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, 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 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 July 22, 1999: 5,319,458
1
INTERLINK ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 6,141 $ 3,900
Accounts receivable, less allowance for doubtful
accounts of $569 and $462 in 1999 and 1998, respectively 5,146 6,758
Inventories 7,339 6,796
Prepaid expenses and other current assets 589 174
--------- ---------
Total current assets 19,215 17,628
--------- ---------
Property and equipment, net 1,291 1,561
Patents and trademarks, less accumulated
amortization of $690 and $640
in 1999 and 1998, respectively 228 277
Other assets 148 111
--------- ---------
Total assets $ 20,882 $ 19,577
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Bank line of credit $ 124 $ 132
Current maturities of long-term debt
and capital lease obligations 414 498
Accounts payable 1,841 2,220
Accrued payroll and expenses 1,365 639
--------- ---------
Total current liabilities 3,744 3,489
--------- ---------
Long term debt, net of current portion 1,295 1,074
Capital lease obligations, net of current portion 240 349
Commitments and contingencies - -
Stockholders' equity:
Common stock (40,000 shares authorized
5,308 and 5,216 outstanding at June 30, 1999
and December 31, 1998, respectively) 24,955 24,694
Accumulated other comprehensive income (23) 216
Accumulated deficit (9,329) (10,245)
--------- ---------
Total stockholders' equity 15,603 14,665
--------- ---------
Total liabilities and stockholders' equity $ 20,882 $ 19,577
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
2
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------------------
Three Month Period Six Month Period
Ended June 30, Ended June 30,
------------------------ ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues $ 6,958 $ 5,351 $ 13,461 $ 10,508
Cost of revenues 4,287 3,296 8,394 6,544
-------- --------- -------- --------
Gross profit 2,671 2,055 5,067 3,964
Operating expense:
Product development and research 565 448 1,086 804
Selling, general and administrative 1,532 1,441 2,942 2,929
-------- --------- -------- --------
Total operating expense 2,097 1,889 4,028 3,733
-------- --------- -------- --------
Operating income 574 166 1,039 231
-------- --------- -------- --------
Other income (expense):
Interest income (expense) 39 (12) 54 (8)
Income taxes (75) - (147) -
Other income (expense) (30) (19) (30) (38)
-------- --------- -------- --------
Total other income (expense) (66) (31) (123) (46)
-------- --------- -------- --------
Net income $ 508 $ 135 $ 916 $ 185
======== ========= ======== ========
Earnings per share - basic $ .10 $ .03 $ .17 $ .04
======== ========= ======== ========
Earnings per share - diluted $ .08 $ .03 $ .15 $ .04
======== ========= ======== ========
Weighted average shares - basic 5,254 5,211 5,236 5,209
======== ========= ======== ========
Weighted average shares - diluted 6,500 5,211 6,154 5,237
======== ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------
Six Month Period
Ended June 30,
--------------------------
1999 1998
----------- ----------
Cash flows from operating activities:
Net income $ 916 $ 185
Adjustments to reconcile net income to net cash
used for operating activities:
Provisions for bad debts 107 21
Depreciation and amortization 452 318
Changes in operating assets and liabilities:
Accounts receivable 1,505 (162)
Inventories (543) (1,823)
Prepaid expenses and other current assets (415) (228)
Other assets (37) 25
Accounts payable (379) (54)
Accrued payroll and expenses 726 79
-------- --------
Net cash used for operating activities 2,332 (1,639)
Cash flows from investing activities:
Purchases of property and equipment (134) (307)
-------- --------
Net cash provided by (used for) investing activities (134) (307)
Cash flows from financing activities:
Borrowings on credit line - 548
Payments on credit line (8) -
Borrowings on notes payable to bank 386 42
Principal payments on notes payable to bank (165) (40)
Proceeds from sale/leaseback - 270
Principal payments on capital lease obligations (192) (281)
Proceeds from issuance of common stock, net 261 63
-------- --------
Net cash provided by financing activities 282 602
-------- --------
Effect of exchange rate changes on cash (239) 172
-------- --------
Decrease in cash and cash equivalents 2,241 (1,172)
Cash and cash equivalents
at beginning of period 3,900 4,176
-------- --------
Cash and cash equivalents
at end of period $ 6,141 $ 3,004
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 23 $ 56
Income taxes paid $ 1 $ 1
The accompanying notes are an integral part of these consolidated financial statements.
4
INTERLINK ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE UNAUDITED SIX MONTHS ENDED JUNE 30, 1999
- ------------------------------------------------
1. Basis of Presentation of Interim Financial Data
The financial information herein for the three month and six month periods ended
June 30, 1999 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, 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:
(In Thousands)
---------------------------------------------
Accumulated Other
Comprehensive Comprehensive
Income Income
----------------- -------------
Balance at December 31, 1998 $ 216 $ -
Translation adjustment (239) (239)
Net income - 916
------- ---------
Balance at June 30, 1999 $ (23) $ 677
======= =========
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, 1999, revenues grew 30% and
28%, respectively as compared to the same periods of 1998. This revenue growth
is a result of the Company's focus on developing and marketing computer pointing
devices based on the Company's patented technologies, primarily in the
computerized presentation projector market. Revenues from these products grew to
$6.0 million and $6.2 million for the first and second quarters of 1999,
respectively. This was an increase from $4.6 million and $4.5 million in the
same periods 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 38% for the second 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 8% of revenues for the second
quarter of 1999, as compared to 8% for the same period in 1998 as the Company
continues to develop products based on its proprietary VersaPoint, VersaPad 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 second quarter ending June 30, 1999, selling, general and administrative
costs (S,G&A) declined to 22% of revenues, as compared to 27% 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 June 30, 1999, working capital totaled $15.5 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, additional bank debt and proceeds
from the exercise of employee stock options.
For the six months ended June 30, 1999, operations generated $2.2 million in
cash due primarily to positive results from operations and improved accounts
receivable management.
For the first six months of 1999, investing activities consisted of the purchase
of production equipment.
For the six months ended June 30, 1999, financing activities constituted,
primarily, borrowings from Japanese banks and additional equity from employee
stock options, 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
September 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. To date, the Company has not
received notice of or become aware of any material Year 2000 deficiency by a
significant vendor, financial institution or customer.
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 foreign currency, exchange risk, year 2000
compliance 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
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 25, 1999 at the Company's Annual Meeting of Shareholders, the
holders of the Company's outstanding common stock took actions described below.
At May 25, 1999, 5,226,813 shares of common stock were outstanding and eligible
to vote at the Annual Meeting of Shareholders.
1. By the vote indicated below, the shareholders re-elected E.
Michael Thoben and George Gu to the Company's Board of
Directions, to serve for three year terms:
For E. Michael Thoben:
3,991,974 Shares in favor
248,736 Shares against
18,932 Shares withheld
For George Gu
3,989,474 Shares in favor
250,836 Shares against
19,332 Shares withheld
2. By the vote indicated below, the shareholders ratified the
appointment of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year ending December 31,
1999.
4,234,009 Shares in Favor
12,400 Shares against
13,233 Shares withheld
The Annual Meeting of Shareholders was adjourned and the consideration of
the remaining two proposals was deferred until June 23, 1999. On June 23, 1999,
the Annual Meeting of Shareholders was adjourned until July 23, 1999. On July
23, 1999, the holders of the Company's outstanding common stock took the actions
described below.
1. By the vote indicated below, the shareholders approved the
proposed amendments to the Company's 1996 Stock Incentive
Plan.
2,434,003 Shares in favor
480,483 Shares against
31,703 Shares withheld
2. By the vote indicated below, the shareholders ratified the
cancellation and reissue of options held by certain
non-employee members of the Company's Board of Directors.
2,434,907 Shares in favor
470,669 Shares against
40,613 Shares withheld
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
27 Financial Data Schedule
8
b) Reports on From 8-K
No Reports on Form 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, on August 5, 1999.
INTERLINK ELECTRONICS, INC.
(Registrant)
PAUL D. MEYER
- -----------------------------
Paul D. Meyer
Chief Financial Officer
9