-----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, Duwxxa3wbfxCI7t36V+8ah7VSrFJDIQH0e96qPhK/fR8lCIZHmTM9FgN8pGkj5RZ 7sH+0+6VbaNN2z4K1YMEEQ== 0000910680-01-000060.txt : 20010205 0000910680-01-000060.hdr.sgml : 20010205 ACCESSION NUMBER: 0000910680-01-000060 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ION NETWORKS INC CENTRAL INDEX KEY: 0000754813 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 222413505 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-13117 FILM NUMBER: 1521851 BUSINESS ADDRESS: STREET 1: 1551 S WASHINGTON AVE CITY: PISCATAWAY STATE: NJ ZIP: 08854 BUSINESS PHONE: 2014944440 MAIL ADDRESS: STREET 1: 1551 S WASHINGTON AVE CITY: PISCATAWAY STATE: NJ ZIP: 08854 FORMER COMPANY: FORMER CONFORMED NAME: MICROFRAME INC DATE OF NAME CHANGE: 19920703 10QSB 1 0001.txt FORM 10-QSB FOR ION NETWORKS, INC. U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB --- / X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ---- ACT OF 1934 For the quarterly period ended December 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. ------------------ (Exact Name of Small Business Issuer in Its Charter) Delaware 22-2413505 (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 1551 South Washington Avenue Piscataway, New Jersey 08854 --------------------------------------------------------- (Address of Principal Executive Offices) (732) 529-0100 -------------- (Issuer's telephone number, including area code) 21 Meridian Road, Edison, New Jersey 08820 ------------------------------------------ (Former Address of Principal Executive Offices) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- There were 18,133,635 shares of Common Stock outstanding as of January 30, 2001. Transitional Small Business Disclosure Format: Yes ___ No X ----- ION NETWORKS, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 2000
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Condensed Consolidated Financial Information 2 Condensed Consolidated Balance Sheets as of December 31, 2000 and March 31, 2000 (Unaudited) 3 Condensed Consolidated Statements of Operations for the Three and Nine Months ended December 31, 2000 and December 31, 1999 (Unaudited) 4 Condensed Consolidated Statement of Stockholders' Equity for the Nine Months ended December 31, 2000 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Nine Months ended December 31, 2000 and December 31, 1999 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis 11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18
PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION -------------------------------------------- The condensed consolidated financial statements included herein have been prepared by the registrant without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Although the registrant believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the registrant's Annual Report on Form 10-KSB for the year ended March 31, 2000. ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31, March 31, 2000 2000 --------------------- ------------------ ASSETS Current assets: Cash and cash equivalents............................................... $ 6,032,849 $ 10,381,612 Accounts receivable, net of allowance for doubtful accounts of $162,408 and $283,607, respectively....................... 1,992,967 4,569,546 Other receivables ...................................................... - 1,560,697 Inventory, net.......................................................... 2,712,897 1,924,671 Prepaid expenses and other current assets............................... 195,094 602,874 --------------------- ------------------ Total current assets........................................... 10,933,807 19,039,400 Restricted cash............................................................. 375,000 - Property and equipment at cost, net of accumulated depreciation of $1,935,560 and $1,381,601, respectively................. 1,552,269 2,146,956 Capitalized software, less accumulated amortization of $5,590,484 and $4,259,851, respectively............................................ 1,778,170 4,185,911 Goodwill and other acquisition - related intangibles, less accumulated amortization of $1,705,744 and $795,226, respectively................... 388,889 1,938,716 Related party notes receivable.............................................. 912,250 - Other assets................................................................ 82,280 79,258 --------------------- ------------------ Total assets ...................................................... $ 16,022,665 $ 27,390,241 ===================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital leases....................................... $ 67,900 $ 67,900 Current portion of long-term debt....................................... 96,000 96,000 Accounts payable and accrued expenses................................... 1,960,949 2,632,135 Accrued payroll and related liabilities................................. 802,785 2,139,524 Deferred income......................................................... 114,210 275,657 Other current liabilities............................................... 373,982 352,093 --------------------- ------------------ Total current liabilities.......................................... 3,415,826 5,563,309 Long-term portion of capital leases......................................... 263,019 302,866 Long-term debt, net of current portion...................................... 47,758 128,129 Commitments and contingencies (Note 11) 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 and outstanding 18,077,210 shares at December 31, 2000; issued 15,111,617 shares and outstanding 15,049,586 shares at March 31, 2000...................................................... 18,077 15,112 Additional paid-in capital.............................................. 40,171,072 35,063,207 Accumulated deficit..................................................... (27,850,237) (13,488,379) Accumulated other comprehensive (loss) income........................... (42,850) 13,196 --------------------- ------------------ 12,296,062 21,603,136 Less-Treasury stock 62,031 shares, at cost at March 31, 2000......................................................... - (207,199) --------------------- ------------------ Total stockholders' equity.................................................. 12,296,062 21,395,937 --------------------- ------------------ Total liabilities and stockholders' equity.................................. $ 16,022,665 $ 27,390,241 ===================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended For the Nine Months Ended December 31, December 31, 2000 1999 2000 1999 ---- ---- ---- ---- Revenue................................................ $ 3,432,572 $ 6,338,988 $ 8,304,574 $ 17,020,334 Cost of sales.......................................... 1,610,796 2,376,852 4,738,864 6,032,612 ----------------- --------------- ---------------- ---------------- Gross margin........................................... 1,821,776 3,962,136 3,565,710 10,987,722 Research and development expenses................. 707,408 1,251,498 2,973,966 2,991,365 Selling, general and administration............... 2,211,994 2,549,829 8,545,715 7,569,472 Restructuring, asset impairments and other charges 2,961,125 - 3,449,420 - Depreciation and amortization..................... 949,787 1,016,833 3,175,999 2,956,653 ----------------- --------------- ---------------- ---------------- Loss from operations................................... (5,008,538) (856,024) (14,579,390) (2,529,768) Interest income........................................ 91,756 75,020 311,172 123,679 Interest (expense)..................................... (12,289) (17,938) (40,621) (171,446) ----------------- --------------- ---------------- ---------------- Loss before income tax expense......................... (4,929,071) (798,942) (14,308,839) (2,577,535) ----------------- --------------- ---------------- ---------------- Income tax expense..................................... 11,291 --- 53,019 --- ----------------- --------------- ---------------- ---------------- Net loss............................................... $ (4,940,362) $ (798,942) (14,361,858) $ (2,577,535) ================= =============== ================ ================ PER SHARE DATA Net loss per share Basic............................................. $ (0.27) $ (0.06) $ (0.87) $ (0.22) Diluted........................................... $ (0.27) $ (0.06) $ (0.87) $ (0.22) Weighted average number of common shares outstanding: Basic............................................. 18,077,210 13,378,574 16,598,179 11,499,791 Diluted........................................... 18,077,210 13,378,574 16,598,179 11,499,791
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 (Unaudited)
Accumulated Additional Other Total Paid-in Accumulated Comprehensive Treasury Stockholders' Shares Par Value Capital Deficit (Loss) Income Stock Equity ---------- --------- ------------ ------------- ------------- ----------- ------------ Balance March 31, 2000 15,111,617 $ 15,112 $ 35,063,207 $ (13,488,379) $ 13,196 $ (207,199) $ 21,395,937 Net loss (14,361,858) (14,361,858) Exercise of stock options and warrants 108,451 108 322,939 323,047 Issuances of common stock 2,857,142 2,857 4,789,944 207,199 5,000,000 Noncash stock-based compensation - - (5,018) (5,018) Translation adjustments (56,046) (56,046) ---------- --------- ------------ ------------- ------------- ----------- ------------ Balance December 31, 2000 18,077,210 $ 18,077 $ 40,171,072 $ (27,850,237) $ (42,850) $ - $ 12,296,062 ========== ========= ============ ============= ============= =========== ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 1999 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss............................................................. $ (14,361,858) $ (2,577,535) Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation and amortization.................................... 3,175,999 2,956,653 Restructuring, asset impairments and other charges............... 3,449,420 - Provision for doubtful accounts.................................. - 133,607 Provision for inventory obsolescence............................. 530,542 - Provision for product warranty................................... - 30,000 Noncash stock-based compensation charges......................... (5,018) 144,000 Changes in operating assets and liabilities: (Increase) decrease in Accounts receivable.............................................. 2,576,579 (1,097,774) Other receivables................................................ 1,560,697 - Inventory........................................................ (1,318,768) 965,299 Prepaid expenses and other current assets........................ 197,737 279,627 Other assets..................................................... (3,022) 6,640 Increase (decrease) in Accounts payable and accrued expenses............................ (694,157) (1,697,758) Accrued payroll and related liabilities.......................... (1,734,116) (262,832) Deferred income.................................................. (161,447) (92,136) Other current liabilities........................................ 21,889 (1,521,639) ------------------ ------------------ Net cash used in operating activities................................ (6,765,523) (2,733,848) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment............................ (329,759) (1,043,336) Capitalized software............................................. (1,169,060) (1,113,662) Proceeds from the sales of software licenses - 285,414 Related party notes receivable, net of repayments................ (912,250) - Restricted cash.................................................. (375,000) - ------------------ ------------------ Net cash used in investing activities................................ (2,786,069) (1,871,584) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on revolving line of credit........................... - 253,720 Proceeds from debt............................................... - 450,000 Principal payments on debt and capital leases.................... (120,218) (2,541,560) Proceeds from sales of common stock / exercise of stock options and warrants..................................................... 5,323,047 18,131,596 ------------------ ------------------ Net cash provided by financing activities............................ 5,202,829 16,293,756 ------------------ ------------------ Net (decrease) increase in cash...................................... (4,348,763) 11,688,324 Cash and cash equivalents, beginning of year......................... 10,381,612 165,994 ------------------ ------------------ Cash and cash equivalents, end of period............................. $ 6,032,849 $ 11,854,318 ================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (Unaudited) Note 1 - Condensed Consolidated Financial Statements: - ----------------------------------------------------- The condensed consolidated balance sheets as of December 31, 2000 and March 31, 2000, the condensed consolidated statements of operations for the three and nine month periods ended December 31, 2000 and for the same periods in 1999 and the condensed consolidated statements of cash flows for the nine month periods then ended have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of the Company's financial position, results of operations and cash flows at December 31, 2000 and 1999 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the annual report on Form 10-KSB for the year ended March 31, 2000. During the third quarter of fiscal 2001, the Company initiated a significant restructuring plan to reduce operating expenses and take the actions necessary to ultimately reach profitability. As a result of the implementation of the plan, the Company expects to improve and stabilize operating performance as it moves forward. Based upon this, together with current revenue assumptions in its operating plan, the Company believes that it has sufficient cash to meet its operating requirements over the next twelve months. To the extent that the Company's revenue assumptions included in its operating plan are not met, the Company may have to raise additional equity and/or debt financing, and may have to curtail other expenditures. There can be no assurance that the Company will be able to obtain any such financing on acceptable terms, if at all. 7 Note 2 - Restricted Cash: - ------------------------- Due to the expiration of the Company's $1.5 million line of credit on September 30, 2000, the Company pledged $375,000 on September 7, 2000 as collateral on an outstanding letter of credit related to the required security deposit for the Company's Piscataway, New Jersey facility. Note 3 - Inventory: - ------------------- Inventory, net of allowance for obsolescence of $813,542 and $283,000 at December 31, 2000 and March 31, 2000, respectively, consists of the following: December 31, 2000 March 31, 2000 ----------------- -------------- Raw materials $ 990,044 $ 782,813 Work in process 116,827 259,180 Finished goods 1,606,026 882,678 --------- ------- Total $ 2,712,897 $ 1,924,671 =========== =========== The Company increased its allowance for obsolete inventory during the nine months to reflect a build up of certain raw materials that the Company believes are slow moving based on current sales projections of the ultimate finished products. Note 4 - Earnings Per Share: - ---------------------------- The computation of Basic Earnings Per Share is based on the weighted average number of common shares outstanding for the period. Diluted Earnings Per Share is based on the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents, comprised of outstanding stock options and warrants. The following is a reconciliation of the denominator used in the calculation of basic and diluted earnings per share:
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended 12/31/00 12/31/99 12/31/00 12/31/99 -------- -------- -------- -------- Weighted Average # of Shares 18,077,210 13,378,574 16,598,179 11,499,791 Outstanding Incremental Shares for Common 132,310 3,237,113 1,283,290 3,422,688 Equivalents --------- --------- ---------- --------- Diluted Shares Outstanding 18,209,520 16,615,687 17,881,469 14,922,479 ========== ========== =========== ==========
The potential incremental common shares were excluded from the computation of diluted earnings per share for all periods presented, because their inclusion would have had an antidilutive effect on earnings per share due to the Company's net loss for each respective period. 8 Note 5- Comprehensive Income: - ----------------------------- The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". The following table reflects the reconciliation between net loss per the financial statements and comprehensive loss.
Three Three Months Months Nine Months Nine Months Ended Ended Ended Ended 12/31/00 12/31/99 12/31/00 12/31/99 -------- -------- -------- -------- Net loss $(4,940,362) $(798,942) $(14,361,858) $(2,577,535) Effect of foreign currency translation (27,923) (18,156) (56,046) 2,802 -------- -------- --------- ----- Comprehensive loss $(4,968,285) $(817,098) $(14,417,904) $(2,574,733) ============ ========== ============= ============
Note 6 - Stockholders' Equity - ----------------------------- On August 18, 2000, the Company sold 2,857,142 shares of Common Stock at a price of $1.75 per share, for total consideration of $5,000,000. Pursuant to the transaction, the Company has registered these shares of Common Stock for resale. In connection with the Company's restructuring plans which were implemented in the third fiscal quarter, remaining employees were issued options to purchase in excess of 1.7 million shares of common stock at $1.125, the fair market value on the date of the grant, November 28, 2000. Note 7 - Restructuring, asset impairments and other charges - ----------------------------------------------------------- During the three and nine months ended December 31, 2000, the Company recorded $2,961,125 and $3,449,420, respectively, of restructuring, asset impairments and other charges. As a result of the Company's operating performance during the first six months of fiscal 2001 as compared to the prior year, the Company's new management evaluated the Company's business and product strategy and, in the Company's third fiscal quarter, implemented a business restructuring plan which is intended to enable the Company to reach a position of positive operating cash flows and focus its product offerings on those believed to have the greatest potential to generate further, near-term market penetration and positive operating contribution. As a result of the Company's initiatives, the Company recorded a charge of approximately $420,000 for restructuring and exit costs. Included in the exit costs were approximately $397,000 of cash severance and termination benefits associated with the separation of approximately 38 employees. All of these affected employees will have left their positions as of January 31, 2001, with 36 employees having left the payroll by December 31, 2000. Termination benefits of $201,698 were paid during the third quarter of fiscal 2001 with the majority of the balance to be paid in the fourth quarter of fiscal 2001. In addition, the Company has made strategic decisions to abandon certain products and 9 technologies including those which were acquired in the acquisition of SolCom Systems, Ltd. on March 31, 1999. The Company also closed down the research and development efforts at SolCom Systems, Ltd. and centralized the research and development functions at the New Jersey headquarters. As a result of the above decisions, the Company recorded an impairment charge of approximately $1,950,000 primarily relating to the abandonment of the capitalized core technology from this acquisition and other existing capitalized software. An additional impairment charge of approximately $870,000 has been recorded on the remaining goodwill from the Company's acquisition of SolCom Systems, Ltd. in March 1999 which was being depreciated over a three year period. Additionally, the Company recorded an impairment in the amount of approximately $209,000 on fixed assets previously used in the manufacturing process at SolCom Systems, Ltd. The following table displays the activity and balances of the restructuring reserve account from March 31, 2000 to December 31, 2000:
- ------------------------- ----------------- ------------------ -------------------- ------------------- Type of Cost March 31, December 31, 2000 Additions Deductions 2000 Balance Balance - ------------------------- ----------------- ------------------ -------------------- ------------------- Employee Separations $ - $ 397,377 $ 201,698 $ 195,679 - ------------------------- ----------------- ------------------ -------------------- ------------------- Facilities cost - 22,971 - 22,971 - ------------------------- ----------------- ------------------ -------------------- ------------------- Total $ - $ 420,348 $ 201,698 $ 218,650 - ------------------------- ----------------- ------------------ -------------------- -------------------
Note 8 - Income Taxes: - ---------------------- The Company's valuation allowance against its federal, state and foreign net operating loss carryforwards and its research and development credits increased by $4,072,421 during the nine months ended December 31, 2000. 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 because management currently believes that it is more likely than not that substantially all of the net operating loss carryforwards and credits will expire unutilized. Note 9 - New Accounting Pronouncements: - ---------------------------------------- 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 June 30, 2000 to the fourth quarter of fiscal 2001 for the Company. The Company has assessed the impact of SAB 101 on its results of operations and believes that its results of operations for the quarter ended December 31, 2000 have been presented in accordance with the provisions of the SAB. The adoption of the SAB will not have an effect on the Company's financial statements. 10 Note 10 - Related Party Transactions: - ------------------------------------- During April 2000, the Company issued a loan to the former Chief Executive Officer (the "Former CEO") of the Company in the amount of $750,000. The loan accrues interest at a rate of LIBOR plus 1%. This loan had an original maturity date of the earlier of April 2005 or thirty days after the Company for any reason no longer employed the Former CEO. The Former CEO resigned his position at the Company effective September 29, 2000. On October 5, 2000, the Company entered into an agreement with the Former CEO pursuant to which the $750,000 promissory note was amended to extend the due date to April 30, 2001, and to provide that interest on the note shall accrue through September 29, 2000. The loan is collateralized by the receipt of a first mortgage interest on the personal residence of the Former CEO. Pursuant to this agreement, the Former CEO also agreed to reimburse the Company for certain expenses totaling $200,000, to be paid over a period of six months ending March 31, 2001. During the quarter ended December 31, 2000, $35,000 was repaid and $22,000 has been recorded as a non-cash offset as a result of earned but unpaid vacation owed to the Former CEO. The remaining receivable of $143,000 at December 31, 2000 is classified within related party notes receivable on the Company's consolidated balance sheet. On June 29, 2000, the Company made an advance of $135,000 to the Former CEO. The advance was subsequently repaid in full on July 26, 2000. Note 11 - Commitments: - ---------------------- On October 5, 2000, the Company entered into a consulting agreement with Venture Consulting Group, Inc. ("VCGI") whereby VCGI is to provide the services of Ronald C. Sacks as Chief Executive Officer of the Company, and the services of three additional consultants. The fees for the consultants' services are $500,000 over a one-year period. In addition, the individual consultants were issued options to purchase 240,000 shares of common stock at the fair market value on the date of grant. Such options vest 25% during December 2000 with the remaining vesting ratably monthly from January through September 2001. The Company will record compensation expense based upon the fair value of the options during each reporting period beginning in October 2000 in connection with the one-year vesting period. The Company has recorded compensation expense of $1,926 for the quarter ended December 31, 2000 based upon the black scholes fair value model for the vested options as of December 31, 2000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ 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 of, and the costs associated with, a new product line; dependence on the acceptance of this new family of products; risks related to technological factors; potential manufacturing difficulties; dependence on third parties; a limited customer base; and liability risks. 11 RESULTS OF OPERATIONS For the three months ended December 31, 2000 compared to the same period in 1999 Revenue for the three months ended December 31, 2000, was $3,432,572 compared to revenue of $6,338,988 for the same period in 1999, a decrease of $2,906,416 or 45.8%. The decrease in revenue was primarily due to reduced order activity, relative to the Company's peak quarter of a year ago which included revenue from a non-recurring sale of a perpetual technology license to an existing customer of approximately $1.5 million. The Company has continued to experience increased activity and order levels for both new and existing customers, recording its second sequential quarter of revenue growth. Cost of goods sold for the three months ended December 31, 2000 was $1,610,796 compared to $2,376,852 for the same period in 1999. Cost of goods sold as a percentage of revenue for the three months ended December 31, 2000 increased to 46.9% from 37.5% for the same period in 1999. The increase is due to the impact of certain fixed manufacturing costs that are spread over a decreased revenue base resulting in a deterioration of product margins as well as the significant margin contribution from the non-recurring sale of a perpetual technology license in the previous year's quarter. Research and development expense, net of capitalized software development, for the three months ended December 31, 2000 was $707,408 compared to $1,251,498 for the same period in 1999. As a percentage of revenue, research and development expenses were 20.6% compared to 19.7% for the same period in 1999. The slight increase in the percentage of research and development to revenue was primarily caused by lower sales volume, as research and development expenses have been reduced from the previous two quarters as a result of completing development of the Company's next generation product release, NetwoRx-PRIISMS Integration 1.2. Selling, general and administrative expenses ("SG&A") for the three months ended December 31, 2000 were $2,211,994 compared to $2,549,829 for the same period in 1999. As a percentage of revenue, SG&A increased to 64.4% compared to 40.2% for the same period in 1999, due primarily to lower sales volume. In absolute dollars, the SG&A expenses for the quarter ended December 31, 2000 reflect a reduction from the previous quarter due in part to employee attrition and a focus on reducing general and administrative expenses. Depreciation and amortization expenses - amortization of capitalized software, goodwill and other acquisition related intangibles, and depreciation on equipment, furniture and fixtures - was $949,787 for the three months ended December 31, 2000 compared to $1,016,833 in the same period in 1999. The decreased expense was primarily the result of management's decision during the second quarter of fiscal 2001 to abandon certain of the products and technology associated with the SolCom acquisition which resulted in related impairment charges. As a result of the Company's operating performance during the first six months of fiscal 2001 as compared to the prior year, the Company's new management has evaluated the Company's business and product strategy and, in the Company's third fiscal quarter, implemented a business restructuring plan which is intended to enable the Company to reach a position of positive operating cash flows and focus its product offerings on those believed to have the greatest 12 potential to generate further, near-term market penetration and positive operating contribution. As a result of this plan, ION Networks recorded $2,961,125 of restructuring, asset impairments and other charges during the quarter. As part of this plan, the Company recorded a charge of approximately $420,000 for restructuring and exit costs. Included in the exit costs was approximately $397,000 of cash severance and termination benefits associated with the separation of approximately 38 employees. All of these affected employees will have left their positions as of January 31, 2001, with 36 employees having left the payroll by December 31, 2000. Termination benefits of $201,698 were paid during the third quarter of fiscal 2001 with the majority of the balance to be paid in the fourth quarter of fiscal 2001. In addition, the Company has made strategic decisions to abandon certain products and technologies including those which were acquired in the acquisition of SolCom Systems, Ltd. on March 31, 1999. The Company also closed down the research and development efforts at SolCom Systems, Ltd. and centralized the research and development functions at the New Jersey headquarters. As a result of the above decisions, the Company recorded an impairment charge of approximately $1,461,000 primarily relating to abandonment of the capitalized core technology from this acquisition and other existing capitalized software. An additional impairment charge of approximately $870,000 has been recorded on the remaining goodwill from the Company's acquisition of SolCom Systems, Ltd. in March 1999 which was being depreciated over a three year period. Additionally, the Company recorded an impairment in the amount of approximately $209,000 on fixed assets previously used in the manufacturing process at SolCom Systems, Ltd. Income tax provision for the three months ended December 31, 2000 was $11,291 compared to $0 at December 31, 1999 due to the required provision for the reported taxable earnings of the Company's UK subsidiary. Net loss for the three months ended December 31, 2000 was $4,940,362 compared to a loss of $798,942 for the same period in 1999 based on the factors discussed above. For the nine months ended December 31, 2000 compared to the same period in 1999 Revenue for the nine months ended December 31, 2000, was $8,304,574 compared to revenue of $17,020,334 for the same period in 1999, a decrease of $8,715,760 or 51.2%. The decrease in revenue was primarily due to reduced orders, delays in the introduction of an updated version of PRIISMS Manager, a slower than anticipated ramp-up of new sales personnel, and the non-recurring realization of revenue from a sale of a perpetual technology license to an existing customer in 1999. With a projected sales cycle of six to nine months, initial revenue associated with the September 2000 PRIISMS release is anticipated in the second calendar quarter of 2001. Cost of goods sold for the nine months ended December 31, 2000 was $4,738,864 compared to $6,032,612 for the same period in 1999, a decrease of $1,293,748 or 21.4%, due to lower sales volume. Included in the $4,738,864 is an approximate $530,000 reserve created during the nine months for raw materials inventory the Company believed to be slow moving based on sales projections of the ultimate finished product. Without this reserve, the decrease would have been 30.2%. Cost of goods sold as a percentage of revenue increased to 57.1% for the nine months 13 ended December 31, 2000 as compared to 35.4% for the same period in 1999. Without the reserve, the percentage is 50.7% because lower sales volume increased the negative impact that certain fixed manufacturing costs had on product margins. Research and development expenses, net of capitalized software development, for the nine months ended December 31, 2000 was $2,973,966 compared to $2,991,365 for the same period in 1999. As a percentage of revenue, research and development expenses increased to 35.8% compared to 17.6% for the same period in 1999, due primarily to lower sales volume. SG&A expenses for the nine months ended December 31, 2000 were $8,545,715 compared to $7,569,472 for the same period in 1999. As a percentage of revenue, SG&A expenses increased to 102.9% compared to 44.5% for the same period in 1999 due primarily to lower sales volume. The increased expenditures resulted primarily from the Company's aggressive growth plans and associated sales and marketing support. Depreciation and amortization expenses - amortization of capitalized software goodwill and other acquisition related intangibles, and depreciation on equipment, furniture and fixtures - was $3,175,999 for the nine months ended December 31, 2000 compared to $2,956,653 for the same period in 1999. The increased expense was primarily the result of depreciation on higher capitalized software costs over the past year due to the Company's increased research and development activities to pursue its growth strategy. During the nine months ended December 31, 2000, the Company recorded $3,449,420 of restructuring, asset impairments and other charges. As a result of the Company's operating performance during the first six months of fiscal 2001 as compared to the prior year, the Company's new management has evaluated the Company's business and product strategy and, in the Comopany's third fiscal quarter, implemented a business restructuring plan which is intended to enable the Company to return to a position of positive operating cash flows and focus its product offerings on those believed to have the greatest potential to generate further, near-term market penetration and positive operating contribution. As a result of the Company's initiatives, the Company recorded a charge of approximately $420,000 for restructuring and exit costs. Included in the exit costs was approximately $397,000 of cash severance and termination benefits associated with the separation of approximately 38 employees. All of these affected employees will have left their positions as of January 31, 2001, with 36 employees having left the payroll by December 31, 2000. Termination benefits of $201,698 were paid during the third quarter of fiscal 2001 with the majority of the balance to be paid in the fourth quarter of fiscal 2001. In addition, the Company has made strategic decisions to abandon certain products and technologies including those which were acquired in the acquisition of SolCom Systems, Ltd. on March 31, 1999. The Company also closed down the research and development efforts at SolCom Systems, Ltd. and centralized the research and development functions at the New Jersey headquarters. As a result of the above decisions, the Company recorded an impairment charge of approximately $1,950,000 primarily relating to the abandonment of the capitalized core technology from this acquisition and other existing capitalized software. An additional 14 impairment charge of approximately $870,000 has been recorded on the remaining goodwill from the Company's acquisition of SolCom Systems, Ltd. in March 1999 which was being depreciated over a three year period. Additionally, the Company recorded an impairment in the amount of approximately $209,000 on fixed assets previously used in the manufacturing process at SolCom Systems, Ltd. Income tax provision for the nine months ended December 31, 2000 was $53,019 compared to $0 at December 31, 1999 due to the required provision for the reported taxable earnings of the Company's United Kingdom subsidiary. Net loss for the nine months ended December 31, 2000 was $14,361,858 compared to a loss of $2,577,535 for the same period in 1999, based on the factors discussed above. FINANCIAL CONDITION AND CAPITAL RESOURCES During the first nine months ended December 31, 2000, the Company's working capital position deteriorated as the Company's reduced revenues combined with continuing expenditure levels utilized significant operating cash. This cash utilization was offset partially by the $5,000,000 raised through the issuance of new shares in a private placement. Working capital at December 31, 2000 decreased $5,958,110 to $7,517,981 from $13,476,091 at March 31, 2000. Net cash used in operating activities during the nine months ended December 31, 2000 was $6,765,523 compared to net cash used during the same period in 1999 of $2,733,848. The increase in net cash used resulted primarily from the build-up of inventory due to lower than expected sales, the payment of accounts payable and accrued expenses, and the significant increase in the net loss offset by the reduction in accounts receivable and other receivables. Net cash used in investing activities during the nine months ended December 31, 2000 was $2,786,069 compared to net cash used during the same period in 1999 of $1,871,584. Investing activities during the nine months ended December 31, 2000 include the restriction of $375,000 in cash relating to the Piscataway, New Jersey operating lease and the loan issued to the Former CEO in the amount of $885,000 as well as the agreed upon reimbursement by the Former CEO of $200,000. These amounts were offset by the repayment of $170,000 by the Former CEO. This use of cash was offset partially by the decrease in expenditures for property and equipment in connection with efforts to limit spending activity. Net cash provided by financing activities during the nine months ended December 31, 2000 was $5,202,829 compared to net cash provided during the same period in 1999 of $16,293,756. Financing activities during the nine months ended December 31, 2000 include the sales of 2,857,142 shares of Common Stock at a price of $1.75 per share, for total consideration of $5,000,000 in a private equity transaction. Pursuant to the transaction, the Company has registered these shares of Common Stock for resale. During the third quarter of fiscal 2001, the Company initiated a significant restructuring plan to reduce operating expenses and target steps to ultimately reach profitability. As a result of the implementation of this plan, the Company expects to improve and stabilize operating performance as it moves forward. Based upon this, together with current revenue assumptions in 15 its operating plan, the Company believes that it has sufficient cash to meet its operating requirements over the next twelve months. To the extent that the Company's revenue assumptions included in its operating plan are not met, the Company may have to raise additional equity and/or debt financing, and may have to curtail other expenditures. There can be no assurance that the Company will be able to obtain any such financing on acceptable terms, if at all. 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 June 30, 2000 to the fourth quarter of fiscal 2001 for the Company. The Company has assessed the impact of SAB 101 on its results of operations and believes that its results of operations for the quarter ended December 31, 2000 have been presented in accordance with the provisions of the SAB. The adoption of the SAB will not have an effect on the Company's financial statements. 16 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- On November 20, 2000, the Company held its 2000 Annual Meeting of Stockholders (the "2000 Meeting"). At the 2000 Meeting, the Company's Stockholders elected six directors to serve until the 2001 Annual Meeting of Stockholders and until their successors shall be elected and qualified. The vote with respect to the election of such directors was as follows: NAME FOR AGAINST ---- --- ------- (a) Stephen M. Deixler 14,447,317 576,397 (b) Baruch Halpern 14,447,317 576,397 (c) Frank S. Russo 14,447,317 576,397 (d) Alexander S. Stark, Jr. 14,447,317 576,397 (e) Alan Hardie 14,447,317 576,397 (f) William Martin Ritchie 14,447,317 576,397 In addition to electing the directors, the Company's Stockholders voted to approve the Company's 2000 Stock Option Plan (the "Plan") including the 2000 U.K. Sub-Plan, providing for, among other things, the reservation of 3,000,000 shares of Common Stock for issuance under the Plan. 5,338,093 votes were cast in favor of the approval of the Plan, representing approximately 86% of the shares of Common Stock present at the meeting and entitled to vote thereon. 850,407 votes were cast in opposition to such approval and 24,703 votes abstained. In addition, there were 8,810,511 broker non-votes with respect to this proposal. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: No Reports on Form 8-K were filed during the quarter. 17 SIGNATURES - ---------- In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: February 1, 2001 ION NETWORKS, INC. /s/ Ronald C. Sacks -------------------------------------------- Ronald C. Sacks, Chief Executive Officer and Interim Principal Financial Officer 18 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 3-MOS 9-MOS MAR-31-2001 MAR-31-2001 APR-01-2000 APR-01-2000 DEC-31-2000 DEC-31-2000 0 6,032,849 0 0 0 2,155,375 0 (162,408) 0 2,712,897 0 10,933,807 0 3,487,829 0 (1,935,560) 0 16,022,665 0 3,415,826 0 0 0 0 0 0 0 18,077 0 12,277,985 0 16,022,665 3,432,572 8,304,574 3,432,572 8,304,574 1,610,796 4,738,864 6,830,314 18,145,100 0 0 0 0 (12,289) (40,621) (4,929,071) (14,308,839) 11,291 53,019 (4,940,362) (14,361,858) 0 0 0 0 0 0 (4,940,362) (14,361,858) (0.27) (0.87) (0.27) (0.87)
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