INTERLINK ELECTRONICS INC — Interim / Quarterly Report 1997

Aug 14, 1997

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, 1997 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 incorporation or organization) Identification Number) 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 July 23, 1997: 4,620,982

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4 INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1997 1. Basis of Presentation of Interim Financial Data The financial information herein for the three month and six month periods ended June 30, 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 conjunction with the financial statements and the notes thereto included in the Interlink Electronics, Inc. Form 10-K for the fiscal year ended December 31, 1996. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. 2. Bank Line of Credit In May 1997 the Company's bank renewed the existing credit line and increased the maximum amount of the line to $2 million. In June 1997 the Company borrowed $1 million against the line. 5 INTERLINK ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS For the three and six month periods ended June 30, 1997, revenues increased 44% and 49%, respectively, as compared to the same periods of 1996. Revenues for the Computer Pointing Devices product line were $4.2 million, an increase of 49% from the prior year, for the three months ended June 30, 1997, and were $8.0 million, an increase of 60% for the six month comparison. The growth in this product line resulted from the Company's further penetration into the computer integration pointing device and retail markets. The Company's patented Versapad touchpad facilitated the growth in the computer integration market. The introduction of a wireless keyboard enhanced the Company's sales and presence in the retail market. Revenues for the Custom Applications products line increased 18% for the three month period ended June 30, 1997, and decreased 5% for the six month period ended June 30, 1997. This relatively flat performance is due to Company's strategy to focus on the Computer Pointing Devices product line. For the quarter ended June 30, 1997, the Custom Applications product line accounted for 11% of total revenues, down from 14% in the same period of 1996. The Company expects that the Custom Applications product line will continue to decline as a percentage of total revenues in succeeding periods. As a percent of revenues, gross profit declined to 43% from 50% for both the three and six month periods ended June 30,1997, as compared to same periods of 1996. The decline in gross profit percentage reflects a greater mix of high volume OEM, which carry a relatively lower profit margin and the introduction of new products which carry relatively higher startup costs. The Company expects gross profit percentages to remain slightly above or below the current level depending on sales mix. Product development and research expenses were 8% of revenues for the three and six month periods ended June 30, 1996 and 1997. 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 six months ended June 30, 1997, selling, general and administrative costs decreased to 28% and 29% of revenues, respectively, as compared to 36% and 38% for the same periods of 1996. The decrease resulted from the leveraging of fixed S,G & A costs over a higher sales base and the greater mix of OEM sales which carry a relatively lower S,G & A requirement. LIQUIDITY AND CAPITAL RESOURCES At June, 1997 working capital totaled $9.4 million as compared to $9.0 million at December 31, 1996. This increase is primarily a result of the Company's positive operating results in the first three months of 1997 and $300,000 in proceeds from the exercise of stock options. For the six months ended June 30, 1997, operations used $2.5 million in cash due primarily to an increase in inventory and receivables as necessitated by the revenue growth and the build-up of inventory related to products expected to be introduced in the third quarter of 1997. As the Company is aggressively seeking customers in the computer retail industry and in Japan, both areas known for extended payment policies, operations may continue to be a net user of cash despite profitable results. For the six months of 1997, investing activities comprised the purchase of production equipment and the furtherance of intellectual property. For the six months ended June 30, 1997, financing activities resulted in proceeds of approximately $1.2 million from the exercise of employee stock options and borrowing on the Company's credit line, net of debt service obligations. 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 and product mix, costs and margin expectations, product development and introductions, operating expense improvements, 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 June 27, 1997 at the Company's Annual Meeting, the holders of the Company's outstanding Common Stock took the action described below. At June 27, 1997, 4,564,122 shares of common stock were outstanding and eligible to vote at the Annual Meeting. 1. The stockholders re-elected Merritt M. Lutz to the Company's Board of Directors, by the vote indicated below, to serve for the ensuing year. 3,625,028 Shares in favor 18,469 Shares against or withheld 0 Abstentions 0 Broker non-votes 2. 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, 1997. 3,618,144 Shares in favor 25,353 Shares against or withheld 0 Abstentions 0 Broker non-votes Item 6. Exhibits and Reports on Form 8-K. a) Exhibits 27 Financial Data Schedule b) Reports on From 8-K No Reports on Form 8-K have been filed during the period for which this Report is filed. 7 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, on April 25th, 1997. INTERLINK ELECTRONICS, INC. (Registrant) PAULD. MEYER - --------------------------- Paul D. Meyer Chief Financial Officer 8