-----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, AgkILtbVFoJDzpHKKfKapGOYeDcRPa/sTaq9lW5QC6VAvvhUTz9O0cCkRoFEPWGN FtLBSmVNS3rdDZN6VR3y0Q== 0000910680-01-500222.txt : 20010702 0000910680-01-500222.hdr.sgml : 20010702 ACCESSION NUMBER: 0000910680-01-500222 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010629 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-13117 FILM NUMBER: 1672500 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 10KSB 1 f10ksb331.txt FORM 10-KSB FOR ION NETWORKS, INC. 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, 2001 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 - --------------------------------------- -------------------------------------- (State or Other Jurisdiction of (IRS Employer Identification Number Incorporation or Organization 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 $11,676,547. 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 25, 2001 was approximately $10,501,434. There were 18,203,302 shares of Common Stock outstanding as of June 25, 2001. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's Definitive Proxy Statement for the 2001 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 the Company expanded its technology base through the purchase of certain assets of LeeMAH DataCom Security Corporation ("LeeMAH"), a California corporation. ION designs and manufactures next-generation secure, proactive and anticipatory network infrastructure management products. ION's products monitor and analyze the performance of a wide range of devices, e.g. PBXs, routers, Digital Subscriber Line Access Multiplexers (DSLAMS), 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 are often able to 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 and managed network services. Today these customers constitute two market segments which ION addresses: o alarming and translation, a relatively small segment of about $400 million per year requiring secure access into the console ports of network devices for the purpose of maintenance, intelligent alarm management, or the translation of proprietary alarms into recognized standards o performance analysis and restoration, a larger (approximately $1 billion) rapidly growing market for the proactive and anticipatory analysis and automated restoration of degraded performance in data networks. The Company believes that a variety of factors will drive significant growth in these markets. 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" -2- or from reducing employee productivity through long response times. 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. ION's products work with many types of network devices and with devices from many different vendors. 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. In addition, ION Devices provide uncompromised security for themselves and for the network devices being managed, thereby protecting the maintenance ports of these devices which are often unsecured and vulnerable to unauthorized access by hackers. ION has a well-recognized customer base of more than 150 customers who use the products in over 10,000 locations. ION's largest customers are telecommunications companies of all kinds, primarily in the United States and in Europe, as well as large enterprises and institutions. The Company's products are sold direct to service providers and enterprises, through resellers, and through networking original equipment manufacturers (OEMs). THE PRODUCTS All of ION's products 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: - ------------------------------------ 1 Intelligent devices are those that contain programmable microprocessors 2 Proactive, real-time, integrated, intelligent, secure, metric-based solution -3- o Intrusion Prevention - DES-encrypted challenge-response authentication ensures that only authorized personnel can obtain information from or send instructions to ION's Devices or to the network devices they manage. Users can logon to one of ION's Devices and get a real-time view of network functionality as well as perform maintenance/upgrade activities. Their actions are logged for later audit. o Alarm Management - When a process running on a network device exceeds preset thresholds, the device generates an alarm. ION's Devices detect these alarms, sort and analyze them using AMT (see below), take appropriate action in response, and report them to the Network Operations Center. ION's Devices also generate alarms when unauthorized access or power loss occurs. All events and alarms are logged for later audit. o 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 sort and handle alarms and 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. o 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. o Environmental Monitoring - Network devices can be impacted by environmental factors, e.g., heat, water, intruders. ION's Devices detect and report various environmental changes. o 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 devices 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 SNMP, the standard for Internet Protocol (IP) networks. 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. o 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. -4- 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 information. 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. o "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. Among the available routines are products which analyze the performance of routers, LANs, LAN Switch ports, and WANS and which perform translations and mappings of various network management protocols/systems from one to another. 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, manages an entire remote location providing a wide range of analyses and anticipatory action to solve network problems before they become severe. The Company believes these products have valuable distinguishing capabilities that limit the level of direct competition. ION's PRIISMS Suite: o 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 five seconds 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. o 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. o 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 person, collect many kinds of additional diagnostic information, etc. -5- o 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. o provides 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. o 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 employees, 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. PRIISMS Manager manages all of ION's Devices, and, because ION's Devices can manage many types of network devices, PRIISMS Manager provides a centralized system for management of multi-element, multi-vendor networks. PRIISMS Manager is a centralized navigation, configuration and alarm handling tool which: o has a web-based Graphical User Interface (GUI) for navigating among the devices and managing alarms and events o polls the devices to determine their state and monitors devices in real-time both using the network and using dial-up (out-of-band) connections if the network has an outage o manages the database of users and access levels by establishing passwords for the devices, administering and aging them, and controlling the criteria for who can gain access to ION's Devices and to the network devices that are being managed o sets up and changes the configurations of ION's Devices, groups them so they can be managed in categories, and stores configurations for re-load if necessary o remotely upgrades software releases on the ION devices o 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. -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 PBX/LAN managed service providers. 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. Infonetics, a technology market research company, estimates that the average Fortune 1000 company loses $5.5 million in revenues and $8.7 million in employee productivity each year due to LAN or WAN downtime or degraded performance. 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 or SLAs), and, to the extent they are not met, must refund payments. -7- 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 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: o are able to determine how network users are impacted by the underlying network problems. o not only deliver data to engineers, but also automate some of the engineer's analyses and activities, making him more productive. o can identify network problems in real-time or even before they happen. o 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. o redirect network traffic to maximize network capacity and avoid bottlenecks and network faults. o provide business solutions, not just network management solutions, allowing the business to increase the returns it can earn. The market for these products is segmented, and the segments have somewhat different characteristics. ION addresses two of these, which, based on market research conducted in the summer of 2000 by Enterprise Management Associates and supplemented by research from International Data Corporation, can be described as follows: o alarming and translation: approximately $200-400 million a year with a growth rate of approximately 7-8% per year on a worldwide basis -8- o performance analysis and restoration: approximately $1.1 billion a year with a growth rate of 30% per year on a worldwide basis. The Company believes it products are uniquely suited to meet the needs of these market segments. 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 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 or 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 On March 31, 2001, the Company's sales force stood at seventeen (17). The Company goes to market through three channels: direct sales, resellers, and OEMs. In FY2001 approximately 57% of sales were direct to customers such as SBC, Worldcom Inc, Rhythms NetConnections and Oracle Corporation. Approximately 22% went through resellers such as Siemens of North America and Celestica, Inc. An additional 15% were employed by managed service providers such as KPN - Telecom BV and Qwest, while 6% were to OEMs such as Avaya. In FY2001, ION had over 150 customers with products deployed at more than 10,000 locations worldwide. ION's largest customers are telecommunications service providers primarily in the United States and Europe. Approximately 85% of sales were in the United States and 15% elsewhere, although many of the customers are multi-nationals who employ the products around the world. 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. Currently ION has little direct competition, and the market it addresses is emerging and both highly fragmented, with many new entrants, and converging, 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 $125 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 because industry participants with very different products claim to deliver similar benefits. Management believes ION currently has a combination of distinguishing capabilities which are valued by the marketplace, especially its uncompromised security, the ability to proactively anticipate network -9- problems, and the ability to 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.
- ----------------- ------------------- -------------------------------- ---------------------------- COMPANY CORE STRENGTH PRODUCTS POSITIONING - ----------------- ------------------- -------------------------------- ---------------------------- Applied Central Office remote site monitoring for AI products enable Innovation mediation and analog and relay contact alarm carriers to efficiently consolidation 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 Communi-cations real-time and real-time monitoring, alarm next-generation management historic notifications & restart of solutions that ensure information failed processes, end-to-end effective e-business view of application performance availability & performance - ----------------- ------------------- -------------------------------- ---------------------------- MicroMuse Event/fault monitors large-scale networks Leading provider of fault Management in real-time to quickly & service-level management identify and address problems software - ----------------- ------------------- -------------------------------- ---------------------------- NetScout Applications comprehensive performance Full-service provider of performance management system from network performance management using integration of probes and management solutions) hardware probes 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 - ----------------- ------------------- -------------------------------- ----------------------------
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, partnerships and associations 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 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 effect 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 two customers - SBC Communications and Worldcom, Inc- accounted for 27.7% of revenues in FY2001. The top six customers, which included Rhythms NetConnections, Celestica Inc, KPN - Telecom BV, and Oracle Corporation, accounted for 51.2% of revenues in FY2001. Two of these largest customers - Celestica Inc and Oracle Corporation, - - were new to the Company during FY2001, and a large majority of the SBC revenues were from a division which had not previously been a customer. The Company issued a press release in January 2001 concerning significant new orders from SBC's Advanced Solutions Inc. subsidiary, and these orders are part of the results reported during FY2001, although the press release noted the expectation of a greater number of orders. However, based on SBC's current requirements, the Company does not anticipate any further orders from this particular subsidiary. Historically, the Company has been dependent on several large customers each year, but they are not necessarily the same every year. In general, the Company cannot predict with certainty which large customers will continue to order. The loss of any of these large customers, or the failure to attract new large 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. -11- The Company has trademark applications pending with the United States Patent and Trademark Office for its corporate logo, ION Networks, Inc, it's about availability. The Company anticipates that these trademarks will be registered, but there can be no assurance that this will occur. GOVERNMENTAL APPROVALS AND EFFECT OF GOVERNMENT REGULATION The Company's products may be exported to any country in the world except those countries restricted by the anti-terrorism controls imposed by the Department of Commerce. These anti-terrorism controls prohibit the Company from exporting some of its products to Cuba, Libya, Iran, Iraq, North Korea, Sudan and Syria without a license. As with all U.S. origin items, the Company's products are also subject to the Bureau of Export Administration's ten general prohibitions that restrict exports to certain countries, organizations, and persons. 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 FY2001 the Company reduced its research and development activities. After a restructuring in late November, 2000 designed to improve operating performance, the R&D staff was reduced, primarily through the elimination of the engineering department in Livingston, Scotland. Because the Company had completed the development and released PRIISMS Suite 1.2, the Company believes the current staff will be sufficient to allow it to keep up with technology advances for the foreseeable future. The current staff has completed and released PRIISMS Manager 1.3 in -12- June of 2001. This product extends the management capabilities described above to all ION Devices. As a result of the changes, research and development funding was reduced from $4,288,396 in FY2000 to $3,297,897 in FY2001. In conjunction with the restructuring of the Company and the elimination of the engineering staff in Livingston, Scotland, the Company recorded an impairment charge during the third quarter of FY2001 of approximately $1,950,000 primarily relating to the abandonment of capitalized core technology from the Solcom acquisition in 1999. Included in this charge was the remainder of the Solcom-initiated development project Sentinel III which the Company had re-badged and released in two versions - NetwoRx - O for optical technology companies and NetwoRx - VT for CLECs - early in FY 2001. During the quarter ended September 30, 2000 the Company discontinued the Solcom ASIC development project resulting in a write down of assets acquired in the SolCom merger of $217,295. At the same time the Company also discontinued several products acquired in the SolCom merger. The Company no longer sells standalone probes or RMON engines, although the technology was integrated into the NetwoRx product described above. The discontinuation resulted in a further write down of the technology assets acquired in the merger of $271,010. The Solcom NetworX development project evolved into NetwoRx and was included in the second release of the PRIISMS Suite in September 2000. NetwoRx is ION's integrated platform for proactive, remote, real-time secure management and monitoring of voice and date networks. The Company has discontinued early versions of this product developed at Solcom resulting in a writedown of approximately $643,000 of capitalized software during the quarter ended March 31, 2001. 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 25, 2001, the Company had 65 employees, all of whom are full-time employees, and of which 10 are technical personnel, 29 are in sales, marketing and support, 13 are in production, and 13 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. RISK FACTORS In addition to those described above, the Company's business and securities have certain risks associated with them including those described below: o The Company's business is vulnerable to technological changes. Its markets experience rapid technological change, changing customer requirements, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. As a result, more advanced products produced by competitors could erode the Company's position in -13- existing markets or other markets that it chooses to enter. It is difficult to estimate the life cycles of ION's products and services, and future success will depend, in part, upon the Company's ability to enhance existing products and services and to develop new products and services on a timely basis. The Company might experience difficulties that could delay or prevent the successful development, introduction and marketing of new products and services. New products and services and enhancements might not meet the requirements of the marketplace and achieve market acceptance. If these things happen, they would materially and negatively affect cash flows, financial condition and the results of operations. o The Company cannot be certain about product development. It is common for hardware and software as complex and sophisticated as that incorporated in ION's products to experience errors or "bugs" both during development and subsequent to commercial introduction. The Company cannot be certain that all potential problems will be identified, that any bugs that are located can be corrected on a timely basis or at all, or that additional errors will not be located in existing or future products at a later time or when usage increases. Any such errors could delay the commercial introduction of new products, the use of existing or new products, or require modifications in systems that have already been installed. Remedying such errors could be costly and time consuming. Delays in debugging or modifying products could materially and adversely affect the Company's competitive position. o The Company's quarterly and annual operating results - both revenues and income - may fluctuate. In the past, the Company has experienced fluctuations in quarterly and annual operating results, and these may continue. The Company has incurred significant losses and negative cash flows from operations, and these may continue. In future quarterly periods results of operations may be below prior results or below the expectations of public market analysts and investors. If this occurs, the price of the Company's common stock could significantly decrease. o The Company may need to raise money in the future. ION's business plan and growth strategy are dependent on its working capital. To the extent that expected revenue assumptions are not achieved, the Company will have to raise additional equity or debt financing and/or curtail certain expenditures contained in the current operating plans. There can be no assurance that additional financing will be available on acceptable terms or at all. If the Company is not able to secure additional financing on acceptable terms, the business may be negatively impacted, and the Company may not be able to execute its business and growth strategies. o The Company may be unable to protect its proprietary rights, permitting competitors to duplicate its products and services. ION Networks holds no patents on its technology. The Company has made a consistent effort to minimize the ability of competitors to duplicate the software technology utilized in its products. However, there remains the possibility of duplication, and competing products have already been introduced. Any such duplication by our competitors could negatively impact on our business and operations. o The Company's results depend on large orders from a changing group of customers. Historically, the Company has been dependent on several large customers each year, but they are not necessarily the same every year. In general, the Company cannot predict with certainty which large customers will continue to order. The loss of any of these large customers, or the -14- failure to attract new large customers would likely significantly decrease the Company's revenues and future prospects. o The Company depends upon key employees and members of management. Success depends in large part on their continued services. Competition for such personnel is intense, and the Company may not successfully attract, motivate and retain key personnel. The inability to hire and retain qualified personnel or the loss of the services of key personnel could have a material adverse effect upon the business, financial condition and results of operations. Currently, the Company does not maintain "key man" insurance policies for any employee. o The Company may have difficulty complying with government regulation. Due to the sophistication of the technology employed in ION's hardware, export of its products is subject to governmental regulation. As required by law or demanded by customer contract, the Company routinely obtains approval of products by Underwriters' Laboratories. Additionally, because many of the Company's products interface with telecommunications networks, Federal Communications Commission ("FCC") approval is necessary as well. The European Community is developing a similar set of requirements for its members, and the Company has begun the process of compliance for Europe. o There are limitations on the liability of ION's directors and officers. The Company's Certificate of Incorporation, as amended, and its Bylaws limits the liability of directors for monetary damages to the fullest extent permissible under Delaware law. This is intended to eliminate the personal liability of a director for monetary damages on an action brought for breach of a director's duties to the Company or to its stockholders except in certain limited circumstances. The Certificate of Incorporation, as amended, and the Bylaws also require the Company to indemnify its directors, officers, employees and agents serving at its request, against expenses, judgments (including derivative actions), fines and amounts paid in settlement. This indemnification is limited to actions taken in good faith in the reasonable belief that the conduct was lawful and in, or not opposed to, the Company's best interests. These provisions may reduce the likelihood of derivative litigation against directors and executive officers and may discourage or deter stockholders or management from suing directors or executive officers for breaches of their fiduciary duties, even though such an action, if successful, might otherwise benefit the Company and its stockholders. o The Company does not anticipate the payment of dividends. It has never declared or paid cash dividends on its common stock and currently anticipates retaining all available funds for use in the operations of the business. The Company does not anticipate paying any cash dividends on common stock in the foreseeable future. o There is potential for fluctuation in the market price of the Company's securities. Because of the nature of the industry in which ION operates, the market price of its securities has been, and can be expected to continue to be, highly volatile. Factors such as announcements by ION or others of technological innovations, new commercial products, regulatory approvals, proprietary rights, or other competitive developments all may have a significant impact on the Company's future business prospects and the market price of its securities. o Shares that are eligible for sale in the future may affect the market price of the Company's -15- common stock. As of June 25, 2001, an aggregate of 4,454,371 of the outstanding shares of common stock are "restricted securities" as that term is defined in Rule 144 under the federal securities laws. These restricted shares may be sold pursuant only to an effective registration statement under the securities laws or in compliance with the exemption provisions of Rule 144 or other securities law provisions. In addition, 2,378,999 shares are issuable pursuant to currently exercisable options, and 306,250 shares are issuable pursuant to currently exercisable warrants, which may be exercised for shares that may be restricted or registered, further adding to the number of outstanding shares. Future sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could negatively affect the price of the Company's common stock. o The Company's common stock may be delisted from Nasdaq. The National Association of Securities Dealers, Inc. has established certain standards for the continued listing of a security on the Nasdaq National Market and the Nasdaq SmallCap Market. The standards include, among other things, that the minimum bid price for the listed securities be at least $1.00 per share. A deficiency in the bid price maintenance standard will be deemed to exist if the issuer fails the individual stated requirement for thirty consecutive trading days, with a 90-day cure period. From November 2000 through June 2001 the Company's common stock has sometimes traded below $1.00 per share. On June 27, 2001, the Company exceeded the 30-day standard and will be required to achieve a $1.00 minimum price for 10 consecutive trading days during the 90-day cure period. There can be no assurance that the Company will continue to satisfy the requirements for maintaining a Nasdaq National Market or SmallCap listing. If excluded, the prices of the common stock and the ability of holders to trade such stock could be adversely affected, and the Company would have to meet Nasdaq's initial listing requirements to be relisted. o The Company's common stock may become subject to the SEC's penny stock rules. If the Company's common stock is excluded from Nasdaq and the price per share is below $5.00, the Company must satisfy certain net asset and revenue tests or become subject to the SEC's "penny stock" rules. Application of these rules may adversely impact both the market price of these shares and the ability of owners to resell them. Prior to a transaction, these rules require a broker-dealer in a penny stock to deliver a standardized risk disclosure document prepared by the SEC to inform buyers about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide current bid and offer quotations, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the broker-dealer must make a special written determination of the suitability of the investor purchasing the penny stock. -16- 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. This lease provides for monthly rentals of (pound)3,583 and expires on August 31, 2011. The Company also leases approximately 5,600 square feet of space at 48834 Kato Road, Fremont, California in the Bedford Fremont Business Center in connection with its Secur@ccess division which was previously 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 --------------------------------------------------- The Company did not sumbit any matters to a vote of the security holders during the fourth quarter of FY2001. -17- 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 2001, Quarter Ending HIGH LOW -------------------------------- ---- --- June 30, 2000 31 2 September 30, 2000 5.94 2 December 31, 2000 3.06 .28 March 31, 2001 3 .38 Fiscal Year 2000, Quarter Ending June 30, 1999 5.06 2.12 September 30, 1999 8.75 3.81 December 31, 1999 22.5 5.44 March 31, 2000 44 18.63 RECENT SALES OF UNREGISTERED SECURITIES On August 18, 2000, the Company issued an aggregate of 2,857,142 shares of Common Stock at a price of $1.75 per share, for an aggregate total consideration of $5,000,000. The shares were issued to a group of accredited investors pursuant to Rule 506 promulgated under the Act. SECURITY HOLDERS As of June 25, 2001, there were 398 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, 2001 and March 31, 2000. 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. -18- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. --------------------------------------------------------- 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 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 FY2001 was a year marked by significant changes and a major restructuring as the Company endeavored to refocus its strategy in the face of reduced revenues from many of its larger customers. Following the resignation of Stephen B. Gray, the Company named Ronald Sacks as its new Chief Executive Officer. Under the direction of Mr. Sacks, the Company undertook a comprehensive review of operations that led to a restructuring plan that was announced late in the third quarter. The restructuring plan resulted in approximately $353,000 in severance and other employee related charges, and approximately $3.4 million for the write-down of goodwill and capitalized software. In addition, at various points in the year, provisions were established to recognize slow moving inventory and the elimination of several products acquired in the SolCom merger. As a result of the Company's restructuring efforts, operating expenses, excluding depreciation, amortization and other charges, showed a reduction of more than $2,406,121 or 49% in the quarter ended March 31, 2001, as compared to the previous year. The Company's employee base also decreased from 134 full-time employees in FY2000 to 67 in FY2001 as a result of restructuring. The Engineering staff was the most significantly impacted, shrinking from 35 in FY2000 to 8 in FY2001. Despite this reduction, the Company believes the current staff will be sufficient to allow it to keep up with technology advances for the foreseeable future. The Sales force also experienced significant changes in personnel during the year, with headcount falling as low as 10 before a focused hiring program brought it back to its current level of 17. During FY2001, the Company maintained key relations with Worldcom, Rhythms NetConnections, KPN - Telecom BV and SBC Communications. Several new important relationships were also formed during the year with Oracle Corporation and Celestica Inc. During the next 12 months the Company plans to seek greater penetration in the market areas -19- of Secure Port Management and Protocol Mediation. It will also continue to seek other available options to increase revenue growth, including evaluating acquisition and merger candidates. In addition, the Company will continue to pursue reductions in the cost of goods sold to provide improvement in product margins. This could include the redesign of systems as well as the on-going examination of the cost and quality of ION's contract manufacturers. RESULTS OF OPERATIONS Fiscal Year 2001 Compared to Fiscal Year 2000 Revenues for the year ended March 31, 2001 were $11,676,547 as compared with revenues of $22,668,833 for the year ended March 31, 2000, a decrease of approximately 48%. This decrease was attributable to reduced order activity, significant turnover in the Company's Sales force and the general economic downturn impacting the telecommunications industry. In addition, the Company sold a perpetual technology license for approximately $3.2 million in fiscal 2000 for which there was no revenue to be recorded in fiscal 2001. Since hitting a low point in the first quarter of with revenues of $2,083,504, the Company has seen a growth in its sales pipeline, recording revenues of $2,788,497, $3,432,572 and $3,371,973 in the three subsequent quarters, respectively. The Company's cost of goods sold decreased to $7,184,666 for the year ended March 31, 2001 compared to $8,409,068 for the year ended March 31, 2000. Cost of goods sold as a percentage of sales increased from 37.1% for the previous comparable fiscal period to 61.5% for this fiscal period. 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 margin contribution from the non-recurring sale of a perpetual technology license in the previous year. In addition, cost of sales included charges for additional provisions of approximately $1,549,099 that were established at various points in the year, to recognize slow moving inventory. Without these reserves, cost of goods sold would have been 48.3% of sales in fiscal 2001. Research and development expenses, net of capitalized software development, decreased from $4,288,396 in the year ended March 31, 2000 to $3,297,897 in the current fiscal year, a decrease of 23.1%. As a percentage of revenues, research and development expenses increased from approximately 19% to 28%. The 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 on a quarter to quarter basis throughout the fiscal year, reflecting the completed development of the Company's next generation product release, NetwoRx-PRIISMS Integration 1.2 and a resizing of the R&D staff as a result of the Company's restructuring activities. Selling, general and administrative expenses decreased 4.1% from $11,155,390 for fiscal 2000 to $10,698,612 for the year ended March 31, 2001. As a percentage of revenues, selling, general and administrative expenses increased from approximately 49% to 92%, due primarily to lower sales volume. Because of the Company's focused efforts to increase sales volumes, the headcount of the sales staff has increased during the last fiscal quarter from 11 to 17 and remained relatively flat as compared to a year ago. Despite this, overall SG&A expenses have been reduced on a quarter to quarter basis throughout the fiscal year again, as a result of the Company's restructuring efforts. Depreciation and amortization was $3,742,450 for FY2001 compared to $3,902,331 for -20- FY2000, a decrease of approximately 4%. Amortization expense for capitalized software decreased from $2,308,136 in fiscal 2000 to $2,138,707 in fiscal 2001, primarily as a result of management's decision during previous quarters of fiscal 2001 to abandon certain of the products and technology associated with the SolCom acquisition. The decision resulted in write-offs of $2,332,120 relating to this technology thereby decreasing the amortization expense for future periods. The Company continued to invest in research and development during fiscal 2001 to complete the NetwoRx-PRIISMS Integration 1.2, but at reduced levels relative to a year ago. 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 evaluated its business and product strategy and, in the Company's third fiscal quarter, implemented a business restructuring plan which was intended to focus the Company's 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 this plan and subsequent related actions, ION Networks recorded $3,763,612 of restructuring, asset impairments and other charges. As part of this plan, the Company recorded a charge of approximately $353,000 for severance, termination benefits and other exit costs associated with the separation of approximately 38 employees during the third and forth fiscal quarters. Termination benefits of $342,234 were paid during these two quarters. All of the affected employees have left the Company as of March 31, 2001. The Company also made strategic decisions to abandon certain products and technologies including those that 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 $2,332,000 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 was recorded on the remaining goodwill from the Company's acquisition of SolCom Systems, Ltd. in March 1999 that was being amortized over a three year period. There remains no meaningful goodwill related to this acquisition at March 31, 2001. 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. that were abandoned and disposed of during the year ended March 31, 2001. The Company had a loss before taxes of $16,669,098 for the year ended March 31, 2001 compared to a loss before taxes of $4,995,248 for the year ended March 31, 2000. At March 31, 2001, the Company had federal, state, and foreign tax-effected net operating loss carryforwards of approximately $8.3 million. The expiration dates for its net operating losses range from the years 2011 through 2021. The net loss for the year ended March 31, 2001 was $16,676,666 compared to a net loss of $5,259,738 for the prior fiscal year. FINANCIAL CONDITION AND CAPITAL RESOURCES During FY2001, the Company's working capital position continued to deteriorate as the Company's reduced revenues combined with continuing expenditure levels utilized significant operating cash. This cash utilization was offset partially by $5,000,000 raised through the issuance of -21- new shares in a private placement of 2,857,142 shares of Common Stock at a price of $1.75 per share. Working capital at March 31, 2001 decreased $6,558,034 to $6,918,057 from $13,476,091 at March 31, 2000. Net cash used in operating activities during the twelve months ending March 31, 2001 was $7,086,246 compared to net cash used during the same period of the previous twelve months of $4,971,783. The increase in net cash used resulted primarily from the build-up of inventory due to lower than expected revenues, the payment of accounts payable and accrued expenses, and the significant increase in the net loss, offset by reductions in accounts and other receivables. Net cash used in investing activities during FY2001 was $3,213,835 compared to net cash used during the same period in FY2000 of $2,493,986. Investing activities during the year ending March 31, 2001 include the restriction of $375,000 in cash relating to the Piscataway, New Jersey operating lease and certain notes receivable issued to the Former CEO in the amount of $897,250. This use of cash was offset partially by the decrease in expenditures for property and equipment. Net cash provided by financing activities during FY2001 was $5,149,302 compared to net cash provided during the same period in FY2000 of $17,681,387. Financing activities during the year ended March 31, 2001 include the sale 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. Financing activities during the year ended March 31, 2000 included the sale of 3,000,000 shares of common stock for proceeds of $12,500,00 and proceeds from the exercise of stock options and warrants of approximately $7,500,000. On September 30, 1999, the Company entered into a $2,500,000 line of credit agreement. The line of credit was available through July 15, 2000. This line of credit has been terminated and effectively replaced with the $1,500,000 line as noted below. On July 15, 2000, the Company entered into a line of credit agreement for $1,500,000. The line of credit was available through September 30, 2000. The line of credit expired on September 30, 2000 with no amounts having been drawn down on such line. The Company does not have any lines of credit available at March 31, 2001. The Company's current operating plan includes certain assumptions, the most important of which is the attainment of future revenues significantly in excess of those in FY 2001. To the extent that revenues in FY2002 fall below those of FY2001, the management of the Company will have to modify its operating plan and scale back its expenditures for personnel and other operating costs in order to preserve its cash. If necessary, management is committed to executing this contingency plan, which it believes will preserve approximately $800,000 of cash during FY2002. Based on achieving revenues equal to or greater than those of FY2001 and management's contingency plan, the Company believes that it will have sufficient cash to fund its operations for the next twelve months. In addition, the Company is presently evaluating the need to raise additional debt or equity financing to grow its business through expansion and/or through acquisitions. There can be no assurance that management will be successful in raising this additional financing on terms acceptable to the Company, if at all. -22- 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 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, an 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. SAB No.101 did not have an impact on the Company's revenues for any of the years presented in the financial statements. ITEM 7 FINANCIAL STATEMENTS. --------------------- The financial statements required hereby are located on pages F-1 through F-21. ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURES --------------------- On June 27, 2001, PricewaterhouseCoopers LLP ("PwC") indicated that upon completion of their audit of the financial statements for the year ended March 31, 2001, it would decline to stand for re-election as Ion Networks, Inc's independent accountant for the fiscal year ending March 31, 2002. PwC completed their audit on June 28, 2001. PwC's reports on the consolidated financial statements of the Company for fiscal years 2001 and 2000 did not contain any adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During fiscal years 2001 and 2000 and the subsequent interim period through June 28, 2001, there were no disagreements with PwC regarding any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused PwC to make reference to the subject matter of the disagreement in their report on the financial statements for such years. The Company requested that PwC furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. The letter, dated June 28, 2001 has been filed as Exhibit 16.1 to this annual report on Form 10-KSB. -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 2001 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. 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. 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. -24- 10.7*** Equipment Lease Agreement dated June 17, 1999 by and between the Company and Lucent Technologies. 10.8**** (i) Non-negotiable Promissory Note in the principal amount of $750,000 issued by Stephen B. Gray to the Company. **** (ii) First Amendment to Promissory Note dated as of August 5, 2000 by and between the Company and Stephen B. Gray. 10.9**** Line of Credit Agreement with United Nations Bank dated September 30, 1999. 10.10***** Asset Purchase Agreement dated as of February 25, 1999 by and among the Registrant, LeeMAH and the Parent. 10.11***** Assignment of Patents of LeeMAH dated February 25, 1999. 10.12***** Assignment of Trademarks of LeeMAH dated February 25, 1999. 10.13****** (i) Separation and Forebearance Agreement made as of October 5, 2000 between the Company and Stephen B. Gray. (ii) Promissory Note in the amount of $163,000 dated October 5, 2000 made by Stephen B. Gray to the Company. 10.14****** Consulting Agreement entered into September 18, 2000 between the Company and Venture Consulting Group, Inc. 10.15(1) Materials and Services Contract dated January 16, 2001, between the Company and SBC Services, Inc. 10.16(1) Stock Purchase Agreement dated August 11, 2000 by and between the Company and the parties identified therein. 16.1(1) Letter dated June 28, 2000, from PricewaterhouseCoopers LLP to the Securities and Exchange Commission. 23.1(1) Consent of PricewaterhouseCoopers LLP ------------------------------ * Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on April 22, 1999. ** Incorporated by reference to the Company's Registration Statement on Form S-8 filed on March 17, 2000. *** Incorporated by reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999. -25- **** Incorporated by reference to the Company's Annual Report on form 10-KSB filed on June 28, 2000. ***** 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 quarterly report on Form 10-QSB filed on November 14, 2000. (1) filed herewith (B) REPORTS ON FORM 8-K ------------------- On January 16, 2001, the Company filed a report on form 8-k reporting the issuance of two press releases; the first, relating to the Company's restructuring plan and the second, relating to the signing of a customer contract with SBC Communications, Inc. -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, 2001 ION NETWORKS, INC. By: /s/ Ronald C. Sacks ---------------------------------------- Ronald C. Sacks, Chief Executive Officer and Interim Principal Financial Officer 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, 2001:
Signature Title --------------- /s/ Ronald C. Sacks Chief Executive Officer and Interim Principal Financial ------------------------------- Officer Ronald C. Sacks /s/ Stephen M. Deixler Chairman of the Board of Directors ------------------------------- Stephen M. Deixler /s/ Baruch Halpern Director ------------------------------- Baruch Halpern /s/ Alexander C. Stark Director ------------------------------- Alexander C. Stark ---------------------------- William Martin Ritchie Director ---------------------------- Alan Hardie Director /s/ Frank Russo ---------------------------- Frank Russo Director
-27- ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED MARCH 31, 2001 AND 2000
ION NETWORKS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 - ------------------------------------------------------------------------------------------------------------------- Page(s) Report of Independent Accountants F-1 Financial Statements: Consolidated Balance Sheets as of March 31, 2001 and March 31, 2000 F-2 Consolidated Statements of Operations for the Years Ended March 31, 2001 and 2000 F-3 Consolidated Statements of Cash Flows for the Years Ended March 31, 2001 and 2000 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 2001 and 2000 F-5 Notes to Consolidated Financial Statements F-6 - F-21
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 cash flows present fairly, in all material respects, the financial position of ION Networks, Inc. and Subsidiaries (the "Company") at March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. PricewaterhouseCoopers LLP Florham Park, New Jersey June 28, 2001 F-1
ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND 2000 - ----------------------------------------------------------------------------------------------------------------- 2001 2000 ASSETS Current assets Cash and cash equivalents $ 5,230,833 $ 10,381,612 Accounts receivable, less allowance for doubtful accounts of $161,000 and $251,000, respectively 2,796,531 4,569,546 Other receivables 13,497 1,560,697 Inventory, net 1,139,448 1,924,671 Prepaid expenses and other current assets 205,829 602,874 Related party notes receivable 897,250 - ----------------- ------------------ Total current assets 10,283,388 19,039,400 Restricted cash 375,000 - Property and equipment, net 1,467,766 2,146,956 Capitalized software, less accumulated amortization of $2,390,041 and $4,259,851, respectively 1,241,495 4,185,911 Goodwill and other acquisition - related intangibles, less accumulated amortization of $694,444 and $1,030,334, respectively 305,556 1,938,716 Other assets 22,683 79,258 ----------------- ------------------ Total assets $ 13,695,888 $ 27,390,241 ================= ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of capital leases $ 74,426 $ 67,900 Current portion of long-term debt 107,026 96,000 Accounts payable and accrued expenses 2,279,072 2,632,135 Accrued payroll and related liabilities 416,093 2,139,524 Deferred income 178,737 275,657 Other current liabilities 309,977 352,093 ----------------- ------------------ Total current liabilities 3,365,331 5,563,309 ----------------- ------------------ Long-term portion of capital leases 220,966 302,866 Long-term debt, net of current portion 18,732 128,129 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 18,203,301 shares and outstanding 18,203,301 shares at March 31, 2001, issued 15,224,911 shares and outstanding 15,162,880 shares at March 31, 2000 18,203 15,225 Additional paid-in capital 40,191,346 35,063,094 Accumulated deficit (30,165,045) (13,488,379) Accumulated other comprehensive income 46,355 13,196 ----------------- ------------------ 10,090,859 21,603,136 Less: Treasury stock, 62,031 shares, at cost at March 31, 2000 - (207,199) ----------------- ------------------ Total stockholders' equity 10,090,859 21,395,937 ----------------- ------------------ Total liabilities and stockholders' equity $ 13,695,888 $ 27,390,241 ----------------- ------------------ 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, 2001 AND 2000 - ----------------------------------------------------------------------------------------------------------------- 2001 2000 Net sales $ 11,676,547 $ 22,668,833 Cost of sales 7,184,666 8,409,068 ----------------- ----------------- Gross margin 4,491,881 14,259,765 Research and development expenses 3,297,897 4,288,396 Selling, general and administrative expenses 10,698,612 11,155,390 Depreciation and amortization expense 3,742,450 3,902,331 Restructuring, asset impairments and other charges 3,763,612 - ----------------- ----------------- Loss from operations (17,010,690) (5,086,352) Interest income 389,359 315,467 Interest expense (47,767) (224,363) ----------------- ----------------- Loss before income taxes (16,669,098) (4,995,248) Income tax expense 7,568 264,490 ----------------- ----------------- Net loss $ (16,676,666) $ (5,259,738) ================= ================= PER SHARE DATA Basic ($0.98) ($0.44) Diluted ($0.98) ($0.44) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 17,064,620 12,063,709 ----------------- ----------------- Diluted 17,064,620 12,063,709 ----------------- ----------------- 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, 2001 and 2000 - ---------------------------------------------------------------------------------------------------------------- 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (16,676,666) $ (5,259,738) Adjustments to reconcile net loss to net cash used in operating activities Restructuring, asset impairments and other charges, non-cash 3,421,378 - Depreciation and amortization 3,742,450 3,902,331 Provision for doubtful accounts - 100,757 Provision for inventory obsolescence 1,549,099 230,893 Noncash stock-based compensation charge 15,382 252,000 Deferred tax provision - 234,034 Changes in operating assets and liabilities Accounts receivable 1,773,015 (1,577,436) Other receivables 1,547,200 (1,560,697) Inventory (763,876) 399,079 Prepaid expenses and other current assets 397,045 (169,843) Other assets 56,575 (40,625) Accounts payable and accrued expenses (353,063) (1,258,017) Accrued payroll and related liabilities (1,655,749) 1,326,258 Deferred income (96,920) 6,200 Other current liabilities (42,116) (1,556,979) ----------------- ----------------- Net cash used in operating activities (7,086,246) (4,971,783) ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (415,174) (1,350,327) Capitalized software expenditures (1,526,411) (1,500,073) Proceeds from the sales of software licenses - 356,414 Related party notes receivable, net of repayments (897,250) - Restricted cash (375,000) - ----------------- ----------------- Net cash used in investing activities (3,213,835) (2,493,986) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under line of credit - 253,711 Proceeds from debt - 450,000 Repayments of the line of credit - (2,250,000) Repayments of debt (173,745) (731,796) Issuances of common stock 5,000,000 12,500,000 Exercises of options and warrants 323,047 7,459,472 ----------------- ----------------- Net cash provided by financing activities 5,149,302 17,681,387 ----------------- ----------------- Net (decrease) increase in cash and cash equivalents (5,150,779) 10,215,618 Cash and cash equivalents - beginning of period 10,381,612 165,994 ----------------- ----------------- Cash and cash equivalents - end of period $ 5,230,833 $ 10,381,612 ----------------- ----------------- SUPPLEMENTAL INFORMATION Cash paid during period for interest $ 47,767 $ 224,363 ----------------- ----------------- 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, 2001 AND 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Additional Other Total Common Paid-In Accumulated Comprehensive Treasury Stockholders' Shares Stock Capital Deficit Income Stock Equity Balance, March 31, 1999 8,399,964 $ 8,400 $14,858,447 $(8,228,641) $ (29,969) $(207,199) $ 6,401,038 COMPREHENSIVE INCOME Net loss (5,259,738) (5,259,738) Translation adjustments 43,165 43,165 ------------- Total comprehensive income (5,216,573) 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 -------------- ----------- ------------ ------------- -------------- ---------- ------------- Balance, March 31, 2000 15,224,911 15,225 35,063,094 (13,488,379) 13,196 (207,199) 21,395,937 Comprehensive income Net loss (16,676,666) (16,676,666) Translation adjustments 33,159 33,159 ------------- Total comprehensive income (16,643,507) Issuances of common stock 2,857,142 2,857 4,789,944 207,199 5,000,000 Exercise of options and warrants 121,248 121 322,926 323,047 Noncash stock-based compensation 15,382 15,382 -------------- ----------- ------------ ------------- -------------- ---------- ------------- Balance, March 31, 2001 18,203,301 $ 18,203 40,191,346 $(30,165,045) $ 46,355 $ - $10,090,859 -------------- ----------- ------------ ------------- -------------- ---------- ------------- The accompanying notes are an integral part of these financial statements. F-5
ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND BASIS OF PRESENTATION 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. The accompanying consolidated financial statements include the accounts of ION Networks, Inc. and its subsidiaries (collectively, the "Company") and have been prepared on the accrual basis of accounting. All material intercompany balances and transactions have been eliminated in consolidation. The Company's current operating plan includes certain assumptions the most significant of which relates to the attainment of significant increases in future revenues in excess of recorded fiscal 2001 revenues. To the extent that revenue in fiscal 2002 falls below fiscal 2001 revenue, the management of the Company will have to modify its current operating plan to scale back its expenditures for personnel and other operating costs in order to preserve operating cash. If necessary, management is committed to execute this contingency plan which it believes will preserve approximately $800,000 of cash during fiscal 2002 for the Company. Based on achievable revenue targets and management's contingency plan, the Company believes that it will have sufficient cash to fund its operations for the next twelve months. In addition, the Company is presently evaluating the need to raise additional debt or equity financing to grow its business either through expansion or acquisitions, or combinations of both. There can be no assurance that management will be successful in raising this additional financing on terms acceptable to the Company, if at all. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 (average cost) 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. F-6 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 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 $1,526,411 and $1,500,073 of software development costs for fiscal 2001 and 2000, respectively. 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, may 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. The Company wrote-off $2,332,120 of software development costs during fiscal 2001 (see Note 3). Amortization expense totaled $2,138,707 and $2,308,136 for fiscal 2001 and 2000, 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. 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. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB 101 did not have an impact on the Company's revenues for any of the years presented. F-7 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WARRANTY COSTS Estimated warranty costs associated with the sale of hardware and software are accrued at the time of sale. The warranty accrual included in other current liabilities as of March 31, 2001 and 2000 approximated $91,200 and $80,000, 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 including estimates of future gross revenues, and the related amortization lives, deferred tax asset valuation allowance and depreciation and amortization lives. 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. 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 2001 and 2000 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 1,429,301 and 3,422,687 were excluded from the computation of diluted earnings per share for fiscal 2001 and 2000, 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 F-8 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. 3. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES During the year ended March 31, 2001, the Company recorded $3,763,612 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 fiscal third quarter, implemented a business restructuring plan which is intended to increase the Company's 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 of March 31, 2001, all restructuring activities had been completed. Included in the exit costs were approximately $353,000 of cash severance and termination benefits associated with the separation of approximately 38 employees. All of these affected employees have left the Company as of March 31, 2001. Termination benefits of approximately $342,000 were paid during the third and fourth quarters 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 $2,332,000 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, to fully write-off the remaining unamortized balance which was being amortized over a three-year period. Additionally, the Company recorded an impairment charge in the amount of approximately $209,000 on fixed assets previously used in the manufacturing process at SolCom Systems, Ltd. 4. INVENTORY Inventory, net of reserve for obsolescence of $1,571,388 and $283,000 at March 31, 2001 and 2000, respectively, consists of the following: 2001 2000 Raw materials $ 690,566 $ 782,813 Work-in-process 18,440 259,180 Finished goods 430,442 882,678 --------------- --------------- $1,139,448 $1,924,671 --------------- --------------- F-9 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- During fiscal 2001, the Company increased its reserves for certain raw materials and finished goods to reflect the slow moving status of certain product lines. 5. PROPERTY AND EQUIPMENT At March 31, 2001 and 2000, property and equipment consists of the following: 2001 2000 Computer and other equipment $ 2,655,786 $ 2,476,635 Furniture and fixtures 747,203 998,929 Leasehold improvements 160,341 237,758 -------------- --------------- 3,563,330 3,713,322 Less: Accumulated depreciation 2,095,564 1,566,366 -------------- --------------- Property and equipment, net $ 1,467,766 $ 2,146,956 -------------- --------------- Depreciation expense for property and equipment for the years ended March 31, 2001 and 2000 amounted to $897,263 and $627,671, respectively. During the years ended March 31, 2001 and 2000, the Company retired fully depreciated assets amounting to $490,488 and $52,652, respectively. 6. BANK BORROWINGS On September 30, 1999, the Company entered into a $2,500,000 line of credit agreement. The line of credit was available through July 15, 2000. At March 31, 2000, there were no borrowings under the facility. Advances were payable at maturity and bore variable interest at a prime rate, as defined in the line of credit agreement. This line of credit was terminated and effectively replaced with the $1,500,000 line as noted below. The line was collateralized by all business assets of the Company. On July 15, 2000, the Company entered into a line of credit agreement for $1,500,000. The line of credit was available through September 30, 2000. The line of credit expired on September 30, 2000 with no amounts having been drawn down on such line. 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 corporate headquarters facility. Accordingly, $375,000 has been reflected as restricted cash as a noncurrent asset at March 31, 2001. F-10 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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, 2001 and 2000, $125,758 and $224,129, respectively, is outstanding under the term loan. 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, pay dividends, purchase or retire any of the Company's outstanding shares or alter or amend the Company's capital structure. The Company was in compliance with all covenants at March 31, 2001. At March 31, 2001, contractual maturities of the outstanding term loan is as follows: 2002 $ 107,026 2003 18,732 --------------- $ 125,758 --------------- 7. INCOME TAXES As of March 31, 2001, the Company has available federal, state and foreign net operating loss carryforwards of approximately $19,213,968, $18,302,460, and $1,668,944, respectively, to offset future taxable income. The federal net operating loss carryforwards expire during the years 2011 through 2021. 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 2020. The components of the income tax provision for the years ended March 31, 2001 and 2000 are as follows: 2001 2000 Current Federal $ - $ - State - - Foreign 7,568 30,456 --------------- -------------- 7,568 30,456 --------------- -------------- Deferred Federal - 198,929 State - 35,105 --------------- -------------- - 234,034 --------------- -------------- $ 7,568 $ 264,490 --------------- -------------- F-11 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The reasons for the difference between the Company's effective tax rate and the United States federal statutory rate are as follows: March 31, 2001 2000 Effective tax rate reconciliation Statutory federal tax rate (34)% (34)% State taxes, net of federal benefit (6) (6) Foreign rate differential - 1 Permanent difference (goodwill) 7 13 Effect of recording valuation allowance on net operating loss carryforwards 32 28 Other 1 3 ---------- ---------- -% 5% ---------- ---------- The tax effect of temporary differences which make up the significant components of the net deferred tax asset and liability at March 31, 2001 and 2000 are as follows:
2001 2000 Current deferred tax assets Inventory $ 879,367 $ 222,246 Accrued expenses 265,609 216,028 Allowance for doubtful accounts 64,580 100,303 -------------- --------------- Total current deferred tax assets 1,209,556 538,577 Valuation allowance (1,209,556) (538,577) -------------- --------------- Net current deferred tax assets - - -------------- --------------- Noncurrent deferred tax assets Depreciation and amortization 251,839 124,852 Net operating loss carryforwards 8,257,819 3,817,178 Research and development credit 254,523 254,523 Alternative minimum tax credit 20,125 20,125 -------------- --------------- Total noncurrent deferred tax assets 8,784,306 4,216,678 Valuation allowance (8,253,458) (3,460,300) -------------- --------------- Net noncurrent deferred tax assets 530,848 756,378 -------------- --------------- Noncurrent deferred tax liabilities Capitalized software (530,848) (756,378) -------------- --------------- Total noncurrent deferred tax liabilities $ (530,848) $ (756,378) -------------- --------------- Net noncurrent deferred tax (liabilities) assets $ - $ - -------------- --------------- F-12
ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company has recorded a full valuation allowance against the defferred tax assets, including the federal, state and foreign net operating loss carryforwards as management believes that it is more likely than not that substantially all of the deferred tax assets will not be realized. 8. 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. 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. There were no warrants outstanding at March 31, 2001. 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. During the discount period, investors exercised 1,143,251 warrants and the Company received net proceeds of $1,618,544. At March 31, 2000, 80,000 warrants were outstanding. These warrants expired unexercised in April 2000. 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. F-13 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- There are no warrants outstanding as of March 31, 2000. STOCK OPTION PLANS During the years ended March 31, 2001 and 2000, respectively, options to purchase 45,948 and 1,433,273 shares of common stock under the Company's stock option plans were exercised, for an aggregate consideration of $99,483 and $2,399,869, respectively. In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000 Plan"). The aggregate number of shares of common stock for which options may be granted under the 2000 Plan is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 2000 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 year ended March 31, 2001, the Company granted options to purchase 1,724,500 shares. At March 31, 2001, 1,433,625 options were outstanding under the 2000 Plan, of which 239,992 options were exercisable. 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, 2001 and 2000, the Company granted options to purchase 1,596,078 and 2,328,791 shares, respectively. At March 31, 2001, 1,832,795 options were outstanding under the 1998 Plan, of which 818,041 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 years ended March 31, 2001 and 2000, there were no option grants provided under the 1994 Plan. At March 31, 2001, 639,347 options were outstanding under the 1994 Plan, of which 597,237 options were exercisable. Of the options granted in fiscal 2001 and 2000, 578,528 and 455,645, respectively, 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 the Company meets certain predetermined sales targets. The Company did not meet the targets for 2001 and 2000 and, as such, all options granted under the TARSAP in 2001 and 2000 will vest seven years from the original date of grant. OTHER OPTIONS F-14 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- In connection with a consulting agreement with Venture Consulting Group, Inc. ("VCGI") (see Note 9), consultants were issued options to purchase 240,000 shares of common stock. Such options vested 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 $22,326 for the year ended March 31, 2001. 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 vested on April 1, 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 year ended March 31, 2000, 90,000 options to purchase shares were exercised under this grant for an aggregate consideration of $104,400. There were no stock option exercises during fiscal 2001. At March 31, 2001, 400,000 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 years ended March 31, 2001 and 2000, the Company recorded compensation (benefit) expense of ($6,944) and $201,600, respectively, related to options given to employees. The Company recorded a compensation benefit in fiscal 2001 due to employee forfeitures of unvested stock options as certain employees left the Company during the current fiscal year. 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 2001 and 2000, consistent with the provisions of SFAS 123, the Company's net loss and loss per share would have increased by $1,277,425 and $.07 and $1,239,998 and $.10, respectively, for the years ended March 31, 2001 and 2000. The pro forma effect on net loss for fiscal 2001 and 2000 may not be representative of the pro forma effect on net loss of future years because the SFAS 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to April 1, 1995. The weighted-average fair values at date of grant for options granted during fiscal 2001 and 2000 were $3.02 and $4.08, respectively. The fair value of each option grant for the Company's common stock is estimated on the date of the grant using the Black Scholes option pricing model, with the following weighted average assumptions used for grants in fiscal 2001 and 2000: 2001 2000 Expected volatility 110% 84% Risk-free interest rate 5.88% 5.32% Expected option lives 3.53 years 4.00 years F-15 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Details of options granted are as follows: WEIGHTED AVERAGE OPTION EXERCISE PRICE PER SHARES PRICE ($) SHARE ($) 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 ----------------- -------------- ------------------ Granted 3,320,578 3.84 1.03 to 29.25 Canceled (1,734,137) 5.80 0.48 to 37.66 Exercised (45,948) 2.17 1.38 to 2.97 ----------------- -------------- ------------------ Options outstanding at March 31, 2001 4,315,767 $ 3.88 $1.03 to $36.44 ----------------- -------------- ------------------ Options exercisable at March 31, 2001 2,065,270 $ 2.94 $1.03 to $36.44 ----------------- -------------- ------------------ WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED RANGE OF YEARS OF AVERAGE AVERAGE EXERCISABLE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE $1.03-1.52 2,089,433 8.3 $1.16 774,115 $1.17 $1.59-2.39 1,273,167 4.1 $1.97 1,007,880 $1.95 $2.41-3.16 126,192 5.0 $2.90 47,382 $2.85 $3.69-4.08 39,634 5.0 $3.84 20,000 $3.86 $5.84-8.44 207,196 4.2 $6.74 114,148 $7.16 $9.13-13.69 335,827 7.9 $12.81 14,999 $9.42 $13.81-15.69 4,878 2.9 $14.38 1,666 $15.25 $20.94-30.81 222,018 4.0 $22.15 74,581 $22.03 $33.44-36.44 17,422 4.2 $34.70 10,499 $34.07 ------------ ------------- ------------- ---------------- ----------- $1.03-36.44 4,315,767 6.5 $3.88 2,065,270 $2.94 ------------ ------------- ------------- ---------------- ----------- F-16 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 9. COMMITMENTS OPERATING LEASES During March 1999, the Company entered into an operating lease to consolidate their office and manufacturing facilities, which had 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. Future minimum payments, by year and in the aggregate, under non-cancellable operating and capital leases as of March 31, 2001 are as follows: CAPITAL OPERATING LEASES LEASES Year ending March 31 2002 $ 97,961 $ 760,816 2003 97,961 802,210 2004 97,961 793,074 2005 51,930 679,478 2006 - 714,470 Thereafter - 2,589,878 -------------- -------------- Total minimum lease payments $ 345,813 $6,339,926 -------------- Less amount representing interest 50,421 -------------- Present value of net minimum lease payments $ 295,392 --------------
Computer and other equipment at March 31, 2001 and 2000 includes $390,638 under capital leases. Rent expense under operating leases for the years ended March 31, 2001 and 2000 approximated $759,989 and $577,315, respectively. CONSULTING CONTRACTS On October 5, 2000, the Company entered into a consulting agreement with 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 functioning in various capacities for the Company. The fees for the consultants' services are $500,000 over a one-year period. In addition, the individual consultants from VCGI, including Ronald C. Sacks, were issued options to purchase 240,000 shares of common stock (see Note 8). F-17 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. 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, 2001 and 2000 was $60,671 and $49,732, 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, 2001 and 2000 are as follows: 2001 2000 United States $ 9,937,107 $ 19,228,324 Europe 1,686,932 3,336,517 Pacific Rim 7,196 11,950 Other 45,312 92,042 ----------------- ----------------- $ 11,676,547 $ 22,668,833 ----------------- ----------------- The Company sold a substantial portion of its products to four customers. Sales to these customers amounted to $4,871,198 (42% of net sales) and $8,606,173 (38% of net sales) in 2001 and 2000, respectively. At March 31, 2001 and 2000, amounts due from these customers included in accounts receivable, were $1,799,041 and $2,104,050, 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 F-18 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 reported revenues 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, 2001 and periodically throughout fiscal 2001, the Company had deposits in this financial institution in excess of the amount insured by the FDIC. The Company sells the majority of its products to customers within the telecommunications industry. The Company's two largest telecommunications customers and one other customer accounted for approximately 64% of net accounts receivable at March 31, 2001. The Company provides for allowances for doubtful accounts which are intended 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 at March 31, 2000 consists of amounts due from foreign employees related to withholding taxes. Included within accrued payroll and related liabilities at March 31, 2000 is an offsetting liability due from the Company to the United Kingdom tax authorities. The receivables were substantially collected during fiscal 2001 and have been remitted to the appropriate United Kingdom tax authorities. 15. SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000 Other Non-Cash Investing and Financing Activities Options issued to consultants as non-cash compensation $ 22,326 $ 50,400 Assets acquired by assuming capital lease obligations - 370,766 Compensation (benefit) charge from employee options (6,944) 201,600 F-19
ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 16. 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 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 year ended March 31, 2001, $50,000 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. At March 31, 2001, the amount owed to the Company from the Former CEO approximated $897,250, and is classified as a related party notes receivable on the Company's consolidated balance sheet. The Former CEO has not paid the amounts due as specified in the agreement. The Company has been advised that the Former CEO has sold the residence and based on an anticipated closing date in late July, 2001, $750,000 of the amounts due from the Former CEO are expected to be repaid from the proceeds of the sale of the residence. 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. 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 accrued interest at the prime rate plus 1%. These advances were due and payable in full upon the officers cessation of employment with the Company or August 31, 2000, whichever is earlier. The advances were repaid in full prior to August 31, 2000. 17. NEW ACCOUNTING PRONOUNCEMENTS 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, an Amendment of FASB Statement No. 133", is effective for fiscal years beginning after F-20 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. F-21 EXHIBIT INDEX ------------- 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. 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. 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**** (i) Non-negotiable Promissory Note in the principal amount of $750,000 issued by Stephen B. Gray to the Company. **** (ii) First Amendment to Promissory Note dated as of August 5, 2000 by and between the Company and Stephen B. Gray. 10.9**** Line of Credit Agreement with United Nations Bank dated September 30, 1999. 10.10***** Asset Purchase Agreement dated as of February 25, 1999 by and among the Registrant, LeeMAH and the Parent. 10.11***** Assignment of Patents of LeeMAH dated February 25, 1999. 10.12***** Assignment of Trademarks of LeeMAH dated February 25, 1999. 10.13****** (i) Separation and Forebearance Agreement made as of October 5, 2000 between the Company and Stephen B. Gray. (ii) Promissory Note in the amount of $163,000 dated October 5, 2000 made by Stephen B. Gray to the Company. 10.14****** Consulting Agreement entered into September 18, 2000 between the Company and Venture Consulting Group, Inc. 10.15(1) Materials and Services Contract dated January 16, 2001, between the Company and SBC Services, Inc. 10.16(1) Stock Purchase Agreement dated August 11, 2000 by and between the Company and the parties identified therein. 16.1(1) Letter dated June 28, 2000, from PricewaterhouseCoopers LLP to the Securities and Exchange Commission. 23.1(1) Consent of PricewaterhouseCoopers LLP ------------------------------ * Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on April 22, 1999. ** Incorporated by reference to the Company's Registration Statement on Form S-8 filed on March 17, 2000. *** Incorporated by reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999. **** Incorporated by reference to the Company's Annual Report on form 10-KSB filed on June 28, 2000. ***** 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 quarterly report on Form 10-QSB filed on November 14, 2000. (1) filed herewith EX-10 2 ex10_15.txt EXHIBIT 10-15 Exhibit 10.15 Master Agreement No. 00017432 Page 1 of 64 Master Agreement No. 00017432 Between ION Networks, Inc. and SBC Services, Inc. For Materials and Services - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 2 of 64
TABLE OF CONTENTS 1.1 Preamble and Effective Date..............................................................................7 1.2 Scope of Agreement.......................................................................................7 1.3 Term of Agreement........................................................................................7 1.4 Cancellation and Termination.............................................................................7 1.5 Cumulative Remedies......................................................................................9 ARTICLE II - Definitions..........................................................................................9 2.1 "Acceptance" means SBC's acceptance of the Materials or Services ordered by SBC and provided by ION as specified in Section 8.6, "Delivery, Performance, and Acceptance.".......................................9 2.2 "Acceptance Date" means the date on which SBC Accepts Materials or Services..............................9 2.3 "Acceptance Letter" means a document signed by SBC, substantially in the form of Appendix F, indicating its Acceptance of the Materials and/or Services..........................................................9 2.5 "Affiliate" means (1) a company, whether incorporated or not, which owns, directly or indirectly, a majority interest in either Party (a "Parent Company"), and/or (2) a company, whether incorporated or not, in which a 5% or greater interest is owned, either directly or indirectly, by: (i) either Party or (ii) a Parent Company....................................................................................9 2.6 "Agreement" shall have the meaning specified in the section called "Entire Agreement."..................10 2.7 "Cancellation" means the occurrence by which either Party puts an end to this Agreement or any Work Order(s) prepared pursuant to the provisions of Section 1.4(B) of this Agreement due to the breach of this Agreement and/or a Work Order......................................................................10 2.12 "Harmful Code" means computer viruses, worms, trap doors, time bombs, undocumented passwords, disabling code (which renders Materials unusable until a patch or new password is provided), or any similar mechanism or device.............................................................................10 2.13 "Information" means all ideas, discoveries, concepts, know-how, trade secrets, techniques, materials, creative content, tools, inventions, specifications, methodologies, discoveries, works of authorship, methods of operation, systems, processes, designs, drawings, sketches, models, manuals, samples, tools, computer programs, technical information, and other confidential business, customer or personnel information or data, whether provided by a Party orally, in writing, or through electronic or other means...................................................................................................10 2.21 "Software" means the computer programs that are listed in the applicable Order or provided by ION under or in connection with this Agreement or an applicable Order. Software also includes all associated Program Materials.......................................................................................12 2.22 "Specs" or Specifications" mean the specifications for and descriptions of Materials, including any warranty statements, which are identified in Appendix C hereto. Any request from SBC for changes to the Specifications, including any additional requirements or specifications, shall be deemed a request for.....................................................................................................12 2.22 "Customized Specs". All requests for Customized Specs shall be clearly identified as such on the applicable Order and must be separately approved of by ION. The Customized Specs that have been accepted by ION shall control over an inconsistency with the Specifications set forth in Appendix C.....12 - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 3 of 64 2.23 Termination" means the occurrence by which either Party, pursuant to Section 1.4(A), puts an end to this Agreement and/or Orders placed under this Agreement................................................12 2.24 "Trial Period" or "Acceptance Test Period" means the length of time specified in an Order (or, if not so specified, a period of no more than sixty (60) days) during which the Acceptance Tests are performed. The Trial Period commences on the first working day following Delivery and, if necessary, it shall be tolled for such time as ION requires to correct any problems with the Material and/or Service being tested. The Trial Period shall recommence on the first working day following ION's written notice that it has completed all necessary corrective action to cause the Material and/or Service to pass the Acceptance Tests. The Acceptance Test Period shall not exceed a total ninety (90) calendar days as a result of ION's failure to correct problems with such delivered product.........12 ARTICLE III - General Clauses....................................................................................12 3.1 Affiliate...............................................................................................12 3.2 Governing Law...........................................................................................13 3.4 Amendments and Waivers..................................................................................14 3.5 Releases Void...........................................................................................14 3.6 Force Majeure...........................................................................................14 3.7 Non-Exclusive Market....................................................................................15 3.8 Assignment..............................................................................................15 3.9 Conflict of Interest....................................................................................15 3.10 Severability.........................................................................................16 3.11 Survival of Obligations..............................................................................16 3.12 Construction and Interpretation......................................................................16 3.13 Third Party Beneficiaries............................................................................17 ARTICLE IV - Compliance Clauses..................................................................................17 4.1 Government Contract Provisions..........................................................................17 Work Orders containing a notation that the Materials is intended for use under government contracts shall be subject to the then current government provisions referenced in or attached to such Work Orders......17 4.2 Compliance with Laws....................................................................................17 4.3 Changes Required to Meet Codes, Laws, and Regulations...................................................17 ARTICLE V - Liability Clauses....................................................................................18 5.1 Confidentiality.........................................................................................18 5.2 Infringement............................................................................................19 5.3 Indemnity..............................................................................................20 5.4 Liquidated Damages......................................................................................21 5.5 Insurance...............................................................................................21 5.6 Hazardous Materials and Regulated Substances............................................................22 ARTICLE VI - Standards Clauses...................................................................................25 6.1 Engineering Complaints..................................................................................25 6.2 Radio Frequency Energy Standards........................................................................25 6.3 OSMINE..................................................................................................26 ARTICLE VII - Ordering Clauses...................................................................................26 7.1 Orders..................................................................................................26 - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 4 of 64 7.2 Product Change Notices..................................................................................27 7.3 Shipping and Packing....................................................................................28 7.4 Title and Risk..........................................................................................29 7.5 Price...................................................................................................29 7.6 Taxes...................................................................................................29 7.7 Invoicing and Payment...................................................................................30 A. Except as otherwise specified in an Order, ION shall render an invoice in duplicate promptly upon the shipment of Materials or the performance of Services identified in the applicable Work Order. The invoice shall specify in detail (1) quantities of each ordered item, (2) unit prices of each ordered item, (3) item and commodity codes, (4) total amounts for each item, (5) the Services provided, (6) any extra charges associated with changes made pursuant to a Change Order,..............................30 A. (7) applicable sales or use taxes, (8) discounts, (9) shipping charges, (10) total amount due, and (11) software right-to-use fees as either "application" or "operational". SBC shall pay ION in accordance with the amounts stated on an invoice within forty-five (45) days of the date of receipt of the invoice. Payment for shortages, or Materials or Services not conforming to the Specifications, and portions of any invoice in dispute, may be withheld by SBC until such problem has been resolved, but in no event shall SBC be entitled to withhold an amount greater than the amount actually in dispute. If SBC disputes any invoice rendered or amount paid, it shall notify ION of the dispute in writing and shall provide a detailed explanation of SBC's allegations. The Parties shall use their best efforts to resolve such dispute expeditiously. Invoices received by SBC more than one (1) year after the provision of Materials or performance of Services are untimely and SBC shall have no obligation to pay such invoices................................................................................................31 Invoices for or including freight charges shall be accompanied by legible copies of prepaid freight bills, express receipts, or bills of lading supporting the invoice amounts. Such invoices shall include (1) carrier's name, (2) date of shipment, (3) number of pieces, (4) weight, and (5) freight classification..........................................................................................31 B. If an Order or an Appendix specifies that ION may submit invoices for progress payments prior to Acceptance, ION is permitted to submit invoices at the end of each month and SBC will make progress payments to ION at thirty (30) day intervals. Such progress payments shall not exceed ninety percent (90%) of satisfactorily completed work at the time of billing, as determined by SBC. ION agrees to use such progress payments for expenses incurred for Services or Materials used in performance of the Work Order for SBC...............31 C. ION agrees to accept standard, commercial methods of payment and evidence of payment obligation including, but not limited to credit card payments, checks and electronic fund transfers, in connection with payment for the Materials and the Services.,....................................................................31 7.8 Records and Audits......................................................................................31 ARTICLE VIII - Performance Clauses...............................................................................32 8.1 Project Administration..................................................................................32 8.2 M/WBE...................................................................................................32 SBC has granted to ION a total waiver of any and all M/WBE and DVBE requirements that may be applicable to ION as a result of its relationship with SBC under the terms of this Agreement.......................32 - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 5 of 64 8.3 Access..................................................................................................32 A. When appropriate, ION shall have reasonable access to SBC's premises during normal business hours and at such other times as may be agreed upon by the Parties in order to enable ION to perform its obligations under this Agreement. Such access may occur through ION's use of remote online access technology used to conduct remote diagnosis and problem resolution as well as by coordinating visits by ION personnel to SBC's premises. Remote online access will be coordinated by ION's Technical Assistance Center. ION shall coordinate access by ION personnel with SBC's designated representative prior to visiting such premises. ION insures SBC that only persons employed by ION or subcontracted by ION will be allowed to enter SBC's premises. If SBC requests ION or its Subcontractor to discontinue furnishing any person provided by ION or its Subcontractor from performing work on SBC's premises, ION shall immediately comply with such request. Such person shall leave SBC's premises promptly and ION shall not furnish such person again to perform work on SBC's premises without SBC's written consent........................................................32 B. SBC may require ION or its representatives, including employees and subcontractors, to exhibit identification credentials, which SBC may issue in order to gain access to SBC's premises for the performance of Services. If, for any reason, any ION representative is no longer performing such Services, ION shall immediately inform SBC. Notification shall be followed by the prompt delivery to SBC of the identification credentials, if issued by SBC, or a written statement of the reasons why said identification credentials cannot be returned. ION shall insure that its representatives, including employees and subcontractors, while on or near SBC's premises, will perform work which (i) conforms to the Specifications, (ii) protects SBC's Materials, buildings, and structures, and (iii) does not interfere with SBC's business operations. Furthermore, ION shall insure that its representatives, including employees and subcontractors, while on or near SBC's premises will perform Services with care and due regard for the safety, convenience, and protection of SBC, its employees, and property and in full conformance with the policies specified in the SBC Code of Conduct, which prohibits the possession of a weapon or an implement which can be used as a weapon (a copy of the SBC Code of Conduct is available upon request)................................................................................................33 8.4 Multi-Supplier Environment..............................................................................33 8.5 Delivery, Performance, and Acceptance...................................................................33 8.6 Subcontractors..........................................................................................34 8.7 Quality Assurance.......................................................................................34 ARTICLE IX - Repair, Maintenance, and Support Clauses............................................................35 9.2 Repair Invoices.........................................................................................37 9.3 Continuing Availability.................................................................................38 9.4 Disaster Recovery.......................................................................................38 ARTICLE X - Software Clauses.....................................................................................39 10.1 Standard Software....................................................................................39 10.2 Standard Software License Fee........................................................................39 10.3 Third Party Software.................................................................................40 10.4 Program Materials....................................................................................40 10.5 Modifications........................................................................................40 10.6 Delivery of Software.................................................................................40 - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 6 of 64 ARTICLE XI - Warranty Clauses....................................................................................41 11.1 Warranty.............................................................................................41 11.2 Repairs Not Covered Under Warranty...................................................................42 After the expiration of the Warranty period, all repairs will be made on a time and materials basis. The applicable price for time and materials repairs will be listed in the then-current issue of ION's price list, less a 40% discount...........................................................................................42 ARTICLE XII - OTHER Clauses......................................................................................45 12.1 Licenses and Patents.................................................................................45 12.2 Independent Contractor...............................................................................45 12.3 Insignia.............................................................................................45 12.4 Notices..............................................................................................46 12.5 Publicity............................................................................................46 12.6 Entire Agreement.....................................................................................47
- -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 7 of 64 ARTICLE I 1.1 PREAMBLE AND EFFECTIVE DATE This Agreement, effective on the date when signed by the last Party ("Effective Date"), is between ION Networks, Inc., a Delaware corporation, ("ION"), and SBC Services Inc., a Delaware corporation ("SBC"). SBC and ION may be referred to individually as a "Party" or jointly as the "Parties". This Agreement is for the purchase of ION's data communications Materials and/or Services for deployment in support of SBC's ASI-NET 13-state Data Communications Network (DCN) project. NOW, THEREFORE, in consideration of the premises and the covenants hereinafter contained, the Parties hereto agree as follows: 1.2 SCOPE OF AGREEMENT Subject to the terms and conditions of this Agreement, ION shall provide to SBC the Materials and Services described in Appendix A, pursuant and in conformance with Orders submitted by SBC. The applicable prices for the Materials and Services are specified in Appendix B. ION agrees that the Materials and Services shall conform in all material respects to the Specifications set forth in Appendix C. The Parties agree to the roles, responsibilities, and procedures in the Work Orders, the form of which is attached hereto as Appendix D. 1.3 TERM OF AGREEMENT This Agreement is effective on the date the last Party signs and, unless terminated or canceled as provided in this Agreement, shall remain in effect for 1 year (the "Initial Term"). 1.4 CANCELLATION AND TERMINATION - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 8 of 64 A. Termination Either ION or SBC may terminate this Agreement upon thirty (30) days prior written notice to the other setting forth the effective date of such termination; provided, however, that no such termination shall be effective prior to the expiration of the Initial Term of this Agreement. The Termination, Cancellation or expiration of this Agreement shall not affect the obligations of either Party to the other Party pursuant to any Order previously executed hereunder, and the terms and conditions of this Agreement shall continue to apply to such Order as if this Agreement had not been terminated or canceled, or had not expired. SBC may terminate any Order in whole or in part, at any time, upon ten (10) days written notice to ION, provided that SBC agrees not to terminate any Order to the extent that it has already been shipped by ION. In the event that SBC terminates an Order upon which ION has commenced work, SBC shall pay ION for all of the costs ION has incurred in connection with such performance, less any savings realized through resale or salvage. If requested, ION agrees to substantiate such costs with proof satisfactory to SBC. In no event shall SBC's liability exceed the full price of any Materials or Services ordered hereunder. SBC shall have no liability for Materials ordered pursuant to any Order that is terminated at least thirty (30) days prior to the applicable Delivery Date; provided, however, that SBC shall have no right to terminate any Order, or any portion of any Order, for custom or specially manufactured Materials. After the receipt of SBC's payment for any Services, ION shall deliver the physical embodiments, if any, of such Services. B. Cancellation If either Party fails to cure a material default under this Agreement or the applicable Order within thirty (30) days after receipt of written notice of such a default, then, in addition to all other rights and remedies, the Party not in default may cancel this Agreement and/or the Order under which the default occurred. If, pursuant to its Cancellation of an Order, SBC elects to return any Materials or reject any Services, ION shall reimburse SBC for those amounts previously paid by SBC for such Materials and/or Services, including any costs incurred in connection with promptly returning such Materials. Upon ION's receipt of any returned Materials and SBC's receipt of any such reimbursement and refund, title to any such Materials, which had previously passed to SBC, shall revert to ION. Partial Cancellation and Termination: Where a provision of this Agreement permits SBC to terminate or cancel an Order, such Termination or Cancellation may, at SBC's option, be either complete or partial. In the case of a partial Termination or Cancellation SBC may, at its - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 9 of 64 option, accept a portion of the Materials or Services covered by an Order and pay ION for such Materials or Services at the unit prices set forth in such Order. 1.5 CUMULATIVE REMEDIES Except when specifically identified as a Party's sole remedy, any rights of Cancellation, Termination, liquidated damages, or other remedies prescribed in this Agreement are cumulative and are not exclusive of any other remedies to which the injured Party may be entitled. Neither Party shall retain the benefit of inconsistent remedies. ARTICLE II - DEFINITIONS For definitions with no "Explanation," please see the explanation provided under the section of the Agreement discussing such term. For instance,. for an explanation of the term "Initial Term," see the section entitled "Term of Agreement". 2.1 "Acceptance" means SBC's acceptance of the Materials or Services ordered by SBC and provided by ION as specified in Section 8.6, "Delivery, Performance, and Acceptance." 2.2 "Acceptance Date" means the date on which SBC Accepts Materials or Services. 2.3 "Acceptance Letter" means a document signed by SBC, substantially in the form of Appendix F, indicating its Acceptance of the Materials and/or Services. 2.4 "Acceptance Tests" means the performance and reliability demonstrations and tests that must be successfully performed on the Materials during the Acceptance Test Period. These tests may include: (1) sample performances of SBC's routine business transactions, (2) tests, demonstrations, or transactions represented or performed by ION, and (3) any other tests, demonstrations, or transactions included or referenced in the applicable Work Order to determine whether the Materials meet the Specifications. 2.5 "Affiliate" means (1) a company, whether incorporated or not, which owns, directly or indirectly, a majority interest in either Party (a "Parent Company"), and/or (2) a company, whether incorporated or not, in which a 5% or greater - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 10 of 64 interest is owned, either directly or indirectly, by: (i) either Party or (ii) a Parent Company. 2.6 "Agreement" shall have the meaning specified in the section called "Entire Agreement." 2.7 "Cancellation" means the occurrence by which either Party puts an end to this Agreement or any Work Order(s) prepared pursuant to the provisions of Section 1.4(B) of this Agreement due to the breach of this Agreement and/or a Work Order. 2.8 "Delivery" means ION's delivery to SBC of Materials and/or ION's performance of Services identified on the applicable Work Order. ION completes Delivery: (i) upon SBC's possession of the Materials if ION is not required to provide additional Services in connection with the Materials, such as installation, (ii) upon completion of any additional Services, if ION is required to provide such Services in connection with providing the Materials, or (iii) upon completing the provision of the Services described in the Work Order. Notwithstanding the above, SBC shall have no obligation to accept any Materials or Services that do not conform in all material respects with the Specifications, as has been determined by the successful completion of the Acceptance Tests. 2.9 "Delivery Date" means the date, identified in the applicable Order, on which the Parties agree ION is scheduled to complete its Delivery. 2.10 "Documentation" or "Program Materials" means all materials in machine readable or printed form that explain for SBC or assist it with the use of the Materials, including, but not limited to, user and system instructions and manuals, training materials and ION's and/or a subcontractor's written Specifications. 2.11 "Hardware" means all ION provided tangible products and equipment. 2.12 "Harmful Code" means computer viruses, worms, trap doors, time bombs, undocumented passwords, disabling code (which renders Materials unusable until a patch or new password is provided), or any similar mechanism or device. 2.13 "Information" means all ideas, discoveries, concepts, know-how, trade secrets, techniques, materials, creative content, tools, inventions, specifications, methodologies, discoveries, works of authorship, methods of operation, systems, processes, designs, drawings, sketches, models, manuals, samples, tools, computer programs, technical information, and other confidential business, customer or - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 11 of 64 personnel information or data, whether provided by a Party orally, in writing, or through electronic or other means. 2.14 "Laws" shall have the meaning specified in the section called "Compliance with Laws." 2.15 "Liability" means all losses, damages, expenses, costs, penalties, fines, fees, including reasonable attorneys' fees, whether or not arising from or incurred in connection with a third Party claim or cause of action related to performance or omission of acts under this Agreement or any Order. 2.16 "Material(s)" means a unit of equipment, apparatus, components, tools, supplies, material, Hardware, Software, or firmware thereto purchased or licensed hereunder by SBC from ION and includes third party Materials provided or furnished by ION. Materials shall be deemed to include any replacements for Materials that ION provides pursuant to Section 8.6 (Delivery, Performance and Acceptance) or Article XI (Warranty Clauses). 2.17 "Material Compliance" means, with respect to ION's performance under this Agreement, that ION shall be responsible for complying fully with the Specifications for all Materials and Services set forth in this Agreement and any Work Order, except that ION shall not be liable, nor shall SBC have a claim against ION under any theory of law, in the event that ION's noncompliance (a) does not negatively affect SBC's use and enjoyment of Materials and/or Services or (b) results from SBC's use of Materials in a manner (i) for which they were not designed, or (ii) not identified by ION as an appropriate use. 2.18 "Notice of Completion" means a written document provided by ION and substantially in the form of Appendix E, which is provided to SBC and states that the Materials ordered by SBC are ready for testing. ION's provision of the Notice of Completion is a representation and warranty that the Materials and Services have been tested to assure compliance and are in compliance with the Specifications. 2.19 "Order" or "Work Order" means such purchase orders, forms, memoranda or other written communications whose Delivery Date shall be agreed to and confirmed by ION via electronic messaging, as may be delivered to ION for the purpose of ordering Materials and Services hereunder. Each Work Order shall be substantially in the form of Appendix D hereto. 2.20 "Service(s)" means any and all labor or service provided in connection with this Agreement or an applicable Order, including but not limited to, consultation, engineering, installation, removal, maintenance, training, technical support, repair, programming, and Software maintenance. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 12 of 64 2.21 "Software" means the computer programs that are listed in the applicable Order or provided by ION under or in connection with this Agreement or an applicable Order. Software also includes all associated Program Materials. 2.22 "Specs" or Specifications" mean the specifications for and descriptions of Materials, including any warranty statements, which are identified in Appendix C hereto. Any request from SBC for changes to the Specifications, including any additional requirements or specifications, shall be deemed a request for "Customized Specs". All requests for Customized Specs shall be clearly identified as such on the applicable Order and must be separately approved of by ION. The Customized Specs that have been accepted by ION shall control over an inconsistency with the Specifications set forth in Appendix C. 2.23 Termination" means the occurrence by which either Party, pursuant to Section 1.4(A), puts an end to this Agreement and/or Orders placed under this Agreement. 2.24 "Trial Period" or "Acceptance Test Period" means the length of time specified in an Order (or, if not so specified, a period of no more than sixty (60) days) during which the Acceptance Tests are performed. The Trial Period commences on the first working day following Delivery and, if necessary, it shall be tolled for such time as ION requires to correct any problems with the Material and/or Service being tested. The Trial Period shall recommence on the first working day following ION's written notice that it has completed all necessary corrective action to cause the Material and/or Service to pass the Acceptance Tests. The Acceptance Test Period shall not exceed a total ninety (90) calendar days as a result of ION's failure to correct problems with such delivered product. ARTICLE III - GENERAL CLAUSES 3.1 AFFILIATE ION agrees that any Affiliate identified on Schedule 3.1 hereto may place Orders with ION, and the term "SBC" shall be deemed to refer to an Affiliate when an Affiliate places an Order with ION under this Agreement. All Orders placed by Affiliates shall, by definition, incorporate the terms and conditions of this Agreement. Such Orders shall not be valid unless they have been placed in the Affiliate's own name and have been executed by an officer of the company authorized to bind the Affiliate with regard to agreements of this nature. By executing an Order, an Affiliate shall be deemed to have consented to be bound by the terms of this Agreement, as if such Affiliate were a Party hereto and had executed this Agreement in its own name. An Affiliate will be responsible for its own obligations, including but not limited to, all charges incurred in connection with such Order. The Parties agree that nothing in this Agreement will be construed as requiring SBC to indemnify ION, or to otherwise be responsible for any acts or omissions of an - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 13 of 64 Affiliate, nor shall anything in this Agreement be construed as requiring an Affiliate to indemnify ION, or to otherwise be responsible for the acts or omissions of SBC. 3.2 GOVERNING LAW THIS AGREEMENT AND PERFORMANCE HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA EXCLUSIVE OF ITS CHOICE OF LAWS PROVISIONS. 3.3 DISPUTE RESOLUTION Resolution of all disputes arising out of or in connection with this Agreement shall be in accordance with the following: 1. In the event of a controversy or claim arising out of or relating to this Agreement or any Work Order, the Parties agree that, they shall attempt in good faith to promptly resolve the matter through negotiations. Participating in the negotiations shall be (a) ION's applicable Account Management, as identified in writing by ION, and (b) those members of SBC's Technology Planning Management with whom ION's Account Management interfaced in the normal course of business. Each Party may also involve its Contract Manager when appropriate. In addition to the participants identified in the preceding sentences, each Party may name additional persons to participate in the negotiations, such as ION's Vice-President Sales and SBC's Executive Director, Strategic Sourcing. 2. If the Parties are unable to resolve the controversy or claim at issue to their mutual satisfaction within thirty (30) days after commencing the negotiations described above, and there is no joint agreement to extend the negotiations period, then either party (the "Moving Party") may initiate arbitration by providing the other party written notice of its intent to arbitrate. If the parties are unable to agree upon an arbitrator within three (3) business days of the Moving Party's written notice to arbitrate, the Moving Party may request the American Arbitration Association ("AAA") to appoint an arbitrator. The AAA shall select an arbitrator who can promptly proceed with and strive to conclude the arbitration as specified herein. If a dispute is submitted to an arbitrator, it shall be finally resolved through binding arbitration in Los Angeles, California, according to the California Arbitration Rules of the AAA, except as modified herein. The award rendered by the arbitrator shall be final and binding on the Parties and shall be deemed enforceable in any court having jurisdiction thereof. The arbitration shall be heard by a single arbitrator who shall by training, education, or experience have knowledge of the general subject matter of this Agreement. The arbitrator shall - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 14 of 64 have the power to award damages, injunctive relief and other remedies to the extent the same would be available in a court of law having jurisdiction of the matter. The arbitrator shall promptly commence the arbitration proceeding with the intent to conclude the proceedings and issue a written decision stating in reasonable detail the basis for the award, which must be supported by law and substantial evidence, as promptly as the circumstances demand and permit, but generally no later than (10) weeks after the arbitrator's appointment. 3. During dispute resolution proceedings, including arbitration, the Parties shall continue to perform their obligations under this Agreement, except for those obligations directly related to the dispute at issue. 3.4 AMENDMENTS AND WAIVERS This Agreement and any Work Order may be amended or modified only by a written document signed by the authorized representatives of both Parties. ION shall use commercially reasonable efforts to accommodate any request made by SBC to change the scope of work set forth in an Order. Any adjustment in the time of performance caused by SBC's request for a change in the scope of work shall be automatically reflected in an adjustment of the Delivery Date. Any increase in ION's cost of performance resulting from SBC's request for a change in the scope of work shall be passed along to SBC on a time and materials basis. No course of dealing or failure of either Party to strictly enforce any term, right or condition of this Agreement shall be construed as a general waiver or relinquishment of such term, right, or condition. A waiver by either Party of any default shall not be deemed a waiver of any other default. 3.5 RELEASES VOID Neither Party shall require waivers or releases of any personnel or other representatives of the other in connection with visits to its premises, and no such releases or waivers shall be pleaded by either Party in any action or proceeding. 3.6 FORCE MAJEURE A. Neither Party shall be deemed in default of this Agreement or any Work Order to the extent that any delay or failure in the performance of its obligations results from any cause beyond its reasonable control and without its fault or negligence, such as acts of God, acts of civil or military authority, embargoes, epidemics, war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, or strikes (each, a "Force Majeure Condition"). B. If any Force Majeure Condition affects ION's ability to perform, ION shall give prompt notice to SBC of such condition. If ION remains unable to perform for a period of more than fifteen (15) days after giving notice to SBC, SBC may elect to either: (1) terminate the affected Work Order(s) or any part thereof for the - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 15 of 64 duration of the Force Majeure Condition, or (2) toll ION's performance under the affected Work Orders(s) and resume performance thereunder once the Force Majeure Condition ceases. Should SBC opt to terminate a Work Order pursuant to option (1), it will have the right to obtain from a third party the Materials and the Services that would have been provided by ION under the Work Order or during the affected period and deduct from any commitment under such Work Order the quantity of the Materials and Services obtained or for which commitments have been made elsewhere. In the event that SBC, pursuant to option (2), decides to toll ION's performance and have ION resume its performance under the affected Work Order(s), any affected Delivery Date or performance date shall be extended up to the length of time the Force Majeure Condition endured but SBC shall also have the right to obtain from a third party any Materials and Services that it requires during the period of the suspension and deduct from any commitment under such Work Order the quantity of the Materials and Services obtained or for which commitments have been made elsewhere but SBC shall also have the right to obtain from a third party any Materials and Services that it requires during the period of the suspension and deduct from any commitment under such Work Order the quantity of the Materials and Services obtained or for which commitments have been made elsewhere. Unless SBC gives written notice within ten (10) days after being notified of the Force Majeure Condition, the second option shall be deemed selected. 3.7 NON-EXCLUSIVE MARKET It is expressly understood and agreed that this Agreement does not grant ION an exclusive privilege to provide to SBC any or all Materials and Services of the type described in this Agreement nor requires SBC to purchase or license any Materials or Services. It is, therefore, understood that SBC may contract with other manufactures and suppliers for the procurement of comparable Materials and Services and that SBC may itself perform the Services described herein. 3.8 ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns, but neither SBC or ION may assign, delegate, subcontract, or otherwise transfer it's rights or obligations under this Agreement without the prior written consent of the other Party, which consent will not be unreasonably withheld; provided, however, SBC will have the right to assign this Agreement to any Affiliate identified on Schedule 3.1, without securing the consent of ION. Any unauthorized assignment by either Party shall be null and void. 3.9 CONFLICT OF INTEREST - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 16 of 64 ION represents and warrants that no officer, director, employee, or agent of SBC has been or will be employed, retained or paid a fee, or otherwise has received or will receive any personal compensation or consideration, by or from ION or any of ION's officers, director's employees, or agents in connection with the obtaining, arranging, or negotiation of this Agreement or other documents entered into or executed in connection with this Agreement. 3.10 SEVERABILITY If any provision or any part of provision of this Agreement shall be invalid or unenforceable, such invalidity or non-enforceability shall not invalidate or render unenforceable any other portion of this Agreement. The entire Agreement will be construed as if it did not contain the particular invalid or unenforceable provision(s) and the rights and obligations of ION and SBC will be construed and enforced accordingly. 3.11 SURVIVAL OF OBLIGATIONS Obligations and rights in connection with this Agreement which by their nature would continue beyond the Termination, Cancellation or expiration of this Agreement, including those in the sections entitled "Compliance With Laws," "Infringement," "Indemnity," "Publicity," "Severability," "Information," "Independent Contractor," and "Warranty," will survive the Termination, Cancellation, or expiration of this Agreement. 3.12 CONSTRUCTION AND INTERPRETATION The language of this Agreement shall in all cases be construed simply, as a whole and in accordance with its fair meaning and not strictly for or against any Party. The Parties agree that this Agreement has been prepared jointly and has been the subject of arm's length and careful negotiation. Each Party has been given the opportunity to independently review this Agreement with legal counsel and other consultants, and each Party has the requisite experience and sophistication to understand, interpret, and agree to the particular language of the provisions. Accordingly, in the event of an ambiguity in or dispute regarding the interpretation of this Agreement, the drafting of the language of this Agreement shall not be attributed to either Party. A. Article, section, or paragraph headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. The use of the word "include" shall mean "includes, but is not limited to." The singular use of words shall include the plural use and vice versa. Except as otherwise specified, ION's price for Materials and Services includes the price for all related Materials or Services necessary for SBC to use the Materials and/or Services for its intended purpose, as well as all other ION obligations under this Agreement. All obligations and rights of the Parties are subject to modification as the Parties may specifically provide in the applicable Work Order. Unless the terms of a Work Order expressly override the terms of this Agreement, - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 17 of 64 if there is an inconsistency or conflict between the terms in this Agreement and those in the applicable Work Order, the terms in this Agreement shall take precedence. B. Whenever any Party is entitled to interest under this Agreement, the amount of interest shall be determined using 12% per annum, or the highest amount allowed by law, whichever is lower. 3.13 THIRD PARTY BENEFICIARIES The provisions of this Agreement are for the benefit of the Parties and not for any other person. ARTICLE IV - COMPLIANCE CLAUSES 4.1 GOVERNMENT CONTRACT PROVISIONS Work Orders containing a notation that the Materials is intended for use under government contracts shall be subject to the then current government provisions referenced in or attached to such Work Orders. 4.2 COMPLIANCE WITH LAWS Each Party shall comply with all applicable federal, state, county, and local rules, including without limitation, all statutes, laws, ordinances, regulations and codes ("Laws"). The obligation to comply with all Laws, shall include the procurement of permits, certificates, approvals, inspections, and licenses, when needed, in the performance of this Agreement. Each Party further agrees to comply with all applicable Executive and Federal regulations as set forth in "Executive Orders and Associated Regulations", a copy of which is attached as Appendix G and by this reference made a part of this Agreement. 4.3 CHANGES REQUIRED TO MEET CODES, LAWS, AND REGULATIONS ION shall, at no additional charge, make any changes to the Materials which are necessary to meet those codes, laws or regulations applicable to the Materials at no additional charge, provided such codes, laws or regulations are in effect on the date of shipment of such Materials. If such changes become effective on or after the date of shipment, ION shall make, and SBC shall pay for, such changes on a time and materials basis. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 18 of 64 ARTICLE V - LIABILITY CLAUSES 5.1 CONFIDENTIALITY All Information furnished by a Party (the "Disclosing Party") to the other (the "Receiving Party") in connection with this Agreement, including Information provided under a separate Non-Disclosure Agreement in connection with discussions and negotiations that occurred prior to executing this Agreement, shall remain the property of the Disclosing Party. The Receiving Party shall have no rights in any such Information. All Information furnished by the Disclosing Party shall not be considered confidential or proprietary unless it is conspicuously marked as such prior to disclosure. The Receiving Party shall hold the Information it has received in strict confidence and it shall not disclose or use such Information without the express written consent of the Disclosing Party, except as necessary to enable the Receiving Party's employees to perform their responsibilities under this Agreement. The Receiving Party shall use reasonable measures and make reasonable efforts to provide protection for the Disclosing Party's Information, which in no event shall be less strict than the measures the Receiving Party uses to protect its own Information. Information shall not be deemed confidential if such Information 1. was already known to the Receiving Party free of any obligation to keep it confidential at the time of its disclosure by the Disclosing Party as evidenced by the Receiving Party's written records prepared prior to such disclosure; or 2. is or becomes publicly known through no wrongful act of the Receiving Party; or 3. is rightfully received from a third person having no direct or indirect secrecy or confidentiality obligation to the Disclosing Party with respect to such Information; or 4. is independently developed by an employee, contractor or agent of the Receiving Party or a third Party not associated with the Project and who did not have any direct or indirect access to the Information; or 5. is approved for release by written authorization by the Disclosing Party. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 19 of 64 B. All confidential Information shall be used only in connection with the Receiving Party's performance under this Agreement, and may not be used for other purposes except as may be agreed upon between ION and SBC in writing. All copies of such Information, in written, graphic or other tangible form, shall be returned to the Disclosing Party upon the earlier of (i) the disclosing Party's request or (ii) the Termination, Cancellation, or expiration of this Agreement. ION, however, may continue to use any Information that it has received in order to complete its performance under a Work Order that has not been terminated. 5.2 INFRINGEMENT A. ION represents and warrants that it has made reasonable independent investigation to determine the legality of its right to sell or license the Materials or provide Services as specified in this Agreement. B. In addition to ION's other obligations set forth in this Section, if an injunction or order is obtained against SBC's use of any Materials or Service, or, if in ION's opinion, any Material or Service is likely to become the subject of a claim of infringement, ION will, at its expense: 1. Procure for SBC the right to continue using the Materials or Service; or 2. After consultation with SBC, replace or modify the Materials or Service to make it a substantially similar, functionally equivalent, non-infringing Materials or Service. C. If the Materials or Service is purchased or licensed, and neither (B)(1) nor (B)(2) above is possible, in addition to SBC's other rights, SBC may cancel the applicable Order and require ION to remove, or cause the removal and return of, such Materials or Service from SBC's location and refund any charges paid by SBC for the Materials adversely affected by the infringement, less a sum calculated as if the amount paid were depreciated on a straight line basis over a five (5) year period. D. In no event will SBC be liable to ION for any charges after the date that SBC no longer uses any Materials or Service because of actual or claimed infringement. E. Notwithstanding the foregoing, ION shall have no liability for any claim of infringement to the extent it results from: (i) SBC's use of a superseded or altered release of some or all of the Materials if infringement would have been avoided by the use of a subsequent unaltered release of the Materials that have been provided to SBC; (ii) SBC's use of any software or other materials not furnished, recommended, suggested or authorized by ION or contemplated by the applicable Work Order; (iii) SBC's use of the Materials in combination with any equipment or software not contemplated by the applicable Work Order and not - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 20 of 64 recommended, suggested or authorized by ION; (iv) ION's compliance with the detailed written instructions of SBC requiring changes to any Materials furnished by ION, when such instructions result in actual infringement; provided, however, that ION shall indemnify SBC when, despite SBC's instructions, the infringement or claim of infringement is based upon: (1) products, software or documentation that are available on the open market; or (2) products, software or documentation of ION's origin, design or selection. Further, ION shall indemnify SBC when ION indemnifies other customers of ION against infringement or claims of infringement based upon the products, software or documentation, as modified by ION in accordance with SBC's instructions; or (vi) modification of the Materials where such modification is not authorized, suggested or made by ION and is not contemplated in the applicable Work Order. 5.3 INDEMNITY A. To the fullest extent permitted by law, ION shall defend, indemnify, and hold harmless SBC and its Affiliates, (including their employees, officers, directors, agents, and contractors) against any Liability arising from: (1) PERSONAL injurY, including death and (2) PROPERTY damage, including theft, that occur as a result of a defect in any material or in any service provided by ion to sbc . sbc may seek indemnification from ion under this section 5.3 only to the extent that the acts or omissions of ion have been proved to have contributed to the alleged harm or wrongdoing. further, ion shall in no way be liable for the acts or omissions of SBC and its Affiliates (including their employees, officers, directors, agents, and contractors) TO THE EXTENT THEY give rise to a claim, or have contributed to the alleged harm or wrongdoing, for which indemnification is sought under this section. B. SBC shall promptly notify ION of any claim, demand, notice or legal proceedings ("Claim") for which ION may be responsible under this indemnity obligation. A delay in notice shall not relieve ION of its indemnity obligation except to the extent ION can show it was prejudiced or otherwise harmed by the delay. C. ION shall assume, at its expense, the sole defense of a Claim through counsel selected by ION and shall keep SBC fully informed as to the progress of such defense. Upon reasonable request of ION and at ION's expense, SBC shall cooperate with ION in the defense of the Claim. At its option and expense, SBC may retain or use separate counsel to represent it, including in-house counsel. ION shall maintain control of the defense, including the decision to settle a Claim. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 21 of 64 If SBC determines that the Claim in question should not for whatever reason be settled, SBC, at its own expense, shall have the right to take over the defense of such Claim. ION shall pay the full amount of any judgment, award or settlement with respect to a Claim and all other expenses related to the resolution of such Claim, including costs, interest, and reasonable attorneys' fees; provided that ION shall have no obligation to refund to SBC the portion of any judgment, award or settlement, including all other expenses related to the resolution of a Claim, however categorized, that were incurred as the result of SBC's decision to exert control or to direct the defense of the Claim in any manner. 5.4 LIQUIDATED DAMAGES ION recognizes the importance of meeting Delivery Dates mutually agreed upon by SBC and ION and agrees to the following liquidated damage provisions and procedures: Upon discovery of information indicating a reasonable certainty that Materials and/or Services will not be completed before the scheduled Delivery Date, ION shall notify SBC and provide information relating to the estimated length of delay. The Parties shall work jointly toward resolution of a plan to resolve the delayed Delivery. If the Parties reach agreement on an extended Delivery Date and ION fails to meet the extended Delivery Date, SBC may (a) cancel such Order, or (b) exercise its right to recover liquidated damages specified hereunder and further extend the Delivery Date. No payments, progress or otherwise, made by SBC to ION after any scheduled Delivery Date shall constitute a waiver of liquidated damages. In the event of ION's failure to meet an extended Delivery Date, SBC shall be entitled to one-thousand dollars ($1,000) for each day after the extended Delivery Date until the day of actual Delivery. Liquidated damages under this section shall in no event exceed 100% of the total price specified for the Materials and/or Services delayed. 5.5 INSURANCE A. With respect to performance hereunder, and in addition to ION's other obligations hereunder, ION agrees to maintain, at all times during the term of this Agreement, the following minimum insurance coverages and limits and any additional insurance and/or bonds required by law: 1. Workers' Compensation insurance with benefits afforded under the laws of the state in which the Services are to be performed and Employers Liability insurance with minimum limits of $100,000 for Bodily Injury-each accident, $500,000 for Bodily Injury by disease-policy limits and $100,000 for Bodily Injury by disease-each employee. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 22 of 64 2. Commercial General Liability insurance with minimum limits of: $2,000,000 General Aggregate limit; $1,000,000 each occurrence sub-limit for all bodily injury or property damage incurred in any one occurrence; $1,000,000 each occurrence sub-limit for Personal Injury and Advertising; $2,000,000 Products/Completed Operations Aggregate limit, with a $1,000,000 each occurrence sub-limit for Products/Completed Operations. Fire Legal Liability sub-limits of $300,000 are required for lease agreements. SBC and its Affiliated companies will be listed as an Additional Insured on the Commercial General Liability policy. 3. If use of a motor vehicle is required, Automobile Liability insurance with minimum limits of $1,000,000 combined single limits per occurrence for bodily injury and property damage, which coverage shall extend to all owned, hired and non-owned vehicles. SBC requires that companies affording insurance coverage have a rating of B+ or better and a Financial Size Category rating of VII or better rating, as rated in the A.M. Best Key Rating Guide for Property and Casualty Insurance Companies. B. A certificate of insurance stating the types of insurance and policy limits provided ION must be received prior to commencement of any work. If a certificate is not received, ION hereby authorizes SBC, and SBC may, but is not required to, obtain insurance on behalf of ION as specified herein. SBC will either invoice ION for the costs incurred to so acquire insurance or will reduce by an applicable amount any amount owed to ION. C. The cancellation clause on the certificate of insurance will be amended to read as follows: "THE ISSUING COMPANY WILL MAIL 30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER PRIOR TO CANCELLATION OR A MATERIAL CHANGE TO POLICY DESCRIBED ABOVE." D. ION shall also require all subcontractors performing work on the project or who may enter upon the work site to maintain the same insurance requirements listed above. 5.6 HAZARDOUS MATERIALS AND REGULATED SUBSTANCES A. A "Regulated Substance" as referred to in this clause is a generic term used to describe all Materials that are regulated by applicable federal or any state or local government during transportation, handling and/or disposal. These include, but are not limited to, Materials - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 23 of 64 that are regulated as (a) "hazardous material" under the Hazardous Material Act and the Control of Radioactive Contamination of Environmental Law, Title 8 of the California Environment Administrative Code, Section 5194 and the Hazardous Substances Information and Training Act, (b) "chemical hazards" under the Occupational Safety and Health Administration (OSHA) standards, (c) "chemical substances and mixtures" under the Toxic Substances Control Act and "chemicals" on the Governor's List known to the State of California to cause cancer, birth defects, and/or other reproductive harm, as that term is defined in the California Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65"), (d) "pesticides" under the Federal Insecticide, Fungicide and Rodenticide Act, and (e) "hazardous waste" as defined or listed under the Resource Conservation and Recovery Act and the Hazardous Waste Control Law. B. ION shall comply with all applicable Laws and Regulations, including any notice requirements, regarding any Materials ordered hereunder which contains or consists of a Regulated Substance or any Service ordered hereunder which involves the use, handling, storage, recycling, or transportation of Regulated Substances. ION shall notify SBC and provide SBC with all necessary information (including but not limited OSHA Material Safety Data Sheets [MSDS]) at least thirty (30) days before shipping Materials containing or consisting of Regulated Substances to SBC or commencing the performance of Services for SBC involving the handling or use of Regulated Substances. Each MSDS must include an attachment indicating the specific worker protection equipment requirement for use with the Regulated Substance covered thereby. If the Regulated Substance is in Materials or materials which are shipped to California facilities and is a chemical defined by Proposition 65, the MSDS for said chemical should indicate that the chemical is one which is known to the state of California to cause cancer, birth defects or other reproductive harm. ION shall maintain and distribute such information upon request to SBC and/or any other contractor at the same location. C. Notwithstanding any other provision of this Agreement, SBC shall have the right, but not the duty, to terminate without liability any Order for Materials consisting of or containing a Regulated Substance or Service involving the use and handling of Regulated Substances thirty (30) days after such notification from SBC. Otherwise, SBC and ION shall cooperate concerning the acceptance by SBC of such Materials and Services. ION shall mark all Materials provided hereunder as Regulated Substances which are required by all applicable Laws and Regulations to be so marked, and shall provide assistance to SBC of an advisory nature in the handling and use of Regulated Substances provided hereunder and the disposal of "hazardous waste", as defined by applicable Laws and Regulations ("Hazardous Wastes"), resulting therefrom. D. ION shall provide SBC with the same information pertaining to Regulated Substances in or used in the Materials and Services it provides to SBC or - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 24 of 64 Hazardous Waste as ION provides to ION's employees or agents involved in the disposition or treatment of such Regulated Substances. E. ION is hereby informed that hazardous chemicals may be used and located at various facilities owned by SBC. ION or any person supplied by ION may see the MSDS for a particular substance in the facility in which they are working by contacting SBC's Building Operations office and filling out the request form. ION agrees to assume responsibility for advising its employees, agents and subcontractors who will be working at SBC's facilities of the existence of chemical hazards on SBC's facilities and the availability of said Material. F. When performing Services at SBC's California facilities, ION shall and shall require its subcontractors to issue warnings in accordance with Proposition 65 for exposure to chemicals covered by Proposition 65 introduced by ION or its subcontractor to personnel at SBC's facilities, the public and SBC from the time ION and/or its subcontractor enter SBC's facilities and/or commence performing Services through the completion of such performance. ION shall, and shall require its subcontractors, to warn SBC of any exposure to chemicals covered by Proposition 65 which may continue after ION and/or its subcontractors have completed the performance of Services. Such warning may take the form of, but not be limited to, a MSDS for each such chemical. G. ION IS HEREBY WARNED IN ACCORDANCE WITH PROPOSITION 65 THAT EXPOSURE TO CHEMICALS MAY OCCUR AT SBC'S FACILITIES. If requested, SBC shall make available to ION, its subcontractors, and any of their employees, a MSDS for the chemicals covered by Proposition 65, if any, at SBC's facilities where ION is providing Services. ION shall issue appropriate warnings to inform and educate its employees, agents, subcontractors, other invitees, and employees of any of them, entering SBC's facilities of the above information in accordance with applicable Laws and Regulations. ION and SBC shall cooperate on such warning. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 25 of 64 ARTICLE VI - STANDARDS CLAUSES 6.1 ENGINEERING COMPLAINTS A. SBC reserves the right to notify ION in cases where SBC has identified current or potential problems or service areas concerning the operation, maintenance, Engineering, Installation or design of Materials furnished hereunder. ION agrees to accept and acknowledge such a notice (an "Engineering Complaint"), if a problem does exist, and to work with SBC on a reasonable resolution thereof. Acknowledgment of the receipt for such Engineering Complaint and identification of ION's proposed organization which will be responsible for resolving it will be provided to SBC within fifteen (15) working days of ION's receipt of the Engineering Complaint. Complaint resolution dates shall not exceed ninety (90) calendar days from the date of SBC's notice, unless a later date is mutually agreed upon by the Parties. If unable to resolve the Engineering Complaint within ninety (90) calendar days, ION shall issue an interim report providing current status and an estimate of schedule for resolution. B. Monthly reporting of the status of such open Engineering Complaints shall be furnished to SBC by ION, together with the proposed schedule for their resolution. ION shall provide this information via written or electronic means, (i.e., E-Mail), in accordance with mutually agreed procedures for electronic transmission of such information. It is ION's responsibility to provide SBC with prompt written notice upon resolving an Engineering Complaint. C. SBC shall notify ION in writing as to where correspondence regarding Engineering Complaints shall be directed and ION shall observe and follow such notification. 6.2 RADIO FREQUENCY ENERGY STANDARDS A. Should Materials furnished in connection with this Agreement generate harmful interference to radio communications, ION shall promptly provide to SBC information relating to methods of suppressing such interference. In the event such interference in SBC's judgment cannot reasonably be suppressed, then SBC may return the Materials and obtain a full refund of the price paid for such Materials. B. Nothing in this section shall be deemed to diminish or otherwise limit ION's obligations or SBC's rights, including those specified in the "Warranty" section of this Agreement. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 26 of 64 6.3 OSMINE All Materials must pass SBC's Approval for Use testing requirements which will include documentation evidencing NEBS compliance. SBC has granted to ION a total waiver of OSMINE for all Materials provided by ION under this Agreement. Instead, ION is required to secure CLEI and TIRKS Function Codes as set forth in Telcordia GR-2977, for all applicable new, changed, modified Hardware and/or potential plug-in substitutions where it supports the function code chaining work. ARTICLE VII - ORDERING CLAUSES 7.1 ORDERS A. SBC may order Materials and Services by submitting Orders in connection with this Agreement. Orders shall specify: 1. a description of the Services and/or Materials, including any numerical/alphabetical identification referenced in the applicable price list; 2. the requested Delivery Date, which shall be confirmed by ION as evidenced by writing or by electronic messaging; 3. the location to which Materials are to be shipped, or the site where Services will be rendered; 4. the location to which invoices are to be rendered for payment. 5. SBC's Order number; and 6. any Custom Specs requested by SBC, which are subject to ION's approval. B. The terms in this Agreement shall apply to Orders submitted in connection with this Agreement, and preprinted terms on the back of any Order shall not apply. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 27 of 64 7.2 PRODUCT CHANGE NOTICES A. ION may at any time make changes in the Materials or Software, or modify the drawings and Specifications relating thereto, or substitute Materials or Software of later design to fill an Order, provided the changes, modifications and substitutions under normal and proper use do not negatively impact upon the Materials' or Software's form, fit, or function. B. ION agrees to make every reasonable effort to notify SBC, in writing in advance, of any change to be made in the Materials or Software furnished in accordance with the Specifications, Software related documentation and/or documentation that would impact upon the form, fit or function of the Materials or Software. C. ION shall furnish Product Change Notices for any change to be made in the Materials provided under this Agreement to SBC. ION shall furnish such notices to an individual to be designated by SBC. D. SBC shall notify ION in writing as to where correspondence regarding Product Change Notices and Product changes shall be directed and ION shall observe and follow such notification. E. In order for SBC to review Materials or Software changes, ION shall make every reasonable effort to provide thirty (30) days advance notice, of any change to the Materials or Software . The final classification of any Materials or Software change proposed by ION will be determined by ION. If SBC disagrees with ION's classification of a change, SBC shall notify ION. If requested, ION shall provide documentation to substantiate the classification of such change. ION agrees to make available to SBC information relating to the application of such changes to SBC's Materials. F. In any of the instances above, if ION ascertains that Materials or Software subject to such change are readily returnable, SBC, at its expense, shall remove and return such Materials or Software to ION's facility. ION, at its expense, shall implement such change at its facility and return such changed Materials or Software to SBC's designated location within the contiguous United States. If the change represents an product, feature or component enhancement SBC shall bear the expense. Reinstallation shall be performed by SBC at its expense. If SBC disagrees that the Materials or Software are readily returnable, SBC will notify ION. If requested, ION shall provide documentation to substantiate the returnability of the Materials or Software. G. ION agrees to make available to SBC, or SBC's representatives, if SBC's representative has a signed nondisclosure agreement with ION, information relating to the application of such changes to SBC's Materials. SBC reserves the - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 28 of 64 right to notify and request ION to modify, change, or develop Materials to meet a specific need. Such requests, if accepted by ION, will be made at SBC's expense. H. ION shall furnish to SBC a quarterly summary report listing all change notifications released to SBC during the previous twelve (12) months. Notification of Materials or Software changes will be provided to SBC at no charge. 7.3 SHIPPING AND PACKING A. Unless instructed otherwise by SBC, or the Parties otherwise agree, all Materials shipped shall be packed and marked by ION at SBC's expense and in accordance with all Laws, transportation industry standards and the applicable Order. B. ION shall (a) use carriers approved and listed in SBC's "Shipment Routing Guide", provided herein; (b) ship Orders complete, provided ION may ship Materials in partial shipments with prior approval of SBC; (c) ship to the destination in the Order; (d) comply with SBC's shipping instructions; (e) enclose a packing memorandum with each shipment and, when more than one package is shipped, identify the package containing such packing memorandum; (f) mark SBC's Order number and product identification number ("PID") on all packages, shipping papers and subordinate documents; (g) list basic unit and part number or Common Language Equipment Identified ("CLEI") code numbers and Continuing Property Record ("CPR") when required by SBC; and (h) include barcodes containg the aforementioned information on all equipment, shipping containers and packages; and (i) ION may consolidate multiple Orders as one shipment to SBC and shall provide and state on the bill of lading the number of pieces, weight, freight classification, and carrier's tariff reference number for each individual Order. C. If SBC incurs additional costs as a result of ION's failure to comply with the provisions of this section called Shipping and Packing, ION shall reimburse SBC for such reasonable costs, which SBC shall document and provide to ION in writing. D. Materials purchased, repaired or replaced hereunder will be packed by ION in containers adequate to prevent damage during shipping, handling and storage and in accordance with all Laws, transportation industry standards, and the applicable Order. Any Materials received by ION from any manufacturer with damaged shipping containers will be repackaged by ION in containers adequate to prevent damage during subsequent shipping, handling and storage. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 29 of 64 7.4 TITLE AND RISK Title to Materials purchased, but not to Materials licensed, will vest in SBC once the Materials have been delivered to the designated carrier, F.O.B. carrier's place of acceptance. If this Agreement calls for additional Services such as unloading or installation, to be performed after Materials have been Delivered, ION will retain title and risk of loss to the Materials until the additional Services have been Delivered as well. 7.5 PRICE Materials and Services shall be furnished by ION in accordance with the prices set forth in Appendix B, attached hereto and made a part hereof, or pursuant to firm prices which are quoted by ION for such Materials and Services, whichever price is lower. The prices for all Materials and Services in Appendix B are subject to change only in accordance with this Agreement, which changes must be in writing and signed by both Parties. If ION at any time makes a general price decrease, ION shall promptly notify SBC in writing and extend such decrease to SBC effective on the date of such general price decrease. 7.6 TAXES A. ION may invoice SBC the amount of any federal excise taxes or state or local sales taxes imposed upon the sale of Materials or provision of Services as separate items, if applicable, listing the taxing jurisdiction imposing the tax. Installation or labor charges must be separately stated. SBC agrees to pay all applicable taxes to ION which are stated on and at the time the Materials or Service invoice is submitted by ION. ION agrees to remit taxes to the appropriate taxing authorities. B. ION agrees to pay, and to hold SBC harmless from and against, any penalty, interest, additional tax, or other charge that may be levied or assessed as a result of the delay or failure of ION, for any reason, to pay any tax or file any return or information required by law, rule or regulation or by this Agreement to be paid or filed by ION. ION agrees to pay and to hold SBC harmless from and against any penalty or sanction assessed as a result of ION doing business with any country subject to U.S. trade restrictions. C. Upon SBC's request, the Parties shall consult with respect to the basis and rates upon which ION shall pay any taxes for which SBC is obligated to reimburse ION under this Agreement. If SBC determines that in its opinion any such taxes are not payable or should be paid on a basis less than the full price or at rates less than the full tax rate, ION shall make payment in accordance with such determinations and SBC shall be responsible for such determinations. If collection is sought by the taxing authority for a greater amount of taxes than that so determined by SBC, ION shall promptly notify SBC. ION shall cooperate with SBC in contesting such determination, but SBC shall be responsible and shall reimburse ION for any tax, - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 30 of 64 interest, or penalty in excess of its determination. If SBC desires to contest such collection, SBC shall promptly notify ION. If SBC determines that in its opinion it has reimbursed ION for sales or use taxes in excess of the amount which SBC is obligated to reimburse ION, SBC and ION shall consult to determine the appropriate method of recovery of such excess reimbursements. ION shall credit any excess reimbursements against tax reimbursements or other payments due from SBC if and to the extent ION can make corresponding adjustments to its payments to the relevant tax authority. At SBC's request, ION shall timely file any claims for refund and any other documents required to recover any other excess reimbursements, and shall promptly remit to SBC all such refunds (and interest) received. D. If any taxing authority advises ION that it intends to audit ION with respect to any taxes for which SBC is obligated to reimburse ION under this agreement, ION shall (1) promptly so notify SBC, (2) afford SBC an opportunity to participate on an equal basis with ION in such audit with respect to such taxes and (3) keep SBC fully informed as to the progress of such audit. Each Party shall bear its own expenses with respect to any such audit, and the responsibility for any additional tax, penalty or interest resulting from such audit shall be determined in accordance with the applicable provisions of this Section. ION's failure to comply with the notification requirements of this section shall relieve SBC of its responsibility to reimburse ION for taxes only if ION's failure materially prejudiced SBC's ability to contest imposition or assessment of those taxes. E. In addition to its rights under subparagraph (d) above with respect to any tax or tax controversy covered by this Tax Section, SBC will be entitled to contest, pursuant to applicable law and tariffs, and at its own expense, any tax previously billed that it is ultimately obligated to pay. SBC will be entitled to the benefit of any refund or recovery of amounts that it had previously paid resulting from such a contest. ION will cooperate in any such contest, provided that all costs and expenses incurred in obtaining a refund or credit for SBC shall be paid by SBC. F. If either Party is audited by a taxing authority or other governmental entity, the other Party agrees to reasonably cooperate with the Party being audited in order to respond to any audit inquiries in an appropriate and timely manner, so that the audit and any resulting controversy may be resolved expeditiously. 7.7 INVOICING AND PAYMENT A. Except as otherwise specified in an Order, ION shall render an invoice in duplicate promptly upon the shipment of Materials or the performance of Services identified in the applicable Work Order. The invoice shall specify in detail (1) quantities of each ordered item, (2) unit prices of each ordered item, (3) item and commodity codes, (4) total amounts for each item, (5) the Services provided, (6) any extra charges associated with changes made pursuant to a Change Order, - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 31 of 64 (7) applicable sales or use taxes, (8) discounts, (9) shipping charges, (10) total amount due, and (11) software right-to-use fees as either "application" or "operational". SBC shall pay ION in accordance with the amounts stated on an invoice within forty-five (45) days of the date of receipt of the invoice. Payment for shortages, or Materials or Services not conforming to the Specifications, and portions of any invoice in dispute, may be withheld by SBC until such problem has been resolved, but in no event shall SBC be entitled to withhold an amount greater than the amount actually in dispute. If SBC disputes any invoice rendered or amount paid, it shall notify ION of the dispute in writing and shall provide a detailed explanation of SBC's allegations. The Parties shall use their best efforts to resolve such dispute expeditiously. Invoices received by SBC more than one (1) year after the provision of Materials or performance of Services are untimely and SBC shall have no obligation to pay such invoices. Invoices for or including freight charges shall be accompanied by legible copies of prepaid freight bills, express receipts, or bills of lading supporting the invoice amounts. Such invoices shall include (1) carrier's name, (2) date of shipment, (3) number of pieces, (4) weight, and (5) freight classification. B. If an Order or an Appendix specifies that ION may submit invoices for progress payments prior to Acceptance, ION is permitted to submit invoices at the end of each month and SBC will make progress payments to ION at thirty (30) day intervals. Such progress payments shall not exceed ninety percent (90%) of satisfactorily completed work at the time of billing, as determined by SBC. ION agrees to use such progress payments for expenses incurred for Services or Materials used in performance of the Work Order for SBC. C. ION agrees to accept standard, commercial methods of payment and evidence of payment obligation including, but not limited to credit card payments, checks and electronic fund transfers, in connection with payment for the Materials and the Services. 7.8 RECORDS AND AUDITS ION agrees that it will: A. Maintain complete and accurate records related to the Materials and Services provided by ION to SBC, including records of all amounts billable to and payments made by SBC in accordance with generally accepted accounting principles and practices, uniformly and consistently applied in a format that will permit audit; B. Retain such records and reasonable billing detail for a period of at least three (3) years from the date of final payment for Materials and Services; - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 32 of 64 C. Provide reasonable supporting documentation to SBC concerning any disputed invoice amount within thirty (30) calendar days after receipt of written notification of such dispute; and D. Permit SBC and its authorized representatives to inspect and audit during normal business hours the charges invoiced to SBC. Should SBC request an audit, ION will make available any pertinent records and files to SBC during normal business hours at no additional charge. ARTICLE VIII - PERFORMANCE CLAUSES 8.1 PROJECT ADMINISTRATION Within seven (7) days of execution of this Agreement, each Party shall appoint a project manager to coordinate activities related to the administration and implementation of this Agreement, oversee its operation, and to be the overall point of contact and representative of that Party. The processes and responsibilities of the respective project managers shall include scheduling, risk management, pricing issues, and change control. If ION utilizes a subcontractor to carry out any of ION's obligations under this Agreement, ION will ensure a project manager is designated by such subcontractor. 8.2 M/WBE SBC has granted to ION a total waiver of any and all M/WBE and DVBE requirements that may be applicable to ION as a result of its relationship with SBC under the terms of this Agreement. 8.3 ACCESS A. When appropriate, ION shall have reasonable access to SBC's premises during normal business hours and at such other times as may be agreed upon by the Parties in order to enable ION to perform its obligations under this Agreement. Such access may occur through ION's use of remote online access technology used to conduct remote diagnosis and problem resolution as well as by coordinating visits by ION personnel to SBC's premises. Remote online access will be coordinated by ION's Technical Assistance Center. ION shall coordinate access by ION personnel with SBC's designated representative prior to visiting such premises. ION insures SBC that only persons employed by ION or subcontracted by ION will be allowed to enter SBC's premises. If SBC requests ION or its Subcontractor to discontinue furnishing any person provided by ION or its Subcontractor from performing work on SBC's premises, ION shall immediately comply with such request. Such person shall leave SBC's premises promptly and ION shall not furnish such person again to perform work on SBC's premises without SBC's written consent. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 33 of 64 B. SBC may require ION or its representatives, including employees and subcontractors, to exhibit identification credentials, which SBC may issue in order to gain access to SBC's premises for the performance of Services. If, for any reason, any ION representative is no longer performing such Services, ION shall immediately inform SBC. Notification shall be followed by the prompt delivery to SBC of the identification credentials, if issued by SBC, or a written statement of the reasons why said identification credentials cannot be returned. ION shall insure that its representatives, including employees and subcontractors, while on or near SBC's premises, will perform work which (i) conforms to the Specifications, (ii) protects SBC's Materials, buildings, and structures, and (iii) does not interfere with SBC's business operations. Furthermore, ION shall insure that its representatives, including employees and subcontractors, while on or near SBC's premises will perform Services with care and due regard for the safety, convenience, and protection of SBC, its employees, and property and in full conformance with the policies specified in the SBC Code of Conduct, which prohibits the possession of a weapon or an implement which can be used as a weapon (a copy of the SBC Code of Conduct is available upon request). 8.4 MULTI-SUPPLIER ENVIRONMENT ION shall work cooperatively with SBC and certain SBC suppliers, as mutually agreed, to discuss interoperability requirements of such supplier's products with the Materials, provided that any proprietary or confidential information ION may communicate to such suppliers during such meeting shall be disclosed only subject to a nondisclosure agreement mutually agreed to by ION and the applicable supplier. 8.5 DELIVERY, PERFORMANCE, AND ACCEPTANCE A. ION acknowledges the competitive telecommunications marketplace in which SBC operates and understands that SBC's business requires prompt delivery of Material and provision of Services by the specified delivery dates. B. For orders that involve Services only, or ION's delivery of Materials with the provision of Services, e.g., installation, ION shall provide SBC a Notice of Completion after Delivery. SBC's Acceptance Test Period shall commence upon (i) SBC's receipt of ION's Notice of Completion, or (ii) upon the Delivery of Material to SBC where ION provides no Services other than shipping. SBC's acceptance shall occur no earlier than ION's Delivery of Materials and/or Services. If Materials or Services are not in Material Compliance with the Specifications, SBC shall notify ION and provide ION an opportunity to cause such Materials or Service to comply in all material respects with the Specifications. After any corrective action, ION shall provide a Notice of Completion, and the Acceptance Test Period shall recommence. Tolling for corrective actions shall not cause the Acceptance Test Period to exceed ninety (90) calendar days. If the Materials or Services successfully complete the - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 34 of 64 Acceptance Tests during the Acceptance Test Period, SBC shall indicate its acceptance by signing the Acceptance Letter and delivering a copy thereof to ION. 8.6 SUBCONTRACTORS A. Each Party has the right to utilize subcontractors in the performance of this Agreement. However, no subcontracting arrangement shall release either Party from its responsibilities and obligations under this Agreement. Each Party shall be fully responsible for the work and activities of each of its subcontractors, including compliance with the terms of this Agreement. Additionally, each Party shall be responsible for all payments to its subcontractors. B. As of the Effective Date, SBC has approved ION's use of any of the subcontractors identified on Schedule 8.6 hereto. Prior to ION's use of any subcontractor not identified on Schedule 8.6, ION shall provide SBC with the name and qualifications of the proposed subcontractor and shall inform SBC's Contact Person of what Materials are to be produced and/or Services to be performed by such subcontractor. Except for those subcontractors identified on Schedule 8.6, ION agrees not to utilize any subcontractors that are excluded at the time the work is to be performed, for any lawful reason, from performing Services for SBC. Subcontractors must abide by the terms of this Agreement and the applicable Work Order(s). 8.7 QUALITY ASSURANCE ION hereby agrees that Materials furnished hereunder by ION have undergone or have been subject to quality control activities and procedures, including performance measurements, testing, quality process reviews or inspections to implement such procedures. ION also agrees to maintain and make available to SBC or SBC's agent the data including all information and reports about ION's quality and process control procedures that demonstrate that the Materials Delivered meets the specified quality and reliability requirements. ION agrees that: A. ION shall provide to SBC a TL 9000 quality plan. Elements to be detailed in the Quality Plan include (at minimum): 1. Documentation of ION's quality assurance process, including a representation that ION's Subcontractor is ISO 9000 certified. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 35 of 64 2. Identification of the TL 9000 or ISO 9000 certification status and schedule for becoming registered of the Subcontractors identified on Schedule 8.6. 3. Designation of ION's quality representative and of the senior executive with quality responsibility. B. ION further agrees that it will, at SBC's request: 1. Notify SBC or SBC's Agent when Materials are ready for source inspection activities and give SBC or SBC's Agent reasonable opportunity for inspection of such Materials. 2. When initiatives, actions, or activities are required due to quality problems or contract non-performance, both Parties will agree on a designated third Party agent to perform quality control or quality assurance related activities. ION will pay the cost of the third party agent. 3. Nothing contained herein will diminish ION's obligation to deliver materially compliant Materials, ION's warranty obligations, or any other provision of this Agreement. The purchase or license of any Materials hereunder is subject to SBC's inspection and Acceptance after Delivery thereof. ARTICLE IX - REPAIR, MAINTENANCE, AND SUPPORT CLAUSES 9.1 MAINTENANCE AND SUPPORT SERVICES During the first year after SBC's Acceptance of Material (i.e., the warranty period), SBC will have access to ION's remote dial-in diagnostics Technical Assistance Center ("TAC") on a 24x7 basis, at a charge to SBC of one hundred dollars ($100) per hour, at a two (2) hour minimum per call. Under this service, SBC receives 24X7 technical telephone support and consultation. SBC will also receive 8x5 next day cross shipment of a replacement unit from SBC's previously purchased spare unit inventory in the event of equipment failure or for functional repairs, at a charge to SBC of one hundred fifty dollars ($150) per unit shipped. ION shall be required to provide a cross shipment of replacement units only to the extent that SBC has purchased a quantity of spare units sufficient to permit such cross shipment. In-Warranty Repairs of returned units will be made at ION's Piscataway NJ location at no charge. Coverage after the end of the warranty period will be at the repair prices listed in the then-current issue of ION's price list, less a 40% discount. A. SBC may contact the TAC concerning any questions that may arise concerning repair. ION shall specify any special packing of Hardware that might be necessary to provide adequate in-transit protection from transportation damage. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 36 of 64 B. SBC must obtain a Return Material Authorization ("RMA") from the TAC and that RMA number must be displayed on the outside packaging of all returned Material and also included inside the packaging with the returned Material. Any material arriving at ION's repair location without proper RMA identification will be returned to SBC at SBC's expense. C. In addition to providing ION with a repair order, SBC shall furnish the following information with Hardware returned to ION for repair or replacement: (a) SBC's name and complete address; (b) name(s) and telephone number(s) of SBC's employee(s) to contact in case of questions about the Hardware to be repaired; (c) ship-to address for return of repaired Hardware if different than (a); (d) invoice address, if different than (a); (e) a complete list of Hardware returned; (f) the nature of the defect or failure, if known; (g) whether or not returned Hardware is In-Warranty; and (h) the RMA number issued by ION. D. In the special situation where Material is determined to be defective immediately upon removal from its original shipping carton and initial installation or testing within sixty (60) days of receipt by SBC, referred to as an Out Of Box Failure, ION will cross ship a new replacement unit within seven (7) days, at ION's expense. SBC must contact ION Technical Assistance Center to obtain a Return Material Authorization Cross Shipment ("RMAX") authorization. E. Defective Hardware which is covered under the warranty provisions defined in this Agreement will be returned to ION for either repair or replacement with new or functionally equivalent Hardware with risk of in-transit loss and damage borne by ION and transportation charges paid by ION. Unless otherwise agreed upon by ION and SBC, ION shall complete repairs and ship the repaired Hardware within fifteen (15) days after receipt of said defective Hardware by ION, whichever is earlier. If Hardware is to be replaced, ION agrees to ship the said replacement Hardware within fifteen (15) days of receipt of said defective Hardware by ION. For Hardware under Warranty, ION shall bear the risk of in-transit loss and damage and shall prepay and bear the cost of transportation charges for shipments to SBC of repaired or replaced Hardware. F. If In-Warranty Hardware returned to ION is determined to be beyond repair, ION shall promptly notify SBC and, unless otherwise agreed to by the Parties, ship replacement Hardware without charge within fifteen (15) days of such notification. G. The provisions in this clause also apply to Hardware that is Out-of-Warranty, except that SBC is responsible for transportation charges to and from ION's repair facilities, if applicable, along with the associated risk of in-transit loss. Charges for repairs and/or replacement for Hardware which is Out-of-Warranty will be at - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 37 of 64 the repair prices listed in the then-current issue of ION's price list, less a 40% discount. 9.2 REPAIR INVOICES Repair Invoices originated by ION for repair/replacement services must be clearly identified as such (for example, by indicating at the top of the invoice that it is a "Repair Invoice") and must contain a reference to SBC's order number for the repair/replacement Services, if applicable. ION's Repair Invoices must contain the following information: Item number, quantity, complete description of the Materials (complete part number and Services provided), unit price and total charge by item number, with a grand total at the end. The following also applies to such Repair Invoices: A. If, on a line item basis, there is no charge on a Repair Invoice, the repair or replacement service described on the line item shall be deemed to have been provided with respect to defective Hardware which was covered by the warranty provisions defined in this Agreement and shall be considered an "In-Warranty" repair. If on a line item basis, there is a charge on the Repair Invoice, the repair or replacement service described on the line item shall be deemed to have been provided with respect to defective Hardware which was not covered in the warranty provisions defined in an applicable Order and shall be considered an "Out-of Warranty" repair, unless otherwise identified. Any other charges will be noted with appropriate descriptions in order for SBC to easily determine the nature of the charge. B. If the Hardware becomes defective during the Warranty Period and SBC is required to return the defective Hardware within a specific time after receiving the replacement Hardware, and SBC does not return the defective Hardware within thirty (30) days, or another mutually agreed timeframe, ION will issue an invoice for the price of the replacement Hardware. If the Hardware becomes defective outside of the Warranty Period, and SBC does not return the defective Hardware within thirty (30) days, or another mutually agreed timeframe, ION will issue an invoice for the repair charge plus the price of the replacement Hardware. Such charges are set forth in the applicable Order. The invoice will also contain a reference to SBC's original Order number, if applicable, and contain a description indicating that the charge is for "Non-Returned Hardware". A Repair Invoice will be issued for every "In-Warranty and Out-of-Warranty Repair. Invoices for In-Warranty repair will show a unit charge, and grand total of zero (0) dollars. ION shall have no responsibility to repair or replace any - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 38 of 64 Hardware that is not accompanied by a Repair Order that includes an RMA or RMAX number. 9.3 CONTINUING AVAILABILITY A. ION agrees to offer to sell to SBC for a period of two (2) years after the Termination, Cancellation or expiration date of this Agreement, or the discontinuance of any Materials provided hereunder, functionally equivalent replacement parts and technical support services ("Spare Parts"). B. ION shall provide SBC with advance written notice no later that ninety (90) days prior to the discontinuance of the manufacture or the provision of any Material(s) or Service(s). SBC shall then have the right to purchase as much of ION's remaining inventory of the discontinued Material(s) as SBC so chooses. 9.4 DISASTER RECOVERY If any natural disaster or other emergency occurs whereby Materials and Services provided in connection with this Agreement are damaged and such condition materially affects SBC's ability to provide Services to its subscribers, ION agrees, at SBC's request, to assist SBC as follows: A. ION will use commercially reasonable efforts to locate backup or replacement Materials and to provide any necessary Service. B. If Materials are available from ION's stock, ION will take commercially reasonable efforts to attempt to ship replacement Materials in a manner specified by SBC within twenty-four (24) hours of receipt of SBC's request therefor. C. When Materials required by SBC are not available from stock for immediate shipment, ION agrees to pursue the following alternative courses of action: 1. Assist SBC in locating functionally equivalent substitute Materials. 2. Assist SBC by providing field technical personnel to make temporary modifications and arrangements to mitigate the effects of out-of-service conditions. If requested by SBC, ION will document such efforts and associated charges. Charges for replacement Materials shall be determined based on the prices set forth on Appendix B. Services shall be provided on a time and materials basis. Additional charges, if any, for overtime and use of premium transportation as authorized by SBC as necessary to alleviate the - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 39 of 64 out-of-service conditions shall be included as a separate item on the invoice. ION will make available the individual whose title, phone number and location are listed below to provide assistance and information on a twenty-four (24) hour basis for all of its support service described above: Bob D'Amico, Vice President of Operations ION Networks, Inc. 1551 So. Washington Ave Piscataway, NJ 08854 Telephone: 732-529-0006 Pager: 800-717-8016 Cell: 732-887-4740 Home: 609-279-0670 Hot Line: 800-722-8986 D. This Section shall not be construed to require ION to maintain any inventories whatsoever, maintain any position of readiness to perform in the future, or breach any of ION's contractual obligations to third Parties. ARTICLE X - SOFTWARE CLAUSES 10.1 STANDARD SOFTWARE Subject to the provisions in this Agreement and in the applicable Work Order: A. ION hereby grants to SBC a nonexclusive, royalty-free, fully paid-up, irrevocable, perpetual Enterprise-wide license to use the Standard Software described in the applicable Order; B. Any Software modification made by ION at the request and expense of SBC shall be governed by the provisions of a separate Work Order and by the Custom Software provisions of this Agreement; and C. ION does not transfer to SBC title to Standard Software. 10.2 STANDARD SOFTWARE LICENSE FEE The Standard Software license fee shall be specified in Appendix B, and shall not be less than ION's list price less the current applicable discount rate extended to SBC. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 40 of 64 10.3 THIRD PARTY SOFTWARE With and prior to execution of each Order, ION shall provide a written list all third-party Software that is part of the Software ordered by SBC or provided by ION. 10.4 PROGRAM MATERIALS A. At no additional cost, ION shall provide SBC with two (2) copies of the Program Materials (other than any source code, unless the applicable Order includes source code) reasonably necessary to enable SBC to adequately use such Software. ION shall provide such Program Materials no later than the originally scheduled Delivery Date. B. SBC shall have the right to reproduce all Program Materials and all machine-readable forms of the Software, provided that such reproduction is made solely for SBC's use hereunder. Any such reproductions shall include any copyright or similar proprietary notices contained in the items being reproduced. 10.5 MODIFICATIONS SBC may not, in any way, alter, modify, add, or make other changes to Software provided hereunder, except with the express permission of ION. Any modification of the Software permitted by ION shall be made at SBC's own risk and expense. SBC may not employ a third party to perform alterations to Software unless such third party has entered into a nondisclosure agreement with ION. The conditions and charges, if any, for ION support of such modifications shall be subject to separate agreement between SBC and ION. The modified portion of the Software and any unmodified portion of the Software that is affected by the modifications shall not be considered "Standard Software", and ION shall have no responsibility to maintain or support such modified portion. Only those portions of Standard Software that have not been affected by the modifications shall be subject to the same terms, conditions, and limitations as if such Software were not modified. Title to any such addition or modification shall remain with ION. 10.6 DELIVERY OF SOFTWARE Software deliveries shall be made in the form mutually agreed to by the Parties, and may include electronic data exchange, U.S. Mail or a private carrier. Unless otherwise agreed to, ION shall deliver a disk containing a copy of the Software (and any subsequent releases or upgrades of the software). - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 41 of 64 ARTICLE XI - WARRANTY CLAUSES 11.1 WARRANTY A. For the units of Materials and Services purchased hereunder, ION will provide its standard warranty having a one-year term from the date when the Materials and Services have been Delivered. The standard warranty is attached hereto as Appendix H. B. ION also warrants to SBC that any Services provided hereunder will be performed in a first-class, professional manner, in Material Compliance with the Specifications, and with the care, skill, and diligence, and in accordance with the applicable standards, currently recognized in ION's profession or industry. If ION fails to meet applicable professional standards, ION will, without additional compensation, promptly correct or revise any errors or deficiencies in the Services furnished hereunder. C. ION represents and warrants that: there are no actions, suits, or proceedings, pending or threatened, which will have a material adverse effect on ION's ability to fulfill its obligations under this Agreement; it will immediately notify SBC if, during the term of this Agreement, ION becomes aware of any action, suit, or proceeding, pending or threatened, which may have a material adverse effect on ION's ability to fulfill the obligations under this Agreement or any Order; it has all necessary skills, rights, financial resources, and authority to enter into this Agreement and related Orders and to provide or license the Materials or Services, including that the Materials and Services will not infringe any patent, copyright, or other intellectual property; no consent, approval, or withholding of objection is required from any entity, including any governmental authority with respect to the entering into or the performance of this Agreement or any Order; the Materials and Services will be provided free of any lien or encumbrance of any kind; it will be fully responsible and liable for all acts, omissions, and work performed by any of its representatives, including any subcontractor; that all representatives, including subcontractors, will strictly comply with the provisions specified in this Agreement; and it will comply with the terms of this Agreement or Work Order, including those specified in any Exhibits or Appendices thereto. D. If the Parties have identified a system on which Software will operate, ION warrants that Software will perform on and be compatible with such system and operate satisfactorily in the system environment specified in the applicable Work Order. System includes the Hardware, operating and application Software, interfaces, and databases that interact with such Software. E. ION warrants that all Materials provided to SBC hereunder shall be tested prior to Delivery to insure they are in Material Compliance with the Specifications and that Materials will not contain Harmful Code at any time. Testing will include - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 42 of 64 complete regression and interaction testing and load, unit, and integration testing when applicable. F. ION warrants that all Software and Firmware, including embedded third party Software, which is licensed to SBC hereunder prior to, during, or after the calendar year 2000, includes or will include, by the date ION ships or installs Materials, year 2000 capability. For the purpose of this license, year 2000 capability means that the Software or Firmware will: 1. Read, compute, store, process, display and print data involving dates, including single century and multi-century formulas, and will not cause computational, display, storage or other errors resulting from the liability to accurately or correctly handle dates, including year 2000 and February 29, 2000; 2. Include the indication of century in all date-related user interface functionality, data fields, and generated code; and 3. Be interoperable with other Software used by SBC that may deliver records to such Software and Firmware, receive records from such Software and Firmware or interact with such Software and Firmware in the course of processing dates. G. If at any time during the Warranty period for Materials or Services SBC believes there is a breach of any warranty, SBC will notify ION setting forth the nature of such claimed breach. ION shall promptly investigate such claimed breach and shall either 1) provide information satisfactory to SBC that no breach of Warranty in fact occurred or 2) at no additional charge to SBC, promptly to take such action as may be required to correct such breach. 11.2 REPAIRS NOT COVERED UNDER WARRANTY After the expiration of the Warranty period, all repairs will be made on a time and materials basis. The applicable price for time and materials repairs will be listed in the then-current issue of ION's price list, less a 40% discount. A. Performance of Work 1. Except as otherwise provided in this Agreement, the schedule for performance of Services, applicable to each Order under this section shall be agreed upon by ION and SBC and shall be set forth in each such Order; however, in no event shall the Service interval exceed fifteen (15) business days after such receipt. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 43 of 64 (a) In the event that ION exceeds the maximum repair interval, SBC shall have the right, without liability, to (i) Cancel such Order or (ii) extend such scheduled service date specified in the Order, subject, however, to the right to Cancel if Service is not made or performance is not completed by such extended date. (b) If an Order is Canceled pursuant to the preceding sentence, ION shall return the Material(s) received from SBC under such Order. ION shall reimburse SBC the costs of shipping the Material(s) to ION and the amounts, if any, previously paid by SBC for Service not received or performed. 2. ION shall furnish all labor, Services, tools, Materials, parts, accessories, instruments and equipment required to perform Services under this section. 3. ION shall provide a written notice to SBC with the name(s) and telephone number(s) of the individual(s) to be contacted concerning any questions that may arise regarding Services under this section. If required, ION shall specify any special packing of Materials that might be necessary to provide adequate in-transit protection from transportation damage. 4. Materials repaired by ION shall have the service completion date stenciled or otherwise identified in a permanent manner at a readily visible location on the Materials. In addition, ION agrees to add any other identification that might be requested by SBC. Charges, if any, for such additional identification marking shall be agreed upon by ION and SBC. 5. Only new standard parts or parts of quality equal to the original parts shall be used in refurbished Materials or in effecting repairs. Parts that have been replaced shall become ION's property. If a part has been replaced, by definition it has been removed; provided, however, that replaced parts shall, upon request by SBC be available for inspection by SBC. Parts that are installed in Materials as a part of the repair process shall become the property of SBC. 6. If Materials returned to ION for repair are determined to be beyond repair, ION shall contact SBC regarding disposition of such Materials. If requested by SBC, ION shall take the necessary steps to dispose of the unrepairable Materials and pay to SBC the salvage value, if any. If requested by SBC, ION shall return the Materials in "as-received" condition, invoicing SBC only for freight charges associated with the return of the Materials. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 44 of 64 B. Transportation Unless SBC, provides written special shipping instructions, upon completion of Services provided pursuant to this clause, ION shall ship Materials using the lowest published common carrier price (rail, truck or freight forwarder). ION agrees to follow shipping instructions according to the "Shipping and Packing" clause herein. ION agrees to place all prepaid freight charges as a separate item on the invoice to be paid by SBC. If requested by SBC, ION agrees to substantiate such charges by providing SBC with the original freight bill or a copy. C. Risk of Loss Except as otherwise provided in this Agreement, after receipt of returned Material from the carrier selected by SBC to ship the malfunctioning Material, ION shall assume the risk of loss of or damage to such Material until the Material is delivered to the carrier for shipment to SBC. SBC shall notify ION promptly of any claim and shall cooperate with ION in every reasonable way to facilitate the settlement of any such claim. D. Invoices 1. All invoices originated by ION for Services provided pursuant to this clause must be clearly identified as such, and must contain: (1) a reference to the Master Agreement number of this Agreement (i.e. No. 00017432), (2) a reference to SBC's Order number for these Services, (3) a reference to ION's RMA or RMAX number, (4) a detailed description of Services performed by ION, and the need therefor, and (5) an itemized listing of parts and labor charges, if any. 2. Shipping and routing instructions may be altered as agreed by ION and SBC without written notice. E. Warranty 1. ION warrants to SBC that the repair Services shall be performed in a fully workmanlike manner to the satisfaction of SBC and in accordance with the Specifications. ION further warrants that the repaired or refurbished Materials shall be free from defects in material and workmanship for a period of ninety (90) days from the date the repaired or refurbished Materials is Accepted by SBC. This warranty shall survive inspection, acceptance and payment. 2. In the event that Materials repaired or refurbished by ION is defective when returned to SBC, SBC shall have the option of (1) returning the - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 45 of 64 Materials to ION for Service, with risk of in-transit loss or damage and freight charges to be borne by ION, or (2) obtaining a full refund or credit for any payment made therefor, plus freight charges paid for its return. ARTICLE XII - OTHER CLAUSES 12.1 LICENSES AND PATENTS Except as otherwise stated herein, no licenses, express or implied, under any patents, copyrights, trademarks, or other intellectual property rights are granted by either Party to the other under this Agreement. 12.2 INDEPENDENT CONTRACTOR ION hereby represents and warrants to SBC that: A. ION is engaged in an independent business and will perform all obligations under this Agreement as an independent contractor and not as the agent or employee of SBC; B. ION's personnel performing Services shall be considered solely the employees of ION and not employees or agents of SBC; C. ION has and retains the right to exercise full control of and supervision over the performance of the Services and full control over the employment, direction, assignment, compensation, and discharge of all personnel performing the Services; D. ION is solely responsible for all matters relating to compensation and benefits of all ION's personnel who perform Services. This responsibility includes, but is not limited to, (a) timely payment of compensation and benefits, including, but not limited to, overtime, medical, dental, and any other benefit, and (b) all matters relating to compliance with all employer obligations to withhold employee taxes, pay employee and employer taxes, and file payroll tax returns and information returns under local, state, and federal income tax laws, unemployment compensation insurance and state disability insurance tax laws, and social security and Medicare tax laws, and all other payroll tax laws or similar laws (all collectively hereinafter referred to as "payroll tax obligations") with respect to all ION personnel providing Services. 12.3 INSIGNIA - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 46 of 64 Upon SBC's written request, certain of SBC's trademarks, trade names, insignia, symbols, decorative designs, or other similar items (hereinafter "Insignia"), shall be properly affixed by ION to the Materials furnished at no additional cost to SBC. Such Insignia shall not be affixed, used, or otherwise displayed on the Materials without SBC's written approval. The manner in which such Insignia will be affixed must be approved in writing by SBC. 12.4 NOTICES Except as otherwise provided in this Agreement, or an applicable Order, all notices or other communications hereunder shall be deemed duly given when they are made in writing (1) on the day of delivery, when delivered in person during business hours, (2) on the following business day, if delivered by an overnight courier or similar delivery service, or (3) three business days after mailing, if deposited in the United States Mail, postage prepaid, return receipt requested. All notices and communications shall be addressed as follows: If to ION: ION Networks, Inc. 1551 South Washington Ave. Piscataway, NJ 08854 Attn.: Jane Kaufman If to SBC: SBC Services, Inc. 2600 Camino Ramon, Rm. 1E000W San Ramon, Calif. 94583 Attn.: Remi Mullins Murphy, Senior Contract Manager The address to which notices or communications shall be delivered to either Party may be changed by written notice given by such Party to the other pursuant to this Section, entitled "Notices". 12.5 PUBLICITY ION shall not use SBC's name or any language, pictures, or symbols which could, in SBC's judgment, imply SBC's identity or endorsement by SBC or any of its employees in any (a) written, electronic, or oral advertising or presentation or (b) brochure, newsletter, book, electronic database, news release or other written material of whatever nature, without SBC's prior written consent (hereafter the terms in this section (a) and (b) shall be collectively referred to as "publicity matters"). ION will submit to SBC for written approval, prior to publication, all publicity matters that mention or display SBC's name and/or marks or contain language from which a connection to said name and/or marks may be inferred or implied. - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 47 of 64 12.6 ENTIRE AGREEMENT The terms contained in this Agreement, and any Orders, including all exhibits and subordinate documents attached to or referenced in the Agreement or any Orders, will constitute the entire integrated Agreement between ION and SBC with regard to the subject matter. The Agreement will supersede all prior oral and written communications, agreements, and understandings of the Parties, if any, with respect hereto. Signature Page Follows - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission Master Agreement No. 00017432 Page 48 of 64 IN WITNESS WHEREOF, the foregoing Agreement has been executed by authorized representatives of the Parties hereto, in duplicate, as of the dates set forth below. ION NETWORKS, INC. SBC SERVICES, INC. By: /s/ By:/s/ --------------------------------- ----------------------------------- Name: Name: ------------------------------- --------------------------------- Title: Title: ------------------------------ -------------------------------- Date: Date: ------------------------------- --------------------------------- - -------------------------------------------------------------------------------- PROPRIETARY INFORMATION Not for use or disclosure outside SBC, ION, their affiliated and subsidiary companies, and their third party representatives without prior written permission EX-10 3 ex10_16.txt EXHIBIT 10-16 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of August 11, 2000 by and between ION NETWORKS, INC., a Delaware corporation having its principal offices at 1551 S. Washington Avenue, Piscataway, New Jersey 08854 (the "Company"), and each of the parties set forth on the schedule (the "Schedule") attached hereto (collectively, the "Buyers"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company desires to issue and sell to the Buyers shares of common stock, par value $.001 per share, of the Company (the "Common Stock"); and WHEREAS, the Buyers desire to purchase Two Million Eight Hundred Fifty Seven Thousand One Hunderd and Fourty Two (2,857,142) shares of Common Stock (the "Shares") in accordance with the allocation set forth in the Schedule. NOW THEREFORE, in consideration of the promises and mutual covenants, agreements, representations and warranties herein contained, the parties hereto agree as follows: 1. Sale and Purchase of Shares. Subject to the terms and conditions of this Agreement, the Company hereby sells, assigns, transfers and delivers to the Buyers, and each of the Buyers hereby purchases from the Company, for and in consideration of the Purchase Price (as hereinafter defined), the Shares in accordance with the allocation set forth on the Schedule. The obligation of each Buyer is limited to the obligation to purchase the number of shares set forth next to such Buyer's name on the Schedule. 2. Purchase Price and Payment. 2.1. Subject to the terms and conditions of this Agreement, the purchase price to be paid by the Buyers to the Company for and in consideration of the sale to the Buyers of the Shares is an amount equal to $5,000,000 (the "Purchase Price"). 2.2. The Purchase Price shall be paid by the Buyers to the Company at the Closing (as hereinafter defined) by wire transfer of immediately available funds to an account designated by the Company to the Buyers. 3. Closing. 3.1. The sale and purchase of the Shares shall take place at the offices of the Company within five (5) business days from the date hereof or on such other date or at such other location as the parties hereto shall mutually agree upon (hereinafter referred to as the "Closing" or the "Closing Date"). 3.2. At the Closing, the Company shall: (a) sell, transfer, assign and deliver to the Buyers the Shares; (b) deliver to each of Zesiger Capital Group LLC (as representative of each of the Buyers for whom it holds power of attorney), Mr. David Greenhouse (as representative of each of the Special Situation Funds listed in the Schedule) (together with Zesiger Capital Group LLC, the "Representatives"), and 21st Century Digital Industries Fund, L.P. ("21st Century") (i) copies of the certificate of incorporation, as amended, and the by-laws of the Company, each as certified by a duly authorized officer of the Company, (ii) resolutions or minutes of the board of directors of the Company authorizing this Agreement and the transactions contemplated hereby, as certified by a duly authorized officer of the Company, (iii) a certificate of good standing of the Company from the Secretary of State of the State of Delaware bearing a recent date thereof and (iv) certificates representing the Shares in the respective names of the Buyers (or their respective nominees as indicated on the Schedule) and (v) a certificate of the Company executed by a duly authorized officer of the Company, dated as of the Closing Date, certifying that the representations and warranties made by the Company in Section 6 hereof are true and correct as of the Closing Date, and (vi) an opinion of Parker Chapin LLP, counsel to the Company, addressed to the Buyers with respect to the valid existence and good standing of the Company, the due authorization, execution and delivery of this Agreement and the issuance and sale of the Shares, and that the Shares, upon issuance and sale to the Buyers, are duly authorized, validly issued, fully paid and nonassessable. 4. Registration of Shares. 4.1. The Company shall use its best efforts to (i) file a registration statement (the "Registration Statement"), within sixty (60) days of the Closing Date, on Form S-3 or other applicable form, registering for resale the Shares and (ii) cause the Registration Statement to be declared effective under the Securities Act of 1933, as amended (the "Act") as soon thereafter as reasonably practicable. The Company promptly shall provide Buyers with such copies of the final Prospectus contained in the Registration Statement after it becomes effective as they shall reasonably request. In addition, the Company shall (a) use its best efforts to keep the Registration Statement effective for a period ending on the earlier of (x) two (2) years from its effective date or (y) when all such Shares can be sold without limitation or delay under Rule 144 and (b) file all reports and forms required to be filed by it under the Securities Exchange Act of 1934, as amended ("Reports") on a timely basis so long as Buyers own any Shares and shall provide the Representatives and 21st Century copies thereof when filed. 4.2. Notwithstanding anything contained herein to the contrary, the Company shall be entitled to postpone the filing of the Registration Statement otherwise required to be prepared and filed by it in accordance with Section 4.1 or, in the event the Registration Statement has been declared effective, without suspending such effectiveness, instruct the Buyers promptly in writing (or any subsequent holders thereof) not to sell or distribute any Shares (a "Delay") as long as the reason for non-disclosure continues, if the Company would be required to disclose in the Registration Statement the existence of any fact relating to a material business situation, transaction or negotiation, or would be required to disclose information that the Company has not otherwise made public, in each case, that the Company reasonably determines is in the best interests of the Company not to disclose at such time, and unless and until the holders furnish to the Company in writing information that may be required to prepare the disclosure required by Items 507 and 508 of Regulation S-B promulgated under the Act, with respect to such Buyer's Shares being sold under the Registration Statement provided that, with respect to Delays because of information related to the Company (rather than disclosure required to be provided by the holders), the Company shall only be entitled to a maximum of three (3) Delays, each Delay not to exceed a period of thirty (30) days; and further provided, that no period of Delay shall commence within 60 days of a previous Delay. 4.3. Each of the Buyers shall (i) reasonably cooperate with the Company in connection with the preparation and filing of the Registration Statement and execute and deliver any agreements or instruments reasonably requested by the Company or its counsel in connection therewith and (ii) upon discovery that, or upon the happening of any event as a result of which, the Registration Statement (or any prospectus included therein), as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made (as determined by the Company or its counsel in its sole discretion), forthwith discontinue its disposition of Shares pursuant to the Registration Statement, until such time as the Buyers (or any holders) have received a supplemented or amended prospectus from the Company relating thereto. The Company agrees to use its best efforts to prepare any necessary amendments or supplements to the Registration Statement as soon as reasonably practicable after the same becomes necessary and to provide to the Representatives and/or Buyers quantities of such amendments or supplements reasonably sufficient for the distribution thereof. 4.4. The Company shall indemnify and hold harmless each of the Buyers, the Representatives and their respective officers, directors, employees, members, agents, affiliates and control persons (each of the foregoing, a "Buyer Indemnitee") who is or may be a party or is or may be threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of or arising from any actual or alleged misrepresentation or misstatement of facts or omission to represent or state any fact or omission to state a fact necessary to make the facts stated under the circumstances not materially misleading, in the Registration Statement or any amendment or supplement thereto or to the prospectus incorporated therein from and against any claim, losses, liabilities, costs and expenses (including attorney's fees, judgments, fines and amounts paid in settlement) ("Loss") actually and reasonably incurred by any such Buyer Indemnitee in connection with such claim, action, suit or proceeding or the defense thereof, except to the extent such Loss is the direct result of a misstatement or omission for which such Buyer Indemnitee is liable to the Company under Section 5.10; provided, however, that the indemnification contained in this Section 4.4 with respect to any preliminary prospectus shall not inure to the benefit of any Buyer Indemnitee -3- on account of any such Loss arising from the sale of the Shares by such Buyer Indemnitee to any person if a copy of the definitive prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and an untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such preliminary prospectus was corrected in the definitive prospectus. 5. Representations and Warranties of the Buyers. Each of the Buyers represents, warrants and covenants to the Company as to himself, herself or itself, as follows: 5.1. The decision to purchase the Shares and the execution and delivery of this Agreement by each of the Buyers, the performance by the Buyers of their respective obligations hereunder and the consummation by the Buyers of the transactions contemplated hereby have been duly authorized and no other proceedings on the part of the Buyers are necessary. The person(s) executing this Agreement on behalf of the Buyers have all right, power and authority to execute and deliver this Agreement on behalf of the Buyers. This Agreement has been duly executed and delivered by the Buyers and, assuming the due authorization, execution and delivery hereof by the Company, will constitute the legal, valid and binding obligations of each of the Buyers, enforceable against each of the Buyers in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and the availability of equitable remedies. 5.2. The execution and delivery of this Agreement and the agreements and documents contemplated hereby by the Buyers and the consummation of the transactions contemplated hereby do not and will not (a) with or without the giving of notice or the passage of time or both, violate, conflict with, result in the breach or termination of, constitute a default under, or result in the right to accelerate or loss of rights under or the creation of any lien, encumbrance or charge upon any assets or property of any of the Buyers, pursuant to the terms or provisions of any contract, agreement, commitment, indenture, mortgage, deed of trust, pledge, security agreement, note, lease, license, covenant, understanding or other instrument or obligation to which any of the Buyers is a party or by which any of the Buyers' properties or assets may be bound or affected, or (b) violate any order, writ, injunction, judgment or decree of any court, administrative agency or governmental body binding upon any of the Buyers. 5.3. Each of the Buyers is aware of what constitutes an Accredited Investor as that term is defined under Regulation D promulgated under the Act (an "Accredited Investor"), and under the laws, if any, of each state governing the Buyers, and each of the Buyers is an Accredited Investor for purposes of Regulation D and the laws, if any, of the state governing the Buyers. Each of the Buyers is able to bear the economic risks of this investment and, consequently, without limiting the generality of the foregoing, is able to hold the Shares for an indefinite period of time and has a sufficient net worth to sustain a loss of its entire investment in the Company in the event such loss should occur. -4- 5.4. Each of the Buyers acknowledges that it is a sophisticated investor, has such knowledge and experience in financial and business matters in general and, when applicable, through its investment adviser or the Representatives, has full familiarity with the current business and future business prospects of the Company and the financial and other affairs of the Company and acknowledges that it has had access to and has received sufficient written and oral information about the Company, including any and all such information requested by the Buyers and including copies of all of the publicly available information prepared by the Company in order to make an informed decision as to the acquisition of the Shares by the Buyers, including without limitation, the Annual Report of the Company on Form 10-KSB for the fiscal year ended March 31, 2000. In addition, each of the Buyers acknowledges that it has had access to the officers, directors and employees of the Company to discuss the business, affairs and prospects of the Company and has had the opportunity to obtain additional information necessary to evaluate the merits and the risks of engaging in the transactions contemplated by this Agreement. Each of the Buyers, either alone or, when applicable, through its investment adviser or the Representatives, has reached an independent decision with respect to the advisability of the sale of the Shares and, in arriving at its decision, has considered both the value of the Shares as well as the present condition and future prospects of the Company. 5.5. Each of the Buyers is acquiring the Shares for its own account for investment and not with a view to or for resale in connection with any distribution of the Shares. It has not offered or sold any portion of the Shares and has no present intention of dividing the Shares with others or of selling, distributing or otherwise disposing of any portion of the Shares either currently or after the passage of a fixed or determinable period of time or upon the occurrence or non-occurrence of any predetermined event or circumstance. 5.6. Each of the Buyers understands that the sale of the Shares has not been registered under the Act in reliance upon an exemption therefrom for non-public or limited offerings. Each of the Buyers understands that the Shares must be held indefinitely unless the sale or other transfer thereof is subsequently registered under the Act or an exemption from such registration is available at that time. 5.7. No Buyer (i) is a "broker-dealer" or an "affiliate" of a broker-dealer as such terms are defined under the Act or (ii) is acting in concert with any other Buyer in connection with the transactions contemplated hereby. 5.8. Any obligation or liability for taxes (state, federal or otherwise) incurred by any of the Buyers in connection with this Agreement or the transactions contemplated hereby shall be the responsibility of and be paid for by the Buyers. 5.9. Each of the Buyers acknowledges that it has been advised to consult with its own attorney regarding legal matters concerning the Company and to consult with its tax advisor regarding the tax consequences of acquiring the Shares. -5- 5.10. Each of the Buyers agrees to indemnify and hold harmless the Company and each officer, director, employee, agent or control person of the Company, who is or may be a party or is or may be threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, to the extent by reason of or arising from any misrepresentation or misstatement of material facts or omission to state material facts necessary to make the facts stated, under the circumstances, not materially misleading, made or omitted by such Buyer to the Company in a writing provided to the Company expressly for the purpose of inclusion in the Registration Statement or any amendment thereto, against losses, liabilities and expenses for which the Company, or any officer, director or control person of the Company has not otherwise been reimbursed (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by the Company or such officer, director or control person in connection with such action, suit or proceeding. 5.11. The power of attorney executed and delivered to Zesiger Capital Group LLC by each of the Buyers it represents, a copy of which powers of attorney have been provided to the Company, is in full force and effect. 5.12. None of the Buyers has employed any broker or incurred any liability for any brokerage fees in connection with the transactions contemplated hereby. 5.13. Certificates for the Shares shall contain a restrictive legend substantially in the following form: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION REQUIREMENTS. 6. Representations and Warranties of the Company. The Company represents and warrants to each of the Buyers as follows: -6- 6.1. The Company has the authority to execute and deliver this Agreement and perform all of its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement and the agreements and documents contemplated hereby are valid and legally binding obligations of the Company, enforceable against it in accordance with their respective terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and the availability of equitable remedies 6.2. The execution and delivery of this Agreement and the agreements and documents contemplated hereby by the Company and the consummation of the transactions contemplated hereby do not and will not (a) with or without the giving of notice or the passage of time or both, violate, conflict with, result in the breach or termination of, constitute a default under, or result in the right to accelerate or loss of rights under or the creation of any lien, encumbrance or charge upon any assets or property of the Company, pursuant to the terms or provisions of any contract, agreement, commitment, indenture, mortgage, deed of trust, pledge, security agreement, note, lease, license, covenant, understanding or other instrument or obligation to which the Company is a party or by which the Company's properties or assets may be bound or affected, or (b) violate any order, writ, injunction, judgment or decree of any court, administrative agency or governmental body binding upon the Company. 6.3. The Shares, when issued and delivered to the Buyers in accordance with the terms of this Agreement, shall be duly authorized, validly issued, fully-paid and nonassessable. 6.4. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, par value $.001 per share ("Preferred Stock"). As of the date hereof, 15,198,416 shares of Common Stock and no shares of Preferred Stock were issued and outstanding. No shares of the Company's capital stock will be issued from the date hereof and until the Closing Date, except for shares issued pursuant to the exercise of options or warrants outstanding as of the date hereof, and the shares being issued pursuant to this agreement. The Company has not granted or issued any rights, options or warrants to acquire, or securities convertible into or exchangeable for any Common Stock or other capital stock of the Company or rights or agreements with respect to any thereof (all of the foregoing, collectively, the "Rights"), except for those Rights disclosed in the annual report on Form 10-KSB/A filed by the Company for the fiscal year ended March 31, 2000, and except for certain preemptive rights granted to certain investors pursuant to that certain Stock Purchase Agreement, dated May 10, 1993, between the Company and the investors identified therein. 6.5. The Company has timely filed all Reports within the last two (2) years, and to the Company's knowledge, all such Reports (i) were prepared substantially in accordance with the Act and the rules and regulations thereunder and (ii) did not, at the time they were filed, contain any untrue statement of a material fact or omit to state a material fact required to be -7- stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 6.6. Each of the Company's audited financial statements for the last two (2) fiscal years (including any notes thereto) and all unaudited financial statements delivered to the Buyers or the Representatives were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout such periods and fairly present the financial position of the Company on the dates and for the periods referred to therein. 6.7. The Company presently intends to utilize the proceeds from the sale of the Shares contemplated by this Agreement for general corporate and working capital purposes. 6.8. No sales of Common Stock or other securities by the Company within the last six (6) months would require integration under the Act and Regulation D promulgated thereunder or would materially adversely affect the sale of the Shares or the timely effectiveness of the Registration Statement referred in Section 4.1. 7. Survival of Representations, Warranties, Covenants and Agreements. The parties covenant and agree that their respective representations, warranties, covenants and agreements contained in this Agreement shall survive the execution and delivery of this Agreement. 8. Notices. All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person or sent by registered or certified mail, return receipt requested, postage prepaid, or delivered via facsimile to the parties hereto at the following addresses: If to the Company: Ion Networks, Inc. 1551 S. Washington Avenue Piscataway, New Jersey 08854 Attention: Mr. Stephen B. Gray Facsimile No.: (732) 529-0115 If to the Buyers: c/o Zesiger Capital Group LLC 320 Park Avenue New York, New York 10022 Attention: Mr. Albert Zesiger Facsimile No.: (212) 508-6399 c/o Special Situations Private Equity Fund, L.P. 153 East 53rd Street, 55th Floor New York, New York 10022 Attention: Mr. David Greenhouse -8- Facsimile No .: (212) 207-6515 c/o 21st Century Digital Industries Fund, L.P. 960 Pines Lake Drive West Wayne, New Jersey 07470 Attention: Mr. Richard Stewart Facsimile No.: (973) 839-2185 or to such other address as any party hereto shall have specified by notice in writing to the other party hereto. All such notices and communications shall be deemed to have been received on the date of delivery thereof or the fifth business day after the mailing thereof. 9. Expenses. Each of the parties hereto shall pay the fees and expenses of its counsel, accountants and other experts and all other expenses incurred by such party incident to the negotiation, preparation and execution of this Agreement. 10. Miscellaneous. 10.1. Partial Invalidity. If it is found in a final judgment of a court of competent jurisdiction (not subject to a further appeal) that any term or provision of this Agreement is invalid or unenforceable, (a) the remaining terms and provisions of this Agreement shall be unimpaired and shall remain in full force and effect and (b) the invalid or unenforceable provision or term of this Agreement shall be enforced to the greatest extent enforceable. 10.2. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. This Agreement may be executed via facsimile. 10.3. Successors and Assigns. The benefits of this Agreement shall inure to the parties hereto, their respective successors and assigns and to the indemnified parties hereunder and their successors and representatives, and the obligations and liabilities assumed in this Agreement by the parties hereto shall be binding upon their respective successors and assigns. 10.4. Governing Law. This Agreement and the legal relations between the parties hereto shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to principles of conflicts or choice of law thereof. 10.5. Headings. Headings of the Sections in this Agreement are for reference purposes only and shall not be deemed to have any substantive effect. 10.6. Entire Agreement; Amendments. This Agreement and any documents contemplated hereby contain, and are intended as, a complete statement of all the terms of the arrangements between the parties with respect to the matters provided for, and supersede any and -9- all prior agreements, arrangements and understandings between the parties with respect to the matters provided for herein. No alteration, waiver, amendment, change or supplement hereto shall be binding or effective unless the same is set forth in writing, signed by the parties hereto or a duly authorized representative thereof. IN WITNESS WHEREOF, the parties have hereunto executed this Agreement on the day and year first above written. ION NETWORKS, INC. By:/s/ Stephen B. Gray ------------------------------------- Name: Stephen B. Gray Title: President CITY OF MILFORD PENSION & RETIREMENT FUND, NFIB CORPORATE ACCOUNT, NORWALK EMPLOYEES' PENSION PLAN, PUBLIC EMPLOYEE RETIREMENT SYSTEM OF IDAHO, CITY OF STAMFORD FIREMEN'S PENSION FUND, THE JENIFER ALTMAN FOUNDATION, DEAN WITTER FOUNDATION, ROANOKE COLLEGE, BUTLER FAMILY LLC, DAVID ZESIGER, THE FERRIS HAMILTON FAMILY TRUST, MARY ANN S. HAMILTON TRUST FOR SELF, HBL CHARITABLE UNITRUST, ANDREW HEISKELL, JEANNE L. MORENCY, PETER LOORAM, MARY C. ANDERSON, MURRAY CAPITAL, LLC, WILLIAM M. AND MIRIAM F. MEEHAN FOUNDATION, INC., DOMENIC J. MIZIO, MORGAN TRUST CO. OF THE BAHAMAS LTD. AS TRUSTEE U/A/D 11/30/93, SUSAN URIS HALPERN, WILLIAM B. LAZAR, WELLS FAMILY LLC, HAROLD & GRACE WILLENS JTWROS, ALBERT L. ZESIGER, BARRIE RAMSAY ZESIGER, WOLFSON INVESTMENT PARTNERS LP -10- By: Zesiger Capital Group LLC as agent and attorney-in-fact for each of the foregoing persons. By: /s/ Albert L. Zesiger ---------------------------------------- Name: Albert L. Zesiger Title: Principal /s/ Albert L. Zesiger ---------------------------------------- Albert L. Zesiger SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. By: /s/ ---------------------------------------- Name: Title: SPECIAL SITUATIONS FUND III, L.P. By: /s/ ---------------------------------------- Name: Title: SPECIAL SITUATIONS CAYMAN FUND, L.P. By: /s/ ---------------------------------------- Name: Title: -11- SPECIAL SITUATIONS TECHNOLOGY FUND, L.P. By: /s/ ---------------------------------------- Name: Title: 21st CENTURY DIGITAL INDUSTRIES FUND, L.P. By: /s/ ---------------------------------------- Name: Title: -12- EX-16 4 ex16_1.txt EXHIBIT 16-1 EXHIBIT 16.1 [PwC Letterhead] June 28, 2001 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We have read the statements made by Ion Networks, Inc. (copy attached), which we understand will be filed with the Commission, pursuant to Item 8 of Form 10-KSB, as part of the Company's Form 10-KSB for the year ended March 31, 2001. We agree with the statements concerning our firm made in Item 8 of said Form 10-KSB. Very truly yours, /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP EX-23 5 ex23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of Ion Networks, Inc. and subsidiaries (the "Company") on Forms S-3 (File Nos. 333-09507, 333-85693 and 333-50246) and Forms S-8 (File Nos. 333-61837, 333-14681 and 333-76809) of our report dated June 28, 2001 relating to the consolidated financial statements, which appears in the Company's Annual Report on Form 10-KSB for the year ended March 31, 2001. /s/ PricewaterhouseCoopers LLP - --------------------------------- PricewaterhouseCoopers LLP Florham Park, New Jersey June 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----