UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1996
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
__________ to __________.
Commission file number: 0-21808
INTERLINK ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0056625
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
546 Flynn Road, Camarillo, California 93012
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (805) 484-8855
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock (Title of Class) Warrants (Title of Class) Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at March 18, 1997, based on the closing price on such date on
the NASDAQ National Market System: $29,666,793.
Number of shares of Common Stock outstanding as of March 18, 1997:
4,564,122.
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
Proxy Statement for 1997 Annual Part III
Meeting of Shareholders
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TABLE OF CONTENTS
Item of Form 10-K Page
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PART I
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 4(a). Executive Officers of the Registrants 13
PART II
Item 5. Market for the Registrant's Common 14
Equity and Related Stockholder Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis 15
of Financial Condition and Results of
Operations
Item 8. Financial Statements and Supplementary 15
Data
Item 9. Changes in and Disagreements with Accountants 15
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of 15
the Registrant
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial 16
Owners and Management
Item 13. Certain Relationships and Related 16
Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules 16
and Reports on Form 8-K
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PART I
Item 1. Business
Force Sensing Technology
Interlink Electronics, Inc.'s (the "Company" or "Interlink") force
sensing technology transforms physical pressure applied to a sensor into a
corresponding electronic response. Products incorporating a sensor using
the Company's force sensing resistor ("FSR") devices can react to pressure
when applied by any means--through human touch, a mechanical device, a
fluid, or a gas. With supporting electronics, an FSR sensor can start,
stop, intensify, select, direct, detect, or measure a desired response.
FSR sensors measure relative pressure and, depending on their
configuration and with supporting electronics, can measure the location at
which the pressure is applied. A "basic" FSR sensor, such as the sensor
used in an electronic drum device sold by the Company, detects the pressure
of a drum stick applied to the device and accurately measures the intensity
of the pressure applied, thereby enabling precise control of the drum
sound. A second type of sensor is a "four zone" sensor with four sensors
arranged in a two-by-two square with an actuator placed directly where the
four sensors touch. Toggling the actuator in any direction, an operator can
control the direction and speed of a cursor on a computer screen. A third
type of FSR sensor, known as a touchpad, consists of a two-dimensional grid
capable of measuring the location and intensity of pressure applied at any
set of coordinates on the grid. This type of device is useful for functions
such as handwriting input or computer cursor control. For example, with
appropriate interface electronics, a computer pointing device can be driven
by the movement of a finger on an FSR touchpad, while the "click" function
could be activated by a temporary increase in pressure.
Because FSR sensors can be as thin as one-hundredth of an inch thick
and measure pressure rather than movement, they can be readily incorporated
into sealed systems without moving parts. This makes FSR sensors
particularly well suited to operation in harsh or abusive environments or
where durability and long life are important. FSR sensor systems, when
packaged in sealed environments, are operationally unaffected by most
levels of moisture, environmental contaminants, vibration, or noise. In
tests conducted by the Company, FSR sensors have retained their performance
through tens of millions of actuations, even in adverse environments
involving heat, moisture, and chemical contamination.
FSR sensors can be designed in any shape. The thin profile of an FSR
sensor enables easy integration into a wide variety of mechanical and
electronic devices. An FSR product can contain as many as 256 individual
FSR sensors within a one-half-inch-square area, enabling a precise
measurement of the location at which the pressure is applied.
A force sensing resistor is described scientifically as a polymer
thick film device that exhibits a decreasing electrical resistance with
increasing force applied to the device surface. FSR sensors consist of two
or more layers of plastic film, one or more layers supporting
interdigitating
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electrodes (conductor patterns) and one or more layers supporting the
proprietary, semiconductive polymer. The two types of substrate layer are
arranged in opposition, and the surface contact between them creates an
electrical connection. The application of pressure on the device increases
the surface area over which the electrical contact occurs thereby
decreasing electrical resistance. Any increase in pressure over a
relatively broad range causes a proportional decrease in electrical
resistance within the circuit that can be measured by standard electronic
measuring devices, thereby translating variances in pressure into
corresponding variances in an electronic signal. The ability of an FSR
sensor to measure variances in pressure is accurate and repeatable in
comparison to comparably priced products, allowing precise correlation
between the amount of pressure applied to the sensor and the result in the
operating system controlled by the sensor. In addition to its patented
technology, the Company has developed a number of manufacturing process
improvements that, while not subject to patent protection, are viewed as
trade secrets by the Company, and are considered to have significant
proprietary value.
Forward-Looking Statements
From time to time the Company may issue forward-looking statements
that involve a number of risks and uncertainties. The following factors are
among the factors that could cause actual results to differ materially from
the forward-looking statements: business conditions and growth in the
electronics industry and general economies, both domestic and
international; lower than expected customer orders, delays in receipt of
orders or cancellation or orders; competitive factors, including increased
competition, new product offerings by competitors and price pressures; the
availability of third party parts and supplies at reasonable prices;
changes in product mix; significant quarterly performance fluctuations due
to the receipt of a significant portion of customer orders and product
shipments in the last month of each quarter; and product shipment
interruptions due to manufacturing problems. The forward-looking statements
contained in this document regarding industry trends, revenue, costs and
margin expectations, product development and introductions and future
business activities should be considered in light of these factors.
Product Applications
General
The capabilities and versatility of the force sensing technology offer
opportunities in numerous markets including computer input, appliances,
consumer electronics, aerospace, automotive, and industrial control and
measurement. While this diversity of applications is viewed by the Company
as an advantage, different kinds of applications call for different
electronic or mechanical support efforts and often require separate sales
and distribution channels. Also, sales volumes and profit margins can vary
significantly from application to application. As a result, the Company has
selected specific targeted applications based on its assessment of market
need and size, effectiveness of distribution channels, support
requirements, and potential profitability to the Company. These
applications are not limited by industry or function but rather are
determined by engineering and economic analysis that shows that force
sensing technology offers a particularly functional, cost-effective or
otherwise attractive solution to the particular product need.
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Prior to 1992, the Company's principal business was the manufacture
and sale of FSR sensors made to customer specifications. During 1992, the
Company changed its product focus to concentrate on the sale of complete
sensor products and systems and now focuses in two areas, pointing device
products based on the Company's proprietary VersaPoint technology and
Custom Applications.
1. VersaPoint Technology
For computer users, the two most common ways to enter data or give
commands are "keying" (using regular "text entry" keys on a keyboard) and
"pointing" (using a mouse or equivalent device, which may be stand-alone or
installed in a keyboard). As both commercial and industrial computer
systems have moved from text-based to graphics-based user interfaces, the
need for pointing devices has increased. The Company believes that its
force sensing technology is particularly well suited to this application
because of its inherent ability to provide accurate control of both cursor
movement and speed without any requirement for movement of the operator
other than simple finger or thumb pressure. New computer technologies, such
as computerized presentations, multimedia software, and the Internet, also
require or support pointing and other non-text-based interface devices.
Interlink Electronics, Inc.' force sensing technology, featuring a thin
sensor profile, zero travel, and broad dynamic range characteristics,
allows for the design of miniature joysticks, touchpads, and pressure
buttons offering a user-friendly, cost-effective pointing solution and data
entry method.
To address these market opportunities, the Company has developed its
proprietary VersaPoint and semiconductive touchpad technologies. The
VersaPoint technology consists of a four-zone FSR sensor array and
proprietary software and firmware that control cursor direction and speed.
Depending on product design, computer function selection can be provided
either by "clicking" separate buttons on the computer pointing device, or
by sharply increasing pressure on the cursor control button itself. In
November 1996 the Company introduced its semiconductive touchpad
technology, VersaPad. With proprietary software and firmware, the user
controls cursor direction and speed by sliding their fingertip across the
touchpad surface. Clicking is performed by separate buttons or by tapping
the touchpad surface.
Branded Products
In 1992 the Company began the development of various stand-alone
computer pointing devices based on its VersaPoint technology. Of these
products, the SuperMouse device was introduced in November 1992, the
DuraPoint ruggedized pointing device was introduced in February 1993, the
ProPoint pointing device was introduced in February 1994, the RemotePoint
cordless pointing device was introduced in August 1994, and the DeskStick
and RemotePointPlus products were introduced in November 1995.
The Company is continuing to develop distribution channels for its
branded products. Current distribution consists of mass merchandiser
outlets, including Circuit City Stores, Inc.,
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Fry's Corporation, and Computer City and, distributors, such as Ingram
Micro, catalogs and specialty resellers targeting corporate accounts.
Marketing to these channels is accomplished by direct sales through Company
employees and a network of independent sales representatives which has
recently been established throughout the United States, Japan, Canada, and
Mexico.
SuperMouse The Company has designed and developed the SuperMouse
device, an after-market mouse for the commercial and consumer market. It is
targeted primarily at the notebook and other portable computer market in
which the Company believes it has a competitive advantage as a result of
its small size and its versatility (it can be used as a portable, desktop,
or handheld mouse). The principal solutions offered for this after-sale
market have been the trackball and the traditional mouse.
ProPoint To address the presentation and multimedia market, in
February 1994, the Company began shipping its ProPoint device, a handheld
corded pointing device used to control cursor movement and function
selection. The ProPoint product comes with 12 feet of cable and, with
optional additional connecting cables, its range can be extended to up to
40 feet, making it useful not only as a personal cursor control device, but
also as a presentation assistant for conference room size presentations.
RemotePoint In order to satisfy the need for a cordless, remote
pointing device to control desktop and conference room computer-based
presentations, Interlink introduced its RemotePoint product in August 1994.
The RemotePoint device is a handheld, infrared cordless cursor control
device that has an effective range of up to 40 feet.
RemotePointPlus At the Fall 1995 COMDEX show, Interlink introduced its
RemotePointPlus product, a remote control computer cursor controller. With
programmable buttons (enabling it to handle dozens of different
user-defined functions), and a range of approximately 40 feet, it is
designed to meet the needs of even the most sophisticated presenters.
DeskStick Interlink's newest desktop mouse replacement, the DeskStick
product, couples the advanced pointing stick technology previously
available only in notebook computers with a very attractive price point,
designed to meet the needs both of first time mouse users, and of those
looking for a unique replacement mouse.
DuraPoint Increasingly, industrial, technical and scientific machinery
is being controlled by computers that incorporate pointing devices as a
means of command input. In many of the environments in which such computers
operate, resistance to moisture, chemicals and other contaminants is a
requirement. Both a traditional mouse and trackball are vulnerable to
contamination and malfunction from a variety of substances because they
have exposed moving parts and because they cannot be contained within
sealed systems. Also, machinery used in hospital operating rooms and some
industrial plants must be "scrubbable" as a part of the normal cleaning and
disinfecting process required in those environments.
To address these needs, in February 1993 Interlink, began shipping its
DuraPoint ruggedized pointing device. To the best of the Company's
knowledge, its DuraPoint device was
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the first cursor control device designed to NEMA 4X, 6P, and 13 standards
(industry association standards relating to the ability of an electronic
device to operate under adverse environmental conditions). Independent
testing to confirm compliance with NEMA standards has not been required by
customers and has not been requested by the Company. The DuraPoint device
can withstand a variety of harsh environments, such as direct water spray,
debris, cleansers or even prolonged submersion. Interlink offers the
DuraPoint device as either a stand-alone product or as a cursor control
module that can be incorporated into an existing or planned control panel
design. Sales channels consist primarily of industrial hardware and
software distributors and bundling arrangements with industrial and medical
equipment manufacturers.
OEM Remote Controls
Since the development of its first hand-held pointing device ProPoint,
Interlink has been selling its remote controls on an OEM basis, i.e. direct
to the system manufacturer. With the introduction of the Interactive Remote
Control ("IRC"), an infrared remote control with VersaPoint pointing
technology and up to 30 additional function buttons, Interlink Electronics,
Inc.' offers many remote control solutions to the OEM. Any of the ProPoint,
RemotePoint, RemotePointPlus and IRC products can be purchased through a
private label arrangement or each has been specifically designed to be
easily customized to customer specifications. Interlink Electronics, Inc.
also offers a circuit board level solution of its remote control/ pointing
device technology.
Keyboard Integration
Interlink offers a variety of alternatives to computer and keyboard
manufacturers to purchase components for a pointing device installed in a
keyboard or panel mounted. Historically, the Company has sold the basic
sensor array for use with electronics supplied by others. More recently,
however, it has focused on the sale of a complete VersaPoint-based sensor
module incorporating both the sensor array and supporting firmware. When
Interlink Electronics, Inc.' proprietary firmware is a part of the package,
the actual electronic components may be sold or the technology may be
licensed to the customer for manufacture by others. The Company's FSR
sensors have been installed in keyboards for a variety of notebook,
desktop, industrial and other computers. A computer pointing device can be
incorporated in a keyboard as a separate component or can be installed
under a regular text-entry or function key. Interlink Electronics, Inc. has
developed a "plug and play" FSR pointing device, marketed under the trade
name "MicroModule", that is available as a standard integrated product for
installation in notebooks or other computers.
Interlink's MicroModule, MicroJoystick and VersaPad computer pointing
devices, and similar OEM systems are designed to be incorporated into
notebook (and smaller) computer applications. Because the required FSR
sensor array can be packaged in an enclosure approximately 0.2" thick, it
can be incorporated at and just below the surface of the keyboard, and
therefore it does not take up significant amounts of space or interfere
with the installation of other components immediately below the keyboard
surface.
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2. Custom Applications
The Company's Custom Applications Product Line consists of design,
engineering and product development teams that incorporate its proprietary
technology into specific custom products for individual OEM customers.
Interlink's force sensing technology addresses many applications in this
area. Because of the required design and development time, sales cycles
typically range from four to 18 months and can be considerably longer. On
the other hand, the result of a successful custom sale is usually a product
that is regularly reordered by the customer over a considerable period of
time.
The principal advantages of force sensing technology that apply to the
Company's other business areas also apply to its Custom Applications. The
ability to produce sensors in a wide variety of shapes and sizes, detection
of both the location and the intensity of pressure applied to the sensor,
the zero-travel characteristic and the system's resistance to environmental
damage are all attractive features for the Company's Custom Applications.
In some cases, Interlink Electronics, Inc.' customers have determined that
force sensing technology provides the only currently available solution to
their sensor requirements.
The Company has identified and is currently working with a variety of
Custom Applications customers that are presently concentrated in the
industrial and medical device industries: for example, it has developed a
fail-safe sensor system for Varian Associates for use in a medical imaging
device. As the heavy medical imaging device is lowered into contact with
the patient, the FSR sensor functions as a safety bumper to prevent injury
from excessive pressure of the device on the patient by halting the
movement of the device when the selected level of pressure is reached. FSR
sensors developed by Interlink Electronics, Inc. for Baxter Healthcare
Corporation are incorporated in an infusion pump where the FSR sensor
functions as a safety device to ensure proper placement of the intravenous
tube in the pump head.
Sales and Marketing
Historically, the Company sought to establish relationships with
customers that require a sensor system for which its proprietary force
sensing technology offers a particularly attractive solution and market
advantage. As a part of such relationships, the Company would work with the
customer to design an appropriate solution which the Company would then
manufacture and supply. Over the past few years Interlink Electronics,
Inc.' sales and marketing strategy has changed, as the Company has evolved
from being merely a supplier of sensors into its present position as a
designer and manufacturer of complete sensor systems. Today, the Company is
focusing on integrating its patented force sensing technology with added
electronic interfacing and mechanics in order to provide full "plug and
play" solutions. With the introduction of the initial version of its
SuperMouse device in late 1992, Interlink Electronics, Inc. entered the
consumer product market. With its DuraPoint device, introduced the next
year, the Company entered the industrial pointing device market. Its
ProPoint, RemotePoint, DeskStick, and RemotePointPlus products, introduced
in subsequent years, have built upon this foundation. The Company expects
to continue to sell its products directly, as well as through distributors,
value-added resellers, system integrators, mass merchandisers, and others.
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Computer Pointing Devices. Since 1990, Interlink has worked with a
variety of keyboard and other computer and computer peripheral device
manufacturers to supply sensors or sensor systems for installation in
computers or peripheral devices. Sales cycles for OEM sales are relatively
long--in part because a successful sale requires Interlink's sensors to be
"designed in" to a customer product. Interlink's success with respect to
such OEM sales is also heavily dependent on the business success of its
customers or prospective customers. The Company has from time to time
experienced difficulty, when rapidly falling computer and peripheral prices
put pressure on many hardware manufacturers, including some of the
Company's customers. The Company believes that OEM sales constitute an
important part of its sales and marketing activity, and is devoting
significant management and sales time to exploring OEM opportunities.
In early 1995, Interlink revised its distribution strategy for its
branded products by replacing its former distributor with a direct sales
force consisting of both Company employees and independent sales
representatives. The Company has established a network of sales
representatives which covers the United States, Canada, and Mexico, and
continues to closely monitor the results of their activities. In Europe,
the Company is considering marketing these products through a non-exclusive
master distributor, as well as through regional and local sales
representatives. Interlink Electronics, Inc. is also actively exploring
possible OEM bundling opportunities regarding these products. The Company's
advertising expenditures regarding these products have thus far been
relatively modest, with strong reliance on retailer cooperative
advertising, favorable product reviews in leading computer publications,
and word of mouth.
The Company's DuraPoint ruggedized industrial pointing device, in its
stand-alone configuration, is sold by a direct sales force, as well as
through a network of industrial electronics distributors. Interlink
supports its sales of DuraPoint products primarily through print
advertising in industrial controls magazines, direct mail and
demonstrations at trade shows.
Custom Applications. Interlink sells its custom designed sensors
through a direct sales organization. An integrated marketing approach,
consisting of a direct mail campaign, media advertising, public relation
campaigns, trade show participation, and telemarketing programs is managed
by the Director of Marketing. The sales and marketing group is supported by
a team of customer service specialists and order-entry personnel.
An important part of the sales cycle for custom and modified standard
products typically involves product development and design. In a new market
or product application, there is often a need to design and engineer a
solution for customers prior to entering a period of manufacturing. This
process typically involves a period of four to seven months for turnkey
solutions before volume production can begin. The Company usually charges
the customer for design, development and tooling work during this period.
In an effort to compress development time, the Company develops product
lines that are readily modifiable to meet customer specific requirements.
This, in conjunction with Product and Project Management teams focused on
the Company's targeted business segments, provides an efficiently
responsive process to meet customer specific requirements.
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International Operations
Interlink Electronics K.K. In April 1994, the Company acquired an 80%
ownership interest in Interlink Electronics K.K. ("IEKK"), a Japanese
company which distributes and performs value added services regarding the
Company's products in Japan. The president of IEKK is a former senior
executive with Mitsubishi Petrochemicals Company, and has a number of years
of experience working with Interlink Electronics, Inc. and its products. In
1996, IEKK's operations accounted for approximately 20% percent of
Interlink Electronics, Inc.' consolidated revenues.
Licensees
International Electronics & Engineering In September 1994, Interlink
entered into several agreements with InvestAR, S.a.r.l., pursuant to which
Interlink Electronics, Inc. transferred its entire ownership interest in
Interlink Electronics, Inc. Europe ("IEE"), a Luxembourg-based joint
venture owned by Interlink Electronics, Inc. and InvestAR, to InvestAR in
exchange for the 510,775 shares of Interlink common stock then held by
InvestAR. These shares, representing approximately 13.3% of the Company's
then-outstanding Common Stock, were returned to the Company, and reverted
to the status of authorized, but unissued, shares. In addition to the stock
transfer, the agreements also provided for continued technological
cooperation between the Company and IEE, and for the payments of technology
license royalties by IEE to the Company for sales by IEE outside of Europe
of certain FSR-based automotive safety related sensors. Royalty revenues
from IEE (which changed its name in 1995 to International Electronics &
Engineering) were not material in 1995 or 1996.
Toshiba Silicone In an agreement entered into in 1989, Toshiba
Silicone Co., K.K. licensed from the Company the right to use Interlink's
Force Sensing Resistor technology in applications for use with musical
instruments. Thus far, the royalties from this license have not been
material to the Company's revenues.
Manufacturing
Production of FSR sensors is a relatively inexpensive and
non-polluting process. The flexibility of the process allows Interlink to
take advantage of changing market opportunities. FSR sensors are
manufactured using screen printing techniques. All proprietary aspects of
the manufacturing process are maintained in-house at Interlink, and at IEE,
its European licensee, to maintain quality and protect the force sensing
technology.
While electronic screen printing is a common process in various
technology industries, the quality and precision of printing required to
make high-quality FSR sensors greatly exceeds the standards applicable in
most other industries. The Company has developed significant expertise in
the manufacture of FSR sensors, and believes this experience would be
difficult to replicate over the short term. In the FSR manufacturing
process, printed sheets of FSR semiconductor material and the corresponding
conductor patterns are laminated to form the FSR
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sandwich structure using inexpensive sheet adhesives. The assembled sheets
are die cut, and suitable connectors are attached.
Readily available materials (substrates, films, polymer thick film
inks) developed for other industries have proved unsuitable for the FSR
manufacturing process. Interlink has worked closely with a small group of
manufacturers to create new materials optimized for FSR usage; most of
these materials are supplied to the Company on an exclusive basis. The raw
materials are processed into their final form on site, using proprietary
material and methods.
The Company maintains agreements with several computer chip
manufacturers pursuant to which they provide microcontrollers to it at
guaranteed prices for use in or with Interlink's pointing devices. From
time to time in the past, there have been unanticipated shortages in the
number, and/or delays in the availability, of microcontrollers required in
the Company's products. No past shortage has had a material effect upon the
Company's ability to supply its products in commercial quantities. While
the Company has taken a number of steps, including the development of
additional chip suppliers, in order to attempt to reduce its prospective
exposure, there can be no guarantee that a future chip shortage will not
occur, and that, if one occurs, that it would not have an adverse effect
upon the Company's operations.
Interlink manufactures FSR sensors in its facility in Camarillo,
California. This facility is capable of operating on a single, double, or
triple shift basis, as volume dictates. The Company acquires the components
of its FSR-based sensors from a number of sources within the United States.
Some components for its VersaPoint products as well as the manufacture of
some of these products are sourced from manufacturing companies located in
the Far East and Mexico; their cost and availability are dependent upon a
number of factors beyond the Company's control, including future currency
exchange rates, and future political conditions in the countries in which
the vendors are located.
The Company's European licensee, IEE, also has a modern and
well-equipped facility. This facility serves the European Community, and
addresses the Company's customers' need for the security of a second
possible manufacturing source.
Research
Interlink's research effort falls into four categories: Intellectual
Property, Materials and Processes, Prototype and Contract Research, and
Special Applications. The research group continues to expand the Company's
intellectual properties. The Company regularly files patent applications
and continuations thereof to cover both new and improved methods of
manufacturing FSR sensors, and new, non-FSR based technologies developed by
the Company.
Product Development
Product development for the Company is focused on developing custom,
standard, and modified standard products. Custom and modified standard
products are developed very selectively, when they are adequately funded,
and when there are obvious long-term strategic
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benefits to the Company. Custom and modified standard products are
primarily developed to meet the requirements specified by OEM customers for
their unique applications of sensors using "force sensing resistor"
technology. Standard or Branded product requirements are established using
market analysis, evaluation and assessment to determine product
differentiation and acceptance. Branded products are funded as defined by
the Company's business plan, and developed to contribute to the Company's
short and long-term business objectives. The Company's VersaPoint
technology is used to develop standard products, primarily for computer
pointing devices serving the OEM, consumer, and industrial markets.
Competition
In the computer pointing device market, the Company competes with a
number of sellers, including Microsoft, IBM, and Logitech (although
Logitech is also a customer of the Company for some components (pointing
sticks) of its products). A number of other companies manufacture
touchpads, pointing sticks or remote control input devices, for a wide
variety of applications. Many of the Company's competitors have greater
financial and technological resources than does the Company, and may also
have established relationships with customers, and enjoy economies of
scale, that afford them a competitive advantage.
In a variety of applications incorporating FSR sensors into complete
products, the Company may also compete with the in-house capabilities of
its larger customers to design and manufacture all or portions of FSR
products. In addition, besides the major previously existing computer
cursor pointing technologies (pointing sticks, mice and trackballs), a new
touchpad technology has gained increased market acceptance over the last
few years; several computer manufacturers which formerly used OEM pointing
sticks have switched to OEM touchpads.
The Company's FSR sensors compete with comparable sensors produced
using a variety of other technologies. For applications that require only
"on/off" capability without any force sensing capability, a wide variety of
sensors exist, including membrane switches, capacitive sensors and
mechanical switches, that compete with the Company's sensors in particular
applications. Other kinds of "force sensing" technology include strain
gauges, piezo sensors and conductive rubber. Each of these technologies
have advantages and disadvantages that make it an attractive solution in
certain applications and not in others. Strain gauges are extremely
accurate but relatively expensive. Piezo sensors are generally comparable
in price and accuracy to FSR sensors but measure instantaneous impact
rather than force over a continuing period. Conductive rubber is a widely
established technology but deteriorates more rapidly over time than do
other force sensing technologies. The Company seeks to identify and pursue
applications in which force sensing technology is a particularly attractive
solution. Most sensors that compete with the Company's FSR sensors are
widely available from a variety of sources.
Patents and Proprietary Rights
Aspects of Interlink's technology are protected by more than 55
patents issued or pending in the United States and abroad, as well as trade
secret and proprietary knowledge. Products incorporating the Company's
force sensing technologies are sold under trademarks issued or
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pending in the United States and various other countries. Of the initial
FSR patents granted (those covering the use of an uneven surface to produce
variable resistance), the last patent granted will expire on February 9,
1999. The Company has continued its efforts to improve the design,
formulation, and manufacture of its sensors; some of these improvements are
maintained as trade secrets, while U.S. and foreign patents have been
applied for with respect to others. Other patents, covering various
apparatus, processes and methods related to the force sensing technology
expire between 1998 and 2015. Various corresponding foreign patents will
expire between this year and 2015. Patents covering various materials and
processes used in the Company's current generation of products, as well as
new devices for angle and displacement sensing, were granted during 1995 by
the U.S. Patent Office. The Company has also filed U.S. and foreign patent
applications regarding the design, and several key operating features, of
its remote control products.
While the Company believes its patents afford it some competitive
advantage, such protection is limited by the resources available to the
Company to identify potential infringements and to defend its rights
against infringement. Furthermore, the extent of the protection offered by
any patent is subject to determinations as to its scope and validity that
would be made only in litigation. Therefore, there is no assurance that the
Company's patents will afford meaningful protection from competition.
The Company has also developed certain manufacturing processes and
other methods of applying its patented technology that it protects as trade
secrets. The Company believes these trade secrets are important for the
effective and efficient use of the patented technology and that a
competitor with a right to use the patented technology would be required to
develop comparable manufacturing and other processes to compete effectively
with the Company. The Company requires its employees to sign nondisclosure
agreements and seeks to limit access to sensitive information to the
greatest practical extent.
Employees
The Company had eighty-five full-time employees in the United States
as of December 31, 1996, eighty at its corporate offices and manufacturing
facilities (including seven members of management), and five sales managers
stationed at regional offices. Its Japan subsidiary had eight employees.
Item 2. Properties
The Company's corporate offices and manufacturing facilities are
located in a 26,000 square foot leased facility in Camarillo, California.
The lease on the Camarillo premises runs until August 1998 and provides for
an average monthly rent payment of $12,772.00. The Company believes that
this facility will be adequate to meet its requirements. Its three regional
sales offices operate out of leased facilities. Its Japan subsidiary,
Interlink Electronics, Inc. K.K., leases office space in Tokyo.
12
<PAGE>
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant
Name Age Position with Company
E. Michael Thoben, III 43 Chairman of the Board,
President, Chief Executive
Officer, and Director
David J. Arthur 48 Senior Vice President--
Operations
William A. Yates 45 Senior Vice President--Sales
and Marketing
Paul D. Meyer 37 Chief Financial Officer,
Secretary
Wendell W. Ritchey 57 Vice President--Product
Development/Engineering
- ---------------
E. Michael Thoben, III became Chief Operating Officer and a
director of the Company in March 1990 and has been President of the Company
since June 1990, Chief Executive Officer since February 1994, and Chairman
of its Board of Directors since August 1994. Prior to that time, for 11
years, Mr. Thoben was employed by Polaroid Corporation, most recently as
the manager of one of Polaroid's seven strategic business units on a
worldwide basis. Mr. Thoben holds a B.S. degree from St. Xavier University
and has taken graduate management courses at the Harvard Business School
and The Wharton School of Business.
David J. Arthur has been Interlink Electronics, Inc.' Senior Vice
President--Operations since May, 1995; prior to that, he served as the
Company's Vice President, Manufacturing and Operations. Before joining the
Company in October 1990, he held senior positions in materials, purchasing
and manufacturing management with TRW Inc., North American Philips
Corporation, and Amdahl Corporation. From 1987 to 1990, he served as Vice
President of Manufacturing at Harman Electronics, Inc.
13
<PAGE>
William A. Yates became Interlink Electronics, Inc.' Senior Vice
President--Sales and Marketing in May, 1995. Prior to joining the Company
in 1990 as its Vice President, Sales and Marketing in 1990, Mr. Yates had
served for nine years in increasingly senior sales positions with Polaroid
Corporation's Industrial Products Division. Mr. Yates has over 23 years of
sales and marketing experience with both small companies and large
businesses, the latter including Carnation Company and Ortho Pharmaceutical
Corporation. Mr. Yates holds a B.A. degree from the University of
California at Berkeley.
Paul D. Meyer joined Interlink Electronics, Inc. in December 1989
as Controller, became its Vice President--Finance in June, 1994, and its
Chief Financial Officer in December 1996. From May 1988 to December 1989,
he was Controller for Dix-See Sales Company. From September 1985 to May
1988, Mr. Meyer was Corporate Accounting Manager for Bell Industries. Mr.
Meyer was initially employed at Price Waterhouse from 1983 to 1985. Mr.
Meyer holds a B.A. degree in economics from the University of California at
Los Angeles.
Wendell W. Ritchey, the Company's Vice President--Product
Development/Engineering, joined Interlink Electronics, Inc. in March 1994.
Prior to joining the Company, he held senior management positions in
research and development, engineering, and operations with ITT Power
Systems. From 1991 to 1993, he served as Vice President, Engineering with
Digital Sound Corporation, a developer of voice processing computers. Mr.
Ritchey holds a B.S. degree from Tri-State College.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
Historical Market Information. From its initial public offering
on June 7, 1993 until September 14, 1995, the Company's Common Stock and
Warrants were listed under the symbols "LINK" and "LINKW," respectively on
the Nasdaq Small Cap Market. Since September 14, 1995, the Company's
securities have been listed for trading on the Nasdaq National Market
System under the same symbols.
The following table sets forth, for the periods shown, the high and low
Nasdaq sales prices for the Common Stock:
Year Ended December 31, 1996 Low High
First Quarter.............................. $ 4.63 $ 7.25
Second Quarter............................. $ 5.75 $ 8.38
Third Quarter.............................. $ 5.06 $ 7.38
Fourth Quarter............................. $ 4.63 $ 6.31
On February 25, 1997 the last reported sale price of the Common Stock on
Nasdaq National Market was $7.375.
14
<PAGE>
Number of Shareholders. As of February 25, 1997, the Company had
approximately 1,600 holders of record. The Company believes that the number
of beneficial owners is substantially greater than the number of record
holders because a large portion of the Company's outstanding Common Stock
is held of record in broker "street names" for the benefit of individual
investors.
Dividend Policy. The Company has never paid cash dividends. It is the
Company's intention to retain earnings, if any, to finance the operation
and expansion of its business and therefore it does not expect to pay cash
dividends in the foreseeable future. Payment of dividends, if any, will be
at the discretion of the Board of Directors after taking into account
various factors, including the Company's financial condition, results of
operations, current and anticipated cash needs, plans for expansion and
restrictions, if any, under the terms of any debt obligations of the
Company or equity securities issued by the Company.
Item 6. Selected Financial Data
The information required by this item is included on page F-1 of this
Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is included at pages F-2 to F-3
of this Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included at pages F-4 to F-16
of this Report on Form 10-K and as listed in Item 14 of Part IV of
this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors of the Company is included under
"Election of Directors" in the Company's definitive proxy statement for its
1997 Annual Meeting of Shareholders filed or to be filed not later than 120
days after the end of the fiscal year covered by this Report and is
incorporated herein by reference. Information with respect to executive
officers of the Company is included under Item 4(a) of Part I of this
Report on Form 10-K. Information with respect to compliance with Section
16(a) of the Securities Exchange Act is included under "Section 16(a)
beneficial ownership reporting compliance" in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders filed or to be
filed not later than 120 days after the end of the fiscal year covered by
this Report and is incorporated herein by reference.
15
<PAGE>
Item 11. Executive Compensation
Information with respect to executive compensation is included under
"Executive Compensation" in the Company's definitive proxy statement for
its 1997 Annual Meeting of Shareholders filed or to be filed not later than
120 days after the end of the fiscal year covered by this Report on Form
10-K and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management is included under "Security Ownership Of Certain
Beneficial Owners And Management" in the Company's definitive proxy
statement for its 1997 Annual Meeting of Shareholders filed or to be filed
not later than 120 days after the end of the fiscal year covered by this
Report on Form 10-K and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Not applicable
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements and Schedules
The following documents are included in this Report on Form 10-K at
the pages indicated:
Page
Report of Independent Public Accountants F-4
Consolidated Balance Sheets at December 31, 1995 and 1996 F-5
Consolidated Statements of Operations for years ended
December 31, 1994, 1995 and 1996 F-6
Consolidated Statements of Shareholders' Equity for years F-7
ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for years ended
December 31, 1994, 1995 and 1996 F-8
Notes to Consolidated Financial Statements F-9-16
16
<PAGE>
No other schedules are included because the required information is
inapplicable or is presented in the financial statements or related notes
thereto.
(a)(2) Exhibits
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1b of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form S-1, Registration No.
33-60380 (the "Form S-1 Registration Statement").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit
3.2a of Post-Effective Amendment No. 8 to Registrant's Form S-1
Registration Statement.
10.1 1988 Stock Option Plan, as amended and restated. Incorporated
by reference to Exhibit 10.1 of the Form S-1 Registration
Statement.**
10.2 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.1a of the Form S-1 Registration Statement.**
10.3 1996 Stock Incentive Plan.**
10.4 Description of Interlink Electronics, Inc. Management
Compensation Program.**
10.5 Form of Promissory Note from Stuart Yaniger dated March 1993.
Incorporated by reference to Exhibit 10.7 of the Form S-1
Registration Statement.
10.6 Form of Amendment to Promissory Note from Stuart Yaniger.
Incorporated by reference to Exhibit 10.7a of the Form S-1
Registration Statement.
10.7 Technology Transfer Agreement between the Registrant and
Franklin Eventoff dated as of December 23, 1987, and amendment
thereto. Incorporated by reference to Exhibit 10.9 of the Form
S-1 Registration Statement.
10.8 Lease Agreement to lease premises in Camarillo, California
dated January 25, 1993. Incorporated by reference to Exhibit
10.11a of the Form S-1 Registration Statement.
10.9 License Agreement between the Registrant and Toshiba Silicone
Co., Ltd. dated March 10, 1989. Incorporated by reference to
Exhibit 10.14 of the Form S-1 Registration Statement.
10.10 Joint Venture Agreement among the Registrant, InvestAR
s.a.r.l., Interlink Electronics, Inc. Europe s.a.r.l. and IEE
Finance s.a.r.l. dated November 7, 1989. Incorporated by
reference to Exhibit 10.15 of the Form S-1 Registration
Statement.
10.11 Exclusive License and Distributor Agreement between the
Registrant and Interlink Electronics, Inc. Europe s.a.r.l.
dated as of November 7, 1989. Incorporated by reference to
Exhibit 10.16 of the Form S-1 Registration Statement.
17
<PAGE>
10.12 Manufacturing and Supply Agreement between the Registrant and
Interlink Electronics, Inc. Europe s.a.r.l. dated as of
November 7, 1989. Incorporated by reference to Exhibit 10.17 of
the Form S-1 Registration Statement.
10.13 Letter Agreement between the Registrant and InvestAR s.a.r.l.
dated November 7, 1989. Incorporated by reference to Exhibit
10.18 of the Form S-1 Registration Statement.
10.14 Agreement between the Government of Luxembourg, Interlink
Electronics, Inc. Europe s.a.r.l., IEE Finance s.a.r.l., the
Registrant and InvestAR s.a.r.l. dated December 18, 1989.
Incorporated by reference to Exhibit 10.19 of the Form S-1
Registration Statement.
10.15 Agreement with InvestAR s.a.r.l. and ARBED S.A. (undated).
Incorporated by reference to Exhibit 10.20 of the Form S-1
Registration Statement.
10.16 Agreement among the Registrant, Interlink Electronics, Inc.
Europe s.a.r.l. and InvestAR s.a.r.l. dated as of December 14,
1990. Incorporated by reference to Exhibit 10.21 of the Form
S-1 Registration Statement.
10.17 Ink Technology Transfer Agreement between the Registrant and
InvestAR s.a.r.l. dated December 11, 1992. Incorporated by
reference to Exhibit 10.23 of the Form S-1 Registration
Statement.
10.18 Financing Agreement between the Registrant and InvestAR
s.a.r.l. in relation with the Ink Technology Transfer Agreement
dated December 11, 1992. Incorporated by reference to Exhibit
10.24 of the Form S-1 Registration Statement.
10.19 Form of Confidentiality and Nondisclosure Agreement in relation
with the Ink Technology Transfer Agreement (undated).
Incorporated by reference to Exhibit 10.25 of the Form S-1
Registration Statement.
10.20 Form of Escrow Agreement for Technology in relation with the
Ink Technology Transfer Agreement dated December 11, 1992.
Incorporated by reference to Exhibit 10.26 of the Form S-1
Registration Statement.
10.21 Financing Agreement between the Registrant and InvestAR
s.a.r.l. dated June 15, 1992. Incorporated by reference to
Exhibit 10.27 of the Form S-1 Registration Statement.
10.22 Interlink Europe Financing Agreement between the Registrant and
InvestAR s.a.r.l. dated April 7, 1993. Incorporated by
reference to Exhibit 10.28 of the Form S-1 Registration
Statement.
18
<PAGE>
10.23 Agreement between Zilog, Inc. and the Registrant date November
30, 1993. Incorporated by reference to Exhibit 10.34 of the
Form S-1 Registration Statement.*
10.24 Employment Agreement between the Registrant and E. Michael
Thoben, III effective as of April 1, 1996.
10.25 Employment Agreement between the Registrant and William A.
Yates effective as of April 1, 1996.
10.26 Employment Agreement between the Registrant and David J. Arthur
effective as of April 1, 1996.
21.1 Subsidiaries of the Registrant.
24.1 Consent of Arthur Andersen.
25.1 Power of Attorney (see page 20).
27 Financial Data Schedule.
- ------------
* Confidential Treatment for portions of this agreement has been granted
by the Commission.
** This exhibit constitutes a management contract or compensatory plan
or arrangement.
(b) Reports on Form 8-K
Not applicable.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERLINK ELECTRONICS, INC.
By: E. MICHAEL THOBEN, III
------------------------------------
E. Michael Thoben, III
Chairman of the Board, President,
Chief Executive Officer
Dated: March 20, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below appoints E. Michael Thoben, III and Paul D. Meyer as his or
her true and lawful attorneys-in-fact and agents, with full power of
substitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K,
and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents,
or their substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
E. MICHAEL THOBEN, III
- ----------------------------- Chairman of the Board, March 20, 1997
E. Michael Thoben, III President, Chief
Executive Officer
PAUL D. MEYER
- ----------------------------- Chief Financial Officer March 20, 1997
Paul D. Meyer and Secretary
GEORGE GU
- ----------------------------- Director March 20, 1997
George Gu
EUGENE F. HOVANEC
- ----------------------------- Director March 20, 1997
Eugene F. Hovanec
CAROLYN MACDOUGALL
- ----------------------------- Director March 20, 1997
Carolyn MacDougall
MERRITT LUTZ Director March 20, 1997
- -----------------------------
Merritt Lutz
20
<PAGE>
INTERLINK ELECTRONICS, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with
the financial statements and the related Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Statement Of Operations Data:
Revenues:
Product sales $2,577 $4,362 $7,797 $ 10,741 $ 13,485
Contract development 450 - - - -
-------- ------- ------- ------- -------
Total revenues 3,027 4,362 7,797 10,741 13,485
------- ------- ------- ------- -------
Cost of revenues 1,754 2,657 4,094 5,252 7,028
------- ------- ------- ------- -------
Gross profit 1,273 1,705 3,703 5,489 6,457
------- ------- ------- ------- -------
Operating expenses:
Product development and research 443 782 1,011 897 1,234
Selling, general and administrative 2,564 3,954 3,887 4,524 4,617
------- ------- ------- ------- -------
Total operating expenses 3,007 4,736 4,898 5,421 5,851
------- ------- ------- ------- -------
Operating income (loss) (1,734) (3,031) (1,195) 68 606
------- ------- ------- ------- -------
Other income (expense):
Debt conversion expense - (450) - - -
Units issued in connection with bridge loans - (550) - - -
Interest expense (79) (84) (37) (60) (118)
Minority interest - - - 41 -
Other 496 175 155 101 27
Gain from sale of interest in European
Joint Venture - - 3,380 - -
------- ------- ------- ------- -------
Total other income (expense) 417 (909) 3,498 82 (91)
Net income (loss) $(1,317) $(3,940) $ 2,303 $ 150 $ 515
======= ======= ======= ======= =======
Earnings (loss) per share $ (5.29) $ (1.80) $ .49 $ .04 $ .12
December 31,
----------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
Balance Sheet Data:
Working capital (deficiency) $ (286) $ 3,631 $ 2,140 $ 6,353 $ 8,969
Total assets 2,222 5,871 5,185 10,187 13,185
Short term debt 1,174 36 251 255 403
Deferred licensing income 180 144 - - -
Long term debt and capital lease obligations 530 128 121 672 850
Shareholders' equity (deficit) $ (313) $ 4,454 $ 3,651 $ 7,589 $ 9,969
</TABLE>
F-1
<PAGE>
INTERLINK ELECTRONICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table presents, as a percentage of total revenues, certain
selected consolidated financial data of each of the three years in the
period ended December 31, 1996.
- -------------------------------------------------------------------------------
1994 1995 1996
- -------------------------------------------------------------------------------
Revenues:
Computer pointing devices 66% 74% 86%
Custom applications 34 26 14
Total revenues 100 100 100
Gross profit 48 51 48
Operating expenses:
Product development and 13 8 9
research
Selling, general and 50 42 34
administrative
Total operating expenses 63 50 43
Operating income(loss) (15) 1 5
Other income (expense) 2 - (1)
Sale of interest in European JV 43 - -
Net income 30 1 4
- -------------------------------------------------------------------------------
Revenues increased 26% from $10.7 million in 1995 to $13.5 million in
1996. As compared to 1994, 1995 revenues grew 38% from $7.8 million in
1994. The revenue growth is a result of the Company's focus on developing
and marketing computer pointing device products based on the Company's
VersaPoint technology. Revenues from this product line grew from $5.2
million in 1994 to $7.9 million in 1995 and to $11.6 million in 1996. The
primary products within this product line are: PortaPoint, introduced in
late 1992 (renamed SuperMouse in early 1994); DuraPoint, introduced in
early 1993, ProPoint, introduced in early 1994, the Integrated Pointing
Stick, introduced in late 1993; the MicroModule, introduced in early 1994;
RemotePoint, introduced in late 1994; RemotePoint Plus, DeskStick and IRC
introduced in late 1995. Because of the Company's focus on pointing device
products, sales in the Custom Applications product line have recorded
nominal growth; growing 10% from $2.6 million in 1994 to $2.8 million in
1995 and recorded a decline of 33% to $1.9 million in 1996. The Company
expects that the Custom Applications product line will continue to show
minimal or negative growth.
The improvement of gross profit to 51% in 1995 from 48% in 1994 was a
reflection of: a) the shift in revenue mix toward the Computer Pointing
Devices product line which carries a relatively higher profit margin; b)
the Company's successful efforts to develop low-cost overseas producers of
the Company's Branded Products, as volume justifies; c) the relatively low
usage of FSR manufacturing capacity, thus as revenue has risen fixed
manufacturing costs have remained relatively constant. In 1996 the gross
profit margin declined to 48% due to a greater mix of high volume, OEM
sales as compared to prior periods. During the periods presented the
Company has not experienced meaningful price erosion in its Computer
Pointing Devices product line.
Product development and research expense decreased from $1 million in
1994 to $897,000 in 1995 and increased in 1996 to $1.2 million. The 1994
expense was spent developing RemotePoint and the
F-2
<PAGE>
MicroJoystick. The Company was able to achieve a decrease in the 1995
expense as the products developed in 1995, RemotePoint Plus, IRC and
DeskStick are essentially line extensions to the products developed in the
previous year. In 1996 development costs increased to support greater OEM
sales, which require more engineering resources, and to develop the
touchpad technology.
On a percentage of sales basis, the Company has achieved a decline in
SG&A costs from 50% in 1994, to 42% in 1995 to 34% in 1996. This decline
results from amortization of fixed SG&A costs over a greater base of sales
and the shift in product mix toward OEM sales.
The Company recorded a profit from operations of $68,000 in 1995 and
$606,000 in 1996 versus an operating loss of $1.2 million in 1994. These
improvements were achieved by strong revenue and profit margin growth from
the Company's key focus area, Computer Pointing Devices and successful cost
management of product development and marketing costs.
The revenue growth in the Company's Computer Pointing Device product
line, and operating cost control contributed to achieve 1996 net income of
$515,000, a $365,000 improvement over 1995 net income of $150,000. 1994's
results included a one time gain of $3.4 million associated with the sale
of the Company's interest in IEE. Thus, without that gain, 1995 results
showed a $1.2 million improvement as compared to 1994.
Liquidity and Capital Resources
Working capital at December 31, 1996, was $8.9 million versus $6.4
million at the end of 1995. The $2.5 million increase results from the
positive results from operations and from proceeds of the exercise of
Warrants.
In 1996 operations consumed $1.3 million of available cash due to
increased customer receivables and inventory requirements necessitated by
the revenue growth.
1996's investing activities consisted of purchases of manufacturing
equipment and the upgrade of computer hardware for the Company's management
information system.
In 1996 the Company negotiated an increase in the maximum available on
its bank line of credit to $1.5 million (the line was unused at December
31, 1996). Additionally, the Company has a $1.8 million equipment lease
line from a leasing company of which approximately $1.3 million had been
drawn by year end. A secondary offering of equity securities or the
exercise of outstanding warrants and options are potential sources of
equity capital that may be available to the Company. Management believes
that forecasted cash requirements for the next twelve months can be met
from existing cash and invested cash balances. However, an unforeseen
downturn of results in sufficient magnitude could effect the Company's
ability to meet that forecast.
F-3
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of Interlink Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Interlink
Electronics, Inc. (a Delaware corporation) and its subsidiary as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the three years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interlink Electronics,
Inc. and its subsidiary as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for the three years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 12, 1997
F-4
<PAGE>
INTERLINK ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31,
1995 1996
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 3,496 $ 3,767
Accounts receivable, less allowance for doubtful
accounts of $233 and $310 in 1995
and 1996, respectively 2,360 3,649
Inventories 2,184 3,634
Prepaid expenses and other current assets 239 285
-------- --------
Total current assets 8,279 11,335
-------- --------
Property and equipment, net 1,160 1,143
Patents and trademarks, less accumulated
amortization of $375 and $453
in 1995 and 1996, respectively 368 439
European marketing rights 225 150
Other assets 155 118
-------- --------
Total assets $ 10,187 $ 13,185
======== ========
Liabilities And Shareholders' Equity
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 255 $ 403
Accounts payable 1,270 1,146
Accrued payroll and expenses 401 817
-------- --------
Total current liabilities 1,926 2,366
-------- --------
Long-term debt, net of current portion 159 235
Capital lease obligations, net of current portion 513 615
Commitments and contingencies -- --
Shareholders' equity:
Common stock (40,000 shares authorized,
4,255 and 4,515 outstanding at December 31,
1995 and 1996, respectively) 18,880 20,768
Accumulated deficit (11,291) (10,799)
-------- --------
Total shareholders' equity 7,589 9,969
-------- --------
Total liabilities and shareholders' equity $ 10,187 $ 13,185
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended December 31,
------------------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Revenues $ 7,797 $ 10,741 $ 13,485
Cost of revenues 4,094 5,252 7,028
----------- ----------- -----------
Gross profit 3,703 5,489 6,457
Operating expenses:
Product development and research 1,011 897 1,234
Selling, general and administrative 3,887 4,524 4,617
----------- ----------- -----------
Total operating expenses 4,898 5,421 5,851
----------- ----------- -----------
Operating income (loss) (1,195) 68 606
----------- ----------- -----------
Other income (expense):
Interest expense (37) (60) (118)
Minority interest - 41 -
Other income 155 101 27
Gain on sale of interest in European
joint venture 3,380 - -
----------- ----------- -----------
Total other income (expense) 3,498 82 (91)
----------- ----------- -----------
Net income $ 2,303 $ 150 $ 515
========== =========== ===========
Earnings per share $ .49 $ .04 $ .12
=========== =========== ===========
Weighted average number of common
shares outstanding 5,810 3,957 4,387
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Accumulated Total Shareholders'
Shares Amount Deficit Equity
-------- -------- ----------- -------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 3,760 $ 18,099 $ (13,645) $ 4,454
Issuance of shares upon exercise
of employee stock options 109 315 - 315
Surrender and retirement of shares
in conjunction with sale of
interest in European Joint Venture (511) (3,400) - (3,400)
Cumulative translation adjustment - - (21) (21)
Net income - - 2,303 2,303
----- -------- ----------- --------
Balance, December 31, 1994 3,358 15,014 (11,363) 3,651
Issuance of shares upon exercise
of employee stock options 185 609 - 609
Issuance of shares upon exercise
of stock warrants 12 92 - 92
Proceeds from private placement, net 700 3,165 - 3,165
Cumulative translation adjustment - - (78) (78)
Net income - - 150 150
----- -------- ----------- --------
Balance, December 31, 1995 4,255 18,880 (11,291) 7,589
Issuance of shares upon exercise
of employee stock options 36 152 - 152
Issuance of shares upon exercise
of stock warrants 224 1,736 - 1,736
Cumulative translation adjustment - - (23) (23)
Net income - - 515 515
----- -------- ----------- --------
Balance, December 31, 1996 4,515 $20,768 $ (10,799) $ 9,969
===== ======== =========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
-----------------------------------------
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,303 $ 150 $ 515
Adjustments to reconcile net income to
net cash used for operating activities:
Gain from sale of interest in JV (3,400) - -
Deferred licensing income (144) - -
Provisions for bad debts 95 91 77
Depreciation and amortization 300 445 602
Changes in operating assets and liabilities:
Accounts receivable (179) (938) (1,366)
Inventories (295) (1,339) (1,450)
Prepaid expenses and other current assets (42) (193) (46)
Other assets (15) (41) 37
Accounts payable (420) 711 (124)
Accrued payroll and expenses (2) (202) 416
-------- ------- --------
Net cash used for operating activities (1,799) (1,316) (1,339)
-------- ------- --------
Cash flows from investing activities:
Net sales of marketable securities 1,125 464 -
Purchases of property and equipment (682) (510) (432)
Acquisition, net of cash acquired 78 - -
Costs of patents and trademarks (61) (170) (149)
-------- ------- --------
Net cash (used for) provided by
investing activities 460 (216) (581)
-------- ------- --------
Cash flows from financing activities:
Borrowings on bank line of credit 200 100 -
Payments on bank line of credit - (300) -
Borrowings on note payable to bank 48 97 180
Payments on note payable to bank (4) (18) (57)
Proceeds from sale/leaseback - 788 478
Principal payments on Tech Transfer Agreement (36) (38) (43)
Principal payments on capital lease obligations - (74) (232)
Due from shareholders 85 49 -
Proceeds from issuance of common stock, net 315 3,866 1,888
-------- ------- --------
Net cash provided by financing activities 608 4,470 2,214
-------- ------- --------
Effect of exchange rate changes on cash (21) (78) (23)
-------- ------- --------
Increase (decrease) in cash and cash equivalents (752) 2,860 271
Cash and cash equivalents
at beginning of period 1,388 636 3,496
-------- ------- --------
Cash and cash equivalents
at end of period $ 636 $ 3,496 $ 3,767
======== ======= ========
Supplemental disclosures of cash flow information:
Interest paid 37 60 111
Income taxes paid 1 2 1
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31,1993, 1994 and 1995
1. Summary of Significant Accounting Policies
Interlink Electronics (the "Company") was incorporated in the State of
California on February 27, 1985 and reincorporated in the State of Delaware
on July 10, 1996. The Company is engaged in the development and manufacture
of products and components incorporating Force Sensing Resistors.
Consolidation Policy - The consolidated financial statements include the
accounts of the Company and its majority owned Japanese subsidiary. All
material intercompany accounts and transactions have been eliminated. The
preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Foreign Currency Transactions - The accounts of the Company's foreign
subsidiary have been translated according to the provisions of Statement of
Financial Accounting Standards No. 52. Gains and losses resulting from
translation of the foreign financial statements are included in
shareholders' equity. Any gain or loss resulting from foreign currency
transactions are reflected in the consolidated statement of operations for
the period in which they occur.
Cash and Cash Equivalents - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
Inventories - Inventories are stated at the lower of cost or market and
includes material, labor, and factory overhead. Cost is determined using
the average cost method.
Property and Equipment - Property and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is recorded on the
straight-line basis over the estimated useful lives of the assets which
range from three to ten years. Amortization of leasehold improvements is
made based upon the estimated useful lives of the assets or the term of the
lease, whichever is shorter. Maintenance and repairs are charged to
operations as incurred, while significant improvements are capitalized.
Upon retirement or disposition of property, the asset and related
accumulated depreciation or amortization are removed from the accounts and
any resulting gain or loss is charged to operations.
Patents and Trademarks - The costs of acquiring patents and trademarks are
amortized on a straight-line basis over their estimated useful lives,
ranging from seven to seventeen years. Amortization expense for the years
ended December 31, 1994, 1995 and 1996 was, $52,000, $60,000 $78,000,
respectively.
Income Taxes - The Company accounts for taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under this
statement, deferred tax assets and liabilities represent the tax effects,
calculated at currently effective rates, of future deductible taxable
amounts attributable to events that have been recognized on a cumulative
basis in the financial statements (see Note 12).
Earnings Per Share - Earnings per share is based upon the weighted average
number of shares outstanding and common stock equivalents. (See Note 10)
Accounts Receivable - Increases to the allowance for doubtful accounts
totaled $95,000, $91,000 and 77,000 for the years ended December 31, 1994,
1995 and 1996, respectively. Write-offs against the allowance for doubtful
accounts totaled $27,000, $12,000 and none for the years ended December 31,
1994, 1995 and 1996, respectively.
F-9
<PAGE>
Reclassifications - Certain amounts in the 1995 financial statements have
been reclassified to conform with the 1996 presentation.
2. Inventories
Inventories consisted of the following (in thousands):
December 31,
----------------------------
1995 1996
----------- -----------
Raw material $ 1,087 $ 2,120
Work in process 573 529
Finished goods 524 985
--------- ----------
Total inventories $ 2,184 $ 3,634
========= ==========
3. Property And Equipment
Property and equipment consisted of the following (in thousands):
December 31,
--------------------------
1995 1996
--------- ----------
Furniture, machinery and equipment $ 2,172 $ 2,588
Leasehold improvements 127 143
--------- ----------
2,299 2,731
Less accumulated depreciation and amortization (1,139) (1,588)
--------- ----------
Property and equipment, net $ 1,160 $ 1,143
========= ==========
Depreciation and amortization expense charged to operations amounted to
$173,000, $314,000 and 449,000 for the years ended 1994, 1995, and 1996,
respectively. Property and equipment under capital leases had a net book
value of $673,000 and $991,000 at December 31, 1995 and 1996 respectively.
4. Investment In Joint Venture
In November 1989, the Company and a Luxembourg entity ("the JV Partner")
formed a joint venture in Luxembourg for the purpose of manufacturing and
marketing Force Sensing Resistor products in the European Economic
Community. The Company contributed $2 million to Interlink Electronics
Europe (the "JV") in exchange for a 50% ownership interest in the JV.
Simultaneously, the JV purchased the rights to use the Company's technology
in Europe for $2 million. Generally accepted accounting principles required
the deferral of the investment and the related $2 million gain on the sale
of technology because of the Company's continued involvement with the JV.
Accordingly, the investment was recorded at no value.
In June 1992, December 1992, and April 1993, the JV Partner invested an
additional $1.5 million (45,000 shares), $500,000 (15,000 shares) and
$850,000 (30,000 shares) in the JV, respectively, increasing their
ownership percentage to 69%.
The Company's interest in the JV was accounted for under the equity method
of accounting. Summarized financial data for the JV were as follows:
(In Thousands)
December 31,
---------------------------
1992 1993
--------- ---------
Net sales $ 418 $ 920
Net loss (2,114) (2,133)
Working capital (706) (2,298)
Total assets 1,496 1,314
Total liabilities 2,691 4,497
Shareholders' deficit $ (1,195) $ (3,183)
F-10
<PAGE>
Because the Company had recorded the investment at no value and the Company
was not liable for the obligations of the JV nor was it otherwise committed
to provide any further financial assistance to the JV, it was not required
to recognize any of the JV's losses.
In December of 1992, the Company sold the JV additional rights to the
technology for $500,000 in cash. Given the Company's 36% ownership interest
in the JV at that time, that portion of the gain ($180,000) was deferred
and was to be amortized over five years. The balance of $320,000 is
included in licensing, royalties and other income in the statement of
operations in 1992. Because of the Company's sale of its interest in the JV
in 1994, the remaining unamortized balance of the deferred gain was
included in other income in 1994.
In 1993, the Company repurchased from the JV the rights to market pointing
device products to the European Community for cash payment of $375,000
which is recorded as an asset and amortized over five years.
On September 26, 1994 the Company sold its interest in the JV to the JV
partner. As payment, the JV partner surrendered its 510,775 common shares
of the Company and agreed to pay a royalty to the Company on certain
product sales by the JV outside of Europe and certain other designated
territories. The shares received, which constituted approximately 13% of
the Company's outstanding shares, were appraised at $3.4 million (after
allowing for a discount for the relatively large number of shares received
in relation to the total outstanding shares) and were immediately retired.
As the Company had carried the investment in the JV at no value, the
Company recorded a gain of $3,380,000 (net of transaction fees). The gain
on the sale of the JV is included in other income (expense) in the
accompanying statement of operations and represents net income of $.58 per
share for the fiscal year ended 1994.
5. Acquisition Of Japanese Subsidiary
On April 1, 1994, the Company acquired an 80% interest in Interlink
Electronics KK for $8,000 in cash. Interlink Electronics KK is located in
Tokyo, Japan and is a distributor and value-added manufacturer of FSR-based
products. The acquisition has been accounted for as a purchase and the
results of Interlink Electronics KK have been included in the accompanying
consolidated financial statements since the date of acquisition. The cost
of the acquisition has been allocated on the basis of the estimated fair
market value of the assets acquired ($428,000) and the liabilities assumed
($476,000). This allocation resulted in goodwill of approximately $58,000
which is being amortized over 15 years. Pro forma results of the
acquisition, assuming it had been made at the beginning of the year, would
not be materially different from the results reported.
6. Short-Term Borrowings
The Company maintains a revolving line of credit agreement with a bank with
a maximum amount of the lessor of $1,500,000 or 70% of eligible accounts
receivable, as defined in the agreement. The loan carries an interest rate
of the bank's interest rate plus 1% (9.25% at December 31, 1996) and
matures in May 1997. The loan is secured by all of the Company's assets and
requires the Company to meet certain financial covenants, all of which were
satisfied at December 31, 1996. At December 31, 1996, the Company was
eligible to utilize $1,300,000 on the loan, of which none had been drawn.
Selected information regarding short-term borrowings are as follows:
Year Ended December 31,
-----------------------
1995 1996
------ ------
Average daily borrowings (000's) $ 106 $ 0
Maximum daily borrowings (000's) $ 300 $ 0
Weighted average interest rate during year 10.7% N/A
F-11
<PAGE>
7. Long-Term Debt and Capital Leases
Bank loans - The Company's Japan subsidiary, Interlink Electronics KK,
maintains unsecured small business loans with three banks totaling
$248,000. The loans carry a weighted average interest rate of 2.5% and are
payable in monthly installments through the year 2002. The combined balance
outstanding as of December 31, 1995 and 1996 was $125,000 and $248,000,
respectively.
Technology Transfer Agreement - In December 1987, the Company purchased
certain patents and related technology from its founder. Under the
Technology Transfer Agreement, the Company is obligated to pay the greater
of $4,000 per month or 1% of monthly gross sales of products related to the
purchased technology. The term of the agreement is from January 1988 to
December 1997. Minimum obligations under the agreement have been recorded
at their present value utilizing an interest rate of 8.25% ($88,000 and
$46,000 at December 31, 1995 and 1996, respectively).
Capital lease obligations - The Company has an equipment financing
agreement with a leasing company to provide for the purchase of equipment
of up to $1.8 million. As amounts are drawn on the line, the funded amount
is converted to a note payable with a standard payment schedule of up to 42
months at an imputed interest rate of 11.5%. As of December 31, 1996, the
Company had utilized and converted $1,266,000 of the line to notes payable.
At December 31, 1996, scheduled maturities of long-term debt and capital
lease obligations for the next five years and thereafter are as follows (in
thousands):
Debt Leases
-------- -------
1997 $ 100 $ 436
1998 57 436
1999 58 207
2000 49 35
2001 23 -
There after 27 -
-------- -------
314 1,114
Less amount representing interest (21) (154)
-------- -------
Present value of minimum payments 293 960
Current portion (58) (345)
-------- -------
Long term portion $ 235 $ 615
======== =======
8. Capitalization
Preferred Stock - The Company is authorized to issue up to 10,000,000
shares of Preferred Stock. As of December 31, 1996, none were outstanding.
In the future, the Preferred Stock may be issued in one or more series with
such rights and preference as may be fixed and determined by the Board of
Directors.
Common Stock - The Company is authorized to issue 40,000,000 shares of
Common Stock.
In March 1993, the shareholders approved a 1 for 5 reverse stock split of
the Company's Common Stock. All share and per share data have been
retroactively restated to reflect this change.
In April 1995, the Company completed a private placement of 700,000 shares
of common stock and 46,668 warrants. The warrants are exercisable at $8.25
and expired on June 7, 1996. The Company received gross proceeds of $3.5
million (before offering expenses and placement agent fees totaling
$335,000). In conjunction with the offering, the placement agents also
received 60,000 warrants. These securities were registered with the
Securities and Exchange Commission under an S-3 Registration Statement
effective July 17, 1995.
In June 1996, 223,723 warrants, with an exercise price of $8.25, were
exercised. The Company received net proceeds of $1.74 million after
deducting offering costs. The remaining 1,673,891 warrants from this class
expired in accordance with their terms.
F-12
<PAGE>
Units - In June 1993, the Company completed an initial public offering
raising $7,102,000 net of expenses, through the sale of 1,553,000 Units.
Each Unit consisted of one share of Common Stock and one Warrant to
purchase one share of Common Stock at $8.25.
9. Stock Warrants And Stock Options
At December 31, 1996, the Company had the following Common Stock Warrants
outstanding:
Number of Exercise Expiration
Shares Price Date
135,000 $6.60 June 4, 1998
135,000 8.26 June 4, 1998
Under the terms of the Company's Option Plans, officers and key employees
may be granted nonqualified or incentive stock options and outside
directors and independent contractors of the Company may be granted
nonqualified stock options. The aggregate number of shares which may be
issued under the plans is 2,006,000. Outstanding options under the plans
vest in various increments through December, 1997. Information concerning
stock options under the plans is summarized as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------
Year Ended December 31,
--------------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Options outstanding, beginning of period 477 1,063 1,219
Options granted (weighted average price of 715 1,236 393
$7.50, $5.19 and $5.76 in 1994, 1995 and
1996, respectively )
Options exercised (weighted average price (109) (185) (36)
of $2.84, $3.29 and $4.23 in 1994, 1995 and
1996, respectively)
Options canceled (20) (895) (144)
--------- -------- --------
Options outstanding, end of period 1,063 1,219 1,432
========= ======== ========
Options exercisable 464 613 958
========= ======== ========
Option price $1.25 to $9.13
</TABLE>
The Company accounts for the plan under Accounting Principles Board Opinion
No. 25 under which no compensation cost is recognized for employee stock
option grants. If the Company had recognized compensation cost for
stock-based employee compensation in accordance with SFAS No. 123, the
Company's net income (loss) would have been as follows:
(In Thousands Except Per Share Data)
1995 1996
Net income (loss):
As reported $ 150 $ 515
Pro forma (2,166) (213)
Earnings (loss) per share:
As reported $ .04 $ .12
Pro forma (.55) (.05)
The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following weighted average assumptions
used in 1995 and 1996: risk-free interest rates of 6.3 percent; expected
life of four years; no expected dividend yield; and a volatility measure of
59%.
F-13
<PAGE>
10. Earnings Per Share
The computation of earnings per share is based upon the weighted average
number of common shares outstanding during the periods presented plus (in
periods of which they have a dilutive effect) the effect of common shares
contingently issuable from options and warrants.
Common stock equivalents are calculated using the modified treasury stock
method. Under the modified treasury stock method, the proceeds from the
assumed conversion of options and warrants are used first to repurchase up
to a maximum of 20% of the outstanding shares, second to retire debt and
third, invested in government securities. Accordingly, interest expense
and/or interest income is adjusted on a proforma basis.
The following table contains information necessary to calculate earnings
per share:
<TABLE>
<CAPTION>
(In Thousands Except Per Share Data)
-------------------------------------
Year Ended December 31,
-------------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Weighted average common and common equivalent shares:
Weighted average shares outstanding 3,678 3,957 4,388
Weighted average share equivalents 2,132 - (1) -(1)
--------- --------- ---------
Weighted average common and common
equivalent shares 5,810 3,957 4,388
========= ========= =========
Net income for per share calculation:
Net income $ 2,303 $ 150 $ 515
Adjustment per modified treasury stock method
calculation 570 - -
--------- --------- ---------
Net income for per share calculation $ 2,873 $ 150 $ 515
========= ========= =========
Earnings per share $ .49 $ .04 $ .12
========= ========= =========
<FN>
- ------------------------------
(1) Common stock equivalents were anti-dilutive and thus were not included
in the calculation.
</FN>
</TABLE>
11. Lease Commitments
The Company leases its main facility and certain equipment under operating
leases expiring through 1999. Rent payments totaled approximately $120,000,
$153,000 and $227,000 in 1994, 1995 and 1996, respectively.
Minimum lease commitments are summarized as follows (in thousands):
Year
- ----
1997 $ 228
1998 109
1999 1
------
$ 338
12. Income Taxes
Under Section 382 of the Internal Revenue Code, net operating losses are
limited when, on a cumulative basis over a three-year period, the holdings
of certain shareholder groups owning more than 5% of the Company have
changed more than 50%. On December 23, 1987, the Company experienced a
greater than 50% change in ownership. As a result, the Company's
utilization of net operating loss carryforwards generated prior to that
date of $1,316,000 is limited to $126,000 per year, for federal income tax
purposes,
F-14
<PAGE>
through 1998. Utilization of state net operating losses generated prior to
December 23, 1987 of $706,000 is limited under the same rules. However, for
the tax years 1991 and 1992, the State of California suspended the use of
net operating loss carryforwards. As of December 31, 1996, the Company has
federal and state income tax net operating loss carryforwards of
approximately $10,489,000 expiring through 2009 and $3,544,000 expiring
through 1999, respectively.
On September 26, 1994, the Company sold its interest in Interlink
Electronics Europe (see Note 4). This transaction may have caused an
additional "change of ownership" under Section 382 of the Internal Revenue
Code. In the event that such a change is deemed to have occurred, the
Company's net operating losses will be limited. The Company has research
and development tax credit carryforwards of approximately $200,000 and
$260,000 at December 31, 1995 and 1996, respectively. The Company has total
net deferred tax assets as follows:
(In Thousands)
-------------------
1995 1996
------ ------
Deferred tax assets:
Net operating loss carryforward $ 4,149 $ 3,896
Vacation accrual 67 59
Allowance for bad debts 82 114
Other 114 306
-------- --------
Total deferred tax assets 4,412 4,375
Deferred tax liabilities:
Other, net - -
-------- --------
Total net deferred assets 4,412 4,375
Valuation allowance (4,412) (4,375)
-------- --------
Total $ - $ -
======== ========
A valuation allowance is recorded if the weight of available evidence
suggests it is more likely than not that if some portion or all of the
deferred tax asset will not be recognized. There is no assurance that the
Company will continue to be profitable in future periods, therefore, a
valuation allowance has been recognized for the full amount of the deferred
tax asset for 1995 and 1996.
13. Related Party Transactions
The Company has an agreement with its founder to provide consulting
services to the Company at $48,000 per year through December 1997.
In June 1994, the former Chairman of the Board entered into a consulting
arrangement with the Company, terminating February 1995. Total consulting
expenses amounted to $143,000 in 1994.
F-15
<PAGE>
14. Segment Information
Product Line Information
(In Thousands)
---------------------------------
Year Ended December 31,
---------------------------------
1994 1995 1996
------ ------ ------
Revenues:
Computer pointing devices $ 5,221 $ 7,910 $ 11,585
Custom applications 2,576 2,831 1,900
-------- -------- --------
$ 7,797 $ 10,741 $ 13,485
======== ======== ========
Operating income (loss):
Computer pointing devices $ (282) $ 397 $ 1,004
Custom applications (283) 139 164
Corporate expenses (630) (468) (562)
-------- -------- --------
$ (1,195) $ 68 $ 606
======== ======== ========
Assets:
Computer pointing devices $ 2,427 $ 4,206 $ 7,246
Custom applications 1,195 1,478 1,180
Corporate 1,563 4,503 4,759
-------- -------- --------
$ 5,185 $ 10,187 $ 13,185
======== ======== ========
Identifiable assets by product line are those assets that are used in the
Company's operations in each segment. Corporate assets are principally cash
and cash equivalents, marketable securities, patents and trademarks,
European marketing rights, due from shareholders and other assets.
Export Sales - The following table shows the breakdown of the Company's
export sales as a percentage of consolidated revenues.
Year Ended December 31,
----------------------------------
1994 1995 1996
------ ------ ------
Asia 23% 29% 26%
Europe and other (1) 17% 13%
(1) Less than 10%
Major Customers - In 1996, sales to one customer in the computer industry
constituted 15% of the Company's sales. In 1995, sales to one customer in
the medical industry constituted 11% of the Company's sales and in 1994,
sales to one customer in the computer industry constituted 23%.
F-16
<PAGE>
EXHIBIT INDEX
Exhibit
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1b of Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form S-1, Registration No.
33-60380 (the "Form S-1 Registration Statement").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2a of
Post-Effective Amendment No. 8 to Registrant's Form S-1 Registration
Statement.
10.1 1988 Stock Option Plan, as amended and restated. Incorporated by
reference to Exhibit 10.1 of the Form S-1 Registration Statement.**
10.2 1993 Stock Incentive Plan. Incorporated by reference to Exhibit
10.1a of the Form S-1 Registration Statement.**
10.3 1996 Stock Incentive Plan.**
10.4 Description of Interlink Electronics, Inc. Management Compensation
Program.**
10.5 Form of Promissory Note from Stuart Yaniger dated March 1993.
Incorporated by reference to Exhibit 10.7 of the Form S-1
Registration Statement.
10.6 Form of Amendment to Promissory Note from Stuart Yaniger.
Incorporated by reference to Exhibit 10.7a of the Form S-1
Registration Statement.
10.7 Technology Transfer Agreement between the Registrant and Franklin
Eventoff dated as of December 23, 1987, and amendment thereto.
Incorporated by reference to Exhibit 10.9 of the Form S-1
Registration Statement.
10.8 Lease Agreement to lease premises in Camarillo, California dated
January 25, 1993. Incorporated by reference to Exhibit 10.11a of the
Form S-1 Registration Statement.
10.9 License Agreement between the Registrant and Toshiba Silicone Co.,
Ltd. dated March 10, 1989. Incorporated by reference to Exhibit
10.14 of the Form S-1 Registration Statement.
10.10 Joint Venture Agreement among the Registrant, InvestAR s.a.r.l.,
Interlink Electronics, Inc. Europe s.a.r.l. and IEE Finance s.a.r.l.
dated November 7, 1989. Incorporated by reference to Exhibit 10.15
of the Form S-1 Registration Statement.
10.11 Exclusive License and Distributor Agreement between the Registrant
and Interlink Electronics, Inc. Europe s.a.r.l. dated as of November
7, 1989. Incorporated by reference to Exhibit 10.16 of the Form S-1
Registration Statement.
<PAGE>
10.12 Manufacturing and Supply Agreement between the Registrant and
Interlink Electronics, Inc. Europe s.a.r.l. dated as of November 7,
1989. Incorporated by reference to Exhibit 10.17 of the Form S-1
Registration Statement.
10.13 Letter Agreement between the Registrant and InvestAR s.a.r.l. dated
November 7, 1989. Incorporated by reference to Exhibit 10.18 of the
Form S-1 Registration Statement.
10.14 Agreement between the Government of Luxembourg, Interlink
Electronics, Inc. Europe s.a.r.l., IEE Finance s.a.r.l., the
Registrant and InvestAR s.a.r.l. dated December 18, 1989.
Incorporated by reference to Exhibit 10.19 of the Form S-1
Registration Statement.
10.15 Agreement with InvestAR s.a.r.l. and ARBED S.A. (undated).
Incorporated by reference to Exhibit 10.20 of the Form S-1
Registration Statement.
10.16 Agreement among the Registrant, Interlink Electronics, Inc. Europe
s.a.r.l. and InvestAR s.a.r.l. dated as of December 14, 1990.
Incorporated by reference to Exhibit 10.21 of the Form S-1
Registration Statement.
10.17 Ink Technology Transfer Agreement between the Registrant and
InvestAR s.a.r.l. dated December 11, 1992. Incorporated by reference
to Exhibit 10.23 of the Form S-1 Registration Statement.
10.18 Financing Agreement between the Registrant and InvestAR s.a.r.l. in
relation with the Ink Technology Transfer Agreement dated December
11, 1992. Incorporated by reference to Exhibit 10.24 of the Form S-1
Registration Statement.
10.19 Form of Confidentiality and Nondisclosure Agreement in relation with
the Ink Technology Transfer Agreement (undated). Incorporated by
reference to Exhibit 10.25 of the Form S-1 Registration Statement.
10.20 Form of Escrow Agreement for Technology in relation with the Ink
Technology Transfer Agreement dated December 11, 1992. Incorporated
by reference to Exhibit 10.26 of the Form S-1 Registration
Statement.
10.21 Financing Agreement between the Registrant and InvestAR s.a.r.l.
dated June 15, 1992. Incorporated by reference to Exhibit 10.27 of
the Form S-1 Registration Statement.
10.22 Interlink Europe Financing Agreement between the Registrant and
InvestAR s.a.r.l. dated April 7, 1993. Incorporated by reference to
Exhibit 10.28 of the Form S-1 Registration Statement.
<PAGE>
10.23 Agreement between Zilog, Inc. and the Registrant date November 30,
1993. Incorporated by reference to Exhibit 10.34 of the Form S-1
Registration Statement.*
10.24 Employment Agreement between the Registrant and E. Michael Thoben,
III effective as of April 1, 1996.
10.25 Employment Agreement between the Registrant and William A. Yates
effective as of April 1, 1996.
10.26 Employment Agreement between the Registrant and David J. Arthur
effective as of April 1, 1996.
21.1 Subsidiaries of the Registrant.
24.1 Consent of Arthur Andersen.
25.1 Power of Attorney (see page 20).
27 Financial Data Schedule.
- ------------
* Confidential Treatment for portions of this agreement has been granted
by the Commission.
** This exhibit constitutes a management contract or compensatory plan
or arrangement.
INTERLINK ELECTRONICS, INC.
1996 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is
to enable Interlink Electronics, Inc. (the "Company") to attract and retain
the services of (1) selected employees, officers and directors of the
Company or of any subsidiary of the Company and (2) selected nonemployee
agents, consultants, advisors, persons involved in the sale or distribution
of the Company's products and independent contractors of the Company or any
subsidiary.
2. Shares Subject to the Plan. Subject to adjustment as provided below
and in paragraph 13, the shares to be offered under the Plan shall consist
of Common Stock of the Company, and the total number of shares of Common
Stock that may be issued under the Plan shall not exceed 1,500,000 shares.
The shares issued under the Plan may be authorized and unissued shares or
reacquired shares. If an option, stock appreciation right or performance
unit granted under the Plan expires, terminates or is canceled, the
unissued shares subject to such option, stock appreciation right or
performance unit shall again be available under the Plan. If shares sold or
awarded as a bonus under the Plan are forfeited to the Company or
repurchased by the Company, the number of shares forfeited or repurchased
shall again be available under the Plan.
3. Effective Date and Duration of Plan.
(a) Effective Date. The Plan shall become effective as of April
30, 1996. No option, stock appreciation right or performance unit granted
under the Plan to an officer who is subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended (an "Officer") or a director,
and no incentive stock option, shall become exercisable, however, until the
Plan is approved by the affirmative vote of the holders of a majority of
the shares of Common Stock represented at a shareholders meeting at which a
quorum is present and any such awards under the Plan prior to such approval
shall be conditioned on and subject to such approval. Subject to this
limitation, options, stock appreciation rights and performance units may be
granted and shares may be awarded as bonuses or sold under the Plan at any
time after the effective date and before termination of the Plan.
(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions
on such shares have lapsed. The Board of Directors may suspend or terminate
the Plan at any time except with respect to options, performance units and
shares subject to restrictions then outstanding under the Plan. Termination
shall not affect any outstanding options, any right of the Company to
repurchase shares or the forfeitability of shares issued under the Plan.
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4. Administration.
(a) Board of Directors. The Plan shall be administered by the
Board of Directors of the Company, which shall determine and designate from
time to time the individuals to whom awards shall be made, the amount of
the awards and the other terms and conditions of the awards. Subject to the
provisions of the Plan, the Board of Directors may from time to time adopt
and amend rules and regulations relating to administration of the Plan,
advance the lapse of any waiting period, accelerate any exercise date,
waive or modify any restriction applicable to shares (except those
restrictions imposed by law) and make all other determinations in the
judgment of the Board of Directors necessary or desirable for the
administration of the Plan. The interpretation and construction of the
provisions of the Plan and related agreements by the Board of Directors
shall be final and conclusive. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or
in any related agreement in the manner and to the extent it shall deem
expedient to carry the Plan into effect, and it shall be the sole and final
judge of such expediency.
(b) Committee. The Board of Directors may delegate to a committee
of the Board of Directors or specified officers of the Company, or both
(the "Committee") any or all authority for administration of the Plan. If
authority is delegated to a Committee, all references to the Board of
Directors in the Plan shall mean and relate to the Committee except (i) as
otherwise provided by the Board of Directors and (ii) that only the Board
of Directors may amend or terminate the Plan as provided in paragraphs 3
and 15. If awards are to be made under the Plan to Officers or directors,
authority for selection of Officers and directors for participation and
decisions concerning the timing, pricing and amount of a grant or award, if
not determined under a formula meeting the requirements of Rule 16b-3 under
the Securities Exchange Act of 1934, as amended, shall be delegated to a
committee consisting of two or more disinterested directors.
5. Types of Awards; Eligibility. The Board of Directors may, from time
to time, take the following actions, separately or in combination, under
the Plan: (i) grant Incentive Stock Options, as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), as provided in
paragraphs 6(a) and 6(b); (ii) grant options other than Incentive Stock
Options ("Non-Statutory Stock Options") as provided in paragraphs 6(a) and
6(c); (iii) award stock bonuses as provided in paragraph 7; (iv) sell
shares subject to restrictions as provided in paragraph 8; (v) grant stock
appreciation rights as provided in paragraph 9; (vi) grant cash bonus
rights as provided in paragraph 10; (vii) grant performance units as
provided in paragraph 11 and (viii) grant foreign qualified awards as
provided in paragraph 12. Any such awards may be made to employees,
including employees who are officers or directors, and to other individuals
described in paragraph 1 who the Board of Directors believes have made or
will make an important contribution to the Company or any subsidiary of the
Company; provided, however, that only employees of the Company shall be
eligible to receive Incentive
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Stock Options under the Plan. The Board of Directors shall select the
individuals to whom awards shall be made and shall specify the action taken
with respect to each individual to whom an award is made. At the discretion
of the Board of Directors, an individual may be given an election to
surrender an award in exchange for the grant of a new award. No employee
may be granted options or stock appreciation rights under the Plan for more
than an aggregate of 200,000 shares of Common Stock in connection with the
hiring of the employee or 50,000 shares of Common Stock in any calendar
year otherwise.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Board of Directors may grant options
under the Plan. With respect to each option grant, the Board of
Directors shall determine the number of shares subject to the option,
the option price, the period of the option, the time or times at which
the option may be exercised and whether the option is an Incentive
Stock Option or a Non-Statutory Stock Option. At the time of the grant
of an option or at any time thereafter, the Board of Directors may
provide that an optionee who exercised an option with Common Stock of
the Company shall automatically receive a new option to purchase
additional shares equal to the number of shares surrendered and may
specify the terms and conditions of such new options.
(ii) Exercise of Options. Except as provided in paragraph
6(a)(iv) or as determined by the Board of Directors, no option granted
under the Plan may be exercised unless at the time of such exercise
the optionee is employed by or in the service of the Company or any
subsidiary of the Company and shall have been so employed or provided
such service continuously since the date such option was granted.
Absence on leave or on account of illness or disability under rules
established by the Board of Directors shall not, however, be deemed an
interruption of employment or service for this purpose. Unless
otherwise determined by the Board of Directors, vesting of options
shall not continue during an absence on leave (including an extended
illness) or on account of disability. Except as provided in paragraphs
6(a)(iv) and 13, options granted under the Plan may be exercised from
time to time over the period stated in each option in such amounts and
at such times as shall be prescribed by the Board of Directors,
provided that options shall not be exercised for fractional shares.
Unless otherwise determined by the Board of Directors, if the optionee
does not exercise an option in any one year with respect to the full
number of shares to which the optionee is entitled in that year, the
optionee's rights shall be cumulative and the optionee may purchase
those shares in any subsequent year during the term of the option.
Unless otherwise determined by the Board of Directors, if an Officer
or a director exercises an option within six months of the
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grant of the option, the shares acquired upon exercise of the option
may not be sold until six months after the date of grant of the
option.
(iii) Nontransferability. Each Incentive Stock Option and,
unless otherwise determined by the Board of Directors with respect to
an option granted to a person who is neither an Officer nor a director
of the Company, each other option granted under the Plan by its terms
shall be nonassignable and nontransferable by the optionee, either
voluntarily or by operation of law, except by will or by the laws of
descent and distribution of the state or country of the optionee's
domicile at the time of death.
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the
Board of Directors, in the event the employment or service of the
optionee with the Company or a subsidiary terminates for any
reason other than because of physical disability or death as
provided in subparagraphs 6(a)(iv)(B) and (C), the option may be
exercised at any time prior to the expiration date of the option
or the expiration of 30 days after the date of such termination,
whichever is the shorter period, but only if and to the extent
the optionee was entitled to exercise the option at the date of
such termination.
(B) Termination Because of Total Disability. Unless
otherwise determined by the Board of Directors, in the event of
the termination of employment or service because of total
disability, the option may be exercised at any time prior to the
expiration date of the option or the expiration of 12 months
after the date of such termination, whichever is the shorter
period, but only if and to the extent the optionee was entitled
to exercise the option at the date of such termination. The term
"total disability" means a medically determinable mental or
physical impairment which is expected to result in death or which
has lasted or is expected to last for a continuous period of 12
months or more and which causes the optionee to be unable, in the
opinion of the Company and two independent physicians, to perform
his or her duties as an employee, director, officer or consultant
of the Company and to be engaged in any substantial gainful
activity. Total disability shall be deemed to have occurred on
the first day after the Company and the two independent
physicians have furnished their opinion of total disability to
the Company.
(C) Termination Because of Death. Unless otherwise
determined by the Board of Directors, in the event of the death
of an optionee while employed by or providing service to the
Company or a subsidiary, the option may be exercised at any time
prior to the expiration
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date of the option or the expiration of 12 months after the date
of death, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the
date of death and only by the person or persons to whom such
optionee's rights under the option shall pass by the optionee's
will or by the laws of descent and distribution of the state or
country of domicile at the time of death.
(D) Amendment of Exercise Period Applicable to
Termination. The Board of Directors, at the time of grant or,
with respect to an option that is not an Incentive Stock Option,
at any time thereafter, may extend the 30-day and 12-month
exercise periods any length of time not longer than the original
expiration date of the option, and may increase the portion of an
option that is exercisable, subject to such terms and conditions
as the Board of Directors may determine.
(E) Failure to Exercise Option. To the extent that the
option of any deceased optionee or of any optionee whose
employment or service terminates is not exercised within the
applicable period, all further rights to purchase shares pursuant
to such option shall cease and terminate.
(v) Purchase of Shares. Unless the Board of Directors
determines otherwise, shares may be acquired pursuant to an option
granted under the Plan only upon receipt by the Company of notice in
writing from the optionee of the optionee's intention to exercise,
specifying the number of shares as to which the optionee desires to
exercise the option and the date on which the optionee desires to
complete the transaction, and if required in order to comply with the
Securities Act of 1933, as amended, containing a representation that
it is the optionee's present intention to acquire the shares for
investment and not with a view to distribution. Unless the Board of
Directors determines otherwise, on or before the date specified for
completion of the purchase of shares pursuant to an option, the
optionee must have paid the Company the full purchase price of such
shares in cash (including, with the consent of the Board of Directors,
cash that may be the proceeds of a loan from the Company (provided
that, with respect to an Incentive Stock Option, such loan is approved
at the time of option grant)) or, with the consent of the Board of
Directors, in whole or in part, in Common Stock of the Company valued
at fair market value, restricted stock, performance units or other
contingent awards denominated in either stock or cash, promissory
notes and other forms of consideration. The fair market value of
Common Stock provided in payment of the purchase price shall be
determined by the Board of Directors. If the Common Stock of the
Company is not publicly traded on the date the option is exercised,
the Board of Directors may consider any valuation methods it deems
appropriate and may, but is not required to, obtain one or more
independent appraisals of the Company. If the Common Stock of the
Company is publicly traded on the date the option is exercised, the
fair market
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value of Common Stock provided in payment of the purchase price shall
be the closing price of the Common Stock as reported in The Wall
Street Journal on the last trading day preceding the date the option
is exercised, or such other reported value of the Common Stock as
shall be specified by the Board of Directors. No shares shall be
issued until full payment for the shares has been made. With the
consent of the Board of Directors (which, in the case of an Incentive
Stock Option, shall be given only at the time of option grant), an
optionee may request the Company to apply automatically the shares to
be received upon the exercise of a portion of a stock option (even
though stock certificates have not yet been issued) to satisfy the
purchase price for additional portions of the option. Each optionee
who has exercised an option shall immediately upon notification of the
amount due, if any, pay to the Company in cash amounts necessary to
satisfy any applicable federal, state and local tax withholding
requirements. If additional withholding is or becomes required beyond
any amount deposited before delivery of the certificates, the optionee
shall pay such amount to the Company on demand. If the optionee fails
to pay the amount demanded, the Company may withhold that amount from
other amounts payable by the Company to the optionee, including
salary, subject to applicable law. With the consent of the Board of
Directors an optionee may satisfy this obligation, in whole or in
part, by having the Company withhold from the shares to be issued upon
the exercise that number of shares that would satisfy the withholding
amount due or by delivering to the Company Common Stock to satisfy the
withholding amount. Upon the exercise of an option, the number of
shares reserved for issuance under the Plan shall be reduced by the
number of shares issued upon exercise of the option.
(b) Incentive Stock Options. Incentive Stock Options shall be
subject to the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may be
granted Incentive Stock Options under the Plan if the aggregate fair
market value, on the date of grant, of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by
that employee during any calendar year under the Plan and under all
incentive stock option plans (within the meaning of Section 422 of the
Code) of the Company or any parent or subsidiary of the Company
exceeds $100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee
possessing more than 10 percent of the total combined voting power of
all classes of stock of the Company or of any parent or subsidiary of
the Company only if the option price is at least 110 percent of the
fair market value, as described in paragraph 6(b)(iv), of the Common
Stock subject to the option on the date it is granted and the option
by its terms is not exercisable after the expiration of five years
from the date it is granted.
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(iii) Duration of Options. Subject to paragraphs 6(a)(ii)
and 6(b)(ii), Incentive Stock Options granted under the Plan shall
continue in effect for the period fixed by the Board of Directors,
except that no Incentive Stock Option shall be exercisable after the
expiration of 10 years from the date it is granted.
(iv) Option Price. The option price per share shall be
determined by the Board of Directors at the time of grant. Except as
provided in paragraph 6(b)(ii), the option price shall not be less
than 100 percent of the fair market value of the Common Stock covered
by the Incentive Stock Option at the date the option is granted. The
fair market value shall be determined by the Board of Directors. If
the Common Stock of the Company is not publicly traded on the date the
option is granted, the Board of Directors may consider any valuation
methods it deems appropriate and may, but is not required to, obtain
one or more independent appraisals of the Company. If the Common Stock
of the Company is publicly traded on the date the option is exercised,
the fair market value shall be deemed to be the closing price of the
Common Stock as reported in The Wall Street Journal on the day
preceding the date the option is granted, or, if there has been no
sale on that date, on the last preceding date on which a sale occurred
or such other value of the Common Stock as shall be specified by the
Board of Directors.
(v) Limitation on Time of Grant. No Incentive Stock Option
shall be granted on or after the tenth anniversary of the effective
date of the Plan.
(vi) Conversion of Incentive Stock Options. The Board of
Directors may at any time without the consent of the optionee convert
an Incentive Stock Option to a Non-Statutory Stock Option.
(c) Non-Statutory Stock Options. Non-Statutory Stock Options
shall be subject to the following terms and conditions in addition to those
set forth in Section 6(a) above:
(i) Option Price. The option price for Non-Statutory Stock
Options shall be determined by the Board of Directors at the time of
grant and may be any amount determined by the Board of Directors.
(ii) Duration of Options. Non-Statutory Stock Options
granted under the Plan shall continue in effect for the period fixed
by the Board of Directors.
7. Stock Bonuses. The Board of Directors may award shares under the
Plan as stock bonuses. Shares awarded as a bonus shall be subject to the
terms, conditions, and restrictions determined by the Board of Directors.
The restrictions may include restrictions concerning transferability and
forfeiture of the shares awarded, together with
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such other restrictions as may be determined by the Board of Directors. If
shares are subject to forfeiture, all dividends or other distributions paid
by the Company with respect to the shares shall be retained by the Company
until the shares are no longer subject to forfeiture, at which time all
accumulated amounts shall be paid to the recipient. The Board of Directors
may require the recipient to sign an agreement as a condition of the award,
but may not require the recipient to pay any monetary consideration other
than amounts necessary to satisfy tax withholding requirements. The
agreement may contain any terms, conditions, restrictions, representations
and warranties required by the Board of Directors. The certificates
representing the shares awarded shall bear any legends required by the
Board of Directors. Unless otherwise determined by the Board of Directors,
shares awarded as a stock bonus to an Officer or a director may not be sold
until six months after the date of the award. The Company may require any
recipient of a stock bonus to pay to the Company in cash upon demand
amounts necessary to satisfy any applicable federal, state or local tax
withholding requirements. If the recipient fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable
by the Company to the recipient, including salary or fees for services,
subject to applicable law. With the consent of the Board of Directors, a
recipient may deliver Common Stock to the Company to satisfy this
withholding obligation. Upon the issuance of a stock bonus, the number of
shares reserved for issuance under the Plan shall be reduced by the number
of shares issued.
8. Restricted Stock. The Board of Directors may issue shares under the
Plan for such consideration (including promissory notes and services) as
determined by the Board of Directors. Shares issued under the Plan shall be
subject to the terms, conditions and restrictions determined by the Board
of Directors. The restrictions may include restrictions concerning
transferability, repurchase by the Company and forfeiture of the shares
issued, together with such other restrictions as may be determined by the
Board of Directors. If shares are subject to forfeiture or repurchase by
the Company, all dividends or other distributions paid by the Company with
respect to the shares shall be retained by the Company until the shares are
no longer subject to forfeiture or repurchase, at which time all
accumulated amounts shall be paid to the recipient. All Common Stock issued
pursuant to this paragraph 8 shall be subject to a purchase agreement,
which shall be executed by the Company and the prospective recipient of the
shares prior to the delivery of certificates representing such shares to
the recipient. The purchase agreement may contain any terms, conditions,
restrictions, representations and warranties required by the Board of
Directors. The certificates representing the shares shall bear any legends
required by the Board of Directors. Unless otherwise determined by the
Board of Directors, shares issued under this paragraph 8 to an Officer or a
director may not be sold until six months after the shares are issued. The
Company may require any purchaser of restricted stock to pay to the Company
in cash upon demand amounts necessary to satisfy any applicable federal,
state or local tax withholding requirements. If the purchaser fails to pay
the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to the purchaser, including salary, subject
to applicable law. With the consent of the Board
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of Directors, a purchaser may deliver Common Stock to the Company to
satisfy this withholding obligation. Upon the issuance of restricted stock,
the number of shares reserved for issuance under the Plan shall be reduced
by the number of shares issued.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under the
Plan by the Board of Directors, subject to such rules, terms, and
conditions as the Board of Directors prescribes.
(b) Exercise.
(i) Each stock appreciation right shall entitle the holder,
upon exercise, to receive from the Company in exchange therefor an
amount equal in value to the excess of the fair market value on the
date of exercise of one share of Common Stock of the Company over its
fair market value on the date of grant (or, in the case of a stock
appreciation right granted in connection with an option, the excess of
the fair market value of one share of Common Stock of the Company over
the option price per share under the option to which the stock
appreciation right relates), multiplied by the number of shares
covered by the stock appreciation right or the option, or portion
thereof, that is surrendered. No stock appreciation right shall be
exercisable at a time that the amount determined under this
subparagraph is negative. Payment by the Company upon exercise of a
stock appreciation right may be made in Common Stock valued at fair
market value, in cash, or partly in Common Stock and partly in cash,
all as determined by the Board of Directors.
(ii) A stock appreciation right shall be exercisable only at
the time or times established by the Board of Directors. If a stock
appreciation right is granted in connection with an option, the
following rules shall apply: (1) the stock appreciation right shall be
exercisable only to the extent and on the same conditions that the
related option could be exercised; (2) the stock appreciation rights
shall be exercisable only when the fair market value of the stock
exceeds the option price of the related option; (3) the stock
appreciation right shall be for no more than 100 percent of the excess
of the fair market value of the stock at the time of exercise over the
option price; (4) upon exercise of the stock appreciation right, the
option or portion thereof to which the stock appreciation right
relates terminates; and (5) upon exercise of the option, the related
stock appreciation right or portion thereof terminates. Unless
otherwise determined by the Board of Directors, no stock appreciation
right granted to an Officer or director may be exercised during the
first six months following the date it is granted.
(iii) The Board of Directors may withdraw any stock
appreciation right granted under the Plan at any time and may impose
any conditions upon
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the exercise of a stock appreciation right or adopt rules and
regulations from time to time affecting the rights of holders of stock
appreciation rights. Such rules and regulations may govern the right
to exercise stock appreciation rights granted prior to adoption or
amendment of such rules and regulations as well as stock appreciation
rights granted thereafter.
(iv) For purposes of this paragraph 9, the fair market value
of the Common Stock shall be determined as of the date the stock
appreciation right is exercised, under the methods set forth in
paragraph 6(b)(iv).
(v) No fractional shares shall be issued upon exercise of a
stock appreciation right. In lieu thereof, cash may be paid in an
amount equal to the value of the fraction or, if the Board of
Directors shall determine, the number of shares may be rounded
downward to the next whole share.
(vi) Each stock appreciation right granted in connection
with an Incentive Stock Option, and unless otherwise determined by the
Board of Directors with respect to a stock appreciation right granted
to a person who is neither an Officer nor a director of the Company,
each other stock appreciation right granted under the Plan by its
terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of
descent and distribution of the state or country of the holder's
domicile at the time of death, and each stock appreciation right by
its terms shall be exercisable during the holder's lifetime only by
the holder.
(vii) Each participant who has exercised a stock
appreciation right shall, upon notification of the amount due, pay to
the Company in cash amounts necessary to satisfy any applicable
federal, state and local tax withholding requirements. If the
participant fails to pay the amount demanded, the Company may withhold
that amount from other amounts payable by the Company to the
participant including salary, subject to applicable law. With the
consent of the Board of Directors a participant may satisfy this
obligation, in whole or in part, by having the Company withhold from
any shares to be issued upon the exercise that number of shares that
would satisfy the withholding amount due or by delivering Common Stock
to the Company to satisfy the withholding amount.
(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan
shall be reduced by the number of shares issued. Cash payments of
stock appreciation rights shall not reduce the number of shares of
Common Stock reserved for issuance under the Plan.
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10. Cash Bonus Rights.
(a) Grant. The Board of Directors may grant cash bonus rights
under the Plan in connection with (i) options granted or previously
granted, (ii) stock appreciation rights granted or previously granted,
(iii) stock bonuses awarded or previously awarded and (iv) shares sold or
previously sold under the Plan. Cash bonus rights will be subject to rules,
terms and conditions as the Board of Directors may prescribe. Unless
otherwise determined by the Board of Directors with respect to a cash bonus
right granted to a person who is neither an Officer nor a director of the
Company, each cash bonus right granted under the Plan by its terms shall be
nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution
of the state or country of the holder's domicile at the time of death. The
payment of a cash bonus shall not reduce the number of shares of Common
Stock reserved for issuance under the Plan.
(b) Cash Bonus Rights in Connection With Options. A cash bonus
right granted in connection with an option will entitle an optionee to a
cash bonus when the related option is exercised (or terminates in
connection with the exercise of a stock appreciation right related to the
option) in whole or in part if, in the sole discretion of the Board of
Directors, the bonus right will result in a tax deduction that the Company
has sufficient taxable income to use. If an optionee purchases shares upon
exercise of an option and does not exercise a related stock appreciation
right, the amount of the bonus, if any, shall be determined by multiplying
the excess of the total fair market value of the shares to be acquired upon
the exercise over the total option price for the shares by the applicable
bonus percentage. If the optionee exercises a related stock appreciation
right in connection with the termination of an option, the amount of the
bonus, if any, shall be determined by multiplying the total fair market
value of the shares and cash received pursuant to the exercise of the stock
appreciation right by the applicable bonus percentage. The bonus percentage
applicable to a bonus right, including a previously granted bonus right,
may be changed from time to time at the sole discretion of the Board of
Directors but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A cash
bonus right granted in connection with a stock bonus will entitle the
recipient to a cash bonus payable when the stock bonus is awarded or
restrictions, if any, to which the stock is subject lapse. If bonus stock
awarded is subject to restrictions and is repurchased by the Company or
forfeited by the holder, the cash bonus right granted in connection with
the stock bonus shall terminate and may not be exercised. The amount and
timing of payment of a cash bonus shall be determined by the Board of
Directors.
(d) Cash Bonus Rights in Connection With Stock Purchases. A cash
bonus right granted in connection with the purchase of stock pursuant to
paragraph 8 will entitle the recipient to a cash bonus when the shares are
purchased or restrictions, if any, to which the stock is subject lapse. Any
cash bonus right granted in connection with shares purchased pursuant to
paragraph 8 shall terminate and may not be exercised
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in the event the shares are repurchased by the Company or forfeited by the
holder pursuant to applicable restrictions. The amount of any cash bonus to
be awarded and timing of payment of a cash bonus shall be determined by the
Board of Directors.
(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable
federal, state and local withholding requirements.
11. Performance Units. The Board of Directors may grant performance
units consisting of monetary units which may be earned in whole or in part
if the Company achieves certain goals established by the Board of Directors
over a designated period of time, but not in any event more than 10 years.
The goals established by the Board of Directors may include earnings per
share, return on shareholders' equity, return on invested capital, and such
other goals as may be established by the Board of Directors. In the event
that the minimum performance goal established by the Board of Directors is
not achieved at the conclusion of a period, no payment shall be made to the
participants. In the event the maximum corporate goal is achieved, 100
percent of the monetary value of the performance units shall be paid to or
vested in the participants. Partial achievement of the maximum goal may
result in a payment or vesting corresponding to the degree of achievement
as determined by the Board of Directors. Payment of an award earned may be
in cash or in Common Stock or in a combination of both, and may be made
when earned, or vested and deferred, as the Board of Directors determines.
Deferred awards shall earn interest on the terms and at a rate determined
by the Board of Directors. Unless otherwise determined by the Board of
Directors with respect to a performance unit granted to a person who is
neither an Officer nor a director of the Company, each performance unit
granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder, either voluntarily or by operation of law,
except by will or by the laws of descent and distribution of the state or
country of the holder's domicile at the time of death. Each participant who
has been awarded a performance unit shall, upon notification of the amount
due, pay to the Company in cash amounts necessary to satisfy any applicable
federal, state and local tax withholding requirements. If the participant
fails to pay the amount demanded, the Company may withhold that amount from
other amounts payable by the Company to the participant, including salary
or fees for services, subject to applicable law. With the consent of the
Board of Directors a participant may satisfy this obligation, in whole or
in part, by having the Company withhold from any shares to be issued that
number of shares that would satisfy the withholding amount due or by
delivering Common Stock to the Company to satisfy the withholding amount.
The payment of a performance unit in cash shall not reduce the number of
shares of Common Stock reserved for issuance under the Plan. The number of
shares reserved for issuance under the Plan shall be reduced by the number
of shares issued upon payment of an award.
12. Foreign Qualified Grants. Awards under the Plan may be granted to
such officers and employees of the Company and its subsidiaries and such
other persons described in paragraph 1 residing in foreign jurisdictions as
the Board of Directors may
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determine from time to time. The Board of Directors may adopt such
supplements to the Plan as may be necessary to comply with the applicable
laws of such foreign jurisdictions and to afford participants favorable
treatment under such laws; provided, however, that no award shall be
granted under any such supplement with terms which are more beneficial to
the participants than the terms permitted by the Plan.
13. Changes in Capital Structure.
(a) Stock Splits; Stock Dividends. If the outstanding Common
Stock of the Company is hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
the Company by reason of any stock split, combination of shares or dividend
payable in shares, recapitalization or reclassification appropriate
adjustment shall be made by the Board of Directors in the number and kind
of shares available for grants under the Plan. In addition, the Board of
Directors shall make appropriate adjustment in the number and kind of
shares as to which outstanding options, or portions thereof then
unexercised, shall be exercisable, so that the optionee's proportionate
interest before and after the occurrence of the event is maintained.
Notwithstanding the foregoing, the Board of Directors shall have no
obligation to effect any adjustment that would or might result in the
issuance of fractional shares, and any fractional shares resulting from any
adjustment may be disregarded or provided for in any manner determined by
the Board of Directors. Any such adjustments made by the Board of Directors
shall be conclusive.
(b) Mergers, Reorganizations, Etc. In the event of a merger,
consolidation, plan of exchange, acquisition of property or stock,
separation, reorganization or liquidation to which the Company or a
subsidiary is a party or a sale of all or substantially all of the
Company's assets (each, a "Transaction"), the Board of Directors shall, in
its sole discretion and to the extent possible under the structure of the
Transaction, select one of the following alternatives for treating
outstanding options under the Plan:
(i) Outstanding options shall remain in effect in accordance
with their terms.
(ii) Outstanding options shall be converted into options to
purchase stock in the corporation that is the surviving or acquiring
corporation in the Transaction. The amount, type of securities subject
thereto and exercise price of the converted options shall be
determined by the Board of Directors of the Company, taking into
account the relative values of the companies involved in the
Transaction and the exchange rate, if any, used in determining shares
of the surviving corporation to be issued to holders of shares of the
Company. Unless otherwise determined by the Board of Directors, the
converted options shall be vested only to the extent that the vesting
requirements relating to options granted hereunder have been
satisfied.
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(iii) The Board of Directors shall provide a 30-day period
prior to the consummation of the Transaction during which outstanding
options may be exercised to the extent then exercisable, and upon the
expiration of such 30-day period, all unexercised options shall
immediately terminate. The Board of Directors may, in its sole
discretion, accelerate the exercisability of options so that they are
exercisable in full during such 30-day period.
(c) Dissolution of the Company. In the event of the dissolution
of the Company, options shall be treated in accordance with paragraph
13(b)(iii).
(d) Rights Issued by Another Corporation. The Board of Directors
may also grant options, stock appreciation rights, performance units, stock
bonuses and cash bonuses and issue restricted stock under the Plan having
terms, conditions and provisions that vary from those specified in this
Plan provided that any such awards are granted in substitution for, or in
connection with the assumption of, existing options, stock appreciation
rights, stock bonuses, cash bonuses, restricted stock and performance units
granted, awarded or issued by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
Transaction.
14. Amendment of Plan. The Board of Directors may at any time, and
from time to time, modify or amend the Plan in such respects as it shall
deem advisable because of changes in the law while the Plan is in effect or
for any other reason. Except as provided in paragraphs 6(a)(iv), 9, 10 and
13, however, no change in an award already granted shall be made without
the written consent of the holder of such award.
15. Approvals. The obligations of the Company under the Plan are
subject to the approval of state and federal authorities or agencies with
jurisdiction in the matter. The Company will use its best efforts to take
steps required by state or federal law or applicable regulations, including
rules and regulations of the Securities and Exchange Commission and any
stock exchange on which the Company's shares may then be listed, in
connection with the grants under the Plan. The foregoing notwithstanding,
the Company shall not be obligated to issue or deliver Common Stock under
the Plan if such issuance or delivery would violate applicable state or
federal securities laws.
16. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere
in any way with the right of the Company or any subsidiary by whom such
employee is employed to terminate such employee's employment at any time,
for any reason, with or without cause, or to decrease such employee's
compensation or benefits, or (ii) confer upon any person engaged by the
Company any right to be retained or employed by the Company or to the
continuation, extension, renewal, or modification of any compensation,
contract, or arrangement with or by the Company.
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<PAGE>
17. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock
until the date of issue to the recipient of a stock certificate for such
shares. Except as otherwise expressly provided in the Plan, no adjustment
shall be made for dividends or other rights for which the record date
occurs prior to the date such stock certificate is issued.
18. Option Grants to Non-Employee Directors.
(a) Initial Board Grants. Each person who becomes a Non-Employee
Director after the Plan is adopted shall be automatically granted an option
to purchase 20,000 shares of Common Stock on the he or she becomes a
Non-Employee Director. A "Non-Employee Director" is a director who is not
an employee of the Company or any of its subsidiaries.
(b) Additional Grants. Each Non-Employee Director shall be
automatically granted an option to purchase additional shares of Common
Stock in each calendar year subsequent to the year in which such
Non-Employee Director was granted an option pursuant to paragraph 18(a),
such option to be granted as of the date of the Company's annual meeting of
shareholders held in such calendar year, provided that the Non-Employee
Director continues to serve in such capacity as of such date. The number of
shares subject to each additional grant shall be 5,000 shares for each
NonEmployee Director.
(c) Exercise Price. The exercise price of all options granted
pursuant to this paragraph 18 shall be equal to 100 percent of the fair
market value of the Common Stock determined pursuant to paragraph 6(b)(iv).
(d) Term of Option. The term of each option granted pursuant to
this paragraph 18 shall be 10 years from the date of grant.
(e) Exercisability. Until an option expires or is terminated and
except as provided in paragraphs 18(f) and 13, an option granted under this
paragraph 19 shall be exercisable according to the following schedule: 33
1/3% for each complete year of continuous service after the date of grant,
rounded up to the next full share, until fully vested.
For purposes of this paragraph 18(e), a complete year shall be
deemed to be the period which starts on the day of grant and ends on the
same day of the following calendar year, so that each successive "complete
year" ends on the same day of each successive calendar year.
(f) Termination As a Director. If an optionee ceases to be a
director of the Company for any reason, including death, the option may be
exercised at any time prior to the expiration date of the option or the
expiration of 30 days (or 12 months in the event of death) after the last
day the optionee served as a director, whichever is the
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<PAGE>
shorter period, but only if and to the extent the optionee was entitled to
exercise the option as of the last day the optionee served as a director.
(g) Nontransferability. Each option by its terms shall be
nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution
of the state or country of the optionee's domicile at the time of death,
and each option by its terms shall be exercisable during the optionee's
lifetime only by the optionee.
(h) Exercise of Options. Options may be exercised upon payment of
cash or shares of Common Stock of the Company in accordance with paragraph
6(a)(v).
Adopted: April 30, 1996
16
DESCRIPTION OF INTERLINK ELECTRONICS, INC.
MANAGEMENT INCENTIVE COMPENSATION PROGRAM
Interlink Electronics, Inc. (the "Company") currently has one cash
bonus plan covering the executive officers of the Company. Performance
objectives for the Company as a whole are determined at the beginning of
each fiscal year during the annual budgeting process and are approved by
the Board of Directors. These performance objectives are established based
upon competitive conditions and general economic circumstances then
prevailing in the industries in which the Company does business.
Eligibility of an executive officer for a bonus is generally dependent
upon the achievement of the predetermined performance objectives of the
bonus plan. Target bonus amounts are established by the Compensation
Committee of the Board of Directors (the "Committee") for each executive
officer at the beginning of each fiscal year, as a percentage of the
executive officer's base salary. If the predetermined performance goals are
met, a preliminary bonus amount is calculated under the bonus formula up to
a maximum of the target bonus amount. The final bonus amount paid to an
eligible executive officer is determined by the Committee, which has
discretion to increase or decrease the formula-derived figure within
certain limits based upon the Committee's assessment of the individual's
performance, and to pay special bonuses in extraordinary circumstances as
judged by the Committee.
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is effective as of April 1,
1996 between Interlink Electronics ("Employer") and E. Michael Thoben, III
("Executive").
Recitals
A. Executive is and has been employed by Employer as its Chairman,
President and Chief Executive Officer. Through such experience, he has
acquired background in and knowledge of Employer's business and the
industry in which it is engaged.
B. Employer desires assurance of the continued association and
services of Executive in order to retain his experience, skills, abilities,
background, and knowledge, and is therefore willing to engage his services
on the terms and conditions set forth below.
C. Executive desires to continue in the employ of Employer and is
willing to do so on those terms and conditions.
NOW, THEREFORE, in consideration of the above recitals and of the
mutual promises and conditions in this Agreement, it is agreed as follows:
Agreement
1. Executive's Duties and Authority. Employer shall employ Executive
as Chairman, President and Chief Executive Officer.
2. Reasonable Time and Effort Required. During his employment,
Executive shall devote such time, interest, and effort to the performance
of this Agreement as may be fairly and reasonably necessary.
3. Covenant Not to Compete During Employment Term. During the
employment term, Executive shall not, directly or indirectly, whether as a
partner, owner, employee, creditor, shareholder, or otherwise, promote,
participate, or engage directly or indirectly in any activity or other
business competitive with Employer's business.
4. Nonsolicitation of Customers. In order to protect Employer's trade
secrets and confidential information following termination of this
Agreement, Executive agrees not to directly or indirectly solicit, divert
for any reason or take away any customers, business or patronage of
Employer by using, disclosing or communicating directly or indirectly any
of Employer's trade secrets and confidential information, as described more
fully in Section 13 of this Agreement.
5. Term of Employment. Subject to earlier termination as provided in
this Agreement, Executive shall be employed for a two year term beginning
April 1, 1996.
Page 1 of 6
<PAGE>
6. Executive's Compensation.
6.1. Salary. Employer shall pay a Basic Salary to Executive at
the rate of $173,000 per year, payable in equal semi-monthly installments.
The Basic Salary payable to Executive under this section may be subject to
increase by an annual inflation adjustment as determined by the Board of
Directors.
6.2. Incentive Compensation. In addition to the Basic Salary
provided for above, Executive shall be entitled to participate in
Employer's management incentive compensation program as set out in Exhibit
A hereto.
6.3. Stock Options. Executive shall be eligible to participate in
the 1988 Stock Option Plan and the 1993 Stock Incentive Plan, in accordance
with the provisions of those Plans, and any awards currently held by
Executive under either or both of such Plans shall continue in full force
and effect.
6.4. Benefits. During the employment term, Executive shall be
entitled to receive all other benefits of employment generally available,
to Employer's other executive and managerial employees when and as he
becomes eligible for them, including group health and life insurance
benefits and an annual vacation of four weeks.
7. Expenses. During the employment term, Employer shall reimburse
Executive for reasonable out-of-pocket expenses incurred in connection with
Employees business, including, travel expenses, food, lodging while away
from home, telephone expenses, and automobile expenses, subject to such
policies as Employer may from time to time reasonably establish for its
employees. Executive shall submit written proof of any expense for which
reimbursement is claimed as Employer may require.
8. Indemnification by Employer. Employer shall, to the maximum extent
permitted by law, indemnify and hold Executive harmless against expenses,
including reasonable attorney's fees judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding arising by reason of Executive's employment by Employer.
Employer shall advance to Executive any expense incurred in defending any
such proceeding to the maximum extent permitted by law.
9. Termination.
9.1 Involuntary Termination. Employer may terminate this
Agreement for any reason on 12 months' written notice.
9.2. Termination for Cause. Employer may terminate this Agreement
at any time if Executive fails to perform his responsibilities under this
Agreement in any material respect and does not cure such failure within
thirty (30) days after receipt of written notice thereof, breaches any
provision of this Agreement, commits any material act of dishonesty, is
convicted of
Page 2 of 6
<PAGE>
or pleads nolo contendere to a crime, discloses confidential information,
engages in the use, possession, purchase, sale or transfer of any drug that
is not legally obtainable, or any drug that is legally obtainable but has
been obtained illegally, or is under the influence of alcohol at any time
while on Employer's business or premises, is guilty of gross carelessness
or misconduct, or unjustifiably neglects his duties under this Agreement,
or acts in any way that has a direct, substantial, and adverse effect on
Employer's business or reputation.
Executive may terminate this Agreement at any time if Employer
materially breaches this Agreement and fails to cure such breach within
thirty (30) days after receipt of written notice thereof.
9.3. Termination on Resignation. Executive may terminate this
Agreement by giving Employer three months' written notice of resignation.
9.4 Termination on Retirement. This Agreement shall be terminated
by Executive's voluntary retirement, which retirement shall be effective on
the last day of any fiscal year, provided that day occurs after Executive's
60th birthday, and provided three months' prior written notice of the
retirement shall have been given by Executive to Employer.
9.5 Termination on Disability or Death. If Executive is unable
due to mental or physical illness or injury to perform the essential
functions of his job with or without reasonable accommodations under this
Agreement, this Agreement shall be then terminated. Also, if Executive dies
during the initial term or during any renewal term of this Agreement, this
Agreement shall be terminated.
10. Disability Insurance. Employer shall obtain and maintain
disability insurance covering Executive, to the extent such insurance is
available at reasonable cost, during the term of this Agreement.
11. Agreement Survives Employer's Combination or Dissolution. This
Agreement shall not be terminated by Employer's voluntary or involuntary
dissolution or by any merger in which Employer is not the surviving or
resulting corporation, or on any transfer of all or substantially all of
Employer's assets. In the event of any such merger or transfer of assets,
the provisions of this Agreement shall be binding on and inure to the
benefit of the surviving business entity or the business entity to which
such assets shall be transferred.
12. Rights and Obligations After Notice of Termination. If Executive
gives notice of termination of this Agreement under Section 9.3, or if it
becomes known that Executive's employment will otherwise terminate, during
the three-month period prior to the termination date, Employer may, in its
sole discretion and subject to its other obligations under this Agreement,
relieve Executive of his duties under this Agreement and assign Executive
other reasonable duties and responsibilities to be performed until the
termination becomes effective.
Page 3 of 6
<PAGE>
13. Disclosure of Confidential Information and Trade Secrets
Prohibited. Executive acknowledges that in the course of his employment, he
will have access to confidential information and trade secrets relating to
Employer's business. Confidential information and trade secrets include but
are not limited to inventions, processes, designs, improvements, programs,
specifications, techniques, data relating to creation, manufacture and
marketing of any product or product concept, customer and prospective
customer names and addresses, sales records, vendor names and addresses,
financial data, information provided by third parties that Employer is
required to keep confidential, and any other proprietary information of
Employer. Except as required in the course of his employment by Employer,
Executive will not, without Employer's prior written consent, either during
his employment by Employer or after termination of that employment,
directly or indirectly disclose to any person or entity any such
confidential information or trade secrets, except that marketing and sales
information, such as customer names and addresses, will not constitute
confidential information and trade secrets five years after termination of
Executive's employment. Executive agrees to exercise the highest degree of
care in safeguarding confidential information and trade secrets against
loss, theft or inadvertent disclosure and to comply with all Employer's
policies and procedures related to protection of confidential information
and trade secrets.
14. Ownership of Inventions and Improvements.
14.1 Employer Ownership. Executive agrees that all inventions,
discoveries, improvements, trade secrets, formulae, techniques, processes
and know-how, whether or not patentable, and whether or not reduced to
practice, that are conceived or developed during Executive's employment by
Employer, either alone or jointly with others, shall be owned exclusively
by Employer, and Executive hereby assigns to Employer all Executive's
right, title and interest in all such intellectual property, and Executive
agrees that Employer shall be the sole owner of all domestic and foreign
patents or other rights pertaining thereto, and further agrees to execute
all documents that Employer reasonably determines to be necessary or
convenient for use in applying for, prosecuting, perfecting, or enforcing
patents or other intellectual property rights, including without
limitation, the execution of any assignments, patent applications, or other
documents that may be requested by Employer. This provision is intended to
apply only to the extent permitted by applicable law.
14.2 Statutory Limitation on Assignment. Executive understands
that Employer is hereby advising Executive that any provision in this
Agreement requiring Executive to assign rights in any invention does not
apply to an invention which qualifies fully under the provisions of Section
2870 of the California Labor Code. That section provides as follows:
"(a) Any provision in an employment agreement which provides
that an employee shall assign, or offer to assign, any of his or
her rights in an invention to his or her employer shall not apply
to an invention that an employee developed entirely on his or her
own time without using the employer's equipment, supplies,
facilities, or trade secret information, except for those
inventions that either:
Page 4 of 6
<PAGE>
"(1) Relate at the time of conception or reduction to
practice of the invention to the employer's business,
or actual or demonstrably anticipated research or
development of the employer; or
"(2) Result from any work performed by the employee for
the employer
"(b) To the extent a provision in an employment agreement
purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under subdivision
(a), the provision is against the public policy of this state and
is unenforceable."
By signing this Agreement, Executive acknowledges that this paragraph shall
constitute written notice of the provisions of Section 2870.
15. Integration. This Agreement contains the entire Agreement between
the parties and supersedes all prior oral and written agreements,
understandings, commitments, and practices between the parties, including
all prior employment agreements, whether or not fully performed by
Executive before the date of this Agreement. No amendments to this
Agreement may be made except by a writing signed by both parties.
16. Choice of Law and Forum. The construction, performance and
enforcement of this Agreement shall be construed in accordance with the
laws of California. Any proceeding to interpret or enforce this Agreement
shall be conducted in Ventura County, California.
17. Notices. Any notice to Employer required or permitted under this
Agreement shall be given in writing to Employer, either by personal service
or by registered or certified mail, postage prepaid, addressed to the
president of Employer at its then principal place of business. Any such
notice to Executive shall be given in a like manner and, if mailed, shall
be addressed to Executive at his home address then shown in Employer's
files. For the purpose of determining compliance with any time limit in
this Agreement, a notice shall be deemed to have been duly given (a) on the
date of service, if served personally on the party to whom notice is to be
given, or (b) on the second business day after mailing, if mailed to the
party to whom the notice is to be given in the manner provided in this
section.
18. Severability. If any provision of this Agreement is held invalid
or unenforceable, the remainder of this Agreement shall nevertheless remain
in full force and effect. If any provision is held invalid or unenforceable
with respect to particular circumstances, it shall nevertheless remain in
full force and effect in all other circumstances.
19. Arbitration. Any claim or controversy arising out of or related to
this Agreement shall be determined by final, binding arbitration in Ventura
County, California pursuant to the expedited commercial rules of the
American Arbitration Association, or as Employer and Executive may agree.
The costs of the arbitration shall be borne initially one- half by Employer
Page 5 of 6
<PAGE>
and one-half by Executive. The arbitrator is authorized to determine the
prevailing party and to award the prevailing party reasonable attorneys'
fees and reimbursement for all other costs of arbitration incurred by the
prevailing party.
INTERLINK ELECTRONICS
By: BRIAN NAYLOR
-------------------------------
Title: VP & Secretary
----------------------------
(Employer)
E. MICHAEL THOBEN, III
- ----------------------------------
E. Michael Thoben, III
(Executive)
Page 6 of 6
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is effective as of April 1,
1996 between Interlink Electronics ("Employer") and William A. Yates
("Executive").
Recitals
A. Executive is and has been employed by Employer as its Senior Vice
President of Sales and Marketing. Through such experience, he has acquired
background in and knowledge of Employer's business and the industry in
which it is engaged.
B. Employer desires assurance of the continued association and
services of Executive in order to retain his experience, skills, abilities,
background, and knowledge, and is therefore willing to engage his services
on the terms and conditions set forth below.
C. Executive desires to continue in the employ of Employer and is
willing to do so on those terms and conditions.
NOW, THEREFORE, in consideration of the above recitals and of the
mutual promises and conditions in this Agreement, it is agreed as follows:
Agreement
1. Executive's Duties and Authority. Employer shall employ Executive
as Senior Vice President, Sales and Marketing.
2. Reasonable Time and Effort Required. During his employment,
Executive shall devote such time, interest, and effort to the performance
of this Agreement as may be fairly and reasonably necessary.
3. Covenant Not to Compete During Employment Term. During the
employment term, Executive shall not, directly or indirectly, whether as a
partner, owner, employee, creditor, shareholder, or otherwise, promote,
participate, or engage directly or indirectly in any activity or other
business competitive with Employer's business.
4. Nonsolicitation of Customers. In order to protect Employees trade
secrets and confidential information following termination of this
Agreement, Executive agrees not to directly or indirectly solicit, divert
for any reason or take away any customers, business or patronage of
Employer by using, disclosing or communicating directly or indirectly any
of Employer's trade secrets and confidential information, as described more
fully in Section 13 of this Agreement.
Page 1 of 6
<PAGE>
5. Term of Employment. Subject to earlier termination as provided in
this Agreement, Executive shall be employed for a term of two years
beginning on April 1, 1996.
6. Executive's Compensation.
6.1. Salary. Employer shall pay a Basic Salary to Executive at
the rate of $115,560 per year, payable in equal semi-monthly installments.
The Basic Salary payable to Executive under this section may be subject to
increase by an annual inflation adjustment as determined by the Board of
Directors.
6.2. Incentive Compensation. In addition to the Basic Salary
provided for above, Executive shall be entitled to participate in
Employer's management incentive compensation program as set out in Exhibit
A hereto.
6.3. Stock Options. Executive shall be eligible to participate in
the 1988 Stock Option Plan and the 1993 Stock Incentive Plan, in accordance
with the provisions of those Plans, and any awards currently held by
Executive under either or both of such Plans shall continue in full force
and effect.
6.4. Benefits. During the employment term, Executive shall be
entitled to receive all other benefits of employment generally available to
Employer's other executive and managerial employees when and as he becomes
eligible for them, including group health and life insurance benefits and
an annual vacation of four weeks.
7. Expenses. During the employment term, Employer shall reimburse
Executive for reasonable out-of-pocket expenses incurred in connection with
Employer's business, including, travel expenses, food, lodging while away
from home, telephone expenses, and automobile expenses, subject to such
policies as Employer may from time to time reasonably establish for its
employees. Executive shall submit written proof of any expense for which
reimbursement is claimed as Employer may require.
8. Indemnification by Employer. Employer shall, to the maximum extent
permitted by law, indemnify and hold Executive harmless against expenses,
including reasonable attorney's fees judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding arising by reason of Executive's employment by Employer.
Employer shall advance to Executive any expense incurred in defending any
such proceeding to the maximum extent permitted by law.
9. Termination.
9.1. Involuntary Termination. Employer may terminate this
Agreement for any reason on nine months' written notice.
Page 2 of 6
<PAGE>
9.2. Termination for Cause. Employer may terminate this Agreement
at any time if Executive fails to perform his responsibilities under this
Agreement in any material respect and does not cure such failure within
thirty (30) days after receipt of written notice thereof, breaches any
provision of this Agreement, commits any material act of dishonesty, is
convicted of or pleads nolo contendere to a crime, discloses confidential
information, engages in the use, possession, purchase, sale or transfer of
any drug that is not legally obtainable, or any drug that is legally
obtainable but has been obtained illegally, or is under the influence of
alcohol at any time while on Employer's business or premises, is guilty of
gross carelessness or misconduct, or unjustifiably neglects his duties
under this Agreement, or acts in any way that has a direct, substantial,
and adverse effect on Employer's business or reputation.
Executive may terminate this Agreement at any time if Employer
materially breaches this Agreement and fails to cure such breach within
thirty (30) days after receipt of written notice thereof.
9.3. Termination on Resignation. Executive may terminate this
Agreement by giving Employer three months' written notice of resignation.
9.4. Termination on Retirement. This Agreement shall be
terminated by Executive's voluntary retirement, which retirement shall be
effective on the last day of any fiscal year, provided that day occurs
after Executive's 60th birthday, and provided three months, prior written
notice of the retirement shall have been given by Executive to Employer.
9.5. Termination on Disability or Death. If Executive is unable
due to mental or physical illness or injury to perform the essential
functions of his job with or without reasonable accommodations under this
Agreement, this Agreement shall be then terminated. Also, if Executive dies
during the initial term or during any renewal term of this Agreement, this
Agreement shall be terminated.
10. Disability Insurance. Employer shall obtain and maintain
disability insurance covering Executive, to the extent such insurance is
available at reasonable cost, during the term of this Agreement.
11. Agreement Survives Employees Combination or Dissolution. This
Agreement shall not be terminated by Employer's voluntary or involuntary
dissolution or by any merger in which Employer is not the surviving or
resulting corporation, or on any transfer of all or substantially all of
Employer's assets. In the event of any such merger or transfer of assets,
the provisions of this Agreement shall be binding on and inure to the
benefit of the surviving business entity or the business entity to which
such assets shall be transferred.
12. Rights and Obligations After Notice of Termination. If Executive
gives notice of termination of this Agreement under Section 9.3, or if it
becomes known that Executive's employment will otherwise terminate, during
the three-month period prior to the termination date, Employer may, in its
sole discretion and subject to its other obligations under this Agreement,
Page 3 of 6
<PAGE>
relieve Executive of his duties under this Agreement and assign Executive
other reasonable duties and responsibilities to be performed until the
termination becomes effective.
13. Disclosure of Confidential Information and Trade Secrets
Prohibited. Executive acknowledges that in the course of his employment, he
will have access to confidential information and trade secrets relating to
Employer's business. Confidential information and trade secrets include but
are not limited to inventions, processes, designs, improvements, programs,
specifications, techniques, data relating to creation, manufacture and
marketing of any product or product concept, customer and prospective
customer names and addresses, sales records, vendor names and addresses,
financial data, information provided by third parties that Employer is
required to keep confidential, and any other proprietary information of
Employer. Except as required in the course of his employment by Employer,
Executive will not, without Employer's prior written consent, either during
his employment by Employer or after termination of that employment,
directly or indirectly disclose to any person or entity any such
confidential information or trade secrets, except that marketing and sales
information, such as customer names and addresses, will not constitute
confidential information and trade secrets five years after termination of
Executive's employment. Executive agrees to exercise the highest degree of
care in safeguarding confidential information and trade secrets against
loss, theft or inadvertent disclosure and to comply with all Employer's
policies and procedures related to protection of confidential information
and trade secrets.
14. Ownership of Inventions and Improvements.
14.1 Employer Ownership. Executive agrees that all inventions,
discoveries, improvements, trade secrets, formulae, techniques, processes
and know-how, whether or not patentable, and whether or not reduced to
practice, that are conceived or developed during Executive's employment by
Employer, either alone or jointly with others, shall be owned exclusively
by Employer, and Executive hereby assigns to Employer all Executive's
right, title and interest in all such intellectual property, and Executive
agrees that Employer shall be the sole owner of all domestic and foreign
patents or other rights pertaining thereto, and further agrees to execute
all documents that Employer reasonably determines to be necessary or
convenient for use in applying for, prosecuting, perfecting, or enforcing
patents or other intellectual property rights, including without
limitations the execution of any assignments, patent applications, or other
documents that may be requested by Employer. This provision is intended to
apply only to the extent permitted by applicable law.
14.2 Statutory Limitation on Assignment. Executive understands
that Employer is hereby advising Executive that any provision in this
Agreement requiring Executive to assign rights in any invention does not
apply to an invention which qualifies fully under the provisions of Section
2870 of the California Labor Code. That section provides as follows:
"(a) Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in-
an invention to his or her employer shall
Page 4 of 6
<PAGE>
not apply to an invention that an employee developed entirely on his or her
own time without using the employer's equipment, supplies, facilities, or
trade secret information, except for those inventions that either:
"(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
"(2) Result from any work performed by the employee for the
employer.
"(b) To the extent a provision in an employment agreement
purports to require an employee to assign an invention otherwise excluded
from being required to be assigned under subdivision (a), the provision is
against the public policy of this state and is unenforceable."
By signing this Agreement, Executive acknowledges that this paragraph shall
constitute written notice of the provisions of Section 2870.
15. Integration. This Agreement contains the entire Agreement between
the parties and supersedes all prior oral and written agreements,
understandings, commitments, and practices between the parties, including
all prior employment agreements, whether or not fully performed by
Executive before the date of this Agreement. No amendments to this
Agreement may be made except by a writing signed by both parties.
16. Choice of Law and Forum. The construction, performance and
enforcement of this Agreement shall be construed in accordance with the
laws of California. Any proceeding to interpret or enforce this Agreement
shall be conducted in Ventura County, California.
17. Notices. Any notice to Employer required or permitted under this
Agreement shall be given in writing to Employer, either by personal service
or by registered or certified mail, postage prepaid, addressed to the
president of Employer at its then principal place of business. Any such
notice to Executive shall be given in a like manner and, if mailed, shall
be addressed to Executive at his home address then shown in Employer's
files. For the purpose of determining compliance with any time limit in
this Agreement, a notice shall be deemed to have been duly given (a) on the
date of service, if served personally on the party to whom notice is to be
given, or (b) on the second business day after mailing, if mailed to the
party to whom the notice is to be given in the manner provided in this
section.
18. Severability. If any provision of this Agreement is held invalid
or unenforceable, the remainder of this Agreement shall nevertheless remain
in full force and effect. If any provision is held invalid or unenforceable
with respect to particular circumstances, it shall nevertheless remain in
full force and effect in all other circumstances.
19. Arbitration. Any claim or controversy arising out of or-related to
this Agreement shall be determined by final, binding arbitration in Ventura
County, California pursuant to the expedited commercial rules of the
American Arbitration Association, or as Employer and Executive may agree.
The costs of the arbitration shall be borne initially one- half by Employer
Page 5 of 6
<PAGE>
and one-half by Executive. The arbitrator is authorized to determine the
prevailing party and to award the prevailing party reasonable attorneys'
fees and reimbursement for all other costs of arbitration incurred by the
prevailing party
INTERLINK ELECTRONICS
By: E. MICHAEL THOBEN, III
-------------------------------
Title: President/CEO/Chairman
----------------------------
(Employer)
WILLIAM A. YATES
- ----------------------------------
William A. Yates
(Executive)
Page 6 of 6
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is effective as of April 1,
1996 between Interlink Electronics ("Employer") and David J. Arthur
("Executive").
Recitals
A. Executive is and has been employed by Employer as its Senior Vice
President of Operations and Manufacturing. Through such experience, he has
acquired background in and knowledge of Employer's business and the
industry in which it is engaged.
B. Employer desires assurance of the continued association and
services of Executive in order to retain his experience, skills, abilities,
background, and knowledge, and is therefore willing to engage his services
on the terms and conditions set forth below.
C. Executive desires to continue in the employ of Employer and is
willing to do so on those terms and conditions.
NOW, THEREFORE, in consideration of the above recitals and of the
mutual promises and conditions in this Agreement, it is agreed as follows:
Agreement
1. Executive's Duties and Authority. Employer shall employ Executive
as Senior Vice President of Operations and Manufacturing.
2. Reasonable Time and Effort Required. During his employment,
Executive shall devote such time, interest, and effort to the performance
of this Agreement as may be fairly and reasonably necessary.
3. Covenant Not to Compete During Employment Term. During the
employment term, Executive shall not, directly or indirectly, whether as a
partner, owner, employee, creditor, shareholder, or otherwise, promote,
participate, or engage directly or indirectly in any activity or other
business competitive with Employer's business.
4. Nonsolicitation of Customers. In order to protect Employees trade
secrets and confidential information following termination of this
Agreement, Executive agrees not to directly or indirectly solicit, divert
for any reason or take away any customers, business or patronage of
Employer by using, disclosing or communicating directly or indirectly any
of Employer's trade secrets and confidential information, as described more
fully in Section 13 of this Agreement.
Page 1 of 6
<PAGE>
5. Term of Employment. Subject to earlier termination as provided in
this Agreement, Executive shall be employed for a term of two years
beginning on April 1, 1996.
6. Executive's Compensation.
6.1. Salary. Employer shall pay a Basic Salary to Executive at
the rate of $116,715 per year, payable in equal semi-monthly installments.
The Basic Salary payable to Executive under this section may be subject to
increase by an annual inflation adjustment as determined by the Board of
Directors.
6.2. Incentive Compensation. In addition to the Basic Salary
provided for above, Executive shall be entitled to participate in
Employer's management incentive compensation program as set out in Exhibit
A hereto.
6.3. Stock Options. Executive shall be eligible to participate in
the 1988 Stock Option Plan and the 1993 Stock Incentive Plan, in accordance
with the provisions of those Plans, and any awards currently held by
Executive under either or both of such Plans shall continue in full force
and effect.
6.4. Benefits. During the employment term, Executive shall be
entitled to receive all other benefits of employment generally available to
Employer's other executive and managerial employees when and as he becomes
eligible for them, including group health and life insurance benefits and
an annual vacation of four weeks.
7. Expenses. During the employment term, Employer shall reimburse
Executive for reasonable out-of-pocket expenses incurred in connection with
Employer's business, including, travel expenses, food, lodging while away
from home, telephone expenses, and automobile expenses, subject to such
policies as Employer may from time to time reasonably establish for its
employees. Executive shall submit written proof of any expense for which
reimbursement is claimed as Employer may require.
8. Indemnification by Employer. Employer shall, to the maximum extent
permitted by law, indemnify and hold Executive harmless against expenses,
including reasonable attorney's fees judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding arising by reason of Executive's employment by Employer.
Employer shall advance to Executive any expense incurred in defending any
such proceeding to the maximum extent permitted by law.
9. Termination.
9.1. Involuntary Termination. Employer may terminate this
Agreement for any reason on nine months' written notice.
Page 2 of 6
<PAGE>
9.2. Termination for Cause. Employer may terminate this Agreement
at any time if Executive fails to perform his responsibilities under this
Agreement in any material respect and does not cure such failure within
thirty (30) days after receipt of written notice thereof, breaches any
provision of this Agreement, commits any material act of dishonesty, is
convicted of or pleads nolo contendere to a crime, discloses confidential
information, engages in the use, possession, purchase, sale or transfer of
any drug that is not legally obtainable, or any drug that is legally
obtainable but has been obtained illegally, or is under the influence of
alcohol at any time while on Employer's business or premises, is guilty of
gross carelessness or misconduct, or unjustifiably neglects his duties
under this Agreement, or acts in any way that has a direct, substantial,
and adverse effect on Employer's business or reputation.
Executive may terminate this Agreement at any time if Employer
materially breaches this Agreement and fails to cure such breach within
thirty (30) days after receipt of written notice thereof.
9.3. Termination on Resignation. Executive may terminate this
Agreement by giving Employer three months' written notice of resignation.
9.4. Termination on Retirement. This Agreement shall be
terminated by Executive's voluntary retirement, which retirement shall be
effective on the last day of any fiscal year, provided that day occurs
after Executive's 60th birthday, and provided three months, prior written
notice of the retirement shall have been given by Executive to Employer.
9.5. Termination on Disability or Death. If Executive is unable
due to mental or physical illness or injury to perform the essential
functions of his job with or without reasonable accommodations under this
Agreement, this Agreement shall be then terminated. Also, if Executive dies
during the initial term or during any renewal term of this Agreement, this
Agreement shall be terminated.
10. Disability Insurance. Employer shall obtain and maintain
disability insurance covering Executive, to the extent such insurance is
available at reasonable cost, during the term of this Agreement.
11. Agreement Survives Employer's Combination or Dissolution. This
Agreement shall not be terminated by Employer's voluntary or involuntary
dissolution or by any merger in which Employer is not the surviving or
resulting corporation, or on any transfer of all or substantially all of
Employer's assets. In the event of any such merger or transfer of assets,
the provisions of this Agreement shall be binding on and inure to the
benefit of the surviving business entity or the business entity to which
such assets shall be transferred.
12. Rights and Obligations After Notice of Termination. If Executive
gives notice of termination of this Agreement under Section 9.3, or if it
becomes known that Executive's employment will otherwise terminate, during
the three-month period prior to the termination date, Employer may, in its
sole discretion and subject to its other obligations under this Agreement,
Page 3 of 6
<PAGE>
relieve Executive of his duties under this Agreement and assign Executive
other reasonable duties and responsibilities to be performed until the
termination becomes effective.
13. Disclosure of Confidential Information and Trade Secrets
Prohibited. Executive acknowledges that in the course of his employment, he
will have access to confidential information and trade secrets relating to
Employer's business. Confidential information and trade secrets include but
are not limited to inventions, processes, designs, improvements, programs,
specifications, techniques, data relating to creation, manufacture and
marketing of any product or product concept, customer and prospective
customer names and addresses, sales records, vendor names and addresses,
financial data, information provided by third parties that Employer is
required to keep confidential, and any other proprietary information of
Employer. Except as required in the course of his employment by Employer,
Executive will not, without Employer's prior written consent, either during
his employment by Employer or after termination of that employment,
directly or indirectly disclose to any person or entity any such
confidential information or trade secrets, except that marketing and sales
information, such as customer names and addresses, will not constitute
confidential information and trade secrets five years after termination of
Executive's employment. Executive agrees to exercise the highest degree of
care in safeguarding confidential information and trade secrets against
loss, theft or inadvertent disclosure and to comply with all Employer's
policies and procedures related to protection of confidential information
and trade secrets.
14. Ownership of Inventions and Improvements.
14.1. Employer Ownership. Executive agrees that all inventions,
discoveries, improvements, trade secrets, formulae, techniques, processes
and know-how, whether or not patentable, and whether or not reduced to
practice, that are conceived or developed during Executive's employment by
Employer, either alone or jointly with others, shall be owned exclusively
by Employer, and Executive hereby assigns to Employer all Executive's
right, title and interest in all such intellectual property, and Executive
agrees that Employer shall be the sole owner of all domestic and foreign
patents or other rights pertaining thereto, and further agrees to execute
all documents that Employer reasonably determines to be necessary or
convenient for use in applying for, prosecuting, perfecting, or enforcing
patents or other intellectual property rights, including without
limitation, the execution of any assignments, patent applications, or other
documents that may be requested by Employer. This provision is intended to
apply only to the extent permitted by applicable law.
14.2. Statutory Limitation on Assignment. Executive understands
that Employer is hereby advising Executive that any provision in this
Agreement requiring Executive to assign rights in any invention does not
apply to an invention which qualifies fully under the provisions of Section
2870 of the California Labor Code. That section provides as follows:
"(a) Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in-
an invention to his or her employer shall not apply to an invention that an
employee developed entirely on his or her own time without
Page 4 of 6
<PAGE>
using the employer's equipment, supplies, facilities, or trade secret
information, except for those inventions that either:
"(1) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or
demonstrably anticipated research or development of the employer; or
"(2) Result from any work performed by the employee for the
employer.
"(b) To the extent a provision in an employment agreement
purports to require an employee to assign an invention otherwise excluded
from being required to be assigned under subdivision (a), the provision is
against the public policy of this state and is unenforceable."
By signing this Agreement, Executive acknowledges that this paragraph shall
constitute written notice of the provisions of Section 2870.
15. Integration. This Agreement contains the entire Agreement between
the parties and supersedes all prior oral and written agreements,
understandings, commitments, and practices between the parties, including
all prior employment agreements, whether or not fully performed by
Executive before the date of this Agreement. No amendments to this
Agreement may be made except by a writing signed by both parties.
16. Choice of Law and Forum. The construction, performance and
enforcement of this Agreement shall be construed in accordance with the
laws of California. Any proceeding to interpret or enforce this Agreement
shall be conducted in Ventura County, California.
17. Notices. Any notice to Employer required or permitted under this
Agreement shall be given in writing to Employer, either by personal service
or by registered or certified mail, postage prepaid, addressed to the
president of Employer at its then principal place of business. Any such
notice to Executive shall be given in a like manner and, if mailed, shall
be addressed to Executive at his home address then shown in Employer's
files. For the purpose of determining compliance with any time limit in
this Agreement, a notice shall be deemed to have been duly given (a) on the
date of service, if served personally on the party to whom notice is to be
given, or (b) on the second business day after mailing, if mailed to the
party to whom the notice is to be given in the manner provided in this
section.
18. Severability. If any provision of this Agreement is held invalid
or unenforceable, the remainder of this Agreement shall nevertheless remain
in full force and effect. If any provision is held invalid or unenforceable
with respect to particular circumstances, it shall nevertheless remain in
full force and effect in all other circumstances.
19. Arbitration. Any claim or controversy arising out of or-related to
this Agreement shall be determined by final, binding arbitration in Ventura
County, California pursuant to the expedited commercial rules of the
American Arbitration Association, or as Employer and Executive may agree.
The costs of the arbitration shall be borne initially one-half by Employer
Page 5 of 6
<PAGE>
and one-half by Executive. The arbitrator is authorized to determine the
prevailing party and to award the prevailing party reasonable attorneys'
fees and reimbursement for all other costs of arbitration incurred by the
prevailing party.
INTERLINK ELECTRONICS
By: E. MICHAEL THOBEN, III
-------------------------------
Title: Chairman, CEO & President
----------------------------
(Employer)
DAVID J. ARTHUR
- ----------------------------------
David J. Arthur
(Executive)
Page 6 of 6
LIST OF SUBSIDIARIES
Jurisdiction of
Name Incorporation
- ---- ---------------
Interlink Electronics K.K. Japan
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3767
<SECURITIES> 0
<RECEIVABLES> 3649
<ALLOWANCES> 0
<INVENTORY> 3634
<CURRENT-ASSETS> 11335
<PP&E> 1143
<DEPRECIATION> 0
<TOTAL-ASSETS> 13185
<CURRENT-LIABILITIES> 2366
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 20768
<TOTAL-LIABILITY-AND-EQUITY> 13185
<SALES> 13485
<TOTAL-REVENUES> 13485
<CGS> 7028
<TOTAL-COSTS> 12879
<OTHER-EXPENSES> 91
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 515
<INCOME-TAX> 0
<INCOME-CONTINUING> 515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 515
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
