-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EFzhblDUttZJciSdWWb7IWGOMASeA5RQ1Fj3aZiu42hsNuuPX3I2URdaET6MAJR6 cXFIdBwz/eu9nfFVtwUWpg== /in/edgar/work/20000628/0000910680-00-000430/0000910680-00-000430.txt : 20000920 0000910680-00-000430.hdr.sgml : 20000920 ACCESSION NUMBER: 0000910680-00-000430 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ION NETWORKS INC CENTRAL INDEX KEY: 0000754813 STANDARD INDUSTRIAL CLASSIFICATION: [3577 ] IRS NUMBER: 222413505 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-13117 FILM NUMBER: 663363 BUSINESS ADDRESS: STREET 1: 21 MERIDIAN RD CITY: EDISON STATE: NJ ZIP: 08820 BUSINESS PHONE: 2014944440 MAIL ADDRESS: STREET 1: 21 MERIDIAN RD CITY: EDISON STATE: NJ ZIP: 08820 FORMER COMPANY: FORMER CONFORMED NAME: MICROFRAME INC DATE OF NAME CHANGE: 19920703 10KSB 1 0001.txt FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2000 OR |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File No.: 0-13117 ION NETWORKS, INC. ------------------ (Name of Small Business Issuer in Its Charter) Delaware 22-2413505 - ------------------------------ ----------------------------------- Incorporation or Organization (IRS Employer Identification Number 1551 South Washington Avenue, Piscataway 08854 ----------------------------------------- ---------------- (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code: (732) 529-0100 -------------- 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 ----------------------------- |X| Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |_| Check if there is no 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 information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. The issuer's revenues for its most recent fiscal year totaled $22,668,833. The aggregate market value of the voting stock held by non-affiliates computed by reference to the average of the bid and asked prices as reported by the Nasdaq Stock Market as of June 22, 2000 was approximately $86,618,805. There were 15,621,862 shares of Common Stock outstanding as of June 22, 2000. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders of the Company are incorporated by reference into Part III hereof. PART I ITEM 1. DESCRIPTION OF BUSINESS. ------------------------ GENERAL ION Networks, Inc., ("ION" or the "Company"), is a developer and manufacturer of software and hardware solutions for monitoring and managing mission critical voice and data network infrastructure. ION is a Delaware corporation founded in 1999 through the combination of two companies focused on network management products - MicroFrame, Inc., a New Jersey corporation (the predecessor entity to the Company, originally founded in 1982) and SolCom Systems Limited ("SolCom"), a Scottish corporation located in Livingston, Scotland (originally founded in 1994). In 1999 ION Networks augmented the Company through the purchase of certain assets of LeeMAH DataCom Security Corporation ("LeeMAH"), a California corporation. The latter now constitutes ION's Secur@ccess division. ION designs and manufactures next-generation secure, proactive and anticipatory network infrastructure management products. ION's products monitor applications (computer programs which people and businesses use), devices and links in a network to determine if a network is working properly. The Company's products are used to collect and analyze data about the network and make meaningful decisions about them. If the network is working erratically, ION's products determine the cause of the problem and attempt to fix it automatically. As a result, ION's products improve network performance and assist the businesses or institutions that are dependent on networks to be more effective. ION's customers are businesses that provide voice and data network services to businesses and consumers, and large enterprises or institutions which need networks to manage their business operations. ION's customers' networks support a variety of uses, e.g., telecommunications, email, accounting and other financial systems, word processing, engineering and manufacturing, e-commerce, and various outsourced services such as applications services and web-hosting. Today these customers constitute a market that is relatively small, (approximately $1 billion) rapidly growing, highly fragmented and exhibiting little direct competition among industry participants. The Company believes that a variety of factors will drive significant growth in this market. Because the number of business functions carried over communications networks has greatly expanded in recent years, businesses are now dependent on networks to support their most critical functions. The number of tasks that networks are used for and the volume of data that networks handle has increased network complexity exponentially. To manage this complexity, many enterprises have outsourced their network operations to service providers. However, to gain outsourcing contracts, service providers must guarantee a certain level of performance and return some payments if the guarantees are not met. Accordingly, both enterprises and service providers are demanding products that can prevent networks from suffering expensive and disruptive "down time" or from reducing employee productivity through long response times. -2- To meet these demands, ION offers a family of next-generation network infrastructure management products called PRIISMS Suite. PRIISMS Suite is an integrated suite of hardware and software for end-to-end network infrastructure management that captures knowledge from network experts and automates their analysis, decision making and actions, in effect making PRIISMS Suite a Virtual Network Expert(TM). PRIISMS Suite consists of various intelligent devices1 ("ION's Devices") for remote monitoring and management of network devices and links, and a central server, PRIISMS2 Manager, which manages the devices and monitors the network from end-to-end. ION's PRIISMS suite enhances the performance of existing networks, allowing network managers to defer or sometimes eliminate the need to incur significant expense in upgrading their networks. Because PRIISMS Suite is scalable, provides predictive and real-time problem identification (Root Cause Analysis), can act to diagnose and resolve problems, makes efficient use of network resources and bandwidth, and can be customized, ION believes its products enhance the economic value of its customers' networks. Because problems are diagnosed and resolved quickly, service providers improve their quality of service and limit the need to pay refunds to their customers. User dissatisfaction and customer defections are reduced. Additionally, expensive visits by repair technicians to remote sites are limited, because the expertise of this scarce resource is extended throughout the network. ION has a well-recognized customer base of more than 250 customers who use the products in over 10,000 locations. ION's largest customers are telecommunications companies of all kinds, both in the United States and in Europe, as well as large enterprises and institutions Approximately one-third of ION's sales are made direct to customers such as AT&T, Rhythms NetConnections, MCI and Intel Corporation, one-third go through resellers such as KNP-Telecom BV, Sycamore Networks, Ameritech and USWest, and one-third are sold through original equipment manufacturers (OEMs) Hewlett-Packard and Lucent Technologies. THE PRODUCTS All of ION's products, except those sold to OEMs, fall within the PRIISMS Suite, an integrated suite of hardware and software products for end-to-end network performance monitoring and management that captures knowledge from network experts and automates their analysis, decision making and actions. Currently, the PRIISMS Suite consists of various different intelligent devices and a centralized software manager, called the PRIISMS Manager. ION'S DEVICES One of ION's core product strategies is to offer a family of Devices that match customers' requirements over a range of capabilities from simple alarm detection and reporting to sophisticated analyses which determine the cause of a network problem and attempt to fix it immediately. ION's Devices have the following capabilities: . Secure Access - Only authorized personnel can obtain information from or send instructions to ION's Devices or to network devices. Users can logon to one of ION's Devices and get a real-time view of network functionality. Their actions are logged for later audit. - ----------------------------- 1. Intelligent devices are those that contain programmable microproccessors 2. Procaticve, real-time, integrated, intelligent, secure, metric-based solution -3- . Alarm Management - When a process running on a network device exceeds preset thresholds, the device generates an alarm. ION's Devices detect these alarms and report them, and also generate alarms when unauthorized access or power loss occurs. All events and alarms are logged for later audit. . Custom AMT Modules - Active Management Technology ("AMT") is the method whereby ION's Devices capture knowledge from network experts and automate their analysis, decision making and actions. How network experts analyze data, the decisions they make about the data and analyses, and the resulting actions they take can be codified in a series of rules, or a "routine", that ION's Devices can execute. As a result, the network expert's ability to identify and solve network problems can be implemented across the entire network. The routines can be executed automatically, fixing many network faults without the need for human intervention. . Data Buffering - Data collected from network devices such as PBXs or servers can be automatically formatted for later viewing or for downloading to other applications such as billing systems. . Environmental Monitoring - Network devices can be impacted by environmental factors, e.g., heat, water, intruders. ION's Devices detect and report various environmental changes. . SNMP Device Monitoring and Management - SNMP (Simple Network Management Protocol) is a widely used standard method of communicating with many network devices. This standard also specifies what kind of information is available about the network device and how it is collected. ION's Devices can collect, report, and analyze information from any network device that conforms to this standard. In passive monitoring, network elements notify ION's Devices of unusual events and action is taken. In active monitoring, ION's Devices poll network devices checking for changes which could indicate a developing problem. This allows ION's Devices to anticipate problems and to take action before problems become severe. o SNMP Traps - ION's Devices can collect data from network devices that do not conform to the SNMP standard and convert the data into the SNMP standard. Then the network devices can take advantage of the most advanced and powerful network management tools. One example of non-SNMP devices are some of the optical switches, those network devices which communicate using photons rather than electrons, and are currently the most advanced switching technology commercially available. . RMON Monitoring - R(emote) MON(itoring) is a standard method for collecting and analyzing data from IP-based network devices and the links between the devices. RMON is an extension of SNMP that performs data collection and analysis about network performance at remote locations. Because information is not constantly reported to a central site, RMON uses less network capacity than does SNMP as it continuously collects fault, configuration, and performance data, as well as running diagnostics and logging performance. RMON analyses the network traffic for each protocol used by the network and for each application running on the network, thereby producing information about all levels of the network. . "Out-of-the-Box" AMT - ION makes available a library of measurement and action routines for analyzing network data, making decisions and taking action. These routines are much more comprehensive than those in RMON and are designed to be useful to most network managers. They are exception-based and report only the most important information from the remote site, making the most productive use of expensive network bandwidth and of the network engineer's time. ION's Devices are based on a common framework and offer subsets of the capabilities described above so as to meet the needs of different customer segments. The most economical devices provide only secure access to network devices and a log of any user activities, whereas the most versatile device, NetwoRx, -4- manages an entire remote location providing a wide range of analyses and anticipatory action to solve network problems before they become severe. The capabilities of each device are described below:
INTELLIGENT ENVIRON- PASSIVE ACTIVE OUT-OF DEVICES SECURE ALARM CUSTOM DATA MENTAL SNMP SNMP SNMP THE-BOX ACCESS MGMT AMT BUFFERING MON TRAPS MON MON RMON AMT - ------------------------ ---------- --------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- . Secure@ccess: X ------------ TraqNet 2000 and FasTraq . Secure X X Sentinel . Sentinel 2000S X X X X X X X . Sentinel 2000 X X X X X X X . NetwoRx-O - X X X X X X X for Optical Technology Manufacturers . NetwoRx-VT X X X X X X X -for CLECs3 . NetwoRx X X X X X X X X X
The Company believes these products have valuable distinguishing capabilities that limit the level of direct competition and have allowed ION to develop as an industry leader in next-generation, proactive network infrastructure management products. ION's PRIISMS Suite: . employs a distributed architecture - Intelligent hardware devices at remote locations ensure that the system scales so it can monitor large, diverse or highly distributed networks without performance degradation. ION's Devices poll network devices every second so the performance information is collected in real-time. Data collection and analysis occur at remote locations without human intervention, resulting in considerable savings to the customer. In addition, this type of analysis ensures that only true problems are reported (exception reporting) to the central manager thereby minimizing the system's use of the customer's valuable bandwidth. . collects and reports information, analyzes and anticipates network problems - Standardized network management data are collected: SNMP MIB data, SNMP Traps (alarms), RMON1, RMON2, console port data, ASCII, TL1, humidity, temperature, and physical intrusion. Various kinds of analyses include: translating between data types, creating Traps, RMON statistics, measurements of router health, measurements of Ethernet LAN health, measurements of PVC status and utilization, measurements of LAN switch and port health, utilization levels of applications and of protocols, and histories. . recommends and takes action - ION's unique AMT automatically takes action to resolve network problems. For example, ION's Devices can be programmed to reboot a device when a particular condition is detected. In addition, they can take a network link up or down, create a Trap, notify a - ----------------------------- 3 Competitive local exchange carriers, e.g. Rhythms NetConnections, Covad, PathNet -5- person, collect many kinds of additional diagnostic information, etc. . operates during power or network outage - ION's Devices have battery back-up and secure out-of-band (dial-up) access so they continue to function when network devices are down. As a result, an authorized network engineer can determine the cause of a problem and even repair it when other network management systems, which are dependent on a functioning network, would be unable to operate. . accommodates secure access and communication - ION's Devices, the central servers which manage them, and the network devices which are being monitored will allow only authorized users to access them. ION's system conforms to Security Industry Standards and provides authentication, access control, authorization and an audit trail. . can be customized to fit any environment - All networks are different. A customer can set/modify thresholds and parameters for any of the measurement and action routines which ION provides. In addition, since all networks are different, ION provides a scripting capability which allows customers, or ION's professional services people, to develop customized routines. PRIISMS MANAGER PRIISMS Manager consolidates the information from multiple ION Devices so customers have a picture of the activity on their whole network. Today PRIISMS Manager manages all of the ION's Devices except TraqNet 2000 and FasTraq, ION Devices produced by the Secur@ccess Division. These devices are currently being integrated and are scheduled to operate with PRIISMS Manager later this year. PRIISMS Manager: . has a web-based Graphical User Interface (GUI) for navigating among the devices and reporting exceptions sent by ION's Devices . can monitor devices in real-time both using the network and using dial-up (out-of-band) connections if the network has an outage . establishes passwords for the devices, administers and ages them, along and controls the criteria for who can gain access to ION's Devices and to the network devices that are being managed . sets up and changes the configurations of ION's Devices and groups them so they can be managed in categories . for NetwoRx, the most capable ION device, displays RMON statistics, allows users to configure thresholds and parameters of the various Out-of-the-Box AMT routines, and provides information from all of ION's Devices in the network, providing an enterprise-wide view. OEM PRODUCTS In addition to ION's Devices, ION sells custom versions of devices and software to OEMs who resell them under the OEM's brand name. In FY2000, ION received $1,596,000 from Hewlett-Packard Company and $2,199,000 from Lucent Technologies, Inc., for these customized products. In addition, during FY2000 the Company developed and licensed the rights to certain customized modules of its software via a perpetual license agreement for approximately $3,244,000. The development and licensing had a positive effect on the gross margins of the Company in FY2000. The Company has no further obligations to the customer with respect to this development and the licensed software. -6- SUPPORT SERVICES In addition to hardware and software products, ION provides a full range of support services including software and hardware maintenance agreements, on-site and in-house training, product installation and configuration, customization, technical support and a help desk. TARGET MARKETS - DEFINITION AND DRIVERS Today most businesses cannot operate effectively or efficiently without their networks, and some businesses cannot operate at all. This dependency on networks began to develop in the mid-1980s as advances in technology made networking devices affordable to large enterprises and institutions. These same advances began to render obsolete the network devices used by network services providers, such as telephone and cable companies. The result was billions of dollars were spent on networking devices and on connecting them together. The availability of reliable, affordable networks encouraged the development of enterprise-wide computing systems and of network-based applications such as integrated finance-manufacturing-human-resources systems, relational databases, e-mail, intranets, data-mining, customer relationship management, and others. Also, new kinds of networking service providers emerged such as web-hosting companies, Internet service providers (ISPs), application service providers (ASPs) and the ubiquitous dot-com companies. Businesses such as those described above cannot run without their networks because their most critical activities are dependent on the network. As a result of their dependency on networks, many businesses experience considerable expense. If the network is not running properly, employee productivity can be reduced, as employees are unable to do their jobs effectively. Many businesses suffer loss of revenues as customers using the network seek elsewhere for their goods and services. Network managers scramble to fix ill defined problems as users wait for the network to recover and as their well-trained engineers leave for better jobs in the highly competitive career marketplace. Service providers with contractual commitments to provide certain levels of network availability to their customers are forced to return payments to customers. Entire operations come to a halt as network security is breached, and systems stop functioning or are reconfigured by unauthorized personnel. These problems only become more difficult when the network must deliver functionality to globally distributed workers, applications, supply chains and enterprises. As new network technologies are developed, enterprises implement them to achieve better performance and cost savings. This is a constant process which increases the complexity of the network and of the problems that can occur. To alleviate the pressure of dealing with these issues, large enterprises and institutions are outsourcing more and more of their network and applications. However, the businesses that provide these services must meet negotiated contractual commitments for performance (Service Level Agreements (SLAs)), and, to the extent they are not met, must refund payments. To an enterprise or a service provider, network performance problems represent real economic loss. For example, according to one of the Company's customers, dispatching a technician to reboot a router in the local -7- area can cost between $200 and $400; most technicians are charged out at $250/ hour, and their average job is $1,000. The cost of a network outage can raise operating costs by 50% from $1.00/hour/user to $1.50/hour/user. Other customers have described a typical repair cycle for a large network as: 20 minutes to detect a problem, 30-120 minutes to diagnose the problem, and 60-120 minutes to implement the solution. An Internet Service Provider (ISP) with 1200 business customers who must return $1000-2000/hour/customer for an outage, can incur as much as $10,000,000 in penalties in just four hours. To reduce the impact of dependency and economic loss, most networks employ some form of network management. However, most of these solutions have limitations. Most deliver technical data in large quantity. Often the data reach the network engineer after a problem has occurred and without identifying its cause, which must still be determined by the network engineer before he can fix it. Determining the root cause of the problem can take up to 75% of the engineer's time, from when a problem is identified until it is fixed. When mission-critical applications are unavailable, this delay is very apparent to network users trying to conduct business. More problematic is how many potentially revenue-producing customers could not get onto the network and took their business elsewhere. Because of these problems, network mangers and users are starting to demand network infrastructure management products that: . are able to determine how network users are impacted by the underlying network problems. . not only deliver data to engineers, but also automate some of the engineer's analyses and activities, making him more productive. . can identify network problems in real-time or even before they happen. . can perform sophisticated analyses that send only the most important information to the engineer. The information should be easily understood, and the cause of the problem should be identified allowing engineers to skip the lengthy diagnosis phase. Fixing the problem automatically is highly desirable. . redirect network traffic to maximize network capacity and avoid bottlenecks and network faults. . provide business solutions, not just network management solutions, allowing the business to increase the returns it can earn. The market for these products is highly fragmented and emerging, and, as such, the size and growth rates are hard to quantify. According to research published by First Security Van Kasper ("FSVK"), only 5% of potential customers utilize these advanced network infrastructure management products. FSVK estimates the network infrastructure management market at $2.7 billion in 1998, growing to $10.4 billion in 2001, representing a compound annual growth rate (CAGR) of 57%. Another study from 1998 conducted by Bear Stearns estimated the size and growth rates of several network infrastructure management segments, as follows: . Performance analysis and reporting tools at $522MM in 2000 with an 80% CAGR . End-user performance management at $413MM in 2000 with an 82% CAGR . Public WAN data service level management at $185MM in 2000 with a 51% CAGR. The Company believes it products are uniquely suited to meet the needs of this market. Its distributed architecture easily scales to manage large, diverse and highly distributed networks while performing predictive and real-time problem identification. ION's Devices have the ability to act to diagnose and resolve problems even during power or network outages. Because analysis and actions occur at the distributed locations ION's products make efficient use of network resources and expensive bandwidth while providing the flexibility for -8- customization to fit any network. The result of these characteristics is real economic benefit. Quality of service is increased and the time to diagnose and resolve problems (mean-time to repair (MTTR)) is reduced thereby limiting service providers' need to make refunds to customers. End user and customer dissatisfaction is minimized improving employee productivity and customer loyalty. Expensive visits to diverse and remote locations are limited. The Virtual Network Expert extends the expertise of scarce resources across the entire network and assists human engineers to solve problems more effectively and efficiently. MARKETING AND DISTRIBUTION In FY2000 the Company continued to expand its sales force, growing from eight in FY1999 to 18 currently. The Company goes to market through three channels: direct sales, resellers, and OEMs. In FY2000 direct sales were 38.5% of revenues; sales through resellers were 30.0%, and OEM sales were 31.5%. ION markets its products primarily in the United States and Europe. In FY2000 85% of sales were in the United States, 15% were in Europe and 5% were in the Pacific Rim and South/Central America. In total, ION has over 250 customers with products deployed at more than 10,000 locations worldwide. ION's largest customers are telecommunications service providers in the United States and Europe. Examples of those to whom ION sells direct are: Rhythms NetConnections, Crown Castle USA, MCI Worldcom, Pointe Communications Corporation, FirstWorld Communications, Sonera Systems Ltd, and Concert. Enterprise and institutional customers are, among others, Intel Corporation, Entergy Corporation, Fleet Boston Corporation, and Bay Area Rapid Transit (BART). Some of ION's resellers are: Bomara Associates, KPN Telecom BV, Bluewater Networks, Inc., Alcatel Belgium, and NeMO GmbH. COMPETITORS The table below shows the eight companies that the Company believes are most likely to become ION competitors. The table describes the core strength of the company, its current products, the way it positions itself in the marketplace and its most recent fiscal year revenues, if available. Currently ION has little direct competition, and the market it addresses is emerging and highly fragmented with many companies expanding by acquisition from their initial business to offer a more comprehensive solution. An indication of the emerging nature of the market ION addresses is the size of the companies in this industry. None has yet reached $100 million in annual sales. While not direct competitors, many companies position themselves in the marketplace in much the same way as does ION. This can be very confusing to potential customers, particularly in the emerging market. Customers are confused because industry participants with very different products claim to deliver similar benefits. These companies claim similar capabilities to ION's, and as ION executes its growth strategy and the industry consolidates through acquisition, the number is likely to increase. Management believes ION currently has a combination of distinguishing capabilities which are valued by the marketplace, especially the ability to proactively anticipate network problems and take the actions required to repair network problems even during power or network outages without using up expensive network bandwidth. These characteristics provide genuine economic benefit to customers by increasing the quality of service delivered by the network and reducing the time required to resolve problems. -9-
- --------------------------------------------------------------------------------------------------- COMPANY CORE STRENGTH PRODUCTS POSITIONING - --------------------------------------------------------------------------------------------------- Applied WAN/LAN remote site monitoring for AI products enable Innovation measurement analog and relay contact alarm carriers to efficiently signals monitor & manage their networks - --------------------------------------------------------------------------------------------------- Aprisma Fault fault management system with A leader in e-business management/- monitoring and fault isolation infrastructure management monitoring software - --------------------------------------------------------------------------------------------------- Concord Reporting software product suite for Market leader in real-time monitoring, alarm next-generation management notifications & restart of solutions that ensure failed processes, end-to-end effective e-business view of application performance availability & performance - --------------------------------------------------------------------------------------------------- MicroMuse Root cause monitors large-scale networks Leading provider of fault analysis in real-time to quickly & service-level management identify and address problems software - --------------------------------------------------------------------------------------------------- NetScout Hardware probes comprehensive performance Full-service provider of for remote management system from network performance monitoring & data integration of probes and management solutions) collection NextPoint application monitoring acquisition - --------------------------------------------------------------------------------------------------- Riversoft Root cause maps and monitors the network The only provider of analysis isolating the room cause of 'interventionless' network the problem management tools - --------------------------------------------------------------------------------------------------- SMARTS Root cause pinpoints root cause of the Real-time problem analysis problem, identifies impact and diagnosis and impact automates response analysis - --------------------------------------------------------------------------------------------------- Visual Networks WAN Measurement; monitor service level Leading provider of QoS; Reporting agreements Service Management Systems for IP networks - ---------------------------------------------------------------------------------------------------
However, there can be no assurance that the Company's PRIISMS Suite will continue to enjoy acceptance or that the Company will be able to compete successfully on an on-going basis. The Company believes that the principal factors affecting competition in the network infrastructure management business are (1) having a unique offering that provides demonstrable economic benefit to the customer, (2) ease of use, including the level of internal integration which supports efficient use by network personnel and of external integration which allow the system to work with other network management tools, (3) the flexibility to rapidly incorporate additional features and customize products to unique needs of individual infrastructures, and (4) for the low end of the product line, price. Although the Company believes that that its present products and services are competitive, the Company competes with a number of companies with substantially larger financial, research and development, marketing and technical resources. Such companies may succeed in producing and distributing competitive products more effectively than the Company and may also develop new products which compete effectively with those of the Company. -10- SOURCES AND AVAILABILITY OF MATERIALS The Company designs its products utilizing readily available parts manufactured by multiple suppliers and relies on and intends to continue to rely on these suppliers. The Company has been and expects to continue to be able to obtain the parts required to manufacture its products without any significant interruption or sudden price increase, although there can be no assurance that it will be able to continue to do so. The Company sometimes utilizes a component available from only one supplier. If a supplier were to cease to supply this component, the Company would most likely have to redesign a feature of the affected device. In these situations, the Company maintains a greater supply of the component on hand in order to allow the time necessary to effectuate a redesign or alternative course of action should the need arise. DEPENDENCE ON PARTICULAR CUSTOMERS The Company has continued to expand its customer base and to broaden its sales constituency. These efforts have resulted in the Company becoming less reliant on any one particular customer. However, the Company sells a substantial portion of its products to several major customers. The top four customers - Rhythms NetConnections, Lucent Technologies, KPN - Telecom BV, and Hewlett-Packard - accounted for 38% of revenues in FY2000. The top eight customers, which included MCI Worldcomm, Crown Castle International, Siemens USA, and AT&T, accounted for 56% of revenues in FY2000. Two of these customers - Crown Castle International and Siemens USA, - were new to the Company during FY2000. The loss of any of these customers could have a material adverse effect on the Company's business. INTELLECTUAL PROPERTY, LICENSES AND LABOR CONTRACTS The Company holds no patents on its technology. Although it licenses some of its technology from third parties, the Company does not consider any of these licenses to be critical to its operation. The Company has made a consistent effort to minimize the ability of competitors to duplicate the software technology utilized in its products. However, the possibility of duplication of its products remains, and competing products have already been introduced. The Secure Sentinel name is a registered trademark filed with the United States Patent and Trademark Office ("PTO"), as is SAFECONNECT and NETREACH. The Company also has trademark applications pending with the PTO for its corporate name, ION Networks, Inc. The Company anticipates that these trademarks will be registered, but there can be no assurance that this will occur. The Company plans to apply for other trademarks during the coming year. GOVERNMENTAL APPROVALS AND EFFECT OF GOVERNMENT REGULATION Due to the sophistication of the technology employed in ION's products, export of these products is subject to governmental regulation. The Company has obtained licenses to export certain of its products in -11- limited quantities to Sweden, Norway, Switzerland, South Africa, the United Kingdom, France, Italy, Germany, Australia and Singapore. As required by law or demanded by customer contract, the Company obtains approval of its products by Underwriters' Laboratories. Additionally, because many of the products interface with telecommunications networks, the Company's products are subject to several key Federal Communications Commission ("FCC") rules requiring FCC approval. Part 68 of the FCC rules contains the majority of the technical requirements with which telephone systems must comply to qualify for FCC registration for interconnection to the public telephone network. Part 68 registration requires telecommunication equipment interfacing with the public telephone network to comply with certain interference parameters and other technical specifications. FCC Part 68 registration for ION's products has been granted, and the Company intends to apply for FCC Part 68 registration for all of its new and future products. Part 15 of the FCC rules requires equipment classified as containing a Class A computing device to meet certain radio and television interference requirements, especially as they relate to operation of such equipment in a residential area. Certain of ION's products are subject to and comply with Part 15. The European Community has developed a similar set of requirements for its members and the Company has begun the compliance process for its products in Europe. Additionally, ION has certified certain of its products to the NEBS (Network Equipment Business Specification) level of certification. This is a certification that was developed by Bellcore (now Telcordia Technologies) and is required by many of ION's telecommunications customers. Although the Company has not experienced any difficulties obtaining such approvals, failure to obtain approval for new and future products could have a material adverse effect on the Company's business. RESEARCH AND DEVELOPMENT ACTIVITIES During FY2000 the Company expanded its research and development activities substantially. The Company continued development of its next-generation of products and introduced three new ION Devices: NetwoRx, NetwoRx - VT, and NetwoRx - O. Additionally, Release 1.1.1 of PRIISMS Manager is entering (beta)-testing. This release will manage products in both the Sentinel and NetwoRx families. Release 1.2 of PRIISMS Manager and NetwoRx will implement AMT metrics and action routines and is scheduled for release in summer 2000. Shortly thereafter, PRIISMS Manager will be extended to manage Secur@ccess devices. In order to deliver these new products, research and development funding increased from $2,580,857 in FY1999 to $4,288,396 in FY2000. During FY2000 the research and development activities of Microframe, the predecessor to the Company, and SolCom, which was acquired in March, 1999, were integrated. Four categories of product were being developed at SolCom: Modular Products, Sentinel III, NetworX, and an ASIC (Application-Specific Integrated Circuit). During FY2000 the Modular Products continued to be developed in Livingston Scotland and resulted in daughter boards that provide RMON monitoring for NetwoRx. The Company no longer sells -12- standalone Modular RMON Products. Sentinel III product development was transferred to Piscataway, New Jersey, and integrated into the NetworX development effort which resulted in three new intelligent devices during FY2000. The hardware portion of the NetworX development effort was also transferred to Piscataway, and the centralized software manager portion was combined with Manager 2000, from MicroFrame, and developed into PRIISMS Manager. The ASIC development effort was reevaluated in light of new technologies on the market and the requirement for continued costly development and the Company intends to complete this effort as a series of FPGAs (field programmable gate arrays) for monitoring high-speed network protocols such as ATM (Asynchronous Transfer Mode), gigabit Ethernet and OC-3 (Optical Carrier). COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS The Company's business activities do not generally fall under applicable regulations involving discharge of materials into the environment. EMPLOYEES As of June 22, 2000, the Company had 134 employees, all of whom are full-time employees, and of which 37 are technical personnel, 54 are in sales, marketing and support, 22 are in production, and 21 are in executive, financial and administrative capacities. None of the Company's employees are represented by labor unions. The Company considers its relations with its employees to be satisfactory. ITEM 2. DESCRIPTION OF PROPERTY. The Company leases 26,247 square feet of space at 1551 South Washington Avenue, Piscataway, New Jersey, for its principal executive offices. This lease, which commenced on February 18, 1999, is for a term of ten (10) years with monthly rent payable by us to the landlord as follows: $511,816.56 for the first two years of the term; $551,187 for the next year of the term; $557,748.72 for the next year of the term; $610,242.72 for the next three years of the term; and $662,242.72 for the remaining three years of the term. In accordance with the lease, the Company is also obligated to make additional payments to the landlord relating to certain taxes and operating expenses. The Company also leases 245 square meters of office space in Antwerp, Belgium for its European operating headquarters. This lease provides for a monthly rental of 81,083 Belgian Francs per month (US$2,316.00 at an exchange rate of 35BEF of 1US$) and expires on July 31, 2005, with an option by the Company to terminate the lease on either July 31, 1999 or July 31, 2002, as applicable. In addition, the Company leases 0.298 hectare of space at SolCom House, Meikle Road, Kirkton Campus, Livingston EH547DE, Scotland as well as 436 square feet of space at 1801 Robert Fulton Drive, Suite 400, Reston, Virginia 20191 in connection with the operations of SolCom and SolCom Systems Inc., a wholly-owned subsidiary of SolCom, respectively. These leases provide for monthly rentals of (pound)3,583 and $3,675, respectively, and expire on August 31, 2011 and February 28, 2000, respectively. The Company also leases approximately 5,600 square feet of space at 48834 Kato Road, Fremont, -13- California in the Bedford Fremont Business Center in connection with its LeeMAH division located in Fremont, California. This lease commenced on June 1, 1999 and is for a term of 60 months with monthly rent payable by the Company to the landlord as follows: $7,360 per month for the first 12 months of the term; $7,590 per month for months 13-24; $7,820 per month for months 25-36; $8,050 per month for months 37-48; and $8,280 per month for months 49-60. ITEM 3. LEGAL PROCEEDINGS. ------------------ There are no material pending legal proceedings to which the Company is a party or to which any of its properties are subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --------------------------------------------------- None. -14- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. --------------------------------------------------------- MARKET INFORMATION The Company's common stock, par value $.001 per share (the "Common Stock"), is listed on the NASDAQ National Market under the symbol "IONN". The following table sets forth the high ask and low bid prices of the Common Stock for the periods indicated as reported on the NASDAQ National Market. Fiscal Year 2000 HIGH LOW ---------------- ---- --- June 30 5 1/16 2 1/8 September 30 8 3/4 3 13/16 December 31 22 1/2 5 7/16 March 31 44 18 5/8 Fiscal Year 1999 June 30 4 3/4 2 3/4 September 30 3 7/16 1 1/8 December 31 3 5/8 1 1/2 March 31 3 1 3/4 RECENT SALES OF UNREGISTERED SECURITIES On March 31, 1999, the Company issued an aggregate of 2,200,233 shares of Common Stock (the "SolCom Shares") and options to purchase 451,188 shares of Common Stock to the holders of SolCom in consideration of the acquisition by the Company of all of the outstanding share capital of SolCom. The Company also granted to employees of SolCom options to purchase up to an additional 48,369 shares of Common Stock. In addition, the Company granted 300,000 performance-based options to certain employees of SolCom, 150,000 of which have terminated for failure to achieve certain revenue targets and the remaining 150,000 of which have terminated due to the termination of employment of the option holders. The SolCom Shares were issued pursuant to Section 4(2) of, and Regulation S promulgated under, the Securities Act of 1933, as amended (the "Act"), to shareholders of SolCom residing outside the United States and to one accredited investor residing in the United States. The options granted are exercisable immediately and have exercise prices ranging from $0.4826 per share to $1.8016 per share and expiration dates ranging from four to ten years. On February 25, 1999, the Company acquired certain selected assets of LeeMAH in consideration of the delivery by the Company to LeeMAH of a promissory note in the principal amount of $1,000,000 with interest thereon at the rate of six (6%) percent per annum, payable in one balloon payment within 90 days thereafter. Effective March 31, 1999, the Note was terminated by agreement of the parties in exchange for the issuance to LeeMAH of 444,000 shares of Common Stock, pursuant to Section 4(2) under the Act. -15- On June 7, 1999, the Company issued an aggregate of 1,000,000 shares of Common Stock and warrants to purchase an aggregate of 500,000 shares of Common Stock to Special Situations Private Equity Fund, L.P. ("Special Situations") and certain affiliated entities of Special Situations in consideration of an amount equal to $3,000,000, pursuant to Section 4(2) under the Act. The terms of the warrants are three years and the exercise prices thereof are $4.50 per share for 250,000 warrants and $6.00 per share for the remaining 250,000 warrants. On August 6, 1999, the Company issued an aggregate of 2,000,000 shares of Common Stock at a price of $4.75 per share to a group of accredited investors in consideration of an amount equal to $9,500,000, pursuant to Rule 506 promulgated under the Act. In addition, in connection with the June 1999 and August 1999 financings, financial advisors were granted warrants to purchase an aggregate of 306,250 shares of Common Stock in consideration of financial advisory services provided by them to the Company. An aggregate of 18,750 warrants are exercisable for a period of three years from the date of grant and the remaining 287,500 are exercisable for a period of five years from the date of grant. The exercise prices thereof are $4.75 per share for 250,000 warrants, $3.00 per share for 37,500 warrants, $4.50 per share for 9,375 warrants and $6.00 per share for the remaining 9,375 warrants. SECURITY HOLDERS As of June 22, 2000, there were 379 holders of record of the Common Stock (not including beneficial owners of Common Stock held by brokers in street name). DIVIDENDS The Company has not paid any cash dividends on its Common Stock during the two fiscal years ended March 31, 2000 and March 31, 1999. The Company presently intends to retain all earnings to finance its operations and therefore does not presently anticipate paying any cash dividends in the foreseeable future. Under the terms of the Company's credit agreement with United National Bank ("United"), the Company may not, without the prior written consent of United, declare or pay any dividends in cash on any shares of capital stock of the Company. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. --------------------------------------------------------- A number of statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. These risks and uncertainties include, but are not limited to, the recent introduction and the costs associated with, a new family of products; dependence on the acceptance of this new family of products; uncertainty as to the acceptance of the Company's products generally; risks related to technological factors; potential manufacturing difficulties; uncertainty of product development; uncertainty of adequate financing; dependence on third parties; dependence on key personnel; competition; a limited customer base; risk of system failure, security risks and liability risks; risk of requirements to comply with government regulations; vulnerability to rapid industry -16- change and technological obsolescence; and general economic conditions. Unless otherwise required by applicable securities laws, the Company assumes no obligation to update any such forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. OVERVIEW/PLAN OF OPERATION FY2000 was a year devoted to integrating the disparate product lines and cultures of the three companies forming ION Networks, i.e., MicroFrame, SolCom, and LeeMAH Datacomm Systems. The three companies have integrated the operations, systems and product lines. The Company now sells various intelligent hardware devices developed from the three companies and managed by a single central system, PRIISMS Manager. The integrated development efforts have resulted in the introduction of three new NetwoRx intelligent devices: NetwoRx, NetwoRx - O which was developed to meet the needs of optical technology manufacturers, and NetwoRx - VT which was developed to meet the needs of CLECs. In addition, the Secur@ccess products have now been certified for operation in Europe. Sales of ION products increased by 29% in Europe during FY2000. The Company's employee base increased from 126 full-time employees in FY1999 to 134 in FY2000 as a result of internal growth. A number of changes and additions were made in the executive team with new personnel being added in Engineering, Marketing and Business Development, Manufacturing, Finance, and Sales. The sales force increased from eight to 18. The result of all of these actions was 79% revenue growth from FY1999 to FY2000. During FY2000 the Company maintained relations with Rhythms NetConnections, Lucent Technologies, KPN - Telecom BV, MCI Worldcomm and AT&T. Several new important relationships were formed during FY2000, e.g., Sycamore Networks, Intel Corporation, Hewlett-Packard, Crown Castle International, Bomara Associates, FirstWorld Communications, and Siemens USA. During the next 12 months the Company plans to continue developing its PRIISMS Suite. Upgrades to the Sentinel family are already underway as is the final integration of Secur@ccess products with PRIISMS Manager. Additional AMT routines for measurement, diagnosis and action are planned. COGS (cost of goods sold) reduction programs are planned which include redesign of systems as well as the on-going examination of the cost and quality of ION's contract manufacturers. The Company will continue to look for attractive acquisition candidates and to build the sales force. Additional expansion in Europe is anticipated as a new Managing Director for the Livingston, Scotland facility starts in July 2000. -17- RESULTS OF OPERATIONS Fiscal Year 2000 Compared to Fiscal Year 1999 Revenues for the year ended March 31, 2000 were $22,668,833 as compared with revenues of $12,673,917 for the year ended March 31, 1999, an increase of approximately 79%. This increase was primarily due to a significant increase (approximately 93%) in shipments of the Company's Sentinel 2000 product. The Company shipped approximately 6,800 units of the Sentinel 2000, generating net revenues of approximately $12,900,000, representing approximately 57% of overall revenue. During fiscal 1999, approximately 3,200 such units were sold, generating net revenues of approximately $6,700,000, or 53% of overall revenue for such year. In addition, during fiscal year 2000, the Company developed and licensed the rights to certain customized modules of its software via a perpetual license agreement to an existing customer for approximately $3.2 million. This development and licensing had a positive effect on the Company's rate of revenue growth and its gross margin for the year. The Company has no further obligations with respect to this development and the licensed software. The newly introduced NetwoRx family of products accounted for $3,835,000 of overall revenues, or 17%, in FY2000. The Company has approximately $1.1 million of sales backlog that it expects to record as revenue in the first half of fiscal 2001. From a geographic standpoint, the Company's net revenue increase was achieved primarily on the domestic side. Shipments to customers in the United States were approximately $19,200,000 (85% of total revenues) in fiscal 2000 as compared to approximately $10,050,000 (79%) in fiscal 1999, representing an increase of 91%. Shipments by the Company to the European market, were approximately $3,337,000 (14%) for the year ended March 31, 2000 compared to approximately $2,580,000 (20%) for the year ended March 31, 1999, an increase of 29%. It is the Company's intention to increase its presence in the European market. The Company's cost of goods sold increased to $8,409,068 for the year ended March 31, 2000 compared to $5,464,708 for the year ended March 31, 1999 as a result of increased shipment levels. Cost of goods sold as a percentage of sales decreased from 43% for the previous comparable fiscal period to 37% for this fiscal period, primarily due to product mix coupled with the software licenses discussed above. Research and development expenses, net of capitalized software development, increased from $2,580,857 in the year ended March 31, 1999 to $4,288,396 in the current fiscal year, an increase of 66%. As a percentage of revenues, research and development expenses decreased from approximately 20% to 19%. The internal research and development staff and related expenses increased significantly during Fiscal 2000 in order to continue to provide increased technical functionality and support to the Sentinel 2000 family of products as well as to further the development of the Company's next generation of products. Selling, general and administrative expenses increased 82% from $6,114,218 for fiscal 1999 to $11,155,390 for the year ended March 31, 2000. As a percentage of revenues, selling, general and administrative expenses increased from approximately 48% to 49%. This increase was primarily due to the -18- addition of sales personnel and administrative infrastructure to support the two aforementioned acquisitions made in fiscal 1999, as well as the Company's organic growth. Amortization expense for capitalized software increased from $372,000 in fiscal 1999 to $2,308,000 in fiscal 2000 due to the increase in capitalized research and development expense during the past two fiscal years. The company continued to invest in Research and Development during fiscal 2000 in order to meet long term growth objectives. Also, amortization expense for goodwill associated with the acquisitions of Solcom and certain assets of LeeMah increased significantly in fiscal year 2000 to $966,000 from $38,000 in fiscal 1999. This increase was a result of the full year impact in fiscal 2000 compared to 1999. The Company had a loss before taxes of $4,995,248 for the year ended March 31, 2000 compared to a loss before taxes of $5,764,764 for the year ended March 31, 1999. The March 31, 1999 loss included a one-time charge for IPR&D of $3,490,177 in connection with the SolCom acquisition. The fiscal year 2000 loss was incurred due to the increase in research and development expenses as well as the expansion of the Company's infrastructure. The Company's tax rate (benefit) was lower than the federal statutory tax rate (benefit) primarily due to the effect of recording a valuation allowance on certain of the Company's net operating loss carryforwards and other deferred tax assets in fiscal 2000 coupled with the recording of a provision for foreign taxes in fiscal 2000. The increase in the valuation allowance of approximately $2.3 million during fiscal 2000 is due primarily to the fact that management believes that at March 31, 2000, it is more likely than not that the net operating loss carryforwards will expire unutilized. At March 31, 2000, the Company had federal, state, and foreign tax-effected net operating loss carryforwards of approximately $3.8 million, respectively. The expiration dates for its net operating losses range from the years 2011 through 2014. The net loss for the year ended March 31, 2000 was $5,259,738 compared to a net loss of $5,997,003 for the prior fiscal year. IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the Company's acquisition of SolCom in the fourth quarter of FY1999, the Company allocated $3,490,177 of the purchase price thereof to purchased IPR&D. The following provides an update on the status of the projects included in the IPR&D analysis. NetworX is a new product line being developed as part of the Company's PRIISMS Suite. NetworX was designed to be the industry's first integrated platform for proactive, remote, real-time secure management and monitoring of voice and data networks. It would use dial-up, Telnet, or SNMP connections to allow network managers to monitor, evaluate and control all aspects of their large, distributed networks from a single central point. The first version of this product has been released as NetwoRx, and additional releases are planned for FY2001. Sentinel III products were designed to offer a range of infrastructure management tools for managing large distributed networks. All Sentinel products feature alarm and fault management, detection of unusual calling patterns on PBXs which could indicate toll fraud, environmental monitoring and control, as well as secure access. Sentinel III was described at FY1999 year-end as an intelligent port controller combining remote monitoring and Sentinel network device management to deliver both network control and a comprehensive picture of network activities. The Company later elected to re-badge the Sentinel III as a less expensive version -19- of the NetworX product. Two versions have been released as NetwoRx - O for optical technology manufacturers, and NetwoRx - VT for CLECs. The Company has been developing an ASIC which incorporates a large portion of the hardware and software required to provide the functionality of an intelligent device. As originally contemplated, the result of this effort has to be a substantial increase in processing speed and a reduction in COGS if the chip is produced in large volumes. Designing the chip required the Company to learn and apply a new technology to develop first one and then a series of more and more capable ASICs. Consequently, the Company put the ASIC project on hold in order to focus all development efforts on the projects described above. By the end of FY2000, the ASIC project was 20% complete, and the costs to complete the work were estimated at $350,000. As previously reported, in early FY2001, Management decided to reevaluate the project in light of new technologies on the market and the requirement for continued costly development. The project will now incorporate a different chip technology, FPGAs (field programmable gate arrays), and will be completed as a series of arrays for monitoring high-speed network protocols such as ATM, gigabit Ethernet and OC-3. After verifying these designs in the field, the gate arrays may, depending on potential for economic benefits, be converted to utilize ASIC technology. Analysis of Products/IPR&D The value allocated to acquired IPR&D for the SolCom acquisition as of the closing on March 31, 1999 was determined utilizing the income approach via an excess earnings analysis. This methodology requires the projection of revenues and expense that will arise as a result of the successful completion of the IPR&D project. The operating income attributable to each IPR&D project was calculated as projected revenues less the projected operating expenses. Net operating income is calculated after applying the projected effective tax rate for the Company. A charge was taken to reflect the economic rent related to the net assets required to run the business and support future growth. This return on the requisite assets was based on industry comparable companies and company specific information. Where it was determined that core technology of the existing technology would be utilized by the IPR&D, a charge was applied against IPR&D revenues. Core technology was identified for all of the IPR&D projects. A core technology charge of 30% of operating profit was applied for each of the IPR&D projects. The charge for use of the core technology and the return on requisite assets was subtracted from net income. The value allocated to acquired IPR&D was determined utilizing the Stage of Completion methodology. This methodology utilizes the same cash flows as the excess earnings analysis, but removes all research and development costs to complete the identified project. In addition, the discounted value of these cash flows is reduced to represent the percentage of which the project has been completed as of March 31, 1999. The determination of the percentage completed is based primarily on the amount of effort (cost or time) expended to date and remaining until completion. Consideration is also given to the amount of risk and effort incorporated in the development steps in relation to the development steps remaining to complete the project. -20- LIQUIDITY AND CAPITAL RESOURCES During fiscal 2000, the Company significantly strengthened its financial position. Total assets increased from $15,973,425 to $27,390,241 while total liabilities decreased from $9,572,437 to $ 5,994,304. The primary reason for the improvement was an increase in cash provided by issuances of common stock of approximately $20 million. These proceeds were used to liquidate liabilities and fund the internal operations of the Company and to purchase various property and equipment. Net cash used in operating activities during fiscal 2000 was $4,971,783 compared to net cash used during fiscal 1999 of $553,688. The use of cash was primarily attributable to the increase in accounts and other receivables of approximately $2.6 million, the decrease in accounts payable and accrued expenses of approximately $3.4 million, the decrease in other current liabilities due to the pay down of prior year transaction costs of approximately $1.6 million, partially offset by the increase in accrued payroll and other liabilities of approximately $1.3 million and the decrease in inventory of approximately $1.3 million. Net cash used by investing activities during fiscal 2000 was $2,493,986 as compared to $2,999,904 for the prior fiscal year. Capital expenditures increased by $785,320 as the Company continued its investment in computers, other equipment and expenditures related to the relocation of its principal executive offices in August 1999. Also, an additional $214,828 of research and development expenses were capitalized during fiscal 2000 as compared with fiscal 1999. In fiscal 2000, $356,414 of cash was received for the amount of the licensed technology discussed above which had been recorded on the balance sheet. Net cash provided by financing activities during the fiscal year was $17,681,387 compared to $3,211,860 for the prior fiscal year. Issuance of Common Stock of $12,500,000 and the exercise of options and warrants of $7,459,472 were the primary reasons for the increase in net cash provided. Overall, cash increased by approximately $10.2 million during fiscal year 2000. In October 1998, the Company entered into a line of credit agreement with an available balance of $2,000,000 through July 30, 1999. In April 1999, the line of credit was increased to $2,250,000. Prior to expiration this line was extended through September 30, 1999. On September 9, 1999, the outstanding balance of $2,250,000 was paid down in full. The line was collateralized by all the business assets of the Company. In December 1998, the Company entered into a term loan agreement with United National Bank in the principal amount of $500,000 through December 2003. At March 31, 2000, there were no borrowings outstanding under the term loan as the balance was fully paid in March 2000. The Company expects to fund the expansion of its business and operations and meet its short and long-term liquidity needs from available cash and cash flow, working capital and from funds derived from future operating revenues as well as through additional financing from outside sources. The Company currently believes that it will have sufficient cash resources to meet its operational needs over the next twelve months. ACCOUNTING PRONOUNCEMENTS In June 1998, The Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, it requires that entities recognize all derivatives -21- as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. This standard, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activites - Deferral of the Effective Date of FASB Statement No. 133, and Amendment of FASB Statement No. 133", is effective for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. For the Company, this means the standard must be adopted no later than April 1, 2001. Management, based on its current operations, does not expect the adoption of this standard to have a material impact on the Company's results of operations, financial position or cash flows. In December 1999 the SEC issued Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements". The SEC delayed the effective date of this SAB from March 31, 2000 and now must be adopted by June 30, 2000. The Company has assessed the impact of SAB 101 on its results of operations and believes that its results of operations for the year ended March 31, 2000 have been presented in accordance with the provisions of the SAB. -22- ITEM 7. FINANCIAL STATEMENTS. --------------------- The financial statements required hereby are located on pages F-1 through F-23. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURES. - ---------------------- None. -23- PART III The information called for by Part III (Items 9, 10, 11 and 12 of Form 10-KSB) is hereby incorporated by reference to the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with the Company's 2000 Annual Meeting of Stockholders. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- (a) EXHIBITS -------- Exhibit No. Description 3.1* Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on August 5, 1998. 3.2* Certificate of Amendment of the Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on December 11, 1998. 3.3 Certificate of Amendment of the Certificate of Incorporation, as filed with the Secretary of state of the State of Delaware an October 12, 1999 (Incorporated by reference to Exhibit 3.3 the Company's Registration Statement on form S-8 filed on March 17, 2000). 3.4* By-Laws of the Company. 3.5***** Form of Specimen Common Stock Certificate of the Company. 4.1* 1998 Stock Option Plan of the Company. 4.2* 1998 U.K. Sub-Plan of the Company, as amended. 10.1***** Lease Agreement dated February 18, 1999 by and between the Company and Washington Plaza Associates, L.P., as landlord. 10.2***** Business Park Gross Lease dated May 17, 1999 by and between the Company and Bedford Property Investors, Inc. 10.3***** Supply Agreement dated October 20, 1998 by and between the Company and Lucent Technologies. 10.4***** OEM Purchase Agreement dated April 13, 1999 by and between the Company and the Hewlett-Packard Company. -24- 10.5***** Agreement dated as of December 19, 1994 by and between LeeMAH DataCom Security Corporation and Siemens Rolm Communications Inc. 10.6***** Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by and between the Company and Siemens Credit Corporation. 10.7***** Equipment Lease Agreement dated June 17, 1999 by and between the Company and Lucent Technologies. 10.8***** Employment Agreement dated as of April 1, 1998 between the Company and Stephen B. Gray 10.9****** Employment Agreement dated as of April 1, 1999 between the Company and Stephen B. Gray. 10.10****** Non-negotiable Promissory Note in the principal amount of $750,000 issued by Stephen B. Gray to the Company. 10.11****** Line of Credit Agreement with United Nations Bank dated September 30, 1999. 10.12** Share Purchase Agreement, as amended, dated as of December 28, 1998 by and among the Company, SolCom Systems Limited ("SolCom"), the shareholders of SolCom and certain representatives of such shareholders. 10.13*** Agreement and Plan of Merger by and between the Company and MicroFrame, Inc., a New Jersey corporation. 10.14**** Asset Purchase Agreement dated as of February 25, 1999 by and among the Registrant, LeeMAH and the Parent. 10.15**** Assignment of Patents of LeeMAH dated February 25, 1999. 10.16**** Assignment of Trademarks of LeeMAH dated February 25, 1999. 23.1****** Consent of PricewaterhouseCoopers LLP 27.1****** Financial Data Schedule ------------------------------ * Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on April 22, 1999. ** Incorporated by Reference to Appendix A of the Company's Definitive Information Statement on Schedule 14C filed on March 11, 1999. -25- *** Incorporated by Reference to Appendix I of the Company's Definitive Information Statement on Schedule 14C filed on March 11, 1999. **** Incorporated by Reference to the Company's Current Report on Form 8-K filed on March 12, 1999. ***** Incorporated by Reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999. ****** Filed herewith. (b) REPORTS ON FORM 8-K -------------------- None -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 authorized. DATED: June 28, 2000 ION NETWORKS, INC. By: /s/ Stephen B. Gray -------------------------- Stephen B. Gray, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on June 28, 2000: Signature Title /s/ Stephen B. Gray -------------------------------- President, Chief Executive Stephen B. Gray Officer and Director -------------------------------- Chairman of the Board of Stephen M. Deixler Directors /s/ Alfred Leonardi -------------------------------- Principal Financial Officer Alfred Leonardi and Principal Accounting Officer /s/ Baruch Halpern -------------------------------- Director Baruch Halpern /s/ Alexander C. Stark Director -------------------------------- Alexander C. Stark /s/ William Martin Ritchie Director -------------------------------- William Martin Ritchie Director -------------------------------- Alan Hardie -27- ION NETWORKS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- Report of Independent Accountants F-1 Consolidated Balance Sheets as of March 31, 2000 and March 31, 1999 F-2 Consolidated Statements of Operations for the Years Ended March 31, 2000 and 1999 F-3 Consolidated Statements of Cash Flows for the Years Ended March 31, 2000 and 1999 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 2000 and 1999 F-5 Notes to Consolidated Financial Statements F-6-23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of ION Networks, Inc. and Subsidiaries: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of ION Networks, Inc. and Subsidiaries (the "Company") at March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. 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 audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP June 8, 2000 F-1 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------
2000 1999 ASSETS Current assets Cash and cash equivalents $ 10,381,612 $ 165,994 Accounts receivable, less allowance for doubtful accounts of $251,000 and $150,000, respectively 4,569,546 3,092,867 Other receivables 1,560,697 - Inventory, net 1,924,671 2,554,643 Deferred tax assets - 422,310 Prepaid expenses and other current assets 602,874 433,031 --------------- --------------- Total current assets 19,039,400 6,668,845 Property and equipment, net 2,146,956 1,010,369 Capitalized software, less accumulated amortization of $4,259,851 and $1,951,715, respectively 4,185,911 5,350,388 Goodwill and other acquisition - related intangibles, less accumulated amortization of $1,030,334 and $63,810, respectively 1,938,716 2,905,240 Other assets 79,258 38,633 --------------- -------------- Total assets $ 27,390,241 $ 15,973,475 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of capital leases $ 67,900 $ - Current portion of long-term debt 96,000 488,948 Accounts payable and accrued expenses 2,632,135 3,890,152 Accrued payroll and related liabilities 2,139,524 813,266 Deferred income 275,657 269,457 Other current liabilities 352,093 1,909,072 --------------- --------------- Total current liabilities 5,563,309 7,370,895 --------------- --------------- Noncurrent deferred tax liabilities, net - 188,276 Long-term portion of capital leases 302,866 Long-term debt, net of current portion 128,129 2,013,266 Commitments and contingencies (Notes 9 and 10) Stockholders' equity Preferred stock - par value $.001 per share; authorized 1,000,000 shares, none issued Common stock - par value $.001 per share; authorized 50,000,000 shares; issued 15,111,617 shares and outstanding 15,049,586 shares at March 31, 2000, issued 8,286,670 shares, outstanding 8,244,639 shares at March 31, 1999 15,112 8,287 Additional paid-in capital 35,063,207 14,858,560 Accumulated deficit (13,488,379) (8,228,641) Accumulated other comprehensive income (loss) 13,196 (29,969) --------------- --------------- 21,603,136 6,608,237 Less - Treasury stock, 62,031 shares, at cost at March 31, 2000 and 1999, respectively (207,199) (207,199) --------------- --------------- Total stockholders' equity 21,395,937 6,401,038 --------------- --------------- Total liabilities and stockholders' equity $ 27,390,241 $ 15,973,475 =============== ==============
The accompanying notes are an integral part of these financial statements. F-2 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------
2000 1999 Net sales $ 22,668,833 $ 12,673,917 Cost of sales 8,409,068 5,464,708 ------------- ------------- Gross margin 14,259,765 7,209,209 Research and development expenses 4,288,396 2,580,857 Selling, general and administrative expenses 11,155,390 6,114,218 Depreciation and amortization expense 3,902,331 731,160 In-process research and development charge - 3,490,177 ------------- ------------- Loss from operations (5,086,352) (5,707,203) Interest income 315,467 43,012 Interest expense (224,363) (100,573) ------------- ------------- Loss before income taxes (4,995,248) (5,764,764) Income tax expense 264,490 232,239 ------------- ------------- Net loss $ (5,259,738) $ (5,997,003) =============== ============== Per share data Basic ($0.44) ($1.09) Diluted ($0.44) ($1.09) Weighted average number of common shares outstanding: Basic 12,063,709 5,499,556 ------------- ------------- Diluted 12,063,709 5,499,556 ------------- -------------
The accompanying notes are an integral part of these financial statements. F-3 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------
2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (5,259,738) $ (5,997,003) Adjustments to reconcile net loss to net cash used in operating activities In-process research and development charge - 3,490,177 Depreciation and amortization 3,902,331 731,160 Provision for doubtful accounts 100,757 23,793 Provision for inventory obsolescence 230,893 - Noncash stock-based compensation charge 252,000 188,120 Deferred tax provision 234,034 232,239 Changes in operating assets and liabilities, net of effects of acquisitions Accounts receivable (1,577,436) (546,951) Other receivables (1,560,697) - Inventory 399,079 (786,783) Prepaid expenses and other current assets (169,843) (198,618) Other assets (40,625) (2,917) Accounts payable and accrued expenses (1,258,017) 2,190,508 Accrued payroll and related liabilities 1,326,258 52,967 Deferred income 6,200 (35,394) Other current liabilities (1,556,979) 105,014 ------------- ------------- Net cash used in operating activities (4,971,783) (553,688) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,350,327) (565,007) Capitalized software expenditures (1,500,073) (1,285,245) Proceeds from the sales of software licenses 356,414 Capitalized acquisition related expenditures, net of cash acquired - (1,149,652) ------------- ------------- Net cash used in investing activities (2,493,986) (2,999,904) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under line of credit 253,711 2,196,280 Proceeds from debt 450,000 Repayments of the line of credit (2,250,000) Repayments of debt (731,796) (55,009) Issuances of common stock 12,500,000 708,000 Exercises of options and warrants 7,459,472 362,589 ------------- ------------- Net cash provided by financing activities 17,681,387 3,211,860 ------------- ------------- Net increase (decrease) in cash and cash equivalents 10,215,618 (341,732) Cash and cash equivalents - beginning of period 165,994 507,726 ------------- ------------- Cash and cash equivalents - end of period $ 10,381,612 $ 165,994 ============= ============= SUPPLEMENTAL INFORMATION Cash paid during period for interest $ 224,363 $ 100,573 ============= =============
The accompanying notes are an integral part of these financial statements. F-4 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------
ACCUMULATED OTHER ADDITIONAL STOCK COMPREHENSIVE TOTAL COMMON PAID-IN SUBSCRIPTION ACCUMULATED INCOME TREASURY STOCKHOLDERS' SHARES STOCK CAPITAL RECEIVABLE DEFICIT (LOSS) STOCK EQUITY Balance, March 31, 1998 4,899,131 $ 4,899 $ 6,345,613 $ (104,000) $(2,231,638) $ (7,920) $(4,000) $4,002,954 Net loss (5,997,003) (5,997,003) Issuances of common stock 3,327,539 3,328 8,279,887 104,000 8,387,215 Noncash stock-based compensation 60,000 60 233,060 233,120 Acquisition of treasury shares (203,199) (203,199) Translation adjustments (22,049) (22,049) ---------- --------- ---------- ---------- ---------- ---------- --------- ----------- Balance, March 31, 1999 8,286,670 8,287 14,858,560 (8,228,641) (29,969) (207,199) 6,401,038 Net loss (5,259,738) (5,259,738) Issuances of common stock 3,000,000 3,000 12,497,000 12,500,000 Exercise of options and warrants 3,824,947 3,825 7,455,647 7,459,472 Noncash stock-based compensation 252,000 252,000 Translation adjustments 43,165 43,165 ---------- --------- ---------- ---------- ---------- ---------- --------- ----------- Balance, March 31, 2000 15,111,617 $15,112 $35,063,207 $ - $(13,488,379) $ 13,196 $(207,199) $21,395,937 ---------- --------- ---------- ---------- ---------- ---------- --------- -----------
The accompanying notes are an integral part of these financial statements. F-5 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- 1. ORGANIZATION THE COMPANY ION Networks, Inc. (the "Company"), a Delaware corporation founded in 1999 through the combination of two network management developers - MicroFrame, a New Jersey Corporation (the predecessor entity to the Company, originally founded in 1982), and SolCom Systems Limited, a Scottish corporation located in Livingston, Scotland (originally founded in 1994), designs, develops and markets a broad range of security, network management and remote maintenance products for voice and data communications networks. By incorporating a variety of hardware and software options for user authentication, these products can deter unauthorized dial-in access to both devices and systems (such as computers, local area networks and private branch exchange telephone switches), while allowing authorized personnel access to perform needed administration and maintenance of host devices and networks from remote locations. The products also provide alarm monitoring and reporting capabilities, a basis for remote network management and maintenance. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of ION Networks, Inc. and its subsidiaries (collectively, the "Company"). All material intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market, and consists of hardware and software components designed to interface with network communications environments. The markets for the Company's products are characterized by rapidly changing technology and the consequential obsolescence of relatively new products. The Company has recorded estimated allowances against inventories related to technological obsolescence. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which are generally three to five years. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred. Gains or losses on disposal of property and equipment are reflected in the statements of operations in the period of disposal. CAPITALIZED SOFTWARE The Company capitalizes computer software development costs in accordance with the provisions of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). SFAS 86 requires that F-6 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- the Company capitalize computer software development costs upon the establishment of the technological feasibility of a product, to the extent that such costs are expected to be recovered through future sales of the product. The Company capitalized $1,500,073 and $1,285,229 of software development costs for fiscal 2000 and 1999, respectively. Additionally, the Company acquired $3,855,000 of existing technology in connection with an acquisition in fiscal 1999 (see Note 3). These costs are amortized by the greater of the amount computed using (i) the ratio that current gross revenues from the sales of software bear to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated useful life of the product (generally three years). It is reasonably possible that those current estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both, will be reduced significantly in the near term (due to competitive pressures). As a result, the carrying amount of the capitalized software costs may be reduced materially in the near term. Amortization expense totaled $2,308,136 and $371,740 for fiscal 2000 and fiscal 1999, respectively. GOODWILL AND OTHER ACQUISITION RELATED INTANGIBLES Goodwill is the excess of purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. The Company amortizes goodwill on a straight-line basis over the periods benefited, ranging from three to ten years. Other acquisition-related intangibles includes customer lists ($300,000). The Company amortizes other acquisition-related intangibles over periods not to exceed three years. RESEARCH AND DEVELOPMENT COSTS The Company charges all costs incurred to establish the technological feasibility of a product or enhancement to research and development expense in the period incurred. REVENUE RECOGNITION POLICY The Company records revenue from product sales upon shipment to the customer if no significant vendor obligations exist and collectibility is probable. Generally, no significant vendor obligations exist upon shipment of the product. Maintenance contracts are sold separately and maintenance revenue is recognized on a straight-line basis over the period the service is provided, generally one year. WARRANTY COSTS Estimated warranty costs associated with the sale of hardware and software are accrued at the time of sale. The warranty reserve included in other current liabilities as of March 31, 2000 and 1999 approximated $80,000 and $50,000, respectively. USE OF ESTIMATES 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 year. Actual results could differ from those estimates. The significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, capitalized software and the related amortization lives, deferred tax asset valuation allowance and depreciation and amortization lives. F-7 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and related liabilities, deferred income and other current liabilities approximates fair value because of the relatively short maturity of these instruments. The Company's line of credit and term loan have variable interest rates which adjust with changes in market interest rates and the book value of such indebtedness is deemed to approximate fair value. VALUATION OF LONG-LIVED ASSETS Long-lived assets such as property and equipment, goodwill, customer lists and capitalized software are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. PER SHARE DATA Earnings per share has been calculated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The weighted average number of common shares outstanding during fiscal 2000 and 1999 were used to compute basic earnings per share. Diluted earnings per share is initially computed using the weighted average number of common shares outstanding plus the dilutive potential common shares outstanding. Dilutive potential common shares are additional common shares assumed to be exercised. Potential common shares of 3,422,687 and 1,040,000 were excluded from the computation of diluted earnings per share for fiscal 2000 and 1999, respectively, because their inclusion would have had an antidilutive effect on earnings per share. FOREIGN CURRENCY TRANSLATION The financial statements of the foreign subsidiaries were prepared in local currency and translated into U.S. dollars based on the current exchange rate at the end of the period for the balance sheet and a weighted-average rate for the period on the statement of operations. Translation adjustments are reflected as foreign currency translation adjustments in stockholders' equity and, accordingly, have no effect on net loss. Transaction adjustments for the foreign subsidiaries are included in income and are not material. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities ("temporary differences") using enacted tax rates in effect for the year in which the differences are expected to reverse. A deferred tax asset is recognized if it is more likely than not that the asset will be realized in the future. RECLASSIFICATIONS The Company has reclassified certain prior year amounts to conform with the 2000 presentation. F-8 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- 3. ACQUISITIONS On March 31, 1999, the Company acquired all the outstanding shares of SolCom Systems Limited ("SolCom") in exchange for 2,200,233 of common shares and 499,567 of options, which had an aggregate value of $6,211,880. The Company also issued 300,000 performance-based options (see Note 8) which have not been reflected in the purchase price. The value of the options, if issued, will be contingent consideration and will be reflected as goodwill in the Company's financial statements. This acquisition has been accounted for under the purchase method of accounting. Accordingly, the accompanying consolidated statements of operations do not include any revenues or expenses related to this acquisition prior to the closing date. The acquisition resulted in an allocation of $1,869,034 to goodwill and $3,855,000 to existing technology. The amortization periods for both the goodwill and the existing technology are three years. Included in the purchase price for the above acquisition was purchased in-process research and development, which was a non cash charge to earnings as this technology had not reached technological feasibility and had no future alternative use. In accordance with Statement of Financial Accounting Standards No. 2 "Accounting for Research and Development Costs," amounts assigned to purchased in-process research and development meeting the above criteria were charged to expense for $3,490,177. This technology will require varying additional development, coding and testing efforts, and other rework over the next year to determine technological feasibility. The value allocated to purchased in-process research and development was determined utilizing an income approach that included an excess earnings analysis reflecting the appropriate cost of capital for the investment. Estimates of future cash flows related to the in-process research and development were made for each project based on the Company's estimates of revenue, operating expenses and income taxes from the project. The valuation included a state of completion adjustment, which utilizes the same cash flows as the excess earnings analysis, but removes all research and development costs to complete the identified project. The discount rates utilized to discount the projected cash flows were based on consideration of the risk profile and the nature of each project and the market. Other factors considered in the determination of the discount rates include the useful life of each project, the anticipated profitability of each project, the uncertainty of technology advances that were known at the time and the stage of completion of each project. F-9 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- Following is a summary of the pro forma results of ION Networks, Inc. as if the merger had closed effective April 1, 1998:
FOR THE YEAR ENDED MARCH 31, 1999 (UNAUDITED) Revenues $ 13,988,252 Net loss (6,027,379) Weighted-average common shares 7,699,789 Weighted-average common shares and potential common shares 7,699,789 Basic earnings per share (.78) Diluted earnings per share (.78)
On February 25, 1999, the Company acquired certain of the operating assets of LeeMAH Datacom Security Corporation ("LeeMAH") in exchange for 444,000 shares of the Company's common stock. The purchase price of approximately $1 million has been reflected primarily as goodwill and other acquisition-related intangibles, mainly customer lists. The acquired entity had sales of $209,000 and income from operations of $149,000 for the period from the date of acquisition through March 31, 1999, accordingly, the acquisition was not material to the Company's statement of operations, its cash flows or its financial position. 4. INVENTORY Inventory, net of reserve for obsolescence of $283,000 and $185,000 at March 31, 2000 and 1999, respectively, consists of the following:
2000 1999 Raw materials $ 782,813 $ 1,570,150 Work-in-process 259,180 223,229 Finished goods 882,678 761,264 ----------- -------------- $ 1,924,671 $ 2,554,643 ---------- --------------
F-10 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- 5. PROPERTY AND EQUIPMENT At March 31, 2000 and 1999, property and equipment consists of the following:
2000 1999 Computer and other equipment $ 2,476,635 $ 1,725,901 Furniture and fixtures 998,929 230,679 Leasehold improvements 237,758 45,136 ---------------- ----------------- 3,713,322 2,001,716 Less: Accumulated depreciation 1,566,366 991,347 ---------------- ----------------- Property and equipment, net $ 2,146,956 $ 1,010,369 ---------------- -----------------
Depreciation expense for property and equipment for the years ended March 31, 2000 and 1999 amounted to $627,671 and $321,740, respectively. During the years ended March 31, 2000 and 1999, the Company retired fully depreciated assets amounting to $52,652 and $649,518, respectively. 6. BANK BORROWINGS On September 30, 1999, the Company entered into a $2,500,000 line of credit agreement. The line of credit is available through July 31, 2000. At March 31, 2000, there were no borrowings under the facility. Advances are payable at maturity, July 31, 2000, and bear variable interest at a prime rate, as defined in the line of credit agreement. The line is collateralized by all business assets of the Company. On May 5, 1999, the Company entered into a $300,000 term loan agreement. The term loan is due May 2002 and bears interest at a fixed rate of 8.50%. The term loan is collateralized by certain property and equipment of the Company. At March 31, 2000, $224,129 is outstanding under the term loan. In October 1998, the Company entered into a line of credit agreement with an available balance of $2,000,000 through July 30, 1999. In April 1999, the line of credit was increased to $2,250,000. Prior to expiration this line was extended through September 30, 1999. On September 9, 1999, the outstanding balance of $2,250,000 was paid down in full. The line was collateralized by all business assets of the Company. In December 1998, the Company entered into a term loan agreement in the amount of $500,000 through December 2003. At March 31, 2000, there were no borrowings outstanding under the term loan as the balance was fully repaid in March 2000. The agreements described above contain various restrictive covenants that, among other things, limit the ability of the Company to incur additional indebtedness, create liens on assets, make investments or acquisitions, engage in mergers or consolidations, dispose of assets, F-11 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- pay dividends, purchase or retire any of the Company's outstanding shares or alter or amend the Company's capital structure. In addition, the Company is required to maintain certain financial covenants, including a debt to net worth ratio as well as limiting borrowings to 75% of the aggregate amount of accounts receivable (the "collateral limit") which are outstanding under 90 days. At certain times during fiscal 1999, the Company's borrowings exceeded the collateral limit noted above. In July 1999, the Company received a waiver of this covenant violation through April 1, 2000. The Company was in compliance with all financial covenants at March 31, 2000. At March 31, 2000, contractual maturities of the outstanding term loan is as follows: 2001 $ 96,000 2002 109,397 2003 18,732 ---------------- $ 224,129 ---------------- ---------------- 7. INCOME TAXES As of March 31, 2000, the Company has available federal, state and foreign net operating loss carryforwards of approximately $8,116,688, $7,149,694, and $1,668,944, respectively, to offset future taxable income. The federal net operating loss carryforwards expire during the years 2011 through 2014. In addition, the Company has investment credit and research and development credit carryforwards aggregating approximately $254,523, which may provide future tax benefits, expiring from 2008 through 2014. The components of the income tax provision for the years ended March 31, 2000 and 1999 are as follows: 2000 1999 Current Federal $ - $ - State - - Foreign 30,456 - -------------- -------------- 30,456 - -------------- -------------- Deferred Federal 198,929 197,403 State 35,105 34,836 -------------- -------------- 234,034 232,239 -------------- -------------- $ 264,490 $ 232,239 -------------- -------------- -------------- -------------- F-12 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------
The reasons for the difference between the Company's effective tax rate and the United States federal statutory rate are as follows: MARCH 31, 2000 1999 Effective tax rate reconciliation Statutory federal tax rate (34) % (34)% State taxes, net of federal benefit (6) (6) Effect of in-process research and development write-off 24 Foreign rate differential 1 (1) Permanent difference (goodwill) 13 - Effect of recording valuation allowance on net operating loss carryforwards 28 20 Other 3 1 ---- ---- 5 % 4 % ---- ----
The tax effect of temporary differences which make up the significant components of the net deferred tax asset and liability at March 31, 2000 and 1999 are as follows:
2000 1999 Current deferred tax assets Inventory $222,246 $ 224,000 Accrued expenses 216,028 118,393 Allowance for doubtful accounts 100,303 79,917 Total current deferred tax assets 538,577 422,310 Valuation allowance (538,577) - -------------- ------------- Net current deferred tax assets $ - $ 422,310 -------------- ------------- Noncurrent deferred tax assets Depreciation and amortization $124,852 $ - Net operating loss carryforwards 3,817,178 1,867,600 Research and development credit 254,523 186,524 Alternative minimum tax credit 20,125 6,867 ------------- --------------- Total noncurrent deferred tax assets 4,216,678 2,060,991 Valuation allowance (3,460,300) (1,696,459) -------------- --------------- Net noncurrent deferred tax assets $ 756,378 $ 364,532 -------------- --------------- Noncurrent deferred tax liabilities Depreciation $ - $ (28,865) Capitalized software (756,378) (523,943) -------------- --------------- Total noncurrent deferred tax liabilities $(756,378) $ (552,808) -------------- --------------- Net noncurrent deferred tax (liabilities) assets $ - $ (188,276) -------------- ---------------
F-13 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- The Company has recorded a full valuation allowance against the federal and state net operating loss carryforwards and a full valuation allowance against the foreign net operating loss carryforwards and the research and development credit as management believes that it is more likely than not that substantially all of the net operating loss carryforwards and credits will expire unutilized. The increase in the valuation allowance is due primarily to current year net operating loss carryforwards for federal and state purposes, $1,610,608, tax effected, and research and development credits, $68,000, offset by the utilization of a small portion of foreign net operating loss carryforwards, ($12,752), tax effected, during the year ended March 31, 2000. Approximately $341,050 of the federal and state net operating losses, if utilized, will reverse through equity in the future. 8. STOCKHOLDERS' EQUITY In August 1999, the Company sold 2,000,000 shares of common stock in a private financing and received net proceeds of $9,500,000. In connection with this sale, warrants to purchase 250,000, 37,500, 9,375 and 9,375 shares of common stock with an exercise price of $4.75, $3.00, $4.50 and $6.00, respectively, were issued. An aggregate of 18,750 warrants expire in August 2002 with the remaining 287,500 warrants expiring in August 2004. In June 1999, the Company sold 1,000,000 shares of common stock to a Private Equity Fund at $3.00 per share and received net proceeds of $3,000,000. In connection with this sale, warrants to purchase 250,000 shares of common stock with an exercise price of $4.50 and warrants to purchase 250,000 shares of common stock with an exercise price of $6.00 were issued. During the year ended March 31, 2000, warrants to purchase 500,000 shares were exercised for an aggregate consideration of $2,625,000. During the year ended March 31, 1998, the Company entered into a stock subscription agreement with one of its directors, under which the director agreed to acquire 50,000 shares of the Company's common stock at $2.08 The shares were issued in fiscal year 1999 after the receipt of $104,000 from the director. During the years ended March 31, 2000 and 1999, respectively, options to purchase 1,433,273 and 358,429 shares of common stock under the Company's stock option plans were exercised, for an aggregate consideration of $2,399,869 and $362,589. During the year ended March 31, 1999, 60,000 shares and 30,000 options were issued in connection with the termination of a consulting contract (see Note 9). The aggregate fair value of this consideration was $171,120 of which $126,120 was provided for in prior years. In April 1996, the Company sold 860,000 shares of common stock to unrelated investors, at $1.25 per share and received net proceeds of approximately $1,023,559. In conjunction with this sale, warrants to purchase 860,000 shares of common stock with an exercise price of $1.50 and warrants to purchase additional 860,000 shares of common stock with an exercise price of $2.00 were issued. During the year ended March 31, 1999, warrants to purchase 376,000 shares were exercised for an aggregate consideration of $604,000. In April 1999, the Company offered a discount on the warrants. These warrants, initially issued at $1.50 and $2.00, were reduced in price to $1.25 and $1.50, respectively. The discount carried an expiration date of June 30, 1999. F-14 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- During the discount period, investors exercised 1,143,251 warrants and the Company received net proceeds of $1,618,544. These warrants expire in April 2000. At March 31, 2000, 80,000 warrants were outstanding. These warrants expired unexercised. In April 1996, the Company sold 241,467 shares of common stock to four current shareholders of record who held the contractual right to maintain their share of ownership. The Company received net proceeds of $301,834. In connection with this sale, warrants to purchase 241,467 shares of common stock with an exercise price of $1.50 and warrants to purchase an additional 241,467 shares of common stock with an exercise price of $2.00 were issued. During the year ended March 31, 2000, warrants to purchase 364,422 shares were exercised for an aggregate consideration of $637,739. There are no warrants outstanding as of March 31, 2000. WARRANTS During October 1995, in connection with services being performed by a consultant, the Company issued 250,000 warrants to the consultant to purchase shares of the Company's common stock. Warrants to purchase 50,000 shares of common stock at $3.25 per share vested immediately. Warrants to purchase each additional block of 50,000 shares of common stock are exercisable at $3.75, $4.25, $4.75 and $5.25 per share, respectively, and shall vest on each three month anniversary of the agreement. The warrants expire five years from the date of grant. STOCK OPTION PLANS The aggregate number of shares of common stock for which options may be granted under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 1998 Plan shall be 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During the years ended March 31, 2000 and 1999, the Company granted options to purchase 2,328,791 and 499,567, respectively. At March 31, 2000, 1,352,238 options were outstanding under the 1998 Plan, of which 219,580 options were exercisable. In connection with the Company's acquisition of SolCom, the Company granted 300,000 performance-based options to certain holders of SolCom options. At March 31, 2000, all 300,000 options were forfeited due to the termination of employment of the option holders. In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan, as amended, increased the number of shares of common stock for which options may be granted to a maximum of 1,250,000 shares. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair market value of one common stock on the date of grant. During the year ended March 31, 1999, the Company granted options to purchase 187,224 shares of its common stock under the 1994 Plan. At March 31, 2000, 770,286 options were outstanding under the 1994 Plan, of which 570,286 options were exercisable. Of the options granted in fiscal 2000, 455,645 were granted under the Company's Time Accelerated Restricted Stock Award Plan ("TARSAP"). The options vest after seven years, however, under the TARSAP, the vesting is accelerated to the last day of the current fiscal year if F-15 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- the Company meets certain predetermined s ales targets. The Company did not meet the targets for 2000 and, as such, all options granted under the TARSAP in 2000 will vest seven years from the original date of grant. OTHER OPTIONS During the years ended March 31, 2000 and 1999, the Company issued 7,500 and 70,000 options, respectively, to various consultants. The term of these options is five years from the date of grant. During the years ended March 31, 2000 and 1999, 23,750 and 30,000 options, respectively vested with 23,750 to vest in Fiscal 2001, contingent on consulting services being provided in such year. Compensation expense of $50,400 and $62,000, respectively, was recorded relative to vesting of options during 2000 and 1999. During September 1996, the Company issued options to certain officers and directors to purchase 620,000 shares of the Company's common stock, of which 420,000 vested immediately and 100,000 vest each April 1 of 1998 and 1999. Options expire ten years from the date of grant. The exercise price of the options is equal to the market value of the Company's stock on the date of grant. During the years ended March 31, 2000, and 1999, 90,000 and 130,000 options to purchase shares were exercised under this grant for an aggregate consideration of $104,400 and $150,800, respectively. At March 31, 2000, 400,000 options were outstanding and exercisable. The Company also has issued outstanding options to certain directors to purchase 162,500 shares of the Company's stock. Options expire in terms ranging from 5 to 10 years from the date of grant. The exercise price of the options is equal to the market value of the Company's stock on the date of grant. At March 31, 2000, 72,500 options were outstanding and exercisable. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its options. During the year ended March 31, 2000, the Company recorded compensation expense of $201,600 related to options given to employees. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). If the Company had elected to recognize compensation costs based on the fair value at the date of grant for awards in fiscal 2000 and 1999, consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would have increased by $1,239,998 and $.10 and $751,295 and $.14, respectively, for the years ended March 31, 2000 and 1999. The pro forma effect on net loss for fiscal 2000 and 1999 may not be representative of the pro forma effect on net loss of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to April 1, 1995. F-16 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- The weighted-average fair values at date of grant for options granted during fiscal 2000 and 1999 were $4.08 and $1.64, respectively. The fair value of each option grant for the Company's common stock is estimated on the date of the grant using the Black Scholes option pricing model, with the following weighted average assumptions used for grants in fiscal 1999 and 1998:
2000 1999 Expected volatility 84% 80% Risk-free interest rate 5.32% 5.12% Expected option lives 4.00 years 5.87 years
Detail of options granted are as follows:
WEIGHTED AVERAGE EXERCISE OPTION PRICE SHARES PRICE ($) PER SHARE ($) Options outstanding at March 31, 1998 1,794,796 1.60 1.16 to 3.13 Granted 1,282,067 2.34 0.48 to 3.54 Canceled (25,596) 1.94 1.54 to 2.31 Exercised (358,429) 1.47 1.16 to 2.87 ----------------- -------------- --------------------- Options outstanding at March 31, 1999 2,692,838 1.52 0.48 to 3.54 ----------------- -------------- --------------------- Granted 2,272,291 6.30 2.28 to 37.66 Canceled (756,582) 3.03 1.75 to 30.81 Exercised (1,433,273) 1.67 0.48 to 5.05 ----------------- -------------- --------------------- Options outstanding at March 31, 2000 2,775,274 5.08 0.48 to 37.66 ----------------- -------------- --------------------- Options exercisable at March 31, 2000 1,281,366 2.32 0.48 to 37.66 ----------------- -------------- ---------------------
F-17 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------
WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED RANGE OF YEARS OF AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE $0.48 49,710 0.2 $ 0.48 49,710 $ 0.48 $1.16 - $1.72 551,107 6.3 $ 1.24 548,607 $ 1.24 $1.75 - $2.57 1,382,032 6.8 $ 2.16 509,049 $ 2.04 $2.97 - $4.34 116,280 4.3 $ 3.28 85,000 $ 3.08 $5.63 - $8.44 273,502 4.7 $ 6.95 74,000 $ 7.57 $9.13 - $13.03 91,889 5.1 $ 9.61 - - $14.47 - $20.94 222,097 5.2 $ 20.34 - - $22.00 - $32.13 50,083 5.5 $ 27.70 7,500 $ 22.00 $33.44 - $37.66 38,574 5.4 $ 34.72 7,500 $ 33.44 -------------- -------------- -------------- -------------- -------------- 2,775,274 6.0 $ 5.08 1,281,366 $ 2.32 -------------- -------------- -------------- -------------- --------------
9. COMMITMENTS OPERATING LEASES During March 1999, the Company entered into an operating lease to consolidate their office and manufacturing facilities, which has a commencement date of July 31, 1999. This lease expires in June 2009. The Company also leases office space for its European operation in Antwerp, Belgium and Livingston, Scotland. In addition, the Company's California division currently leases office facilities. CAPITAL LEASES The Company leases certain equipment under agreements which are classified as capital leases. Each of the capital lease agreements expire within five years and have purchase options at the end of the lease term. F-18 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- Future minimum payments, by year and in the aggregate, under non-cancellable operating and capital leases as of March 31, 2000 are as follows:
CAPITAL OPERATING LEASES LEASES Year ending March 31 2001 $ 97,949 $ 769,184 2002 97,949 760,804 2003 97,949 802,206 2004 97,949 793,074 2005 36,501 679,478 Thereafter - 3,350,246 -------------- ------------- Total minimum lease payments $ 428,297 $ 7,154,992 -------------- ------------- Less amount representing interest 57,531 -------------- Present value of net minimum lease payments $ 370,766 --------------
Computer and other equipment at March 31, 2000 includes $390,638 under capital leases. There were no assets under capital lease agreements at March 31, 1999. Rent expense under operating leases for the years ended March 31, 2000 and 1999 approximated $577,315 and $171,496, respectively. CONSULTING CONTRACT In connection with the acquisition of European Business Associates BVBA of Brussels, Belgium, the Company entered into a consulting agreement with a former principal for a term of five years. The consulting agreement provides for an annual consulting fee of $75,000 with 5% annual increments, as well as reimbursement of certain expenses. During February 1999, the Company and the consultant mutually agreed to terminate the above consulting contract. In connection with the termination the consultant received 60,000 common shares and 30,000 options. Compensation expense of approximately $126,120 was recorded during fiscal 1999, in connection with this issue of shares and options. 10. CONTINGENT LIABILITIES In the normal course of business the Company and its subsidiaries may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. In the opinion of management, the outcome of such current legal proceedings, claims and assessments will not have a material effect on the Company's financial position, results of operations or cash flows. F-19 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- 11. EMPLOYEE BENEFIT PLANS Effective April 1, 1993, the Company adopted a defined contribution savings plan. The terms of the plan provide for eligible employees who have met certain age and service requirements to participate by electing to contribute up to 15% of their gross salary to the plan, as defined, with the Company matching 30% of an employee's contribution in cash up to a maximum of 6% of gross salary, as defined. Company contributions vest at the rate of 25% of the balance at each employee's second, third, fourth, and fifth anniversary of employment. The employees' contributions are immediately vested. The Company's contribution to the savings plan for the years ended March 31, 2000 and 1999 was $49,732 and $37,058, respectively. 12. SALES The Company, which operates in a single industry segment, designs, develops and markets a broad range of security, network management and remote maintenance products for voice and data communications networks. The Company's headquarters, physical production and shipping facilities are located in the United States. The Company's local and foreign export sales for the years ended March 31, 2000 and 1999 are as follows: 2000 1999 United States $ 19,228,324 $ 10,054,769 Europe 3,336,517 2,583,040 Pacific Rim 11,950 - Other 92,042 36,108 ------------ ------------ $ 22,668,833 $ 12,673,917 ------------ ------------ The Company sold a substantial portion of its products to four customers. Sales to these customers amounted to $8,606,173 (38% of net sales) and $6,914,525 (55% of net sales) in 2000 and 1999, respectively. At March 31, 2000 and 1999, amounts due from these customers included in accounts receivable, were $2,104,050 and $1,362,061, respectively. The loss of any of these four customers or a significant decline in sales volumes from any of these four customers could have a material adverse effect on the Company's financial position and results of operations. Additionally, during the year ended March 31, 2000, the Company licensed the rights to certain customized modules of its software via a perpetual license agreement with one customer and recorded approximately $3.2 million in revenue which had a positive effect on the Company's rate of revenue growth and gross margin. 13. CONCENTRATION OF CREDIT RISK The Company maintains deposits in a financial institution which is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At March 31, 2000 and periodically throughout fiscal 2000, the Company had deposits in this financial institution in excess of the amount insured by the FDIC. F-20 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- The Company sells the majority of its products to customers within the telecommunications industry. The Company's three largest telecommunications customers and one other customer accounted for approximately 46% of net accounts receivable at March 31, 2000. The Company provides for allowances for doubtful accounts which management believes are adequate to cover potential credit risk losses. The Company designs its products utilizing readily available parts manufactured by multiple suppliers and the Company currently relies on and intends to continue to rely on these suppliers. The Company has been and expects to continue to be able to obtain the parts generally required to manufacture its products without any significant interruption or sudden price increase, although there can be no assurance that the Company will be able to continue to do so. The Company sometimes utilizes a component available from only one supplier. If a supplier were to cease to supply this component, the Company would most likely have to redesign a feature of the affected device. In these situations, the Company maintains a greater supply of the component on hand in order to allow the time necessary to effectuate a redesign or alternative course of action should the need arise. 14. OTHER RECEIVABLES Other receivables consists of amounts due from foreign employees related to withholding taxes. Included within accrued payroll and related liabilities is an offsetting liability due from the Company to the United Kingdom tax authorities. The receivables which have been collected subsequent to March 31, 2000 have been remitted to the appropriate United Kingdom tax authorities. 15. OTHER CURRENT LIABILITIES At March 31, 1999, other current liabilities consisted mainly of additional liabilities assumed by the Company in connection with the acquisition of SolCom. These liabilities relate to professional fees incurred by SolCom and its directors for services provided in conjunction with the acquisition. These liabilities have been paid in full at March 31, 2000. F-21 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- 16. SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 Non-cash acquisition of SolCom System Limited Operating activities Accounts receivable $ 422,423 Inventory 342,509 Prepaid expenses and other current assets 81,652 Accounts payable 788,801 Accrued payroll and related liabilities 411,902 Deferred income 123,278 Other current liabilities 1,398,796 Investing and financing activities Property and equipment, net 388,712 Capitalized software, net 185,532 Borrowings 30,935 Common stock and options issued in connection with the purchase acquisition 6,211,880 Other Non-Cash Investing and Financing Activities Common stock issued in connection with the purchase acquisition of LeeMAH Datacom Security Corporation 1,000,000 Acquisition of treasury shares 203,199 Common stock and options issued in connection with termination of consulting contract 126,120 Options issued to consultants as non-cash compensation $ 50,400 62,000 Assets acquired by assuming capital lease obligations 370,766 Compensation charge from employee options 201,600
17. RELATED PARTY TRANSACTIONS The Company borrowed funds from a director of the Company in the amount of $150,000 on April 14, 1999. This amount was fully repaid along with a market rate of interest during June 1999. The amount of interest expense was not material to the Company. The Company issued advances to two officers of the Company in the amount of $50,000 each on August 31, 1998. These advances accrue interest at the prime rate plus 1%. These advances are due and payable in full upon the officers cessation of employment with the Company or August 31, 2000, whichever is earlier. During fiscal 2000, one of the officers, who has terminated employment with the Company, repaid his outstanding balance in full. F-22 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999 - ------------------------------------------------------------------------------- 18. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. This standard, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and Amendment of FASB Statement No. 133", is effective for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. For the Company this means the standard must be adopted no later than April 1, 2001. Management, based on its current operations, does not expect the adoption of this standard to have a material impact on the Company's results of operations, financial position or cash flows. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". The SEC delayed the effective date of this SAB from March 31, 2000, so that the SAB must now be adopted by June 30, 2000. The Company has assessed the impact of SAB 101 on its results of operations and believes that its results of operations for the year ended March 31, 2000 have been presented in accordance with the provisions of the SAB. 19. SUBSEQUENT EVENTS During April 2000, the Company issued a loan to the Chief Executive Officer of the Company in the amount of $750,000. The loan accrues interest at a rate of LIBOR plus 1%. This loan is due and payable on June 27, 2005. If the Chief Executive Officer leaves the employ of the Company or is terminated from his employment, with or without cause, the principal and accrued interest will be due and payable in full within 30 days of such termination. F-23 EXHIBIT INDEX ------------- Exhibit Description ------- ----------- 10.9 Employment Agreement dated as of April 1, 1999 between the Company and Stephen B. Gray. 10.10 Non-negotiable Promissory Note in the principal amount of $750,000 issued by Stephen B. Gray to the Company. 10.11 Line of Credit Agreement with United Nations Bank dated September 30, 1999. 23.1 Consent of PricewaterhouseCoopers LLP 27.1 Financial Data Schedule EX-10.9 2 0002.txt EMPLOYMENT AGREEMENT DATED AS OF APRIL 1, 1999 EXHIBIT 10.9 [ION NETWORKS LETTERHEAD] To: Stephen B. Gray June 16, 2000 From: Stephen Deixler Re: FY2000 Compensation Package The following will be the terms for your compensation for FY2000. This package represents recognition for the job you have done at Microframe/ION Networks over the last years as well as in recognition of your duties and responsibilities going forward as ION Networks, Inc. CEO and President. This document amends and restates the original letter dated April 1, 1999, to be effective as of such date. POSITION: CEO and President - -------- SALARY: Your salary will be $275,000/yr. effective 4/1/99 - ------ TERM: This agreement is effective from 4/1/99 thru 3/31/2000 - ---- OTHER: In addition to your salary, and a non-accountantable - ----- expenses/signing bonus of $30K, you will be entitled to and receive the following: 1) Fully paid medical/dental, including and/all out of pocket Expenses and/or costs. 2) $1,750/mo. net car allowance, including all operating Expenses, (i.e. insurance, gas, repairs, etc.) 3) 28 days of vacation with contractual provisions equivalent to other Company officers. Specifically, Section 3(d) which entitles the officer to either a) 28 days to be used/taken at officers' discretion as business conditions allow and/or b) compensation in respect of earned, but unused vacation days per the executive vacation policy currently in place by the company. 4) Grant of 100,000 Stock Options at the 4/1/99 share price, vesting 2 years from 4/1/99. 5) Acceleration of all options you own (vested and non-vested), if/when ION Networks is sold or if there is a change of control/ownership in ION Networks. 6) Any of your 577,000 non-qualified stock options that are not vested (not including the options granted pursuant to paragraph 4 hereof) will become vested immediately upon signing of this agreement. 7) Any options you elect to exercise/sell up to a total of 400,000 over the next two years with a maximum of 200,000 in any one year, will be backfilled in the exact same quantities/type as were sold. These options will be replaced at a strike price based upon the then current market price of shares of ION Networks, Inc. Please let me know if you have any questions. Good luck, Agreed: - ---------------------------------- -------------------------------------- Stephen M. Deixler Stephen B. Gray Chairman President and CEO Dated: June 16, 2000 -2- EX-10.10 3 0003.txt NON-NEGOTIABLE PROMISSORY NOTE EXHIBIT 10.10 THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. IT MAY NOT BE OFFERED OR TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS (I) A REGISTRATION STATEMENT FOR SUCH PROMISSORY NOTE UNDER THE SECURITIES ACT OF 1933 IS IN EFFECT OR (II) PAYEE(AS DEFINED BELOW) HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS SATISFACTORY TO THE PAYEE, TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. PROMISSORY NOTE --------------- PRINCIPAL: $750,000.00 PISCATAWAY, NJ INTEREST: LIBOR PLUS 1% JUNE 27, 2000 FOR VALUE RECEIVED, Stephen B. Gray, an individual residing at 9 Pavilica Road, Stockton, NJ 08559 (the "Maker"), hereby promises to pay to ION NETWORKS, INC., a Delaware corporation with an address of 1551 South Washington Avenue, Piscataway, New Jersey 08854 (the "Payee"), the aggregate sum of Seven Hundred Fifty Thousand Dollars ($750,000.00) (the "Principal Amount"), together with interest as set forth herein (as the same may be supplemented, modified, amended or restated from time to time in the manner provided herein, this "Note"). Interest on the Principal Amount shall accrue at the rate of LIBOR plus one (1%) percent per annum, to be determined and fixed on each one (1) year anniversary of this Note. Such payment shall be made at the address set forth above or at such other place as may be designated from time to time in writing by the Payee. 1. Payment of Principal and Interest. The Principal Amount together with all interest accruing thereon shall be paid by the Maker to the Payee in a single payment on or before the earliest to occur of (i) five (5) years from the date hereof or, (ii) the occurrence of an Event of Default (as defined below), such earlier date as may be otherwise provided herein (the "Maturity Date"). Notwithstanding the foregoing, this note and all accrued interest shall be due and payable, thirty (30) days after termination of Maker's employment with the Payee, if such date is prior to the Maturity Date, whether such termination occurs as a result of Maker leaving the Payee's employ of his own volition, or as a result of the Payee's termination of Maker's employment with or without cause. If Payee has been acquired (such as in a merger, consolidation, or otherwise), then the provisions relating to Maker's continued employment shall be deemed satisfied if Maker continues to be employed by Payee's successor. Notwithstanding the foregoing, if Payee dies or becomes permanently disabled prior to the Maturity Date, then the Principal Amount and all accrued interest on this Note shall be due and payable on the Maturity Date. 2. Prepayment. The Maker shall have the right to prepay the outstanding Principal Amount of this Note, in whole or in part, at any time and from time to time, without penalty or premium. Maker agrees that he will prepay this Note upon sale of shares underlying 100,000 stock options granted to Maker pursuant to grant instrument dated September 25, 1996. Maker agrees he will not sell shares underlying such options without prior notification of Payee's compensation committee or CFO. 3. Events of Default. An "Event of Default" shall be deemed to occur (i) upon the commencement of any proceedings by the Maker, or with the consent of Maker, under any law or statute concerning bankruptcy, arrangement of debt, insolvency or readjustment of debt, or the commencement of any such proceedings without the consent of the Maker and such proceedings shall continue undischarged for a period of sixty (60) days (ii) the failure to pay any amounts under this Note when due. 4. Interest Upon Default. Without limiting any other rights or remedies of the Payee in accordance with this Note or applicable law, in the event of the occurrence of an Event of Default, Payee, at its election, may accelerate and demand immediate payment of the Principal and accrued interest due under this Note and Maker shall be liable for all such amounts. 5. Governing Law. This Note shall be governed by, and construed in accordance with, the laws of the State of New Jersey, without regard to principles of conflicts or choice of laws thereof. This Note shall not be interpreted or construed with any presumption against the Payee by virtue of the Payee causing this Note to be drafted. 6. Amendments. No amendment, modification, or waiver of any provision of this Note nor consent to any departure by the Maker therefrom shall be effective unless the same shall be in writing and signed by the Payee and the Maker. 7. Successors And Assigns. This Note shall not be negotiable, transferable or assignable by the Maker without the prior written consent of Payee. This Note shall be binding upon and shall inure to the benefit of the Payee and its successors and assigns, if any, subject to the provisions hereof. 8. Entire Agreement. This Note sets forth the entire agreement and understanding of the Maker and the Payee and supersedes any prior oral or written agreement between the Maker and the Payee with respect to the subject matter of this Note. 9. Waiver of the Right to Trial by Jury. The Maker hereby irrevocably waives the right to trial by jury in any action, suit, claim, counterclaim or other proceeding, whether in contract or tort, at law or in equity, in any manner connected with this Note or any transactions contemplated hereunder. The exclusive jurisdiction of any disputes arising hereunder shall be in the federal or state courts of the State of New Jersey in Middlesex County. 10. Notices. Any notice, request, demand or other communication permitted or required to be given hereunder shall be in writing, shall be sent by one of the following means to the addressee at the address set forth above (or at such other address as shall be designated hereunder by notice to the other parties and persons receiving copies, effective upon actual receipt) and shall be deemed conclusively to have been given: (a) on the first Business Day (as hereinafter defined) following the day timely deposited with Federal Express (or other equivalent national overnight courier) or United States Express Mail, with the cost of delivery prepaid; (b) on the fifth Business Day following the day duly sent by certified or registered United States mail, postage prepaid and return receipt requested; or (c) when otherwise actually delivered to the addressee. Copies may be sent by regular first-class mail, postage prepaid, to such person(s) as a party may direct from time to time by notice to the others, but failure or delay in sending copies shall not affect the validity of any such notice, request, demand or other communication so given to a party. For purposes hereof, "Business Day" shall mean any day during which banks are open for business in New York, New York, other than any Saturday, Sunday or a day on which commercial banks in New York State are authorized or required to close. IN WITNESS WHEREOF, the Maker has executed this Note as of the date first written above, and the Payee has agreed to the provisions hereof. MAKER: /s/ Stephen B. Gray - -------------------------------------- Stephen B. Gray ACCEPTED: ION NETWORKS, INC. By: /s/Stephen M. Deixler ----------------------------------- Chairman of the Board of Directors EX-10.11 4 0004.txt LINE OF CREDIT AGREEMENT WITH UNITED NATIONS BANK LOAN AGREEMENT
- ------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS $2,500,000.00 09-30-1999 07-31-2000 1101700001 RE-NEW LINE OF CRED HPP - ------------------------------------------------------------------------------------------------ REFERENCES IN THE SHADED AREA ARE FOR LENDER'S USE ONLY AND DO NOT LIMIT THE APPLICABILITY OF THIS DOCUMENT TO ANY PARTICULAR LOAN OR ITEM. - ------------------------------------------------------------------------------------------------
BORROWER:ION Networks, Inc.(TIN: 22-2413505) LENDER: UNITED NATIONAL BANK 21 Meridian Road 1130 ROUTE 22 EAST Edison, NJ 08820 PO BOX 6000 BRIDGEWATER, NJ 08807-0010 THIS LOAN AGREEMENT between ION Networks, Inc. ("Borrower") and UNITED NATIONAL BANK ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of September 30, 1999, and shall continue thereafter until all indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. Account. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). Account Debtor. The words "Account Debtor" mean the person or entity obligated upon an Account. Advance. The word "Advance" means a disbursement of Loan funds under this Agreement. Borrower. The word "Borrower" means ION Networks, Inc. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries" and Affiliates." Borrowing Base. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (a) $2,500,000.00; or (b) 75.000% of the aggregate amount of Eligible Accounts. Business Day. The words "Business Day" mean a day on which commercial banks are open for business in the State of New Jersey. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor Is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (e) Accounts which are subject to dispute, counterclaim, or setoff. (f) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (g) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (h) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an 09-30-1999 LOAN AGREEMENT PAGE 2 Loan No. 1101700001 (Continued) assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (i) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (j) Accounts which have not been paid in full within Under Ninety (90) days from the invoice date. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Expiration Date. The words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement. Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any indebtedness. Indebtedness. The word "indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such indebtedness may be or hereafter may become barred by any statute of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means UNITED NATIONAL BANK, its successors and assigns. Line of Credit. The words "Line of Credit" mean the credit facility described in the Section entitled "LINE OF CREDIT" below. Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i. e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. Conditions Precedent to Each Advance. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. 09-30-1999 LOAN AGREEMENT PAGE 3 Loan No. 1101700001 (Continued) (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted an audit at Borrower's Accounts, books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable; (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." Making Loan Advances. Advances under the Line of Credit may be requested orally subject to the limitations set forth below. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cut-off time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. Under no circumstances shall Lender be required to make any Advance in an amount less than $1,000.00. Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts and general intangibles. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: Perfection of Security Interests. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. The following is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower's Accounts: 21 Meridian Road, Edison, Middlesex County, New Jersey. Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts and Eligible Accounts, in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and such other matters and information relating to Borrower's Accounts as Lender may request. Supplemental schedules shall be delivered according to the following schedule: to Lender, as soon as available, but in no event later than ten (10) days after the end of the month. Representations and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (c) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of New Jersey and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a 09-30-1999 LOAN AGREEMENT PAGE 4 Loan No. 1101700001 (Continued) violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49, U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act. 42 U.S.C. Section 6901, et seq., the New Jersey Industrial Site Recovery Act, NJSA Section 13: 1K-6 ("ISRA"), the New Jersey Spill Compensation and Control Act, NJSA 58: 10-23.11, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the properties. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 21 Meridian Road, Edison, NJ 08820. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower will: 09-30-1999 LOAN AGREEMENT PAGE 5 Loan No. 1101700001 (Continued) Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Other Ratio. Maintain a ratio of Maximum Debt to Worth of 0.75 to 1.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as 09-30-1999 LOAN AGREEMENT PAGE 6 Loan No. 1101700001 (Continued) Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. ANNUAL RENEWAL. Notwithstanding the foregoing, the unpaid principal balance of the Note shall be due and payable, if not called earlier, together with all accrued and unpaid interest, fees and charges from the date of this Note to July 31, 2000. The Lender will have the option to renew the Line of Credit created by this Note and may terminate it at it's absolute discretion by giving thirty (30) days written notice to the Borrower at any time. Should the Bank choose not to renew the facility, the Borrower(s) shall pay the Bank the entire outstanding principal balance together with all accrued and unpaid interest, thereon and all other unpaid fee, charges, and expenses. BORROWER'S FINANCIAL STATEMENTS. Borrower covenants and agrees with Lender that, while this Agreement is in affect, Borrower shall furnish Lender with, as soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public account satisfactory to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistant basis, and certified by Borrower(s) as being true and correct. INTERIM FINANCIAL STATEMENTS. Borrower shall furnish Lender with, as soon as available, but in no event later than sixty (60) days after the end of each fiscal quarter, Profit and Loss Statements and Account Receivables list and aging report. All financial reports required to be provided under this Agreement shall be supplied by Borrower, prepared on a consistant basis and certified by Borrower as being true and correct. AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct from Borrower's account numbered 400-335-9 the amount of any loan payment. If the funds are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reason, Borrower or Lender may voluntarily terminate Automatic Payments. BORROWING BASE REQUIREMENTS. Borrower covenants and agrees with Lender that while this Agreement is in affect: I) Maximum borrowings shall be the lesser of a) $2,000,000.00; or b) 75.000% of agregate amount of "Eligible Accounts." II) Eligible Accounts shall be Accounts Receivable that are under ninety (90) days evidenced by monthly Borrowing Base Certificate. III) Monthly Accounts Receivable aging reports are to submitted to Lender, as soon as available, but in no case later than ten (10) day after the end of each month. IV) Lender will reserve the right to conduct an audit of Accounts Receivable, twice annually, at the Borrower's expense or at any time and frequency should a condition of default exist. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default In Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. 09-30-1999 LOAN AGREEMENT PAGE 7 Loan No. 1101700001 (Continued) Credit or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the indebtedness. Lender, at its option, may, but shall not be required to permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. Right to Cure. If any default, other than a Default on indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within thirty (30) days; or (b) if the cure requires more than thirty (30) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of New Jersey. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of SOMERSET County, the State of New Jersey. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the persons signing below is responsible for all obligations in this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation Interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). No Joint Venture Partnership. The relationship of Borrower and Lender created by this Agreement is strictly that of debtor-creditor, and nothing contained in this Agreement or in any of the Related Documents shall be deemed or construed to create a partnership or joint venture between Borrower and Lender. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; 09-30-1999 LOAN AGREEMENT PAGE 8 Loan No. 1101700001 (Continued) however, if the offending provision cannot be so modified it shall be stricken and all other provisions of this Agreement in all other respect shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF SEPTEMBER 30, 1999. BORROWER: ION Networks, Inc. By: /s/ Ken Hay -------------------------------- Ken Hay, Chief Financial Officer ATTEST: By: /s/ Illegible -------------------------------- (CORPORATE SEAL) Secretary or Assistant Secretary LENDER: UNITED NATIONAL BANK By: -------------------------------- Authorized Officer EX-23.1 5 0005.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS --------- We hereby consent to the incorporation by reference in this Registration Statement on Forms S-3 (File Nos. 333-09507 and 333-85693) and Forms S-8 (File Nos. 33-61837, 333-14681 and 333-76809) of our report dated June 8, 2000, relating to the consolidated financial statements which appears in ION Networks, Inc. and Subsidiaries' Annual Report on Form 10-KSB for the year ended March 31, 2000. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York June 28, 2000 EX-27.1 6 0006.txt ION NETWORKS, INC. FINANCIAL DATA SCHEDULE
5 All Amounts Shown In 1's Currency - US Dollars 12-MOS 12-MOS Mar-31-2000 Mar-31-1999 APR-01-1999 APR-01-1998 Mar-31-2000 Mar-31-1999 10,381,612 165,994 0 0 6,381,243 3,242,867 (251,000) (150,000) 1,924,671 2,554,643 19,039,400 6,668,845 3,713,322 2,001,716 (1,566,366) (991,347) 27,390,241 15,973,475 5,563,309 7,370,895 0 0 0 0 0 0 15,112 8,287 21,380,825 6,392,751 27,390,241 15,973,475 22,668,833 12,673,917 22,668,833 12,673,917 8,409,068 5,464,708 19,346,117 12,916,412 0 0 0 0 (224,363) (100,573) (4,995,248) (5,764,764) 264,490 232,239 (5,259,738) (5,997,003) 0 0 0 0 0 0 (5,259,738) (5,997,003) (0.44) (1.09) (0.44) (1.09)
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