<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 1998
----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-19705
LINKON CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 13-3469932
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
140 Sherman Street,
Fairfield, Connecticut 06430
----------------------------
(Address of principal executive offices)
(203) 319-3100
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at December 4, 1998
------------------------------- -------------------------------
Common Stock, Par Value $.001 Per Share 13,512,348
==========
Transitional Small Business Disclosure Format (Check One):
Yes ; No X
----- -----
<PAGE>
LINKON CORPORATION
FORM 10-QSB
QUARTERLY REPORT
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998
<TABLE>
<CAPTION>
Page to Page
------------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet October 31, 1998 and 3-4
January 31, 1998
Consolidated Statements of Operations - Nine Months
Ended October 31, 1998 and 1997 5
Consolidated Statements of Operations - Three Months
Ended October 31, 1998 and 1997 6
Consolidated Statements of Cash Flows Nine Months
Ended October 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Exhibit I - Calculation of Earnings per Share 13
PART II. Other Information 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE>
PART 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LINKON CORPORATION AND SUBSIDIARY
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
A S S E T S
-----------
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash and Cash Equivalents $ 146,440 $ 511,961
Accounts Receivable (Net of Allowance) 417,907 37,135
Notes Receivable -- --
Other Receivables 5,000 1,972
Inventory 737,300 400,625
Prepaid Expenses 33,292 16,773
----------- -----------
Total Current Assets 1,339,939 968,466
----------- -----------
MACHINERY & EQUIPMENT
- ---------------------
Machinery & Equipment, at cost 1,618,350 1,430,553
Less: Accumulated Depreciation (1,173,066) (1,020,066)
----------- -----------
Machinery & Equipment, Net 445,285 410,487
----------- -----------
OTHER ASSETS
- ------------
Software (Net of Amortization) 914,070 957,200
Investments, at cost 25,000 --
Prepaid Financing Costs 10,457 18,300
Security Deposits 16,781 10,688
----------- -----------
Total Other Assets 966,307 986,188
----------- -----------
$ 2,751,531 $ 2,365,141
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
3
<PAGE>
LINKON CORPORATION AND SUBSIDIARY
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
- -------------------
Accounts Payable $ 1,269,752 $ 591,538
Notes Payable-Current 100,000 350,000
Customer Advance Deposits 67,200 154,679
Accrued Salaries -- --
Taxes Payable 1,000 1,377
Interest Payable 28,494 234,865
Accrued Expenses 325,946 451,248
------------- -------------
Total Current Liabilities 1,792,392 1,783,707
------------- -------------
LONG TERM LIABILITIES
- ---------------------
Notes Payable, Net 1,002,972 957,328
------------- -------------
COMMITMENTS AND CONTINGENCIES -- --
- -----------------------------
STOCKHOLDERS' EQUITY
- --------------------
Common Stock, $.001 Par Value,
24,900,000 shares authorized,
13,512,348 shares issued and
outstanding 13,513 10,897
Preffered Stock, $.001 Par Value
1,000,000 shares authorized,
none issued and outstanding
Capital in Excess of Par Value 11,666,207 9,404,266
Retained Earnings (Accumulated Deficit) ( 11,723,553) ( 9,791,057)
------------- -------------
Total Stockholders' Equity ( 43,833) ( 375,894)
------------- -------------
$ 2,751,531 $ 2,365,141
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
4
<PAGE>
LINKON CORPORATION AND SUBSIDIARY
---------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
1998 1997
---- ----
<S> <C> <C>
Gross Revenues $ 3,664,150 $ 2,444,223
Cost of Goods Sold - Product 2,283,095 1,172,928
- Software amortization 288,360 289,098
---------------- ----------------
2,571,455 1,462,026
---------------- ----------------
Gross Margin On Sales 1,092,695 982,197
Selling, General and
Administrative Expenses 2,776,347 1,844,720
Research and Development 252,915 198,513
---------------- ----------------
3,029,262 2,043,233
---------------- ----------------
Operating Income (Loss) (1,936,567) (1,061,036)
OTHER INCOME (EXPENSE)
Interest Income 9,513 25
Interest Expense ( 114,356) (164,404)
---------------- ----------------
( 104,843) (164,379)
---------------- ----------------
Income (Loss)Before Income Taxes (2,041,410) (1,225,415)
Income Taxes 1,000 4,000
---------------- ----------------
Income (Loss) Before Extraordinary Item (2,042,410) (1,229,415)
Extraordinary item - net gain on pay off
Note payable 109,914 --
---------------- ----------------
Net Income (Loss) ($1,932,496) (1,229,415)
================ ================
Earnings(Loss)per share:
Before extraordinary item ($0.16) ($0.11)
Extraordinary Item $0.01 --
---------------- ----------------
Net Earnings(Loss) ($0.15) ($0.11)
---------------- ----------------
Average shares outstanding 12,775,276 10,888,752
---------------- ----------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
5
<PAGE>
LINKON CORPORATION AND SUBSIDIARY
---------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
1998 1997
---- ----
<S> <C> <C>
Gross Revenues $ 364,521 $ 916,173
Cost of Goods Sold - Product 216,498 388,019
- Software amortization 96,120 96,366
---------------- ----------------
312,618 484,385
---------------- ----------------
Gross Margin On Sales 51,903 431,788
Selling, General and
Administrative Expenses 1,056,983 557,457
Research and Development 87,643 72,846
---------------- ----------------
1,144,626 630,303
---------------- ----------------
Operating Income (Loss) ( 1,092,723) (198,515)
OTHER INCOME (EXPENSE)
Interest Income 2,988 --
Interest Expense ( 29,008) ( 59,581)
---------------- ----------------
( 26,020) ( 59,581)
---------------- ----------------
Income(Loss) Before Income Taxes ( 1,118,743) (258,096)
Income Taxes -- 4,000
---------------- ----------------
Net Income (Loss) ($1,118,743) ($ 262,096)
================ ================
Earnings(Loss)per share:
Net Earnings(Loss) ($0.09) ($0.02)
---------------- ----------------
Average shares outstanding 12,775,276 10,888,752
---------------- ----------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
6
<PAGE>
LINKON CORPORATION AND SUBSIDIARY
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31,
1998 1997
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- --------------------------------------
Net Income (Loss)- Before Extraordinary Item $(2,042,410) $(1,229,415)
Add: Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation & Amortization 483,899 453,736
Warrants issued for services 12,500 --
Loss from induced conversion of convertible debt 83,000
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable ( 380,772) ( 74,987)
(Increase) Decrease in Other Receivables ( 3,028) 3,359
(Increase) Decrease in Inventory ( 336,675) 180,830
(Increase) Decrease in Prepaid Expenses ( 16,519) 15,584
(Increase) Decrease in Software ( 245,229) ( 261,770)
(Increase) Decrease in Prepaid Financing Cost 7,843 7,842
(Increase) Decrease in Security Deposits ( 6,093) --
Increase (Decrease) in Accounts Payable 678,214 57,225
Increase (Decrease) in Accrued Expenses ( 125,302) 166,888
Increase (Decrease) in Interest Payable ( 206,371) 122,502
Increase (Decrease) in Customer Deposits ( 87,479) --
Increase (Decrease) in Taxes Payable ( 377) ( 4,207)
----------- -----------
Net Cash Used in Operating Activities (2,184,800) ( 562,413)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Cash Paid to Purchase Equipment ( 187,797) ( 47,490)
Investment in Non-Marketable Securities ( 25,000) --
----------- -----------
Net Cash Provided by (Used in) Investing Activities ( 212,797) ( 47,490)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from Sale of Common Stock 2,032,076 45,000
Proceeds from issuance of Note Payable 1,100,000 --
Principal payments on Notes Payable (1,100,000) --
----------- -----------
Net Cash Provided by (Used in) Financing Activities 2,032,076 45,000
----------- -----------
Net Increase (Decrease) in Cash ( 365,521) ( 564,903)
Cash and Cash Equivalents at Beginning of Period 511,961 630,726
----------- -----------
Cash and Cash Equivalents at End of Period $ 146,440 $ 65,823
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
7
<PAGE>
LINKON CORPORATION
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
OCTOBER 31, 1998
----------------
1) In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments(consisting of only normal recurring
accruals) necessary to present fairly the Company's financial position as of
October 31, 1998, and January 31, 1998, and the Company's results of operations
for the nine and three month periods ended October 31, 1998 and 1997 and cash
flows for the nine month periods ended October 31, 1998 and 1997.
The accounting policies followed by the Company are set forth in Note 3 to
the Company's financial statements in the Linkon Corporation Annual Report on
Form 10-KSB for the fiscal year ended January 31, 1998.
2) ANALYSIS OF STOCKHOLDERS' EQUITY:
---------------------------------
<TABLE>
<CAPTION>
Capital
Outstanding in Excess Accumulated
Shares Amount of Par Value Deficit
----------- ------- ------------ -------------
<S> <C> <C> <C> <C>
Balance January 31, 1998 10,896,252 $10,897 $ 9,404,266 $ (9,791,057)
Issuance of 2,616,096 $ 2,616 $ 2,029,460 --
Common Stock, Net of
Expenses
Value assigned to warrants -- -- 149,481 --
Loss from induced conversion
of convertible debt 83,000
Loss for Nine Months
Ended October 31, 1998 -- -- -- (1,932,496)
---------- ------- ----------- ------------
Balance October 31, 13,512,348 $13,513 $11,666,207 $(11,723,553)
========== ======= =========== ============
</TABLE>
3) FINANCING OF OPERATIONS:
------------------------
See Management's Discussion and Analysis- Liquidity and Capital Resources as to
the Company's need for additional capital and any plans for the future financing
of its operations.
4)VALUE ASSIGNED TO WARRANTS
--------------------------
See Management's Discussion and Analysis- Liquidity and Capital Resources,
Issuance of Notes Payable/Gain on Payoff of Note Payable, as to issuance of
warrants.
8
<PAGE>
ITEM 2
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS- NINE MONTHS ENDED OCTOBER 31, 1998
NET INCOME (LOSS)
- -----------------
The Company reported a net loss of $1,932,496 for the nine months ended
October 31, 1998 as compared to a net loss of $1,229,415 for the same period
during the prior year. This increase of $703,081 in the net loss reported by the
Company was due to the following factors:
Gross Revenues increased by $1,219,927 for the nine months ended
October 31, 1998 as compared to the nine months ended October 31, 1997.
However, Cost of Goods Sold, as a percentage of revenues, increased from
aproximately 60% for the nine months ended October 31, 1997 to approximately 70%
for the nine months ended October 31, 1998. As a result of this increase in
Cost of Goods Sold, the net increase in Gross Margin realized on the $1,219,927
increase in revenues was only $110,498.
At the same time, SG&A and R&D expenses increased by $986,029 for the
nine months ended October 31, 1998 as compared to the nine months ended October
31, 1997. In addition, the Company had a net gain of $109,914 realized on the
payoff of notes payable. Each of these factors is discussed in detail below.
REVENUES
- --------
For the nine months ended October 31, 1998 revenues increased by
$1,219,927 as compared to the nine month period ended October 31, 1997, an
increase of 50%. This increase was due mainly to increased shipments to AT&T,
the Company's largest customer, and to Sequel Communications. The Company's
total order backlog as of October 31, 1998 was approximately $425,000 and as of
December 4, 1998 was approximately $319,000. Substantially the entire backlog
is for products scheduled to be shipped during the fourth quarter of fiscal
1999.
During the nine months ended October 31, 1998, the Company deployed its
first major installation of LinkNetTM , its new Internet Telephony (Voice and
Fax over the Internet) product with SS7 signalling, to Sequel Communication. The
Company has shipped aproximately $515,000 of LinkNet Gateway product to Sequel
Communications to date.
The Company continues to concentrate on developing and expanding its
customer base and is currently working on several new projects for other major
customers which it anticipates will diversify its customer base and increase
revenues in both the near and long-term. While the certainty of these new
projects becoming future revenues for the Company cannot be measured at this
point in time, and the Company has not yet realized the anticipated product
sales, the management of the Company continues to be encouraged by the
inquiries it is receiving concerning its products.
COST OF GOODS SOLD
- ------------------
Cost of goods sold for products, consisting of parts, supplies and
manufacturing costs for the Company's hardware and software products, including
software amortization, were $2,571,455 and $1,462,026, or 70% and 60% of
revenues, for the nine months ended October 31, 1998 and 1997, respectively.
Excluding software amortization, cost of goods sold for products, consisting of
parts, supplies and manufacturing costs for the Company's hardware and software
products were $2,283,095 and $1,172,928, or 63% and 48% of revenues, for the
nine months ended October 31, 1998 and 1997, respectively.
Management attributes the increase in cost of goods sold to a) sale of
certain presumably non- recurring third party development services to AT&T at a
35% margin and b) highly competitive pricing associated with initial shipments
of its LinkNet/TM/ product to Sequel Communications and other customers. The
cost of goods sold varies with each product line,
9
<PAGE>
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.
While management continues to believe that its products can ultimately
be sold with a less than 50% cost of goods sold (excluding the software
amortization costs), management also realizes the need to gain market share for
its products and will, for the near term, continue to be aggressive in its
pricing policy. However, management also believes that the cost of sales will go
down as customers begin to order enhanced software features, which features
carry significantly lower costs than the Company's hardware products, as well as
a result of manufacturing and research and development projects aimed at
increasing efficiency while reducing cost.
Software amortization costs for the nine months ending October 31,
1998 and 1997, were $288,360 and $289,098 respectively. These amounts were 8%
and 12% of revenues for the nine months ending October 31, 1998 and 1997, and
are included in the Cost of Goods Sold total percentage of 70% and 60% for the
above periods being presented.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, General and Administrative(SG&A) expenses for the nine months
ended October 31, 1998 and 1997 were $2,776,347 and $1,844,720, respectively.
This constituted approximately 76% and 75% of revenues for the nine months ended
October 31, 1998 and 1997, respectively. This increase of approximately
$932,000, or approximately 51%, was due primarily to increases in staffing in
Sales, Marketing and Customer Support, travel to trade shows and customer sites,
expenditures for Marketing and Advertising programs for the LinkNet TM and
EscapeTM products. The Company also incurred an expense as a result of the
conversion of $100,000 in convertible subordinated notes at below the $2.00
conversion price provided for in the notes.
While the Company expects SG&A expenses to continue to increase as the
Company's products gain acceptance in the marketplace, the Company also believes
that SG&A expenses as a percentage of revenues will begin to decrease.
RESEARCH, DEVELOPMENT AND SOFTWARE
- ----------------------------------
The Company incurred total research, development and software costs of
approximately $471,615 and $417,213 for the nine months ended October 31, 1998
and 1997, respectively. It is the policy of the Company to capitalize research
and development costs that are incurred subsequent to the establishment of
technological feasibility to produce the finished product. For the nine month
periods ending October 31, 1998 and 1997 the amounts capitalized were $218,700
for both periods. The increase in research and development costs was primarily
due to increases in staffing to support the continued development efforts on the
LinkNetTM product line. These amounts consist of internal salaries, outside
consulting services, equipment and fixed overhead costs. The Company expects
research, development and software costs to increase over the next several
quarters, as finances permit.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary capital requirements to date have been to fund
losses from operations. In addition, from time to time the Company has required
capital to fund increases in inventory of certain products necessary for the
Company to sell such products. The Company has funded its capital requirements
through the receipt of proceeds from private placements of convertible debt and
equity, the exercise of warrants, interest earned from the investment of such
proceeds in interest earning assets, factoring facilities and revenues from
operations. During the nine months ended October 31, 1998 the net cash deficit
from operating activities was $2,184,800, net cash provided by financing
activities was $2,032,076, and net cash used for investment activities was
$212,797. This resulted in a net decrease in cash during the nine months ended
October 31, 1998 of $365,521, decreasing the Company's cash and cash equivalents
from $511,961 as of January 31, 1998 to approximately $146,440 as of October 31,
1998. As of October 31, 1998, the Company's working capital position was
negative by approximately $452,453 as compared to January 31, 1998 when it was
negative by $815,241. The Company's working capital deficit as of October 31,
1998, when combined with the rate at which the Company lost money and consumed
cash during the first nine months of fiscal 1999 means that the Company will be
dependent upon future equity investments and/or increased
10
<PAGE>
revenues from product sales in order to be able to continue its business
operations over succeeding months. The Company believes that its approximately
$319,000 of backlog as of December 4, 1998, when combined with a $300,000 bridge
loan closed on December 9, 1998, will allow it to continue operations through
the remainder of the current fiscal year. However, in order to continue
operations through the Company's fiscal year ending January 31, 2000, as well as
the period thereafter( including fiscal 2001, during which time the $1.1 million
promissory note due to the RG Fund described below becomes due), a significant
equity capital transaction and/or a significantly increased level of product
sales that will enable the Company to produce capital from operations will be
necessary. There can be no assurances that either of such events will occur.
The Company does not currently contemplate any significant capital expenditures
during fiscal 1999. The Company does not believe that, except as stated herein,
any contingencies exist which would have a material adverse effect on the
Company's financial condition, future operating results or liquidity.
FACTORING FACILITIES
--------------------
On March 19, 1998 the Company entered into an Agreement for Purchase
of Receivables (the "Imperial Factoring Agreement") with Imperial Bank
("Imperial") pursuant to which the Company may sell to Imperial accounts
receivable and other general intangibles ("Purchased Receivables") that are from
time to time identified by the Company and accepted by Imperial. Upon
acceptance by Imperial, Imperial is obligated to pay the Company 85% of the face
value of the Purchased Receivables (subject to adjustment), retaining the
remaining 15% of the face value of the Purchased Receivable as a reserve until
after the Purchased Receivables are paid by the Company's customers (i.e., the
account debtors). The Company is obligated to pay Imperial (i) a factor fee at a
rate of 1.75% per month on the face amount of each unpaid invoice relating to
Purchased Receivables and (ii) an administrative fee at a rate of 0.5% of the
face amount of each invoice for a Purchased Receivable. Imperial's purchase from
the Company of Purchased Receivables is with full recourse against the Company.
The Company's obligations under the Imperial Factoring Agreement are secured
primarily by its accounts receivable and other general intangibles and the
proceeds thereof. The term of the Imperial Agreement is one year and it will
automatically be renewed from year to year thereafter unless terminated by the
parties in accordance with the Imperial Factoring Agreement.
On March 26, 1998, the Company executed an addendum to the Imperial
Factoring Agreement that enables the Company to offer to sell to Imperial and
Imperial to elect to buy from the Company the Company's right to payment under
purchase orders given to the Company by its customers. The advance rate with
respect to purchased Company purchase orders is 20% (as opposed to the 85%
advance rate applicable to accounts receivable). The total amount of financing
to be provided to the Company with respect to the sale of purchase orders is
capped at the lesser of $400,000 or the outstanding reserve amount plus
$200,000.
After entering into the Imperial Factoring Agreement the Company
terminated its factoring arrangement with Boston Financial and Equity
Corporation (the "Boston Financial Factoring Arrangement"). The Company
believes that the Imperial Factoring Agreement represents an improvement from
the Boston Financial Factoring Arrangement. Imperial only reserves 15% of the
purchase price of Purchased Receivables as opposed to the 20% reserve required
under the Boston Financial Factoring Arrangement. The Company's borrowing
power on the date of sale of the Purchased Receivables is further enhanced under
the Imperial Factoring Agreement through the payment of the monthly factoring
fee on unpaid invoices relating to Purchased Receivables as compared to the 2%
discounted sale structure (i.e, a fee of 2% of the dollar amount of Purchased
Receivables was taken by Boston Financial upon the purchase of the Purchased
Receivables) used in the Boston Financial Factoring Arrangement. In addition,
the Company's ability under the addendum to the Imperial Factoring Agreement to
obtain financing in advance of shipment based upon customer purchase orders (as
opposed to accounts receivable) provides the Company with a new source of
financing not previously available under the Boston Financial Factoring
Arrangement.
SALES OF COMMON STOCK
---------------------
1) On April 6, 1998 the Company consumated an equity and debt financing
transaction with RG Capital Fund, LLC (the "RG Fund"), was consummated. The
equity financing piece of the financing involved the sale, pursuant to a
subscription agreement, to the RG Fund and ten investors designated by the RG
Fund to participate in the investment(said ten investors constituting
collectively the "outside investors") of an aggregate of 2,400,000 shares of the
Company's Common Stock for an
11
<PAGE>
aggregate consideration of $1,800,000. Funding of the sale to the Outside
Investors took place on April 14, 1998. The aforesaid subscription agreement
provides, among other things, that the Company must permit a designee of the RG
Fund to be an unpaid advisor to the Board of Directors of the Company. The RG
Fund's designee has none of the voting rights conferred upon directors of the
Company, but does have the right to receive notice of and to attend meetings of
the Board of Directors of the Company and committees thereof.
The subscription agreement also contains covenants by the RG Fund in
favor of the Company relating to the voting of shares, additional purchases of
common stock, and resales of shares. The RG Fund is obligated, as long as the
Company is not in default under the RG Note or certain other agreements with the
RG Fund, to vote all shares of Common Stock purchased by it in accordance with
the recommendations of the Board of Directors of the Company. The RG Fund is
also prohibited from purchasing additional shares of the Company's Common Stock
on the open market or from any person or entity other than the Company without
the Company's prior written consent. The voting agreement and restrictions on
purchase remain in effect until such time as the RG Fund and its affiliates own
less than 5% of the Company's outstanding common stock. In addition, for a
period of two years the RG Fund is prohibited from selling or otherwise
transferring or disposing of its shares, except in amounts that would otherwise
be permitted under Rule 144 of the Securities Act without giving effect to the
holding period requirements thereof unless such sale, transfer or disposition is
pursuant to an underwritten public offering of such shares.
The gross proceeds ($1,800,000) less $32,924, the legal and other costs
of closing the transaction, were recorded in the equity acccounts of the Company
in the quarter ending April 30, 1998. Such proceeds were used to (1) pay off a
$300,000 bridge loan made to the company on March 11, 1998 by James Scibelli, an
affiliate of the R&G Fund, and (2) for working capital purposes.
2) During the third quarter of fiscal 1999, two of the holders of
convertible subordinated notes issued by the Company in the principal amounts of
$50,000 and $100,000, respectively, elected, as provided for in the provisions
of such notes, to convert such notes into Common Stock at a rate of $2.00 per
share. Accordingly, the Company issued 25,000 and 50,000 shares of Common Stock,
respectively, to such holders upon such conversions and cancelled each of such
notes. In addition, two of the holders of similar convertible subordinated notes
issued by the Company in the principal amounts of $50,000 each agreed after
negotiations with the Company to convert such notes into Common Stock at a rate
of $0.75 per share instead of the $2.00 per share provided for in such notes.
Accordingly, the Company issued 66,667 shares of Common Stock to each holder
upon such conversions and cancelled each of such notes.
ISSUANCE OF NOTES PAYABLE / GAIN ON PAYOFF OF NOTE PAYABLE
----------------------------------------------------------
The debt portion of the RG Financing (see Sale of Common Stock #1,
above) consists of a loan to the Company by the RG Fund in the principal amount
of $1,100,000. The loan is evidenced by a promissory note issued by the Company
to the RG Fund in like principal amount bearing interest at an annual rate of
8%(the "RG Note"). The RG Note is unsecured and is payable in full in one lump
sum payment on April 6, 2000. As long as the RG Note remains unpaid, the Company
is prohibited, unless it obtains the prior written consent of the RG Fund, from,
among other things, (i) issuing securities in reliance on Regulation S of the
Securities Act, (ii) issuing securities at a price that is less than 75% of the
public trading price of the Company's Common Stock, (iii) incurring indebtedness
for borrowed money other than in connection with factoring agreements, financed
purchases or leases of equipment (not to exceed $500,000) or existing
indebtedness of the Company, (iv) guarantying obligations of its affiliates, (v)
declaring dividends or redeeming capital stock, or (vi) selling assets outside
of the ordinary course of business. The proceeds of the loan were used by the
Company to pay off all amounts owed by the Company to IBJS Capital Corporation
("IBJS") pursuant to the Company's $1,000,000 Secured Convertible Debenture (the
"IBJS Debenture") and to retire all warrants held by IBJS, for a cash payment of
$1,092,833 (which was approximately $150,000 less than the amount then due on
the IBJS Debenture).
The gain of $150,000, as noted above, from the payoff of the IBJS
debenture was reduced by $40,086 of deferred financing that was still remaining
to be amortized as of the date of the payoff. The net gain of $109,914 was an
addition to net income during the quarter ending April 30, 1998.
12
<PAGE>
In addition to aforesaid debt and equity financings, the Company also entered
into an investment banking and financial advisory services relationship with
Roberts & Green, Inc.("R&G"), pursuant to which the Company appointed R&G as its
exclusive financial advisor and agreed to (i) pay R&G a monthly advisory fee
equal to $5,000 for a period of eighteen months and (ii) issue to R&G warrants
to purchase an aggregate of 1,000,000 shares of Common Stock at an exercise
price of $1.50, such warrant terminating in eighteen months from the date of
issuance.
The 2,400,000 shares of Common Stock issued to the RG Fund and the Outside
Investors and the 1,000,000 shares of Common Stock underlying the warrants
granted to R&G are entitled to the benefit of certain registration rights which,
among other things, required the Company to file a registration statement with
respect to such shares under the Securities Act on or before May 15, 1998. Said
registration statement has been filed and is effective.
YEAR 2000 ISSUES
- ----------------
The "Year 2000 Issue" results from computer programs being written using two
digits, instead of four, to define a given year. Programs running time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in disruptions to various activities and
operations, miscalculations and even system failures.
The Company believes, after investigation, that all software and hardware
products that it is currently in the process of manufacturing(directly or
through vendors) are Year 2000 compliant. However, the Company usually sells
such products "bundled" with hardware and software components obtained from
third party vendors. The Company has commenced an investigation and is making
written inquiry of its suppliers as to whether all of these bundled components
are Year 2000 compliant, and expects to receive confirmation that all such
components are Year 2000 compliant, or will after modification be compliant,
during the first half of fiscal 2000. Specifically, the Company is aware that
the Escape platform sold to its largest customer, AT&T, which combines products
manufactured by the Company with components purchased from outside suppliers, is
not Year 2000 compliant. The Company has begun taking steps to remedy such non-
compliance by porting the product to the Sun Solaris operating system. The
Company expects this project to be completed during the first quarter of fiscal
2000. The Company believes, after investigation, that its own software
operating systems are Year 2000 compliant. Funds for such costs have not been
reserved for, and therefore as expended, will have a direct negative impact on
the Company's future income.
If, however, the Company, its suppliers and other third parties with whom the
Company maintains business relations are unable to resolve any arising Year 2000
problems in a timely manner, risk to the Company's financial condition could
result. In addition, in the event that the economy as a whole is materially and
adversely effected by widespread interruptions, or by failures of of key
infrastructure providers (such as banks and utilities), or in the event that the
computer and software industry are disrupted generally by Year 2000 glitches, it
is likely that the Company's financial condition and results of operations would
be materially adversely effected.
Based upon preliminary data currently in its possession, the Company does not
expect the costs of Year 2000 compliance to have a material adverse effect on
the Company or its results of operation, financial condition or future cash
flows. Nonetheless, employee hours that could otherwise be utilized for other
purposes will have to be spent resolving Year 2000 issues and making bundled
products, such as the Escape platform, Year 2000 compliant.
FORWARD LOOKING INFORMATION
- ---------------------------
The statements in this Annual Report on Form 10-KSB that are not statements of
historical fact constitute "forward-looking statements." Said forward- looking
statements involve risks and uncertainties which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performances or achievements, expressly predicted or implied by
such forward-looking statements. These forward-looking statements are
identified by their use of forms of such terms and phrases as "expects,"
"intends," "goals," "estimates," "projects," "plans," "anticipates," "should,"
"future," "believes," and "scheduled."
13
<PAGE>
The important factors which may cause actual results to differ from the
forward-looking statements contained herein include, but are not limited to, the
following: general economic and business conditions; competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain key management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and costs of raw materials and supplies; and changes in, or failure
to comply with, government regulations. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this filing will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and expectations of the Company will be achieved.
14
<PAGE>
EXHIBIT I
LINKON CORPORATION
------------------
CALCULATION OF EARNINGS PER SHARE
---------------------------------
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
Loss for the Period $ (1,932,496) $ (1,229,415)
================ ================
Weighted Number of Shares Outstanding 12,775,276 10,888,752
================ ================
Loss Per Share: $ (.15) $ (.11)
================ ================
15
<PAGE>
LINKON CORPORATION
------------------
PART II. OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
The disclosure appearing in ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Sales of Common Stock of Part
- ------------------------------------------------------------------------
1 of this report regarding the issuance of shares of common stock upon the
conversion of certain convertible subbordinated notes by the Company is
incorporated into this Item 2 Of Part II by reference. Such shares were issued
pursuant to the exemptions from registration afforded by SectionS 3(a)(9) and
4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
Exhibit
No. Description of Document
------- -----------------------
27 Financial Data Schedule for the period ended October 31,1998
b. Reports on Form 8-K
There were no reports on Form 8-K filed for the nine months ended October 31,
1998.
16
<PAGE>
LINKON CORPORATION
------------------
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LINKON CORPORATION
------------------
Registrant
DATED: December 14, 1998 /s/ Lee W. Hill
----------------
BY: LEE W. HILL
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATED: December 14, 1998 /s/ Thomas V. Cerabona
-----------------------
BY: THOMAS V. CERABONA
SENIOR VICE PRESIDENT
PRINCIPAL ACCOUNTING OFFICER
17
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Document
----- -----------------------
27 Financial Data Schedule for the period ended
October 31, 1998(1)
____________
(1) Submitted separately, electronically.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET DATED AS OF OCTOBER 31, 1998 AND THE
COMPANY'S CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 146,440
<SECURITIES> 0
<RECEIVABLES> 462,345
<ALLOWANCES> 44,438
<INVENTORY> 737,300
<CURRENT-ASSETS> 1,339,939
<PP&E> 1,618,350
<DEPRECIATION> 1,173,066
<TOTAL-ASSETS> 2,751,531
<CURRENT-LIABILITIES> 1,792,392
<BONDS> 1,002,972
<COMMON> 13,513
0
0
<OTHER-SE> (57,346)
<TOTAL-LIABILITY-AND-EQUITY> 2,751,531
<SALES> 3,664,150
<TOTAL-REVENUES> 3,664,150
<CGS> 2,571,455
<TOTAL-COSTS> 2,571,455
<OTHER-EXPENSES> 3,029,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,843
<INCOME-PRETAX> (2,041,410)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 109,914
<CHANGES> 0
<NET-INCOME> (1,932,496)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
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