U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________
Commission File No.: 0-13117
ION NETWORKS, INC.
------------------
(Exact Name of Small Business Issuer in Its Charter)
Delaware 22-2413505
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1551 South Washington Avenue Piscataway, New Jersey 08854
---------------------------------------------------------
(Address of Principal Executive Offices)
(732) 529-0100
--------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No___
There were 25,138,001 shares of Common Stock outstanding as of August 7, 2002.
Transitional Small Business Disclosure Format:
Yes___ No X
ION NETWORKS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2002
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Information (Unaudited) 2
Condensed Consolidated Balance Sheets as of June 30, 2002
and March 31, 2002 3
Condensed Consolidated Statements of Operations for the Three
Months ended June 30, 2002 and 2001 4
Condensed Consolidated Statement of Stockholders' Equity
for the Three Months ended June 30, 2002 5
Condensed Consolidated Statements of Cash Flows for the Three
Months ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 25
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by the registrant without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. Although the registrant believes that
the disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these condensed financial statements be read in conjunction with
the audited financial statements and the notes thereto included in the
registrant's Annual Report on Form 10-KSB , as amended, for the year ended March
31, 2002.
2
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, March 31,
2002 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 2,472,024 $ 4,050,657
Accounts receivable, net of allowance for doubtful
accounts of $206,137 and $149,999 respectively................... 823,262 1,521,230
Other receivables................................................. 12,900 -
Inventory, net.................................................... 1,534,983 1,024,126
Prepaid expenses and other current assets......................... 185,961 492,609
Related party notes receivable.................................... 83,657 83,657
------------ ------------
Total current assets........................................ 5,112,787 7,172,279
Restricted cash...................................................... 125,700 125,700
Property and equipment at cost, net of accumulated
depreciation of $2,880,800 and $2,684,152, respectively............. 672,070 796,625
Capitalized software, less accumulated amortization of $3,583,212 and
$3,412,040, respectively............................................ 889,674 908,464
Other assets......................................................... 64,968 6,653
------------ ------------
Total assets................................................ $ 6,865,199 $ 9,009,721
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases................................. $ 74,426 $ 74,426
Current portion of long-term debt................................. 12,238 33,444
Accounts payable.................................................. 839,372 917,846
Accrued expenses.................................................. 362,186 373,766
Accrued payroll and related liabilities........................... 366,218 353,590
Deferred income................................................... 137,625 115,927
Sales tax payable................................................. 137,570 188,435
Other current liabilities......................................... 84,245 73,923
------------ ------------
Total current liabilities................................... 2,013,880 2,131,357
Long-term portion of capital leases.................................. 126,869 146,540
Long-term debt, net of current portion............................... 5,241 4,597
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.001 per share; authorized 1,000,000
shares, none issued.............................................. - -
Common stock, par value $.001 per share; authorized 50,000,000
shares, 25,138,001 shares issued and outstanding at June 30,
2002, and at March 31, 2002...................................... 25,138 25,138
Additional paid-in capital........................................ 44,381,454 44,381,454
Notes receivable from officers.................................... (549,914) (549,914)
Deferred compensation............................................. - (62,893)
Accumulated deficit............................................... (39,146,058) (37,094,424)
Accumulated other comprehensive income............................ 8,589 27,866
------------ ------------
Total stockholders' equity........................................... 4,719,209 6,727,227
------------ ------------
Total liabilities and stockholders' equity........................... $ 6,865,199 $ 9,009,721
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
June 30,
2002 2001
----------------- -----------------
Revenue................................................ $ 960,132 $ 1,933,442
Cost of sales.......................................... 356,505 857,600
----------------- -----------------
Gross margin........................................... 603,627 1,075,842
Research and development expenses................... 235,309 479,784
Selling, general and administration................. 2,136,968 2,155,114
Depreciation and amortization....................... 281,971 471,276
----------------- -----------------
Loss from operations................................... (2,050,621) (2,030,332)
Interest income........................................ 9,534 47,532
Interest expense....................................... (5,246) (9,116)
----------------- -----------------
Loss before income tax expense......................... (2,046,333) (1,991,916)
Income tax expense..................................... 5,301 -
----------------- -----------------
Net loss............................................... $ (2,051,634) $ (1,991,916)
================= =================
PER SHARE DATA
Net loss per share
Basic and diluted................................... $ (0.09) $ (0.11)
Weighted average number of common shares outstanding:
Basic and diluted................................... 22,600,501 18,203,301
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(Unaudited)
Accumulated Notes
Additional Other Receivable Total
Par Paid-in Accumulated Comprehensive from Deferred Stockholders'
Shares Value Capital Deficit Income Officers Compensation Equity
---------- --------- ----------- ------------ ------------- ---------- ------------ -------------
Balance April 1, 2002 25,138,001 $ 25,138 $44,381,454 $(37,094,424) $ 27,866 $ (549,914) $ (62,893) $ 6,727,227
Net loss (2,051,634) (2,051,634)
Deferred compensation 62,893 62,893
Translation adjustments (19,277) (19,277)
---------- --------- ----------- ------------ ------------- ---------- ------------ -------------
Balance June 30, 2002 25,138,001 $ 25,138 $44,381,454 $(39,146,058) $ 8,589 $ (549,914) - $ 4,719,209
========== ========= =========== ============ ============= ========== ============ =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED
JUNE 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................ $ (2,051,634) $ (1,991,916)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................................... 281,095 426,956
Asset impairments and other charges.............................. - 32,699
Noncash stock-based compensation charges......................... 62,893 18,600
Changes in operating assets and liabilities:
Accounts receivable.............................................. 697,968 1,751,387
Other receivables................................................ (12,900) 13,497
Inventory........................................................ (510,857) (506,219)
Prepaid expenses and other current assets........................ 248,333 (253,073)
Other assets..................................................... - 113
Accounts payable and accrued expenses............................ (90,054) (181,592)
Accrued payroll and related liabilities.......................... 12,628 (46,097)
Deferred income.................................................. 21,698 (86,475)
Sales tax payable................................................ (50,865) -
Other current liabilities........................................ 10,322 (2,417)
------------ ------------
Net cash used in operating activities............................... (1,381,373) (824,537)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................. - (27,370)
Capitalized software expenditures................................ (137,750) (62,490)
Related party notes receivable, net of repayments................ - 15,000
------------ ------------
Net cash used in investing activities............................... (137,750) (74,860)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt and capital leases.................... (40,233) (13,445)
------------ ------------
Net cash used in financing activities............................... (40,233) (13,445)
Effects of exchange rates on cash................................... (19,277) (2,813)
------------ ------------
Net decrease in cash................................................ (1,578,633) (915,655)
Cash and cash equivalents, beginning of period...................... 4,050,657 5,230,833
------------ ------------
Cash and cash equivalents, end of period............................ $ 2,472,024 $ 4,315,178
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures and
sells infrastructure security and management products to corporations, service
providers and government agencies. The Company's hardware and software products
are designed to form a secure auditable portal to protect IT and network
infrastructure from internal and external security threats. ION's infrastructure
security solution operates in the IP, data center, telecommunications and
transport, and telephony environments and is sold by a direct sales force and
indirect channel partners mainly throughout North America and Europe.
The condensed consolidated balance sheets as of June 30, 2002 and March 31,
2002, the condensed consolidated statements of operations for the three month
periods ended June 30, 2002 and 2001, the condensed consolidated statements of
cash flows for the three month periods ended June 30, 2002 and 2001 and the
condensed consolidated statement of stockholders' equity for the three month
period ended June 30, 2002, have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only normal
non-material recurring adjustments) necessary for the fair presentation of the
Company's financial position, results of operations and cash flows at June 30,
2002 and 2001 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and notes thereto included in the annual report on Form
10-KSB as amended, for the year ended March 31, 2002.
Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern, which contemplates the realization and
satisfaction of liabilities and commitments in the normal course of business. At
June 30, 2002, we had an accumulated deficit of $39,146,058 and working capital
of $3,098,907. We also realized net losses of $2,051,634 for the three months
ended June 30, 2002. Our existing working capital might not be sufficient to
sustain our operations.
Our plans to overcome this condition includes refocusing our sales efforts to
include penetrating additional markets with our enterprise infrastructure
security products, reducing expenses and raising additional equity capital. We
have restructured and reorganized to reduce our operating expenses by the
elimination of eight employees in July 2002, which reduced the Company's
overhead expenses by approximately $575,000 in annual salaries and employee
benefits. The Company has refocused its sales effort to emphasize the selling of
its software products and reengineered its hardware products in an effort to
increase gross margins. The Company has begun to establish alternate channels
that will open opportunities in the future to sell our
7
products without the overhead expenses associated with direct sales. We can not
assure that our sales efforts or expense reduction programs will be successful,
or that additional financing will be available to us, or, if available, that the
terms will be satisfactory to us. We believe that our working capital as of June
30, 2002 will fund the Company's operations, as currently planned, until January
2003. We believe that a minimum of $2,000,000 in additional capital will be
needed in order to fund the Company's planned operations through June 2003. We
plan to seek equity financing to provide funding for operations but the current
market for equity financing may be weak. If we are not successful in increasing
our revenue, reducing our expenses or raising additional equity capital to
generate sufficient cash flows to meet our obligations as they come due, we may
not be able to continue as a going concern. Our financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or to amounts and classification of liabilities that may
be necessary should we be unable to continue as a going concern.
Certain amounts in the financial statements for the year ended March 31, 2002
have been reclassified to conform to the presentation of the financial
statements for the quarter ended June 30, 2002.
8
NOTE 2 - RESTRICTED CASH:
Due to the expiration of the Company's $1,500,000 line of credit on September
30, 2000, the Company pledged $375,000 on September 7, 2000 as collateral on an
outstanding letter of credit related to the required security deposit for the
Company's Piscataway, New Jersey corporate headquarters facility. On November 9,
2001, the Company entered into an agreement with the landlord for its
Piscataway, NJ facility to amend the Lease Agreement dated February 18, 1999.
The amendment allowed the Company to use $250,000 of its restricted cash from
the letter of credit towards the rent payments for 10 months starting January
2002. On January 10, 2002, the Landlord received the $250,000 from the letter of
credit per the above mentioned lease amendment. The Company agreed to replenish
the letter of credit by November 2003. Accordingly, $125,700, which includes
interest, has been reflected as restricted cash as a noncurrent asset at
June 30, 2002.
NOTE 3 - INVENTORY:
Inventory, net of allowance for obsolescence of $1,018,415 and $1,005,907 at
June 30, 2002 and March 31, 2002, respectively, consists of the following:
June 30, 2002 March 31, 2002
------------- --------------
Raw materials $ 246,170 $ 265,725
Work in process 1,979 2,161
Finished goods 1,286,834 756,240
------------- --------------
Total $ 1,534,983 $ 1,024,126
============= ==============
NOTE 4 - EARNINGS PER SHARE:
The computation of Basic Earnings Per Share is based on the weighted average
number of common shares outstanding for the period. Diluted Earnings Per Share
is based on the weighted average number of common shares outstanding for the
period plus the dilutive effect of common stock equivalents, comprised of
outstanding stock options and warrants.
The following is a reconciliation of the denominator used in the calculation of
basic and diluted earnings per share:
Three Months Three Months
Ended Ended
6/30/02 6/30/01
------------ ------------
Weighted Average No. of Shares Outstanding 22,600,501 18,203,301
Incremental Shares for Common Equivalents 691,040 3,193
------------ ------------
Diluted Shares Outstanding 23,291,541 18,206,494
============ ============
9
The potential incremental common shares above were excluded from the computation
of diluted earnings per share for all periods presented, because their inclusion
would have had an antidilutive effect on earnings per share due to the Company's
net loss for each respective period.
NOTE 5 - COMPREHENSIVE INCOME:
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income". The following table reflects the
reconciliation between net loss per the financial statements and comprehensive
loss.
Three Months Three Months
Ended Ended
6/30/02 6/30/01
-------------- --------------
Net loss $ (2,051,634) $ (1,991,916)
Effect of foreign currency translation (19,277) (2,813)
-------------- --------------
Comprehensive loss $ (2,070,911) $ (1,994,729)
============== ==============
NOTE 6 - INCOME TAXES:
The Company has recorded a full valuation allowance against the federal and
state net operating loss carryforwards and a full valuation allowance against
the foreign net operating loss carryforwards and the research and development
credit because management currently believes that it is more likely than not
that substantially all of the net operating loss carryforwards and credits will
expire unutilized.
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires use of the purchase method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142, which is
effective for the Company beginning April 1, 2002, requires that the
amortization of goodwill and certain other intangible assets cease and that the
related asset values be reviewed annually for impairment. The Company has
adopted SFAS No.141 and SFAS No.142 and as a result there has been no material
impact on its results of operations or financial position related to
implementation of SFAS Nos. 141 and 142.
In July 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for the
amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The Company does not anticipate any
material impact on its results of operations or financial position related to
implementation of SFAS No. 143.
10
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 superceded Statement of Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of," and the accounting and reporting provisions relating to the
disposal of a segment of a business in Accounting Principles Board Opinion No.
30. The Company adopted SFAS No. 144 and as a result there has been no material
impact on the Company's operating results or financial condition related to the
implementation of SFAS No. 144.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" and nullified EITF Issue No. 94-3. SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF No. 94-3 had
recognized the liability at the commitment date to an exit plan. The Company is
required to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. The Company is currently
evaluating the impact of adoption of this statement.
NOTE 8 - RELATED PARTY TRANSACTIONS:
During April 2000, the Company made a loan (the "Loan") to the former Chief
Executive Officer (the "Former CEO") of the Company in the amount of $750,000.
At the time that the Loan was issued to the Former CEO in April 2000, the
Company was contemplating a secondary public offering and potential mergers and
acquisitions opportunities. As a result, the Company did not want the Former CEO
to exercise his stock options. In consideration for not exercising his stock
options at that time, the Company issued the Loan to him. At that time, the
Company had sufficient cash and it was contemplated that the Loan would be
repaid within one year. The Loan accrues interest at a rate of LIBOR plus 1%.
The LIBOR plus one percent interest rate in April 2000 was 7.197% as compared to
the first mortgage interest rate in April 2000 of 6.90% for a 1-year ARM, 7.97%
for a 15-year FRM and 8.30% for a 30-year FRM. This Loan had an original
maturity date of the earlier of April 2005 or thirty days after the Company for
any reason no longer employed the Former CEO.
The Former CEO resigned his position at the Company effective September 29,
2000. On October 5, 2000, the Company entered into an agreement with the Former
CEO pursuant to which the $750,000 promissory note for the Loan was amended to
extend the due date to April 30, 2001, and to provide that interest on the note
shall accrue through September 29, 2000 (the "Seperation and Forebearance
Agreement"). The Loan is collateralized by a first mortgage interest on the
personal residence of the Former CEO. The Company agreed to extend the repayment
date of the Loan so that the Former CEO would be able to repay the Loan to the
Company by selling his personal residence. In addition to the Loan, pursuant to
the terms of the Seperation and Forebearance Agreement between the Company and
the Former CEO, the Former CEO also agreed to reimburse the Company for certain
expenses totaling $200,000, to be paid over a period of six months ending March
31, 2001. These certain expenses were incurred by the Former CEO as part of his
personal expense account arrangement with the Company. During the year ended
March 31, 2001, $50,000 of the amounts owed to the Company by the Former CEO was
repaid and $22,000 has been recorded as a non-cash offset as a result of earned
but unpaid vacation owed to the Former CEO. During the year ended March 31,
2002, $813,593 was repaid which included proceeds in the amount of $777,713
received by the Company on August 3, 2001 for the sale of the Former CEO's
personal residence. At June 30, 2002, the total
11
amount owed to the Company by the Former CEO was approximately $148,605, which
includes interest accrued through June 30, 2002. Of this amount approximately
$64,948 has been recorded as a reserve against the note receivable. The net
balance of $83,657 is classified as a related party notes receivable on the
Company's consolidated balance sheet. Because the amounts were not paid by their
respective maturity dates, interest is accruing at the default interest rate of
12%.
The Company entered into a definitive Sublease Agreement with Multipoint
Communications, LLC (the "Tenant") on April 17, 2002 to sublease approximately
5,400 square feet of its facility for a period of 24 months. The rental rate and
the other material terms of the lease with Multipoint Communications, LLC
("Multipoint") were negotiated through a real estate broker and separate
attorneys representing each party. The rental rate was established by prorating
the amount of space leased by Multipoint by the current rent paid by the Company
to its landlord. Given the current real estate market condition in the area, the
Company believes that the terms of the lease with Multipoint are comparable to
terms of leases that might have been obtained from a non-affiliate. The rent
will be $5,200 per month for the first nine months and $10,400 per month for the
last fifteen months, but with a 100% abatement for the first three months. As
part of the rental payment the Tenant was to be issued shares totaling the value
of $77,400, which shall be based on the per share price of the Tenant's common
stock as priced in the first round of institutional financing (the "Financing")
which was intended to close on or before June 30, 2002. These shares shall have
the registration rights as other shares issued in the Financing. The Financing
did not close by June 30, 2002, consequently, the Tenant shall pay the Company
additional rent in the amount of $4,300 per month commencing on July 1, 2002. At
June 30, 2002, future minimum lease payments due from the Tenant are
approximately $249,000. The Chairman of the Board of Directors of the Company
currently serves as the Chief Financial Officer of the Tenant.
NOTE 9 - EQUITY:
Effective October 2001, the Company approved and granted 2,900,000 shares of
restricted stock to three executives at fair value. The restricted shares are
subject to a repurchase right which will permit the Company to repurchase any
shares which have not yet vested at the effective date of termination of the
officers' employment, as defined in their employment agreements, for an amount
equal to the purchase price per share paid by the officers. The Company received
a series of full recourse interest bearing promissory notes for the value of the
shares to be repaid by the officers. The notes are to be repaid by the officers
at the earlier of ten years or the date upon which the employees dispose of
their shares. The issuance of the restricted shares and the notes receivable due
from the officers is recorded in the Company's financial statements. Only the
vested portion of the shares has been included in the weighted average number of
common shares outstanding at June 30, 2002.
12
NOTE 10 - SUBSEQUENT EVENTS:
In July 2002 the Company announced the elimination of eight positions in order
to reduce operating expenses. The Company expects that the elimination of these
eight positions will result in a charge in the second quarter of approximately
$125,000 in severance and other employee related matters. As a result, the
Company will reduce its annual overhead expenses by approximately $575,000 in
salaries and employee benefits (approximately $48,000 per month).
On August 5, 2002, the Company received a letter from Nasdaq approving its
transfer from the Nasdaq National Market to the Nasdaq SmallCap Market,
effective as of the opening of business on August 7, 2002. See also revised risk
factor, "Our Common Stock may be delisted from Nasdaq", in Item 2. Management's
Discussion and Analysis below.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
A number of statements contained in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable statements. These
risks and uncertainties include, but are not limited to, those described in the
Company's filings with the Securities and Exchange Commission included in its
annual report Form 10-KSB, as amended, for the fiscal year ended March 31, 2002.
Subsequent to the filing of our Form 10-KSB, as amended, for the fiscal year
ended March 31, 2002, we hereby amended the risk factor, "Our Common Stock may
be delisted from Nasdaq" with the following:
Our Common Stock may be delisted from Nasdaq.
The National Association of Securities Dealers, Inc. has established certain
standards for the continued listing of a security on the Nasdaq National Market
and the Nasdaq SmallCap Market. The standards for continued listing on either
market require, among other things, that the minimum bid price for the listed
securities be at least $1.00 per share. A deficiency in the bid price
maintenance standard will be deemed to exist if the issuer fails the stated
requirement for thirty consecutive trading days, with a 90-day grace period,
with respect to the Nasdaq National Market, and a 180-day grace period with
respect to the Nasdaq SmallCap Market. Our Common Stock has traded below $1.00
since January 29, 2002, and on March 13, 2002, we received notice from Nasdaq
stating that our Common Stock has not met the Nasdaq National Market's $1.00
continuing listing standard for a period of 30 consecutive trading days. While
our Common Stock continues to be traded on the Nasdaq National Market, we
applied (within 90 days of the date of deficiency notice) for a transfer to the
Nasdaq SmallCap Market in order to take advantage of the longer 180-day grace
period. On August 5, 2002, we received a letter from Nasdaq approving the
transfer of the Company's securities from the Nasdaq National Market to the
Nasdaq SmallCap Market, effective as of the opening of business on August 7,
2002. The Nasdaq SmallCap Market requires that the Company's securities close at
$1.00 per share or more for a minimum of 10 consecutive trading days. If the
price deficiency is cured during the 180-day grace period provided by the Nasdaq
SmallCap Market by September 9, 2002, and we otherwise continue to comply with
the Nasdaq National Market maintenance standards, we could then transfer back to
the Nasdaq National Market. If we cannot demonstrate compliance with the
13
Nasdaq SmallCap Market minimum bid price requirement by the end of the 180-day
grace period, the Company may be eligible for an additional 180-day grace
period, if we demonstrate compliance with the initial listing criteria for the
Nasdaq SmallCap Market. As of the date of this filing, the Company is currently
not eligible for this additional 180-day grace period, as it is not in
compliance with the initial listing criteria for the Nasdaq SmallCap Market.
There can be no assurance that we will satisfy the requirements for maintaining
a Nasdaq National Market or SmallCap listing. If our Common Stock were to be
excluded from Nasdaq, the prices of our Common Stock and the ability of holders
to sell such stock would be adversely affected, and we would be required to
comply with the initial listing requirements to be relisted on Nasdaq.
OVERVIEW
ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures
and sells infrastructure security and management products to corporations,
service providers and government agencies. The Company's hardware and software
products are designed to form a secure auditable portal to protect IT and
network infrastructure from internal and external security threats. ION's
infrastructure security solution operates in the IP, data center,
telecommunications and transport, and telephony environments and is sold by a
direct sales force and indirect channel partners mainly throughout North America
and Europe.
As organizations become more interconnected and dependent on networks such
as the Internet, they are increasingly being exposed to a widening range of
cyber-threats. These attacks occur despite the wide spread deployment of
information security technologies, suggesting that it is not sufficient to only
protect the electronic perimeter of an organization. With the most damaging
security breaches increasingly appearing within the boundaries of organizations,
Infrastructure Security has become one of the newest components of electronic
security strategies. Infrastructure Security focuses on protecting the critical
infrastructure devices that support the transfer, storage, and processing of
business applications and information. Infrastructure security also provides a
method by which the tools used to manage these devices, and the administrators
who keep these devices running smoothly, are protected against the threat of
attack from the outside.
The ION Secure (TM) product suite provides ION customers with comprehensive
infrastructure security including secure access, authentication, authorization,
audit and administrative functions that we believe form a highly scalable,
robust, reliable, easy-to-use and cost-effective secure management portal. ION
solutions include ION Secure PRIISMS centralized management software, 3000 and
5000 series security appliances, and 500 series security tokens. These solutions
are based on ION proprietary software and hardware developed and maintained by
the Company. ION infrastructure security solutions use the same single-purpose
embedded ION Secure Operating System (ISOS) software on all security appliance
models, with the goal of simplifying the management of thousands of IT and
telecommunications infrastructure devices such as servers, routers, LAN
switches, PBXs, messaging systems and multiplexers. ION solutions are designed
to enable administrators to securely configure, troubleshoot and manage
geographically dispersed infrastructure devices from central operations centers,
reducing costly on-site visits, service disruptions and skilled personnel
requirements. ION infrastructure security solutions can be used in a variety of
networks including TCP/IP-data, PBX-telephony, telecommunications and data
centers ranging in size from one to thousands of infrastructure devices. ION
solutions are designed to be fully compatible with information security
solutions offered by, among others, Cisco, Checkpoint and Nortel Networks.
14
ION's infrastructure security solutions are distributed via three distinct
channels: (i) a direct sales force, (ii) indirect channels, such as Value Added
Resellers (VARs) and (iii) Original Equipment Manufacturers (OEMs). Services
revenue is typically generated from integration and maintenance services in
conjunction with the sale of ION solutions.
The Company is a Delaware corporation founded in 1999 through the
combination of two companies - MicroFrame ("MicroFrame"), a New Jersey
Corporation (the predecessor entity to the Company, originally founded in 1982),
and SolCom Systems Limited ("SolCom"), a Scottish corporation located in
Livingston, Scotland (originally founded in 1994). From the time of the merger
in 1999 through the third quarter of fiscal 2002, the Company's principal
objective was to address the need for security based network management
solutions, primarily for the PBX-based telecommunications market, resulting in a
significant portion of our revenues being generated from sales to various
telecommunications companies. During the last twelve to eighteen months, the
telecommunications industry has endured a significant economic downturn.
Telecommunications service providers have typically reduced planned capital
spending, have reduced staff, and sought bankruptcy proceedings and/or ceased
operations. Consequently, the spending cutback of the organizations has affected
the Company through reduced product orders. The decline in product orders
negatively impacted our revenues, resulting in significant operating losses and
negative cash flows. As a result, it is imperative for us to be successful in
increasing our revenue, reducing costs, and/or securing additional funding in
fiscal 2003 in order to continue operating as a going concern.
15
RESULTS OF OPERATIONS
For the three months ended June 30, 2002 compared to the same period in 2001
Revenue for the three months ended June 30, 2002, was $960,132 compared to
revenue of $1,933,442 for the same period in 2001, a decrease of $973,310 or
50.3%. The decrease in revenue was primarily attributable to the weakness of
capital and IT spending specifically in the telecommunications service provider
sector. The continued economic slowdown has caused corporations to freeze
capital spending, resulting in prolonged sales cycles.
Cost of sales for the three months ended June 30, 2002 was $356,505 compared to
$857,600 for the same period in 2001 primarily due to a decrease in revenue.
Gross margin as a percentage of revenue for the three months ended June 30, 2002
increased from 55.6% to 62.9% for the same period in 2001 due to reduction of
our fixed manufacturing costs from the prior year and increase to our prices.
Research and development ("R&D") expense, net of capitalized software
development, for the three months ended June 30, 2002 was $235,309 compared to
$479,784 for the same period in 2001, a decrease of $244,475 or 51.0%. The
decrease in R&D expense was primarily the result of a decrease in spending for
third party consultants.
Selling, general and administrative expenses ("SG&A") for the three months ended
June 30, 2002 was $2,136,968 compared to $2,155,114 for the same period in 2001,
a decrease of $18,146 or 0.8%. The SG&A expense was relatively flat from the
prior year. Although there was a headcount and corresponding expense reduction
in October 2001, the expenses have since increased in the quarter ending June
30, 2002 primarily due to an increase in sales, marketing and other
professionals engaged to further ION's new product and service focus.
Depreciation and amortization expenses - amortization of capitalized software,
goodwill and other acquisition related intangibles, and depreciation on
equipment, furniture and fixtures - was $281,971 for the three months ended June
30, 2002 compared to $471,276 in the same period in 2001, a decrease of $189,305
or 40.2%. The decrease was primarily the result of the three-year amortization
period for the acquisitions of LeeMAH and Solcom Systems, Ltd coming to an end
on March 31, 2002.
Net loss for the three months ended June 30, 2002 was $2,051,634 compared to a
loss of $1,991,916 for the same period in 2001. This represents only a minor
increase from last year despite the reduction in revenue of this current
quarter. This is attributable to reduced operating expenses and improved gross
margins as a percentage of revenue.
16
FINANCIAL CONDITION AND CAPITAL RESOURCES
The Company's working capital balance as of June 30, 2002 was $3,098,907 as
compared to $5,040,922 at March 31, 2002. This decline in working capital was
due to continued operating losses generated throughout the three months ended
June 30, 2002. We believe that our working capital as of June 30, 2002 will fund
the Company's operations, as currently planned, until January 2003. We believe
that a minimum of $2,000,000 in additional capital will be needed in order to
fund the Company's planned operations through June 2003. We plan to seek equity
financing to provide funding for operations but the current market for equity
financing may be weak. If we are not successful in raising additional equity
capital to generate sufficient cash flows to meet our obligations as they come
due, we plan to continue to reduce our overhead expenses by the reduction of
headcount and other available measures. We may also explore the possibility of
mergers and acquisitions. If we are not successful in increasing our revenue,
reducing our expenses or raising additional equity capital to generate
sufficient cash flows to meet our obligations as they come due, we may not be
able to continue as a going concern.
Net cash used in operating activities during the three months ended
June 30, 2002 was $1,381,373 compared to net cash used during the same period in
2001 of $824,537. The increase in net cash used during the three months ended
June 30, 2002 compared to the same period in 2001, was primarily due to lower
than expected revenues. The $1,381,373 net cash used in operating activities
primarily consisted of the build-up of inventory due to lower than expected
revenues, the payment of accounts payable, and the net loss incurred during the
quarter.
Net cash used in investing activities during the three months ended June 30,
2002 was $137,750 compared to net cash used during the same period in 2001 of
$74,860. This increase was primarily due to additional capitalized software.
Net cash used in financing activities during the three months ended June 30,
2002 was $40,233 compared to net cash used during the same period in 2001 of
$13,445. This increase was primarily due to principal payment on long-term debt
and capital leases.
Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern, which contemplates the realization and
satisfaction of liabilities and commitments in the normal course of business. At
June 30, 2002, we had an accumulated deficit of $39,146,058 and working capital
of $3,098,907. We also realized net losses of $2,051,634 for the three months
ended June 30, 2002. Our existing working capital might not be sufficient to
sustain our operations.
Our plans to overcome this condition includes refocusing our sales efforts to
include penetrating additional markets with our enterprise infrastructure
security products, reducing expenses and raising additional equity capital. We
have restructured and reorganized to reduce our operating expenses by the
elimination of eight employees in July 2002, which reduced the Company's
overhead expenses by approximately $575,000 in annual salaries and employee
benefits. The Company has refocused its sales effort to emphasize the selling of
its software products and reengineered its hardware products in an effort to
increase gross margins. The Company has begun to establish alternate channels
that will open opportunities in the future to sell our products without the
overhead expenses associated with direct sales. We can not assure that our sales
efforts or expense reduction programs will be successful, or that additional
financing will be available to us, or, if available, that the terms will be
satisfactory to us. If we are not
17
successful in increasing our revenue, reducing our expenses or raising
additional equity capital, to generate sufficient cash flows to meet our
obligations as they come due, we may not be able to continue as a going concern.
Our financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary should we be unable to
continue as a going concern
SIGNIFICANT ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below.
Revenue Recognition - The Company recognizes revenue from product sales to end
users, value-added resellers (VARs) and original equipment manufacturers (OEMs)
upon shipment if no significant vendor obligations exist and collectibility is
probable. We do not offer our customers the right to return products, however
the Company records warranty costs at the time revenue is recognized. Management
estimates the anticipated warranty costs but actual results could differ from
those estimates. Maintenance contracts are sold separately and maintenance
revenue is recognized on a straight-line basis over the period the service is
provided, generally one year.
Allowance for Doubtful Accounts Receivable - Accounts receivable are reduced by
an allowance to estimate the amount that will actually be collected from our
customers. Many of our customers have been adversely affected by economic
downturn in the telecommunications industry. If the financial condition of our
customers were to materially deteriorate, resulting in an impairment of their
ability to make payments, additional allowances could be required.
Inventory Obsolescence Reserves - Inventories are stated at the lower of cost
(average cost) or market. Reserves for slow moving and obsolete inventories are
provided based on historical experience and current product demand. If our
estimate of future demand is not correct or if our customers place significant
order cancellations, inventory reserves could increase from our estimate. We may
also receive orders for inventory that has been fully or partially reserved. To
the extent that the sale of reserved inventory has a material impact on our
financial results, we will appropriately disclose such effects. Our inventory
carrying costs are not material; thus we may not physically dispose of reserved
inventory immediately.
Impairment of Software Development and Purchased Software Costs - The Company
capitalizes computer software development costs in accordance with the
provisions of Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86"). SFAS 86 requires that the Company capitalize computer software
development costs upon the establishment of the technological
18
feasibility of a product, to the extent that such costs are expected to be
recovered through future sales of the product. Management is required to use
professional judgment in determining whether development costs meet the criteria
for immediate expense or capitalization. These costs are amortized by the
greater of the amount computed using (i) the ratio that current gross revenues
from the sales of software bear to the total of current and anticipated future
gross revenues from the sales of that software, or (ii) the straight-line method
over the estimated useful life of the product. As a result, the carrying amount
of the capitalized software costs may be reduced materially in the near term.
We record impairment losses on capitalized software and other long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow estimates
are based on historical results adjusted to reflect our best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires use of the purchase method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142, which is
effective for the Company beginning April 1, 2002, requires that the
amortization of goodwill and certain other intangible assets cease and that the
related asset values be reviewed annually for impairment. The Company has
adopted SFAS No. 141 and SFAS No. 142 and as a result there has been no material
impact on its results of operations or financial position related to
implementation of SFAS Nos. 141 and 142.
In July 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for the
amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The Company does not anticipate any
material impact on its results of operations or financial position related to
implementation of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 superceded Statement of Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of," and the accounting and reporting provisions relating to the
disposal of a segment of a business in Accounting Principles Board Opinion No.
30. The Company adopted SFAS No. 144 and as a result there has been no material
impact on the Company's operating results or financial condition related to the
implementation of SFAS No. 144.
19
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" and nullified EITF Issue No. 94-3. SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF No. 94-3 had
recognized the liability at the commitment date to an exit plan. The Company is
required to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. The Company is currently
evaluating the impact of adoption of this statement.
20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
No. Description
------- -----------
3.1 Certificate of Incorporation of the Company, as filed with
the Secretary of State of the State of Delaware on August 5,
1998./(1)/
3.2 Certificate of Amendment of the Certificate of
Incorporation, as filed with the Secretary of State of the
State of Delaware on December 11, 1998./(1)/
3.3 Certificate of Amendment of the Certificate of
Incorporation, as filed with the Secretary of state of the
State of Delaware an October 12, 1999./(2)/
3.4 By-Laws of the Company./(1)/
3.5 Form of Specimen Common Stock Certificate of the
Company./(3)/
4.1 1998 Stock Option Plan of the Company./(1)/
4.2 1998 U.K. Sub-Plan of the Company, as amended./(1)/
10.1 Lease Agreement dated February 18, 1999 by and between the
Company and Washington Plaza Associates, L.P., as landlord.
/(3)/
10.2 Business Park Gross Lease dated May 17, 1999 by and between
the Company and Bedford Property Investors, Inc./(3)/
10.3 Supply Agreement dated October 20, 1998 by and between the
Company and Lucent Technologies. (Incorporated by reference
to the Company's Annual Report on form 10-KSB for the fiscal
year ended March 31, 1999)./(3)/
10.4 OEM Purchase Agreement dated April 13, 1999 by and between
the Company and the Hewlett-Packard Company./(3)/
10.5 Agreement dated as of December 19, 1994 by and between
LeeMAH DataCom Security Corporation and Siemens Rolm
Communications Inc./(3)/
21
Exhibit
No. Description
------- -----------
10.6 Equipment Lease Agreements dated June 10, 1999 and May 5,
1999 by and between the Company and Siemens Credit
Corporation. (Incorporated by reference to the Company's
Annual Report on form 10-KSB for the fiscal year ended March
31, 1999)./(3)/
10.7 Equipment Lease Agreement dated June 17, 1999 by and between
the Company and Lucent Technologies./(3)/
10.8 (i) Non-negotiable Promissory Note in the principal
amount of $750,000 issued by Stephen B. Gray to the
Company./(4)/
(ii) First Amendment to Promissory Note dated as of
August 5, 2000 by and between the Company and Stephen B.
Gray./(4)/
10.9 Line of Credit Agreement with United Nations Bank dated
September 30, 1999./(4)/
10.10 Asset Purchase Agreement dated as of February 25, 1999 by
and among the Registrant, LeeMAH and the Parent./(5)/
10.11 Assignment of Patents of LeeMAH dated February 25,
1999./(5)/
10.12 Assignment of Trademarks of LeeMAH dated February 25,
1999./(5)/
10.13 (i) Separation and Forebearance Agreement made as of October
5, 2000 between the Company and Stephen B. Gray./(6)/
(ii)Promissory Note in the amount of $163,000 dated October
5, 2000 made by Stephen B. Gray to the Company./(6)/
10.14 Consulting Agreement entered into September 18, 2000 between
the Company and Venture Consulting Group, Inc./(6)/
10.15 Materials and Services Contract dated January 16, 2001,
between the Company and SBC Services, Inc./(7)/
10.16 Stock Purchase Agreement dated August 11, 2000 by and
between the Company and the parties identified therein./(7)/
10.17 Form of Warrant Agreement dated July 17, 2001./12/
10.18 Form of Warrant Agreement dated January 4, 2002./12/
10.19 Form of Non-Qualified Stock Option Agreement dated March 19,
1999 by and between the Company's predecessor, Microframe,
Inc. and its consultants./12/
10.20 Form of Non-Employee Director Stock Option Contract dated
March 10, 1998 between the Company's predecessor,
Microframe, Inc. and its non-employee directors./12/
10.21 Form of Non-Employee Director Stock Option Contract dated
September 17, 1997 by and between the Company's predecessor,
Microframe, Inc. and its non-employee directors./12/
22
Exhibit
No. Description
------- -----------
10.22 Form of Non-Qualified Stock Option Agreement dated September
25, 1996 by and between the Company's predecessor,
Microframe, Inc. and its employees./12/
10.23 Amended and Restated Non-Qualified Stock Option Agreement
dated May 19, 1997 by and between the Company's predecessor,
Microframe, Inc. and its employees./(8)/
10.24 Employment Agreement dated October 4, 2001 between the
Company and Kam Saifi./10/
10.25 Employment Agreement dated October 17, 2001 between the
Company and Cameron Saifi./11/
10.26 Employment Agreement dated October 17, 2001 between the
Company and David Arbeitel./11/
10.27 Sublease Agreement dated April 17, 2002 between the Company
and Multipoint Communications, LLC./13/
10.28 Employment Agreement dated May 20, 2002 between the Company
and Ted Kaminer.*
16.1 Letter dated June 28, 2001, from PricewaterhouseCoopers LLP
to the Securities and Exchange Commission./(9)/
21.1 List of Subsidiaries./13/
----------
(1) Incorporated by Reference to the Company's Registration Statement on Form
S-8 filed on April 22, 1999.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on March 17, 2000.
(3) Incorporated by reference to the Company's Annual Report on form 10-KSB
for the fiscal year ended March 31, 1999.
(4) Incorporated by reference to the Company's Annual Report on form 10-KSB
filed on June 28, 2000.
(5) Incorporated by Reference to the Company's Current Report on Form 8-K
filed on March 12, 1999.
(6) Incorporated by reference to the Company's quarterly report on Form 10-QSB
filed on November 14, 2000.
(7) Incorporated by reference to the Company's annual report on form 10-KSB
filed on June 29, 2001.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on November 17, 2000.
(9) Incorporated by reference to the Company's annual report on form 10-KSB
filed on June 29, 2001.
(10) Incorporated by Reference to the Company's Current Report on Form 8-K
filed on October 23, 2001.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K
filed on October 24, 2001.
(12) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 2002, as filed on July 1, 2002.
23
(13) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A,
Amendment No.2, for the fiscal year ended March 31, 2002, as filed on August 2,
2002.
* Filed herewith.
(b) Reports on Form 8-K:
On April 22, 2002, the Company filed a report on Form 8-K reporting the
issuance of a press release announcing unaudited preliminary results for the
fourth quarter ended March 31, 2002.
On May 30, 2002, the Company filed a report on Form 8-K reporting the
issuance of a press release announcing the results for the fourth quarter ended
March 31, 2002.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 14, 2002
ION NETWORKS, INC.
/s/ Kam Saifi
------------------------------------------
Kam Saifi, Chief Executive Officer and President
/s/ Ted Kaminer
------------------------------------------
Ted Kaminer, Chief Financial Officer
25
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
3.1 Certificate of Incorporation of the Company, as filed with
the Secretary of State of the State of Delaware on August 5,
1998./(1)/
3.2 Certificate of Amendment of the Certificate of
Incorporation, as filed with the Secretary of State of the
State of Delaware on December 11, 1998./(1)/
3.3 Certificate of Amendment of the Certificate of
Incorporation, as filed with the Secretary of state of the
State of Delaware an October 12, 1999./(2)/
3.4 By-Laws of the Company./(1)/
3.5 Form of Specimen Common Stock Certificate of the
Company./(3)/
4.1 1998 Stock Option Plan of the Company./(1)/
4.2 1998 U.K. Sub-Plan of the Company, as amended./(1)/
10.1 Lease Agreement dated February 18, 1999 by and between the
Company and Washington Plaza Associates, L.P., as landlord.
/(3)/
10.2 Business Park Gross Lease dated May 17, 1999 by and between
the Company and Bedford Property Investors, Inc./(3)/
10.3 Supply Agreement dated October 20, 1998 by and between the
Company and Lucent Technologies. (Incorporated by reference
to the Company's Annual Report on form 10-KSB for the fiscal
year ended March 31, 1999)./(3)/
10.4 OEM Purchase Agreement dated April 13, 1999 by and between
the Company and the Hewlett-Packard Company./(3)/
10.5 Agreement dated as of December 19, 1994 by and between
LeeMAH DataCom Security Corporation and Siemens Rolm
Communications Inc./(3)/
26
Exhibit
No. Description
------- -----------
10.6 Equipment Lease Agreements dated June 10, 1999 and May 5,
1999 by and between the Company and Siemens Credit
Corporation. (Incorporated by reference to the Company's
Annual Report on form 10-KSB for the fiscal year ended March
31, 1999)./(3)/
10.7 Equipment Lease Agreement dated June 17, 1999 by and between
the Company and Lucent Technologies./(3)/
10.8 (i) Non-negotiable Promissory Note in the principal
amount of $750,000 issued by Stephen B. Gray to the
Company./(4)/
(ii) First Amendment to Promissory Note dated as of
August 5, 2000 by and between the Company and Stephen B.
Gray./(4)/
10.9 Line of Credit Agreement with United Nations Bank dated
September 30, 1999./(4)/
10.10 Asset Purchase Agreement dated as of February 25, 1999 by
and among the Registrant, LeeMAH and the Parent./(5)/
10.11 Assignment of Patents of LeeMAH dated February 25,
1999./(5)/
10.12 Assignment of Trademarks of LeeMAH dated February 25, 1999.
/(5)/
10.13 (i) Separation and Forebearance Agreement made as of October
5, 2000 between the Company and Stephen B. Gray./(6)/
(ii)Promissory Note in the amount of $163,000 dated October
5, 2000 made by Stephen B. Gray to the Company./(6)/
10.14 Consulting Agreement entered into September 18, 2000 between
the Company and Venture Consulting Group, Inc./(6)/
10.15 Materials and Services Contract dated January 16, 2001,
between the Company and SBC Services, Inc./(7)/
10.16 Stock Purchase Agreement dated August 11, 2000 by and
between the Company and the parties identified therein./(7)/
10.17 Form of Warrant Agreement dated July 17, 2001./12/
10.18 Form of Warrant Agreement dated January 4, 2002./12/
10.19 Form of Non-Qualified Stock Option Agreement dated March 19,
1999 by and between the Company's predecessor, Microframe,
Inc. and its consultants./12/
10.20 Form of Non-Employee Director Stock Option Contract dated
March 10, 1998 between the Company's predecessor,
Microframe, Inc. and its non-employee directors./12/
10.21 Form of Non-Employee Director Stock Option Contract dated
September 17, 1997 by and between the Company's predecessor,
27
Microphone, Inc, and its non-employee directors./12/
Exhibit
No. Description
------- -----------
10.22 Form of Non-Qualified Stock Option Agreement dated September
25, 1996 by and between the Company's predecessor,
Microframe, Inc. and its employees./12/
10.23 Amended and Restated Non-Qualified Stock Option Agreement
dated May 19, 1997 by and between the Company's predecessor,
Microframe, Inc. and its employees./(8)/
10.24 Employment Agreement dated October 4, 2001 between the
Company and Kam Saifi./10/
10.25 Employment Agreement dated October 17, 2001 between the
Company and Cameron Saifi./11/
10.26 Employment Agreement dated October 17, 2001 between the
Company and David Arbeitel./11/
10.27 Sublease Agreement dated April 17, 2002 between the Company
and Multipoint Communications, LLC./13/
10.28 Employment Agreement dated May 20, 2002 between the Company
and Ted Kaminer.*
16.1 Letter dated June 28, 2001, from PricewaterhouseCoopers LLP
to the Securities and Exchange Commission./(9)/
21.2 List of Subsidiaries./13/
----------
(1) Incorporated by Reference to the Company's Registration Statement on Form
S-8 filed on April 22, 1999.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on March 17, 2000.
(3) Incorporated by reference to the Company's Annual Report on form 10-KSB
for the fiscal year ended March 31, 1999.
(4) Incorporated by reference to the Company's Annual Report on form 10-KSB
filed on June 28, 2000.
(5) Incorporated by Reference to the Company's Current Report on Form 8-K
filed on March 12, 1999.
(6) Incorporated by reference to the Company's quarterly report on Form 10-QSB
filed on November 14, 2000.
(7) Incorporated by reference to the Company's annual report on form 10-KSB
filed on June 29, 2001.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on November 17, 2000.
(9) Incorporated by reference to the Company's annual report on form 10-KSB
filed on June 29, 2001.
(10) Incorporated by Reference to the Company's Current Report on Form 8-K
filed on October 23, 2001.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K
filed on October 24, 2001.
28
(12) Incorporated by reference to the Company's Annual Report on Form 10-KSB,
as amended, for the fiscal year ended March 31, 2002.
(13) Incorporated by reference to the Company's Annual Report on Form
10-KSB/A, Amendment No.2, for the fiscal year ended March 31, 2002, as filed on
August 2, 2002.
* Filed herewith.
29