INTERLINK ELECTRONICS INC — Interim / Quarterly Report 1998

May 6, 1998

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, 1998 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 30, 1998: 5,209,076

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4 INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1998 - -------------------------------------------------------------------------------- 1. Basis of Presentation of Interim Financial Data The financial information herein for the three month periods ended March 31, 1997 and 1998 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, 1997. 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, 1998, revenues grew 21% as compared to the same period of 1997. Revenues for the Computer Pointing Devices product line were $4.6 million, up 18% from the prior year. The growth in this product line resulted from the Company's further penetration into the presentation system market, both in the United States and Japan. Revenues for the Custom Applications products line increased 46% in the same comparison. As a percent of revenues, gross profit declined to 37% for the first quarter of 1998 as compared to 44% for the same period of 1997. 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 vary slightly depending on the mix of high volume OEM business versus low volume OEM business or non OEM business. Product development and research expenses were 7% of revenues for the first quarter of 1998, as compared to 8% for the same period in 1997 as the Company continues to develop products based on its proprietary VersaPoint and RemoteLink Technologies. Given the industries the Company participates in, management expects minimum research and development costs, as a percent of revenues, to remain at or near the current level. For the three months ended March 31, 1998, selling, general and administrative costs (S,G & A) declined to 29% of revenues, as compared to 30% for the same period of 1997. 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, 1998 working capital totaled $12.2 million as compared to $12.5 million at December 31, 1997. This decrease is primarily a result of the Company's investment in property and equipment. For the three months ended March 31, 1998, operations used $1.1 million in cash due primarily to an increase in inventory as necessitated by the revenue growth and the build-up of inventory related to business expansion in Japan. 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 first three months of 1998, investing activities comprised the purchase of production equipment. For the three months ended March 31, 1998, financing activities constituted primarily, borrowings on the Company's Japan bank line of credit partially offset by the repayment of capital lease and other debt 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 gross profit expectations, product development costs, operating expense improvements, cash flow 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 6, 1998. INTERLINK ELECTRONICS, INC. (Registrant) PAUL D. MEYER - ---------------------------------- Paul D. Meyer Chief Financial Officer 7