Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Overview: Interlink is a leader in intuitive interface devices for home and business applications, utilizing proprietary Force Sensing Resistor (FSR) and wireless communication technologies. The company operates primarily in the business communications market (OEM sales to projector manufacturers) and is expanding into home entertainment and e-transactions markets.
Key Financial Metrics (Fiscal Year 1999)
| Metric | 1999 Value | 1998 Value |
|---|---|---|
| Revenues | $28.1 million | $22.1 million |
| Gross Profit | $10.5 million (37% margin) | $8.1 million (37% margin) |
| Operating Income | $2.4 million (9% margin) | $0.9 million (4% margin) |
| Net Income | $2.1 million | $0.4 million |
| Earnings Per Share (Diluted) | $0.21 | $0.05 |
| Cash Flow from Operations | $2.9 million (Net Provider) | ($0.5 million) (Net User) |
| Working Capital | $17.6 million | $14.1 million |
| Total Assets | $24.7 million | $19.6 million |
| Short-Term Debt | $0.5 million | $0.6 million |
| Long-Term Debt | $1.4 million | $1.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 27% year-over-year, driven primarily by a 31% annualized growth in the business communications segment and a threefold increase in home entertainment sales to $1.5 million.
- Profitability: Operating income more than doubled to $2.4 million. Net income surged to $2.1 million, compared to $0.4 million in 1998.
- Tax Impact: For the first time, the company recorded significant income taxes ($252,000) as its Japanese subsidiary fully utilized tax loss carryforwards.
- Cash Flow: Operations shifted from a net user of cash in 1998 to a net provider of $2.9 million in 1999, aided by improved accounts receivable and inventory management.
- Foreign Exchange: The company recognized $440,000 in losses on foreign currency exchange contracts, which were reflected in revenues.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Strategic Shift: Management plans to spend between $10 million and $15 million starting in the second quarter of 2000 to market technology to digital set-top box manufacturers and expand in the e-transactions market.
- Expense Forecast: Product development and marketing expenses are expected to increase at a rate exceeding revenue growth in the near term due to these new market initiatives.
- Liquidity: The company believes current cash balances and lines of credit (including a $3 million unused U.S. line and $1.1 million unused Japanese line) are sufficient to fund operations for at least the next 12 months.
Risks and Contingencies
- Customer Concentration: The top three customers (NEC, inFocus, Sony) accounted for approximately 37% of 1999 revenue. Sales to Japanese customers represented 50% of total revenue, creating exposure to yen/dollar exchange rate fluctuations.
- Market Adoption: Success depends on the adoption of new technologies in home entertainment and e-transactions markets, which are subject to intense competition and evolving standards.
- Intellectual Property: While the company holds over 65 patents, some initial FSR patents expired in 1999. Continued protection relies on new patents and trade secrets.
- Supply Chain: Risks include interruption of contract manufacturing arrangements and supply shortages of significant FSR sensors.
Investor Verification Checklist
- Customer Concentration: Verify the stability of relationships with top three customers (NEC, inFocus, Sony) which comprise over one-third of revenue.
- Foreign Currency Exposure: Assess the impact of yen/dollar fluctuations on the 50% of revenue derived from Japanese customers.
- Capital Expenditure Plan: Monitor the execution of the planned $10-$15 million investment in home entertainment and e-transactions marketing and development.
- Tax Position: Confirm the utilization of remaining net operating loss carryforwards ($9.8 million federal) and the trajectory of future tax liabilities.
- Patent Portfolio: Review the status of new patent applications filed to replace expired FSR patents and maintain competitive advantage.