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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended January 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ................to.............
Commission file Number 0-19705
LINKON CORPORATION
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(Name of small business issuer as specified in its charter)
NEVADA 13-3469932
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Sherman Street, Fairfield, CT 06430
(Address of principal executive offices) (Zip Code)
(203) 319-3175
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 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
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year $1,418,432.
State the aggregate market value of the voting stock held by non-
affiliates of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and asked
price of such stock, as of a specified date within the past 60 days. $7,503,252.
Number of shares outstanding of the registrant's common stock, as of
April 22, 1996 was 10,753,252.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one):
Yes No X
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Item 1. Description of Business
General Business
Linkon Corporation, a Nevada corporation ("Linkon" or the "Company")
designs, assembles and markets modular computer hardware and software components
primarily for the call processing industry. The call processing industry
encompasses the hardware and software that allow remote communications to be
initiated, answered, routed or otherwise processed by a machine rather than a
person. Technologies that assist people in using telephones, such as voice
activation in cellular phones, are a part of this industry.
Call processing applications generally fall into one of the following
categories: voice mail, call centers (including automated call distributors, or
"ACDs"); interactive voice response ("IVR"), audiotext, and fax. Increasingly,
the distinctions between these segments are being blurred. IVR systems are
offering return fax (merger of fax and IVR) and are also being integrated with
ACDs in call centers (merger of call centers, fax and IVR). Mailboxes are
becoming universal, accepting fax, e-mail as well as voice correspondence.
Perhaps more importantly, applications are integrating new features such as
voice recognition and text-to-speech and are interacting with multiple media (e-
mail, fax, video, voice, speaker verification for cellular fraud detection, and
the Internet). Though not a large share of the overall market today,
applications using multiple resources (as opposed to 100% fax or 100% voice
recognition etc.) are growing significantly faster than the overall market and
are being adopted in products of most existing companies. In a few years, most
applications will allow for a blend of several types of applications and
interact with multiple media. Linkon's products are specifically designed to
meet the diverse needs of application developers targeting this high-end,
multifunction segment of the market.
Products
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Linkon currently has two board level products; the 3000 series
Communications Boards, which Linkon continues to ship because they have been
designed into a number of existing systems, and the fourth generation
Maestro(TM) 4000(TM) system, which Linkon began shipping in October 1995. The
4000 series is a DSP board which requires only software additions to run any
telephony function and gives true universal port availability (supporting any
technology feature present in the system) to each call session. The board level
products are supported by comprehensive applications development software tools,
TeraVox(R) and Link O/S(TM). TeraVox(R) is a set of UNIX(R) extensions which
simplifies application development. Link O/S(TM) is a board level operating
system which removes the complexity of dealing with board level resource
allocation, control and management during system development.
Linkon believes in creating an open architecture and, together with
TeraVox(R), it permits this for system developers. In addition, Linkon's boards
can operate on virtually any standard system bus and are designed to work with
both of the major communications buses, MVIP and SCSA. This allows Linkon's
products to be utilized in virtually any system environment.
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Linkon's architecture differentiates it from other system component
manufacturers and allows it to address the fastest growing segment of the
market - high density multimedia applications.
Design overview
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The primary difference between Linkon's products and those of other
component suppliers is that the same hardware, with no modification, can be used
for voice recognition, fax, modem, text-to-speech, speech recognition, DTMF
recognition, speaker verification, voice compression, etc. Each of these
features is enabled by loading the appropriate algorithm into the board level
memory. Because no specialized hardware is required for the different
algorithms, system resources can be dynamically reallocated as required to allow
the board to adapt to changing user demands for voice, fax and other features. A
channel that on a previous session was running voice only can run a combination
of voice recognition and fax on its next session. A single board that is
responding to 48 simultaneous voice only channels in one moment may be handling
a combination of voice only, fax, TTS and voice recognition in the next moment
giving unparalleled flexibility with a single board. In an S-bus expansion
chassis, up to 120 channels of call processing can potentially be achieved on a
single Sparc computer, thereby providing the industry's highest density.
This is in marked contrast to the historical industry architecture of
individual, specialized boards for each capability. For example, using one
competitor's basic architecture to design a system of four ports of fax and
voice mail, utilizing voice recognition and text to speech requires four
separate boards and four PC computer slots. Linkon can provide this system on
one computer board in one PC slot. Some competitors products need as many as 10
boards to perform the same tasks as one Linkon board. Confirming the appeal of
this type of architecture, a competitor recently introduced a new board which
allows a few algorithms to run on a single board. Although the concept is
similar to Linkon's, this competitor offers relatively few algorithms compared
to Linkon. This new product is the competitor's first product allowing multiple
applications on a single board and does not provide the hardware flexibility,
bus independence or other improvements that Linkon has developed and implemented
on its 4000 series through customer feedback and subsequent redesign of its
earlier products. With fewer components, the 4000 series design lowers costs for
the end-user and competitors' offerings, when fully equipped, tend to be
significantly more expensive on a per-port basis.
Hardware independent architecture
---------------------------------
Another unique feature of the FC-4000(TM) system is its bus-independent
design which permits hardware flexibility on the part of system developers.
Linkon produces feature modules about one fourth the size of a PC board - which
contains the DSP and RAM resources required to perform call processing
applications. These modules are "plugged" into a foundation card which is bus
specific. This hardware architecture accomplishes several important goals.
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Lower costs - by having all the complex elements in a single
standardized module Linkon does not have to inventory a variety of application
or bus specific cards to meet changing customer needs. In addition,
manufacturing costs are lower because of higher unit volumes of a standardized
part.
Easy Upgrade Path - Future upgrades to algorithms (changes and retrofit
of existing systems) are accomplished with software only. ROM swap outs or board
redesign are not required .
Rapid Product Development - To take advantage of advances in DSPs and
memory, Linkon only has to redesign its modules as opposed to its competitors
who have to do a redesign of their entire product line (more than 30 boards in
the case of the competitor mentioned above). This is a profound competitive
advantage because it allows Linkon to dramatically shorten its product life
cycle.
Access to Additional Markets - Linkon's customer base is expanded to
alternative bus markets, most notably Sun MicroSystems. Interest in using Sun
based platforms for call processing applications has expanded dramatically with
the rapid growth of the Internet.
Easy Change in Form Factor - Producing a prototype of a new foundation
card to accomodate a different bus - compact PCI, for example - is mainly a
function of some CAD/CAM work and takes only a few weeks.
Platform flexibility
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The bus specific foundation card contains the bus interface logic for
both the system bus as well as the communications bus. Linkon currently offers
foundation cards for the EISA/ISA and SBus. VME Bus, PCI bus, and compact PCI
bus foundation cards are planned. New foundation cards are relatively simple
because the processing and telephony electronics reside on the modules described
above. This allows Linkon to address proprietary bus systems seeking to develop
or augment call processing capabilities on a custom basis. Other third-party
component suppliers have all their capability designed and built specifically
for standard buses and thus do not generally provide capabilities for
proprietary systems.
The foundation cards also work with both of the dominant call processing
bus architectures; PEB, the standard originally promoted by Dialogic which is
now migrating to SCSA or, the MVIP standard promoted by Natural MicroSystems.
The EISA/ISA PC bus configuration comes standard with both MVIP and PEB
connections on the same board. This capability allows developers to work with
other vendor's products (particularly the established industry leaders) in a
single system. The capability to work on virtually any system bus combined with
the industry standard communication buses gives Linkon a degree of hardware
independence unmatched by any other third party board supplier in the industry.
When the hardware independence is combined with the software capabilities,
Linkon becomes the most flexible approach to system integration on the market.
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Telephony applications algorithms
---------------------------------
Call processing functions are shipped on disks with the 4000 series
boards. Customers only pay for those algorithms (for example voice) which are
required for their current system application. These algorithms are loaded onto
the system hard drive and downloaded to the board's RAM on power up. Later, if
the application developer needs additional capabilities, it can pay an
incremental licensing fee and the additional algorithms can be sent on an
additional diskette or downloaded electronically. No hardware changes are
required. Linkon encourages third party developers to develop additional
algorithms for its platform.
Unlike the 4000 series, the 3000 series incorporated all the algorithms
on board at the time of shipment forcing customers to pay licensing fees for all
algorithms up front. In the early stages of market development, many customers
did not require all the capabilities available for the 3000 product line and
were unwilling to pay the premium over competing boards that provided more
limited capabilities. The Company's competitors effectively marketed against
Linkon by providing voice-only capabilities at prices below that which Linkon
could charge, even though Linkon's boards were capable of providing multiple
functionality. The 4000 series software implementation has addressed many of the
pricing issues of the 3000. The 4000 series also allows sales of high margin
software algorithms separately from hardware and provides the potential for
increasing margins if the Company can gain a sufficient installed base of its
equipment.
System level software
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On a systems level basis, Linkon provides TeraVox(R) which is a set of
UNIX(R) extensions (written in C) controlling the interaction of the host and
the 4000-series communications boards. TeraVox(R) provides developers tools to
create any call processing application rapidly. TeraVox(R) is available and is
supported under a number of operating systems including UNIX(R). The new Version
5.0 release of TeraVox(R) will permit even easier and faster software
applications development.
Board level software
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Link O/S(TM) is a board level operating system with a powerful API that,
combined with TeraVox(R), manages board and system level resource allocation.
Link O/S(TM) supports dynamic allocation of applications software functions to
any port or channel. Each channel can support any technology feature present in
a given system, allowing a universal port for every call session. Because system
developers do not have to write low level drivers and code, development time for
implementing new features is significantly reduced. Also, Link O/S insulates
developers from the specifics of different algorithms within each algorithm
class. For example, an application written for Lernout & Hauspie's speech
recognition will also run Syrinx and all other speech recognition algorithms
with no application software modifications.
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Application development software
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Application software packages are programs which provide the computer
with a particular desired functionality necessary to satisfy the needs of an end
user. Linkon provides a variety of application specific software toolkits,
including LINK-Mail(TM) and LINK-Fax(TM), its high level voice mail and fax
developer tool kits. This high level software is delivered in source code form
and permits a VAR, system integrator or OEM to easily write its own custom
applications.
Third party development software
--------------------------------
In addition, several independent software development companies, such as
Voicetek and Callstream Communications, have developed application generator
software packages for the 3000 series which permit software application
development to be performed at the end-user level by an individual having
limited experience with software development. These companies are in the process
of migrating to the 4000 series product.
Custom engineering
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The Company also provides customized software services for highly
specialized applications with sufficient commercial potential. Custom
engineering charges apply to all such projects. Several of the current customers
for the Company's products began their relationship with the Company as custom
engineering customers.
Research and Development
The nature of the computer hardware and software industries is such that
research and development is deemed mandatory by management in order to ensure
competitiveness. The Company incurred research and development costs of
approximately $1,005,700, and $839,600 respectively in the fiscal years ended
January 31, 1996 and 1995. The Company's research and development activities
seek to maintain market competitiveness by designing and developing advanced
hardware products (communications boards) and more efficient software products
to operate them. Presently, communications processing applications that are
integrated with voice, fax and modem are forcing the creation of more complex
hardware configurations to meet increasing demand. The Company has a technical
research and development center in Fairfield, Connecticut where it is performing
research on expanding the levels of performance of its communications board
technology.
Linkon's product strategy is to design its products with an "OPEN"
architecture. This permits them to interface with all existing competitive
hardware and software and permits Linkon to market software replacement and
upgrades as new products are developed.
Linkon's R&D strategy is to have strong in-house design and engineering
capability, but to utilize state-of-the-art technology houses to develop long
lead-time leading edge technology.
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Some examples are Linkon's arrangements with Lernout & Hauspie, a Belgian
algorithm development firm in the Voice Recognition and Text to Speech areas
and Syrinx Speech Products, an Australian firm, to port their speech recognition
algorithms to to the LINK-Engine(TM) Communications Board.
Prior to the fiscal year ended January 31, 1993, the Company expensed
all software development costs as research and development for new products
prior to the capitalization point under Paragraph 4 of "Statement of Financial
Auditing Standards 86". While the exact moment of transition of costs cannot be
precisely quantified, starting at approximately the beginning of the fiscal year
ended January 31, 1994, significant portions of employees' time has been spent
on coding and testing after technological feasibility has been established. As
these products were shipped in the fiscal year ended January 31, 1993, and have
been accepted by customers, it appears that both technological feasibility and
potential marketability has been established. Costs related to the conceptual
formulations and design of licensed programs are expensed as research and
development. Costs incurred subsequent to establishment of technological
feasibility to produce the finished product are generally capitalized.
Marketing
To date the Company has marketed its products via sales to independent
distributors, original equipment manufacturers ("OEM") and value added resellers
("VAR"). In addition the Company's marketing program consists of advertising in
the trade press, exhibiting at trade shows and direct mailings.
Although Linkon's products have received wide recognition, commercial
success with previous generations has been moderate because of the high price
point (on a per port basis) for voice-only applications. Pricing issues have
been addressed with the 4000 series products. The Company's product design and
feature set were ahead of the market trend towards more complex multimedia
applications and larger systems. As the market for systems has become more
competitive, and differentiation is increasingly feature based, demand is
rapidly rising for high port count and multi-feature systems which the Company's
product line addresses.
Strategic relationships and major customers
Linkon's strong technology and quality product design have led to
several strategic relationships over the last few years. Some of the more
significant relationships are outlined below. Given Linkon's limited size and
resources, it has relied heavily on its strategic partners to develop sales for
the Company.
Lucent and Aumtech (assigned from AT&T)
---------------------------------------
In late 1993, AT&T's Network Systems Division announced a new product
called the Information Services Platform (ISP), developed in part using hardware
and software designed and supplied by Linkon. Due to the breakup of AT&T, the
relationship and contracts Linkon has
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with AT&T have been assigned to Lucent Technologies. The ISP platform 2.X has
been deployed in Europe and the United States and has been turned over to
Aumtech, a technology company that has been integrally involved with AT&T in its
development of the ISP platform.
Sun Microsystems Computer Company
---------------------------------
Linkon is the only computer telephony board-level company currently
shipping a communication board for the S-bus, making it compatible with Sun's
SPARCserver systems. Thus, developers of call processing applications for Sun
systems are using Linkon's products. Sun is making an increased sales effort
into the computer telephony and call-processing industry, enlarging this
opportunity. To concentrate on these efforts, Linkon recently created a Sun
business unit with its own dedicated manager. In March 1996, Sun introduced a
CTI server utilizing Linkon technology.
Access Graphics, Inc.
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In March 1995, the Company announced an agreement with Access Graphics,
a leading distributor of open client/server solutions, to distribute Linkon
hardware and software, including the recently announced Sun Sbus hardware
product. In March 1996, Access Graphics, Inc. introduced a line of call
processing solutions called Telefusions, incorporating Linkon technology.
Southwestern Bell Technology Resources, Inc. ("SWBTR")
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In November 1993, the Company entered into an agreement with SWBTR
whereby the Company agreed to provide engineering services to SWBTR by modifying
the Company's TERAVOX(R) operating environment and producing a new operating
environment, PROVOX(TM).
Dassault Automation and Telecommunication Group
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In October 1994, the Company announced a joint development agreement
with Paris-based Dassault A&T Group to develop an enhanced service platform
targeted to French telecommunications, computer, and system integration
companies. The strategic alliance is ultimately aimed at all of Europe, where
the companies hope to offer Europe's most advanced multi-language voice/fax
system through Dassault's existing distribution system.
Trigon Business Alliance, Inc./NEC
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In May 1995, Trigon Business Alliance, Inc., a Houston, TX, end user of
Linkon hardware and software, announced the creation of FAXDRAW, an interactive
voice/fax system. Drawings produced by Autodesk Corporation's AUTOCAD design
software can be retrieved over the phone from an Oracle database located on a
remote Sun Sparc workstation and printed on a NEC fax machine. Linkon has formed
a marketing alliance with Sun Microsystems, NEC, Autodesk, and Trigon Business
Alliance, Inc.
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IBM Australia/Syrinx
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IBM and Syrinx are developing a call-processing solution for the
Australian market featuring speech recognition running the Maestro(TM) system.
Bell South Intelliventures
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Bell South Intelliventures is currently testing a Linkon S-bus platform
to provide consumer information services to Yellow Page customers, which
features Applied Language Technologies speech recognition software developed at
MIT.
Voicetek
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Currently, Voicetek is adapting their leading-edge Generations
application development software to the Linkon S-bus platform.
TCIS-Multitel
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TCIS-Multitel, a Belgium Technical Institute, which has developed speech
recognition technology utilized in a voice-dialing application running on a
Linkon platform.
Sales
Through the Company's sales force, and its analysis of the sales volume,
market specialization and financial status of potential customers, the Company
predetermines potential customers deemed qualified for its products and makes
direct telephone or written contact with the appropriate representatives
thereof. The primary sales targets for the Company's products on the component
level are VARs, Systems Integrators ("SI"), OEMs and telephone companies. The
Company anticipates its relationship with Sun Microsystems will facilitate sales
of Linkon products to existing and future owners of SPARC workstations.
Distributors
The Company is seeking to develop relationships with independent
distributors firms to carry the Company's products both domestically and
internationally. The Company currently has relationships with distributors in
the United States, United Kingdom, and Germany. On March 7, 1995 the Company
announced an agreement with Access Graphics, Inc., a leading distributor of open
client/server solutions, whereby Access Graphics will distribute the Company's
full line of products, including the recently announced T-1 SBus
telecommunications hardware product, for use with Sun Microsystems'
SPARCstations.
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OEM Sales
The Company seeks to establish agreements with OEM companies with large
customer bases which intend to modify the Company's hardware, operating systems
and/or utilities for marketing by the OEM under their own name. It is
contemplated that these arrangements will involve training, volume discounts and
minimum purchase commitments. As of the date hereof, the Company sells to
several OEM's.
Customer Support and Warranty
The Company offers a one year warranty on all products and services.
Customers are entitled to receive telephone hotline access, field support and
periodic software updates.
Competition
The Company has many competitors. Although the Company does not
presently possess a meaningful market share in the voice processing industry,
management believes that its products are very competitive with those in the
marketplace, and in certain instances superior to that which is available.
Dialogic Corporation, Rhetorex Corp., Brooktrout Technology, Inc. and Natural
Microsystems, Inc., among others, are substantial hardware competitors of the
Company. Management believes that its communications board and its TERAVOX(R)
operating platform are superior to similar products presently being manufactured
or sold in that the Company's products are able to run all functionality on a
single board, compared to multiple boards for the Company's competitors, the
Company's products can run compression software in conjuction with other
modalities and the Company's software is scalable to the highest density.
However, given the competitive nature of the industry, no assurance can be given
that the Company can achieve a commercially successful market for its products
or that its competitors will not develop similar or better products than the
Company's present line in the future.
Key Customers
Two of the Company's customers accounted for approximately 33% of
revenues for the year ended January 31, 1996. Management believes that sales
will continue to come from a small customer base of VARs, SIs and OEMs who, in
turn, will resell the Company's products to end users.
Employees
The Company employs 19 persons on a full-time basis: 5 Executive, 10
technical, 2 sales and 2 administrative. There is no union contract relating to
employees nor does the Company anticipate there to be unionization of its
employees.
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Patents, Trademarks & Copyrights
The Company's computer board design and code are proprietary and a trade
secret. There are currently no patents or copyrights on any of the Company's
products. The Company has obtained registration of its TERAVOX(R) trademark from
the U.S. Patent and Trademark Office and intends to seek source code copyright
protection on future operating systems and utilities.
Item 2. Properties
The Company leases approximately 5,000 square feet of office and
laboratory space in Fairfield, Connecticut, pursuant to a five-year lease
expiring on September 30, 1997 at an annual rental of $87,437. The Company
consolidated all its operations at this facility in December 1995. The facility
has capacity for expansion and is deemed sufficient for the Company's
foreseeable needs.
The Company maintained its corporate headquarters and leased
approximately 4,500 square feet of office space at 226 East 54th Street, New
York, NY pursuant to a five-year lease at an annual rental of $87,122. The lease
expired March 31, 1996. The New York office was primarily utilized as the
location of the Company's sales and administrative support staff.
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Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a vote of Security Holders.
None
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
The Company's shares are listed on the National Quotations Bureau
"Bulletin Board". Various market dealers make the market of the Company's stock
and trades are made through what is commonly known as the "pink sheets."
The following table sets forth, for the periods indicated, the quarterly
high and low representative bid quotations for the Company's Common Stock as
reported by the National Quotations Bureau. Quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs, or commissions, and may not
necessarily represent actual transactions.
Fiscal Year Ending January 31,
1996 1995
High Low High Low
1st quarter 2 1/4 7/8 3 1/2 2
2nd quarter 1 5/8 1 1/8 2 7/8 1 1/4
3rd quarter 2 3/16 1 3/8 1 7/8 1
4th quarter 1 3/4 11/16 2 1/2 7/8
As of April 22, 1996, there were 656 shareholders of record of the
Common Stock of the Company. The Company estimates, based on prior shareholder
mailings, that holdings in "street name" represents approximately 7,500
additional shareholders.
The Company has not declared any dividends since its inception and, due
to its anticipated needs for all revenue generated by the Company's operations
to be used to operate the Company's business, has no intention of paying any
cash dividends in the immediate future.
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The Company's rights to pay dividends are also restricted pursuant to the terms
of a Securities Purchase Agreement, dated October 27, 1994, between the Company
and IBJS Capital Corporation (the "Debentureholder"), the holder of the
Company's $1,000,000 10% Senior Secured Convertible Debenture (the "Debenture").
Pursuant to such agreement, until such time as at least two thirds of the
original principal amount of the Debenture has been repaid or converted into
common stock, the Company may not, without the consent of the Debentureholder,
pay any dividends on the Common Stock, except out of earned surplus at a time
when the Company is in compliance with certain specified contractual provisions
(including being current on the payment of interest on the Debenture).
Item 6. Management's Discussion and Analysis or Plan of Operations.
Revenues
For the year ended January 31, 1996 revenues decreased approximately
$1,111,000 from the year ended January 31, 1995, a decrease of 44%. This was
primarily the result of a delay in the release of the Company's FC4000(TM)
Maestro(TM) System. For the year ended January 31, 1995 revenues increased
approximately $1,035,000 from the year ended January 31, 1994, an increase of
69%. This is entirely the result of increased sales of the Company's products.
Management expects sales of the Company's hardware and software products to
increase.
No expansion was made to the administrative staff during the fiscal
years ended January 31, 1996 and 1995. As the Company grows or as finances will
permit, additional sales, administrative, technical and customer service staff
will be hired. Subject to adequate financing, efforts will be made to maintain a
streamlined operation utilizing external support arrangements where practicable
or necessary.
Cost of sales
Cost of goods sold, consisting of parts, supplies and manufacturing
costs for the Company's hardware and software products, constituted
approximately 45% and 37% of revenues for the years ended January 31, 1996 and
1995 respectively. Management attributes the change in cost of goods sold to the
changes in the mixture of products sold. The Company anticipates that its cost
of goods sold will remain in the 30-40% of revenues range. The cost of goods
sold varies with each product line, with software having little or no material
cost (approximately 5-10%). The primary costs incurred by the Company are for
materials and equipment relating to its hardware products, which also carry
lower profit margins than the Company's software products. The Company
manufactures and assembles all hardware through contracted third party suppliers
under the direct supervision of the Company's management. Management anticipates
opportunities for increased gross profit from research and development projects
aimed at increasing efficiency while decreasing cost. Gross profit margins for
the Company's hardware and software products, currently in the 55% - 65% range,
may not, however, materially change with increased revenues (notwithstanding
anticipated lower costs of production), due to anticipated increased market
competition.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal years ended
January 31, 1996 and 1995 constituted approximately 168% and 78% for such years,
respectively. This increase for fiscal 1996 when compared with fiscal 1995 was
due primarily to reduced sales volume and increased salary and related
expenditures.
Research, Development and Software
The Company incurred research, development and software costs of
approximately $1,005,700 and $839,600 for the fiscal years ended January 31,
1996 and 1995 respectively. These amounts consist of internal salaries, outside
consulting services, equipment and fixed overhead costs. The Company expects
research, development and software costs to increase in future periods.
Liquidity and Capital Resources
To date, the Company has funded operations principally from receipt of
proceeds from the private placements of debt and equity securities, the exercise
of warrants, interest income earned from the investment of such proceeds in
interest earning assets and revenues from operations. During the fiscal year
ended January 31, 1996 the Company received $2,148,000 in net proceeds, after
payment of offering related expenses, from the sale of its common stock, which
amount was primarily used in operations. During the fiscal year ended January
31, 1995 the Company received $363,000 in net proceeds, after payment of
offering related expenses, from the sale of its common stock and $1,357,715 in
net proceeds from the issuance of long term debt. These funds were primarily
utilized to fund operations.
Management believes it has sufficient resources available to meet its
liquidity needs for the next year. Management believes that long-term liquidity
needs will be met from increased hardware and software sales as well as
additional financing from investors either through private placements of the
Company's securities, exercise of outstanding warrants, or borrowing from
outside third parties. Due to the planned introduction of new and improved
products and the anticipated growth related to, among other things, the
manufacturing of hardware and software products and the expansion of operations,
management anticipates there will be a continuing trend and need for cash
resources. Such demand on the Company's resources will require the Company, in
the long term, to obtain additional financing and increased sales volume to meet
anticipated commitments for raw materials and personnel.
Item 7. Financial Statements and Supplementary Data.
The financial statements are included herein following Item 14 of this
Annual Report on Form 10-KSB commencing on Page F-1.
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Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in, or disagreements with, the Company's certified
public accountants during the fiscal years ended January 31, 1996 and 1995.
16
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Held Position
Name Age Office(s) Since(1) (2)
<S> <C> <C> <C>
Charles Castelli 52 Chairman of the July, 1990
Board of
Directors, Chief
Technology Officer
Thomas V. Cerabona 44 Vice President March, 1996
of Operations
Lee W. Hill 52 President and March, 1993
Chief Executive
Officer
Patrick J. Kane 46 Senior Vice President July, 1990
Secretary, Treasurer
and Director
James E. Linley 43 Vice President March, 1991
of Engineering
Mark O'Brien 48 Vice President September, 1993
of International
Kenneth S. Weiner 47 Chief Financial February, 1993
Officer
Jon Carvalho 56 Director July, 1990
_________________
</TABLE>
(1) Represented only since the Company was reorganized in July, 1990.
(2) Each director of the Company has been elected to serve until the next
annual meeting of stockholders of the Company and until such director's
successor shall have been duly elected and shall have qualified. Each executive
officer of the Company has been elected to serve until the next organizational
meeting of the Company's Board of Directors and until such officer's successor
shall have been duly elected and shall have qualified.
___________________________________________________________
17
<PAGE>
Charles Castelli is the founder of Linkon Delaware, which merged with
the Company in July, 1990 and is presently the Company's Chief Technology
Officer and Chairman of the Board of Directors. He became the Company's
President in July, 1990 and the CTO in March, 1993. During the period 1984
through 1988, Mr.Castelli was the sole proprietor of Linkon Company, a
predecessor to Linkon Delaware engaged in consulting and research and
development of computer hardware and software products for the telecommunication
industry. Prior thereto he held numerous engineering management and marketing
positions in the telecommunications and computer industries, which included
positions with Q1 Corporation, Singer/Tele Signal, Data Products Corporation,
Litcom Corporation and Bell Telephone Laboratories. In these capacities Mr.
Castelli was responsible for the market introduction and sale of several
computer system and software products.
Thomas V. Cerabona is Vice President of Operations of the Company,
heading a department including manufacturing, distribution, quality assurance,
customer support, and finance. Cerabona was previously with Paragon Networks
International, Inc., a provider of leading edge data communications products,
where he held a similar position. Prior to Paragon, Mr. Cerabona was Vice
President and General Manager of Cobotyx Corporation, a developer, manufacturer
and marketer of telecommunications voice processing systems, where he was a co-
founder.
Lee W. Hill is Linkon Corporation's President and Chief Executive
Officer. Mr. Hill joined Linkon on March 1, 1993 after Affluence, Inc., a
management consulting firm he founded, conducted a project for Linkon. From 1985
to 1990, Hill was with Wild-Leitz U.S.A., Inc., the Swiss-German high tech
equipment and measuring instrument maker. There he served as President of the
IMS Division and as Vice President, Corporate Development. From 1971 to 1985
Hill was with Bausch & Lomb, where his last position was Vice President of
Worldwide Marketing and Sales for a consumer products division.
Patrick J. Kane is the Company's Senior Vice President. He functions
as Secretary and Treasurer and as a member of the Board of Directors. Mr. Kane
joined Linkon Delaware in 1988. During the year 1987, Mr. Kane was a partner
with Consulting Marketing Partners, in New York City. Prior thereto, during the
period 1983 to 1986, he was a Director of Marketing for Marine Midland Bank.
Prior positions have provided him experience in strategic corporate planning,
market research, market segmentation, market planning, direct response marketing
and business development. He has held positions at Chemical Bank and Control
Data Corporation.
James E. Linley, Vice President of Engineering for the Company, manages
the research and development, software development and technical support areas.
He was previously employed with Citicorp POS Information Services (1988 to 1990)
as a software engineer. Prior thereto he was with Target Technologies, Norwalk,
Connecticut for more than ten years as chief engineer and partner. Target
Technologies is a firm specializing in research and development and in the
design of computer based voice processing applications. He also held management
positions in systems engineering at Texas Instruments, National CSS and Wright
Investors
18
<PAGE>
Services. He is fluent in the majority of programming languages for
PC, mini-computer and mainframe applications plus a wide array of hardware
configurations. Mr. Linley designed and developed the FC1000(TM) Voice Board,
the FC2000(TM) Voice Board, the AUDCOM(TM) operating system, the TERAVOX(R)
operating system and the Linkon FC3000(TM) Communications Board.
Mark O'Brien, is Vice President of International for the Company. Mr.
O'Brien joined the Company in September 1993. Prior to joining the Company, Mr.
O'Brien was President of Universal/Univis, an optical products supplier.
Previously he was vice president and general manager of Cuno, a water
purification company and president of Criterion Telepscope, a division of Bausch
& Lomb. Mr. O'Brien holds a BA and MBA in accounting.
Kenneth S. Weiner has been Chief Financial Officer of the Company since
February 1, 1993. Prior to joining the Company, Mr. Weiner practiced as a
Certified Public Accountant both in his own practice and, since 1988, as a
shareholder of Greenspan & Company, P.A., the Company's former audit firm, in
charge of SEC audits, Management Advisory Services and Information Technology.
Mr. Weiner is a member of the American Institute of Certified Public Accountants
and both the New York and New Jersey State Societies of CPA's.
Jon Carvalho is a non-salaried member of the Board of Directors.
Mr.Carvalho is President/Owner of several businesses located in Portugal,
Africa, Europe and Japan. The more significant of the foregoing businesses are
(a) Uniao Commercial de Automoveis, Ltd. an importer and seller of all
international automobiles in Angola; (b) Urban and Suburban Properties, Inc. a
Real Estate and Development Company in Portugal; (c) IMPORMOL, a manufacturer of
automotive springs & connectors for trucks and tractor trailers; (d) IMAUTO, a
distributor of automotive machinery in Angola; and (e) Company Vale Do Loma,
S.A.R.L., a coffee plantation in Portugal. Mr. Carvalho has been president and a
principal of the foregoing entities for a period of more than ten years. In
these capacities he has accumulated experience in all aspect of corporate
operations plus established worldwide contacts at the corporate and government
level.
19
<PAGE>
Item 10. Executive Compensation.
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
(a) (b) (c) (d)
- ------------------- ------ --------- --------
Name and Fiscal
Principal Position Year Salary($) Bonus($)
Lee W. Hill, 1996 $147,500 $ 25,000
President and Chief 1995 $118,000 $ 25,000
Executive Officer 1994 $ 88,000 $ ---
Mark O'Brien, 1996 $106,174 $ ---
Vice President 1995 $100,000 $ ---
of International 1994 $ 28,125 $ ---
_________________
(1) Other columns have been excluded because they are not applicable to any year
covered by this table.
On March 1, 1993, the Company entered into an employment agreement with
Lee W. Hill. The agreement provides for an annual salary of $96,000 for the
first year of the agreement, $120,000 for the second year of the agreement and
$150,000 for the third and fourth years of the agreement. In addition, the
agreement provides for an annual bonus of not less than $25,000 for each year of
the agreement. Mr. Hill was also granted options to purchase up to 250,000
shares of Common Stock of the Company.
Directors are not compensated in their capacities as directors but are
reimbursed reasonable expenses in connection with attendance at meetings.
20
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of April 22, 1996
with respect to any person, other than the Company's executive officers and
directors, who is known to the Company to be beneficial owner of more than 5% of
any class of its voting securities.
Common Stock $.001 par value
Name and Address Amount of Approximate
of Beneficial Beneficial Percentage of
Owner Ownership Class
IBJS Capital Corporation 820,193(1) 7.6%
One State Street
New York, NY 10004
Piers M. MacDonald (2) 962,400(3) 9.0%
c/o Gulfstream Partners, L.P.
Two Greenwich Plaza, Suite 100
Greenwich, Connecticut 06830
Steven P. Cordovano (2) 687,400(4) 6.4%
c/o Gulfstream Partners, L.P.
Two Greenwich Plaza, Suite 100
Greenwich, Connecticut 06830
(1) Comprised of 605,693 shares currently acquirable upon the conversion of a
$1,000,000 Senior Secured Convertible Debenture and 214,500 shares currently
acquirable upon the exercise of warrants to purchase Common Stock at $1.8648 per
share.
(2) According to a Schedule 13D filed by Messrs. MacDonald and Cordovano on
May 26, 1995, Mr.MacDonald is the managing general partner of Gulfstream
Partners, L.P., a Delaware limited partnership (the "Partnership"), and
Mr. Cordovano is a general partner thereof.
(3) Comprised of (i) 111,900 shares of Common Stock owned by Messrs. MacDonald
and Cordovano; (ii) 275,000 shares of Common Stock and 27,500 Warrants to
purchase Common Stock owned by Mr. MacDonald and his spouse, Bonner D.
MacDonald, and (iii) 448,000 shares of Common Stock and 67,000 Warrants to
purchase Common Stock owned by the Partnership.
(4) Comprised of (i) 144,900 shares of Common Stock owned by Messrs. Cordovano
and MacDonald; (ii) 25,000 shares of Common Stock and 2,500 Warrants to purchase
Common Stock owned by Mr. Cordovano and his wife Sarah M. Cordovano; and (iii)
448,000 shares of Common Stock and 67,000 Warrants to purchase Common Stock
owned by the Partnership.
________________________________________________________
The following table sets forth, as of April 22, 1996, the number of
outstanding shares of the Company's Common Stock beneficially owned by each of
the Company's current directors and executive officers named in the Summary
Compensation Table in Item 10, individually, and by all such directors and
executive officers as a group.
Common Stock $.001 par value
Name and Address Amount of Approximate
of Beneficial Beneficial Percentage of
Owner Ownership Class
Charles Castelli 1,800,000 16.7%
Patrick Kane 800,000 7.4%
James Linley 600,000 5.6%
Lee W. Hill 250,000(1) 2.3%
Jon Carvalho 50,000 0.5%
Executive Officers 3,560,000(2) 33.1%
and Directors
As a Group (7
persons)
(1) Comprised of 250,000 shares currently acquirable upon the exercise of
warrants to purchase Common Stock at $2.00 per share.
21
<PAGE>
(2) Comprised of 360,000 shares currently acquirable upon the exercise of
warrants to purchase Common Stock at $2.00 per share.
_______________________________________________________
Item 12. Certain Relationships and Related Transactions.
None
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The following financial statements are included in Part II, Item 7:
Index to Financial Statements and Schedules F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - January 31, 1996 and 1995 F-3
Consolidated Statements of Operations - Three years ended F-4
January 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Three years ended F-5
January 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity - Three years ended F-6
January 31, 1996, 1995 and 1994
Notes to Financial Statements F-7
(b) Reports on Form 8-K None
(c) Exhibits
Exhibit
No. Description of Document
- ------- -----------------------
3.1 Articles of Incorporation. (Incorporated by reference to Exhibit
8 to the Company's Registration Statement on Form S-18 (File
Number 33-22054-NY) which became effective on December 14, 1990).
22
<PAGE>
3.2 By-laws. (Incorporated by reference to Exhibit 8 to the Company's
Registration Statement on Form S-18 (File Number 33-22054-NY)
which became effective on December 14, 1990).
4.1 10% Senior Secured Convertible Debenture Purchase Agreement,
dated October 27, 1994, between the Company and IBJS Capital
Corporation, including forms of the Company's Senior Debentures
and Warrant Certificates issued on October 27, 1994.
(Incorporated by reference to Exhibit 4.1 to the Company's Form
10KSB for the fiscal year ended January 31, 1995).
4.2 Convertible Subordinated Debenture Purchase Agreement, dated July
29, 1994, between the Company and the purchasers of subordinated
debentures set forth therein, including forms of the Company's
Subordinated Debentures and Warrant Certificates issued on July
29, 1994 and the October 27, 1994 agreement between said parties
amending the same. (Incorporated by reference to Exhibit 4.2 to
the Company's Form 10KSB for the fiscal year ended January 31,
1995).
4.3 Placement Agent Agreement, dated January 14, 1994, between the
Company and Sloan Securities Corp., including forms of the
Company's Warrant Certificates, issued on January 28, 1994,
February 28, 1994 and April 30, 1994 and the October 27, 1994
agreement between said parties amending the same. (Incorporated
by reference to Exhibit 4.3 to the Company's Form 10KSB for the
fiscal year ended January 31, 1995).
4.4 Employment Agreement dated March 1, 1993 between the Company and
Lee W. Hill. (Incorporated by reference to Exhibit 4.4 to the
Company's Form 10KSB for the fiscal year ended January 31, 1995).
4.5 Lease Agreement dated February 22, 1991 between the Company and
Danrich & Co. (Incorporated by reference to Exhibit 12 (iii) to
the Company's Registration Statement on Form S-1 (File Number 33-
44506) which became effective on August 20, 1992).
4.6 Lease Agreement dated March 19, 1991 between the Company and
Sherman Street Limited Partnership. (Incorporated by reference to
Exhibit 12 (xiii) to the Company's Registration Statement on Form
S-1 (File Number 33-44506) which became effective on August 20,
1992).
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly executed on this 26th day of April, 1996.
LINKON CORPORATION
/s/ Lee W. Hill
By:__________________________________
Lee W. Hill, Chief Executive
Officer and President
/s/ Kenneth S. Weiner
By:__________________________________
Kenneth S. Weiner, Chief Financial
Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Charles Castelli Chairman of the April 26, 1996
- ----------------------- Board of Directors
Charles Castelli
/s/ Patrick Kane Chief Operating Officer April 26, 1996
- ----------------------- and Director
Patrick Kane
/s/ Jon Carvalho Director April 26, 1996
- -----------------------
Jon Carvalho
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
Page
LINKON CORPORATION
Index to Financial Statements and Schedules F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - January 31, 1996 and 1995 F-3
Consolidated Statements of Operations - Three years ended F-4
January 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Three years ended F-5
January 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity - Three years ended F-6
January 31, 1996, 1995 and 1994
Notes to Financial Statements F-7
-F1-
<PAGE>
To the Board of Directors
and Stockholders
Linkon Corporation
Fairfield, Connecticut
We have audited the accompanying consolidated balance sheet of Linkon
Corporation as of January 31, 1996, 1995 and 1994 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
three years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Linkon Corporation
as of January 31, 1996, 1995 and 1994 and the results of its operations and its
cash flows for the three years then ended in conformity with generally accepted
accounting principles.
Feldman Radin & Co., P.C.
Certified Public Accountants
New York, New York
April 11, 1996
-F2-
<PAGE>
<TABLE>
<CAPTION>
LINKON CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
ASSETS
1996 1995
<S> <C> <C>
Current Assets
- --------------
Cash and Cash Equivalents $ 522,569 $ 592,460
Certificate of Deposit 63,934 60,000
Accounts Receivable (Net of Allowance) 611,387 927,067
Notes Receivable 51,000 51,000
Other Receivables 51,213 97,259
Inventory 888,655 1,114,209
Prepaid Expenses 27,406 11,446
---------- ----------
Total Current Assets 2,216,164 2,853,441
---------- ----------
Machinery & Equipment
- ---------------------
Machinery & Equipment, at cost 1,046,008 829,575
Equipment under Capital Leases 156,965 156,965
---------- ----------
1,202,973 986,540
Less: Accumulated Depreciation 696,283 528,266
---------- ----------
Machinery & Equipment, Net 506,690 458,274
---------- ----------
Other Assets
- ------------
Software (Net of Amortization) 928,148 719,764
Investments, at cost 375,182 374,825
Prepaid Financing Costs 39,213 52,285
Deferred Offering Costs -- 29,019
Security Deposits 19,931 25,680
Organization Costs (Net of Amortization) -- --
---------- ----------
Total Other Assets 1,362,474 1,201,573
---------- ----------
$4,085,328 $4,513,288
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- -------------------
Accounts Payable $1,004,125 $ 800,229
Bank Loan Payable 30,230 30,000
Taxes Payable 18,108 12,195
Capital Leases Payable - Current Portion -- 6,583
Interest Payable 100,000 43,759
Officers' Salary Payable 7,272 7,332
---------- ----------
Total Current Liabilities 1,159,735 900,098
---------- ----------
Long Term Liabilities
- ---------------------
Notes Payable, Net 1,251,265 1,290,776
---------- ----------
Total Long Term Liabilities 1,251,265 1,290,776
---------- ----------
Commitments and Contingencies -- --
- -----------------------------
Stockholders' Equity
- --------------------
Common Stock, $.001 Par Value,
25,000,000 shares authorized,
10,753,252 shares issued and
outstanding (1996), 8,599,919
shares issued and outstanding
(1995) 10,754 8,600
Capital in Excess of Par Value 9,129,970 6,983,722
Accumulated Deficit (7,466,396) (4,669,908)
---------- ----------
Total Stockholders' Equity 1,674,328 2,322,414
---------- ----------
$4,085,328 $4,513,288
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
-F3-
<PAGE>
<TABLE>
<CAPTION>
LINKON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31,
1996 1995 1994
<S> <C> <C> <C>
Revenues $ 1,418,432 $2,529,451 $1,494,236
Cost of Goods Sold 638,532 932,429 622,242
----------- ---------- ----------
Gross Margin On Sales 779,900 1,597,022 871,994
----------- ---------- ----------
Selling, General and
Administrative Expenses 2,385,255 1,984,087 2,125,502
Research and Development 653,386 497,218 226,251
Provision for Doubtful Accounts 392,000 20,000 2,000
----------- ---------- ----------
3,430,641 2,501,305 2,353,753
----------- ---------- ----------
Operating Loss (2,650,741) ( 904,283) (1,481,759)
----------- ---------- ----------
Other Income (Expense)
Interest Income 13,248 74,248 18,578
Interest Expense (157,960) (56,075) (14,055)
Gain (Loss) on Exchange
Rate Conversion 536 874 ( 1,310)
Loss on Marketable Securities -- -- --
Unrealized Gain (Loss) on
Marketable Securities -- -- --
----------- ---------- ----------
(144,176) 19,047 3,213
----------- ---------- ----------
Loss Before Income Taxes (2,794,917) ( 885,236) (1,478,546)
Income Taxes 1,571 2,280 ( 345)
----------- ---------- ----------
Net Loss $(2,796,488) $( 887,516) $(1,478,201)
============ ============ ============
Loss Per Share $ (.30) $ (.10) $ (.18)
============ ============ ============
Weighted Average Number of
Shares Outstanding 9,470,186 8,561,721 8,034,689
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
-F4-
<PAGE>
<TABLE>
<CAPTION>
LINKON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JANUARY 31,
1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities:
- -------------------------------------
Net Loss $(2,796,488) $( 887,516) $(1,478,201)
Adjustments to Reconcile Net Loss
to Net Cash Used in Operating
Activities:
Depreciation and Amortization 168,017 157,915 132,145
Accrued Interest (Income) Expense 56,241 47,638 --
Changes in Assets and Liabilities:
Decrease in Restricted Cash -- -- 81,000
Increase in Certificate of Deposit (3,934) (60,000) --
(Increase) Decrease in Subscriptions
Receivable -- -- 825,000
(Increase) Decrease in Accounts
Receivable 315,680 (199,740) (22,825)
(Increase) Decrease in Other
Receivables 46,046 (80,679) 38,994
(Increase) Decrease in Inventory 225,554 (436,526) (333,145)
(Increase) Decrease in Prepaid
Expenses (15,960) (11,130) 4,165
Increase in Software (208,384) (226,287) (288,984)
(Increase) Decrease in Deferred
Offering Costs 29,019 (29,019) --
(Increase) Decrease in Security
Deposits 5,749 (5,432) (125)
Decrease in Prepaid Financing Costs 13,072 -- --
Increase (Decrease) in Accounts
Payable 203,896 50,704 162,337
Increase (Decrease) in Deferred
Income -- -- (364,157)
Increase (Decrease) in Officers
Salary Payable (60) (68) (23,000)
Decrease in Deferred Income Taxes -- -- (1,074)
Increase (Decrease) in Taxes
Payable 5,913 (1,764) 5,113
------------ ------------ ------------
Net Cash Used in Operating
Activities (1,955,639) (1,681,904) (1,262,757)
------------ ------------ ------------
Cash Flows From Investing Activities:
- -------------------------------------
Cash Paid to Purchase Equipment (216,433) (193,477) (181,991)
(Increase) Decrease in Notes Rec. -- 459,000 (573,800)
Increase in Investments (357) (260,025) --
------------ ------------ ------------
Net Cash Provided by (Used in)
Investing Activities (216,790) 5,498 (755,791)
------------ ------------ ------------
Cash Flows From Financing Activities:
- -------------------------------------
Net Proceeds from Issuance of Common
Stock 2,148,402 415,296 722,350
Repayments of Shareholder Loans -- -- (2,230)
Net Proceeds from Long Term Debt -- 1,357,715 --
Principal Payments on Debt (39,281) -- --
Principal Payments Under Capital
Lease Obligations (6,583) (35,632) (39,785)
------------ ------------ ------------
Net Cash Provided by
Financing Activities 2,102,538 1,737,379 680,335
------------ ------------ ------------
Net Increase (Decrease) in Cash (69,891) 60,973 (1,338,213)
Cash and Cash Equivalents at
Beginning of Year 592,460 531,487 1,869,700
------------ ------------ ------------
Cash and Cash Equivalents at
End of Year $ 522,569 $ 592,460 $ 531,487
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
-F5-
<PAGE>
<TABLE>
<CAPTION>
LINKON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED JANUARY 31, 1996, 1995 AND 1994
Capital in
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit Totals
<S> <C> <C> <C> <C> <C>
Balances
January 31, 1993 7,940,716 $ 7,941 $ 5,753,632 $(2,304,191) $3,457,382
Issuance of Common
Stock Net of
Expenses 400,000 400 721,950 -- 722,350
Net Loss for Year
Ended January 31,
1994 -- -- -- (1,478,201) (1,478,201)
--------- -------- ---------- ----------- -----------
Balances
January 31, 1994 8,340,716 8,341 6,475,582 (3,782,392) 2,701,531
Issuance of Common
Stock Net of
Expenses 259,203 259 415,037 -- 415,296
Issuance of Warrants -- -- 93,103 -- 93,103
Net Loss for Year
Ended January 31,
1995 -- -- -- ( 887,516) ( 887,516)
--------- -------- ---------- ----------- -----------
Balances
January 31, 1995 8,599,919 8,600 6,983,722 (4,669,908) 2,322,414
Issuance of Common
Stock Net of
Expenses 2,153,333 2,154 2,146,248 -- 2,148,402
Net Loss for Year
Ended January 31,
1996 -- -- -- (2,796,488) (2,796,488)
--------- -------- ---------- ----------- -----------
Balances
January 31, 1996 10,753,252 $10,754 $ 9,129,970 $(7,466,396) $1,674,328
========== ======= =========== ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
-F6-
<PAGE>
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996
NOTE 1 - ORGANIZATION, CAPITALIZATION, BUSINESS DESCRIPTION
The Company is engaged in the business of manufacturing and marketing computer
peripheral hardware and software products for the automated voice response,
telecommunications, computer and multimedia communications industries.
NOTE 2 - ECONOMIC DEPENDENCY
Two of the Company's customers accounted for approximately 20% and 13% or
approximately $277,000 and $188,000 of consolidated revenues for the year ended
January 31, 1996 respectively. The first of these customers accounted for
approximately 31%, or approximately $787,000 of revenue for the year ended
January 31, 1995. For the year ended January 31, 1994, this customer accounted
for approximately 27%, or approximately $409,000 of consolidated revenues.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Method of Accounting
- --------------------
The Company utilizes the accrual basis method of accounting for financial
reporting purposes.
Cash and Cash Equivalents
- -------------------------
The Company considers all short-term debt securities purchased with an original
maturity of three months or less to be cash equivalents.
Accounts Receivable
- -------------------
The Company believes all receivables are collectible unless information to the
contrary is obtained. In the event such information is received the Company
establishes an allowance for the uncollectible portions. At January 31, 1996
the allowance was $412,000 and at January 31, 1995 the allowance was $20,000.
Inventory
- ---------
Inventory is valued at the lower of cost or market value using the first-in,
first out (FIFO) method, and consists of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Raw Materials $ 130,830 $ 809,530
Work in Process 241,311 46,200
Finished Goods 516,514 258,479
---------- ----------
$ 888,655 $1,114,209
========== ==========
</TABLE>
Machinery and Equipment and Capital Leases
- ------------------------------------------
Machinery and equipment are stated at cost. Capital leases are stated at the
lesser of the present value of the minimum lease payments or the fair market
value. Property, equipment and capital leases are comprised predominately of
computer equipment. Expenditures for maintenance and repairs are charged to
-F7-
<PAGE>
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996
NOTE 3 - (CONTINUED)
operations as incurred. Depreciation and amortization are provided for utilizing
the straight-line method over the estimated useful lives of the property and
equipment. Depreciation expense for the years ended January 31, 1996, 1995 and
1994 was $168,017, $157,855 and $132,057 respectively.
Capitalized Software Costs
- --------------------------
Costs related to the conceptual formulation and design of licensed programs are
expensed as research and development. Costs incurred subsequent to establishment
of technological feasibility to produce the finished product are generally
capitalized. The amounts charged to expense for the years ended January 31,
1996, 1995 and 1994 were approximately $615,000, $497,000 and $226,000,
respectively. The Company has capitalized software costs included in Other
Assets which totaled approximately $437,000, $350,000 and $403,000 for the years
ended January 31, 1996, 1995 and 1994, respectively. Amortization included in
the accompanying Consolidated Statements of Operations for fiscal years ended
January 31, 1996, 1995 and 1994 was $228,000, $124,000 and $66,000,
respectively.
Income Taxes
- ------------
The Company has adopted Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach to
accounting for income taxes. Deferred income taxes are recorded for temporary
differences between taxable income and pretax financial income and the tax bases
of assets or liabilities and their reported amounts in the financial statements.
Loss Per Share
- --------------
Loss per share is based on the number of shares outstanding. No effect has been
given to outstanding warrants as the result would be antidilutive.
NOTE 4 - CAPITAL CONTRIBUTION
Employee Stock Options
- ----------------------
The Company does not currently have an employee stock option plan but intends to
institute such a plan during the fiscal year ending January 31, 1997. The
Company intends to issue stock options to employees at no less than fair market
value at the time of issuance.
Options and warrants to purchase 2,009,384 shares of the Company's common stock
were exercisable at prices ranging from $.75 to $3.50 per share at January 31,
1996. Outstanding options and warrants expire at various dates through February
2003.
The following table summarizes the changes in options and warrants outstanding
and the related price ranges for shares of the Company's common stock.
<TABLE>
<CAPTION>
Stock Options Warrants
------------------------ ----------------
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Outstanding at
January 31, 1993 425,000 $0.75 to 2.00 150,000 $2.00
Granted 539,000 $2.00 125,000 $3.00
Exercised -- -- (150,000) $2.00
Expired -- -- -- --
------- ------------- ------- -------------
Outstanding at
January 31, 1994 964,000 $0.75 to 2.00 125,000 $3.00
Granted -- -- 538,401 $2.00 to 3.00
Exercised -- -- (150,000) $2.00
Expired -- -- -- --
------- ------------- ------- -------------
Outstanding at
January 31, 1995 964,000 $0.75 to 2.00 663,401 $2.00 to 3.00
</TABLE>
-F8-
<PAGE>
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996
<TABLE>
<CAPTION>
NOTE 4 - (CONTINUED)
<S> <C> <C> <C> <C> <C>
Outstanding at
January 31, 1995 964,000 $0.75 to 2.00 663,401 $2.00 to 3.00
Granted 20,000 -- 620,316 $1.50 to 3.50
Exercised (50,000) $2.00 (208,333) $2.00
Expired -- -- -- --
Outstanding at
January 31, 1996 934,000 $0.75 to 2.00 1,075,381 $1.50 to 3.50
</TABLE>
NOTE 5 - INCOME TAXES
As at January 31, 1996, the Company had net operating loss carryforwards of
approximately $7,400,000, for both book and tax purposes, expiring from 2005 to
2011. As a result of the Tax Reform Act of 1986, the Company is obligated to pay
an alternative minimum tax on its alternative minimum taxable income, even
though it has a loss carryforward. These carryforwards are subject to possible
limitations on annual utilization if there are "equity structural shifts" or
"owner shifts" involving "5% shareholders" (as these terms are defined in
Section 382 of the Internal Revenue Code), which result in a more than 50
percentage point change in ownership.
At this time, the Company does not believe it can reliably predict profitability
beyond the current fiscal year. Accordingly, the deferred tax asset applicable
to operations subsequent to January 31, 1996 has been reduced in its entirety by
the valuation allowance. For the period ending January 31, 1996, the provision
for taxes is comprised only of appropriate state taxes.
Reconciliation of income taxes shown in the financial statements and amounts
computed by applying the Federal income tax rate of 34% for the years ended
January 31, 1996, 1995 and 1994, respectively is as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
1996 1995 1994
<S> <C> <C> <C>
Loss Before Income Taxes $(2,796,488) $( 885,236) $(1,497,033)
- ------------------------ ----------- ----------- -----------
Computed expected tax credit $ 951,000 $ 301,000 $ 509,000
Operating loss for which no benefits
were provided ( 951,000) ( 301,000) ( 509,000)
Benefit provided by net operating
loss carryforward -- -- --
Reduction of Deferred Federal Tax -- -- 1,074
Provision for alternative minimum tax -- -- --
State and local tax provision ( 1,571) ( 2,280) ( 729)
----------- ----------- -----------
Provision for income taxes $( 1,571) $( 2,280) $ 345
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
- ------
The Company is obligated to pay minimum annual rentals on existing non-
cancelable real estate leases as follows:
Year Ending January 31, 1997 1998 Total
$101,957 58,291 $160,248
The Company leased approximately 4,500 square feet for office premises in New
York City. The lease provided for annual payments effective April 1, 1991 of
$87,122 and expired on March 31, 1996. The Company vacated the premises in
December 1995, which was subsequently re-leased by the landlord. The Company and
the landlord are presently negotiating the amount of the credit due the Company.
-F9-
<PAGE>
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1996
NOTE 6 - (CONTINUED)
The Company has a five year lease agreement for approximately 5,000 square feet
of office space in Fairfield, CT expiring September 30, 1997. That lease
provides for annual payments amounting to $87,437.
The Company incurred rent expense amounting to $185,899, $178,586 and $177,809
for the years ended January 31, 1996, 1995, and 1994 respectively.
Royalty Agreements
The Company acquires the rights to certain software algorithms from various
developers under renewable contracts of varying terms. Royalties are based on
a per unit charge based on sales of products utilizing such algorithms.
Warranties
The Company warrants that all equipment manufactured by it will be free from
defects in material and workmanship under normal use for a period of one year
from the date of shipment. The Company's expenses in connection with such
warranties have been minimal.
NOTE 7 - NOTES PAYABLE
During the year ended January 31, 1995, the Company issued $1,350,000 in
principal amount of convertible debentures due October 27, 2000. The notes bear
interest at a rate of 10% per annum, payable quarterly. The first interest
payment was not due until October 31, 1995. The notes are accompanied by
detachable warrants to purchase 316,664 shares of the Company's common stock at
an exercise price of $2.00 per share. The warrants will expire on October 31,
2001. Such warrants were valued at $93,103. The unamortized discount is carried
as a reduction of notes payable on the balance sheet. The unamortized expenses
associated with the issuance of the debentures are carried as prepaid financing
costs on the balance sheet. The Company's rights to issue dividends are
restricted under this agreement. The Company also entered into a loan agreement
with its primary bank whereby the Company borrowed $60,000 payable in equal
monthly installments through January 3, 1997 at an interest rate of 1% above the
prime rate. At January 31, 1996 interest amounting to $100,000 has been accrued
on these liabilities. The following table shows the maturities, at January 31,
1996, of the $1,380,000 remaining principal:
Year Ending January 31, 1997 1998 1999 2000
30,000 -- -- 1,350,000
NOTE 8 - SUPPLEMENTAL CASH FLOWS DISCLOSURES
Cash flows from operating activities reflect interest paid of $101,719, interest
earned of $13,248 and taxes paid of $1,571 for the year ended January 31, 1996,
interest paid of $52,196, interest earned of $74,248 and taxes paid of $2,280
for the year ended January 31, 1995 and interest paid of $14,055, interest
earned of $18,578 and taxes paid of $729 for the year ended January 31, 1994.
There were no noncash investing or financing activities during the years ended
January 31, 1996, 1995 and 1994.
-F10-
