Interlink Electronics Announces Fourth Quarter and Year End 2004 Financial Results

Business Wire, March 23, 2005

CAMARILLO, Calif. -- Interlink Electronics, Inc. (NASDAQ:LINK), a world leader in the development of intuitive interface technologies and solutions for business and home applications, today announced its financial results for the fourth quarter of 2004. Consistent with the Company's previous guidance, revenues for the three months ended December 31, 2004 totaled $9.7 million, up slightly from the third quarter of 2004 and up 11% compared to the fourth quarter of 2003. For the year ended December 31, 2004, revenues equaled $35.4 million, a 14% increase over the $31.0 million for the year ended December 31, 2003.

For the fourth quarter of 2004, the Company reported an operating loss of $1.1 million as compared to operating income of $554,000 in the fourth quarter of 2003. For the 2004 year, the operating loss was $2.3 million as compared to operating income of $1.1 million in 2003. The net loss for the fourth quarter was $1.1 million or $.08 loss per diluted share as compared to net income of $407,000 or $.03 earnings per diluted share in the fourth quarter of 2003. For the 2004 year, the net loss was $2.3 million or a $.19 loss per diluted share as compared to net income of $1.1 million or $.09 earnings per diluted share in 2003.

"Despite significant revenue growth in the second half of 2004, we experienced a net loss for the year. The principal factors generating the loss were increased startup costs and margin pressures in certain business segments and unprecedented accounting costs relating to compliance with Section 404 of the Sarbanes-Oxley Act of 2002," said E. Michael Thoben, III, Chairman, CEO & President.

"The startup costs relate to the unusually high number of new products that we introduced in 2004 as our business expanded in each of our business segments," said Mr. Thoben. "We also incurred significant costs connected with the transfer of the production of some of our OEM products from Japan and the U.S. to China. We believe that our decision to incur these costs will be justified as our businesses continue to build momentum.

"As with previous years, we expect to continue to be challenged by margin pressures, particularly in connection with sales of OEM remote controls in the consumer markets," Mr. Thoben continued. "Our decision to expand our China operation was based in part on the need to address margin challenges by adopting best cost production processes consistent with the service and quality levels that our customers expect. We believe we will have opportunities to improve margins as we integrate additional technologies into our customers' next generation products.

"Like most public companies, we have experienced increased general and administrative expenses in connection with Sarbanes-Oxley Act compliance and increased auditor costs that have continually surpassed our most pessimistic expectations," said Mr. Thoben. "Outside costs incurred in the fourth quarter exceeded $721,000 or $.05 per share. It is difficult to estimate future costs in this area, but we believe the majority of the initial implementation costs are behind us."

As previously disclosed in the Company's Form 12b-25 filing last week, the Company is in the process of completing the review of its internal control system in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. The Company expects to file its report with Form 10-K no later than March 31, 2005. Consistent with its filing last week, the Company has identified certain material weaknesses relating to overestimated capitalized overhead in inventory, revenue recognition policies, quarterly and annual closing processes and processes related to the Company's Japanese subsidiary, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Business Outlook

"Our Business Communication revenue worldwide grew 4% in 2004. This is a consolidated growth rate made up of OEM sales and Interlink Electronics' own branded products," Mr. Thoben continued. "Looking closer at these results, the OEM segment actually outperformed our original expectations for 2004 and grew 20% year over year. This solid performance was largely masked by the 23% decline in our Interlink Electronics branded products. This decline was expected as we chose to focus our branded product sales on specialty distribution and move away from the traditional consumer retail channels. This strategy worked well as revenue in the branded channel grew sequentially each quarter of 2004 and the momentum continues into 2005. Looking forward, we expect the 2005 consolidated Business Communication revenue to be on par with the growth we saw in 2004.

"Our progress in the Home Entertainment segment was noteworthy in 2004," said Mr. Thoben. "Revenue in the fourth quarter is up 197% over the same period last year. The acceleration in revenue growth occurred mainly in the second half of the year as we began shipping new production remotes to manufacturers of advanced viewing devices. Looking forward, we expect this segment to remain one of our highest areas of growth, as new advanced viewing device models are introduced by our current customers and additional design wins are announced.