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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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-21858
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 offices) (Zip Code)
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 9, 2001 the aggregate market value of the registrant's
Common Stock held by non-affiliates of the registrant was $68,618,314. Solely
for purposes of this calculation, the registrant has treated its Board of
Directors and executive officers as the only affiliates.
As of March 9, 2001, the number of shares of the registrant's Common
Stock outstanding was 9,538,170.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's Proxy Statement for its 2001 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
INTERLINK ELECTRONICS, INC.
TABLE OF CONTENTS
ITEM PAGE
NO. NO.
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PART I
1. Business................................................................................. 3
2. Properties............................................................................... 13
3. Legal Proceedings........................................................................ 13
4. Submission of Matters to a Vote of Security Holders...................................... 13
4(A). Executive Officers of the Registrant..................................................... 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 15
6. Selected Financial Data.................................................................. 16
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 17
7(A). Quantitative and Qualitative Disclosures About Market Risk............................... 21
8. Financial Statements and Supplemental Data............................................... 22
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 22
PART III
10. Directors and Executive Officers of the Registrant....................................... 22
11. Executive Compensation................................................................... 22
12. Security Ownership of Certain Beneficial Owners and Management........................... 22
13. Certain Relationships and Related Transactions........................................... 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 23
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:
o Our inability to predict the amount or timing of growth in
markets where we expect our future revenue growth to occur.
o Our operating results continuing to fluctuate and not meeting
published analyst forecasts.
o Our sales being concentrated with one or more customers or in
limited market or geographic areas.
o Our business strategy of developing products for the home
entertainment and e-transactions markets not being
successfully implemented.
o International sales and manufacturing risks.
o Fluctuations in the value of foreign currencies.
o Our inability to develop and introduce new products to respond
to evolving industry requirements in a timely manner.
o The home entertainment and e-transactions markets not adopting
our technology.
o Our markets being intensely competitive and many of our
potential competitors having resources that exceed our own.
o Failure to attract and retain qualified individuals for
critical positions.
o Failure to manage our growth effectively.
o Our inability to overcome price advantages of low-cost remote
control products that compete with our products.
o Changing standards or regulations.
o Interruption of our contract manufacturing arrangements.
o Interruption in the supply of any significant Force Sensing
Resistor sensor or other component causing us to miss shipment
deadlines.
o Performance, reliability or quality problems with our
products.
o Federal, state and international legislation and regulations
affecting e-commerce.
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o Failure to protect our intellectual property.
o Proprietary technologies of our competitors creating barriers
to entry.
o Adoption of technologies and standards by electronics
manufacturers and service providers.
o Risks associated with manufacturing certain of our products at
a single facility.
o Reliance on others for significant aspects of our technology
development.
o Industry downturns in the markets we serve.
o Volatility in our stock price.
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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 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 recently began to use our collection of intuitive
interface technologies for two new markets: home entertainment and
electronic transactions. By building partnerships with providers of
complementary software and hardware technologies, we market these products
for use with appliances as digital interface technology is incorporated into
them.
In the past year, we began marketing 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 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 original equipment
manufacturer, or 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, license 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
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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 website. These new applications
are creating a need for interactive appliances in the home entertainment,
e-transactions and business communications 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. estimated that 15.3% of U.S. households had 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 communications market is
growing at an average annual rate of 23% with unit volumes expected to
increase from 540,000 units in 1998 to 3 million units in 2003. Our OEM
customers have recently introduced business communications 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.
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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. 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 look up 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
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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, or FSR, 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 technology, 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.
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:
o send signals having sufficient speed and bandwidth to support
applications such as handwriting input, stereo quality
streaming audio and telephony;
o 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
o 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
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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 Hewlett Packard/VeriFone and Cardiff
Software, Inc that are interested in promoting the widespread use of
electronic documents, rather than paper, 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
communications 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 Power TV, 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.
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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 our 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
communications, home entertainment, e-transactions and specialty components
markets.
BUSINESS COMMUNICATION PRODUCTS. Our intuitive interface devices
are used by the business communications 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.
Additionally, we have 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 and value added
resellers. Our current customers include some of the largest presentation
device OEMs, including; 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
integrates mouse pointing, text entry, freehand writing and drawing and voice
transmission capabilities. The device enables total control of the variety of
home entertainment options available yet retains a highly intuitive user
interface and an ergonomic design.
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.
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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 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
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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 nine 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 trade show 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 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
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.
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CUSTOMERS
Our ten largest customers by revenue in 2000 were:
1. NEC Corporation 6. Microsoft Corporation
2. inFocus, Inc. 7. Hitachi, Ltd.
3. International Engineering and Electronics 8. Mitsubishi Electronics America, Inc.
4. Sony Corporation 9. Toshiba Corporation
5. Sharp Corporation 10. Varian, Inc.
In 2000, no single customer exceeded 10% of consolidated revenues.
MANUFACTURING
We manufacture FSR sensors at 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 a manufacturer 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
11
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.
We employ 32 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 2001 and 2015. Various
corresponding foreign patents will expire between 2001 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.
12
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 118 full-time employees in the United States as of December
31, 2000; 109 at our corporate offices and manufacturing facilities, and nine
at our regional sales offices. Our Japanese subsidiary had 34 employees on
that date.
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
fourth quarter of 2000.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table contains information as of March 9, 2001 with
respect to each person who is an executive officer of Interlink:
NAME AGE POSITION
- ---- --- --------
E. Michael Thoben, III.......... 47 President, Chief Executive Officer and Chairman of the Board
Paul D. Meyer................... 41 Chief Financial Officer and Secretary
Tamio Mori...................... 54 President and General Manager, Interlink Electronics K.K.
Michael W. Ambrose.............. 41 Vice President--Engineering
13
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 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.
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 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. Prior to Interlink, Mr. Mori served in increasingly senior positions
for 22 years with Mitsubishi Petrochemical Corporation, most recently as
Assistant General Manager of New Business Development. He has a Master of
Chemical Engineering and a Bachelor of Science in Organic Chemistry from
Waseda University.
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.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was traded on the Nasdaq Small Cap Market System
from June 7, 1993 to September 14, 1995 and since then on the Nasdaq National
Market System 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, 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 ENDED DECEMBER 31, 2000
First Quarter............................... $25.33 $69.17
Second Quarter.............................. 17.31 62.67
Third Quarter............................... 15.00 50.00
Fourth Quarter.............................. 8.50 31.73
YEAR ENDING DECEMBER 31, 2001
First Quarter (through March 9, 2001)....... $ 5.81 $15.69
On March 9, 2001, the closing price of the common stock on the
Nasdaq National Market was $7.469. As of March 9, 2001 there were
approximately 83 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 9, 2001 there were 9,538,170 shares
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.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read with our
consolidated 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 Form 10-K. The consolidated statements
of operations data for the years ended December 31, 1998, 1999 and 2000 and
the consolidated balance sheet data at December 31, 1999 and 2000 are derived
from our consolidated financial statements which have been audited by Arthur
Andersen LLP, our independent public accountants, and are included elsewhere
in this Form 10-K. The statements of operations data for the years ended
December 31, 1996 and 1997 and the consolidated balance sheets dated as of
December 31, 1996, 1997 and 1998 are derived from our consolidated financial
statements which have been audited by Arthur Andersen LLP and are not
included in this Form 10-K.
YEAR ENDED DECEMBER 31,
1996 1997 1998 1999 2000
--------- ---------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 13,485 $ 19,153 $ 22,095 $ 28,106 $ 33,870
Cost of revenues 7,028 11,829 13,954 17,640 19,453
--------- ---------- ---------- ---------- ---------
Gross profit 6,457 7,324 8,141 10,466 14,417
Operating expenses:
Product development and research 1,234 1,600 1,416 2,225 3,222
Selling, general and administrative 4,617 5,555 5,837 5,799 7,612
--------- ---------- ---------- ---------- ---------
Total operating expenses 5,851 7,155 7,253 8,024 10,834
--------- ---------- ---------- ---------- ---------
Operating income 606 169 888 2,442 3,583
--------- ---------- ---------- ---------- ---------
Other income (expense):
Minority interest -- -- -- (31) (25)
Interest income (expense) (118) (152) (127) 35 94
Cost of cancelled equity offering -- -- -- -- (769)
Other 27 13 (359) (86) (49)
--------- ---------- ---------- ---------- ---------
Total other income (expense) (91) (139) (486) (82) (749)
--------- ---------- ---------- ---------- ---------
Income before provision (benefit)
for income taxes 515 30 402 2,360 2,834
Provision (benefit) for income taxes -- -- -- 252 (274)
--------- ---------- ---------- ---------- ---------
Net income $ 515 $ 30 $ 402 $ 2,108 $ 3,108
========= ========== ========== ========== =========
Earnings per share--basic(1) $ 0.08 $ 0.00 $ 0.05 $ 0.26 $ 0.35
Earnings per share--diluted(1) $ 0.07 $ 0.00 $ 0.05 $ 0.21 $ 0.28
DECEMBER 31,
1996 1997 1998 1999 2000
--------- ---------- ---------- ---------- ---------
(in thousands)
BALANCE SHEET DATA:
Working capital $ 8,969 $ 12,461 $ 14,139 $ 17,644 $ 23,128
Total assets 13,185 17,555 19,577 24,707 31,774
Short term debt 403 1,090 630 518 2,079
Long term debt and capital lease obligations 850 724 1,423 1,424 2,598
Stockholders' equity 9,969 13,453 14,665 18,247 22,433
- -----------
(1) As adjusted for the three-for-two stock split effected as a stock dividend
to stockholders of record on March 20, 2000.
16
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 1992, 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 communications market. In 1999, we introduced
the ePad product for e-transactions applications and IntuiTouch technology
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 six years as we have established
ourselves in new markets and built a base of OEM customers in the computer,
computer peripheral and business communications industry. Gross profit, as a
percentage of revenues, varies depending on product and licensing revenue
mix. 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, declined through 1999,
stabilized in 2000, 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 became fully
utilized; therefore income taxes are expected to increase on both a
percentage and absolute dollar basis. Other income (expense) was significant
in 1998 and 2000 as the result of a non-recurring legal settlement expense
and the cancelled offering cost.
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 and was essentially break-even in 2000.
Sales of business communications intuitive interface devices
accounted for 61% of our total sales in 2000 and 62% of our total sales in
the three years ended December 31, 2000. Our business communications sales in
dollars grew at an average annualized rate of 20% in 2000. Because our market
share for business communications 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 communications
17
market. Many of these OEMs are based in Japan and approximately 43% of our
2000 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. We have occasionally licensed other
aspects of our technology in connection with the settlement of intellectual
property disputes and expect to continue to do so in the future.
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. We adopted
this standard in January 2001, however, we do not expect its implementation
to have a significant impact on our 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,
1998 1999 2000
--------- --------- ---------
Revenues 100% 100% 100%
--------- --------- ---------
Gross profit 37 37 42
Operating expenses:
Product development and research 7 8 10
Selling, general and administrative 26 20 22
--------- --------- ---------
Total operating expenses 33 28 32
--------- --------- ---------
Operating income 4 9 10
Other income (expense) (2) -- (2)
Income tax -- 1 (1)
--------- --------- ---------
Net income 2% 8% 9%
========= ========= =========
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 31, 1999
Revenues increased 21% from $28.1 million in 1999 to $33.9 million
in 2000. This revenue growth is a result primarily of growth in sales to the
business communications market and, to a lesser extent, from a twofold
increase in home entertainment sales to $2.9 million reflecting our initial
penetration of that market.
Gross profit as a percent of sales improved to 42% in 2000 from 37%
in 1999 due to growth in home entertainment and $2.6 million in licensing
revenues.
Product development and research expense increased 45% from $2.2
million in 1999 to $3.2 million in 2000 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
18
targeted markets.
Selling, general and administrative expense increased 31% from $5.8
million in 1999 to $7.6 million in 2000 and increased as a percentage of
sales from 20% in 1999 to 22% in 2000 . The percentage increase reflects the
creation of sales and marketing teams for the home entertainment and
e-transaction markets.
In 2000, we recorded a nonrecurring expense of $769,000 related to a
cancelled public stock offering.
In 2000, we recorded a deferred tax asset of $600,000 related to our
$12.8 million in federal net operating loss carryforwards.
Operating income was $3.6 million and net income was $3.1 million in
2000, the increases over 1999 were primarily attributable to increased sales.
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 communications 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 57% 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.
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.
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.
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.
19
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated statement of
operations data for each of the eight quarters ended December 31, 2000, 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)
(IN THOUSANDS)
March 31, June 30, Sept 30, Dec 31, March 31, June 30, Sept 30, Dec 31,
1999 1999 1999 1999 2000 2000 2000 2000
---------- --------- --------- --------- --------- --------- -------- --------
Revenue $ 6,503 $ 6,958 $ 7,207 $ 7,438 $ 7,685 $ 8,257 $ 8,625 $ 9,303
Cost of revenues 4,107 4,287 4,573 4,673 4,771 4,661 4,833 5,188
---------- --------- --------- --------- --------- --------- -------- --------
Gross profit 2,396 2,671 2,634 2,765 2,914 3,596 3,792 4,115
Operating expenses:
Product development
and research 483 565 543 634 619 955 725 923
Selling, general
and administrative 1,448 1,532 1,431 1,388 1,511 1,790 2,207 2,104
---------- --------- --------- --------- --------- --------- -------- --------
Total operating expenses 1,931 2,097 1,974 2,022 2,130 2,745 2,932 3,027
Operating income 465 574 660 743 784 851 860 1,088
Other income (expense) 15 9 (9) (97) 72 (783) 43 (81)
---------- --------- --------- --------- --------- --------- -------- --------
Income before
income taxes 480 583 651 646 856 68 903 1,007
Income tax expense (benefit) 72 75 105 -- 144 -- 106 (524)
---------- --------- --------- --------- --------- --------- -------- --------
Net income $ 408 $ 508 $ 546 $ 646 $ 712 $ 68 $ 797 $ 1,531
========== ========= ========= ========= ========= ========= ======== ========
March 31, June 30, Sept 30, Dec 31, March 31, June 30, Sept 30, Dec 31,
1999 1999 1999 1999 2000 2000 2000 2000
---------- --------- --------- --------- --------- --------- -------- --------
Revenue 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues 63.2 61.6 63.5 62.8 62.1 56.5 56.0 55.8
---------- --------- --------- --------- --------- --------- -------- --------
Gross profit 36.8 38.4 36.5 37.2 37.9 43.5 44.0 44.2
Operating expenses:
Product development
and research 7.3 8.1 7.5 8.5 8.0 11.5 8.4 9.9
Selling, general
and administrative 22.3 22.0 19.9 18.7 19.7 21.7 25.6 22.6
---------- --------- --------- --------- --------- --------- -------- --------
Total operating expenses 29.6 30.1 27.4 27.2 27.7 33.2 34.0 32.5
---------- --------- --------- --------- --------- --------- -------- --------
Operating income 7.2 8.3 9.1 10.0 10.2 10.3 10.0 11.7
Other income (expense) 0.2 0.1 0.0 (1.3) 0.9 (9.5) 0.5 (0.9)
---------- --------- --------- --------- --------- --------- -------- --------
Income before income taxes 7.4 8.4 9.1 8.7 11.1 0.8 10.5 10.8
Income tax expense (benefit) 1.1 1.1 1.5 -- 1.9 -- 1.3 (5.6)
---------- --------- --------- --------- --------- --------- -------- --------
Net income 6.3% 7.3% 7.6% 8.7% 9.2% 0.8% 9.2% 16.4%
========== ========= ========= ========= ========= ========= ======== ========
20
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 2000 was $23.1 million versus $17.6
million at the end of 1999. This increase resulted from positive results from
operations, proceeds from debt agreements obtained through Japanese banks and
cash received from the exercises of employee stock options.
Operations was essentially break-even from a cash standpoint in 2000
as compared to a cash provider of $2.9 million in 1999. Our growth into two
new business sectors as well as the inventory investment required for the
transition to a new contract manufacturer resulted in the cash flow
difference.
We spent $529,000 in 1999 and $640,000 in 2000 to purchase
additional manufacturing equipment and computer equipment related to our
internal computer network. We invested $104,000 in new patents in 1999 and
$74,000 in 2000.
We have a maximum amount available under our Japanese bank line of
credit to $1.1 million, none of which was used as of December 31, 2000. Our
U.S. line of credit was unused at December 31, 2000 and had $5 million of
availability as of that date. We have a $1 million equipment lease line,
unused at December 31, 2000. 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 and lines of credit will allow us to fund our
operations for at least the next 12 months. However, an unforeseen downturn
of results in sufficient magnitude could adversely affect our ability to meet
that forecast.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK
Our Japanese subsidiary, Interlink Electronics K.K., generally
transacts 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
2000, 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 is 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. The fair
value of foreign currency exchange contracts is estimated by obtaining quotes
from brokers. At December 31, 2000, the Company had foreign currency exchange
contracts outstanding with a notional value of $7.0 million. During fiscal
2000, the Company recognized $601,000 of gains on foreign currency exchange
contracts which is reflected in income in the accompanying consolidated
statements of operations.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by this item is included at pages F-1 to
F-14 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 2001 annual
meeting of stockholders (the "2001 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 will be 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 will be included under "Section 16(a) Beneficial
Ownership Reporting Compliance" in the 2001 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 2001 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 2001 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 2001 Proxy Statement and is incorporated herein by reference.
22
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 Accountants........................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000.......... F-3
Consolidated Statements of Operations for each of the years in the period
ended December 31, 2000......................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the years
in the period ended December 31, 2000........................................... F-5
Consolidated Statements of Cash Flows for each of the years in
the period ended December 31, 2000.............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
2. EXHIBITS
The exhibits listed below are filed as part of this report.
EXHIBIT
NUMBER
-------
3.1 Certificate of Incorporation as amended.
3.2 Bylaws.
10.1 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.1a
of the Post-Effective Amendment No. 8 to Registrant's Registration
Statement on Form S-1 (Registration No. 333-60380) (the Form S-1
Registration Statement).*
10.2 1996 Stock Incentive Plan as amended.*
10.3 Description of Registrant's Management Compensation Program (incorporated
by reference to Exhibit 10.4 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
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. (incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999).
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
(incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999).
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
23
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).
10.14 Credit Agreement between Wells Fargo Bank, National Association, and the Registrant
dated September 1, 2000 (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).+
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (see signature page).
- -----------
* This exhibit constitutes a management contract or compensatory plan or
arrangement.
+ Exhibits for which Registrant has received confidential treatment for
certain portions. The confidential material in such exhibits has been
redacted and separately filed with the Securities and Exchange
Commission as part of Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 2000.
24
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 29, 2001.
INTERLINK ELECTRONICS, INC.
By:
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 29, 2001
on behalf of the Registrant and in the capacities indicated:
SIGNATURES TITLE
- ---------- -----
E. MICHAEL THOBEN, III President, Chief Executive Officer and
- ------------------------------------ Chairman of the Board of Directors
E. MICHAEL THOBEN, III (Principal Executive Officer)
PAUL D. MEYER Chief Financial Officer and Secretary
- ------------------------------------ (Principal Financial Officer and
PAUL D. MEYER Principal Accounting Officer)
GEORGE GU Director
- ------------------------------------
GEORGE GU
EUGENE F. HOVANEC Director
- ------------------------------------
EUGENE F. HOVANEC
MERRITT M. LUTZ Director
- ------------------------------------
MERRITT M. LUTZ
Director
- ------------------------------------
JOHN A. BUCKETT, II
25
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, 1999 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 14, 2001
F-2
INTERLINK ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PAR VALUE)
- -------------------------------------------------------------------------------
ASSETS DECEMBER 31,
Current assets: 1999 2000
---------- ----------
Cash and cash equivalents $ 7,492 $ 10,506
Accounts receivable, less allowance for
doubtful accounts of $620 and $722
in 1999 and 2000, respectively 7,056 8,613
Inventories 7,928 9,435
Deferred tax asset - 600
Prepaid expenses and other current assets 173 661
---------- ----------
Total current assets 22,649 29,815
---------- ----------
Property and equipment, net 1,559 1,632
Patents and trademarks, less accumulated
amortization of $739 and $860
in 1999 and 2000, respectively 282 235
Other assets 217 92
---------- ----------
Total Assets $ 24,707 $ 31,774
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 518 $ 2,079
Accounts payable 3,041 3,305
Accrued payroll and related expenses 957 936
Other accrued expenses 489 367
---------- ----------
Total current liabilities 5,005 6,687
---------- ----------
Minority interest 31 56
Long-term debt, net of current portion 1,261 2,547
Capital lease obligations, net of current portion 163 51
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $5.00 par value
(100 shares authorized, none issued
and outstanding) -- --
Common stock $0.00001 par value
(50,000 shares authorized, 8,553
and 9,249 issued and outstanding
at December 31, 1999 and 2000, respectively) 26,197 27,630
Accumulated other comprehensive income (loss) 187 (168)
Accumulated deficit (8,137) (5,029)
---------- ----------
Total stockholders' equity 18,247 22,433
---------- ----------
Total Liabilities and Stockholders' Equity $ 24,707 $ 31,774
========== ==========
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,
1998 1999 2000
----------- ----------- -----------
Revenues $ 22,095 $ 28,106 $ 33,870
Cost of revenues 13,954 17,640 19,453
----------- ----------- -----------
Gross profit 8,141 10,466 14,417
Operating expenses:
Product development and research 1,416 2,225 3,222
Selling, general and administrative 5,837 5,799 7,612
----------- ----------- -----------
Total operating expenses 7,253 8,024 10,834
----------- ----------- -----------
Operating income 888 2,442 3,583
----------- ----------- -----------
Other income (expense):
Minority interest -- (31) (25)
Interest income (expense) (127) 35 94
Cost of cancelled equity offering -- -- (769)
Other (expense) (359) (86) (49)
----------- ----------- -----------
Total other income (expense) (486) (82) (749)
----------- ----------- -----------
Income before provision (benefit) for
income taxes 402 2,360 2,834
Provision (benefit) for income taxes -- 252 (274)
----------- ----------- -----------
Net income $ 402 $ 2,108 $ 3,108
=========== =========== ===========
Earnings per share--basic $ 0.05 $ 0.26 $ 0.35
Earnings per share--diluted $ 0.05 $ 0.21 $ 0.28
Weighted average shares--basic 7,818 8,016 8,892
Weighted average shares--diluted 7,818 10,014 11,130
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, 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
Comprehensive income:
Net income -- -- -- 3,108 3,108
Foreign currency translation adjustment -- -- (355) -- (355)
-------
Comprehensive income 2,753
Exercise of options 696 1,433 -- -- 1,433
--------- --------- --------------- ------------ -------
Balance, December 31, 2000 9,249 $ 27,630 $ (168) $ (5,029) $22,433
========= ========= =============== ============ =======
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,
1998 1999 2000
----------- ---------- -----------
Cash flows from operating activities:
Net income $ 402 $ 2,108 $ 3,108
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for bad debts 110 183 133
Depreciation and amortization 533 630 688
Minority interest -- 31 25
Deferred tax asset -- -- (600)
Changes in operating assets and liabilities:
Accounts receivable (1,184) (481) (1,764)
Inventories (1,335) (1,132) (1,507)
Prepaid expenses and other current assets 344 1 (488)
Other assets 80 (106) 125
Accounts payable 285 821 264
Accrued payroll and related expenses 286 807 (69)
----------- ---------- -----------
Net cash provided by (used in)
operating activities (479) 2,862 (85)
----------- ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (846) (529) (640)
Costs of patents and trademarks -- (104) (74)
----------- ---------- -----------
Net cash used in investing activities (846) (633) (714)
----------- ---------- -----------
Cash flows from financing activities:
Borrowing on credit line 548 -- --
Payments on credit line (992) (132) --
Borrowings on notes payable to bank 880 583 3,967
Principal payments on notes payable to bank (42) (231) (1,049)
Proceeds from sales/leaseback 332 -- --
Principal payments on capital lease
obligations (487) (331) (183)
Proceeds from issuance of common stock, net 65 1,503 1,433
----------- ---------- -----------
Net cash provided by financing activities 304 1,392 4,168
----------- ---------- -----------
Effect of exchange rate changes on cash 745 (29) (355)
----------- ---------- -----------
Increase (decrease) in cash and cash
equivalents (276) 3,592 3,014
Cash and cash equivalents:
Beginning of year 4,176 3,900 7,492
----------- ---------- -----------
End of year $ 3,900 $ 7,492 $ 10,506
=========== ========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 127 $ 93 $ 128
Income taxes paid 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. Our products enable a user to 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. 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--The Company generally recognized product
revenue, net of allowances for returns and warranty, when persuasive evidence
of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is probable. The Company generally warrants
its products against defects in materials and workmanship for 1 year. The
estimated cost of warranty obligations is recognized at the time of revenue
recognition. 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
statements 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, 1999 and 2000, the Company had $5.8
million and $8.2 million, respectively, of cash in excess of federally
insured limits.
FINANCIAL INSTRUMENTS--The carrying amounts of the Company's line of
credit, long-term debt and capital lease obligations approximate their fair
value as interest rates approximate market rates for similar instruments.
During 2000 and 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
F-7
derivatives during 1998. The fair value of foreign currency contracts is
estimated by obtaining quotes from brokers. At December 31, 1999 and 2000,
the Company had foreign currency contracts outstanding with a notional and
fair value of $5.4 million and $7 million respectively. During fiscal 1999
and 2000, the Company recognized $440,000 of losses and $601,000 of gains,
respectively, on foreign exchange contracts which are included in income 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
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, 1999 and 2000 was $98,000, $99,000 and
$121,000, respectively.
INCOME TAXES--The Company accounts for taxes under SFAS 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.
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 $177,000, $183,000 and $133,000 for the years ended December
31, 1998, 1999 and 2000, respectively. Write-offs against the allowance for
doubtful accounts totaled $67,000, $25,000 and $31,000 for the years ended
December 31, 1998, 1999 and 2000, respectively.
USE OF ESTIMATES--The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States 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 adopted this
standard in January 2001; however, the Company does not expect its
implementation to have a significant impact on the Company's financial
position or results
F-8
of operations.
In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 expresses the views of the SEC staff
in applying accounting principles generally accepted in the United States to
certain revenue recognition issues. The Company will adopt the provisions of
SAB No. 101 in the first quarter of fiscal 2001 and expects that its adoption
will have no material impact on its financial position or its 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,
------------------------------
1999 2000
------------ -----------
Raw material................... $ 3,705 $ 3,345
Work in process................ 645 582
Finished goods................. 3,578 5,508
------------ -----------
Total inventories.............. $ 7,928 $ 9,435
============ ===========
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
DECEMBER 31,
------------------------------
1999 2000
------------ -----------
Furniture, machinery and
equipment.................. $ 4,450 $ 5,090
Leasehold improvements......... 212 212
------------ -----------
4,662 5,302
Less accumulated depreciation
and amortization........... (3,103) (3,670)
------------ -----------
Property and equipment, net.... $ 1,559 $ 1,632
============ ===========
Depreciation and amortization expense charged to operations amounted
to $436,000, $531,000 and $567,000 for the years ended 1998, 1999, and 2000,
respectively. Included in property and equipment are assets financed under
capital leases with a net book value of $412,000 and $267,000 at December 31,
1999 and 2000 respectively.
4. LINES OF CREDIT
The Company maintains a $5,000,000 domestic revolving line of credit
with Wells Fargo Bank, N.A. at a fluctuating rate per annum equal to the
prime rate in effect from time to time or at a fixed rate per annum
determined by the bank to be 2.0% above LIBOR in effect on the first day of
the applicable fixed rate term (8.5% at December 31, 2000). This commitment
will expire on June 1, 2002
The Company also has a $1,000,000 non-revolving commitment from
Wells Fargo Bank, N.A. to be used to finance the Company's purchases of
equipment. This line carries a fluctuating interest rate per annum equal to
the prime rate in effect from time to time or at a fixed rate per annum
determined by Wells Fargo to
F-9
be 2.25% above LIBOR in effect on the first day of the applicable fixed rate
term (8.5% at December 31, 2000). This commitment will expire on June 1, 2001.
Both commitments are secured by all of the Company's assets and
require the Company to meet certain financial covenants, all of which were
satisfied at December 31, 2000.
The Company had no borrowings on any of the above-mentioned lines in
the current year.
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 2006. The combined balance outstanding as of
December 31, 1999 and 2000 was $1,596,000 and $4,515,000, 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%.
At December 31, 2000, scheduled maturities of long-term debt and
capital lease obligations for the next five years and thereafter are as
follows (in thousands):
DEBT LEASES
----------- -----------
2001................................... $ 2,049 $ 120
2002................................... 687 52
2003................................... 707 --
2004................................... 550 --
2005................................... 390 --
Thereafter............................. 327 --
----------- -----------
4,710 172
Less amount representing interest...... (195) (10)
----------- -----------
Present value of minimum payments...... 4,515 162
----------- -----------
Less current portion................... (1,968) (111)
----------- -----------
Long term portion...................... $ 2,547 $ 51
=========== ===========
6. CAPITALIZATION
PREFERRED STOCK--The Company is authorized to issue up to 100,000
shares of Preferred Stock. As of December 31, 1999 and 2000, none were issued
or 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 50,000,000 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.
F-10
7. STOCK OPTIONS
Under the terms of the Company's Option Plans, officers and key
employees may be granted non-qualified or incentive stock options and outside
directors and independent contractors of the Company may be granted
non-qualified stock options. The aggregate number of shares which may be
issued under the plans is 7,026,225.
Information concerning stock options under the plans is summarized
as follows (in thousands, except per share information):
1998 1999 2000
------------------------ --------------------- ----------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ---------- ------- ---------- --------- --------
Outstanding beginning of year......... 2,122 $ 3.75 3,082 $ 1.83 2,881 $ 2.19
Granted............................... 3,729 2.14 583 3.71 960 24.50
Exercised............................. (21) 3.09 (729) 2.06 (696) 2.06
Forfeited and expired................. (2,748) 3.75 (55) 2.21 (151) 14.98
--------- ---------- ------- ---------- --------- --------
Outstanding end of year............... 3,082 $ 1.83 2,881 $ 2.19 2,994 $ 8.81
========= ========== ======= ========== ========= ========
Exercisable end of year............... 1,474 $ 1.83 1,817 $ 2.03 2,132 $ 4.52
========= ========== ======= ========== ========= ========
The following table summarizes information about options outstanding at
December 31, 2000 (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............................ 1,661 2.7 $ 1.83 1,649 $ 1.83
3.08 - 3.83...................... 334 3.2 3.23 220 3.21
5.50 - 5.67...................... 102 3.7 5.50 52 5.50
15.50 - 20.00.................... 359 4.7 16.96 45 17.93
29.00............................ 538 4.1 29.00 166 29.00
--------- -------- --------- --------- ---------
2,994 3.3 $ 8.81 2,132 $ 4.52
========= ======== ========= ========= =========
The weighted average fair value at date of grant for options granted
during 1998, 1999 and 2000 was $1.33, $1.91 and $17.88 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:
1998 1999 2000
---- ---- ----
Expected life (years)............... 4 4 4
Interest rate....................... 6.0% 5.8% 6.2%
Volatility.......................... 79% 60% 95%
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
F-11
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 as follows (in thousands except per share
information):
1998 1999 2000
----------- ----------- -----------
Net income (loss) - as reported............................ $ 402 $ 2,108 $ 3,108
- pro forma.............................. (1,198) 294 (3,180)
Basic earnings (loss) per share - as reported.............. $ 0.05 $ 0.26 $ 0.35
- pro forma.............................. (0.15) 0.04 (0.36)
Diluted earnings (loss) per share - as reported............ $ 0.05 $ 0.21 $ 0.28
- pro forma.............................. (0.15) 0.03 (0.36)
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,
------------------------------------
1998 1999 2000
--------- ---------- ---------
Weighted average shares outstanding........................ 7,818 8,016 8,892
Effect of diluted securities; options and warrants......... -- (1) 1,998 2,238
--------- ---------- ---------
Weighted average shares--diluted........................... 7,818 10,014 11,130
========= ========== =========
- -----------
(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 $239,000, $357,000 and $470,000 for 1998, 1999 and 2000,
respectively. Minimum lease commitments at December 31, 2000 are summarized
as follows (in thousands):
2001.......................... $ 452
2002.......................... 284
2003.......................... 168
--------
$ 904
========
F-12
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, 2000, the Company had federal income tax net
operating loss carryforwards of approximately $12.8 million expiring through
2020.
The Company has total net deferred tax assets as follows (in
thousands):
1999 2000
----------- -----------
Deferred tax assets:
Net operating loss carryforward $ 5,317 $ 10,064
Credits 120 168
Accruals 179 39
Reserves 483 581
Depreciation on Amortization 418 367
Other (148) 6
---------- ----------
Total deferred tax assets 6,369 11,225
Valuation allowance (6,369) (10,625)
---------- ----------
Net deferred tax assets $ -- $ 600
========== ==========
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.
The provision (benefit) for income taxes for the years ended
December 31, 1998, 1999 and 2000 are as follows (in thousands):
1998 1999 2000
-------- -------- ---------
Current taxes:
Federal......................... $ -- $ -- $ 48
State........................... -- -- 89
Foreign......................... -- 252 189
-------- -------- ---------
Sub Total................ -- 252 326
Deferred taxes:
Federal......................... -- -- (408)
State........................... -- -- (192)
-------- -------- ---------
Provision (benefit) for income
taxes.................... $ -- $ 252 $ (274)
======== ======== =========
Differences between the provision for income taxes and income taxes
at statutory federal income tax rate for the years ended December 31, 1998,
1999 and 2000 are as follows (in thousands):
1998 1999 2000
-------- -------- ---------
Income taxes at the statutory federal rate............ $ 137 $ 802 $ 964
State income taxes, net of federal income tax effect.. 24 142 170
Foreign taxes at rates different than U.S. taxes...... -- 12 14
Utilization of net operating losses................... (161) (704) (1,422)
-------- --------- ---------
Total provision for income taxes......... $ -- $ 252 $ (274)
======== ======== =========
F-13
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,
-----------------------
1999 2000
---------- ----------
Asia......................... 62% 57%
Europe and other............. 7% 15%
MAJOR CUSTOMERS-- In 1998, sales to three customers constituted
approximately 15%, 14% and 10% of total revenues . In 1999, three customers
constituted approximately 14%, 12% and 11%, of total revenues. In 2000, no
single customer exceeded 10% of total revenues.
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, 1998, 1999 and 2000 is as follows (in thousands):
SPECIALTY
BUSINESS COMMUNICATIONS COMPONENTS AND OTHER TOTAL
----------------------- -------------------- -------
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
2000
Revenue............ $20,540 $13,330 $33,870
Gross profit....... 6,171 8,246 14,417
F-14
EXHIBIT INDEX
EXHIBIT
NUMBER
-------
3.1 Certificate of Incorporation as amended.
3.2 Bylaws.
10.1 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.1a
of the Post-Effective Amendment No. 8 to Registrant's Registration
Statement on Form S-1 (Registration No. 333-60380) (the Form S-1
Registration Statement).*
10.2 1996 Stock Incentive Plan as amended.*
10.3 Description of Registrant's Management Compensation Program (incorporated
by reference to Exhibit 10.4 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
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. (incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999).
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
(incorporated by reference to Exhibit 10.7 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999).
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).
10.14 Credit Agreement between Wells Fargo Bank, National Association, and the Registrant
dated September 1, 2000 (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).+
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (see signature page).
- -----------
* This exhibit constitutes a management contract or compensatory plan or
arrangement.
+ Exhibits for which Registrant has received confidential treatment for
certain portions. The confidential material in such exhibits has been
redacted and separately filed with the Securities and Exchange
Commission as part of Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000.