INTERLINK ELECTRONICS INC — Interim / Quarterly Report 1997

May 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 March 31, 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 April 15, 1997: 4,564,122

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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 periods ended March 31, 1996 and 1997 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. 5 INTERLINK ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS For the three month period ended March 31, 1997, revenues grew 55% as compared to the same period of 1996. Revenues for the Computer Pointing Devices product line were $3.9 million, up 74% from the prior year. The growth in this product line resulted from the Company's further penetration into the presentation system and home multi-media PC markets. Revenues for the Custom Applications products line decreased 25% as a result of the Company's strategy to focus on the Computer Pointing Devices product line. For the quarter ended March 31, 1997, the Custom Applications product line accounted for 9% of total revenues, down from 19% 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 44% for the first quarter of 1997 as compared to 51% for the same period of 1996. The decline in gross profit percentage reflects a greater mix of high volume OEM business, which carries a relatively lower profit margin. The Company expects gross profit percentages to remain slightly above or below the current level depending on the mix of high volume OEM business versus low volume OEM business or non OEM business. Product development and research expenses were 8% of revenues for the first quarter of 1997, as compared to 9% for the same period in 1996 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 ended March 31, 1997, selling, general and administrative costs fell to 30% of revenues, as compared to 40% for the same period 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 March 31, 1997 working capital totaled $9.3 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 $212,000 in proceeds from the exercise of stock options. For the three months ended March 31, 1997, operations used $1.8 million in cash due primarily to an increase in inventory as necessitated by the revenue growth and the build-up of inventory related to products expected to be introduced in the second 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 three months of 1997, investing activities comprised the purchase of production equipment. For the three months ended March 31, 1997, financing activities resulted in proceeds of approximately $212,000 from the exercise of employee stock options. 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. Item 6. Exhibits and Reports on Form 8-K No reports were 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, on May 5, 1997. INTERLINK ELECTRONICS, INC. (Registrant) PAUL D. MEYER - ---------------------------------- Paul D. Meyer Chief Financial Officer 7