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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.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
[ ] TRANSITION REPORT UNDER 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
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
NEVADA 13-3469932
(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
(ISSUER 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
(TITLE OF CLASS)
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 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. $4,243,996
As of May 6, 1999 the aggregate market value of the voting stock held
by non-affiliates was $6,368,365
Number of shares outstanding of the issuer's common stock, as of May 6,
1999 was 13,659,478
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's definitive proxy statement to be filed with the Securities
and Exchange Commission within 120 days after January 31, 1999 is incorporated
by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes No X
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL BUSINESS
On May 10, 1999, Linkon Corporation (hereinafter referred to as
"Linkon" or the "Company") laid off all but one employee due to the fact that
the Company has basically run out of cash. While the Company still hopes to
attract equity capital, rehire employees and continue its business plan, and
while the Company's officers are actively endeavoring to raise equity capital,
there can be no assurances that it will be able to do so. The remainder of this
Item 1 describes the Company's business on the assumption that the Company will
be able to continue its operations. Linkon Corporation, a Nevada corporation, is
a technology supplier to the telecommunications, Internet, cable and data
networking industries. The Company's software and hardware products feature a
"Universal Port" architecture that provides for efficient, multimedia
communications in large networked environments. Solutions incorporating Linkon
products have been created for applications such as interactive voice response
(IVR), voice activated dialing, call center automation and Internet telephony.
Linkon sells to original equipment manufacturers ("OEMs"), system integrators,
value added resellers ("VARs") and distributors.
Linkon Software includes the Link O/S(TM) Operating System, which
manages digital signal processing resources, memory, and software objects for
telephony, fax, modem, speech compression, recognition, verification and
synthesis. Linkon also offers a Direct Driver Interface for board-level
programming, a signaling server engine for connecting Linkon-based systems to a
variety of communications networks, as well as high-level application
development tools such as Teravox(R). Software applications include the
LinkNet(TM) IP (internet protocol) Telephony Software Suite and LinkNet(TM)
Gatekeeper Module.
Linkon Hardware includes the Maestro(TM) System, a modular and
scaleable Digital Signal Processing ("DSP")-based platform for processing voice,
fax, voice compression, modem, speech recognition and synthesis. The Maestro(TM)
System also provides public switched telephone network connectivity, echo
cancellation for IP Telephony applications, and computer bus and computer
telephony bus connectivity.
Linkon technology-based systems include the LinkNet(TM) IP Telephony
Gateway - a new offering for the rapidly growing Internet telephone market - and
the ESCAPE(TM) Enhanced Services Platform for the dynamic call center automation
market. Both products leverage Linkon's award-winning Maestro(TM) System
technology.
Linkon has formed relationships with a variety of technology suppliers.
These include Sun Microsystems, for whom Linkon is a value added reseller and
"Catalyst Partner"; IBM, for whom Linkon is an independent software vendor and
"Power Partner"; Lernout & Hauspie Speech Products, a leading provider of speech
recognition, synthesis and compression; Voxware, a compression software
provider; Syrinx Speech Products, an Australian speech recognition provider;
AumTech, a provider of application generation software; and Designer Labs, a
provider of Signaling System 7 services.
Customers to date include AT&T, BellSouth, Broken Hill Proprietary,
Sequel Communications, Frontier, Everbright Computer, Belgacom, Airtouch, US
West, Telco Solutions, West Interactive, US Department of Defense, Boeing,
Southwest Bell and TriGem Microsystems.
LinkNetwork Corporation is a wholly owned subsidiary of Linkon
Corporation. The Company's goal is to establish a global Internet Protocol (IP)
based voice and data network to deliver advanced IP telephony services through a
group of international partners ("LinkNetwork Partners"). LinkNetwork will
establish and operate several network nodes around the globe interconnected by
an IP network backbone. LinkNetwork Partners will purchase hardware and software
that enables them to connect to the LinkNetwork backbone. Once connected, the
Partners will be able to offer callers in their home countries calling rates
based on significantly lower cost structures of fully-deregulated markets --
like the US and the UK -- while leveraging the benefits of IP calling.
While Linkon has begun implementing LinkNetwork, and several nodes are
installed or under construction, the full implementation of the LinkNetwork
business plan will require capital funding beyond Linkon's current
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resources.
THE MARKET FOR IP TELEPHONY
From its humble beginnings as a hobbyist toy in early 1995, IP
Telephony has rapidly gained the potential to transform the $62 billion
international telecommunications business. During 1996, the industry reached
consensus on important interoperability standards and gained the strong backing
of major computer vendors. The remaining technical limitations are quickly being
addressed, and the stage is now set for a direct assault on the world's most
lucrative telecom markets. According to Action Information Services, a
Washington DC-based market research firm, the IP telephony industry will impact
Public Switched Telephone Network revenues by more than $8 billion from 1998
through 2001. According to Frost and Sullivan, the market for IP Telephony
Gateways will rise from a projected $200 million in 1998 to $1.7 billion in
2001, which translates into a compounded annual growth rate of 229%. The growth
in revenues is being driven mainly by toll-bypass and toll reduction
capabilities, rapid product quality improvements, the growth of the Internet and
intranets, the desire or need to conduct multimedia communications, and the
integration of voice and data into a single network.
TECHNOLOGY OVERVIEW
Linkon Hardware includes the Maestro(TM) System, a modular and
scaleable DSP-based platform for processing voice, fax, voice compression,
modem, speech recognition and synthesis. The Maestro(TM) System also provides
public switched telephone network connectivity, echo cancellation for IP
Telephony applications, and computer bus and computer telephony bus
connectivity.
Hardware-independent Architecture
A unique feature of the Maestro(TM) system is its bus-independent
design, which permits hardware flexibility on the part of system developers.
Linkon produces a variety of feature modules (similar in concept to PC-based
"daughter cards") about one fourth the size of a full-size PC board. The DSP
module contains the DSP and RAM resources required to perform the various voice,
speech and call processing applications. Other modules support analog signaling,
digital communications, and echo-cancellation. These modules are "plugged" into
a foundation card (similar in concept to a PC-based "motherboard") which is
computer bus specific.
This hardware architecture accomplishes the following important goals:
1. It lowers costs;
2. It provides an easy upgrade path;
3. It allows rapid product development;
4. It provides access to additional markets with the rapid growth of the
Internet; and
5. It permits an easy change in form factor.
Platform Flexibility
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 EISA/ISA, Sbus and PCI bus. Compact PCI bus foundation
cards are in development. 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. The Company believes that 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 three of the dominant computer
telephony bus architectures: PEB, SCSA and MVIP. A new H.100 Card is currently
in development. The capability to work on virtually any system bus combined with
the industry standard communication buses gives Linkon a degree of hardware
independence
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unmatched by any other third-party board supplier in the industry. When the
hardware independence is combined with the software capabilities, Linkon's
design approach becomes the most flexible approach to system integration on the
market.
The primary advantage of Linkon's products over those of other
technology suppliers is that the same hardware, with no modification, can be
used for all applications, including speech recognition, fax, modem,
text-to-speech, DTMF (touch tone) recognition, speaker verification, voice
compression, and IP Telephony (the sending of voice and fax communications over
IP-based networks). 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,
connectivity to IP networks and other features. This is in marked contrast to
the historical industry "shared resource" architecture comprised 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 speech 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. The competitor's offerings, when fully equipped, tend to be
significantly more expensive on a per-port basis.
DSP-based Software Algorithms
Computer telephony functions are shipped on CDs with the Maestro(TM)
System boards. Customers only pay for those algorithms (voice, for example)
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, the developer
can pay an incremental licensing fee and the additional algorithms can be
delivered on an additional diskette or downloaded via modem connection. No
system hardware changes are required. Linkon encourages third-party developers
to develop additional algorithms for its platform. The Maestro(TM) System 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.
Application Development Software
For high-level application development, Linkon provides TeraVox(R),
which is a set of UNIX extensions written in the "C" programming language.
TeraVox(R) provides system developers with the tools to rapidly create any call
processing application. TeraVox(R) is available and is supported under a number
of operating systems, including various versions of UNIX, such as Solaris from
Sun Microsystems.
Board-level Software
Link O/S(TM) is a board-level operating system that, when combined with
TeraVox(R), manages board and system-level resource allocation. Link O/S(TM)
supports dynamic allocation of application software functions to any port or
channel. Each channel can support any technology feature present in a given
system, providing 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(TM) insulates
developers from the specifics of different algorithms within each algorithm
class.
Third-Party Application Generator Software
Linkon has worked with several independent software development
companies to develop third-party application generator software packages which
permit software application development to be performed at the end-user level by
an individual having little or no experience with software development. 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.
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.
LINKON TECHNOLOGY-BASED PRODUCTS
Linkon currently has the following distinct product lines: The
LinkNet(TM) Gateway System; The Escape(TM) System; the fourth-generation
Maestro(TM) System (discussed above); and LinkNet(TM) SS7 Server.
THE LINKNET GATEWAY SYSTEM
The LinkNet Gateway System is based on Linkon's technical expertise, knowledge
and experience of implementing voice communication switching systems, network
signaling protocols and real-time communication requirements demanded by telecom
networks. The rapid development of the internet has introduced a new dynamic
market of Internet based voice and fax communications which requires the
creation of a new communication paradigm based in TCIP/IP communications and IP
switching. As the new paradigm progresses the convergence of traditional
telecommunication networks with the internet will be required.
This creates a requirement for a new class of communication and signaling server
hardware and software applications to make the two disparate networks work in a
homogeneous fashion. To accomplish this task a sophisticated level of "Carrier
Grade TCP/IP Computer Telephony" integration and the duplication of Class 4 and
5 level switch features on the platform is required.
Linkon's approach to achieve this goal is to use best of breed system
components, specialized systems integration services, and high powered UNIX
based server platforms. Linkon's engineering team architects the systems and
applies a real-time communication model to TCP/IP networking to approximate the
PSTN telecommunication network supporting voice and fax communications. Linkon
will test and evaluate all aspects of the project and work as part of a team to
implement and custom design a system which will meet your specifications.
The best of breed components include Linkon's Voice and Fax Internet telecom
software, Sun Microsystems servers incorporating digital signal processors
(Lucent's DSPs) with multiple industry standard real-time voice codec
transcoding for seamless PSTN to IP network communication. Linkon's signaling
server API which allows control of the telecom server via specialized network
control software including vendor supplied H323 and SS7. LinkNet internet driver
control is optimized for real-time data transfer from computer network
interfaces, and LinkVox suite of "C" APIs enabling full control of all functions
of the communication server and creation of enhanced service modules required
for messaging, network billing, call progress monitoring and detailed session
logging.
LinkNet utilizes Sun Microsystems imbedded Sparc processors and Solaris
operating system in custom server configurations to manage all aspects of the
communications servers, data base registration and network control via signaling
interfaces. Software systems are provided by third party integrators selected
and approved to be used with LinkNet's system architecture.
Desktop Web Phones and other multimedia telecommunication devices as well as
Java applications are integrated into the system architecture delivering full
telecommunication soft phone features. It is important to note that there are
many different "Web SoftPhones" on the market. The server can utilize different
software packages supporting different voice compression types as long as the
compression and signaling types are supported on the Linkon telecom server.
ARCHITECTURE
The LinkNet product is designed as an open system platform with a full set of
enabling technologies and API tool set supporting IP to PSTN communication
applications. LinkNet's Gateway product goal is to supply to OEMs, Telcos, ISPs,
CTI System Integrators and communication service providers with System
Development, Integration, and Engineering capabilities of a solid foundation to
build IP telephony communication products/application
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solutions. As the IP telephony market rapidly moves from the early adopter stage
of an emerging market the requirements for large scale reliable system platforms
will become an absolute necessity as new IP service revenues become mission
critical to major service providers. LinkNet's architecture is focused on the
mission critical applications with the same reliability of communication
services that the public switched networks offer today. To achieve this
reliability LinkNet is based on telco and ISP service provider proven system
platforms, signaling and operating systems. These platforms include UNIX
(Solaris) operating systems, Sun Microsystems Servers, Lucent DSPs, and SS7
signaling control. All of these system components are found in service
providers' networks and have proven their performance with a high level of
reliability. In addition to solid hardware there is an abundance of standard
network management software packages and standards based interfaces to other
operation and maintenance systems. It is Linkon's objective position that if a
new class of service provider is to generate new revenue streams by entering the
growing competitive market of telecommunication services the network
infrastructure has to be equivalent or better than existing networks. LinkNet is
positioned to take advantage of the best of the existing networks, price
advantage of open systems, and leveraging new communication software
applications. To fully understand the advantages of LinkNet's Gateway
Architecture you have to review the design criteria: 1) object oriented software
design with messaging interfaces, 2) hardware modularity, and 3) application
portability. To explain this architecture a discussion and description of the
gateway from the component level starting with the telecom interfaces, moving
through the DSP communication levels, to the highest application layer is
required. The following is a brief overview description of each of the Gateway's
component layers:
LINKNET SUN MICROSYSTEMS SPARC ADVANTAGE
SUN MICROSYSTEMS. Sun Microsystems architecture delivers a robust industry
standard data communication bus ideal for internet communications. SUN has the
experience and the installed based for internet gateways and a suite of powerful
RISC CPUs to support the demands of internet applications.
SUN MICROSYSTEMS TCP/IP NETWORK INTERFACES. Sun Microsystems is one of the
leading web and internet gateway servers on the market and one of the reasons is
the support of a number of different vendors providing networking interface
cards. These cards are proven performers in the data communication field and
support very high demand communication applications such as real time video.
Voice communication and the bandwidth required approximates the demands of video
and audio and the network communication equipment is there with a solid
reputation for 24x7 operation.
UNIX SOLARIS. Telecommunications infrastructure is based on Unix and Solaris is
an excellent operating system with a real-time kernel perfectly suited for
internet telephony.
REAL UNIX SERVERS. Sun Microsystems is a leader in Unix servers. Unlike other
computing platforms Unix and Sun are designed to work together. This eliminated
time consuming configuration and incompatible components. Real Unix servers
scale well and offer a variety of system sizes to meet all communication
requirements.
THE ESCAPE(TM) PLATFORM
The Linkon ESCAPE(TM) Voice Response Unit (IVR System) also utilizes
the Maestro(TM) System universal-port, DSP-based CTI boards and application
generation software. This hardware/software combination, built upon a fully
open-architected, telco-grade computer platform, provides great flexibility in
integrating previously disparate systems and emerging technologies.
With ESCAPE(TM), customers acquire a middleware system that applies not
just to current technologies, but also to emerging ones. ESCAPE(TM) enables the
exchange of information with other systems, regardless of whether they are old,
new, in-house, or third party. This allows a business to protect its existing
investments while reducing the costs associated with expanding services.
ESCAPE(TM) PLATFORM DESCRIPTION
The ESCAPE(TM) Platform utilizes its Maestro(TM) CTI architecture,
which enables the system to support either multiple channels of DTMF per DSP, or
"Universal Port" functionality supporting DTMF, Fax, Speech Recognition,
multiple voice compressions, modem, and Text-To-Speech.
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Use of the Maestro(TM) boards in these VRU's offers significant
advantages over competitive products. According to Computer Telephony Magazine,
"Maestro(TM) delivers the best price performance while maintaining the Company's
reputation of producing the telecom market's "most powerful" board.
In addition to the Maestro(TM) Boards and application generator
software, each ESCAPE(TM) System is built upon a Pentium based Industrial Rack
Mounted Computer. This computer provides redundant power supplies, remote
monitoring and optional RAID disk storage capability.
LINKNETWORK
LinkNetwork Corporation is a wholly owned subsidiary of Linkon Corporation. The
Company's goal is to establish a global Internet Protocol (IP) based voice and
data network to deliver advanced IP telephony services through a group of
international partners ("LinkNetwork Partners"). LinkNetwork will establish and
operate several network nodes around the globe interconnected by an IP network
backbone. LinkNetwork Partners will purchase hardware and software that enables
them to connect to the LinkNetwork backbone. Once connected, the Partners will
be able to offer callers in their home countries calling rates based on
significantly lower cost structures of fully-deregulated markets -- like the US
and the UK -- while leveraging the benefits of IP calling. Additionally,
LinkNetwork Partners that are able to terminate voice traffic in their home
markets will be able to generate income by providing this service to other
LinkNetwork Partners and third-party carriers. LinkNetwork will offer gateway
services to partners on a non-discriminatory basis and will charge a flat
transaction rate for these gateway services. In return for the transaction fee,
LinkNetwork partners will gain access to the lowest cost termination rates
available. The impetus to form LinkNetwork is a result of negotiation with
potential customers planning to deploy VoIP gateways in foreign countries.
LinkNetwork is currently working with its first Partner located in the
Philippines. The Company has executed letters of intent with additional Partners
in Greece, Bulgaria, Mexico and Peru. The LinkNet is offered in a variety of
configurations ranging in size from four to thousands of ports. The gateways are
modular and scaleable due to their open architecture and use of UNIX as an
operating system. Linkon is the leading maker of open, universal-port digital
signal processing (DSP) based communications boards for Sun Microsystems
computer platforms. Gateways turn circuit-switched voice transmissions into
"packetized" data transmissions. In order for a phone call to be completed, a
gateway is required on either side of the connection. In the infancy of Internet
Protocol (IP) telephony, two computers would connect over the Internet and then
converse. Because this required multimedia computers, specialized software and
technical expertise, the activity was limited to a few hobbyists. Technological
advances in VoIP hardware and software now enable individuals to utilize the
Internet for voice transmission using nothing more then a telephone. Using VoIP
to make phone calls has two distinct advantages. Phone calls placed over the
Internet do not incur the tariffs that a circuit switched phone call would
incur. In addition, digitizing voice transmissions allows users to add enhanced
services not possible with circuit-switched voice communications.
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The Network
The network configuration of LinkNetwork will consist of four switching nodes
("LinkNetwork Nodes") strategically co-located in carrier hotels throughout the
world. The Company has initially targeted New York, London, Los Angeles and Hong
Kong as LinkNetwork Node sites. The first two co-location sites are now being
constructed in New York and London. The Company anticipates adding Hong Kong and
Los Angeles by the middle of 1999. The Company will be responsible for
establishing and maintaining links to the public switched telephone networks in
these markets. The Company is also establishing a Network Operations Control
(NOC) facility and software applications development center in Manila. Partners
will purchase equipment, the LinkNet Gateway Switch, from the Company and secure
a data connection to the nearest LinkNetwork Node. Once established, a partner
will market its phone services to its own customer base. A typical Partner
client will access the service through the local Phone Company. Once the call is
received by the Partner's equipment, the call will be packetized and delivered
to the nearest LinkNetwork Node. That Node will be responsible for determining
the least cost routing schedule to terminate the call. By way of example, if an
individual in Europe who is a client of a LinkNetwork Partner wishes to make a
call to Chicago, he would access the LinkNetwork Partner's gateway, enter an
access number, and dial the number of the international destination. The call
would be received by the LinkNetwork Partner's gateway, which would packetize
the call and send it to the nearest LinkNetwork Node, in this case the UK. The
UK node would determine the least cost route to complete the call and terminate
it in Chicago. LinkNetwork would charge the Partner a flat fee for routing the
call along with the actual transmission cost; the LinkNetwork Partner would then
charge its client a fee for making the call.
The Market
The global market for international long distance calling is forecasted to be in
excess of $150 Billion in 1999. The market for LinkNetwork consists of
entrepreneurial foreign companies that wish to capture a portion of that market
by providing international telephone service that combines the significantly
lower cost structure of deregulated markets such as the United States and the
United Kingdom with the greater flexibility of the Internet Protocol. The
initial economic engine for LinkNetwork and its Partners will be toll-avoidance
and long-distance rate arbitrage. Given the enormous size of the market, and
remarkable changes generated by telecom deregulation, it is envisioned that
furnishing Partners the means to provide simple long distance telephone calling
functionality can generate significant revenue. If and when the arbitrage
opportunity ends, these Partners will be well positioned to benefit from the
next generation of IP-based enhanced services.
Ideal LinkNetwork Partners are foreign Internet Service Providers (ISPs),
calling card and callback marketing companies, cable television companies and
multi-national corporations with existing data networks.
Products and Services
LinkNetwork's primary source of revenue will be derived from providing backbone
network, switching and other services (collectively referred to as "Service") to
Partners. Service revenue will be generated by transaction fees charged on a
"minute of use" basis (MOU). There are several types of service that will
generate transaction fees. At the most basic level, every Partner that
interconnects to a LinkNetwork Node will either send or receive calls through
that node. These calls will, in all cases, require the use of a matching LinkNet
Gateway Switch ("switching") and varying amounts of network backbone
("network"). LinkNetwork will charge a transaction fee for each MOU for these
components. Additionally, Partners will be able to offer their customers certain
enhanced services such as debit calling cards, travel cards, voice mail and
unified messaging. In some cases, these services will be performed on the
Partner's equipment. In other cases, these services will be performed on the
Company's equipment and the Company will charge additional transaction fees
accordingly. Other services include technical support for the gateway equipment
and the consulting and integration associated with installation, billing,
customer care and OAM&P (Operation, Administration, Maintenance and
Provisioning) that will be required by Partners. The company will also provide
the Hardware and Software needed by Partners. Hardware includes LinkNet Gateway
Switches and miscellaneous networking equipment. Software includes calling card
and other enhanced services software modules. Typical enhanced services could be
interactive voice response units, voice mail, fax mailbox, or unified messaging.
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Differentiators
The Company views the following items as key success factors. These matters
reflect the Company's unique approach that affords it a greater likelihood of
success.
Flexibility
Unlike other "partner" programs, LinkNetwork will afford its Partners
significant flexibility to make independent business decisions. LinkNetwork
views itself only as a facilitator. LinkNetwork does not compete with its
Partners by selling and/or reselling their services. This is a major point of
differentiation between LinkNetwork and all of the other companies engaged in
the VoIP network business. Among other things, LinkNetwork gives Partners
complete control of the prices that are charged for their services. Partners can
make deals with their own customers such that the commercial arrangement will be
exclusively between them. Moreover, Partners are not required to use
LinkNetwork's international termination services, and are free to make deals
with any carrier they wish. In practice, the Company expects that most Partners
will want LinkNetwork to assist in procuring inbound termination customers and/
or to act as a collection/settlement agent on their behalf - at least during the
start-up phase of the business. The Company believes that simple economics will
cause Partners to use its termination services as the Company intends to pass
its direct costs for these services to its Partners. The Company will benefit
from substantial volume discounts resulting from the aggregation of traffic
generated by multiple Partners.
SS7/C7 Signaling
Telephone company central offices use a signaling technology standard set by the
ITU. Termed SS7 in the US and C7 internationally, this standard provides call
control, routing and billing in large systems. The LinkNet gateway is fully able
to interoperate using this technology. To its knowledge, Linkon is the only
provider of VoIP equipment that has ISUP and TCAP gateways in commercial
deployment.
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, development and software
costs of approximately $692,573 and $608,874 for the fiscal years ended January
31, 1999 and 1998 respectively. 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.
Linkon product strategy calls for products with an "OPEN" architecture
design. 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.
The Company's R&D strategy is to have strong in-house design and
engineering capability, but also to utilize state-of-the-art technology houses
to develop long lead-time leading edge technology. Some examples are
arrangements with Designer Labs for SS7 signalling solutions, Aumtech for
application generator software and Lernout & Hauspie, for Speech Recognition
and Text to Speech.
TECHNOLOGY RELATIONSHIPS
The Company's strong technology and quality product design have led to
several technology relationships over the last few years. The more significant
relationships are outlined below. Given its limited size and resources, Linkon
has relied upon these and other third parties to develop technology necessary
for the Company's products.
Aumtech
AumTech is a provider of application generation software for the ESCAPE
Platform, having ported its software product to the Maestro System's boards. The
Aumtech software is used by Linkon's customers to develop
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interactive voice response applications for call center environments.
IBM
Linkon supports IBM's AIX operating system, allowing the Maestro
System's boards to functionally operate in IBM's flagship RS/6000 Telecom Server
product. The marriage of the Maestro System's Boards and the RS/6000 Telecom
Server from IBM creates a powerful and highly scaleable platform for creating
computer telephony enhanced services, such as fax-on-demand and other leading
voice and fax processing applications, including voice dialing, unified
messaging, speech controlled interactive voice response, email reading, and
Internet Telephony/Fax Gateways. The IBM RS/6000 is one of the world's leading
servers with an installed base of over 500,000 units worldwide.
Designer Labs
Designer Labs is a telecommunications software company based in New
Hampshire that specializes in intelligent network, or Signaling System 7
("SS7"), solutions for switched circuit and IP-based services. SS7 is
essentially a data network that runs parallel to the network of switches that
carry voice traffic over the public switched telephony network. The SS7 network
provides for a "signaling layer" that carries information about line and phone
status conditions (busy, out of service, etc.) between switches in the network
thereby helping to make the network more efficient and intelligent. SS7 also
uses specialized databases that contain call routing information, making it
possible, for example, for a telephone switch to route a call to a secondary
phone number if the primary number is unavailable. Designer Labs has partnered
with Linkon to develop SS7 signaling services that allow SS7 to be harnessed as
a signaling mechanism for the transport of voice over IP networks. This allows
Linkon's LinkNet Gateway to offer the same intelligent network services for IP
Telephony network applications.
Opus/ Mockingbird
Linkon and Opus/ Mockingbird Networks signed a joint agreement to merge
their technologies and is in development of a next-generation high density
hybrid IP/telephony platform technology for the carrier market. The relationship
provides for the ability to significantly improve enhanced messaging services
and increasing port densities, to expanding system scalability and lowering
costs.
Sun Microsystems Computer Company
Linkon is the only computer telephony board-level company currently
shipping a communications board for the Sun S-bus as well as PCI bus
architectures, making it compatible with Sun's Ultra SPARC, Netra and FT1800
server systems. As a result, developers of call processing applications for Sun
systems can use Linkon products. Sun is making an increased sales effort into
the computer telephony and call-processing industry, enlarging this opportunity.
In March 1996, Sun introduced a CTI server utilizing Linkon technology. In June
of 1997, Linkon introduced the LinkNet System based upon the Sun hardware and
software architecture. In January of 1998, Linkon became a Sun Authorized
Reseller, which enables Linkon to build and deploy complete systems based upon
the Sun platform.
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, speaking engagements and
presentations by Linkon personnel at leading industry conferences and seminars,
demonstrations of Linkon technology with companies who are key prospects for
strategic relationships, and direct mail campaigns.
Although the Company'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
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issues have been addressed with the Maestro(TM) System 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.
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 Company is directly targeting the Call Center market for sales of
the ESCAPE(TM) IVR platform. The primary sales targets for the Company's
component level products are VARs, Systems Integrators ("SI"), OEMs and
telephone companies.
In January 1998 Linkon was approved as an Authorized Sun Microsystems
Reseller, allowing the Company to resell Sun Microsystems' entire product line
to customers. As a benefit of this relationship, Sun Microsystems provides a
number of marketing programs for Linkon to leverage off of. Specific activities
include exhibiting in Sun partner pavilions at leading Internet, CTI and telecom
trade shows, joint email and fax blasting, direct mail campaigns, sales support,
technical support, introductions to other resellers, special events and
technology briefings, and public relations support.
Distributors
The Company is seeking to develop relationships with independent firms
to carry the Company's products both domestically and internationally. The
Company currently has relationships with distributors in the United States,
Korea, Philippines and Spain.
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 its own name. It is contemplated
that these arrangements will usually involve training, volume discounts and
minimum purchase commitments. As of the date hereof, the Company sells to
several OEMs.
Direct Sales
The company sells directly to a number of accounts, including AT&T. As
awareness of the technological advantages of the company's ESCAPE(TM) IVR
Platform and Maestro(TM) System products grow in the market, it is expected that
the percentage of direct sales versus OEM/VAR and SI sales will grow
significantly in proportion.
INTERNATIONAL SALES
Linkon is in the process of negotiating distribution agreements for the
Philippines, Spain, France and China.
KEY CUSTOMERS
Three of the Company's customers accounted for approximately 77% of
revenues for the year ended January 31, 1999. Management believes that future
sales will come from:
1. Sales of the LinkNet(TM) IP Telephony Gateway Server to customers such as
competitive local exchange carriers, next generation telecom companies and
prepaid calling card companies.
2. Sales of voice and fax transport services through LinkNetwork.
3. Sales of the ESCAPE(TM) IVR platform into the Call Center environment.
4. VARs, Sis and OEMs who will develop or private label their own platforms
using Linkon
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technology, and in essence, will resell the Company's products to end
users.
AT&T
The Company's largest customer is AT&T. The group within AT&T that
utilizes the Company's products provides call center operations to service
AT&T's 800 number customers. AT&T's call center application consists of the
ESCAPE(TM) Platform supporting over 5000 lines of telephone service. In fiscal
1999, AT&T purchased approximately $2,500,000 of this product from Linkon.
Sequel Communications
Sequel Communications is a facilities-based telecommunications provider
offering a wide range of communications solutions. Established in April, 1994 as
a wholly-owned subsidiary of Sequel Concepts, Sequel Communications was created
to take advantage of the growing worldwide demand for telecommunications
services while leveraging the company's expertise as a systems integrator and
vertical software developer and its strong ties with Southeast Asia. As such, it
is situated to benefit from the surging demand for telecommunication services
presented by countries in this region which will account for more than one half
of all telephones put into service worldwide over the coming decade. In fiscal
1999, Sequel Communications purchased and deployed approximately $500,000 of the
LinkNet(TM) Gateway product in a network from the U.S. to the Philippines.
Magenta
In fiscal 1999, Magenta purchased and deployed approximately $400,000 of Linkon
Maestro products.
TeleTower, Inc.
In fiscal 1999, TeleTower purchased and deployed approximately $100,000
of LinkNet Gateway products, and has signed a Volume Purchase Agreement for $3M
of LinkNet Gateway products over a 15 month period. Created in 1996, Tele Tower
is a privately held corporation based in Flushing, NY. Their extensive network
includes points of presence in USA, UK, Mexico, South America and Asia. They
have strategic alliances with various TIER-I and TIER-II carriers to provide
reliable and cost-efficient global telecom coverage. Customers include prepaid
and debit card companies, call-back carriers, cellular operators and Internet
Service Providers.
BACKLOG
As of February 1, 1999, Linkon had a backlog of approximately $263,000,
all of which was for product to be shipped during the first quarter of fiscal
1999. As of May 6, 1999, the Company had a backlog of approximately $140,000 to
be shipped during the first and second quarters of fiscal 1999.
CUSTOMER SUPPORT AND WARRANTY
The Company offers a two year warranty on all products and services.
Customers are entitled to receive telephone hotline access, field support and
periodic software updates. Customers return defective product for repair to
Linkon. Costs incurred as a result of "In Warranty" repairs and returns have not
been material in the past.
COMPETITION
The Company's markets are extremely competitive. Competitors to the
Company's various product lines include:
For the Maestro(TM) System products, Dialogic Corporation, Rhetorex, a
division of the Octel Division of Lucent, Brooktrout Technology, Inc. and
Natural Microsystems, Inc., among others, are substantial hardware competitors
of the Company.
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For the Escape(TM) Platform products, Conversant, a division of Lucent
Technologies, Brite Voice, Intervoice, Periphonics, and Syntellect manufacture
IVR systems.
For the LinkNet System products: Dialogic Corporation, Natural
Microsystems, Analogic Corporation and Brooktrout Technology, Inc. have
introduced competing IP telephony hardware/software components. For LinkNet
Gateway (server) products: Netspeak, Vocaltec, e- Net, Franklin Telecom, Netrix,
Nu-Era, Science Dynamics, Inter-Tel, Vienna Systems and other companies as well
as several proprietary products companies have built competing IP Telephony
gateway products that utilize components from one or more of the companies
listed above.
For LinkNetwork; ITXC, Delta Three, Inter-Tel, IDT, VIP Calling, F-Net
and Coyote Networks.
Management believes that its products possess certain competitive
advantages. 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 conjunction with other modalities. The
Company's software is scaleable to a high density. In addition, the Company's
LinkNet(TM) product is at present the only Sun Microsystems's SPARC and
Solaris-based IP Telephony Gateway on the market - a factor that provides Linkon
with a distinct competitive advantage in the telecommunications and Internet
services marketplace. 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. The Company does
not presently possess a meaningful market share in the voice processing industry
and many of the Company's competitors have greater financial and other resources
and more substantial marketing capabilities than the Company.
PATENTS, TRADEMARKS & COPYRIGHTS
The Company's computer board design and code are proprietary and a
trade secret. The Company has obtained no patents or registered any copyrights
for any of its products.
The Company has obtained a registration for its TERAVOX(R) trademark
from the U.S. Patent and Trademark Office and intends to seek source code
copyright protection on its future operating systems and utilities.
On February 10, 1998 the Company entered into a TXG-NX Field Deployable
Software License Agreement, TXG-NX Lab Deployable Software License Agreement and
a USP Library Software License Agreement with Designer Labs, llc. Each of such
license agreements are non-exclusive and permit the Company to use and sell
certain computer software in connection with the development and sale of the
Company's products. The terms of the licenses vary from approximately one year
to perpetual unless terminated by the Company or, in the event of a breach by
the Company of any the terms of the applicable license agreement, by Designer
Labs, llc.
The Company has also entered into a world-wide, non-exclusive license
agreement to use or incorporate in products sold by the Company certain computer
software, patents, trademarks and copyrights owned by Aumtech Limited related to
applications generation and service creation for use in voice processing
systems. This license is for a two-year term ending December 1999 and is
renewable for successive one-year terms upon mutual written consent of the
parties.
EMPLOYEES
As of May 6, 1999 the Company employed 28 persons: 4
executive, 9 technical, 5 sales and marketing, 5 operations and 5
administrative. There is no union contract relating to employees nor does the
Company anticipate there to be unionization of its employees. On May 10, 1999,
Linkon laid off all but one employee (an administrative employee) because it did
not have the cash on hand to meet further payrolls. While the Company hopes to
raise equity capital and hire many of its employees back in the near future,
there can be no assurances that the Company will have the financial wherewithal
to rehire its employees. In addition, while the Company believes
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that its relationship with these former employees is generally positive, there
can be no assurances that any or all of these employees would come back to work
for the Company if the Company were to offer them reemployment.
ITEM 2. PROPERTIES
The Company currently leases approximately 6951 square feet of office
and laboratory space in Fairfield, Connecticut, pursuant to a 1 year lease
extension expiring on August 31, 1999 at an annual rental of $135,396. The
facility has capacity for expansion and is deemed sufficient for the Company's
foreseeable needs. The Company is currently 2 months late with its lease
payments. The Company is currently negotiating with the landlord for an
extension at the same time that it is reviewing whether it wishes to attempt to
extend its lease for an additional period of time or to relocate. However, the
Company's working capital position may make it difficult to secure a lease with
a new landlord.
ITEM 3. LEGAL PROCEEDINGS
By complaint dated January 4, 1999, Syrinx Speech Systems Pty. Limited
commenced a civil action against Linkon in the Connecticut Superior Court,
Syrinx Speech Systems Pty. Ltd. v. Linkon Corp., CV-99-0358989-S, alleging
payment due and owing on invoices for services performed. In conjunction with
and based upon the complaint, Syrinx applied for a prejudgment attachment
against Linkon in the amount of $1 million. Following negotiations, including
with respect to the quality and nature of services performed and to be performed
by Syrinx, Linkon and Syrinx entered into a settlement agreement dated April 5,
1999. Under the terms of the settlement agreement, Linkon agreed to have
judgment entered against it in the amount of $802,500.00, and judgment in that
amount has been entered against Linkon. As part of the settlement agreement,
Syrinx agreed that it will not execute upon the judgment until June 1, 1999,
provided that Linkon remains in compliance with the conditions of the settlement
agreement, which include that Linkon make an installment payment of $30,000 by
May 1, 1999 (which was paid) and pay to Syrinx an adjustable percentage of new
equity investment toward satisfaction of the judgment. In the event Linkon fails
to comply with the conditions of the settlement agreement, or fails to satisfy
the judgment amount of $802,500.00 (of which $40,000 has been paid) by May 31,
1999, Syrinx is entitled to execute immediately upon the judgment and shall be
entitled to recover from Linkon the amount of the judgment (less any payments
made by Linkon toward the judgment pursuant to the settlement agreement), plus
reasonable costs of execution, including attorneys' fees. Until such time as the
judgment amount of $802,500.00 is paid to Syrinx in accordance with the terms of
the settlement agreement, the restrictions set forth in the settlement agreement
remain in effect, including that Linkon will not incur or assume debt,
encumbrances, liens, conditional sales, lease commitments or a disposal of
assets except as provided for in the settlement agreement.
In a separate matter, Linkon has entered into a settlement agreement
with Devendra Bhagat ("Bhagat"). In response to a demand for payment on a
Convertible Subordinated Debenture previously issued to Bhagat by Linkon in the
amount of $100,000.00, Linkon agreed to make payment on the debenture. By
agreement dated December 22, 1998, Linkon agreed to pay Bhagat $106,335.62 in
principal and interest in four (4) installments, the last installment to be paid
no later than May 17, 1999. Linkon has paid the first three (3) installments in
the aggregate amount of $78,616.44, leaving a balance of $25,219.18. As part of
the consideration for the settlement agreement with Bhagat, Linkon signed an
affidavit of confession of judgment which would allow Bhagat, upon a default by
Linkon under the settlement agreement, to have judgment entered in New York
Supreme Court against Linkon for any remaining balance due under the December
22, 1998 settlement agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
N/A
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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". Its stock symbol is "LKON". 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.
<TABLE>
<CAPTION>
Fiscal Year Ending January 31,
------------------------------------------------------------------
1999 1998
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st quarter 3.656 0.45 2.625 1.0625
2nd quarter 2.875 1.375 1.3125 0.75
3rd quarter 1.656 0.50 1.125 0.625
4th quarter 1.906 0.406 0.9375 0.50
</TABLE>
As of May 6, 1999, there were 594 shareholders of record of the Common
Stock of the Company. The Company estimates, based on prior shareholder
mailings, that holdings in "street name" represent approximately 2800 additional
beneficial shareholders.
The Company has not declared any dividends since its inception and, due
to its anticipated need 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. In addition, the Company is contractually
prohibited from paying dividends without the approval of the Company's principal
lender.
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SALES OF THE COMPANY'S SECURITIES DURING FISCAL 1999
The following is a description of transactions in which the Company
sold its securities during the fiscal year ended January 31, 1999 , not
previously reported on the Company's Quarterly Reports on Form 10-QSB;
1) On November 17, 1998, the Company completed a debt
financing in the amount of $200,000, secured by a 6 month Promissory Note in
favor of James Scibelli. As a part of the transaction, the Company issued 40,000
Warrants at an exercise price of $0.50.
2) On December 9, 1998, the Company completed a debt financing
in the amount of $300,000, secured by a 6 month Promissory Note in favor of
Woodland Partners. As a part of the transaction, the Company issued 60,000
Warrants at an exercise price of $0.50.
See "Item 6. Management's Discussion and Analysis of Plan of Operations
- -- Liquidity and Capital Resources" for a more detailed discussion of securities
sold by the Company during and after the fiscal year ended January 31, 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The following discussion concerning the Company's net income, revenues,
cost of goods sold, selling, general and administrative expenses and research,
development and software, does not take into account the future trends that
would (absent the Company being able to raise additional capital) arise from the
fact that the Company is, as of May 11, 1999, basically out of cash. See
"Liquidity and Capital Resources" below.
NET INCOME
The Company reported a net loss of $2,686,779 for fiscal 1999 as
compared to a net loss of $1,647,135 for the prior fiscal year. This increase in
the net loss reported by the Company was primarily due to the following three
factors:
1. Selling, general and administrative expenses increased by
approximately $914,000 (or 34%) during fiscal 1999, primarily
due to a decision by the Company to materially increase its
sales, marketing and customer support staff.
2. Research and Development expenses increased by approximately
$114,000 (or 44%) during fiscal 1999, primarily due to a
decision by the Company to materially increase its engineering
staff.
3. Gross Margin decreased from 42% in fiscal 1998 to 33% in
fiscal 1999.
REVENUES
For the year ended January 31, 1999, revenues increased approximately
$381,402 from the year ended January 31, 1998, from $3,862,594 to $4,243,996, an
increase of 10%. This increase was due mainly to increased revenues from the
LinkNet product line, the Company's new product line.
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 $2,853,592 and $2,227,528 for the years
ended January 31, 1999 and 1998 respectively. This constituted approximately 67%
and and 58% of revenues for the years ended January 31, 1999 and 1998,
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 $2,469,112 and $1,842,064, or 58% and 48% of
revenues, for the years ended January 31, 1999 and 1998 respectively.
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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, with software
having little or no material cost (approximately 5-10% excluding amortization).
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 higher margins, management 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 years ended January 31,
1999 and 1998, were $384,480 and $385,464 respectively. These amounts were 9%
and 10% of revenues for the years ended January 31, 1999 and 1998, respectively,
and are included in the Cost of Goods Sold total percentage of 67% and 58% for
the above periods being presented.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the fiscal years ended
January 31, 1999 and 1998 were $3,638,681 and $2,723,876 respectively. This
constituted approximately 86% and 71% of revenues for the fiscal years ended
January 31, 1999 and 1998, respectively. This increase for fiscal 1999 when
compared with fiscal 1998 was due primarily to increased staffing in Sales,
Marketing and Customer Support, expenditures for Marketing and Advertising
programs for the Escape(TM) and LinkNet(TM) products and LinkNetwork(TM), and
legal and administrative costs associated with the RG Financing (see Liquidity
section). Assuming that the Company is able to raise equity capital and continue
operations, the Company expects selling, general and administrative expenses to
increase in the future as sales volume increases.
RESEARCH, DEVELOPMENT AND SOFTWARE
The Company incurred research, development and software costs of
approximately approximately $692,573 and $608,874 for the fiscal years ended
January 31, 1999 and 1998 respectively. This increase of approximately 14% was
primarily due to an increase in engineering staff and related services. These
amounts consist of internal salaries, outside consulting services, equipment and
fixed overhead costs.
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, including the exercise of warrants, interest earned
from the investment of such proceeds in interest earning assets, factoring
facilities and revenues from operations. During fiscal 1999, net cash used in
operating activities was $2,426,476, net cash provided by financing activities
was $2,514,576, and net cash used for investment activities (the purchase of
equipment) was $223,465. This resulted in a net decrease in cash during fiscal
1999 of $135,365, reducing the Company's cash and cash equivalents from $511,961
as of January 31, 1998 to $376,596 as of January 31, 1999. However, due to the
fact that the Company's net loss for fiscal 1999 was $2,686,779, and that the
Company's net cash used in operations was $2,426,476, the Company had a working
capital deficit (current assets less current liabilities) as of January 31,
1999, of $1,074,473 as compared to a
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working capital deficit of $815,241 as of January 31, 1998. Therefore, as of
January 31, 1999, the Company's working capital position was severely impaired.
As of May 11, 1999, the Company had cash on hand of approximately $50,000.
The Company needs to raise cash through financing activities
(presumably through the sale of equity securities) in the very near future in
order to be able to fund its continuing losses. In fact, if the Company is not
able to raise a substantial amount of equity capital by the end of May, 1999, it
will probably have little choice other than allowing its assets to be seized by
creditors or seeking protection under federal bankruptcy law.
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 initial term of the Imperial Agreement was one year. On
March 19, 1999, the Imperial Factoring Agreement was extended for one year.
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 consummated an equity and debt financing
transaction with RG Capital Fund LLC (the "RG Fund"). The equity financing piece
of the financing involved the sale, pursuant to a subscription agreement, to the
RG Fund and ten outside investors (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
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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 accounts 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 fiscal 1999, one of the holders of convertible subordinated notes
issued by the Company in the principal amount of $50,000, and one of the holders
of convertible subordinated notes issued by the Company in the principal amount
of $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 such
holder upon such conversions and cancelled each of such notes. A fifth holder of
similar convertible subordinated notes issued by the Company in the principal
amounts of $100,000 agreed after negotiations with the Company to a payout
schedule for the principal amount of $100,000 plus interest in four installments
in December, 1998, March 1999, April 1999 and May 1999.
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).
20
<PAGE> 21
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 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.
On November 17, 1998, the Company completed a debt financing in the amount of
$200,000, secured by a 6 month Promissory Note in favor of James Scibelli. As a
part of the transaction, the Company issued 40,000 Warrants at an exercise price
of $0.50.
On December 9, 1998, the Company completed a debt financing in the amount of
$300,000, secured by a 6 month Promissory Note in favor of Woodland Partners.
As a part of the transaction, the Company issued 60,000 Warrants at an exercise
price of $0.50.
During the period of 2/1/99 and 4/30/99, the Company has raised approximately
$380,000 through a combination of stock option and warrant exercises and short
term debt financing.
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 also anticipates that a full buildout of the LinkNetwork business
plan will require capital funding beyond Linkon's current resources.
The Company does not believe that, except as stated herein, and as described in
Item 3 above, 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 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. The Company believes, after investigation,
that its own software operating systems are Year 2000 compliant. The Company has
also just successfully completed an upgrade to the Escape platform sold to its
largest customer, AT&T, for Y2K compliance. Funds for such costs have not been
reserved for, and therefore as expended, will have a direct negative impact on
21
<PAGE> 22
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."
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included herein commencing on Page F-1.
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, 1999 and
1998.
22
<PAGE> 23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this Item is incorporated herein by
reference to the sections entitled "Proposal No. 1 -- Election of Directors --
Executive Officers of the Company" and "-- Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's Definitive Proxy Statement to be filed
with the Commission within 120 days after January 31, 1999.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by
reference to the sections entitled "Proposal No. 1 -- Election of Directors --
Compensation of Directors" and "-- Executive Compensation" of the Company's
Definitive Proxy Statement to be filed with the Commission within 120 days after
January 31, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management" of the Company's Definitive Proxy Statement to be filed
with the Commission within 120 days after January 31, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by
reference to the section entitled "Proposal No. 1 -- Election of Directors --
Certain Relationships and Transactions" of the Company's Definitive Proxy
Statement to be filed with the Commission within 120 days after January 31,
1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS.
The following financial statements are included in Part II, Item 7:
<TABLE>
<S> <C>
Index to Financial Statements and Schedules F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - January 31, 1999 and 1998 F-3
Consolidated Statements of Operations - Two years ended F-4
January 31, 1999 and 1998
Consolidated Statements of Cash Flows - Two years ended F-5
January 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity - Two years ended F-6
January 31, 1999 and 1998
Notes to Financial Statements F-7
</TABLE>
(b) REPORTS ON FORM 8-K None
23
<PAGE> 24
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Document
--- -----------------------
<S> <C>
3.1 Restated Articles of Incorporation (incorporated by reference
to Exhibit A to the Company's Proxy Statement, dated February
24, 1997).
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, as
amended by Exhibit 3.1 to the Company's Form 10-QSB for the
quarter ended April 30, 1998).
4.1 Linkon Corporation 1996 Stock Option and Performance Incentive
Plan (Incorporated by reference to Exhibit B to the Company's
proxy statement, dated February 24, 1997).
4.2 Promissory Note, dated April 6, 1998, by the Company in favor
of RG Capital Fund LLC, in the principal amount of
$1,100,000(incorporated by reference to the Company's Form
10KSB for the fiscal year ended January 31, 1998).
4.3 Warrant Certificate, dated April 6, 1998, by the Company in
favor of Roberts & Green, Inc. (incorporated by reference to
the Company's Form 10KSB for the fiscal year ended January 31,
1998).
4.4* Promissory Note, dated November 17, 1998, by the Company in
favor of James Scibelli, in the principal amount of $200,000.
4.5* Promissory Note, dated December 9, 1998, by the Company in
favor of Woodland Partners, in the principal amount of
$300,000.
4.6* Warrant Certificate, dated December 9, 1998, by the Company in
favor of James Scibelli.
4.7* Warrant Certificate, dated December 9, 1998, by the Company in
favor of Woodland Partners.
10.1 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).
10.2 Subscription Agreement, dated April 6, 1998, between the
Company and RG Capital Fund LLC (incorporated by reference to
the Company's Form 10KSB for the fiscal year ended January 31,
1998).
10.3 Form of Subscription Agreement, dated April 14, 1998, between
the Company and each of the investors party thereto that was
designated by RG Capital Fund LLC(incorporated by reference to
the Company's Form 10KSB for the fiscal year ended January 31,
1998).
10.4 Warrant Agreement, dated April 6, 1998, between the Company
and Roberts & Green, Inc. (incorporated by reference to the
Company's Form 10KSB for the fiscal year ended January 31,
1998).
10.5 Registration Rights Agreement, dated April 6, 1998, among the
Company, RG Capital Fund LLC
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C>
and Roberts & Green, Inc.(incorporated by reference to the
Company's Form 10KSB for the fiscal year ended January 31,
1998).
10.6 Investment Banking and Financial Advisory Services Agreement,
dated April 6, 1998, between the Company and Roberts & Green,
Inc.(incorporated by reference to the Company's Form 10KSB for
the fiscal year ended January 31, 1998).
10.7 Release and Termination Agreement, dated April 6, 1998,
between the Company and IBJS Capital Corporation.(incorporated
by reference to the Company's Form 10KSB for the fiscal year
ended January 31, 1998).
10.8 Agreement for Purchase of Receivables, dated March 19, 1998,
between the Company and Imperial Bank(incorporated by
reference to the Company's Form 10KSB for the fiscal year
ended January 31, 1998).
10.9 Purchase Order Addendum to Agreement for Purchase of
Receivables, dated March 26, 1998, between the Company and
Imperial Bank(incorporated by reference to the Company's Form
10KSB for the fiscal year ended January 31, 1998).
10.10 Commercial Lease, dated June 17, 1997, by and between 140
Sherman Street, LLC and the Company(incorporated by reference
to the Company's Form 10KSB for the fiscal year ended January
31, 1998).
10.11 Form of Incentive Stock Option Agreement under the Company's
1996 Stock Option and Performance Incentive Plan(incorporated
by reference to the Company's Form 10KSB for the fiscal year
ended January 31, 1998).
10.12 Form of Non-Qualified Stock Option Agreement under the
Company's 1996 Stock Option and Performance Incentive Plan.
10.13* Commercial Lease Amendment, dated May 11, 1998, by and
between 140 Sherman Street, LLC and the Company.
10.14* Employment Agreement dated May 19, 1998 between the Company
and Mr, Lee W. Hill.
10.15* Employment Agreement dated May 19, 1998 between the Company
and Mr. Charles Castelli.
10.16* Employment Agreement dated March 19, 1998 between the Company
and Mr. Thomas V. Cerabona.
10.17* Engagement Agreement, dated February 12, 1999, between the
Company and Morgen Evan and Co.
27.1* Financial Data Schedule.
</TABLE>
* filed herewith
25
<PAGE> 26
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 12th day of May, 1999.
LINKON CORPORATION
By:/s/ Lee W. Hill
---------------------------------------
Lee W. Hill, Chief Executive
Officer, President and Director
By:/s/ Thomas V. Cerabona
---------------------------------------
Thomas V. Cerabona, Vice President
of Operations, Chief Accounting Officer
and Secretary
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 May 12, 1999
- ----------------------------- Board of Directors
Charles Castelli
/s/Daniel Zwiren Director May 12, 1999
- -----------------------------
Daniel Zwiren
Director May 12, 1999
- -----------------------------
Joao Carvalho
/s/ Lee Hill Chief Executive May 12, 1999
- ----------------------------- Officer, President
Lee W. Hill and Director
</TABLE>
26
<PAGE> 27
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
LINKON CORPORATION
Index to Financial Statements and Schedules F-1
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - January 31, 1999 and 1998 F-3
Consolidated Statements of Operations - Two years ended F-4
January 31, 1999 and 1998
Consolidated Statements of Cash Flows - Two years ended F-5
January 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity - Two years ended F-6
January 31, 1999 and 1998
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders
Linkon Corporation
Fairfield, Connecticut
We have audited the accompanying consolidated balance sheets
of Linkon Corporation as of January 31, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the 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, 1999 and 1998 and the results of operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in the
notes to the financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in the notes to the financial statements.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Radin Glass & Co., LLP
Radin Glass & Co., LLP
Certified Public Accountants
New York, New York
March 10, 1999
F-2
<PAGE> 29
LINKON CORPORATION
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents (NOTE 3): 376,596 511,961
Accounts Receivable (NOTE 3): 191,358 37,135
Inventory (NOTE 3): 879,366 400,625
Other Receivables -- 1,972
Prepaid Expenses 20,496 16,773
------------ ------------
Total Current Assets 1,467,816 968,466
------------ ------------
MACHINERY & EQUIPMENT (NOTE 3):
Machinery & Equipment, at cost 1,629,018 1,430,553
Less: Accumulated Depreciation (1,227,467) (1,020,066)
------------ ------------
Machinery & Equipment, net 401,551 410,487
------------ ------------
OTHER ASSETS
Software - Net (NOTE 3): 894,845 957,200
Investments, at cost 25,000 --
Prepaid Financing Costs 7,843 18,300
Security Deposits 18,563 10,688
------------ ------------
946,251 986,188
------------ ------------
$ 2,815,618 $ 2,365,141
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts Payable 1,341,743 591,538
Taxes Payable (NOTES 5 AND 9): 1,000 1,377
Interest Payable (NOTE 7,8 AND 9): 54,245 234,865
Customer Advances 216,128 154,679
Accrued Expenses 369,495 451,248
Notes Payable 559,678 350,000
------------ ------------
Total Current Liabilities 2,542,289 1,783,707
------------ ------------
LONG TERM LIABILITIES
Notes Payable (NOTE 8): 1,020,094 957,328
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 4):
Common Stock. $.001 Par Value, 24,900,000
shares authorized, 13,521,578 shares
issued and outstanding (1999),
10,897,252 shares issued and outstanding (1998) 13,522 10,897
Prefered Stock, $.001 Par Value
1,000,000 shares authorized, none issued
and outstanding -- --
Capital in Excess of Par Value 11,717,549 9,404,266
Accumulated Deficit (12,477,836) (9,791,057)
------------ ------------
Total Stockholders' Deficit (746,765) (375,894)
------------ ------------
$ 2,815,618 $ 2,365,141
============ ============
</TABLE>
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-3
<PAGE> 30
LINKON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31,
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues (NOTE 2): 4,243,996 3,862,594
Cost of Goods Sold
Product 2,469,113 1,842,064
Software Amortization (NOTES 3): 384,480 385,464
------------ ------------
Gross Margin On Sales 1,390,403 1,635,066
------------ ------------
Selling, General and
Administrative Expenses 3,638,681 2,723,876
Research and Development 370,448 256,877
Provision for Doubtful Accounts 40,563 33,724
------------ ------------
4,049,692 3,014,477
------------ ------------
Operating Loss (2,659,289) (1,379,411)
------------ ------------
OTHER INCOME (EXPENSE)
Interest Income 9,722 326
Interest Expense (146,126) (264,050)
------------ ------------
(136,404) (263,724)
------------ ------------
Loss Before Income Taxes (2,795,693) (1,643,135)
Income Taxes (1,000) (4,000)
------------ ------------
Loss Before Extraordinary Item $ (2,796,693) $ (1,647,135)
Extraordinary item - gain on settlement of
debt (NOTE 7): 109,914 --
------------ ------------
Net Loss $ (2,686,779) $ (1,647,135)
============ ============
Loss Per Share (NOTE 3):
Continuing Operations $ (0.22) $ (0.15)
Extraordinary Item $ 0.01 $ 0.00
============ ============
Net loss per share $ (0.21) $ (0.15)
============ ============
Weighted Average Number of Shares
Outstanding 12,977,671 10,896,252
============ ============
</TABLE>
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-4
<PAGE> 31
LINKON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JANUARY 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Cash Flows From Operating Activities:
<S> <C> <C>
Net Loss $(2,686,779) $(1,647,135)
Add: Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation & Amortization 659,719 582,983
Warrants issued for services 32,852 30,000
Loss from induced conversion of convertible debt 83,000 --
Extraordinary item - gain on settlement of debt (109,914) --
CHANGES IN ASSETS AND LIABILITIES:
(Increase) Decrease in Accounts Receivable (154,223) 396,363
(Increase) Decrease in Other Receivables 1,972 1,387
(Increase) Decrease in Inventory (478,741) 227,873
(Increase) Decrease Prepaid Expenses (3,723) 41,740
(Increase) Decrease in Software (322,125) (351,997)
(Increase) Decrease in Notes Receivable -- 51,000
(Increase) Decrease in Investments -- 34,613
(Increase) Decrease in Security Deposits (7,875) (2,493)
Decrease in Prepaid Financing Costs 10,457 10,456
Increase (Decrease) in Accounts Payable 750,205 (64,589)
Increase (Decrease) in Interest Payable (180,620) 148,754
Increase (Decrease) in Taxes Payable (377) (3,623)
Increase (Decrease) in Customer Deposits 61,449 154,679
Increase (Decrease) in Accrued Expenses (81,753) 303,116
----------- -----------
Net Cash Used in Operating Activities (2,426,476) (86,873)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Paid to Purchase Equipment (198,465) (76,892)
Investment in Non-Marketable Securities (25,000) --
----------- -----------
Net Cash Used in Investing Activities (223,465) (76,892)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from Sale of Common Stock 1,789,576 45,000
Net Proceeds from Long Term Debt 1,100,000 --
Net Proceeds from Short Term Debt 500,000 --
Principal Payments on Debt (875,000) --
Net Cash Provided by (Used in) Financing Activities 2,514,576 45,000
----------- -----------
Net Decrease in Cash and Cash Equivalents (135,365) (118,765)
Cash and Cash Equivalents at Beginning of Year 511,961 630,726
----------- -----------
Cash and Cash Equivalents at End of Period $ 376,596 $ 511,961
=========== ===========
</TABLE>
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-5
<PAGE> 32
LINKON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
EXCESS OF ACCUMULATED
SHARES AMOUNT PAR VALUE DEFICIT TOTALS
------ ------ --------- ------- ------
BALANCES
<S> <C> <C> <C> <C> <C>
JANUARY 31, 1997 10,866,252 $ 10,867 $ 9,329,296 ($ 8,143,922) $ 1,196,241
ISSUANCE OF WARRANTS -- -- 30,000 -- 30,000
ISSUANCE OF COMMON
STOCK, NET OF
EXPENSES 30000 30 44,970 -- 45,000
NET LOSS -- -- -- (1,647,135) (1,647,135)
------------ ------------ ------------ ------------ -------------
BALANCES
JANUARY 31, 1998 10,896,252 $ 10,897 9,404,266 (9,791,057) (375,894)
ISSUANCE OF WARRANTS FOR
SERVICES -- -- 32,852 -- 32,852
ISSUANCE OF WARRANTS WITH
DEBT -- -- 160,481 -- 160,481
ISSUANCE OF COMMON
STOCK, NET OF
EXPENSES 2,625,326 $ 2,625 2,119,950 -- 2,122,575
NET LOSS -- -- -- (2,686,779) (2,686,779)
------------ ------------ ------------ ------------ -------------
BALANCES
JANUARY 31, 1999 13,521,578 $ 13,522 $ 11,717,549 ($12,477,836) ($ 746,765)
============ ============ ============ ============ =============
</TABLE>
The accompanying footnotes are an integral part of these financial statements
F-6
<PAGE> 33
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
On May 10, 1999, Linkon Corporation (hereinafter referred to as "Linkon" or the
"Company") laid off all but one employee due to the fact that the Company has
basically run out of cash. While the Company still hopes to attract equity
capital, rehire employees and continue its business plan, and while the
Company's officers are actively endeavoring to raise equity capital, there can
be no assurances that it will be able to do so. The remainder of this Item 1
describes the Company's business on the assumption that the Company will be able
to continue its operations.
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 - MAJOR CUSTOMERS AND LINE OF BUSINESS
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 131
"Disclosure about Segments of an Enterprise and Related Information", at
December 31,1998. SFAS 131 establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about its
products, services, geographic areas and major customers.
Under SFAS 131, the Company's operations are treated as one operating segment as
it only reports profit and loss information on an aggregate basis to chief
operating decision makers of the Company. Information about the Companies
product sales and major customers are as follows:
<TABLE>
<CAPTION>
PRODUCT SALES 1999 1998
<S> <C> <C>
HARDWARE 3,746,606 3,625,957
SOFTWARE 239,541 208,966
MAINTENANCE 257,848 27,671
----------------------------------
4,243,995 3,862,594
==================================
</TABLE>
Two of the Company's customers accounted for approximately 58% and 10% or
approximately $ 2,476,000 and $433,000 of consolidated revenues for the year
ended January 31, 1999. The first of these customers accounted for 67% or
approximately $ 2,594,000 of revenue for the year ended January 31, 1998.
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
F-7
<PAGE> 34
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 uncollectible portions. At January 31, 1999 the
allowance was $40,000 and at January 31, 1998 the allowance was $39,465.
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE 3 - (CONTINUED)
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>
Year Ending, January 31, 1999 1998
---- ----
<S> <C> <C>
Raw Materials $ 516,130 $ 213,865
Work in Process 89,460 100,730
Finished Goods 393,776 261,030
Less : Allowance Account (120,000) (175,000)
--------- ---------
$ 879,366 $ 400,625
========= =========
</TABLE>
Machinery and Equipment and Capital Leases
Machinery and equipment are stated at cost. Property and equipment are comprised
predominantly of computer equipment. Expenditures for maintenance and repairs
are charged to 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, 1999 and 1998 was $ 207,400 and $ 182,000 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 the
establishment of technological feasibility to produce the finished product are
generally capitalized . The Company has capitalized software costs included in
Other Assets in the Consolidated Balance Sheet. Amounts capitalized were
$321,225 and $351,997 for the years ended January 31,1999 and 1998,
respectively. Amortization of prior years capitalized software costs are
included in the Cost of Goods Sold section of the Consolidated Statement of
Operations and amounted to $384,480 and $385,464 for the years ended January 31,
1999 and 1998, respectively. The capitalization of such costs and the related
amortization is in accordance with SFAS No. 86.
Advertising Costs
Advertising costs are expensed as incurred except for direct response
advertising, the costs of which are deferred and amortized over the period the
related sales are recorded. There was no amortization for direct response
advertising costs for the years ending January 31, 1999 and 1998.
Fair Value of Financial Instruments
Effective March 31, 1996, the Company adopted SFAS No. 107 "Disclosures About
Fair Value of Financial Instruments", that requires disclosure of fair value
information about financial instruments whether or not recognized in the balance
sheet. The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments. The Company believes the
carrying amount of borrowings under the Notes approximates fair value.
F-8
<PAGE> 35
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE 3 - (CONTINUED)
Accounting for Long-Lived Assets
The Company reviews long-lived assets, certain identifiable assets and any
goodwill related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recoverable. At January 31, 1999, the Company believes that there has
been no impairment of its long-lived assets.
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
The Company has adopted SFAS No.128,"Earnings per Share". Earnings per common
share are computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the period.The
earnings per common share, assuming dilution, computation gives effect to all
dilutive potential common . shares during the period.The computation assumes
that the outstanding stock options and warrants were exercised and that the
proceeds were used to purchase common shares of the Company. Earnings per share
computation for the years ended January 31,1999 and 1998 have been restated to
reflect this new standard.
Stock Based Compensation
The Company accounts for stock transactions in accordance with APB Opinion No.
25, "Accounting For Stock Issued To Employees". Accordingly, no compensation is
recorded on the issuance of employee stock options at fair market value.
NOTE 4 - SHAREHOLDERS' EQUITY
Accounting for Employee Stock Options
During the year ended January 31, 1997, the Board of Directors of the Company
adopted, and the stockholders approved in March 1997, the Linkon Corporation
1996 Stock Option and Performance Incentive Plan (the "Option Plan"). This plan
provides for awards of up to 1,000,000 options to purchase Common Stock of the
Company to employees of the Company and its subsidiaries during the term of the
Option Plan.These shares have been reserved by the Board of Directors from the
Company's authorized but unissued shares of Common Stock.
The above plan was amended as of May 18, 1998 (with the approval of the
Company's shareholders, at the Company's annual meeting), to increase the number
of shares available for awards from 1,000,000 to 2,500,000.
On May 18, 1998, December 19,1997, and May 31,1996 the Company granted 621,500,
191,000 and 682,400 incentive stock options to employees and directors.These
options are exercisable at $1.50, $0.56 and $0.75 per share at various dates
through April 30, 2007 and will qualify for incentive stock option treatment
under the Internal Revenue Code of 1986. There is no compensation recorded as a
result of the grant of these options as the Company is following accounting
prescribed in APB Opinion #25 and the stock price at the time of the grant was
$1.50, $0.56 and $0.75 per share.
Employee options to purchase 1,619,300 shares of the Companies common stock were
exercisable at prices ranging from $0.56 to $2.35 per share at January 31, 1999.
Outstanding options and warrants expire at various dates through April 2007.
F-9
<PAGE> 36
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE 4 - (CONTINUED)
The Company accounts for its stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", under which no compensation expense
is recognized. In fiscal 1997, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation" for disclosure purposes; accordingly, no compensation
expense has been recognized in the results of operations for its stock option
plan as required by APB Opinion No.25.
For disclosure purposes the fair value of each stock option grant is estimated
on the date of grant using the Black-Scholes option- pricing model with the
following weighted-average assumptions used for stock options granted during the
years ended January 31,1999 and 1998, respectively: annual dividends of $0.00
for both years, expected volatility of 40.0% and, risk free interest of 5.60%,
for both years and and expected life of five years for all grants. The
weighted-average fair value of the stock options granted during the years ended
January 31, 1999 and 1998 was $0.23 and $0.25, respectively.
If the Company recognized compensation cost for the employee stock option plan
in accordance with SFAS No.123, the Company's pro forma net loss and loss per
share would have been $2,800,000 and $0.22 for year ending January 31,1999 and
$1,700,000 and $0.16 for the year ending January 31, 1998. The SFAS No.123
method of accounting does not apply to options granted prior to March 31, 1995
and, accordingly, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
The following table summarizes the changes in employee options outstanding and
the related price ranges for shares of the Company's common stock.
<TABLE>
<CAPTION>
Stock Options
-------------
Weighted Average
Shares Exercise Price
----------------------- ------------------------
<S> <C> <C> <C>
Outstanding at: January 31, 1996 400,000 $1.84
-----------------------
Granted 914,050 $0.78
Expired (60,000) $0.95
Retired (340,000) $2.00
-----------------------
Outstanding at: January 31, 1997 914,050 $0.78
-----------------------
Granted 188,000 $0.56
Expired (59,500) $0.75
-----------------------
Outstanding at: January 31, 1998 1,042,550 $0.75
-----------------------
Granted 632,750 $1.54
Expired (56,000) $0.81
-----------------------
Outstanding at: January 31, 1999 1,619,300 $1.05
=======================
</TABLE>
The following summarizes information about employee stock options outstanding at
January 31,1999:
<TABLE>
<CAPTION>
Range of Number Weighted average Weighted Number Weighted average
Exercise Prices Outstanding Remaining Contractual average Exercisable exercise price
Life exercise price
---- --------------
<S> <C> <C> <C> <C> <C>
$0.50-0.99 975,300 7.39 $0.73 975,300 $0.73
$1.00-1.99 619,000 6.84 $1.52 619,000 $1.52
$2.00-2.35 25,000 2.24 $2.24 25,000 $2.24
------------ ------------
1,619,300 1,619,300
============ ============
</TABLE>
F-10
<PAGE> 37
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE 4 - (CONTINUED)
The following summarizes information about non-employee stock options and
warrants, issued pursuant to various financing transactions:
<TABLE>
<S> <C> <C>
Outstanding at: January 31, 1997 1,654,632
Granted 103,000
Exercised (30,000)
Expired (390,824)
-----------
Outstanding at: January 31, 1998 1,336,808
-----------
Granted 1,172,484
Exercised 0
Expired (84,900)
Expired (323,373)
-----------
Outstanding at: January 31, 1999 2,101,019
===========
</TABLE>
<TABLE>
<CAPTION>
Range of Number Weighted average Weighted Number Weighted average
Exercise Prices Outstanding Remaining Contractual average Exercisable exercise price
Life exercise price
---- --------------
<S> <C> <C> <C> <C> <C>
$0.50-0.99 359,200 7.39 $0.73 359,200 $0.73
$1.00-1.99 1,225,169 6.84 $1.52 1,225,169 $1.52
$2.00-3.50 516,650 2.24 $2.24 516,650 $2.24
------------- -----------
2,101,019 2,101,019
============= ===========
</TABLE>
NOTE 5 - INCOME TAXES
At January 31, 1999 and 1998, the Company had net operating loss carryforwards
of approximately $12,000,000 and $9,400,000, respectively for book and tax
purposes, expiring from 2005 to 2014. 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 carryfoward. 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 more than a 50% 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, 1999 has been reduced in its entirety by
the valuation allowance. For the periods ending January 31, 1999 and 1998, the
provision for taxes is comprised only of appropriate state income 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, 1999 and 1998, respectively is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loss Before Income Taxes ($2,795,693) ($1,643,135)
=========== ===========
Computed expected tax credit 907,670 558,666
Operating loss for which no benefits were provided (907,670) (558,666)
State and local tax provision (1,000) (4,000)
----------- -----------
Provision for income taxes ($ 1,000) ($ 4,000)
=========== ===========
</TABLE>
F-11
<PAGE> 38
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated for approximately 6,951 square feet of office space
under a non-cancelable operating lease. The office lease expires August 31, 1999
and is currently being re-negotiated by the Company. Minimum lease payments
remaining under the lease total $78,981. Rent expense charged to operations was
$127,009 and $94,791 for the years ending January 31, 1999 and 1998,
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 - Short Term Liabilities
During the year ended January 31,1999 four (4) individuals who held debt
instruments issued by the Company elected, as provided for in the provisions of
the debt instrument, to convert their notes to common stock. A total of $250,000
of notes payable were converted to common stock with 208,334 common stock being
issued. Due to the conversion price being reduced in two of the four
conversions, a loss was recognized in the income statement for $83,000.
Notes payable were also reduced by the Company making a $25,000 payment against
another note payable of $100,000 which matured on October 31,1998. The Company
has re-negotiated the payment dates for this note and is currently not in
default on this obligation.
During the year ended January 31,1999 the Company issued two (2) additional
short term notes payable totalling $500,000. Both notes bear an interest rate of
10%, are due six months from the date of the notes, and are unsecured. A total
of 100,000 warrants to purchase the Companies stock were issued related to the
above two(2) notes. These warrants were assigned a value of $23,500 and this
amount was recorded as a discount on the issuance of the two notes.This discount
is being amortized over the life of the notes (six months), and as at January
31,1999 the unamortized discount totals $15,322.
NOTE 8 - NOTES PAYABLE - Long Term Liabilities
During the year ended January 31, 1999, the Company issued a note payable to RG
Capital Fund in the amount of $1,100,000.This promissory note, is unsecured,
bears interest at a rate of 8% per annum, payable quarterly, and is payable in
full in one lump sum payment on April 5, 2000. The promissory note contains
provisions prohibiting, among other things,
(1) issuing securities in reliance on Regulation S of the
Securities Act
(2) issuing securities at a price less than 75% of public trading
price of the Company's stock
(3) incurring indebtedness other than in connection with
factoring, financed purchases or leases or existing
indebtedness of the Company
(4) guarantying obligations of its affiliates
(5) declaring dividends or redeeming capital stock
(6) selling assets outside the ordinary course of business
The proceeds of the loan were used to pay off all amounts owed by the Company to
IBJS Capital Corporation which included principal and accrued interest. Due to
IBJS Capital accepting, in full payment of their $1,000,000 Debenture, a reduced
payment of $850,000 the Company had an extraordinary gain from the pay off of
this debt. The gain, as noted above, was reduced by $40,086 of deferred
financing cost that was still remaining to be amortized as of the date of the
payoff. This net gain of $109,914 was an addition to net income for the year
ending January 31, 1999.
F-12
<PAGE> 39
LINKON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
NOTE 8 - (CONTINUED)
In addition to the above promissory note, the Company also issued to R&G Fund
warrants to purchase an aggregate of 1,000,000 shares of Common Stock at an
exercise price of $1.50, terminating in eighteen months. These warrants were
assigned a value of $136,981 and this amount was recorded as a discount on the
$1,100,000 note payable. This discount is being amortized over the life of the
note payable.
<TABLE>
<CAPTION>
Long Term Liabilities:
<S> <C> <C> <C>
Year ending January 31, 2001 1,100,000
Less Unamortized Discount @ January 31, 1999 (79,906)
-----------
Total $ 1,020,094
===========
</TABLE>
NOTE 9 - SUPPLEMENTAL CASH FLOWS DISCLOSURES
Cash flows from operating activities for the year ended January 31, 1999
reflects interest paid of $324,160, interest earned of $9,722 and taxes paid of
$2,162. The year ended January 31, 1998 reflected interest paid of $26,250,
interest earned of $326 and taxes paid of $8,207.
During the year ended January 31, 1998, 30,000 options were exercised to
purchase the Common Stock of the Company. These options had an exercise price of
$1.50 per option. No options were exercised during the year ended January 31,
1999.
F-13
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Document
--- -----------------------
<S> <C>
3.1 Restated Articles of Incorporation (incorporated by reference
to Exhibit A to the Company's Proxy Statement, dated February
24, 1997).
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, as
amended by Exhibit 3.1 to the Company's Form 10-QSB for the
quarter ended April 30, 1998).
4.1 Linkon Corporation 1996 Stock Option and Performance Incentive
Plan (Incorporated by reference to Exhibit B to the Company's
proxy statement, dated February 24, 1997).
4.2 Promissory Note, dated April 6, 1998, by the Company in favor
of RG Capital Fund LLC, in the principal amount of
$1,100,000(incorporated by reference to the Company's Form
10KSB for the fiscal year ended January 31, 1998).
4.3 Warrant Certificate, dated April 6, 1998, by the Company in
favor of Roberts & Green, Inc. (incorporated by reference to
the Company's Form 10KSB for the fiscal year ended January 31,
1998).
4.4* Promissory Note, dated November 17, 1998, by the Company in
favor of James Scibelli, in the principal amount of $200,000.
4.5* Promissory Note, dated December 9, 1998, by the Company in
favor of Woodland Partners, in the principal amount of
$300,000.
4.6* Warrant Certificate, dated December 9, 1998, by the Company in
favor of James Scibelli.
4.7* Warrant Certificate, dated December 9, 1998, by the Company in
favor of Woodland Partners.
10.1 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).
10.2 Subscription Agreement, dated April 6, 1998, between the
Company and RG Capital Fund LLC (incorporated by reference to
the Company's Form 10KSB for the fiscal year ended January 31,
1998).
10.3 Form of Subscription Agreement, dated April 14, 1998, between
the Company and each of the investors party thereto that was
designated by RG Capital Fund LLC(incorporated by reference to
the Company's Form 10KSB for the fiscal year ended January 31,
1998).
10.4 Warrant Agreement, dated April 6, 1998, between the Company
and Roberts & Green, Inc. (incorporated by reference to the
Company's Form 10KSB for the fiscal year ended January 31,
1998).
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
<S> <C>
10.5 Registration Rights Agreement, dated April 6, 1998, among the
Company, RG Capital Fund LLC and Roberts & Green,
Inc.(incorporated by reference to the Company's Form 10KSB for
the fiscal year ended January 31, 1998).
10.6 Investment Banking and Financial Advisory Services Agreement,
dated April 6, 1998, between the Company and Roberts & Green,
Inc.(incorporated by reference to the Company's Form 10KSB for
the fiscal year ended January 31, 1998).
10.7 Release and Termination Agreement, dated April 6, 1998,
between the Company and IBJS Capital Corporation.(incorporated
by reference to the Company's Form 10KSB for the fiscal year
ended January 31, 1998).
10.8 Agreement for Purchase of Receivables, dated March 19, 1998,
between the Company and Imperial Bank(incorporated by
reference to the Company's Form 10KSB for the fiscal year
ended January 31, 1998).
10.9 Purchase Order Addendum to Agreement for Purchase of
Receivables, dated March 26, 1998, between the Company and
Imperial Bank(incorporated by reference to the Company's Form
10KSB for the fiscal year ended January 31, 1998).
10.10 Commercial Lease, dated June 17, 1997, by and between 140
Sherman Street, LLC and the Company(incorporated by reference
to the Company's Form 10KSB for the fiscal year ended January
31, 1998).
10.11 Form of Incentive Stock Option Agreement under the Company's
1996 Stock Option and Performance Incentive Plan(incorporated
by reference to the Company's Form 10KSB for the fiscal year
ended January 31, 1998).
10.12 Form of Non-Qualified Stock Option Agreement under the
Company's 1996 Stock Option and Performance Incentive Plan.
10.13* Commercial Lease Amendment, dated May 11, 1998, by and
between 140 Sherman Street, LLC and the Company.
10.14* Employment Agreement dated May 19, 1998 between the Company
and Mr, Lee W. Hill.
10.15* Employment Agreement dated May 19, 1998 between the Company
and Mr. Charles Castelli.
10.16* Employment Agreement dated March 19, 1998 between the Company
and Mr. Thomas V. Cerabona.
10.17* Engagement Agreement, dated February 12, 1999, between the
Company and Morgen Evan and Co.
27.1* Financial Data Schedule.
</TABLE>
* filed herewith
<PAGE> 1
Exhibit 4.4
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR UNDER ANY
STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNTIL
(i) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAW OR (ii) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY THAT SUCH NOTE MAY BE
PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE SECURITIES LAWS.
LINKON CORPORATION
PROMISSORY NOTE
$200,000.00 New York, New York
November 17, 1998
FOR VALUE RECEIVED, the undersigned, Linkon Corporation (hereinafter
referred to as "Maker"), a Nevada corporation, having offices at 140 Sherman
Avenue, Fairfield, CT 06430, hereby promises to pay to the order of JAMES
SCIBELLI, residing at 2936 Bay Drive, Merrick, NY 11566, or registered assigns,
(the "Holder"), the principal amount of Two Hundred Thousand Dollars
($200,000.00), in such coin or currency of the United States of America as at
the time of payment shall be legal tender for the payment of public or private
debts, together with interest on the unpaid balance of said principal amount
from time to time outstanding at the rate of ten percent (10%) per annum from
the date hereof until the Maturity Date (as defined below), in like coin and
currency; provided, however, that if this note is not paid in full on or before
the Maturity Date, interest shall accrue on the outstanding principal of and
interest on this Note from the Maturity Date up to and including the date of
payment at a rate of fifteen percent (15%) per annum (the "Default Rate").
Payment of principal shall be made six months from the date of this Note (the
"Maturity Date"). Payment of interest accrued on the unpaid principal balance
hereof shall be made on the Maturity Date. Payments of principal and interest
are to be made at the address of the Holder designated above or at such other
place as the Holder shall have notified the Company in writing at least five (5)
days before such payment is due.
1 Maker shall have the right to prepay in part or in full, without
penalty, this promissory note (together with accrued interest to the
date of prepayment on the amount of principal thus prepaid) at any time
or from time to time.
2. Except as set forth herein, Maker waives presentment, demand and
presentation for payment, notice of nonpayment and dishonor, protest
and notice of protest and expressly agrees that this promissory note or
any payment hereunder may be extended from time to time without in any
way affecting the liability of the Maker.
3. Events of Default:
a) Any of the following events shall constitute an Event of
Default hereunder:
i) Maker shall fail to make any payment of principal or
interest upon an Event of Default due under this note
on (i) the applicable payment date therefor or (ii)
at the
<PAGE> 2
Maturity Date; and in each such case such failure
shall not be remedied within five (5) days; or
ii) Maker shall: (i) make an assignment for the benefit
of creditors; or (ii) commence (as the debtor) a case
in bankruptcy or any proceedings under any other
insolvency law; or
iii) A case in bankruptcy or any proceedings under any
other insolvency law shall be commenced against Maker
(as the debtor) and: (i) a court having jurisdiction
in the premises enters an order for relief against
Maker (as the debtor); (ii) the case or proceeding
remains undismissed for ninety days; or (iii) Maker
admits or consents to the material allegations
against it in any such case or proceeding; or
iv) A trustee, receiver, agent or custodian (however
named) is appointed or authorized to take charge of
substantially all of the property of Maker for the
purpose of enforcing a lien against such property or
for the purpose of general administration of such
property.
b) Maker immediately shall give Holder notice of the occurrence
of any matter referred to in Section 3(ii), 3(iii) or 3(iv)
hereof, but the failure to give such notice shall not affect
in any manner Holder's rights hereunder. At any time while a
default or an Event of Default is continuing, Holder may
declare the principal of and interest accrued on this note in
connection with an Event of Default, if any, to be forthwith
immediately due and payable, without diligence, notice,
presentment, demand or protest, all of which are hereby
expressly waived by the Maker ("Acceleration of Payment").
4. Suits for Enforcement and Remedies: If there shall be any Acceleration
of Payment, or if Maker otherwise shall fail to pay the unpaid
principal amount hereof or interest thereon, Holder may proceed to
enforce the payment of this note, or to enforce any other legal or
equitable right of Holder. No right or remedy herein or in any other
agreement or instrument conferred upon Holder is intended to be
exclusive of any other right or remedy, and each and every such right
or remedy shall be cumulative and shall be in addition to every other
right and remedy given hereunder or now or hereafter existing at law or
in equity or by statute or otherwise.
5. Miscellaneous:
a) Maker represents that it has full power, authority and legal
right to execute and deliver this note and that the obligation
to make the payment provided for in this note is absolute and
unconditional.
b) Maker agrees to pay all costs of collection of any amount due
hereunder when incurred, including, without limitation,
reasonable attorney's fees and expenses. Such costs shall be
added to the principal balance then due. No forbearance,
indulgence, delay or failure to exercise any right or remedy
with respect to this note shall operate as a waiver, nor as an
acquiescence in any default, nor shall any single or partial
exercise thereof or the exercise of any other right or remedy.
-2-
<PAGE> 3
c) This note may not be modified, changed, terminated or
discharged orally, but only in writing duly executed by
Holder.
d) The headings of the various paragraphs of this note are for
convenience or reference only and shall in no way modify any
of the terms or provisions of this note.
e) Any notice required or permitted to be given hereunder shall
be in writing and shall be deemed to have been duly given when
personally delivered or two days after being mailed certified
or registered mail, to the address of the parties as set forth
in the preamble to this note or at such other address as the
intended recipient shall have given to the other party hereto
pursuant to the provisions hereof.
f) This note and the obligations of Maker and the rights of
Holder hereunder, shall be governed by and construed in
accordance with the laws of the State of New York, applicable
to contracts made and to be performed entirely within such
State. The Maker hereby irrevocably consents to the
jurisdiction of the courts of the State of New York and of any
Federal courts located in such state in connection with any
action or proceeding arising out of or relating to this Note.
g) This Note shall be binding upon the successors and permitted
assigns of the Maker, and shall inure to the benefit of the
successors and assigns of Holder. If any term of this note
shall be held invalid or unenforceable, the validity of the
other terms and provisions hereof shall in no way be affected
thereby.
IN WITNESS WHEREOF, Maker has executed this promissory note on this
17th day of November 1998.
LINKON CORPORATION
BY: /s/ Lee Hill
Lee Hill
Chief Executive Officer
-3-
<PAGE> 1
Exhibit 4.5
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR UNDER ANY
STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNTIL
(i) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE
SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAW OR (ii) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY THAT SUCH NOTE MAY BE
PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE SECURITIES LAWS.
LINKON CORPORATION
PROMISSORY NOTE
$ 300,000.00 New York, New York
December 9, 1998
FOR VALUE RECEIVED, the undersigned, Linkon Corporation (hereinafter
referred to as "Maker"), a Nevada corporation, having offices at 140 Sherman
Avenue, Fairfield, CT 06430, hereby promises to pay to the order of Woodland
Partners, having principle offices at 68 Wheatley Road, Brookville, NY 11545, or
registered assigns, (the "Holder"), the principal amount of Three Hundred
Thousand Dollars ($ 300,000.00), in such coin or currency of the United States
of America as at the time of payment shall be legal tender for the payment of
public or private debts, together with interest on the unpaid balance of said
principal amount from time to time outstanding at the rate of ten percent (10%)
per annum from the date hereof until the Maturity Date (as defined below), in
like coin and currency; provided, however, that if this note is not paid in full
on or before the Maturity Date, interest shall accrue on the outstanding
principal of and interest on this Note from the Maturity Date up to and
including the date of payment at a rate of fifteen percent (15%) per annum (the
"Default Rate"). Payment of principal shall be made six months from the date of
this Note (the "Maturity Date"). Payment of interest accrued on the unpaid
principal balance hereof shall be made on the Maturity Date. Payments of
principal and interest are to be made at the address of the Holder designated
above or at such other place as the Holder shall have notified the Company in
writing at least five (5) days before such payment is due.
1. Maker shall have the right to prepay in part or in full, without
penalty, this promissory note (together with accrued interest to the
date of prepayment on the amount of principal thus prepaid) at any time
or from time to time.
2. Except as set forth herein, Maker waives presentment, demand and
presentation for payment, notice of nonpayment and dishonor, protest
and notice of protest and expressly agrees that this promissory note or
any payment hereunder may be extended from time to time without in any
way affecting the liability of the Maker.
3. Events of Default:
a) Any of the following events shall constitute an Event of
Default hereunder:
i) Maker shall fail to make any payment of principal or
interest upon an Event of Default due under this note
on (i) the applicable payment date therefor or (ii)
at the Maturity Date; and in each such case such
failure shall not be remedied within five (5) days;
or
ii) Maker shall: (i) make an assignment for the benefit
of creditors; or (ii) commence (as the debtor)
<PAGE> 2
a case in bankruptcy or any proceedings under any
other insolvency law; or
iii) A case in bankruptcy or any proceedings under any
other insolvency law shall be commenced against Maker
(as the debtor) and: (i) a Court having jurisdiction
in the premises enters an order for relief against
Maker (as the debtor); (ii) the case or proceeding
remains undismissed for ninety days; or (iii) Maker
admits or consents to the material allegations
against it in any such case or proceeding; or
iv) A trustee, receiver, agent or custodian (however
named) is appointed or authorized to take charge of
substantially all of the property of Maker for the
purpose of enforcing a lien against such property or
for the purpose of general administration of such
property.
b) Maker immediately shall give Holder notice of the occurrence
of any matter referred to in Section 3(ii), 3(iii) or 3(iv)
hereof, but the failure to give such notice shall not affect
in any manner Holder's rights hereunder. At any time while a
default or an Event of Default is continuing, Holder may
declare the principal of and interest accrued on this note in
connection with an Event of Default, if any, to be forthwith
immediately due and payable, without diligence, notice,
presentment, demand or protest, all of which are hereby
expressly waived by the Maker ("Acceleration of Payment").
4. Suits for Enforcement and Remedies: If there shall be any Acceleration
of Payment, or if Maker otherwise shall fail to pay the unpaid
principal amount hereof or interest thereon, Holder may proceed to
enforce the payment of this note, or to enforce any other legal or
equitable right of Holder. No right or remedy herein or in any other
agreement or instrument conferred upon Holder is intended to be
exclusive of any other right or remedy, and each and every such right
or remedy shall be cumulative and shall be in addition to every other
right and remedy given hereunder or now or hereafter existing at law or
in equity or by statute or otherwise.
5. Miscellaneous:
a) Maker represents that it has full power, authority and legal
right to execute and deliver this note and that the obligation
to make the payment provided for in this note is absolute and
unconditional.
b) Maker agrees to pay all costs of collection of any amount due
hereunder when incurred, including, without limitation,
reasonable attorney's fees and expenses. Such costs shall be
added to the principal balance then due. No forbearance,
indulgence, delay or failure to exercise any right or remedy
with respect to this note shall operate as a waiver, nor as an
acquiescence in any default, nor shall any single or partial
exercise thereof or the exercise of any other right or remedy.
c) This note may not be modified, changed, terminated or
discharged orally, but only in writing duly executed by
Holder.
d) The headings of the various paragraphs of this note are for
convenience or reference only and shall in no way modify any
of the terms or provisions of this note.
-2-
<PAGE> 3
e) Any notice required or permitted to be given hereunder shall
be in writing and shall be deemed to have been duly given when
personally delivered or two days after being mailed certified
or registered mail, to the address of the parties as set forth
in the preamble to this note or at such other address as the
intended recipient shall have given to the other party hereto
pursuant to the provisions hereof.
f) This note and the obligations of Maker and the rights of
Holder hereunder, shall be governed by and construed in
accordance with the laws of the State of New York, applicable
to contracts made and to be performed entirely within such
State. The Maker hereby irrevocably consents to the
jurisdiction of the courts of the State of New York and of any
Federal courts located in such state in connection with any
action or proceeding arising out of or relevancy to this Note.
g) This Note shall be binding upon the successors and permitted
assigns of the Maker, and shall inure to the benefit of the
successors and assigns of Holder. If any term of this note
shall be held invalid or unenforceable, the validity of the
other terms and provisions hereof shall in no way be affected
thereby.
IN WITNESS WHEREOF, Maker has executed this promissory note on this 9th
day of December, 1998.
LINKON CORPORATION
BY: /s/ Lee Hill
Lee Hill
Chief Executive Officer
<PAGE> 1
EXHIBIT 4.6
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS THERE IS IN EFFECT A REGISTRATION
STATEMENT UNDER SUCH ACT WITH RESPECT TO THE SECURITIES AND SUCH SALE, OFFER FOR
SALE, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS MADE IN ACCORDANCE WITH SUCH
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, IN
FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SALE, OFFER
FOR SALE, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION DOES NOT VIOLATE THE
PROVISIONS OF SUCH ACT SHALL HAVE BEEN FURNISHED TO THE COMPANY.
Date: December 9, 1998
No. 98-122 40,000 Warrants
WARRANT AGREEMENT AND CERTIFICATE
To Subscribe for and Purchase Common Stock, Par Value $0.001 Per Share, of
LINKON CORPORATION
1. THIS CERTIFIES that, for value received, JAMES SCIBELLI, with an
address c/o Roberts & Green, Inc., One Hollow Lane, Suite 208, Lake Success, NY
11040, or permitted assigns (the "Holder") is the owner of the number of
Warrants set forth above, each of which entitles the Holder to purchase from
Linkon Corporation, a Nevada corporation (herein called the "Company"), at any
time during the period commencing on the date hereof through the close of
business on the fifth anniversary of the date hereof (the "Exercise Period") one
share of common stock, par value $0.001 per share, of the Company ("Common
Stock"), at a price of $0.50 (the "Initial Exercise Price"), subject to the
adjustments and conditions hereinafter set forth.
2. The Warrants evidenced hereby may be exercised by the Holder, in
whole or in part, by the surrender of this Warrant Agreement and Certificate,
duly endorsed (unless endorsement is waived by the Company), at the principal
office of the Company, 140 Sherman Street, Fairfield, Connecticut 06430 (or such
other office or agency of the Company as it may designate by notice in writing
to the Holder at its last address appearing on the books of the Company) and
upon payment to it of the Exercise Price (as defined below) for the Warrants so
exercised. The Company agrees that the shares of Common Stock purchased upon the
exercise of the Warrants shall be deemed to be issued to the Holder on the date
on which this Warrant Agreement and Certificate shall have been surrendered and
the Exercise Price paid as aforesaid; provided, however, that no such surrender
on any date when the stock transfer books of the Company shall be closed shall
be effective to constitute the person entitled to receive such shares as the
record holder thereon on such date, but such surrender shall be effective to
constitute the person entitled to receive such shares as the record
<PAGE> 2
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holder thereof for all purposes immediately after the opening of business on the
next succeeding day on which such stock transfer books are open. The
certificates for such shares shall be delivered to the Holder within a
reasonable time, not exceeding ten days, after Warrants evidenced hereby shall
have been so exercised and a new Warrant Agreement and Certificate evidencing
the number of Warrants, if any, remaining unexercised shall also be issued to
the Holder within such time unless such Warrants shall have expired. No
fractional shares of capital stock of the Company, or scrip for any such
fractional shares, shall be issued upon the exercise of any Warrants.
The above provisions are, however, subject to the following:
(a) Exercise Price. The Initial Exercise Price of $0.50 per share shall
be subject to adjustment from time to time as hereinafter provided (such price
or price as last adjusted being herein called the "Exercise Price").
(b) Subdivision of Stock. If, at any time after the Date of Issuance,
the number of shares of Common Stock outstanding is increased by a stock
dividend payable in shares of Common Stock, or by a subdivision or split-up,
then, concurrently with the effectiveness of such event, the number of shares of
Common Stock issuable on exercise of each Warrant shall be increased in
proportion to such increase in outstanding shares and the Exercise Price in
effect immediately prior to such event shall be decreased by multiplying such
Exercise Price by a fraction, the numerator of which shall be the number of
shares issuable upon exercise of each Warrant immediately prior to such increase
and the denominator of which shall be the number of shares issuable on exercise
of each Warrant immediately after such increase.
(c) Combination of Stock. If, at any time after the Date of Issuance,
the number of shares of Common Stock outstanding is decreased by a combination
of the outstanding shares of Common Stock, then, concurrently with the
effectiveness of such event, the number of shares of Common Stock issuable on
exercise of each Warrant shall be decreased in proportion to such decrease in
outstanding shares and the Exercise Price in effect immediately prior to such
event shall be increased by multiplying such Exercise Price by a fraction, the
numerator of which shall be the number of shares issuable upon exercise of each
Warrant immediately prior to such decrease and the denominator of which shall be
the number of shares issuable on exercise of each Warrant immediately after such
decrease.
(d) Reorganization, Reclassification, Consolidation, Merger or Sale. In
the event, at any time after the Date of Issuance, of any capital
reorganization, or any reclassification of the capital stock of the Company
(other than a change in par value from par value to no par value or from no par
value to par value or as a result of a stock dividend or subdivision, split-up
or combination of shares), or the consolidation or merger of the Company with or
into another person (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any change in the
Common Stock, other than as a result of the issuance thereof in
<PAGE> 3
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connection with such merger or consolidation) or the sale or other disposition
of substantially all the properties and assets of the Company as an entirety to
any other person, each Warrant shall after such reorganization,
reclassification, consolidation, merger, sale or other disposition be
exercisable into the kind and number of shares of stock or other securities or
property of the Company or of the corporation resulting from such consolidation
or surviving such merger or to which such properties and assets shall have been
sold or otherwise disposed to which the holder of the number of shares of Common
Stock deliverable (immediately prior to the time of such reorganization,
reclassification, consolidation, merger, sale or other disposition) upon
exercise of such Warrant would have been entitled upon such reorganization,
reclassification, consolidation, merger, sale or other disposition. The
provisions of this paragraph 2(d) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales or other
dispositions.
(e) Notice of Adjustment. Upon any adjustment of the Exercise Price,
then and in each such case the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the Holder at the address of the
Holder as shown on the books of the Company, which notice shall be signed by the
chief financial officer of the Company and shall state the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of the Warrants
evidenced hereby, setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based.
(f) Other Notices. In case at any time:
(1) the Company shall declare any cash dividend upon its
Common Stock payable at a rate in excess of the last regular cash
dividend theretofore paid;
(2) the Company shall declare any dividend upon its Common
Stock payable in stock or make any special dividend or other
distribution (other than regular cash dividends) to the holders of its
Common Stock;
(3) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights;
(4) there shall be any capital reorganization or
reclassification of the capital stock of the Company or any
consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation; or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the Holder at the address of the Holder as
shown on the books of the Company, (a) at
<PAGE> 4
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least 20 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights, or (b) for determining rights to vote in respect of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days' prior written notice of the date on
which any reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place. Such notice in
accordance with the foregoing clause (a) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and such notice in accordance
with the foregoing clause (b) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be. The failure to give or receive the notice required by paragraph 2(e) or
2(f) hereof or any defect therein shall not affect the legality or validity of
any such dividend, distribution, right or warrant or other action.
(g) Taxes on Exercise. The issuance of stock certificates on exercise
of the Warrants represented hereby shall be made without charge to the Holder
for any issue tax in respect of such issuance. The Company shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of stock in a name other than that of the
Holder, and the Company shall not be required to issue or deliver any such stock
certificate unless and until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of any such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(h) Company to Provide Stock. The Company shall at all times reserve
and keep available out of the aggregate of its authorized but unissued stock or
its issued stock held in its treasury, or both, for the purpose of effecting the
conversion of the Warrants represented hereby, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient to
effect the conversion of these Warrants; and if at any time such number of
shares of Common Stock shall not be sufficient to effect the conversion of these
Warrants, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued Common Stock
to, or otherwise acquire, such number of shares as shall be sufficient for such
purpose.
3. Cashless Exercise.
(a) At any time during the Exercise Period, the Holder may, at its
option, exchange the Warrants represented by this Warrant Agreement and
Certificate, in whole or in part (a "Warrant Exchange"), into the number of
fully paid and non-assessable shares of Common Stock determined in accordance
with this paragraph 3, by surrendering such Warrant at the principal office of
the Company or at the office of its transfer agent, accompanied by a notice
stating such Holder's intent to effect such exchange, the number of shares of
Common Stock to be exchanged and the date
<PAGE> 5
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on which the Holder requested such Warrant Exchange occur (the "Notice of
Exchange"). The Warrant Exchange shall take place on or, as soon as practicable
after, the date specified in the Notice of Exchange or, if later, the date the
Notice of Exchange is received by the Company or, as soon as practicable
thereafter (the "Exchange Date"). Certificates for the shares of Common Stock
issuable upon such Warrant Exchange and, if applicable, a new Warrant of like
tenor evidencing the number of Warrants, if any, remaining unexercised shall be
issued as of the Exchange Date or, as soon as practicable thereafter, and
delivered to the Holder within three days following the Exchange Date. In
connection with any Warrant Exchange, the Holder's Warrant shall represent the
right to subscribe for and acquire the number of shares of Common Stock (rounded
to the next highest integer) equal to (x) the number of shares of Common Stock
specified by the Holder in its Notice of Exchange (the "Total Share Number")
less (y) the number of shares of Common Stock equal to the quotient obtained by
dividing (i) the product of the Total Share Number and the existing Exercise
Price per share by (ii) the Current Market Price (as hereinafter defined) of a
share of Common Stock.
(b) As used herein, the phrase "Current Market Price" at any date
shall be the average of the last reported sale prices for the 20 trading days,
as officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or as reported in the Nasdaq SmallCap
System, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted on the Nasdaq SmallCap System, the last
reported sale price as furnished by the National Association of Securities
Dealers, Inc. through Nasdaq or similar organization if Nasdaq is no longer
reporting such information, or if the Common Stock is not quoted on Nasdaq, as
determined in good faith by resolution of the Board of Directors of the Company,
ending two days immediately preceding the date of the Notice of Exchange.
4. Rights of Holder. This Warrant Agreement and Certificate shall not
entitle the holder hereof any voting rights or other right as a shareholder of
the Company.
5. Non-transferability of this Warrant Agreement and Certificate. This
Warrant Agreement and Certificate, the Warrants evidenced hereby and any shares
of Common Stock of the Company issued upon any exercise hereof may not be
assigned or transferred except in compliance with applicable law, including,
without limitation, applicable federal and state securities laws.
6. Representations and Warranties
(a) Representations and Warranties of the Company. The Company
represents and warrants that it has all requisite power and authority to (i)
execute, deliver, and perform its obligations under this Warrant Agreement and
Certificate and (ii) to issue, sell and deliver the Warrants evidenced hereby to
the Holder, and upon due exercise of the Warrants evidenced hereby in accordance
with the terms hereof, to issue, sell and deliver the shares of Common Stock
(the "Warrant Shares") underlying the Warrants evidenced by this Warrant
Agreement and Certificate. All necessary corporate proceedings of the Company
have been duly taken to authorize the
<PAGE> 6
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execution, delivery, and performance of this Warrant Agreement and Certificate.
This Warrant Agreement and Certificate has been duly authorized by the Company
and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
(b) Representations and Warranties of the Holder. The Holder
represents and warrants that:
(i) The Holder has the power and authority to execute and
deliver this Warrant Agreement and Certificate, to consummate the transactions
contemplated hereby and to take all other actions required to be taken by it
pursuant to the provisions hereof; and this Warrant Agreement and Certificate is
valid, binding and enforceable upon the Holder in accordance with its terms.
(ii) The Holder is an "Accredited Investor" as that term is
defined in Section 501(a) of Regulation D promulgated under the Securities Act
of 1933, as amended (the "Securities Act").
(iii) The Company has made available to the Holder all
information which the Holder deemed material to making an informed investment
decision in connection with its acquisition of the Warrants and the Warrant
Shares or the Holder is in a position regarding the Company which has enabled
the Holder to obtain information from the Company necessary to evaluate the
merits and risks of an investment in the Warrants and the Warrant Shares.
(iv) The Holder has such knowledge and experience in finance,
securities, investments and other business matters so as to be able to protect
its interests in connection with the investment contemplated by this Warrant
Agreement and Certificate, and the Holder's investment in the Company hereunder
is not material when compared to the Holder's total financial capacity.
(v) The Holder understands the various risks of an investment in
the Company as proposed under this Warrant Agreement and Certificate and can
afford to bear such risks, including, but not limited to, the risks of losing
the entire investment.
(vi) The Holder has been advised by the Company that the
Warrants and the Warrant Shares have not been registered under the Securities
Act, that the Securities will be issued on the basis of the statutory exemption
provided by Section 4(2) of the Securities Act or Regulation D promulgated
thereunder, or both, relating to transactions by an issuer not involving any
public offering and under similar exemptions under certain state securities
laws. In particular, the Holder agrees that no sale, assignment, or transfer of
any of the Warrants or the Warrant Shares shall be valid or effective, and the
Company shall not be required to give any effect to any such sale, assignment or
transfer, unless (i) the sale, assignment or transfer of the Warrants or the
Warrant Shares is registered under the Securities Act, it being understood that
the Warrants and the Warrant
<PAGE> 7
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Shares are not currently registered for sale and that the Company has no
obligation or intention to so register the Warrants or the Warrant Shares or
(ii) such Warrants or Warrant Shares are sold, assigned or transferred in
accordance with all the requirements and limitations of Rule 144 under the
Securities Act, or (iii) such sale, assignment or transfer is otherwise exempt
from registration under the Securities Act. The Holder acknowledges that the
Warrants and the Warrant Shares shall be subject to stop transfer orders and the
certificates evidencing the Warrants and the Warrant Shares shall bear the
following or a substantially similar legend and such other legends as may be
required by state blue sky laws:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws and neither
such securities nor any interest therein may be offered, sold,
pledged, assigned, or otherwise transferred unless (1) a
registration statement with respect thereto is effective under
the Securities Act and any applicable state securities laws or
(2) the Company receives an opinion of counsel to the holder
of such securities, which counsel and opinion are reasonably
satisfactory to the Company, that such securities may be
offered, sold, pledged, assigned, or transferred in the manner
contemplated without an effective registration statement under
the Securities Act or applicable state securities laws."
(vii) The Holder is acquiring the Warrants and the Warrant
Shares for the Holder's own account for investment and not with a view to the
sale or distribution thereof or the granting of any participation therein, and
has no present intention of distributing or selling to others any of such
interest or granting any participation therein.
7. Lost, Stolen or Mutilated Certificates. Upon receipt of any evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Agreement and Certificate, and in case of any such loss, theft or
destruction, upon delivery of an indemnity agreement satisfactory to the
Company, or in case of any such mutilation, upon surrender and cancellation of
such certificate, the Company at its expense will issue and deliver to the
Holder a new Warrant Agreement and Certificate of like tenor, in lieu of such
lost, stolen or mutilated certificate.
8. Law Governing. This Warrant Agreement and Certificate shall be
construed and enforced in accordance with, and governed by, the laws of the
State of New York, without giving effect to conflicts of law principles.
9. Entire Agreement; Modification. This Warrant Agreement and
Certificate contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended except
in a writing duly signed by the party against whom enforcement of the
modification or amendment is sought.
<PAGE> 8
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IN WITNESS WHEREOF, LINKON CORPORATION has caused this Warrant
Agreement and Certificate to be signed by a duly authorized officer under its
corporate seal, and this Warrant Agreement and Certificate to be dated the date
first above written.
LINKON CORPORATION
Attest: By: /s/ Thomas V. Cerabona
----------------------------
Its: Vice President
/s/ Daniel Grossner
---------------------------
JAMES SCIBELLI
/s/ James Scibelli
----------------------------
Attest:
/s/ Robert Scibelli
---------------------------
<PAGE> 1
EXHIBIT 4.7
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS THERE IS IN EFFECT A REGISTRATION
STATEMENT UNDER SUCH ACT WITH RESPECT TO THE SECURITIES AND SUCH SALE, OFFER FOR
SALE, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS MADE IN ACCORDANCE WITH SUCH
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, IN
FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SALE, OFFER
FOR SALE, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION DOES NOT VIOLATE THE
PROVISIONS OF SUCH ACT SHALL HAVE BEEN FURNISHED TO THE COMPANY.
Date: December 9, 1998
No. 98-121 60,000 Warrants
WARRANT AGREEMENT AND CERTIFICATE
To Subscribe for and Purchase Common Stock, Par Value $0.001 Per Share, of
LINKON CORPORATION
1. THIS CERTIFIES that, for value received, WOODLAND PARTNERS, with an
address at 68 Wheatley Road, Brookville, NY 11545,or permitted assigns (the
"Holder") is the owner of the number of Warrants set forth above, each of which
entitles the Holder to purchase from Linkon Corporation, a Nevada corporation
(herein called the "Company"), at any time during the period commencing on the
date hereof through the close of business on the fifth anniversary of the date
hereof (the "Exercise Period") one share of common stock, par value $0.001 per
share, of the Company ("Common Stock"), at a price of $0.50 (the "Initial
Exercise Price"), subject to the adjustments and conditions hereinafter set
forth.
2. The Warrants evidenced hereby may be exercised by the Holder, in
whole or in part, by the surrender of this Warrant Agreement and Certificate,
duly endorsed (unless endorsement is waived by the Company), at the principal
office of the Company, 140 Sherman Street, Fairfield, Connecticut 06430 (or such
other office or agency of the Company as it may designate by notice in writing
to the Holder at its last address appearing on the books of the Company) and
upon payment to it of the Exercise Price (as defined below) for the Warrants so
exercised. The Company agrees that the shares of Common Stock purchased upon the
exercise of the Warrants shall be deemed to be issued to the Holder on the date
on which this Warrant Agreement and Certificate shall have been surrendered and
the Exercise Price paid as aforesaid; provided, however, that no such surrender
on any date when the stock transfer books of the Company shall be closed shall
be effective to constitute the person entitled to receive such shares as the
record holder thereon on such date, but such surrender shall be effective to
constitute the person entitled to receive such shares as the record holder
thereof
<PAGE> 2
- 2 -
for all purposes immediately after the opening of business on the next
succeeding day on which such stock transfer books are open. The certificates for
such shares shall be delivered to the Holder within a reasonable time, not
exceeding ten days, after Warrants evidenced hereby shall have been so exercised
and a new Warrant Agreement and Certificate evidencing the number of Warrants,
if any, remaining unexercised shall also be issued to the Holder within such
time unless such Warrants shall have expired. No fractional shares of capital
stock of the Company, or scrip for any such fractional shares, shall be issued
upon the exercise of any Warrants.
The above provisions are, however, subject to the following:
(a) Exercise Price. The Initial Exercise Price of $0.50 per share shall
be subject to adjustment from time to time as hereinafter provided (such price
or price as last adjusted being herein called the "Exercise Price").
(b) Subdivision of Stock. If, at any time after the Date of Issuance,
the number of shares of Common Stock outstanding is increased by a stock
dividend payable in shares of Common Stock, or by a subdivision or split-up,
then, concurrently with the effectiveness of such event, the number of shares of
Common Stock issuable on exercise of each Warrant shall be increased in
proportion to such increase in outstanding shares and the Exercise Price in
effect immediately prior to such event shall be decreased by multiplying such
Exercise Price by a fraction, the numerator of which shall be the number of
shares issuable upon exercise of each Warrant immediately prior to such increase
and the denominator of which shall be the number of shares issuable on exercise
of each Warrant immediately after such increase.
(c) Combination of Stock. If, at any time after the Date of Issuance,
the number of shares of Common Stock outstanding is decreased by a combination
of the outstanding shares of Common Stock, then, concurrently with the
effectiveness of such event, the number of shares of Common Stock issuable on
exercise of each Warrant shall be decreased in proportion to such decrease in
outstanding shares and the Exercise Price in effect immediately prior to such
event shall be increased by multiplying such Exercise Price by a fraction, the
numerator of which shall be the number of shares issuable upon exercise of each
Warrant immediately prior to such decrease and the denominator of which shall be
the number of shares issuable on exercise of each Warrant immediately after such
decrease.
(d) Reorganization, Reclassification, Consolidation, Merger or Sale. In
the event, at any time after the Date of Issuance, of any capital
reorganization, or any reclassification of the capital stock of the Company
(other than a change in par value from par value to no par value or from no par
value to par value or as a result of a stock dividend or subdivision, split-up
or combination of shares), or the consolidation or merger of the Company with or
into another person (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any change in the
Common Stock, other than as a result of the issuance thereof in connection with
such
<PAGE> 3
- 3 -
merger or consolidation) or the sale or other disposition of substantially all
the properties and assets of the Company as an entirety to any other person,
each Warrant shall after such reorganization, reclassification, consolidation,
merger, sale or other disposition be exercisable into the kind and number of
shares of stock or other securities or property of the Company or of the
corporation resulting from such consolidation or surviving such merger or to
which such properties and assets shall have been sold or otherwise disposed to
which the holder of the number of shares of Common Stock deliverable
(immediately prior to the time of such reorganization, reclassification,
consolidation, merger, sale or other disposition) upon exercise of such Warrant
would have been entitled upon such reorganization, reclassification,
consolidation, merger, sale or other disposition. The provisions of this
paragraph 2(d) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales or other dispositions.
(e) Notice of Adjustment. Upon any adjustment of the Exercise Price,
then and in each such case the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the Holder at the address of the
Holder as shown on the books of the Company, which notice shall be signed by the
chief financial officer of the Company and shall state the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of the Warrants
evidenced hereby, setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based.
(f) Other Notices. In case at any time:
(1) the Company shall declare any cash dividend upon its
Common Stock payable at a rate in excess of the last regular cash
dividend theretofore paid;
(2) the Company shall declare any dividend upon its Common
Stock payable in stock or make any special dividend or other
distribution (other than regular cash dividends) to the holders of its
Common Stock;
(3) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights;
(4) there shall be any capital reorganization or
reclassification of the capital stock of the Company or any
consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation; or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the Holder at the address of the Holder as
shown on the books of the Company, (a) at
<PAGE> 4
- 4 -
least 20 days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights, or (b) for determining rights to vote in respect of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days' prior written notice of the date on
which any reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place. Such notice in
accordance with the foregoing clause (a) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and such notice in accordance
with the foregoing clause (b) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be. The failure to give or receive the notice required by paragraph 2(e) or
2(f) hereof or any defect therein shall not affect the legality or validity of
any such dividend, distribution, right or warrant or other action.
(g) Taxes on Exercise. The issuance of stock certificates on exercise
of the Warrants represented hereby shall be made without charge to the Holder
for any issue tax in respect of such issuance. The Company shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of stock in a name other than that of the
Holder, and the Company shall not be required to issue or deliver any such stock
certificate unless and until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of any such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(h) Company to Provide Stock. The Company shall at all times reserve
and keep available out of the aggregate of its authorized but unissued stock or
its issued stock held in its treasury, or both, for the purpose of effecting the
conversion of the Warrants represented hereby, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient to
effect the conversion of these Warrants; and if at any time such number of
shares of Common Stock shall not be sufficient to effect the conversion of these
Warrants, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued Common Stock
to, or otherwise acquire, such number of shares as shall be sufficient for such
purpose.
3. Cashless Exercise.
(a) At any time during the Exercise Period, the Holder may, at
its option, exchange the Warrants represented by this Warrant Agreement and
Certificate, in whole or in part (a "Warrant Exchange"), into the number of
fully paid and non-assessable shares of Common Stock determined in accordance
with this paragraph 3, by surrendering such Warrant at the principal office of
the Company or at the office of its transfer agent, accompanied by a notice
stating such Holder's intent to effect such exchange, the number of shares of
Common Stock to be exchanged and the date on
<PAGE> 5
- 5 -
which the Holder requested such Warrant Exchange occur (the "Notice of
Exchange"). The Warrant Exchange shall take place on or, as soon as practicable
after, the date specified in the Notice of Exchange or, if later, the date the
Notice of Exchange is received by the Company or, as soon as practicable
thereafter (the "Exchange Date"). Certificates for the shares of Common Stock
issuable upon such Warrant Exchange and, if applicable, a new Warrant of like
tenor evidencing the number of Warrants, if any, remaining unexercised shall be
issued as of the Exchange Date or, as soon as practicable thereafter, and
delivered to the Holder within three days following the Exchange Date. In
connection with any Warrant Exchange, the Holder's Warrant shall represent the
right to subscribe for and acquire the number of shares of Common Stock (rounded
to the next highest integer) equal to (x) the number of shares of Common Stock
specified by the Holder in its Notice of Exchange (the "Total Share Number")
less (y) the number of shares of Common Stock equal to the quotient obtained by
dividing (i) the product of the Total Share Number and the existing Exercise
Price per share by (ii) the Current Market Price (as hereinafter defined) of a
share of Common Stock.
(b) As used herein, the phrase "Current Market Price" at any
date shall be the average of the last reported sale prices for the 20 trading
days, as officially reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading or as reported in the Nasdaq
SmallCap System, or, if the Common Stock is not listed or admitted to trading on
any national securities exchange or quoted on the Nasdaq SmallCap System, the
last reported sale price as furnished by the National Association of Securities
Dealers, Inc. through Nasdaq or similar organization if Nasdaq is no longer
reporting such information, or if the Common Stock is not quoted on Nasdaq, as
determined in good faith by resolution of the Board of Directors of the Company,
ending two days immediately preceding the date of the Notice of Exchange.
4. Rights of Holder. This Warrant Agreement and Certificate shall not
entitle the holder hereof any voting rights or other right as a shareholder of
the Company.
5. Non-transferability of this Warrant Agreement and Certificate. This
Warrant Agreement and Certificate, the Warrants evidenced hereby and any shares
of Common Stock of the Company issued upon any exercise hereof may not be
assigned or transferred except in compliance with applicable law, including,
without limitation, applicable federal and state securities laws.
6. Representations and Warranties
(a) Representations and Warranties of the Company. The Company
represents and warrants that it has all requisite power and authority to (i)
execute, deliver, and perform its obligations under this Warrant Agreement and
Certificate and (ii) to issue, sell and deliver the Warrants evidenced hereby to
the Holder, and upon due exercise of the Warrants evidenced hereby in accordance
with the terms hereof, to issue, sell and deliver the shares of Common Stock
(the "Warrant Shares") underlying the Warrants evidenced by this Warrant
Agreement and Certificate. All necessary corporate proceedings of the Company
have been duly taken to authorize the execution,
<PAGE> 6
- 6 -
delivery, and performance of this Warrant Agreement and Certificate. This
Warrant Agreement and Certificate has been duly authorized by the Company and
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
(b) Representations and Warranties of the Holder. The Holder
represents and warrants that:
(i) The Holder has the power and authority to execute and
deliver this Warrant Agreement and Certificate, to consummate the transactions
contemplated hereby and to take all other actions required to be taken by it
pursuant to the provisions hereof; and this Warrant Agreement and Certificate is
valid, binding and enforceable upon the Holder in accordance with its terms.
(ii) The Holder is an "Accredited Investor" as that term is
defined in Section 501(a) of Regulation D promulgated under the Securities Act
of 1933, as amended (the "Securities Act").
(iii) The Company has made available to the Holder all
information which the Holder deemed material to making an informed investment
decision in connection with its acquisition of the Warrants and the Warrant
Shares or the Holder is in a position regarding the Company which has enabled
the Holder to obtain information from the Company necessary to evaluate the
merits and risks of an investment in the Warrants and the Warrant Shares.
(iv) The Holder has such knowledge and experience in finance,
securities, investments and other business matters so as to be able to protect
its interests in connection with the investment contemplated by this Warrant
Agreement and Certificate, and the Holder's investment in the Company hereunder
is not material when compared to the Holder's total financial capacity.
(v) The Holder understands the various risks of an investment
in the Company as proposed under this Warrant Agreement and Certificate and can
afford to bear such risks, including, but not limited to, the risks of losing
the entire investment.
(vi) The Holder has been advised by the Company that the
Warrants and the Warrant Shares have not been registered under the Securities
Act, that the Securities will be issued on the basis of the statutory exemption
provided by Section 4(2) of the Securities Act or Regulation D promulgated
thereunder, or both, relating to transactions by an issuer not involving any
public offering and under similar exemptions under certain state securities
laws. In particular, the Holder agrees that no sale, assignment, or transfer of
any of the Warrants or the Warrant Shares shall be valid or effective, and the
Company shall not be required to give any effect to any such sale, assignment or
transfer, unless (i) the sale, assignment or transfer of the Warrants or the
Warrant Shares is registered under the Securities Act, it being understood that
the Warrants and the Warrant Shares are not currently registered for sale and
that the Company has no obligation or intention to so register the
<PAGE> 7
- 7 -
Warrants or the Warrant Shares or (ii) such Warrants or Warrant Shares are sold,
assigned or transferred in accordance with all the requirements and limitations
of Rule 144 under the Securities Act, or (iii) such sale, assignment or transfer
is otherwise exempt from registration under the Securities Act. The Holder
acknowledges that the Warrants and the Warrant Shares shall be subject to stop
transfer orders and the certificates evidencing the Warrants and the Warrant
Shares shall bear the following or a substantially similar legend and such other
legends as may be required by state blue sky laws:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or any state securities laws and neither such
securities nor any interest therein may be offered, sold, pledged,
assigned, or otherwise transferred unless (1) a registration statement
with respect thereto is effective under the Securities Act and any
applicable state securities laws or (2) the Company receives an
opinion of counsel to the holder of such securities, which counsel and
opinion are reasonably satisfactory to the Company, that such
securities may be offered, sold, pledged, assigned, or transferred in
the manner contemplated without an effective registration statement
under the Securities Act or applicable state securities laws."
(vii) The Holder is acquiring the Warrants and the Warrant
Shares for the Holder's own account for investment and not with a view to the
sale or distribution thereof or the granting of any participation therein, and
has no present intention of distributing or selling to others any of such
interest or granting any participation therein.
7. Lost, Stolen or Mutilated Certificates. Upon receipt of any evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Agreement and Certificate, and in case of any such loss, theft or
destruction, upon delivery of an indemnity agreement satisfactory to the
Company, or in case of any such mutilation, upon surrender and cancellation of
such certificate, the Company at its expense will issue and deliver to the
Holder a new Warrant Agreement and Certificate of like tenor, in lieu of such
lost, stolen or mutilated certificate.
8. Law Governing. This Warrant Agreement and Certificate shall be
construed and enforced in accordance with, and governed by, the laws of the
State of New York, without giving effect to conflicts of law principles.
9. Entire Agreement; Modification. This Warrant Agreement and
Certificate contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended except
in a writing duly signed by the party against whom enforcement of the
modification or amendment is sought.
<PAGE> 8
- 8 -
IN WITNESS WHEREOF, LINKON CORPORATION has caused this Warrant
Agreement and Certificate to be signed by a duly authorized officer under its
corporate seal, and this Warrant Agreement and Certificate to be dated the date
first above written.
LINKON CORPORATION
Attest: By: /s/ Thomas V. Cerabona
----------------------------
Its: Vice President
/s/ Daniel Grossner
---------------------------
WOODLAND PARTNERS
By: /s/ Barry Rubenstein
----------------------------
Its:
Attest:
/s/ Robin Suekoff
---------------------------
<PAGE> 1
EXHIBIT 10.13
FIRST AMENDMENT OF LEASE
This First Amendment of Lease is made as of this 11th day of May, 1998,
by and between 140 Sherman Street, LLC (hereinafter referred to as "Landlord"),
and Linkon Corporation (hereinafter referred to as "Tenant").
In consideration of the mutual benefits and obligations set forth
herein, the parties hereby amend a certain lease between Landlord and Tenant
dated June 17, 1997, for the lease of space in Landlord's building at 140
Sherman Street, Fairfield, Connecticut (the June 17, 1997 lease as amended,
hereinafter referred to collectively as the "Lease"), in the following manner:
A. Paragraph 1.1(b) of the Lease is deleted and is replaced with the
following:
"1.02 The Leased Premises is located on the second floor in
Landlord's building at 140 Sherman Street, Fairfield, Connecticut. For
the period of time from the Initial Commencement Date until May 31,
1998, the Leased Premises is defined by the floor area outline attached
to the Lease as Exhibit A. For the period of time from June 1, 1998
until the end of the Initial Term, the Leased Premises is further
defined by the floor area outline attached hereto as Exhibit A, Sheet
1."
B. Paragraph 1.1(c) of the Lease is deleted and is replaced with the
following:
"1.1 (c) The Tenant's Leased Premises Square Footage
fluctuates over the Term of the Lease, and the following square
footages represent the Tenant's Leased Premises Square Footage for the
various periods during the Term of the Lease:
[i] 5,704 square feet, for the period from September 1, 1997 until May
31, 1998; and
[ii] 6,951 square feet from June 1, 1998 until the end of the Initial
Term of the Lease."
C. Paragraph 1.1(e) of the Lease is deleted and is replaced with the
following:
"1.1(e) The "Initial Term" is the period beginning with the
Initial Commencement Date and ending at the end of the 24th full
calendar month from and after the Initial Commencement Date."
<PAGE> 2
D. Paragraph 1.1(g) of the Lease is deleted and is replaced with the
following:
"1.1(g) The "Base Rent" for the Initial Term is:
<TABLE>
<CAPTION>
Period Monthly Installments
------ --------------------
<S> <C>
9/1/97 to 5/31/98 $5,228.67
6/1/98 to the end of the Initial Term $6,371.75
</TABLE>
E. Landlord, at its expense, will construct an opening in a wall to
connect the additional space that is being added to Tenant's Leased Premises by
this First Amendment of Lease and the Leased Premises originally leased by
Tenant.
F. Reference to Exhibit A in the Lease means the Exhibit A attached to
the June 17, 1997 lease. "Exhibit A, Sheet 1" is a separate exhibit from Exhibit
A, is added to the Lease and incorporated into it as a new exhibit, and is
attached to the First Amendment of Lease.
In the event of any conflict between this First Amendment of Lease and
the June 17, 1997 lease, this First Amendment of Lease shall control, the Lease
being hereby ratified and to remain in full force and effect in all other
respects.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of
the day and year first above written.
Linkon Corporation
By: /s/Thomas V. Cerabona
-----------------------------------------
Thomas V. Cerabona
its duly authorized Vice President
140 Sherman Street, LLC
By: /s/Robert D. Scinto
-----------------------------------------
Robert D. Scinto
its duly authorized member
2
<PAGE> 3
State of Connecticut
ss Town of Fairfield
County of Fairfield
Personally appeared Thomas V. Cerabona, signer and sealer of the
foregoing instrument and duly authorized Vice President of Linkon Corporation,
who acknowledged the same to be his free act and deed and duly authorized free
act and deed of Linkon Corporation, before me, this 8th day of May, 1998.
/s/ Jennifer R. Hogarth
---------------------------------------------
Commissioner of the Superior Court/
Notary Public
State of Connecticut
ss City of Shelton
County of Fairfield
Personally appeared Robert D. Scinto, signer and sealer of the
foregoing instrument and duly authorized member of 140 Sherman Street, LLC, who
acknowledged his execution to be his free act and deed and duly authorized free
act and deed of 140 Sherman Street, LLC, before me, this 12th day of May, 1998.
/s/ Eleanor M. Choate
---------------------------------------------
Notary Public
3
<PAGE> 4
[GRAPHIC ILLUSTRATION]
4
<PAGE> 1
EXHIBIT 10.14
May 19, 1998
Lee W. Hill
62 Arch Street
Riverside, CT 06878
EMPLOYMENT AGREEMENT
--------------------
Dear Mr. Hill:
The purpose of this letter is to summarize the terms of our agreement for your
employment as President and CEO of Linkon Corporation. This full time position
reports to me as Chairman and to the Board of Directors. It is located in our
Fairfield, CT office. Following are the terms of employment:
1.) RESPONSIBILITY
You will have primary executive responsibility for the company. You will
specifically be responsible for the overall strategic direction, financial
results, daily operations and personnel decisions for Linkon Corporation as a
publicly traded company. Attachment I to this letter provides a more detailed
definition of duties.
2.) COMPENSATION
1. A monthly base salary of $12,500 which will be reviewed annually.
2. A performance bonus of $25,000 paid annually based upon achievement of
goals as defined in Attachment 2 of this letter.
3.) OPTIONS
1. You will participate in the Linkon stock option plan.
2. You will receive in any event, 150,000 fully vested options as a
signing bonus with this contract.
4.) BENEFITS
1. Linkon has health and life insurance programs for which you are
eligible.
2. Linkon has a 401K program for which you are eligible.
3. You will be entitled to one month vacation.
4. You will receive an auto allowance of $700 per month.
5.) TERM
The term of this employment agreement shall commence on the day of the signing
of this employment agreement and shall continue for three years or until
otherwise terminated in this agreement.
<PAGE> 2
Lee W. Hill Employment Agreement
May 19, 1998
Page Two
6.) Termination
1. In the event you are terminated for cause, you will receive no
compensation. "Cause" is defined as: (i) Violation of any rule or
regulation of any regulatory organization or Governmental agency which
is injurious to Linkon. (ii) Your conviction of a felony. (iii) Your
conviction of any crime involving moral turpitude. (iv) A finding that
you sexually harassed or discriminated against any company employee.
(v) A material breach of the terms of this offer.
2. Should Linkon terminate you, you will receive a severance payment
equal to one year salary plus any bonus earned and benefits.
3. In the event, Linkon undergoes a sales, merger or acquisition to a 3rd
Party resulting in your termination, you will receive a severance
payment equal to two years of base salary plus any bonus earned and
benefits.
7.) INDEMNIFICATION
Linkon will indemnify you for any and all claims, suits, proceedings, damages,
losses or liabilities incurred by you and arising out of any acts or decisions
done or made by Linkon from the signing of this agreement. Linkon agrees to pay
your reasonable expenses, including reasonable attorney's fees, actually
incurred by you in connection with the defense of any such action, suit or
proceedings and in connection with any appeal thereon including the cost of
court settlements if such settlement is agreed to by Linkon. Nothing contained
herein shall entitle you to indemnification by Linkon in excess of that
permitted by applicable law.
8.) NON-COMPETITION
You agree that in consideration for Linkon's agreement contained in this offer,
you will not directly operate any business which is in competition with the
business of Linkon.
Please sign this letter as an indication of your acceptance of these terms of
employment.
Sincerely,
Charles Castelli
Chairman and CTO
enclosure (2) I accept the terms of this employment agreement,
------------------------- -----------------
Lee W. Hill Date
<PAGE> 1
May 19,1998 Exhibit 10.15
Charles Castelli
141 E. Central Avenue
Palisades Park, NJ 07650
EMPLOYMENT AGREEMENT
Dear Mr. Castelli:
The purpose of this letter is to summarize the terms of our agreement for your
employment as Chairman and Chief Technology Officer (CTO) of Linkon Corporation.
As CTO, this full time position reports to me as President and CEO and is
located in our Fairfield, CT office. Following are the terms of employment:
1.) RESPONSIBILITY
You will be responsible for the strategic direction of Linkon's product
offerings. You will survey the technical, trade and financial literature and
make recommendations on products or companies Linkon Corporation should create,
use or acquire. Attachment 1 to this letter provides a more detailed definition
of duties.
2.) COMPENSATION
1. A monthly base salary of $12,500 which will be reviewed
annually.
2. A performance bonus of $25,000 paid annually based upon
achievement of goals as defined in Attachment 2 of this
letter.
3.) OPTIONS
1. You will participate in the Linkon stock option plan.
2. You will receive in any event, 100,000 fully vested options as
a signing bonus with this contract.
4.) BENEFITS
1. Linkon has health and life insurance programs for which you
are eligible.
2. Linkon has a 401K program for which you are eligible.
3. You will be entitled to one month vacation.
4. You will receive an auto allowance of $700 per month.
5.) TERM
The term of this employment agreement shall commence on the day of the signing
of this employment agreement and shall continue for three years or until
otherwise terminated in this agreement.
6.) TERMINATION
1. In the event you are terminated for cause, you will receive no
compensation. "Cause" is defined as: (i) Violation of any rule
or regulation of any regulatory organization or Governmental
agency which is injurious to Linkon. (ii) Your conviction of a
felony. (iii) Your conviction of any crime involving moral
turpitude. (iv) A finding that you sexually harassed or
discriminated against any company employee. (v) A material
breach of the terms of this offer.
2. Should Linkon terminate you, you will receive a severance
payment equal to one year salary plus
<PAGE> 2
Thomas V. Cerabona Employment Agreement
May 19, 1998
Page 2
any bonus earned and benefits.
3. In the event, Linkon undergoes a sales, merger or acquisition
to a 3rd Party resulting in your termination, you will receive
a severance payment equal to two years of base salary plus any
bonus earned and benefits.
7.) INDEMNIFICATION
Linkon will indemnify you for any and all claims, suits, proceedings, damages,
losses or liabilities incurred by you and arising out of any acts or decisions
done or made by Linkon from the signing of this agreement. Linkon agrees to pay
your reasonable expenses, including reasonable attorney's fees, actually
incurred by you in connection with the defense of any such action, suit or
proceedings and in connection with any appeal thereon including the cost of
court settlements if such settlement is agreed to by Linkon. Nothing contained
herein shall entitle you to indemnification by Linkon in excess of that
permitted by applicable law.
8.) NON-COMPETITION
You agree that in consideration for Linkon's agreement contained in this offer,
you will not, directly or indirectly, be employed by, manage, operate, control
or acquire an interest in, or otherwise engage or participate in any business
which is in competition with the business of Linkon.
Please sign this letter as an indication of your acceptance of these terms of
employment.
Sincerely,
Lee W. Hill
President and CEO
enclosure (2) I accept the terms of this employment agreement,
------------------------------ ------------
Charles Castelli Date
<PAGE> 1
May 19, 1998 Exhibit 10.16
Thomas V. Cerabona
3061 Dahlia Court
Yorktown Heights, NY 10598
EMPLOYMENT AGREEMENT
Dear Mr. Cerabona:
The purpose of this letter is to summarize the terms of our agreement for your
employment as Senior Vice President, Operations of Linkon Corporation. This full
time position reports to me as President and CEO and is located in our Fairfield
headquarters. Following are the terms of employment:
1.) RESPONSIBILITY
You will have primary responsibility for the company's day to day operations.
You will specifically be responsible for the overall strategic direction of the
company's accounting, manufacturing, materials management, sales support,
treasury and legal departments. You will have budgeting, expense control and
personnel decision making for your functional areas. Attachment 1 to this letter
provides a more detailed definition of duties.
2.) COMPENSATION
1. A monthly base salary of $10,417 which will be reviewed
annually.
2. A performance bonus of $25,000 paid annually based upon
achievement of goals as defined in Attachment 2 of this
letter.
3.) OPTIONS
1. You will participate in the Linkon stock option plan.
2. You will receive in any event, 75,000 fully vested options as
a signing bonus with this contract.
4.) BENEFITS
1. Linkon has health and life insurance program for which you are
eligible.
2. Linkon has a 401K program for which you are eligible.
3. You will be entitled to one month vacation.
4. You will receive an auto allowance of $500 per month.
5.) TERM
The term of this employment agreement shall commence on the day of the signing
of this employment agreement and shall continue for two years or until otherwise
terminated in this agreement.
<PAGE> 2
Thomas V. Cerabona
May 19, 1998
Page 2
6.) TERMINATION
1. In the event you are terminated for cause, you will receive no
compensation. "Cause" is defined as: (i) Violation of any rule
or regulation of any regulatory organization or Governmental
agency which is injurious to Linkon. (ii) Your conviction of a
felony. (iii) Your conviction of any crime involving moral
turpitude. (iv) A finding that you sexually harassed or
discriminated against any company employee. (v) A material
breach of the terms of this offer.
2. Should Linkon terminate you, you will receive a severance
payment equal to one year salary plus any bonus earned and
benefits.
3. In the event, Linkon undergoes a sales, merger or acquisition
to a 3rd Party resulting in your termination, you will receive
a severance payment equal to one year of base salary plus any
bonus earned and benefits.
7.) INDEMNIFICATION
Linkon will indemnify you for any and all claims, suits, proceedings, damages,
losses or liabilities incurred by you and arising out of any acts or decisions
done or made by Linkon from the signing of this agreement. Linkon agrees to pay
your reasonable expenses, including reasonable attorney's fees, actually
incurred by you in connection with the defense of any such action, suit or
proceedings and in connection with any appeal thereon including the cost of
court settlements if such settlement is agreed to by Linkon. Nothing contained
herein shall entitle you to indemnification by Linkon in excess of that
permitted by applicable law.
8.) NON-COMPETITION
You agree that in consideration for Linkon's agreement contained in this offer,
you will not, directly or indirectly, be employed by, manage, operate, control
or acquire an interest in, or otherwise engage or participate in any business
which is in competition with the business of Linkon.
Please sign this letter as an indication of your acceptance of these terms of
employment.
Sincerely,
Lee W. Hill
President and CEO
enclosure (2) I accept the terms of this employment agreement,
------------------------------ ------------
Thomas V. Cerabona Date
<PAGE> 1
Exhibit 10.17
ENGAGEMENT AGREEMENT
This Engagement Agreement ("Agreement") sets the basis upon which Linkon
Corporation, ("LINKON" or "the Company") has engaged Morgen, Evan & Company,
Inc. ("MECo") to act as exclusive advisor to LINKON or any of its affiliated
companies, in connection with a strategic alliance, financing, distribution
agreement, or merger and/or sale of the Company (collectively referred to herein
as a "Strategic Alliance"). This Agreement exclusivity covers all companies of
Japanese origin, or any subsidiaries/affiliates of such Japanese companies.
I. OBJECTIVES
MECo understands LINKON's Interests with regards to a Strategic Alliance to
incorporate any or all of the following:
(1) Support of a private placement, terms for which would have to be
structured,
(2) A target strategic investor, merger partner, or purchaser for LINKON,
(3) Support for implementation of a product distribution (or licensing)
relationship,
(4) Support for joint research and development of next generation LINKON
products.
MECo will use its best efforts to:
(A) Identify prospective Merger Partner/Purchasers/Investors/Distributors
(collectively, "Partners"). Evaluate, prioritize and recommend to and
secure approval from LINKON to initiate discussions. MECo will maintain
and provide to LINKON on a regular basis, an ongoing list of all
prospects including name, contact and status.
(B) Confirm LINKON's interest in and arrange for management of LINKON to
meet the potential Partners as an initial step in negotiating a
transaction.
(C) Analyze LINKON to determine a fair value in order to negotiate
appropriate terms of the sale/strategic alliance in conjunction with
LINKON. MECo will assist in all phases of negotiations, as well as
interface as appropriate with LINKON's counsel, auditors, and public
relations consultants in analysis, strategy, negotiations and any other
steps necessary to the consummation of the transaction. MECo will
assist in the preparation of relevant documents as is warranted.
II. FEES
As consideration for MECo's services, LINKON will pay a Retainer Fee, Contingent
Transaction Fees, and reimbursement of expenses as set forth below:
(A) Retainer Fees:
(1) LINKON shall pay to MECo, for each three month period (each a
"Retainer Period") following the Effective Date (as defined in
Section IV below), a retainer fee (the "Retainer Fee") of: (i)
15,000 "144 class" shares (the "Shares") of common stock of LINKON
and (ii) warrants (the "Warrants") to purchase 30,000 shares of
the registered common stock of LINKON. The Shares paid to MECo as
part of the Retainer Fee for each Retainer Period under this
Agreement shall have piggy-back registration rights. The Warrants
paid to MECo as part of the Retainer Fee for each Retainer Period
shall have an exercise price equal to the price of the common
stock of LINKON on the first day of the applicable Retainer
Period. The Warrants shall contain standard anti-dilution features
adjusting for stock-splits and shall have an expiration date which
is five years from the Effective Date. Each Retainer Fee shall be
paid on the first day of the applicable Retainer Period. LINKON
may cancel the Agreement at any time by giving MECo thirty days
prior written notice. In the event that the Agreement is
terminated prior to the end of any quarter, MECo will retain the
full Retainer Fee for the applicable Retainer Period.
<PAGE> 2
(2) LINKON acknowledges that MECo has been providing services for
LINKON (such as preliminary research and potential partner
contact) since December 1, 1998. In consideration for such
services rendered and in addition to any Retainer Fees payable to
MECo pursuant to paragraph (A)(1) above, LINKON shall pay to MECo,
on the Effective Date, additional warrants (the "Additional
Warrants") to purchase 30,000 shares of the registered common
stock of LINKON. The Additional Warrants shall have an exercise
price of $0.5312 per share of common stock of LINKON, shall
contain standard anti-dilution features (including adjustments
upon stock-splits) and shall have an expiration date which is five
years from the Effective Date.
(B) Contingent Transaction "Success" Fee: The contingent transaction fee
will be as follows:
(1) Upon the successful closing of an equity transaction, (a sale of
LINKON stock, in whole or in part), MECo shall earn a success fee
equivalent to 7.0% of the value of the consideration received for
LINKON equity. Equity shall be defined as any security with an
equity component, such as convertibles, preferred stock, etc.
(2) In the event of a merger between LINKON and another company
directly or indirectly introduced by MECo, MECo shall earn a fee
of 7.0% of the valuation of LINKON, as reported in the merger
documentation.
(3) If LINKON receives debt financing from a Partner directly or
indirectly introduced by MECo, MECo shall earn a fee of 2.0% of
such financing. For purposes of this Agreement debt financing
shall be defined as any form of debt, whether short term or long
term. Preferred stock and convertible are defined as equity,
subject to a fee as outlined in (1) or (2) above.
(4) Upon the implementation of a distribution and/or licensing
agreement, MECo shall earn a fee of three (3.0) percent of all
LINKON sales or royalties received through such agreement. Such
fees will be paid quarterly for a period of five years. MECHANICS
GOVERNING THIS CLAUSE WILL BE WILL BE AGREED UPON BETWEEN THE
PARTIES AND PROVIDED AS A RIDER HERETO AT A LATER DATE.
(C) Expense Reimbursement: During the term of this Agreement, LINKON will
reimburse MECo for its reasonable out-of-pocket expenses for travel,
lodging, food and communications, including long distance charges,
express delivery charges, etc. MECo agrees that total reimbursable
expenses under this paragraph, excluding travel expenses that have been
approved in advance by LINKON, shall not exceed $3,000 per quarter.
LINKON agrees to reimburse MECo within 30 days following submission of
a request for expense reimbursement.
Any contingent fee due to MECo shall be payable by LINKON upon the receipt of
proceeds from the Transaction at closing. For the purpose of this Agreement, the
term "Transaction" shall mean the total consideration paid by the
Purchasers/Investors or received by LINKON for the conveyance of a current or
future ownership interest in LINKON.
<PAGE> 3
Any obligation of LINKON to pay a contingent fee (as described in Section II.
(B) above) pursuant to the Agreement shall remain in effect for a period of 24
months from the date of termination of this Agreement, for all prospects
introduced by MECo to LINKON. In the event of multiple closings and/or multiple
transactions, MECo shall be entitled to a fee based upon each transaction
occurring within this period.
LINKON will indemnify MECo from and against any liability arising from the
authorized efforts by MECo under this Agreement, and of information furnished by
LINKON that is false or misleading.
MECo will indemnify LINKON from and against any liability for finders fees,
brokerage fees, or any other compensation claimed by any other person allegedly
used or engaged by MECo in connection with the transaction.
III. MISCELLANEOUS
(A) Notices. Any notice, demand, or communication required or
permitted to be given by any provision of this Agreement shall be
deemed to have been sufficiently given or served for all purposes
if delivered personally to the party or to an executive officer of
the party to whom the same is directed or, if sent by registered
or certified mail, postage and charges prepaid, addressed to the
party's address, as appropriate, or if sent by facsimile provided
transmission thereof is confirmed. If sent by registered or
certified mail, any such notice shall be deemed to have been given
five business days after the date on which the same was deposited
in a regularly maintained receptacle for the deposit of United
States mail, addressed and sent as aforesaid.
(B) Headings. The headings in this Agreement are inserted for
convenience only and are in no way intended to describe,
interpret, define, or limit the scope, extent or intent of the
Agreement or any provision hereof.
(C) Heir, Successors and Assigns. Each and all of the covenants,
terms, provisions and agreements herein contained shall be binding
upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and assigns.
(D) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original but both of which shall
constitute one and the same instrument.
(E) Entire Agreement. This Agreement contains the entire agreement of
the parties and supersedes any prior agreements, whether written
or verbal, and may only be amended by an agreement in writing
signed by both of the parties.
(F) Governing Law. This Agreement shall be governed by the laws of the
State of New York without regard to principles of conflicts of law
or choice of law.
IV. EFFECTIVE DATE
The Effective Date of this Agreement shall be February 12, 1999.
In Witness Whereof, the parties have executed this Agreement.
AGREED TO AND ACCEPTED:
<PAGE> 4
LINKON CORPORATION MORGEN, EVAN & COMPANY, INC.
By: /s/ Lee W. Hill By: /s/ Mark J. Lerner
--------------------- ----------------------
Lee W. Hill Mark J. Lerner
President and CEO President
Date: Feb. 12, 1999 Date: 3/5/99
--------------------- ----------------------
<PAGE> 5
MORGEN, EVAN & COMPANY, INC.
Investment Banking
63 Wall Street,
New York, N.Y. 10005
Tel. 212-480-4511
Fax. 212 483 9160
Web. http://www.nnorgenevan.com
SIDE LETTER NO. I TO THE ENGAGEMENT AGREEMENT
March 11, 1999
Mr. Lee W. Hill
Linkon Corporation
140 Sherman Street
Fairfield, CT 06430
Dear Lee:
As per the conversation earlier today with Tom Cerabona in which he
confirmed that LinkNetwork Corporation is a subsidiary of Linkon Corporation and
that MECo's services would include services for LinkNetwork Corporation, for the
purpose of clarity, the Engagement Agreement dated February 12, 1999 (the
"Agreement"), between Linkon Corporation and MECo, shall be amended as follows:
(1) The first sentence of the Agreement shall read:
"This Engagement Agreement ("Agreement") sets the basis upon which Linkon
Corporation and any of its affiliated companies (including LinkNetwork
Corporation), ("LINKON" or "the Company") has engaged Morgen, Evan &
Company, Inc. ("MECo") to act as exclusive advisor to LINKON, in connection
with a strategic alliance, financing, distribution agreement, or merger
and/or sale of the Company (collectively referred to herein as a "Strategic
Alliance")."
(2) Any payment of securities (including shares of common stock and warrants)
due to MECo under the Agreement shall be paid to MECo by Linkon Corporation
in the applicable securities of Linkon Corporation.
Any capitalized terms used but not defined in this letter shall have the
meanings provided in the Agreement. Except as expressly provided herein, the
terms of the Agreement shall remain in full force and effect without
modification or amendment. If the foregoing correctly sets forth the
understanding between us, please so indicate in the space below, whereupon this
shall constitute a binding agreement between us.
Agreed to by:
LINKON CORPORATION MORGEN, EVEN & COMPANY, INC.
By: /s/ Lee W. Hill By: /s/ Mark Lerner
--------------------- ----------------------
Name: Lee W. Hill Name: Mark Lerner
Title: President and Chief Title: President
Executive Officer
LINKNETWORK CORPORATION
By: /s/ Lee W. Hill
---------------------
Name: Lee W. Hill
Title: President and Chief
Executive Officer
<PAGE> 6
EXHIBIT G
ESCROW AGREEMENT
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET DATED AS OF JANUARY, 31 1999 AND THE
COMPANY'S CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED
JANUARY, 31 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 376,596
<SECURITIES> 0
<RECEIVABLES> 231,358
<ALLOWANCES> 40,000
<INVENTORY> 879,366
<CURRENT-ASSETS> 1,467,816
<PP&E> 1,629,018
<DEPRECIATION> 1,227,467
<TOTAL-ASSETS> 2,815,618
<CURRENT-LIABILITIES> 2,542,289
<BONDS> 1,020,094
0
0
<COMMON> 13,522
<OTHER-SE> (746,765)
<TOTAL-LIABILITY-AND-EQUITY> 2,815,618
<SALES> 4,243,996
<TOTAL-REVENUES> 4,243,996
<CGS> 2,853,593
<TOTAL-COSTS> 2,853,593
<OTHER-EXPENSES> 4,049,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,404
<INCOME-PRETAX> (2,795,693)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 109,914
<CHANGES> 0
<NET-INCOME> (2,686,779)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
