Registration No. ________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ION NETWORKS, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 754813 22-2413505
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
120 CORPORATE BLVD.,
SOUTH PLAINFIELD, NJ 07080
(908) 546-3900
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
NORMAN E. CORN
CHIEF EXECUTIVE OFFICER
120 CORPORATE BLVD.,
SOUTH PLAINFIELD, NJ 07080
(908) 546-3900
(Name, Address and Telephone Number of Agent For Service)
Copies to:
JAMES ALTERBAUM
MOSES & SINGER LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NY 10019
(212) 554-7800
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: from time to time after the
effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
------------------------- ------------------------ ---------------------- ----------------------- ----------------------
Title Of Each Proposed Maximum Proposed Maximum
Class Of Securities Amount To Be Offering Price Per Aggregate Offering Amount Of
To Be Registered Registered (1) Share (2) Price Registration Fee
------------------------- ------------------------ ---------------------- ----------------------- ----------------------
Common Stock, $.001 par 4,411,764 shares $0.185 $816,177 $96.06
value
------------------------- ------------------------ ---------------------- ----------------------- ----------------------
Common Stock, $.001 par
value (3) 2,409,638 shares $0.185 $445,783 $52.47
------------------------- ------------------------ ---------------------- ----------------------- ----------------------
Common Stock, $.001 par
value (4) 797,230 shares $0.185 $147,488 $17.36
------------------------- ------------------------ ---------------------- ----------------------- ----------------------
Common Stock, $.001 par
value (5) 3,373,882 shares $0.185 $624,168 $73.47
------------------------- ------------------------ ---------------------- ----------------------- ----------------------
Total 10,992,514 shares - $2,033,616 $239.36
------------------------- ------------------------ ---------------------- ----------------------- ----------------------
(1) All 10,992,514 shares registered pursuant to this registration statement are
held by selling stockholders. Pursuant to Rule 416 under the Securities Act
of 1933, this registration statement also covers such number of additional
shares of common stock to prevent dilution resulting from stock splits,
stock dividends and similar transactions pursuant to the terms of the
securities referenced below.
(2) Estimated solely for the purpose of computing amount of the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act of 1933, based
on the average of the bid and asked prices on the OTC Bulletin Board on
April 20, 2005.
(3) Consists of 2,409,638 shares of common stock issuable upon conversion of a
convertible debenture held by a selling stockholder.
(4) Consists of 797,230 shares of common stock issuable upon conversion of
preferred stock held by selling stockholders.
(5) Consists of 3,373,882 shares of common stock issuable upon exercise of
warrants held by selling stockholders.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
an amendment which specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until this registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
--------------------------------------------------------------------------------
PROSPECTUS
Subject to completion, dated April 21, 2005
10,992,514 shares of common stock
ION NETWORKS, INC.
This prospectus covers up to 10,992,514 shares of our common stock held by the
selling stockholders identified on pages 30 and 31 of this prospectus,
including: (i) 3,373,882 shares issuable upon exercise of warrants, (ii)
2,409,638 shares issuable upon conversion of a convertible debenture, and (iii)
797,230 shares issuable upon conversion of preferred stock. The selling
stockholders may sell or otherwise dispose of their shares or interests therein
from time to time after the date hereof. The terms on which any sale or
disposition may be effected are described under "Plan of Distribution" herein.
We will receive no proceeds from the sale or other disposition of the shares or
interests therein by the selling stockholders. However, we will receive proceeds
in the amount of $1,601,113 assuming the cash exercise of all of the warrants
held by the selling stockholders.
Our common stock is traded on the Over-the-Counter Bulletin Board under the
trading symbol "IONN.OB" On April 20, 2005, the last price as reported on the
OTC Bulletin Board was $0.18.
The selling stockholders, and any participating broker-dealers may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, and any
commissions or discounts given to any such broker-dealer may be regarded as
underwriting commissions or discounts under the Securities Act. The selling
stockholders have informed us that they do not have any agreement or
understanding, directly or indirectly, with any person to distribute their
common stock.
Brokers or dealers effecting transactions in the shares should confirm the
registration of these securities under the securities laws of the states in
which transactions occur or the existence of an exemption from registration.
An investment in shares of our common stock involves a high degree of risk. We
urge you to carefully consider the risk factors beginning on page 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
April 21, 2005
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................1
The Company..............................................................................................1
Recent Developments......................................................................................1
General..................................................................................................1
The Offering.............................................................................................1
Summary Financial And Operating Information..............................................................2
RISK FACTORS......................................................................................................2
FORWARD LOOKING STATEMENTS........................................................................................7
USE OF PROCEEDS...................................................................................................7
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................................7
Principal Market And Market Prices.......................................................................7
Approximate Number Of Holders Of Our Common Stock........................................................7
Dividends................................................................................................7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................8
Overview.................................................................................................8
DESCRIPTION OF BUSINESS..........................................................................................10
EMPLOYEES........................................................................................................18
DESCRIPTION OF PROPERTY..........................................................................................18
LEGAL PROCEEDINGS................................................................................................19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.....................................................19
COMPENSATION OF DIRECTORS........................................................................................22
BENEFICIAL OWNERSHIP INFORMATION.................................................................................26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................27
DESCRIPTION OF SECURITIES........................................................................................28
SELLING STOCKHOLDERS.............................................................................................30
PLAN OF DISTRIBUTION.............................................................................................32
INTEREST OF NAMED EXPERTS AND COUNSEL............................................................................33
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..............................34
AVAILABLE INFORMATION............................................................................................34
FINANCIAL STATEMENTS.............................................................................................35
i
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information that you should
consider before investing in the common stock. You should carefully read the
entire prospectus, including the "Risk Factors" and the financial statements
contained herein, before making an investment decision. In this prospectus, "ION
Networks, Inc." the "Company," "we," "us" and "our" refer to ION Networks, Inc.
The Company
We are a Delaware corporation founded in 1999 through the combination of two
companies -- MicroFrame, a New Jersey Corporation (the predecessor entity to the
us, originally founded in 1982), and SolCom Systems Limited, a Scottish
corporation located in Livingston, Scotland (originally founded in 1994), and we
design, develop, manufacture and sell network and information security and
management products to corporations, service providers and government agencies.
Our hardware and software suite of products are designed to form a secure
auditable portal to protect IT and network infrastructure from internal and
external security threats. Our products operate in the IP, data center,
telecommunications and transport, and telephony environments and are sold by a
direct sales force and indirect channel partners mainly throughout North America
and Europe.
Recent Developments
On March 31, 2005, we completed a private placement of 4,411,764 shares of
common stock and warrants to purchase an additional 2,205,882 shares of common
stock. The total offering price was $750,000. The shares of common stock were
issued at $0.17 cents per share and the warrants are exercisable at a price of
$0.23 per share subject to certain anti-dilution adjustments. The warrants will
expire on expire March 31, 2010. The Company has the right to call the warrants
in the event that its common stock trades at a price exceeding $0.69 per share
for twenty (20) consecutive trading sessions and certain other conditions are
met. The Company also agreed to register for resale the shares of common stock
as well as the shares issued upon exercise of the warrants. Further terms
relating to this investment are described in the liquidity section of the
Management's Discussion and Analysis section contained in this prospectus.
General
Our executive offices are located at 120 Corporate Blvd., South Plainfield, New
Jersey 07080 and our telephone number is (908) 546-3900.
Our corporate web site is www.ION-Networks.com. The information found on our web
site is not intended to be part of this prospectus and should not be relied upon
by you when making a decision to invest in our common stock.
The Offering
Common Stock Covered Hereby 10,992,514 shares
Common Stock Outstanding Before The Offering 27,050,044 (1)
Common Stock To Be Outstanding After The Offering 33,630,294 shares(2).
Use Of Proceeds We will receive no
proceeds from the sale of
common stock by the
selling stockholders. We
will receive $1,601,113
if all of the warrants
for underlying shares
included in this
prospectus are exercised
for cash. We will use
these proceeds for
general corporate
purposes.
(1) Does not include 12,932,499 shares issuable pursuant to currently,
outstanding warrants, options and other convertible securities.
(2) Assumes the issuance of all shares that are issuable upon (i) exercise
of warrants to purchase 3,373,882 shares, (ii) conversion of preferred
stock into 797,230 shares of common stock, and (iii) conversion of a
convertible debenture into 2,409,638 shares of common stock.
2
Summary Financial And Operating Information
The following selected financial information is derived from the financial
statements appearing elsewhere in this prospectus and should be read in
conjunction with the financial statements, including the notes thereto,
appearing elsewhere in this prospectus.
Year Ended December 31,
------------------------------------
Summary of Operations: 2004 2003
--------------- -----------------
Revenues $ 3,616,261 $ 3,342,620
Cost of sales 1,065,443 892,373
Operating expenses 3,141,798 3,286,469
--------------- -----------------
Operating loss (590,980) (836,222)
Other income 18,309 5,279
Net loss before income taxes $ (572,671) $ (830,943)
Income tax benefit 322,831 227,151
--------------- -----------------
Net loss $ (249,840) $ (603,792)
=============== =================
Net loss per share, basic and (.01) (.03)
diluted
As of December 31,
------------------------------------
2004 2003
--------------- -----------------
Statement of Financial Position
Cash and cash equivalents $ 287,437 $ 357,711
Total assets $ 1,886,824 $ 2,104,656
Working capital $ 372,861 $ 287,930
Stockholders' equity $ 592,786 $ 797,510
RISK FACTORS
We are vulnerable to technological changes, which may cause our products and
services to become obsolete which could materially and negatively impact our
cash flow.
Our industry experiences rapid technological changes, changing customer
requirements, frequent new product introductions and evolving industry standards
that may render existing products and services obsolete. As a result, more
advanced products produced by competitors could erode our position in existing
markets or other markets that they choose to enter and prevent us from expanding
into existing markets or other markets. It is difficult to estimate the life
cycles of our products and services, and future success will depend, in part,
upon our ability to enhance existing products and services and to develop new
products and services on a timely basis. We might experience difficulties that
could delay or prevent the successful development, introduction and marketing of
new products and services. New products and services and enhancements might not
meet the requirements of the marketplace and achieve market acceptance. If these
things happen, they would materially and negatively affect cash flow, financial
condition and the results of operations.
Hardware and software incorporated in our products may experience bugs or
"errors" which could delay the commercial introduction of our products and
require time and money to alleviate.
Due to the complex and sophisticated hardware and software that is incorporated
in our products, our products have in the past experienced errors or "bugs" both
during development and subsequent to commercial introduction. We cannot be
certain that all potential problems will be identified, that any bugs that are
located can be corrected on a timely basis or at all, or that additional errors
will not be located in existing or future products at a later time or when usage
increases. Any such errors could delay the commercial introduction of new
products, the use of existing or new products, or require modifications in
systems that have already been installed. Remedying such errors could be costly
and time consuming. Delays in debugging or modifying products could materially
and adversely affect our competitive position.
3
We have difficulty predicting our future operating results or profitability due
to the fluctuation in our quarterly and annual revenues.
In the past, we experienced fluctuations in our quarterly and annual revenues
and we anticipate that such fluctuations will continue therefore making it
difficult for us to predict our future operating results or profitability. Our
quarterly and annual operating results may vary significantly depending on a
number of factors, including:
o the timing of the introduction or acceptance of new products and
services;
o changes in the mix of products and services provided;
o long sales cycles;
o changes in regulations affecting our business;
o increases in the amount of research and development expenditures
necessary for new product development and innovation;
o changes in our operating expenses;
o uneven revenue streams;
o volatility in general economic conditions;
o volatility in the network security market; and
o threats of terror and war.
We cannot assure you that our revenues will not vary significantly among
quarterly periods or that in future quarterly periods our results of operations
will not be below prior results or the expectations of public market analysts
and investors. If this occurs, the price of our common stock could significantly
decrease. See also "Risks Associated with Our Securities - There is potential
for fluctuation in the market price of our securities" page 5.
In the past we have experienced significant losses and negative cash flows from
operations. If this trend reoccurs in the future, it could adversely affect our
financial condition.
ION has incurred significant, though declining, losses but for the year 2004 has
reversed a trend of negative cash flows from operations. For the year ended
December 31, 2004 and 2003, we experienced net losses of $249,840 and $603,792,
respectively, and cash flows provided by (used in) operations of $108,279 and
($376,940), respectively. There can be no assurance that our business will
become profitable in the future and that additional losses and negative cash
flows from operations will not be incurred. If these trends continue in the
future, there could be a material adverse affect on our financial condition.
As of December 31, 2004, the Company continues to have a marginal working
capital balance, which could inhibit future growth and impact the Company's
financial viability.
Although the Company's working capital balance increased to $372,861 at December
31, 2004 as compared to $287,930 at December 31, 2003, this balance is still
lower than the Company's optimal requirements. This low working capital balance,
while improving, may continue to impact the ability of the Company to attract
new customers and employees and could have a material adverse affect upon our
business. Subsequent to December 31,2004, on March 31,2005 the Company sold
$750,000 of common stock which significantly improved its working capital
position. ION is encouraged by this increase however working capital is still
not sufficient to fully mitigate this risk.
We face significant competition and if we do not compete successfully, our
results of operations may be adversely affected.
We are subject to significant competition from different sources for our
different products and services. We cannot assure you that the market will
continue to accept our hardware and software technology or that we will be able
to compete successfully in the future. We believe that the main factors
affecting competition in the network security business are:
4
o the products' ability to meet various network security requirements;
o the products' ability to conform to the network and/or computer
systems;
o the products' ability to avoid becoming technologically outdated;
o the willingness and the ability of distributors to provide support
customization, training and installation; and
o the price.
Although we believe that our present products and services are competitive, we
compete with a number of large data networking, network security and network
device manufacturers which have financial, research and development, marketing
and technical resources far greater than ours. Our competitors may succeed in
producing and distributing competitive products more effectively than we can
produce and distribute our products, and may also develop new products which
compete effectively with our products. Many of our current or potential
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
other resources than we do. Nothing prevents or hinders these actual or
potential competitors from entering our target markets at any time. In addition,
our competitors may bundle products competitive to ours with other products that
they may sell to our current or potential customers. These customers may accept
these bundled products rather than separately purchasing our products. If our
current or potential competitors were to use their greater financial, technical
and marketing resources in our target markets and if we are unable to compete
successfully, our business, financial condition and results of operations may be
materially and adversely affected.
We may be unable to protect our proprietary rights, permitting competitors to
duplicate our products and services, which could negatively impact our business
and operations.
We hold no patents on any of our technology. If we are unable to license any
technology or products that we may need in the future, our business and
operations may be materially and adversely impacted. We have made a consistent
effort to minimize the ability of competitors to duplicate our software
technology utilized in our products. However, there remains the possibility of
duplication of our products, and competing products have already been
introduced. Any such duplication by our competitors could negatively impact our
business and operations.
We rely on several key customers for a significant portion of our business, the
loss of which would likely significantly decrease our revenues.
Historically, we have been dependent on several large customers each year, but
they are not necessarily the same every year. For the year ended December 31,
2004, our most significant customers (stated as an approximate percentage of
revenue) were Avaya 38% and MCI 9% compared to the year ended December 31, 2003,
of Avaya 18%, Siemens 12%. Qwest 8% and MCI 7%. In general, we cannot predict
with certainty, which large customers will continue to order. The loss of any of
these large customers, or the failure to attract new large customers would
likely significantly decrease our revenues and future prospects, which could
materially and adversely affect our business, financial condition and results of
operations.
We depend upon key members of our employees and management, the loss of which
could have a material adverse effect upon our business, financial condition and
results of operations.
Our business is greatly dependent on the efforts of the Chief Executive Officer,
Mr. Norman E. Corn, Chief Financial Officer, Mr. Patrick E. Delaney, and Chief
Technology Officer, Mr. William Whitney and other key employees, and on our
ability to attract key personnel. Other than with respect to Messrs. Corn,
Delaney, and Whitney, we do not have employment agreements with our other key
employees. Our success depends in large part on the continued services of our
key management, sales, engineering, research and development and operational
personnel and on our ability to continue to attract, motivate and retain highly
qualified employees and independent contractors in those areas. Competition for
such personnel is intense and we cannot assure you that we will successfully
attract, motivate and retain key personnel. While all of our employees have
entered into non-compete agreements, there can be no assurance that any employee
will remain with us. Our inability to hire and retain qualified personnel or the
loss of the services of our key personnel could have a material adverse effect
upon our business, financial condition and results of operations. Currently, we
do not maintain "key man" insurance policies with respect to any of our
employees.
We rely on several contract manufacturers to supply our products. If our product
manufacturers fail to deliver our products, or if we lose these suppliers, we
may be unable to deliver our product and our sales and revenues could be
negatively impacted.
5
We rely on three primary contract manufacturers to supply our products: PPI Time
Zero, Ituner Networks Corp., and ACE Electronics, Inc. If these manufacturers
fail to deliver our products or if we lose these suppliers and are unable to
replace them, then we would not be able to deliver our products to our
customers. This could negatively impact our sales and revenues and have a
material adverse affect on our business, financial condition and results of
operations.
Our certificate of incorporation and bylaws contain limitations on the liability
of our directors and officers, which may discourage suits against directors and
executive officers for breaches of fiduciary duties.
Our Certificate of Incorporation, as amended, and our Bylaws contain provisions
limiting the liability of our directors for monetary damages to the fullest
extent permissible under Delaware law. This is intended to eliminate the
personal liability of a director for monetary damages on an action brought by or
in our right for breach of a director's duties to us or to our stockholders
except in certain limited circumstances. In addition, our Certificate of
Incorporation, as amended, and our Bylaws contain provisions requiring us to
indemnify our directors, officers, employees and agents serving at our request,
against expenses, judgments (including derivative actions), fines and amounts
paid in settlement. This indemnification is limited to actions taken in good
faith in the reasonable belief that the conduct was lawful and in, or not
opposed to our best interests. The Certificate of Incorporation and the Bylaws
provide for the indemnification of directors and officers in connection with
civil, criminal, administrative or investigative proceedings when acting in
their capacities as agents for us. These provisions may reduce the likelihood of
derivative litigation against directors and executive officers and may
discourage or deter stockholders or management from suing directors or executive
officers for breaches of their fiduciary duties, even though such an action, if
successful, might otherwise benefit our stockholders and directors and officers.
RISKS ASSOCIATED WITH OUR SECURITIES
We do not anticipate the payment of dividends.
We have never declared or paid cash dividends on our common stock. We currently
anticipate that we will retain all available funds for use in the operation of
our business. Thus, we do not anticipate paying any cash dividends on our common
stock in the foreseeable future.
There is potential for fluctuation in the market price of our securities.
Because of the nature of the industry in which we operate, the market price of
our securities has been, and can be expected to continue to be, highly volatile.
Factors such as announcements by us or others of technological innovations, new
commercial products, regulatory approvals or proprietary rights developments,
and competitive developments all may have a significant impact on our future
business prospects and market price of our securities.
Shares that are eligible for sale in the future may affect the market price of
our common stock.
As of April 20, 2005, an aggregate of 6,651,242 of the outstanding shares of our
common stock are "restricted securities" as that term is defined in Rule 144 of
the Securities Act of 1933 (Rule 144). These restricted shares may be sold
pursuant only to an effective registration statement under the securities laws
or in compliance with the exemption provisions of Rule 144 or other securities
law provisions. In addition, 5,565,629 shares are issuable pursuant to currently
exercisable options, 3,373,882 shares are issuable pursuant to currently
exercisable warrants, 1,555,570 shares are issuable pursuant to currently
convertible preferred stock of 155,557 shares and 2,409,638 shares are issuable
pursuant to a convertible debenture. Future sales of substantial amounts of
shares in the public market, or the perception that such sales could occur,
could negatively affect the price of our common stock.
We may be restricted from issuing new equity securities.
In September 2002, we issued shares of Series A Preferred Stock to several
investors. Under the terms of the preferred stock, any issuances of equity
securities or securities convertible into or exercisable for equity securities
require the prior approval of the holders of a majority of the outstanding
shares of Series A Preferred Stock. While two of our directors currently own a
significant portion (48.75%) they do not constitute a majority of such preferred
stock. While the Company has been successful in obtaining the consent of a
majority of the series a preferred stock when the Board of Directors has
requested, there can be no assurance that the company will continue to be able
to obtain such consent. If the Company is unable to obtain this approval, the
Company would be prevented from issuing equity securities which would preclude
the Company from raising equity financing, utilizing equity based compensation
plans and from other actions requiring the issuance of equity securities. In
addition, the consent of certain of our existing investors (which consent may
not be unreasonably withheld or delayed) is required in connection with certain
financings involving (subject to certain exclusions) the issuance of securities
in which the purchase price, number of securities, exercise price or conversion
rate are subject to future adjustment. Failure to obtain such consent could
restrict the Company's ability to avail itself of the benefits of such
financings.
6
Our common stock is subject to penny stock regulation that may affect the
liquidity for our common stock.
Our common stock is subject to the regulations of the Securities and Exchange
Commission relating to the market for penny stocks. These regulations generally
require that a disclosure schedule explaining the penny stock market and the
risks associated therewith be delivered to purchasers of penny stocks and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. The
regulations applicable to penny stocks may severely affect the market liquidity
for our common stock and could limit your ability to sell your securities in the
secondary market.
7
FORWARD LOOKING STATEMENTS
Statements contained in this prospectus include "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, including, in particular and without limitation, statements
contained herein under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements
involve known and unknown risks, uncertainties and other factors which could
cause the Company's actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, not to occur or be
realized. These include uncertainties relating to our intellectual property, our
expansion plans, and rapid technological changes. Such forward-looking
statements generally are based upon the Company's best estimates of future
results, performance or achievement, based upon current conditions and the most
recent results of operations. Forward-looking statements may be identified by
the use of forward-looking terminology such as "may," "will," "expect,"
"believe," "estimate," "project," "anticipate," "continue" or similar terms,
variations of those terms or the negative of those terms. You should carefully
consider such risks, uncertainties and other information, disclosures and
discussions which contain cautionary statements identifying important factors
that could cause actual results to differ materially from those provided in the
forward-looking statements. Readers should carefully review the "Risk Factors"
section and any other cautionary statements contained in this prospectus and our
other public filings. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
USE OF PROCEEDS
We will not receive any portion of the proceeds from the sale or other
disposition of common stock or interests therein by the selling stockholders. We
may receive proceeds of up to $1,601,113 if all the warrants relating to shares
registered hereby are exercised for cash. Management currently anticipates that
any such proceeds will be utilized for working capital and other general
corporate purposes. We cannot estimate how many, if any, warrants may be
exercised as a result of this offering.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Principal Market And Market Prices
Our common stock has traded in the over-the-counter market on the OTC Electronic
Bulletin Board (OTCBB) under the symbol "IONN.OB." The following table sets
forth for the indicated periods the high and low bid prices of the common stock
for the two fiscal years ended December 31, 2004, 2003, and for the period from
January 1, 2005 through April 20, 2005 as reported on the OTCBB. These prices
are based on quotations between dealers, and do not reflect retail mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.
Fiscal Period Year Ended December 31, Year Ended December 31, Year Ended December 31,
2005 2004 2003
High Low High Low High Low
First Quarter .27 .17 .20 .04 .28 .05
Second Quarter* .19 .13 .14 .05 .11 .05
Third Quarter - - .37 .06 .11 .05
Fourth Quarter - - .44 .19 .11 .04
* Through April 20, 2005
Approximate Number Of Holders Of Our Common Stock
On April 20, 2005, there were approximately 408 stockholders of record of our
common stock.
Dividends
We have never declared dividends or paid cash dividends. We intend to retain and
use any future earnings for the development and expansion of our business and do
not anticipate paying any cash dividends in the foreseeable future.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures and
sells security solutions that protect enterprise network administrative
interfaces from improper, unauthorized or otherwise undesirable access from
external and internal sources. Administrative interfaces are the network access
points used by highly trained technical individuals who are charged with the
responsibilities of maintaining and supporting the networks and devices employed
within the networks such as servers, routers, PBXs and similar network
equipment. These technicians may be employees of the enterprise or employed by
third parties such as managed service providers, consultants, device vendors or
application developers. In all cases, they are considered "trusted insiders"
since in order to perform their jobs; permission to enter and work within the
network must be granted. The Company's solution, comprised of centralized
management and control software, administrative security appliances and soft
tokens, are designed to provide secure, auditable access to all administrative
interfaces and monitored security once working within the network. Service
Providers, Enterprises and Governmental Agencies utilize the ION solution
globally in their voice, data and converged environments, to establish and
maintain security policies while providing the support and maintenance required
of networks and their devices.
The Company is a Delaware corporation founded in 1999 through the combination of
two companies - MicroFrame ("MicroFrame"), a New Jersey Corporation (the
predecessor entity to the Company, originally founded in 1982), and SolCom
Systems Limited ("SolCom"), a Scottish corporation located in Livingston,
Scotland (originally founded in 1994). The Scottish corporation was dissolved in
2003. The Company's principal objective was to address the need for security and
network management and monitoring solutions, primarily for the PBX-based
telecommunications market, resulting in a significant portion of our revenues
being generated from sales to various telecommunications companies.
During 2004, the Company's financial condition improved particularly with the
operating results in the last half of 2004 where the company posted two
successive quarters of earnings and over $1.0 million in revenue for each
quarter. The Company generated $108,279 in cash provided by operating activities
in 2004 compared to $376,940 used in 2003. Also, in 2004 the Company increased
its investments in new products to be rolled-out in 2005 and still was able to
improve the overall annual usage of cash and cash equivalents, with the net
decrease to $70,274 from a net decrease of $507,973 in 2003. The Company
continues to have a delicate cash position and while the future viability of the
organization has significantly improved, it is necessary for it to continue to
strictly manage expenditures and to increase product revenues despite the cash
infusion of $750,000 on March 31, 2005 from the sale of 4,411,765 shares of
common stock.
Results Of Operations
The Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
Revenues for the year ended December 31, 2004 were $3,616,261 as compared to
$3,342,620 for the year ended December 31, 2003, an increase of approximately 8%
or $273,641. This increase is attributable mainly to the growth in the number of
units sold for the year 2004 compared to 2003 offset in part by a slight
reduction in maintenance revenues. This reversal in the trend for the Company of
declining year over year revenues was caused primarily by the growth of the
ION's Original Equipment Manufacturing (OEM) business and by a general rebound
in the telecommunications sector of the economy. The Company's prices declined
slightly in 2004 when compared to 2003 reducing gross margin as a percentage of
revenue from 73.3% in 2003 to 70.5% in 2004.
Research and development expenses, net of capitalized software development,
increased to $598,012 for the year ended December 31, 2004 from $503,146 for the
year ended December 31, 2003, an increase of 18.8%. This increase for research
and development expenditures was primarily due to the higher expenses related to
the conversion of certain products to a Linux based platform from a proprietary
software platform and the preliminary outside consulting services related to new
product development.
Selling, general and administrative expenses decreased 5.6% from $2,452,031 for
the year ended December 31, 2003 to $2,314,834 for the year ended December 31,
2004. This decline in expense was due primarily to certain cost containment
programs implemented by management particularly for insurances, professional
services and the full year impact of the move in 2003 of the Company's
headquarters to a more efficient facility.
Depreciation and amortization was $409,485 for the year ended December 31, 2004
compared to $736,694 for the year ended December 31, 2003, a decrease of
$327,209 or approximately 44.4%. The primary reason for this reduction in 2004
as compared to 2003 was that the Company did not purchase depreciable fixed
assets at a rate equal to prior periods due to a shift of the Company's
reduction in staff and outsourcing of certain manufacturing processes.
9
The Company acquired a corporation business tax benefit certificate pursuant to
New Jersey law, which relates to the surrendering of unused net operating
losses. For the year ended December 31, 2004 and for the year ended December 31,
2003, the Company received a benefit of $322,831 and $227,151, respectively.
During the year ended December 31, 2004 the Company recognized benefits from
restructuring in the amount of $180,533 compared to $405,402 for the year ended
December 31, 2003.
The Company had a loss of $249,840 for the year ended December 31, 2004 compared
to a loss of $603,792 for the year ended December 31, 2003 or an improvement of
$353,952.
Financial Condition And Capital Resources
The Company's working capital balance as of December 31, 2004 was $372,861
compared to $287,930 as of December 31, 2003.
Net cash provided by operating activities during the year ended December 31,
2004 was $108,279, compared to net cash used in operating activities of $376,940
during the year ended December 31, 2003. The $485,219 improvement in cash
provided from operations was primarily a result of the decrease in net losses of
$353,952 for the year ended December 31, 2004 compared to the year ended
December 31, 2003.
Net cash used in investing activities during the year ended December 31, 2004
was $321,963, compared to net cash used of $59,167 in year ended December 31,
2003. The increase of $262,796 of the net cash used in investing activities
during the year ended December 31, 2004, was due to a slight increase of
capitalized software expenditures in 2004 of $310,223 compared to $214,996 in
2003 and that in the prior year there were offsets against capital spending for
the release of restricted cash of $125,700 and sale of certain assets of
$30,129.
Net cash provided by financing activities during the year ended December 31,
2004 was $143,410, compared to $85,135 used in the year ended December 31, 2003.
Financing activities during the year ended December 31, 2004 include the sale of
a $200,000 convertible debenture to Mr. Steven Deixler in August 2004 (see item
5 - Recent Sales of unregistered securities) and exercise of $11,250 of employee
stock options. During 2003 there were no financings.
On March 31, 2005, the Company entered into a investment agreement with the New
York based institutional investment firm Special Situations Fund III, LP and
several related funds (the "SSF Funds"), pursuant to which Ion completed a
private placement of 4,411,765 shares of common stock and warrants to purchase
an additional 2,205,882 shares of common stock. The total offering price was
$750,000. This cash infusion should permit the Company to complete engineering,
build initial inventory stocks and expend some marketing funds on the launch of
its two new product offerings and have some cash remaining for general corporate
purposes.
Critical Accounting Policies
Use of Estimates -
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
The significant estimates include the allowance for doubtful accounts, allowance
for inventory obsolescence, capitalized software including estimates of future
gross revenues, and the related amortization lives, deferred tax asset valuation
allowance and depreciation and amortization lives.
Allowance for Doubtful Accounts Receivable -
Accounts receivable are reduced by an allowance to estimate the amount that will
actually be collected from our customers. If the financial condition of our
customers were to materially deteriorate, resulting in an impairment of their
ability to make payments, additional allowances could be required.
Inventory, net -
Inventory is stated at the lower of cost (average cost) or market. Reserves for
slow moving and obsolete inventories are provided based on historical experience
and current product demand. If our estimate of future demand is not correct or
if our customers place significant order cancellations, inventory reserves could
increase from our estimate. We may also receive orders for inventory that has
been fully or partially reserved. To the extent that the sale of reserved
inventory has a material impact on our financial results, we will appropriately
disclose such effects. Our inventory carrying costs are not material; thus we
may not physically dispose of reserved inventory immediately.
10
Capitalized Software -
The Company capitalizes computer software development costs in accordance with
the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize
computer software development costs upon the establishment of the technological
feasibility of a product, to the extent that such costs are expected to be
recovered through future sales of the product. Management is required to use
professional judgment in determining whether development costs meet the criteria
for immediate expense or capitalization. These costs are amortized by the
greater of the amount computed using (i) the ratio that current gross revenues
from the sales of software bear to the total of current and anticipated future
gross revenues from the sales of that software, or (ii) the straight-line method
over the estimated useful life of the product. As a result, the carrying amount
of the capitalized software costs may be reduced materially in the near term.
We record impairment losses on capitalized software and other long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow estimates
are based on historical results adjusted to reflect our best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our estimates.
Description of Business
Overview
ION Networks, Inc and subsidiary ("ION" or the "Company") designs, develops,
manufactures and sells security solutions that protect enterprise network
administrative interfaces from improper, unauthorized or otherwise undesirable
access from external and internal sources. Administrative interfaces are the
network access points used by highly trained technical individuals who are
charged with the responsibilities of maintaining and supporting the networks and
devices employed within the networks such as servers, routers, PBXs and similar
types of equipment. These technicians may be employees of the enterprise or
employed by third parties such as managed service providers, consultants, device
vendors or application developers. In all cases, they are considered "trusted
insiders" since in order to perform their jobs; permission to enter and work
within the network must be granted. The Company's solution, comprised of
centralized management and control software, administrative security appliances
and soft tokens, are designed to provide secure, auditable access to all
administrative interfaces and monitored security once working within the
network. Service Providers, Enterprises and Governmental Agencies utilize the
ION solution globally in their voice, data and converged environments, to
establish and maintain security policies while providing the support and
maintenance required of networks and their devices.
As network complexity continues to rise, particularly with the growing movement
toward IP (internet protocol) based networks (converged environments,) security
implications for both enterprises and their service providers are growing even
more rapidly. The significant growth in outsourcing of network and device
support and maintenance functions has required an increasing level of `trust'
between enterprise and service provider as well as heightened the level of
competition between managed service providers. New compliance and privacy
legislation and regulations are having an equally broad impact. Management and
control requirements have escalated with the advent of Sarbanes-Oxley and the
numerous privacy laws recently enacted such as Gramm-Leach-Bliley, HIPPA,
California SB 1386, etc.
Service providers are struggling to maintain expertise throughout their
geographic footprint. They are faced with an expanding deployment of enterprise
security strategies and an inability to implement security solutions
independently. On the other side, enterprises have become more cost conscious,
working to extend the life of their legacy devices and aggregate network
connections through the Internet. With all this movement, there is little
consistency or standards regarding security and service delivery as the number
of trusted insiders increases dramatically. The implications are enormous,
particularly when understanding that the average cost of a network breach,
reported by the 2003 CSI/FBI Security Survey, is $56,000 when it occurs from
external sources (through the perimeter of the network) and in excess of $2.5
million when it is caused by an "insider." There are many effective and popular
`security solutions' that address the perimeter, such as Firewalls, Intrusion
Detection Systems, Virtual Private Networks and anti-virus software, providing
protection from the typical hacker as well as end users. However, little
attention has been paid to securing administrative interfaces where either
maliciously or inadvertently, information and data can be easily compromised or
destroyed. This is the arena in which ION focuses.
11
ION's solution provides customers with secure access as well as forensic
security within their owned and managed networks. It is a robust solution that
is highly scalable, reliable, simple to use and cost effective. The solution
also provides monitoring and alarming of the environment such as temperature and
contact closures, forensics and buffering, and security logging of all
activities down to the keystroke level. Due to the fact it is vendor agnostic,
broad connectivity to virtually all network devices is guaranteed. The
combination of ION's single sign-on centralized management and control software,
PRIISMS, our administrative security appliances and our two factor
authentication tokens, mitigates the impact of potential network breaches. These
breaches would likely cause financial losses to the enterprise due to lost
revenue and lost intellectual property; plummeting customer satisfaction, and
corporate embarrassment with most consumers attuned to security issues and where
reputations cannot be quickly rebuilt; extensive physical and environmental
damage as well as data corruption; and the difficult and costly tasks of
detection and recovery. ION's solutions are used in small, remote branch
locations, medium to large local and global networks as well as data centers,
ranging from a few to thousands of devices.
Though the Company's focus is providing hardware and software solutions, ION
also offers support and maintenance programs. Services revenue is typically
generated from systems engineering and maintenance services in conjunction with
the sale of our solutions.
ION's solutions are distributed via three channels: (i) a direct sales force,
(ii) indirect channels such as service providers and original equipment
manufacturers (OEM) and (iii) resellers both domestically and internationally.
In addition to these distribution channels, the Company segments its target
markets by (i) enterprises, (ii) service providers and (iii) governmental
agencies. Each market segment has unique characteristics and provides
significant opportunities for future growth.
ION Networks, Inc. is a Delaware corporation founded in 1999 through the
combination of two companies, MicroFrame, Inc. (originally founded in 1982), a
New Jersey corporation and SolCom Systems Limited (originally founded in 1994),
a Scottish corporation located in Livingston, Scotland. The Scottish corporation
was dissolved in 2003. In 1999, the Company expanded through the purchase of
certain assets of LeeMAH DataCom Security Corporation. The Company currently has
over 300 customers located in 35 countries and more than 50,000 appliances and
devices currently in use. References in this document to "we," "our," "us," and
"the Company" refer to ION Networks, Inc. Our principal executive offices are
located at 120 Corporate Blvd. South Plainfield, New Jersey 07080, and our
telephone number is (908) 546-3900.
Market Background
The Exposure
Accelerated growth of market factors such as increasing network complexity and
expansion of network management outsourcing has resulted in a far greater need
for security of network administrative interfaces. These interfaces are used for
network and device management, maintenance and repair, as well as updates and
changes. The administrative `sessions' are active in all types of networks
including voice networks, data networks and networks supporting critical
infrastructure such as electronic distribution. To perform these functions
effectively and efficiently, both local and remote access is required.
The "Inside" Threat is Real
Enterprises and service providers alike must consider the human element in
performing network support and maintenance. In addition to the outsourcing of
many IT functions, employee turnover at both the enterprise and service provider
plays a key role in secure access and network security. Today, the `insider' is
everywhere, even outside. The technical environment poses additional challenges.
Remote access is necessary to maintain any semblance of cost controls and access
is quite simple. The risk of a security breach has never been higher. The
`trusted' community is large, knowledgeable and potentially motivated.
Inconsistent, ineffective, and non-existent security practices exist in far too
many places. An inadvertent breach is as costly as a malicious attack. According
to The National Strategy to Secure Cyberspace (part of The President's Critical
Infrastructure Protection Board,) "approximately 70 percent of all cyber attacks
on enterprise systems are believed to be perpetrated by trusted insiders." The
former Director of Security Strategies of The Hurwitz Group stated, "For every
in-house attack reported, there could be as many as 50 that go either unreported
or undetected." Newspapers, magazines and government publications are littered
with articles about security breaches such as the US Department of Justice press
release on November 26, 2001 where, "former (network hardware vendor)
accountants sentenced for unauthorized access to computer systems to illegally
issue almost $8 Million in company stock to themselves" and the US Department of
Justice press release on December 18, 2003, where a "Milford man pleads guilty
to intrusion and theft of data costs company $5.8 Million."
12
To Make Matters Worse . . .
Federal regulations are stringent and increasing while new legislation from
States has already begun. Fines for mismanagement have been greatly increased.
Penalties, formerly just at the corporate level are now targeted at individuals
as well. Executives are now personally responsible and liable for fines,
incarceration and professional sanctions. Fragile customer trust is fueling
negative publicity while legal costs are rising. In an effort to combat these
realities, organizations have learned that compliance is not simple. Regulations
are sweeping, yet vague. Implications are felt across all departments and
ignorance is no longer an accepted excuse. ION's solutions help mitigate these
risks.
The Market is Growing
IDC and Janney Montgomery Scott Research estimated the worldwide Network
Security Market at over $25 Billion in 2004 with a compound annual growth rate
of greater than 27%. The US Network Security Market was estimated at
approximately $7 Billion in 2004 with 2006 estimates at about $10 Billion by
Datamonitor. In addition, a 2003 survey by PricewaterhouseCoopers and CIO
magazine showed a 62% increase in security spending with the top strategic
initiatives being: blocking unauthorized access and enhancing network security.
We believe enterprises, service providers and government agencies are
recognizing, in constantly increasing numbers, the vulnerabilities associated
with the lack of secure network access and internal network security and the
markets for ION's solutions will continue to grow at higher rates than in the
past.
The ION Networks Solution
At the core of enterprise networks is proprietary data and information. It is
typically accessed by its end user population through the perimeter of the
network to applications that massage and organize the data and information. In
order to gain access, users have to go through firewalls, intrusion detection
systems, anti-virus software and other tools. The overall enterprise contains
many different networks such as a Data Network with routers and switches, a
Voice Network with PBXs and voicemail, an IT Network with servers and network
attached storage, and middleware such as databases and applications. In order to
maintain and support the various enterprise networks and their devices, internal
network support staff along with equipment vendors, managed service providers,
IT consultants, etc., must have access. ION's integrated solution includes
PRIISMS, which provides controlled centralized access and administrative
management access; a family of administrative security appliances, which provide
local security for remote access sessions and include encryption, strong
authentication and environmental monitoring; and 3DES soft tokens with two
factor authentication, which can be used from a Windows PC, Palm or Blackberry.
The Value Equation
The value of ION's solution can be viewed through the eyes of the Company's
Enterprise customers, Service Provider customers, and in many cases, both. A
sample of elements that provide value to both include:
o Scalable across thousands of distributed locations and tens of
thousands of protected endpoints. The modular hardware design and
robust software allow the solution to be easily expanded.
o Reduces knowledge of inner workings of networks by masking routes to
equipment preventing endpoints from being accessed independently.
o Provides audit and forensic data through the real-time monitoring of
administrative sessions, instantly identifying incorrect network
administration as well as a tool for fault diagnostics.
o Provides alarms for network and device outages, vulnerabilities and
environmental events through polling to accelerate fault identification
and resolution while allowing immediate response to an impending
breach.
o Provides high availability with both in-band and out-of-band secure
access
A few elements of the value equation that address enterprise concerns
include:
o Regulatory compliance support by encrypting, recording and reporting
all device management activities, controlling access to information and
maintaining privacy.
o Reduces internal and external threats since access to information is
approved or denied at a central point and monitoring of user activity
and endpoints is accomplished in real-time.
o Provides a mechanism to implement and maintain enterprise-wide security
policies
o Provides investment protection with full security and monitoring for
legacy devices
A few of the value elements that address the many challenges facing
service providers include:
13
o Increased margins through more efficient management and a central point
of control
o Reduced costs since less headcount and fewer `truck rolls' are
required
o Enhanced ability to meet their customers' security policies and
service level agreements
o Differentiated and expanded service offerings
o Reduced downstream liability due to increased audit controls
o Lower cost of ownership by providing multiple functions in a single
solution along with ease of device management.
ION Networks Products and Services
ION Networks provides a complete network and information security solution that
provides secure access to enterprise networks through administrative interfaces
as well as secure access to devices within the network. The specific devices the
technical users may access and work upon, as well as what actions may be
performed on those devices, can be controlled from a central point using ION's
PRIISMS software. Once authorization is granted and user authentication
completed, the users' activities can be monitored and tracked, down to the
keystroke level. Should the technical user attempt to perform an action without
permission, an alarm can be broadcast, preventing a breach before it occurs.
Additionally, the environment and devices may be monitored with specific alarms
that are sent due to water, heat or other damaging factors, including
disconnecting of lines or devices or doors left ajar. The ION security solution
is based on centralized security policy management and distributed security
policy enforcement. It consists of ION's Administrative Security Gateway,
PRIISMS for centralized management and control, and ION's Administrative
Security Appliances for distributed secure access and monitoring. ION also
provides training, consulting and support services to our customers and
partners.
ION PRIISMS - Administrative Security Gateway
Through its web-based user interface, PRIISMS provides connectivity to a vast
array of managed endpoints from nearly every vendor covering a variety of
platforms. This administrative security gateway enables authenticated
administrators and technicians to configure, troubleshoot and manage
geographically dispersed network devices from a central operations center within
a secure environment. PRIISMS also provides centralized, 24x7 surveillance and
provisioning across the entire suite of ION Administrative Security Appliances.
Key Capabilities include:
|X| Single Sign-On Environment for Local and Remote Access.
Multi-factor authentication via ION soft tokens or 3rd party
vendor hard tokens
Support for in-band and out-of-band connectivity
Control of all device access information
Masking of IP addresses and phone numbers
Point and click access to all authorized devices
|X| Secure Environment for all Administrative Access
Instant VPN tunneling for automatic encrypted sessions
HTTPS or SSH connections for all users
|X| Centralized Administration for large Device Networks
User management of access to each device
Centralizes alarm notification, logging and consolidation
Device polling
Real-time, forensic monitoring and control of user sessions to
the keystroke level
|X| Scalable, Web-Based Architecture
Easily manage large (5000+) device communities
Easily handle great number of concurrent users
ION Administrative Security Appliances
ION appliances provide a connection point for secure, authorized access, and
also act as a barrier to access by unauthorized systems and individuals. ION
appliances integrate secure connectivity, monitoring, alarming and event logging
of administrator level users into a single appliance, providing simplified and
cost effective protection against unintentional or malicious security threats.
ION's suite of appliances support 2, 4, 16 or 28 serial ports, 1 or 2 modems, up
to 2 Ethernet ports, multifactor authentication, and environmental sensor inputs
including up to 144 contact closures, 2 relay connectors, 2 temperature sensor
inputs and 1 analog input. In addition, the majority of ION appliances include
support for encrypted sessions and a firewall.
14
Key Capabilities include:
|X| Connectivity
Serial and Ethernet Connectivity
Built-in VPN, Router, Firewall capability
|X| Security
Appliance logs
Logging of All Sessions - Distribution over Dial-up,
Ethernet or via PRIISMS
PBX, VM, Router Monitoring (ASCII, PING)
Control of external devices for Device Reboot (intelligent
power controller)
|X| Monitoring and Alarming
Environment
Hi Temperature, Low Temperature
Water, Humidity
Contact Closures - Monitor UPS, Doors, Motion
Relays - Remotely Open Doors, Turn on Fan, Turn on Alarm or
Flashing Light
Access - Notification of Login Success, Failure
Cables - Notification of Device Disconnect or Failure
Multiple Delivery Methods, Locations (SNMP, SMTP, Pager, ASCII)
|X| Buffering / Forensics
Session Buffering
Host Port Buffering
Core Dump
ION Soft Tokens
ION soft tokens are simple to use. Each user may be assigned a `disposable' ION
soft token via email or the web which can be loaded onto a Windows(R), RIM(R)
Blackberry(TM) or PalmOS(R) device. Each time the user requests connectivity to
PRIISMS or an appliance, they are challenged to enter additional criteria
generated by the token that will positively identify them. ION soft tokens
utilize strong 3DES encryption and can be quickly activated and deactivated
through PRIISMS.
Wide Range of Protected Infrastructure Devices
ION network and information security solutions protect a growing variety of
infrastructure devices provided by leading IT and telecommunications network and
system vendors, including vendors of:
o Access Servers o Multi-Service Switches
o Routers o Optical Switches
o VoIP Platforms o PBXs (Switched & IP)
o Call Management Systems o Power Protection Systems (UPS)
o Carrier Grade Multi-Service Switches o Application Servers
o Cellular Switches o SONET Switches
o CSU/DSUs o SS7 Switches
o Databases o DSLAMs
o Integrated Access Devices o Storage Area Networks
o LAN Switches o Terminal Servers
o Mail Servers o UNIX Servers
o Messaging Servers o Wireless Switches
Strategy
Having narrowed our focus over the last year, the Company's goal is to
concentrate on providing secure administrative access to enterprise networks
while delivering a full security solution to our target markets. Our emphasis
will be on the value provided to Service Providers, Enterprises and Government
agencies rather than simply our technology. Key items of value include:
15
|X| Scalability across thousands of distributed locations and tens
of thousands protected endpoints
Modular hardware design and robust centralized
management and control software
Easily expandable solutions
|X| Reduction in the knowledge of the inner workings of networks
Routes to devices and information are masked
Endpoints cannot be independently accessed
|X| Provision of audit and forensic data and real-time monitoring of
administrative sessions
Identifying incorrect network administration
Providing a tool for fault diagnosis
|X| Providing alarms to devices and environmental elements through
polling
Mechanism for fault identification and resolution
Provide for immediate response to an impending breach
|X| Enabling compliance with current legislation
Providing control over access to information
Maintaining privacy
|X| Reduction of internal and external threats
Approval or denial, at a central point, of access to
information
Monitoring user activities and endpoints in real-time
|X| Reduction of costly administrative activities
Providing a single sign-on, central point of
administration
Eliminating time and costs associated with password
changes
Significantly reducing the requirement for on-site
support
|X| Continuing to be completely vendor agnostic
|X| Providing high availability through secure in-band and
out-of-band access
Our goal is to become recognized by our target markets as an industry leader and
the standard by which secure access and network security solutions are measured.
Key elements of our strategy include:
Increase Percent of Value Delivered through Software. Continuing upon the
direction of providing most of our new and enhanced value through our software
technology, changing the hardware / software mix of the ION solution and
enabling the Company to deliver greater value more rapidly.
Expand, Update Product Line, Develop New Products, and Reduce Manufacturing
Costs. The Company is pursuing a strategy of leveraging the open source
development community and intends to expand our current offerings at both the
entry and top end of our product offerings. The Company also intends to better
align its solutions with its target markets, recognizing the different value
equations for each. By reducing manufacturing costs we will be able to maintain
margins while addressing the price pressures of the market.
Establish the ION Networks Brand. We believe that strong brand recognition in
our target markets is important to our long-term success. We intend to continue
to strengthen our brand names through increased corporate marketing, a newly
refreshed web site, direct mailings to customers in all our target markets and
public relations. The positioning of our solutions and the value they provide
will contribute both our direct and more importantly, our indirect sales
efforts.
Expand Indirect Channels. Our strategy is to build and expand our base of
indirect channel partners domestically and internationally through new marketing
programs and by leveraging current relationships.
Expand Strategic Original Equipment Manufacturer Relationships. By entering into
original equipment manufacturer ("OEM") arrangements to sell our products, we
intend to leverage our sales capabilities and expand penetration of our target
markets.
Customers
During the year ended December 31, 2004, 54 customers generated $3,616,261 in
revenue from hardware, software, services, maintenance and repairs.
Historically, our largest customers have been service providers primarily in the
United States and in Europe. See also "Risk Factors - We rely on several key
customers for a significant portion of our business, the loss of which would
likely significantly decrease our revenues" on page 4. While ION has begun to
penetrate the corporate market and, in particular, the financial services
sector, the majority of revenues continue to come from our traditional customer
base.
ION customers can be categorized based on three target markets: Enterprises,
Service Providers and Governmental Agencies:
16
Enterprises. The Enterprise target market consists of non-governmental
organizations that use their network infrastructure as a platform to provide
their own goods or services. There are many sectors in the enterprise market,
including, but not limited to, banking, financial services, insurance, energy,
manufacturing, retailers, pharmaceuticals, healthcare, technology and
transportation.
Service Providers. The service provider target market consists of businesses
that use their network infrastructure to provide services to their customers and
provide managed services to enterprises, supporting their networks and devices.
It also includes resellers of solutions such as ION's, who provide complementary
services to their customer base.
Governmental Agencies. The Government target market consists of domestic and
foreign governmental agencies that provide internal services to their
constituencies. Particular emphasis is placed on agencies within the Department
of Defense and the Department of Energy.
Sales and Marketing
Our marketing programs are intended to promote ION Networks and brand awareness
to build our reputation as a supplier of highly scalable, robust, reliable,
easy-to-use and cost-effective secure access and network security solutions.
During the year ended December 31, 2004, the Company did not have the financial
resources to adequately promote and strengthen our brand. ION attempted to
repair damaged customer relationships by frequent, direct executive
communications with customers. The relative effectiveness of this customer
retention program has been demonstrated by improved operating results in 2004.
We intend to expand and strengthen our customer and channel relationships
through additional marketing programs and staff, as well as increased
promotional activities as resources become available.
While we believe ION solutions are suited for both direct sale to customers and
indirect channels where it is not economically efficient for us to sell directly
to end user organizations, we are focusing on the opportunity to leverage the
sales forces of our service provider customers and resellers.
Direct Sales. On December 31, 2004, the Company's sales and marketing headcount
stood at 4. For the year ended December 31, 2004, approximately 15% of ION's
revenue came from direct sales.
Indirect Sales/Channel Partners. We also market and sell our solutions via
indirect channels through Service providers and reseller partners in the United
States and in Europe. Indirect sales accounted for approximately 47% of our
total revenue for the year ended December 31, 2004. Our VAR partnerships are
non-exclusive.
Original Equipment Manufacturers (OEMs). We enter into select original equipment
manufacturer relationships in order to take advantage of well-established
companies that sell into our target markets. We believe these relationships
expand our overall market penetration. The terms of our agreements with these
customers vary by contract, but have typically been for three year terms. For
the year ended December 31, 2004, our original equipment manufacturer revenue
accounted for approximately 38% of total revenue.
Geographic Distribution. We divide our sales organization regionally into three
territories: (1) the United States and Canada, (2) Europe, the Middle East and
Africa, and (3) other locations.
For the year ended December 31, 2004, approximately 80% of ION's sales were in
the United States and Canada and 20% Europe, the Middle East, Africa and other
locations. (Refer to Note 12 in the Company's Consolidated Financial
Statements.)
Technical Services
We offer our customers a range of support services that includes technical
support either by phone or electronically, product maintenance and repair,
custom development and professional support services. Our technical services
staff, including quality assurance, is located at our corporate headquarters in
South Plainfield, New Jersey.
Competition
The market for secure network access and security solutions is worldwide, highly
competitive, and growing rapidly. Competitors can be generally categorized as
either: (i) vendors who provide high performance, security point products, or
(ii) suppliers of network management appliances that provide limited security
features. Many of these individual solutions require additional products in
order to implement a comprehensive network access and security solution. Current
and potential competitors in our markets include, but are not limited to the
following companies, all of which sell worldwide or have a presence in most of
the major markets for such products:
17
o Alarm and Buffer Box vendors such as: Data Track, Teltronics, OmniTronics;
o Network vendors such as: Cisco, Juniper;
o Terminal Server vendors such as: MRV, Cyclades, Digi;
o Secure Modem vendors such as: US Robotics, Multitech.
Many competitors have generally targeted large organizations' perimeter security
needs with VPN, firewall and intrusion detection systems that range in price
from under one thousand to hundreds of thousands of dollars. These offerings may
increase competitive pressure on some of our solutions, resulting in both lower
prices and gross margins. Many of our current or potential competitors have
greater name recognition, larger customer bases and significantly greater
financial, technical, marketing and other resources than ION. Nothing prevents
or hinders these actual or potential competitors from entering our target
markets at any time. In addition, our competitors may bundle products
competitive to ours with other products that they may sell to our current or
potential customers. These customers may accept these bundled products rather
than separately purchasing our products. If these companies were to use their
greater financial, technical and marketing resources in our target markets, it
could adversely affect our business. See also "Risk Factors - We face
significant competition and if we do not compete successfully, our results of
operations may be adversely affected" on page 3.
Sources And Availability Of Materials
The Company designs its security appliances utilizing readily available parts
manufactured by multiple suppliers and relies on and intends to continue to rely
on these suppliers. Our principal suppliers are Arrow Electronics, Inc., PPI
Time Zero, Ituner Networks Corp., AVNET, Inc. and ACE Electronics, Inc.. The
Company has been and expects to continue to be able to obtain the parts required
to manufacture its products without any significant interruption or sudden price
increase, although there can be no assurance that it will be able to continue to
do so.
The Company sometimes utilizes a component available from only one supplier. If
a supplier were to cease to supply this component, the Company would most likely
have to redesign a feature of the affected device. In these situations, the
Company maintains a greater supply of the component on hand in order to allow
the time necessary to effect a redesign or alternative course of action should
the need arise.
Dependence On Particular Customers
Historically, the Company has been dependent on several large customers each
year, but they are not necessarily the same every year. In general, the Company
cannot predict with certainty, which large customers will continue to order our
products. The loss of any of these large customers, or the failure to attract
new large customers, could have a material adverse effect on the Company's
business.
Intellectual Property, Licenses And Labor Contracts
The Company holds no patents on its technology. Although it licenses some of its
technology from third parties, the Company does not consider any of these
licenses to be critical to its operation.
The Company has made a consistent effort to minimize the ability of competitors
to duplicate the software technology utilized in its solutions. However, the
possibility of duplication of its products remains, and competing products have
already been introduced.
Governmental Approvals And Effect Of Governmental Regulation
The Company's solutions may be exported to any country in the world except those
countries restricted by the anti-terrorism controls imposed by the Department of
Commerce. These anti-terrorism controls prohibit the Company from exporting some
of its solutions to Cuba, Libya, Iran, Iraq, North Korea, Sudan and Syria
without a license. As with all U.S. origin items, the Company's solutions are
also subject to the Bureau of Export Administration's ten general prohibitions
that restrict exports to certain countries, organizations, and persons.
As required by law or demanded by customer contract, the Company obtains
approval of its solutions by Underwriters' Laboratories. Additionally, because
many of the products interface with telecommunications networks, the Company's
products are subject to several key Federal Communications Commission ("FCC")
rules requiring FCC approval.
18
Part 68 of the FCC rules contains the majority of the technical requirements
with which telephone systems must comply in order to qualify for FCC
registration for interconnection to the public telephone network. Part 68
registration requires telecommunication equipment interfacing with the public
telephone network to comply with certain interference parameters and other
technical specifications. FCC Part 68 registration for ION's products has been
granted, and the Company intends to apply for FCC Part 68 registration for all
of its new and future products.
Part 15 of the FCC rules requires equipment classified as containing a Class A
computing device to meet certain radio and television interference requirements,
especially as they relate to operation of such equipment in a residential area.
Certain of ION's products are subject to and comply with Part 15.
The European Community has developed a similar set of requirements for its
members and the Company has begun the compliance process for its products in
Europe. Additionally, ION has certified certain of its products to the NEBS
(Network Equipment Business Specification) level of certification. This is a
certification that was developed by Bellcore (now Telcordia Technologies) and is
required by many of ION's telecommunications customers.
Research And Development Activities
As of December 31, 2004, the Company had 5 R&D staff members devoting part of
their time to research and development activities. We believe the effort of
these employees will be minimally sufficient to allow the Company to keep up
with technology advances for the foreseeable future. However, the Company
intends to increase staff during 2005, as resources become available, in order
to more rapidly introduce new and enhanced products. In 2004, the Company
incurred a charge of $598,012 for R&D activities.
The current R&D staff was primarily responsible for the successful completion
and delivery of the most recent ISOS software releases and enhancing PRIISMS
functionality. They also enhanced the code base to meet major customer
requirements and significantly reduced the number of product issues affecting
our customers. In addition, the quality assurance function was reestablished and
has designed a new QA lab for product testing.
Employees
As of December 31, 2004, the Company had 23 employees, 21 full-time employees
and 2 part-time employees. This headcount includes 9 technical and production, 7
sales, marketing and support, and 7 financial, administrative and executive
capacities. None of the Company's employees are represented by labor unions. The
Company considers it has generally satisfactory relations with its employees.
DESCRIPTION OF PROPERTY
The Company entered into a lease on August 1, 2003 for approximately 7,000
square feet for its principal executive offices at 120 Corporate Blvd., South
Plainfield, New Jersey. The base rent is $4,505 per month effective October 2003
through July 2006. The Company is also obligated to make additional payments to
the landlord relating to certain taxes and operating expenses.
The Company abandoned the lease space at 48834 Kato Road, Fremont, California in
the Bedford Fremont Business Center. This lease commenced on June 1, 1999 and is
for a term of 60 months with monthly rent payable by the Company to the landlord
as follows: $7,360 per month for the first 12 months of the term; $7,590 per
month for months 13-24; $7,820 per month for months 25-36; $8,050 per month for
months 37-48; and $8,280 per month for months 49-60. The Company entered into an
abandonment agreement with the landlord in March of 2003. As a result, the
Company recorded a one-time charge to Restructuring of $123,510 in the quarter
ended March 31, 2003. This amount represents the total lease payments from
December 2002 to May 2004 offset by landlords stated sub-lease rental payments.
The Company has not occupied the space since approximately March 2003. In 2004,
Management revaluated the current status of the ongoing negotiations and
reversed its prior reserve amount by approximately $63,716. Management believes
that the final settlement amount should not exceed the reserved amount of
$60,000 at December 31, 2004. However, the Company and Landlord have no
settlement agreement in place at this time.
LEGAL PROCEEDINGS
While the Company is occasionally involved in various claims and legal actions
in the ordinary course of business. The Company is not currently involved in any
legal proceedings.
19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position Held with the Company
Norman E. Corn 58 Chief Executive Officer
Patrick E. Delaney 51 Chief Financial Officer
William Whitney 50 Chief Technology Officer and
Vice President of Research and Development
Stephen M. Deixler 69 Chairman of the Board of
Directors
Harry F. Immerman 61 Director
Frank S. Russo 62 Director
NORMAN E. CORN has served as Chief Executive Officer since August 15, 2003.
Prior to joining ION, from 2000 until 2003, Mr. Corn was Executive Vice
President of Liquent, Inc., a Pennsylvania-based software company that provides
electronic publishing solutions, focused on the life sciences industry. Mr. Corn
has also served from 1994 to 2000 as CEO of TCG Software, Inc., an offshore
software services organization providing custom development to large corporate
enterprises in the US. Mr. Corn has led other companies, including Axiom Systems
Group, The Cobre Group, Inc., The Office Works, Inc. and Longview Results, Inc.,
having spent the early part of his career in sales, marketing and executive
positions in AT&T and IBM.
PATRICK E. DELANEY has served as Chief Financial Officer since September 15,
2003. Prior to joining ION, from 2000 until 2003, Mr. Delaney was the President
of Taracon, Inc. a privately owned independent consulting firm that provides
management consulting for early and mid-stage technology and financial services
companies. Mr. Delaney also served as Chief Financial Officer for two publicly
traded telecommunications providers, Pointe Communications Corporation from 1993
to 2000 and Advanced Telecommunications Corporation from 1986 to 1993. Mr.
Delaney has served other companies in executive capacities including RealCom
Communications, Argo Communications and ACF Industries.
WILLIAM WHITNEY has served as Vice President of Research and Development since
March 2002 and Chief Technology Officer since October 1, 2002. Prior to joining
ION, from April 2000 to February 2002, Mr. Whitney served as the Vice President
of Development and Chief Technology Officer for Outercurve Technologies, a
provider of wireless application development and deployment solutions.
Previously from, May 1998 to March 2002, Mr. Whitney served as President of CTO
Systems.
STEPHEN M. DEIXLER has been Chairman of the Board of Directors since May 1982
and served as Chief Executive Officer of the Company from April 1996 to May
1997. He was President of the Company from May 1982 to June 1985 and served as
Treasurer of the Company from its formation in 1982 until September 1993. During
the period since March 2003 to September 2003, Mr. Deixler has served as the
interim Chief Financial Officer of the Company. He also serves as Chairman of
the Board of Trilogy Leasing Co., LLC and President of Resource Planning Inc.
Mr. Deixler was the Chairman of Princeton Credit Corporation until April 1995
and Chief Financial Officer of Multipoint Communications, LLC until November
2002.
HARRY F. IMMERMAN joined the ION Network Board of Directors in October, 2004.
Mr. Immerman retired from PricewaterhouseCoopers LLP ("PwC") in July, 2003,
having worked at the firm since July, 1966. He became a partner in the firm on
October 1, 1973. During his career with PwC, he served in several management and
client service positions. Mr. Immerman served as the Global Tax Leader for the
Pharmaceutical Industry Sector from 1999 to 2003, the National Director of
Industry Programs from 1996 to 1999 and as the Partner-in-Charge of the New York
Metro Region and New York office tax department from 1983 to 1993. From 1983 to
1995, he also was a member of the Firm Council, the partner group responsible
for management oversight and governance. Throughout his career with PwC, Mr.,
Immerman served as the client service tax partner on large multinational
companies with a focus on pharmaceutical and telecommunication enterprises.
20
FRANK S. RUSSO has served as a director of the Company since November 2000. Mr.
Russo was with AT&T Corporation from September 1980 to September 2000 and most
recently served as its Corporate Strategy and Business Development Vice
President. While at AT&T Solutions, Mr. Russo held a number of other positions
including that of General Manager, Network Management Services from which he
helped architect and launch AT&T's entry into the global network outsourcing and
professional services business. Mr. Russo retired from AT&T in 2000. Prior to
joining AT&T, Mr. Russo was employed by IBM Corporation in a variety of system
engineering, sales and sales management positions. Mr. Russo served on the Board
of Directors of Oak Industries, Inc., a manufacturer of highly engineered
components, from January 1999 to February 2000, and currently serves on the
Board of Directors of Advance-com, a private e-commerce company headquartered in
Boston, Massachusetts.
21
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned, whether paid or
deferred, by the Company's Chief Executive Officer and its other two most highly
compensated executive officers during the year ended December 31, 2004 (the
"Named Executive Officers") for services rendered in all capacities to the
Company.
Summary Compensation Table
Annual Compensation Long-term Compensation
------------------- ----------------------
Awards Payouts
-------- -------
Other
Annual Restricted Securities All Other
Principal Compen- Stock Underlying LTIP Compen-
Position Year Ending* Salary($) Bonus($) sation Award(s)($) Options(#) Payouts($) sation($)/(1)/
--------------------- ------------------- ----------- --------- -------- ----------- ------------ --------- --------------
Norman E. Corn/(3)/ 12/31/2004 217,400/(5) 20,000 1,723 -- 1,550,000 -- --
Chief Executive 12/31/2003 60,000 -- -- -- -- -- --
Officer
Patrick E. Delaney/(4)/ 12/31/2004 181,400/(5) 10,000 4,125 -- 1,050,000 -- --
Chief Financial 12/31/2003 35,323 -- -- -- -- -- --
Officer
William Whitney/(1)(2)/ 12/31/2004 150,000 -- -- -- 400,000 -- --
Vice President & 12/31/2003 117,692 -- -- -- -- -- --
Chief Technology 12/31/2002 112,500 -- -- -- -- --
*Please note the 12/31/02 year end represents the nine-month period from 4/1/02
to 12/31/02.
(1) Mr. Whitney joined the Company on 3/11/02. Pursuant to his employment
agreement, he receives an annualized base salary of $150,000.
(2) Refer to the Employment Contracts, Termination of Employment and Change of
Control Arrangements section below for a more detailed description of all
consulting and employment agreements.
(3) Mr. N. Corn joined the Company on 08/15/03. Pursuant to his employment
agreement, he receives an annualized base salary of $180,000 for the fiscal
year ended December 31, 2003. In the year ended December 31, 2004, his
annualized base salary is $200,000.
(4) Mr. P. Delaney joined the Company on 09/15/03. Pursuant to his employment
agreement, he receives an annualized base salary of $175,000 and $120,000
for the fiscal year ended December 31, 2004 and 2003, respectively.
(5) Includes $9,900 in auto allowance.
22
Option Grants for the Year Ended December 31, 2004
The following table sets forth certain information concerning stock option
grants during the year ended December 31, 2004 to the Named Executive Officers:
Individual Grants
Percent
Number of of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
-------- ------------ ------------ ----------- -----------
Norman E. Corn (1) 800,000 35.77% $0.115 1/29/2009
750,000 0.06 1/29/2009
Patrick E. Delaney (2) 800,000 24.53 0.115 1/29/2009
250,000 0.045 1/29/2009
William Whitney (3) 200,000 9.23 0.115
200,000 0.35 11/02/2012
1/28/2012
(1) Represents options granted in connection with an Employment Agreement dated
September 8, 2003.
(2) Represents options granted in connection with an Employment Agreement dated
September 15, 2003
(3) Represents options granted for continued service.
Aggregated Option Exercises for Year Ended December 31, 2004
And Year Ended Option Values
The following table sets forth certain information concerning each exercise of
stock options during year ended December 31, 2004 by each of the Named Executive
Officers and the number and value of unexercised options held by each of the
Named Executive Officers on December 31, 2004.
Value of
Number of Unexercised
Securities Underlying In-the-Money
Shares Unexercised Options Options at
Acquired on Value at FY-End(#) FY-End($)/(1)/
Name Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------------- ------------ -------------------------- -------------------------
Norman E. Corn -- -- 1,550,000/0 $250,500/0
Patrick E. Delaney 250,000 11,250 800,000/0 $108,000/0
William Whitney -- -- 91,750/408,250 0/$27,000
(1) The average price for the Common Stock as reported by the OTC Bulletin Board
on December 30, 2004, was $0.25 per share. Value is calculated on the basis of
the difference between the option exercise price and $0.25 multiplied by the
number of shares of Common Stock underlying the options.
Compensation of Directors
Standard Arrangements: For the year ended December 31, 2004, the Company
reestablished the plan such that, each of the members of the Board of Directors
who is not also an employee of the Company ("Non-Employee Directors") received
fully vested options to purchase 10,000 shares of Common Stock at exercise
prices per share equal to the fair market value of the Common Stock on the date
of grant on an annual basis. Non-Employee Directors were also granted fully
vested options to purchase an additional 1,500 shares of Common Stock for each
meeting of the Board of Directors attended by such Non-Employee Director at
exercise prices per share equal to the fair market value of the common stock on
the date of the grant. Non-Employee Directors serving on committees of the Board
of Directors were granted, on an annual basis, fully vested options to purchase
1,500 shares of Common Stock for each committee served thereby at exercise
prices per share equal to the fair market value of the common stock on the date
of the grant. In addition, the Company reimburses all Non-Employee Directors
traveling more than fifty miles to a meeting of the Board of Directors for all
reasonable travel expenses
23
Employment Contracts, Termination of Employment and Change of Control
Arrangements
The Company entered into an employment agreement with Norman E. Corn dated
August 15, 2003. Pursuant to the agreement Mr. Corn shall serve as Chief
Executive Officer at the will of the Company. Mr. Corn's annual base salary as
of March 15, 2004 was $200,000. In addition, he will receive a monthly car
allowance of $900 plus, reimbursement for additional life and disability
insurances. On January 28, 2004, the Company awarded Mr. Corn options to
purchase 1,550,000 shares of common stock at $0.115 per share for 800,000 shares
issuable pursuant to incentive stock options and $0.06 per share for 750,000
shares issuable pursuant to non-incentive stock options. These options vested
immediately. If the Company terminates Mr. Corn's employment it is obligated to
make a severance payment equal to 18 months of the then current annual salary.
The Company entered into an employment agreement with Patrick E. Delaney dated
September 15, 2003. Pursuant to the agreement Mr. Delaney shall serve as Chief
Financial Officer at the will of the Company. Mr. Delaney's annual base salary
as of March 15, 2004 was $170,000. In addition, he will receive a monthly car
allowance of $900 plus, reimbursement for additional life and disability
insurances. On January 28, 2004, the Company awarded Mr. Delaney options to
purchase 1,050,000 shares of common stock at $0.115 per share for 800,000 shares
issuable pursuant to incentive stock options and $0.045 per share for 250,000
shares issuable pursuant to non-incentive stock options. These options vested
immediately. If the Company terminates Mr. Delaney's employment, it is obligated
to make a severance payment equal to 18 months of the then current annual
salary.
The Company entered into an employment agreement with William Whitney dated
March 11, 2002. Pursuant to the agreement, Mr. Whitney shall receive a base
salary at an annual rate of $150,000. Pursuant to the agreement, Mr. Whitney was
granted stock options to purchase 100,000 shares of the Company's Common Stock
at a price of $0.70 per share. These options vest as follows: 34,000 vest on
March 11, 2003, and 8,250 at the end of each three month period, commencing with
the period ending June 11, 2003, and ending with the period ending March 11,
2005. In the event of a change in control event (as described in the employment
agreement) all options will become immediately vested.
24
Equity Compensation Plan Information
As of December 31, 2004
(c)
Number of securities
(a) (b) remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants, and rights warrants, and rights reflecting in column (a))
-------------------------- --------------------- --------------------------
Plan Category
Equity compensation plans approved by 4,207,629 0.50 1,674,371
security holders/(1)/
Equity compensation plans not approved 1,358,000 0.58 -
by security holders/(2)/
Total 5,565,629 0.54 1,674,371
(1) Shareholder Approved Plans
In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000
Plan"). The aggregate number of shares of common stock for which options may be
granted under the 2000 Plan is 3,000,000. The maximum number of options which
may be granted to an employee during any calendar year under the 2000 Plan is
400,000. The term of these non-transferable stock options may not exceed ten
years. The exercise price of these stock options may not be less than 100% (110%
if the person granted such options owns more than ten percent of the outstanding
common stock) of the fair value of one share of common stock on the date of
grant. During the year ended December 31, 2004 and 2003, the Company granted
options to purchase 2,048,000 and zero shares, respectively. As of December 31,
2004, 2,626,000 options were outstanding under the 2000 Plan, of which 1,544,750
options were exercisable.
The aggregate number of shares of common stock for which options may be granted
under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum
number of options which may be granted to an employee during any calendar year
under the 1998 Plan is 400,000. The term of these non-transferable stock options
may not exceed ten years. The exercise price of these stock options may not be
less than 100% (110% if the person granted such options owns more than ten
percent of the outstanding common stock) of the fair value of one share of
common stock on the date of grant. During the year ended December 31, 2004 and
2003, the Company granted options to purchase 1,285,000 and zero shares,
respectively. As of December 31, 2004, 1,556,629 options were outstanding under
the 1998 Plan, of which 1,020,900 options were exercisable.
In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan, as amended, increased the number of shares of common
stock for which options may be granted to a maximum of 1,250,000 shares. The
term of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of the outstanding common
stock) of the fair market value of one common stock on the date of grant. During
the year ended December 31, 2004 and 2003, there were no option grants provided
under the 1994 Plan. As of December 31, 2004, 25,000 options were outstanding
and exercisable under the 1994 Plan.
During the years ended 2004 and 2003, there were no options granted under the
Company's Time Accelerated Restricted Stock Award Plan ("TARSAP"). The options
vest after seven years, however, under the TARSAP, the vesting is accelerated to
the last day of the fiscal year in which the options are granted if the Company
meets certain predetermined sales targets. The Company did not meet the targets
for 2001 and, as such, all options granted under the TARSAP in 2001 will vest
seven years from the original date of grant.
(2) Non-Shareholder Approved Awards
During the year ended December 31, 2004 the Company granted options and warrants
to purchase 1,000,000 shares of Common Stock outside of the shareholder approved
plans. The awards have been made to employees, directors and consultants, and
except as noted below, have been granted with an exercise price equal to the
fair market value of the Common Stock on the date of grant. The Company has not
reserved a specific number of shares for such awards. The non-shareholder
approved awards are more specifically described below.
During July 2001 in connection with services being performed by a consultant,
the Company issued warrants to purchase 48,000 shares of the Company's Common
Stock at $0.62 per share. The warrants vested immediately and expire five years
from the date of the grant.
25
During January 2002 in connection with services being performed by a consultant,
the Company issued warrants to purchase 100,000 shares of the Company's Common
Stock at $1.35 per share and 50,000 shares of Common Stock at $1.80 per share.
The warrants vested immediately and expired in January 2005.
On March 19, 1999, the Company issued options to certain consultants and
employees to purchase an aggregate of 20,000 shares of the Company's Common
Stock, all of which vested on the first year anniversary of the date of grant.
The options expire six years from the date of grant. However, in the event of
(a) the liquidation or dissolution of the Company or (b) a merger in which the
Company is not the surviving corporation or a consolidation involving the
Company, the options shall terminate, unless other provision is made therefore
in the transaction. The exercise price of the options is $2.41 and equals to the
market value of the Company's Common Stock on the date of grant. At December 31,
2004, 10,000 options were outstanding and exercisable.
On September 25, 1996, the Company issued options to certain officers and
directors to purchase 620,000 shares of the Company's Common Stock, of which
420,000 vested immediately and 100,000 vested on April 1, 1998 and 1999. The
options expire ten years from the date of grant. However, in the event of (a)
the liquidation or dissolution of the Company or (b) a merger in which the
Company is not the surviving corporation or a consolidation involving the
Company, the options shall terminate, unless other provision is made in the
transaction. There were no stock option exercised during the year ended December
31, 2004 and 2003. The exercise price of the options is $1.156 and equals to the
market value of the Company's Stock on the date of grant. At December 31, 2004,
400,000 options were outstanding and exercisable.
In January 2004, the Company issued options to certain officers to purchase
1,000,000 shares of the Company's Common Stock, which vested immediately. The
exercise price of the options ranged from $0.045 to $0.06. At December 31, 2004,
750,000 options were outstanding and exercisable.
26
Beneficial Ownership Information
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 15, 2005 by each person (or
group within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934) known by the Company to own beneficially 5% percent or more of the
Company's Common Stock, and by the Company's directors and named executive
officers, both individually and as a group.
As used in this table, "beneficial ownership" means the sole or shared power to
vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within sixty days from April 15, 2005 through the exercise of any
option, warrant or right. Shares of Common Stock subject to options, warrants or
rights (including conversion from Preferred Stock) which are currently
exercisable or exercisable within sixty days are deemed outstanding for
computing the ownership percentage of the person holding such options, warrants
or rights, but are not deemed outstanding for computing the ownership percentage
of any other person. The amounts and percentages are based upon 27,050,044
shares of Common Stock and 155,557 shares of Preferred Stock outstanding as of
April 15, 2005.
Common Stock Percent of Class
------------ ----------------
Norman E. Corn 1,565,000/(5)/ 5.5%
Patrick E. Delaney 1,050,000/(6)/ 3.7%
Stephen M. Deixler 3,840,900/(1)/ 12.7%
Frank S. Russo 381,780/(2)/ 1.4%
Harry F. Immerman 54,500/(7) *
William Whitney 168,704/(3)/ *
5% or more beneficial owners:
Austin Marxe and David Greenhouse 9,747,930/(4)/ 32.1%
153 East 53rd Street, 55th Floor
New York, NY 10022
Directors and Executive Officers as a 7,060,884 21.3%
group 6 persons)
(1) Does not include 220,000 shares of Common Stock owned by Mr. Deixler's wife,
mother, children and grandchildren as to which shares Mr. Deixler disclaims
beneficial ownership. Includes 480,560 shares of Common Stock subject to
conversion from 48,056 shares of Preferred Stock within 60 days of April 15,
2005 and 355,500 shares of Common Stock subject to options that are currently
exercisable or exercisable within 60 days of April 15, 2005. Includes 2,409,638
shares issuable pursuant to conversion of a $200,000 debenture.
(2) Includes 277,780 shares of Common Stock subject to conversion from 27,778
shares of Preferred Stock within 60 days of April 15, 2005 and 86,500 shares of
Common Stock subject to options that are currently exercisable or exercisable
within 60 days of April 15, 2005.
(3) Includes 38,890 shares of Common Stock subject to conversion from 3,889
shares of Preferred Stock within 60 days of April 15, 2005 and 67,000 shares of
Common Stock subject to options that are currently exercisable or exercisable
within 60 days of April 15, 2005.
(4) Based on a Schedule 13D filed by the beneficial owners on April 8, 2005;
includes (i) 3,343,200 shares of Common Stock and 1,733,659 shares of Common
Stock issuable upon the exercise of Warrants that are currently exercisable held
by Special Situations Fund III, L.P., (ii) 1,198,747 shares of Common Stock and
604,324 shares of Common Stock issuable upon the exercise of Warrants that are
currently exercisable held by Special Situations Cayman Fund, L.P., (iii)
1,281,653 shares of Common Stock and 666,476 shares of Common Stock issuable
upon the exercise of Warrants that are currently exercisable held by Special
Situations Private Equity Fund, L.P., (iv) 94,621 shares of Common Stock and
50,780 shares of Common Stock issuable upon the exercise of Warrants that are
currently exercisable held by Special Situations Technology Fund, L.P. and (v)
270,644 shares of Common Stock and 505,826 shares of Common Stock issuable upon
27
the exercise of Warrants that are currently exercisable held by Special
Situations Technology Fund II, L.P. MGP Advisors Limited ("MGP") is the general
partner of Special Situations Fund III, L.P. AWM Investment Company, Inc.
("AWM") is the general partner of MGP and the general partner of and investment
adviser to the Special Situations Cayman Fund, L.P. SST Advisers, L.L.C.
("SSTA") is the general partner of and investment adviser to the Special
Situations Technology Fund, L.P. and the Special Situations Technology Fund II,
L.P. MG Advisers, L.L.C. ("MG") is the general partner of and investment adviser
to the Special Situations Private Equity Fund, L.P. Austin W. Marxe and David M.
Greenhouse are the principal owners of MGP, AWM, SSTA and MG. Through their
control of MGP, AWM, SSTA and MG, Messrs. Marxe and Greenhouse share voting and
investment control over the portfolio securities of each of the funds listed
above.
(5) Includes 15,000 shares of Common Stock and 1,550,000 shares of Common Stock
subject to options that are currently exercisable.
(6) Includes 250,000 shares of Common Stock and 800,000 shares of Common Stock
subject to options that are currently exercisable.
(7) Consists of 54,500 shares of Common Stock subject to options that are
currently exercisable or exercisable within 60 days of April 15, 2005.
(8) Unless otherwise noted, the address of each such person is c/o the Company,
120 Corporate Blvd., S. Plainfield, New Jersey 07080.
*Indicates ownership of Common Stock of less than one (1%) percent of the
total issued and outstanding Common Stock on April 15, 2005.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into a definitive Sublease Agreement with Multipoint
Communications, LLC (the "Tenant") on April 17, 2002 to sublease approximately
5,400 square feet of its Piscataway, NJ facility for a period of 24 months. The
rental rate and the other material terms of the lease with Multipoint
Communications, LLC ("Multipoint") were negotiated through a real estate broker
and separate attorneys representing each party. The rental rate was established
by prorating the amount of space leased by Multipoint by the current rent paid
by the Company to its landlord. Given the current real estate market condition
in the area, the Company believes that the terms of the lease with Multipoint
are comparable to terms of leases that might have been obtained from a
non-affiliate. The rent will be $5,200 per month for the first nine months and
$10,400 per month for the last fifteen months, but with a 100% abatement for the
first three months. As part of the rental payment the Tenant was to issue shares
totaling the value of $77,400, which were to be based on the per share price of
the Tenant's common stock as priced in the first round of institutional
financing (the "Financing") which were to have closed on or before June 30,
2002. These shares were to have had the registration rights as other shares
issued in the Financing. Since the Financing did not close on or before June 30,
2002, the Tenant owes the Company additional rent in the amount of $4,300 per
month commencing on July 1, 2002. The Chairman of the Board of Directors of the
Company served as the Chief Financial Officer of the Tenant until November 2002.
On or about January 16, 2003, the Tenant filed for voluntary Ch. 7 bankruptcy
with the U.S. Bankruptcy Court for the District of New Jersey. As a result in
2002, the Company wrote off an amount of $122,550 which is included in selling,
general and administrative expenses.
During April 2000, the Company made a loan (the "Loan") to the former Chief
Executive Officer (the "Former CEO") of the Company in the amount of $750,000.
At the time that the Loan was made to the Former CEO in April 2000, the Company
was contemplating a secondary public offering and potential mergers and
acquisitions opportunities. As a result, the Company did not want the Former CEO
to exercise his stock options. In consideration for not exercising his stock
options at that time, the Company issued the Loan to him. At that time, the
Company had sufficient cash and it was contemplated that the Loan would be
repaid within one year. The Loan accrues interest at a rate of LIBOR plus 1%.
The LIBOR plus one percent interest rate in April 2000 was 7.197% as compared to
the first mortgage interest rate in April 2000 of 6.90% for a 1-year ARM, 7.97%
for a 15-year FRM and 8.30% for a 30-year FRM. This Loan had an original
maturity date of the earlier of April 2005 or thirty days after the Company for
any reason no longer employed the Former CEO. The Former CEO resigned his
position at the Company effective September 29, 2000. On October 5, 2000, the
Company entered into an agreement with the Former CEO pursuant to which the
$750,000 promissory note for the Loan was amended to extend the due date to
April 30, 2001, and to provide that interest on the note shall accrue through
September 29, 2000 (the "Separation and Forbearance Agreement"). The Loan was
collateralized by a first mortgage interest on the personal residence of the
Former CEO. The Company agreed to extend the repayment date of the Loan so that
the Former CEO would be able to repay the Loan to the Company by selling his
28
personal residence. In addition to the Loan, pursuant to the terms of the
Separation and Forbearance Agreement between the Company and the Former CEO, the
Former CEO also agreed to reimburse the Company for certain expenses totaling
$200,000, to be paid over a period of six months ending March 31, 2001. These
certain expenses were incurred by the Former CEO as part of his personal expense
account arrangement with the Company. During the year ended March 31, 2001,
$50,000 of the amounts owed to the Company by the Former CEO was repaid and
$22,000 has been recorded as a non-cash offset as a result of earned but unpaid
vacation owed to the Former CEO. During the year ended March 31, 2002, $813,593
was repaid which included proceeds in the amount of $777,713.48 received by the
Company on August 3, 2001 for the sale of the Former CEO's personal residence.
At December 31, 2004, the total amount owed to the Company by the Former CEO was
approximately $196,173, which includes interest accrued through December 31,
2004. The full amount has been recorded as a reserve against the note
receivable. Because these amounts were not paid by their respective maturity
dates, interest is accruing at the default interest rate of 12%. The Company
will continue to attempt to collect the note receivable.
On March 29, 2004, the Company agreed to a final separation agreement with its
former President and Chief Executive Officer. As part of the agreement, the
Company agreed to accept the return of 2,000,000 shares of the Company's common
stock as full payment for the former officers' total indebtedness to the Company
of $294,493. In addition, the former officer released the Company from any
obligations, which may have arisen from the separation of the officer from the
Company.
On October 14, 2004, the Company agreed to a final separation agreement with its
former Executive Vice President and Chief Operating Officer. As part of the
agreement, the Company agreed to accept the return of 600,000 shares of the
Company's common stock as full payment for the former officers' total
indebtedness to the Company of $216,926. In addition, the former officer
released the Company from any obligations, other than the sum of $8,000 to cover
certain expenses, which may have arisen from the separation of the officer from
the Company.
On August 5, 2004, the Company issued, for $200,000 cash, a convertible
debenture (the "Debenture") to Stephen M. Deixler, one of the Company's
directors. The Debenture matures on August 5, 2008 and bears interest at five
(5%) percent per annum, compounded annually. The principal amount of the
Debenture is convertible into shares of the Company's common stock, $.001 par
value at a conversion price equal to $0.083 per share (the "Conversion Price"),
which is equal to the ten (10) day average of the closing prices of the
Company's common stock, as quoted on the OTC Bulletin Board during the five (5)
trading days immediately prior to and subsequent to August 5, 2004. The
principal amount of the Debenture is convertible at the Conversion Price at the
option of the holder, or after August 5, 2005 at the Company's option if the
Company's common stock trades at a price of at least $0.166 for twelve (12)
trading days in any fifteen (15) trading day period. The Company is also
entitled to prepay the principal amount of the Debenture, at any time after
August 5, 2005, but shall be required to pay a premium of two (2%) percent in
the second year after issuance of the Debenture of the principal amount prepaid,
for prepayments made during that period. The Company has granted certain
"piggyback" registration rights to the holder to register for resale the shares
issuable upon conversion of the Debenture. In 2004, the Company recorded $4,167
of related party interest expense related to this transaction.
DESCRIPTION OF SECURITIES
The following is a summary description of our capital stock and certain
provisions of our Certificate of Incorporation and Amended and Restated By-Laws.
The following discussion is qualified in its entirety by reference to the actual
documents, copies of which can be obtained through our public filings on the
Securities and Exchange Commission's website at "www.sec.gov".
General
Our authorized capital stock consists of 50,000,000 shares of common stock, par
value $.001 per share, and 1,000,000 shares of preferred stock, par value $.001
per share, 200,000 shares of which have been designated as Series A Preferred
Stock. As of April 20, 2005, we had 27,050,044 shares of common stock issued and
outstanding and 155,557 shares of Series A Preferred Stock issued and
outstanding. We have reserved (i) 5,565,629 shares of common stock for issuance
pursuant to outstanding options, (ii) 3,373,882 shares of common stock for
issuance pursuant to outstanding warrants, (iii) 2,409,638 shares of common
stock for issuance pursuant to conversion of a debenture, and (iv) 1,555,570
shares of common stock for issuance upon conversion of a Series A Preferred
Stock.
Common Stock
The holders of ION common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of common
stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefore. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in the assets remaining after payment of liabilities and of the
Series A Preferred Stock liquidation preference. Holders of common stock have no
preemptive, conversion or redemption rights. All of the outstanding shares of
common stock are fully-paid and nonassessable.
29
Preferred Stock
Each share of Series A Preferred Stock is convertible into 10 shares of the
Company's common stock at the conversion price of $0.18 per share of common
stock. The Series A Preferred Stock is non-voting, has a standard liquidation
preference equal to its purchase price ($1.80 per share), and does not pay
dividends. In addition, the consent of holders of a majority of the outstanding
shares of Series A Preferred Stock is required in connection with certain
corporate actions, including the issuance of any of the Company's common stock.
Holders of Series A Preferred stock have no preemptive or redemption rights. All
of the outstanding shares of Series A Preferred Stock are fully-paid and
nonassessable.
In addition, our Board of Directors may, without stockholder approval, establish
and issue shares of one or more classes or series of preferred stock having the
designations, number of shares, dividend rates, liquidation preferences,
redemption provisions, sinking fund provisions, conversion rights, voting rights
and other rights, preferences and limitations that our Board may determine. The
Board may authorize the issuance of preferred stock with voting, conversion and
economic rights senior to ION's common stock so that the issuance of preferred
stock could adversely affect the market value of the common stock. The creation
of one or more additional series of preferred stock may adversely affect the
voting power or other rights of the holders of common stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things and under
some circumstances, have the effect of delaying, deferring or preventing a
change in control without any action by stockholders.
Warrants
In July 2001 in connection with services being performed by a consultant, the
Company issued a warrant to purchase 48,000 shares of the Company's common
stock, at an exercise price of $0.62 per share. The warrant vested immediately
and expires five years from the date of the grant.
In connection with the sale of common stock on February 14, 2002, warrants to
purchase 1,120,000 shares of common stock with an exercise price of $1.25 per
share, subject to certain adjustments, including a weighted-average ratchet
adjustment for certain issuances of the Company's equity securities below the
warrant exercise price, were issued. As of April 12, 2005 the exercise price is
$0.95. The warrants expire on February 14, 2007. In the event that the closing
bid price of the Company's common stock exceeds $1.50 for a period of 20
consecutive trading days and certain other conditions are met, the Company has
the right to require the exercise of all such warrants within 20 days. Any
warrants not so exercised within such time period would be canceled.
In connection with the sale of common stock on March 31, 2005, warrants to
purchase 2,205,882 shares of common stock, subject to certain adjustments, with
an exercise price of $0.23 per share, subject to certain adjustments, including
a full ratchet adjustment for certain issuances of the Company's equity
securities below the warrant exercise price, were issued. The warrants expire on
March 31, 2010. In the event that the closing bid price of the Company's common
stock equals or exceeds $0.69 per share for a period of 20 consecutive trading
days and certain other conditions are met, the Company may redeem the warrants
on 30 days prior written notice (during which periods the warrants may be
exercised) for a redemption price of $.001 per share of common stock underlying
such warrants.
Convertible Debenture
On August 5, 2004, the Company issued, for $200,000 cash, a convertible
debenture (the "Debenture") to Stephen M. Deixler, one of the Company's
directors. The Debenture matures on August 5, 2008 and bears interest at five
(5%) percent per annum, compounded annually. The principal amount of the
Debenture is convertible into shares of the Company's common stock, $.001 par
value at a conversion price equal to $0.083 per share (the "Conversion Price"),
for a total of 2,409,638 shares of common stock. The principal amount of the
Debenture is convertible at the Conversion Price at the option of the holder, or
after August 5, 2005 at the Company's option if the Company's common stock
trades at a price of at least $0.166 for twelve (12) trading days in any fifteen
(15) trading day period. The Company is also entitled to prepay the principal
amount of the Debenture, at any time after August 5, 2005, but shall be required
to pay a premium of two (2%) percent in the second year after issuance of the
Debenture of the principal amount prepaid, for prepayments made during that
period.
30
SELLING STOCKHOLDERS
This prospectus covers up to (i) 4,411,764 shares of common stock, (ii)
3,373,882 shares of common stock issuable upon exercise of outstanding warrants,
(iii) 797,230 shares of common stock issuable upon conversion of 79,723 shares
of Series A Preferred Stock, and (iv) 2,409,638 shares of common stock issuable
upon conversion of a $200,000 debenture held by the selling stockholders.
The selling stockholders are comprised of (i) investors who purchased shares of
our common stock and warrants in a private placement in March 2005, and
purchased warrants in a private placement in February 2002, (ii) a consultant
who received a warrant in July 2001 to purchase shares of our common stock
pursuant to a consulting agreement, (iii) investors who purchased shares of our
Series A Preferred Stock in a private placement in September 2002, and (iv) the
Chairman of the Board of Directors, who was issued a $200,000 convertible
debenture in August 2004.
The following table sets forth, as of April 20, 2005 and upon completion of this
offering, information with regard to the beneficial ownership of our common
stock by each of the selling stockholders, including shares underlying warrants
and the shares issuable upon conversion of Series A Preferred Stock and the
conversion of the $200,000 convertible debenture. The term "selling stockholder"
includes the stockholders listed below and their respective transferees,
assignees, pledges, donees and other successors.
Because the selling stockholders may sell or otherwise dispose of all, some or
none of their common stock, no definitive estimate as to the number of shares
thereof that will be held by the selling stockholders after the offering
contemplated by this prospectus can be provided and the following table has been
prepared on the assumption that all shares of common stock covered by this
prospectus will be sold.
31
SELLING STOCKHOLDERS
Shares Percentage
Beneficially Number Of Shares Beneficial
Owned Before Offered By Selling Ownership After
Name Offering Stockholders Offering(1)
Special Situations Fund III, L.P.(2) 5,076,857 4,027,775(3) 3.6%
Special Situations Caymans Fund, L.P.(2) 1,803,071 1,421,971(4) 1.4%
Special Situations Private Equity Fund, L.P.(2) 1,948,129 1,548,829(5) 1.4%
Special Situations Technology Fund, L.P.(2) 145,401 115,486(6) *
Special Situations Technology Fund II, L.P.(2) 776,470 623,585(7) *
Stephen M. Deixler(8) 3,840,900 2,890,198(9) 2.8%
Frank S. Russo(10) 381,780 277,780(11) *
William Whitney(12) 168,704 38,890(13) *
Lipman Capital Group, Inc. 48,000 48,000(14) 0
--------------------
Total: 10,992,514
* Less than 1.0%
1 Percentage is calculated based upon 27,050,044 shares of common stock
outstanding as of April 21, 2005, and assumes the sale of all Shares
offered by the Selling Stockholders.
2 The Special Situations funds (other than Special Situations Technology
Fund II, L.P.), purchased from the Company a total of 4,000,000 shares
and warrants to purchase 1,120,000 shares in a private placement in
February 2002. The shares underlying the warrants issued in 2002 are
being registered hereby. The Special Situations funds purchased from
the Company a total of 4,411,764 shares and warrants to purchase
2,205,882 shares in a private placement in March 2005. All of the
shares issued in the March private placement and the shares underlying
the warrants, are being registered hereby. MGP is the general partner
of Special Situations Fund III, L.P. AWM is the general partner of MGP
and the general partner of and investment adviser to the Special
Situations Cayman Fund, L.P. SSTA is the general partner of and
investment adviser to the Special Situations Technology Fund, L.P. and
the Special Situations Technology Fund II, L.P. MG is the general
partner of and investment adviser to the Special Situations Private
Equity Fund, L.P. Austin W. Marxe and David M. Greenhouse are the
principal owners of MGP, AWM, SSTA and MG. Through their control of
MGP, AWM, SSTA and MG, Messrs. Marxe and Greenhouse share voting and
investment control over the portfolio securities of each of the funds
listed above.
3 Includes 1,733,658 shares issuable pursuant to warrants.
4 Includes 604,324 shares issuable pursuant to warrants.
5 Includes 666,476 shares issuable pursuant to warrants.
6 Includes 50,780 shares issuable pursuant to warrants.
7 Includes 270,644 shares issuable pursuant to warrants.
8 Mr. Deixler is the chairman of the board of directors and was
the interim chief financial officer of the Company between March and
September 2003.
9 Includes 2,409,638 shares issuable pursuant to conversion of a $200,000
debenture, and 480,560shares issuable upon conversion of 48,056 shares
of Series A Preferred Stock. The shares issuable pursuant to the
conversion of the debenture are subject to a lock-up agreement expiring
March 31, 2006.
10 Mr. Russo is a director of the Company.
11 Consists of shares issuable upon conversion of 27,780 shares of Series
A Preferred Stock.
12 Mr. Whitney is the Vice President of Research & Development and the
Chief Technology Officer of the Company.
13 Consists of shares issuable upon conversion of 3,889 shares of Series A
Preferred Stock.
14 Consists of 48,000 shares issuable pursuant to warrants.
32
Plan of Distribution
The selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.
The selling stockholders may use any one or more of the following
methods when disposing of shares or interests therein:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent, but may position and resell a portion of the block as principal
to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- short sales effected after the date the registration statement of
which this Prospectus is a part is declared effective by the SEC;
- through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
- broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per
share;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The selling stockholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling stockholders also may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling stockholders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the selling stockholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be made directly or
through agents. We will not receive any of the proceeds from this offering. Upon
any exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.
33
The selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
The selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are "underwriters" within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements of
the Securities Act.
To the extent required, the shares of our common stock to be sold, the names of
the selling stockholders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable, the
common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We have advised the selling stockholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling stockholders and their affiliates. In
addition, we will make copies of this prospectus (as it may be supplemented or
amended from time to time) available to the selling stockholders for the purpose
of satisfying the prospectus delivery requirements of the Securities Act. The
selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We have agreed to indemnify certain of the selling stockholders against
liabilities, including liabilities under the Securities Act and state securities
laws, relating to the registration of the shares offered by this prospectus.
We agreed with certain of the selling stockholders to file a registration
statement, registering for resale certain of the shares of common stock as well
as certain of the shares issued upon exercise of warrants, within 45 days from
March 31, 2005, and thereafter to use commercially reasonably efforts to cause
such registration statement to become effective as soon as practicable. The
registration statement must be declared effective no later than the earlier of
five business days after the SEC determines that no review of the registration
statement will be made and 120 days after March 31, 2005. If we fail to meet
these registration obligations or to maintain the effectiveness of the
registration statement as required under the terms of the a certain registration
rights agreement with certain of the selling stockholders, then we will be
obligated to make certain cash liquidated damage payments to such selling
stockholders.
We have agreed with certain of the selling stockholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of (1) such time as all of the shares covered by this prospectus have
been disposed of pursuant to and in accordance with the registration statement
or (2) the date on which the shares may be sold pursuant to Rule 144(k) of the
Securities Act.
INTEREST OF NAMED EXPERTS AND COUNSEL
Moses & Singer LLP, New York will pass upon the validity of the common stock
being offered by this Prospectus.
The consolidated financial statements of ION Networks, Inc. as of December 31,
2004 and 2003 included in this prospectus, have been so included in reliance on
the report of Marcum & Kliegman LLP, an independent registered public accounting
firm, given on the authority of said firm as experts in auditing and accounting.
34
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The only statute, charter provision, by-law, contract, or other arrangement
under which any controlling person, director or officers of ION Networks, Inc.
is insured or indemnified in any manner against any liability which he may incur
in his capacity as such, is as follows:
Our certificate of incorporation limits the liability of our directors and
officers to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for:
(i) breach of the directors' duty of loyalty; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption, and (iv) any transaction from which the director derives an improper
personal benefit. Our certificate of incorporation also requires us to indemnify
our directors and officers to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware.
The effect of the foregoing is to require us to indemnify our officers and
directors for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy and is,
therefore, unenforceable.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act with respect to the common stock offered hereby. This prospectus,
which constitutes part of the registration statement, does not contain all of
the information set forth in the registration statement and the exhibits and
schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the SEC. For further information regarding our common
stock and us please review the registration statement, including exhibits,
schedules and reports filed as a part thereof. Statements in this prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement, set forth the material terms of such contract or other
document but are not necessarily complete, and in each instance reference is
made to the copy of such document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
We are also subject to the informational requirements of the Exchange Act which
requires us to file reports, proxy statements and other information with the
SEC. Such reports, proxy statements and other information along with the
registration statement, including the exhibits and schedules thereto, may be
inspected at public reference facilities of the SEC at Judiciary Plaza, 450
Fifth Street N.W., Washington D.C. 20549. Copies of such material can be
obtained from the Public Reference Section of the SEC at Judiciary Plaza, 450
Fifth Street N.W., Washington, D.C. 20549 at prescribed rates. Because we file
documents electronically with the SEC, you may also obtain this information by
visiting the SEC's Internet website at http://www.sec.gov.
35
Financial Statements
Index to Consolidated Financial Statements
For the Year Ended December 31, 2004 and 2003
Page(s)
Report of Independent Registered Public Accounting Firm 36
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 2004 37
Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003 38
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003 39
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004 and 2003 40-41
Notes to Consolidated Financial Statements 42-53
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ION Networks, Inc.
South Plainfield, New Jersey
We have audited the accompanying consolidated balance sheet of ION Networks,
Inc. and Subsidiary as of December 31, 2004, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years ended December 31, 2004 and 2003. 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 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ION
Networks, Inc. and Subsidiary as of December 31, 2004, and the consolidated
results of their operations and their cash flows for each of the years ended
December 31, 2004 and 2003 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Marcum & Kliegman LLP
New York, New York
February 11, 2005, (Except for Note 16(b),
as to which the date is March 31, 2005).
37
ION Networks, Inc. and Subsidiary
Consolidated Balance Sheet
December 31,
Assets 2004
-----------------
Current assets
Cash and cash equivalents $ 287,437
Accounts receivable, less allowance for doubtful accounts of
$16,923 578,491
Inventory, net 511,426
Prepaid expenses and other current assets 78,436
-----------------
Total current assets 1,455,790
Property and equipment, net 11,847
Capitalized software, net 406,351
Other assets 12,836
-----------------
Total assets $ 1,886,824
=================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 2,311
Accounts payable 354,602
Accrued expenses 549,730
Deferred income 160,212
Sales tax payable 6,074
Other current liabilities 10,000
-----------------
Total current liabilities
1,082,929
-----------------
Convertible debenture - related party 204,167
Long term debt, net of current portion 6,942
-----------------
Total liabilities $ 1,294,038
-----------------
Commitments and contingencies
Stockholders' equity
Preferred stock - par value $.001 per share; authorized 1,000,000 shares,
200,000 shares designated Series A; 158,335 shares issued and outstanding
(Aggregate Liquidation Preference $285,003) 158
Common stock - par value $.001 per share; authorized 50,000,000 shares;
22,610,500 shares issued and outstanding 22,611
Additional paid-in capital 44,146,595
Accumulated deficit (43,576,578)
-----------------
Total stockholders' equity 592,786
-----------------
Total liabilities and stockholders' equity $ 1,886,824
=================
The accompanying notes are an integral part of these consolidated financial
statements.
38
ION Networks, Inc. and Subsidiary
Consolidated Statements of Operations
Years Ended December 31,
2004 2003
------------------ -----------------
Net sales $ 3,616,261 $ 3,342,620
Cost of sales 1,065,443 892,373
------------------ -----------------
Gross margin 2,550,818 2,450,247
Research and development expenses 598,012 503,146
Selling, general and administrative expenses, including $58,750 and
$(95,000) of non-cash stock based compensation/(recovery) for the
years ended December 31, 2004 and 2003, respectively 2,314,834 2,452,031
Depreciation and amortization expenses 409,485 736,694
Restructuring, asset impairments and other credits (180,533) (405,402)
------------------ -----------------
Loss from operations (590,980) (836,222)
Interest income 25,810 19,872
Interest income/(expense)- related party (4,167) -
Interest income/(expense) (3,334) (14,593)
------------------ -----------------
(572,671) (830,943)
Loss before income taxes
Income tax benefit 322,831 227,151
------------------ -----------------
Net loss $ (249,840) $ (603,792)
================== =================
Per share data
Basic and diluted $ (0.01) $ (0.03)
================== =================
Weighted average number of common shares outstanding
Basic and diluted 23,294,325 23,900,500
================== =================
39
The accompanying notes are an integral part of these consolidated financial
statements.
ION Networks, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31,
2004 2003
-------------------- --------------------
Cash flows from operating activities
Net loss $ (249,840) $ (603,792)
Adjustments to reconcile net loss to net cash from operating activities:
Restructuring, asset impairments and other charges, non-cash (180,533) (405,402)
Depreciation and amortization 409,485 736,694
Provision for inventory reserves (48,880) (26,002)
Other (39,171) -
Non-cash stock-based compensation charge (credit) 58,750 (95,000)
Non-cash interest income from notes receivable from officers (24,884) (13,130)
Changes in operating assets and liabilities:
Accounts receivable, net (180,747) 164,018
Inventory 239,496 583,228
Prepaid expenses and other current assets 49,702 75,796
Other assets 465 1,577
Accounts payable 126,723 (690,303)
Accrued expenses 20,714 (82,543)
Deferred income (40,093) 45,284
Sales tax payable (32,908) (31,385)
Other current liabilities - (35,980)
-------------------- --------------------
Net cash provided by (used in) operating activities 108,279 (376,940)
-------------------- --------------------
Cash flows from investing activities
Acquisition of property and equipment (11,740) -
Capitalized software expenditures (310,223) (214,996)
Proceeds from sale of equipment - 30,129
Restricted cash - 125,700
-------------------- --------------------
Net cash used in investing activities (321,963) (59,167)
-------------------- --------------------
Cash flows from financing activities
Principal payments on debt and capital leases (67,840) (85,135)
Issuance of convertible debenture 200,000 -
Proceeds from the exercise of stock options 11,250 -
-------------------- --------------------
Net cash provided by (used in) financing activities 143,410 (85,135)
-------------------- --------------------
Effect of exchange rates on cash - 13,269
-------------------- --------------------
Net decrease in cash and cash equivalents (70,274) (507,973)
Cash and cash equivalents - beginning of year 357,711 865,684
-------------------- --------------------
Cash and cash equivalents - end of year $ 287,437 $ 357,711
==================== ====================
Supplemental information
Cash paid during period for interest $ 3,334 $ 13,650
==================== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
40
ION Networks, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2004 and 2003
Preferred Common Additional Accumulated
Paid-In Accumulated Other
Shares Stock Shares Stock Capital Deficit Comprehensive Income(Loss)
-------- --------- ---------- ---------- ----------- -------------- -------------
Balance, December 166,835 $ 167 24,875,500 $ 24,876 $44,680,740 $(42,722,946) $ (13,269)
31, 2002
Comprehensive loss
Net loss (603,792)
Translation
adjustments 13,269
Total
comprehensive loss
Notes receivable
from officers
-accrued interest
Non-cash stock-based
compensation to
officers (95,000)
-------- --------- ---------- ---------- ----------- -------------- -------------
Balance, December
31, 2003 166,835 $ 167 24,875,500 $ 24,876 $44,585,740 $(43,326,738) $ -
Net loss (249,840)
Conversion of
preferred stock to
common stock (8,500) (9) 85,000 85 (76)
Issuances of common
stock upon exercise
of options 250,000 250 11,000
Notes receivable
from officers -
accrued interest
Cancellation of
restricted shares
from former officers (2,600,000) (2,600) (508,819)
Non-cash stock-based
compensation issued
to officers 58,750
-------- --------- ---------- ---------- ----------- -------------- -------------
Balance, December
31, 2004 158,335 $ 158 22,610,500 $ 22,611 $44,146,595 $ (43,576,578) $ -
======== ========= ========== ========== =========== ============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
41
ION Networks, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2004 and 2003
Notes
Receivable Total
from former Stockholders'
Officers Equity
--------------- -----------------
Balance, December $ (473,405) $ 1,496,163
31, 2002
Comprehensive loss
Net loss (603,792)
Translation
adjustments 13,269
-----------------
Total
comprehensive loss (590,523)
Notes receivable
from officers -
accrued interest (13,130) (13,130)
Non-cash stock-based
compensation to
officers (95,000)
--------------- -----------------
Balance, December
31, 2003 $ (486,535) $ 797,510
Net loss (249,840)
Conversion of
preferred stock to
common stock -
Issuances of common
stock upon exercise
of options 11,250
Notes receivable
from officers -
accrued interest (24,884) (24,884)
Cancellation of
restricted shares
from former officers 511,419 -
Non-cash stock-based
compensation issued
to officers 58,750
--------------- -----------------
Balance, December
31, 2004 $ - $ 592,786
=============== =================
The accompanying notes are an integral part of these consolidated financial
statements.
42
ION Networks, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
The Company
ION Networks, Inc. (the "Company"), a Delaware corporation founded in 1999
through the combination of two companies -- MicroFrame, a New Jersey Corporation
(the predecessor entity to the Company, originally founded in 1982), and SolCom
Systems Limited, a Scottish corporation located in Livingston, Scotland
(originally founded in 1994), designs, develops, manufactures and sells network
and information security and management products to corporations, service
providers and government agencies. The Company's hardware and software suite of
products are designed to form a secure auditable portal to protect IT and
network infrastructure from internal and external security threats. ION's
products operate in the IP, data center, telecommunications and transport, and
telephony environments and are sold by a direct sales force and indirect channel
partners mainly throughout North America and Europe.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ION
Networks, Inc. and a single Subsidiary in 2004 and two subsidiaries in 2003. All
material inter-company balances and transactions have been eliminated in
consolidation. Due to Management's cost containment programs, the Company ceased
its operations in Belgium and Scotland in 2003.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
The significant estimates include the allowance for doubtful accounts, allowance
for inventory obsolescence, capitalized software costs including estimates of
future gross revenues, and the related amortization lives, deferred tax asset
valuation allowance and depreciation and amortization lives.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
Allowance for Doubtful Accounts Receivable
Accounts receivable are reduced by an allowance to estimate the amount that will
actually be collected from our customers. If the financial condition of our
customers were to materially deteriorate, resulting in an impairment of their
ability to make payments, additional allowances could be required.
Inventory, net
Inventory is stated at the lower of cost (average cost) or market. Reserves for
slow moving and obsolete inventories are provided based on historical experience
and current product demand. If our estimate of future demand is not correct or
if our customers place significant order cancellations, inventory reserves could
increase from our estimate. We may also receive orders for inventory that has
been fully or partially reserved. To the extent that the sale of reserved
inventory has a material impact on our financial results, we will appropriately
disclose such effects. Our inventory carrying costs are not material; thus we
may not physically dispose of reserved inventory immediately.
43
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which are
generally two to five years. Expenditures for maintenance and repairs, which do
not extend the economic useful life of the related assets, are charged to
operations as incurred. Gains or losses on disposal of property and equipment
are reflected in the statements of operations in the period of disposal.
Capitalized Software
The Company capitalizes computer software development costs in accordance with
the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize
computer software development costs upon the establishment of the technological
feasibility of a product, to the extent that such costs are expected to be
recovered through future sales of the product. Management is required to use
professional judgment in determining whether development costs meet the criteria
for immediate expense or capitalization. These costs are amortized by the
greater of the amount computed using (i) the ratio that current gross revenues
from the sales of software bear to the total of current and anticipated future
gross revenues from the sales of that software, or (ii) the straight-line method
over the estimated useful life of the product. As a result, the carrying amount
of the capitalized software costs may be reduced materially in the near term.
We record impairment losses on capitalized software and other long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow estimates
are based on historical results adjusted to reflect our best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our estimates.
The Company capitalized $310,223 and $214,996 of software development costs for
the year ended December 31, 2004 and 2003, respectively. Amortization expense
totaled $352,160 and $531,136 for the year December 31, 2004 and 2003,
respectively.
Research and Development Costs
The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development expense in
the period incurred.
Advertising Costs
The Company incurred approximately $30,000 and $1,000 for the year ended
December 31, 2004 and 2003, respectively.
Revenue Recognition Policy
The Company recognizes revenue from product sales to end users, value-added
resellers (VARs) and original equipment manufacturers (OEMs) upon shipment if no
significant vendor obligations exist and collectibility is probable. We do not
offer our customers the right to return products, however the Company records
warranty costs at the time revenue is recognized. Management estimates the
anticipated warranty costs but actual results could differ from those estimates.
Maintenance contracts are sold separately and maintenance revenue is recognized
on a straight-line basis over the period the service is provided, generally one
year.
Shipping and Handling Costs
Shipping and handling costs incurred are billed to the customer and included as
part of cost of sales.
Fair Value of Financial Instruments
The carrying value of items included in working capital and debt approximates
fair value because of the relatively short maturity of these instruments.
Net Loss Per Share of Common Stock
Basic net loss per share excludes dilution for potentially dilutive securities
and is computed by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share reflects the potential dilution that could occur if
securities or other instruments to issue common stock were exercised or
converted into common stock. Potentially dilutive securities of 9,327,672 and
4,783,505 at December 31, 2004 and 2003 are excluded from the computation of
diluted net loss per share as their inclusion would be antidilutive.
44
Stock Compensation
The Company records stock-based employee compensation arrangements in
accordance with provisions of Accounting Principals Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees", and complies with the disclosure
requirements of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123," issued in December 2002. Under APB Opinion No. 25,
compensation expense is based on the difference, if any, generally on the date
of grant, between the fair value of our stock and the exercise price of the
option. Equity instruments issued to non-employee vendors are recorded in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That are Issued to
Other Than Employees from Acquiring, or in Conjunction with Selling, Goods and
Services". All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the date on which the
counter party's performance is complete.
The Company issued certain stock options in 2004. 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. The assumptions used to value the 2004
options issued are as follows:
Expected Volatility 214.97%
Risk-free interest rate 4.00
Expected option lives 5.00 years
During the year ended December 31, 2003, the Company issued no stock options.
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. If the
Company had elected to recognize compensation costs based on the fair value at
the date of grant for awards, consistent with the provisions of SFAS No. 123,
the Company's net loss and basic and diluted net loss per share would have
increased to the pro forma amounts indicated below:
Years Ended December 31,
2004 2003
-------------- ------------
Net loss as reported $(249,840) $(603,792)
Add: Stock based compensation expense (recovery) included in net loss 58,750 (95,000)
Deduct: Stock based employee compensation determined under the fair (454,493) (217,158)
value method
-------------- ------------
Pro forma net loss $(645,583) $(915,950)
============== ============
Basic and diluted net loss per share of common stock
As reported (0.01) (0.03)
============== ============
Pro forma (0.03) (0.04)
============== ============
Foreign Currency Translation
The financial statements of the foreign subsidiaries were prepared in local
currency and translated into U.S. dollars based on the current exchange rate at
the end of the period for the balance sheet and a weighted-average rate for the
period on the statement of operations. Translation adjustments are reflected as
foreign currency translation adjustments in stockholders' equity and,
accordingly, have no effect on net loss. Transaction adjustments for the foreign
subsidiaries are included in income and are not material. The Company ceased its
foreign operations during the year ended December 31, 2003.
45
Income Taxes
Deferred income tax assets and liabilities are computed annually based on
enacted tax laws and rates for temporary differences between the financial
accounting and income tax bases of assets and liabilities. A valuation allowance
is established, when necessary, to reduce deferred income tax assets to the
amount that is more likely than not to be realized.
Warranty Costs
The Company estimates its warranty costs based on historical warranty claim
experience. Future costs for warranties applicable to sales recognized in the
current period are charged to cost of sales. Adjustments are made when actual
warranty claim experience differs from estimates. The warranty accrual included
in other current liabilities as of December 31, 2004 is $10,000.
For the years ended
December 31, 2004 December 31, 2003
------------------------- -----------------------
Balance at beginning of the year $ 48,388 $ 48,388
Change in liability due to preexisting warranty (38,388) -
------------------------- -----------------------
Balance at the end of the year $ 10,000 $ 48,388
========================= =======================
Reclassifications
Certain amounts in the consolidated financial statements for the year ended
December 31, 2003 have been reclassified to conform to the presentation of the
consolidated financial statements for the year ended December 31, 2004.
3. Restructuring, Asset Impairments and Other Credits
The total amount of restructuring, asset impairments and other credits for the
year ended December 31, 2004 was $180,533. This amount consisted of three items
for which the Company recognized credits; $67,671 for forgiveness of debt
related to legal, taxes and loan amounts; $63,716 related to a change in
management estimate reducing potential liability for damages previously accrued
for related to the abandonment of an office lease and $49,146 related to the
write-off of certain payables for which management believes are not valid
liabilities.
As a result of the Company being notified by the landlord to cancel its lease
effective August 15, 2003 at the Piscataway, NJ facility, the net book value of
leasehold improvements amounting to $28,955 were written-off. In addition, the
Company was required to sell property and equipment in order to move into its
smaller newly leased facility. At June 30, 2003 the Company recorded an
impairment loss of $163,662 which represents the difference between the cash
proceeds of the August 2003 sale and carrying value prior to the impairment.
During the quarter ended June 30, 2003, the Company completed its voluntary
liquidation of its UK subsidiary. As a result of the liquidation, the Company
reversed its prior restructuring accrual of $508,458, which was recorded in
fourth quarter 2002, related to a charge for the remaining long-term occupancy
lease that expires August 31, 2011.
During the quarter ended September 30, 2003, the Company successfully negotiated
a settlement of a $243,071 open payable due to Xetel for a payment of $30,000
and a forgiveness of debt in the amount of $213,071.
The components of the restructuring, asset impairments and other credits
recorded in 2004 and 2003 are as follows:
Asset Impairment Restructuring Other Credits Total
---------------- ---------------- ---------------- ---------------
First Quarter 2004 charges $ - $ - $ - $ -
Second Quarter 2004 charges (reversals) - - (59,570) (59,570)
Third Quarter 2004 charges (reversals) - (63,716) - (63,716)
Fourth Quarter2004 charges (reversals) - - (57,247) (57,247)
================== =================== ================ ===============
Total $ - $ (63,716) $(116,817) $ (180,533)
================== =================== ================ ===============
First Quarter 2003 charges $ - $ 123,510 $ - $ 123,510
Second Quarter 2003 charges (reversals)
192,617 (508,458) - (315,841)
Third Quarter 2003 charges (reversals)
- - (213,071) (213,071)
Fourth Quarter2003 charges
- - - -
================== =================== ================ ===============
Total $ 192,617 $ (384,948) $(213,071) $ (405,402)
================== =================== ================ ===============
46
The Company is in negotiations with the landlord from the Fremont, California
location for the disposition of the reserved amount of $123,510 recorded in
2003. The Company has not occupied the space since approximately March 2003. In
2004, Management revaluated the current status of the ongoing negotiations and
reversed its prior reserve amount by $63,716. Management believes that the final
settlement amount should not exceed the reserved amount of $60,000 at December
31, 2004.
In January 2003, the Company's sub-tenant, Multipoint voluntarily filed for
Chapter 7 Bankruptcy with the U.S. Bankruptcy Court for the District of New
Jersey. As a result of consideration of Multipoint's financial condition,
culminating with the bankruptcy, the Company wrote-off an amount of $122,550 for
the unpaid balance of rent due from Multipoint which is included in selling and
general and administrative expenses.
4. Inventory, net
Inventory, net of reserves of $149,853, consists of the following:
December 31,
2004
----------------
Finished goods $ 448,742
Raw materials 61,844
Work-in-progress 840
----------------
Inventory, net $ 511,426
================
The Company evaluates the inventory reserves on a quarterly basis. In 2004, the
Company adjusted its inventory reserves which resulted in a benefit of $48,880
and this amount was included as part of cost of sales in its consolidated
statements of operations. In 2003, the Company recorded a charge of $26,002 to
cost of sales related to reserves for excess and obsolete inventory.
5. Property and Equipment, net
Property and equipment consists of the following:
December 31,
2004
------------------
Computer and other equipment $ 764,900
Furniture and fixtures 68,408
------------------
833,308
Less accumulated depreciation (821,461)
------------------
Property and equipment, net $ 11,847
==================
Depreciation expense for property and equipment for the year ended December 31,
2004 and 2003, amounted to $57,325 and $205,558, respectively. During the year
ended December 31, 2004 and 2003, the Company retired both fully and not fully
depreciated assets amounting to $53,963 and $1,730,369, respectively. During the
year ended December 31, 2003, the Company relocated its headquarters and
therefore, recorded an asset impairment charge of $192,617 to recognize the
retirement of assets not fully depreciated (see Note 3).
6. Debt - Related Party
On August 5, 2004, the Company issued, for $200,000 cash, a convertible
debenture (the "Debenture") to Stephen M. Deixler, one of the Company's
directors. The Debenture matures on August 5, 2008 and bears interest at five
(5%) percent per annum, compounded annually. The principal amount of the
Debenture is convertible into shares of the Company's common stock, $.001 par
value at a conversion price equal to $0.083 per share (the "Conversion Price"),
which is equal to the ten (10) day average of the closing prices of the
Company's common stock, as quoted on the OTC Bulletin Board during the five (5)
trading days immediately prior to and subsequent to August 5, 2004. The
principal amount of the Debenture is convertible at the Conversion Price at the
option of the holder, or after August 5, 2005 at the Company's option if the
Company's common stock trades at a price of at least $0.166 for twelve (12)
trading days in any fifteen (15) trading day period. The Company is also
entitled to prepay the principal amount of the Debenture, at any time after
August 5, 2005, but shall be required to pay a premium of two (2%) percent in
the second year after issuance of the Debenture of the principal amount prepaid,
for prepayments made during that period. The Company has granted certain
"piggyback" registration rights to the holder to register for resale the shares
issuable upon conversion of the Debenture. In 2004, the Company recorded $4,167
of related party interest expense as part of the statement of operations.
47
7. Income Taxes
As of December 31, 2004, the Company has available federal and state net
operating loss carry forwards of approximately $42,773,686 and $26,340,185,
respectively, to offset future taxable income. The federal net operating loss
carry forwards expire during the years 2011 through 2024. In addition, the
Company has investment credit and research and development credit carry forwards
aggregating approximately $405,000, which may provide future tax benefits,
expiring from 2008 through 2020. The Internal Revenue Code contains provisions
which will limit the net operating loss carry forward available for use in any
given year if significant changes in ownership interest of the Company occur.
The Company obtained a corporation business tax benefit certificate pursuant to
New Jersey law which allows the sale of unused state net operating losses. For
the years ended December 2004 and 2003, the Company received a benefit of
$322,831 and $227,151, respectively.
The tax effect of temporary differences which make up the significant components
of the net deferred tax asset and liability at December 31, 2004 are as follows:
December 31,
2004
---------------
Current deferred tax assets
Inventory reserves $ 88,727
Accrued expenses 196,526
Allowance for doubtful accounts 85,239
---------------
Total current deferred tax assets 370,492
Valuation allowance (370,492)
---------------
Net current deferred tax assets -
---------------
Noncurrent deferred tax assets
Depreciation and amortization 245,425
Net operating loss carry forwards 16,103,494
Research and development credit 405,078
---------------
Total noncurrent deferred tax assets 16,753,997
Valuation allowance (16,591,457)
---------------
Net noncurrent deferred tax assets 162,540
Noncurrent deferred tax liabilities
Capitalized software (162,540)
---------------
Total noncurrent deferred tax liabilities (162,540)
---------------
Net noncurrent deferred tax (liabilities) assets $ -
===============
The Company has recorded a full valuation allowance against the deferred tax
assets, including the federal and state net operating loss carry forwards as
management believes that it is more likely than not that substantially all of
the deferred tax assets will not be realized. During the year ended December 31,
2004, the Company had an annual change in the valuation allowance of $1,948,386.
8. Stockholders' Equity
Preferred Stock - On September 13, 2002 the Company received equity financing in
the amount of $300,303 ($285,303, net of issuance costs) for the issuance of
166,835 unregistered shares of the Company's preferred stock at $1.80 per share.
The Company has designated 200,000 of the 1,000,000 authorized shares of
preferred stock as Series A Preferred Stock ("Preferred Stock"). Each share of
Preferred Stock is convertible into 10 shares of the Company's common stock at
the conversion price of $0.18 per share of common stock, which was the closing
bid price of the Company's common stock on September 13, 2002. The Preferred
Stock is non-voting, has a standard liquidation preference equal to its purchase
price, and does not pay dividends. Proceeds of the equity financing will be used
for working capital and general corporate purposes. All of the shares of
Preferred Stock were purchased by directors and management of the Company. On
December 27, 2004, 8,500 shares of preferred stock was converted to 85,000
shares of common stock.
Restricted Stock - Effective October 2001, the Company approved and granted
2,600,000 shares of restricted stock (the "Restricted Shares") to two executives
stockholders at fair value. The Restricted Shares are subject to a repurchase
right which will permit the Company to repurchase any shares which have not yet
vested at the effective date of termination of the officers' employment, as
defined in their employment agreements, for an amount equal to the purchase
price per share paid by the officers. The Company received a series of partial
recourse interest bearing (5.46% on an annual basis) promissory notes for the
value of the Restricted Shares to be repaid by the officers. As of December 31,
2003 Mr. Kam Saifi owes approximately $282,618 (including approximately $24,618
of interest) for 2,000,000 Restricted Shares and; Mr. Cameron Saifi owes
approximately $203,917 (including approximately $18,517 of interest) for 600,000
Restricted Shares.
48
The notes are to be repaid by the officers at the earlier of ten years or the
date upon which the employees dispose of their shares or under certain
circumstances, when the borrower's employment with the Company terminates for
any reason. The issuance of the restricted shares and the notes receivable due
from the former officers is recorded in the Company's financial statements. On
July 7, 2003, Mr. Kam Saifi and Mr. Cameron Saifi separated from the Company.
On March 29, 2004, the Company agreed to a final separation agreement with its
former President and Chief Executive Officer. As part of the agreement, the
Company agreed to accept the return of 2,000,000 shares of the Company's common
stock as full payment for the former officers' total indebtedness to the Company
of $294,493. In addition, the former officer released the Company from any
obligations, which may have arisen from the separation of the officer from the
Company.
On October 14, 2004, the Company agreed to a final separation agreement with its
former Executive Vice President and Chief Operating Officer. As part of the
agreement, the Company agreed to accept the return of 600,000 shares of the
Company's common stock as full payment for the former officers' total
indebtedness to the Company of $216,926. In addition, the former officer
released the Company from any obligations for the sum of $8,000 as full
compensation for said release.
The variable accounting method used to account for the partial recourse
restricted stock granted to management resulted in a cashless charge of $95,000
for the period ended December 31, 2002. In accordance with accounting guidance
for the partial recourse restricted stock granted to management resulted in a
reversal of the cashless charge of $95,000 for the period ended December 31,
2003.
Common Stock - On February 14, 2002 the Company sold 4,000,000 shares of common
stock at a price of $0.87 per share, for total consideration of $3,480,000. In
connection with this sale, warrants to purchase 1,120,000 shares of common stock
with an exercise price of $1.25 were issued. The warrants expire on February 14,
2007.
Stock Option Plans
In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000
Plan"). The aggregate number of shares of common stock for which options may be
granted under the 2000 Plan is 3,000,000. The maximum number of options which
may be granted to an employee during any calendar year under the 2000 Plan is
400,000. The term of these non-transferable stock options may not exceed ten
years. The exercise price of these stock options may not be less than 100% (110%
if the person granted such options owns more than ten percent of the outstanding
common stock) of the fair value of one share of common stock on the date of
grant. During the year ended December 31, 2004 and 2003, the Company granted
options to purchase 2,048,000 and zero shares, respectively. As of December 31,
2004, 2,626,000 options were outstanding under the 2000 Plan, of which 1,544,750
options were exercisable.
The aggregate number of shares of common stock for which options may be granted
under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum
number of options which may be granted to an employee during any calendar year
under the 1998 Plan is 400,000. The term of these non-transferable stock options
may not exceed ten years. The exercise price of these stock options may not be
less than 100% (110% if the person granted such options owns more than ten
percent of the outstanding common stock) of the fair value of one share of
common stock on the date of grant. During the year ended December 31, 2004 and
2003, the Company granted options to purchase 1,285,000 and zero shares,
respectively. As of December 31, 2004, 1,556,629 options were outstanding under
the 1998 Plan, of which 1,020,900 options were exercisable.
In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan, as amended, increased the number of shares of common
stock for which options may be granted to a maximum of 1,250,000 shares. The
term of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of the outstanding common
stock) of the fair market value of one common stock on the date of grant. During
the year ended December 31, 2004 and 2003, there were no option grants provided
under the 1994 Plan. As of December 31, 2004, 25,000 options were outstanding
and exercisable under the 1994 Plan.
Warrants
In connection with the sale of common stock on February 14, 2002, warrants to
purchase 1,120,000 shares of common stock with an exercise price of $1.25,
subject to certain adjustments, were issued. As of March 18, 2005 the exercise
price is $1.08. The warrants expire on February 14, 2007.
During July 2001 in connection with services being performed by a consultant,
the Company issued warrants to purchase 48,000 shares of the Company's Common
Stock at $0.62 per share. The warrants expire five years from the date of the
grant.
During January 2002 in connection with services being performed by a consultant
through June 30, 2002, the Company issued warrants to purchase 100,000 shares of
the Company's common stock at $1.35 per share. Warrants to purchase an
additional 50,000 shares of common stock are exercisable at $1.80. All 150,000
warrants expired in January 2005.
Other Options
On September 25, 1996, the Company issued options to certain officers and
directors to purchase 620,000 shares of the Company's Common Stock, of which
420,000 vested immediately and 100,000 vested on April 1, 1998 and 1999. The
options expire ten years from the date of grant. However, in the event of (a)
the liquidation or dissolution of the Company or (b) a merger in which the
Company is not the surviving corporation or a consolidation involving the
Company, the options shall terminate, unless other provision is made in the
transaction. There were no stock option exercised during the year ended December
31, 2004 and 2003. The exercise price of the options is $1.156 and equals to the
market value of the Company's Stock on the date of grant. At December 31, 2004,
400,000 options were outstanding and exercisable.
During March 1999, the Company issued options to certain employees and
consultants to purchase 20,000 shares of the Company's common stock, all of
which vested on the first year anniversary of the date of the grant. The options
expire six years from the date of the grant. The exercise price of the options
is equal to the market value of the Company's common stock on the date of the
grant. There were no stock options exercised during the year ended December 31,
2004 and 2003. At December 31, 2004, 10,000 options were outstanding and
exercisable.
In January 2004, the Company issued options to certain officers to purchase
1,000,000 shares of the Company's common stock, which vested immediately. The
exercise price of the below market options ranged from $0.045 to $0.06 on the
date of grant. The Company recorded a stock based compensation charge of
$58,750. At December 31, 2004, 750,000 options were outstanding and exercisable.
50
Accounting for Stock-Based Compensation
The Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its options. During the year ended December 31, 2004 and 2003 the
Company has recorded compensation expense (benefit) of $58,750 and ($95,000),
respectively.
Details of the options granted are as follows:
Weighted Average
Shares Exercise Price ($)
Options outstanding at December 31, 2002 3,667,102 1.62
-----------
Granted - -
Canceled (1,821,947) 3.55
Exercised - -
-----------
Options outstanding at December 31, 2003 1,845,155 1.59
Granted 4,333,000 0.15
Expired (73,250) 5.63
Canceled (487,276) 1.16
Exercised (250,000) 0.05
-----------
Options outstanding at December 31, 2004 5,367,629 0.51
===========
Options exercisable at December 31, 2004 3,750,650 0.50
===========
Weighted Average Weighted Average
Number Remaining Years of Average Number Exercise
Range of Exercise Outstanding Contractual Life Exercise Price Exercisable Price
$0.00 - 7.53 5,320,964 4.67 $ 0.36 3,737,550 $ 0.40
$7.54 - 15.06 36,605 4.85 13.62 3,600 13.62
$15.06 - 22.59 1,500 .05 22.00 1,500 22.00
$22.59 - 30.12 1,500 .25 29.25 1,500 29.25
$30.12 - 37.65 7,060 .49 34.69 6,500 34.66
------------- ------------------ -------------- ----------- ----------
$0.00 - 37.65 5,367,629 4.67 $ 0.51 3,750,650 $ 0.50
============= ================== ============== =========== ==========
9. Commitments
Operating Leases
The Company entered into a lease on August 1, 2003 for approximately 7,000
square feet for its principal executive offices at 120 Corporate Blvd., South
Plainfield, New Jersey. The base rent is $4,505 per month effective October 2003
through July 2006. The Company is also obligated to make additional payments to
the landlord relating to certain taxes and operating expenses.
As a result of the Company being notified by the landlord of their intent to
cancel its lease effective August 15, 2003, the Company no longer occupies the
space at 1551 S. Washington Avenue, Piscataway, New Jersey. The Company entered
into the lease on February 18, 1999 for approximately 26,247 square feet for its
principal executive offices. On March 17, 2003, the Company signed an amendment
with the landlord reducing the space from 26,247 to 12,722 square feet and the
rent from $50,153.64 to $20,143.17 per month effective March 1, 2003. The
Company was also obligated to make additional payments to the landlord relating
to certain taxes and operating expenses.
The Company 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.
51
Future minimum payments, by year and in the aggregate, under non-cancelable
capital and operating leases as of December 31, 2004 are as follows:
Capital Leases Operating Leases
---------------- ----------------
Year ending December 31,
2005 $ 2,691 $ 77,016
2006 2,691 44,926
2007 2,691 -
2008 2,243 -
---------------- ----------------
Total minimum lease payments $ 10,316 $ 121,942
================ ================
Less amount representing interest 1,063
----------------
Present value on net minimum lease payment $ 9,253
================
Rent expense under operating leases for the year ended December 31, 2004 and
2003 was approximately $74,500 and $210,800, respectively.
Employment Contracts
The Company has entered into certain employment contracts with various officers.
Included in these contracts is a provision for severance, where by such officers
if terminated without cause as defined in the agreement is entitled to severance
ranging in terms of three to eighteen months. At December 31, 2004 the Company
had a potential loss for severance costs of approximately $735,000 under these
employment contracts.
10. Contingent Liabilities
In the normal course of business the Company and its Subsidiary 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.
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 a discretionary contribution
by 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.
As of January 1, 2003, the Company per the provisions of the plan decided not to
make discretionary contributions until further notice.
12. Geographic Information
The Company's headquarters, physical production and shipping facilities are
located in the United States. The Company's domestic and foreign export sales
for each of the years ended December 31, 2004 and 2003 are as follows:
Year Ended Year Ended
December 31, 2004 December 31, 2003
-------------------------------------
United States $ 2,875,996 $ 2,743,170
Europe 723,222 477,153
Pacific Rim 16,657 122,188
Other 386 109
-------------------------------------
$ 3,616,261 $ 3,342,620
=====================================
Historically, we have been dependent on several large customers each year, but
they are not necessarily the same every year. For the year ended December 31,
2004, our most significant customers (stated as an approximate percentage of
revenue) were Avaya 38% and MCI 9%, with remaining accounts receivables of
$275,662 and $20,170, respectively, compared to the year ended December 31,
2003, of Avaya 18%, Siemens 12%. Qwest 8% and MCI 7% with remaining accounts
receivables of $80,929, $0, $0, $176,947, respectively. In general, we cannot
predict with certainty, which large customers will continue to order. The loss
of any of these large customers, or the failure to attract new large customers
would likely significantly decrease our revenues and future prospects, which
could materially and adversely affect our business, financial condition and
results of operations.
52
The loss of any of these customers or a significant decline in sales volumes
from any of these customers could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
13. Concentration of Credit Risk
The Company maintains deposits in a financial institution which is insured by
the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December
31, 2004 and periodically throughout 2004, the Company had deposits in this
financial institution in excess of the amount insured by the FDIC.
The Company designs its products utilizing readily available parts manufactured
by multiple suppliers and the Company currently relies on and intends to
continue to rely on these suppliers. The Company has been and expects to
continue to be able to obtain the parts generally required to manufacture its
products without any significant interruption or sudden price increase, although
there can be no assurance that the Company will be able to continue to do so.
The Company sometimes utilizes a component available from only one supplier. If
a supplier were to cease to supply this component, the Company would most likely
have to redesign a feature of the affected device. In these situations, the
Company maintains a greater supply of the component on hand in order to allow
the time necessary to effectuate a redesign or alternative course of action
should the need arise.
14. Supplemental Cash Flow Information
In 2004 the Company converted 8,500 shares of preferred stock into 85,000 of
common stock.
15. New Accounting Pronouncements
During 2003, SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150") was issued. SFAS
150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in certain cases). The provisions of SFAS 150 are
effective for instruments entered into or modified after May 31,2003 and
pre-existing instruments as of July 1, 2003. On October 29, 2003, the FASB voted
to indefinitely defer the effective date of SFAS 150 for mandatory redeemable
instruments as they relate to minority interests in consolidated finite-lived
entities through the issuance of FASB Staff Position 150-3. The adoption of SFAS
No. 150 did not have a material impact on the Company's results of operations or
financial position.
In December 2003, a revision of SFAS 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" was issued, revising disclosures about
pension loans and other post retirements benefits plans and requiring additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. The adoption of SFAS No. 132 did not have a material impact on the
Company's results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123R "Shared Based Payment." This
statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS 123R addresses all
forms of shared based payment ("SBP") awards, including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be
measured at fair value on the awards' grant date, based on the estimated number
of awards that are expected to vest and will be reflected as compensation cost
in the historical financial statements. This statement is effective for public
entities that file as small business issuers - as of the beginning of the first
interim or annual reporting period that begins after December 15, 2005. The
Company is in the process of evaluating whether the SFAS No. 123R will have a
significant impact on the Company's overall results of operations or financial
position.
53
16. Subsequent Events
(a) Subsequent to December 31, 2004 the Company converted 2,778 shares of
preferred stock into 27,780 of common stock.
(b) On March 31, 2005, we completed a private placement of 4,411,764 shares of
common stock and warrants to purchase an additional 2,205,882 shares of common
stock. The total offering price was $750,000. The shares of common stock were
issued at $0.17 cents per share and the warrants are exercisable at a price of
$0.23 per share subject to certain anti-dilution adjustments. The warrants will
expire on expire March 31, 2010. The Company has the right to call the warrants
in the event that its common stock trades at a price exceeding $0.69 per share
for twenty (20) consecutive trading sessions and certain other conditions are
met. The Company also agreed to register for resale the shares of common stock
as well as the shares issued upon exercise of the warrants.
54
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN SHARES OF THOSECONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANYINTRAC, INC. SECURITIES OTHER THAN THOSESPECIFICALLY OFFERED HEREBY OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. EXCEPT WHERE OTHERWISE INDICATED, THIS PROSPECTUS SPEAKS AS OF THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANYSALEHEREUNDER SHALLUNDERANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PROSPECTUS THE
COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PROSPECTUS SUMMARY
The Company
-----------
Recent Developments
-------------------
General
-------
The Offering
------------
Summary Financial And Operating Information
-------------------------------------------
RISK FACTORS
FORWARD LOOKING STATEMENTS
USE OF PROCEEDS
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Principal Market And Market Prices
----------------------------------
Approximate Number Of Holders Of Our Common Stock
-------------------------------------------------
Dividends
---------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
--------
DESCRIPTION OF BUSINESS
EMPLOYEES
DESCRIPTION OF PROPERTY
LEGAL PROCEEDINGS
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
COMPENSATION OF DIRECTORS
BENEFICIAL OWNERSHIP INFORMATION
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DESCRIPTION OF SECURITIES
SELLING STOCKHOLDERS
PLAN OF DISTRIBUTION
INTEREST OF NAMED EXPERTS AND COUNSEL
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
AVAILABLE INFORMATION
FINANCIAL STATEMENTS
55
10,992,514
SHARES OF COMMON STOCK
ION NETWORKS, INC.
PROSPECTUS
April 21, 2005
56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The only statute, charter provision, by-law, contract, or other arrangement
under which any controlling person, director or officers of ION is insured or
indemnified in any manner against any liability which he may incur in his
capacity as such, is as follows:
Our certificate of incorporation limits the liability of our directors and
officers to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors, except liability for:
(i) breach of the directors' duty of loyalty; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption, and (iv) any transaction from which the director derives an improper
personal benefit. Our certificate of incorporation also requires us to indemnify
our directors and officers to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware.
The effect of the foregoing is to require us to indemnify our officers and
directors for any claim arising against such persons in their official
capacities if such person acted in good faith and in a manner that he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this offering in connection with the issuance and
distribution of the securities being registered, all of which are to be paid by
the Registrant, are as follows (all of such expenses, other than the SEC
registration fee are estimated):
Registration Fee $ 239
Legal Fees and Expenses 3,000
Accounting Fees and Expenses 3,000
Miscellaneous Expenses 1,000
--------
Total $ 7,239
========
57
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On March 31, 2005, ION Networks, Inc. ("ION") entered into a purchase agreement
with various accredited investors ("Investors"), pursuant to which Ion completed
a private placement of 4,411,764 shares of common stock and warrants to purchase
an additional 2,205,882 shares of common stock. Certain of the Investors
beneficially owned approximately 11% of Ion common stock prior to the
transaction. The total offering price was $750,000. The shares of common stock
were issued at $0.17 cents per share and the warrants are exercisable at a price
of $0.23 per share subject to certain anti-dilution adjustments. The warrants
will expire on March 31, 2010. In the event that the closing bid price of the
Company's common stock equals or exceeds $0.69 per share for a period of 20
consecutive trading days and certain other conditions are met, the Company may
redeem the warrants on 30 days prior written notice (during which periods the
warrants may be exercised) for a redemption price of $.001 per share of common
stock underlying such warrants. ION also agreed to file a registration
statement, registering for resale the shares of common stock as well as the
shares issued upon exercise of the warrants, within 45 days from March 31, 2005,
and thereafter to use commercially reasonably efforts to cause such registration
statement to become effective as soon as practicable. The registration statement
must be declared effective no later than the earlier of five business days after
the SEC determines that no review of the registration statement will be made and
120 days after March 31, 2005. If ION Networks, Inc. fail to meet these
registration obligations or to maintain the effectiveness of the registration
statement as required under the terms of the Agreements, then ION Networks, Inc.
will be obligated to make certain cash liquidated damage payments to the
Investors.
The securities in this private placement were issued without registration in
reliance on Section 4(2) of the Securities Act of 1933, as amended ("1933 Act"),
as amended, and Rule 506 promulgated thereunder. The exemption was established
by the representation of each purchaser as to its status as an accredited
investor, that it was purchasing the securities for its own account and not with
a view to the resale or distribution of any part thereof in violation of the
1933 Act and the acknowledgment by each purchaser that resale of the securities
may not be made unless registered under the 1933 Act, or another exemption is
available. In addition, the securities bear a legend indicating such
restrictions on transferability.
On August 5, 2004, the Company issued, for $200,000 cash, a convertible
debenture (the "Debenture") to Stephen M. Deixler, one of the Company's
directors. The Debenture matures on August 5, 2008 and bears interest at five
(5%) percent per annum, compounded annually. The principal amount of the
Debenture is convertible into shares of the Company's common stock, $.001 par
value at a conversion price equal to $0.083 per share (the "Conversion Price"),
which is equal to the ten (10) day average of the closing prices of the
Company's common stock, as quoted on the OTC Bulletin Board during the five (5)
trading days immediately prior to and subsequent to August 5, 2004. The
principal amount of the Debenture is convertible at the Conversion Price at the
option of the holder, or after August 5, 2005 at the Company's option if the
Company's common stock trades at a price of at least $0.166 for twelve (12)
trading days in any fifteen (15) trading day period. The Company is also
entitled to prepay the principal amount of the Debenture, at any time after
August 5, 2005, but shall be required to pay a premium of two (2%) percent in
the second year after issuance of the Debenture of the principal amount prepaid,
for prepayments made during that period. The Company has granted certain
"piggyback" registration rights to the holder to register for resale the shares
issuable upon conversion of the Debenture. In 2004, the Company recorded $4,167
of related party interest expense as part of the statement of operations. The
securities in this private placement were issued without registration in
reliance on Section 4(2) of the Securities Act of 1933, as amended ("1933 Act"),
as amended, and Rule 506 promulgated thereunder. The exemption was established
by the representation of the purchaser as to his status as an accredited
investor, that it was purchasing the securities for his own account and not with
a view to the resale or distribution of any part thereof in violation of the
1933 Act and the acknowledgment by the purchaser that resale of the securities
may not be made unless registered under the 1933 Act, or another exemption is
available. In addition, the securities bear a legend indicating such
restrictions on transferability.
In January 2004, the Company issued options to certain officers to purchase
1,000,000 shares of the Company's Common Stock, which vested immediately. The
exercise price of the options ranged from $0.045 to $0.06. At December 31, 2004,
750,000 options were outstanding and exercisable. The securities in this private
placement were issued without registration in reliance on Section 4(2) of the
Securities Act of 1933, as amended ("1933 Act"), as amended, and Rule 506
promulgated thereunder, based on the fact that the options were issued to two
executive officers of the Company for their own account and not with a view to
the resale or distribution of any part thereof in violation of the 1933 Act and
the acknowledgment by the purchaser that resale of the securities may not be
made unless registered under the 1933 Act, or another exemption is available.
On September 13, 2002 the Company issued 166,835 Series A Preferred Stock to
certain officers and directors of the Company for a total purchase price of
$300,363. Each share of Series A Preferred Stock is convertible into ten shares
of common stock and has a liquidation preference of $1.80. The securities in
this private placement were issued without registration in reliance on Section
4(2) of the Securities Act of 1933, as amended ("1933 Act"), as amended, and
Rule 506 promulgated thereunder. The exemption was established by the
representation of each purchaser as to its status as an accredited investor,
that it was purchasing the securities for its own account and not with a view to
58
the resale or distribution of any part thereof in violation of the 1933 Act and
the acknowledgment by each purchaser that resale of the securities may not be
made unless registered under the 1933 Act, or another exemption is available. In
addition, the securities bear a legend indicating such restrictions on
transferability.
59
ITEM 27. EXHIBITS.
Exhibit
No. Description
------- -----------
3.1 (i)Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on August 5,
1998./(2)/
(ii)Certificate of Amendment of the Certificate of Incorporation,
as filed with the Secretary of State of the State of Delaware on
December 11, 1998./(2)/
(iii)Certificate of Amendment of the Certificate of
Incorporation, as filed with the Secretary of state of the State
of Delaware an October 12, 1999./(3)/
(iv)Amended and Restated Certificate of Designation of Rights
Preferences, Privileges and Restrictions of Series A Preferred
Stock of ION Networks, Inc. /15/
3.2 By-Laws of the Company./(19)/
3.3 Form of Specimen Common Stock Certificate of the Company./(4)/
4.1 1994 Stock Option Plan of the Company. /(1)/
4.2 1998 Stock Option Plan of the Company./(2)/
4.3 1998 U.K. Sub-Plan of the Company, as amended./(2)/
4.4 2000 Stock Option Plan of the Company./(12)/
4.5 Form of Warrant Agreement dated July 17, 2001./(11)/
4.6 Form of Warrant Agreement dated February 14, 2002./(11)/
4.7 Convertible Debenture dated August 5, 2004./19/
4.8 Form of Warrant Agreement dated March 31, 2005. /(22)/
5.0 Opinion of Moses & Singer LLP.*
10.3 Agreement dated as of December 19, 1994 by and between LeeMAH
DataCom Security Corporation and Siemens Rolm Communications
Inc./(4)/
10.4 Equipment Lease Agreements dated October 29, 2003 by and between
the Company and GE Capital Corporation. /(21)/
10.5 (i)Non-negotiable Promissory Note in the principal amount of
$750,000 issued by Stephen B. Gray to the Company./(5)/
60
Exhibit
No. Description
------- -----------
(ii)First Amendment to Promissory Note dated as of August 5, 2000
by and between the Company and Stephen B. Gray./(5)/
10.6 (i) Separation and Forbearance Agreement made as of October 5,
2000 between the Company and Stephen B. Gray./(6)/
(ii)Promissory Note in the amount of $163,000 dated October 5,
2000 made by Stephen B. Gray to the Company./(6)/
10.7 Materials and Services Contract dated January 16, 2001, between
the Company and SBC Services, Inc./(7)/
10.8 Stock Purchase Agreement dated August 11, 2000 by and between the
Company and the parties identified therein./(7)/
10.9 Purchase Agreement by and between the Company and the Selling
Shareholders set forth therein dated February 7, 2002./(13)/
10.10 Employment Agreement dated October 4, 2001 between the Company
and Kam Saifi./(9)/+
10.11 Employment Agreement dated October 17, 2001 between the Company
and Cameron Saifi./(10)/+
10.12 Employment Agreement dated February 25, 2002, between the
Company and William Whitney./15/+
10.13 Amended and Restated Employment Agreement dated August 15, 2003,
between the Company and Norman E. Corn./16/
10.14 Employment Agreement dated September 15, 2003, between the
Company and Patrick E. Delaney./14/
10.15 Lease Agreement dated July 21, 2003 by and between the Company
and 116 Corporate Boulevard, LLC, Inc. /(17)/
10.16 Separation Agreement dated March 29, 2004 between the Company
and Kam Saifi. /(21)/
10.17 Separation Agreement dated October 14, 2004 between the Company
and Cameron Saifi. /(21)/
10.18 First Amendment to the Amended and Restated Employment Agreement
dated September 8, 2003 by and between the Company and Norman E.
Corn dated November 10, 2004 /(21)/
10.19 First Amendment to the Employment Agreement dated September 15,
2003 by and between the Company and Patrick E. Delaney dated
November 10, 2004. /(21)/
10.20 Employment Agreement dated August 31, 2004 by and between the
Company and Henry A. Hill. /20/
10.21 Severance Agreement dated September 2, 2004 by and between the
Company and William Whitney. /(21)/
61
Exhibit
No. Description
------- -----------
10.22 Severance Agreement dated September 2, 2004 by and between the
Company and Henry Gold. /(21)/
10.23 Option Agreement dated January 28, 2004 by and between the
Company and Norman E. Corn. /(21)/
10.24 Option Agreement dated January 28, 2004 by and between the
Company and Patrick E. Delaney. /(21)/
10.25 Agreement dated February 25, 2005 by and between the Company and
Sprint/Untied Management Company. /(21)/
10.26 Agreement dated October 28, 2004 by and between the Company and
General Dynamics Network Systems. /(21)/
10.27 Purchase Agreement dated March 31, 2005 by and between the
Company And the selling stockholders identified therein. /(22)/
10.28 Registration Rights Agreement dated March 31,2005, by and
between the Company and the Selling Shareholders identified
therein. /(22)/
16.1 Letter dated October 31,2003, from Deloitte & Touche, LLP. To the
Securities and Exchange Commission./(8)/
21.1 List of Subsidiaries. /(21)/
23.1 Independent Registered Public Accounting Firm's Consent *
23.2 Consent of Moses & Singer LLP (incorporated by reference to
Opinion Of Moses & Singer filed herewith as Exhibit 5).
24 Power of Attorney* (on signature page).
(1) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on August 15, 1995.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on April 22, 1999.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on March 17, 2000.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1999.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed on June 28, 2000.
(6) Incorporated by reference to the Company's Quarterly report on Form 10-QSB
filed on November 14, 2000
(7) Incorporated by reference to the Company's Annual report on Form 10-KSB
filed on June 29, 2001.
(8) Incorporated by reference to the Company's Annual report on Form 8-KSB
filed on October 31, 2003.
(9) Incorporated by reference to the Company's Current Report on Form 8-K filed
on October 23, 2001.
(10) Incorporated by reference to the Company's Current Report on Form 8-K filed
on October 24, 2001.
(11) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 2002, as filed on July 1, 2002.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on January 11, 2002.
(13) Incorporated by reference to the Company's Registration Statement on Form
S-3 filed on March 4, 2002.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed on November 17, 2003.
(15) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2002, as filed on April 15, 2003.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10QSB
filed on September 12, 2003.
(17) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed for the year ended December 31, 2003.
(18) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A,
Amendment No.2, for the fiscal year ended March 31, 2002, as filed on
August 2, 2002.
(19) Incorporated by reference to the Company's Quarterly Report on Form 10QSB
filed on August 13, 2004.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10QSB
filed on November 15, 2004
62
(21) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2004.
(22) Incorporated by reference to the Company's Current Report on Form 8-K filed
on April 5, 2005.
* Filed herewith
63
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act").
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of a prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the change in volume and price represents no more than a 20
percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) to include any additional or changed material information with
respect to the plan of distribution.
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions of its Certificate of Incorporation, By-Laws, the
Delaware General Corporation Law or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer of controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
64
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in South Plainfield, New Jersey, on the 22th day of April, 2005.
ION NETWORKS, INC.
By: /s/ Norman E. Corn
------------------
Norman E. Corn
CEO
Each director and/or officer of the registrant whose signature appears below
hereby appoints Norman E. Corn or Patrick E. Delaney as his attorney-in-fact to
sign in his name and behalf, in any and all capacities stated below, and to file
with the Securities and Exchange Commission, any and all amendments, including
post-effective amendments, to this registration statement.
Pursuant to the requirements of the Securities Act of 1933, registration
statement has been signed below by or on behalf of the following persons in the
capacities date indicated.
SIGNATURE TITLE
By: /s/ Stephen Deixler Chairman of the Board and Director April 22, 2005
-----------------------
Stephen Deixler
By: /s/ Norman E. Corn Chief Executive Officer April 22, 2005
-----------------------
Norman E. Corn
By: /s/ Patrick E. Delaney Chief Financial Officer April 22, 2005
-----------------------
Patrick E. Delaney
By: /s/ Frank S. Russo Director April 22, 2005
-----------------------
Frank S. Russo
By: /s/ Director April 22, 2005
-----------------------
Harry F. Immerman
65