INTERLINK ELECTRONICS INC — Interim / Quarterly Report 1996

Aug 14, 1996

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 No. 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) (Zip Code) (805) 484-8855 (Registrant's telephone number, including area code) Not applicable. (Former name, former address and former fiscal year if changed since last report.) 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 --- --- Shares of Common Stock Outstanding, at August 7, 1996: 4,481,048

2

3

4 INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE UNAUDITED SIX MONTHS ENDED JUNE 30, 1996 - - ------------------------------------------------ 1. BASIS OF PRESENTATION OF INTERIM FINANCIAL DATA The financial information herein for the three month periods ended June 30, 1995 and 1996 and for the six month periods ended June 30, 1995 and 1996 is unaudited; however, such information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The interim statements should be read in conjuntion with the financial statements and the notes thereto included in the Interlink Electronics, Inc. Form 10-K for the fiscal year ended December 31, 1995. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. 2. EXERCISE AND EXPIRATION OF WARRANTS As of December 31, 1995 the Company had the following Common Stock Warrants outstanding: Number of Shares Exercise Price Expiration Date - - ---------------- -------------- --------------- 1,897,614 $8.25 June 7, 1996 135,000 $8.25 June 7, 1998 135,000 $6.60 June 7, 1998 Of the Warrants expiring in June 1996, 223,723 Warrants were exercised just prior to the expiration date and the remaining 1,673,891 warrants expired. As a result of the exercise, the Company received net proceeds of $1.75 million (after deducting offering costs of approximately $100,000). 3. LINE OF CREDIT In May 1996, the Company's bank renewed the existing credit line and increased the maximum amount of the line to $1.5 million. All other terms remained the same. 4. BANK LOAN In March 1996 two Japanese banks co-agreed to lend approximately $180,000 to the Company's Japan subsidiary. The loan carries an interest rate of 2.8% and is to be repaid over a six year period. 5. EQUIPMENT LEASE LINE In April 1996 the Company's equipment leasing firm increased the maximum amount available under the Company's equipment lease line to $1.8 million. As of June 30, 1996 the Company had used approximately $914,000 of the line. 5 INTERLINK ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the three months and the six months ended June 30, 1996, revenues increased 16% and 19%, respectively, as compared to the same periods of 1995. Revenues for the Computer Pointing Devices product line increased 48% for the six months ended June 30, 1996 as compared to the same period of 1995. The growth in this product line resulted from the Company's further penetration into the rugged portable computer and presentation system markets, as well as broader distribution of its Branded products in retail channels. Revenues for the Custom Applications products line decreased 18% as a result of the Company's strategy to focus on the Computer Pointing Devices product line for the six months ended June 30, 1996 as compared to the same period of 1995. For the first half of 1996, the Custom Applications product line accounted for 16% of total revenues, down from 33% in the first half of 1995. The Company expects that the Custom Applications product line will continue to decline as a percentage of total revenues in succeeding periods. For the three months and the six months ended June 30, 1996, gross profit decreased to 50% of revenues as compared to 51% for the same periods in the prior year. The Company expects gross profit margins to fluctuate slightly above or below 50% depending on the mix of high volume OEM business (which carries a relatively lower profit margin) versus lower volume OEM business and non-OEM business. Product development and research expenses remained relatively unchanged at 8% of revenues in the second quarter and the first half of 1996 versus 9% of revenues for same periods of 1995 as the Company continues to develop products based on its proprietary VersaPoint technology, which was developed in 1992. Given the industries the Company participates in, management expects minimum research and development costs to remain at or near the current level. For the three months and the six months ended June 30, 1996, selling, general and administrative costs fell to 36% and 38% of revenues, respectively, as compared to 41% and 42% for the same periods of 1995. The decrease resulted from the leveraging of fixed S,G & A costs over a higher sales base. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996 working capital totaled $8.5 million as compared to $6.4 million at December 31, 1995. This increase was primarily a result of the Company's positive operating results in the first half and the receipt of $2 million from the exercise of outstanding warrants and use of the Company's equipment lease line. For the six months ended June 30, 1996, operations used $1.2 million in cash due to an increase in accounts receivable and inventory required by the revenue growth. Because the Company is aggressively seeking customers in the computer retailer industry and in Japan, both areas known for extended payment policies, operations may, in the near term, continue to be a net user of cash despite profitable results. For the first six months of 1996, investing activities comprised the purchase of production equipment and the furtherance of intellectual property. For the six months ended June 30, 1996, financing activities resulted in proceeds of approximately $200,000 from a loan from two Japanese banks, additional use of the Company's equipment lease line and $1.8 million from the exercise of outstanding warrants. 6 FORWARD LOOKING STATEMENTS From time to time the Company may issue forward-looking statements that involve a number of risks and uncertainties. The following 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 of 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. PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On May 28, 1996 at the Company's Annual Meeting, the holders of the Company's outstanding Common Stock took the action described below. At May 28, 1996, 4,265,113 shares of common stock were outstanding and eligible to vote at the Annual Meeting. 1. The shareholders elected each of George Gu, Eugene F. Hovanec, Merritt M. Lutz, Carolyn MacDougall, E. Michael Thoben, III and Peter N. Vicars to the Company's Board of Directors, by the votes indicated below, to serve for the ensuing year. George Gu 3,093,158 shares in favor 71,808 shares against or withheld 0 abstentions 0 broker nonvotes Eugene F. Hovanec 3,093,158 shares in favor 71,808 shares against or withheld 0 abstentions 0 broker nonvotes Merritt M. Lutz 3,093,158 shares in favor 71,808 shares against or withheld 0 abstentions 0 broker nonvotes Carolyn MacDougall 3,089,658 shares in favor 75,308 shares against or withheld 0 abstentions 0 broker nonvotes 7 E. Michael Thoben 3,093,158 shares in favor 71,808 shares against or withheld 0 abstentions 0 broker nonvotes Peter N. Vicars 3,093,158 shares in favor 71,808 shares against or withheld 0 abstentions 0 broker nonvotes 2. The shareholders approved, by the vote indicated below, an amendment to the Company's 1993 Stock Incentive Plan to increase the number of authorized shares of Common Stock available under the Plan from 1,426,000 shares to 1,726,000 shares. 906,546 shares in favor 244,655 shares against or withheld 39,125 abstentions 1,974,640 broker nonvotes 3. The shareholders approved, by the vote indicated below, an amendment to the Company's 1993 Stock Incentive Plan to provide for an automatic increase in the number of authorized shares of the Common Stock available under the Plan of 300,000 shares annually for each fiscal year during which the plan remains in effect. 871,164 shares in favor 289,602 shares against or withheld 42,245 abstentions 1,962,955 broker nonvotes 4. The shareholders ratified, by the vote indicated below, the appointment of Arthur Andersen LLP as the Company's independent accountants for the fiscal year ending December 31, 1996. 3,122,234 shares in favor 14,051 shares against or withheld 28,861 abstentions 0 broker nonvotes Item 5. Other Information The Company entered into an Agreement and Plan of Merger, dated effective July 10, 1996 (the "Merger Agreement ) with Interlink Electronics, Inc., a Delaware corporation ("Interlink Delaware ), providing for the statutory reincorporation merger of the Company with an into Interlink Delaware (the "Merger ), with Interlink Delaware becoming the surviving coporation. Under the terms of the Merger Agreement, upon consummation of the Merger each outstanding share of Common Stock of the Company was converted into one share of Interlink Delaware Common Stock, par value $.01. 8 The Merger Agreement was previously approved by the shareholders of the Company and the stockholder of Interlink Delaware. The Merger Agreement contemplates that the Merger will be tax free to the shareholders of the Company. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as an exhibit and incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Agreement and Plan of Merger dated July 10, 1996 between the Company and Interlink Electronics, Inc. 27 Financial Data Schedule (b) Reports on From 8-K No reports on From 8-K have been filed during the period for which this report is filed. Pursuant to the requirements of the Securities and 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. (Registrant) PAUL D. MEYER Dated: August 14, 1996 ----------------------------------- Paul D. Meyer Vice President, Finance 9