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, 2003
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)
120 Corporate Boulevard, South Plainfield, NJ 07080
---------------------------------------------------
(Address of Principal Executive Offices)
(908) 546-3900
--------------
(Issuer's telephone number, including area code)
1551 South Washington Ave., Piscataway, NJ 08854
------------------------------------------------
(Former address of Principal Executive Offices)
There were 24,875,500 shares of Common Stock outstanding as of September 12,
2003.
Transitional Small Business Disclosure Format:
Yes___ No X
ION NETWORKS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2003
PART I. FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Information 2
Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Operations for the Three and Six Months ended June 30, 2003 and 2002 (Unaudited) 4
Consolidated Statement of Stockholders' Equity for the Six Months ended June 30, 2003 (Unaudited)
and for the Nine Months ended December 31, 2002 5
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2003 (Unaudited) and 2002 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 15
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 25
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL INFORMATION
The 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 financial statements be read in conjunction with the audited
financial statements and the notes thereto included in the registrant's
Transition Report on Form 10-KSB for the nine months ended December 31, 2002.
2
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
Assets (Unaudited)
-------------- -------------
Current assets
Cash and cash equivalents $ 93,546 $ 865,684
Accounts receivable, less allowance for doubtful accounts of
$90,774, and $90,521, respectively 572,582 561,762
Inventory, net 1,021,697 1,259,268
Prepaid expenses and other current assets 46,566 203,934
-------------- -------------
Total current assets 1,734,391 2,890,648
Restricted cash - 125,700
Property and equipment, net 164,996 485,735
Capitalized software, less accumulated amortization of $4,012,306 and
$3,920,223, respectively 590,926 764,429
Other assets 9,168 14,878
-------------- -------------
Total assets $ 2,499,481 $ 4,281,390
============== =============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of capital leases $ 91,055 $ 87,057
Current portion of long-term debt - 4,004
Accounts payable 930,978 1,195,023
Accrued expenses 524,649 906,154
Accrued payroll and related liabilities 89,715 185,358
Deferred income 139,684 155,021
Sales tax payable 70,814 84,025
Other current liabilities 59,746 89,317
-------------- -------------
Total current liabilities
1,906,641 2,705,959
-------------- -------------
Long term portion of capital leases 27,002 73,551
Long term debt, net of current portion - 5,717
Commitments and contingencies (Note 10)
Stockholders' Equity
Preferred stock - par value $.001 per share; authorized 1,000,000 shares
at
June 30, 2003, and December 31, 2002; 200,000 shares designated
Series A at June 30, 2003 and December 31, 2002; 166,835 shares
issued
and outstanding at June 30, 2003 and December 31, 2002 167 167
Common stock - par value $.001 per share; authorized 50,000,000 shares at
June 30, 2003 and December 31, 2002; 24,875,500 shares issued and
outstanding at June 30, 2003 and December 31, 2002 24,876 24,876
Additional paid-in capital 44,585,740 44,680,740
Notes receivable from officers (482,342) (473,405)
Accumulated deficit (43,549,225) (42,722,946)
Accumulated other comprehensive loss (13,378) (13,269)
-------------- -------------
Total stockholders' equity 565,838 1,496,163
-------------- -------------
Total liabilities and stockholders' equity $ 2,499,481 $ 4,281,390
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Six Months Six Months,
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
-------------- -------------- ---------------- -----------------
Net sales $ 874,200 $ 960,132 $ 1,639,319 $ 3,036,329
Cost of sales 230,851 356,505 474,839 1,317,590
-------------- -------------- ---------------- -----------------
Gross Margin 643,349 603,627 1,164,480 1,718,739
-------------- -------------- ---------------- -----------------
Research and development expenses 124,356 235,309 261,755 406,425
Selling, general and administrative expenses 579,668 2,136,968 1,482,205 3,852,003
Restructuring, asset impairment and
other charges (315,841) - (192,331) -
Depreciation and amortization expenses 205,657 281,971 440,428 720,391
-------------- -------------- ---------------- -----------------
Total operating expense 593,840 2,654,248 1,992,057 4,978,819
-------------- -------------- ---------------- -----------------
Income(Loss) from operations 49,509 (2,050,621) (827,577) (3,260,080)
Interest income 1,782 9,534 11,326 32,458
Interest expense (2,659) (5,246) (10,028) (11,893)
-------------- -------------- ---------------- -----------------
Income(Loss) before income taxes 48,632 (2,046,333) (826,279) (3,239,515)
Income tax expense - 5,301 - 29,665
-------------- -------------- ---------------- -----------------
Net Income(loss) $ 48,632 $ (2,051,634) $ (826,279) $ (3,269,180)
============== ============== ================ =================
Per share data
Net income(loss) per share
Basic $ 0.00 $ (0.09) $ (0.03) $ (0.14)
Diluted $ 0.00 $ (0.09) $ (0.03) $ (0.14)
Weighted average number of common shares
outstanding
Basic 23,902,643 22,600,501 23,902,643 22,600,501
Diluted 25,570,993 22,600,501 23,902,643 22,600,501
The accompanying notes are an integral part of these consolidated financial
statements.
4
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003 (Unaudited)
AND NINE MONTHS ENDED DECEMBER 31, 2002
Accumulated
Additional Other
Paid-In Accumulated Comprehensive
Preferred Common Capital Deficit Loss
--------------------- --------------------------- ------------ ------------ -------------
Shares Stock Shares Stock
-------- --------- ------------ ----------- ------------ ------------ -------------
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 (826,279)
Translation adjustments (109)
Total comprehensive loss
Notes Receivable from
officers
Non-cash stock-based
compensation (95,000)
-------- --------- ------------ ----------- ------------ ------------ -------------
Balance, June 30, 2003 166,835 $ 167 24,875,500 $ 24,876 $44,585,740 $(43,549,225) $ (13,378)
======== ========= ============ =========== ============ ============ =============
5
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003 (Unaudited)
AND NINE MONTHS ENDED DECEMBER 31, 2002
Notes Total
Receivable Deferred Stockholders'
from 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 (826,279)
Translation adjustments (109)
------------------
Total comprehensive loss (826,388)
Notes Receivable from
officers (8,937) (8,937)
Non-cash stock-based
compensation (95,000)
-------------- ------------------ ------------------
Balance, June 30, 2003 $ (482,342) - $ 565,838
============== ================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
6
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six For the Six
Months Ended Months Ended June
June 30, 30,
2003 2002
------------------ -----------------
Cash flows from operating activities
Net loss $ (826,279) $(3,269,180)
Adjustments to reconcile net loss to net cash used in
operating activities:
Restructuring, asset impairments and other charges,
non-cash (192,331) -
Depreciation and amortization 440,428 720,391
Other charges - 6,122
Non-cash stock-based compensation (95,000) 62,893
Issuances of restricted stock - 539,000
Notes receivable from officers (8,937) (549,914)
Deferred compensation - 62,893
Changes in operating assets and liabilities:
Accounts receivable (10,820) 651,759
Other receivables - (12,900)
Inventory 237,571 (98,881)
Prepaid expenses and other current assets 157,368 24,268
Other assets 5,710 -
Accounts payable and other accrued expenses (260,602) (323,622)
Accrued payroll and related liabilities (95,643) (306,182)
Deferred income (15,337) (41,756)
Sales tax payable (13,211) (4,321)
Other current liabilities (29,571) (70,646)
------------------ -----------------
Net cash used in operating activities (706,654) (2,610,076)
------------------ -----------------
Cash flows from investing activities
Acquisition of property and equipment - (4,493)
Capitalized software expenditures (138,803) (303,998)
Related party notes receivable, net of repayments - 14,880
Restricted cash 125,700 249,300
------------------ -----------------
Net cash used in investing activities (13,103) (44,311)
------------------ -----------------
Cash flows from financing activities
Principal payments on debt and capital leases (52,272) (91,449)
Proceeds from sales of common stock/exercise of stock
options and warrants - 3,475,592
Exercises of options and warrants - 19,258
------------------ -----------------
Net cash (used in) provided by financing activities (52,272) 3,403,401
------------------ -----------------
Effect of exchange rates on cash (109) (23,622)
------------------ -----------------
Net (decrease) increase in cash and cash equivalents (772,138) 725,392
Cash and cash equivalents - beginning of period 865,684 1,746,632
------------------ -----------------
Cash and cash equivalents - end of period $ 93,546 $ 2,472,024
================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
7
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 1 -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 consolidated balance sheet as of June 30, 2003, the consolidated statements
of operations for the three month and six month periods ended June 30, 2003 and
2002, the consolidated statements of cash flows for the six month periods ended
June 30, 2003 and 2002 and the consolidated statement of stockholders' equity
for the six month period ended June 30, 2003, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary for the fair presentation of the
Company's financial position, results of operations and cash flows at June 30,
2003 and 2002 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been or omitted. It is suggested that these consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and notes thereto included in the transition report on Form 10-KSB
for the nine months ended December 31, 2002.
Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern. At June 30, 2003, we had an accumulated
deficit of $43,549,225 and negative working capital of $172,250. We also
realized a net loss of $826,279 for the six months ended June 30, 2003. We
believe that our working capital as of June 30, 2003 is not sufficient to fund
the Company's operations beyond December 2003; and management has implemented
cost saving measures and improved margins on sales, which it expects will extend
the companies ability to meet its cash requirements through December 31, 2003.
We have been aggressively seeking to raise additional capital through selling
our equity since August 2002 and have been unable to secure such financing other
than the $300,303 raised from the sale of our preferred stock in September 2002.
Our efforts to raise approximately $1.5 million of additional capital through
selling securities and/or debt have not been successful. Because of the weak
financial condition of the Company, we expect that it will be necessary to issue
securities having a valuation and terms that are far more favorable to investors
than securities ION has previously issued. In order to induce investors to
provide capital to ION at this time, it may be necessary to pledge all of the
assets of the Company as collateral for such securities, provide liquidation
preferences at a multiple of the purchase price of the securities, provide
favorable conversion premiums to investors and other similar terms which could
have a negative effect on the value of our common stock and rights of our equity
shareholders upon liquidation or other circumstances. There is no assurance we
can raise the needed $1.5 million or any additional capital on any terms
reasonably acceptable to the Company. Nonetheless, the management will continue
to have discussions with the creditors to defer payments and/or extend payment
terms in order to improve the ability for its cash flows to fund its ongoing
operations. The board of directors has also been considering strategic
alternatives for the Company, which have not materialized as of this date. If
the Company is unable to secure additional financing, enter into a strategic
transaction or generate revenues sufficient to sustain its operations, the
Company may need to consider other alternatives including ceasing its operations
as early as January 2004.
Subsequent to June 30, 2003, Kam Saifi, President and Chief Executive Officer,
and Cameron Saifi, Executive Vice President and Chief Operating Officer, have
agreed to separate from the Company. We are continuing to negotiate the specific
terms of their separation and the termination of their employment agreements. In
view of the Company's financial condition, we have no plans to hire a Chief
Operating Officer at this time, and Mr. Cameron Saifi's duties will be assumed
by the Director of Financial Reporting, the Vice President of Sales and the
Chief Technology Officer. Until the appointment of Norman E. Corn as our new
Chief Executive Officer on August 16, 2003, Mr. Stephen M. Deixler served as the
interim Chief Executive Officer in addition to his current responsibilities as
Chairman of the Board of Directors and interim Chief Financial Officer. Also
subsequent to June 30, 2003, Christopher Corrado resigned from the Board of
Directors citing other professional commitments.
NOTE 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") and have been
prepared on the accrual basis of accounting. All inter-company balances and
transactions have been eliminated in consolidation.
8
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 periods, deferred tax asset
valuation allowance and estimated lives of property and equipment.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents.
Allowance for Doubtful Accounts Receivable
The Company sells its products on credit to its customers and is subject to
credit risk. 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
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.
Research and Development Costs
The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development expense in
the period incurred.
Revenue Recognition Policy
The Company 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
9
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.
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 Income (Loss) Per Share of Common Stock
Basic net loss per share excludes dilution for potentially dilutive securities
and is computed by dividing net income(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:
Three Months Three Months Six Months Ended Six Months
Ended Ended June 30, 2003 Ended
June 30, 2003 June 30, 2002 (Unaudited) June 30, 2002
(Unaudited) (Unaudited) (Unaudited)
----------------- ----------------- ----------------- ----------------
Basic Weighted Average No. of 23,902,643 22,600,501 23,902,643 22,600,501
Shares Outstanding
Incremental Shares for Common Stock
Equivalents 1,668,350 553,313 1,668,350 626,535
----------------- ----------------- ----------------- ----------------
Total* 25,570,993 23,153,814 25,570,993 23,227,036
================= ================= ================= ================
* Since there was a loss attributable to common shareholders
in the three months ended June 30, 2002 and the six months
ended June 30, 2003 and 2002 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 553,313 for the three month period ending June 30,
2002 and 1,668,350 and 626,535 for the six months ending June
30, 2003 and 2002 were excluded from the computation of
diluted earnings per share.
Stock Compensation
We account for stock-based employee compensation arrangements in accordance with
provisions of Accounting Principals Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and comply 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. We account for
equity instruments issued to non-employee vendors 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.
If the Company had elected to recognize compensation costs based on the fair
value at the date of grant for awards for the three and six months ended June
30, 2003 and 2002, consistent with the provisions of SFAS No. 123, the Company's
net income (loss) and basic and diluted net income (loss) per share would have
increased to the pro forma amounts indicated below:
Three months Three months Six months Six months
ended ended ended ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- --------------- -------------- ---------------
Net Income
(loss) As reported $ 48,632 $ (2,051,634) $ (826,279) $ (3,269,180)
Add back (Deduct): Stock based
employee compensation
determined under fair value
methods for all awards granted
since 1994 (inception) 156,320 (459,350) (177,507) (883,215)
--------------- --------------- -------------- ---------------
Pro forma
net income
(loss) $ 204,952 $ (2,510,984) $ (1,003,786) $ (4,152,395)
=============== =============== ============== ===============
Basic and diluted net income (loss) per share of
common stock
As reported $ 0.00 $ (0.09) $ (0.03) $ (0.14)
Pro forma $ 0.01 $ (0.11) $ (0.04) $ (0.18)
10
Foreign Currency Translation
The financial statements of the foreign subsidiaries were prepared in local
currency and translated into U.S. dollars based on the current exchange rate at
the end of the period for the balance sheet and a weighted-average rate for the
period on the statement of operations. Translation adjustments are reflected as
foreign currency translation adjustments in stockholders' equity and,
accordingly, have no effect on net loss. Transaction adjustments for the foreign
subsidiaries are included in income and are not material.
Income Taxes
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.
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 June 30, 2003 and December 30, 2002
approximated $55,000 and $48,400, respectively.
NOTE 3 - RESTRICTED CASH:
The Company maintains a restricted cash balance in accordance with its Lease
Agreement for its former Piscataway, NJ facility. On March 17, 2003 the Lease
Agreement for the Piscataway, NJ facility was amended to apply $105,908 of the
remaining restricted cash balance of $125,700 towards the payment of the
outstanding rent obligations. The balance of $19,792 was added to the working
capital reducing the letter of credit to zero. This amendment to the Lease
Agreement required the Company to deposit $60,000 into a new letter of credit by
December 2003. The Company has leased new premises subsequent to the balance
sheet date and accordingly this lease was terminated and therefore the Company
no longer has to deposit $60,000 into a new letter of credit by December
2003.(Note 10)
NOTE 4 - INVENTORY:
Inventory, net of allowance for obsolescence of $326,981 and $720,772, at June
30, 2003 and December 31, 2002, respectively, consists of the following:
June 30, 2003 December 31, 2002
------------------ -------------------
Raw materials 85,093 195,283
Work-in-progress 70,929 84,230
Finished goods 865,675 979,755
------------------ -------------------
$ 1,021,697 $ 1,259,268
================== ===================
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.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
(Unaudited) (Unaudited)
-------------------- ---------------------
Net loss $ (826,279) $ (3,269,180)
Effect of foreign currency translation (109) (19,277)
-------------------- ---------------------
Comprehensive loss $ (826,388) $ (3,288,457)
==================== =====================
NOTE 6 - INCOME TAXES:
The Company has recorded a full valuation allowance against the federal and
state net operating loss carry-forwards and a full valuation allowance against
the foreign net operating loss carry-forwards 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 carry-forwards and credits will
expire unutilized.
11
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB also issued SFAS No.143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for years beginning
after June 15, 2002. The Company adopted this statement on January 1, 2003 and
determined that there is no impact on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires all long-lived assets classified
as held for sale to be valued at the lower of their carrying amount of fair
value less cost to sell and which broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted this
standard on April 1, 2002. There was no effect upon adoption on the Company's
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. This differs from prior guidance, which required the liability to be
recognized when a commitment plan was put into place. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. There was no effect upon the adoption of this
standard to the Company's consolidated financial position, results of
operations, or cash flow.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002. The impact of FIN 45 on the Company's
consolidated financial statements will depend upon whether the company enters
into or modifies any guarantee arrangements. The Company did not enter into any
guarantees in 2003. The Company has no guarantees.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial
statements issued after January 31, 2003, if it is reasonably possible that as
of the transition date: (1) the company will be the primary beneficiary of an
existing VIE that will require consolidation or, (2) the company will hold a
significant variable interest in, or have significant involvement with, an
existing VIE. The Company does not have any entities that require disclosure or
new consolidation as a result of adopting the provisions of FIN 46.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances). The
requirements of this statement apply to issuers' classification and measurement
of freestanding financial instruments, including those that comprise more than
one option or forward contract. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company is in the process of assessing the impact of adopting SFAS No.
150 on its consolidated results of operations, consolidated financial position
or consolidated cash flows.
NOTE 8 - 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 employs 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 June 30, 2003, the total amount owed to the
Company by the Former CEO was approximately $164,089 (including accrued
interest) has been fully reserved. The Company will continue to attempt to
collect the note receivable.
12
NOTE 9 - STOCKHOLDERS' EQUITY:
On September 13, 2002 the Company received equity financing in the amount of
$300,303 ($285,303, net of issuance cost) 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. The
purpose of the Preferred Stock Financing was to enable the Company to comply
with the Nasdaq SmallCap Market's initial listing requirement of a minimum of
$5,000,000 of stockholders' equity so that the Company was eligible for an
additional 180-day grace period to attempt to regain compliance with the $1.00
minimum bid price requirement of the Nasdaq SmallCap Market (based on
stockholders equity of $5,004,215 at June 30, 2002, adjusted on a pro forma
basis for the equity financing). The preferred stock is recorded in
Stockholders' equity, net of issuance costs.
Effective October 2001, the Company approved and granted 2,900,000 shares of
restricted stock to Messrs. Kam Saifi, Cameron Saifi, and David Arbeitel 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.
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 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, 2003 and 2002. As of June 30, 2003 Mr. Kam
Saifi owes approximately $283,035 (including approximately $25,035 in interest)
for 2,000,000 Restricted Shares and; Mr. Cameron Saifi owes approximately
$204,976 (including approximately $19,576 in interest) for 600,000 Restricted
Shares.
On September 29, 2002, Mr. David Arbeitel separated employment from the Company.
As a result, the note relating to Mr. Arbeitel's 37,500 vested Restricted Shares
became due and payable and as of September 30, 2002, Mr. Arbeitel owed
approximately $12,190 (including approximately $602 of interest) with respect to
such vested shares. On November 11, 2002, Mr. Arbeitel paid the Company $12,264
(including accrued interest of $676) in satisfaction of the note for the 37,500
vested shares. The Company and Mr. Arbeitel agreed to rescind the stock purchase
transaction with respect to 262,500 of the unvested Restricted Shares thereby
canceling the unpaid portion of the notes in an amount of $ 85,322 (including
accrued interest of $4,210) relating to such unvested shares. Messrs. Kam Saifi
and Cameron Saifi have separated from the Company subsequent to June 30, 2003.
The Company has entered into negotiations regarding the specific terms of
Messrs. Kam Saifi and Cameron Saifi's separation and the termination of their
employment agreements.
The variable accounting method used to account for the partial recourse
restricted stock granted to management resulted in a cashless credit of $95,000
for the six month period ended June 30, 2003.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company entered into a lease on February 18, 1999 for approximately 26,247
square feet for its former 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 $50,154 to $20,143 per month effective March 1, 2003. The
Company is also obligated to make additional payments to the landlord relating
to certain taxes and operating expenses. Under the term of the amendment the
landlord retained the right to cancel the lease. During the quarter ended June
30, 2003, the landlord notified the Company it has exercised their right
effective August 15, 2003.
The Company entered into a lease on July 21, 2003 for approximately 7,000 square
feet for its principal executive offices at 120 Corporate Blvd., South
Plainfield, New Jersey 07080. The Company moved it's offices to this location on
August 6, 2003. The terms of the lease require payment of $162,180 in monthly
installments of $4,505 from October 1, 2003 to July 31, 2006. The Company is
also obligated to make additional payments to the landlord relating to certain
taxes and operating expenses.
Capital Leases
The Company leases certain equipment under agreements which are classified as
capital leases. Each of the capital lease agreements expire within five years
and have purchase options at the end of the lease term.
13
Consulting Contracts
On October 5, 2000, the Company entered into a consulting agreement with VCGI
whereby VCGI is to provide the services of Ronald C. Sacks as Chief Executive
Officer of the Company, and the services of three additional consultants
functioning in various capacities for the Company. The fees for the consultants'
services were $500,000 over a one-year period. The final payment was issued on
July 2003. In addition, the individual consultants from VCGI, including Ronald
C. Sacks, were issued options to purchase 240,000 shares of common stock.
Contingent Liabilities
In the normal course of business the Company and its subsidiaries may be
involved in legal proceedings, claims and assessments arising in the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes
are not predictable with assurance. In the opinion of management, the outcome of
such current legal proceedings, claims and assessments will not have a material
effect on the Company's financial position, results of operations or cash flows.
NOTE 11 - 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, the remaining 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. Accordingly, an impairment of $163,662 was recorded which reflected
the difference between the cash proceeds of the sale and the remaining value.
The asset sale occurred in August 2003.
During the quarter ended June 30, 2003, the Company completed its liquidation of
its UK subsidiary. As a result of the liquidation, the Company reversed its
prior restructuring accrual of $508,458 related to the remaining long-term
lease, and other operating accruals of $294,704. These accruals were reflected
in the consolidated statement of operations in the line items that reflected the
original charge.
The components of the restructuring, asset impairments and other charges are as
follows:
Asset Write-down Lease Termination Total
Costs
First Quarter 2003
charges $ - $ 123,510 $ 123,510
Second Quarter 2003
charges $ 192,617 $ (508,458) $ (315,841)
------------------- ----------------------- ------------------------
Total $ 192,617 $ (384,948) $ (192,331)
=================== ======================= ========================
The movement of the reserve, which related to lease termination costs, during
2003 were as follows:
----------------------------------------------------------- ----------------------------------
Balance at December 31, 2002 $ 508,458
----------------------------------------------------------- ----------------------------------
First quarter 2003 provision 123,510
----------------------------------------------------------- ----------------------------------
First quarter 2003 payments -
----------------------------------------------------------- ----------------------------------
Second quarter 2003 adjustment (508,458)
----------------------------------------------------------- ----------------------------------
Second quarter 2003 payments -
----------------------------------------------------------- ----------------------------------
Total $ 123,510
----------------------------------------------------------- ----------------------------------
The Company is in negotiations with the landlord for the reserved amount of
$123,510 and intends to have resolution by the end of the fourth quarter 2003.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
ION Networks, Inc. (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 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). From the time of the merger in 1999
through the quarter ended December 31, 2001, 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 the quarter ended December 31, 2001, a new
management team joined the Company and evaluated ION's revenue and expenditures,
existing product suite, present customer base and evolving addressable market.
As a result of this evaluation, the Company refocused its product line from that
of network management monitoring to that of infrastructure security, which was
the original focus of MicroFrame prior to the merger with Solcom. We also added
significant network features to the product to broaden the scope of the
potential customer base, emphasizing infrastructure security. We identified
additional enterprise markets that extend beyond the telecommunications industry
and believe that successfully penetrating these additional markets could
positively impact revenue, although there can be no assurance that these efforts
will be successful. Despite these efforts, during the last two years, the
telecommunications industry has endured a significant economic downturn.
Telecommunications service providers have generally reduced planned capital
spending, have reduced staff, and, in some cases, 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 the second half of 2003 in
order to continue operating as a going concern. If we are not successful in
raising additional equity capital, to generate sufficient cash flows to meet our
obligations as they come due, our financial condition and results of operations
will be materially and adversely affected and we will not be able to continue to
operate as a going concern beyond December 2003. If we are successful in raising
additional capital but fail to increase our revenue or reduce our expenses and
defer payments and/or extend payment terms in order to allow the cash flows to
meet ongoing operations, our financial condition and results of operations may
be materially and adversely affected and we may not be able to continue to
operate as a going concern.
RESULTS OF OPERATIONS
For the three months ended June 30, 2003 compared to the same period in 2002
Net sales for the three months ended June 30, 2003, was $874,200 compared to net
sales of $960,132 for the same period in 2002, a decrease of $85,932 or 8.9%.
The decrease in sales is attributable mainly to the reduction in the number of
units sold in the three-month period ended June 30, 2003. The continuing impact
of the overall downturn in the information technology and the telecommunications
industry compounded by the weak financial condition of the Company has caused
the Company's decrease in sales for this period.
Cost of sales for the three months ended June 30, 2003 was $230,851 compared to
$356,505 for the same period in 2002. Cost of sales as a percentage of net sales
for the six months ended June 30, 2003 decreased to 26.4% from 37.1% for the
same period in 2002, and therefore gross margin increased to 73.6% from 62.9% as
compared to the prior year. The decrease in cost of sales or the increase in
gross margin is mainly due to lowering the costs associated with manufacturing
of the appliances and lack of larger sales orders that typically require higher
volume discounts.
Research and development expense, net of capitalized software development, for
the three months ended June 30, 2003 was $124,356 compared to $235,309 for the
same period in 2002 or a decrease of $110,953 as compared to the comparable
period of the prior year. The decrease is primarily attributable to the
reduction in salaries.
Selling, general and administrative expenses ("SG&A") for the three months ended
June 30, 2003 were $579,668 compared to $2,136,968 for the same period in 2002,
a decrease of $1,557,300. The reduction is due to management's implementation of
cost saving strategies primarily in the areas of salary reductions, selling
expenses and overhead. During the quarter ended June 30, 2003, the Company
completed its liquidation of its UK subsidiary. As a result of liquidation of a
foreign subsidiary and its release from creditor obligations under a plan of
insolvency the Company released liabilities which totaled approximately $803,162
of which $294,704 was credited to SG&A. These accruals were reflected in the
consolidated statement of operations in the line items that reflected the
original charge.
15
Restructuring credit for the three months ended June 30, 2003 was $315,841
compared to zero in the same period in 2002. The credit arose as a result of
liquidation of a foreign subsidiary and its release from creditor obligations
under a plan of insolvency. The total liabilities release was approximately
$803,162 of which $508,458 was credited to restructuring for a lease accrual. In
addition, due to leaving the facility at 1551 south Washington Ave. the Company
incurred an asset impairment charge for leasehold improvements and furniture of
$192,617.
Depreciation and amortization expenses - amortization of capitalized software,
goodwill and other acquisition related intangibles, and depreciation of property
and equipment was $205,657 for the three months ended June 30, 2003 compared to
$281,971 in the same period in 2002. The decrease was primarily the result of
fully depreciated and amortized expenses..
Net income for the three months ended June 30, 2003 was $48,632 (Net loss of
$754,530 less credit from liquidation of foreign subsidiary above in the amount
of $803,162) compared to a loss of $2,051,634 for the same period in 2002. This
is primarily due to the reduction of operating expenses and improved gross
margin.
For the six months ended June 30, 2003 compared to the same period in 2002
Net sales for the six months ended June 30, 2003, was $1,639,319 compared to net
sales of $3,036,329 for the same period in 2002, a decrease of $1,397,010 or
46%. The decrease in sales is attributable mainly to the reduction in the number
of units sold in the six-month period ended June 30, 2003. The Company sold
mostly the ION Secure 3000 series security appliances (formerly called the
Sentinel 2000) in both periods so there was no impact on revenue from a change
in product mix. The continuing impact of the overall downturn in the information
technology and the telecommunications industry compounded by the weak financial
condition of the Company has caused the Company's decrease in sales for this
period.
Cost of sales for the six months ended June 30, 2003 was $474,839 compared to
$1,317,590 for the same period in 2002. Cost of sales as a percentage of net
sales for the six months ended June 30, 2003 decreased to 29.0% from 43.4% for
the same period in 2002, and therefore gross margin increased to 71.0% from
56.6% as compared to the prior year. The decrease in cost of sales or the
increase in gross margin is mainly due to lowering the costs associated with
manufacturing of the appliances and lack of larger sales orders that typically
require higher volume discounts.
Research and development expense, net of capitalized software development, for
the six months ended June 30, 2003 was $261,755 compared to $406,425 for the
same period in 2002 or a decrease of $144,670 as compared to the comparable
period of the prior year. The decrease is primarily attributable to the
reduction in salaries.
Selling, general and administrative expenses ("SG&A") for the six months ended
June 30, 2003 were $1,482,205 compared to $3,852,003 for the same period in
2002, a decrease of $2,369,798. The reduction is due to management's
implementation of cost saving strategies primarily in the areas of salary
reductions, selling expenses and overhead. During the quarter ended June 30,
2003, the Company completed its liquidation of its UK subsidiary. As a result of
the liquidation, the Company reversed its prior restructuring accrual of
$508,458 related to the remaining long-term lease, and other operating accruals
of $294,704. These accruals were reflected in the consolidated statement of
operations in the line items that reflected the original charge.
Restructuring credit for the six months ended June 30, 2003 was $192,331
compared to zero in the same period in 2002. The credit arose as a result of
liquidation of a foreign subsidiary and its release from creditor obligations
under a plan of insolvency. The total debt release was approximately $803,162 of
which $508,458 was credited to restructuring. During the quarter ended March 31,
2003, the Company abandoned the space at California location. As a result, the
Company incurred a one-time charge of $123,510 in the six months ended June 30,
2003. In addition, due to leaving the facility at 1551 South Washington Ave.,
the Company incurred an asset impairment charge for leasehold improvements and
furniture of $192,617.
Depreciation and amortization expenses - amortization of capitalized software,
goodwill and other acquisition related intangibles, and depreciation of property
and equipment - was $440,428 for the six months ended June 30, 2003 compared to
$720,391 in the same period in 2002. 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 six months ended June 30, 2003 was $826,279 ($1,629,441 less
credit from liquidation of foreign subsidiary above in the amount of $803,162)
compared to a loss of $3,269,180 for the same period in 2002. This is primarily
due to the reduction of operating expenses and improved gross margin.
FINANCIAL CONDITION AND CAPITAL RESOURCES
Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern. At June 30, 2003, we had an accumulated
deficit of $43,549,225 and a working capital deficit of $172,250 as compared to
$184,689 at December 31, 2002. This decline in working capital was due to
continued operating losses generated throughout the six months ended June 30,
2003. We also realized net losses of $826,279 and $3,269,180 for the six months
ended June 30, 2003 and 2002 respectively. We believe that our working capital
16
as of June 30, 2003 is not sufficient to fund the Company's operations beyond
December 2003; and management has implemented cost saving measures and improved
margins on sales, which it expects will extend the companies ability to meet its
cash requirements through December 31, 2003. We have been aggressively seeking
to raise additional capital through selling our equity since August 2002 and
have been unable to secure such financing other than the $300,303 raised from
the sale of our preferred stock in September 2002. Additionally, our efforts to
raise approximately $1.5 million of additional capital through selling
securities and/or debt have not been successful. Because of the weak financial
condition of the Company, we expect that it will be necessary to issue
securities having a valuation and terms that are far more favorable to investors
than securities ION has previously issued. In order to induce investors to
provide capital to ION at this time, it may be necessary to pledge all of the
assets of the Company as collateral for such securities, provide liquidation
preferences at a multiple of the purchase price of the securities, provide
favorable conversion premiums to investors and other similar terms which could
have a negative effect on the value of our common stock and rights of our equity
shareholders upon liquidation or other circumstances. There is no assurance we
can raise the needed $1.5 million or any additional capital on any terms
reasonably acceptable to the Company. Nonetheless, the management will continue
to have discussions with the creditors to defer payments and/or extend payment
terms in order to improve the ability for its cash flows to fund its ongoing
operations. The board of directors has also been considering strategic
alternatives for the Company which have not materialized as of this date. If the
Company is unable to secure additional financing, enter into a strategic
transaction or generate revenues sufficient to sustain its operations, the
Company may need to consider other alternatives including ceasing its operations
as early as January 2004.
Net cash used in operating activities during the six months ended June 30, 2003
was $706,654 compared to net cash used during the same period in 2002 of
$2,610,076. The decrease in net cash used during the six months ended June 30,
2003 compared to the same period in 2002, was primarily due to the reduction in
operating expenses and improved gross margins.
Net cash used in investing activities during the six months ended June 30, 2003
was $13,103 compared to net cash used in during the same period in 2002 of
$44,311. This decrease was primarily due to a reduction in Capitalized Software
expenditures and restricted cash.
Net cash used from financing activities during the six months ended June 30,
2003 was $52,272 compared to net cash generated during the same period in 2002
of $3,403,401(which included $3,475,592 for the proceeds from sales of common
stock).
Operating Lease commitments
The Company entered into a lease on July 21, 2003 for approximately 7,000 square
feet for its principal executive offices at 120 Corporate Blvd., South
Plainfield, New Jersey 07080. The Company moved it's offices to this location on
August 6, 2003. The terms of the lease require payment of $162,180 in monthly
installments of $4,505 from October 1, 2003 to July 31, 2006. The Company is
also obligated to make additional payments to the landlord relating to certain
taxes and operating expenses.
Capital Leases
The Company leases certain equipment under agreements which are classified as
capital leases. Each of the capital lease agreements expire within five years
and have purchase options at the end of the lease term. Future capital lease
payments as of June 30, 2003 are approximately $118,056
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.
Significant 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
17
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 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 FASB also issued SFAS No.143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for years beginning
after June 15, 2002. The Company adopted this statement on January 1, 2003 and
determined that there is no impact on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires all long-lived assets classified
as held for sale to be valued at the lower of their carrying amount of fair
value less cost to sell and which broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted this
standard on April 1, 2002. There was no effect upon adoption on the Company's
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. This differs from prior guidance, which required the liability to be
recognized when a commitment plan was put into place. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. There was no effect upon the adoption of this
standard to the Company's consolidated financial position, results of
operations, or cash flow.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002. The impact of FIN 45 on the company's
consolidated financial statements will depend upon whether the company enters
into or modifies any guarantee arrangements. The Company did not enter into any
guarantees in 2003.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial
statements issued after January 31, 2003, if it is reasonably possible that as
of the transition date: (1) the company will be the primary beneficiary of an
existing VIE that will require consolidation or, (2) the company will hold a
significant variable interest in, or have significant involvement with, an
existing VIE. The Company does not have any entities that require disclosure or
new consolidation as a result of adopting the provisions of FIN 46.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances). The
requirements of this statement apply to issuers' classification and measurement
of freestanding financial instruments, including those that comprise more than
one option or forward contract. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company is in the process of assessing the impact of adopting SFAS No.
150 on its consolidated results of operations, consolidated financial position
or consolidated cash flows.
18
ITEM 3. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and our Interim Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures. Based on
this evaluation, our Chief Executive Officer and our Interim Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information required to be included in this
report.
There has been no change in our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected or
is reasonably likely to materially affect our internal control over financial
reporting.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Subsequent to June 30, 2003, Kam Saifi, President and Chief Executive Officer,
and Cameron Saifi, Executive Vice President and Chief Operating Officer, have
agreed to separate from the Company. We are continuing to negotiate the specific
terms of their separation and the termination of their employment agreements. In
view of the Company's financial condition, we have no plans to hire a Chief
Operating Officer at this time, and Mr. Cameron Saifi's duties will be assumed
by the Director of Financial Reporting, the Vice President of Sales and the
Chief Technology Officer. Until the appointment of Norman E. Corn as our new
Chief Executive Officer on August 16, 2003, Mr. Stephen M. Deixler served as the
interim Chief Executive Officer in addition to his current responsibilities as
Chairman of the Board of Directors and interim Chief Financial Officer. Also
subsequent to June 30, 2003, Christopher Corrado resigned from the Board of
Directors citing other professional commitments.
20
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./(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. /(20)/
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)/
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)/
22
Exhibit
No. Description
------- -----------
10.1 Lease Agreement dated February 18, 1999 by and between the
Company and Washington Plaza Associates, L.P., as landlord.
/(4)/
10.2 Business Park Gross Lease dated May 17, 1999 by and between
the Company and Bedford Property Investors, Inc./(4)/
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)/
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)/
23
Exhibit
No. Description
------- -----------
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. /20)/
10.20 Employment Agreement Amendment 1 dated September 30, 2002
by and between the Company and Kam Saifi.*
10.21 Amendment dated January 8, 2003 to Employment Agreement
by and between the Company and Kam Saifi.*
10.22 Employment Agreement Amendment 1 dated September 30, 2002
by and between the Company and Cameron Saifi.*
10.23 Amendment dated January 8, 2003 to Employment Agreement
by and between the Company and Cameron Saifi.*
10.24 Amended and Restated Employment Agreement dated September
8, 2003 by and between the Company and Norman E. Corn.*
16.1 Letter dated June 28, 2001, from PricewaterhouseCoopers LLP
to the Securities and Exchange Commission./(10)/
21.1 List of Subsidiaries./(14)/
31.1 Section 302 Certification of the Chief Executive Officer.*
31.2 Section 302 Certification of the Interim Chief Financial
Officer.*
32.1 Section 906 Certification of the Chief Executive Officer.*
32.2 Section 906 Certification of the Interim Chief Financial
Officer.*
(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 10-KSB
filed on June 29, 2001.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K filed
on October 23, 2001.
(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.
24
(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 Transition Report on Form 10-KSB
for the nine months ended December 31, 2002, as filed on April 15, 2003.
* Filed herewith
(b) Reports on Form 8-K:
On May 16, 2003, the Company filed a report on Form 8-K reporting the issuance
of two press releases announcing the Company's financial results for the three
months ended March 31, 2003 and a transcript of the conference call hosted on
May 12, 2003 discussing such financial results.
25
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: September 12, 2003
ION NETWORKS, INC.
/s/ Norman E. Corn
------------------------------------------
Norman E. Corn, Chief Executive Officer
26
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. /(20)/
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)/
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)/
27
Exhibit
No. Description
------- -----------
10.1 Lease Agreement dated February 18, 1999 by and between the
Company and Washington Plaza Associates, L.P., as landlord.
/(4)/
10.2 Business Park Gross Lease dated May 17, 1999 by and between
the Company and Bedford Property Investors, Inc./(4)/
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)/
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)/
28
Exhibit
No. Description
------- -----------
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. /20)/
10.20 Employment Agreement Amendment 1 dated September 30, 2002
by and between the Company and Kam Saifi.*
10.21 Amendment dated January 8, 2003 to Employment Agreement
by and between the Company and Kam Saifi.*
10.22 Employment Agreement Amendment 1 dated September 30, 2002
by and between the Company and Cameron Saifi.*
10.23 Amendment dated January 8, 2003 to Employment Agreement
by and between the Company and Cameron Saifi.*
10.24 Amended and Restated Employment Agreement dated September
8, 2003 by and between the Company and Norman E. Corn.*
16.1 Letter dated June 28, 2001, from PricewaterhouseCoopers LLP
to the Securities and Exchange Commission./(10)/
21.1 List of Subsidiaries./(14)/
31.1 Section 302 Certification of the Chief Executive Officer.*
31.2 Section 302 Certification of the Interim Chief Financial
Officer.*
32.1 Section 906 Certification of the Chief Executive Officer.*
32.2 Section 906 Certification of the Interim Chief Financial
Officer.*
(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 10-KSB
filed on June 29, 2001.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K filed
on October 23, 2001.
(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 Transition Report on Form 10-KSB
for the nine months ended December 31, 2002, as filed on April 15, 2003.
* Filed herewith
29