<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 JULY 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 SEPTEMBER 9, 1998
- ------------------------------- --------------------------------
COMMON STOCK, PAR VALUE $.001 PER SHARE 13,371,252
==========
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES _____; NO X
----
<PAGE>
LINKON CORPORATION
FORM 10-QSB
QUARTERLY REPORT
For the Six Months Ended July 31, 1998
Page to Page
------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet July 31, 1998 and 3-4
January 31, 1998
Consolidated Statements of Operations - Six Months
Ended July 31, 1998 and 1997 5
Consolidated Statements of Operations - Three Months
Ended July 31, 1998 and 1997 6
Consolidated Statements of Cash Flows Six Months
Ended July 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
2
<PAGE>
PART 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LINKON CORPORATION AND SUBSIDIARY
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
A S S E T S
-----------
JULY 31, JANUARY 31,
1998 1998
------------ ------------
CURRENT ASSETS
- --------------
Cash and Cash Equivalents $ 1,287,118 $ 511,961
Accounts Receivable (Net of Allowance) 358,850 37,135
Notes Receivable -- --
Other Receivables 5,000 1,972
Inventory 665,638 400,625
Prepaid Expenses 56,835 16,773
----------- -----------
Total Current Assets 2,373,442 968,466
----------- -----------
MACHINERY & EQUIPMENT
- ---------------------
Machinery & Equipment, at cost 1,536,723 1,430,553
Less: Accumulated Depreciation (1,122,066) (1,020,066)
----------- -----------
Machinery & Equipment, Net 414,657 410,487
----------- -----------
OTHER ASSETS
- ------------
Software (Net of Amortization) 921,046 957,200
Investments, at cost 25,000 --
Prepaid Financing Costs 13,071 18,300
Security Deposits 17,432 10,688
----------- -----------
Total Other Assets 976,549 986,188
----------- -----------
$3,764,648 $2,365,141
========== ==========
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
------------------------------------
JULY 31, JANUARY 31,
1998 1998
---- ----
CURRENT LIABILITIES
- -------------------
Accounts Payable $ 675,205 $ 591,538
Notes Payable-Current 200,000 350,000
Customer Advance Deposits 38,037 154,679
Accrued Salaries -- --
Taxes Payable 1,000 1,377
Interest Payable 239 234,865
Accrued Expenses 987,408 451,248
---------- ----------
Total Current Liabilities 1,901,889 1,783,707
---------- ----------
LONG TERM LIABILITIES
- ---------------------
Notes Payable, Net 985,849 957,328
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
- -----------------------------
STOCKHOLDERS' EQUITY
- -----------------------------
Common Stock, $.001 Par Value,
24,900,000 shares authorized,
13,371,252 shares issued and
outstanding 13,372 10,897
Preffered Stock, $.001 Par Value
1,000,000 shares authorized,
none issued and outstanding
Capital in Excess of Par Value 11,468,348 9,404,266
Retained Earnings (Accumulated Deficit) (10,604,810) (9,791,057)
------------ -----------
Total Stockholders' Equity 876,909 ( 375,894)
------------ -----------
$ 3,764,648 $ 2,365,141
============ ===========
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)
SIX MONTHS SIX MONTHS
Ended July 31, Ended July 31,
1998 1997
---- ----
Gross Revenues $3,299,629 $1,528,050
Cost of Goods Sold - Product 2,066,597 784,909
- Software amortization 192,240 192,732
---------- ----------
2,258,837 977,641
---------- ----------
Gross Margin On Sales 1,040,792 550,409
Selling, General and
Administrative Expenses 1,719,366 1,287,263
Research and Development 165,272 125,667
---------- ----------
1,884,638 1,412,930
---------- ----------
Operating Income (Loss) ( 843,846) (862,521)
OTHER INCOME (EXPENSE)
Interest Income 6,525 25
Interest Expense ( 85,346) (104,823)
---------- ----------
( 78,821) (104,798)
---------- ----------
Income (Loss)Before Income Taxes ( 922,667) (967,319)
Income Taxes 1,000 --
---------- ----------
Income (Loss) Before Extraordinary Item ( 923,667) (967,319)
Extraordinary item net gain on pay off
Note payable 109,914 --
---------- ----------
Net Income (Loss) ($813,753) ($967,319)
=========== ==========
Earnings(Loss)per share:
Before extraordinary item ($0.08) ($0.09)
Extraordinary Item $0.01 --
---------- ----------
Net Earnings(Loss) ($0.07) ($0.09)
----------- ----------
Average shares outstanding 12,121,252 10,853,002
---------- ----------
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 July 31, Ended July 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Gross Revenues $ 2,431,006 $ 805,501
Cost of Goods Sold Product 1,522,514 371,764
- Software amortization 96,120 96,366
----------- -----------
1,618,634 458,130
----------- -----------
Gross Margin On Sales 812,372 347,371
Selling, General and
Administrative Expenses 934,968 674,966
Research and Development 85,417 52,626
----------- -----------
1,020,385 727,592
----------- -----------
Operating Income (Loss) ( 208,013) (380,221)
OTHER INCOME (EXPENSE)
Interest Income 4,750 --
Interest Expense ( 36,240) ( 66,368)
----------- -----------
(31,490) ( 66,368)
----------- -----------
Income(Loss) Before Income Taxes ( 239,503) (446,589)
Income Taxes -- --
----------- -----------
Net Income (Loss) ($ 239,503) ($ 446,589)
=========== ===========
Earnings(Loss)per share:
Net Earnings(Loss) ($0.02) ($0.04)
----------- -----------
Average shares outstanding 12,121,252 10,853,002
----------- -----------
</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>
SIX MONTHS ENDED JULY 31,
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
Net Income (Loss)- Before Extraordinary Item $( 923,667) $ (967,319)
Add: Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation & Amortization 319,658 302,491
Warrants issued for services 12,500 --
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable ( 321,717) 169,296
(Increase) Decrease in Other Receivables ( 3,028) 3,359
(Increase) Decrease in Inventory ( 265,013) 175,637
(Increase) Decrease in Prepaid Expenses ( 40,062) ( 36,738)
(Increase) Decrease in Software ( 156,086) ( 169,315)
(Increase) Decrease in Prepaid Financing Cost 5,229 5,228
(Increase) Decrease in Security Deposits ( 6,744) --
Increase (Decrease) in Accounts Payable 83,667 ( 37,081)
Increase (Decrease) in Accrued Expenses 536,160 ( 84,058)
Increase (Decrease) in Interest Payable ( 234,626) 78,750
Increase (Decrease) in Customer Deposits ( 116,642) --
Increase (Decrease) in Taxes Payable ( 377) --
----------- ----------
Net Cash Used in Operating Activities (1,110,747) ( 559,750)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Cash Paid to Purchase Equipment ( 106,170) ( 14,138)
Investment in Non-Marketable Securities ( 25,000) --
----------- ----------
Net Cash Provided by (Used in) Investing Activities ( 131,170) ( 14,138)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from Sale of Common Stock 1,917,076 45,000
Proceeds from issuance of Note Payable 1,100,000 --
Principal payments on Notes Payable (1,000,000) --
----------- ----------
Net Cash Provided by (Used in) Financing Activities 2,017,076 45,000
----------- ----------
Net Increase (Decrease) in Cash 775,157 ( 528,888)
Cash and Cash Equivalents at Beginning of Period 511,961 630,726
----------- ----------
Cash and Cash Equivalents at End of Period $ 1,287,118 $ 101,838
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this report.
7
<PAGE>
LINKON CORPORATION
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
July 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 financial position as of July 31,
1998, and January 31, 1998, and the results of operations for the six and three
month periods ended July 31, 1998 and 1997 and cash flows for the six month
periods ended July 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 2,475,000 $ 2,475 $ 1,914,601 --
Common Stock, Net of
Expenses
Value assigned to warrants -- -- 149,481 --
Loss for Six Months
Ended July 31, 1998 -- -- -- ( 813,753)
----------- ------- ----------- ------------
Balance July 31, 13,371,252 $13,372 $11,468,348 $(10,604,810)
=========== ======= =========== ============
</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 - SIX MONTHS ENDED JULY 31, 1998
- ------------------------------------------------------
NET INCOME (LOSS)
- -----------------
The Company reported a net loss of $813,753 for the six months ended
July 31, 1998 as compared to a net loss of $967,319 for the same period during
the prior year. This decrease of $153,564 in the net loss reported by the
Company was due to the following factors:
Gross revenues increased by $1,771,579 for the six months ended July
31, 1998 as compared to the six months ended July 31, 1997. As a result of this
increase in revenues an additional $490,383 of gross margin was generated.
Selling, General and Administrative and Research and Development
expenses increased by $471,708 for the six months ended July 31, 1998 as
compared to the six months ended July 31, 1997.
In addition, the Company had a net gain of $109,914 realized on the
payoff of notes payable.
REVENUES
- --------
For the six months ended July 31, 1998 revenues increased by
$1,771,579 as compared to the six month period ended July 31, 1997, an increase
of 116%. 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 July 31, 1998 was approximately $260,000 and as of September
9, 1998 was approximately $440,000. Substantially the entire backlog is for
products scheduled to be shipped during the third quarter of fiscal 1999.
During the six months ended July 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 Communications. The
Company expects sales of this product to increase during fiscal 1999 and
thereafter to a diverse base of customers.
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, the management of the Company is 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 $2,258,837 and $977,641, or 68% and 64% of revenues,
for the six months ended July 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 $2,066,597 and $784,909, or 63% and 51% of revenues, for the six
months ended July 31, 1998 and 1997, respectively.
Management attributes the increase in cost of goods sold to a) Sale of certain
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, with software having little or no
9
<PAGE>
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 six months ending July 31, 1998
and 1997, were $192,240 and $192,732 respectively. These amounts were 6% and 13%
of revenues for the six months ending July 31, 1998 and 1997, and are included
in the Cost of Goods Sold total percentage of 68% and 64% for the above periods
being presented.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, General and Administrative(SG&A) expenses for the six months
ended July 31, 1998 and 1997 were $1,719,366 and $1,287,263, respectively. This
constituted approximately 52% and 84% of revenues for the six months ended July
31, 1998 and 1997, respectively. This increase of approximately $430,000 or
approximately 34% was due primarily to increases in staffing in Sales, Marketing
and Customer Support, travel to trade shows and customer sites, and expenditures
for Marketing and Advertising programs for the LinkNet TM and EscapeTM products.
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 continue to decrease.
RESEARCH, DEVELOPMENT AND SOFTWARE
- ----------------------------------
The Company incurred total research, development and software costs of
approximately $238,172 and $198,567 for the six months ended July 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 six month
periods ending July 31, 1998 and 1997 the amounts capitalized were $72,900 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
LinkNet/TM/ 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 six months ended July 31, 1998 the net cash deficit from
operating activities was $1,110,747, net cash provided by financing activities
was $2,017,076, and net cash used for investment activities was $131,170. This
resulted in a net increase in cash during the six months ended July 31, 1998 of
$775,157, increasing the Company's cash and cash equivalents from $511,961 as of
January 31, 1998 to approximately $1,287,118 as of July 31, 1998. As of July 31,
1998, the Company's working capital position was positive by approximately
$471,553 as compared to January 31, 1998 when it was negative by $815,241.
However, even with this improvement in working capital, the rate at which the
Company lost money and consumed cash during the first six months of fiscal 1999
means that the Company will be dependent upon increased revenues from product
sales and/or future equity investments during the current fiscal year in order
to remain solvent. However, the Company's approximately $440,000 backlog as of
10
<PAGE>
September 9, 1998, as well as the Company's view of its prospects for sales well
in excess of historical levels (and at or above levels that would be expected
from its current backlog position), lead management to conclude that its
liquidity will be sufficient for the remainder of the current fiscal year. There
can be no assurances however, that such level of product sales will be achieved
and/or maintained.
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 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.
11
<PAGE>
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 six month period ended July 31, 1998, 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.
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.
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
12
<PAGE>
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.
The Company believes that the combination of its working capital surplus
subsequent to the closing of the RG Financing transaction, its improved
factoring facility with Imperial, its backlog and prospects for the remainder of
Fiscal 1999 as of July 31, 1998, and its ability to raise equity capital in the
past will be sufficient to provide it with adequate liquidity for fiscal
1999. The Company's ability to have adequate capital for the fiscal year ending
on January 31, 2000 and periods thereafter (including the ability to repay the
$1,100,000 due to the RG Fund in April 2000) will be dependent upon the
Company's ability to gain market acceptance of its products and/or its ability
to raise additional capital.
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.
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 has designed all of its currently manufactured software and
hardware to be Year 2000 ready. The Company has commenced an investigation and
is making written inquiry to its suppliers as to whether the component parts of
certain of its products that are supplied by such third parties are Year 2000
compliant. With respect to the Company's own operating systems, the Company is
taking steps to remediate any existing Year 2000 Issues and does not expect the
costs of such efforts to be material.
Based upon preliminary data, the Company does not believe that the Year 2000
Issue will have a material adverse impact on the Company's financial condition,
results of operation or future cash flows. 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.
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."
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.
13
<PAGE>
EXHIBIT I
LINKON CORPORATION
------------------
CALCULATION OF EARNINGS PER SHARE
---------------------------------
(UNAUDITED)
SIX MONTHS SIX MONTHS
Ended Ended
July 31, 1998 JULY 31, 1997
-------------- -------------
Loss for the Period $ ( 813,753) $ (967,319)
============ ==========
Weighted Number of Shares Outstanding 12,121,252 10,853,002
========== ==========
Loss Per Share: $ (.07) $ (.09)
=========== ===========
14
<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 50,000 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 Section 4(2) of, and
Regulation D under, the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders.
------------------------------------------------------
On July 15, 1998, the Company held an Annual Meeting of its stockholders. At
such meeting, each of the four nominees for director, Joao M. Carvalho, Charles
Castelli, Lee W. Hill, and Daniel Zwiren was reelected as a director by the
following vote:
Nominee Votes For Votes Witheld
- ------- --------- -------------
Joao M. Carvalho 11,181,860 59,010
Charles Castelli 11,189,010 51,860
Lee W. Hill 11,188,910 51,960
Daniel Zwiren 11,189,010 51,860
In addition, the Company's shareholders approved an amendment to the
Company's 1996 Stock Option and Performance Incentive Plan by a vote of
6,018,591 in favor, 419,870 opposed with 24,430 shares abstaining and 4,777
broker non-votes. The amendments were as follows: (a) increase the number of
shares authorized for issuance pursuant thereto from 1,000,000 to 2,500,000
and (b) provide for the issuance to Non-Employee Directors who remain as such
on the last day of any given fiscal quarter of such number of shares of the
Company's Common Stock as have a fair market value equal to $3,750 as of the
last day of each such fiscal quarter.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
Exhibit
No. Description of Document
------- -----------------------
27 Financial Data Schedule for the period ended July 31, 1998
b. Reports on Form 8-K
There were no reports on Form 8-K filed for the six months ended July 31, 1998.
15
<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: September 14, 1998 /s/ Lee W. Hill
----------------
BY: LEE W. HILL
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATED: September 14, 1998 /s/ Thomas V. Cerabona
-----------------------
BY: THOMAS V. CERABONA
SENIOR VICE PRESIDENT
PRINCIPAL ACCOUNTING OFFICER
16
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Document
----- -----------------------
27 Financial Data Schedule for the period ended
July 31, 1998(1)
____________
(1) Submitted separately, electronically.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET DATED AS OF JULY 31, 1998 AND THE COMPANY'S
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 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> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JUL-31-1998
<CASH> 1,287,118
<SECURITIES> 0
<RECEIVABLES> 388,863
<ALLOWANCES> 30,013
<INVENTORY> 665,638
<CURRENT-ASSETS> 2,373,442
<PP&E> 1,536,723
<DEPRECIATION> 1,122,066
<TOTAL-ASSETS> 3,764,648
<CURRENT-LIABILITIES> 1,901,889
<BONDS> 985,849
<COMMON> 13,372
0
0
<OTHER-SE> 863,537
<TOTAL-LIABILITY-AND-EQUITY> 3,764,648
<SALES> 3,299,629
<TOTAL-REVENUES> 3,299,629
<CGS> 2,258,837
<TOTAL-COSTS> 2,258,837
<OTHER-EXPENSES> 1,884,638
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,821
<INCOME-PRETAX> (922,667)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 109,914
<CHANGES> 0
<NET-INCOME> (813,753)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
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