INTERLINK ELECTRONICS INC — Interim / Quarterly Report 1999

May 4, 1999

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, 1999 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 19, 1999: 5,226,813

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4 INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1999 - -------------------------------------------------------------------------------- 1. Basis of Presentation of Interim Financial Data The financial information herein for the three month periods ended March 31, 1998 and 1999 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, 1998. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. 2. Comprehensive Income The following table provides the data required to calculate comprehensive income:

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, 1999, revenues grew 26% as compared to the same period of 1998. This revenue growth is a result of the Company's focus on developing and marketing the computer pointing device product line based on the Company's patented technologies, primarily in the computerized presentation projector market. Revenues from this product line grew to $6.0 million in 1999 from $4.6 million in the first quarter of 1998. The Company has established relationships with most of the major Original Equipment Manufacturers (OEM's) in the computerized presentation projector market and currently derives approximately two-thirds of its revenue from that market. Many of these OEM's reside in Japan (however the majority of the end-user customer base is in the United States) and accordingly approximately 50% of the Company's revenues come from Japanese customers. As result the Company is subject to foreign currency exchange rate fluctuations, primarily yen/dollar. As a percent of revenues, gross profit remained at 37% for the first quarter of 1999 as compared to the same period of 1998. The Company expects gross profit percentages to vary slightly from 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 7% of revenues for the first quarter of 1999, as compared to 7% for the same period in 1998 as the Company continues to develop products based on its proprietary VersaPoint and RemoteLink Technologies. Given the industries the Company participates in, management expects research and development costs, as a percent of revenues, to remain at or near the current level. For the three months ended March 31, 1999, selling, general and administrative costs (S,G&A) declined to 22% of revenues, as compared to 29% for the same period of 1998. 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, 1999, working capital totaled $14.9 million as compared to $14.1 million at December 31, 1998. This increase is primarily a result of the Company's positive results from operations and additional bank debt. For the three months ended March 31, 1999, operations generated $500,000 in cash due primarily to positive results from operations. As the Company is seeking customers in the computer retail industry and in Japan, both areas known for extended payment policies, operations may be a net user of cash, despite profitable results, in future periods. For the first three months of 1999, investing activities consisted of the purchase of production equipment. For the three months ended March 31, 1999, financing activities constituted, primarily, borrowings from Japanese banks partially offset by the repayment of capital lease and other debt obligations. 6 Year 2000 Issues The Company has assessed the Year 2000 compliance of each of the products it currently manufactures and sells. The Company believes each of those products and their component parts is Year 2000 compliant. The Company has assessed the sensitivity of its internal manufacturing control, accounting and information management systems and determined that a majority of its systems have no material Year 2000 deficiencies. The Company has developed and is implementing a strategy to identify and eliminate any remaining system deficiencies. The Company believes that the total cost of eliminating such deficiencies will not exceed $100,000. Completion of this program is expected by mid-1999. In the fourth quarter of 1998 the Company requested each of its suppliers of critical parts and services to provide information to the Company about the entity's anticipated Year 2000 compliance. Until that information is received, the Company cannot complete that phase of the Company's Year 2000 assessment. In 1999 the Company expects to complete plans for risk management and any contingency plans determined to be necessary. At this time, the Company believes costs incurred in responding to other parties' Year 2000 computer system deficiencies, together with the cost of any required modifications to the Company's ancillary systems, will not have a material impact on the Company's results of operations or financial condition. This analysis may be modified as the Company receives responses from its parts and services suppliers. Deficiencies not cured could severely impact the Company's ability to meet the above cost estimate, timeline and its ability to operate efficiently beyond January 1, 2000. In its analysis, the Company has assumed that basic public utilities such as gas, electric and telephone services will continue to be available for operations of the Company on and after January 1, 2000. If this assumption proves incorrect, the operations of the affected location would be materially adversely affected for the duration of the interruption. 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. Foreign Currency Exchange Risk The Company enters into foreign exchange forward contracts to hedge certain revenue exposures against future movements in foreign exchange rates. Gains and losses on the forward contracts are largely offset by gains and losses on the underlying exposure and consequently a sudden or significant change in foreign exchange rates would not have a material impact on future net income or cash flows. 7 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 - Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K 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 3, 1999. INTERLINK ELECTRONICS, INC. (Registrant) PAUL D. MEYER - ---------------------------------- Paul D. Meyer Chief Financial Officer 8