U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2000
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.
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(Name of Small Business Issuer in Its Charter)
Delaware 22-2413505
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Incorporation or Organization (IRS Employer Identification Number
1551 South Washington Avenue, Piscataway 08854
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (732) 529-0100
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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|X| Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
|_| Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB.
The issuer's revenues for its most recent fiscal year totaled $22,668,833.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average of the bid and asked prices as reported by the
Nasdaq Stock Market as of June 22, 2000 was approximately $86,618,805.
There were 15,621,862 shares of Common Stock outstanding as of June 22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's Definitive Proxy
Statement for the 2000 Annual Meeting of Stockholders of the Company are
incorporated by reference into Part III hereof.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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GENERAL
ION Networks, Inc., ("ION" or the "Company"), is a developer and
manufacturer of software and hardware solutions for monitoring and managing
mission critical voice and data network infrastructure. ION is a Delaware
corporation founded in 1999 through the combination of two companies focused on
network management products - MicroFrame, Inc., a New Jersey corporation (the
predecessor entity to the Company, originally founded in 1982) and SolCom
Systems Limited ("SolCom"), a Scottish corporation located in Livingston,
Scotland (originally founded in 1994). In 1999 ION Networks augmented the
Company through the purchase of certain assets of LeeMAH DataCom Security
Corporation ("LeeMAH"), a California corporation. The latter now constitutes
ION's Secur@ccess division.
ION designs and manufactures next-generation secure, proactive and
anticipatory network infrastructure management products. ION's products monitor
applications (computer programs which people and businesses use), devices and
links in a network to determine if a network is working properly. The Company's
products are used to collect and analyze data about the network and make
meaningful decisions about them. If the network is working erratically, ION's
products determine the cause of the problem and attempt to fix it automatically.
As a result, ION's products improve network performance and assist the
businesses or institutions that are dependent on networks to be more effective.
ION's customers are businesses that provide voice and data network
services to businesses and consumers, and large enterprises or institutions
which need networks to manage their business operations. ION's customers'
networks support a variety of uses, e.g., telecommunications, email, accounting
and other financial systems, word processing, engineering and manufacturing,
e-commerce, and various outsourced services such as applications services and
web-hosting. Today these customers constitute a market that is relatively small,
(approximately $1 billion) rapidly growing, highly fragmented and exhibiting
little direct competition among industry participants.
The Company believes that a variety of factors will drive significant
growth in this market. Because the number of business functions carried over
communications networks has greatly expanded in recent years, businesses are now
dependent on networks to support their most critical functions. The number of
tasks that networks are used for and the volume of data that networks handle has
increased network complexity exponentially. To manage this complexity, many
enterprises have outsourced their network operations to service providers.
However, to gain outsourcing contracts, service providers must guarantee a
certain level of performance and return some payments if the guarantees are not
met. Accordingly, both enterprises and service providers are demanding products
that can prevent networks from suffering expensive and disruptive "down time" or
from reducing employee productivity through long response times.
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To meet these demands, ION offers a family of next-generation network
infrastructure management products called PRIISMS Suite. PRIISMS Suite is an
integrated suite of hardware and software for end-to-end network infrastructure
management that captures knowledge from network experts and automates their
analysis, decision making and actions, in effect making PRIISMS Suite a Virtual
Network Expert(TM). PRIISMS Suite consists of various intelligent devices1
("ION's Devices") for remote monitoring and management of network devices and
links, and a central server, PRIISMS2 Manager, which manages the devices and
monitors the network from end-to-end.
ION's PRIISMS suite enhances the performance of existing networks,
allowing network managers to defer or sometimes eliminate the need to incur
significant expense in upgrading their networks. Because PRIISMS Suite is
scalable, provides predictive and real-time problem identification (Root Cause
Analysis), can act to diagnose and resolve problems, makes efficient use of
network resources and bandwidth, and can be customized, ION believes its
products enhance the economic value of its customers' networks. Because problems
are diagnosed and resolved quickly, service providers improve their quality of
service and limit the need to pay refunds to their customers. User
dissatisfaction and customer defections are reduced. Additionally, expensive
visits by repair technicians to remote sites are limited, because the expertise
of this scarce resource is extended throughout the network.
ION has a well-recognized customer base of more than 250 customers who
use the products in over 10,000 locations. ION's largest customers are
telecommunications companies of all kinds, both in the United States and in
Europe, as well as large enterprises and institutions Approximately one-third of
ION's sales are made direct to customers such as AT&T, Rhythms NetConnections,
MCI and Intel Corporation, one-third go through resellers such as KNP-Telecom
BV, Sycamore Networks, Ameritech and USWest, and one-third are sold through
original equipment manufacturers (OEMs) Hewlett-Packard and Lucent Technologies.
THE PRODUCTS
All of ION's products, except those sold to OEMs, fall within the
PRIISMS Suite, an integrated suite of hardware and software products for
end-to-end network performance monitoring and management that captures knowledge
from network experts and automates their analysis, decision making and actions.
Currently, the PRIISMS Suite consists of various different intelligent devices
and a centralized software manager, called the PRIISMS Manager.
ION'S DEVICES
One of ION's core product strategies is to offer a family of Devices
that match customers' requirements over a range of capabilities from simple
alarm detection and reporting to sophisticated analyses which determine the
cause of a network problem and attempt to fix it immediately. ION's Devices have
the following capabilities:
. Secure Access - Only authorized personnel can obtain information from
or send instructions to ION's Devices or to network devices. Users can
logon to one of ION's Devices and get a real-time view of network
functionality. Their actions are logged for later audit.
-----------------------------
1. Intelligent devices are those that contain programmable microproccessors
2. Procaticve, real-time, integrated, intelligent, secure, metric-based solution
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. Alarm Management - When a process running on a network device exceeds
preset thresholds, the device generates an alarm. ION's Devices detect
these alarms and report them, and also generate alarms when
unauthorized access or power loss occurs. All events and alarms are
logged for later audit.
. Custom AMT Modules - Active Management Technology ("AMT") is the method
whereby ION's Devices capture knowledge from network experts and
automate their analysis, decision making and actions. How network
experts analyze data, the decisions they make about the data and
analyses, and the resulting actions they take can be codified in a
series of rules, or a "routine", that ION's Devices can execute. As a
result, the network expert's ability to identify and solve network
problems can be implemented across the entire network. The routines can
be executed automatically, fixing many network faults without the need
for human intervention.
. Data Buffering - Data collected from network devices such as PBXs or
servers can be automatically formatted for later viewing or for
downloading to other applications such as billing systems.
. Environmental Monitoring - Network devices can be impacted by
environmental factors, e.g., heat, water, intruders. ION's Devices
detect and report various environmental changes.
. SNMP Device Monitoring and Management - SNMP (Simple Network
Management Protocol) is a widely used standard method of communicating
with many network devices. This standard also specifies what kind of
information is available about the network device and how it is
collected. ION's Devices can collect, report, and analyze information
from any network device that conforms to this standard. In passive
monitoring, network elements notify ION's Devices of unusual events
and action is taken. In active monitoring, ION's Devices poll network
devices checking for changes which could indicate a developing
problem. This allows ION's Devices to anticipate problems and to take
action before problems become severe. o SNMP Traps - ION's Devices can
collect data from network devices that do not conform to the SNMP
standard and convert the data into the SNMP standard. Then the network
devices can take advantage of the most advanced and powerful network
management tools. One example of non-SNMP devices are some of the
optical switches, those network devices which communicate using
photons rather than electrons, and are currently the most advanced
switching technology commercially available.
. RMON Monitoring - R(emote) MON(itoring) is a standard method for
collecting and analyzing data from IP-based network devices and the
links between the devices. RMON is an extension of SNMP that performs
data collection and analysis about network performance at remote
locations. Because information is not constantly reported to a central
site, RMON uses less network capacity than does SNMP as it continuously
collects fault, configuration, and performance data, as well as running
diagnostics and logging performance. RMON analyses the network traffic
for each protocol used by the network and for each application running
on the network, thereby producing information about all levels of the
network.
. "Out-of-the-Box" AMT - ION makes available a library of measurement and
action routines for analyzing network data, making decisions and taking
action. These routines are much more comprehensive than those in RMON
and are designed to be useful to most network managers. They are
exception-based and report only the most important information from the
remote site, making the most productive use of expensive network
bandwidth and of the network engineer's time.
ION's Devices are based on a common framework and offer subsets of the
capabilities described above so as to meet the needs of different customer
segments. The most economical devices provide only secure access to network
devices and a log of any user activities, whereas the most versatile device,
NetwoRx,
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manages an entire remote location providing a wide range of analyses
and anticipatory action to solve network problems before they become severe. The
capabilities of each device are described below:
<TABLE>
<CAPTION>
INTELLIGENT ENVIRON- PASSIVE ACTIVE OUT-OF
DEVICES SECURE ALARM CUSTOM DATA MENTAL SNMP SNMP SNMP THE-BOX
ACCESS MGMT AMT BUFFERING MON TRAPS MON MON RMON AMT
------------------------ ---------- --------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
. Secure@ccess: X
------------
TraqNet 2000 and
FasTraq
. Secure X X
Sentinel
. Sentinel 2000S X X X X X X X
. Sentinel 2000 X X X X X X X
. NetwoRx-O - X X X X X X X
for Optical
Technology
Manufacturers
. NetwoRx-VT X X X X X X X
-for CLECs3
. NetwoRx X X X X X X X X X
</TABLE>
The Company believes these products have valuable distinguishing
capabilities that limit the level of direct competition and have allowed ION to
develop as an industry leader in next-generation, proactive network
infrastructure management products.
ION's PRIISMS Suite:
. employs a distributed architecture - Intelligent hardware devices at
remote locations ensure that the system scales so it can monitor large,
diverse or highly distributed networks without performance degradation.
ION's Devices poll network devices every second so the performance
information is collected in real-time. Data collection and analysis
occur at remote locations without human intervention, resulting in
considerable savings to the customer. In addition, this type of
analysis ensures that only true problems are reported (exception
reporting) to the central manager thereby minimizing the system's use
of the customer's valuable bandwidth.
. collects and reports information, analyzes and anticipates network
problems - Standardized network management data are collected: SNMP MIB
data, SNMP Traps (alarms), RMON1, RMON2, console port data, ASCII, TL1,
humidity, temperature, and physical intrusion. Various kinds of
analyses include: translating between data types, creating Traps, RMON
statistics, measurements of router health, measurements of Ethernet LAN
health, measurements of PVC status and utilization, measurements of LAN
switch and port health, utilization levels of applications and of
protocols, and histories.
. recommends and takes action - ION's unique AMT automatically takes
action to resolve network problems. For example, ION's Devices can be
programmed to reboot a device when a particular condition is detected.
In addition, they can take a network link up or down, create a Trap,
notify a
-----------------------------
3 Competitive local exchange carriers, e.g. Rhythms NetConnections, Covad,
PathNet
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person, collect many kinds of additional diagnostic information, etc.
. operates during power or network outage - ION's Devices have battery
back-up and secure out-of-band (dial-up) access so they continue to
function when network devices are down. As a result, an authorized
network engineer can determine the cause of a problem and even repair
it when other network management systems, which are dependent on a
functioning network, would be unable to operate.
. accommodates secure access and communication - ION's Devices, the
central servers which manage them, and the network devices which are
being monitored will allow only authorized users to access them. ION's
system conforms to Security Industry Standards and provides
authentication, access control, authorization and an audit trail.
. can be customized to fit any environment - All networks are different.
A customer can set/modify thresholds and parameters for any of the
measurement and action routines which ION provides. In addition, since
all networks are different, ION provides a scripting capability which
allows customers, or ION's professional services people, to develop
customized routines.
PRIISMS MANAGER
PRIISMS Manager consolidates the information from multiple ION Devices
so customers have a picture of the activity on their whole network. Today
PRIISMS Manager manages all of the ION's Devices except TraqNet 2000 and
FasTraq, ION Devices produced by the Secur@ccess Division. These devices are
currently being integrated and are scheduled to operate with PRIISMS Manager
later this year. PRIISMS Manager:
. has a web-based Graphical User Interface (GUI) for navigating among
the devices and reporting exceptions sent by ION's Devices
. can monitor devices in real-time both using the network and using
dial-up (out-of-band) connections if the network has an outage
. establishes passwords for the devices, administers and ages them,
along and controls the criteria for who can gain access to ION's
Devices and to the network devices that are being managed
. sets up and changes the configurations of ION's Devices and groups
them so they can be managed in categories
. for NetwoRx, the most capable ION device, displays RMON statistics,
allows users to configure thresholds and parameters of the various
Out-of-the-Box AMT routines, and provides information from all of
ION's Devices in the network, providing an enterprise-wide view.
OEM PRODUCTS
In addition to ION's Devices, ION sells custom versions of devices and
software to OEMs who resell them under the OEM's brand name. In FY2000, ION
received $1,596,000 from Hewlett-Packard Company and $2,199,000 from Lucent
Technologies, Inc., for these customized products. In addition, during FY2000
the Company developed and licensed the rights to certain customized modules of
its software via a perpetual license agreement for approximately $3,244,000. The
development and licensing had a positive effect on the gross margins of the
Company in FY2000. The Company has no further obligations to the customer with
respect to this development and the licensed software.
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SUPPORT SERVICES
In addition to hardware and software products, ION provides a full
range of support services including software and hardware maintenance
agreements, on-site and in-house training, product installation and
configuration, customization, technical support and a help desk.
TARGET MARKETS - DEFINITION AND DRIVERS
Today most businesses cannot operate effectively or efficiently without
their networks, and some businesses cannot operate at all. This dependency on
networks began to develop in the mid-1980s as advances in technology made
networking devices affordable to large enterprises and institutions. These same
advances began to render obsolete the network devices used by network services
providers, such as telephone and cable companies. The result was billions of
dollars were spent on networking devices and on connecting them together.
The availability of reliable, affordable networks encouraged the
development of enterprise-wide computing systems and of network-based
applications such as integrated finance-manufacturing-human-resources systems,
relational databases, e-mail, intranets, data-mining, customer relationship
management, and others. Also, new kinds of networking service providers emerged
such as web-hosting companies, Internet service providers (ISPs), application
service providers (ASPs) and the ubiquitous dot-com companies.
Businesses such as those described above cannot run without their
networks because their most critical activities are dependent on the network. As
a result of their dependency on networks, many businesses experience
considerable expense. If the network is not running properly, employee
productivity can be reduced, as employees are unable to do their jobs
effectively. Many businesses suffer loss of revenues as customers using the
network seek elsewhere for their goods and services. Network managers scramble
to fix ill defined problems as users wait for the network to recover and as
their well-trained engineers leave for better jobs in the highly competitive
career marketplace. Service providers with contractual commitments to provide
certain levels of network availability to their customers are forced to return
payments to customers. Entire operations come to a halt as network security is
breached, and systems stop functioning or are reconfigured by unauthorized
personnel.
These problems only become more difficult when the network must deliver
functionality to globally distributed workers, applications, supply chains and
enterprises. As new network technologies are developed, enterprises implement
them to achieve better performance and cost savings. This is a constant process
which increases the complexity of the network and of the problems that can
occur. To alleviate the pressure of dealing with these issues, large enterprises
and institutions are outsourcing more and more of their network and
applications. However, the businesses that provide these services must meet
negotiated contractual commitments for performance (Service Level Agreements
(SLAs)), and, to the extent they are not met, must refund payments.
To an enterprise or a service provider, network performance problems
represent real economic loss. For example, according to one of the Company's
customers, dispatching a technician to reboot a router in the local
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area can cost between $200 and $400; most technicians are charged out at $250/
hour, and their average job is $1,000. The cost of a network outage can
raise operating costs by 50% from $1.00/hour/user to $1.50/hour/user. Other
customers have described a typical repair cycle for a large network as: 20
minutes to detect a problem, 30-120 minutes to diagnose the problem, and 60-120
minutes to implement the solution. An Internet Service Provider (ISP) with 1200
business customers who must return $1000-2000/hour/customer for an outage, can
incur as much as $10,000,000 in penalties in just four hours.
To reduce the impact of dependency and economic loss, most networks
employ some form of network management. However, most of these solutions have
limitations. Most deliver technical data in large quantity. Often the data reach
the network engineer after a problem has occurred and without identifying its
cause, which must still be determined by the network engineer before he can fix
it. Determining the root cause of the problem can take up to 75% of the
engineer's time, from when a problem is identified until it is fixed. When
mission-critical applications are unavailable, this delay is very apparent to
network users trying to conduct business. More problematic is how many
potentially revenue-producing customers could not get onto the network and took
their business elsewhere.
Because of these problems, network mangers and users are starting to
demand network infrastructure management products that:
. are able to determine how network users are impacted by the underlying
network problems.
. not only deliver data to engineers, but also automate some of the
engineer's analyses and activities, making him more productive.
. can identify network problems in real-time or even before they happen.
. can perform sophisticated analyses that send only the most important
information to the engineer. The information should be easily
understood, and the cause of the problem should be identified allowing
engineers to skip the lengthy diagnosis phase. Fixing the problem
automatically is highly desirable.
. redirect network traffic to maximize network capacity and avoid
bottlenecks and network faults.
. provide business solutions, not just network management solutions,
allowing the business to increase the returns it can earn.
The market for these products is highly fragmented and emerging, and,
as such, the size and growth rates are hard to quantify. According to research
published by First Security Van Kasper ("FSVK"), only 5% of potential customers
utilize these advanced network infrastructure management products. FSVK
estimates the network infrastructure management market at $2.7 billion in 1998,
growing to $10.4 billion in 2001, representing a compound annual growth rate
(CAGR) of 57%. Another study from 1998 conducted by Bear Stearns estimated the
size and growth rates of several network infrastructure management segments, as
follows:
. Performance analysis and reporting tools at $522MM in 2000 with an 80%
CAGR
. End-user performance management at $413MM in 2000 with an 82% CAGR
. Public WAN data service level management at $185MM in 2000 with a 51%
CAGR.
The Company believes it products are uniquely suited to meet the needs
of this market. Its distributed architecture easily scales to manage large,
diverse and highly distributed networks while performing predictive and
real-time problem identification. ION's Devices have the ability to act to
diagnose and resolve problems even during power or network outages. Because
analysis and actions occur at the distributed locations ION's products make
efficient use of network resources and expensive bandwidth while providing the
flexibility for
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customization to fit any network. The result of these characteristics
is real economic benefit. Quality of service is increased and the time to
diagnose and resolve problems (mean-time to repair (MTTR)) is reduced
thereby limiting service providers' need to make refunds to customers.
End user and customer dissatisfaction is minimized improving employee
productivity and customer loyalty. Expensive visits to diverse and remote
locations are limited. The Virtual Network Expert extends the expertise of
scarce resources across the entire network and assists human engineers to solve
problems more effectively and efficiently.
MARKETING AND DISTRIBUTION
In FY2000 the Company continued to expand its sales force, growing from
eight in FY1999 to 18 currently. The Company goes to market through three
channels: direct sales, resellers, and OEMs. In FY2000 direct sales were 38.5%
of revenues; sales through resellers were 30.0%, and OEM sales were 31.5%. ION
markets its products primarily in the United States and Europe. In FY2000 85% of
sales were in the United States, 15% were in Europe and 5% were in the Pacific
Rim and South/Central America.
In total, ION has over 250 customers with products deployed at more
than 10,000 locations worldwide. ION's largest customers are telecommunications
service providers in the United States and Europe. Examples of those to whom ION
sells direct are: Rhythms NetConnections, Crown Castle USA, MCI Worldcom, Pointe
Communications Corporation, FirstWorld Communications, Sonera Systems Ltd, and
Concert. Enterprise and institutional customers are, among others, Intel
Corporation, Entergy Corporation, Fleet Boston Corporation, and Bay Area Rapid
Transit (BART). Some of ION's resellers are: Bomara Associates, KPN Telecom BV,
Bluewater Networks, Inc., Alcatel Belgium, and NeMO GmbH.
COMPETITORS
The table below shows the eight companies that the Company believes are
most likely to become ION competitors. The table describes the core strength of
the company, its current products, the way it positions itself in the
marketplace and its most recent fiscal year revenues, if available. Currently
ION has little direct competition, and the market it addresses is emerging and
highly fragmented with many companies expanding by acquisition from their
initial business to offer a more comprehensive solution. An indication of the
emerging nature of the market ION addresses is the size of the companies in this
industry. None has yet reached $100 million in annual sales.
While not direct competitors, many companies position themselves in the
marketplace in much the same way as does ION. This can be very confusing to
potential customers, particularly in the emerging market. Customers are confused
because industry participants with very different products claim to deliver
similar benefits. These companies claim similar capabilities to ION's, and as
ION executes its growth strategy and the industry consolidates through
acquisition, the number is likely to increase.
Management believes ION currently has a combination of distinguishing
capabilities which are valued by the marketplace, especially the ability to
proactively anticipate network problems and take the actions required to repair
network problems even during power or network outages without using up expensive
network bandwidth. These characteristics provide genuine economic benefit to
customers by increasing the quality of service delivered by the network and
reducing the time required to resolve problems.
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<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
COMPANY CORE STRENGTH PRODUCTS POSITIONING
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Applied WAN/LAN remote site monitoring for AI products enable
Innovation measurement analog and relay contact alarm carriers to efficiently
signals monitor & manage their
networks
---------------------------------------------------------------------------------------------------
Aprisma Fault fault management system with A leader in e-business
management/- monitoring and fault isolation infrastructure management
monitoring software
---------------------------------------------------------------------------------------------------
Concord Reporting software product suite for Market leader in
real-time monitoring, alarm next-generation management
notifications & restart of solutions that ensure
failed processes, end-to-end effective e-business
view of application performance
availability & performance
---------------------------------------------------------------------------------------------------
MicroMuse Root cause monitors large-scale networks Leading provider of fault
analysis in real-time to quickly & service-level management
identify and address problems software
---------------------------------------------------------------------------------------------------
NetScout Hardware probes comprehensive performance Full-service provider of
for remote management system from network performance
monitoring & data integration of probes and management solutions)
collection NextPoint application
monitoring acquisition
---------------------------------------------------------------------------------------------------
Riversoft Root cause maps and monitors the network The only provider of
analysis isolating the room cause of 'interventionless' network
the problem management tools
---------------------------------------------------------------------------------------------------
SMARTS Root cause pinpoints root cause of the Real-time problem
analysis problem, identifies impact and diagnosis and impact
automates response analysis
---------------------------------------------------------------------------------------------------
Visual Networks WAN Measurement; monitor service level Leading provider of
QoS; Reporting agreements Service Management Systems
for IP networks
---------------------------------------------------------------------------------------------------
</TABLE>
However, there can be no assurance that the Company's PRIISMS Suite
will continue to enjoy acceptance or that the Company will be able to compete
successfully on an on-going basis. The Company believes that the principal
factors affecting competition in the network infrastructure management business
are (1) having a unique offering that provides demonstrable economic benefit to
the customer, (2) ease of use, including the level of internal integration which
supports efficient use by network personnel and of external integration which
allow the system to work with other network management tools, (3) the
flexibility to rapidly incorporate additional features and customize products to
unique needs of individual infrastructures, and (4) for the low end of the
product line, price. Although the Company believes that that its present
products and services are competitive, the Company competes with a number of
companies with substantially larger financial, research and development,
marketing and technical resources. Such companies may succeed in producing and
distributing competitive products more effectively than the Company and may also
develop new products which compete effectively with those of the Company.
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SOURCES AND AVAILABILITY OF MATERIALS
The Company designs its products utilizing readily available parts
manufactured by multiple suppliers and relies on and intends to continue to rely
on these suppliers. The Company has been and expects to continue to be able to
obtain the parts required to manufacture its products without any significant
interruption or sudden price increase, although there can be no assurance that
it will be able to continue to do so.
The Company sometimes utilizes a component available from only one
supplier. If a supplier were to cease to supply this component, the Company
would most likely have to redesign a feature of the affected device. In these
situations, the Company maintains a greater supply of the component on hand in
order to allow the time necessary to effectuate a redesign or alternative course
of action should the need arise.
DEPENDENCE ON PARTICULAR CUSTOMERS
The Company has continued to expand its customer base and to broaden
its sales constituency. These efforts have resulted in the Company becoming less
reliant on any one particular customer. However, the Company sells a substantial
portion of its products to several major customers. The top four customers -
Rhythms NetConnections, Lucent Technologies, KPN - Telecom BV, and
Hewlett-Packard - accounted for 38% of revenues in FY2000. The top eight
customers, which included MCI Worldcomm, Crown Castle International, Siemens
USA, and AT&T, accounted for 56% of revenues in FY2000. Two of these customers -
Crown Castle International and Siemens USA, - were new to the Company during
FY2000. The loss of any of these customers could have a material adverse effect
on the Company's business.
INTELLECTUAL PROPERTY, LICENSES AND LABOR CONTRACTS
The Company holds no patents on its technology. Although it licenses
some of its technology from third parties, the Company does not consider any of
these licenses to be critical to its operation.
The Company has made a consistent effort to minimize the ability of
competitors to duplicate the software technology utilized in its products.
However, the possibility of duplication of its products remains, and competing
products have already been introduced.
The Secure Sentinel name is a registered trademark filed with the
United States Patent and Trademark Office ("PTO"), as is SAFECONNECT and
NETREACH. The Company also has trademark applications pending with the PTO for
its corporate name, ION Networks, Inc. The Company anticipates that these
trademarks will be registered, but there can be no assurance that this will
occur. The Company plans to apply for other trademarks during the coming year.
GOVERNMENTAL APPROVALS AND EFFECT OF GOVERNMENT REGULATION
Due to the sophistication of the technology employed in ION's products,
export of these products is subject to governmental regulation. The Company has
obtained licenses to export certain of its products in
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limited quantities to Sweden, Norway, Switzerland, South Africa, the United
Kingdom, France, Italy, Germany, Australia and Singapore.
As required by law or demanded by customer contract, the Company
obtains approval of its products by Underwriters' Laboratories. Additionally,
because many of the products interface with telecommunications networks, the
Company's products are subject to several key Federal Communications Commission
("FCC") rules requiring FCC approval.
Part 68 of the FCC rules contains the majority of the technical
requirements with which telephone systems must comply to qualify for FCC
registration for interconnection to the public telephone network. Part 68
registration requires telecommunication equipment interfacing with the public
telephone network to comply with certain interference parameters and other
technical specifications. FCC Part 68 registration for ION's products has been
granted, and the Company intends to apply for FCC Part 68 registration for all
of its new and future products.
Part 15 of the FCC rules requires equipment classified as containing a
Class A computing device to meet certain radio and television interference
requirements, especially as they relate to operation of such equipment in a
residential area. Certain of ION's products are subject to and comply with Part
15.
The European Community has developed a similar set of requirements for
its members and the Company has begun the compliance process for its products in
Europe. Additionally, ION has certified certain of its products to the NEBS
(Network Equipment Business Specification) level of certification. This is a
certification that was developed by Bellcore (now Telcordia Technologies) and is
required by many of ION's telecommunications customers.
Although the Company has not experienced any difficulties obtaining
such approvals, failure to obtain approval for new and future products could
have a material adverse effect on the Company's business.
RESEARCH AND DEVELOPMENT ACTIVITIES
During FY2000 the Company expanded its research and development
activities substantially. The Company continued development of its
next-generation of products and introduced three new ION Devices: NetwoRx,
NetwoRx - VT, and NetwoRx - O. Additionally, Release 1.1.1 of PRIISMS Manager is
entering (beta)-testing. This release will manage products in both the Sentinel
and NetwoRx families. Release 1.2 of PRIISMS Manager and NetwoRx will implement
AMT metrics and action routines and is scheduled for release in summer 2000.
Shortly thereafter, PRIISMS Manager will be extended to manage Secur@ccess
devices. In order to deliver these new products, research and development
funding increased from $2,580,857 in FY1999 to $4,288,396 in FY2000.
During FY2000 the research and development activities of Microframe,
the predecessor to the Company, and SolCom, which was acquired in March, 1999,
were integrated. Four categories of product were being developed at SolCom:
Modular Products, Sentinel III, NetworX, and an ASIC (Application-Specific
Integrated Circuit). During FY2000 the Modular Products continued to be
developed in Livingston Scotland and resulted in daughter boards that provide
RMON monitoring for NetwoRx. The Company no longer sells
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standalone Modular RMON Products. Sentinel III product development was
transferred to Piscataway, New Jersey, and integrated into the NetworX
development effort which resulted in three new intelligent devices during
FY2000. The hardware portion of the NetworX development effort was also
transferred to Piscataway, and the centralized software manager portion was
combined with Manager 2000, from MicroFrame, and developed into PRIISMS Manager.
The ASIC development effort was reevaluated in light of new technologies on the
market and the requirement for continued costly development and the Company
intends to complete this effort as a series of FPGAs (field programmable gate
arrays) for monitoring high-speed network protocols such as ATM (Asynchronous
Transfer Mode), gigabit Ethernet and OC-3 (Optical Carrier).
COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company's business activities do not generally fall under
applicable regulations involving discharge of materials into the environment.
EMPLOYEES
As of June 22, 2000, the Company had 134 employees, all of whom are
full-time employees, and of which 37 are technical personnel, 54 are in sales,
marketing and support, 22 are in production, and 21 are in executive, financial
and administrative capacities. None of the Company's employees are represented
by labor unions. The Company considers its relations with its employees to be
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases 26,247 square feet of space at 1551 South Washington
Avenue, Piscataway, New Jersey, for its principal executive offices. This lease,
which commenced on February 18, 1999, is for a term of ten (10) years with
monthly rent payable by us to the landlord as follows: $511,816.56 for the first
two years of the term; $551,187 for the next year of the term; $557,748.72 for
the next year of the term; $610,242.72 for the next three years of the term; and
$662,242.72 for the remaining three years of the term. In accordance with the
lease, the Company is also obligated to make additional payments to the landlord
relating to certain taxes and operating expenses.
The Company also leases 245 square meters of office space in Antwerp,
Belgium for its European operating headquarters. This lease provides for a
monthly rental of 81,083 Belgian Francs per month (US$2,316.00 at an exchange
rate of 35BEF of 1US$) and expires on July 31, 2005, with an option by the
Company to terminate the lease on either July 31, 1999 or July 31, 2002, as
applicable.
In addition, the Company leases 0.298 hectare of space at SolCom House,
Meikle Road, Kirkton Campus, Livingston EH547DE, Scotland as well as 436 square
feet of space at 1801 Robert Fulton Drive, Suite 400, Reston, Virginia 20191 in
connection with the operations of SolCom and SolCom Systems Inc., a wholly-owned
subsidiary of SolCom, respectively. These leases provide for monthly rentals of
(pound)3,583 and $3,675, respectively, and expire on August 31, 2011 and
February 28, 2000, respectively.
The Company also leases approximately 5,600 square feet of space at
48834 Kato Road, Fremont,
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California in the Bedford Fremont Business Center in connection with its LeeMAH
division located in Fremont, California. This lease commenced on June 1, 1999
and is for a term of 60 months with monthly rent payable by the Company to the
landlord as follows: $7,360 per month for the first 12 months of the term;
$7,590 per month for months 13-24; $7,820 per month for months 25-36; $8,050 per
month for months 37-48; and $8,280 per month for months 49-60.
ITEM 3. LEGAL PROCEEDINGS.
------------------
There are no material pending legal proceedings to which the Company is
a party or to which any of its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------
MARKET INFORMATION
The Company's common stock, par value $.001 per share (the "Common
Stock"), is listed on the NASDAQ National Market under the symbol "IONN". The
following table sets forth the high ask and low bid prices of the Common Stock
for the periods indicated as reported on the NASDAQ National Market.
Fiscal Year 2000 HIGH LOW
---------------- ---- ---
June 30 5 1/16 2 1/8
September 30 8 3/4 3 13/16
December 31 22 1/2 5 7/16
March 31 44 18 5/8
Fiscal Year 1999
June 30 4 3/4 2 3/4
September 30 3 7/16 1 1/8
December 31 3 5/8 1 1/2
March 31 3 1 3/4
RECENT SALES OF UNREGISTERED SECURITIES
On March 31, 1999, the Company issued an aggregate of 2,200,233 shares
of Common Stock (the "SolCom Shares") and options to purchase 451,188 shares of
Common Stock to the holders of SolCom in consideration of the acquisition by the
Company of all of the outstanding share capital of SolCom. The Company also
granted to employees of SolCom options to purchase up to an additional 48,369
shares of Common Stock. In addition, the Company granted 300,000
performance-based options to certain employees of SolCom, 150,000 of which have
terminated for failure to achieve certain revenue targets and the remaining
150,000 of which have terminated due to the termination of employment of the
option holders. The SolCom Shares were issued pursuant to Section 4(2) of, and
Regulation S promulgated under, the Securities Act of 1933, as amended (the
"Act"), to shareholders of SolCom residing outside the United States and to one
accredited investor residing in the United States. The options granted are
exercisable immediately and have exercise prices ranging from $0.4826 per share
to $1.8016 per share and expiration dates ranging from four to ten years.
On February 25, 1999, the Company acquired certain selected assets of
LeeMAH in consideration of the delivery by the Company to LeeMAH of a promissory
note in the principal amount of $1,000,000 with interest thereon at the rate of
six (6%) percent per annum, payable in one balloon payment within 90 days
thereafter. Effective March 31, 1999, the Note was terminated by agreement of
the parties in exchange for the issuance to LeeMAH of 444,000 shares of Common
Stock, pursuant to Section 4(2) under the Act.
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On June 7, 1999, the Company issued an aggregate of 1,000,000 shares of
Common Stock and warrants to purchase an aggregate of 500,000 shares of Common
Stock to Special Situations Private Equity Fund, L.P. ("Special Situations") and
certain affiliated entities of Special Situations in consideration of an amount
equal to $3,000,000, pursuant to Section 4(2) under the Act. The terms of the
warrants are three years and the exercise prices thereof are $4.50 per share for
250,000 warrants and $6.00 per share for the remaining 250,000 warrants.
On August 6, 1999, the Company issued an aggregate of 2,000,000 shares
of Common Stock at a price of $4.75 per share to a group of accredited investors
in consideration of an amount equal to $9,500,000, pursuant to Rule 506
promulgated under the Act.
In addition, in connection with the June 1999 and August 1999
financings, financial advisors were granted warrants to purchase an aggregate of
306,250 shares of Common Stock in consideration of financial advisory services
provided by them to the Company. An aggregate of 18,750 warrants are exercisable
for a period of three years from the date of grant and the remaining 287,500 are
exercisable for a period of five years from the date of grant. The exercise
prices thereof are $4.75 per share for 250,000 warrants, $3.00 per share for
37,500 warrants, $4.50 per share for 9,375 warrants and $6.00 per share for the
remaining 9,375 warrants.
SECURITY HOLDERS
As of June 22, 2000, there were 379 holders of record of the Common
Stock (not including beneficial owners of Common Stock held by brokers in street
name).
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock during
the two fiscal years ended March 31, 2000 and March 31, 1999. The Company
presently intends to retain all earnings to finance its operations and therefore
does not presently anticipate paying any cash dividends in the foreseeable
future.
Under the terms of the Company's credit agreement with United National
Bank ("United"), the Company may not, without the prior written consent of
United, declare or pay any dividends in cash on any shares of capital stock of
the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
---------------------------------------------------------
A number of statements contained in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable statements. These
risks and uncertainties include, but are not limited to, the recent introduction
and the costs associated with, a new family of products; dependence on the
acceptance of this new family of products; uncertainty as to the acceptance of
the Company's products generally; risks related to technological factors;
potential manufacturing difficulties; uncertainty of product development;
uncertainty of adequate financing; dependence on third parties; dependence on
key personnel; competition; a limited customer base; risk of system failure,
security risks and liability risks; risk of requirements to comply with
government regulations; vulnerability to rapid industry
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change and technological obsolescence; and general economic conditions. Unless
otherwise required by applicable securities laws, the Company assumes no
obligation to update any such forward-looking statements, or to update the
reasons why actual results could differ from those projected in the
forward-looking statements.
OVERVIEW/PLAN OF OPERATION
FY2000 was a year devoted to integrating the disparate product lines
and cultures of the three companies forming ION Networks, i.e., MicroFrame,
SolCom, and LeeMAH Datacomm Systems. The three companies have integrated the
operations, systems and product lines. The Company now sells various intelligent
hardware devices developed from the three companies and managed by a single
central system, PRIISMS Manager.
The integrated development efforts have resulted in the introduction of
three new NetwoRx intelligent devices: NetwoRx, NetwoRx - O which was developed
to meet the needs of optical technology manufacturers, and NetwoRx - VT which
was developed to meet the needs of CLECs. In addition, the Secur@ccess products
have now been certified for operation in Europe. Sales of ION products increased
by 29% in Europe during FY2000.
The Company's employee base increased from 126 full-time employees in
FY1999 to 134 in FY2000 as a result of internal growth. A number of changes and
additions were made in the executive team with new personnel being added in
Engineering, Marketing and Business Development, Manufacturing, Finance, and
Sales. The sales force increased from eight to 18. The result of all of these
actions was 79% revenue growth from FY1999 to FY2000.
During FY2000 the Company maintained relations with Rhythms
NetConnections, Lucent Technologies, KPN - Telecom BV, MCI Worldcomm and AT&T.
Several new important relationships were formed during FY2000, e.g., Sycamore
Networks, Intel Corporation, Hewlett-Packard, Crown Castle International, Bomara
Associates, FirstWorld Communications, and Siemens USA.
During the next 12 months the Company plans to continue developing its
PRIISMS Suite. Upgrades to the Sentinel family are already underway as is the
final integration of Secur@ccess products with PRIISMS Manager. Additional AMT
routines for measurement, diagnosis and action are planned. COGS (cost of goods
sold) reduction programs are planned which include redesign of systems as well
as the on-going examination of the cost and quality of ION's contract
manufacturers.
The Company will continue to look for attractive acquisition candidates
and to build the sales force. Additional expansion in Europe is anticipated as a
new Managing Director for the Livingston, Scotland facility starts in July 2000.
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RESULTS OF OPERATIONS
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenues for the year ended March 31, 2000 were $22,668,833 as
compared with revenues of $12,673,917 for the year ended March 31, 1999, an
increase of approximately 79%. This increase was primarily due to a significant
increase (approximately 93%) in shipments of the Company's Sentinel 2000
product. The Company shipped approximately 6,800 units of the Sentinel 2000,
generating net revenues of approximately $12,900,000, representing approximately
57% of overall revenue. During fiscal 1999, approximately 3,200 such units were
sold, generating net revenues of approximately $6,700,000, or 53% of overall
revenue for such year. In addition, during fiscal year 2000, the Company
developed and licensed the rights to certain customized modules of its software
via a perpetual license agreement to an existing customer for approximately $3.2
million. This development and licensing had a positive effect on the Company's
rate of revenue growth and its gross margin for the year. The Company has no
further obligations with respect to this development and the licensed software.
The newly introduced NetwoRx family of products accounted for $3,835,000 of
overall revenues, or 17%, in FY2000.
The Company has approximately $1.1 million of sales backlog that it
expects to record as revenue in the first half of fiscal 2001. From a geographic
standpoint, the Company's net revenue increase was achieved primarily on the
domestic side. Shipments to customers in the United States were approximately
$19,200,000 (85% of total revenues) in fiscal 2000 as compared to approximately
$10,050,000 (79%) in fiscal 1999, representing an increase of 91%. Shipments by
the Company to the European market, were approximately $3,337,000 (14%) for the
year ended March 31, 2000 compared to approximately $2,580,000 (20%) for the
year ended March 31, 1999, an increase of 29%. It is the Company's intention to
increase its presence in the European market.
The Company's cost of goods sold increased to $8,409,068 for the
year ended March 31, 2000 compared to $5,464,708 for the year ended March 31,
1999 as a result of increased shipment levels. Cost of goods sold as a
percentage of sales decreased from 43% for the previous comparable fiscal period
to 37% for this fiscal period, primarily due to product mix coupled with the
software licenses discussed above.
Research and development expenses, net of capitalized software
development, increased from $2,580,857 in the year ended March 31, 1999 to
$4,288,396 in the current fiscal year, an increase of 66%. As a percentage of
revenues, research and development expenses decreased from approximately 20% to
19%. The internal research and development staff and related expenses increased
significantly during Fiscal 2000 in order to continue to provide increased
technical functionality and support to the Sentinel 2000 family of products as
well as to further the development of the Company's next generation of products.
Selling, general and administrative expenses increased 82% from
$6,114,218 for fiscal 1999 to $11,155,390 for the year ended March 31, 2000. As
a percentage of revenues, selling, general and administrative expenses increased
from approximately 48% to 49%. This increase was primarily due to the
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addition of sales personnel and administrative infrastructure to support the two
aforementioned acquisitions made in fiscal 1999, as well as the Company's
organic growth.
Amortization expense for capitalized software increased from
$372,000 in fiscal 1999 to $2,308,000 in fiscal 2000 due to the increase in
capitalized research and development expense during the past two fiscal years.
The company continued to invest in Research and Development during fiscal 2000
in order to meet long term growth objectives. Also, amortization expense for
goodwill associated with the acquisitions of Solcom and certain assets of LeeMah
increased significantly in fiscal year 2000 to $966,000 from $38,000 in fiscal
1999. This increase was a result of the full year impact in fiscal 2000 compared
to 1999.
The Company had a loss before taxes of $4,995,248 for the year
ended March 31, 2000 compared to a loss before taxes of $5,764,764 for the year
ended March 31, 1999. The March 31, 1999 loss included a one-time charge for
IPR&D of $3,490,177 in connection with the SolCom acquisition. The fiscal year
2000 loss was incurred due to the increase in research and development expenses
as well as the expansion of the Company's infrastructure. The Company's tax rate
(benefit) was lower than the federal statutory tax rate (benefit) primarily due
to the effect of recording a valuation allowance on certain of the Company's net
operating loss carryforwards and other deferred tax assets in fiscal 2000
coupled with the recording of a provision for foreign taxes in fiscal 2000. The
increase in the valuation allowance of approximately $2.3 million during fiscal
2000 is due primarily to the fact that management believes that at March 31,
2000, it is more likely than not that the net operating loss carryforwards will
expire unutilized. At March 31, 2000, the Company had federal, state, and
foreign tax-effected net operating loss carryforwards of approximately $3.8
million, respectively. The expiration dates for its net operating losses range
from the years 2011 through 2014. The net loss for the year ended March 31, 2000
was $5,259,738 compared to a net loss of $5,997,003 for the prior fiscal year.
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Company's acquisition of SolCom in the fourth
quarter of FY1999, the Company allocated $3,490,177 of the purchase price
thereof to purchased IPR&D. The following provides an update on the status of
the projects included in the IPR&D analysis.
NetworX is a new product line being developed as part of the Company's
PRIISMS Suite. NetworX was designed to be the industry's first integrated
platform for proactive, remote, real-time secure management and monitoring of
voice and data networks. It would use dial-up, Telnet, or SNMP connections to
allow network managers to monitor, evaluate and control all aspects of their
large, distributed networks from a single central point. The first version of
this product has been released as NetwoRx, and additional releases are planned
for FY2001.
Sentinel III products were designed to offer a range of infrastructure
management tools for managing large distributed networks. All Sentinel products
feature alarm and fault management, detection of unusual calling patterns on
PBXs which could indicate toll fraud, environmental monitoring and control, as
well as secure access. Sentinel III was described at FY1999 year-end as an
intelligent port controller combining remote monitoring and Sentinel network
device management to deliver both network control and a comprehensive picture of
network activities. The Company later elected to re-badge the Sentinel III as a
less expensive version
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of the NetworX product. Two versions have been released as NetwoRx - O for
optical technology manufacturers, and NetwoRx - VT for CLECs.
The Company has been developing an ASIC which incorporates a large
portion of the hardware and software required to provide the functionality of an
intelligent device. As originally contemplated, the result of this effort has to
be a substantial increase in processing speed and a reduction in COGS if the
chip is produced in large volumes. Designing the chip required the Company to
learn and apply a new technology to develop first one and then a series of more
and more capable ASICs. Consequently, the Company put the ASIC project on hold
in order to focus all development efforts on the projects described above. By
the end of FY2000, the ASIC project was 20% complete, and the costs to complete
the work were estimated at $350,000. As previously reported, in early FY2001,
Management decided to reevaluate the project in light of new technologies on the
market and the requirement for continued costly development. The project will
now incorporate a different chip technology, FPGAs (field programmable gate
arrays), and will be completed as a series of arrays for monitoring high-speed
network protocols such as ATM, gigabit Ethernet and OC-3. After verifying these
designs in the field, the gate arrays may, depending on potential for economic
benefits, be converted to utilize ASIC technology.
Analysis of Products/IPR&D
The value allocated to acquired IPR&D for the SolCom acquisition as of
the closing on March 31, 1999 was determined utilizing the income approach via
an excess earnings analysis. This methodology requires the projection of
revenues and expense that will arise as a result of the successful completion of
the IPR&D project. The operating income attributable to each IPR&D project was
calculated as projected revenues less the projected operating expenses. Net
operating income is calculated after applying the projected effective tax rate
for the Company.
A charge was taken to reflect the economic rent related to the net
assets required to run the business and support future growth. This return on
the requisite assets was based on industry comparable companies and company
specific information. Where it was determined that core technology of the
existing technology would be utilized by the IPR&D, a charge was applied against
IPR&D revenues. Core technology was identified for all of the IPR&D projects. A
core technology charge of 30% of operating profit was applied for each of the
IPR&D projects. The charge for use of the core technology and the return on
requisite assets was subtracted from net income.
The value allocated to acquired IPR&D was determined utilizing the
Stage of Completion methodology. This methodology utilizes the same cash flows
as the excess earnings analysis, but removes all research and development costs
to complete the identified project. In addition, the discounted value of these
cash flows is reduced to represent the percentage of which the project has been
completed as of March 31, 1999. The determination of the percentage completed is
based primarily on the amount of effort (cost or time) expended to date and
remaining until completion. Consideration is also given to the amount of risk
and effort incorporated in the development steps in relation to the development
steps remaining to complete the project.
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LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, the Company significantly strengthened its
financial position. Total assets increased from $15,973,425 to $27,390,241 while
total liabilities decreased from $9,572,437 to $ 5,994,304. The primary reason
for the improvement was an increase in cash provided by issuances of common
stock of approximately $20 million. These proceeds were used to liquidate
liabilities and fund the internal operations of the Company and to purchase
various property and equipment.
Net cash used in operating activities during fiscal 2000 was $4,971,783
compared to net cash used during fiscal 1999 of $553,688. The use of cash was
primarily attributable to the increase in accounts and other receivables of
approximately $2.6 million, the decrease in accounts payable and accrued
expenses of approximately $3.4 million, the decrease in other current
liabilities due to the pay down of prior year transaction costs of approximately
$1.6 million, partially offset by the increase in accrued payroll and other
liabilities of approximately $1.3 million and the decrease in inventory of
approximately $1.3 million.
Net cash used by investing activities during fiscal 2000 was $2,493,986
as compared to $2,999,904 for the prior fiscal year. Capital expenditures
increased by $785,320 as the Company continued its investment in computers,
other equipment and expenditures related to the relocation of its principal
executive offices in August 1999. Also, an additional $214,828 of research and
development expenses were capitalized during fiscal 2000 as compared with fiscal
1999. In fiscal 2000, $356,414 of cash was received for the amount of the
licensed technology discussed above which had been recorded on the balance
sheet.
Net cash provided by financing activities during the fiscal year was
$17,681,387 compared to $3,211,860 for the prior fiscal year. Issuance of Common
Stock of $12,500,000 and the exercise of options and warrants of $7,459,472 were
the primary reasons for the increase in net cash provided.
Overall, cash increased by approximately $10.2 million during fiscal
year 2000.
In October 1998, the Company entered into a line of credit agreement
with an available balance of $2,000,000 through July 30, 1999. In April 1999,
the line of credit was increased to $2,250,000. Prior to expiration this line
was extended through September 30, 1999. On September 9, 1999, the outstanding
balance of $2,250,000 was paid down in full. The line was collateralized by all
the business assets of the Company.
In December 1998, the Company entered into a term loan agreement with
United National Bank in the principal amount of $500,000 through December 2003.
At March 31, 2000, there were no borrowings outstanding under the term loan as
the balance was fully paid in March 2000.
The Company expects to fund the expansion of its business and
operations and meet its short and long-term liquidity needs from available cash
and cash flow, working capital and from funds derived from future operating
revenues as well as through additional financing from outside sources. The
Company currently believes that it will have sufficient cash resources to meet
its operational needs over the next twelve months.
ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, it requires that entities recognize all derivatives
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as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. Gains and losses resulting from changes
in the fair values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. This
standard, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activites - Deferral of the Effective Date of FASB Statement No. 133,
and Amendment of FASB Statement No. 133", is effective for fiscal years
beginning after June 15, 2000, though earlier adoption is encouraged and
retroactive application is prohibited. For the Company, this means the standard
must be adopted no later than April 1, 2001. Management, based on its current
operations, does not expect the adoption of this standard to have a material
impact on the Company's results of operations, financial position or cash flows.
In December 1999 the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements". The SEC delayed the effective
date of this SAB from March 31, 2000 and now must be adopted by June 30, 2000.
The Company has assessed the impact of SAB 101 on its results of operations and
believes that its results of operations for the year ended March 31, 2000 have
been presented in accordance with the provisions of the SAB.
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ITEM 7. FINANCIAL STATEMENTS.
---------------------
The financial statements required hereby are located on pages F-1
through F-23.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES.
----------------------
None.
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PART III
The information called for by Part III (Items 9, 10, 11 and 12 of Form
10-KSB) is hereby incorporated by reference to the Company's Definitive Proxy
Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934, as amended, in connection with the Company's 2000 Annual Meeting of
Stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) EXHIBITS
--------
Exhibit
No. Description
3.1* Certificate of Incorporation of the Company, as filed with
the Secretary of State of the State of Delaware on August 5,
1998.
3.2* Certificate of Amendment of the Certificate of
Incorporation, as filed with the Secretary of State of the
State of Delaware on December 11, 1998.
3.3 Certificate of Amendment of the Certificate of
Incorporation, as filed with the Secretary of state of the
State of Delaware an October 12, 1999 (Incorporated by
reference to Exhibit 3.3 the Company's Registration
Statement on form S-8 filed on March 17, 2000).
3.4* By-Laws of the Company.
3.5***** Form of Specimen Common Stock Certificate of the Company.
4.1* 1998 Stock Option Plan of the Company.
4.2* 1998 U.K. Sub-Plan of the Company, as amended.
10.1***** Lease Agreement dated February 18, 1999 by and between the
Company and Washington Plaza Associates, L.P., as landlord.
10.2***** Business Park Gross Lease dated May 17, 1999 by and between
the Company and Bedford Property Investors, Inc.
10.3***** Supply Agreement dated October 20, 1998 by and between the
Company and Lucent Technologies.
10.4***** OEM Purchase Agreement dated April 13, 1999 by and between
the Company and the Hewlett-Packard Company.
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10.5***** Agreement dated as of December 19, 1994 by and between
LeeMAH DataCom Security Corporation and Siemens Rolm
Communications Inc.
10.6***** Equipment Lease Agreements dated June 10, 1999 and May
5, 1999 by and between the Company and Siemens Credit
Corporation.
10.7***** Equipment Lease Agreement dated June 17, 1999 by and
between the Company and Lucent Technologies.
10.8***** Employment Agreement dated as of April 1, 1998 between
the Company and Stephen B. Gray
10.9****** Employment Agreement dated as of April 1, 1999 between
the Company and Stephen B. Gray.
10.10****** Non-negotiable Promissory Note in the principal amount
of $750,000 issued by Stephen B. Gray to the Company.
10.11****** Line of Credit Agreement with United Nations Bank dated
September 30, 1999.
10.12** Share Purchase Agreement, as amended, dated as of
December 28, 1998 by and among the Company, SolCom
Systems Limited ("SolCom"), the shareholders of SolCom
and certain representatives of such shareholders.
10.13*** Agreement and Plan of Merger by and between the Company
and MicroFrame, Inc., a New Jersey corporation.
10.14**** Asset Purchase Agreement dated as of February 25, 1999
by and among the Registrant, LeeMAH and the Parent.
10.15**** Assignment of Patents of LeeMAH dated February 25, 1999.
10.16**** Assignment of Trademarks of LeeMAH dated February 25,
1999.
23.1****** Consent of PricewaterhouseCoopers LLP
27.1****** Financial Data Schedule
------------------------------
* Incorporated by Reference to the Company's Registration
Statement on Form S-8 filed on April 22, 1999.
** Incorporated by Reference to Appendix A of the Company's
Definitive Information Statement on Schedule 14C filed
on March 11, 1999.
-25-
<PAGE>
*** Incorporated by Reference to Appendix I of the Company's
Definitive Information Statement on Schedule 14C filed
on March 11, 1999.
**** Incorporated by Reference to the Company's Current
Report on Form 8-K filed on March 12, 1999.
***** Incorporated by Reference to the Company's Annual Report
on form 10-KSB for the fiscal year ended March 31, 1999.
****** Filed herewith.
(b) REPORTS ON FORM 8-K
--------------------
None
-26-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DATED: June 28, 2000
ION NETWORKS, INC.
By: /s/ Stephen B. Gray
--------------------------
Stephen B. Gray, President
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and
in the capacities indicated on June 28, 2000:
Signature Title
/s/ Stephen B. Gray
-------------------------------- President, Chief Executive
Stephen B. Gray Officer and Director
-------------------------------- Chairman of the Board of
Stephen M. Deixler Directors
/s/ Alfred Leonardi
-------------------------------- Principal Financial Officer
Alfred Leonardi and Principal Accounting
Officer
/s/ Baruch Halpern
-------------------------------- Director
Baruch Halpern
/s/ Alexander C. Stark Director
--------------------------------
Alexander C. Stark
/s/ William Martin Ritchie Director
--------------------------------
William Martin Ritchie
Director
--------------------------------
Alan Hardie
-27-
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
Report of Independent Accountants F-1
Consolidated Balance Sheets as of March 31, 2000
and March 31, 1999 F-2
Consolidated Statements of Operations for the Years
Ended March 31, 2000 and 1999 F-3
Consolidated Statements of Cash Flows for the Years
Ended March 31, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity for
the Years Ended March 31, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ION Networks, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of ION
Networks, Inc. and Subsidiaries (the "Company") at March 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the two years
in the period ended March 31, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
June 8, 2000
F-1
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 10,381,612 $ 165,994
Accounts receivable, less allowance for doubtful accounts of $251,000 and
$150,000, respectively 4,569,546 3,092,867
Other receivables 1,560,697 -
Inventory, net 1,924,671 2,554,643
Deferred tax assets - 422,310
Prepaid expenses and other current assets 602,874 433,031
--------------- ---------------
Total current assets 19,039,400 6,668,845
Property and equipment, net 2,146,956 1,010,369
Capitalized software, less accumulated amortization of
$4,259,851 and $1,951,715, respectively 4,185,911 5,350,388
Goodwill and other acquisition - related intangibles, less
accumulated amortization of $1,030,334 and $63,810, respectively 1,938,716 2,905,240
Other assets 79,258 38,633
--------------- --------------
Total assets $ 27,390,241 $ 15,973,475
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital leases $ 67,900 $ -
Current portion of long-term debt 96,000 488,948
Accounts payable and accrued expenses 2,632,135 3,890,152
Accrued payroll and related liabilities 2,139,524 813,266
Deferred income 275,657 269,457
Other current liabilities 352,093 1,909,072
--------------- ---------------
Total current liabilities 5,563,309 7,370,895
--------------- ---------------
Noncurrent deferred tax liabilities, net - 188,276
Long-term portion of capital leases 302,866
Long-term debt, net of current portion 128,129 2,013,266
Commitments and contingencies (Notes 9 and 10)
Stockholders' equity
Preferred stock - par value $.001 per share; authorized 1,000,000
shares, none issued
Common stock - par value $.001 per share; authorized
50,000,000 shares; issued 15,111,617 shares and outstanding
15,049,586 shares at March 31, 2000, issued 8,286,670 shares,
outstanding 8,244,639 shares at March 31, 1999 15,112 8,287
Additional paid-in capital 35,063,207 14,858,560
Accumulated deficit (13,488,379) (8,228,641)
Accumulated other comprehensive income (loss) 13,196 (29,969)
--------------- ---------------
21,603,136 6,608,237
Less - Treasury stock, 62,031 shares, at cost at
March 31, 2000 and 1999, respectively (207,199) (207,199)
--------------- ---------------
Total stockholders' equity 21,395,937 6,401,038
--------------- ---------------
Total liabilities and stockholders' equity $ 27,390,241 $ 15,973,475
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net sales $ 22,668,833 $ 12,673,917
Cost of sales 8,409,068 5,464,708
------------- -------------
Gross margin 14,259,765 7,209,209
Research and development expenses 4,288,396 2,580,857
Selling, general and administrative expenses 11,155,390 6,114,218
Depreciation and amortization expense 3,902,331 731,160
In-process research and development charge - 3,490,177
------------- -------------
Loss from operations (5,086,352) (5,707,203)
Interest income 315,467 43,012
Interest expense (224,363) (100,573)
------------- -------------
Loss before income taxes (4,995,248) (5,764,764)
Income tax expense 264,490 232,239
------------- -------------
Net loss $ (5,259,738) $ (5,997,003)
=============== ==============
Per share data
Basic ($0.44) ($1.09)
Diluted ($0.44) ($1.09)
Weighted average number of common shares outstanding:
Basic 12,063,709 5,499,556
------------- -------------
Diluted 12,063,709 5,499,556
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (5,259,738) $ (5,997,003)
Adjustments to reconcile net loss to net cash
used in operating activities
In-process research and development charge - 3,490,177
Depreciation and amortization 3,902,331 731,160
Provision for doubtful accounts 100,757 23,793
Provision for inventory obsolescence 230,893 -
Noncash stock-based compensation charge 252,000 188,120
Deferred tax provision 234,034 232,239
Changes in operating assets and liabilities, net of
effects of acquisitions
Accounts receivable (1,577,436) (546,951)
Other receivables (1,560,697) -
Inventory 399,079 (786,783)
Prepaid expenses and other current assets (169,843) (198,618)
Other assets (40,625) (2,917)
Accounts payable and accrued expenses (1,258,017) 2,190,508
Accrued payroll and related liabilities 1,326,258 52,967
Deferred income 6,200 (35,394)
Other current liabilities (1,556,979) 105,014
------------- -------------
Net cash used in operating activities (4,971,783) (553,688)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,350,327) (565,007)
Capitalized software expenditures (1,500,073) (1,285,245)
Proceeds from the sales of software licenses 356,414
Capitalized acquisition related expenditures, net of cash acquired - (1,149,652)
------------- -------------
Net cash used in investing activities (2,493,986) (2,999,904)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit 253,711 2,196,280
Proceeds from debt 450,000
Repayments of the line of credit (2,250,000)
Repayments of debt (731,796) (55,009)
Issuances of common stock 12,500,000 708,000
Exercises of options and warrants 7,459,472 362,589
------------- -------------
Net cash provided by financing activities 17,681,387 3,211,860
------------- -------------
Net increase (decrease) in cash and cash equivalents 10,215,618 (341,732)
Cash and cash equivalents - beginning of period 165,994 507,726
------------- -------------
Cash and cash equivalents - end of period $ 10,381,612 $ 165,994
============= =============
SUPPLEMENTAL INFORMATION
Cash paid during period for interest $ 224,363 $ 100,573
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL STOCK COMPREHENSIVE TOTAL
COMMON PAID-IN SUBSCRIPTION ACCUMULATED INCOME TREASURY STOCKHOLDERS'
SHARES STOCK CAPITAL RECEIVABLE DEFICIT (LOSS) STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998 4,899,131 $ 4,899 $ 6,345,613 $ (104,000) $(2,231,638) $ (7,920) $(4,000) $4,002,954
Net loss (5,997,003) (5,997,003)
Issuances of common stock 3,327,539 3,328 8,279,887 104,000 8,387,215
Noncash stock-based
compensation 60,000 60 233,060 233,120
Acquisition of treasury
shares (203,199) (203,199)
Translation adjustments (22,049) (22,049)
---------- --------- ---------- ---------- ---------- ---------- --------- -----------
Balance, March 31, 1999 8,286,670 8,287 14,858,560 (8,228,641) (29,969) (207,199) 6,401,038
Net loss (5,259,738) (5,259,738)
Issuances of common stock 3,000,000 3,000 12,497,000 12,500,000
Exercise of options and
warrants 3,824,947 3,825 7,455,647 7,459,472
Noncash stock-based
compensation 252,000 252,000
Translation adjustments 43,165 43,165
---------- --------- ---------- ---------- ---------- ---------- --------- -----------
Balance, March 31, 2000 15,111,617 $15,112 $35,063,207 $ - $(13,488,379) $ 13,196 $(207,199) $21,395,937
---------- --------- ---------- ---------- ---------- ---------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
1. ORGANIZATION
THE COMPANY
ION Networks, Inc. (the "Company"), a Delaware corporation founded in
1999 through the combination of two network management developers -
MicroFrame, a New Jersey Corporation (the predecessor entity to the
Company, originally founded in 1982), and SolCom Systems Limited, a
Scottish corporation located in Livingston, Scotland (originally
founded in 1994), designs, develops and markets a broad range of
security, network management and remote maintenance products for voice
and data communications networks. By incorporating a variety of
hardware and software options for user authentication, these products
can deter unauthorized dial-in access to both devices and systems (such
as computers, local area networks and private branch exchange telephone
switches), while allowing authorized personnel access to perform needed
administration and maintenance of host devices and networks from remote
locations. The products also provide alarm monitoring and reporting
capabilities, a basis for remote network management and maintenance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of ION Networks, Inc. and its subsidiaries (collectively, the
"Company"). All material intercompany balances and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash
equivalents.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
market, and consists of hardware and software components designed to
interface with network communications environments. The markets for the
Company's products are characterized by rapidly changing technology and
the consequential obsolescence of relatively new products. The Company
has recorded estimated allowances against inventories related to
technological obsolescence.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
assets, which are generally three to five years. Expenditures for
maintenance and repairs, which do not extend the economic useful life
of the related assets, are charged to operations as incurred. Gains or
losses on disposal of property and equipment are reflected in the
statements of operations in the period of disposal.
CAPITALIZED SOFTWARE
The Company capitalizes computer software development costs in
accordance with the provisions of Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed" ("SFAS 86"). SFAS 86 requires that
F-6
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
the Company capitalize computer software development costs upon the
establishment of the technological feasibility of a product, to the
extent that such costs are expected to be recovered through future
sales of the product.
The Company capitalized $1,500,073 and $1,285,229 of software
development costs for fiscal 2000 and 1999, respectively. Additionally,
the Company acquired $3,855,000 of existing technology in connection
with an acquisition in fiscal 1999 (see Note 3). These costs are
amortized by the greater of the amount computed using (i) the ratio
that current gross revenues from the sales of software bear to the
total of current and anticipated future gross revenues from sales of
that software, or (ii) the straight-line method over the estimated
useful life of the product (generally three years). It is reasonably
possible that those current estimates of anticipated future gross
revenues, the remaining estimated economic life of the product, or
both, will be reduced significantly in the near term (due to
competitive pressures). As a result, the carrying amount of the
capitalized software costs may be reduced materially in the near term.
Amortization expense totaled $2,308,136 and $371,740 for fiscal 2000
and fiscal 1999, respectively.
GOODWILL AND OTHER ACQUISITION RELATED INTANGIBLES
Goodwill is the excess of purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases.
The Company amortizes goodwill on a straight-line basis over the
periods benefited, ranging from three to ten years. Other
acquisition-related intangibles includes customer lists ($300,000). The
Company amortizes other acquisition-related intangibles over periods
not to exceed three years.
RESEARCH AND DEVELOPMENT COSTS
The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development
expense in the period incurred.
REVENUE RECOGNITION POLICY
The Company records revenue from product sales upon shipment to the
customer if no significant vendor obligations exist and collectibility
is probable. Generally, no significant vendor obligations exist upon
shipment of the product. Maintenance contracts are sold separately and
maintenance revenue is recognized on a straight-line basis over the
period the service is provided, generally one year.
WARRANTY COSTS
Estimated warranty costs associated with the sale of hardware and
software are accrued at the time of sale. The warranty reserve included
in other current liabilities as of March 31, 2000 and 1999 approximated
$80,000 and $50,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the year. Actual results could differ from those
estimates. The significant estimates include the allowance for doubtful
accounts, allowance for inventory obsolescence, capitalized software
and the related amortization lives, deferred tax asset valuation
allowance and depreciation and amortization lives.
F-7
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, accrued payroll and related liabilities, deferred
income and other current liabilities approximates fair value because of
the relatively short maturity of these instruments. The Company's line
of credit and term loan have variable interest rates which adjust with
changes in market interest rates and the book value of such
indebtedness is deemed to approximate fair value.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property and equipment, goodwill, customer
lists and capitalized software are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the total of the expected future
undiscounted cash flows is less than the carrying amount of the asset,
a loss is recognized for the difference between the fair value and
carrying value of the asset.
PER SHARE DATA
Earnings per share has been calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The
weighted average number of common shares outstanding during fiscal 2000
and 1999 were used to compute basic earnings per share. Diluted
earnings per share is initially computed using the weighted average
number of common shares outstanding plus the dilutive potential common
shares outstanding. Dilutive potential common shares are additional
common shares assumed to be exercised. Potential common shares of
3,422,687 and 1,040,000 were excluded from the computation of diluted
earnings per share for fiscal 2000 and 1999, respectively, because
their inclusion would have had an antidilutive effect on earnings per
share.
FOREIGN CURRENCY TRANSLATION
The financial statements of the foreign subsidiaries were prepared in
local currency and translated into U.S. dollars based on the current
exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statement of operations.
Translation adjustments are reflected as foreign currency translation
adjustments in stockholders' equity and, accordingly, have no effect on
net loss. Transaction adjustments for the foreign subsidiaries are
included in income and are not material.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
return. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities ("temporary differences") using
enacted tax rates in effect for the year in which the differences are
expected to reverse. A deferred tax asset is recognized if it is more
likely than not that the asset will be realized in the future.
RECLASSIFICATIONS
The Company has reclassified certain prior year amounts to conform with
the 2000 presentation.
F-8
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
3. ACQUISITIONS
On March 31, 1999, the Company acquired all the outstanding shares of
SolCom Systems Limited ("SolCom") in exchange for 2,200,233 of common
shares and 499,567 of options, which had an aggregate value of
$6,211,880. The Company also issued 300,000 performance-based options
(see Note 8) which have not been reflected in the purchase price. The
value of the options, if issued, will be contingent consideration and
will be reflected as goodwill in the Company's financial statements.
This acquisition has been accounted for under the purchase method of
accounting. Accordingly, the accompanying consolidated statements of
operations do not include any revenues or expenses related to this
acquisition prior to the closing date. The acquisition resulted in an
allocation of $1,869,034 to goodwill and $3,855,000 to existing
technology. The amortization periods for both the goodwill and the
existing technology are three years.
Included in the purchase price for the above acquisition was purchased
in-process research and development, which was a non cash charge to
earnings as this technology had not reached technological feasibility
and had no future alternative use. In accordance with Statement of
Financial Accounting Standards No. 2 "Accounting for Research and
Development Costs," amounts assigned to purchased in-process research
and development meeting the above criteria were charged to expense for
$3,490,177. This technology will require varying additional
development, coding and testing efforts, and other rework over the next
year to determine technological feasibility.
The value allocated to purchased in-process research and development
was determined utilizing an income approach that included an excess
earnings analysis reflecting the appropriate cost of capital for the
investment. Estimates of future cash flows related to the in-process
research and development were made for each project based on the
Company's estimates of revenue, operating expenses and income taxes
from the project. The valuation included a state of completion
adjustment, which utilizes the same cash flows as the excess earnings
analysis, but removes all research and development costs to complete
the identified project.
The discount rates utilized to discount the projected cash flows were
based on consideration of the risk profile and the nature of each
project and the market. Other factors considered in the determination
of the discount rates include the useful life of each project, the
anticipated profitability of each project, the uncertainty of
technology advances that were known at the time and the stage of
completion of each project.
F-9
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
Following is a summary of the pro forma results of ION Networks, Inc.
as if the merger had closed effective April 1, 1998:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
MARCH 31,
1999
(UNAUDITED)
<S> <C>
Revenues $ 13,988,252
Net loss (6,027,379)
Weighted-average common shares 7,699,789
Weighted-average common shares and potential common shares 7,699,789
Basic earnings per share (.78)
Diluted earnings per share (.78)
</TABLE>
On February 25, 1999, the Company acquired certain of the operating
assets of LeeMAH Datacom Security Corporation ("LeeMAH") in exchange
for 444,000 shares of the Company's common stock. The purchase price of
approximately $1 million has been reflected primarily as goodwill and
other acquisition-related intangibles, mainly customer lists. The
acquired entity had sales of $209,000 and income from operations of
$149,000 for the period from the date of acquisition through March 31,
1999, accordingly, the acquisition was not material to the Company's
statement of operations, its cash flows or its financial position.
4. INVENTORY
Inventory, net of reserve for obsolescence of $283,000 and $185,000 at
March 31, 2000 and 1999, respectively, consists of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Raw materials $ 782,813 $ 1,570,150
Work-in-process 259,180 223,229
Finished goods 882,678 761,264
----------- --------------
$ 1,924,671 $ 2,554,643
---------- --------------
</TABLE>
F-10
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
At March 31, 2000 and 1999, property and equipment consists of the
following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Computer and other equipment $ 2,476,635 $ 1,725,901
Furniture and fixtures 998,929 230,679
Leasehold improvements 237,758 45,136
---------------- -----------------
3,713,322 2,001,716
Less: Accumulated depreciation 1,566,366 991,347
---------------- -----------------
Property and equipment, net $ 2,146,956 $ 1,010,369
---------------- -----------------
</TABLE>
Depreciation expense for property and equipment for the years ended
March 31, 2000 and 1999 amounted to $627,671 and $321,740,
respectively. During the years ended March 31, 2000 and 1999, the
Company retired fully depreciated assets amounting to $52,652 and
$649,518, respectively.
6. BANK BORROWINGS
On September 30, 1999, the Company entered into a $2,500,000 line of
credit agreement. The line of credit is available through July 31,
2000. At March 31, 2000, there were no borrowings under the facility.
Advances are payable at maturity, July 31, 2000, and bear variable
interest at a prime rate, as defined in the line of credit agreement.
The line is collateralized by all business assets of the Company.
On May 5, 1999, the Company entered into a $300,000 term loan
agreement. The term loan is due May 2002 and bears interest at a fixed
rate of 8.50%. The term loan is collateralized by certain property and
equipment of the Company. At March 31, 2000, $224,129 is outstanding
under the term loan.
In October 1998, the Company entered into a line of credit agreement
with an available balance of $2,000,000 through July 30, 1999. In April
1999, the line of credit was increased to $2,250,000. Prior to
expiration this line was extended through September 30, 1999. On
September 9, 1999, the outstanding balance of $2,250,000 was paid down
in full. The line was collateralized by all business assets of the
Company.
In December 1998, the Company entered into a term loan agreement in the
amount of $500,000 through December 2003. At March 31, 2000, there were
no borrowings outstanding under the term loan as the balance was fully
repaid in March 2000.
The agreements described above contain various restrictive covenants
that, among other things, limit the ability of the Company to incur
additional indebtedness, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, dispose of assets,
F-11
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
pay dividends, purchase or retire any of the Company's outstanding
shares or alter or amend the Company's capital structure. In addition,
the Company is required to maintain certain financial covenants,
including a debt to net worth ratio as well as limiting borrowings to
75% of the aggregate amount of accounts receivable (the "collateral
limit") which are outstanding under 90 days. At certain times during
fiscal 1999, the Company's borrowings exceeded the collateral limit
noted above. In July 1999, the Company received a waiver of this
covenant violation through April 1, 2000. The Company was in compliance
with all financial covenants at March 31, 2000.
At March 31, 2000, contractual maturities of the outstanding term loan
is as follows:
2001 $ 96,000
2002 109,397
2003 18,732
----------------
$ 224,129
----------------
----------------
7. INCOME TAXES
As of March 31, 2000, the Company has available federal, state and
foreign net operating loss carryforwards of approximately $8,116,688,
$7,149,694, and $1,668,944, respectively, to offset future taxable
income. The federal net operating loss carryforwards expire during the
years 2011 through 2014. In addition, the Company has investment credit
and research and development credit carryforwards aggregating
approximately $254,523, which may provide future tax benefits, expiring
from 2008 through 2014.
The components of the income tax provision for the years ended March
31, 2000 and 1999 are as follows:
2000 1999
Current
Federal $ - $ -
State - -
Foreign 30,456 -
-------------- --------------
30,456 -
-------------- --------------
Deferred
Federal 198,929 197,403
State 35,105 34,836
-------------- --------------
234,034 232,239
-------------- --------------
$ 264,490 $ 232,239
-------------- --------------
-------------- --------------
F-12
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The reasons for the difference between the Company's effective tax rate
and the United States federal statutory rate are as follows:
MARCH 31,
2000 1999
<S> <C> <C>
Effective tax rate reconciliation
Statutory federal tax rate (34) % (34)%
State taxes, net of federal benefit (6) (6)
Effect of in-process research and development write-off 24
Foreign rate differential 1 (1)
Permanent difference (goodwill) 13 -
Effect of recording valuation allowance on net operating loss
carryforwards 28 20
Other 3 1
---- ----
5 % 4 %
---- ----
</TABLE>
The tax effect of temporary differences which make up the significant
components of the net deferred tax asset and liability at March 31,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Current deferred tax assets
Inventory $222,246 $ 224,000
Accrued expenses 216,028 118,393
Allowance for doubtful accounts 100,303 79,917
Total current deferred tax assets 538,577 422,310
Valuation allowance (538,577) -
-------------- -------------
Net current deferred tax assets $ - $ 422,310
-------------- -------------
Noncurrent deferred tax assets
Depreciation and amortization $124,852 $ -
Net operating loss carryforwards 3,817,178 1,867,600
Research and development credit 254,523 186,524
Alternative minimum tax credit 20,125 6,867
------------- ---------------
Total noncurrent deferred tax assets 4,216,678 2,060,991
Valuation allowance (3,460,300) (1,696,459)
-------------- ---------------
Net noncurrent deferred tax assets $ 756,378 $ 364,532
-------------- ---------------
Noncurrent deferred tax liabilities
Depreciation $ - $ (28,865)
Capitalized software (756,378) (523,943)
-------------- ---------------
Total noncurrent deferred tax liabilities $(756,378) $ (552,808)
-------------- ---------------
Net noncurrent deferred tax (liabilities) assets $ - $ (188,276)
-------------- ---------------
</TABLE>
F-13
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
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 as management believes that it is more
likely than not that substantially all of the net operating loss
carryforwards and credits will expire unutilized.
The increase in the valuation allowance is due primarily to current
year net operating loss carryforwards for federal and state purposes,
$1,610,608, tax effected, and research and development credits,
$68,000, offset by the utilization of a small portion of foreign net
operating loss carryforwards, ($12,752), tax effected, during the year
ended March 31, 2000. Approximately $341,050 of the federal and state
net operating losses, if utilized, will reverse through equity in the
future.
8. STOCKHOLDERS' EQUITY
In August 1999, the Company sold 2,000,000 shares of common stock in a
private financing and received net proceeds of $9,500,000. In
connection with this sale, warrants to purchase 250,000, 37,500, 9,375
and 9,375 shares of common stock with an exercise price of $4.75,
$3.00, $4.50 and $6.00, respectively, were issued. An aggregate of
18,750 warrants expire in August 2002 with the remaining 287,500
warrants expiring in August 2004.
In June 1999, the Company sold 1,000,000 shares of common stock to a
Private Equity Fund at $3.00 per share and received net proceeds of
$3,000,000. In connection with this sale, warrants to purchase 250,000
shares of common stock with an exercise price of $4.50 and warrants to
purchase 250,000 shares of common stock with an exercise price of $6.00
were issued. During the year ended March 31, 2000, warrants to purchase
500,000 shares were exercised for an aggregate consideration of
$2,625,000.
During the year ended March 31, 1998, the Company entered into a stock
subscription agreement with one of its directors, under which the
director agreed to acquire 50,000 shares of the Company's common stock
at $2.08 The shares were issued in fiscal year 1999 after the receipt
of $104,000 from the director.
During the years ended March 31, 2000 and 1999, respectively, options
to purchase 1,433,273 and 358,429 shares of common stock under the
Company's stock option plans were exercised, for an aggregate
consideration of $2,399,869 and $362,589. During the year ended March
31, 1999, 60,000 shares and 30,000 options were issued in connection
with the termination of a consulting contract (see Note 9). The
aggregate fair value of this consideration was $171,120 of which
$126,120 was provided for in prior years.
In April 1996, the Company sold 860,000 shares of common stock to
unrelated investors, at $1.25 per share and received net proceeds of
approximately $1,023,559. In conjunction with this sale, warrants to
purchase 860,000 shares of common stock with an exercise price of $1.50
and warrants to purchase additional 860,000 shares of common stock with
an exercise price of $2.00 were issued. During the year ended March 31,
1999, warrants to purchase 376,000 shares were exercised for an
aggregate consideration of $604,000. In April 1999, the Company offered
a discount on the warrants. These warrants, initially issued at $1.50
and $2.00, were reduced in price to $1.25 and $1.50, respectively. The
discount carried an expiration date of June 30, 1999.
F-14
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
During the discount period, investors exercised 1,143,251 warrants and
the Company received net proceeds of $1,618,544. These warrants expire
in April 2000. At March 31, 2000, 80,000 warrants were outstanding.
These warrants expired unexercised.
In April 1996, the Company sold 241,467 shares of common stock to four
current shareholders of record who held the contractual right to
maintain their share of ownership. The Company received net proceeds of
$301,834. In connection with this sale, warrants to purchase 241,467
shares of common stock with an exercise price of $1.50 and warrants to
purchase an additional 241,467 shares of common stock with an exercise
price of $2.00 were issued. During the year ended March 31, 2000,
warrants to purchase 364,422 shares were exercised for an aggregate
consideration of $637,739. There are no warrants outstanding as of
March 31, 2000.
WARRANTS
During October 1995, in connection with services being performed by a
consultant, the Company issued 250,000 warrants to the consultant to
purchase shares of the Company's common stock. Warrants to purchase
50,000 shares of common stock at $3.25 per share vested immediately.
Warrants to purchase each additional block of 50,000 shares of common
stock are exercisable at $3.75, $4.25, $4.75 and $5.25 per share,
respectively, and shall vest on each three month anniversary of the
agreement. The warrants expire five years from the date of grant.
STOCK OPTION PLANS
The aggregate number of shares of common stock for which options may be
granted under the 1998 Stock Option Plan (the "1998 Plan") is
3,000,000. The maximum number of options which may be granted to an
employee during any calendar year under the 1998 Plan shall be 400,000.
The term of these non-transferable stock options may not exceed ten
years. The exercise price of these stock options may not be less than
100% (110% if the person granted such options owns more than ten
percent of the outstanding common stock) of the fair value of one share
of common stock on the date of grant. During the years ended March 31,
2000 and 1999, the Company granted options to purchase 2,328,791 and
499,567, respectively. At March 31, 2000, 1,352,238 options were
outstanding under the 1998 Plan, of which 219,580 options were
exercisable.
In connection with the Company's acquisition of SolCom, the Company
granted 300,000 performance-based options to certain holders of SolCom
options. At March 31, 2000, all 300,000 options were forfeited due to
the termination of employment of the option holders.
In August 1994, the Company adopted its 1994 Stock Option Plan (the
"1994 Plan"). The 1994 Plan, as amended, increased the number of shares
of common stock for which options may be granted to a maximum of
1,250,000 shares. The term of these non-transferable stock options may
not exceed ten years. The exercise price of these stock options may not
be less than 100% (110% if the person granted such options owns more
than ten percent of the outstanding common stock) of the fair market
value of one common stock on the date of grant. During the year ended
March 31, 1999, the Company granted options to purchase 187,224 shares
of its common stock under the 1994 Plan. At March 31, 2000, 770,286
options were outstanding under the 1994 Plan, of which 570,286 options
were exercisable.
Of the options granted in fiscal 2000, 455,645 were granted under the
Company's Time Accelerated Restricted Stock Award Plan ("TARSAP"). The
options vest after seven years, however, under the TARSAP, the vesting
is accelerated to the last day of the current fiscal year if
F-15
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
the Company meets certain predetermined s ales targets. The
Company did not meet the targets for 2000 and, as such, all options
granted under the TARSAP in 2000 will vest seven years from the
original date of grant.
OTHER OPTIONS
During the years ended March 31, 2000 and 1999, the Company issued
7,500 and 70,000 options, respectively, to various consultants. The
term of these options is five years from the date of grant. During the
years ended March 31, 2000 and 1999, 23,750 and 30,000 options,
respectively vested with 23,750 to vest in Fiscal 2001, contingent on
consulting services being provided in such year. Compensation expense
of $50,400 and $62,000, respectively, was recorded relative to vesting
of options during 2000 and 1999.
During September 1996, the Company issued options to certain officers
and directors to purchase 620,000 shares of the Company's common stock,
of which 420,000 vested immediately and 100,000 vest each April 1 of
1998 and 1999. Options expire ten years from the date of grant. The
exercise price of the options is equal to the market value of the
Company's stock on the date of grant. During the years ended March 31,
2000, and 1999, 90,000 and 130,000 options to purchase shares were
exercised under this grant for an aggregate consideration of $104,400
and $150,800, respectively. At March 31, 2000, 400,000 options were
outstanding and exercisable.
The Company also has issued outstanding options to certain directors to
purchase 162,500 shares of the Company's stock. Options expire in terms
ranging from 5 to 10 years from the date of grant. The exercise price
of the options is equal to the market value of the Company's stock on
the date of grant. At March 31, 2000, 72,500 options were outstanding
and exercisable.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company continues to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its options. During the year ended
March 31, 2000, the Company recorded compensation expense of $201,600
related to options given to employees.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). If the Company had elected to recognize
compensation costs based on the fair value at the date of grant for
awards in fiscal 2000 and 1999, consistent with the provisions of SFAS
No. 123, the Company's net loss and loss per share would have increased
by $1,239,998 and $.10 and $751,295 and $.14, respectively, for the
years ended March 31, 2000 and 1999.
The pro forma effect on net loss for fiscal 2000 and 1999 may not be
representative of the pro forma effect on net loss of future years
because the SFAS No. 123 method of accounting for pro forma
compensation expense has not been applied to options granted prior to
April 1, 1995.
F-16
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
The weighted-average fair values at date of grant for options granted
during fiscal 2000 and 1999 were $4.08 and $1.64, respectively. The
fair value of each option grant for the Company's common stock is
estimated on the date of the grant using the Black Scholes option
pricing model, with the following weighted average assumptions used for
grants in fiscal 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Expected volatility 84% 80%
Risk-free interest rate 5.32% 5.12%
Expected option lives 4.00 years 5.87 years
</TABLE>
Detail of options granted are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE OPTION PRICE
SHARES PRICE ($) PER SHARE ($)
<S> <C> <C> <C> <C>
Options outstanding at March 31, 1998 1,794,796 1.60 1.16 to 3.13
Granted 1,282,067 2.34 0.48 to 3.54
Canceled (25,596) 1.94 1.54 to 2.31
Exercised (358,429) 1.47 1.16 to 2.87
----------------- -------------- ---------------------
Options outstanding at March 31, 1999 2,692,838 1.52 0.48 to 3.54
----------------- -------------- ---------------------
Granted 2,272,291 6.30 2.28 to 37.66
Canceled (756,582) 3.03 1.75 to 30.81
Exercised (1,433,273) 1.67 0.48 to 5.05
----------------- -------------- ---------------------
Options outstanding at March 31, 2000 2,775,274 5.08 0.48 to 37.66
----------------- -------------- ---------------------
Options exercisable at March 31, 2000 1,281,366 2.32 0.48 to 37.66
----------------- -------------- ---------------------
</TABLE>
F-17
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF YEARS OF AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C> <C>
$0.48 49,710 0.2 $ 0.48 49,710 $ 0.48
$1.16 - $1.72 551,107 6.3 $ 1.24 548,607 $ 1.24
$1.75 - $2.57 1,382,032 6.8 $ 2.16 509,049 $ 2.04
$2.97 - $4.34 116,280 4.3 $ 3.28 85,000 $ 3.08
$5.63 - $8.44 273,502 4.7 $ 6.95 74,000 $ 7.57
$9.13 - $13.03 91,889 5.1 $ 9.61 - -
$14.47 - $20.94 222,097 5.2 $ 20.34 - -
$22.00 - $32.13 50,083 5.5 $ 27.70 7,500 $ 22.00
$33.44 - $37.66 38,574 5.4 $ 34.72 7,500 $ 33.44
-------------- -------------- -------------- -------------- --------------
2,775,274 6.0 $ 5.08 1,281,366 $ 2.32
-------------- -------------- -------------- -------------- --------------
</TABLE>
9. COMMITMENTS
OPERATING LEASES
During March 1999, the Company entered into an operating lease to
consolidate their office and manufacturing facilities, which has a
commencement date of July 31, 1999. This lease expires in June 2009.
The Company also leases office space for its European operation in
Antwerp, Belgium and Livingston, Scotland. In addition, the Company's
California division currently leases office facilities.
CAPITAL LEASES
The Company leases certain equipment under agreements which are
classified as capital leases. Each of the capital lease agreements
expire within five years and have purchase options at the end of the
lease term.
F-18
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
Future minimum payments, by year and in the aggregate, under
non-cancellable operating and capital leases as of March 31, 2000 are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
Year ending March 31
2001 $ 97,949 $ 769,184
2002 97,949 760,804
2003 97,949 802,206
2004 97,949 793,074
2005 36,501 679,478
Thereafter - 3,350,246
-------------- -------------
Total minimum lease payments $ 428,297 $ 7,154,992
-------------- -------------
Less amount representing interest 57,531
--------------
Present value of net minimum lease payments $ 370,766
--------------
</TABLE>
Computer and other equipment at March 31, 2000 includes $390,638 under
capital leases. There were no assets under capital lease agreements at
March 31, 1999.
Rent expense under operating leases for the years ended March 31, 2000
and 1999 approximated $577,315 and $171,496, respectively.
CONSULTING CONTRACT
In connection with the acquisition of European Business Associates BVBA
of Brussels, Belgium, the Company entered into a consulting agreement
with a former principal for a term of five years. The consulting
agreement provides for an annual consulting fee of $75,000 with 5%
annual increments, as well as reimbursement of certain expenses. During
February 1999, the Company and the consultant mutually agreed to
terminate the above consulting contract. In connection with the
termination the consultant received 60,000 common shares and 30,000
options. Compensation expense of approximately $126,120 was recorded
during fiscal 1999, in connection with this issue of shares and
options.
10. CONTINGENT LIABILITIES
In the normal course of business the Company and its subsidiaries may
be involved in legal proceedings, claims and assessments arising in the
ordinary course of business. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. In the
opinion of management, the outcome of such current legal proceedings,
claims and assessments will not have a material effect on the Company's
financial position, results of operations or cash flows.
F-19
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
11. EMPLOYEE BENEFIT PLANS
Effective April 1, 1993, the Company adopted a defined contribution
savings plan. The terms of the plan provide for eligible employees who
have met certain age and service requirements to participate by
electing to contribute up to 15% of their gross salary to the plan, as
defined, with the Company matching 30% of an employee's contribution in
cash up to a maximum of 6% of gross salary, as defined. Company
contributions vest at the rate of 25% of the balance at each employee's
second, third, fourth, and fifth anniversary of employment. The
employees' contributions are immediately vested. The Company's
contribution to the savings plan for the years ended March 31, 2000 and
1999 was $49,732 and $37,058, respectively.
12. SALES
The Company, which operates in a single industry segment, designs,
develops and markets a broad range of security, network management and
remote maintenance products for voice and data communications networks.
The Company's headquarters, physical production and shipping facilities
are located in the United States. The Company's local and foreign
export sales for the years ended March 31, 2000 and 1999 are as
follows:
2000 1999
United States $ 19,228,324 $ 10,054,769
Europe 3,336,517 2,583,040
Pacific Rim 11,950 -
Other 92,042 36,108
------------ ------------
$ 22,668,833 $ 12,673,917
------------ ------------
The Company sold a substantial portion of its products to four
customers. Sales to these customers amounted to $8,606,173 (38% of net
sales) and $6,914,525 (55% of net sales) in 2000 and 1999,
respectively. At March 31, 2000 and 1999, amounts due from these
customers included in accounts receivable, were $2,104,050 and
$1,362,061, respectively. The loss of any of these four customers or a
significant decline in sales volumes from any of these four customers
could have a material adverse effect on the Company's financial
position and results of operations. Additionally, during the year ended
March 31, 2000, the Company licensed the rights to certain customized
modules of its software via a perpetual license agreement with one
customer and recorded approximately $3.2 million in revenue which had a
positive effect on the Company's rate of revenue growth and gross
margin.
13. CONCENTRATION OF CREDIT RISK
The Company maintains deposits in a financial institution which is
insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000. At March 31, 2000 and periodically throughout fiscal 2000,
the Company had deposits in this financial institution in excess of the
amount insured by the FDIC.
F-20
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
The Company sells the majority of its products to customers within the
telecommunications industry. The Company's three largest
telecommunications customers and one other customer accounted for
approximately 46% of net accounts receivable at March 31, 2000. The
Company provides for allowances for doubtful accounts which management
believes are adequate to cover potential credit risk losses.
The Company designs its products utilizing readily available parts
manufactured by multiple suppliers and the Company currently relies on
and intends to continue to rely on these suppliers. The Company has
been and expects to continue to be able to obtain the parts generally
required to manufacture its products without any significant
interruption or sudden price increase, although there can be no
assurance that the Company will be able to continue to do so.
The Company sometimes utilizes a component available from only one
supplier. If a supplier were to cease to supply this component, the
Company would most likely have to redesign a feature of the affected
device. In these situations, the Company maintains a greater supply of
the component on hand in order to allow the time necessary to
effectuate a redesign or alternative course of action should the need
arise.
14. OTHER RECEIVABLES
Other receivables consists of amounts due from foreign employees
related to withholding taxes. Included within accrued payroll and
related liabilities is an offsetting liability due from the Company to
the United Kingdom tax authorities. The receivables which have been
collected subsequent to March 31, 2000 have been remitted to the
appropriate United Kingdom tax authorities.
15. OTHER CURRENT LIABILITIES
At March 31, 1999, other current liabilities consisted mainly of
additional liabilities assumed by the Company in connection with the
acquisition of SolCom. These liabilities relate to professional fees
incurred by SolCom and its directors for services provided in
conjunction with the acquisition. These liabilities have been paid in
full at March 31, 2000.
F-21
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
16. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999
Non-cash acquisition of SolCom System Limited
Operating activities
<S> <C>
Accounts receivable $ 422,423
Inventory 342,509
Prepaid expenses and other current assets 81,652
Accounts payable 788,801
Accrued payroll and related liabilities 411,902
Deferred income 123,278
Other current liabilities 1,398,796
Investing and financing activities
Property and equipment, net 388,712
Capitalized software, net 185,532
Borrowings 30,935
Common stock and options issued in connection
with the purchase acquisition 6,211,880
Other Non-Cash Investing and Financing Activities
Common stock issued in connection with the
purchase acquisition of LeeMAH
Datacom Security Corporation 1,000,000
Acquisition of treasury shares 203,199
Common stock and options issued in connection with
termination of consulting contract 126,120
Options issued to consultants as non-cash compensation $ 50,400 62,000
Assets acquired by assuming capital lease obligations 370,766
Compensation charge from employee options 201,600
</TABLE>
17. RELATED PARTY TRANSACTIONS
The Company borrowed funds from a director of the Company in the amount
of $150,000 on April 14, 1999. This amount was fully repaid along with
a market rate of interest during June 1999. The amount of interest
expense was not material to the Company.
The Company issued advances to two officers of the Company in the
amount of $50,000 each on August 31, 1998. These advances accrue
interest at the prime rate plus 1%. These advances are due and payable
in full upon the officers cessation of employment with the Company or
August 31, 2000, whichever is earlier. During fiscal 2000, one of the
officers, who has terminated employment with the Company, repaid his
outstanding balance in full.
F-22
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
18. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
Among other provisions, it requires that entities recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Gains
and losses resulting from changes in the fair values of those
derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. This
standard, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133, and Amendment of FASB Statement No. 133", is
effective for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is
prohibited. For the Company this means the standard must be adopted no
later than April 1, 2001. Management, based on its current operations,
does not expect the adoption of this standard to have a material impact
on the Company's results of operations, financial position or cash
flows.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements". The SEC delayed the
effective date of this SAB from March 31, 2000, so that the SAB must
now be adopted by June 30, 2000. The Company has assessed the impact of
SAB 101 on its results of operations and believes that its results of
operations for the year ended March 31, 2000 have been presented in
accordance with the provisions of the SAB.
19. SUBSEQUENT EVENTS
During April 2000, the Company issued a loan to the Chief Executive
Officer of the Company in the amount of $750,000. The loan accrues
interest at a rate of LIBOR plus 1%. This loan is due and payable on
June 27, 2005. If the Chief Executive Officer leaves the employ of the
Company or is terminated from his employment, with or without cause,
the principal and accrued interest will be due and payable in full
within 30 days of such termination.
F-23
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
10.9 Employment Agreement dated as of April 1, 1999 between
the Company and Stephen B. Gray.
10.10 Non-negotiable Promissory Note in the principal amount
of $750,000 issued by Stephen B. Gray to the Company.
10.11 Line of Credit Agreement with United Nations Bank dated
September 30, 1999.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
