They Know Not What They Do

I usually don't pick on OTC companies. It’s all the little darlings can do to keep their heads above water, after all, and no one expects their managers to be paragons of virtue.

But Interlink Electronics, Inc. (LINK.PK) is simply irresistible.

Interlink filed an 8-K today reporting that it will forgive roughly $140,000 in loans it made to Michael Ambrose, one of its Senior VPs. This kindhearted gesture was made "after considering the likelihood of repayment" (meaning, I guess, the unlikelihood of repayment.) Hmm, wonder if that reasoning will work on my credit card company.

Why did Mr. Ambrose need to borrow so much money? Ah, therein lies a tale. (Well, actually, the tale lies in the 2006 proxy.)

Once upon a time, in the year 2000, Ambrose and two other senior execs exercised some options and then sold the stock they got from the exercise. Soon after that the price dropped, so they got a yen to buy some more. The board of directors thought this was a dandy idea; so dandy, in fact, that they lent each of them about $40,000 of company money to fund the purchase. (Loan #1).

Unfortunately the execs ran afoul of the SEC’s "short-swing" profits rule, which makes insiders give to their company any profits from buying its stock and then selling it (or, as in this case, selling and then buying it) within 6 months. Ambrose now owed Interlink $104,050. Sadly, he couldn't cough up that much without, as the proxy puts it, "substantial disruption" to his "personal financial affairs." So – still with me here? – the company lent him that money, too (Loan #2). All for a good cause, of course – “the interest of Interlink in avoiding unnecessary pressures and distractions on these individuals at a critical time in Interlink's history.”

Six years later, Ambrose hasn’t paid off either loan. And now he won’t have to.

Aside from the unseemliness of the whole affair, I wonder how wiping out Loan #2 can be kosher under the short-swing profits rule. As far as I can tell, Ambrose never really turned over his profits to the company, since it lent him the money he was supposed to pay and then ripped up the loan papers.

Meanwhile, Interlink's auditors found material weaknesses in its financial reporting for 2004 and 2005, the company had to restate its results for 2003 and 2004, NASDAQ delisted it, shareholders are suing it up the wazoo, and apparently (though I can't find anyplace they've disclosed this fact), they’re being investigated for options backdating. Oh, and as far as anyone can tell from the enduring mystery that is Interlink's financial reporting, they’ve lost money for 6 years straight.

It says on Yahoo that Interlink's corporate governance rating from Institutional Shareholder Services is in the 95th percentile. Talk about grade inflation.


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