-----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, RlJguT/rhFRDnL4ZEk5Ye/mP1TzDcXgFW62yIvEdkjybVpOmNxZ6whu4A0Gv6Sie BRmlc6Atq/Ar7e/rvvnd4w== 0001021408-02-010873.txt : 20020814 0001021408-02-010873.hdr.sgml : 20020814 20020814124951 ACCESSION NUMBER: 0001021408-02-010873 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ION NETWORKS INC CENTRAL INDEX KEY: 0000754813 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 222413505 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13117 FILM NUMBER: 02733416 BUSINESS ADDRESS: STREET 1: 1551 S WASHINGTON AVE CITY: PISCATAWAY STATE: NJ ZIP: 08854 BUSINESS PHONE: 2014944440 MAIL ADDRESS: STREET 1: 1551 S WASHINGTON AVE CITY: PISCATAWAY STATE: NJ ZIP: 08854 FORMER COMPANY: FORMER CONFORMED NAME: MICROFRAME INC DATE OF NAME CHANGE: 19920703 10QSB 1 d10qsb.txt FORM 10-QSB FOR ION NETWORKS U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File No.: 0-13117 ION NETWORKS, INC. ------------------ (Exact Name of Small Business Issuer in Its Charter) Delaware 22-2413505 -------- ---------- (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 1551 South Washington Avenue Piscataway, New Jersey 08854 --------------------------------------------------------- (Address of Principal Executive Offices) (732) 529-0100 -------------- (Issuer's telephone number, including area code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ There were 25,138,001 shares of Common Stock outstanding as of August 7, 2002. Transitional Small Business Disclosure Format: Yes___ No X ION NETWORKS, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 2002 PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Condensed Consolidated Financial Information (Unaudited) 2 Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2002 3 Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2002 and 2001 4 Condensed Consolidated Statement of Stockholders' Equity for the Three Months ended June 30, 2002 5 Condensed Consolidated Statements of Cash Flows for the Three Months ended June 30, 2002 and 2001 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 25 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION The condensed consolidated financial statements included herein have been prepared by the registrant without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Although the registrant believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the registrant's Annual Report on Form 10-KSB , as amended, for the year ended March 31, 2002. 2 ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, March 31, 2002 2002 ------------ ------------ ASSETS Current assets: Cash and cash equivalents......................................... $ 2,472,024 $ 4,050,657 Accounts receivable, net of allowance for doubtful accounts of $206,137 and $149,999 respectively................... 823,262 1,521,230 Other receivables................................................. 12,900 - Inventory, net.................................................... 1,534,983 1,024,126 Prepaid expenses and other current assets......................... 185,961 492,609 Related party notes receivable.................................... 83,657 83,657 ------------ ------------ Total current assets........................................ 5,112,787 7,172,279 Restricted cash...................................................... 125,700 125,700 Property and equipment at cost, net of accumulated depreciation of $2,880,800 and $2,684,152, respectively............. 672,070 796,625 Capitalized software, less accumulated amortization of $3,583,212 and $3,412,040, respectively............................................ 889,674 908,464 Other assets......................................................... 64,968 6,653 ------------ ------------ Total assets................................................ $ 6,865,199 $ 9,009,721 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital leases................................. $ 74,426 $ 74,426 Current portion of long-term debt................................. 12,238 33,444 Accounts payable.................................................. 839,372 917,846 Accrued expenses.................................................. 362,186 373,766 Accrued payroll and related liabilities........................... 366,218 353,590 Deferred income................................................... 137,625 115,927 Sales tax payable................................................. 137,570 188,435 Other current liabilities......................................... 84,245 73,923 ------------ ------------ Total current liabilities................................... 2,013,880 2,131,357 Long-term portion of capital leases.................................. 126,869 146,540 Long-term debt, net of current portion............................... 5,241 4,597 Commitments and contingencies 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, 25,138,001 shares issued and outstanding at June 30, 2002, and at March 31, 2002...................................... 25,138 25,138 Additional paid-in capital........................................ 44,381,454 44,381,454 Notes receivable from officers.................................... (549,914) (549,914) Deferred compensation............................................. - (62,893) Accumulated deficit............................................... (39,146,058) (37,094,424) Accumulated other comprehensive income............................ 8,589 27,866 ------------ ------------ Total stockholders' equity........................................... 4,719,209 6,727,227 ------------ ------------ Total liabilities and stockholders' equity........................... $ 6,865,199 $ 9,009,721 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended June 30, 2002 2001 ----------------- ----------------- Revenue................................................ $ 960,132 $ 1,933,442 Cost of sales.......................................... 356,505 857,600 ----------------- ----------------- Gross margin........................................... 603,627 1,075,842 Research and development expenses................... 235,309 479,784 Selling, general and administration................. 2,136,968 2,155,114 Depreciation and amortization....................... 281,971 471,276 ----------------- ----------------- Loss from operations................................... (2,050,621) (2,030,332) Interest income........................................ 9,534 47,532 Interest expense....................................... (5,246) (9,116) ----------------- ----------------- Loss before income tax expense......................... (2,046,333) (1,991,916) Income tax expense..................................... 5,301 - ----------------- ----------------- Net loss............................................... $ (2,051,634) $ (1,991,916) ================= ================= PER SHARE DATA Net loss per share Basic and diluted................................... $ (0.09) $ (0.11) Weighted average number of common shares outstanding: Basic and diluted................................... 22,600,501 18,203,301
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED JUNE 30, 2002 (Unaudited)
Accumulated Notes Additional Other Receivable Total Par Paid-in Accumulated Comprehensive from Deferred Stockholders' Shares Value Capital Deficit Income Officers Compensation Equity ---------- --------- ----------- ------------ ------------- ---------- ------------ ------------- Balance April 1, 2002 25,138,001 $ 25,138 $44,381,454 $(37,094,424) $ 27,866 $ (549,914) $ (62,893) $ 6,727,227 Net loss (2,051,634) (2,051,634) Deferred compensation 62,893 62,893 Translation adjustments (19,277) (19,277) ---------- --------- ----------- ------------ ------------- ---------- ------------ ------------- Balance June 30, 2002 25,138,001 $ 25,138 $44,381,454 $(39,146,058) $ 8,589 $ (549,914) - $ 4,719,209 ========== ========= =========== ============ ============= ========== ============ =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss............................................................ $ (2,051,634) $ (1,991,916) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................................... 281,095 426,956 Asset impairments and other charges.............................. - 32,699 Noncash stock-based compensation charges......................... 62,893 18,600 Changes in operating assets and liabilities: Accounts receivable.............................................. 697,968 1,751,387 Other receivables................................................ (12,900) 13,497 Inventory........................................................ (510,857) (506,219) Prepaid expenses and other current assets........................ 248,333 (253,073) Other assets..................................................... - 113 Accounts payable and accrued expenses............................ (90,054) (181,592) Accrued payroll and related liabilities.......................... 12,628 (46,097) Deferred income.................................................. 21,698 (86,475) Sales tax payable................................................ (50,865) - Other current liabilities........................................ 10,322 (2,417) ------------ ------------ Net cash used in operating activities............................... (1,381,373) (824,537) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures............................................. - (27,370) Capitalized software expenditures................................ (137,750) (62,490) Related party notes receivable, net of repayments................ - 15,000 ------------ ------------ Net cash used in investing activities............................... (137,750) (74,860) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt and capital leases.................... (40,233) (13,445) ------------ ------------ Net cash used in financing activities............................... (40,233) (13,445) Effects of exchange rates on cash................................... (19,277) (2,813) ------------ ------------ Net decrease in cash................................................ (1,578,633) (915,655) Cash and cash equivalents, beginning of period...................... 4,050,657 5,230,833 ------------ ------------ Cash and cash equivalents, end of period............................ $ 2,472,024 $ 4,315,178 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (Unaudited) NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures and sells infrastructure security and management products to corporations, service providers and government agencies. The Company's hardware and software products are designed to form a secure auditable portal to protect IT and network infrastructure from internal and external security threats. ION's infrastructure security solution operates in the IP, data center, telecommunications and transport, and telephony environments and is sold by a direct sales force and indirect channel partners mainly throughout North America and Europe. The condensed consolidated balance sheets as of June 30, 2002 and March 31, 2002, the condensed consolidated statements of operations for the three month periods ended June 30, 2002 and 2001, the condensed consolidated statements of cash flows for the three month periods ended June 30, 2002 and 2001 and the condensed consolidated statement of stockholders' equity for the three month period ended June 30, 2002, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal non-material recurring adjustments) necessary for the fair presentation of the Company's financial position, results of operations and cash flows at June 30, 2002 and 2001 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the annual report on Form 10-KSB as amended, for the year ended March 31, 2002. Our consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates the realization and satisfaction of liabilities and commitments in the normal course of business. At June 30, 2002, we had an accumulated deficit of $39,146,058 and working capital of $3,098,907. We also realized net losses of $2,051,634 for the three months ended June 30, 2002. Our existing working capital might not be sufficient to sustain our operations. Our plans to overcome this condition includes refocusing our sales efforts to include penetrating additional markets with our enterprise infrastructure security products, reducing expenses and raising additional equity capital. We have restructured and reorganized to reduce our operating expenses by the elimination of eight employees in July 2002, which reduced the Company's overhead expenses by approximately $575,000 in annual salaries and employee benefits. The Company has refocused its sales effort to emphasize the selling of its software products and reengineered its hardware products in an effort to increase gross margins. The Company has begun to establish alternate channels that will open opportunities in the future to sell our 7 products without the overhead expenses associated with direct sales. We can not assure that our sales efforts or expense reduction programs will be successful, or that additional financing will be available to us, or, if available, that the terms will be satisfactory to us. We believe that our working capital as of June 30, 2002 will fund the Company's operations, as currently planned, until January 2003. We believe that a minimum of $2,000,000 in additional capital will be needed in order to fund the Company's planned operations through June 2003. We plan to seek equity financing to provide funding for operations but the current market for equity financing may be weak. If we are not successful in increasing our revenue, reducing our expenses or raising additional equity capital to generate sufficient cash flows to meet our obligations as they come due, we may not be able to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern. Certain amounts in the financial statements for the year ended March 31, 2002 have been reclassified to conform to the presentation of the financial statements for the quarter ended June 30, 2002. 8 NOTE 2 - RESTRICTED CASH: Due to the expiration of the Company's $1,500,000 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. On November 9, 2001, the Company entered into an agreement with the landlord for its Piscataway, NJ facility to amend the Lease Agreement dated February 18, 1999. The amendment allowed the Company to use $250,000 of its restricted cash from the letter of credit towards the rent payments for 10 months starting January 2002. On January 10, 2002, the Landlord received the $250,000 from the letter of credit per the above mentioned lease amendment. The Company agreed to replenish the letter of credit by November 2003. Accordingly, $125,700, which includes interest, has been reflected as restricted cash as a noncurrent asset at June 30, 2002. NOTE 3 - INVENTORY: Inventory, net of allowance for obsolescence of $1,018,415 and $1,005,907 at June 30, 2002 and March 31, 2002, respectively, consists of the following: June 30, 2002 March 31, 2002 ------------- -------------- Raw materials $ 246,170 $ 265,725 Work in process 1,979 2,161 Finished goods 1,286,834 756,240 ------------- -------------- Total $ 1,534,983 $ 1,024,126 ============= ============== NOTE 4 - EARNINGS PER SHARE: The computation of Basic Earnings Per Share is based on the weighted average number of common shares outstanding for the period. Diluted Earnings Per Share is based on the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents, comprised of outstanding stock options and warrants. The following is a reconciliation of the denominator used in the calculation of basic and diluted earnings per share: Three Months Three Months Ended Ended 6/30/02 6/30/01 ------------ ------------ Weighted Average No. of Shares Outstanding 22,600,501 18,203,301 Incremental Shares for Common Equivalents 691,040 3,193 ------------ ------------ Diluted Shares Outstanding 23,291,541 18,206,494 ============ ============ 9 The potential incremental common shares above were excluded from the computation of diluted earnings per share for all periods presented, because their inclusion would have had an antidilutive effect on earnings per share due to the Company's net loss for each respective period. NOTE 5 - COMPREHENSIVE INCOME: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". The following table reflects the reconciliation between net loss per the financial statements and comprehensive loss. Three Months Three Months Ended Ended 6/30/02 6/30/01 -------------- -------------- Net loss $ (2,051,634) $ (1,991,916) Effect of foreign currency translation (19,277) (2,813) -------------- -------------- Comprehensive loss $ (2,070,911) $ (1,994,729) ============== ============== NOTE 6 - INCOME TAXES: The Company has recorded a full valuation allowance against the federal and state net operating loss carryforwards and a full valuation allowance against the foreign net operating loss carryforwards and the research and development credit because management currently believes that it is more likely than not that substantially all of the net operating loss carryforwards and credits will expire unutilized. NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142, which is effective for the Company beginning April 1, 2002, requires that the amortization of goodwill and certain other intangible assets cease and that the related asset values be reviewed annually for impairment. The Company has adopted SFAS No.141 and SFAS No.142 and as a result there has been no material impact on its results of operations or financial position related to implementation of SFAS Nos. 141 and 142. In July 2001, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not anticipate any material impact on its results of operations or financial position related to implementation of SFAS No. 143. 10 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 superceded Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business in Accounting Principles Board Opinion No. 30. The Company adopted SFAS No. 144 and as a result there has been no material impact on the Company's operating results or financial condition related to the implementation of SFAS No. 144. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and nullified EITF Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact of adoption of this statement. NOTE 8 - RELATED PARTY TRANSACTIONS: During April 2000, the Company made a loan (the "Loan") to the former Chief Executive Officer (the "Former CEO") of the Company in the amount of $750,000. At the time that the Loan was issued to the Former CEO in April 2000, the Company was contemplating a secondary public offering and potential mergers and acquisitions opportunities. As a result, the Company did not want the Former CEO to exercise his stock options. In consideration for not exercising his stock options at that time, the Company issued the Loan to him. At that time, the Company had sufficient cash and it was contemplated that the Loan would be repaid within one year. The Loan accrues interest at a rate of LIBOR plus 1%. The LIBOR plus one percent interest rate in April 2000 was 7.197% as compared to the first mortgage interest rate in April 2000 of 6.90% for a 1-year ARM, 7.97% for a 15-year FRM and 8.30% for a 30-year FRM. 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 for the Loan 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 "Seperation and Forebearance Agreement"). The Loan is collateralized by a first mortgage interest on the personal residence of the Former CEO. The Company agreed to extend the repayment date of the Loan so that the Former CEO would be able to repay the Loan to the Company by selling his personal residence. In addition to the Loan, pursuant to the terms of the Seperation and Forebearance Agreement between the Company and the Former CEO, 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. These certain expenses were incurred by the Former CEO as part of his personal expense account arrangement with the Company. During the year ended March 31, 2001, $50,000 of the amounts owed to the Company by the Former CEO 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. During the year ended March 31, 2002, $813,593 was repaid which included proceeds in the amount of $777,713 received by the Company on August 3, 2001 for the sale of the Former CEO's personal residence. At June 30, 2002, the total 11 amount owed to the Company by the Former CEO was approximately $148,605, which includes interest accrued through June 30, 2002. Of this amount approximately $64,948 has been recorded as a reserve against the note receivable. The net balance of $83,657 is classified as a related party notes receivable on the Company's consolidated balance sheet. Because the amounts were not paid by their respective maturity dates, interest is accruing at the default interest rate of 12%. The Company entered into a definitive Sublease Agreement with Multipoint Communications, LLC (the "Tenant") on April 17, 2002 to sublease approximately 5,400 square feet of its facility for a period of 24 months. The rental rate and the other material terms of the lease with Multipoint Communications, LLC ("Multipoint") were negotiated through a real estate broker and separate attorneys representing each party. The rental rate was established by prorating the amount of space leased by Multipoint by the current rent paid by the Company to its landlord. Given the current real estate market condition in the area, the Company believes that the terms of the lease with Multipoint are comparable to terms of leases that might have been obtained from a non-affiliate. The rent will be $5,200 per month for the first nine months and $10,400 per month for the last fifteen months, but with a 100% abatement for the first three months. As part of the rental payment the Tenant was to be issued shares totaling the value of $77,400, which shall be based on the per share price of the Tenant's common stock as priced in the first round of institutional financing (the "Financing") which was intended to close on or before June 30, 2002. These shares shall have the registration rights as other shares issued in the Financing. The Financing did not close by June 30, 2002, consequently, the Tenant shall pay the Company additional rent in the amount of $4,300 per month commencing on July 1, 2002. At June 30, 2002, future minimum lease payments due from the Tenant are approximately $249,000. The Chairman of the Board of Directors of the Company currently serves as the Chief Financial Officer of the Tenant. NOTE 9 - EQUITY: Effective October 2001, the Company approved and granted 2,900,000 shares of restricted stock to three executives at fair value. The restricted shares are subject to a repurchase right which will permit the Company to repurchase any shares which have not yet vested at the effective date of termination of the officers' employment, as defined in their employment agreements, for an amount equal to the purchase price per share paid by the officers. The Company received a series of full recourse interest bearing promissory notes for the value of the shares to be repaid by the officers. The notes are to be repaid by the officers at the earlier of ten years or the date upon which the employees dispose of their shares. The issuance of the restricted shares and the notes receivable due from the officers is recorded in the Company's financial statements. Only the vested portion of the shares has been included in the weighted average number of common shares outstanding at June 30, 2002. 12 NOTE 10 - SUBSEQUENT EVENTS: In July 2002 the Company announced the elimination of eight positions in order to reduce operating expenses. The Company expects that the elimination of these eight positions will result in a charge in the second quarter of approximately $125,000 in severance and other employee related matters. As a result, the Company will reduce its annual overhead expenses by approximately $575,000 in salaries and employee benefits (approximately $48,000 per month). On August 5, 2002, the Company received a letter from Nasdaq approving its transfer from the Nasdaq National Market to the Nasdaq SmallCap Market, effective as of the opening of business on August 7, 2002. See also revised risk factor, "Our Common Stock may be delisted from Nasdaq", in Item 2. Management's Discussion and Analysis below. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS A number of statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. These risks and uncertainties include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission included in its annual report Form 10-KSB, as amended, for the fiscal year ended March 31, 2002. Subsequent to the filing of our Form 10-KSB, as amended, for the fiscal year ended March 31, 2002, we hereby amended the risk factor, "Our Common Stock may be delisted from Nasdaq" with the following: Our 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 for continued listing on either market require, 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 stated requirement for thirty consecutive trading days, with a 90-day grace period, with respect to the Nasdaq National Market, and a 180-day grace period with respect to the Nasdaq SmallCap Market. Our Common Stock has traded below $1.00 since January 29, 2002, and on March 13, 2002, we received notice from Nasdaq stating that our Common Stock has not met the Nasdaq National Market's $1.00 continuing listing standard for a period of 30 consecutive trading days. While our Common Stock continues to be traded on the Nasdaq National Market, we applied (within 90 days of the date of deficiency notice) for a transfer to the Nasdaq SmallCap Market in order to take advantage of the longer 180-day grace period. On August 5, 2002, we received a letter from Nasdaq approving the transfer of the Company's securities from the Nasdaq National Market to the Nasdaq SmallCap Market, effective as of the opening of business on August 7, 2002. The Nasdaq SmallCap Market requires that the Company's securities close at $1.00 per share or more for a minimum of 10 consecutive trading days. If the price deficiency is cured during the 180-day grace period provided by the Nasdaq SmallCap Market by September 9, 2002, and we otherwise continue to comply with the Nasdaq National Market maintenance standards, we could then transfer back to the Nasdaq National Market. If we cannot demonstrate compliance with the 13 Nasdaq SmallCap Market minimum bid price requirement by the end of the 180-day grace period, the Company may be eligible for an additional 180-day grace period, if we demonstrate compliance with the initial listing criteria for the Nasdaq SmallCap Market. As of the date of this filing, the Company is currently not eligible for this additional 180-day grace period, as it is not in compliance with the initial listing criteria for the Nasdaq SmallCap Market. There can be no assurance that we will satisfy the requirements for maintaining a Nasdaq National Market or SmallCap listing. If our Common Stock were to be excluded from Nasdaq, the prices of our Common Stock and the ability of holders to sell such stock would be adversely affected, and we would be required to comply with the initial listing requirements to be relisted on Nasdaq. OVERVIEW ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures and sells infrastructure security and management products to corporations, service providers and government agencies. The Company's hardware and software products are designed to form a secure auditable portal to protect IT and network infrastructure from internal and external security threats. ION's infrastructure security solution operates in the IP, data center, telecommunications and transport, and telephony environments and is sold by a direct sales force and indirect channel partners mainly throughout North America and Europe. As organizations become more interconnected and dependent on networks such as the Internet, they are increasingly being exposed to a widening range of cyber-threats. These attacks occur despite the wide spread deployment of information security technologies, suggesting that it is not sufficient to only protect the electronic perimeter of an organization. With the most damaging security breaches increasingly appearing within the boundaries of organizations, Infrastructure Security has become one of the newest components of electronic security strategies. Infrastructure Security focuses on protecting the critical infrastructure devices that support the transfer, storage, and processing of business applications and information. Infrastructure security also provides a method by which the tools used to manage these devices, and the administrators who keep these devices running smoothly, are protected against the threat of attack from the outside. The ION Secure (TM) product suite provides ION customers with comprehensive infrastructure security including secure access, authentication, authorization, audit and administrative functions that we believe form a highly scalable, robust, reliable, easy-to-use and cost-effective secure management portal. ION solutions include ION Secure PRIISMS centralized management software, 3000 and 5000 series security appliances, and 500 series security tokens. These solutions are based on ION proprietary software and hardware developed and maintained by the Company. ION infrastructure security solutions use the same single-purpose embedded ION Secure Operating System (ISOS) software on all security appliance models, with the goal of simplifying the management of thousands of IT and telecommunications infrastructure devices such as servers, routers, LAN switches, PBXs, messaging systems and multiplexers. ION solutions are designed to enable administrators to securely configure, troubleshoot and manage geographically dispersed infrastructure devices from central operations centers, reducing costly on-site visits, service disruptions and skilled personnel requirements. ION infrastructure security solutions can be used in a variety of networks including TCP/IP-data, PBX-telephony, telecommunications and data centers ranging in size from one to thousands of infrastructure devices. ION solutions are designed to be fully compatible with information security solutions offered by, among others, Cisco, Checkpoint and Nortel Networks. 14 ION's infrastructure security solutions are distributed via three distinct channels: (i) a direct sales force, (ii) indirect channels, such as Value Added Resellers (VARs) and (iii) Original Equipment Manufacturers (OEMs). Services revenue is typically generated from integration and maintenance services in conjunction with the sale of ION solutions. The Company is a Delaware corporation founded in 1999 through the combination of two companies - MicroFrame ("MicroFrame"), 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). From the time of the merger in 1999 through the third quarter of fiscal 2002, the Company's principal objective was to address the need for security based network management solutions, primarily for the PBX-based telecommunications market, resulting in a significant portion of our revenues being generated from sales to various telecommunications companies. During the last twelve to eighteen months, the telecommunications industry has endured a significant economic downturn. Telecommunications service providers have typically reduced planned capital spending, have reduced staff, and sought bankruptcy proceedings and/or ceased operations. Consequently, the spending cutback of the organizations has affected the Company through reduced product orders. The decline in product orders negatively impacted our revenues, resulting in significant operating losses and negative cash flows. As a result, it is imperative for us to be successful in increasing our revenue, reducing costs, and/or securing additional funding in fiscal 2003 in order to continue operating as a going concern. 15 RESULTS OF OPERATIONS For the three months ended June 30, 2002 compared to the same period in 2001 Revenue for the three months ended June 30, 2002, was $960,132 compared to revenue of $1,933,442 for the same period in 2001, a decrease of $973,310 or 50.3%. The decrease in revenue was primarily attributable to the weakness of capital and IT spending specifically in the telecommunications service provider sector. The continued economic slowdown has caused corporations to freeze capital spending, resulting in prolonged sales cycles. Cost of sales for the three months ended June 30, 2002 was $356,505 compared to $857,600 for the same period in 2001 primarily due to a decrease in revenue. Gross margin as a percentage of revenue for the three months ended June 30, 2002 increased from 55.6% to 62.9% for the same period in 2001 due to reduction of our fixed manufacturing costs from the prior year and increase to our prices. Research and development ("R&D") expense, net of capitalized software development, for the three months ended June 30, 2002 was $235,309 compared to $479,784 for the same period in 2001, a decrease of $244,475 or 51.0%. The decrease in R&D expense was primarily the result of a decrease in spending for third party consultants. Selling, general and administrative expenses ("SG&A") for the three months ended June 30, 2002 was $2,136,968 compared to $2,155,114 for the same period in 2001, a decrease of $18,146 or 0.8%. The SG&A expense was relatively flat from the prior year. Although there was a headcount and corresponding expense reduction in October 2001, the expenses have since increased in the quarter ending June 30, 2002 primarily due to an increase in sales, marketing and other professionals engaged to further ION's new product and service focus. Depreciation and amortization expenses - amortization of capitalized software, goodwill and other acquisition related intangibles, and depreciation on equipment, furniture and fixtures - was $281,971 for the three months ended June 30, 2002 compared to $471,276 in the same period in 2001, a decrease of $189,305 or 40.2%. The decrease was primarily the result of the three-year amortization period for the acquisitions of LeeMAH and Solcom Systems, Ltd coming to an end on March 31, 2002. Net loss for the three months ended June 30, 2002 was $2,051,634 compared to a loss of $1,991,916 for the same period in 2001. This represents only a minor increase from last year despite the reduction in revenue of this current quarter. This is attributable to reduced operating expenses and improved gross margins as a percentage of revenue. 16 FINANCIAL CONDITION AND CAPITAL RESOURCES The Company's working capital balance as of June 30, 2002 was $3,098,907 as compared to $5,040,922 at March 31, 2002. This decline in working capital was due to continued operating losses generated throughout the three months ended June 30, 2002. We believe that our working capital as of June 30, 2002 will fund the Company's operations, as currently planned, until January 2003. We believe that a minimum of $2,000,000 in additional capital will be needed in order to fund the Company's planned operations through June 2003. We plan to seek equity financing to provide funding for operations but the current market for equity financing may be weak. If we are not successful in raising additional equity capital to generate sufficient cash flows to meet our obligations as they come due, we plan to continue to reduce our overhead expenses by the reduction of headcount and other available measures. We may also explore the possibility of mergers and acquisitions. If we are not successful in increasing our revenue, reducing our expenses or raising additional equity capital to generate sufficient cash flows to meet our obligations as they come due, we may not be able to continue as a going concern. Net cash used in operating activities during the three months ended June 30, 2002 was $1,381,373 compared to net cash used during the same period in 2001 of $824,537. The increase in net cash used during the three months ended June 30, 2002 compared to the same period in 2001, was primarily due to lower than expected revenues. The $1,381,373 net cash used in operating activities primarily consisted of the build-up of inventory due to lower than expected revenues, the payment of accounts payable, and the net loss incurred during the quarter. Net cash used in investing activities during the three months ended June 30, 2002 was $137,750 compared to net cash used during the same period in 2001 of $74,860. This increase was primarily due to additional capitalized software. Net cash used in financing activities during the three months ended June 30, 2002 was $40,233 compared to net cash used during the same period in 2001 of $13,445. This increase was primarily due to principal payment on long-term debt and capital leases. Our consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates the realization and satisfaction of liabilities and commitments in the normal course of business. At June 30, 2002, we had an accumulated deficit of $39,146,058 and working capital of $3,098,907. We also realized net losses of $2,051,634 for the three months ended June 30, 2002. Our existing working capital might not be sufficient to sustain our operations. Our plans to overcome this condition includes refocusing our sales efforts to include penetrating additional markets with our enterprise infrastructure security products, reducing expenses and raising additional equity capital. We have restructured and reorganized to reduce our operating expenses by the elimination of eight employees in July 2002, which reduced the Company's overhead expenses by approximately $575,000 in annual salaries and employee benefits. The Company has refocused its sales effort to emphasize the selling of its software products and reengineered its hardware products in an effort to increase gross margins. The Company has begun to establish alternate channels that will open opportunities in the future to sell our products without the overhead expenses associated with direct sales. We can not assure that our sales efforts or expense reduction programs will be successful, or that additional financing will be available to us, or, if available, that the terms will be satisfactory to us. If we are not 17 successful in increasing our revenue, reducing our expenses or raising additional equity capital, to generate sufficient cash flows to meet our obligations as they come due, we may not be able to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern SIGNIFICANT ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. Revenue Recognition - The Company recognizes revenue from product sales to end users, value-added resellers (VARs) and original equipment manufacturers (OEMs) upon shipment if no significant vendor obligations exist and collectibility is probable. We do not offer our customers the right to return products, however the Company records warranty costs at the time revenue is recognized. Management estimates the anticipated warranty costs but actual results could differ from those estimates. 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. Allowance for Doubtful Accounts Receivable - Accounts receivable are reduced by an allowance to estimate the amount that will actually be collected from our customers. Many of our customers have been adversely affected by economic downturn in the telecommunications industry. If the financial condition of our customers were to materially deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. Inventory Obsolescence Reserves - Inventories are stated at the lower of cost (average cost) or market. Reserves for slow moving and obsolete inventories are provided based on historical experience and current product demand. If our estimate of future demand is not correct or if our customers place significant order cancellations, inventory reserves could increase from our estimate. We may also receive orders for inventory that has been fully or partially reserved. To the extent that the sale of reserved inventory has a material impact on our financial results, we will appropriately disclose such effects. Our inventory carrying costs are not material; thus we may not physically dispose of reserved inventory immediately. Impairment of Software Development and Purchased Software Costs - 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 18 feasibility of a product, to the extent that such costs are expected to be recovered through future sales of the product. Management is required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization. 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 the sales of that software, or (ii) the straight-line method over the estimated useful life of the product. As a result, the carrying amount of the capitalized software costs may be reduced materially in the near term. We record impairment losses on capitalized software and other long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our estimates. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142, which is effective for the Company beginning April 1, 2002, requires that the amortization of goodwill and certain other intangible assets cease and that the related asset values be reviewed annually for impairment. The Company has adopted SFAS No. 141 and SFAS No. 142 and as a result there has been no material impact on its results of operations or financial position related to implementation of SFAS Nos. 141 and 142. In July 2001, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not anticipate any material impact on its results of operations or financial position related to implementation of SFAS No. 143. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 superceded Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business in Accounting Principles Board Opinion No. 30. The Company adopted SFAS No. 144 and as a result there has been no material impact on the Company's operating results or financial condition related to the implementation of SFAS No. 144. 19 In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and nullified EITF Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact of adoption of this statement. 20 PART II. OTHER INFORMATION ITEM 6. 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./(1)/ 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./(1)/ 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./(2)/ 3.4 By-Laws of the Company./(1)/ 3.5 Form of Specimen Common Stock Certificate of the Company./(3)/ 4.1 1998 Stock Option Plan of the Company./(1)/ 4.2 1998 U.K. Sub-Plan of the Company, as amended./(1)/ 10.1 Lease Agreement dated February 18, 1999 by and between the Company and Washington Plaza Associates, L.P., as landlord. /(3)/ 10.2 Business Park Gross Lease dated May 17, 1999 by and between the Company and Bedford Property Investors, Inc./(3)/ 10.3 Supply Agreement dated October 20, 1998 by and between the Company and Lucent Technologies. (Incorporated by reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999)./(3)/ 10.4 OEM Purchase Agreement dated April 13, 1999 by and between the Company and the Hewlett-Packard Company./(3)/ 10.5 Agreement dated as of December 19, 1994 by and between LeeMAH DataCom Security Corporation and Siemens Rolm Communications Inc./(3)/ 21 Exhibit No. Description ------- ----------- 10.6 Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by and between the Company and Siemens Credit Corporation. (Incorporated by reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999)./(3)/ 10.7 Equipment Lease Agreement dated June 17, 1999 by and between the Company and Lucent Technologies./(3)/ 10.8 (i) Non-negotiable Promissory Note in the principal amount of $750,000 issued by Stephen B. Gray to the Company./(4)/ (ii) First Amendment to Promissory Note dated as of August 5, 2000 by and between the Company and Stephen B. Gray./(4)/ 10.9 Line of Credit Agreement with United Nations Bank dated September 30, 1999./(4)/ 10.10 Asset Purchase Agreement dated as of February 25, 1999 by and among the Registrant, LeeMAH and the Parent./(5)/ 10.11 Assignment of Patents of LeeMAH dated February 25, 1999./(5)/ 10.12 Assignment of Trademarks of LeeMAH dated February 25, 1999./(5)/ 10.13 (i) Separation and Forebearance Agreement made as of October 5, 2000 between the Company and Stephen B. Gray./(6)/ (ii)Promissory Note in the amount of $163,000 dated October 5, 2000 made by Stephen B. Gray to the Company./(6)/ 10.14 Consulting Agreement entered into September 18, 2000 between the Company and Venture Consulting Group, Inc./(6)/ 10.15 Materials and Services Contract dated January 16, 2001, between the Company and SBC Services, Inc./(7)/ 10.16 Stock Purchase Agreement dated August 11, 2000 by and between the Company and the parties identified therein./(7)/ 10.17 Form of Warrant Agreement dated July 17, 2001./12/ 10.18 Form of Warrant Agreement dated January 4, 2002./12/ 10.19 Form of Non-Qualified Stock Option Agreement dated March 19, 1999 by and between the Company's predecessor, Microframe, Inc. and its consultants./12/ 10.20 Form of Non-Employee Director Stock Option Contract dated March 10, 1998 between the Company's predecessor, Microframe, Inc. and its non-employee directors./12/ 10.21 Form of Non-Employee Director Stock Option Contract dated September 17, 1997 by and between the Company's predecessor, Microframe, Inc. and its non-employee directors./12/ 22 Exhibit No. Description ------- ----------- 10.22 Form of Non-Qualified Stock Option Agreement dated September 25, 1996 by and between the Company's predecessor, Microframe, Inc. and its employees./12/ 10.23 Amended and Restated Non-Qualified Stock Option Agreement dated May 19, 1997 by and between the Company's predecessor, Microframe, Inc. and its employees./(8)/ 10.24 Employment Agreement dated October 4, 2001 between the Company and Kam Saifi./10/ 10.25 Employment Agreement dated October 17, 2001 between the Company and Cameron Saifi./11/ 10.26 Employment Agreement dated October 17, 2001 between the Company and David Arbeitel./11/ 10.27 Sublease Agreement dated April 17, 2002 between the Company and Multipoint Communications, LLC./13/ 10.28 Employment Agreement dated May 20, 2002 between the Company and Ted Kaminer.* 16.1 Letter dated June 28, 2001, from PricewaterhouseCoopers LLP to the Securities and Exchange Commission./(9)/ 21.1 List of Subsidiaries./13/ - ---------- (1) Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on April 22, 1999. (2) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on March 17, 2000. (3) Incorporated by reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999. (4) Incorporated by reference to the Company's Annual Report on form 10-KSB filed on June 28, 2000. (5) Incorporated by Reference to the Company's Current Report on Form 8-K filed on March 12, 1999. (6) Incorporated by reference to the Company's quarterly report on Form 10-QSB filed on November 14, 2000. (7) Incorporated by reference to the Company's annual report on form 10-KSB filed on June 29, 2001. (8) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on November 17, 2000. (9) Incorporated by reference to the Company's annual report on form 10-KSB filed on June 29, 2001. (10) Incorporated by Reference to the Company's Current Report on Form 8-K filed on October 23, 2001. (11) Incorporated by Reference to the Company's Current Report on Form 8-K filed on October 24, 2001. (12) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 2002, as filed on July 1, 2002. 23 (13) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A, Amendment No.2, for the fiscal year ended March 31, 2002, as filed on August 2, 2002. * Filed herewith. (b) Reports on Form 8-K: On April 22, 2002, the Company filed a report on Form 8-K reporting the issuance of a press release announcing unaudited preliminary results for the fourth quarter ended March 31, 2002. On May 30, 2002, the Company filed a report on Form 8-K reporting the issuance of a press release announcing the results for the fourth quarter ended March 31, 2002. 24 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 14, 2002 ION NETWORKS, INC. /s/ Kam Saifi ------------------------------------------ Kam Saifi, Chief Executive Officer and President /s/ Ted Kaminer ------------------------------------------ Ted Kaminer, Chief Financial Officer 25 EXHIBIT INDEX 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./(1)/ 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./(1)/ 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./(2)/ 3.4 By-Laws of the Company./(1)/ 3.5 Form of Specimen Common Stock Certificate of the Company./(3)/ 4.1 1998 Stock Option Plan of the Company./(1)/ 4.2 1998 U.K. Sub-Plan of the Company, as amended./(1)/ 10.1 Lease Agreement dated February 18, 1999 by and between the Company and Washington Plaza Associates, L.P., as landlord. /(3)/ 10.2 Business Park Gross Lease dated May 17, 1999 by and between the Company and Bedford Property Investors, Inc./(3)/ 10.3 Supply Agreement dated October 20, 1998 by and between the Company and Lucent Technologies. (Incorporated by reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999)./(3)/ 10.4 OEM Purchase Agreement dated April 13, 1999 by and between the Company and the Hewlett-Packard Company./(3)/ 10.5 Agreement dated as of December 19, 1994 by and between LeeMAH DataCom Security Corporation and Siemens Rolm Communications Inc./(3)/ 26 Exhibit No. Description ------- ----------- 10.6 Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by and between the Company and Siemens Credit Corporation. (Incorporated by reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999)./(3)/ 10.7 Equipment Lease Agreement dated June 17, 1999 by and between the Company and Lucent Technologies./(3)/ 10.8 (i) Non-negotiable Promissory Note in the principal amount of $750,000 issued by Stephen B. Gray to the Company./(4)/ (ii) First Amendment to Promissory Note dated as of August 5, 2000 by and between the Company and Stephen B. Gray./(4)/ 10.9 Line of Credit Agreement with United Nations Bank dated September 30, 1999./(4)/ 10.10 Asset Purchase Agreement dated as of February 25, 1999 by and among the Registrant, LeeMAH and the Parent./(5)/ 10.11 Assignment of Patents of LeeMAH dated February 25, 1999./(5)/ 10.12 Assignment of Trademarks of LeeMAH dated February 25, 1999. /(5)/ 10.13 (i) Separation and Forebearance Agreement made as of October 5, 2000 between the Company and Stephen B. Gray./(6)/ (ii)Promissory Note in the amount of $163,000 dated October 5, 2000 made by Stephen B. Gray to the Company./(6)/ 10.14 Consulting Agreement entered into September 18, 2000 between the Company and Venture Consulting Group, Inc./(6)/ 10.15 Materials and Services Contract dated January 16, 2001, between the Company and SBC Services, Inc./(7)/ 10.16 Stock Purchase Agreement dated August 11, 2000 by and between the Company and the parties identified therein./(7)/ 10.17 Form of Warrant Agreement dated July 17, 2001./12/ 10.18 Form of Warrant Agreement dated January 4, 2002./12/ 10.19 Form of Non-Qualified Stock Option Agreement dated March 19, 1999 by and between the Company's predecessor, Microframe, Inc. and its consultants./12/ 10.20 Form of Non-Employee Director Stock Option Contract dated March 10, 1998 between the Company's predecessor, Microframe, Inc. and its non-employee directors./12/ 10.21 Form of Non-Employee Director Stock Option Contract dated September 17, 1997 by and between the Company's predecessor, 27 Microphone, Inc, and its non-employee directors./12/ Exhibit No. Description ------- ----------- 10.22 Form of Non-Qualified Stock Option Agreement dated September 25, 1996 by and between the Company's predecessor, Microframe, Inc. and its employees./12/ 10.23 Amended and Restated Non-Qualified Stock Option Agreement dated May 19, 1997 by and between the Company's predecessor, Microframe, Inc. and its employees./(8)/ 10.24 Employment Agreement dated October 4, 2001 between the Company and Kam Saifi./10/ 10.25 Employment Agreement dated October 17, 2001 between the Company and Cameron Saifi./11/ 10.26 Employment Agreement dated October 17, 2001 between the Company and David Arbeitel./11/ 10.27 Sublease Agreement dated April 17, 2002 between the Company and Multipoint Communications, LLC./13/ 10.28 Employment Agreement dated May 20, 2002 between the Company and Ted Kaminer.* 16.1 Letter dated June 28, 2001, from PricewaterhouseCoopers LLP to the Securities and Exchange Commission./(9)/ 21.2 List of Subsidiaries./13/ - ---------- (1) Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on April 22, 1999. (2) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on March 17, 2000. (3) Incorporated by reference to the Company's Annual Report on form 10-KSB for the fiscal year ended March 31, 1999. (4) Incorporated by reference to the Company's Annual Report on form 10-KSB filed on June 28, 2000. (5) Incorporated by Reference to the Company's Current Report on Form 8-K filed on March 12, 1999. (6) Incorporated by reference to the Company's quarterly report on Form 10-QSB filed on November 14, 2000. (7) Incorporated by reference to the Company's annual report on form 10-KSB filed on June 29, 2001. (8) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on November 17, 2000. (9) Incorporated by reference to the Company's annual report on form 10-KSB filed on June 29, 2001. (10) Incorporated by Reference to the Company's Current Report on Form 8-K filed on October 23, 2001. (11) Incorporated by Reference to the Company's Current Report on Form 8-K filed on October 24, 2001. 28 (12) Incorporated by reference to the Company's Annual Report on Form 10-KSB, as amended, for the fiscal year ended March 31, 2002. (13) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A, Amendment No.2, for the fiscal year ended March 31, 2002, as filed on August 2, 2002. * Filed herewith. 29 EX-10.28 3 dex1028.txt EMPLOYMENT AGREEMENT Exhibit. 10.28 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, made this 20th day of May, 2002, by and between ION Networks, Inc., a Delaware corporation, with its principal place of business at 1551 South Washington Avenue, Piscataway, New Jersey 08854, (the "Company") and Ted Kaminer residing at 12 Chateau Drive, Cherry Hill, New Jersey 08003 (the "Employee"). W I T N E S S E T H: WHEREAS, the Company desires to employ the Employee as Chief Financial Officer and Vice President and wishes to acquire and be assured of Employee's continued services on the terms and conditions hereinafter set forth; WHEREAS, the Employee desires to be employed by the Company as Chief Financial Officer and Vice President and to perform and to serve the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual terms, covenants, agreements and conditions hereinafter set forth, the Company and the Employee hereby agree as follows: 1. Employment. The Company hereby employs the Employee to serve as a full time Employee of the Company, and the Employee hereby accepts such employment with the Company, for the period set forth in Section 2 below. The Employee's principal place of employment shall be in the Company's offices in Piscataway, New Jersey or other such places as are reasonably directed by the Company. The Employee hereby accepts such employment and agrees to undertake the duties and responsibilities inherent in such position. 2. Term. Unless earlier terminated as provided in this Agreement, the term of the Employee's employment under this Agreement shall commence on May 20, 2002 (the "Engagement Date") and shall continue until June 30, 2005, but shall be terminable prior thereto, for the reasons set forth in paragraph 7, including for "Cause" (as defined in paragraph 7(a)(iii)). The period of Employee's employment hereunder shall hereinafter be known as the "Employment Term." Any renewal of this agreement shall be only by mutual agreement of the parties. The parties will commence discussion of any possible renewal not later than May 31, 2005. 3. Duties and Authority. (a) Duties. The Employee shall be employed as the Chief Financial Officer and Vice President of the Company, shall faithfully and competently perform such duties at such times and places and in such manner as the Board of Directors of the Company (the "Board"), may from time to time reasonably direct, and Employee shall report to the Chief Executive Officer of the Company. The Employee will be primarily responsible for overseeing the Company's finance and administration components including, but not limited to, accounting and controls, risk management, corporate administration and investor relations. In addition, the Employee will provide integral financial perspective regarding key senior management decisions. Except as otherwise may be approved in advance by the Board, and except during 1 vacation periods and reasonable periods of absence, including absences due to sickness, personal injury, family leave as permitted by law, or other disability, the Employee shall devote Employee's full time throughout the Employment Term to the services required of Employee hereunder. The Employee shall render Employee's services exclusively to the Company during the Employment Term and shall use Employee's best efforts, judgment and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of Employee's position. (b) Authority. The Employee shall have such authority, duties and responsibilities consistent with his position, subject to the supervision and authority of the Board. (c) Assistance. The Company will assist the Employee by furnishing all necessary information with respect to its products and with respect to all technical and administrative support as is reasonably required. The Company will keep the Employee informed concerning its new products, sales strategies and general business developments. The Company will provide Employee with office facilities adequate to his function and position, comparable to that provided by the Company to other senior executives. 4. Compensation. (a) Base Salary. In consideration of the services of the Employee rendered to the Company hereunder, the Company shall pay the Employee (i) a base salary at an annual rate of $145,000 during the period of the Employment Term commencing May 20, 2002, and (ii) certain bonus payments as set forth below. Upon expiration or termination of this Agreement, payments made pursuant to this section shall cease (unless Employee is terminated in a manner specified in Section 7(b), in which event that subparagraph's provisions shall control); provided, however, that the Employee shall be entitled to payments for periods or partial periods that occurred prior to the date of termination and for which the Employee has not yet been paid. (b) Provided Employee continues to remain employed on the date which is 16 days prior to the end of each of the applicable fiscal quarters of the Company referenced herein, Employee shall be entitled to a bonus payment of $12,500 each time the Company achieves certain revenue projections as set forth in Schedule 1, attached hereto. (c) Stock Options. The Employee shall receive a one-time award of 200,000 Stock Options pending approval by the Board of Directors. The strike price of these options will be the market value on the Employee's start date. The term of these options is seven years with vesting over three years as follows: (i) 25,000 options will vest on execution of this agreement (ii) 21.5% of the total number of shares subject to each option shall vest 12 months from the date of grant, and the remaining (iii) The remaining 66% shall vest at a rate of 8.25% at the end of every three month period following the 12 month anniversary of the grant. In the event of a transaction which constitutes a Change in Control of the 2 Company as defined below, any unvested portion of the options granted hereby (whether or not such options are assumed by the successor or surviving entity of such transaction, as provided below) will accelerate and become immediately vested so that the options shall, 10 days before the effective date of the event constituting a Change in Control, become exercisable for all the Shares subject to this option. A Change in Control is defined as (i) a proposed dissolution or liquidation of the Company, or (ii) a proposed sale of all or substantially all of the assets or outstanding equity of the Company, or (iii) the merger or consolidation of the Company with or into another entity or any other corporate reorganization if persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization fifty percent (50%) or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity. (d) Withholding, Etc. Payroll taxes will be withheld from payment of amounts payable hereunder, in accordance with then-applicable New Jersey and federal tax guidelines. 5. Benefits. During the Employment Term, the Employee shall be entitled to: (a) 20 annual paid vacation days in accordance with Company policy; such vacation to be taken at a time mutually convenient to Company and the Employee. If the Employee's employment is terminated, any accrued unused vacation time shall be paid at the time of termination, except in the event of termination for "Cause" under Paragraph 7(a)(iii), in which event all such time shall be forfeited; (b) Paid sick leave, holidays and floating holidays in accordance with Company policy; (c) reimbursement for all reasonable and necessary out-of-pocket business expenses, such expenses to be properly receipted or otherwise documented, incurred by the Employee in the performance of Employee's duties hereunder in accordance with the Company's policies applicable on or after the Engagement Date; (d) coverage under the Company's health and welfare benefits and other similar plans and programs, including the Company's 401(k) Plan, upon terms comparable to those provided by the Company to other senior executives; and (e) reimbursement for automobile mileage, to extent utilized on Company business at the then applicable Internal Revenue Service deduction rate. 6. Developments and Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows: (a) The Company is engaged in a continuous program of research, design, development, production, marketing and servicing with respect to its business. 3 (b) The Employee's employment hereunder creates a relationship of confidence and trust between the Employee and the Company with respect to certain information pertaining to the business of the Company and its Affiliates (as hereinafter defined) or pertaining to the business of any client or customer of the Company or its Affiliates which may be made known to the Employee by the Company or any of its Affiliates or by any client or customer of the Company or any of its Affiliates or learned by the Employee during the period of Employee's employment by the Company. (c) The Company possesses and will continue to possess information that has been created, discovered or developed by, or otherwise become known to it (including, without limitation, information created, discovered or developed by, or made known to, the Employee during the period of Employee's employment or arising out of Employee's employment) or in which property rights have been or may be assigned or otherwise conveyed to the Company, which information has commercial value in the business in which the Company is engaged and is treated by the Company as confidential. (d) Any and all inventions, products, discoveries, improvements, processes, manufacturing, marketing and services methods or techniques, formulae, designs, styles, specifications, data bases, computer programs (whether in source code or object code), know-how, strategies and data, whether or not patentable or registrable under copyright or similar statutes, made, developed or created by the Employee (whether at the request or suggestion of the Company, any of its Affiliates, or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the period of Employee's employment by the Company which pertains to the Company's actual or contemplated business, products, intellectual property or processes of the Company or any of its Affiliates (collectively hereinafter referred to as "Developments"), shall be the sole property of the Company and will be promptly and fully disclosed by the Employee to the Board without any additional compensation therefor, including, without limitation, all papers, drawings, models, data, documents and other material pertaining to or in any way relating to any Developments made, developed or created by Employee as aforesaid. The Company shall own all right, title and interest in and to the Developments and such Developments shall be considered "works made for hire" for the Company under US Copyright Law. If any of the Developments are held for any reason not to be "works made for hire" for the Company or if ownership of all right, title and interest in and to the Developments has not vested exclusively and immediately in the Company upon creation, Employee irrevocably assigns, without further consideration any and all, right, title and interest in and to the Developments to the Company, including any and all moral rights, and "shop rights" in the Developments recognized by applicable law. Employee irrevocably agrees to execute any document requested by the Company or its Affiliates to give effect to this paragraph such as assignment of invention or other general assignments of intellectual property rights, without additional compensation therefor. For the purposes of this Agreement, the term "Affiliate" or "Affiliates" shall mean any person, corporation or other entity directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For the purposes of this definition, "control" when used with respect to any person, corporation or other entity means the power to direct the management and policies of such person or entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 4 (e) The Employee will keep confidential and will hold for the Company's sole benefit any Development which is to be the exclusive property of the Company under this Section 6, irrespective of whether any patent, copyright, trademark or other right or protection is issued in connection therewith. (f) The Employee also agrees that the Employee will not, without the prior approval of the Board, (i) use for Employee's benefit or disclose at any time during Employee's employment by the Company, or thereafter, except to the extent required by the performance by Employee of Employee's duties as an employee of the Company, any information obtained or developed by Employee while in the employ of the Company with respect to any Developments or with respect to any customers, clients, suppliers, products, services, prices, executives, financial affairs, or methods of design, distribution, marketing, service, procurement or manufacture of the Company or any of its Affiliates, or any confidential matter, except information which at the time is generally known to the public other than as a result of disclosure by Employee not permitted hereunder, or (ii) take with Employee upon leaving the employ of the Company any document or paper relating to any of the foregoing or any physical property of the Company or any of its Affiliates. Notwithstanding the foregoing, the following will not constitute confidential information for purposes of this Agreement: (i) information which is or becomes publicly available other than as a result of disclosure by the Employee; (ii) information designated in writing by the Company as no longer confidential, or (iii) information known by the Employee as of the Engagement Date and identified as such in writing to the Board. Employee will comply with all intellectual property disclosure policies established by the Company from time to time with respect to the Company's confidential information, including without respect to Developments. (g) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Company and its Affiliates shall be entitled to injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach; provided, however, that nothing contained herein shall be construed as prohibiting the Company or any of its Affiliates from pursuing any other rights and remedies available for any such breach or threatened breach. (h) The Employee agrees that upon termination of Employee's employment for any reason, the Employee shall forthwith return to the Company all documents and other property in Employee's possession or under the Employee's control belonging to the Company or any of its Affiliates. (i) The Employee represents and warrants that he has terminated employment with one or more prior employers and that his employment by the Company and the use by the Company of any skills and knowledge that he may have, are not in violation of the terms of any contract that he is a party to or any other applicable provision of the law. (j) The Employee represents and warrants that his performance of all the terms of this Agreement and his duties as an employee of the Company does not now and will not knowingly breach any agreement to keep in confidence confidential information acquired by him in confidence or in trust prior to his employment with the Company. The Employee further represents and warrants that he has not entered into and he will not enter into any agreement either written or oral in conflict herewith. 5 (k) The Employee represents and warrants that he has not brought and will not bring with him to the Company or use in the performance of his responsibilities at the Company (a) any materials, documents or confidential information of a former employer which are not generally available to the public, unless he has obtained written authorization from the former employer for their possession and use, or (b) any confidential information which he knows or should have known has been acquired by improper means, or otherwise misappropriated from another person. (l) Without limiting the generality of Section 9 hereof, the Employee hereby expressly agrees that the provisions of this Section 6 shall be binding upon the Employee's heirs, successors and legal representatives. (m) The provisions of section 6 shall be binding irrespective of any claim by Employee for breach of this Agreement by the Company. (n) The provisions of section 6 shall survive any termination of this Agreement. 7. Termination. (a) The Employee's employment hereunder shall be terminated: (i) upon death of the Employee; or (ii) upon the Employee's inability to perform Employee's duties on account of disability or incapacity for a period of ninety (90) or more days, whether or not consecutive, occurring within any period of twelve (12) consecutive months, such termination to take effect on 30 days prior written notice from the Company to the Employee. A determination of disability shall be made by a physician satisfactory to both the Employee and the Company; provided that if the Employee and the Company do not agree on a physician, they shall each select a physician and these two together shall select a third physician, whose determination as to disability shall be binding on all parties; or (iii) at any time, by the Company, for "Cause"; "Cause" shall be defined as (1) conviction of a felony, or (2) acts of dishonesty or moral turpitude constituting fraud or embezzlement or otherwise materially adversely affecting the business or properties of the Company and/or its Affiliates; (3) failure to obey the reasonable and lawful directions of the Board; (4) repeated negligence by the Employee in the performance of, or willful disregard by Employee of his obligations under, this Agreement; or (5) if Employee is indicted for a criminal violation of the securities laws. (b) Employee's employment may be terminated, at any time immediately upon written notice by the Company, without "Cause". If Employee is terminated other than for "Cause," Employee shall be entitled to a severance payment equal to the lesser of (i) the remaining salary due Employee for the balance of the Employment Term at the date of such termination; (ii) a payment of salary for the next three months as if the Agreement had not been terminated. Employee and Company agree that such severance payment shall also constitute liquidated damages and is a reasonable approximation of Employee's damages as a result of such termination. 6 (c) Employee and Company agree that no acceleration of vesting of Employee's options granted under Section 4 shall occur in the event of (i) a termination under Section 7(a)(i), (ii) or (iii) hereof, or (ii) a termination without "Cause," except in the context of a "Change in Control," to the extent specified in Section 4. In the event of a "Change in Control", as defined above, Employee shall be entitled to treat this Agreement as terminated, and shall be entitled to such severance payments (as specified in Section 7(b) above) as liquidated damages, unless Employee is offered employment as the CFO of the successor or surviving corporation of such "Change in Control", in which event Employee will not be entitled to such severance payments, unless he is terminated without "Cause" within the 6 month period following such "Change in Control" or resigns for "Good Reason" during such period. In addition, the provisions of Section 4, with respect to accelerated vesting of Employee's options, shall apply in the event of a "Change in Control." "Good Reason" is defined as (i) without Employee's express written consent, a change in Employee's responsibilities, status, or titles, which represents a material diminution of Employee's responsibilities, status, or titles with the Company as of the date of this Agreement, or any removal of Employee from, or any failure to re-appoint Employee to, any of such titles, except in connection with (a) the termination of Employee's employment as a result of Employee's death; (b) a termination by the Company as a result of Employee's disability as specified in paragraph 7(a)(ii); (c) a termination by the Company for Cause as specified in paragraph 7(a)(iii); or (d) a termination initiated by Employee other than for reasons specified in this paragraph; (ii) a reduction by the Company in Employee's base salary as in effect as of the date of this Agreement plus all increases therein subsequent to such date; (iii) an intentional, material reduction by the Company in Employee's aggregate target incentive awards granted to Employee in this Agreement or in subsequent agreements; or (iv) the unjustified failure by the Company to pay Employee any material amount of Employee's salary, or any material amount of Employee's compensation deferred under any plan, agreement or arrangement of or with the Company, within ten (10) days after Employee's written demand for such amount. (d) Except as required by applicable law, and except as expressly provided elsewhere in this Agreement, the Company and its Affiliates shall not be obligated to make any payments to the Employee or on Employee's behalf of whatever kind or nature by reason of the Employee's cessation of employment, other than (i) such amounts, if any, of Employee's salary, and unused vacation time, as shall have accrued and remained unpaid as of the date of said cessation and (ii) such other amounts which may be then otherwise payable to the Employee from the Company's benefits plans or reimbursement policies, if any. Variable bonus payments under Section 4(b) for any fiscal quarter shall not be paid if Employee is not employed on the date which is 16 days prior to the end of the fiscal quarter for which the bonus payment for such quarter is to be determined. (e) Upon termination of this Agreement, all Company owned property, documentation and other Company proprietary materials furnished to Employee shall be immediately returned to the Company. (f) Upon notice of termination, at the Company's request, Employee shall not continue to perform services for the Company or represent the Company in any manner, shall not appear at the Company's offices and shall otherwise refrain from any activity not specifically requested by the Company under this Agreement. 7 8. Non-Competition. (a) During the period during which Employee is employed hereunder (the "Non-Competition Period"), and, at the Company's option, for a period of six months thereafter, provided the Company continues to pay Employee his base salary, as in effect at the date Employee's employment ended (with any severance payments made to Employee credited to such payments), during such six month period, irrespective of any claim by Employee of a breach by Company of this Agreement: (i) the Employee will not make any statement or perform any act intended to advance an interest of any existing or prospective Competitor (as defined in subparagraph (iii) below) of the Company or any of its Affiliates in any way that will or may injure an interest of the Company or any of its Affiliates in its relationship and dealings with existing or potential customers or clients, or solicit or encourage any other Employee of the Company or any of its Affiliates to do any act that is disloyal to the Company or any of its Affiliates or inconsistent with the interest of the Company or any of its Affiliates' interests or in violation of any provision of this Agreement; (ii) the Employee will not solicit, divert or take away, or attempt to solicit, divert or to take away, the business or patronage of any of the clients, customers, dealers, distributors, representatives or accounts, or prospective clients, customers, dealers, distributors, representatives or accounts, of the Company or its Affiliates which were contacted, solicited or served by employees of the Company while the Employee was employed by the Company. This subparagraph (ii) shall only apply to such actions taken by the Employee on behalf of a Competitor of the Company, as described in subparagraph (iii) below; (iii) the Employee will not directly or indirectly (as a director, stockholder, officer, executive, manager, consultant, independent contractor, advisor or otherwise) engage in competition with, or own any interest in, perform any services for, participate in or be connected with (a) any business or organization which engages in competition with the Company or any of its Affiliates in the United States or any other geographical area where any business is presently carried on by the Company or any of its Affiliates, or (b) any business or organization which engages in competition in such area of business with the Company or any of its Affiliates in any geographical area where any such business shall be hereafter, during the period of the Employee's employment by the Company, carried on by the Company or any of its Affiliates, if such business is also being carried on by the Company or any of its Affiliates in such geographical area during the Non-Competition Period. Competition shall be deemed to exist between the Company and any other person or firm which primarily engages in the business of manufacturing, sale or distribution of network management products, such person or firm to be defined herein as a "Competitor"; and (iv) the Employee will not directly or indirectly solicit for employment, or advise or recommend to any other person that they employ or solicit for employment, for or on behalf of a Competitor, any employee of the Company or any of its Affiliates; provided, however, that the provisions of this Section 8(a) shall not be deemed to prohibit the Employee's ownership of not more than five percent (5%) of the total shares of all classes of stock outstanding of any publicly held company. 8 (b) (i) The Employee further agrees that the limitations set forth in this Section 8 (including, without limitation, any time or territorial limitations) are reasonable and properly required for the adequate protection of the businesses of the Company and its Affiliates. It is understood and agreed that the covenants made by the Employee in this Section 8 shall survive the expiration or termination of this Agreement. (ii) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 8 would be inadequate and, therefore, agrees that the Company and any of its Affiliates shall be entitled to injunctive relief in addition to any other available rights and remedies in cases of any such breach or threatened breach; provided, however, that nothing contained herein shall be construed as prohibiting the Company or any of its Affiliates from pursuing any other rights and remedies available for any such breach or threatened breach. 9. Non-Assignability. Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee, Employee's beneficiaries, or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 9 shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder upon Employee's death or incapacity. 10. Binding Effect. Without limiting or diminishing the effect of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns. 11. Notice. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and either delivered in person or sent by first class certified or registered mail, postage prepaid, if to the Company, at the Company's principal place of business, and if to the Employee, at Employee's home address set forth on the signature hereto, or to such other address or addresses as either party shall have designated in writing to the other party hereto. Notices may also be given by recognized overnight courier service. Notices shall be effective (i) upon receipt if given personally, (ii) 3 days after dispatch if by mail, or (iii) 1 day after dispatch if by overnight courier services. 12. Severability. The Employee agrees that in the event that any court of competent jurisdiction or arbitral forum shall finally hold that any provision of Section 6 or 8 hereof is void or constitutes an unreasonable restriction against the Employee, such provision shall not be rendered void but shall apply to such extent as such court may judicially determine constitutes a reasonable restriction under the circumstances. If any part of this Agreement other than Section 6 or 8 is held by a court of competent jurisdiction or arbitral forum to be invalid, ineligible or incapable of being enforced in whole or in part by reason of any rule of law or public policy, such part shall be deemed to be severed from the remainder of this Agreement for the purpose only of the particular legal proceedings in question and all other covenants and provisions of this Agreement shall in every other respect continue in full force and effect and no covenant or provision shall be deemed dependent upon any other covenant or provision. 13. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 9 14. Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto. 15. Governing Law and Arbitration of Disputes. This Agreement shall be construed and enforced in accordance with the internal laws of the State of New Jersey without regard to those that would defer to the substantive laws of other jurisdiction. Any dispute arising hereunder, except as provided in the last sentence below, shall be settled by arbitration in Bergen County, New Jersey, in accordance with the then effective rules of the American Arbitration Association ("AAA"). One Arbitrator will be chosen by the parties who shall be an attorney experienced in employment law. If the parties cannot agree on the identity of the Arbitrator, he will be appointed by the head of the AAA in New Jersey. Employee submits to the jurisdiction of the AAA in New Jersey to resolve any such disputes. The Company reserves the right to enforce Section 6 or Section 8 of this Agreement any jurisdiction where such enforcement is necessary or desirable, through a Court or arbitration proceeding, as the Company elects. 16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may be executed by facsimile. 17. Representation by Counsel; No Duress. Employee acknowledges that this Agreement has been negotiated at arms length; that he has had full opportunity for representation by counsel in connection with the negotiation and review of this Agreement and has either been adequately represented by counsel or chosen to forego his opportunity to be so represented; that this Agreement will be deemed to have been drafted by both parties and, as such, ambiguities shall not be construed against any one party; and that he enters into this Agreement freely and without duress or compulsion of any kind. 18. Directors and Officers Insurance Coverage. The Company will provide Employee with a Directors and Officers insurance coverage in an amount consistent with the levels currently maintained by the Company. IN WITNESS WHEREOF, the Company and the Employee have duly executed and delivered this Agreement as of the day and year first above written. ION NETWORKS, INC. By: ----------------------------------- Name: KAM SAIFI Title: PRESIDENT & CEO -------------------------------------- TED KAMINER Date 10 -----END PRIVACY-ENHANCED MESSAGE-----