Item 1. Business
Interlink Electronics, Inc. (the "Company" or "Interlink") designs, manufactures and sells input devices for computers and other electronic products based on the Company's portfolio of proprietary technologies, including its Force Sensing Resistor ("FSR") technology. The Company sells a full spectrum of value-added products and components ranging from FSR sensors, to modules incorporating one or more FSR sensors and related electronics mounted on a printed circuit board ("PCB"), to complete products such as remote controls ready for use by an end-user, which Interlink offers on a branded or generic basis. Interlink also designs, manufactures and sells a broad variety of non-computer products ("Custom Products") based on its FSR technology. Interlink's customers include the leading computer, computer peripheral and presentation device manufacturers, such as NEC, Sharp, Toshiba, In Focus Systems, IBM, Sony and Logitech.
Input Devices
The original IBM personal computer and others built on that model used a text-based operating system in which the user input data to the computer using a keyboard not substantially different from the keyboard found on a typewriter. As computer systems have moved from textbased to graphics-based user interfaces, the keyboard has been supplemented and, in some applications, replaced by alternative input devices such as mice, trackballs, pointing sticks, touchpads, touchscreens and a variety of other single or multipurpose input devices designed to input, alter or transfer data other than text. At the same time, the range and complexity of electronic devices available for both household and business use has increased dramatically, thus increasing the complexity of the choices afforded to the user. This has created a market for input devices, such as television remote controls, that allow the user of the device to select from among
the many options available. For example, the traditional television had an on-off switch that often doubled as a volume control, a channel selector and a series of rarely used knobs that adjusted picture quality. The remote control for a modern television set and related electronics such as VCRs, DVD players and the like may be required to select a signal from any of a variety of sources, determine whether the program is to be selected for immediate or deferred viewing, choose from several audio playback options, select the language in which the chosen program will be viewed, determine whether to watch or suppress subtitles, fast forward or rewind the program and enable or disable the audio channel, all in addition to selecting the channel and adjusting volume. The rapid development of internet resources, video games and the convergence of computer and television applications have also added to demand for complex devices that allow the user to select from a menu of choices and/or to control the function of complex electronic devices.
In the world of commerce, the pervasive use of electronic communication and the advent of the "paperless office" have led to a need for computer equivalents to traditional hard copy documents. For example, input devices allowing the user to convert handwritten data either to computer text (as with some personal digital assistants "PDA's") or to graphic representations (as with signature input) are rapidly becoming standard elements of business communication and data processing. Electronic systems such as presentation devices, complex telecommunication systems and specialized audiovisual equipment present the same complex range of options as do their consumer counterparts and demand the same complexity in input devices.
All of these developments in the computer and communications industries have created a rapidly expanding market for input devices of many different types, from traditional mice or pointing sticks installed in or wired to a computer to remote input devices using infrared signals to control a computer, television, presentation device, videoconferencing system or other electronic product. Not only is the market for such devices expanding in absolute terms but the variety and complexity of the various devices has grown as the devices themselves have become more varied and more complex. It is now common in both the home and the business environment for several different electronic systems to be used at the same time, often causing their control devices to compete with one another.
The Company believes that it has developed a portfolio of technologies that is particularly well suited to the input device market. The Company's FSR technology is particularly applicable because of its inherent ability to provide accurate control of both cursor movement and speed without any requirement for movement of the operator other than simple finger or thumb pressure. New computer technologies, such as computerized presentations, multimedia software, and the Internet, also require or support pointing and other non-text-based interface devices. The Company's force sensing technology, featuring a thin sensor profile, zero travel, and broad dynamic range characteristics, allows for the design of miniature joysticks, touchpads and pressure buttons offering a user-friendly, cost-effective pointing solution and data entry method.
The Company has developed a number of technologies including its proprietary VersaPoint and Semiconductive touchpad technologies. The VersaPoint technology consists of a
four-zone FSR sensor array and proprietary software and firmware that control cursor direction and speed. In November 1996 the Company introduced its Semiconductive touchpad technology, VersaPad. With proprietary software and firmware, the user controls cursor direction and speed by sliding their fingertip or pen across the touchpad surface. Clicking is performed by separate buttons or by tapping the touchpad surface. The Company has received a design patent for the integration of a thumb-activated "mouse" button combined with an index finger activated "Trigger" click button, trade named "ClickTrigger". In addition the Company has filed patent applications for proprietary infrared communication protocols. See "Business - Technology."
Input Devices - Products
OEM Interactive Remote Controls
With the advent of computer driven presentation systems and software, the larger screen size of multimedia computer systems and the greater use of televisions for Internet access and other computer related functions, a need has been created for wireless remote controls with computer mouse functionality. To address this need Interlink has created a line of interactive remote controls ("IRC") to be sold on an OEM basis. All these products use infrared technology, incorporate a VersaPoint pointing button to control the cursor and the Company's patented ClickTrigger design for "clicking". These products range from a simple remote with only VersaPoint and ClickTrigger technology to remotes with 30 function keys to control various functions of the computer and/or presentation projector. Interlink had developed standard case designs that allow for easy customization of the button configuration and function by the OEM customer. Examples of OEM customers purchasing IRC's from Interlink include InFocus Systems, NEC, Sharp and Toshiba.
Depending on the OEM's requirement, the Company may sell an accompanying receiver that, by cable, attaches to the OEM's central processing unit (CPU) and receives the signal from the remote control. In most cases however, the receiver electronics are integrated into the CPU.
To date the preponderance of Interlink's IRC's have been sold to the presentation projector manufacturer market, however the Company believes a substantial future market opportunity lies with video conferencing, "WebTV" type systems and other systems targeted for home internet access.
OEM Keyboard Integration
With the proliferation of icon-based computer operating systems such as Microsoft Windows and the Apple Macintosh, computer mouse driven systems have now moved into many environments where a traditional mouse is impractical. Examples include mobile computing and industrial environments. In addition, many keyboard manufacturers see the value of incorporating the mouse functions directly into the keyboard to save the end-user the expense and inconvenience of a separate peripheral. Because of the thin profile of an FSR, the Company's integrated pointing solutions can be built into keyboards easily. In addition the exceptional ruggedness of the FSR technology makes it an ideal solution for harsh environments.
The Company offers several solutions to OEM's for keyboard integration:
- - The MicroJoystick which is similar to the "eraser head" type pointing device most notably found in IBM's ThinkPad notebook computer.
- - The MicroModule that uses a circular rubber button as the actuator and is offered mounted to a PCB assembly.
- - The OEM VersaPad which utilizes the Company's patented Semiconductive touchpad technology.
Depending on the OEM's expertise, each of these solutions can be sold with just the sensor and a microcontroller with the Company's proprietary firmware or as a full module with the actuator, sensor and microcontroller mounted on a PCB assembly.
Historically Interlink's principal OEM integrated pointing product was its MicroJoystick, which it sold primarily to manufacturers of notebook computer keyboards and to a lesser extent manufacturers of aftermarket keyboards. Within the past two years the notebook computer market has transitioned to touchpads as the dominant choice for integrated pointing devices. As a result the Company has developed the OEM VersaPad. The OEM VersaPad differs from competitive touchpad products in that it uses pressure as its method of activation. By contrast, touchpads using capacitive technology (the most widely used touchpad technology) require an electrically conductive object to touch the pad for activation. Since human skin is conductive, the finger is the primary method of using a capacitive touchpad. However, the VersaPad can be used when it detects pressure from any source. Thus a gloved finger will work as will a common pen or stylus. With the advent of reliable handwriting recognition software, Interlink expects to capitalize on the VersaPad's ability to receive pen input to create a competitive advantage. Interlink will market the VersaPad to notebook computer manufacturers, aftermarket keyboard manufacturers and manufacturers of specialty peripherals that require pen input capability as well as standard mouse functions.
Historically the Company has been one of the dominant suppliers of integrated pointing devices for the rugged and industrial computing markets. The FSR characteristics of environmental stability and ability to be sealed make it an optimal solution for these markets. These FSR characteristics plus the rubber overlay of the MicroModule make it the Company's most popular products for these markets. To a lesser extent, the Company also sells the MicroJoystick, the VersaPad and an OEM version of its DuraPoint ruggedized pointing device to these markets.
Branded Products
Approximately 85% of the Company's revenues are generated from OEM sales. However, in order to generate OEM sales, the Company has often found it expedient to develop a complete, functional prototype or sales sample demonstrating the Company's unique technology. In many cases the Company has chosen to further develop these products into stand-alone peripheral products that are available for sale either as branded or generic products.
The Company is continuing to develop distribution channels for its branded products. Current distribution consists of mass merchandiser outlets, including Best Buy, Inc., Fry's Corporation, and distributors such as Ingram Micro, catalogs and specialty resellers targeting corporate accounts. Marketing to these channels is accomplished by direct sales through Company employees and a network of independent sales representatives. In Europe the Company uses distributors such as Ingram Micro.
The Company's stand-alone peripheral products, referred to below by their branded names, are:
VersaPad. In September 1997, the Company shipped VersaPad, a stand-alone touchpad peripheral, incorporating the Company's Semiconductive technology. Similar to touchpads found in most notebook computers today, cursor control is performed by simple finger pressure on the touchpad surface. The VersaPad also includes several function bars adding many productivity enhancing tools.
VersaPoint Wireless Keyboard. In June 1997, the Company shipped the VersaPoint Wireless keyboard. With an infrared range of 50 feet, the VersaPoint keyboard has all the functions of a wired keyboard. It also incorporates the Company's touchpad technology and its unique design is especially well suited for use on one's lap.
RemotePoint. In order to satisfy the need for a cordless, remote pointing device to control desktop and conference room computer-based presentations, the Company introduced its RemotePoint product in August 1994. The RemotePoint device is a handheld, infrared cordless cursor control device that has an effective range of up to 40 feet.
RemotePointPlus. In Fall 1995, Interlink introduced its RemotePoint Plus product, a remote control computer cursor controller. With programmable buttons (enabling it to handle dozens of different user-defined functions) and a range of approximately 40 feet, it is designed to meet the needs of the most sophisticated presenters.
ProPoint. To address the presentation and multimedia market, the ProPoint device is a handheld corded pointing device used to control cursor movement and function selection. The ProPoint product comes with 6 feet of cable and, with optional additional connecting cables, its range can be extended to up to 12 feet, making it useful not only as a personal cursor control device, but also as a presentation assistant for conference room size presentations.
DeskStick. Interlink's desktop mouse replacement, DeskStick, couples the advanced pointing stick technology previously available only in notebook computers with a very attractive price point, designed to meet the needs both of first time mouse users, and of those looking for a unique replacement mouse.
SuperMouse. The Company designed and developed the SuperMouse device as an aftermarket mouse for the commercial and consumer markets. It is targeted primarily at the notebook
and other portable computers because of its small size and its versatility (it can be used as a portable, desktop, or handheld mouse).
DuraPoint. To address the needs of industrial users, in February 1993, Interlink began shipping its DuraPoint ruggedized pointing device. To the best of the Company's knowledge, its DuraPoint device was the first cursor control device designed to NEMA 4X, 6P, and 13 standards (industry association standards relating to the ability of an electronic device to operate under adverse environmental conditions). The DuraPoint device can withstand a variety of harsh environments, such as direct water spray, debris, cleansers or even prolonged submersion. Sales channels consist primarily of industrial hardware and software distributors and bundling arrangements with industrial and medical equipment manufacturers.
FreedomWriterPRO. In December 1998, the Company began shipping FreedomWriterPRO. The product is a remote control that includes both the Company's semiconductive touchpad and RemoteLink Technologies. Using the touchpad's pen input capabilities, a presenter can now draw or annotate on a slide from a computerized presentation. Through software, the product can convert handwriting to digital text; a functionality the company plans to market to the video conference and home internet access markets.
Custom Applications
The Company's Custom Applications Product Line consists of design, engineering and product development teams that incorporate its proprietary technology into specific custom products for individual OEM customers. Interlink's force sensing technology addresses many applications in this area. Because of the required design and development time, sales cycles typically range from four to 18 months and can be considerably longer. On the other hand, the result of a successful custom sale is usually a product that is regularly reordered by the customer over a considerable period of time.
The principal advantages of force sensing technology that apply to the Company's other business areas also apply to its Custom Applications. The ability to produce sensors in a wide variety of shapes and sizes, detection of both the location and the intensity of pressure applied to the sensor, the zero-travel characteristic and the system's resistance to environmental damage are all attractive features for the Company's Custom Applications. In some cases the Company's customers have determined that force sensing technology provides the only currently available solution to their sensor requirements.
The Company has identified and is currently working with a variety of Custom Applications customers that are presently concentrated in the industrial and medical device industries: for example, it has developed a fail-safe sensor system for Varian Associates for use in a medical imaging device. As the heavy medical imaging device is lowered into contact with the patient, the FSR sensor functions as a safety bumper to prevent injury from excessive pressure of the device on the patient by halting the movement of the device when the selected level of pressure is reached. FSR sensors developed by Interlink for Baxter Healthcare Corporation are incorporated in an infusion pump where the FSR sensor functions as a safety device to ensure
proper placement of the intravenous tube in the pump head.
Sales and Marketing
Interlink employs a direct sales team of five people in the U.S. and four in Japan. Each sales team is supported by inside sales personnel, product managers and application engineers. For the branded products, the Company also uses manufacturer representatives and distributors, covering the U.S. and Europe.
For OEM sales, the Company uses public relations activity, some 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, the Company 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 six to 18 months from the initial visit to the first shipment. However, once obtained, an OEM customer usually offers the Company a more predictable revenue stream, potential for future sales through follow-on products and lower on-going sales and marketing costs.
For branded products, the Company uses public relations, third-party product reviews and limited direct advertising to generate customer awareness. Direct sales calls are made to potential distributors and specialty resellers. Manufacturer representatives call on potential retail accounts. Once a customer relationship is established, the Company supports these customers with co-op advertising, sales "spiffs", end-user rebates, etc. As necessary, branded customers may also negotiate cash discounts, extended billing or right of return privileges.
Technology
Interlink has developed a diverse portfolio of technologies related to a variety of remote and wired input devices. These technologies include the basic FSR and Semiconductive touchpad technologies and refinements thereon, the ClickTrigger technology and proprietary infrared communication protocols. In general, Interlink seeks to develop new technologies in order to enhance and create competitive advantages for its products rather than to develop entirely new products.
FSR Technology. Force sensing technology transforms physical pressure applied to a sensor into a corresponding electronic response. Interlink's FSR sensors can react to pressure when applied by any means - through human touch, a mechanical device, a fluid or a gas. With supporting electronics, an FSR sensor can start, stop, intensify, select, direct, detect or measure a desired response.
FSR sensors measure relative pressure and, depending on their configuration and with supporting electronics, can measure the location at which the pressure is applied. A "basic" FSR sensor 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. 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. This type of device is useful for functions such as handwriting input or computer cursor control.
Because FSR sensors can be as thin as one-hundredth of an inch, they are particularly well suited for use where space is a critical issue, as in laptop and sub-laptop keyboards. FSR sensors have also demonstrated impressive reliability, retaining their performance through tens of millions of actuations, even in adverse environments involving heat, moisture, and chemical contamination.
ClickTrigger. In October 1997, the Company received patent protection for its ClickTrigger remote control design. With the ClickTrigger configuration, the user controls the cursor by thumb pressure on the round button on the top of the remote control and operates mouse clicks by squeezing the mouse button underneath the remote control, similar to the trigger on a gun. This configuration allows for one-handed "click and drag" mouse functions. This design is already an industry standard and the Company is actively pursuing license arrangements.
RemoteLink Technology. As a result of developing sophisticated remote controls for the presentation projector industry, the Company has become a leader in infrared communication innovation. In 1997 the Company introduced the VersaPoint wireless keyboard - the only wireless keyboard that communicates both keyboard and touchpad mouse protocols effectively. Late in 1997 the Company announced RemoteLink, a new infrared protocol. This unique technology allows for multiple users simultaneously, full two-way communication and high bandwidth. Potential products are wireless simultaneous game controllers, wireless infrared telephones, wireless speakers and wireless handwriting recognition capable PDA's.
International Operations
In 1994, the Company acquired an 80% ownership interest in Interlink Electronics K.K. ("IEKK"), a Japanese company which distributes and performs value added services regarding the Company's products in Japan. The president of IEKK is a former senior executive with Mitsubishi Petrochemical Company, and has a number of years of experience working with Interlink and its products. In 1998, IEKK's operations accounted for approximately 50% percent of Interlink's consolidated revenues.
Licensees
International Electronics & Engineering In September 1994, Interlink entered into several agreements with InvestAR, S.a.r.l., pursuant to which Interlink transferred its entire ownership interest in Interlink Electronics, Inc. Europe ("IEE"), a Luxembourg-based joint venture owned by Interlink and InvestAR, to InvestAR in exchange for the 510,775 shares of Interlink common stock then held by InvestAR. These shares, representing approximately 13.3%
of the Company's then-outstanding Common Stock, were returned to the Company, and reverted to the status of authorized, but unissued, shares. In addition to the stock transfer, the agreements also provided for continued technological cooperation between the Company and IEE, and for the payments of technology license royalties by IEE to the Company for sales by IEE outside of Europe of certain FSR-based automotive safety related sensors. Royalty revenues from IEE (which changed its name in 1995 to International Electronics & Engineering) were not material in 1996, 1997 or 1998.
Toshiba Silicone. In an agreement entered into in 1989, Toshiba Silicone Co., K.K. licensed from the Company the right to use Interlink's Force Sensing Resistor technology in applications for use with musical instruments. Thus far, the royalties from this license have not been material to the Company's revenues.
ClickTrigger. In 1998, the Company entered into license agreements for the ClickTrigger remote control design with Panasonic, Seiko Epson, and Sanyo. Each licensee pays a quarterly per-unit license fee. The Company believes additional companies also infringe on its ClickTrigger patents and is actively pursuing these companies to enter into license agreements or to cease use of the proprietary design.
Manufacturing
Production of FSR sensors is a relatively inexpensive and non-polluting process. The flexibility of the process allows Interlink to take advantage of changing market opportunities. FSR sensors are manufactured using screen printing techniques. All proprietary aspects of the manufacturing process are maintained in-house at Interlink, and at IEE, its European licensee, to maintain quality and protect the force sensing technology.
While electronic screen printing is a common process in various technology industries, the quality and precision of printing required to make high-quality FSR sensors greatly exceeds the standards applicable in most other industries. The Company has developed significant expertise in the manufacture of FSR sensors, and believes this experience would be difficult to replicate over the short term. In the FSR manufacturing process, printed sheets of FSR semiconductor material and the corresponding conductor patterns are laminated to form the FSR sandwich structure using inexpensive sheet adhesives. The assembled sheets are die cut and suitable connectors are attached.
Readily available materials (substrates, films, polymer thick film, inks) developed for other industries have proved unsuitable for the FSR manufacturing process. Interlink has worked closely with a small group of manufacturers to create new materials optimized for FSR usage; most of these materials are supplied to the Company on an exclusive basis. The raw materials are processed into their final form on site, using proprietary material and methods.
The Company maintains agreements with several computer chip manufacturers pursuant to which they provide microcontrollers to it at guaranteed prices for use in or with Interlink's pointing devices. From time to time in the past, there have been unanticipated shortages in the
number, and/or delays in the availability, of microcontrollers required in the Company's products. No past shortage has had a material effect upon the Company's ability to supply its products in commercial quantities. While the Company has taken a number of steps, including the development of additional chip suppliers, in order to attempt to reduce its prospective exposure, there can be no guarantee that a future chip shortage will not occur, and that, if one occurs, that it would not have an adverse effect upon the Company's operations.
Interlink manufactures FSR sensors in its facility in Camarillo, California. This facility is capable of operating on a single, double, or triple shift basis, as volume dictates. The Company acquires the components of its FSR-based sensors from a number of sources within the United States. Some components for its VersaPoint products as well as the manufacture of some of these products are sourced from manufacturing companies located in the Far East; their cost and availability are dependent upon a number of factors beyond the Company's control, including future currency exchange rates, and future political conditions in the countries in which the vendors are located.
Research and Product Development
The research group continues to expand the Company's intellectual properties. The Company regularly files patent applications and continuations thereof to cover both new and improved methods of manufacturing FSR sensors and new, non-FSR based technologies developed by the Company.
Product development for the Company is focused on developing custom, standard, and modified standard products. Custom and modified standard products are developed very selectively, when they are adequately funded, and when there are obvious long-term strategic benefits to the Company. Custom and modified standard products are primarily developed to meet the requirements specified by OEM customers for their unique applications. Standard or branded product requirements are established using market analysis, evaluation and assessment to determine product differentiation and acceptance. Branded products are funded as defined by the Company's business plan, and developed to contribute to the Company's short and long-term business objectives. The Company's VersaPoint technology is used to develop standard products, primarily for computer pointing devices serving the OEM, consumer and industrial markets.
Competition
In the computer pointing device market, the Company competes with a number of sellers, including Microsoft, IBM, and Logitech (although Logitech is also a customer of the Company for some components (pointing sticks) of its products). A number of other companies manufacture touchpads, pointing sticks or remote control input devices, for a wide variety of applications. Many of the Company's competitors have greater financial and technological resources than does the Company, and may also have established relationships with customers, and enjoy economies of scale, that afford them a competitive advantage.
In a variety of applications incorporating FSR sensors into complete products, the
Company may also compete with the in-house capabilities of its larger customers to design and manufacture all or portions of FSR products. In addition, besides the major previously existing computer cursor pointing technologies (pointing sticks, mice and trackballs), touchpad technology has gained increased market acceptance over the last few years; several computer manufacturers which formerly used OEM pointing sticks have switched to OEM touchpads.
The Company's FSR sensors compete with comparable sensors produced using a variety of other technologies. For applications that require only "on/off" capability without any force sensing capability, a wide variety of sensors exist, including membrane switches, capacitive sensors and mechanical switches, that compete with the Company's sensors in particular applications. Other kinds of "force sensing" technology include strain gauges, piezo sensors and conductive rubber. Each of these technologies have advantages and disadvantages that make it an attractive solution in certain applications and not in others. Strain gauges are extremely accurate but relatively expensive. Piezo sensors are generally comparable in price and accuracy to FSR sensors but measure instantaneous impact rather than force over a continuing period. Conductive rubber is a widely established technology but deteriorates more rapidly over time than do other force sensing technologies. The Company seeks to identify and pursue applications in which force sensing technology is a particularly attractive solution. Most sensors that compete with the Company's FSR sensors are widely available from a variety of sources.
Patents and Proprietary Rights
Aspects of Interlink's technology are protected by more than 65 patents issued or pending in the United States and abroad, as well as trade secret and proprietary knowledge. Products incorporating the Company's force sensing technologies are sold under trademarks issued or pending in the United States and various other countries. Of the initial FSR patents granted (those covering the use of an uneven surface to produce variable resistance), the first of these patents expired on February 9, 1999. The Company has continued its efforts to improve the design, formulation, and manufacture of its sensors; some of these improvements are maintained as trade secrets, while U.S. and foreign patents have been applied for with respect to others. Other patents, covering various apparatus, processes and methods related to the force sensing technology will expire between 1999 and 2015. Various corresponding foreign patents will expire between 1999 and 2015. Patents covering various materials and processes used in the Company's current generation of products, as well as new devices for angle and displacement sensing, were granted during 1995 by the U.S. Patent Office. The Company has also filed U.S. and foreign patent applications regarding the design, and several key operating features, of its remote control products.
While the Company believes its patents afford it some competitive advantage, such protection is limited by the resources available to the Company to identify potential infringements and to defend its rights against infringement. Furthermore, the extent of the protection offered by any patent is subject to determinations as to its scope and validity that would be made only in litigation. Therefore, there is no assurance that the Company's patents will afford meaningful protection from competition.
The Company has also developed certain manufacturing processes and other methods of
applying its patented technology that it protects as trade secrets. The Company believes these trade secrets are important for the effective and efficient use of the patented technology and that a competitor with a right to use the patented technology would be required to develop comparable manufacturing and other processes to compete effectively with the Company. The Company requires its employees to sign nondisclosure agreements and seeks to limit access to sensitive information to the greatest practical extent.
The Company actively defends its patents. When a potential infringing company is identified, Interlink first seeks to notify the company of Interlink's patent rights. Historically, the Company has been successful in negotiating license arrangements. If an agreement cannot be reached, the Company will pursue legal remedies. In June 1996, the Company brought an action in the United States District Court in the Central District of California against InControl Corporation ("InControl") for infringement of certain FSR patents. The Company seeks a court order enjoining InControl from further infringement. In February 1997, the court granted summary judgment in favor of InControl and dismissed the Company's action. The Company is currently appealing the decision and the Company does not believe the outcome of this action will have a material effect on 1999 results.
Employees
The Company had ninety-two full-time employees in the United States as of December 31, 1998; eighty-nine at its corporate offices and manufacturing facilities (including five members of management), and three sales managers stationed at regional offices. Its Japan subsidiary had twenty-eight employees.
Item 2.
Item 2. Properties
The Company's corporate offices and 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. The Company believes that this facility will be adequate to meet its requirements. Two regional sales offices operate out of leased facilities. Its Japan subsidiary, Interlink Electronics, Inc. K.K., leases office space in Tokyo.
Item 3.
Item 3. Legal Proceedings
In June 1996, the Company brought an action in Federal Court against InControl for infringement of certain FSR patents. The Company seeks a court order enjoining InControl from further infringement. In February 1997, the court granted summary judgment in favor of InControl and dismissed the Company's action. The Company is currently appealing the decision and the Company does not believe the outcome of this action will have a material effect on 1999 results.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant
Name Age Position with Company - ---- --- ---------------------
E. Michael Thoben, III 45 Chairman of the Board,
President, Chief Executive Officer and Director
David J. Arthur 50 Senior Vice President, Operations
William A. Yates 47 Senior Vice President, Sales
Paul D. Meyer 39 Chief Financial Officer and Secretary
Roger Moore 38 Vice President, Marketing and Engineering - ---------------
E. Michael Thoben, III became Chief Operating Officer and a director of the Company in March 1990 and has been President of the Company since June 1990, Chief Executive Officer since February 1994, and Chairman of its Board of Directors since August 1994. Prior to that time, for 11 years, Mr. Thoben was employed by Polaroid Corporation, most recently as the manager of one of Polaroid's seven strategic business units on a worldwide basis. Mr. Thoben holds a B.S. degree from St. Xavier University and has taken graduate management courses at the Harvard Business School and The Wharton School of Business.
David J. Arthur has been Interlink's Senior Vice President--Operations since May 1995; prior to that, he served as the Company's Vice President, Manufacturing and Operations. Before joining the Company in October 1990, he held senior positions in materials, purchasing and manufacturing management with TRW Inc., North American Philips Corporation, and Amdahl Corporation. From 1987 to 1990, he served as Vice President of Manufacturing at Harman Electronics, Inc.
William A. Yates became Interlink's Senior Vice President--Sales and Marketing in May 1995. Prior to joining the Company in 1990 as its Vice President, Sales and Marketing, 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 both small companies and large businesses, the latter including Carnation Company and Ortho Pharmaceutical Corporation. Mr. Yates holds a B.A. degree from the University of California at Berkeley.
Paul D. Meyer joined Interlink in December 1989 as Controller, became its Vice President--Finance in June 1994, and its Chief Financial Officer in December 1996. From May 1988 to December 1989, he was Controller for Dix-See Sales Company. From September 1985 to May 1988, Mr. Meyer was Corporate Accounting Manager for Bell Industries. Mr. Meyer was employed at Price Waterhouse from 1983 to 1985. Mr. Meyer holds a B.A. degree in economics from the University of California at Los Angeles.
Roger P. Moore, II joined Interlink in July 1997. Prior to joining the Company, he held senior management positions in sales and marketing with American Power Conversion Corporation and Anova Technologies LLC. From 1996 to 1997 he served as President of echoMEDIA, Inc. Mr. Moore holds a Master of Management from Yale University, a Master of Science in Aeronautics from Stanford University and a Bachelor of Science in Aerospace Engineering from the University of California at Los Angeles.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Historical Market Information. From its initial public offering on June 7, 1993 until September 14, 1995, the Company's Common Stock and Warrants were listed under the symbols "LINK" and "LINKW," respectively on the Nasdaq Small Cap Market. Since September 14, 1995, the Company's securities have been listed for trading on the Nasdaq National Market System under the same symbols.
The following table sets forth, for the periods shown, the high and low Nasdaq sales prices for the Common Stock:
On March 15, 1999, the last reported sale price of the Common Stock on Nasdaq National Market was $5.25.
Number of Stockholders. As of March 15, 1999, the Company had approximately 1,600 holders of record. The Company believes that the number of beneficial owners is substantially greater than the number of record holders because a large portion of the Company's outstanding Common Stock is held of record in broker "street names" for the benefit of individual investors.
Dividend Policy. The Company has never paid cash dividends. It is the Company's intention to retain earnings, if any, to finance the operation and expansion of its business and therefore it
does not expect to pay cash dividends in the foreseeable future. Payment of dividends, if any, will be at the discretion of the Board of Directors after taking into account various factors, including the Company's financial condition, results of operations, current and anticipated cash needs, plans for expansion and restrictions, if any, under the terms of any debt obligations of the Company or equity securities issued by the Company.
Item 6.
Item 6. Selected Financial Data
The information required by this item is included on page of this Report on Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is included at pages to of this Report on Form 10-K.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included at pages to of this Report on Form 10-K and as listed in Item 14 of Part IV of this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors of the Company is included under "Election of Directors" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report on Form 10-K. Information with respect to compliance with Section 16(a) of the Securities Exchange Act is included under "Section 16(a) beneficial ownership reporting compliance" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Information with respect to executive compensation is included under "Executive Compensation" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders filed or to be filed not later than 120 days after the end of the fiscal year covered by
this Report on Form 10-K and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners and management is included under "Security Ownership Of Certain Beneficial Owners And Management" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report on Form 10-K and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements and Schedules
The following documents are included in this Report on Form 10-K at the pages indicated: Page Report of Independent Public Accountants
Page ---- Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements -15
No other schedules are included because the required information is inapplicable or is presented in the financial statements or related notes thereto.
(a)(2) Exhibits
3.1 Certificate of Incorporation of the Company. Incorporated by reference to
Exhibit 3.1b of Post-Effective Amendment No. 8 to Registrant's Registration Statement on Form S-1. Registration No. 33-60380 (the "Form S-1 Registration Statement").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2a of the Form S-1 Registration Statement.
10.1 1988 Stock Option Plan, as amended and restated. Incorporated by reference to Exhibit 10.1 of the Form S-1 Registration Statement.**
10.2 1993 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1a of the Form S-1 Registration Statement.**
10.3 1996 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 of the Registrants' Annual Report on From 10-K for the year ended December 31, 1996.**
10.4 Description of Registrant's Management Compensation Program. Incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.**
10.5 Form of Promissory Note from Stuart Yaniger dated March 1993. Incorporated by reference to Exhibit 10.7 of the Form S-1 Registration Statement.
10.6 Form of Amendment to Promissory Note from Stuart Yaniger. Incorporated by reference to Exhibit 10.7a of the Form S-1 Registration Statement.
10.7 Technology Transfer Agreement between the Registrant and Franklin Eventoff dated as of December 23, 1987, and amendment thereto. Incorporated by reference to Exhibit 10.9 of the Form S-1 Registration Statement.
10.8 Lease Agreement to lease premises in Camarillo, California dated August 15, 1998.
10.9 License Agreement between the Registrant and Toshiba Silicone Co., Ltd. dated March 10, 1989. Incorporated by reference to Exhibit 10.14 of the Form S-1 Registration Statement.
10.10 Joint Venture Agreement among the Registrant, InvestAR s.a.r.l., Interlink Electronics Europe s.a.r.l. and IEE Finance s.a.r.l. dated November 7, 1989. Incorporated by reference to Exhibit 10.15 of the Form S-1 Registration Statement.
10.11 Exclusive License and Distributor Agreement between the Registrant and Interlink Electronics Europe s.a.r.l. dated as of November 7, 1989. Incorporated by reference to Exhibit 10.16 of the Form S-1 Registration Statement.
10.12 Manufacturing and Supply Agreement between the Registrant and Interlink Electronics Europe s.a.r.l. dated as of November 7, 1989. Incorporated by reference to Exhibit 10.17 of the Form S-1 Registration Statement.
10.13 Letter Agreement between the Registrant and InvestAR s.a.r.l. dated November 7, 1989. Incorporated by reference to Exhibit 10.18 of the Form S-1 Registration Statement.
10.14 Agreement between the Government of Luxembourg, Interlink Electronics Europe s.a.r.l., IEE Finance s.a.r.l., the Registrant and InvestAR s.a.r.l. dated December 18, 1989. Incorporated by reference to Exhibit 10.19 of the Form S-1 Registration Statement.
10.15 Agreement with InvestAR s.a.r.l. and ARBED S.A. (undated). Incorporated by reference to Exhibit 10.20 of the Form S-1 Registration Statement.
10.16 Agreement among the Registrant, Interlink Electronics Europe s.a.r.l. and InvestAR s.a.r.l. dated as of December 14, 1990. Incorporated by reference to Exhibit 10.21 of the Form S-1 Registration Statement.
10.17 Ink Technology Transfer Agreement between the Registrant and InvestAR s.a.r.l. dated December 11, 1992. Incorporated by reference to Exhibit 10.23 of the Form S-1 Registration Statement.
10.18 Financing Agreement between the Registrant and InvestAR s.a.r.l. in relation with the Ink Technology Transfer Agreement dated December 11, 1992. Incorporated by reference to Exhibit 10.24 of the Form S-1 Registration Statement.
10.19 Form of Confidentiality and Nondisclosure Agreement in relation with the Ink Technology Transfer Agreement (undated). Incorporated by reference to Exhibit 10.25 of the Form S-1 Registration Statement.
10.20 Form of Escrow Agreement for Technology in relation with the Ink Technology Transfer Agreement dated December 11, 1992. Incorporated by reference to Exhibit 10.26 of the Form S-1 Registration Statement.
10.21 Financing Agreement between the Registrant and InvestAR s.a.r.l. dated June 15, 1992. Incorporated by reference to Exhibit 10.27 of the Form S-1 Registration Statement.
10.22 Interlink Europe Financing Agreement between the Registration and InvestAR s.a.r.l. dated April 7, 1993. Incorporated by reference to Exhibit 10.28 of the Form S-1 Registration Statement.
10.23 Agreement between Zilog, Inc. and the Registrant dated November 30, 1993. Incorporated by reference to Exhibit 10.34 of the Form S-1 Registration Statement.
10.24 Employment Agreement between the Registrant and E. Michael Thoben, III effective as of April 1, 1996. Incorporated by reference to Exhibit 10.22 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.**
10.25 Employment Agreement between the Registrant and William A. Yates effective as of April 1, 1996. Incorporated by reference to Exhibit 10.23 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.**
10.26 Employment Agreement between the Registrant and David J. Arthur effective as of April 1, 1996. Incorporated by reference to Exhibit 10.24 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.**
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
------------
* Confidential Treatment for portions of this agreement has been granted by the Commission.
** This exhibit constitutes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
Not applicable.
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 the 27th day of March, 1998.
INTERLINK ELECTRONICS, INC.
By: E. MICHAEL THOBEN, III ----------------------------------------------- E. Michael Thoben, III Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ----
Principal Executive Officer:
E. MICHAEL THOBEN, III Chairrman of the Board, Chief March 27, 1999 - --------------------------- Executive Officer, President E. Michael Thoben, III
Principal Financial Officer:
PAUL D. MEYER Chief Financial Officer, March 27, 1999 - ---------------------------- Paul D. Meyer Secretary
Directors:
GEORGE GU* Director March 27, 1999 - ---------------------------- George Gu
EUGENE F. HOVANEC* Director March 27, 1999 - ---------------------------- Eugene F. Hovanec
MERRITT M. LUTZ* Director March 27, 1999 - ---------------------------- Merritt M. Lutz
CAROLYN MACDOUGALL* Director March 27, 1999 - ---------------------------- Carolyn MacDougall
E. MICHAEL THOBEN, III Director March 27, 1999 - ---------------------------- E. Michael Thoben, III
* By: E. MICHAEL THOBEN, III --------------------------- E. Michael Thoben, III Attorney in Fact
EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1b of Post-Effective Amendment No. 8 to Registrant's Registration Statement on Form S-1. Registration No. 33-60380 (the "Form S-1 Registration Statement").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2a of the Form S-1 Registration Statement.
10.1 1988 Stock Option Plan, as amended and restated. Incorporated by reference to Exhibit 10.1 of the Form S-1 Registration Statement.**
10.2 1993 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1a of the Form S-1 Registration Statement.**
10.3 1996 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 of the Registrant's Annual Report on From 10-K for the year ended December 31, 1996.**
10.4 Description of Registrant's Management Compensation Program. Incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.**
10.5 Form of Promissory Note from Stuart Yaniger dated March 1993. Incorporated by reference to Exhibit 10.7 of the Form S-1 Registration Statement.
10.6 Form of Amendment to Promissory Note from Stuart Yaniger. Incorporated by reference to Exhibit 10.7a of the Form S-1 Registration Statement.
10.7 Technology Transfer Agreement between the Registrant and Franklin Eventoff dated as of December 23, 1987, and amendment thereto. Incorporated by reference to Exhibit 10.9 of the Form S-1 Registration Statement.
10.8 Lease Agreement to lease premises in Camarillo, California dated August 15, 1998.
10.9 License Agreement between the Registrant and Toshiba Silicone Co., Ltd. dated March 10, 1989. Incorporated by reference to Exhibit 10.14 of the Form S-1 Registration Statement.
10.10 Joint Venture Agreement among the Registrant, InvestAR s.a.r.l., Interlink Electronics Europe s.a.r.l. and IEE Finance s.a.r.l. dated November 7, 1989.
Incorporated by reference to Exhibit 10.15 of the Form S-1 Registration Statement.
10.11 Exclusive License and Distributor Agreement between the Registrant and Interlink Electronics Europe s.a.r.l. dated as of November 7, 1989. Incorporated by reference to Exhibit 10.16 of the Form S-1 Registration Statement.
10.12 Manufacturing and Supply Agreement between the Registrant and Interlink Electronics Europe s.a.r.l. dated as of November 7, 1989. Incorporated by reference to Exhibit 10.17 of the Form S-1 Registration Statement.
10.13 Letter Agreement between the Registrant and InvestAR s.a.r.l. dated November 7, 1989. Incorporated by reference to Exhibit 10.18 of the Form S-1 Registration Statement.
10.14 Agreement between the Government of Luxembourg, Interlink Electronics Europe s.a.r.l., IEE Finance s.a.r.l., the Registrant and InvestAR s.a.r.l. dated December 18, 1989. Incorporated by reference to Exhibit 10.19 of the Form S-1 Registration Statement.
10.15 Agreement with InvestAR s.a.r.l. and ARBED S.A. (undated). Incorporated by reference to Exhibit 10.20 of the Form S-1 Registration Statement.
10.16 Agreement among the Registrant, Interlink Electronics Europe s.a.r.l. and InvestAR s.a.r.l. dated as of December 14, 1990. Incorporated by reference to Exhibit 10.21 of the Form S-1 Registration Statement.
10.17 Ink Technology Transfer Agreement between the Registrant and InvestAR s.a.r.l. dated December 11, 1992. Incorporated by reference to Exhibit 10.23 of the Form S-1 Registration Statement.
10.18 Financing Agreement between the Registrant and InvestAR s.a.r.l. in relation with the Ink Technology Transfer Agreement dated December 11, 1992. Incorporated by reference to Exhibit 10.24 of the Form S-1 Registration Statement.
10.19 Form of Confidentiality and Nondisclosure Agreement in relation with the Ink Technology Transfer Agreement (undated). Incorporated by reference to Exhibit 10.25 of the Form S-1 Registration Statement.
10.20 Form of Escrow Agreement for Technology in relation with the Ink Technology Transfer Agreement dated December 11, 1992. Incorporated by reference to Exhibit 10.26 of the Form S-1 Registration Statement.
10.21 Financing Agreement between the Registrant and InvestAR s.a.r.l. dated June 15,
1992. Incorporated by reference to Exhibit 10.27 of the Form S-1 Registration Statement.
10.22 Interlink Europe Financing Agreement between the Registration and InvestAR s.a.r.l. dated April 7, 1993. Incorporated by reference to Exhibit 10.28 of the Form S-1 Registration Statement.
10.23 Agreement between Zilog, Inc. and the Registrant dated November 30, 1993. Incorporated by reference to Exhibit 10.34 of the Form S-1 Registration Statement.
10.24 Employment Agreement between the Registrant and E. Michael Thoben, III effective as of April 1, 1996. Incorporated by reference to Exhibit 10.22 on the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.**
10.25 Employment Agreement between the Registrant and William A. Yates effective as of April 1, 1996. Incorporated by reference to Exhibit 10.23 on the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.**
10.26 Employment Agreement between the Registrant and David J. Arthur effective as of April 1, 1996. Incorporated by reference to Exhibit 10.24 on the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.**
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
27 Financial Data Schedule.
------------
* Confidential Treatment for portions of this agreement has been granted by the Commission.
** This exhibit constitutes a management contract or compensatory plan or arrangement.
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INTERLINK ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table presents, as a percentage of total revenues, certain selected consolidated financial data of each of the three years in the period ended December 31, 1998.
In 1998, revenues grew 15% to $22.1 million as compared to $19.2 million in 1997. Revenues increased 42% in 1997 from $13.5 million in 1996. This revenue growth is a result of the Company's focus on developing and marketing the computer pointing device product line based on the Company's patented technologies, primarily in the computerized presentation projector market. Revenues from this product line grew from $7.9 million in 1995 to $11.6 million in 1996, $16.9 million in 1997 and $19.4 million in 1998. The Company has established relationships with most of the major Original Equipment Manufacturers (OEM's) in the computerized presentation projector market and currently derives approximately two-thirds of its revenue from that market. Many of these OEM's reside in Japan (however the majority of the end-user customer base is in the US) and accordingly approximately 50% of the Company's revenues come from Japanese customers. As a result the Company is subject to foreign currency exchange rate fluctuations, primarily yen/dollar. Because of the Company's focus on pointing device products, the Company expects that the Custom Applications product line will show minimal or negative growth in the future.
In 1998, gross profit as a percent of sales was 37% as compared to 38% in 1997 and 48% in 1996. This decline is a result of the growth of the Company's sales to OEM customers, which typically carry a lower gross profit percentage as compared to non-OEM sales. Additionally the computerized presentation projector industry now is experiencing the rapid product development and price competition expectations typically experienced in the computer hardware industry. The drop in gross profit percentage from 1996 to 1997 was also impacted by a one-time manufacturing yield problem.
Product development and research expense increased from $1.2 million in 1996, to $1.6 million in 1997 and $1.4 million in 1998. During 1997, development costs increased primarily due to the development costs, both internal and external, relating to the introduction of the Company's VersaPad technology and the development of RemoteLink technology. In 1998 resources were added to support the increased OEM business both in the US and Japan and to develop the new product FreedomWriter (first shipped in December 1998) and a new touchpad peripheral to be introduced in 1999.
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On a percent of sales basis, the Company has achieved a decline in SG&A costs from 34% in 1996, to 29% in 1997 and 26% in 1998. This decline results from the amortization of fixed SG&A costs over a greater base of sales and the shift in product mix towards OEM sales.
The Company recorded a profit from operations of $606,000 in 1996, $169,000 in 1997 and $888,000 in 1998. The decline in 1997 as compared to 1996 was caused 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 as compared to 1997 is a result of continued growth from the OEM business which allowed for strong cost containment that offset the lower gross margin 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 the Company's Computer Pointing Device product line, and operating cost control contributed to achieve 1996, 1997, and 1998 net income of $515,000, $30,000 and $402,000. The decline in 1997 as compared to 1996 was caused 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. 1998 results were negatively impacted by a one-time charge related to a legal settlement of $355,000.
Liquidity and Capital Resources
Working capital at December 31, 1998 was $14.1 million versus $12.5 million at the end of 1997. This $1.6 million increase resulted from positive results from operations and from the proceeds from debt agreements obtained through Japanese banks.
In 1998, operations consumed approximately $479,000 in cash due to the growth in accounts receivable and inventory necessitated by revenue growth. As the Company continues to pursue its branded products and Japan-based businesses, both markets known for extended payment policies, operations may continue to be a net user of cash.
In 1998 the Company spent approximately $846,000 to purchase additional manufacturing equipment and computer equipment, related to the Company's internal computer network.
In 1998, the Company negotiated an increase in the maximum available on its Japanese bank line of credit to $1.1 million ($132,000 was used as of December 31, 1998). Also the Company's US line of credit was unused at December 31, 1998 ($3 million availability). Additionally, the company believes there are a number of sources available for the leasing of equipment. A secondary offering of equity securities or the exercise of outstanding stock options are potential sources of equity capital that may be available to the Company. Management believes that forecasted cash requirements for the next twelve months can be met from existing cash and invested cash balances. However, an unforeseen downturn of results in sufficient magnitude could effect the Company's ability to meet that forecast.
Year 2000 Issues
The Company has assessed the Year 2000 compliance of each of the products it currently manufactures and sells. The Company believes each of those products and their component parts is Year 2000 compliant.
The Company has assessed the sensitivity of its internal manufacturing control, accounting and information management systems and determined that a majority of its systems have no material Year 2000 deficiencies. The Company has developed and is implementing a strategy to identify and eliminate any remaining system deficiencies. The Company believes that the total cost of eliminating such deficiencies will not exceed $100,000. Completion of this program is expected by mid-1999.
F - 3
In the fourth quarter of 1998 the Company requested each of its suppliers of critical parts and services to provide information to the Company about the entity's anticipated Year 2000 compliance. Until that information is received, the Company cannot complete that phase of the Company's Year 2000 assessment. In 1999 the Company expects to complete plans for risk management and any contingency plans determined to be necessary.
At this time, the Company believes costs incurred in responding to other parties' Year 2000 computer system deficiencies, together with the cost of any required modifications to the Company's ancillary systems, will not have a material impact on the Company's results of operations or financial condition. This analysis may be modified as the Company receives responses from its parts and services suppliers. Deficiencies not cured could severely impact the Company's ability to meet the above cost estimate, timeline and its ability to operate efficiently beyond January 1, 2000.
In its analysis, the Company has assumed that basic public utilities such as gas, electric and telephone services will continue to be available for operations of the Company on and after January 1, 2000. If this assumption proves incorrect, the operations of the affected location would be materially adversely affected for the duration of the interruption.
Foreign Currency Exchange Risk
The Company enters into foreign exchange forward contracts to hedge certain revenue exposures against future movements in foreign exchange rates. Gains and losses on the forward contracts are largely offset by gains and losses on the underlying exposure and consequently a sudden or significant change in foreign exchange rates would not have a material impact on future net income or cash flows.
F - 4
Report of Independent Public Accountants
To the Board of Directors of Interlink Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Interlink Electronics, Inc. (a Delaware corporation) and its subsidiary as of December 31,1997 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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, 1997 and 1998, and the results of their operations and their cash flows for the three years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Los Angeles, California February 11, 1999
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F - 6
F - 7
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F - 9
INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
1. Summary of Significant Accounting Policies
Interlink Electronics, Inc. (the "Company") was incorporated in the State of California on February 27, 1985 and reincorporated in the State of Delaware on July 10, 1996. The Company is engaged in the development and manufacture of products and components incorporating Force Sensing Resistors.
Consolidation Policy - The consolidated financial statements include the accounts of the Company and its majority owned Japanese subsidiary. All material intercompany accounts and transactions have been eliminated. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Foreign Currency Transactions - The accounts of the Company's foreign subsidiary have been translated according to the provisions of Statement of Financial Accounting Standards No. 52. Gains and losses resulting from translation of the foreign financial statements are included in consolidated stockholders' equity. Any gain or loss resulting from foreign currency transactions are reflected in the consolidated statement of operations for the period in which they occur.
Cash and Cash Equivalents - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of cost or market and includes material, labor, and factory overhead. Cost is determined using the average cost method.
Property and Equipment - Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is recorded on the straight-line basis over the estimated useful lives of the assets which range from three to ten years. Amortization of leasehold improvements is made based upon the estimated useful lives of the assets or the term of the lease, whichever is shorter. Maintenance and repairs are charged to operations as incurred, while significant improvements are capitalized. Upon retirement or disposition of property, the asset and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is charged to operations.
Patents and Trademarks - The costs of acquiring patents and trademarks are amortized on a straight-line basis over their estimated useful lives, ranging from seven to seventeen years. Amortization expense for the years ended December 31, 1998, 1997 and 1996 was $98,000, $90,000 and $78,000, respectively.
Income Taxes - The Company accounts for taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this statement, deferred tax assets and liabilities represent the tax effects, calculated at currently effective rates, of future deductible taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements (see Note 11).
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 9)
Accounts Receivable - Increases to the allowance for doubtful accounts totaled $177,000, $42,000 and $77,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Write-offs against the allowance for doubtful accounts totaled, $67,000, $139,000 and none for the years ended December 31, 1998, 1997 and 1996, respectively.
Reclassifications - Certain prior year balances have been reclassified to conform with the 1998 presentation.
F - 10
Recent Pronouncements - In June 1998, the AICPA issued Statement of Financial Accounting Standards #133 "Accounting for Derivative Instruments and Hedging Activities." The Company will adopt this standard in the third quarter of 1999. The Company has not yet determined the impact of this new standard.
2. Inventories
3. Property And Equipment
Property and equipment consisted of the following (in thousands):
Depreciation and amortization expense charged to operations amounted to $436,000, $534,000 and $449,000 for the years ended 1998, 1997, and 1996, respectively. Property and equipment under capital leases had a net book value of $656,000 and $1,046,000 at December 31, 1998 and 1997 respectively.
4. Acquisition of Japanese Subsidiary
On April 1, 1994, the Company acquired an 80% interest in Interlink Electronics KK for $8,000 in cash. Interlink Electronics KK is located in Tokyo, Japan and is a distributor and value-added manufacturer of FSR-based products. The acquisition has been accounted for as a purchase and the results of Interlink Electronics KK have been included in the accompanying consolidated financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired ($428,000) and the liabilities assumed ($476,000). This allocation resulted in goodwill of approximately $58,000 which is being amortized over 15 years.
5. Short-Term Borrowings
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, 1998. The loan carries an interest rate of the bank's interest rate (7.75% at December 31, 1998) and matures in May 1999. The loan is secured by all of the Company's assets and requires the Company to meet certain financial covenants, all of which were satisfied at December 31, 1998.
The Company's Japan subsidiary maintains an unsecured line of credit with a bank with a maximum amount of $1,124,000, of which, $132,000 was drawn at December 31, 1998. This line carries an interest rate of 1.3%.
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Selected information regarding short-term borrowings is as follows:
6 . Long-Term Debt and Capital Leases
Bank loans - The Company's Japan subsidiary, Interlink Electronics KK, maintains unsecured loans with five banks. The loans carry a weighted average interest rate of 2.7% and are payable in monthly installments through the year 2004. The combined balance outstanding as of December 31, 1998 and 1997 was $1,244,000 and $406,000, respectively.
Capital lease obligations - The Company had an equipment financing agreement with a leasing company to provide for the purchase of equipment. As amounts were drawn, the funded amount was converted to a note payable with a standard payment schedule of up to 48 months at an effective interest rate of 8.35%. As of December 31, 1998, the Company had utilized and converted $1,825,000 to notes payable.
At December 31, 1998, scheduled maturates of long-term debt and capital lease obligations for the next five years and thereafter are as follows (in thousands):
7. Capitalization
Preferred Stock - The Company is authorized to issue up to 10,000,000 shares of Preferred Stock. As of December 31, 1998, none were outstanding. In the future, the Preferred Stock may be issued in one or more series with such rights and preference as may be fixed and determined by the Board of Directors.
Common Stock - The Company is authorized to issue 40,000,000 shares of Common Stock.
In June 1996, 223,723 warrants, with an exercise price of $8.25, were exercised. The Company received net proceeds of $1.74 million after deducting offering costs. The remaining 1,673,891 warrants from this class expired in accordance with their terms.
In September 1997, the Company completed a private placement of 324,348 shares of common stock. The Company received gross proceeds of $2,250,000 prior to fees totaling $100,000.
8. Stock Warrants And Stock Options
On June 4, 1998, the Company's remaining outstanding stock warrants (270,000) expired by their terms.
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. Outstanding options under the plans vest in various increments through October 2002. Information concerning stock options under the plans is summarized as follows:
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As of December 31, 1998, the stock options outstanding under the plans had an average exercise price of $2.75 and a weighted average remaining contractual life of five years.
The weighted average fair value at date of grant for options granted during 1998, 1997 and 1996 was $3.21, $6.50 and $5.76 per option, respectively. The fair value of options at date of grant was estimated using the Black Scholes model with the following weighted average assumptions:
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 method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company would have recorded stock-based compensation expense of $1.6 million in 1998, $1.2 million in 1997 and $213,000 in 1996.
9. Earnings Per Share
For all periods presented, per share information was computed pursuant to provisions of SFAS 128. 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.
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The following table contains information necessary to calculate earnings per share:
10. Commitments and Contingencies
The Company leases its main facility and certain equipment under operating leases expiring through 2003.
Rent payments totaled approximately $239,000, $236,000 and $227,00 for 1998, 1997 and 1996, respectively.
Minimum lease commitments at December 31, 1998 are summarized as follows (in thousands):
1999 $ 330 2000 267 2001 273 2002 283 2003 185 ------- $ 1,338 =======
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, if any, incurred will have a significant impact on the Company's financial position or results of operations.
11. Income Taxes
As of December 31, 1998, the Company had federal and state income tax net operating loss carryforwards of approximately $11,674,000 expiring through 2017 and $80,000 expiring through 1999, respectively.
The Company has research and development tax credit carryforwards of approximately $260,000 and $270,000 at December 31, 1997 and 1998, respectively. The Company has total net deferred tax assets as follows:
A valuation allowance is recorded if the weight of available evidence suggests it is more likely than not that if some portion or all of the deferred tax asset will not be recognized. There is no assurance that the Company will continue to be profitable in future periods, therefore, a valuation allowance has been recognized for the full amount of the deferred tax asset for 1998 and 1997.
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12. Related Party Transaction
The Company had an agreement with its founder to provide consulting services to the Company at $48,000 per year through December 1997.
13. Revenue Information
Export Sales - The following table shows the breakdown of the Company's export sales as a percentage of consolidated revenues.
Major Customers - In 1998, sales to three customers in the computer industry exceeded 10% of the Company's sales. Their sales constituted over 15%, 14% and 10%. In 1997, sales to one customer in the computer industry constituted 13% of the Company's sales and in 1996, sales to one customer in the computer industry constituted 15% of the Company's sales.
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