD player, stereo system, game
console and PC. The convergence of television, computer technology and the
Internet has created interactive applications on both the PC and the television.
As a result, traditional application interface devices, such as a standard
keyboard, are no longer intuitive or capable of interacting across multiple
appliances.
We believe traditional remote control devices are not well suited for
evolving user requirements. In the home environment, entertainment appliances
are increasing in complexity, more applications and content can be accessed on
each appliance, and multiple appliances are often used simultaneously.
3
However, the remote control devices that consumers typically use to control
applications and appliances in the home environment are not intuitive and are
often difficult to use. They typically contain many buttons, which require users
to memorize or lookup each function of each button. Users often need several
control devices, such as a remote and a wireless keyboard, to access multiple
applications, such as digital TV content, Internet-based communication and
commerce, and the telephone.
Moreover, the typical remote control device operates on infrared, or IR,
technology, which does not work well over long distances or if there are
intervening objects, such as furniture. IR signals also interfere with each
other, which prevents the use of multiple IR signals in a single room,
significantly limiting interactivity between the remote and the multiple devices
it controls and making bi-directional communication impossible. Finally, IR
technology limits speed and bandwidth, limiting the complexity of data that can
be transmitted.
In the e-transactions market, businesses seeking to automate workflow or
conduct e-commerce transactions need a hardware and software solution that can
be used to capture signatures, bind them to documents, and authenticate and
verify them. There are few cost-effective turnkey solutions commercially
available that can be deployed, requiring businesses to develop proprietary
software and hardware solutions.
In the business communications market, users need a highly reliable wireless
device to control their presentation or videoconferencing system. Users must be
able to move untethered to interact with their audience while simultaneously
controlling their equipment. Advanced presenters require the ability to annotate
on a slide or to modify their presentation during the actual presentation.
THE INTERLINK SOLUTION
We use our collection of proprietary intuitive interface technologies to
create devices that enable users to operate and control computers, televisions,
projectors and other complex electronic appliances. By enabling interactivity
between interface devices and the appliances they control, we allow users to
interact directly with menu-driven application programs resident in the
controlled appliance through an on-screen display. Our devices will allow users
to use high bandwidth applications such as telephony and provide an intuitive
interface for applications encompassing the functions typically associated with
computers, such as browsing the Internet and sending and receiving e-mail. For
instance, our new interface device for next generation digital set-top boxes
will integrate cursorless navigation, text entry, freehand writing and drawing
and voice transmission capabilities within a single lightweight, hand-held
platform. The device will enable total control of various home entertainment
options available yet retain a highly intuitive user interface and a sleek
ergonomic design.
Our interface devices offer a number of benefits not available on
traditional remote controls:
EASY-TO-USE TOUCHPAD TECHNOLOGY. All of our products include our patented
VERSAPAD touchpad technology. The touchpad incorporates our patented FORCE
SENSING RESISTOR and other technologies to create a pointing device that
responds to pressure and can accept input from a finger or a pen. The VERSAPAD
also consumes minimal power, making it ideal for use in a battery powered
interface device. In conjunction with pad-to-screen mapping and gestures, our
touchpads provide an intuitive means of communicating with a wide array of
applications and appliances.
INTUITIVE PAD-TO-SCREEN MAPPING. Our pad-to-screen, or PTS, mapping
technology, for which we have a patent pending, allows a user to touch a point
on a touchpad based on VERSAPAD technology to activate a button or menu item in
a corresponding on-screen location. This capability eliminates the need to click
or cursor through various intervening menu items. Using PTS mapping, a user can
easily and quickly perform a number of complex functions without looking at the
remote device, including the operation of a virtual keyboard activated through
the touchpad but appearing on the monitor.
4
INNOVATIVE GESTURE CONTROL. Our "gesture" technology, for which we have a
patent pending, allows the user to input or write commands on a screen by
touching and moving a finger or pen on a touchpad. For example, a channel can be
changed by tracing the channel number on the touchpad or, if a higher or lower
channel is desired, by swiping to the right or left, as applicable, and
continuing to touch the touchpad to scroll through the channel numbers. Other
commands, such as play, record or pause are accomplished by making gestures that
mimic the standard symbols for those functions appearing on VCRs, DVD players
and other playback and recording devices.
ENHANCED WIRELESS COMMUNICATIONS TECHNOLOGY. Our patented REMOTELINK
wireless communications technology retains the IR technology necessary to
communicate with most of today's appliances and combines it with radio
frequency, or RF, technology to overcome most of the shortcomings of traditional
IR technology. REMOTELINK permits our intuitive interface devices to:
- send signals having sufficient speed and bandwidth to support applications
such as handwriting input, stereo quality streaming audio and telephony;
- support bi-directional and multiple signals, thereby enabling true
interactive communication and/or the simultaneous use of multiple remote
devices in a single room; and
- send sufficiently robust signals to eliminate the need to point the remote
device at the receiver for the controlled device.
FUNCTIONAL AND ERGONOMIC DESIGN. Our intuitive interface devices reflect
our strong focus on functionality and ergonomics. We maintain an active product
design effort and devote considerable attention to issues related to ease of use
of our products. An example of the results of these efforts is our patented
CLICKTRIGGER button incorporated in a number of our products, which enables the
user to click on an icon on a monitor by squeezing a button with his or her
index finger in a motion similar to pulling a trigger on a gun.
THE INTERLINK STRATEGY
We intend to use our collection of technologies to become the leading
provider of intuitive interface devices for the home and business markets
through the implementation of the following strategies:
DEVELOP INTUITIVE INTERFACE DEVICES THAT ARE COMPATIBLE WITH MOST HOME
ENTERTAINMENT APPLIANCES. We will introduce intuitive interface devices for the
home entertainment market that will enable users to take full advantage of the
many interactive applications that are starting to become widely available. We
are building technology partnerships with a variety of other technology
providers, such as multiple service operators, manufacturers of digital set-top
boxes and developers of software applications, to promote the compatibility of
our devices with as many different interactive home entertainment appliances and
systems as possible. In order to support this compatibility, we will develop or
partner with others to develop communication protocols that enable our interface
devices to function with the various applications available to consumers in the
home entertainment market and the appliances on which these applications will
run. Because many of our OEM customers in the business communications market are
also participants in the market for home entertainment appliances, we expect to
use our relationships with them to facilitate the widespread adoption of our
intuitive interface devices in this market.
AGGRESSIVELY MARKET OUR EPAD PRODUCT TO THE E-TRANSACTIONS MARKET. We will
foster adoption of our recently introduced EPAD product in the e-transactions
market by expanding distribution channels and building strategic relationships
with key software and systems integrators to develop turnkey solutions for
deployment in large-scale corporate settings. To foster adoption of the EPAD in
the workflow automation market, we are working with electronic signature
software companies like Silanis Technology, Inc. and Communication Intelligence
Corporation, or CIC. For example, our EPAD APPROVEIT product is bundled with
software from Silanis Technology, Inc. We also are working with companies like
Adobe Systems
5
Incorporated and Cardiff Software, Inc that are interested in promoting the
widespread use of electronic, rather than paper, documents in
business-to-business commerce.
MAINTAIN OUR LEADERSHIP POSITION IN THE BUSINESS COMMUNICATIONS MARKET. We
will seek to maintain our leadership position in the business communication
market by continuing to provide our OEM and reseller customers with innovative
products that are responsive to consumer needs. We also expect to introduce
products for related ancillary markets, such as conference room and video
conferencing controllers and conferencing automation products.
DEVELOP PROPRIETARY APPLICATIONS TO FACILITATE OUR ENTRY INTO NEW
MARKETS. We will develop either for ourselves or in partnership with other
companies, software applications that enhance the functionality of our intuitive
interface devices and will seek to license such applications where possible. We
are entering into strategic relationships with companies such as PSW
Technologies Inc. that can assist us in developing such software applications.
We intend to work with our customers and development partners to identify and
develop applications that will meet actual customer needs and, where
appropriate, to license these applications to appliance manufacturers, system
operators and others.
ENHANCE OUR CURRENT TECHNOLOGY AND DEVELOP OR ACQUIRE NEW TECHNOLOGY AND
APPLICATIONS. We will maintain an active technology development program that
will enable us to enhance our current touchpad and wireless communication
technologies and develop new technologies and applications for them. We believe
this continuing development will allow us to increase our market share in the
markets in which we compete and identify new markets where are technologies can
provide us with a competitive advantage. Where appropriate, we may acquire
technologies from others or acquire companies that own or are developing
technologies that we believe would allow us to enhance our product offerings.
PRODUCTS
We have four principal product lines targeted at the business communication,
home entertainment, e-transactions and specialty components markets.
BUSINESS COMMUNICATION PRODUCTS. Our intuitive interface devices are used
by the business communication market to control presentation appliances such as
projectors. Our traditional interface devices incorporate a pointing button to
control the cursor and one or more function selection buttons. These products
range from a simple interface device with only a pointing device and a single
click button to devices with 30 function keys. Most of these products
incorporate our patented CLICKTRIGGER button. We have recently introduced
interface devices based on our REMOTELINK technology incorporating a touchpad
and permitting the user, in addition to the normal presentation control
functions, to write over or highlight material appearing in the formal
presentation.
We sell interface devices principally to OEMs and, to a lesser extent, as
branded products through a variety of distributors, value added resellers and
large retail chains. Our current customers include some of the largest
presentation device OEMs, including Seiko Epson Corporation, Hitachi, Ltd.,
inFocus, Inc., Mitsubishi Electronics America, Inc., NEC Corporation, Sanyo
Electric Co., Ltd., Sony Corporation and Toshiba Corporation. Although most
business presentation devices are made by Japanese companies, the United States
represents the largest market for these products. Accordingly, our OEM sales are
concentrated in Japan and managed by our Japanese subsidiary while our branded
sales are primarily U.S.-based.
HOME ENTERTAINMENT PRODUCTS. The INTUITOUCH product, our prototype
intuitive interface device for home entertainment appliances such as digital
set-top boxes, is based on a technological platform similar to our most advanced
business communications devices. The pad-centric remote device we are developing
will integrate mouse pointing, text entry, freehand writing and drawing and
voice transmission capabilities. The device will enable total control of the
variety of home entertainment options available yet retain a highly intuitive
user interface and an ergonomic design.
6
E-TRANSACTIONS PRODUCTS. Our EPAD product consists of a FSR-based, VERSAPAD
touchpad mounted in a plastic case and connected by a cable to a computer. Like
all of our FSR-based touchpads, it is actuated using a finger, electronic pen or
any other device capable of exerting pressure at a given point on the sensor.
The EPAD captures and binds signatures to electronic documents. We work with
major electronic signature software application developers to provide turnkey
solutions to end-users. Depending on the software used with it, the EPAD device
can perform a variety of document authentication functions, such as alerting a
reader if any change has been made to a document since it was transmitted by the
sender. Other potential functions include signature verification.
SPECIALTY COMPONENTS. Our specialty components business consists primarily
of two segments. We sell integrated pointing solutions to manufacturers of
notebook computers and industrial computers. We also sell a diverse assortment
of custom-designed sensors for non-computer applications, such as for use in
medical devices as safety switches and automotive components, such as car seats.
TECHNOLOGIES
Our core technologies are FORCE SENSING RESISTORS and REMOTELINK, our
wireless communication protocol.
FORCE SENSING RESISTORS. All of our products incorporate one or more FSRs.
A basic FSR sensor can detect and accurately measure a force applied to it,
thereby enabling precise control of the process applying the force. A more
complex sensor, known as a "four zone" sensor, has four sensors arranged in a
two-by-two square with an actuator placed directly where the four sensors touch.
By toggling the actuator in any direction, an operator can control the direction
and speed of a cursor on a computer screen. An FSR sensor can also serve as a
touchpad by incorporating a two-dimensional grid capable of measuring the
location and intensity of pressure applied at any set of coordinates on the
grid. In contrast to most standard touchpads, FSR touchpads can also measure the
amount of pressure applied at any point on the grid, thereby creating a
three-dimensional matrix that can characterize an input along X, Y and Z axes.
This type of device is useful for functions such as handwriting input, where not
only the outline of the signature but the pressure applied in writing it can be
measured, or computer cursor control, where variable cursor speed is desirable.
Our FSR sensors can be as thin as one-hundredth of an inch, making them
particularly well suited for use where space is a critical issue, as in notebook
and sub-notebook keyboards. In touchpad applications, they consume significantly
less power than do capacitive touchpads, the principal competing technology.
FSRs are therefore an appropriate choice for wireless applications. Also, unlike
capacitive touchpads which react to the electrical capacitance in a human
finger, FSRs react to pressure from any object and therefore support pen input.
FSR sensors have no moving parts and can be packaged in a sealed environment.
They are therefore highly reliable, retaining their performance through tens of
millions of actuations, even in adverse environments involving heat, moisture,
and chemical contamination.
FSR sensors are manufactured using screen printing techniques. All
proprietary aspects of the manufacturing process are conducted in-house at
Interlink, 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. We have
developed significant expertise in the manufacture of FSR sensors, and believe
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 sandwich
structure using inexpensive sheet adhesives. The assembled sheets are die cut
and suitable connectors are attached.
REMOTELINK. Our REMOTELINK technology uses a proprietary optical carrier
design to provide a relatively high speed, multi-channel, digital or analog,
optical communications link that does not interfere
7
with, or become contaminated by, signals from IR remote controls. REMOTELINK can
be configured to support multiple users and simultaneous channels operating over
a number of carrier frequency spectrums, including the 1 to 6 megahertz range.
REMOTELINK'S bandwidth supports wireless data transmissions of up to 100
kilobits per second and a 6 kilohertz bandwidth analog transmission at distances
of up to 10 meters. REMOTELINK technology can simultaneously transmit data,
voice and legacy IR codes. REMOTELINK technology's ability to transmit legacy IR
codes makes it compatible with existing remote controls.
APPLICATIONS. We have created a number of applications that allow our
hardware technologies to support specific functions. These applications, for
example, enable our FSR-based touchpads to support PTS mapping and gesture
control. We expect to develop, or work with others to develop, new applications
that will allow our intuitive interface devices to control an ever increasing
number of interactive functions.
SALES AND MARKETING
We employ a direct sales team of eight people in the U.S. and five in Japan.
Each sales team is supported by inside sales personnel, product managers and
application engineers. For our branded products, we also use value-added
resellers, system integrators and distributors throughout the U.S. and Europe.
For OEM sales, we use public relations activity, direct advertising and
tradeshow participation to generate product awareness. Promising sales leads and
known industry targets are followed up with sales visits. Depending on forecast
volume and required lead times, we may sell component solutions,
ready-to-integrate modules, complete solutions or totally custom products. As
necessary, application engineers support and visit customers to promote ease of
integration. A successful OEM sale will generally take from 6 to 18 months from
the initial visit to the first shipment. However, once obtained, an OEM customer
usually offers us a more predictable revenue stream.
For branded products, we use public relations, third-party product reviews,
trade shows and limited direct advertising to generate customer awareness.
Direct sales calls are made to potential distributors and specialty resellers.
Once a customer relationship is established, we support these customers with
co-op advertising, sales "spiffs," end-user rebates and other promotions.
Current distribution channels for our branded products consist of mass
merchandiser outlets, such as Fry's Corporation, and distributors such as Ingram
Micro, catalogs and specialty resellers targeting corporate accounts. We market
to these channels with direct sales through our employees. In Europe we use
distributors and specialty resellers. We use these distribution channels not
only to increase branded product sales but also to establish customer demand for
new products that generate OEM sales.
We are using our relationships with our OEM customers to facilitate the
introduction of our products in the home entertainment market. We also are
forming relationships with software developers, digital set-top box
manufacturers and cable and satellite television providers to enhance that
market's acceptance of our products and technologies. We anticipate using
similar sales and marketing techniques as those described above once we become
established in this market.
We are conducting a variety of pilot projects with several potential
corporate purchasers of our EPAD product. Because we expect that the EPAD sales
channels will be different from those for our other principal products, we are
evaluating various sales and marketing options, including partnership or
licensing arrangements with third parties.
8
CUSTOMERS
Our ten largest customers by revenue in 1999 were:
NEC Corporation Hitachi, Ltd.
inFocus, Inc. Mitsubishi Electronics America, Inc.
Sony Corporation Toshiba Corporation
Sharp Corporation Varian, Inc.
Logitech International, S.A. Microsoft Corporation
In 1999, we derived approximately $3.9 million, or 14.0%, of our revenue
from NEC, $3.5 million, or 12.4%, of our revenue from inFocus, and
$3.0 million, or 10.8%, of our revenue from Sony.
MANUFACTURING
We manufacture FSR sensors in our facility in Camarillo, California. This
facility is capable of operating on a single, double, or triple shift basis, as
volume dictates. We acquire raw materials and components from a number of
sources, mostly within the United States. We have worked closely with a small
group of manufacturers to create new materials optimized for FSR usage; most of
these materials are supplied to us on an exclusive basis. The raw materials are
processed into their final form using proprietary material and methods. We
contract with two manufacturers in China to conduct most of our high volume,
non-FSR manufacturing operations.
COMPETITION
We face competition from larger, more established companies that can produce
lower cost products using more mature technologies. Many of these companies have
greater financial, engineering and manufacturing resources than we do and have
long-standing customer relationships with key potential customers. While we
believe our technologies are superior, these competitors may develop or acquire
enhanced technologies sufficient to maintain or improve their market share.
Moreover, competitive pricing pressures on our OEM customers' products may force
them to choose lower cost, less sophisticated solutions from our competitors.
In the business communications market, our competitors include Hoshiden and
SMK Corporation. In the home entertainment and e-transactions markets, we will
face competition from Koninklijke Philips Electronics N.V., Universal
Electronics Inc., Wacom Technology Co. and other smaller companies.
We believe we can continue to compete effectively by continuing to develop
patented technologies that increase the functionality of the products of our OEM
customers. To maintain our patented technology advantage, we will continue to
invest heavily in product and advanced technology development. By manufacturing
most of our non-FSR components in countries with lower labor costs, we can
continue to offer high volume, low cost solutions.
RESEARCH AND DEVELOPMENT
The business communications, home entertainment and e-transactions markets
are characterized by rapid and continuous technological development of the
appliances with which our products interface. For example, in the business
communications market, the computerized projector has rapidly become a powerful,
lightweight machine that is easily portable by its user. To maintain our
competitive position, we believe we must develop, in a timely manner, new
interface technologies and products and enhance our existing technologies and
products. Accordingly, we allocate a significant amount of our financial
resources to engineering, product and advanced technology development. We also
maintain close relationships with our customers, which helps us anticipate their
product needs.
9
We employ 26 people in our product design, engineering support and advanced
technology departments in the US and in Japan. As appropriate, we engage outside
software development firms to facilitate the integration of our products into
our customers' appliances.
Most of our current research and development efforts are focused on further
development of our intellectual property surrounding PTS mapping, gesture
control and the REMOTELINK communication protocol. Ongoing efforts are directed
at enhancing the ergonomics of our interface designs, such as touchpad input and
our CLICKTRIGGER control. Future efforts will be directed toward providing a
single chip solution for the REMOTELINK technology and software integration of
our home entertainment solution to next-generation digital set-top boxes. We do
not anticipate the development of technology unrelated to our customers'
evolving needs.
PATENTS AND INTELLECTUAL PROPERTY
We regularly file patent applications and continuations to cover both new
and improved methods of manufacturing FSR sensors and non-FSR based
technologies.
Aspects of our technology are protected by more than 65 patents issued or
pending in the United States and abroad, as well as by trade secrets and
proprietary knowledge. Products incorporating our force sensing technologies are
sold under trademarks issued or pending in the United States and various other
countries. Of the initial FSR patents granted, those which cover certain aspects
of the use of an uneven surface to produce variable resistance, the first of
these patents expired on September 24, 1999. We have continued our efforts to
improve the design, formulation, and manufacture of our 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 will
expire between 2000 and 2015. Various corresponding foreign patents will expire
between 2000 and 2015. U.S. patents covering various materials and processes
used in our current generation of products, as well as new devices for angle and
displacement sensing, were granted during 1995 and our CLICKTRIGGER design was
afforded patent protection in 1997. We have also filed U.S. and foreign patent
applications regarding the design, and several key operating features, of our
REMOTELINK technology.
We have also developed certain manufacturing processes and other methods of
applying our patented technology that we protect as trade secrets. We believe
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. We require our employees to sign nondisclosure
agreements and seek to limit access to sensitive information to the greatest
practical extent.
We actively enforce our patents. When a potential infringing company is
identified, we first seek to notify the company of our patent rights.
Historically, we have been successful in negotiating license arrangements. If an
agreement cannot be reached, we will pursue legal remedies.
While we believe our patents afford some competitive advantage, such
protection is limited by the resources available to us to identify potential
infringements and to defend our rights against infringement. 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. We cannot be sure that our
patents will afford meaningful protection from competition.
EMPLOYEES
We had 130 full-time employees in the United States as of February 29, 2000;
101 at our corporate offices and manufacturing facilities, and two at our two
regional sales offices. Our Japanese subsidiary had 27 employees on that date.
10
ITEM 2. PROPERTIES
Our corporate offices and principal manufacturing facilities are located in
a 35,333 square foot leased facility in Camarillo, California. The lease on the
Camarillo premises runs until August 2003 and provides for an average monthly
rent payment of $20,681. We believe that this facility will be adequate to meet
its requirements for at least the next 12 months. Our two regional sales offices
operate out of leased facilities. Our Japanese subsidiary, Interlink
Electronics, K.K., leases office space in Tokyo.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any litigation that we expect will have a material
adverse effect on our business, financial condition or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the period
covered by this report.
ITEM 4(A) EXECUTIVE OFFICERS OF THE REGISTRANT
The following table contains information as of March 24, 2000 with respect
to each person who is an executive officer of Interlink:
NAME AGE POSITION
- ---- -------- ------------------------------------------
E Michael Thoben, III..................... 46 President, Chief Executive Officer and
Chairman of the Board
William A. Yates.......................... 48 Senior Vice President--Sales and Marketing
David J. Arthur........................... 51 Senior Vice President--Operations
Paul D. Meyer............................. 40 Chief Financial Officer and Secretary
Tamio Mori................................ 53 President and General Manager, Interlink
Electronics K.K.
Michael W. Ambrose........................ 40 Vice President--Engineering
E. MICHAEL THOBEN, III has served as Interlink's president, chief executive
officer and chairman of the board of directors since 1994. From 1990 to 1994, he
served as Interlink's president and a director. Prior to joining Interlink in
1990, Mr. Thoben was employed by Polaroid Corporation for 11 years, most
recently as the manager of one of Polaroid's seven strategic business units on a
worldwide basis. Mr. Thoben is currently a director of GordenLabs and the
American Electronics Association. 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.
WILLIAM A. YATES has served as Interlink's senior vice president--sales and
marketing since May 1995. From 1990 to 1995, Mr. Yates served as Interlink's
vice president--sales and marketing. Prior to joining Interlink in 1990,
Mr. Yates 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 companies such as Polaroid,
Carnation Company and Ortho Pharmaceutical Corporation. Mr. Yates holds a B.S.
degree in marketing from the University of California at Berkeley and has taken
graduate courses in business at San Diego State University.
DAVID J. ARTHUR has served as Interlink's senior vice president--operations
since May 1995. From 1990 to 1995, he served as Interlink's vice
president-manufacturing and operations. Prior to joining Interlink in 1990,
Mr. Arthur held senior positions in materials, purchasing and manufacturing
management with Harman Electronics, Inc., TRW Inc., North American Philips
Corporation, and Amdahl Corporation.
PAUL D. MEYER has served as Interlink's chief financial officer since
December 1996. From 1994 to 1996, he served as vice president--finance, and from
1989 to 1994 he served as controller. From May 1988 to
11
December 1989, Mr. Meyer served as controller for Dix-See Sales Company. From
September 1985 to May 1988, he served as corporate accounting manager for Bell
Industries. Mr. Meyer was employed at Price Waterhouse from 1983 to 1985.
Mr. Meyer is a Certified Public Accountant and holds a B.A. degree in economics
from the University of California, Los Angeles.
TAMIO MORI has served as the president and general manager of Interlink
Electronics K.K., Interlink's 80% owned Japanese subsidiary, since 1993 when it
was funded.
MICHAEL W. AMBROSE has served as Interlink's vice president--engineering
since June 1999. Between March 1998 and June 1999, he was director of
engineering. From August 1995 to February 1998, he served as the director of
marketing of Communication Intelligence Corp., a computer software company
specializing in software for mobile computing, e-signatures and computer
security. Prior to August 1995, he was employed by Logitech Inc., a computer
peripherals company, as the general manager of its Gazelle Business Unit and as
vice president of product marketing for Gazelle Graphic Systems. Mr. Ambrose
holds a B.S. degree in electrical engineering from Washington State University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market System since
September 15, 1995 under the symbol "LINK." The following table sets forth the
high and low closing prices for the common stock as reported on the Nasdaq
National Market for the quarters indicated. These prices do not include retail
markups, markdowns or commissions. The number of shares and the prices reflect a
three-for-two stock split effected as a stock dividend on shares of our common
stock outstanding on March 20, 2000.
LOW HIGH
-------- --------
YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. $ 2.96 $ 4.25
Second Quarter............................................ 2.67 4.25
Third Quarter............................................. 1.50 3.42
Fourth Quarter............................................ 1.09 3.17
YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $ 2.67 $ 4.17
Second Quarter............................................ 3.13 7.09
Third Quarter............................................. 4.52 9.50
Fourth Quarter............................................ 5.25 41.34
YEAR ENDING DECEMBER 31, 2000
First Quarter (through March 23, 2000).................... $27.33 $64.84
On March 23, 2000, the closing price of the common stock on the Nasdaq
National Market was $59.71 on a split-adjusted basis ($89.56 actual). As of
March 20, 2000 there were approximately 55 shareholders of record of our common
stock. We believe the number of beneficial owners is substantially greater than
the number of record holders because a large portion of Interlink's outstanding
common stock is held of record in broker "street names" for the benefit of
individual investors. As of March 20, 2000 there were 8,673,866 shares were
outstanding.
We have never declared or paid cash dividends on our common stock. Payment
of any cash dividends will depend on the results of our operations, our
financial condition and our capital expenditure plans, as well as other factors
our board of directors may consider relevant. We presently intend to retain any
earnings for use in our business and, therefore, do not anticipate paying any
cash dividends in the foreseeable future.
12
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following selected financial data should be read with our financial
statements and the notes to those statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data at December 31, 1998
and 1999 are derived from our financial statements which have been audited by
Arthur Andersen LLP, our independent public accountants, and are included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1995 and 1996 and the balance sheet dated as of December 31,
1995, 1996 and 1997 are derived from our financial statements which have been
audited by Arthur Andersen LLP and are not included in this prospectus.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $10,741 $13,485 $19,153 $22,095 $28,106
Cost of revenues............................... 5,252 7,028 11,829 13,954 17,640
------- ------- ------- ------- -------
Gross profit................................. 5,489 6,457 7,324 8,141 10,466
------- ------- ------- ------- -------
Operating expenses:
Product development and research............. 897 1,234 1,600 1,416 2,225
Selling, general and administrative.......... 4,524 4,617 5,555 5,837 5,799
------- ------- ------- ------- -------
Operating expenses......................... 5,421 5,851 7,155 7,253 8,024
------- ------- ------- ------- -------
Operating income............................... 68 606 169 888 2,442
------- ------- ------- ------- -------
Other income (expense):
Minority interest............................ 41 -- -- -- (31)
Interest income (expense).................... (60) (118) (152) (127) 35
Other........................................ 101 27 13 (359) (86)
------- ------- ------- ------- -------
Total other income (expense)............... 82 (91) (139) (486) (82)
------- ------- ------- ------- -------
Income before provision for income taxes....... 150 515 30 402 2,360
Income taxes................................... -- -- -- -- 252
------- ------- ------- ------- -------
Net income..................................... $ 150 $ 515 $ 30 $ 402 $ 2,108
======= ======= ======= ======= =======
Earnings per share--basic(1)................... $ .03 $ .08 $ .00 $ .05 $ .26
Earnings per share--diluted(1)................. $ .02 $ .07 $ .00 $ .05 $ .21
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................................ $ 6,353 $ 8,969 $12,461 $14,139 $17,644
Total assets................................... 10,187 13,185 17,555 19,577 24,707
Short term debt................................ 255 403 1,090 630 518
Long term debt and capital lease obligations... 672 850 724 1,423 1,424
Stockholders' equity........................... 7,589 9,969 13,453 14,665 18,247
- ------------------------
(1) As adjusted for the three-for-two stock split effected as a stock dividend
to stockholders of record on March 20, 2000.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leader in the development of intuitive interface devices for a
variety of home and business applications. We were incorporated in California in
February 1985 and reincorporated in Delaware in July 1996. From 1985 to 1993, we
developed and refined our FORCE SENSING RESISTOR, or FSR, technology and sold it
to customers for electronic, musical, medical and other applications, which we
now refer to as the specialty components market. In 1992, we introduced our
first branded computer pointing device, PORTAPOINT, and in 1994, we introduced
our first wireless pointing device, REMOTEPOINT. With the advent of this latter
device, we established ourselves as a leading supplier to OEMs in the
computerized presentation system market, which we now call the business
communication market. In 1999, we introduced products for e-transactions
applications and began developing products for the home entertainment market.
Revenue, net of allowances for returns and warranty, is recognized upon
shipment of product. Royalty revenue is recorded when earned. Revenues have
increased steadily during the last five years as we have established ourselves
in new markets and built a base of OEM customers in the computer and computer
peripheral industry. Gross profit as a percentage of revenues declined between
1995 and 1997 as a result of the increasing percentage of our business that
involved sales of computer products to OEMs but has remained relatively steady
over the last three years. Product development and research expenditures, which
includes engineering, contract engineering and development and material costs of
development, have generally increased as revenue has increased but has remained
relatively consistent as a percentage of revenues, reflecting our continuing
commitment to the technological and design innovation required to maintain a
leadership position in existing markets and to develop new ones. Selling,
general and administrative expense, which includes sales, marketing and
administrative personnel, advertising, sales commissions, reseller incentives,
tradeshow costs and other sales expenses, has declined each year as a percentage
of sales, reflecting the amortization of a relatively fixed expense requirement
over a larger revenue base. Because of net operating loss carryforwards
available both for our U.S.-based and Japan-based operations, we historically
have not paid income tax. Beginning in 1999, some of these loss carryforwards
began to expire or become fully utilized; therefore income taxes are expected to
increase on both a percentage and absolute dollar basis. Other income (expense)
was significant in 1998 as the result of a non-recurring legal settlement
expense.
Prior to 1999, operations was a net user of cash and we funded this through
existing cash balances, private placements of equity and to a lesser extent,
bank and lease financing. In 1999, operations was a net provider of cash,
generating $2.9 million.
Sales of business communication intuitive interface devices accounted for
63% of our total sales in 1999 and 60% of our total sales in the three years
ended December 31, 1999. Our business communication sales in dollars grew at an
average annualized rate of 31% in 1999. Because our market share for business
communication interface devices is approximately 80%, we expect that our ability
to achieve further revenue growth in this market will largely depend on growth
in the market itself.
We have established relationships with most of the major OEMs in the
business communication market. Many of these OEMs are based in Japan and
approximately 50% of our 1999 revenues came from Japanese customers. As a result
we are subject to foreign currency exchange rate fluctuations, primarily in the
yen/dollar exchange rate.
We have licensed certain technology related to the production of FSR sensors
to International Electronics and Engineering, a former affiliate based in
Luxembourg, for use in connection with sales of sensors to the automotive
industry. We are entitled to royalties in connection with sales of automotive
sensors outside Europe. Royalties earned in 1999 approximated $580,000. We have
occasionally licensed
14
other aspects of our technology in connection with the settlement of
intellectual property disputes and expect to continue to do so in the future.
Beginning in the second quarter of this year, we plan to spend between $10
and $15 million to
- market our technology to digital set-top box manufacturers, cable and
other service providers and others in the home entertainment market and
- increase customer awareness and product development efforts in the
e-transactions market.
As a result, we expect product development expense to increase more quickly
than revenue. We also expect marketing and sales expense to increase at a rate
that exceeds its historical rate of increase as a result of these expenditures.
In June 1998 and June 1999, the AICPA issued Statement of Financial
Accounting Standards, or SFAS, No. 133 "Accounting for Derivative Instruments
and Hedging Activities" and SFAS No. 137, which delayed the effective date of
SFAS No. 133 and required its adoption beginning January 1, 2001. The Company
will adopt this standard in January 2001 and is currently analyzing the
statement to determine the impact, if any, on the Company's financial position
or results of operations.
RESULTS OF OPERATIONS
The following table presents our historical operating results for the
periods indicated as a percentage of revenues:
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
Revenues.................................................... 100% 100% 100%
--- --- ---
Gross profit................................................ 38 37 37
Operating expenses:
Product development and research.......................... 8 7 8
Selling, general and administrative....................... 29 26 20
--- --- ---
Total operating expenses................................ 37 33 28
--- --- ---
Operating income............................................ 1 4 9
Other income (expense)...................................... (1) (2) --
Income tax.................................................. -- -- 1
--- --- ---
Net income.................................................. --% 2% 8%
=== === ===
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 31, 1998
Revenues increased 27% from $22.1 million in 1998 to $28.1 million in 1999.
This revenue growth is a result primarily of growth in sales to the business
communication market and, to a lesser extent, from a threefold increase in home
entertainment sales to $1.5 million reflecting our initial penetration of that
market.
Gross profit as a percent of sales did not change appreciably.
Product development and research expense increased from $1.4 million in 1998
to $2.2 million in 1999 while increasing marginally as a percentage of sales.
The increase reflects our continuing commitment to develop products that will
support our leadership position in our existing and targeted markets.
15
Selling, general and administrative expense was $5.8 million in 1998 and
1999 but declined as a percentage of sales from 26% in 1998 to 20% in 1999. The
percentage decrease represents the amortization of a relatively stable general
and administrative burden over increased sales.
Income taxes were significant for the first time in 1999 at $252,000, as our
Japanese subsidiary fully utilized its tax loss carryforwards and began to
accrue tax on income. We expect income taxes to increase absolutely and as a
percentage of pretax income as the federal and state income tax loss
carryforwards become fully utilized or expire as well. Other expense was
insignificant in 1999 and declined from 1998 as a result of a one-time charge
related to a legal settlement expense of $355,000 in 1998.
Operating income was $2.4 million and net income was $2.1 million in 1999,
the increases over 1998 were primarily attributable to increased sales.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 31, 1997
Revenues increased 15% from $19.2 million in 1997 to $22.1 million in 1998.
This revenue growth resulted from our focus on developing and marketing our
computer pointing device product line primarily in the business communication
market.
Gross profit as a percent of sales decreased from 38% in 1997 to 37% in
1998. This decline was a result of the growth of our sales to OEM customers,
which typically carry a lower gross profit percentage as compared to non-OEM
sales. Additionally, in 1998, the business communication industry experienced
the rapid product development and price competition typically experienced in the
computer hardware industry.
Product development and research expense decreased from $1.6 million in 1997
to $1.4 million in 1998. During 1997, development costs were materially affected
by the development costs, both internal and external, relating to the
introduction of our VERSAPAD-REGISTERED TRADEMARK- technology and the
development of REMOTELINK technology. In 1998 resources were added to support
the increased OEM business both in the U.S. and Japan and to develop the new
product FREEDOMWRITER (first shipped in December 1998) and a new touchpad
peripheral introduced in July 1999.
Selling, general and administrative expense as a percent of sales decreased
from 29% in 1997 to 26% in 1998. This decline resulted from the amortization of
relatively fixed costs over a greater base of sales and the shift in product mix
towards OEM sales.
We recorded a profit from operations of $169,000 in 1997 and $888,000 in
1998. 1997 results were affected by a one-time write-off due to yield problems
related to the new VERSAPAD technology that more than offset continued strong
revenue growth and cost containment efforts. The improvement in 1998 was a
result of continued growth from the OEM business which allowed for strong cost
containment that offset the lower gross profit percentage.
Other expense, relatively minor in prior years, reached $486,000 in 1998 due
to a one-time legal settlement expense of $355,000.
The revenue growth in our computer pointing device product line, and
operating cost control contributed to achieve net income of $30,000 in 1997 and
$402,000 in 1998. The results in 1997 were affected by a one-time write-off due
to yield problems related to the new VERSAPAD technology that more than offset
continued strong revenue growth and cost containment efforts. The results in
1998 were negatively impacted by a one-time charge related to a legal settlement
of $355,000.
16
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated statement of operations
data for each of the eight quarters ended December 31, 1999, as well as such
data expressed as a percentage of revenue. We believe that all necessary
adjustments have been included to fairly present the quarterly information when
read in conjunction with the consolidated financial statements. The operating
results for any quarter are not necessarily indicative of the results for any
subsequent quarter.
QUARTER ENDED (UNAUDITED)
---------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
Revenue......................... $5,157 $5,351 $5,231 $6,356 $6,503 $6,958
Cost of revenues................ 3,248 3,296 3,307 4,103 4,107 4,287
------ ------ ------ ------ ------ ------
Gross profit.................... 1,909 2,055 1,924 2,253 2,396 2,671
Operating expenses:
Product development and
research.................... 356 448 403 209 483 565
Selling, general and
administrative.............. 1,488 1,441 1,264 1,644 1,448 1,532
------ ------ ------ ------ ------ ------
Total operating expenses........ 1,844 1,889 1,667 1,853 1,931 2,097
Operating income................ 65 166 257 400 465 574
Other income (expense).......... (15) (31) (393) (47) 15 9
------ ------ ------ ------ ------ ------
Income (loss) before income
taxes......................... 50 135 (136) 353 480 583
Income taxes.................... 0 0 0 0 (72) (75)
------ ------ ------ ------ ------ ------
Net income (loss)............... $ 50 $ 135 $ (136) $ 353 $ 408 $ 508
====== ====== ====== ====== ====== ======
QUARTER ENDED (UNAUDITED)
-----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- -------------
(IN THOUSANDS)
Revenue......................... $7,207 $7,438
Cost of revenues................ 4,573 4,673
------ ------
Gross profit.................... 2,634 2,765
Operating expenses:
Product development and
research.................... 543 634
Selling, general and
administrative.............. 1,431 1,388
------ ------
Total operating expenses........ 1,974 2,022
Operating income................ 660 743
Other income (expense).......... (9) (97)
------ ------
Income (loss) before income
taxes......................... 651 646
Income taxes.................... (105) --
------ ------
Net income (loss)............... $ 546 $ 646
====== ======
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
------------- ------------- ------------- ------------- ------------- -------------
Revenue......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 63.0 61.6 63.2 64.6 63.2 61.6
----- ----- ----- ----- ----- -----
Gross profit.................... 37.0 38.4 36.8 35.4 36.8 38.4
Operating expenses:
Product development and
research.................... 6.9 8.4 7.7 3.3 7.3 8.1
Selling, general and
administrative.............. 28.8 26.9 24.2 25.8 22.3 22.0
----- ----- ----- ----- ----- -----
Total operating expenses........ 35.7 35.3 31.9 29.1 29.6 30.1
----- ----- ----- ----- ----- -----
Operating income................ 1.3 3.1 4.9 6.3 7.2 8.3
Other income (expense).......... (0.3) (0.6) (7.5) (0.7) 0.2 0.1
----- ----- ----- ----- ----- -----
Income (loss) before income
taxes......................... 1.0 2.5 (2.6) 5.6 7.4 8.4
Income taxes.................... 0.0 0.0 0.0 0.0 (1.1) (1.1)
----- ----- ----- ----- ----- -----
Net income (loss)............... 1.0% 2.5% (2.6)% 5.6% 6.3% 7.3%
===== ===== ===== ===== ===== =====
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- -------------
Revenue......................... 100.0% 100.0%
Cost of revenues................ 63.5 62.8
----- -----
Gross profit.................... 36.5 37.2
Operating expenses:
Product development and
research.................... 7.5 8.5
Selling, general and
administrative.............. 19.9 18.7
----- -----
Total operating expenses........ 27.4 27.2
----- -----
Operating income................ 9.1 10.0
Other income (expense).......... 0.0 (1.3)
----- -----
Income (loss) before income
taxes......................... 9.1 8.7
Income taxes.................... (1.5) 0.0
----- -----
Net income (loss)............... 7.6% 8.7%
===== =====
Revenues declined slightly in the third quarter of 1998 when one of our key
OEM customers rescheduled certain orders from the third to the fourth quarters
of that year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1999 was $17.6 million versus $14.1 million
at the end of 1998. This increase resulted from positive results from
operations, from the proceeds from debt agreements obtained through Japanese
banks and equity issuances related to employee stock options.
17
Operations changed from a net user of cash of $479,000 in 1998 to a net
provider of cash of $2.9 million in 1999. This improvement resulted from the
positive results from operations coupled with improved accounts receivable and
inventory management and increases in accounts payable and accrued expenses.
We spent $846,000 in 1998 and $529,000 in 1999 to purchase additional
manufacturing equipment and computer equipment related to our internal computer
network. In 1999, we invested $104,000 in new patents.
In 1998, we negotiated an increase in the maximum available under our
Japanese bank line of credit to $1.1 million, none of which was used as of
December 31, 1999. Our U.S. line of credit was unused at December 31, 1999 and
had $3 million of availability as of that date. We also believe there are a
number of sources available for the leasing of equipment. The exercise of
outstanding stock options is a potential source of equity capital that may be
available to us. We believe that our current cash balances, lines of credit and
net proceeds from this offering will allow us to fund our operations for at
least the next 12 months. However, an unforeseen downturn of results in
sufficient magnitude could effect our ability to meet that forecast.
FOREIGN CURRENCY EXCHANGE RISK
The Japanese subsidiary generally makes its sales and collects its accounts
receivable in Japanese yen. To hedge these revenues against future movements in
exchange rates, we will from time to time purchase foreign exchange forward
contracts. Gains or losses on the forward contracts are then offset by gains or
losses on the underlying exposure and consequently a sudden or significant
change of foreign exchange rates would not have a material impact on net income
or cash flows to the extent future revenues are protected by forward currency
contracts. During 1999, the Company entered into foreign currency exchange
contracts in the normal course of business to manage its exposure against
foreign currency fluctuations on revenues denominated in foreign currencies. The
principle objective of such contracts was to minimize the risks and costs
associated with financial and global operating activities. The Company does not
utilize financial instruments for trading or other speculative purposes. There
were no off balance sheet derivatives during 1997 or 1998. The fair value of
foreign currency exchange contracts is estimated by obtaining quotes from
brokers. At December 31, 1999, the Company had foreign currency exchange
contracts outstanding with a notional value of $5.4 million. During fiscal 1999,
the Company recognized $440,000 of losses on foreign currency exchange contracts
which is reflected in revenues in the accompanying consolidated statements of
operations.
YEAR 2000 COMPLIANCE
We have assessed the Year 2000 compliance of each of the products we
manufacture and sell. We believe each of those products and their component
parts is Year 2000 compliant. We have assessed the sensitivity of our internal
manufacturing control, accounting and information management systems and
determined that a majority of our systems have no material Year 2000
deficiencies.
As of March 13, 2000, we have not experienced any problem indicating that
our information technology systems are not Year 2000 compliant. We cannot assure
you that we have successfully identified all of our internal Year 2000 issues.
The failure to identify and address internal Year 2000 issues in a timely
fashion could have a material adverse effect on our business and results of
operations.
In the fourth quarter of 1998, we requested each of our suppliers of
critical parts and services to provide information to us about the entity's
anticipated Year 2000 compliance. To date, we have not received notice of or
become aware of any material Year 2000 deficiency by a significant vendor,
financial institution or customer. As of March 13, 2000, we have not experienced
any problems or received any notification that any major supplier, subcontractor
or customer is not Year 2000 compliant.
18
We have not incurred significant expenditures for software, hardware, and
system related costs in connection with remediation of Year 2000 issues.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by this item is included at pages F-1 to F-15 and
as listed in Item 14 of Part IV.
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 our directors will be included under "Election
of Directors" in our definitive proxy statement for our 2000 annual meeting of
stockholders (the "2000 Proxy Statement") 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 our executive officers is
included under Item 4(A) of Part I of this Report. Information with respect to
compliance with Section 16(a) of the Securities Exchange Act of 1934 is included
under "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2000
Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included under
"Executive Compensation" in the 2000 Proxy Statement 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 will be included under "Security Ownership of Certain Beneficial
Owners and Management" in the 2000 Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management will be included under "Certain Transactions" in the 2000 Proxy
Statement and is incorporated herein by reference.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
PAGE IN THIS
REPORT.
------------
Interlink Electronics, Inc.--Consolidated Financial
Statements................................................ F-1
Report of Independent Public Auditors....................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1999......................................... F-3
Consolidated Statements of Operations for years ended
December 31, 1997, December 31, 1998 and December 31,
1999...................................................... F-4
Consolidated Statements of Stockholders' Equity for years
ended December 31, 1997, December 31, 1998, and
December 31, 1999......................................... F-5
Consolidated Statements of Cash Flows for years ended
December 31, 1997, December 31, 1998 and December 31,
1999...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
20
2. EXHIBITS
The exhibits listed below are filed as part of this report.
EXHIBIT
NUMBER
- ---------------------
3.1 Certificate of Incorporation (incorporated by reference to
Exhibit 3.1b of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form S-1
(Registration No. 333-60380) (the "Form S-1 Registration
Statement")).
3.2 Bylaws (incorporated by reference to Exhibit 3.2a of
Post-Effective Amendment No. 8 to the Form S-1
Registration Statement).
10.1 1993 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1a of the Form S-1 Registration Statement).*
10.2 1996 Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996 (the "1996 Form
10-K")).*
10.3 Description of Registrant's Management Compensation Program
(incorporated by reference to Exhibit 10.4 to the 1996
Form 10-K)
10.4 Lease Agreement dated August 15, 1998 (incorporated by
reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998).
10.5 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).
10.6 Restructuring Agreement, entered into and effective as of
September 7, 1994, by and between InvestAR S.a. r.l.,
Interlink Electronics Europe, S.a. r.l., and IEE Finance,
S.a. r.l.
10.7 Exclusive License and Distributor Agreement between the
Registrant and Interlink Electronics Europe S.a. r.l.,
Amended and Restated as of September 7, 1994.
10.8 Agreement between the Government of Luxembourg, Interlink
Electronics 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.
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule.
- ------------------------
* This exhibit constitutes a management contract or compensatory plan or
arrangement.
(B) REPORTS ON FORM 8-K
Not applicable.
21
SIGNATURES
Pursuant to the requirements of Section 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, in the City of
Camarillo, State of California on March 24, 2000.
INTERLINK ELECTRONICS, INC.
By: /s/ E. MICHAEL THOBEN, III
-----------------------------------------
E. MICHAEL THOBEN, III
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints E. Michael Thoben, III and Paul D. Meyer, and
each of them, his or her attorneys-in-fact and agents, each 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 Report, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and 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 in connection with this
Report, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that any of said attorneys-in-fact
and agents, or his substitute or substitutes, may lawfully 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 below by the following persons on March 24, 2000 on
behalf of the Registrant and in the capacities indicated:
SIGNATURE TITLE
--------- -----
/s/ E. MICHAEL THOBEN, III President, Chief Executive Officer
- -------------------------------------- and
E. Michael Thoben, III Chairman of the Board of Directors
(Principal Executive Officer)
/s/ PAUL D. MEYER Chief Financial Officer and
- -------------------------------------- Secretary
Paul D. Meyer (Principal Financial Officer and
Principal Accounting Officer)
/s/ GEORGE GU Director
- --------------------------------------
George Gu
/s/ EUGENE F. HOVANEC Director
- --------------------------------------
Eugene F. Hovanec
/s/ MERRITT M. LUTZ Director
- --------------------------------------
Merritt M. Lutz
/s/ CAROLYN F. MACDOUGALL Director
- --------------------------------------
Carolyn F. MacDougall
22
INTERLINK ELECTRONICS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Interlink Electronics, Inc.--Consolidated Financial
Statements................................................ F-1
Report of Independent Public Accountants................ F-2
Consolidated Balance Sheets............................. F-3
Consolidated Statements of Operations................... F-4
Consolidated Statements of Stockholders' Equity......... F-5
Consolidated Statements of Cash Flows................... F-6
Notes to Consolidated Financial Statements.............. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1998 and 1999, and the related consolidated statements of
operations, stockholders' 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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, 1998 and 1999, and the results of their
operations and their cash flows for the three years then ended in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 14, 2000
F-2
INTERLINK ELECTRONIC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
----------------------
Current assets: 1998 1999
-------- --------
Cash and cash equivalents................................. $ 3,900 $ 7,492
Accounts receivable, less allowance for doubtful accounts
of $462 and $620 in 1998 and 1999, respectively......... 6,758 7,056
Inventories............................................... 6,796 7,928
Prepaid expenses and other current assets................. 174 173
-------- --------
Total current assets........................................ 17,628 22,649
-------- --------
Property and equipment, net................................. 1,561 1,559
Patents and trademarks, less accumulated amortization of
$640 and $739 in 1998 and 1999, respectively.............. 277 282
Other assets................................................ 111 217
-------- --------
$ 19,577 $ 24,707
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit........................................... $ 132 $ --
Current maturities of long-term debt and capital lease
obligations............................................. 498 518
Accounts payable.......................................... 2,220 3,041
Accrued payroll and related expenses...................... 503 957
Other accrued expenses.................................... 136 489
-------- --------
Total current liabilities................................... 3,489 5,005
-------- --------
Minority interest........................................... -- 31
Long-term debt, net of current portion...................... 1,074 1,261
Capital lease obligations, net of current portion........... 349 163
Commitments and contingencies
Stockholders' equity:
Preferred stock, $5.00 par value (100 shares authorized,
none issued and outstanding)............................ -- --
Common stock $0.00001 par value (15,000 shares authorized,
7,824 and 8,553 issued and outstanding at December 31,
1998 and 1999, respectively)............................ 24,694 26,197
Accumulated other comprehensive income.................... 216 187
Accumulated deficit....................................... (10,245) (8,137)
-------- --------
Total stockholders' equity.................................. 14,665 18,247
-------- --------
$ 19,577 $ 24,707
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Revenues.................................................... $19,153 $22,095 $28,106
Cost of revenues............................................ 11,829 13,954 17,640
------- ------- -------
Gross profit................................................ 7,324 8,141 10,466
Operating expenses:
Product development and research.......................... 1,600 1,416 2,225
Selling, general and administrative....................... 5,555 5,837 5,799
------- ------- -------
Total operating expenses................................ 7,155 7,253 8,024
------- ------- -------
Operating income............................................ 169 888 2,442
------- ------- -------
Other income (expense):
Minority interest......................................... -- -- (31)
Interest income (expense)................................. (152) (127) 35
Other income (expense).................................... 13 (359) (86)
------- ------- -------
Total other income (expense)............................ (139) (486) (82)
------- ------- -------
Income before provision for income taxes.................... 30 402 2,360
Income taxes................................................ -- -- 252
------- ------- -------
Net income.................................................. $ 30 $ 402 $ 2,108
======= ======= =======
Earnings per share--basic................................... $ .00 $ .05 $ .26
Earnings per share--diluted................................. $ .00 $ .05 $ .21
Weighted average shares--basic.............................. 7,146 7,818 8,016
Weighted average shares--diluted............................ 7,530 7,818 10,014
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER
------------------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT INCOME (LOSS) DEFICIT TOTAL
-------- -------- ------------- ----------- --------
Balance, December 31, 1996................ 6,772 $20,768 $(122) $(10,677) $ 9,969
Comprehensive income:
Net income............................ -- -- -- 30 30
Foreign currency translation
adjustment.......................... -- -- (407) -- (407)
-------
Comprehensive loss...................... (377)
Exercise of options..................... 545 1,711 -- -- 1,711
Private placement, net.................. 486 2,150 -- -- 2,150
----- ------- ----- -------- -------
Balance, December 31, 1997................ 7,803 24,629 (529) (10,647) 13,453
Comprehensive income:
Net income............................ -- -- -- 402 402
Foreign currency translation
adjustment.......................... -- -- 745 -- 745
-------
Comprehensive income.................... 1,147
Exercise of options..................... 21 65 -- -- 65
----- ------- ----- -------- -------
Balance, December 31, 1998................ 7,824 24,694 216 (10,245) 14,665
Comprehensive income:
Net income............................ -- -- -- 2,108 2,108
Foreign currency translation
adjustment.......................... -- -- (29) -- (29)
-------
Comprehensive income.................... 2,079
Exercise of options..................... 729 1,503 -- -- 1,503
----- ------- ----- -------- -------
Balance, December 31, 1999................ 8,553 $26,197 $ 187 $ (8,137) $18,247
===== ======= ===== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
Cash flows from operating activities:
Net income................................................ $ 30 $ 402 $ 2,108
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for bad debts............................... 119 110 183
Depreciation and amortization......................... 712 533 630
Minority interest..................................... -- -- 31
Changes in operating assets and liabilities:
Accounts receivable................................. (2,154) (1,184) (481)
Inventories......................................... (1,827) (1,335) (1,132)
Prepaid expenses and other current assets........... (233) 344 1
Other assets........................................ 2 80 (106)
Accounts payable.................................... 789 285 821
Accrued payroll and expenses........................ (464) 286 807
------- ------- -------
Net cash provided by (used in) operating
activities........................................ (3,026) (479) 2,862
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (555) (846) (529)
Costs of patents and trademarks........................... (25) -- (104)
------- ------- -------
Net cash used in investing activities............... (580) (846) (633)
------- ------- -------
Cash flows from financing activities:
Borrowing on credit line.................................. 1,576 548 --
Payments on credit line................................... (1,000) (992) (132)
Borrowings on notes payable to bank....................... 237 880 583
Principal payments on notes payable to bank............... (79) (42) (231)
Proceeds from sales/leaseback............................. 225 332 --
Principal payments on capital lease obligations........... (353) (487) (331)
Proceeds from issuance of common stock, net............... 3,861 65 1,503
Other..................................................... (45) -- --
------- ------- -------
Net cash provided by financing activities........... 4,422 304 1,392
------- ------- -------
Effect of exchange rate changes on cash..................... (407) 745 (29)
------- ------- -------
Increase (decrease) in cash and cash equivalents............ 409 (276) 3,592
Cash and cash equivalents:
Beginning of year......................................... 3,767 4,176 3,900
------- ------- -------
End of year............................................... $ 4,176 $ 3,900 $ 7,492
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 152 $ 127 $ 93
Income taxes paid......................................... 33 1 2
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interlink Electronics, Inc. (the "Company") is engaged in the development of
intuitive interface technologies and solutions for a variety of business and
home applications. Products include interactive remote controls, pen input pads,
wireless keyboards and integrated mouse pointing devices. Force Sensing
Resistors are a key component of the Company's products.
CONSOLIDATION POLICY--The consolidated financial statements include the
accounts of the Company and its 80 percent owned Japanese subsidiary. All
material intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION--Revenue, net of allowances for returns and warranty, is
recorded upon shipment of the products. Royalty revenue is recorded when earned.
FOREIGN CURRENCY TRANSLATION/TRANSACTIONS--The accounts of the Company's
foreign subsidiary have been translated according to the provisions of Statement
of Financial Accounting Standards, or SFAS, No. 52, "Foreign Currency
Translation." Management has determined that the functional currency of its
foreign subsidiary is the Japanese Yen. Thus all foreign translation gains or
losses are reflected as other comprehensive income in the consolidated statement
of stockholders' equity. The foreign subsidiary's balance sheets are translated
into U.S. dollars using the year-end exchange rate except for stockholders'
equity accounts, which are translated at rates in effect when these balances
were originally recorded. Revenues and expenses are translated at average rates
during the year. 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. Cash and cash equivalents are stated at cost, which
approximates market. At December 31, 1998 and 1999, the Company had
$3.0 million and $5.8 million, respectively, of cash in excess of federally
insured limits.
FINANCIAL INSTRUMENTS--The carrying amounts of line of credit, long-term
debt and capital lease obligations approximate their fair value as interest
rates approximate market rates for similar instruments. During 1999, the Company
entered into foreign currency exchange contracts in the normal course of
business to manage its exposure against foreign currency fluctuations on
revenues denominated in foreign currencies. The principle objective of such
contracts was to minimize the risks and costs associated with financial and
global operating activities. The Company does not utilize financial instruments
for trading or other speculative purposes. There were no off balance sheet
derivatives during 1997 or 1998. The fair value of foreign currency contracts is
estimated by obtaining quotes from brokers. At December 31, 1999, the Company
had foreign currency contracts outstanding with a notional and fair value of
$5.4 million. During fiscal 1999, the Company recognized $440,000 of losses on
foreign exchange contracts which is included in revenues in the accompanying
consolidated statements of operations.
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 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
F-7
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997, 1998 and 1999 was $90,000, $98,000 and $99,000, 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 10).
EARNINGS PER SHARE--Earnings per share-basic is based upon the weighted
average number of shares outstanding. Earnings per share-diluted is based on the
weighted average shares outstanding including the dilutive effect of common
stock equivalents. (See Note 8)
ACCOUNTS RECEIVABLE--Increases to the allowance for doubtful accounts
totaled $42,000, $177,000 and $183,000 for the years ended December 31, 1997,
1998 and 1999, respectively. Write-offs against the allowance for doubtful
accounts totaled, $139,000. $67,000 and $25,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
USE OF ESTIMATES--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.
RECENT PRONOUNCEMENTS--In June 1998 and June 1999, the AICPA issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" and SFAS
No.137, which delayed the effective date of SFAS No. 133 and required its
adoption beginning January 1, 2001. The Company will adopt this standard in
January 2001 and is currently analyzing the statement to determine the impact,
if any, on the Company's financial position or results of operations.
RECLASSIFICATIONS--Certain prior year balances have been reclassified to
conform to the current year presentation.
2. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31,
-------------------
1998 1999
-------- --------
Raw material................................................ $3,130 $3,705
Work in process............................................. 618 645
Finished goods.............................................. 3,048 3,578
------ ------
Total inventories........................................... $6,796 $7,928
====== ======
F-8
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
DECEMBER 31,
-------------------
1998 1999
-------- --------
Furniture, machinery and equipment........................ $ 3,956 $ 4,450
Leasehold improvements.................................... 177 212
------- -------
4,133 4,662
Less accumulated depreciation and amortization............ (2,572) (3,103)
------- -------
Property and equipment, net............................... $ 1,561 $ 1,559
======= =======
Depreciation and amortization expense charged to operations amounted to
$534,000, $436,000 and $531,000 for the years ended 1997, 1998, and 1999,
respectively. Included in property and equipment are assets financed under
capital leases with a net book value of $656,000 and $412,000 at December 31,
1998 and 1999 respectively.
4. LINES OF CREDIT
The Company maintains a domestic revolving line of credit with a maximum
amount of $3,000,000, none of which had been drawn as of December 31, 1999. The
line carries an interest rate of the bank's interest rate (8.5% at December 31,
1999) and matures in May 2000. The line 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, 1999.
The Company's Japanese subsidiary maintains an unsecured line of credit with
a bank with a maximum amount of $1,124,000, of which none was drawn at
December 31, 1999. This line carries an interest rate of 1.3%.
Selected information regarding short-term borrowings is as follows (in
thousands):
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
Average daily borrowings.................................... $ 594 $ 85
Maximum daily borrowings.................................... $1,124 $136
Weighted average interest rate during year.................. 1.3% 1.3%
5. LONG-TERM DEBT AND CAPITAL LEASES
BANK LOANS--The Company's Japanese subsidiary, Interlink Electronics, KK,
maintains unsecured loans with four banks. The loans carry a weighted average
interest rate of 2.6% and are payable in monthly installments through the year
2005. The combined balance outstanding as of December 31, 1998 and 1999 was
$1,244,000 and $1,596,000, respectively.
CAPITAL LEASE OBLIGATIONS--The Company had an equipment lease financing
agreement for the purchase of equipment. Terms include a standard payment
schedule of up to 48 months at an effective interest rate of 8.35%.
F-9
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
At December 31, 1999, scheduled maturities of long-term debt and capital
lease obligations for the next five years and thereafter are as follows (in
thousands):
DEBT LEASES
-------- --------
2000........................................................ $ 366 $203
2001........................................................ 402 120
2002........................................................ 383 52
2003........................................................ 324 --
2004........................................................ 155 --
Thereafter.................................................. 49 --
------ ----
1,679 375
Less amount representing interest........................... (83) (29)
------ ----
Present value of minimum payments........................... 1,596 346
Current portion............................................. (335) (183)
------ ----
Long term portion........................................... $1,261 $163
====== ====
6. CAPITALIZATION
PREFERRED STOCK--The Company is authorized to issue up to 100,000 shares of
Preferred Stock. As of December 31, 1999, none were outstanding. In the future,
the Preferred Stock may be issued in one or more series with such rights and
preferences as may be fixed and determined by the Board of Directors.
COMMON STOCK--The Company is authorized to issue 15,000,000 shares of Common
Stock.
On March 20, 2000, the Company effected a three-for-two stock split by means
of a stock dividend to its stockholders. All share information in these
financial statements give retroactive effect to the stock split.
7. STOCK OPTIONS
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
3,184,150.
F-10
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
Information concerning stock options under the plans is summarized as
follows (in thousands, except per share information):
1997 1998 1999
-------------------- -------------------- --------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- --------- -------- ---------
Outstanding beginning of year............. 2,148 $3.50 2,122 $3.75 3,082 $1.83
Granted................................... 651 4.33 3,729 2.14 583 3.71
Exercised................................. (545) 3.14 (21) 3.09 (729) 2.06
Forfeited and expired..................... (132) 3.75 (2,748) 3.75 (55) 2.21
----- ----- ------ ----- ----- -----
Outstanding end of year................... 2,122 $3.75 3,082 $1.83 2,881 $2.19
===== ===== ====== ===== ===== =====
Exercisable end of year................... 1,326 $3.67 1,474 $1.83 1,817 $2.03
===== ===== ====== ===== ===== =====
The following table summarizes information about options outstanding at
December 31, 1999 (in thousands, except per share information):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
WTD. AVG.
REMAINING WTD. AVG. WTD. AVG.
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
- ------------------------ -------- ----------- --------- -------- ---------
$1.83.......................................... 2,343 3.7 $1.83 1,608 $1.83
3.08-3.83...................................... 415 4.1 3.21 173 3.19
5.50........................................... 123 4.7 5.50 36 5.50
----- ----- ----- ----- -----
2,881 3.8 $2.19 1,817 $2.03
===== ===== ===== ===== =====
The weighted average fair value at date of grant for options granted during
1997, 1998 and 1999 was $2.35, $1.33 and $1.91 per option, respectively. The
fair value of options at the date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
1997 1998 1999
-------- -------- --------
Expected life (years)...................................... 4 4 4
Interest rate.............................................. 6.3% 6.0% 5.8%
Volatility................................................. 64% 79% 60%
Dividend yield............................................. 0% 0% 0%
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
its stock option plans. Accordingly, no compensation cost has been recognized
for these plans. Had compensation cost for the Company's plans been determined
based on the fair value at the grant dates for awards under the plans consistent
with the
F-11
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
method of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company
would have recorded stock-based compensation expense as follows:
1997 1998 1999
-------- -------- --------
Net income (loss)--as reported.............................. $ 30 $ 402 $2,108
--pro forma.................................. (1,170) (1,198) 294
Diluted earnings (loss) per share--as reported.............. $ .00 $ .05 $ 0.21
--pro forma..................... (.16) (.15) .03
8. EARNINGS PER SHARE
For all periods presented, per share information was computed pursuant to
provisions of SFAS No. 128 "Earnings Per Share." The computation of earnings per
share--basic is based upon the weighted average number of common shares
outstanding during the periods presented. Earnings per share--diluted also
includes the effect of common shares contingently issuable from options and
warrants (in periods which they have a dilutive effect).
Common stock equivalents are calculated using the treasury stock method.
Under the treasury stock method, the proceeds from the assumed conversion of
options and warrants are used to repurchase outstanding shares, using a yearly
average market price.
The following table contains information necessary to calculate earnings per
share (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Weighted average shares outstanding................... 7,146 7,818 8,016
Effect of diluted securities;
options and warrants................................ 384 --(1) 1,998
----- ----- ------
Weighted average shares--diluted...................... 7,530 7,818 10,014
===== ===== ======
- ------------------------
(1) The diluted share calculation result was anti-dilutive. Thus, the primary
weighted average shares were used.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company leases its main facility and certain equipment
under operating leases expiring through 2003. Rent payments totaled
approximately $236,000, $239,000 and $357,000 for 1997,
F-12
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
1998 and 1999, respectively. Minimum lease commitments at December 31, 1999 are
summarized as follows (in thousands):
2000........................................................ $ 393
2001........................................................ 376
2002........................................................ 270
2003........................................................ 168
------
$1,207
======
LEGAL MATTERS--From time to time, the Company is involved in various legal
actions which arise in the ordinary course of business. The Company does not
believe that losses incurred, if any, will have a significant impact on the
Company's financial position or results of operations.
10. INCOME TAXES
As of December 31, 1999, the Company had federal income tax net operating
loss carryforwards of approximately $9.8 million expiring through 2014.
The Company has research and development tax credit carryforwards of
approximately $270,000 and $171,000 at December 31, 1998 and 1999, respectively.
The Company has total net deferred tax assets as follows (in thousands):
1998 1999
-------- --------
Deferred tax assets:
Net operating loss carryforward........................... $3,976 $3,354
Credits................................................... 234 171
Accruals.................................................. 99 120
Reserves.................................................. 336 465
Other..................................................... 44 (31)
------ ------
Total deferred tax assets................................. 4,689 4,079
Valuation allowance......................................... (4,689) (4,079)
------ ------
Total..................................................... $ -- $ --
====== ======
A valuation allowance is recorded if the weight of available evidence
suggests it is more likely than not that 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 1998 and
1999.
F-13
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999 are as follows (in thousands):
1997 1998 1999
-------- -------- --------
Current taxes:
Federal............................................... $ -- $ -- $ --
State................................................. -- -- --
Foreign............................................... -- -- 252
---- ---- ----
-- -- 252
Deferred taxes:
Federal............................................... -- -- --
State................................................. -- -- --
---- ---- ----
-- -- --
---- ---- ----
Provision for income taxes.............................. $ -- $ -- $252
==== ==== ====
Differences between the provision for income taxes and income taxes at
statutory federal income tax rate for the years ended December 31, 1997, 1998
and 1999 are as follows (in thousands):
1997 1998 1999
-------- -------- --------
Income taxes at the statutory federal rate............. $ 10 $ 137 $ 802
State income taxes, net of federal income tax effect... 2 24 142
Foreign taxes at rates different than U.S. taxes....... -- -- 12
Utilization of net operating losses.................... (12) (161) (704)
---- ----- -----
$ -- $ -- $ 252
==== ===== =====
11. REVENUE INFORMATION
EXPORT SALES--The following table shows the breakdown of the Company's
export sales as a percentage of consolidated revenues.
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Asia............................................. 26% 59% 62%
Europe and other................................. 13% 11% 7%
MAJOR CUSTOMERS--In 1997, sales to one customer in the computer industry
constituted 13% of the Company's sales. In 1998, sales to three customers in the
computerized projector industry exceeded 10% of the Company's sales. Their sales
constituted approximately 15%, 14% and 10%. In 1999, three customers in the
computerized projector industry exceeded 10% of the Company's sales. Sales to
these customers constituted approximately 14%, 12% and 11%, respectively, of
total sales.
F-14
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION
The Company has two separately managed business segments, (i) Business
Communications and (ii) Specialty Components and Other. The accounting policies
of the segments are the same as those described in the significant accounting
policies however, the Company evaluates performance based on gross profit. The
Company does not allocate any other income, expenses or assets to these
segments. Reportable segment information for the years ended December 31, 1997,
1998 and 1999 is as follows (in thousands):
SPECIALTY COMPONENTS
BUSINESS COMMUNICATIONS AND OTHER TOTAL
----------------------- -------------------- --------
1997
Revenue................................... $10,422 $ 8,731 $19,153
Gross profit.............................. 3,832 3,492 7,324
1998
Revenue................................... $13,547 $ 8,548 $22,095
Gross profit.............................. 4,722 3,419 8,141
1999
Revenue................................... $17,693 $10,413 $28,106
Gross profit.............................. 6,139 4,327 10,466
F-15
EXHIBIT INDEX
EXHIBIT
NUMBER
- ---------------------
3.1 Certificate of Incorporation (incorporated by reference to
Exhibit 3.1b of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form S-1
(Registration No. 333-60380) (the "Form S-1 Registration
Statement")).
3.2 Bylaws (incorporated by reference to Exhibit 3.2a of
Post-Effective Amendment No. 8 to the Form S-1
Registration Statement).
10.1 1993 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1a of the Form S-1 Registration Statement).*
10.2 1996 Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996 (the "1996 Form
10-K")).*
10.3 Description of Registrant's Management Compensation Program
(incorporated by reference to Exhibit 10.4 to the 1996
Form 10-K)
10.4 Lease Agreement dated August 15, 1998 (incorporated by
reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998).
10.5 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).
10.6 Restructuring Agreement, entered into and effective as of
September 7, 1994, by and between InvestAR S.a. r.l.,
Interlink Electronics Europe, S.a. r.l., and IEE Finance,
S.a. r.l.
10.7 Exclusive License and Distributor Agreement between the
Registrant and Interlink Electronics Europe S.a. r.l.,
Amended and Restated as of September 7, 1994.
10.8 Agreement between the Government of Luxembourg, Interlink
Electronics 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.
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule.
- ------------------------
* This exhibit constitutes a management contract or compensatory plan or
arrangement.