-----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, DrVkcpJfIi4nEi/753mrKuArjjAqYBtQVjygZOlGdHe7xiDtHzWv4BeZE2Sx0QgY zM68flcz9fnHdS6ImHnSIw== 0001144204-04-003812.txt : 20040330 0001144204-04-003812.hdr.sgml : 20040330 20040330120622 ACCESSION NUMBER: 0001144204-04-003812 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 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: 1202 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13117 FILM NUMBER: 04699027 BUSINESS ADDRESS: STREET 1: 1551 S WASHINGTON AVE CITY: PISCATAWAY STATE: NJ ZIP: 08854 BUSINESS PHONE: 2014944440 MAIL ADDRESS: STREET 1: 1551 S WASHINGTON AVE CITY: PISCATAWAY STATE: NJ ZIP: 08854 FORMER COMPANY: FORMER CONFORMED NAME: MICROFRAME INC DATE OF NAME CHANGE: 19920703 10KSB 1 v02280_10ksb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB |X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________ . COMMISSION FILE NO.: 0-13117 ION NETWORKS, INC. (Name of Small Business Issuer in Its Charter) DELAWARE 22-2413505 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification Number) 120 CORPORATE BLVD., S. PLAINFIELD, NJ 07080 (Address of Principal Executive Offices) (Zip Code) (908) 546-3900 (Issuer's telephone number, including area code) SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: Name of Each Exchange Title of Each Class On Which Registered - ------------------- ------------------- NONE NONE SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, $.001 PAR VALUE (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |_| The issuer's revenues for its most recent twelve-month ended December 31, 2003 totaled $ 3,342,620 The aggregate market value of voting stock held by non-affiliates, based on the closing price of the Common Stock, par value $0.001 (the "Common Stock") on March 25, 2004 of $0.11, as reported on the OTC Bulletin Board was approximately $2,237,760.14. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose. There were 24,875,500 shares of Common Stock outstanding as of March 15, 2004. DOCUMENTS INCORPORATED BY REFERENCE: NONE TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes |_| No |X| Information Regarding Forward-Looking Statements 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 statements include, but are not limited to, statements regarding the Company's ability to gain further market recognition and the Company's cost reduction efforts. These risks and uncertainties include, but are not limited to, uncertainty as to the acceptance of the Company's products; risks related to technological factors; potential manufacturing difficulties; uncertainty of product development; uncertainty of obtaining or maintaining adequate financing; dependence on third parties; dependence on key personnel and changes in the Company's sales force and management; the risks associated with the expansion of the Company's sales channels; competition; a limited customer base; risk of system failure, security risks and liability risks; risk of requirements to comply with government regulations; vulnerability to rapid industry change and technological obsolescence; and general economic conditions. In some cases, you can identify forward-looking statements by our use of words such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative or other variations of these words, or other comparable words or phrases. Unless otherwise required by applicable securities laws, the Company assumes no obligation to update any such forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. PART I Item 1: Description of Business Overview ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures and sells network and information 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 network and information 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, network and information security has become one of the newest components of electronic security strategies. Network and information security focuses on protecting the critical infrastructure devices that support the transfer, storage, and processing of business applications and information. Network and information 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 secure access, authentication, authorization, audit and administrative functions that we believe form a highly scalable, robust, reliable, easy-to-use and cost-effective comprehensive network and information security solution. ION Secure solutions include ION Secure PRIISMS centralized management software; 2000, 3000 and 5000 Series security appliances and ION Secure Soft Tokens. These solutions are based on ION proprietary software and hardware developed and maintained by the Company. ION network and information 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 network and information 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, Check Point and Nortel Networks. In addition to hardware/software products the Company offers an array of repair and maintenance programs. Services revenue is typically generated from integration and maintenance services in conjunction with the sale of ION solutions. ION's network and information 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). In addition to these distribution channels, the Company further segments its markets to (i) enterprises, (ii) service providers, and (iii) governmental agencies. Each market segment has unique characteristics and provides significant opportunities to grow the Company's business in the future. 3 ION Networks, Inc. is a Delaware corporation founded in 1999 through the combination of two companies, MicroFrame, Inc. (originally founded in 1982), a New Jersey corporation and SolCom Systems Limited (originally founded in 1994), a Scottish corporation located in Livingston, Scotland. In 1999, the Company expanded its technology base through the purchase of certain assets of LeeMAH DataCom Security Corporation. References in this document to "we," "our," "us," and "the Company" refer to ION Networks, Inc. Our principal executive offices are located at 120 Corporate Blvd. South Plainfield, New Jersey 07080, and our telephone number is (908) 546-3900. Industry Background Pervasive Use of Corporate Security to Protect Employees and Business Assets ION believes that a key factor to the long-term success and competitive advantage of any business is its ability to protect its people and assets from all types of security threats. Many businesses have implemented some type of corporate security strategy that physically protects employees and business assets from outsiders who may seek to harm individuals, steal proprietary information, or disrupt the operations of an organization. Wide Acceptance of Information Security to Protect Business Applications and Information 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 -- threats that we believe transcend the need for physical access in order to cause damage to a business. To counter potential cyber-threats, organizations are seeking to secure corporate user access, business applications and information with information security strategies designed to protect the electronic doorways into an organization. Increasingly, businesses are deploying information security solutions that protect against outsiders -- people such as hackers without any legitimate access -- through the use of security tokens for user authentication, intrusion detection systems to identify attackers and firewalls to restrict remote access to corporate networks and systems. Growing Impact of Insider Security Threats While outsider threats present a significant challenge to organizations, the Computer Security Institute and the Federal Bureau of Investigation have reported that outsiders account for fewer than half of the reported information security incidents in the United States, although the number of such incidents continues to rise. These reports estimated the average cost of a successful attack by outsiders to be $56,000. By contrast, the average cost of a malicious act by insiders was estimated to be $2.7 million. Interestingly, these attacks occurred despite the wide spread deployment of firewalls, intrusion detection systems and anti-virus software, suggesting that simply protecting the electronic perimeter of an organization has not slowed the pace of real losses from security threats. Increasing Need to Protect the "Electronic Interior" of Businesses -- Network and Information Security We continue to believe that there is a growing trend of outsourcing IT professionals for services that are not core to a business, thereby creating an ever-changing climate where organizations know less and less about the backgrounds and intentions of their IT administrators. Therefore, organizations are increasingly exposed to potentially significant financial and productivity losses unless the most empowered users with access to administrative functions are adequately restricted and monitored. Information security strategies cannot be effective unless administrative services are protected through the implementation of infrastructure security strategies that safeguard infrastructure devices such as servers, routers, LAN switches, PBXs, messaging systems and multiplexers. We believe that many of today's most damaging security threats are appearing within the boundaries of organizations, forcing organizations to extend their security protection inward from the perimeter. Network Information Security, focuses on protecting the critical infrastructure devices that support the transfer, storage, and processing of business applications and information. The ION Networks Solution The ION network and information security solution consists of ION Secure PRIISMS software and ION Secure 2000, 3000 and 5000 series appliances for centralized security policy management and distributed security policy enforcement. Together, the PRIISMS single sign-on portal and the security appliances form a secure management system to critical infrastructure devices. ION solutions also provide a variety of management features for improving administrator productivity and mediating alarms from these infrastructure devices. ION Secure 2000, 3000 and 5000 series security appliances also support management of discrete alarms for the physical environment surrounding infrastructure devices such as doors, lighting, air conditioners or diesel generators and monitoring environmental conditions including temperature, humidity, fire and water conditions. 4 The ION Secure Product Suite is Intended to Provide our Customers with the following Key Benefits: A Complete Network and information security Solution. We believe ION offers one of the most complete, commercially available solutions in our industry for securely managing infrastructure devices. We have taken a broad approach to network and information security and developed a product suite that protects administrative interfaces with one unified solution by providing secure: o Access -- ION solutions are designed so that administrators can only gain access to infrastructure devices through the network connectivity provided by ION Secure PRIISMS software and ION Secure 2000, 3000 and 5000 series security appliances that together form a secure and auditable environment. PRIISMS provides a single point of entry into the environment for administrators utilizing Secure Shell (SSH), Point-to-Point Tunneling Protocol (PPTP) and Telnet. Access to PRIISMS is only granted based on strong multi-factor authentication of administrators. PRIISMS servers are typically collocated in Network Operations Centers along with enterprise management and operational support systems. ION Secure 2000, 3000 and/or 5000 series security appliances are deployed throughout an organization's network to protect against unauthorized access to infrastructure devices. ION Secure PRIISMS software and ION Secure 2000, 3000 and 5000 series security appliances provide infrastructure access protection by forcing all administrative traffic through a secure management network using one or both of the following methods: (i) `Inband' meaning TCP/IP based Virtual Private Networks (IP-VPNs) with dynamic firewall capabilities and encrypted IPSec tunnels and (ii) `Out-of-band' meaning via Virtual Private Dial-up Networks (VPDNs) or over public switched telephone networks. o Authentication -- ION network and information security solutions combine strong multi-factor authentication with "single sign-on" to the secure management environment. Administrative sessions require the use of ION Soft Tokens that use two-factor authentication. PRIISMS provides a single sign-on portal for all administrative applications. Single sign-on means that administrators need only log into PRIISMS once to easily gain secure access to the infrastructure devices they are tasked with managing. ION 2000, 3000 and 5000 series security appliances support the same strong authentication mechanisms as PRIISMS. Whether connecting in or out-of-band, multi-factor authentication is required for administrators to communicate with every ION security appliance. Private key management services are integrated into ION network and information security solutions in order to ease deployment of PRIISMS and security appliances. o Authorization -- ION network and information security solutions provide extensive security policy management capabilities for controlling administrator actions. Policies are centrally managed via ION Secure PRIISMS software at the user or group level with distributed policy enforcement handled by the 2000, 3000 and 5000 Series security appliances. ION Secure PRIISMS multi-level authorization restricts administrator access to specific infrastructure devices, as well as prohibits the issuing of specific commands. Multi-level authorization services are intended to provide tight control over the specific commands that can be issued by administrators via command filtering. o Audit -- ION Secure PRIISMS software and 2000, 3000 and 5000 series security appliances are designed to maintain detailed audit trails on administrator activities, infrastructure devices and security appliance health. ION security appliances maintain extensive logs on administrative sessions including administrator authentication success, failure and connection histories. The entire history of each administrative session can be captured down to the characters entered by an administrator. Command filters can be utilized to restrict which commands an administrator may enter to control an infrastructure device. ION security appliance logs are protected from tampering and can maintain the history of administrative sessions. o Administration -- ION Secure PRIISMS software provides directory services for assigning authentication methods and privileges to users and groups and the logical partitioning of authorized infrastructure device views. Once authenticated into PRIISMS, administrators can only see and manage assigned infrastructure devices. In addition, centralized management of ION security appliances via PRIISMS simplifies the installation, configuration and upgrade of the ION Secure Operating System (ISOS) on remote ION security appliances. The ION Secure 2000, 3000 and 5000 Series appliances provide a wide range of site management services such as alarm mediation, remote diagnostics, and task automation. In addition, messages from non-standard managed infrastructure devices can be converted to Simple Network Management Protocol (SNMP) traps and sent to PRIISMS for centralized viewing and forwarding to third party enterprise management and operational support systems. Network and port-level diagnostic utilities can also be used by administrators to remotely troubleshoot infrastructure devices. The automation of administrative tasks can be implemented both in PRIISMS and ION Secure appliances. Action triggers can be set for automating common tasks such as event notification via SNMP trap, pager or e-mail, the power recycling of infrastructure devices, or the uploading of logs from ION security appliances. ION security appliances also provide a native scripting (computer programming) language and task scheduler that can run these scripts based on an alarm, date or time for custom automation requirements. 5 Low Total Cost of Ownership. The ION solution is designed to minimize the purchase, installation and maintenance costs of Network Information Security. The list prices for our network and information security appliances currently begin at $1,250 and scale up with products and features that address a wide array of customer requirements. Many studies have shown that the complex systems integration of multiple security products is a significant component of the total cost of implementing security solutions. We believe that our cost-effective, integrated solution, consisting of easy-to-manage security appliances and management software, enables customers to avoid the expense of costly systems integration that may otherwise be required to implement and maintain an effective network and information security solution. Rapid Return on Investment. ION solutions help protect against the growing threat of security breaches that can result in among other losses, significant financial losses and legal liabilities, lost productivity, poor network availability, brand defamation, and theft of proprietary information. ION solutions enable customers to centrally perform administrative functions that otherwise may require a dispatch of an administrator to a remote location. Fewer service calls reduce the need for having costly technical personnel on staff. Ease of Installation and Use. The ION Secure product family delivers `plug-and-protect' appliances designed for easy installation and use. Installation involves simply connecting an ION security appliance to the network, and providing nothing more than a network address. Appliances can be remotely configured through ION PRIISMS centralized management software, including software upgrades and configuration of new software features. ION Networks Products and Services ION Networks provides a complete network and information security solution that includes secure access, authentication, authorization, audit and administration functions that form a secure management environment for managing infrastructure devices. The ION Secure network and information security solution is based on centralized security policy management and distributed security policy enforcement. It consists of centralized ION Secure PRIISMS software and distributed ION Secure 2000, 3000 and 5000 series security appliances forming a secure management network. We also provide training, consulting and support services to our customers and distribution partners. ION Secure PRIISMS Management Portal. Through its web-based user interface, PRIISMS provides connectivity to a wide-range of managed endpoints from a plethora of vendors and platforms. This scalable portal application enables authenticated administrators to configure, troubleshoot and manage geographically dispersed critical infrastructure devices from central operations centers within a secure environment. PRIISMS also provides centralized, 24x7 surveillance and provisioning across the entire suite of ION Secure 2000, 3000 and 5000 security appliances. Key features include: o Single Sign-on: Additional security is often thought of as an incremental step or process that ensures the validity of a user or process. PRIISMS however simplifies this process by requiring only a single authentication procedure to take place before presenting the user with a list of endpoints he or she is authorized to access. Username, password and authentication procedures are handled by PRIISMS. Administrators can securely log into PRIISMS once instead of logging into each individual appliance, expediting any urgent operations. o Multi-factor Authentication: Utilize a number of security measures to protect infrastructure devices, including the ability to lock out a specific administrator across the network in seconds. This feature requires the use of ION Secure tokens or commercially available RADIUS token technology. o Multi-level Authorization: Use flexible security policies to define and enforce strict control over administrators' actions when accessing infrastructure devices. Users can be restricted to only certain types or geographical location of managed endpoints. Further restrictions can be defined such as allowable commands/operations. o Active and Passive auditing: Real-time monitoring of user operations can alert security staff in the event of suspicious activity. All operations are stored in tamper-proof files and available for post-breach forensic analysis o Centralized Alarm Notification and Logging: Simultaneously view alarms and events within PRIISMS for ION security appliances and managed endpoints. o Centralized Provisioning and Job Scheduling: Centrally manage the scheduling of jobs for managing configuration files and software updates to ION appliances. 6 o Automatic Backups: Automatically back up configuration files for all ION security appliances on the network to the PRIISMS server. o Real-time Inventory and Status: Track system health to ensure that ION security appliances and infrastructure devices are running properly 24 x 7. ION Secure 2000 Series. The ION Secure 2500 security appliance combines access, console, and alarm functions into a single centrally manageable solution. With support for up to 2 physical `console' ports and up to 2 logical IP endpoints, the 2000 series is targeted at small, remote branch office locations with need for secure remote management. ION Secure 3000 Series. The ION Secure 3100, 3200, 3300 and 3500 security appliances combine access, console, alarm and site management functions into a single centrally manageable solution. With support for up to 28 physical `console' ports and up to 32 logical IP endpoints, the 3000 series protects user access and control for a wide variety of infrastructure devices requiring in-band and out-of-band access. ION Secure 5000 Series. The ION Secure 5010 and 5500 supports the same ISOS features as the 3000 series, providing support for up to 28 console ports and 64 IP enabled endpoints. With a LINUX core and integrated VPN router capabilities, the 5000 Series appliances are able to securely carry administrative traffic through an intranet or a public network via IPSec tunnel. The 5000 Series is specifically targeted at higher-end data center, server farm and IP-rich environments. ION Secure Soft Tokens. ION Secure soft tokens are simple to use. Each user may be assigned a `disposable' ION Secure Soft Token via email or web which can be loaded onto a Windows(R), RIM(R) Blackberry(TM) or PalmOS(R) device. Each time the user requests connectivity to PRIISMS they are challenged to enter additional criteria generated by the token that will positively identify them to the portal. ION Secure soft tokens utilize strong 3DES encryption and can be quickly activated and deactivated through PRIISMS. Employees, business partners and customers can use ION Secure tokens whether local, remote or mobile. Wide Range of Protected Infrastructure Devices ION network and information security solutions protect a growing variety of infrastructure devices provided by leading IT and telecommunications network and system vendors, including vendors of:
o Access Servers o Multi-Service Switches o Application Servers o Optical Switches o Bus & Tag Channel Extenders o PBXs (Switched & IP) o Call Management Systems o Power Protection Systems (UPS) o Carrier Grade Multi-Service Switches o Routers o Cellular Switches o SONET Switches o CSU/DSUs o SS7 Switches o Databases o DSLAMs o Integrated Access Devices o Storage Area Networks o LAN Switches o Terminal Servers o Mail Servers o Various Types of PC Class Servers o Messaging Servers o Various Types of UNIX Class Server o Wireless Switches
Strategy Our goal is to extend our market position to remain one of the industry leaders for network and information security solutions for service providers, corporations and government agencies. Key elements of our strategy include: Extend Our Market Position in Network Infomation Security. We believe that we are establishing a growing market position as a provider of network and information security solutions designed for our target markets by offering an integrated, robust, reliable, easy-to-use suite of products at attractive prices. We intend to continue to focus our product development efforts, distribution strategies and marketing programs to satisfy the growing needs of these markets. We believe that many of the current network and information security offerings of other vendors are expensive, incomplete, technically complex and generally unable to satisfy these target markets. Develop New Products and Reduce Manufacturing Costs. We intend to use our product design and development expertise to expand our product offerings and reduce our manufacturing costs. We believe that new product offerings and associated cost reductions will strengthen our market position and assist us in penetrating new markets. 7 Establish the ION Networks Brand. We believe that strong brand recognition in our target markets is important to our long-term success. We intend to continue to strengthen our ION Networks TM and ION SecureTM brand names through industry trade shows, our web site, advertising, direct mailings to both our resellers and our end-users, and public relations. The continued development of our reputation as a comprehensive, reliable, easy-to-use and cost effective network and information security vendor will contribute to our sales efforts. Expand Our Direct Channel. We intend to continue to build and expand our base of direct relationships with customers through additional marketing programs and increased targeted advertising. Expand Our Indirect Channels. Our distribution channels are currently in place to serve ION target markets. The Company's products have been implemented in over 50 countries by partnering with value-added resellers who sell our solutions. We intend to continue to build and expand our base of indirect channel relationships through additional marketing programs and targeted advertising. Expand Strategic Original Equipment Manufacturer Relationships. By entering into original equipment manufacturer ("OEM") arrangements to sell our products, we intend to build upon the brand awareness and worldwide channels of major networking and telecommunications equipment suppliers to further penetrate our target markets. Customers During the year ended December 31,2003, 84 customers generated $3,342,620 in revenue from hardware, software, repairs and maintenance. Historically, our largest customers have been service providers primarily in the United States and in Europe. See also Risk Factors, "We rely on several key customers for a significant portion of our business, the loss of which would likely significantly decrease our revenues" on page 13. However, over the last year we have begun to diversify away from our traditional customer base. ION has begun to penetrate the corporate market and, in particular, the financial services sector. ION customers can be categorized based on three market segments: Enterprises, Service Providers and Governmental Agencies: Enterprises. The Enterprise market consists of non-governmental organizations that do not provide goods or services from a network infrastructure, but rather use their network infrastructure as a platform to provide their own goods or services. There are many sectors in the enterprise market, including, but not limited to, banking, financial services, insurance, energy, manufacturing, retailers, pharmaceuticals, healthcare, technology and transportation. Service Providers. The service provider market consists of businesses that use their network infrastructure to provide services to their customers, including specific sectors such as (i) transport service providers that provide voice, data, and long-distance transport of telephone and data services, including ILECs, CLECs, long-distance carriers, cable telephony, and optical network providers; (ii) managed service providers that provide network infrastructure, managed services, and managed network services, including Internet Data Centers, ISPs and ASPs; (iii) broadband service providers that provide wire line-based broadband services to residential and business customers. Broadband services include DSL, CATV, cable modems, VoD (Voice over Data) and VoIP (Voice over IP) services; and (iv) wireless service providers that provide wireless voice and data services. This includes mobile/cellular, wireless data, satellite, and wireless LAN services. Governmental Agencies. The Government market consists of domestic and foreign governmental agencies that do not provide services from a network infrastructure, but rather use their network infrastructure as a platform to provide their own goods and services. There are many sectors in the government market, including, but not limited to, federal and national agencies, military, state agencies, local agencies, police departments, fire departments, and emergency services. Sales and Marketing Our marketing programs promote ION Networks and ION Secure brand awareness and reputation as a highly scalable, robust, reliable, easy-to-use and cost-effective network and information security solution. During the year ended December 31, 2003, the Company did not have the resources to adequately strengthen our brand. ION attempted to repair damaged relationships by direct executive communications with customers. The relative effectiveness of this customer retention program should be demonstrated by improved operating results in 2004. We intend to expand and strengthen our direct and indirect channel relationships through additional marketing programs and staff, as well as increased promotional activities as resources become available. 8 We believe that ION solutions are suited for both direct sale to customers and indirect channels where it is not economically efficient for us to sell directly to the end users of our products. Direct Sales. On December 31, 2003, the Company's sales and marketing headcount stood at 5. For the year ended December 31, 2003, approximately 37% of ION revenue came from direct sales. Indirect Sales/Channel Partners. We also market and sell our solutions via indirect channels through a distribution structure of Value Added Resellers (VARs) or Channel Partners in the United States and in Europe. VARs accounted for approximately 32% of our total revenue for the year ended December 31, 2003. Our VAR partnerships are non-exclusive. Original Equipment Manufacturers (OEMs). We enter into select original equipment manufacturer relationships in order to take advantage of the channels of well-established companies that sell into our target markets. We believe these channels expand our overall market while having a minor impact on our own indirect channel sales. The terms of our agreements with these customers vary by contract. These agreements can generally be terminated upon 30 days written notice or if ION becomes insolvent. For the year ended December 31, 2003, our original equipment manufacturer revenue accounted for approximately 31% of total revenue. Geographic Distribution. We divide our sales organization regionally into three territories: (1) the United States and Canada; (2) Europe, the Middle East and Africa, and (3) other locations. Regional sales representatives manage our relationships with our network of channel partners, sell to and support key customer accounts, and act as a liaison between our indirect channels and our marketing organization. For the year ended December 31, 2003, approximately 82% of ION's sales were in the United States and Canada (Direct Sales -approximately 35%, Indirect/Channel Partners -approximately 23%, and OEM - approximately 24% ) and 18% Europe, the Middle East, Africa and other locations (Direct Sales - -approximately 1.3%, Indirect/Channel Partners -approximately 8.9%, and OEM - approximately 7.8% ). (Refer to Note 12 in the Company's Consolidated Financial Statements.) Customer Service and Technical Support We offer our customers a comprehensive range of support services under the ION SecureCare brand that includes electronic support, product maintenance and personalized technical support services on a worldwide basis. Our technical support staff is located at our corporate headquarters in South Plainfield, New Jersey. Our ION SecureCare offering includes ION 24x7 support. This support offering provides replacement for failing hardware, telephone and/or web-based technical support and software updates. Incentive programs are offered to ION SecureCare customers to provide added benefits for upgrading to newer products. Competition The market for network and information security solutions is worldwide and highly competitive, and competition has begun to intensify. Competitors can be generally categorized as either: (i) information security vendors who provide high performance, security point products, or (ii) suppliers of network management appliances that provide limited infrastructure security features. Many of these solutions require additional security products in order to implement a comprehensive network and information security solution. Current and potential competitors in our markets include, but are not limited to the following companies, all of which sell worldwide or have a presence in most of the major markets for such products: o Security software vendors such as RSA Security, ActivCard, Check Point Software and Symantec; o Network equipment manufacturers such as Cisco Systems; o Operating system software vendors such as Microsoft and Novell; o Security solution suppliers such as Computer Associates, SafeNet and Network Associates; o Security appliance suppliers such as SonicWall and NetScreen Technologies; and o Low cost management-only appliance vendors, which may include limited infrastructure security functionality such as MRV Communications and Teltronics. Many of our competitors have generally targeted large organizations' information security needs with VPN, firewall and 3A (Authorization, Authentication and Audit) products that range in price from under one thousand to hundreds of thousands of dollars. These offerings may increase competitive pressure on some of our solutions, resulting in both lower prices and gross margins. Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, marketing and other resources than we do. Nothing prevents or hinders these actual or potential competitors from entering our target markets at any time. In addition, our competitors may bundle products competitive to ours with other products that they may sell to our current or potential customers. These customers may accept these bundled products rather than separately purchasing our products. If these companies were to use their greater financial, technical and marketing resources in our target markets, it could adversely affect our business. See also Risk Factors, " We face significant competition and if we do not compete successfully, our results of operations may be adversely affected" on page 12. 9 Sources And Availability Of Materials The Company designs its security appliances utilizing readily available parts manufactured by multiple suppliers and relies on and intends to continue to rely on these suppliers. Our principal suppliers are Youngtron, Inc., TDK Systems Europe Ltd., and EXP Computer, Inc. The Company has been and expects to continue to be able to obtain the parts required to manufacture its products without any significant interruption or sudden price increase, although there can be no assurance that it will be able to continue to do so. The Company sometimes utilizes a component available from only one supplier. If a supplier were to cease to supply this component, the Company would most likely have to redesign a feature of the affected device. In these situations, the Company maintains a greater supply of the component on hand in order to allow the time necessary to effect a redesign or alternative course of action should the need arise. Dependence On Particular Customers Historically, the Company has been dependent on several large customers each year, but they are not necessarily the same every year. In general, the Company cannot predict with certainty, which large customers will continue to order our products. The loss of any of these large customers, or the failure to attract new large customers, could have a material adverse effect on the Company's business. Intellectual Property, Licenses And Labor Contracts The Company holds no patents on its technology. Although it licenses some of its technology from third parties, the Company does not consider any of these licenses to be critical to its operation. The Company has made a consistent effort to minimize the ability of competitors to duplicate the software technology utilized in its solutions. However, the possibility of duplication of its products remains, and competing products have already been introduced. Governmental Approvals And Effect Of Governmental Regulation The Company's solutions may be exported to any country in the world except those countries restricted by the anti-terrorism controls imposed by the Department of Commerce. These anti-terrorism controls prohibit the Company from exporting some of its solutions to Cuba, Libya, Iran, Iraq, North Korea, Sudan and Syria without a license. As with all U.S. origin items, the Company's solutions are also subject to the Bureau of Export Administration's ten general prohibitions that restrict exports to certain countries, organizations, and persons. As required by law or demanded by customer contract, the Company obtains approval of its solutions by Underwriters' Laboratories. Additionally, because many of the products interface with telecommunications networks, the Company's products are subject to several key Federal Communications Commission ("FCC") rules requiring FCC approval. Part 68 of the FCC rules contains the majority of the technical requirements with which telephone systems must comply in order to qualify for FCC registration for interconnection to the public telephone network. Part 68 registration requires telecommunication equipment interfacing with the public telephone network to comply with certain interference parameters and other technical specifications. FCC Part 68 registration for ION's products has been granted, and the Company intends to apply for FCC Part 68 registration for all of its new and future products. Part 15 of the FCC rules requires equipment classified as containing a Class A computing device to meet certain radio and television interference requirements, especially as they relate to operation of such equipment in a residential area. Certain of ION's products are subject to and comply with Part 15. 10 The European Community has developed a similar set of requirements for its members and the Company has begun the compliance process for its products in Europe. Additionally, ION has certified certain of its products to the NEBS (Network Equipment Business Specification) level of certification. This is a certification that was developed by Bellcore (now Telcordia Technologies) and is required by many of ION's telecommunications customers. Research And Development Activities As of March 15, 2004, the Company had 5 R&D staff members devoting part of their time to research and development activities. We believe the part time effort of these employees will be minimally sufficient to allow the Company to keep up with technology advances for the foreseeable future. However, the Company intends to increase staff during 2004, as resources become available, in order to more rapidly introduce new and improved products. The current R&D staff was primarily responsible for the successful completion and release of the most recent ION Secure 2500 and 5500 security appliances, ISOS software releases and enhancing ION Secure PRIISMS functionality. These products provide ION Networks with the ability to address a more diverse computing and IP based network market due to its ability to provide connectivity across secure IP tunnels by utilizing integrated VPN router technology. Employees As of March 15, 2004, the Company had 21 employees, 19 are full-time employees and 2 are part-time employees. The headcount includes 6 technical, 7 sales, marketing and support, 3 production, and 5 financial, administrative and executive capacities. None of the Company's employees are represented by labor unions. The Company considers it has generally satisfactory relations with its employees. RISK FACTORS We are vulnerable to technological changes, which may cause our products and services to become obsolete which could materially and negatively impact our cash flow. Our industry experiences rapid technological changes, changing customer requirements, frequent new product introductions and evolving industry standards that may render existing products and services obsolete. As a result, more advanced products produced by competitors could erode our position in existing markets or other markets that they choose to enter and prevent us from expanding into existing markets or other markets. It is difficult to estimate the life cycles of our products and services, and future success will depend, in part, upon our ability to enhance existing products and services and to develop new products and services on a timely basis. We might experience difficulties that could delay or prevent the successful development, introduction and marketing of new products and services. New products and services and enhancements might not meet the requirements of the marketplace and achieve market acceptance. If these things happen, they would materially and negatively affect cash flow, financial condition and the results of operations. Hardware and software incorporated in our products may experience bugs or "errors" which could delay the commercial introduction of our products and require time and money to alleviate. Due to the complex and sophisticated hardware and software that is incorporated in our products, our products have in the past experienced errors or "bugs" both during development and subsequent to commercial introduction. We cannot be certain that all potential problems will be identified, that any bugs that are located can be corrected on a timely basis or at all, or that additional errors will not be located in existing or future products at a later time or when usage increases. Any such errors could delay the commercial introduction of new products, the use of existing or new products, or require modifications in systems that have already been installed. Remedying such errors could be costly and time consuming. Delays in debugging or modifying products could materially and adversely affect our competitive position. We have difficulty predicting our future operating results or profitability due to the fluctuation in our quarterly and annual revenues. In the past, we experienced fluctuations in our quarterly and annual revenues and we anticipate that such fluctuations will continue therefore making it difficult for us to predict our future operating results or profitability. Our quarterly and annual operating results may vary significantly depending on a number of factors, including: o the timing of the introduction or acceptance of new products and services; o changes in the mix of products and services provided; o long sales cycles; o changes in regulations affecting our business; 11 o increases in the amount of research and development expenditures necessary for new product development and innovation; o changes in our operating expenses; o uneven revenue streams; o volatility in general economic conditions; o volatility in the network and information security market; and o threats of terror and war. We cannot assure you that our revenues will not vary significantly among quarterly periods or that in future quarterly periods our results of operations will not be below prior results or the expectations of public market analysts and investors. If this occurs, the price of our common stock could significantly decrease. See also Risks Associated with Our Securities, "There is potential for fluctuation in the market price of our securities" page 14. In the past we have experienced significant losses and negative cash flows from operations. If these trends continue in the future, it could adversely affect our financial condition. We have incurred significant losses and negative cash flows from operations in the past. For the year ended December 31, 2003 and the nine months ended December 31, 2002, we experienced net losses of $603,792 and $5,628,522, respectively, and negative cash flows from operations of $376,940 and $2,972,337, respectively. These results have had a negative impact on our financial condition. There can be no assurance that our business will become profitable in the future and that additional losses and negative cash flows from operations will not be incurred. If these trends continue in the future, it could have a material adverse affect on our financial condition. As of December 31, 2003, the Company continues to have a relatively low working capital balance, which could inhibit future growth and impact the Company's financial viability. Although the Company's working capital balance increased to $287,930 at December 31, 2003 as compared to $184,689 as of December 31, 2002 this balance is still lower than the Company's optimal requirements. This low working capital balance while improving, may continue to impact the ability of the Company to attract new customers and employees and could have a material adverse affect upon our business. We face significant competition and if we do not compete successfully, our results of operations may be adversely affected. We are subject to significant competition from different sources for our different products and services. We cannot assure you that the market will continue to accept our hardware and software technology or that we will be able to compete successfully in the future. We believe that the main factors affecting competition in the network management business are: o the products' ability to meet various network management and security requirements; o the products' ability to conform to the network and/or computer systems; o the products' ability to avoid becoming technologically outdated; o the willingness and the ability of distributors to provide support customization, training and installation; and o the price. Although we believe that our present products and services are competitive, we compete with a number of large data networking, network security and enterprise management manufacturers which have financial, research and development, marketing and technical resources far greater than ours. Our competitors include, Cisco Systems, Network Associates, Cyclades, Digi, MRV Communications, Teltronics and NetScreen Technologies. Such companies may succeed in producing and distributing competitive products more effectively than we can produce and distribute our products, and may also develop new products which compete effectively with our products. Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, marketing and other resources than we do. Nothing prevents or hinders these actual or potential competitors from entering our target markets at any time. In addition, our competitors may bundle products competitive to ours with other products that they may sell to our current or potential customers. These customers may accept these bundled products rather than separately purchasing our products. If our current or potential competitors were to use their greater financial, technical and marketing resources in our target markets and if we are unable to compete successfully, our business, financial condition and results of operations may be materially and adversely affected. 12 We may be unable to protect our proprietary rights, permitting competitors to duplicate our products and services, which could negatively impact our business and operations. We hold no patents on any of our technology. If we are unable to license any technology or products that we may need in the future, our business and operations may be materially and adversely impacted. We have made a consistent effort to minimize the ability of competitors to duplicate our software technology utilized in our products. However, there remains the possibility of duplication of our products, and competing products have already been introduced. Any such duplication by our competitors could negatively impact our business and operations. We rely on several key customers for a significant portion of our business, the loss of which would likely significantly decrease our revenues. Historically, we have been dependent on several large customers each year, but they are not necessarily the same every year. For the year ended December 31, 2003, our most significant customers (stated as an approximate percentage of revenue) were Avaya 18% and Siemens 12% compared to the nine months ended December 31, 2002, of SBC 13%, Sprint 12%, Avaya 12%, and Siemens 11% In general, we cannot predict with certainty which large customers will continue to order. The loss of any of these large customers, or the failure to attract new large customers would likely significantly decrease our revenues and future prospects, which could materially and adversely affect our business, financial condition and results of operations. We depend upon key members of our employees and management, the loss of which could have a material adverse effect upon our business, financial condition and results of operations. Our business is greatly dependent on the efforts of our CEO, Mr. Norman E. Corn, our Chief Financial Officer, Mr. Patrick E. Delaney, and our Chief Technology Officer, Mr. Bill Whitney and other key employees, and on our ability to attract key personnel. Other than with respect to Messrs. N. Corn, P. Delaney, and W. Whitney, we do not have employment agreements with our other key employees. Our success depends in large part on the continued services of our key management, sales, engineering, research and development and operational personnel and on our ability to continue to attract, motivate and retain highly qualified employees and independent contractors in those areas. Competition for such personnel is intense and we cannot assure you that we will successfully attract, motivate and retain key personnel. While all of our employees have entered into non-compete agreements, there can be no assurance that any employee will remain with us. Our inability to hire and retain qualified personnel or the loss of the services of our key personnel could have a material adverse effect upon our business, financial condition and results of operations. Currently, we do not maintain "key man" insurance policies with respect to any of our employees. We rely on several contract manufacturers to supply our products. If our product manufacturers fail to deliver our products, or if we lose these suppliers, we may be unable to deliver our product and our sales and revenues could be negatively impacted. We rely on three contract manufacturers to supply our products: Youngtron, Inc., TDK Systems Europe Ltd. and EXP Computer, Inc. If these manufacturers fail to deliver our products or if we lose these suppliers and are unable to replace them, then we would not be able to deliver our products to our customers. This could negatively impact our sales and revenues and have a material adverse affect on our business, financial condition and results of operations. Our certificate of incorporation and bylaws contain limitations on the liability of our directors and officers, which may discourage suits against directors and executive officers for breaches of fiduciary duties. Our Certificate of Incorporation, as amended, and our Bylaws contain provisions limiting the liability of our directors for monetary damages to the fullest extent permissible under Delaware law. This is intended to eliminate the personal liability of a director for monetary damages on an action brought by or in our right for breach of a director's duties to us or to our stockholders except in certain limited circumstances. In addition, our Certificate of Incorporation, as amended, and our Bylaws contain provisions requiring us to indemnify our directors, officers, employees and agents serving at our request, against expenses, judgments (including derivative actions), fines and amounts paid in settlement. This indemnification is limited to actions taken in good faith in the reasonable belief that the conduct was lawful and in, or not opposed to our best interests. The Certificate of Incorporation and the Bylaws provide for the indemnification of directors and officers in connection with civil, criminal, administrative or investigative proceedings when acting in their capacities as agents for us. These provisions may reduce the likelihood of derivative litigation against directors and executive officers and may discourage or deter stockholders or management from suing directors or executive officers for breaches of their fiduciary duties, even though such an action, if successful, might otherwise benefit our stockholders and directors and officers. 13 RISKS ASSOCIATED WITH OUR SECURITIES We do not anticipate the payment of dividends. We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all available funds for use in the operation of our business. Thus, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. There is potential for fluctuation in the market price of our securities. Because of the nature of the industry in which we operate, the market price of our securities has been, and can be expected to continue to be, highly volatile. Factors such as announcements by us or others of technological innovations, new commercial products, regulatory approvals or proprietary rights developments, and competitive developments all may have a significant impact on our future business prospects and market price of our securities. Shares that are eligible for sale in the future may affect the market price of our common stock. As of March 15, 2004, an aggregate of 5,423,675 of the outstanding shares of our common stock are "restricted securities" as that term is defined in Rule 144 of the Securities Act of 1933 (Rule 144). These restricted shares may be sold pursuant only to an effective registration statement under the securities laws or in compliance with the exemption provisions of Rule 144 or other securities law provisions. In addition, 4,987,580 shares are issuable pursuant to currently exercisable options, 1,580,500 shares are issuable pursuant to currently exercisable warrants, and 1,668,350 shares are issuable pursuant to currently convertible preferred stock of 166,835 shares. Future sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could negatively affect the price of our common stock. Our common stock was delisted from Nasdaq. On March 19, 2003, Nasdaq notified the Company that it has not regained compliance with the minimum bid price requirement. Nasdaq determined that the Company does not meet the initial listing requirements of the Nasdaq Small Cap Market. Consequently, our Common Stock was delisted from the Nasdaq Small Cap Market at the opening of business on March 28, 2003. The delisting of our Common Stock from Nasdaq could negatively effect the prices of our stock, impair the ability of holders to sell such stock, limit the coverage of our stock by research analysts, adversely impact our efforts to secure financing, materially and adversely affect our financial condition and results of operations and will make us ineligible to register additional shares under a Form S-3. We may be restricted from issuing new equity securities. In September 2002, we issued shares of Series A Preferred Stock to several investors. Under the terms of the preferred stock, any issuances of equity securities or securities convertible into or exercisable for equity securities require the prior approval of the holders of a majority of the outstanding shares of Series A Preferred Stock. While two of our directors currently own such a majority, there can be no assurance that they will remain directors or that they will continue to own such a majority. If these two directors no longer continue to remain directors, or no longer continue to own a majority of the Series A Preferred Stock, or do not vote their shares of Series A Preferred Stock to permit issuances of securities approved by the board of directors, the Company would be prevented from issuing equity securities which would preclude the Company from raising equity financing, utilizing equity based compensation plans and from other actions requiring the issuance of equity securities. We may be in default of certain registration rights obligations In February 2002, we issued a total of 4,000,000 shares and warrants to purchase 1,200,000 shares for a total of $3,480,000 received from various investors. In connection with this financing, we registered such securities for resale on a form S-3 pursuant to a registration rights agreement which obligated us to do so. Since our stock is no longer listed on NASDAQ, we are no longer eligible to use a Form S-3 registration statement and we may be in default under the registration rights agreement. This may render us liable for damages to the holders of the registration rights for losses they may incur as a result of the Company not maintaining an effective registration statement for their securities. 14 ITEM 2: DESCRIPTION OF PROPERTY The Company entered into a lease on August 1, 2003 for approximately 7,000 square feet for its principal executive offices at 120 Corporate Blvd., South Plainfield, New Jersey. The base rent is $4,505 per month effective October 2003 through July 2006. The Company is also obligated to make additional payments to the landlord relating to certain taxes and operating expenses. As a result of the Company being notified by the landlord to cancel its lease effective August 15, 2003, the Company no longer occupies the space at 1551 S. Washington Avenue, Piscataway, New Jersey. The Company entered into the lease on February 18, 1999 for approximately 26,247 square feet for its principal executive offices at 1551 South Washington Avenue, Piscataway, New Jersey. On March 17, 2003, the Company signed an amendment with the landlord reducing the space from 26,247 to 12,722 square feet and the rent from $50,153.64 to $20,143.17 per month effective March 1, 2003. The Company was also obligated to make additional payments to the landlord relating to certain taxes and operating expenses. The Company abandoned the lease space at SolCom House, Meikle Road, Kirkton Campus, Livingston EH547DE, Scotland. . As a result, the Company recorded a charge of $508,458 in the quarter ended December 31, 2002 for the remainder of the lease term that expires on August 31, 2011. The Company abandoned the lease space at 48834 Kato Road, Fremont, California in the Bedford Fremont Business Center. This lease commenced on June 1, 1999 and is for a term of 60 months with monthly rent payable by the Company to the landlord as follows: $7,360 per month for the first 12 months of the term; $7,590 per month for months 13-24; $7,820 per month for months 25-36; $8,050 per month for months 37-48; and $8,280 per month for months 49-60. The Company entered into an abandonment agreement with the landlord in March of 2003. As a result, the Company recorded a one-time charge to SG&A expense of $ 139,610 in the quarter ended March 31, 2003. This amount represents the total lease payments from December 2002 to May 2004 offset by landlords stated sub-lease rental payments. However, the Company and Landlord have no settlement agreement in place at this time. ITEM 3: LEGAL PROCEEDINGS On or about June 12, 2002, Xetel Corporation ("Xetel") filed a petition (Xetel Corporation vs. ION Networks Inc., Cause No.GN201901 in the 250th District Court of Travis County, Texas) against the Company alleging that the Company owes Xetel $243,070.19 in accounts receivable for finished assemblies shipped to and accepted by the Company and $23,626.02 in purchased materials and inventory being held in Xetel's warehouse pursuant to the Company's written instruction. Xetel sought actual damages in the amount of $266,696.21, plus interest, attorneys' fees and costs, and incidental damages as a result of the Company's alleged breach. The Company successfully negotiated a settlement with Xetel Corporation in the amount of $30,000 and forgiveness of debt for the remaining amount. As a result, the Company recorded a one time credit of $213,071 in the quarter ended September 30, 2003(see note 3). ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not hold an annual meeting of the stockholders during the year ended December 31, 2003. The Company plans to hold an annual meeting during the year ending December 31, 2004. 15 PART II ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Company's common stock, par value $.001 per share (the "Common Stock"), is currently quoted on the OTC Bulletin board under the symbol "IONN.OB". The following table sets forth the high ask and low bid prices of the Common Stock for the periods indicated as reported on the NASDAQ National and Small Cap Market. Year Ended December 31, 2003 Quarter Ending HIGH LOW - ------------------------------------------- ---- --- March 31, 2003 $0.28 $0.05 June 30, 2003 0.11 0.05 September 30, 2003 0.11 0.05 December 31, 2003 0.11 0.04 Year Ended December 31, 2002, Quarter Ending - -------------------------------------------- March 31, 2002 $1.84 $0.65 June 30, 2002 0.82 0.33 September 30, 2002 0.45 0.15 December 31, 2002 0.47 0.10 Recent Sales of Unregistered Securities None. Security Holders As of February 27, 2004 there were 438 holders of record of the Common Stock Dividends The Company has not paid any cash dividends on its Common Stock during the year ended December 31, 2003, and the nine-month ended December 31, 2002. The Company presently intends to retain all earnings to finance its operations and therefore does not presently anticipate paying any cash dividends in the foreseeable future. ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview ION Networks, Inc. (the "Company"), designs, develops, manufactures and sells network and information 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 products operate in the IP, data center, telecommunications and transport, and telephony environments and are sold by a direct sales force and indirect channel partners mainly throughout North America and Europe. 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), The Company's principal objective was to address the need for security and network management and monitoring 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 2003, the Company stabilized its excessive negative cash flow and in fact increased cash from a low of less than $100,000 at September 30, 2003 to approximately $357,000 at December 31, 2003. The Company continues to have a delicate cash position and while the future viability of the organization has significantly improved, it is necessary for it to continue to strictly manage expenditures and to increase revenues. In addition, it is the intention of the new management team, hired in the quarter ended September 30, 2003, to secure additional financing during 2004 to accelerate growth and insure long-term viability. 16 Results Of Operations EXPLANATORY NOTE ON OCTOBER 25, 2002, ION NETWORKS, INC. CHANGED ITS FISCAL YEAR END FROM MARCH 31 TO DECEMBER 31. AS A RESULT, PURSUANT TO THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION, THIS ANNUAL REPORT ON FORM 10-KSB PRESENTS FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO A PROFORMA YEAR ENDED DECEMBER 31, 2002(UNAUDITED). The Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002(Unaudited) Revenues for the year ended December 31, 2003 were $3,342,620 as compared with revenues of $5,411,357 for the year ended December 31, 2002, a decrease of approximately 38% or $2,068,737. This decrease is attributable mainly to the reduction in the number of units sold for the year 2003. The decline in revenues was caused by several factors including a continued economic slump in the telecommunication industry, the reduction of ION's sales force and lack of resources for marketing activities. The Company's prices remained relatively consistent throughout both periods. The Company's cost of goods sold decreased to $892,373 or 26.7% for the year ended December 31, 2003 compared to $2,389,122 or 44.2% for the year ended December 31, 2002. The decrease is mainly due to lower costs associated with manufacturing of the appliances and an increase in the percentage of revenues relating to higher margins obtained from repair and service activities. Research and development expenses, net of capitalized software development, decreased from $937,637 for the year ended December 31, 2002 to $503,146 for the year ended December 31, 2003, a decrease of 46.3%. This decrease for research and development expenditures was primarily due to the expense reduction of related headcount from 11 to 5. Selling, general and administrative expenses decreased 66.1% from $7,233,824 or 133.5% of revenue for the year ended December 31, 2002 to $2,452,031 or 73.3% of revenue for the year ended December 31, 2003. This decline in expense was due primarily to reduced headcount of 25 to 11, reduced salaries for the remaining staff, and a sharp decrease in facilities expenditures due to certain cost containment programs implemented by management. Depreciation and amortization was $736,694 for the year ended December 31, 2003 compared to $1,102,124 for the year ended December 31, 2002, a decrease of approximately 33.2%. The primary reason for this reduction in 2003 as compared to 2002 was that the Company did not purchase depreciable fixed assets. The Company acquired a corporation business tax benefit certificate pursuant to New Jersey law which relates to the surrendering of unused net operating losses. For the year ended December 31, 2003 and for the year ended December 31, 2002, the Company received a benefit of $227,151 and $236,728, respectively. During the year ended December 31, 2003 the Company recognized benefits from restructuring in the amount of $405,402 compared to charges in the amount of $835,315 for the year ended December 31, 2002. The bulk of this positive variance, $1,016,916, was due to a charge of $508,458 for the abandonment of space at SolCom House, Livingstion, Scotland for the year ended December 31, 2002. In the quarter ended June 30, 2003, the Company after analysis, under took a voluntary liquidation of it subsidiary ION Networks, LTD., which resulted in the reversal of the $508,458 charge. The Company had a loss of $603,792 for the year ended December 31, 2003 compared to a loss of $6,846,068 for the year ended December 31, 2002 or an improvement of $6,242,276. Financial Condition And Capital Resources The Company's working capital balance as of December 31, 2003 was $287,930 compared to $184,689 as of December 31, 2002. Net cash used in operating activities during the year ended December 31, 2003 was $376,940, compared to $4,201,040 in year ended December 31, 2002. The decrease in net cash used was primarily a result of the decrease in net losses of $6,242,276 for the year ended December 31, 2003 offset in part by non-cash restructuring benefits of $1,240,717 and reduced depreciation and amortization of $365,430. Net cash used in investing activities during the year ended December 31, 2003 was $59,167, compared to net cash used of $286,951 in year ended December 31, 2002. Of the $59,167 of the net cash used in investing activities during the year ended December 31, 2003, $214,996 was for capitalized software expenditures offset in part by release of restricted cash of $125,700 and sale of certain assets of $30,129. During the year ended December 31, 2002 net cash used was $286,951, $505,936 was for capitalized software expenditures offset in part by release of restricted cash of $249,300. 17 Net cash used for financing activities during the year ended December 31, 2003 was $85,135, used to repay debt, compared to $3,652,523 provided by capital raising activities in year ended December 31, 2002. Financing activities during the year ended December 31, 2002 include the sale of 4,000,000 unregistered shares of the Company's common stock at $0.87 per share for a total consideration of $3,480,000 and the sale of 166,835 unregistered shares of the Company's Series A Preferred Stock ("Preferred Stock") at $1.80 per share for a total consideration of $300,303.00 in private equity transactions offset in part by repayment of debt and capital leases of $139,894. Critical Accounting Policies Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, capitalized software including estimates of future gross revenues, and the related amortization lives, deferred tax asset valuation allowance and depreciation and amortization lives. Allowance for Doubtful Accounts Receivable - Accounts receivable are reduced by an allowance to estimate the amount that will actually be collected from our customers. 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 - 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. Capitalized Software - The Company capitalizes computer software development costs in accordance with the provisions of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize computer software development costs upon the establishment of the technological feasibility of a product, to the extent that such costs are expected to be recovered through future sales of the product. 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. Reclassifications - Certain amounts in the financial statements for the nine months ending December 31, 2002 have been reclassified to conform to the presentation of the financial statements for the year ended December 31, 2003. ITEM 7: FINANCIAL STATEMENTS The financial statements required hereby are located on pages 40 through 61. 18 ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Company with the Approval of the Audit Committee of the Company's Board of Directors appointed Deloitte & Touche LLP as the Company's independent public accountants for the nine months ended December 31, 2002. On November 11, 2003 the Company filed an 8-K/A announcing the appointment of Marcum and Kliegman, LLC as the Company's independent public accountants for the year ended December 31, 2003, effective as of October 7, 2003. The Board of Directors formally approved the appointment at its October 16, 2003 meeting. On November 11, 2003 the Company filed an 8-K/A announcing Deloitte & Touche LLP declination to be reappointed as the Company's independent public accountants. During the nine month period ended December 31, 2002 and the fiscal year ended March 31,2002 and the subsequent interim period through October 06, 2003, there were no disagreements with Deloitte & Touche LLP regarding any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP, would have caused Deloitte & Touche LLP to make reference to the subject matter of the disagreement in their report on the financial statements for such years. The Company requested that Deloitte & Touche LLP furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. The letter, dated October 31, 2003 has been filed as Exhibit 16.1 to the Company's Form 10KSB for the year ended December 31, 2003. ITEM 8A: CONTROLS AND PROCEDURES Prior to the filing date of this annual report, the Company's management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation. 19 PART III ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. As of March 15, 2004 the directors and executive officers of the Company were as follows: Name Age Position Held with the Company ---- --- ------------------------------ Norman E. Corn 57 Chief Executive Officer Patrick E. Delaney 50 Chief Financial Officer William Whitney 49 Chief Technology Officer and Vice President of Research and Development Stephen M. Deixler 68 Chairman of the Board of Directors Baruch Halpern 53 Director Frank S. Russo 61 Director NORMAN E. CORN has served as Chief Executive Officer since August 15, 2003. Prior to joining ION, from 2000 until 2003, Mr. Corn was Executive Vice President of Liquent, Inc., a Pennsylvania-based software company that provides electronic publishing solutions, focused on the life sciences industry. Mr. Corn has also served from 1994 to 2000 as CEO of TCG Software, Inc., an offshore software services organization providing custom development to large corporate enterprises in the US. Mr. Corn has led other companies, including Axiom Systems Group, The Cobre Group, Inc., The Office Works, Inc. and Longview Results, Inc., having spent the early part of his career in sales, marketing and executive positions in AT&T and IBM. PATRICK E. DELANEY has served as Chief Financial Officer since September 15, 2003. Prior to joining ION, from 2000 until 2003, Mr. Delaney was the President of Taracon, Inc. a privately owned independent consulting firm that provides management consulting for early and mid-stage technology and financial services companies. Mr. Delaney also served as Chief Financial Officer for two publicly traded telecommunications providers, Pointe Communications Corporation from 1993 to 2000 and Advanced Telecommunications Corporation from 1986 to 1993. Mr. Delaney has served other companies in executive capacities including: RealCom Communications, Argo Communications and ACF Industries. WILLIAM WHITNEY has served as Vice President of Research and Development since March 2002 and Chief Technology Officer since October 1, 2002. Prior to joining ION, from April 2000 to February 2002, Mr. Whitney served as the Vice President of Development and Chief Technology Officer for Outercurve Technologies, a provider of wireless application development and deployment solutions. Previously from, May 1998 to March 2002, Mr. Whitney served as President of CTO Systems. STEPHEN M. DEIXLER has been Chairman of the Board of Directors since May 1982 and served as Chief Executive Officer of the Company from April 1996 to May 1997. He was President of the Company from May 1982 to June 1985 and served as Treasurer of the Company from its formation in 1982 until September 1993. During the period since March 2003 to September 2003, Mr. Deixler has served as the interim Chief Financial Officer of the Company. He also serves as Chairman of the Board of Trilogy Leasing Co., LLC and President of Resource Planning Inc. Mr. Deixler was the Chairman of Princeton Credit Corporation until April 1995 and Chief Financial Officer of Multipoint Communications, LLC until November 2002. BARUCH HALPERN has served as a director of the Company since October 1999. From January 1995 to May 1999, Mr. Halpern was an institutional research analyst with Goldsmith & Harris Incorporated, where he advised institutions about investment opportunities. He was also an advisor in connection with a leveraged buy-out of a public company and several private placements. In 1999, Mr. Halpern formed Halpern Capital as a DBA entity under Goldsmith & Harris Incorporated. The DBA was subsequently moved to Magna Securities (Member: NASD/SIPC) and then UVEST Investment Services (Member: NASD/SIPC). In January 2003, Mr. Halpern formed his own broker-dealer, Halpern Capital, Inc. Over the last few years Baruch Halpern's entities were involved in numerous financings, having raised over $300 million in capital for several public entities. 20 FRANK RUSSO has served as a director of the Company since November 2000. Mr. Russo was with AT&T Corporation from September 1980 to September 2000 and most recently served as its Corporate Strategy and Business Development Vice President. While at AT&T Solutions, Mr. Russo held a number of other positions including that of General Manager, Network Management Services from which he helped architect and launch AT&T's entry into the global network outsourcing and professional services business. Mr. Russo retired from AT&T in 2000. Prior to joining AT&T, Mr. Russo was employed by IBM Corporation in a variety of system engineering, sales and sales management positions. Mr. Russo served on the Board of Directors of Oak Industries, Inc., a manufacturer of highly engineered components, from January1999 to February 2000, and currently serves on the Board of Directors of Advance-com, a private e-commerce company headquartered in Boston, Massachusetts. Financial Expert The Company's board of directors has determined that none of its current members meets the standard of an audit committee "financial expert" as defined in the Sarbanes-Oxley Act of 2002. The Company has determined that its current financial position makes it impractical to obtain the services of an additional director meeting this standard. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors, executive officers and persons who own more than 10% of the Company's Common Stock (collectively, "Reporting Persons") to file reports of ownership and changes in ownership of the Company's Common Stock with the Securities and Exchange Commission and The Nasdaq Stock Market, Inc. Copies of these reports are also required to be delivered to the Company. The Company believes, based solely on its review of copies of such reports received or written representations from certain Reporting Persons, that during the Company's fiscal year Messrs. Deixler, Russo and Halpern failed to file various Forms 4s and 5s with respect to the reporting of various stock options granted to them and Messrs. Corn and Delaney failed to file Forms 3s with respect to becoming executive officers of the Company in August and September 2003, respectively. The Company has a Code of Ethics in place for all of its employees. A copy of the Company's Code of Ethics will be provided free of charge, upon written request to ION Networks, Inc 120 Corporate Blvd., South Plainfield, NJ 07080 21 ITEM 10: EXECUTIVE COMPENSATION The following table sets forth the compensation earned, whether paid or deferred, by the Company's Chief Executive Officer, its other four most highly compensated executive officers during the year ended December 31, 2003, and up to four additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of the year ended December 31, 2003 (the "Named Executive Officers") for services rendered in all capacities to the Company.
Summary Compensation Table Annual Compensation ------------------- Principal Position Year Ending* Salary($) Bonus($) - ------------------------------------------------------------------------------------ Current CEO and Executive Officers: Norman E. Corn/(10)/ 12/31/2003 60,000 -- Chief Executive Officer Patrick E. Delaney/(11)/ 12/31/2003 35,323 -- Chief Financial Officer William Whitney/(4)(6)/ 12/31/2003 117,692 -- Vice President & 12/31/2002 112,500 -- Chief Technology 03/31/2002 9,135 -- Officer Former Executive Officers: Kam Saifi/(2)(6)/(7)/ 12/31/2003 163,570/(8)/ -- President & Chief 12/31/2002 273,300/(7)/ -- Executive Officer 03/31/2002 132,681/(9)/ 50,000 Cameron Saifi/(3)(6)/(8)/ 12/31/2003 85,130 -- Executive Vice President 12/31/2002 139,500 -- President & Chief 03/31/2002 90,519 25,000 Operating Officer Ted I. Kaminer/(5)/(6)/ 12/31/2003 14,145 -- Vice President & 12/31/2002 90,625 -- Chief Financial Officer
Summary Compensation Table Long-term Compensation ---------------------- Awards Payouts ------ ------- Other Annual Compen- Restricted Securities All Other Principal sation Stock Underying LTIP Compen- Position ($) Award(s)($) Options (#) Payouts($) sation($)/(1)/ - --------------------------------------------------------------------------------------------------------------------- Current CEO and Executive Officers: Norman E. Corn/(10)/ -- -- -- -- -- Chief Executive Officer Patrick E. Delaney/(11)/ -- -- -- -- -- Chief Financial Officer William Whitney/(4)(6)/ -- -- -- -- -- Vice President & -- -- -- -- -- Chief Technology -- -- 100,000/(12)/ -- -- Officer Former Executive Officers: Kam Saifi/(2)(6)/(7)/ -- -- -- -- -- President & Chief -- -- -- -- -- Executive Officer -- 260,000/(13)/ -- -- 1,398 Cameron Saifi/(3)(6)/(8)/ -- -- -- -- -- Executive Vice President -- -- -- -- -- President & Chief -- 186,000/(14)/ -- -- 1,641 Operating Officer Ted I. Kaminer/(5)/(6)/ -- -- -- -- -- Vice President & -- -- 200,000/(9)/ -- -- Chief Financial Officer
- ---------------- *Please note that the 12/31/03 year end represents the twelve month period from 1/1/03 to 12/31/03 and the 12/31/02 year end represents the nine-month period from 4/1/02 to 12/31/02. (1) Represents contribution of the Company under the Company's 401(k) Plan. (2) Mr. K. Saifi joined the Company on 10/1/01. Pursuant to his employment agreement, he received an annualized base salary of $350,000 for the nine-months ended December 31, 2002. Mr. K. Saifi separated from the Company on July 7, 2003. (3) Mr. C. Saifi joined the Company on 10/17/01. Pursuant to his employment agreement, he received an annualized base salary of $186,000. Mr. C. Saifi separated from the Company on July 7, 2003. (4) Mr. Whitney joined the Company on 3/11/02. Pursuant to his employment agreement, he receives an annualized base salary of $150,000. (5) Mr. Kaminer joined the Company on 5/20/02 and separated from the Company on 2/6/03. (6) Refer to the Employment Contracts, Termination of Employment and Change of Control Arrangements section below for a more detailed description of all consulting and employment agreements. 22 (7) Includes $14,400 in auto allowance. (8) Includes $7,200 in auto allowance. (9) 25,000 shares vested on May 20, 2002. The remaining shares vest as follows: 43,000 on May 20, 2003, and 16,500 at the end of each three month period, commencing with the period ending August 20,2003 and ending with the period ending May 20, 2005 (10) Mr. N. Corn joined the Company on 08/15/03. Pursuant to his employment agreement, he receives an annualized base salary of $180,000 for the fiscal year ended December 31, 2003. (11) Mr. P. Delaney joined the Company on 09/15/03. Pursuant to his employment agreement, he receives an annualized base salary of $120,000 for the fiscal year ended December 31, 2003. (12) These shares vest as follows: 34,000 on March 11, 2003, and 8,250 at the end of each three month period, commencing with the period ending June 11, 2003, and ending with the period ending March 11, 2005. (13) These shares vest as follows: 250,000 on October 4, 2001, 550,000 on September 30, 2002 and 150,000 at the end of each quarter, commencing with the quarter ended December 31, 2002, and ending with the quarter ending September 30, 2004, for a total of 1,200,000. (14) These shares vest as follows: 75,000 on October 17, 2001, 165,000 on September 30, 2002 and 45,000 at the end of each quarter, commencing with the quarter ended December 31, 2002, and ending with the quarter ending September 30, 2004, for a total of 360,000. 23 Option Grants for Year Ended December 31, 2003 During the year ended December 31, 2003 there were no option grants awarded to any employees. Aggregated Option Exercises for Year Ended December 31, 2003 And Year Ended Option Values The following table sets forth certain information concerning each exercise of stock options during year ended December 31, 2003 by each of the Named Executive Officers and the number and value of unexercised options held by each of the Named Executive Officers on December 31, 2003.
Value of Number of Unexercised Securities Underlying In-the-Money Shares Unexercised Options Options at Acquired on Value at FY-End(#) FY-End($)/(1)/ Name Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ ----------- ------------------------- ------------------------- Current CEO and Executive Officers: Norman E. Corn -- -- -- -- Patrick E. Delaney -- -- -- -- William Whitney -- -- 58,750/41,250 -- Former Executive Officers: Kam Saifi -- -- -- -- Cameron Saifi -- -- -- -- Ted Kaminer -- -- -- --
(1) The average price for the Common Stock as reported by the Nasdaq Bulletin Board on December 31, 2003, was $.04 per share. Value is calculated on the basis of the difference between the option exercise price and $.04 multiplied by the number of shares of Common Stock underlying the options. Compensation of Directors Standard Arrangements: During the year ended December 2003 no compensation was paid to any Board member. Employment Contracts, Termination of Employment and Change of Control Arrangements The Company entered into an employment agreement with Norman E. Corn dated August 15, 2003. Pursuant to the agreement Mr. Corn shall serve as Chief Executive Officer at the will of the Company. Mr. Corn's annual base salary as of March 15, 2004 was $200,000. In addition, he will receive a monthly car allowance of $900 plus, reimbursement for additional life and disability insurances. On January 28, 2004, the Company awarded Mr. Corn 1,550,000 options to purchase common stock at $0.115 per share for 800,000 incentive stock options and $0.07 per share for 750,000 non-incentive stock options. These options vested immediately. If the Company terminates Mr. Corn's employment no severance payment is contemplated by the contract. The Company entered into an employment agreement with Patrick E. Delaney dated September 15, 2003. Pursuant to the agreement Mr. Delaney shall serve as Chief Financial Officer at the will of the Company. Mr. Delaney's annual base salary as of March 15, 2004 was $170,000.In addition, he will receive a monthly car allowance of $900 plus, reimbursement for additional life and disability insurances. On January 28, 2004, the Company awarded Mr. Delaney 1,050,000 options to purchase common stock at $0.115 per share for 800,000 incentive stock options and $0.045.per share for 250,000 non-incentive stock options. These options vested immediately. If the Company terminates Mr. Delaney's employment no severance payment is contemplated by the contract. Effective July 7, 2003, Mr. Kam Saifi and Mr. Cameron Saifi ceased to be employed by the Company. As of the date of this filing, neither Mr. Kam Saifi nor Mr. Cameron Saifi has executed separation agreements. However, the parties continue to negotiate and seek an appropriate settlement. Presented below are these former executives employment disclosure from the period ended December 31, 2002 form 10KSB. 24 The Company entered into an employment agreement with Kam Saifi dated October 4, 2001. Pursuant to the agreement, Mr. Saifi served as Chief Executive Officer and President commencing October 1, 2001 and continuing through July 7, 2003. Mr. K. Saifi received a base salary at an annual rate of $250,000 during the period of October 1, 2001 and ending March 31, 2002. He received a base salary at an annual rate of $350,000 commencing April 1, 2002 and continuing through July 7, 2003. In addition he received a monthly car allowance of $1,200. Pursuant to the agreement, Mr. K. Saifi was granted restricted stock consisting of 2,000,000 shares of the Company's Common Stock at a price of $0.13 per share. As of December 31, 2003, all 2,000,000 shares were vested, but are subject to a loan and pledge in favor of the Company. The Company entered into an employment agreement with Cameron Saifi dated October 17, 2001. Pursuant to the agreement, Mr. C. Saifi served as Chief Operating Officer and Executive Vice President commencing October 17, 2001 and continuing through July 7, 2003. Mr. C. Saifi received a base salary at an annual rate of $186,000. In addition he received a monthly car allowance of $600. Pursuant to the agreement, Mr. C. Saifi was granted restricted stock consisting of 600,000 shares of the Company's Common Stock at a price of $0.31 per share. As of December 31, 2003, all 600,000 shares were vested, but are subject to a loan and pledge in favor of the Company. The Company entered into an employment agreement with William Whitney dated March 11, 2002. Pursuant to the agreement, Mr. Whitney shall receive a base salary at an annual rate of $150,000. Pursuant to the agreement, Mr. Whitney was granted stock options consisting of 100,000 shares of the Company's Common Stock at a price of $0.70 per share. These options vest as follows: 34,000 vest on March 11, 2003, and 8,250 at the end of each three month period, commencing with the period ending June 11, 2003, and ending with the period ending March 11, 2005. In the event of a change in control event (as described in the employment agreement) all options will become immediately vested. The Company entered into an employment agreement with Ted Kaminer dated May 20, 2002. Pursuant to the agreement, Mr. Kaminer was to serve as Chief Financial Officer and Vice President commencing May 20, 2002 and continuing until June 30, 2005 unless earlier terminated as provided in the agreement. On February 6, 2003, Mr. Kaminer voluntarily separated employment from the Company and, as a result, no severance was paid to him. 25 ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plan Information As of December 31, 2003
(c) Number of securities (a) (b) remaining available for Number of securities to Weighted-average future issuance under be issued upon exercise exercise price of equity compensation plans of outstanding options, outstanding options, (excluding securities warrants, and rights warrants, and rights reflecting in column (a)) -------------------- -------------------- ------------------------- Plan Category Equity compensation plans approved by 1,435,155 1.62 1,176,426 security holders/(1)/ Equity compensation plans not approved 608,000 1.22 - by security holders/(2)/ Total 2,043,155 1.53 1,176,426
(1) Shareholder Approved Plans In June 2002, the Company adopted its 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan provides for the issuance of stock options, grants of common stock and stock appreciation rights covering up to 1,250,000 shares of common stock; provided, however, no more than 250,000 shares may be issued in connection with awards or stock appreciation rights. In January 2004, the Company discovered that the 2002 Plan was improperly approved without regard to rights granted to the holders of its Series A preferred stock which required prior approval of the holders of majority of Series A preferred stock prior to issuance or authorization of equity securities or instruments convertible into or exercisable for equity securities. No awards were made under 2002 Plan. The Company is taking the position that the 2002 Plan is invalid. In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000 Plan"). The aggregate number of shares of common stock for which options may be granted under the 2000 Plan is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 2000 Plan is 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During the year ended December 31, 2003 and the nine month period ended December 31, 2002, the Company granted options to purchase zero and 838,000, shares, respectively. As of December 31, 2003, 868,775 options were outstanding under the 2000 Plan, of which 660,875 options were exercisable. The aggregate number of shares of common stock for which options may be granted under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 1998 Plan is 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During the year ended December 31, 2003 and the nine months ended December 31, 2002, the Company granted no options to purchase shares. As of December 31, 2003, 533,629 options were outstanding under the 1998 Plan, of which 482,800 options were exercisable. In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan, as amended, increased the number of shares of common stock for which options may be granted to a maximum of 1,250,000 shares. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair market value of one common stock on the date of grant. During the year ended December 31, 2003 and the nine month ended December 31, 2002 , there were no option grants provided under the 1994 Plan. As of December 31, 2003, 32,751 options were outstanding under the 1994 Plan, of which 32,751 options were exercisable. During the year ended December 31, 2003, and nine month period ended December 31, 2002, there were no options granted under the Company's Time Accelerated Restricted Stock Award Plan ("TARSAP"). The options vest after seven years, however, under the TARSAP, the vesting is accelerated to the last day of the fiscal year in which the options are granted if the Company meets certain predetermined sales targets. The Company did not meet the targets for 2001 and, as such, all options granted under the TARSAP in 2001 will vest seven years from the original date of grant. (2) Non-Shareholder Approved Awards 26 The Company as of December 31, 2003 has granted options and warrants to purchase 608,000 shares of Common Stock outside of the shareholder approved plans. The awards have been made to employees, directors and consultants, and except as noted below, have been granted with an exercise price equal to the fair market value of the Common Stock on the date of grant. The Company has not reserved a specific number of shares for such awards. The non-shareholder approved awards are more specifically described below. During July 2001 in connection with services being performed by a consultant, the Company issued warrants to purchase 48,000 shares of the Company's Common Stock at $0.62 per share. The warrants vested immediately and expire five years from the date of the grant. During January 2002 in connection with services being performed by a consultant, the Company issued warrants to purchase 100,000 shares of the Company's Common Stock at $1.35 per share and 50,000 shares of Common Stock at $1.80 per share. The warrants vested immediately and expire three years from the date of the grant. On March 19, 1999, the Company issued options to certain consultants and employees to purchase an aggregate of 20,000 shares of the Company's Common Stock, all of which vested on the first year anniversary of the date of grant. The options expire six years from the date of grant. However, in the event of (a) the liquidation or dissolution of the Company or (b) a merger in which the Company is not the surviving corporation or a consolidation involving the Company, the options shall terminate, unless other provision is made therefore in the transaction. The exercise price of the options is $2.41 and equals to the market value of the Company's Common Stock on the date of grant. At December 31, 2003, 10,000 options were outstanding and exercisable. On September 25, 1996, the Company issued options to certain officers and directors to purchase 400,000 shares of the Company's Common Stock, of which 200,000 vested immediately and 100,000 vested on April 1, 1998 and 1999. The options expire ten years from the date of grant. However, in the event of (a) the liquidation or dissolution of the Company or (b) a merger in which the Company is not the surviving corporation or a consolidation involving the Company, the options shall terminate, unless other provision is made therefore in the transaction. The exercise price of the options is $1.156 and equals to the market value of the Company's Stock on the date of grant. At December 31, 2003, 400,000 options were outstanding and exercisable. 27 Beneficial Ownership Information The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of February 28, 2004 by each person (or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) known by the Company to own beneficially 5% percent or more of the Company's Common Stock, and by the Company's directors and named executive officers, both individually and as a group. As used in this table, "beneficial ownership" means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security. A person is deemed to be the beneficial owner of securities that can be acquired within sixty days from March 15, 2004 through the exercise of any option, warrant or right. Shares of Common Stock subject to options, warrants or rights (including conversion from Preferred Stock) which are currently exercisable or exercisable within sixty days are deemed outstanding for computing the ownership percentage of the person holding such options, warrants or rights, but are not deemed outstanding for computing the ownership percentage of any other person. The amounts and percentages are based upon 24,875,500 shares of Common Stock and 166,835 shares of Preferred Stock outstanding as of February 28, 2004. Common Stock Percent of Class ------------ ---------------- Current, Directors, CEO and Executive Officers: Norman E. Corn 1,565,000/(8)/ 5.9% Patrick E. Delaney 1,050,000/(9)/ 4.1% Stephen M. Deixler 1,457,772/(1)/ 5.7% Frank Russo 361,280/(2)/ 1.4% Baruch Halpern 1,001,760/(3)/ 3.9 % William Whitney 168,704(6) * Former Executive Officers: Kam Saifi 2,308,890/(4)/ 9.2% Cameron Saifi 685,000/(5)/ 2.7% 5% or more beneficial owners: AWM Investment Company 2,731,000/(7)/ 11.03% 153 East 53rd Street, 55th Floor New York, NY 10022 Directors and Executive Officers as a 8,598,406 28.8% group 8 persons) (1) Does not include 220,000 shares of Common Stock owned by Mr. Deixler's wife, mother, children and grandchildren as to which shares Mr. Deixler disclaims beneficial ownership. Includes 480,560 shares of Common Stock subject to conversion from 48,056 shares of Preferred Stock within 60 days of March 15, 2004 and 382,500 shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of March 15, 2004. (2) Includes 277,780 shares of Common Stock subject to conversion from 27,778 shares of Preferred Stock within 60 days of March 15, 2004 and 83,500 shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of March 15, 2004. (3) Does not include 17,000 shares of Common Stock owned by Mr. Halpern's daughter as to which Mr. Halpern disclaims beneficial ownership. Includes 480,560 shares of Common Stock subject to conversion from 48,056 shares of Preferred Stock within 60 days of March 15, 2004, 287,500 shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of March 15, 2004 and 100,000 shares of Common Stock subject to warrants that are currently exercisable or exercisable within 60 days of March 15, 2004. (4) Includes 138,890 shares of Common Stock subject to conversion from 13,889 shares of Preferred Stock within 60 days of March 15, 2004. (5) Includes 85,000 shares of Common Stock subject to conversion from 8,500 shares of Preferred Stock within 60 days of March 15, 2004. 28 (6) Includes 38,890 shares of Common Stock subject to conversion from 3,889 shares of Preferred Stock within 60 days of March 15, 2004 and 67,000 shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of March 15, 2004. (7) Based on American Stock and Transfer & Trust list of shareholders dated February 27, 2004 plus 1,120,000 warrants to purchase common stock. (8) Includes 15,000 shares of Common Stock and 1,550,000 shares of Common Stock subject to options that are currently exercisable. (9) Consists of 1,050,000 shares of Common Stock subject to options that are currently exercisable. (10) Unless otherwise noted, the address of each such person is c/o the Company, 120 Corporate Blvd., S. Plainfield, New Jersey 07080. *Indicates ownership of Common Stock of less than one (1%) percent of the total issued and outstanding Common Stock on March 15, 2004. ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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 Piscataway, NJ 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 issue shares totaling the value of $77,400, which were to 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 were to have closed on or before June 30, 2002. These shares were to have had the registration rights as other shares issued in the Financing. Since the Financing did not close on or before June 30, 2002, the Tenant owes the Company additional rent in the amount of $4,300 per month commencing on July 1, 2002. The Chairman of the Board of Directors of the Company served as the Chief Financial Officer of the Tenant until November 2002. On or about January 16, 2003, the Tenant filed for voluntary Ch. 7 bankruptcy with the U.S. Bankruptcy Court for the District of New Jersey. As a result, the Company wrote off an amount of $122,550 which is included in selling, general and administrative expenses. 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 made 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 "Separation and Forbearance 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 Separation and Forbearance 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 $777,713.48 received by the Company on August 3, 2001 for the sale of the Former CEO's personal residence. At December 31, 2003, the total amount owed to the Company by the Former CEO was approximately $175,154, which includes interest accrued through December 31, 2003. The full amount has been recorded as a reserve against the note receivable. Because these amounts were not paid by their respective maturity dates, interest is accruing at the default interest rate of 12%. The Company will continue to attempt to collect the note receivable. 29 Effective October 2001, the Company approved and granted 2,600,000 shares of restricted stock to two executives: Messrs. Kam Saifi (2,000,000 shares at $0.13 per share), and Cameron Saifi, (600,000 shares at $0.31 per share) at fair value. The restricted shares vest at the rate of 12.5% on the date of grant, 27.5% on September 30, 2002, and thereafter 7.5% at the end of each quarter which commenced on December 31, 2002. These restricted shares were subject to a repurchase right which permitted 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 partial recourse interest bearing (5.46% on an annual basis) 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. As of December 31, 2003 Mr. Kam Saifi owes approximately $290,718 (including approximately $32,718 of interest) for 2,000,000 Restricted Shares and; Mr. Cameron Saifi owes approximately $208,526 (including approximately $23,126 of interest) for 600,000 Restricted Shares. The issuance of the restricted shares and the notes receivable due from the officers is recorded in the Company's financial statements. The Company is continuing to negotiate agreements relating to the disposition of the loans due to the separation of the officers from the Company. As of December 31, 2003, all 2,600,000 shares were vested, but are subject to a loan and pledge in favor of the Company. 30 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit No. Description - ------- ----------- 3.1 Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on August 5, 1998./(2)/ 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./(2)/ 3.3 Certificate of Amendment of the Certificate of Incorporation, as filed with the Secretary of state of the State of Delaware an October 12, 1999./(3)/ 3.4 By-Laws of the Company./(2)/ 3.5 Form of Specimen Common Stock Certificate of the Company./(4)/ 4.1 1994 Stock Option Plan of the Company. /(1)/ 4.2 1998 Stock Option Plan of the Company./(2)/ 4.3 1998 U.K. Sub-Plan of the Company, as amended./(2)/ 4.4 Amended and Restated Certificate of Designation of Rights Preferences, Privileges and Restrictions of Series A Preferred Stock of ION Networks, Inc. /21/ 4.5 2000 Stock Option Plan of the Company./(17)/ 4.6 2002 Stock Option Plan of the Company./(19)/ 4.7 Form of Warrant Agreement dated July 17, 2001./(13)/ 4.8 Form of Warrant Agreement dated January 4, 2002./(13)/ 4.9 Form of Non-Qualified Stock Option Agreement dated March 19, 1999 by and between the Company's predecessor, Microframe, Inc. and its consultants./(13)/ 4.10 Form of Non-Employee Director Stock Option Contract dated March 10, 1998 between the Company's predecessor, Microframe, Inc. and its non-employee directors./(13)/ 4.11 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./(13/) 4.12 Form of Non-Qualified Stock Option Agreement dated September 25, 1996 by and between the Company's predecessor, Microframe, Inc. and its employees./(13)/ 31 Exhibit No. Description - ------- ----------- 4.13 Amended and Restated Non-Qualified Stock Option Agreement dated May 19, 1997 by and between the Company's Predecessor, Microframe, Inc. and its employees./(9)/ 10.3 Agreement dated as of December 19, 1994 by and between LeeMAH DataCom Security Corporation and Siemens Rolm Communications Inc./(4)/ 10.4 Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by and between the Company and Siemens Credit Corporation./(4)/ 10.5 Equipment Lease Agreement dated June 17, 1999 by and between the Company and Lucent Technologies./(4)/ 10.6 (i) Non-negotiable Promissory Note in the principal amount of $750,000 issued by Stephen B. Gray to the Company./(5)/ (ii) First Amendment to Promissory Note dated as of August 5, 2000 by and between the Company and Stephen B. Gray./(5)/ 10.7 Line of Credit Agreement with United Nations Bank dated September 30, 1999./(5)/ 10.8 (i) Separation and Forbearance Agreement made as of October 5, 2000 between the Company and Stephen B. Gray./(7)/ (ii)Promissory Note in the amount of $163,000 dated October 5, 2000 made by Stephen B. Gray to the Company./(7)/ 10.9 Materials and Services Contract dated January 16, 2001, between the Company and SBC Services, Inc./(8)/ 10.10 Stock Purchase Agreement dated August 11, 2000 by and between the Company and the parties identified therein./(8)/ 10.11 Purchase Agreement by and between the Company and the Selling Shareholders set forth therein dated February 7, 2002./(18)/ 10.12 Employment Agreement dated October 4, 2001 between the Company and Kam Saifi./(11)/ 10.13 Employment Agreement dated October 17, 2001 between the Company and Cameron Saifi./(12)/ 10.14 Sublease Agreement dated April 17, 2002 between the Company and Multipoint Communications, LLC./(14)/ 32 Exhibit No. Description - ------- ----------- 10.15 Agreement and General Release dated August 15, 2002 between the Company and Ron Forster./(16)/ 10.16 Rescission Agreement dated September 29, 2002 between the Company and David Arbeitel./(16)/ 10.17 Separation Agreement and General Release dated October 31, 2002 between the Company and David Arbeitel./(16)/ 10.18 Employment Agreement dated May 20, 2002 between the Company and Ted Kaminer./(15)/ 10.19 Employment Agreement dated February 25, 2002, between the Company and William Whitney./21/ 10.20 Employment Agreement dated August 15, 2003, between the Company and Norman E. Corn./22/ 10.21 Employment Agreement dated September 15, 2003, between the Company and Patrick E. Delaney./20/ 10.22 Lease Agreement dated July 21, 2003 by and between the Company and 116 Corporate Boulevard, LLC, Inc.* 16.1 Letter dated October 31,2003, from Deloitte & Touche, LLP. to the Securities and Exchange Commission./(10)/ 21.1 List of Subsidiaries./(14)/ 31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.* 31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.* 32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.* 32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.* (1) Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on August 15, 1995. (2) Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on April 22, 1999. (3) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on March 17, 2000. (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999. (5) Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on June 28, 2000. (6) Incorporated by Reference to the Company's Current Report on Form 8-K filed on March 12, 1999. (7) Incorporated by reference to the Company's Quarterly report on Form 10-QSB filed on November 14, 2000 (8) Incorporated by reference to the Company's Annual report on Form 10-KSB filed on June 29, 2001. (9) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on November 17, 2000. (10) Incorporated by reference to the Company's Annual report on Form 8-KSB filed on October 31, 2003. (11) Incorporated by Reference to the Company's Current Report on Form 8-K filed on October 23, 2001. 33 (12) Incorporated by Reference to the Company's Current Report on Form 8-K filed on October 24, 2001. (13) 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. (14) 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. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB filed on August 14, 2002. (16) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB filed on November 14, 2002. (17) Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on January 11, 2002. (18) Incorporated by Reference to the Company's Registration Statement on Form S-3 filed on March 4, 2002. (19) Incorporated by Reference to the Company's Definitive Proxy Statement filed on September 16, 2002. (20) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB filed on November 17, 2003. (21) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, as filed on April 15, 2003. (22) Incorporated by reference to the Company's Quarterly Report on Form 10QSB filed on September 12, 2003. * Filed herewith (b) Reports on Form 8-K On November 3, 2003, the Company filed a report on Form 8-K reporting the change of its independent principal accountants. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES YEAR ENDED YEAR ENDED DECEMBER 31, 2003 DECEMBER 31, 2002 Audit Fees $116,870 $ 73,657 Audit Related Fees 0 0 Tax Fees (1) $ 15,000 $ 30,000 All Other Fees 0 0 (1) Preparation of federal, state and local income and franchise taxes. 34 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 2004 ION NETWORKS, INC. By: /s/ Norman E. Corn ------------------------------ Norman E. Corn Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 29, 2004: Signature Title --------- ----- /s/ Norman E. Corn Chief Executive Officer - ------------------------------- Norman E. Corn /s/ Patrick E. Delaney Chief Financial Officer - ------------------------------- Patrick E. Delaney /s/ Stephen M. Deixler Chairman of the Board of Directors - ------------------------------- Stephen M. Deixler /s/ Baruch Halpern Director - ------------------------------- Baruch Halpern /s/ Frank Russo Director - ------------------------------- Frank Russo 35 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003 AND NINE MONTHS ENDED DECEMBER 31, 2002 36 ION NETWORKS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003 AND NINE MONTHS ENDED DECEMBER 31, 2002
Page(s) ------- Independent Auditors' Report 38 Independent Auditors' Report 39 Financial Statements: Balance Sheet as of December 31, 2003 40 Consolidated Statements of Operations for the Year Ended December 31, 2003 and the Nine Months Ended December 31, 2002 41 Consolidated Statements of Cash Flows for the Year Ended December 31, 2003 and the Nine Months Ended December 31, 2002 42 Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2003 and the Nine Months Ended December 31, 2002 43-44 Notes to Consolidated Financial Statements 45-62
37 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of ION Networks, Inc. South Plainfield, New Jersey We have audited the accompanying balance sheet of ION Networks, Inc. as of December 31, 2003, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ION Networks, Inc. as of December 31, 2003, and the consolidated results of their operations and thier cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's recurring losses from operations and its difficulty in generating sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Marcum & Kliegman LLP New York, New York February 19, 2004 38 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of ION Networks, Inc. and Subsidiaries Piscataway, New Jersey We have audited the consolidated balance sheet (not separately included herein) of ION Networks, Inc. and subsidiaries (the "Company") as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the nine months ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2002, and the results of its operations and its cash flows for the nine months ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the 2002 financial statements, the Company's recurring losses from operations and its difficulty in generating sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 1 to the financial statements, effective April 1, 2002, the Company changed its fiscal year end from March 31 to December 31. /s/ DELOITTE & TOUCHE LLP March 11, 2003 Parsippany, New Jersey 39 ION NETWORKS, INC. BALANCE SHEET
December 31, ASSETS 2003 ----------------- Current assets Cash and cash equivalents $ 357,711 Accounts receivable, less allowance for doubtful accounts of $66,549 397,744 Inventory, net 702,042 Prepaid expenses and other current assets 128,138 ------------ Total current assets 1,585,635 Property and equipment, net 57,432 Capitalized software, less accumulated amortization of $3,796,836 448,288 Other assets 13,301 ------------ Total assets $ 2,104,656 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of capital leases $ 73,551 Current portion of long-term debt 2,202 Accounts payable 340,740 Accrued expenses 574,930 Deferred income 200,305 Sales tax payable 52,640 Other current liabilities 53,337 ------------ Total current liabilities $ 1,297,705 ------------ Long term debt, net of current portion 9,441 Commitments and contingencies Stockholders' Equity Preferred stock - par value $.001 per share; authorized 1,000,000 shares, 200,000 shares designated Series A; 166,835 shares issued and outstanding (Aggregate Liquidation Preference $300,303) 167 Common stock - par value $.001 per share; authorized 50,000,000 shares; 24,875,500 shares issued and outstanding 24,876 Additional paid-in capital 44,585,740 Notes receivable from former officers (486,535) Accumulated deficit (43,326,738) ------------ Total stockholders' equity 797,510 ------------ Total liabilities and stockholders' equity $ 2,104,656 ============
The accompanying notes are an integral part of these financial statements. 40 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Nine Months Ended December 31, December 31, 2003 2002 ------------ ------------ Net sales $ 3,342,620 $ 3,335,160 Cost of sales 866,371 1,142,902 ------------ ------------ 2,476,249 2,192,258 Less inventory write downs 26,002 285,135 ------------ ------------ Gross Margin 2,450,247 1,907,123 ------------ ------------ Research and development expenses 503,146 766,521 Selling, general and administrative expenses 2,452,031 5,519,665 Depreciation and amortization expenses 736,694 835,315 Restructuring, asset impairments and other (credits) charges (405,402) 662,828 ------------ ------------ Loss from operations (836,222) (5,877,206) Interest income 19,872 36,781 Interest expense (14,593) (19,524) ------------ ------------ (830,943) (5,859,949) Loss before income taxes Income tax benefit 227,151 231,427 ------------ ------------ Net loss $ (603,792) $ (5,628,522) ============ ============ Per share data Basic and diluted $ (0.03) $ (0.25) Weighted average number of common shares outstanding Basic and diluted 23,900,500 22,843,009
The accompanying notes are an integral part of these financial statements. 41 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Nine Months Ended December 31, December 31, 2003 2002 ----------- ----------- Cash flows from operating activities Net loss $ (603,792) $(5,628,522) Adjustments to reconcile net loss to net cash from operating activities: Restructuring, asset impairments and other charges, non-cash (405,402) 508,458 Depreciation and amortization 736,694 835,315 Provision for inventory obsolescence (26,002) (285,135) Non-cash stock-based compensation charge (95,000) 95,000 (Cancellation) of restricted stock -- (81,112) Notes receivable from officers (13,130) 64,245 Reserve allowance of related party note receivable -- 83,657 Deferred compensation -- 62,893 Changes in operating assets and liabilities: Accounts receivable 164,018 959,468 Inventory 583,228 49,993 Prepaid expenses and other current assets 75,796 280,450 Other assets 1,577 -- Accounts payable and other accrued expenses (690,303) 301,107 Accrued payroll and related liabilities (82,543) (168,232) Deferred income 45,284 39,094 Sales tax payable (31,385) (104,410) Other current liabilities (35,980) 15,394 ----------- ----------- Net cash used in operating activities (376,940) (2,972,337) ----------- ----------- Cash flows from investing activities Acquisition of property and equipment -- (40,702) Capitalized software expenditures (214,996) (339,688) Proceeds from sale of equipment 30,129 -- Restricted cash 125,700 -- ----------- ----------- Net cash used in investing activities (59,167) (380,390) ----------- ----------- Cash flows from financing activities Repayment of restricted stock note -- 12,264 Repayment of debt (85,135) (88,678) Issuances of preferred stock, net -- 285,303 ----------- ----------- Net cash (used in) provided by financing activities (85,135) 208,889 ----------- ----------- Effect of exchange rates on cash 13,269 (41,135) ----------- ----------- Net decrease in cash and cash equivalents (507,973) (3,184,973) Cash and cash equivalents - beginning of period 865,684 4,050,657 ----------- ----------- Cash and cash equivalents - end of period $ 357,711 $ 865,684 =========== =========== Supplemental information Cash paid during period for interest $ 13,650 $ 19,553 =========== =========== Cash paid for taxes $ 0 $ 117,401 =========== ===========
The accompanying notes are an integral part of these financial statements. 42 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 2002 AND FOR THE YEAR ENDED DECEMBER 31, 2003
Preferred Common Additional Accumulated Accumulated Other --------------------- ------------------------ Paid-In Comprehensive Shares Stock Shares Stock Capital Deficit Income -------- --------- ---------- ---------- ----------- -------------- ------------- Balance, March 31, 2002 - - 25,138,000 $ 25,138 $44,381,454 $(37,094,424) $ 27,866 -------- --------- ---------- ---------- ----------- -------------- ------------- Comprehensive loss Net loss (5,628,522) Translation adjustments (41,135) Total comprehensive loss Issuances of preferred stock 166,835 167 285,136 Cancellation of restricted shares (262,500) (262) (80,850) Notes receivable from officers Deferred compensation Non-cash stock-based compensation 95,000 -------- --------- ---------- ---------- ----------- -------------- ------------- Balance, December $ 31, 2002 166,835 $ 167 24,875,500 $ 24,876 $44,680,740 (42,722,946) $ (13,269) ======== ========= ========== ========== =========== ============== ============= Comprehensive loss Net loss (603,792) Translation adjustments 13,269 Total comprehensive loss Notes receivable from officers Non-cash stock-based compensation (95,000) -------- --------- ---------- ---------- ----------- -------------- ------------- Balance, December 31, 2003 166,835 $ 167 24,875,500 $ 24,876 $44,585,740 $ (43,326,738) $ - ======== ========= ========== ========== =========== ============== =============
The accompanying notes are an integral part of these financial statements. 43 ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 2002 AND FOR THE YEAR ENDED DECEMBER 31, 2003
Notes Receivable Total from former Deferred Stockholders' Officers Compensation Equity --------------- ----------------- ----------------- Balance, March 31, 2002 $ (549,914) $ (62,893) $ 6,727,227 --------------- ----------------- ----------------- Comprehensive loss Net loss (5,628,522) Translation adjustments (41,135) ----------------- Total comprehensive loss (5,669,657) Issuances of preferred stock 285,303 Cancellation of restricted shares (81,112) Notes receivable from officers 76,509 76,509 Deferred compensation 62,893 62,893 Non-cash stock-based compensation 95,000 --------------- ----------------- ----------------- Balance, December 31, 2002 $ (473,405) - $ 1,496,163 =============== ================= ================= Comprehensive loss Net loss (603,792) Translation adjustments 13,269 ----------------- Total comprehensive loss (590,523) Notes receivable from officers (13,130) (13,130) Non-cash stock-based compensation (95,000) --------------- ----------------- ----------------- Balance, December 31, 2002 $ (486,535) - $ 797,510 =============== ================= =================
The accompanying notes are an integral part of these financial statements. 44 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION The Company ION Networks, Inc. (the "Company"), a Delaware corporation founded in 1999 through the combination of two companies -- MicroFrame, a New Jersey Corporation (the predecessor entity to the Company, originally founded in 1982), and SolCom Systems Limited, a Scottish corporation located in Livingston, Scotland (originally founded in 1994), designs, develops, manufactures and sells network and information security and management products to corporations, service providers and government agencies. The Company's hardware and software suite of products are designed to form a secure auditable portal to protect IT and network infrastructure from internal and external security threats. ION's products operate in the IP, data center, telecommunications and transport, and telephony environments and are sold by a direct sales force and indirect channel partners mainly throughout North America and Europe. 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 December 31, 2003, we had an accumulated deficit of $43,326,738 and a working capital position of $287,930. We also had net losses of $603,792 for the year ended December 31, 2003 and $5,628,522 for the nine months ended December 31, 2002. During 2003, the Company stabilized its excessive negative cash flow and in fact increased its cash and cash equivalent position from a low of less than $100,000 at September 30, 2003 to approximately $357,000 at December 31, 2003. The Company continues to have a delicate cash position and while the future viability of the organization has significantly improved, it is necessary for it to continue to strictly manage expenditures and to increase revenues. In addition, it is the intention of the new management team, hired in the quarter ended September 30, 2003, to secure additional financing during 2004 to accelerate growth and insure long-term viability. Basis of Presentation Effective April 1, 2002, the Company changed its fiscal year end from March 31 to December 31. The consolidated financial statements include the presentation of the transition period beginning April 1, 2002 and ending on December 31, 2002. The following table presents certain financial information for the years ended December 31, 2003 and 2002: YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 ---- ---- (UNAUDITED) Net Sales $ 3,342,260 $ 5,411,357 Gross Margin 2,450,247 3,022,235 Loss from operations before income tax (830,943) (7,053,131) Income tax benefit 227,151 255,791 Net loss $ (603,792) $ (6,846,068) Basic and Diluted earnings per share $ (0.03) $ (0.30) Weighted average common shares 23,900,500 22,843,009 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of ION Networks, Inc. and its subsidiaries (collectively, the "Company"). All material inter-company balances and transactions have been eliminated in consolidation. Due to cost containment in 2003, the Company ceased its operations in Belgium and Scotland. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. 45 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, capitalized software including estimates of future gross revenues, and the related amortization lives, deferred tax asset valuation allowance and depreciation and amortization lives. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. 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, net 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. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which are generally two to five years. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred. Gains or losses on disposal of property and equipment are reflected in the statements of operations in the period of disposal. Capitalized Software The Company capitalizes computer software development costs in accordance with the provisions of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize computer software development costs upon the establishment of the technological feasibility of a product, to the extent that such costs are expected to be recovered through future sales of the product. 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. The Company capitalized $214,996 and $339,688 of software development costs for the year ended December 31, 2003 and the nine months ended December 31, 2002, respectively. Amortization expense totaled $531,136 and $483,723 for the year December 31, 2003 and for the nine months ended December 31, 2002, respectively. 46 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Research and Development Costs The Company charges all costs incurred to establish the technological feasibility of a product or enhancement to research and development expense in the period incurred. Advertising Costs The Company expenses advertising cost as incurred. The Company incurred approximately $1,000 and $17,726 for the year ended December 31, 2003 and the nine months ended December 31, 2002, respectively. Revenue Recognition Policy 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. Shipping and Handling Costs Shipping and handling costs incurred are billed to the customer and included as part of cost of sales. Fair Value of Financial Instruments The carrying value of items included in working capital and debt approximates fair value because of the relatively short maturity of these instruments. Net Loss Per Share of Common Stock Basic net loss per share excludes dilution for potentially dilutive securities and is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted net loss per share when their inclusion would be antidilutive. A reconciliation between basic and diluted weighted average shares outstanding is as follows:
Year Ended Nine Months Ended December 31, 2003 December 31, 2002 Weighted average shares outstanding, basic 23,900,500 22,843,009 Dilutive shares issuable in connection with stock plans and warrants granted -- 327,870 Conversion of preferred stock to common stock 1,668,350 661,273 ---------- ---------- Weighted average shares outstanding, diluted* 25,568,850 23,832,152 ========== ==========
* Since there was a loss attributable to common shareholders in these periods, the basic weighted average shares outstanding were used in calculating diluted loss per share, as inclusion of the incremental shares shown in this calculation would be antidilutive. Potential common shares of 3,115,155 and 989,143 for the year ended December 31, 2003 and the nine month period ended December 31, 2002, repectively, were excluded from the computation of diluted earnings per share. 47 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Compensation The Company records stock-based employee compensation arrangements in accordance with provisions of Accounting Principals Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and complies with the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123," issued in December 2002. Under APB Opinion No. 25, compensation expense is based on the difference, if any, generally on the date of grant, between the fair value of our stock and the exercise price of the option. Equity instruments issued to non-employee vendors are recorded in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees from Acquiring, or in Conjunction with Selling, Goods and Services". All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the date on which the counter party's performance is complete. During the year ended December 31, 2003 there were no options issued. The weighted-average fair values at date of grant for options granted during the nine months ended December 31, 2002 was $0.32. The fair value of each option grant for the Company's common stock is estimated on the date of the grant using the Black Scholes option pricing model. December 31, 2002 --------------- Expected Volatility 135.27% Risk-free interest rate 3.96 Expected option lives 5.48 years If the Company had elected to recognize compensation costs based on the fair value at the date of grant for awards. Compensation expense for the year ended December 31, 2003 and the nine months ended December 31, 2002, consistent with the provisions of SFAS No. 123, the Company's net loss and basic and diluted net loss per share would have increased to the pro forma amounts indicated below: by $217,158 and $.01 and $201,279 and $.01, respectively, for the year ended December 31, 2003 and the nine months ended December 31, 2002.
Year Ended Nine months ended December 31, 2003 December 31, 2002 ----------------- ----------------- Net loss As reported $ (603,792) $(5,628,522) Deduct: Stock based employee compensation determined under the fair value methods 217,158 201,279 ----------- ----------- Pro forma net loss $ (820,950) $(5,829,801) =========== =========== Basic and diluted net loss per share of common stock As reported (0.03) (0.25) Pro forma (0.03) (0.26)
Foreign Currency Translation The financial statements of the foreign subsidiaries were prepared in local currency and translated into U.S. dollars based on the current exchange rate at the end of the period for the balance sheet and a weighted-average rate for the period on the statement of operations. Translation adjustments are reflected as foreign currency translation adjustments in stockholders' equity and, accordingly, have no effect on net loss. Transaction adjustments for the foreign subsidiaries are included in income and are not material. The Company ceased its foreign operations during the year ended December 31, 2003. Income Taxes Deferred income tax assets and liabilities are computed annually based on enacted tax laws and rates for temporary differences between the financial accounting and income tax bases of assets and liabilities. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized. 48 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warranty Costs The Company estimates its warranty costs based on historical warranty claim experience. Future costs for warranties applicable to sales recognized in the current period are charged to cost of sales. The warranty accrual is reviewed quarterly to reflect the remaining obligation. Adjustments are made when actual warranty claim experience differs from estimates. The warranty accrual included in other current liabilities as of December 31, 2003 approximated $48,400. Reclassifications Certain amounts in the financial statements for the nine month period ended December 31,2002 and year ended March 31, 2002 have been reclassified to conform to the presentation of the financial statements for the year ended December 31, 2003. 3. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES As a result of the Company being notified by the landlord to cancel its lease effective August 15, 2003 at the Piscataway, NJ facility, the net book value of leasehold improvements amounting to $28,955 were written-off. In addition, the Company was required to sell property and equipment in order to move into its smaller newly leased facility. At June 30, 2003 the Company recorded an impairment of $163,662 which represents the difference between the cash proceeds of the August 2003 sale and carrying value prior to the impairment. During the quarter ended June 30, 2003, the Company completed its voluntary liquidation of its UK subsidiary. As a result of the liquidation, the Company reversed its prior restructuring accrual of $508,458, which was recorded in fourth quarter 2002, related to the remaining long-term lease, and other operating accruals of $294,704. These accruals were reflected in the consolidated statement of operations as part of restructuring and SG&A expenses. During the quarter ended September 30,2003 the Company successfully negotiated a settlement of a $243,071 open payable due to Xetel for a payment of $30,000 and a forgiveness of debt in the amount of $213,071. The components of the restructuring, asset impairments and other charges are as follows:
Asset Impairment Restructuring Other Charges Total ---------------- ------------- ------------- ----- First Quarter 2003 charges $ -- $ 123,510 $ -- $ 123,510 Second Quarter 2003 charges 192,617 (508,458) -- (315,841) Third Quarter 2003 charges -- -- (213,071) (213,071) Fourth Quarter 2003 charges -- -- -- -- ============ ============ ============ ============ Total $ 192,617 $ (384,948) $ (213,071) $ (405,402) ============ ============ ============ ============
The Company is in negotiations with the landlord from the Fremont, California location for the disposition of the reserved amount of $123,510. The Company has not occupied the space since approximately March 2003 and the successful outcome of the negotiations cannot be assured, however, the Company believes that the amount should not exceed the reserved amount of $123,510. During the quarter ended December 31, 2002 the Company separated with thirteen employees which resulted in a restructuring charge during the quarter of $154,370 in severance and other related matters, all of which has been paid prior to December 31, 2002. Also during the quarter ended December 31, 2002, the Company abandoned the space at SolCom House, Livingston, Scotland that was leased by its subsidiary ION Networks, Ltd. As a result, the Company recorded a charge of $508,458 in the quarter ended December 31, 2002 for the remainder of the lease term that expires on August 31, 2011. 49 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 2003, the Company's sub-tenant, Multipoint voluntarily filed for Chapter 7 Bankruptcy with the U.S. Bankruptcy Court for the District of New Jersey. As a result of consideration of Multipoint's financial condition, culminating with the bankruptcy, the Company wrote-off an amount of $122,550 for the unpaid balance of rent due from Multipoint which is included in selling and general and administrative expenses. 4. INVENTORY Inventory, net of reserves of $198,734, consists of the following: December 31, 2003 ------------ Raw materials $ 62,851 Work-in-progress 47,044 Finished goods 592,147 ------------ Inventory , net $ 702,042 ============ Consistent with the downturn in markets served by us, we evaluated our inventory levels in light of actual and forecasted revenue. As a result, we recorded a charge of $26,002 and $285,135 to cost of sales for the year ended December 31, 2003 and the nine months ended December 31, 2002, respectively, related to reserves for excess and obsolete inventory. We will continue to monitor our excess reserves and to the extent that inventory that has been reserved as excess is ultimately sold by us, such amounts will be disclosed in the future. 5. PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following: December 31, 2003 -------------- Computer and other equipment $ 807,123 Furniture and fixtures 68,408 -------------- 875,531 Less accumulated depreciation 818,099 -------------- Property and equipment, net $ 57,432 ============== Depreciation expense for property and equipment for the year ended December 31, 2003 and the nine months ended December 31, 2002, amounted to $205,558 and $351,592. During the year ended December 31, 2003 and the nine months ended December 31, 2002, the Company retired both fully and not fully depreciated assets amounting to $1,730,369 and $847,785, respectively. During the year ended December 31, 2003 the Company relocated it's headquarters and therefore, recorded an asset impairment charge of $192,617 to recognize the retirement of assets not fully depreciated. 6. DEBT In 1998, the Company entered into two equipment loan agreements for its Belgium subsidiary. The first loan is for approximately $50,000, the loan was due July 2003 and bore an interest rate of 5.2%. The second loan was for approximately $30,000, the loan was due February 2003 and bore an interest rate of 2.5%. At December 31, 2003 there is no outstanding balance under either term loan. During the year ended December 31, 2003, the Company ceased its operations in Belgium. 50 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. On March 17, 2003 the Company entered into an agreement with the landlord to amend the lease for its Piscataway, NJ facility to reduce the letter of credit to $60,000 and to replenish it by December 2003. The Company moved its corporate location as of August 15, 2003 from its Piscataway, NJ facility and no longer holds any obligations for a security deposit. 7. INCOME TAXES As of December 31, 2003, the Company has available federal and state net operating loss carry forwards of approximately $42,188,000 and $23,836,000, respectively, to offset future taxable income. The federal net operating loss carry forwards expire during the years 2011 through 2024. In addition, the Company has investment credit and research and development credit carry forwards aggregating approximately $405,000, which may provide future tax benefits, expiring from 2008 through 2020. The Company acquired a corporation business tax benefit certificate pursuant to New Jersey law which relates to the surrendering of unused net operating losses. For the year ended December 2003 and the nine months ended December 31, 2002, the Company received a benefit of $227,151 and $236,728, respectively. The components of the income tax benefit for the year ended December 31, 2003 and the nine months ended December 31, 2002 are as follows: December 31, December 31, 2003 2002 ---------------- -------------- Current Federal $ 227,151 $ 236,728 State -- -- Foreign -- (5,301) ---------------- -------------- Subtotal $ 227,151 $ 231,427 Deferred Federal -- -- State -- -- ---------------- -------------- $ 227,151 $ 231,427 ================ ============== The reasons for the difference between the Company's effective tax rate and the United States federal statutory rate are as follows: December 31, December 31, 2003 2002 ------------------------ Effective tax rate reconciliation Statutory federal tax rate (34)% (34)% State taxes, net of federal benefit (6) (6) Effect of recording valuation allowance on net operating loss carry forwards 39 39 Sale of state net operating losses and other 1 (8) ------------------------ -- -9% ======================== 51 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effect of temporary differences which make up the significant components of the net deferred tax asset and liability at December 31, 2003 and 2002 are as follows:
December 31, December 31, 2003 2002 ------------ ------------ Current deferred tax assets Inventory reserves $ 132,850 $ 367,511 Accrued expenses 36,610 71,102 Allowance for doubtful accounts 60,100 69,671 ------------ ------------ Total current deferred tax assets 229,560 508,284 Valuation allowance (229,560) (508,284) ------------ ------------ Net current deferred tax assets -- -- ------------ ------------ Noncurrent deferred tax assets Depreciation and amortization 250,000 250,000 Net operating loss carry forwards 14,343,920 16,304,184 Research and development credit 405,078 254,523 Alternative minimum tax credit -- 20,125 ------------ ------------ Total noncurrent deferred tax assets 14,998,998 16,828,832 Valuation allowance (14,784,003) (16,329,571) ------------ ------------ Net noncurrent deferred tax assets 214,995 499,261 Noncurrent deferred tax liabilities Capitalized software (214,995) (499,261) ------------ ------------ Total noncurrent deferred tax liabilities $ (214,995) $ (499,261) ------------ ------------ Net noncurrent deferred tax (liabilities) assets $ -- $ -- ============ ============
The Company has recorded a full valuation allowance against the deferred tax assets, including the federal and state net operating loss carry forwards as management believes that it is more likely than not that substantially all of the deferred tax assets will not be realized. 8. STOCKHOLDERS' EQUITY PREFERRED STOCK - On September 13, 2002 the Company received equity financing in the amount of $300,303 ($285,303, net of issuance costs) for the issuance of 166,835 unregistered shares of the Company's preferred stock at $1.80 per share. The Company has designated 200,000 of the 1,000,000 authorized shares of preferred stock as Series A Preferred Stock ("Preferred Stock"). Each share of Preferred Stock is convertible into 10 shares of the Company's common stock at the conversion price of $0.18 per share of common stock, which was the closing bid price of the Company's common stock on September 13, 2002. The Preferred Stock is non-voting, has a standard liquidation preference equal to its purchase price, and does not pay dividends. Proceeds of the equity financing will be used for working capital and general corporate purposes. All of the shares of Preferred Stock were purchased by directors and management of the Company. RESTRICTED STOCK - Effective October 2001, the Company approved and granted 2,600,000 shares of restricted stock (the "Restricted Shares") to two executives stockholders 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 partial recourse interest bearing (5.46% on an annual basis) promissory notes for the value of the Restricted Shares to be repaid by the officers. As of December 31, 2003 Mr. Kam Saifi owes approximately $290,718 (including approximately $32,718 of interest) for 2,000,000 Restricted Shares and; Mr. Cameron Saifi owes approximately $208,526 (including approximately $23,126 of interest) for 600,000 Restricted Shares. 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 or under certain circumstances, when the borrower's employment with the Company terminates for any reason. The issuance of the restricted shares and the notes receivable due from the former officers is recorded in the Company's financial statements. On July 7, 2003, Mr. Kam Saifi and Mr. Cameron Saifi separated from the Company. The Company is in the process of negotiating settlement agreements with the former officers. The variable accounting method used to account for the partial recourse restricted stock granted to management resulted in a cashless charge of $95,000 for the period ended December 31, 2002. In accordance with accounting guidance for the partial recourse restricted stock granted to management resulted in a reversal of the cashless charge of $95,000 for the period ended December 31, 2003 52 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMON STOCK - On February 14, 2002 the Company sold 4,000,000 shares of common stock at a price of $0.87 per share, for total consideration of $3,480,000. In connection with this sale, warrants to purchase 1,120,000 shares of common stock with an exercise price of $1.25 were issued. The warrants expire on February 14, 2007. STOCK OPTION PLANS In June 2002, the Company adopted its 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan provides for the issuance of stock options, grants of common stock and stock appreciation rights covering up to 1,250,000 shares of common stock; provided, however, no more than 250,000 shares may be issued in connection with awards or stock appreciation rights. In January 2004, the Company discovered that the 2002 Plan was improperly approved without regard to rights granted to the holders of its Series A preferred stock which required prior approval of the holders of majority of Series A preferred stock prior to issuance or authorization of equity securities or instruments convertible into or exercisable for equity securities. No awards were made under 2002 Plan. The Company is taking the position that the 2002 Plan is invalid. In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000 Plan"). The aggregate number of shares of common stock for which options may be granted under the 2000 Plan is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 2000 Plan is 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During the year ended December 31, 2003 and the nine month period ended December 31, 2002, the Company granted options to purchase zero and 838,000, shares, respectively. At December 31, 2003, 868,775 options were outstanding under the 2000 Plan, of which 660,875 options were exercisable. The aggregate number of shares of common stock for which options may be granted under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 1998 Plan is 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During the year ended December 31, 2003 and the nine months ended December 31, 2002, the Company granted no options to purchase shares. At December 31, 2003, 533,629 options were outstanding under the 1998 Plan, of which 482,800 options were exercisable. In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan, as amended, increased the number of shares of common stock for which options may be granted to a maximum of 1,250,000 shares. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair market value of one share of common stock on the date of grant. During the year ended December 31, 2003 and the nine month period ended December 31, 2002, there were no option grants provided under the 1994 Plan. At December 31, 2003, 32,751 options were outstanding under the 1994 Plan, of which 32,751 options were exercisable. WARRANTS During July 2001 in connection with services being performed by a consultant, the Company issued warrants to purchase 48,000 shares of the Company's common stock at $0.62 per share, as of December 31, 2003 no warrants have been exercised. The warrants vested immediately and expire five years from the date of the grant. The Company recorded compensation expense of $13,199 based upon the fair value of the vested warrants as determined using the Black Scholes pricing model. In connection with the sale of common stock on February 14, 2003, warrants to purchase 1,120,000 shares of common stock with an exercise price of $1.25 were issued. The warrants expire on February 14, 2007. During January 2002 in connection with services being performed by a consultant through June 30, 2002, the Company issued warrants to purchase 100,000 shares of the Company's common stock at $1.35 per share. Warrants to purchase an additional 50,000 shares of common stock are exercisable at $1.80, and the warrants vested immediately and expire three years from the date of the grant. The Company recorded compensation expense of $62,893 based upon the fair value of the vested warrants as determined using the Black Scholes pricing model. 53 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTHER OPTIONS During September 1996, the Company issued options to certain officers and directors to purchase 620,000 shares of the Company's common stock, of which 420,000 vested immediately and 100,000 vested on April 1, 1998 and 1999. Options expire ten years from the date of grant. The exercise price of the options is equal to the market value of the Company's stock on the date of grant. There were no stock option exercised during the year ended December 31, 2003 and the nine months ended December 31, 2002. At December 31, 2003, 400,000 options were outstanding and exercisable. During March 1999, the Company issued options to certain employees and consultants to purchase 20,000 shares of the Company's common stock, all of which vested on the first year anniversary of the date of the grant. The options expire six years from the date of the grant. The exercise price of the options is equal to the market value of the Company's common stock on the date of the grant. There were no stock options exercised during the year ended December 31, 2003 and the nine month period ended December 31, 2002. At December 31, 2003, 10,000 options were outstanding and exercisable. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its options. During the year ended December 31, 2003 and the nine months ended December 31, 2002 the Company had recorded no compensation expense as no options were granted to employees below market value. Details of the options granted are as follows:
Weighted Average Option Price Shares Exercise Price ($) Per Share ($) ----------------- ---------------------- --------------------- Options outstanding at March 31, 2002 4,928,260 1.92 0.12 to 36.44 Granted 838,000 0.44 0.16 to 0.79 Canceled (2,099,158) 1.84 0.12 to 36.44 Exercised - - - ----------------- ---------------------- --------------------- Options outstanding at December 31, 2002 3,667,102 1.62 0.12 to 35.03 ----------------- ---------------------- --------------------- Granted - - Canceled (1,821,947) 3.55 0.12 to 33.44 Exercised - - Options outstanding at December 31, 2003 1,845,155 1.52 0.12 to 35.03 ----------------- ---------------------- --------------------- Options exercisable at December 31, 2003 1,586,426 1.37 $ 0.12 to 35.03 ----------------- ---------------------- ---------------------
Weighted Weighted Average Weighted Average Number Remaining Years of Average Number Exercise Range of Exercise Outstanding Contractual Life Exercise Price Exercisable Price $0.00 - 7.53 1,774,990 3.2 $ 0.98 1,549,826 $ 1.02 $7.54 - 15.06 57,105 4.0 11.60 24,100 8.83 $15.06 - 22.59 3,000 1.05 22.00 3,000 22.00 $22.59 - 30.12 1,500 1.26 29.25 1,500 29.25 $30.12 - 37.65 8,560 1.44 34.47 8,000 34.43 ------------------- --------------------- ---------------- -------------- -------------- $0.00 - 37.65 1,845,155 3.21 $1.52 1,586,426 $1.37 =================== ===================== ================ ============== ==============
54 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. COMMITMENTS Operating Leases The Company entered into a lease on August 1, 2003 for approximately 7,000 square feet for its principal executive offices at 120 Corporate Blvd., South Plainfield, New Jersey. The base rent is $4,505 per month effective October 2003 through July 2006. The Company is also obligated to make additional payments to the landlord relating to certain taxes and operating expenses. As a result of the Company being notified by the landlord of their intent to cancel its lease effective August 15, 2003, the Company no longer occupies the space at 1551 S. Washington Avenue, Piscataway, New Jersey. The Company entered into the lease on February 18, 1999 for approximately 26,247 square feet for its principal executive offices. On March 17, 2003, the Company signed an amendment with the landlord reducing the space from 26,247 to 12,722 square feet and the rent from $50,153.64 to $20,143.17 per month effective March 1, 2003. The Company was also obligated to make additional payments to the landlord relating to certain taxes and operating expenses. The Company abandoned the lease space at 48834 Kato Road, Fremont, California in the Bedford Fremont Business Center. This lease commenced on June 1, 1999 and is for a term of 60 months with monthly rent payable by the Company to the landlord as follows: $7,360 per month for the first 12 months of the term; $7,590 per month for months 13-24; $7,820 per month for months 25-36; $8,050 per month for months 37-48; and $8,280 per month for months 49-60. The Company entered into an abandonment agreement with the landlord in March of 2003. As a result, the Company recorded a one-time restructure charge of $ 139,610 in the quarter Capital Leases Operating Leases ended March 31, 2003. This amount represents the total lease payments from December 2002 to May 2004 offset by landlords stated sub-lease rental payments. However, the Company and Landlord have no settlement agreement in place at this time. The Company leases certain equipment under agreements which are classified as capital leases. Each of the capital lease agreements expire within five years and have purchase options at the end of the lease term. Future minimum payments, by year and in the aggregate, under non-cancelable operating and capital leases as of December 31, 2003 are as follows: Capital Leases Operating Leases --------------- ---------------- Year ending December 31, 2004 $ 76,410 $ 77,016 2005 - 77,016 2006 - 44,926 --------------- -------------- Total minimum lease payments $ 76,410 $ 198,958 =============== ============== Less amount representing interest 2,859 --------------- Present value on net minimum lease payment $ 73,551 =============== Rent expense under operating leases for the year ended December 31, 2003 and the nine months ended December 31, 2002 was $210,796 and $1,165,118 (including a charge of $508,458 for abandoning the Livingston, Scotland lease), respectively. 10. CONTINGENT LIABILITIES In the normal course of business the Company and its subsidiaries may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. 55 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. EMPLOYEE BENEFIT PLANS Effective April 1, 1993, the Company adopted a defined contribution savings plan. The terms of the plan provide for eligible employees who have met certain age and service requirements to participate by electing to contribute up to 15% of their gross salary to the plan, as defined, with the Company matching 30% of an employee's contribution in cash up to a maximum of 6% of gross salary, as defined. Company contributions vest at the rate of 25% of the balance at each employee's second, third, fourth, and fifth anniversary of employment. The employees' contributions are immediately vested. The Company's contribution to the savings plan for the nine months ended December 31, 2002 was $26,342. As of January 1, 2003, the Company per the provisions of the plan decided not to make discretionary contribution until further notice. 12. GEOGRAPHIC INFORMATION The Company's headquarters, physical production and shipping facilities are located in the United States. The Company's domestic and foreign export sales for the year ended December 31, 2003 and the nine months ended December 31, 2002 are as follows: Year Ended Nine Months Ending December 31, 2003 December 31, 2002 --------------------- ------------------------- United States $ 2,743,170 $ 2,811,899 Europe 477,153 430,859 Pacific Rim 122,188 48,685 Other 109 43,717 --------------------- ------------------------- $ 3,342,620 $ 3,335,160 ===================== ========================= The Company sold a substantial portion of its products to four customers. Sales to these customers amounted to $1,562,410 (46% of net sales) and $1,591,107 (48% of net sales) for the year ended December 31, 2003 and the nine months ended December 31, 2002, respectively. For the year ended December 31, 2003, our most significant customers were Avaya, Inc. (18% of net sales), Siemens (12% of net sales), Qwest (9% of net sales) and MCI Worldcom (7% of net sales). For the nine-months ended December 31, 2002, our most significant customers were SBC (13% of net sales), Sprint (12% of net sales) Avaya Inc.(12% of net sales) and Siemens (11% of net sales). The loss of any of these four customers or a significant decline in sales volumes from any of these four customers could have a material adverse effect on the Company's financial position, results of operations and cash flows. 13. CONCENTRATION OF CREDIT RISK The Company maintains deposits in a financial institution which is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 2003 and periodically throughout 2003, the Company had deposits in this financial institution in excess of the amount insured by the FDIC. The Company designs its products utilizing readily available parts manufactured by multiple suppliers and the Company currently relies on and intends to continue to rely on these suppliers. The Company has been and expects to continue to be able to obtain the parts generally required to manufacture its products without any significant interruption or sudden price increase, although there can be no assurance that the Company will be able to continue to do so. The Company sometimes utilizes a component available from only one supplier. If a supplier were to cease to supply this component, the Company would most likely have to redesign a feature of the affected device. In these situations, the Company maintains a greater supply of the component on hand in order to allow the time necessary to effectuate a redesign or alternative course of action should the need arise. 56 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended Nine Months Ending December 31, 2003 December 31, 2002 -------------------- ---------------------- Other Non-Cash Investing and Financing Activities Options and warrants issued to consultants as non-cash compensation $ -- $ 62,893 Non-cash stock-based compensation charge $ (95,000) $ 95,000
15. RELATED PARTY TRANSACTIONS During April 2000, the Company issued a loan (the "Loan") to the former Chief Executive Officer (the "Former CEO") of the Company in the amount of $750,000. The Loan accrues interest at a rate of LIBOR plus 1%. This Loan had an original maturity date of the earlier of April 2005 or thirty days after the Company for any reason no longer employed the Former CEO. The Former CEO resigned his position at the Company effective September 29, 2000. On October 5, 2000, the Company entered into an agreement with the Former CEO pursuant to which the $750,000 promissory note 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. Pursuant to the terms of the Separation and Forbearance 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. 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. At December 31, 2003, the total amount owed to the Company by the Former CEO was approximately $175,154, which includes interest accrued through December 31, 2003. The full amount has been recorded as a reserve against the note receivable. The Company will continue to attempt to collect the note receivable. 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. As part of the rental payment the Company 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. The Financing did not close by June 30, 2002, consequently, the Tenant was required to pay the Company additional rent in the amount of $4,300 per month commencing on July 1, 2002. The Chairman of the Board of Directors of the Company served as a Chief Financial Officer of the tenant until November 2002. On or about January 16, 2003, the Tenant voluntarily filed for Chapter 7 bankruptcy with the U.S. Bankruptcy Court for the District of New Jersey. As a result, the Company wrote off an amount of $122,550 which is included in selling, general and administrative expenses. 16. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46 ("FIN 46", "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31,2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. In December 2003, the FASB issued Interpretation No. 46R ("FIN 46") which revised certain provisions of FIN 46. Publicly reporting entities that are small business issuers may apply FIN 46R to all entities subject to FIN 46R no later than the end of the first reporting period that ends after December 15, 2004 (as of December 31, 2004, for a calendar enterprise). The effective date includes those entities to which FIN 46 had previously been applied. However, prior to the application of FIN 46R, a public entity that is a small business issuer shall apply FIN46 or FIN 46R to those entities that are considered special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003(as of December 31, 2003 for the calendar year). In April 2003, SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149) was issued. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB statement No. 133 ("SFAS 133"), " Accounting for Derivative Instruments and Hedging Activities". This statement is effective for contracts entered into or modified after June 30, 2003. 57 ION NETWORKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 2003, SFAS150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150") was issued. SFAS 150 establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in certain cases). The provisions of SFAS 150 are effective for instruments entered into or modified after May 31,2003 and pre-existing instruments as of July 1, 2003. On October 29, 2003, the FASB voted to indefinitely defer the effective date of SFAS 150 for mandatory redeemable instruments as they relate to minority interests in consolidated finite-lived entities through the issuance of FASB Staff Position 150-3. In December 2003, a revision of SFAS 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued, revising disclosures about pension loans and other post retirements benefits plans and requiring additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company expects that the adoption of the new statements will not have a significant impact on its financial statements. 58 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./(2)/ 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./(2)/ 3.3 Certificate of Amendment of the Certificate of Incorporation, as filed with the Secretary of state of the State of Delaware an October 12, 1999./(3)/ 3.4 By-Laws of the Company./(2)/ 3.5 Form of Specimen Common Stock Certificate of the Company./(4)/ 4.1 1994 Stock Option Plan of the Company. /(1)/ 4.2 1998 Stock Option Plan of the Company./(2)/ 4.3 1998 U.K. Sub-Plan of the Company, as amended./(2)/ 4.4 Amended and Restated Certificate of Designation of Rights Preferences, Privileges and Restrictions of Series A Preferred Stock of ION Networks, Inc. /21/ 4.5 2000 Stock Option Plan of the Company./(17)/ 4.6 2002 Stock Option Plan of the Company./(19)/ 4.7 Form of Warrant Agreement dated July 17, 2001./(13)/ 4.8 Form of Warrant Agreement dated January 4, 2002./(13)/ 4.9 Form of Non-Qualified Stock Option Agreement dated March 19, 1999 by and between the Company's predecessor, Microframe, Inc. and its consultants./(13)/ 4.10 Form of Non-Employee Director Stock Option Contract dated March 10, 1998 between the Company's predecessor, Microframe, Inc. and its non-employee directors./(13)/ 4.11 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./(13/) 4.12 Form of Non-Qualified Stock Option Agreement dated September 25, 1996 by and between the Company's predecessor, Microframe, Inc. and its employees./(13)/ 59 Exhibit No. Description - ------- ----------- 4.13 Amended and Restated Non-Qualified Stock Option Agreement dated May 19, 1997 by and between the Company's Predecessor, Microframe, Inc. and its employees./(9)/ 10.3 Agreement dated as of December 19, 1994 by and between LeeMAH DataCom Security Corporation and Siemens Rolm Communications Inc./(4)/ 10.4 Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by and between the Company and Siemens Credit Corporation./(4)/ 10.5 Equipment Lease Agreement dated June 17, 1999 by and between the Company and Lucent Technologies./(4)/ 10.6 (i) Non-negotiable Promissory Note in the principal amount of $750,000 issued by Stephen B. Gray to the Company./(5)/ (ii) First Amendment to Promissory Note dated as of August 5, 2000 by and between the Company and Stephen B. Gray./(5)/ 10.7 Line of Credit Agreement with United Nations Bank dated September 30, 1999./(5)/ 10.8 (i) Separation and Forbearance Agreement made as of October 5, 2000 between the Company and Stephen B. Gray./(7)/ (ii)Promissory Note in the amount of $163,000 dated October 5, 2000 made by Stephen B. Gray to the Company./(7)/ 10.9 Materials and Services Contract dated January 16, 2001, between the Company and SBC Services, Inc./(8)/ 10.10 Stock Purchase Agreement dated August 11, 2000 by and between the Company and the parties identified therein./(8)/ 10.11 Purchase Agreement by and between the Company and the Selling Shareholders set forth therein dated February 7, 2002./(18)/ 10.12 Employment Agreement dated October 4, 2001 between the Company and Kam Saifi./(11)/ 10.13 Employment Agreement dated October 17, 2001 between the Company and Cameron Saifi./(12)/ 10.14 Sublease Agreement dated April 17, 2002 between the Company and Multipoint Communications, LLC./(14)/ 60 Exhibit No. Description - ------- ----------- 10.15 Agreement and General Release dated August 15, 2002 between the Company and Ron Forster./(16)/ 10.16 Rescission Agreement dated September 29, 2002 between the Company and David Arbeitel./(16)/ 10.17 Separation Agreement and General Release dated October 31, 2002 between the Company and David Arbeitel./(16)/ 10.18 Employment Agreement dated May 20, 2002 between the Company and Ted Kaminer./(15)/ 10.19 Employment Agreement dated February 25, 2002, between the Company and William Whitney./21/ 10.20 Employment Agreement dated August 15, 2003, between the Company and Norman E. Corn./22/ 10.21 Employment Agreement dated September 15, 2003, between the Company and Patrick E. Delaney./20/ 10.22 Lease Agreement dated July 21, 2003 by and between the Company and 116 Corporate Boulevard, LLC, Inc.* 16.1 Letter dated October 31,2003, from Deloitte & Touche, LLP. to the Securities and Exchange Commission./(10)/ 21.1 List of Subsidiaries./(14)/ 31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.* 31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.* 32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.* 32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.* (1) Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on August 15, 1995. (2) Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on April 22, 1999. (3) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on March 17, 2000. (4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999. (5) Incorporated by reference to the Company's Annual Report on Form 10-KSB filed on June 28, 2000. (6) Incorporated by Reference to the Company's Current Report on Form 8-K filed on March 12, 1999. (7) Incorporated by reference to the Company's Quarterly report on Form 10-QSB filed on November 14, 2000 (8) Incorporated by reference to the Company's Annual report on Form 10-KSB filed on June 29, 2001. (9) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on November 17, 2000. (10) Incorporated by reference to the Company's Annual report on Form 8-KSB filed on October 31, 2003. (11) Incorporated by Reference to the Company's Current Report on Form 8-K filed on October 23, 2001. 61 (12) Incorporated by Reference to the Company's Current Report on Form 8-K filed on October 24, 2001. (13) 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. (14) 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. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB filed on August 14, 2002. (16) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB filed on November 14, 2002. (17) Incorporated by Reference to the Company's Registration Statement on Form S-8 filed on January 11, 2002. (18) Incorporated by Reference to the Company's Registration Statement on Form S-3 filed on March 4, 2002. (19) Incorporated by Reference to the Company's Definitive Proxy Statement filed on September 16, 2002. (20) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB filed on November 17, 2003. (21) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, as filed on April 15, 2003. (22) Incorporated by reference to the Company's Quarterly Report on Form 10QSB filed on September 12, 2003. * Filed herewith 62 EX-10.22 3 v02280_ex10-22.txt BUSINESS CENTER LEASE 116 CORPORATE BOULEVARD LLC AND ION NETWORKS, INC. July 21, 2003 TABLE OF CONTENTS ARTICLE 1.00 BASIC LEASE INFORMATION........................................1 ARTICLE 2.00 AGREEMENT......................................................2 ARTICLE 3.00 TERM, DELIVERY AND ACCEPTANCE OF PREMISES......................2 3.01 GENERAL..........................................................2 3.02 FAILURE TO DELIVER POSSESSION....................................2 3.03 EARLY ACCESS.....................................................2 3.04 CONDITION OF THE PREMISES........................................3 ARTICLE 4.00 MONTHLY BASE RENT..............................................3 4.01 GENERAL..........................................................3 4.02 ANNUAL MONTHLY BASE RENT ADJUSTMENT..............................3 ARTICLE 5.00 COMMON AREA MAINTENANCE, OPERATING EXPENSES....................3 5.01 GENERAL..........................................................3 5.02 ESTIMATED PAYMENTS...............................................4 5.03 ANNUAL SETTLEMENT................................................4 5.04 PRORATION UPON TERMINATION.......................................5 5.05 OTHER TAXES......................................................5 5.06 ADDITIONAL RENT..................................................5 ARTICLE 6.00 INSURANCE......................................................5 6.01 LANDLORD'S INSURANCE.............................................5 6.02 TENANT'S INSURANCE...............................................5 6.03 FORMS OF THE POLICIES............................................6 6.04 ADEQUACY OF COVERAGE.............................................6 6.05 INADEQUATE INSURANCE.............................................6 ARTICLE 7.00 UTILITIES AND SERVICES.........................................6 ARTICLE 8.00 PROPERTY USE; .................................................6 8.01 USE - GENERAL....................................................6 8.02 OPERATION OF TENANT'S BUSINESS...................................7 8.03 MANNER OF CONDUCTING BUSINESS....................................7 8.04 TENANT PARKING...................................................7 8.05 EXCLUSIVE USE....................................................7 ARTICLE 9.00 REQUIREMENTS OF LAW; FIRE INSURANCE............................7 9.01 GENERAL..........................................................7 9.02 TOXIC MATERIALS..................................................7 9.03 CERTAIN INSURANCE RISKS..........................................8 9.04 TENANT'S INSURANCE PAYMENTS......................................8 ARTICLE 10.00 ASSIGNMENT AND SUBLETTING.....................................8 10.01 GENERAL.........................................................8 10.02 LIMITATION ON REMEDIES..........................................8 ARTICLE 11.00 COMMON AREAS..................................................9 ARTICLE 12.00 LANDLORD'S SERVICES...........................................9 12.01 LANDLORD'S REPAIR AND MAINTENANCE...............................9 12.02 LANDLORD'S SERVICES............................................10 12.03 LIMITATION ON LIABILITY........................................10 ARTICLE 13.00 TENANT'S REPAIRS.............................................10 ARTICLE 14.00 ALTERATIONS..................................................11 ARTICLE 15.00 MECHANICS' LIENS.............................................12 ARTICLE 16.00 END OF TERM..................................................12 ARTICLE 17.00 EMINENT DOMAIN...............................................12 ARTICLE 18.00 DAMAGE AND DESTRUCTION.......................................13 ARTICLE 19.00 SUBORDINATION................................................14 19.01 GENERAL........................................................14 19.02 ATTORNMENT.....................................................14 ARTICLE 20.00 ENTRY BY LANDLORD............................................15 ARTICLE 21.00 INDEMNIFICATION, WAIVER AND RELEASE..........................15 21.01 INDEMNIFICATION................................................15 21.02 WAIVER AND RELEASE.............................................15 ARTICLE 22.00 SECURITY DEPOSIT.............................................16 ARTICLE 23.00 QUIET ENJOYMENT..............................................16 ARTICLE 24.00 EFFECT OF SALE...............................................16 ARTICLE 25.00 DEFAULT......................................................16 25.01 EVENTS OF DEFAULT..............................................16 25.02 LANDLORD'S REMEDIES............................................17 25.03 CERTAIN DAMAGES................................................18 25.04 CONTINUING LIABILITY AFTER TERMINATION.........................18 25.05 CUMULATIVE REMEDIES............................................18 ARTICLE 26.00 RULES AND REGULATIONS........................................18 ARTICLE 27.00 SIGNS........................................................19 ARTICLE 28.00 MISCELLANEOUS................................................19 28.01 NO OFFER.......................................................19 28.02 JOINT AND SEVERAL LIABILITY....................................19 28.03 NO CONSTRUCTION AGAINST DRAFTING PARTY.........................19 28.04 TIME OF THE ESSENCE............................................19 28.05 NO RECORDATION.................................................19 28.06 NO WAIVER......................................................20 28.07 LIMITATION ON RECOURSE.........................................20 28.08 ESTOPPEL CERTIFICATES..........................................20 28.09 WAIVER OF JURY TRIAL...........................................20 28.10 NO MERGER......................................................20 28.11 HOLDING OVER...................................................20 28.12 NOTICES........................................................20 28.13 SEVERABILITY...................................................21 28.14 WRITTEN AMENDMENT REQUIRED.....................................21 28.15 ENTIRE AGREEMENT...............................................21 28.16 CAPTIONS.......................................................21 28.17 NOTICE OF LANDLORD'S DEFAULT...................................21 28.18 AUTHORITY......................................................21 28.19 BROKERS........................................................21 28.20 GOVERNING LAW..................................................21 28.21 FORCE MAJEURE..................................................21 28.22 LATE PAYMENTS..................................................22 28.23 NO EASEMENTS FOR AIR OR LIGHT..................................22 28.24 TAX CREDITS....................................................22 28.25 RELOCATION OF PREMISES........................................22 28.26 LANDLORD'S FEES................................................22 28.27 BINDING EFFECT.................................................22 BUSINESS CENTER LEASE THIS BUSINESS CENTER LEASE is entered into by Landlord and Tenant described in the following Basic Lease Information on the Date which is set forth for reference only in the following Basic Lease Information. Landlord and Tenant agree: ARTICLE 1.00 BASIC LEASE INFORMATION In addition to the terms which are defined elsewhere in this Lease, the following defined terms are used in this Lease: (a) DATE: July 21, 2003 (b) TENANT: ION Networks, Inc. (c) TENANT'S ADDRESS: 1551 S. Washington Ave Piscataway, NJ 08854 Phone # (800) 722-8986 Federal I.D. No. or SSN: ______________________ (d) LANDLORD: 116 CORPORATE BOULEVARD LLC (e) LANDLORD'S ADDRESS: 275 N. Franklin Turnpike P.O. Box 369 Ramsey, New Jersey 07446 with a copy at the same time to: None (f) BUSINESS CENTER ADDRESS: 120 Corporate Blvd. South Plainfield, NJ (g) LEASE COMMENCEMENT DATE: August 1, 2003 or Landlord Delivery in accordance with Workletter Exhibit C, whichever first occurs. Rent to commence 60 days from Lease Commencement Date. (h) EXPIRATION DATE: July 31, 2006 (i) SECURITY DEPOSIT: $12,836.00 (j) FIRST MONTH'S MONTHLY BASE RENT: $4,505.00 (k) MONTHLY BASE RENT: $4,505.00 (l) LEASABLE AREA OF THE PREMISES: 7,000 s.f. (m) LEASABLE AREA OF THE BUSINESS CENTER: 84,884 s.f. (n) TENANT'S PRO RATA SHARE (of (n) above): 8.32% (o) FIRST CALENDAR YEAR ESTIMATED MONTHLY PAYMENT FOR OPERATING EXPENSES: $1,913.00 (p) USE PERMITTED: The Tenant covenants and agrees to use the Leased Premises for Office, Light Manufacturing/Assembly, and Warehouse purposes only. Also, Tenant's use of the Leased Premises is and shall be expressly subject to all applicable zoning ordinances, rules and regulations of any governmental instrumentalities, boards or bureaus having jurisdiction thereof. Tenant agrees not to use or permit the Leased Premises to be used for any other purpose without the prior written consent of the Landlord. (q) BROKER: None (r) GUARANTOR: None (s) ADDITIONAL RENT: In addition to monthly base rent, Tenant shall pay during the Lease term additional rent consisting of all other sums of 1 money, costs, expenses, fees or charges of any kind or amount whatsoever which Tenant assumes or agrees to pay, or which becomes due and payable by Tenant to Landlord pursuant to this Lease. Tenant shall pay Fixed Rent and Additional Rent when same becomes due and payable without any demand and without any abatement, deduction or set-off whatsoever. Fixed Rent and Additional Rent due and payable for any partial month of Tenant's occupancy shall be prorated and paid together with the fixed rent due and payable on the first day of the month subsequent to the commencement date of the lease term. If tenant fails to pay any Fixed Rent or Additional Rent, Landlord shall have available to it the remedies listed in Article 25.02 in addition to any other remedies provided by law or equity. For purposes of this Lease, Additional Rent includes any and all sums as shall become due to the Landlord under this Lease that do not constitute Fixed Rent. Unless otherwise provided herein, any and all costs incurred in connection with this tenancy shall be Tenant's responsibilities and shall be considered Additional Rent. Any amounts, including without limitation Operating Expenses, which this Lease requires Tenant to pay in addition to Monthly Base Rent. (t) LAND: The land on which the Business Center is located and which is more particularly described on Exhibit A to this Lease. (u) PREMISES and LEASABLE AREA: The Premises shown on Exhibit B to this Lease and known as Unit 104. The Premises do not include, and Landlord reserves, the exterior walls and roof of the Premises, the land beneath the Premises, the pipes and ducts, conduits, wires, fixtures and equipment above the suspended ceiling or structural elements which serve the Premises or the Business Center; however, Landlord has the right to enter the Premises in order to install, inspect, maintain, use, repair and replace those areas and items described in the preceding sentence. Notwithstanding this paragraph, "Leasable Area of Premises" is defined as the area measured from the outside of the exterior wall to outside of the exterior wall. In the event that a wall is an interior, then the measurement is made to the center of the interior wall. (v) BUSINESS CENTER: The Business Center consisting of the Land and all improvements built on the Land, including without limitation the parking lot, parking structure (if any), walkways, driveways, fences, and landscaping. (w) RENT: The Monthly Base Rent and Additional Rent. These exhibits are attached to this Lease and are made parts of this Lease: EXHIBIT A - Legal Description of the Business Center EXHIBIT B - The Premises EXHIBIT C - Workletter EXHIBIT D - Rules and Regulations EXHIBIT E - Sign Criteria EXHIBIT F - Environmental Specification EXHIBIT G - Option to Renew ARTICLE 2.00 AGREEMENT Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, according to this Lease. ARTICLE 3.00 TERM, DELIVERY AND ACCEPTANCE OF PREMISES 3.01 GENERAL. The duration of this Lease will be the "Term". The Term will commence on the Commencement Date, and will expire on the Expiration Date. 3.02 FAILURE TO DELIVER POSSESSION. If for any reason Landlord cannot deliver possession of the Premises to Tenant on the Commencement Date, (a) this Lease will not be void or voidable, (b) Landlord will not be liable to Tenant for any resultant loss or damage, and (c) unless Landlord is unable to deliver possession of the Premises to Tenant on the Commencement Date because of Tenant's delays, Rent will be waived for the period between the Commencement Date and the date on which Landlord delivers possession of the Premises to Tenant. If delivery of possession of the Premises is delayed beyond the Commencement Date and Tenant is not responsible for delays in completion of the Premises, (i) the Commencement Date will be extended automatically, one day for each day after the Commencement Date and before delivery of possession; and (ii) Landlord and Tenant will execute a certificate of the Commencement Date. Landlord will construct or install in the Premises the improvements to be constructed or installed by Landlord according to Exhibit C. Landlord will be 2 deemed to have delivered possession of the Premises to Tenant on the tenth (10th) day after Landlord gives Tenant written notice either that Landlord has substantially completed the improvements or that Landlord will have substantially completed the improvements within ten (10) days after such notice, in either case subject only to the completion of Landlord's "punch-list" items which do not materially interfere with Tenant's use and enjoyment of the Premises. 3.03 EARLY ACCESS. If Tenant is permitted access (and Landlord will not unreasonably withhold or delay consent for Tenant to have early access) to the Premises prior to the Commencement Date for the purpose of installing fixtures or any other purpose permitted by Landlord, such early entry will be at Tenant's sole risk and subject to all the terms and provisions of this Lease as though the Commencement Date had occurred, except for the payment of Monthly Base Rent which will commence on the Commencement Date. Tenant, its agents or employees will not interfere with or delay Landlord's completion of construction of the improvements and all rights of Tenant under this Section 3.03 will be subject to the requirements of all applicable building codes and zoning requirements so as not to interfere with Landlord's obtaining of a certificate of occupancy for the Premises. Landlord has the right to impose such additional conditions on Tenant's early entry as Landlord, in its sole discretion, deems appropriate, and will further have the right to require that Tenant execute an early entry agreement containing such conditions prior to Tenant's early entry. 3.04 CONDITION OF THE PREMISES. Prior to the Commencement Date, Tenant will conduct a walk-through inspection of the Premises with Landlord and prepare a punch-list of items needing additional work by Landlord. Other than the items specified in the punch-list, by taking possession of the Premises Tenant will be deemed to have accepted the Premises in their condition on the date of delivery of possession. The punch-list will not include any damage to the Premises caused by Tenant's move-in or early access, if permitted. Damage caused by Tenant will be repaired or corrected by Landlord, at Tenant's expense. Tenant acknowledges that neither Landlord nor its agents or employees have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant's business or for any other purpose, nor has Landlord or its agents or employees agreed to undertake any alterations or construct any improvements to the Premises except as expressly provided in this Lease and Exhibit C to this Lease. If Tenant fails to submit a punch-list to Landlord prior to the Commencement Date, it will be deemed that there are no items needing additional work or repair. Landlord's contractor will complete all reasonable punch-list items within thirty (30) days after the walk-through inspection or as soon as practicable after such walk-through. ARTICLE 4.00 MONTHLY BASE RENT 4.01 GENERAL. Throughout the Term of this Lease, Tenant will pay Monthly Base Rent to Landlord as rent for the Premises. Monthly Base Rent will be paid in advance on or before the first day of each calendar month of the Term. If the Term commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, then Monthly Base Rent will be appropriately prorated by Landlord for such month. If the Term commences on a day other than the first day of a calendar month, then the prorated Monthly Base Rent for such month will be paid on or before the first day of the Term. Monthly Base Rent will be paid to Landlord, without notice or demand, and without deduction or offset, in lawful money of the United States of America at Landlord's address, or to such other person or at such other place as Landlord may from time to time designate in writing. In the event of the existence of any rent, additional rent or other charges and expenses contemplated this Lease which are in arrears, Landlord shall credit any payments first to such arrears and then to Tenant's current obligations. 4.02 ANNUAL MONTHLY BASE RENT ADJUSTMENT. YEAR BASE RENT ANNUALLY BASE RENT MONTHLY ---- ------------------ ----------------- 08/01/03-09/30/03 $0 $0 10/01/03-07/31/04 $54,060.00 $4,505.00 08/01/04-07/31/05 $54,060.00 $4,505.00 08/01/05-07/31/06 $54,060.00 $4,505.00 ARTICLE 5.00 COMMON AREA MAINTENANCE, OPERATING EXPENSES 5.01 GENERAL. In addition to Monthly Base Rent, Tenant will pay Tenant's 3 Pro Rata Share of the Operating Expenses paid, payable or incurred by Landlord in each calendar year or partial calendar year during the Term. As used in this Lease, the term "Operating Expenses" means: (a) all costs of management, operation and maintenance of the Business Center (any of which may be furnished by an affiliate of Landlord), including without limitation: cleaning, landscaping, lighting, maintaining, painting, repairing, and replacing (except to the extent proceeds of insurance or condemnation awards are available) any common areas; maintaining, repairing and replacing, cleaning, lighting, removing snow and ice, painting, and landscaping of all vehicle parking areas and other outdoor common areas, including any Business Center signage (other than Tenant's signs); repairing or replacing roof; providing security (Landlord not incurring or assuming any obligation to provide such protection or security or any liability for the failure of the same); seasonal holiday decorations; removing trash from the common areas; the charges for rubbish containers and removal (except that at Landlord's option Tenant shall be directly responsible for contracting for providing for rubbish containers and removal subject to Landlord's approval of the provisions and conditions of the agreement therefore providing public liability, property damage, fire, and extended coverage and such other insurance as Landlord deems appropriate; total compensation and benefits (including premiums for workmen's compensation and other insurance) paid to or on behalf of employees for work at the Business Center; supplies; fire protection and fire hydrant charges; steam, water and sewer charges; gas, electricity, and telephone utility charges; licenses and permit fees; depreciation of equipment used in operating and maintaining the common areas and rent paid for leasing such equipment; real property taxes, assessments, impositions, (and any tax levied in whole or in part in lieu of real property taxes); and any other costs, charges, and expenses which under generally accepted accounting principles would be regarded as maintenance and operating expenses (b) the cost (amortized over such reasonable period as Landlord will determine) of any capital improvements (i) cost (amortized over such reasonable period as Landlord will determine) which are made to the Business Center by Landlord during the Term and which are intended to reduce other Operating Expenses, or (ii) which are made to the Business Center by Landlord after the Date and which are required under any governmental law or regulation that was not applicable to the Business Center at the time it was constructed and are not a result of Tenant's unique use of the Premises. The cost of any capital improvements which are required to be made to the Business Center after the Date as a result of Tenant's unique use of the Premises will be made by Landlord at Tenant's sole cost and expense. Operating Expenses will not include depreciation on the Business Center (other than depreciation on personal property, equipment, window coverings on exterior windows provided by Landlord and carpeting in public corridors and common areas), costs of improvements made for other tenants of the Business Center, real estate broker's commissions, mortgage interest and capital items other than those referred to in clause (b). 5.02 ESTIMATED PAYMENTS. In addition to Monthly Base Rent, Tenant will pay to Landlord in advance on the first day of each month during the Term one-twelfth (l/12) of Tenant's Pro Rata Share of estimated Operating Expenses paid, payable or incurred during the subject calendar year or partial calendar year (the "Estimated Operating Expenses"). The Estimated Operating Expenses are subject to revision according to the further provisions of this Section 5.02 and Section 5.03. During December of each calendar year or as soon after December as practicable, Landlord will give Tenant written notice of Landlord's reasonable estimate of the amounts payable under Section 5.01 for the ensuing calendar year. On or before the first day of each month during the ensuing calendar year, Tenant will pay to Landlord in advance one-twelfth (1/12) of such reasonable estimated amount; however, if such notice is not given in December, Tenant will continue to pay on the basis of the prior year's estimate until the month after such notice is given; provided that in the month Tenant first pays Landlord's new estimate Tenant will pay to Landlord the difference between the new estimate and the amount payable under the prior year's estimate for each month which has elapsed since December. If at any time or times it reasonably appears to Landlord that the amount payable under Section 5.01 for the current calendar year will vary from Landlord's estimate, Landlord may, by written notice to Tenant, revise Landlord's estimate for such year, and subsequent payments by Tenant for such year will be based upon Landlord's reasonably revised estimate. 5.03 ANNUAL SETTLEMENT. Within ninety (90) days after the close of each calendar year or as soon after such ninety (90) day period as practicable, Landlord will deliver to Tenant a statement of amounts payable under Section 5.01 for such calendar year. The Tenant shall have the right to receive from Landlord documentation of all chargeable items billed, including copies of 4 invoices and payments. The Tenant shall have the right to audit Landlord's statement for a period within ninety (90) days from the rendering of the statement by the Landlord. If such statement shows an amount owing by Tenant that is less than the estimated payments previously made by Tenant for such calendar year, the excess will be held by Landlord and credited against the next payment of Rent; however, if the Term has ended and Tenant was not in default at its end, Landlord will refund the excess to Tenant. If such statement shows an amount owing by Tenant that is more than the estimated payments previously made by Tenant for such calendar year Tenant will pay the deficiency to Landlord within thirty (30) days after the delivery of such statement. 5.04 PRORATION UPON TERMINATION. If, for any reason other than the default of Tenant, this Lease ends on a day other than the last day of a calendar year, the amount of increase (if any) in Operating Expenses payable by Tenant applicable to the calendar year in which this Lease ends will be calculated on the basis of actual expenses for the period up to the Lease termination date. 5.05 OTHER TAXES. Tenant will reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of Landlord and Tenant: (a) upon, measured by or reasonably attributable to the cost or value of Tenant's merchandise, equipment, furniture, fixtures and other personal property located in the Premises or by the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, regardless of whether title to such improvements is in Tenant or Landlord; (b) upon or measured by Rent, including, without limitation, any gross income tax or excise tax levied by the federal government or any other governmental body with respect to the receipt of Rent; (c) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion of the Premises; (d) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it is not lawful for Tenant to reimburse Landlord, the Rent payable to Landlord under this Lease will be revised to yield to Landlord the same net rental after the imposition of any such tax upon Landlord as would have been payable to Landlord prior to the imposition of any such tax. Tenant will pay promptly when due all sales, merchandise or personal property taxes on Tenant's personal property in the Premises and any other taxes payable by Tenant, the nonpayment of which might give rise to a lien on the Premises or the Tenant's interest in the Premises. 5.06 ADDITIONAL RENT. Amounts payable by Tenant according to this Article 5.00 will be payable as Rent, without deduction or offset. If Tenant fails to pay any amounts due according to this Article 5.00, Landlord will have all the rights and remedies available to it on account of Tenant's failure to pay Rent. ARTICLE 6.00 INSURANCE 6.01 LANDLORD'S INSURANCE. At all times during the term of this Lease, Landlord will carry and maintain (a) fire and extended coverage insurance covering full replacement cost agreed value of the Business Center, parking structure (if any) and the Business Center's equipment and common area furnishings, and (b) public liability and property damage insurance in such amounts as Landlord determines from time to time in its reasonable discretion. Tenant will reimburse Landlord, as an Operating Expense, for the costs of all such insurance in accordance with Article 5.00 and in particular Article 5.06, as Additional Rent. 6.02 TENANT'S INSURANCE. At all times during the term of this Lease, Tenant will carry and maintain, at Tenant's expense, the following insurance, in the amounts specified below or such other amounts as Landlord may from time to time reasonably request, with insurance companies and on forms satisfactory to Landlord: (a) Public liability and property damage liability insurance, with a combined single occurrence limit of not less than $l,000,000.00. All such insurance will specifically include, without limitation, contractual liability coverage for the performance by Tenant of the indemnity agreements set forth in Article 21.00 of this Lease. (b) Fire and extended coverage insurance covering all leasehold improvements in the Premises and all of Tenant's merchandise, equipment, trade fixtures, appliances, furniture, furnishings and personal property, from time to time in, on, or upon the Premises, in an amount not less than the full replacement cost without deduction for depreciation from time to time during the 5 term of this Lease, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended peril (all risk), boiler, glass breakage and sprinkler leakage. All policy proceeds will be used for the repair or replacement of the property damaged or destroyed; however, if this Lease ceases under the provisions of Article 18.00, Tenant will be entitled to any proceeds resulting from damage to Tenant's merchandise, equipment, trade fixtures, appliances, furniture, Tenant's supplied improvements, personal property and Tenant's business interruption insurance, and Landlord will be entitled to all other proceeds. (c) Workmen's compensation insurance insuring against and satisfying Tenant's obligations and liabilities under the workmen's compensation laws of the state in which the Premises are located. 6.03 FORMS OF THE POLICIES. All policies of liability insurance which Tenant is obligated to maintain according to this Lease (other than any policy of workmen's compensation insurance) will name Landlord and such other persons or firms as Landlord specifies from time to time as additional insureds. Original or true copies of original policies (together with copies of the endorsements naming Landlord and any others specified by Landlord as additional insureds) and evidence of the payment of all premiums of such policies will be delivered to Landlord prior to Tenant's occupancy of the Premises and from time to time at least thirty (30) days prior to the expiration of the term of each such policy. All public liability and property damage liability policies maintained by Tenant will contain a provision that Landlord and any other additional insureds, although named as an insured, will nevertheless be entitled to recover under such policies for any loss sustained by Landlord and such other additional insureds, its agents and employees as a result of the acts or omissions of Tenant. All such policies maintained by Tenant will provide that they may not be terminated or amended except after thirty (30) days' prior written notice to Landlord. All public liability, property damage liability and casualty policies maintained by Tenant will be written as primary policies, not contributing with and not supplemental to the coverage that Landlord may carry. No insurance required to be maintained by Tenant by this Article 6.00 will be subject to more than a $250 deductible limit without Landlord's prior written consent. All Tenant's policies required to be maintained under this Lease shall contain "severability of interests" and "cross liability" endorsements, and such policies shall be written by an insurance company having a Best Rating of A (VI) or better. 6.04 ADEQUACY OF COVERAGE. Landlord, its agents and employees make no representation that the limits of liability specified to be carried by Tenant pursuant to this Article 6.00 are adequate to protect Tenant. If Tenant believes that any of such insurance coverage is inadequate, Tenant will obtain, at Tenant's sole expense, such additional insurance coverage as Tenant deems adequate. 6.05 INADEQUATE INSURANCE. Upon failure of Tenant to comply with the provisions of Article 6.00, in addition to any other rights and remedies of the Landlord, Landlord shall have a right to obtain such insurance, to pay the premiums for the same, and to recover the cost of such insurance at once as additional rent due from Tenant to Landlord under this Lease. ARTICLE 7.00 UTILITIES AND SERVICES Tenant will make application for all services and pay all initial utility deposits and fees, and all monthly service charges for water, electricity, sewage, gas, telephone, and any other utility services furnished to the Premises and the improvements on the Premises during the term of this Lease. If any such services are not separately metered or billed to Tenant but rather are billed to and paid by Landlord, Tenant will pay to Landlord Tenant's Pro Rata Share of the cost of such services in accordance with Article 5.00 and in particular, Article 5.06, as Additional Rent. Tenant shall be responsible to keep the store windows and frames clean at all times and shall contract with a professional window cleaner at its own cost and expense to wash the interior and exterior of the windows on a weekly basis. ARTICLE 8.00 USE OF PROPERTY (a) The Property may only be used for the use set forth in section l(p) and all uses incidental thereto. (b) Notwithstanding the foregoing, Tenant shall not use or permit 6 the Property to be used for (i) any unlawful purpose; (ii) in violation of any certificate of occupancy covering the Property; (iii) any use which may constitute a public or private nuisance or make voidable any insurance in force relating to the Property; (iv) any purpose which creates or produces noxious odors, smoke, fumes, emissions, noise or vibrations; or (v) any use which involves or results in the generation, manufacture, refining, transportation, treatment, storage, handling or disposal of petroleum products or hazardous substances or wastes. However, the Tenant may store and handle substances which are classified as hazardous provided they are essential to the normal operation of Tenant's business, a list of all such products are provided to Landlord, and further provided that such substances are stored, handled and disposed of in accordance with applicable State and Federal statutes and regulations. (c) Tenant shall not cause or permit any overloading of the floors of the Building. Tenant shall not install any equipment or other items upon or through the roof, or cause openings to be made in the roof, without Landlord's prior written consent. Tenant shall not install any underground storage tanks or facilities at the Property. (d) No storage of any goods, equipment or materials shall be permitted outside the Building on the Property. (e) The tenant shall furnish to the Leased Premises and shall maintain in good operating condition throughout the term hereof, fire extinguishers, in such quantities and of such type as may be required from time-to-time by Landlord's fire or casualty insurance carrier in order to achieve the lowest possible fire insurance rating for said Leased Premises and the buildings or buildings wherein the same are situate. (f) Lessee's occupancy of the Demised Premised shall include the use of parking spaces in the building parking area in accordance with its proportionate share. Lessee shall, upon request, promptly furnish to Lessor the license numbers of the cars operated by Lessee and its subtenants, licensees, invitees, concessionaires, officers and employees ARTICLE 9.00 REQUIREMENTS OF LAW; FIRE INSURANCE 9.01 GENERAL. Tenant, at its expense, shall obtain all permits, approvals, and certificates required by any governmental body and will comply with all applicable governmental laws, orders and regulations, and with any direction of any public officer or officers, according to law, which will impose any violation, order or duty upon Landlord or Tenant with respect to the Premises, or their use or occupancy. 9.02 TOXIC MATERIALS. Tenant will not store, use or dispose of any hazardous, toxic or radioactive matter in, on, or about the Premises or the Business Center. 9.03 CERTAIN INSURANCE RISKS. Tenant will not do or permit to be done any act or thing upon the Premises which would (a) jeopardize or be in conflict with fire insurance policies covering the Business Center and fixtures and property in the Business Center, or (b) increase the rate of fire insurance applicable to the Business Center to an amount higher than it otherwise would be for the general use as a Business Center, or (c) subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being carried on upon the Premises; however, this Section 9.03 will not prevent Tenant's use of the Premises for the purposes stated in Article 1.00. 9.04 TENANT'S INSURANCE PAYMENTS. If, as a result of any act or omission, other than the permitted use, by Tenant or violation of this Lease, the rate of fire insurance applicable to the Business Center or any other insurance carried by Landlord is increased to an amount higher than it otherwise would have been, Tenant will reimburse Landlord for the increased cost of Landlord's insurance premiums. Such reimbursement will be Rent payable upon the first day of the month following Landlord's delivery to Tenant of a statement showing payment by Landlord for such increased insurance premiums. In any action or proceeding in which Landlord and Tenant are parties, a schedule or "make up" of rates for the Business Center or Premises issued by the body making fire insurance rates for the Premises or a notice from Landlord's insurer will be presumptive evidence of the facts stated and of the several items and charges in the fire insurance rate then applicable to the Premises. 7 ARTICLE 10.00 ASSIGNMENT AND SUBLETTING 10.01 GENERAL. Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, covenants that it will not assign, mortgage or encumber this Lease, nor sublease, or permit the Premises or any part of the Premises to be used or occupied by others, without the prior written consent of Landlord in each instance, which consent may not be unreasonably withheld or delayed. The transfer of control or of a majority of the issued and outstanding capital stock of any corporate tenant or subtenant of this Lease or a majority interest in any partnership tenant (excluding transfer of said partnership interest to the remaining partner in the event of the death of the other partner) or subtenant, however accomplished, and whether in a single transaction or in a series of transactions, will be an assignment of this Lease or of such sublease requiring Landlord's prior written consent in each instance. The transfer of outstanding capital stock of any corporate tenant, for purposes of this Article 10.00, will not include any sale of such stock by persons other than those deemed "insiders" within the meaning of the Securities Exchange Act of 1934 as amended, and which sale is effected through "over-the-counter-market" or through any recognized stock exchange. Any assignment or sublease in violation of this Section 10.01 will be void. If this Lease is assigned, or if the Premises or any part of the Premises are subleased or occupied by anyone other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to Rent. No assignment, sublease, occupancy or collection will be deemed (a) a waiver of the provisions of this Section 10.01; or (b) the acceptance of the assignee, subtenant or occupant as Tenant; or (c) release Tenant from the further performance by Tenant of covenants on the part of Tenant contained in this Lease. The consent by Landlord to an assignment or sublease will not be construed to relieve Tenant from obtaining Landlord's prior written consent in writing to any further assignment or sublease. No permitted subtenant will assign or encumber its sublease or further sublease all or any portion of its subleased space, or otherwise permit the subleased space or any part of its subleased space to be used or occupied by others, without Landlord's prior written consent in each instance. In the event of such default, at the Landlord's option, any future extensions of this Lease may be declared null and void. 10.02 LIMITATION ON REMEDIES. Tenant will not be entitled to make, nor will Tenant make, any claim, and Tenant by this Section waives any claim, for money damages (nor will Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord has unreasonably withheld or unreasonably delayed its consent or approval to a proposed assignment or subletting as provided for in this Article 10.00. Tenant's sole remedy will be an action or proceeding to enforce any such provision, or for specific performance, injunction, or declaratory judgment. ARTICLE 11.00 COMMON AREAS As used in this Lease, the term "common areas" means, without limitation, any hallways, entryways, stairs, elevators, driveways, walkways, terraces, docks, loading areas, trash facilities and all other areas and facilities in the Business Center which are provided and designated from time to time by Landlord for the general nonexclusive use and convenience of Tenant with other tenants of the Business Center and their respective employees, customers, invitees, licensees or other visitors. Landlord grants Tenant, its employees, invitees, licensees and other visitors a nonexclusive license for the Term to use the common areas in common with others entitled to use the common areas including, without limitation, Landlord and other tenants of the Business Center, and their respective employees, customers, invitees, licensees and visitors, and other persons authorized by Landlord, subject to the terms and conditions of this Lease. Without advance notice to Tenant (except with respect to matters covered by subsection (a) below) and without any liability to Tenant in any respect, Landlord will have the right to: (a) establish and enforce reasonable rules and regulations concerning the maintenance, management, use and operation of the common areas; (b) close off any of the common areas to whatever extent required in the opinion of Landlord and its counsel to prevent a dedication of any of the common areas or the accrual of any rights by any person or the public to the common areas, provided such closure does not deprive Tenant of the substantial benefit and enjoyment of the Premises; (c) temporarily close any of the common areas for maintenance, alteration or improvement purposes; 8 (d) select, appoint or contract with any person for the purpose of operating and maintaining the common areas, subject to such terms and at such rates as Landlord deems reasonable and proper; (e) change the size, use, shape or nature of any such common areas, provided such change does not deprive Tenant of the substantial benefit and enjoyment of the Premises. So long as Tenant is not thus deprived of the substantial use and benefit of the Premises, Landlord will also have the right at any time to change the arrangement or location of, or both, or to regulate or eliminate the use of, any concourse, parking spaces, garage, or any elevators, stairs, toilets or other public conveniences in the Business Center, without incurring any liability to Tenant or entitling Tenant to any abatement of rent and such action will not constitute an actual or constructive eviction of Tenant; and (f) erect one or more additional buildings on the common areas, expand the existing Business Center to cover a portion of the common areas, convert common areas to a portion of the Business Center, or convert any portion of the Business Center to common areas. Upon erection or change of location of the buildings, the portion of the Business Center upon which buildings or structures have been erected will no longer be deemed to be a part of the common areas. In the event of any such changes in the size or use of the Business Center or common areas, Landlord will make an appropriate adjustment in the Leasable Area of the Business Center and in Tenant's Pro Rata Share payable pursuant to Article 5.00 of this Lease. ARTICLE 12.00 LANDLORD'S SERVICES 12.01 LANDLORD'S REPAIR AND MAINTENANCE. Landlord will maintain, repair, restore, repaint and replace the common areas of the Business Center, including, without limitation, landscaping, asphalt, and the mechanical, plumbing and electrical equipment serving the common areas, in reasonably good order and condition, except for (a) any damage occasioned by the negligent or willful acts or omissions of Tenant, Tenant's agents, employees or invitees, (b) any damage occasioned by the failure of Tenant to perform or comply with any terms, conditions or covenants in this Lease; (c) ordinary wear and tear; and (d) any structural alterations or improvements required by Tenant's use and occupancy of the Premises, which damage will be repaired by Landlord at Tenant's expense. As a condition precedent to all obligations of Landlord to repair, restore and maintain under this Section 12.01, Tenant must notify Landlord in writing of the need for such repairs, restoration or maintenance. Landlord shall provide all existing mechanical systems in working order and will warranty the mechanical systems for one (1) year (parts and labor) from Lease Commencement Date. Tenant is responsible for all normal, scheduled maintenance for mechanical systems from Lease Commencement Date. Tenant will reimburse Landlord for Tenant's Pro Rata Share of the costs which Landlord incurs in performing its repair and maintenance obligations with respect to the Business Center, except for structural wall and structural roof repairs, if any. Reimbursement by Tenant to Landlord for Tenant's share of such costs will be made within thirty (30) days of receipt of a statement for such changes. These amounts due and payable shall be paid as Additional Rent in accordance with Article 5.06. If Landlord fails to commence the making of repairs within thirty (30) days after such notice, so long as such repairs could have been accomplished within the time period based on a commercially reasonable standard, and the failure to repair has materially interfered with Tenant's use of the Premises, Tenant's sole right and remedy for such failure on the part of the Landlord will be to cause such repairs to be made and to charge Landlord the reasonable cost of such repairs. If the repair is necessary to end or avert an emergency and if Landlord after receiving notice from Tenant of such necessity fails to commence repair as soon as reasonably possible, Tenant may do so at Landlord's cost, without waiting thirty (30) days. 12.02 LANDLORD'S SERVICES. Landlord will keep the common areas (a) in a clean and orderly condition and free of snow, ice and debris (steps, walkways, approaches and entrances adjacent to the demised Premises excepted); and (b) properly lighted and landscaped. Landlord will not be in default under this Lease or be liable for any damages directly or indirectly resulting from, nor will the Rent be abated by reason of, (i) the installation, use, or interruption of use of any equipment in connection with the furnishing of any of such services, (2) failure to furnish, or delay in furnishing, any such services when such failure or delay is caused by accident or any condition beyond the reasonable control of Landlord or by the making of necessary repairs or improvements to the Premises or to the Business Center, or (3) the limitation, curtailment, rationing or restriction on use of water, electricity, gas or any 9 other form of energy serving the Premises or the Business Center. Landlord will use reasonable efforts to remedy diligently any interruption in the furnishing of such services. 12.03 LIMITATION ON LIABILITY. Landlord will not be liable to Tenant or any other person, for direct or consequential damage or otherwise, for any failure to supply any heat, air conditioning, elevator, cleaning, lighting, security or other service Landlord has agreed to supply during any period when Landlord used reasonable diligence to supply such services. Landlord reserves the right to discontinue temporarily such services, or any of them, at such times as may be necessary by reason of accident; unavailability of employees; repairs, alterations or improvements; strikes; lockouts; riots; acts of God; governmental preemption in connection with a national or local emergency; and rule, order or regulation of any governmental agency; conditions of supply and demand which make any product unavailable; Landlord's compliance with any mandatory governmental energy conservation or environmental protection program, or any voluntary governmental energy conservation program at the request of or with consent or acquiescence of Tenant; or any other happening beyond the control of Landlord. Landlord will not be liable to Tenant or any other person or entity for direct or consequential damages resulting from the admission to or exclusion from the Business Center of any person. In the event of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord's sole opinion, Landlord will have the right to prevent access to or from the Business Center during the continuance of the same by such means as Landlord, in its sole discretion, may deem appropriate, including, without limitation, locking doors and closing parking areas and other common areas. Landlord will not be liable for damages to person or property or for injury to, or interruption of, business for any discontinuance permitted under this Article 12.00, nor will such discontinuance in any way be construed as an eviction of Tenant or cause an abatement of rent or operate to release Tenant from any of Tenant's obligations under this Lease. ARTICLE 13.00 TENANT'S REPAIRS (a) Tenant will at all times during the Term of this Lease keep and maintain at its own cost and expense, in good order, condition, and repair, the Premises (including, without limitation, all improvements, fixtures, and equipment on the Premises), and will make all repairs and replacements, interior and exterior, above or below ground, and ordinary or extraordinary as caused by Tenant. Landlord shall provide all existing mechanical systems in working order and will warranty the mechanical systems for one (1) year (parts and labor) from Lease Commencement Date. Tenant is responsible for all normal, scheduled maintenance for mechanical systems from Lease Commencement Date. (b) Tenant's obligation to keep and maintain, at its own cost and expense, the Premises in good order, condition, and repair includes, without limitation, all plumbing and sewage facilities in the Premises, floors (including floor coverings); doors, locks, and closing devices; window easements and frames; glass and plate glass; grilles; all electrical facilities and equipment; HVAC systems and equipment and all other appliances and equipment of every kind and nature; and all landscaping upon, within, or attached to the Premises. Tennant shall make all necessary replacements with parts or items equal in quality and condition to the originals. If the tenant fails to make such required repairs and/or replacements, Landlord may complete same for Tenant and be reimbursed by Tenant for expenses incurred by the Landlord in connection therewith as Additional Rent. In addition, Tenant will at its sole cost and expense install or construct any improvements, equipment, or fixtures required by any governmental authority or agency as a consequence of Tenant's use and occupancy of the Premises. Tenant will replace any damaged plate glass within two (2) business days of the occurrence of such damage. (c) Landlord will assign to Tenant, and Tenant will have the benefit of, any guarantee of warranty to which Landlord is entitled under any purchase, construction, or installation contract relating to a component of the Premises which Tenant is obligated to repair and maintain. Tenant will have the right to call upon the contractor to make such adjustments, replacements, or repairs which are required to be made by the contractor under such contract. (d) Landlord may at Landlord's option employ and pay a firm satisfactory to Landlord, engaged in the business of maintaining systems, to perform periodic inspections of the HVAC systems serving the Premises, and to perform any necessary work, maintenance, or repair of them. In that event, Tenant will reimburse Landlord on demand for all reasonable amounts paid by 10 Landlord in connection with such employment. (e) Any work to be done on the roof to accommodate Tenant improvements, including holes, patches, etc., or anything that would alter the roof, shall be done by Landlord's roofer at Tenant's expense. (f) Upon the expiration or termination of this Lease, Tenant will surrender the Premises to Landlord in good order, condition, and repair, ordinary wear and tear excepted. To the extent allowed by law, Tenant waives the right to make repairs at Landlord's expense under the provisions of any laws permitting repairs by a tenant at the expense of a landlord. ARTICLE 14.00 ALTERATIONS Tenant will not make or cause to be made any alterations, additions, or improvements t o or of the Premises or any part of the Premises, or attach any fixture of equipment to the Premises, without first obtaining Landlord's written consent. Any alterations, additions, or improvements to the Premises consented to by Landlord will be made by Tenant at Tenant's sole cost and expense according to plans and specifications approved by Landlord, and any contractor or person selected by Tenant to make them must first be approved by Landlord. Landlord may require, at its option, that Tenant provide Landlord at Tenant's sole cost and expense a lien and completion bond, or payment and performance bond, in an amount equal to twice the estimated cost of any contemplated alterations, fixtures, and improvements, to insure Landlord against any liability for mechanics' or materialmen's liens and to ensure the completion of such work. All alterations, additions, fixtures, and improvements, whether temporary or permanent in character, made in or upon the Premises either by Tenant or Landlord (other than furnishings, trade fixtures, and equipment installed by Tenant), will be Landlord's property and, at the end of the Term of this Lease, will remain on the Premises without compensation to Tenant. If Landlord requests, Tenant will remove all such alterations, fixtures, and improvements from the Premises and return the Premises to the condition in which they were delivered to Tenant. Upon such removal Tenant will immediately and fully repair any damage to the Premises occasioned by the removal. ARTICLE 15.00 MECHANICS' LIENS Tenant will pay or cause to be paid all costs and charges for work done by it or caused to be done by it in or to the Premises, and for all materials furnished for or in connection with such work. Tenant will indemnify Landlord against, and hold Landlord, the Premises and the Business Center free, clear and harmless of and from, all mechanics' liens and claims of liens, and all other liabilities, liens, claims, and demands, on account of such work. If any such lien, at any time, is filed against the Premises or any part of the Business Center, Tenant will cause such lien to be discharged of record within ten (10) days after the filing of such lien, except that if Tenant desires to contest such lien, it will furnish Landlord, within such ten (10) day period, security reasonably satisfactory to Landlord of at least one hundred fifty percent (150%) of the amount of the claim, plus estimated costs and interest. If a final judgment establishing the validity or existence of a lien for any amount is entered, Tenant will pay and satisfy the same at once. If Tenant fails to pay any charge for which a mechanics' lien has been filed, and has not given Landlord security as described above, Landlord may, at its option, pay such charge and related costs and interest, and the amount so paid, together with reasonable attorneys' fees incurred in connection with such lien, will be immediately due from Tenant to Landlord. Nothing contained in this Lease will be deemed the consent or agreement of Landlord to subject Landlord's interest in the Business Center to liability under any mechanics' or other lien law. If Tenant receives notice that a lien has been or is about to be filed against the Premises or the Business Center or any action affecting title to the Business Center has been commenced on account of work done by or for or materials furnished to or for Tenant, it will immediately give Landlord written notice of such notice. At least fifteen (15) days prior to the commencement of any work (including, but not limited to, any alterations, additions, improvements or installations) in or to the Premises, by or for Tenant, Tenant will give Landlord written notice of the proposed work and the names and addresses of the persons supplying labor and materials for the proposed work, however, this is not required on initial Tenant fit-up. Landlord will have the right to post notices of non-responsibility or similar notices on the Premises in order to protect the Premises against any such liens. 11 ARTICLE 16.00 END OF TERM At the end of this Lease, Tenant will promptly quit and surrender the Premises in good order, condition, and repair, ordinary wear and tear excepted. If Tenant is not then in default, Tenant may remove from the Premises any trade fixtures, equipment and movable furniture placed in the Premises by Tenant, whether or not such trade fixtures or equipment are fastened to the Business Center; Tenant will not remove any trade fixtures or equipment without Landlord's written consent if such fixtures or equipment are used in the operation of the Business Center or improvements or the removal of such fixtures or equipment will result in impairing the structural strength of the Business Center or improvements. Whether or not Tenant is in default, Tenant will remove such alterations, additions, improvements, trade fixtures, equipment and furniture as Landlord has requested in accordance with Article 14.00. Tenant will fully repair any damage occasioned by the removal of any trade fixtures, equipment, furniture, alterations, additions and improvements. All trade fixtures, equipment, furniture, inventory, effects, alterations, additions and improvements not so removed will be deemed conclusively to have been abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without notice to Tenant or any other person and without obligation to account for them; and Tenant will pay Landlord for all expenses incurred in connection with such property, including, but not limited to, the cost of repairing any damage to the Business Center or Premises caused by the removal of such property. Tenant's obligation to observe and perform this covenant will survive the expiration or other termination of this Lease. ARTICLE 17.00 EMINENT DOMAIN (a) The term "total taking" means the taking of the fee title or Landlord's master leasehold estate by right of eminent domain or other authority of law, or a voluntary transfer under the threat of the exercise of the right of eminent domain or other authority, to so much of the Premises or a portion of the Business Center as is necessary for Tenant's occupancy, that the Premises are not suitable for Tenant's intended use in Tenant's reasonable judgment. The term "partial taking" means the taking of only a portion of the Premises or the Business Center, which does not constitute a total taking. (b) If a total taking occurs during the Term of this Lease, this Lease will terminate as of the date of the taking. The phrase "date of the taking" means the date of taking actual physical possession by the condemning authority or such earlier date as the condemning authority gives notice that it is deemed to have taken possession. (c) If a partial taking occurs during the Term of this Lease, either Landlord or Tenant may cancel this Lease by written notice given within thirty (30) days after the date of the taking, and this Lease will terminate as to the portion of the Premises taken on the date of the taking. If the Lease is not so terminated, this Lease will continue in full force and effect as to the remainder of the Premises. The Monthly Base Rent payable by Tenant for the balance of the Term will be abated in the proportion that the leasable area of the Premises taken bears to the Leasable Area of the Premises immediately prior to such taking, and Landlord will make all necessary repairs or alterations to make the remaining Premises a complete architectural unit. (d) If more than forty percent (40%) of the common areas in the Business Center dedicated to customer parking are acquired or condemned under power of eminent domain or other authority of law, or a voluntary transfer under the threat of an exercise of the right of eminent domain or other authority, then the Term of this Lease will terminate as of the date of the taking unless Landlord takes reasonable steps to provide other parking facilities substantially equal to the previously existing ratio between the common parking areas and the leasable area of the Business Center, and such parking facilities are provided by Landlord within ninety (90) days from the date of the taking. If Landlord provides such other parking facilities, then this Lease will continue in full force. (e) All compensation and damages awarded for the taking of the Premises, and portion of the Premises, or the whole or any portion of the common areas or Business Center will belong to Landlord. Tenant will not have any claim or be entitled to any award for diminution in value of its rights under this Lease or for the value of any unexpired term of this Lease; however, Tenant may make its own claim for any separate award that may be made by the condemnor for Tenant's loss of business or for the taking of or injury to Tenant's improvements, or on account of any cost or loss Tenant may sustain in the removal of Tenant's trade fixtures, equipment, and furnishing, or as a result of 12 any alterations, modifications, or repairs which may be reasonably required by Tenant in order to place the remaining portion of the Premises not so condemned in a suitable condition for the continuance of Tenant's occupancy. (f) If this Lease is terminated pursuant to the provisions of this Article 17.00, then all rentals and other charges payable by Tenant to Landlord under this Lease will be paid up to the date of the taking, and any rentals and other charges paid in advance and allocable to the period after the date of the taking will be repaid to Tenant by Landlord. Landlord and Tenant will then be released from all further liability under this Lease. ARTICLE 18.00 DAMAGE AND DESTRUCTION (a) If the Premises or the portion of the Business Center necessary for Tenant's occupancy is damaged or destroyed during the Term of this Lease by any casualty insurable under standard fire and extended coverage insurance policies, Landlord will repair or rebuild the Premises to substantially the condition in which the Premises were immediately prior to such destruction. (b) Landlord's obligation under this Article 18.00 will not exceed the lesser of: (i) with respect to the Premises, the scope of building-standard improvements installed by Landlord in the original construction of the Premises, or (ii) the extent of proceeds received by Landlord of any insurance policy maintained by Landlord. (c) The Monthly Base Rent will be abated proportionately during any period in which, by reason of any damage or destruction not occasioned by the negligence or willful misconduct of Tenant or Tenant's employees or invitees, there is a substantial interference with the operation of the business of Tenant. Such abatement will be proportional to the measure of business in the Premises which Tenant may be required to discontinue. The abatement will continue for the period commencing with such destruction or damage and ending with the completion by the Landlord of such work, repair, or reconstruction as Landlord is obligated to do. (d) If the Premises, or the portion of the Business Center necessary for Tenant's occupancy, is damaged or destroyed (i) to the extent of ten percent (10%) or more of the then-replacement value of either, (ii) in the last three (3) years of the Term of this Lease, (iii) by a cause or casualty other than those covered by fire and extended coverage insurance, or (iv) to the extent that it would take, in Landlord's opinion, in excess of ninety (90) days to complete the requisite repairs, then Landlord may either terminate this Lease or elect to repair or restore the damage or destruction. If this Lease is not terminated pursuant to the preceding sentence, this Lease will remain in full force and effect. Landlord and Tenant waive the provisions of any law that would dictate automatic termination or grant either of them an option to terminate in the event of damage or destruction. Landlord's election to terminate under this paragraph will be exercised by written notice to Tenant given within sixty (60) days after the damage or destruction. Such notice will set forth the effective date of the termination of this Lease. (e) Upon the completion of any such work, repair, or restoration by Landlord, Tenant will repair and restore all other parts of the Premises including without limitation nonbuilding-standard leasehold improvements and all trade fixtures, equipment, furnishings, signs, and other improvements originally installed by Tenant. Tenant's work will be subject to the requirements of Article 14.00. (f) During any period of reconstruction or repair of the Premises, Tenant will continue the operation of its business in the Premises to the extent reasonably practicable. ARTICLE 19.00 SUBORDINATION 19.01 GENERAL. This Lease and Tenant's rights under this Lease are subject and subordinate to any ground or underlying lease, first mortgage, indenture, first deed of trust or other first lien encumbrance, together with any renewals, extensions, modifications, consolidations and replacements of such first lien encumbrance, now or after the Commencement Date, affecting or placed, charged or enforced against the Land or all or any portion of the Business Center or any interest of Landlord in them or Landlord's interest in this Lease and the leasehold estate created by this Lease (except to the extent any such instrument will expressly provide that this Lease is superior to such instrument). This provision will be self-operative and no further instrument of subordination will 13 be required in order to effect it. Nevertheless, Tenant will execute, acknowledge and deliver to Landlord, at any time and from time to time, upon demand by Landlord, such documents as may be requested by Landlord, any ground or underlying lessor, or any mortgagee, to confirm or effect any such subordination. If Tenant fails or refuses to execute, acknowledge and deliver any such document within fourteen (14) days after written demand, Landlord, it successors and assigns will be entitled to execute, acknowledge and deliver any and all such documents for and behalf of Tenant as attorney-in-fact to execute, acknowledge and deliver any and all documents described in this Section 19.01 for and on behalf of Tenant, as provided in this Section 19.01. 19.02 ATTORNMENT. Tenant agrees that in the event that any holder of any ground or underlying lease, mortgage, deed of trust, or other encumbrance encumbering any part of the Business Center succeeds to Landlord's interest in the Premises, Tenant will pay to such holder all rents subsequently payable under this Lease. Further, Tenant agrees that in the event of the enforcement by the trustee or the beneficiary under or holder or owner of any such mortgage, deed of trust, or land or ground lease of the remedies provided for by law or by such mortgage, deed of trust, or land or ground lease, Tenant will, upon request of any person or party succeeding to the interest of Landlord as a result of such enforcement, automatically become the Tenant of and attorn to such successor in interest without change in the terms or provisions of this Lease. Such successor in interest will not be bound by (a) any payment of Monthly Base Rent or Rent for more than one month in advance except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease, or (b) any amendment or modification of this Lease made without the written consent of such trustee, beneficiary, holder or owner or such successor in interest. Upon request by such successor in interest and without cost to Landlord or such successor in interest, Tenant will execute, acknowledge and deliver an instrument or instruments confirming the attornment. ARTICLE 20.00 ENTRY BY LANDLORD Landlord, its agents, employees, and contractors may enter the Premises at any time in response to an emergency and at reasonable hours, with notice, to (a) inspect the same, (b) exhibit the same to prospective purchasers, lenders or tenants, except Premises may be shown to prospective tenants only during the last six (6) months of the Lease so long as Tenant is not in default of this Lease, (c) determine whether Tenant is complying with all its obligations in this Lease, (d) supply any service which this Lease obligates Landlord to provide to Tenant, (e) post notices of non-responsibility or similar notices, or (f) make repairs required of Landlord under the terms of this Lease or repairs to any adjoining space or utility services or make repairs, alterations or improvements to any other portion of the Business Center; however, all such work will be done as promptly as reasonably possible and so as to cause as little interference to Tenant as reasonably possible. Tenant by this Article 20.00 waives any claim against Landlord, its agents, employees or contractors for damages for: any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, except as caused by Landlord's negligence or acts. Landlord will at all times have and retain a key with which to unlock all of the doors in, on, or about the Premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance). Landlord will have the right to use any and all means which Landlord may deem proper to open doors in and to the Premises in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord by any means permitted under this Article will not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises, or any portion of the Premises, nor will any such entry entitle Tenant to damages or an abatement of Monthly Base Rent, Additional Rent, or other charges which this Lease requires Tenant to pay. ARTICLE 21.00 INDEMNIFICATION, WAIVER AND RELEASE 21.01 INDEMNIFICATION. Tenant will neither hold nor attempt to hold Landlord or its employees or agents liable for, and Tenant will indemnify and hold harmless Landlord, its employees and agents from and against, all demands, claims, suits, causes of action, fines, penalties, damages (including consequential damages), liabilities, judgments, and expenses (including, without limitation, attorney's fees) incurred in connection with or arising from: (a) the use or occupancy or manner of use or occupancy of the Premises by Tenant or any person claiming under Tenant; 14 (b) any activity, work or thing, done, permitted or suffered, by Tenant in or about the Premises or the Business Center; (c) any acts, omissions or negligence, of Tenant or any person claiming under Tenant, or the contractors, agents, employees, invitees or visitors of Tenant or any such person; (d) any breach, violation or nonperformance, by Tenant or any person claiming under Tenant, or the employees, agents, contractors, invitees or visitors of Tenant or any such person of any term, covenant or provision of this Lease or any law, ordinance or governmental requirement of any kind; (e) any injury including claims for death or damage to the person, property or business of Tenant, its employees, agents, contractors, invitees, visitors or any other person entering upon the Premises or the Business Center under the express or implied invitation of Tenant, unless due to Landlord's negligence or willful misconduct. If any action or proceeding is brought against Landlord or its employees by reason of any such claim, Tenant, upon notice from Landlord, will defend the same at Tenant's expense. 21.02 WAIVER AND RELEASE. Tenant, as a material part of the consideration to Landlord for this Lease, by this Section 21.02 waives and releases all claims against Landlord, its employees and agents with respect to all matters for which Landlord has disclaimed liability pursuant to the provisions of this Lease. Tenant agrees that Landlord, its agents and its employees will not be liable for any loss, injury, death or damage (including consequential damages) to persons, property or Tenant's business occasioned by theft; act of God; public enemy; injunction; riot; strike; insurrection; war; court order; requisition; order of governmental body or authority; fire; explosion; falling objects; steam, water, rain or snow; leak or flow of water (including fluid from the elevator system), rain or snow from or into part of the Business Center or from the roof, street, subsurface or from any other place, or by dampness, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures of the Business Center; or from construction, repair or alteration of any other premises in the Business Center or the Premises; or from any acts or omissions of any other tenant, occupant or visitor of the Business Center; or from any cause beyond Landlord's control. The negligence or willful misconduct of Landlord is specifically excluded. ARTICLE 22.00 SECURITY DEPOSIT Tenant has deposited the Security Deposit with Landlord as security for the full, faithful and timely performance of every provision of this Lease to be performed by Tenant. If Tenant defaults with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of Rent Landlord may use, apply or retain all or any part of the Security Deposit for the payment of any Rent, or any other sum in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used, applied or retained Tenant will within ten (10) days after written demand deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord will not be required to keep the Security Deposit separate from its general funds and Tenant will not be entitled to interest on the Security Deposit. The Security Deposit will not be deemed a limitation on Landlord's damages or a payment of liquidated damages or a payment of the Monthly Base Rent due for the last month of the Term. If Tenant fully, faithfully and in a timely manner performs every provision of this Lease to be performed by it, the Security Deposit or any balance of the Security Deposit will be returned to Tenant within thirty (30) days after the expiration of the Term. Landlord may deliver the funds deposited under this Lease by Tenant to the purchaser of the Business Center in the event the Business Center is sold, and after such time, Landlord will have no further liability to Tenant with respect to the Security Deposit. ARTICLE 23.00 QUIET ENJOYMENT Landlord covenants and agrees with Tenant that so long as Tenant pays the Rent and observes and performs all the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises subject, nevertheless, to the terms and conditions of 15 this Lease, and Tenant's possession will not be disturbed by anyone claiming by, through or under Landlord. ARTICLE 24.00 EFFECT OF SALE A sale, conveyance or assignment of the Business Center will operate to release Landlord from liability from and after the effective date of such sale, conveyance or assignment upon all of the covenants, terms and conditions of this Lease, express or implied, except those which arose prior to such effective date, and, after the effective date of such sale, conveyance or assignment, Tenant will look solely to Landlord's successor in interest in and to this Lease. This lease will not be affected by any such sale, conveyance or assignment, and Tenant will attorn to Landlord's successor in interest to this Lease. ARTICLE 25.00 DEFAULT 25.01 EVENTS OF DEFAULT. The following events are referred to collectively as "Events of Default," or individually as an "Event of Default:" (a) Tenant defaults in the due and punctual payment of Rent or additional rent, and such default continues for five (5) days after notice from Landlord; however, Tenant will not be entitled to more than one (1) notice for monetary defaults during any twelve (12) month period, and if after such notice and Rent is not paid when due, an Event of Default will be considered to have occurred without further notice; (b) This Lease or the Premises or any part of the Premises are taken upon execution or by other process of law directed against Tenant, or are taken upon or subject to any attachment at the instance of any creditor or claimant against Tenant, and the attachment is not discharged or disposed of within fifteen (15) days after its levy; (c) Tenant files a petition in bankruptcy or insolvency or for reorganization or arrangement under the bankruptcy laws of the United States or under any insolvency act of any state, or admits the material allegations of any such petition by answer or otherwise, or it's dissolved or makes an assignment for the benefit of creditors; (d) Involuntary proceedings under any such bankruptcy law or insolvency act or for the dissolution of Tenant are instituted against Tenant, or a receiver or trustee is appointed for all or substantially all of the property of Tenant, and such proceeding is not dismissed or such receivership or trusteeship vacated within sixty (60) days after such institution or appointment; (e) Tenant fails to take possession of the Premises on the Commencement Date of the Term; (f) Tenant breaches any of the other agreements, terms, covenants or conditions which this Lease requires Tenant to perform, and such breach continues for a period of thirty (30) days after notice from Landlord to Tenant; or if such breach cannot be cured reasonably within such thirty (30) day period and Tenant fails to commence and proceed diligently to cure such breach within a reasonable time period. 25.02 LANDLORD'S REMEDIES. If any one or more Events of Default set forth in Section 25.01 occurs then Landlord has the right, at its election: (a) to give Tenant written notice of Landlord's intention to terminate this Lease on the earliest date permitted by law or on any later date specified in such notice, in which case Tenant's right to possession of the Premises will cease and this Lease will be terminated, except as to Tenant's liability, as if the expiration of the term fixed in such notice were the end of the Term; or (b) without further demand or notice, to reenter and take possession of the Premises or any part of the Premises, repossess the same, expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, using such force for such purposes as may be necessary, without being liable for prosecution, without being deemed guilty of any manner of trespass, and without prejudice to any remedies for arrears of Monthly Base Rent or other amounts payable under this Lease or as a result of any preceding breach of covenants or conditions; all actions to occur through legal process; or 16 (c) without further demand or notice, to cure any Event of Default and to charge Tenant for the cost of effecting such cure, including, without limitation, attorneys' fees and interest on the amount so advanced at the rate set forth in Section 28.22 provided that Landlord will have no obligation to cure any such Event of Default of Tenant. Should Landlord elect to reenter as provided in subsection (b), or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided by law, Landlord may, from time to time, without terminating this Lease, relet the Premises or any part of the Premises in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Term) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord, in its sole discretion, may determine, and Landlord may collect and receive the rent. Landlord will in no way be responsible or liable for any failure to relet the Premises or any part of the Premises, or for any failure to collect any rent due upon such reletting. No such reentry or taking possession of the Premises by Landlord will be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant. No notice from Landlord under this Section or under a forcible or unlawful entry and detainer statute or similar law will constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right following any such reentry or reletting to exercise its right to terminate this Lease by giving Tenant such written notice, in which event this Lease will terminate as specified in such notice. 25.03 CERTAIN DAMAGES. If Landlord does not elect to terminate this Lease as permitted in subsection (a) of Section 25.02, but on the contrary elects to take possession as provided in subsection (b) of Section 25.02, Tenant will pay to Landlord: (a) Monthly Base Rent and other sums as provided in this Lease, which would be payable under this Lease if such repossession had not occurred, less (b) the net proceeds, if any, of any reletting of the Premises after deducting all Landlord's expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, attorneys' fees, expenses of employees, alteration and repair costs and expenses of preparation for such reletting. If, in connection with any reletting, the new lease term extends beyond the existing Term, or the premises covered by such new lease include other premises not part of the Premises, a fair apportionment of the rent received from such reletting and the expenses incurred in connection with such reletting as provided in this Section will be made in determining the net proceeds from such reletting, and any rent concessions will be equally apportioned over the term of the new lease. Tenant will pay such rent and other sums to Landlord monthly on the day on which the Monthly Base Rent would have been payable under this Lease if possession had not been retaken, and Landlord will be entitled to receive such rent and other sums from Tenant on each such day. 25.04 CONTINUING LIABILITY AFTER TERMINATION. If this Lease is terminated on account of the occurrence of an Event of Default, Tenant will remain liable to Landlord for damages in an amount equal to Monthly Base Rent and other amounts which would have been owing by Tenant for the balance of the Term, had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to such termination, after deducting all Landlord's expenses in connection with such reletting, including, but without limitation, the expenses enumerated in Section 25.03. Landlord will be entitled to collect such damages from Tenant monthly on the day on which Monthly Base Rent and other amounts would have been payable under this Lease if this Lease had not been terminated, and Landlord will be entitled to receive such Monthly Base Rent and other amounts from Tenant on each such day. Alternatively, at the option of Landlord, in the event this Lease is so terminated, Landlord will be entitled to recover against Tenant, as damages for loss of the bargain and not as a penalty, an aggregate Rent which, at the time of such termination of this Lease, represents the excess of the aggregate of Monthly Base Rent and all other Rent payable by Tenant that would have accrued for the balance of the Term over the aggregate rental value of the Premises (such rental value to be computed on the basis of a tenant paying not only a rent to Landlord for the use and occupation of the Premises, but also such other charges as are required to be paid by Tenant under the terms of this Lease) for the balance of such term, both discounted to present value at six (6%) percent." 25.05 CUMULATIVE REMEDIES. Any suit or suits for the recovery of the amounts and damages set forth in Sections 25.03 and 25.04 may be brought by Landlord, from time to time, at Landlord's election, and nothing in this Lease will be deemed to require Landlord to await the date upon which this Lease or the Term would have expired had there occurred no Event of Default. Each right and remedy provided for in this Lease is cumulative and is in addition to every 17 other right or remedy provided for in this Lease or now or after the Date existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease or now or after the Date existing at law or in equity or by statute or otherwise will not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this Lease or now or after the Date existing at law or in equity or by statute or otherwise. All costs incurred by Landlord in collecting any amounts and damages owing by Tenant pursuant to the provisions of this Lease or to enforce any provision of this Lease, including reasonable attorneys' fees from the date any such matter is turned over to an attorney, whether or not one or more actions are commenced by Landlord, will also be recoverable by Landlord from Tenant. Such attorney's fees will be due and payable upon tendering of a statement. Failure to pay such fees will constitute a breach of the terms and conditions of the within Lease. Landlord may treat the failure to make such payment as a default in the payment of rent and as more particularly set forth in Article 5.06. ARTICLE 26.00 RULES AND REGULATIONS Tenant and its employees, agents, licensees and visitors will at all times observe faithfully, and comply strictly with, the rules and regulations set forth on Exhibit D. Landlord may from time to time amend, delete or modify existing rules and regulations, or adopt new rules and regulations for the use, safety, cleanliness and care of the Premises and the Business Center, and the comfort, quiet and convenience of occupants of the Business Center. Modifications or additions to the rules and regulations will be effective upon notice to Tenant from Landlord. In the event of any breach of any rules or regulations or any amendments or additions to such rules and regulations, Landlord will have all remedies which this Lease provides for default by Tenant, and will, in addition, have any remedies available at law or in equity, including the right to enjoin any breach of such rules and regulations. Landlord will not be liable to Tenant for violation of such rules and regulations by any other tenant, its employees, agents, visitors or licensees or any other person. In the event of any conflict between the provisions of this Lease and the rules and regulations, the provisions of this Lease will govern. ARTICLE 27.00 SIGNS (a) No sign, advertisement or notice shall be affixed to or placed upon any part of the leased premises by the Tenant, except in such a manner, and of such a size, design, uniformity, and color as shall be approved in advance in writing by the Landlord. Tenant shall be obligated to make his own application for a sign, obtain permits, and to comply with the local authority having jurisdiction. (b) No roof signs shall be permitted; nor shall there be any attachments or openings permitted of any kind to or through the roof. (c) Tenant will purchase and install one sign in the location designated by Landlord on the front of the Premises. Installation will be completed on the earlier of the date on which Tenant opens for business. The sign will conform to Landlord's sign criteria attached to this Lease as Exhibit E. Tenant will maintain, repair, and replace the sign as required by Landlord during this Lease. ARTICLE 28.00 MISCELLANEOUS 28.01 NO OFFER. This Lease is submitted to Tenant on the understanding that it will not be considered an offer and will not bind Landlord in any way until (a) Tenant has duly executed and delivered duplicate originals to Landlord and (b) Landlord has executed and delivered one of such originals to Tenant. 28.02 JOINT AND SEVERAL LIABILITY. If Tenant is composed of more than one signatory to this Lease, each signatory will be jointly and severally liable with each other signatory for payment and performance according to this Lease. 28.03 NO CONSTRUCTION AGAINST DRAFTING PARTY. Landlord and Tenant acknowledge that each of them and their counsel have had an opportunity to review this Lease and that this Lease will not be construed against Landlord merely because Landlord's counsel has prepared it. 28.04 TIME OF THE ESSENCE. Time is of the essence on each and every provision of this Lease. 18 28.05 NO RECORDATION. Tenant's recordation of this Lease or any memorandum or short form of it will be void and a default under this Lease. 28.06 NO WAIVER. The waiver by Landlord of any agreement, condition or provision contained in this Lease will not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition or provision contained in this Lease, nor will any custom or practice which may grow up between the parties in the administration of the terms of this Lease be construed to waive or to lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms of this Lease. The subsequent acceptance of Rent by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any agreement, condition or provision of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. 28.07 LIMITATION ON RECOURSE. Tenant specifically agrees to look solely to Landlord's interest in the Business Center for the recovery of any judgments from Landlord, it being agreed that Landlord (and its shareholders, venturers, and partners, and their shareholders, venturers and partners and all of their officers, directors and employees) will never be personally liable for any such judgments. The provision contained in the preceding sentence is not intended to, and will not, limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord. 28.08 ESTOPPEL CERTIFICATES. At any time and from time to time but within ten (10) days after written request by Landlord, Tenant will execute, acknowledge and deliver to Landlord a certificate certifying (a) that this Lease is unmodified and in full force and effect or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification, (b) the date, if any, to which rent and other sums payable under this Lease have been paid, (c) that no notice has been received by Landlord of any default which has not been cured, except as to defaults specified in the certificate, and (d) such other matters as may be reasonably requested by Landlord. Any such certificate may be relied upon by any prospective purchaser or existing or prospective mortgagee or beneficiary under any deed of trust of the Business Center or any part of the Business Center. 28.09 WAIVER OF JURY TRIAL. Landlord and Tenant by this Section 28.09 waive trial by jury in any action, proceeding or counterclaim brought by either of the parties to this Lease against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any other claims (including without limitation claims for personal injury or property damage), and any emergency statutory or any other statutory remedy. 28.10 NO MERGER. The voluntary or other surrender of this Lease by Tenant or the cancellation of this Lease by mutual agreement of Tenant and Landlord or the termination of this Lease on account of Tenant's default will not work a merger, and will, at Landlord's option, (a) terminate all or any subleases and subtenancies, or (b) operate as an assignment to Landlord of all or any subleases or subtenancies. Landlord's option under this Section 28.10 will be exercised by notice to Tenant and all known sublessees or subtenants in the Premises or any part of the Premises. 28.11 HOLDING OVER. Tenant will have no right to remain in possession of all or any part of the Premises after the expiration of the Term. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term, with the express or implied consent of Landlord: (a) such tenancy will be deemed to be a periodic tenancy from month-to-month only; (b) such tenancy will not constitute a renewal or extension of this Lease for any further term; and (c) such tenancy may be terminated by Landlord upon the earlier of (i) thirty (30) days prior written notice or (ii) the earliest date permitted by law. In such event, Monthly Base Rent will be increased to an amount equal to one hundred fifty percent (150%) of the Monthly Base Rent payable during the last month of the Term, and any other sums due under this Lease will be payable in the amount and at the times specified in this Lease. Such month-to-month tenancy will be subject to every other term, condition, and covenant contained in this Lease. 28.12 NOTICES. Any notice, request, demand, consent, approval or other communication required or permitted under this Lease must be in writing and will be deemed to have been given when personally delivered or deposited in any depository regularly maintained by the United States Postal Service, postage prepaid, certified mail, return receipt requested, addressed to the party for 19 whom it is intended at its address set forth in Article l.00. Either Landlord or Tenant may add additional addresses or change its address for purposes of receipt of any such communication by giving ten (10) days prior written notice of such change to the other party in the manner prescribed in this Section 28.12. 28.13 SEVERABILITY. If any provision of this Lease proves to be illegal, invalid or unenforceable, the remainder of this Lease will not be affected by such finding, and in lieu of each provision of this Lease that is illegal, invalid or unenforceable, a provision will be added as a part of this Lease as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 28.14 WRITTEN AMENDMENT REQUIRED. No amendment, alteration, modification of or addition to the Lease will be valid or binding unless expressed in writing and signed by the party or parties to be bound by such change. Tenant agrees to make any modifications of the terms and provisions of this Lease required or requested by a lending institution providing financing for the Business Center, provided that no such modifications will materially adversely affect Tenant's rights and obligations under this Lease. 28.15 ENTIRE AGREEMENT. This Lease, the Exhibits and Addenda, if any, contain the entire agreement between Landlord and Tenant and may be amended only by subsequent written agreement. No promises or representations, except as contained in this Lease, have been made to Tenant respecting the condition of the Premises or the manner of operating the Business Center. 28.16 CAPTIONS. The captions of the various Articles and Sections of this Lease are for convenience only and do not necessarily define, limit, describe or construe the contents of such Articles or Sections. 28.17 NOTICE OF LANDLORD'S DEFAULT. In the event of any alleged default in the obligation of Landlord under this Lease, Tenant will deliver to Landlord written notice and Landlord will have thirty (30) days following receipt of such notice to cure such alleged default or, in the event the alleged default cannot reasonably be cured within a thirty (30) day period, to commence action to cure such alleged default. A copy of such notice will be sent to any holder of a mortgage or other encumbrance on the Business Center or the Premises of which Tenant has been notified in writing, and such holder will also have the same time periods to cure such alleged default. 28.18 AUTHORITY. Tenant and the party executing this Lease on behalf of Tenant represent to Landlord that such party is authorized to do so by requisite action of the board of directors, or partners, as the case may be, and agree upon request to deliver to Landlord a resolution or similar document to that effect. 28.19 BROKERS. Landlord and Tenant respectively represent and warrant to each other that neither of them has consulted or negotiated with any broker or finder with regard to the Premises except the Broker named in Article l.00(s), if any. Each of them will indemnify the other against and hold the other harmless from any claims for fees or commissions from anyone with who either of them has consulted or negotiated with regard to the Premises except the Broker. Landlord will pay any fees or commissions due the Broker as may be provided for in a separate written agreement between the Landlord and Broker. 28.20 GOVERNING LAW. This Lease will be governed by and construed pursuant to the laws of the state in which the Business Center is located. 28.21 FORCE MAJEURE. Landlord will have no liability to Tenant, nor will Tenant have any right to terminate this Lease or abate Rent or assert a claim of partial or total actual or constructive eviction, because of Landlord's failure to perform any of its obligations in the Lease if the failure is due to reasons beyond Landlord's reasonable control, including, without limitation, strikes or other labor difficulties; inability to obtain necessary governmental permits and approvals (including building permits or certificates of occupancy); unavailability or scarcity of materials; war; riot; civil insurrection; accidents; acts of God; and governmental preemption in connection with a national emergency. If Landlord fails to perform its obligations because of any reasons beyond Landlord's reasonable control (including those enumerated above), the period for Tenant's performance will be extended day for day for the duration of the cause of Landlord's failure. 28.22 LATE PAYMENTS. Any payment of Rent, including Monthly Base Rent and Additional Rent, which is not received within five (5) days after it is due will be subject to a late charge equal to five percent (5%) of the unpaid payment. This amount is in compensation of Landlord's additional cost of processing late payments. 20 28.23 NO EASEMENTS FOR AIR OR LIGHT. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Business Center will in no way affect this Lease or impose any liability on Landlord. 28.24 TAX CREDITS. Landlord is entitled to all local, state and federal income tax benefits (including, without limitation, investment tax credits, energy credits and rehabilitation credits) available as a result of leasehold improvements for which Landlord has paid, or lent money, or guaranteed payment. Promptly after Landlord's demand, Tenant will give Landlord a detailed list of the leasehold improvements and fixtures and their respective costs for which Tenant has paid without a loan or guarantee by Landlord, and Tenant will be entitled to tax benefits attributable to such listed improvements. Landlord will be entitled to all other such tax benefits for all other leasehold improvements. 28.25 RELOCATION OF THE PREMISES. Landlord reserves the unrestricted and unconditional right to relocate the Premises to substantially comparable space within the Business Center. Landlord will give Tenant a written notice of its intention to relocate the Premises, and Tenant will complete such relocation within thirty (30) days after receipt of such written notice. If the furnishings of the space to which Landlord proposes to relocate Tenant are not substantially the same as those of the Premises, or if the Monthly Base Rent of the new space is not substantially the same as the prior Monthly Base Rent, Tenant may so notify Landlord, and if Landlord fails to offer space satisfactory to Tenant, Tenant may terminate this Lease effective as of the thirtieth (30th) day after Landlord's initial notice. Upon Tenant's peaceable vacation and abandonment of the premises, Landlord will pay to Tenant a sum equal to one monthly installment of the Monthly Base Rent payable under this Lease. If Tenant does relocate within the Business Center, then effective on the date of such relocation this Lease will be amended by deleting the description of the original Premises and substituting for it a description of such comparable space. Landlord agrees to reimburse Tenant for its actual moving costs to such other space within the Business Center, to the extent such costs are reasonable. 28.26 LANDLORD'S FEES. Whenever Tenant requests Landlord to take any action or give any consent required or permitted under this Lease, same will not be unreasonably withheld. Tenant will reimburse Landlord for all of Landlord's costs incurred in reviewing the proposed action or consent, including, without limitation, reasonable attorneys', engineers', architects', accountants' and other professional fees, within ten (10) days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. 28.27 BINDING EFFECT. The covenants, conditions and agreements contained in this Lease will bind and inure to the benefit of Landlord and Tenant and their respective heirs, distributees, executors, administrators, successors, and, except as otherwise provided in this Lease, their assigns. Landlord and Tenant have executed this Lease as of the day and year first above written. WITNESS: LANDLORD: 116 CORPORATE BOULEVARD LLC By: - ------------------------------ --------------------------------------- ATTEST: TENANT: ION NETWORKS, INC. By: - ------------------------------ --------------------------------------- Its Secretary 21 [Corporate Seal if applicable] 22 EXHIBIT A --------- LEGAL DESCRIPTION OF THE BUSINESS CENTER The land referred to in this commitment is described as follows: All that certain Lot, piece or parcel of land, with the buildings and improvements thereon erected, situate, lying and being in the Borough of South Plainfield, County of Middlesex, State of New Jersey. The following description is described in accordance with the survey made by De Muro Associates dated January 10, 2000 and Revised October 16, 2000. BEGINNING at a point of intersection of the southwesterly line of Corporate Boulevard with the northeasterly line of New Durham Road formerly Perth Amboy Turnpike and from thence running; (1) Along the said northeasterly line of New Durham Road North 79 degrees 47 minutes 28 seconds West, 320.27 feet to a point; THENCE(2) North 27 degrees 15 minutes 22 seconds West, 915.22 feet to a point; THENCE (3) North 62 degrees 44 minutes 38 seconds East, 356.00 feet to a point in the southwesterly line of Corporate Boulevard; THENCE (4) Along the southwesterly line of Corporate Boulevard, South 27 degrees 15 minutes 22 East, 830.09 feet to a point of curve; THENCE (5) Still along the southwesterly line of Corporate Boulevard on a curve to the right having a radius of 444.00 feet, a distance of 293.59 feet to another point of curve; THENCE (6) Still along the said line of Corporate Boulevard on a curve to the right having a radius of 30 feet, a distance of 11.04 feet to the point and place BEGINNING. NOTE: Being Lot(s) 47.04, 47.03 & 47.02, Block 528, Tax Map of the Borough of South Plainfield, County of Middlesex. 23 EXHIBIT B --------- THE PREMISES 24 EXHIBIT C --------- WORKLETTER Landlord and Tenant agree that Tenant will accept the demised premises in "as is" condition. Tenant is responsible for obtaining its own Building Permits and Certificate of Occupancy. OTHER COMMENTS: Landlord agrees to do the following work: 1) Clean existing carpet 2) Repair and re-paint existing damaged walls 25 EXHIBIT D --------- RULES AND REGULATIONS 1. Tenant shall not conduct or permit to be conducted within the demised premises or any portion of the Business Center any political gathering or meeting or distribution of any political information and will not install or permit to be installed anywhere in the Business Center any poster or sign of any political nature. 2. All deliveries or shipments of any kind to and from the Leased Premises, including loading and unloading of goods, shall be made only at such times, in the areas and through the entrances reasonably designated for such purpose by Landlord. Trailers and/or trucks servicing the Leased Premises shall remain parked in the Business Center only during those periods necessary to service Tenant's operations, but in no event shall such trailers or trucks remain parked in the Business Center overnight. 3. No radio, television, phonograph or other similar device, or aerial attached thereto (inside or outside the Leased Premises) shall be installed without first obtaining in each instance, Landlord's written consent. Any aerial installed without Landlord's consent shall be subject to removal without notice at any time. No radio, television, phonograph or other similar device shall be used in a manner so as to be heard or seen outside of the Leased Premises. 4. Tenant shall not burn trash or garbage in or about the Leased Premises or the Business Center. 5. Tenant shall not place or cause to be placed on any vehicles parked in the common areas of the Business Center, any handbills, bumper stickers or other advertising or promotional materials nor shall Tenant use any of the common areas in the Business Center for business or promotional purposes without the prior written consent of Landlord. 6. The plumbing facilities within or serving the Leased Premises shall not be used for any purposes other than for which they were constructed, and no foreign substances of any kind shall be thrown therein. 7. Tenant shall not obstruct walkways, entrances, passages, courts, corridors, vestibules, halls or any common areas in the Leased Premises or the Business Center. 8. Tenant shall not keep on the Leased Premises inflammables, such as gasoline, kerosene, naphtha, benzine, or explosives, or any other articles of an intrinsically dangerous nature. 9. Tenant shall be responsible for the observance of these rules and regulations by Tenant's employees, agents, clients, customers, invitees and guests. 10. Tenant shall not make or permit any noise or odor which Landlord deems objectionable to emanate from the Leased Premises and no person shall use the Leased Premises as sleeping quarters, sleeping apartments or lodging rooms. 11. Landlord may after notice to Tenant, amend or add new rules and regulations for the use and care of the Leased Premises, the building of which the Leased Premises forms a part and the common areas of the Business Center. Such amendments or new rules shall be reasonable and shall apply uniformly to all tenants for the Business Center. 12. No equipment or other fixtures shall be attached to the outside walls or the windowsills of the building or otherwise affixed so as to project from the building, without the prior written consent of Lessor. 13. Windows in the premises shall not be covered or obstructed by Lessee. No bottles, parcels, or other articles be placed on the windowsills, in the halls, or in any other part of the building other than the leased premises. 14. No additional locks or bolts of any kind shall be placed on any of the doors by Lessee. Lessee shall, on the termination of Lessee's tenancy, deliver to Lessor, all keys to any space within the building, either furnished to or 26 otherwise procured by Lessee, and in the event of the loss of any keys furnished, Lessee shall pay to Lessor the cost thereof. 15. Lessor reserves the right to prescribe the weight and position of all safes and other heavy equipment so as to distribute properly the weight thereof and to prevent any unsafe condition from arising. Business machines and other equipment shall be placed and maintained by Lessee at Lessee's expense in settings sufficient in Lessor's reasonable judgment to absorb and prevent unreasonable vibration, noise, and annoyance. 16. Lessor shall not be responsible to Lessee for the non-observance or violation of any of these rules by any other tenant. 17. Lessor hereby reserves to itself any and all rights not granted to Lessee hereunder, including, but not limited to, the following rights which are reserved to Lessor for its purposes in operating the Business Center: (a) The exclusive right to the use of the name of the Business Center for all purposes, except that Lessee may use the name as its business address and for no other purpose; (b) The right to change the name of the Business Center at any time and from time to time, without incurring any liability to Lessee for so doing; (c) The right to install and maintain a sign or signs on the exterior of the Business Center and/or anywhere in the Business Center Area; (d) The exclusive right to use or dispose of the use of all or any part of the roof of the Business Center and Business Center Area; (e) The right to grant anyone the right to conduct any particular business or undertaking in the Business Center or Business Center Area. 27 EXHIBIT E --------- SIGN CRITERIA It is understood and agreed that the Tenant shall have the right to signage similar to signs presently located in the Business Center which the demised premises is a part or signage which falls under the specifications set forth, whichever policy is then in effect, Tenant shall present to Landlord prior to construction and installation of any sign, a professionally drawn rendering specifying size, material, copy and any other specifications included but not limited to lighting and electrical load. All signage must be approved in writing by the Landlord prior to installation, Landlord's approval shall not be unreasonably withheld or delayed. 28 EXHIBIT F --------- ENVIRONMENTAL SPECIFICATION Environmental Representations and Compliance. -------------------------------------------- (a) The Tenant, its officers, partners, employees, agents and subsidiaries, agree to indemnify, defend and hold the Landlord, its officers, partners, employees, successors or assigns, harmless from any and all claims, causes of action, and any and all damages, liabilities, costs and expenses of any kind whatsoever, including fines, assessments, clean-up costs, shut-down fees, contractor's costs and actual attorney fees, which arise out of, are asserted on account of, or traceable to Tenant's use, storage, manufacture, dumping, leakage or the carrying on of any activities or occurrence upon the Premises that is the subject of this Lease relating to oil, waste oil, thinners, spirits, materials all petro-chemical by-products, and any substance, material or compound classified as toxic or hazardous under any federal, state or local environmental law, and any other material or compound known to have an adverse environmental impact. (b) In addition, Tenant hereby makes the following representations to Landlord, understanding that Landlord shall and does in fact rely thereon. Tenant shall also indemnify, defend and hold Landlord harmless from any and all claims, costs, damages, expenses, attorney fees, and causes of action arising as a result of, or associated with these representations made by Tenant: (c) Landlord will indemnify and hold Tenant harmless for any environmental conditions existing prior to Tenant's occupancy of leased premises. Landlord is not aware of any existing environmental conditions. (1) Air Quality: (i) Tenant represents that any and all air emission permits required by state, local or federal authorities have been properly obtained and will remain in force. (ii) Tenant represents that its facility is in compliance with any conditions attendant to such permits. (iii) Tenant represents that its facility is and will remain in compliance with Occupational Safety Health Act requirements governing exposure of workers to hazardous materials in the work place. (2) Water Pre-Treatment: (i) Tenant represents that any present discharge of industrial waste water into the sewer system has been properly permitted by local, state or federal authorities. (ii) Tenant represents that all permits have been properly complied with and that Tenant is not in violation of any permits, ordinances, or compliance requirements. (3) Underground Storage Tanks: (i) Tenant acknowledges that there are presently no underground storage tanks upon the property and that none will be installed without Landlord's specific written consent. (4) Water Discharge: (i) Tenant represents that any permits for such water discharge have been properly obtained and are current and that Tenant is in compliance therewith. (c) Tenant further understands and agrees that Landlord shall be entitled to enter upon the Premises to conduct environmental audit inspections, tests, borings, samplings and the like which Landlord deems reasonable and necessary to determine the environmental status of the property. (d) Tenant agrees that it shall, at its sole cost and expense, fulfill, observe and comply with all of the terms and provisions of all federal, state and local environmental laws now in effect or hereinafter enacted, as any 29 of the same may be amended from time to time, and all rules, regulations, ordinances, opinions, orders and directive issued or promulgated pursuant thereto or in connection therewith, as and to the extent any of the foregoing may be applicable to the Property and Tenant's use and occupancy thereof. (e) Within ten (10) days after written request by the Landlord or any mortgagee of Landlord, and, in any event, on each anniversary of the commencement date hereof, Tenant shall deliver to Landlord or Landlord's mortgagee, as the case may be, a duly executed and acknowledged affidavit of Tenant or Tenant's chief executive officer, certifying: (1) The proper four digit Standard Industrial Classification number ("S.I.C. number") relating to Tenant's then current use of the Property (said S.I.C. number to be obtained by reference to the then current Standard Industrial Classification Manual prepared and published by the Executive Office of the President, Office of Management and Budget or the successors to such publication). Tenant hereby represents, warrants and covenants that its S.I.C. number as of the date of this Lease is as set forth in Section 1(i) hereof; and (2) (a) That Tenant's use of the Property does not involve and has not involved the generation, manufacture, refining, transportation, treatment, storage, handling, or disposal of petroleum products or hazardous substances or wastes (as hazardous substances and hazardous wastes are defined in any Environmental Laws) on site, above ground or below ground (all of the foregoing being hereinafter collectively referred to as the Presence of Hazardous Substances); or (b) that Tenant's use does involve or has involved the Presence of Hazardous Substances, in which event, such affidavit shall describe in detail that portion of Tenant's operations which involves or involved the Presence of Hazardous Substances. Said description shall identify each Hazardous Substance and describe the manner in which it is or was generated, handled, manufactured, refined, transported, treated, stored, and/or disposed of. Tenant shall supply Landlord or Landlord's mortgagee with such additional information relating to said Presence of Hazardous Substances as Landlord or Landlord's mortgagee may request. (f) Tenant shall provide Landlord with copies of all reports, information and materials filed with or provided to any governmental agency or authority pursuant to any of the environmental laws. (g) In the event that, upon the date of termination or expiration of the term of this Lease, Tenant has not satisfied and complied with all requirements imposed upon Landlord if said requirements are imposed due to Tenant or Tenant's actions, or Tenant under any environmental laws or by any governmental agency or authority pursuant to any environmental laws, Tenant shall continue to pay Fixed Rent at the annual rent payable immediately prior to such date of termination or expiration plus an increase for each year until such obligation terminates, each such annual increase to be determined by the percentage increase in the Consumer Price Index published by the Bureau of Labor Statistics of the United States for All Urban Consumers (1982-1984-100). Such increased portion of rent over the Fixed Rent shall be computed by the increase in the Index from three (3) months prior to the initial Term of the Lease to the later of three (3) months prior to the expiration of the Lease or three (3) months prior to the anniversary of each continuance of the Lease multiplied by the annual rental during the last year of the Lease. The increased rental when added to the previous Fixed Rent shall become the new Fixed Rent. In no event shall Fixed Rent be reduced below the amount payable for the prior year. Such Fixed Rent shall be payable notwithstanding that Tenant may be barred and precluded from occupying and using the Property. Such payments of Fixed Rent shall continue until Tenant has complied in full with the requirements imposed by environmental laws or by governmental agencies and authorities having jurisdiction with respect thereto and has provided to Landlord written confirmation from governmental agency or authority having jurisdiction that such compliance has in fact occurred. Tenant shall, in addition to payments of Fixed Rent as aforesaid, promptly pay any fines, penalties, levies or assessments against the Property or Landlord which are imposed at any time or from time to time as a result of any action, act or failure to act of the Tenant relating to environmental laws. (h) Tenant agrees that each and every provision of this Section shall survive the expiration or earlier termination of the Term of this Lease. 30 EXHIBIT I --------- OPTION TO RENEW OPTION TO RENEW THE LEASE. The Tenant may extend the term of this lease. The extended term will be on all of the terms, covenants, and conditions of the lease applicable at the expiration date of the initial lease subject to the following terms and conditions. (a) OPTION PERIOD. So long as Tenant is not in default under this Lease, either at the time of exercise or at the time the extended term commences, the Tenant will have the option to extend the initial term of this lease for two (2) additional consecutive periods of three (3) years each hereinafter referred to as the "first (1st) option period" and the "second (2nd) option period" and together as the "option period". (b) NOTICE. The Tenant will exercise its option by giving Landlord written notice (option notice) at least six (6) months prior to the expiration of the initial term of the lease for the first option period and at least six (6) months prior to the expiration of the first (1st) option period for exercising the option for the second (2nd) option period. (c) OPTION PERIOD RENT. The rental for each option period shall be 95% of the CPI increase to be determined as follows: 1) The Consumer Price Index hereinafter referred to as the CPI, shall be the Consumer Price Index - Average for All Urban Consumers, All Items, as published by the United States Bureau of Labor Statistics. In the event of a change in the method of determining the CPI, an adjustment shall be made in the revised index to produce results equivalent, as nearly possible, to those which would have been obtained had the CPI not been changed. 2) "Base Level Index" as used herein shall be the one month period three months prior to the commencement of the initial term of this Lease. 3) "Lease Year Index" as used herein shall be the one month period three months prior to the commencement of each option period. 4) The monthly rental for the option periods shall be calculated using the following formula: .95 (Lease Year Index - Base Level Index) x Annual = Option Period ----------------------------------------- Base Rent Min Base Rent Base Level Index 5) However, the annual rental for each option shall in no event be less than $54,060. 31 EX-31.1 4 v02280_ex31-1.txt CERTIFICATIONS I, Norman E. Corn, certify that: 1. I have reviewed this annual report on Form 10-KSB for ION Networks, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this report any changes in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting: and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 29, 2004 By: /s/ Norman E. Corn --------------------------------------- Norman E. Corn, Chief Executive Officer 63 EX-31.2 5 v02280_ex31-2.txt CERTIFICATIONS I, Patrick E. Delaney, certify that: 1. I have reviewed this annual report on Form 10-KSB for ION Networks, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d. Disclosed in this report any changes in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting: and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 29, 2004 By: /s/ Patrick E. Delaney ------------------------------------------- Patrick E. Delaney, Chief Financial Officer 64 EX-32.1 6 v02280_ex32-1.txt ION NETWORKS, INC. CERTIFICATION PURSUANT TO 18U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION In connection with the periodic report of ION Networks, Inc. (the "Company") on Form 10-KSB for the year ended December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Norman E. Corn, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ION Networks, Inc. and will be retained by ION Networks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission. Date: March 29, 2004 By: /s/ Norman E. Corn ----------------------- Norman E. Corn Chief Executive Officer 65 EX-32.2 7 v02280_ex32-2.txt ION NETWORKS, INC. CERTIFICATION PURSUANT TO 18U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION In connection with the periodic report of ION Networks, Inc. (the "Company") on Form 10-KSB for the year ended December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Patrick E. Delaney, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ION Networks, Inc. and will be retained by ION Networks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission. Date: March 29, 2004 By: /s/ Patrick Delaney ----------------------- Patrick Delaney Chief Financial Officer 66 -----END PRIVACY-ENHANCED MESSAGE-----