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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2004
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________
COMMISSION FILE NUMBER 001-14015
---------------------
IONATRON, INC.
(Exact Name of Registrant as Specified in Its Charter)
-------------------
DELAWARE 77-0262908
------------------------------ ---------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
3590 EAST COLUMBIA STREET
TUCSON, ARIZONA 85714
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (520) 628-7415
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE
----------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [_]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant, computed by reference to the last reported
sales price at which the stock was sold on June 30, 2004 (the last day of the
registrant's most recently completed second quarter) was approximately
$137,991,000.
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, as of March 15, 2005 was 71,171,363.
IONATRON, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX
PAGE NO.
PART I.
Item 1. Business.................................................. 4
Item 2. Properties................................................ 7
Item 3. Legal Proceedings......................................... 8
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 8
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities......... 8
Item 6. Selected Financial Data................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................... 10
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 17
Item 8. Financial Statements and Supplementary Data............... 17
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ..................................... 17
Item 9A. Controls and Procedures................................... 17
Item 9B. Other Information......................................... 17
PART III.
Item 10. Directors and Executive Officers of the Registrant........ 18
Item 11. Executive Compensation.................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters........................... 24
Item 13. Certain Relationships and Related Transactions............ 27
Item 14. Principal Accountant Fees and Services.................... 27
PART IV:
Item 15. Exhibits and Financial Statement Schedules................ 28
Signatures: ........................................................... 31
PART I
ITEM 1. BUSINESS:
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS:
Certain statements in this Form 10-K constitute forward-looking statements for
purposes of the securities laws. Forward-looking statements include all
statements that do not relate solely to the historical or current facts, and can
be identified by the use of forward looking words such as "may", "believe",
"will", "expect", "expected", "project", "anticipate", "anticipated"
"estimates", "plans", "strategy", "target", "prospects" or "continue". These
forward looking statements are based on the current plans and expectations of
our management and are subject to a number of uncertainties and risks that could
significantly affect our current plans and expectations, as well as future
results of operations and financial condition and may cause our actual results,
performances or achievements to be materially different from any future results,
performances or achievements expressed or implied by such forward-looking
statements. This Form 10-K contains important information as to risk factors
above. In making these forward-looking statements, we claim the protection of
the safe-harbor for forward-looking statements contained in the Private
Securities Reform Act of 1995. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. We do not
assume any obligation to update these forward-looking statements to reflect
actual results, changes in assumptions, or changes in other factors affecting
such forward-looking statements.
AVAILABLE INFORMATION:
Ionatron makes available free of charge on its website at www.ionatron.com its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act, as soon as reasonable practical after
electronically filing or furnishing such material to the Securities and Exchange
Commission (SEC).
This report may be read or copied at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20549 or at www.sec.gov. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
GENERAL:
On March 18, 2004, a subsidiary of U. S. Home & Garden Inc. (USHG), a
non-operating, publicly traded company, merged into Ionatron Technologies, Inc.,
formerly Ionatron, Inc. (the "Merger"). Following the Merger, USHG shareholders
held 33.89% and Ionatron shareholders held 66.11% of the outstanding USHG common
stock. The combination has been accounted for as a recapitalization of Ionatron,
Inc., from our inception on June 3, 2002, and the issuance of 19,346,090 common
shares and 5,429,009 options and warrants to the USHG shareholders on the date
of merger in exchange for cash. The consolidated financial statements reflect
the historical results of Ionatron, Inc., prior to March 18, 2004 and the
consolidated results of operations of the Company since March 18, 2004. On April
29, 2004, our shareholders approved the change of our corporate name to
Ionatron, Inc., an increase of our authorized common stock to 100,000,000 shares
and the classification of our Board of Directors into three classes. We also
changed our fiscal year end from June 30 to December 31. The common stock and
per share information in the consolidated financial statements and related notes
have been retroactively adjusted to give effect to the re-capitalization.
Ionatron was formed on June 3, 2002 to develop and market Directed Energy Weapon
technology products initially for sale to the U.S. Government. The goal of the
Company is to produce products that incorporate our technology initially for
specific U.S. Government customer applications and platforms. Ionatron and the
U.S. Government have entered into several contracts for products and services as
well as Cooperative Research and Development Agreements for joint research on
Laser Induced Plasma Channel ("LIPC") based directed energy weapons. We expect
to offer U.S. Government approved versions of our products for commercial
security applications in the future. During 2003 and 2002, the Company engaged
in research and development and business development activities culminating in
our first U.S. Government contract in September of 2003. During 2004 we
demonstrated the laser guided man-made lightning directed energy technology in
the laboratory; demonstrated the technology effects on a variety of targets both
under U.S. Government contract and using internal research and development
funding; delivered a compact laser source specifically designed to enable the
technology under a U.S. Government contract; and commenced a U.S. Government
contract for the development of a system on a mobile platform for field
demonstration and testing.
4
Our manufacturing facility at the NASA Stennis Space Center is being upgraded,
utilizing $2 million in U.S. Army funding and is expected to be available for
occupancy by Ionatron in early April 2005. The Stennis manufacturing facility
will be utilized for LIPC production, when our government customers are
satisfied that LIPC is ready for low rate initial production. The Mississippi
facility will also be used for extended range testing and effects testing. It is
also anticipated we will use the facility for any production level contracts
from our North Star Acquisition Corp. subsidiary. We will prepare the facility
for range testing and manufacturing throughout 2005 with some level of
production being anticipated in 2005.
In September 2004, Ionatron completed the acquisition of substantially all the
assets of North Star Research Corporation ("North Star"), a New Mexico
corporation engaged in the business of designing and manufacturing a broad range
of high voltage equipment for the defense, aerospace, semi-conductor, and
medical industries. As consideration for North Star's assets, the Company paid
$700,000, issued 199,063 shares of the Company's common stock and assumed
liabilities for warranty claims and other accrued expenses. The Company
recognized goodwill of $1,487,884 and intangible assets of $886,000 in the
acquisition. The transaction was effected through a our subsidiary, North Star
Research Acquisition Corp., a Delaware corporation, and was funded through cash
on hand.
The Government's interest level in our technology continues to escalate, which
has led to LIPC being put into the 2006 Department of Defense (or DoD) budget as
a separate line item. The continued move by the DoD towards directed energy
solutions for soldiers, versus traditional ballistic technologies, leads us to
believe that DoD spending in the coming years will continue to increase in the
annual defense budget.
In January 2005, we doubled the space at our North Star Acquisition Corp.
subsidiary in anticipation of continued growth in its product line. Through
North Star Acquisition Corp., we are involved in the design and manufacture of a
broad range of high voltage equipment for the defense, aerospace,
semi-conductor, and medical industries. We intend for North Star Acquisition
Corp. to grow its base of business in both the defense sector and commercial
enterprises.
Overall, we expect 2005 to be a transition year. We will continue the long-term
development of our LIPC product line and expect that some specific LIPC
products, for some mission specific applications, will enter into low rate
initial production. We anticipate growth at our North Star facility and
anticipate that some of its development contracts will turn into production
contracts.
Our executive office is located at 3590 East Columbia Street, Tucson, Arizona
85714 and its telephone number is (502) 628-7415.
IONATRON OPERATIONS:
We are a new technology company working under contracts with agencies of the
U.S. Government concerned with national security that has developed and
demonstrated in our laboratory a novel internally developed directed energy
weapon technology called LIPC. Our LIPC technology controls and directs
electrical energy between two points. Our business strategy is to continue
long-term development of the technology for multiple national security and
defense applications, as well as develop applications in other commercial
sectors. Short-term military applications have been demonstrated to our
customers. Our immediate plan is to manufacture transportable demonstrators for
those applications for various U.S. Government organizations, in order to
demonstrate the field utility of the technology. In April 2004, we received a $9
million contract for one such unit. Upon completion of this contract the intent
is to transition to building prototypes and a limited number of production units
as soon as it is practicable. We cannot assure that the demonstrator will
perform to the specifications required or that additional prototypes or units
will be ordered.
5
We have had meetings and performed demonstrations of the technology for all
branches of the U.S. Military, as well as many other U.S. Government
organizations involved in various defensive, anti-terrorism, or offensive
military type operations. We currently have many potential contracts in the
negotiation stage and have U.S. Government customers actively seeking short-term
and long-term funding for our projects. We cannot assure that any such contracts
will become finalized in a timely manner or at all.
In order to help manage our interface with our government customers and
congressional funding counterparts, the Company maintains an ongoing
relationship with a well-known and qualified Washington, D.C. based government
relations firm. The Company also has an established Executive Vice President
Programs, whose group will be expanding this year as we aggressively market our
U.S. Government products.
We also have various U.S. Government contracts in the following areas:
- Transportable demonstrator for field trials;
- Portal ingress/egress denial demonstration;
- Effects of LIPC technology on various targets; and
- Compact architecture development of the equipment to allow placement
on smaller platforms.
The LIPC technology is designed as a line of sight weapon, which allows the
propagation of various forms and quantities of electrical energy to be aimed and
directs electrical energy between two points. The laboratory demonstrations of
the technology have ranged from low voltage disruptive type energies to the
target to very high voltages and currents which have demonstrated energy
densities that physically damage different types of materials, such as ablating
concrete.
We intend to take advantage of, and utilize, existing and mature laser targeting
and tracking technology for our systems with slight modifications. We are in
negotiations with three vendors to supply, to its specifications, the electrical
system requirements and have received a working prototype from one vendor.
Outsourcing such supply requirements is intended to free up the technical
personnel and other resources to work on development of next generation
electrical sources, now that we have developed at least one electrical source
that can be manufactured for them by outside sources. We also have optical
components and sections of its laser sources manufactured by outside vendors,
which are then assembled and integrated at Ionatron to produce the final laser
source for its LIPC systems.
These LIPC systems will be self-contained units that operate off of existing
power supplies found on typical mobile military platforms, such as HMMWV's. Due
to the low average power requirements of its systems, no additional or exotic
power systems will be required to support these systems. Future systems will
utilize the advanced electrical technologies developed for other military
programs to support more compact sources, and smaller, lighter LIPC systems that
can be mounted on smaller, autonomous platforms now under development in other
government programs.
The targets, effects, ranges, voltages and currents delivered, along with many
other aspects of the technology are classified under specific Department of
Defense guidelines and, consequently, cannot be disclosed to the public.
NORTH STAR OPERATIONS:
North Star Acquisition Corp. is engaged in the business of designing and
manufacturing a broad range of high voltage equipment for the defense,
aerospace, semi-conductor and medical industries. The business has ongoing
contracts for research and development with customers such as the United States
Air Force, Sandia National Laboratory and Los Alamos National Laboratory. Prior
to the acquisition, we had been working with North Star to develop and
manufacture the electrical sources for the LIPC directed energy guided
electrical products.
6
PATENTS/PROPRIETARY INFORMATION:
We have numerous patent applications in various stages of preparation and
prosecution, which we believe has novel intellectual property and that it might
be able to secure patents that operate to protect our proprietary technical
information and capabilities that will give them the competitive advantage to
continue to be the leader in the technology. Some of these patents will be
evaluated by the government to determine if the technology will be classified in
nature, and thus will be not be published as specified under section 181 of the
U.S. Patent Act. We also have proprietary information in the form of trade
secrets and technology specific know-how that should give us additional
competitive advantages.
CUSTOMER DEPENDENCY AND ELECTION OF GOVERNMENT:
Our revenues are derived from contracts with the U.S. Government or contractors
to the U.S. Government which represents approximately 99% and 100% of total
revenue for 2004 and 2003, respectively. The loss of any of these customers
would have a material adverse effect on Ionatron. All contracts are subject to
renegotiation of profits or termination at the election of the Government.
RESEARCH AND DEVELOPMENT:
We have funded our original research and development through capital investment
by its founders and we retain the ownership of all the original intellectual
property, which we believe is necessary to use and control the technology. We
also outsource certain research tasks to experienced individuals or companies
for some activities that require sophisticated laboratory equipment or optical
modeling programs we do not have at our disposal. We have over ten relationships
of this kind, which provide that any intellectual property developed under the
agreement is the sole property of Ionatron. Our research and development expense
for 2002, 2003 and 2004 was $264,799, $1,151,350 and $808,242, respectively.
Our short-term research and development goals are to complement the existing
system design by developing more efficient and compact laser sources, electrical
sources, and lower cost more efficient optical beam trains. Our government
customers fund some of this development work. Most of our research related work
is funded internally in order to capture any intellectual property rights from
novel processes and inventions that may arise.
Our long-term research is to identify the long-range physical limits of the
technology. This work relates to understanding the long-range capabilities of
LIPC from alternative and potentially technically superior optical sources and
new potential wavelengths that it may be advantageous to exploit. This work
includes efforts to achieve a more complete understanding of the entire physical
laws we work within regarding atmospheric physics, plasma physics, and the
future capabilities of new solid-state laser materials and laser processes that
may enable the technology to be more fully exploited.
We also intend to explore other uses of the technology in the existing
application area as well as completely novel applications in commercial sectors
outside the defense and national security application areas.
EMPLOYEES:
As of March 2005, we had 70 employees, compared to 12 on December 31, 2003, 28
of which are in management and general administrative, 2 are in human resources,
18 are in technical and engineering and 22 are in manufacturing. The increase in
employees was fueled by the need to increase staff to meet the demands of our
contract commitments as well as the acquisition of North Star. We expect to
significantly increase the number of our personnel over the next several months,
primarily in manufacturing.
7
RISKS FACTORS
Future results of operations of Ionatron involve a number of known and unknown
risks and uncertainties. Factors that could affect future operating results and
cash flows and cause actual results to vary materially from historical results
include, but are not limited to those risks set forth in Exhibit 99.1 hereto.
ITEM 2. PROPERTIES:
Our executive office currently is located at 3590 East Columbia Street, Tucson,
Arizona, where we lease approximately 25,000 square feet of space. The lease
commitment on this property expires November 2012. This is primarily a research
and development and prototyping facility. Our North Star subsidiary leases a
12,000 square feet office, manufacturing and storage space at 4421 McCleod
Street NE, Albuquerque, New Mexico with assembly areas to build custom ordered
high voltage power supplies as well as offices for general and administrative.
In addition, we have entered into a lease for 50,148 square feet of office,
manufacturing and warehouse facilities at the Stennis Space Center in
Mississippi that is expected to be available for occupancy early April 2005. The
lease is for a five-year term. The lease may be renewed three times in five-year
increments. The facility is being improved by the landlord to make the space
ready for lease and these improvements must be completed before we will take
possession. We do not have access to or control over the facility and have no
financial obligations until the improvements are completed to our satisfaction
and the property is turned over to us. We are not subject to any incentives or
allowances for leasehold improvements from the landlord. See Note 13 to the
Consolidated Financial Statements of our 2004 Financial Statements, which is
incorporated herein by reference for information with respect to our lease
commitments at December 31, 2004.
ITEM 3. LEGAL PROCEEDINGS:
We may from time to time be involved in legal proceedings arising from the
normal course of business. As of the date of this report, we were not involved
in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASE OF EQUITY SECURITIES:
Our common stock is currently listed on the NASDAQ Stock Market, trading under
the symbol "IOTN." In 2004, our common stock was traded on the Over-The-Counter
electronic bulletin board (the "OTC BB") maintained by NASD under the symbol
"IOTN". The following table sets forth information as to the price range of our
common stock for the period January 1, 2004 through December 31, 2004. No
dividends on common stock were declared for this period. The table reflects the
range of high and low sales prices per share as reported on the OTC BB.
High Low
---- ---
Quarterly Periods
2004
----
First $ 4.98 $ 0.48
Second 8.40 3.00
Third 9.60 4.55
Fourth 11.60 5.90
8
As of March 3, 2005, there were approximately 241 holders of record of
Ionatron's common stock.
ITEM 6. SELECTED FINANCIAL DATA:
The following selected financial data should be read in conjunction with the
consolidated financial statements and the notes thereto contained herein in Item
8. "Financial Statements and Supplementary Data," the information contained
herein in Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the information contained herein in Item 1.
"Business." Historical results are not necessarily indicative of future results.
Following is a summary of Ionatron's selected financial data for the years ended
and as of December 31, 2002, 2003, and 2004. The financial data for 2004
includes the effect of the acquisition of substantially all the assets and some
of the liabilities of North Star Research Corporation on September 30, 2004 by
our subsidiary North Star Acquisition Corp. The financial results include the
results of operations of North Star Acquisition Corp. from October 1 2004 to
December 31, 2004.
CONSOLIDATED STATEMENT OF EARNINGS DATA:
For The Period Years Ended December 31
June 3 to
December 31,
-----------------------
2002 2003 2004
---- ---- ----
Revenue $ -- $ 383,273 $ 10,930,522
Cost of revenue -- (356,822) (10,094,379)
Operating expenses:
General and administrative 429,352 1,681,174 2,565,778
Selling and marketing 53,524 239,847 544,564
Research and development 264,799 1,151,350 808,242
Other expenses - net -- 196,189 168,987
------------ ------------ ------------
Loss before provision for
income taxes (747,675) (3,242,109) (3,251,428)
------------ ------------ ------------
Provision for income taxes -- -- 9,577
------------ ------------ ------------
Net loss $ (747,675) $ (3,242,109) $ (3,261,005)
============ ============ ============
Basic and diluted net loss per share $ (0.02) $ (0.07) $ (0.05)
Weighted average number of common shares
outstanding 48,452,249 48,452,249 65,264,393
CONSOLIDATED BALANCE SHEET DATA:
2002 2003 2004
---- ---- ----
Cash and cash equivalents $ 97,206 $ 103,392 $ 3,495,779
Total assets 1,360,627 1,526,120 12,537,891
Total debt 1,175,000 4,300,000 3,005,088
Total liabilities 2,088,302 4,995,904 5,308,215
Total stockholders' equity (727,675) (3,469,784) 7,216,617
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The following discussion and analysis should be read in conjunction with
Ionatron's consolidated financial statements and the related notes that are
included elsewhere herein.
Ionatron develops and markets Directed Energy Weapon technology products
initially for sale to the U.S. Government. Our goal is to produce products that
incorporate its technology initially for specific U.S. Government customer
applications and platforms. Through North Star Acquisition Corp., Ionatron is
involved in the design and manufacture of a broad range of high voltage
equipment for the defense, aerospace, semi-conductor, and medical industries.
OVERVIEW:
Ionatron was formed on June 3, 2002 to develop and market Directed Energy Weapon
technology products initially for sale to the U.S. Government. Ionatron and the
U.S. Government have entered into several contracts for products and services as
well as Cooperative Research and Development Agreements for joint research on
Laser Induced Plasma Channel ("LIPC") based directed energy weapons. We expect
to offer U.S. Government approved versions of our products for commercial
security applications in the future. During 2003 and 2002, the Company engaged
in research and development and business development activities culminating in
our first U.S. Government contract in September of 2003. During 2004, we
demonstrated the laser guided man-made lightning directed energy technology in
the laboratory; demonstrated the technology effects on a variety of targets both
under U.S. Government contract and using internal research and development
funding; delivered a compact laser source specifically designed to enable the
technology under a U.S. Government contract; and commenced a U.S. Government
contract for the development of a system on a mobile platform for field
demonstration and testing.
On March 18, 2004, a subsidiary of U. S. Home & Garden Inc. (USHG), a
non-operating, publicly traded company, merged into Ionatron Technologies, Inc.,
formerly Ionatron, Inc. (the "Merger"). Following the Merger, USHG shareholders
held 33.89% and Ionatron shareholders held 66.11% of the outstanding USHG common
stock. The combination has been accounted for as a recapitalization of Ionatron,
Inc., from our inception on June 3, 2002, and the issuance of 19,346,090 common
shares and 5,429,009 options and warrants to the USHG shareholders on the date
of merger in exchange for cash. The consolidated financial statements reflect
the historical results of Ionatron, Inc., prior to March 18, 2004 and the
consolidated results of operations of the Company since March 18, 2004. On April
29, 2004, our shareholders approved the change of our corporate name to
Ionatron, Inc., an increase of authorized common stock to 100,000,000 shares and
the classification of the Board of Directors into three classes. Ionatron also
changed its fiscal year end from June 30 to December 31.
In September 2004, we completed the acquisition of substantially all the assets
of North Star Research Corporation ("North Star"), a New Mexico corporation
engaged in the business of designing and manufacturing a broad range of high
voltage equipment for the defense, aerospace, semi-conductor, and medical
industries.
As consideration for North Star's assets, the Company paid $700,000, issued
199,063 shares of the Company's common stock, and assumed liabilities for
warranty claims and other accrued expenses. The Company recognized goodwill of
$1,487,884 and intangible assets of $886,000 in the acquisition. The transaction
was effected through a newly formed subsidiary, North Star Acquisition Corp., a
Delaware corporation, and was funded through cash on hand.
10
OPERATING SEGMENTS:
We are currently engaged in developing and marketing through two distinct
segments: (1) Ionatron, Inc., where the focus is on Directed Energy Weapon
technology products for sale to the U.S. Government and (2) North Star , where
the focus is on the manufacture of custom high voltage equipment for sale in a
more broad-based market.
CRITICAL ACCOUNTING POLICIES:
USE OF ESTIMATES:
Our consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (GAAP), which require management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. We have identified the
following significant accounting policies that require a higher degree of
judgment and complexity. See Note 1 to the Consolidated Financial Statements to
our Financial Statements, which is incorporated herein by reference for
information with respect to other significant accounting policies.
REVENUE RECOGNITION:
Revenue has been derived from ongoing contract work for effects testing and the
design and development of an in house demonstration system for a government
customer. It is expected that continued work on effects testing, design and
development of use specific Ionatron systems, advanced design and proof of
principle on an existing contract, compact laser source development and the
manufacture of a transportable demonstrator will contribute to revenues going
forward in 2005. This work is expected to be generally performed under cost-plus
contracts with U.S. Government customers.
Revenue under long-term U.S. Government contracts is recorded under the
percentage of completion method. Revenues, billable monthly, under cost plus
fixed fee contracts are recorded as costs are incurred and include estimated
earned fees in the proportion that costs incurred to date bear to total
estimated costs. Costs include direct labor, direct materials, and subcontractor
costs and overhead. As contracts can extend over one or more accounting periods,
revisions in costs and earnings estimated during the course of work are
reflected during the accounting period in which the facts become known. When the
current contract estimate indicates a loss, provision is made for the total
anticipated loss in the current period.
The asset accounts receivable includes costs and estimated earnings in excess of
billing on uncompleted contracts which represents revenues recognized in excess
of amounts billed. Such revenues are billable under the terms of the contracts
at December 31, 2004, yet were not invoiced until January 2005 and are generally
expected to be collected within 60 days. The liability "billings in excess of
costs and estimated earnings on uncompleted contracts" represents billings in
excess of revenues recognized.
Revenues for other products and services are recognized when such products are
delivered and, in connection with certain sales to government agencies, when the
products and services are accepted, which is normally negotiated as part of the
initial contract. Revenues from commercial, non-governmental, customers are
based on fixed price contacts where the sale is recognized upon acceptance of
the product or performance of the service.
COST OF REVENUE:
Cost of revenue under long-term U.S. Government contracts is recorded using the
cost plus fixed fee method. Cost of revenue is recorded as costs are incurred.
Costs include direct labor, direct materials, subcontractor costs and
manufacturing and administrative overhead. General and administrative expenses
allowable under the terms of the contract are allocated per contract depending
on its direct labor and material proportion to total direct labor and material
of all contracts.
As contracts can extend over one or more accounting periods, revisions in costs
estimated during the course of work are reflected during the accounting period
in which the facts become known.
11
INTANGIBLE ASSETS:
We account for Goodwill and Indefinite Life Intangible Assets based on the
method of accounting prescribed by the provisions of SFAS 142, "Goodwill and
Other Intangible Assets," and we have determined that Ionatron, Inc. and North
Star Acquisition Corp. are separate reporting units. We believe that the North
Star Research trade name is an indefinite life intangible asset.
Goodwill and indefinite life intangible assets will be tested annually for
impairment or more frequently if events or changes in circumstances indicate
that the assets might be impaired. In assessing the recoverability of goodwill
and indefinite life intangible assets, we must make assumptions about the
estimated future cash flows and other factors to determine the fair value of
these assets.
Assumptions about future revenue and cash flows require significant judgment
because of the current state of the economy and the fluctuation of actual
revenue and the timing of expenses. We develop future cash flows based on
projected sales with the assumption that expenses will grow at rates consistent
with historical rates. If the expected cash flows are not realized, impairment
losses may be recorded in the future.
For goodwill, the impairment evaluation includes a comparison of the carrying
value of the reporting unit (including goodwill) to that reporting unit's fair
value. If the reporting unit's estimated fair value exceeds the reporting unit's
carrying value, no impairment of goodwill exists. If the fair value of the
reporting unit does not exceed the unit's carrying value, then an additional
analysis is performed to allocate the fair value of the reporting unit to all of
the assets and liabilities of that unit. If the excess of the fair value of the
reporting unit over the fair value of the identifiable assets and liabilities is
less than the carrying value of the unit's goodwill, an impairment charge is
recorded for the difference.
The impairment evaluation for indefinite life intangible assets is performed by
a comparison of the asset's carrying value to the asset's fair value. When the
carrying value exceeds fair value an impairment charge is recorded for the
amount of the difference. An intangible asset is determined to have an
indefinite useful life when there are no legal, regulatory, contractual,
competitive, economic, or any other factors that may limit the period over which
the asset is expected to contribute directly or indirectly to our future cash
flows. In addition, each reporting period, we evaluate the remaining useful life
of an intangible asset that is not being amortized to determine whether events
and circumstances continue to support an indefinite useful life. If an
intangible asset that is not being amortized is determined to have a finite
useful life, the asset will be amortized prospectively over the estimated
remaining useful life and accounted for in the same manner as intangible assets
subject to amortization.
RESULTS OF OPERATIONS:
Our consolidated financial information for the years ending December 31, 2004,
2003 and 2002 is as follows:
2004 2003 2002
---- ---- ----
Revenue $ 10,930,522 $ 383,273 $--
Cost of revenue (10,094,379) (356,822) --
General and administrative 2,565,778 1,681,174 429,352
Selling and marketing 544,564 239,847 53,524
Research and development 808,242 1,151,350 264,799
Other (expense) income:
Interest expense (215,593) (196,189) --
Interest income 46,122 -- --
Other income 484 -- --
------------ ------------ ------------
Loss before provision for
income taxes (3,251,428) (3,242,109) (747,675)
------------ ------------ ------------
Provision for income taxes 9,577 -- --
------------ ------------ ------------
Net loss $ (3,261,005) $ (3,242,109) $ (747,675)
============ ============ ============
12
REVENUE:
The increase in revenue for 2004 compared to 2003 was attributed to an increase
in the number of governmental contracts as well as the maturity of initial
government contracts started in 2003. The revenue in 2003 was derived from the
initial work on U.S. Government contracts while there was no revenue in 2002.
COST OF REVENUE:
Cost of revenue also increased when compared to 2003 due to the increase in the
number of contracts and completion of 2003 contracts. There was no cost of
revenue in 2002.
GENERAL AND ADMINISTRATIVE:
The increase in general and administrative expenses during 2004 was primarily
related to processional fees in connection with the reverse merger in March
2004, acquisition of North Star, compliance with SOX 404 and the additional
costs of being a publicly traded company as well as a 33% increase in
depreciation and a 126% increase in recruiting costs. Rent expense increased 10%
due to the three months of rent expense related to the North Star acquisition.
The general and administrative costs increased from 2002 to 2003 primarily as a
result of a 10 fold increase in payroll costs, a 2 times increase in
depreciation expense, and a 4 times increase in rent expense due to moving into
the new facility.
We are mandated to comply with the SOX 404 requirement for a review of the
control over our financial reporting environment. This review was initiated in
2004 and continued into 2005. The SOX expense was approximately $422,000 for
2004.
SOX compliance expenses in the remainder of 2005 is expected to include costs
for internal auditing, costs for assessing, documenting and testing the system
of internal control at North Star's facility, and expanded internal audit
testing when we become operational at the Stennis facility.
SELLING AND MARKETING:
Selling and marketing expenses increased during 2004 primarily resulting from an
increase in business development activity as we broadened our efforts to inform
potential customers of our LIPC technology in pursuit of Government contracts.
These business development activities included briefing of Government officials,
submission of bids and proposals, and participation in trade shows and industry
conferences.
RESEARCH AND DEVELOPMENT:
The decrease in research and development expenses during 2004 as compared 2003
was primarily due to the shift of the Company from internally funded proof of
concept and research and development to production and research and development
under contracts. The increase in expenses from 2002 to 2003 represents the
expansion of self-funded scientific proof of concept. Certain material,
personnel and consulting expenses were transferred to cost of sales in the
latter part of 2003 as certain research and development was funded under our
contracts.
INTEREST EXPENSE:
The interest expense on our credit line payable with our Chairman increased
$19,000 from 2003 to 2004 primarily as a result of an increase of the prime
interest rate from 4.0% in July 2003 to 5.25% in December 2004. In 2003, we
began paying interest under an $8 million revolving loan and security agreement
with our Chairman. We were not charged interest in 2002. See "Liquidity and
Capital Resources" for further information concerning the restructuring of the
credit line agreement.
13
INTEREST INCOME:
The interest income in 2004 was a result of the investment of the cash acquired
in the merger with USHG into a short-term investment fund.
NET LOSS:
The operations for the year ended December 31, 2004 resulted in a net loss of
$3,261,005, a slight increase from the 2003 net loss of $3,242,109. General and
administrative expenses increased 53% primarily due to additional professional
fees resulting from the reverse merger with USHG, the acquisition of North Star,
and compliance costs related to the Sarbanes-Oxley ("SOX") Section 404. Selling
and marketing expenses increased 127% resulting from an increase in business
development activity as we broadened our efforts to inform potential customers
of our technology in pursuit of Government contracts. Offsetting the impact of
these increases, 2004 research and development expenses decreased by 30% from
2003 as expected due to the shift from internal research and development to
development under contracts. Since Ionatron's formation in June 2002 through the
first part of 2003, most of our efforts were directed towards scientific proof
of concept and introduction of our technology to potential U.S. Government
customers.
QUARTERLY OPERATING RESULTS (UNAUDITED):
Quarterly operating results for 2004 and 2003 were as follows:
1ST 2ND 3RD 4TH
---------------- ----------- ----------- -----------
2004
Revenue $ 272,442 $ 1,833,572 $ 2,628,982 $ 6,195,526
Cost of revenue 255,000 1,726,753 2,441,243 5,671,383
Total expenses 933,336 1,461,052 1,083,765 609,418
----------- ----------- ----------- -----------
Net loss before taxes $ (915,894) $(1,354,233) $ (896,026) $ (85,275)
Income taxes -- -- -- 9,577
----------- ----------- ----------- -----------
Net loss $ (915,894) $(1,354,233) $ (896,026) $ (94,852)
=========== =========== =========== ===========
Basic and diluted net earnings per share (0.02) (0.02) (0.01) 0.00
2003
Revenue $-- $-- $ 148,586 $ 234,687
Cost of revenue -- -- 137,874 218,948
Total expenses 992,861 1,051,565 826,360 397,774
----------- ----------- ----------- -----------
Net loss $ (992,861) $(1,051,565) $ (815,648) $ (382,035)
=========== =========== =========== ===========
Basic and diluted net earnings per share (0.02) (0.02) (0.02) (0.01)
14
LIQUIDITY AND CAPITAL RESOURCES:
The Company's cash position increased during 2004 by $3.4 million primarily as a
result of the merger with USHG that provided $8.9 million of cash. At December
31, 2004, the Company had approximately $3.5 million of cash and cash
equivalents.
During 2004, we used $5.8 million in operating activities, consisting primarily
of our net loss of $3.3 million and increases in accounts receivable of $4.1
million and prepaid expenses of $357,000, partially offset by an increase in
accounts payable of $1.5 million and depreciation and amortization of $887,000.
We anticipate that short-term and long-term funding needs will be provided from
the cash flow from working on government contracts as well as our available line
of credit.
In 2004, we used $1.6 million in investing activities, consisting of purchases
of $1.1 million of equipment and a net use of $573,000 in connection with the
acquisition of North Star.
During 2004, financing activities provided $10.7 million of cash, consisting of
$8.8 million of cash acquired in the March 2004 reverse merger with USHG, $1.2
million from option exercises and $500,000 of net proceeds from the issuance of
a note to our Chairman.
Our activities during 2003 and 2002 were financed by advances and loans from our
Chairman. At December 31, 2003, we had borrowings of $4.3 million and additional
availability of $3.7 million under our revolving loan and security agreement.
This borrowing arrangement was restructured in March 2004, after a pay down of
$500,000 and his contribution of $2.0 million to our capital, into a $3.0
million revolving credit arrangement and $500,000 of proceeds from the issuance
of warrants.
In 2003, we used $3.0 million in operations, primarily resulting from our net
loss of $3.2 million, a decrease in accounts payable of $538,000 which was
partially reduced by $645,000 of depreciation and amortization. During 2003,
cash flows from investing activities consisted of our purchase of $625,000 of
equipment.
We believe that we will have sufficient working capital to fulfill existing
contracts and expected contracts in 2005 and into 2006. The transportable
demonstrator contract and at least two of the other Ionatron contracts, that
presently represent a major portion of its current activity, are on a cost plus
fixed fee basis. This means all work performed is done at our
government-approved rates, which include general and administrative costs,
overhead, labor and materials, fees and profit. These costs are accrued as
incurred and billed monthly. Other contracts are at fixed prices which have
commercial type gross margins associated with them.
BACK-LOG OF ORDERS
At December 31, 2001, we had a backlog (that is, work load remaining on
signed contracts) of $3,214,000, to be completed within the next twelve months.
CONTRACTUAL OBLIGATIONS:
Payment by Period
---------------------------------------------------------------------
More
Less than 1 1 to 3 3 to 5 than 5
Total Year Years Years Years
---------------------------------------------------------------------
Capital lease $ 6,356 $ 2,724 $ 3,632 $ -- $ --
Insurance premium financing 199,171 199,171 -- -- --
Note payable to stockholder 2,800,000 2,800,000 -- -- --
Operating lease 3,128,433 439,663 838,707 759,000 1,091,063
---------- ---------- ---------- ------- ---------
Total $6,133,960 $3,441,558 $ 842,339 $759,000 $1,091,063
========== ========== ========== ======= =========
15
Interest expense on insurance premium financing and note payable to stockholder
was not included in the above table but is expected to total $216,000 next year.
CAPITAL LEASES:
We rent office equipment under a capitalized lease agreement which expires in
2007.
OPERATING LEASES:
We generally operate in leased premises. The leases have options permitting
renewals for additional periods. In addition to minimum fixed rentals, the
leases contain scheduled escalation clauses resulting in a deferred rent accrual
at December 31, 2004 of $52,874. Total rent expense on premises amounted to
$340,000 for 2004, $355,000 for 2003 and $73,000 for 2002. We also have
operating leases on vehicles at our Tucson and Albuquerque facilities which
expire in 2006.
RECENT ACCOUNTING PRONOUNCEMENTS:
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS
123(R)), "Share-Based Payment," which is a revision of SFAS 123. SFAS 123(R)
supersedes APB 25 and amends SFAS 95, "Statement of Cash Flows." Generally, the
approach to accounting for share-based payments in SFAS 123(R) is similar to the
approach described in SFAS 123, however, SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options (for all grant
years), to be recognized in the financial statements based on their fair values.
SFAS 123(R) is effective for public companies at the beginning of the first
interim or annual period beginning after June 15, 2005. Thus, Ionatron must
adopt SFAS 123(R) no later than July 1, 2005.
SFAS 123(R) permits public companies to account for share-based payments using
one of two methods: modified-prospective method or modified-retrospective
method. The modified-prospective method is similar to the modified prospective
method described in SFAS 148. Under this method, compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123(R)
for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123(R) that remain unvested on the effective date.
Under the modified retrospective method, which includes the requirements of the
modified prospective method described above, companies are permitted to restate,
based on the amounts previously recognized under SFAS 123 for purposes of pro
forma disclosures either (a) all prior periods presented or (b) prior interim
periods of the year of adoption.
Ionatron plans to adopt SFAS 123(R) no later than July 1, 2005, but has not yet
determined what method it will use. We account for our stock option awards under
the intrinsic value based method of accounting prescribed by APB Opinion 25,
"Accounting for Stock Issued to Employees," and related interpretations,
including FASB Interpretation 44 "Accounting for Certain Transactions Including
Stock Compensation," an interpretation of APB Opinion 25. Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. Pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by SFAS 123, "Accounting for Stock-Based
Compensation" and SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS 123." Non-employee stock-based
transactions are accounted for under SFAS 123 of accounting prescribed by APB
Opinion 25. Currently, Ionatron uses the Black-Scholes formula to estimate the
value of stock options granted to employees and expects to continue to use this
acceptable option valuation model upon the required adoption of SFAS 123(R).
On November 24, 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 "Inventory Costs--an amendment of ARB No. 43, Chapter 4" (SFAS
No. 151) effective for fiscal years beginning after June 15, 2005. SFAS 151 will
become effective for us on August 1, 2005. This Statement amends the guidance in
ARB 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). This Statement requires that those items be recognized as
current-period charges. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. We are currently reviewing the
requirements of SFAS 151; however, we do not believe that the adoption of SFAS
151 will have a material effect on our results of operations or financial
position.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS:
In the normal course of business, our financial position is subject to a variety
of risks, such as the collectibility of our accounts receivable and the
recoverability of the carrying values of our long-term assets. We do not
presently enter into any transactions involving derivative financial instruments
for risk management or other purposes.
Our available cash balances are invested on a short-term basis and are not
subject to significant risks associated with changes in interest rates.
Substantially all of our cash flows are derived from our operations within the
United States and we are not subject to market risk associated with changes in
foreign exchange rates.
We are exposed to market risk for the impact of interest rate changes, as the
interest rate of our borrowings under our revolving credit agreement with our
Chairman is subject to changes based on changes in the prime interest rate;
should that rate increase by 1%, the effect would be an increase in the net loss
by $33,703.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The Company's financial statements, the related notes, the Independent Auditors'
Report thereon, Management's Report on Internal Control Over Financial Reporting
and the Independent Auditors' Report on internal control over financial
reporting are included in Ionatron's 2004 Financial Statements and are filed as
a part of this report on page F-1 following the signatures.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES:
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
As of the end of the period covered by this report, an evaluation was carried
out under the supervision and with the participation of our management,
including our chief executive officer/chief financial officer, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our chief executive officer/chief financial officer has concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
DESIGN AND EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING:
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report
of management's assessment of the design and effectiveness of its internal
controls as part of this Annual Report on Form 10-K for the fiscal year ended
December 31, 2004. The independent registered public accounting firm of ours
also attested to, and reported on, management's assessment of the effectiveness
of internal control over financial reporting. Management's report and the
independent registered public accounting firm's attestation report are included
with Ionatron's 2004 Financial Statements under the captions entitled
"Management's Report on Internal Control Over Financial Reporting" and "Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting" and are incorporated herein by reference.
17
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:
There has been no change in Ionatron's internal control over financial reporting
during fourth fiscal quarter ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, Ionatron's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION:
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
At a special meeting of the Board of Directors held on March 18, 2004,
immediately after the closing of the Merger, the size of the Board of Directors
was set at six members, the resignations of all of Directors prior to the Merger
were accepted, and the individuals designated by Ionatron, Inc. in the Merger
Agreement, who are listed below, were appointed to the Company's Board of
Directors.
The following table sets forth the name, age and position of each of the persons
appointed to the Company's Board of Directors at the special meeting and each of
the persons appointed as an Executive Officer of the Company:
Name Age Principal Position
---- --- ------------------
Robert Howard 81 Director, Chairman of the Board
Thomas C. Dearmin 47 Director, Chief Executive Officer, President and
Chief Financial Officer
Joseph C. Hayden 46 Executive Vice President Programs
Stephen W. McCahon 45 Executive Vice President Engineering
Bernard Walik 52 Executive Vice President Operations
Stephen A. McCommon 55 Vice President Finance and Chief Accounting Officer
George P. Farley 66 Director
James K. Harlan 53 Director
David C. Hurley 64 Director
Admiral Thomas W. Steffens (Ret.) 58 Director
ROBERT HOWARD: Robert Howard has been the Chairman of the Board of Directors of
Ionatron since its inception in 2002. From 1969 to April 1980, he served as
President and Chairman of the Board of Centronics Data Computer Corp.
("Centronics"), a manufacturer of a variety of computer printers, including the
first impact dot matrix printer, of which he was the inventor. He resigned from
Centronics' Board of Directors in 1983. Commencing in mid-1982, Mr. Howard,
doing business as RH Research, developed the Color Ink Jet technology upon which
iCAD, Inc. ("iCAD") was initially based. He contributed this technology, without
compensation, to iCAD. Since its establishment in 1984, Mr. Howard has been the
founder and Chairman of the Board of Directors of iCAD, a company now involved,
among other things, in the manufacture and sale of computer aided devices
("CAD") used for early detection of Breast Cancer. Starting in December of 1993,
Mr. Howard was Chairman of the Board of Presstek, Inc. ("Presstek"), a public
company which has developed proprietary digital imaging and consumables
technologies for the printing and graphic arts industries from June 1988 to
September 1998 and then served as Chairman Emeritus of the Board of Presstek
from September 1998 to December 2000. In 2001 Mr. Howard and Mr. Dearmin started
the development work that became Ionatron.
18
THOMAS C. DEARMIN: Thomas C. Dearmin has been the President, Chief Executive
Officer and Chief Financial Officer as well as a Director of Ionatron since its
inception in 2002. From 1999 to 2002, Mr. Dearmin also was the President and
Chief Executive Officer of Lasertel Inc., a company Mr. Dearmin started and had
operational in 9 months, manufacturing high power semiconductor lasers. From
1992 to 1998, Mr. Dearmin was one of the co-founders and Vice President of Opto
Power Corporation, one of the first high power semiconductor laser manufacturers
to commercialize high power laser diodes. Opto Power also designed and built
semiconductor laser prototypes for US Military applications. Opto Power became
the largest supplier of high power fiber coupled laser diodes in the world,
which created new applications in the defense, medical, industrial and graphic
arts areas. Opto Power Corporation became a wholly owned division of Spectra
Physics Lasers which went public in 1998. Prior to 1992, Mr. Dearmin was part of
the original high power semiconductor group at Ensign Bickford Aerospace and was
head of Business Development for that group. Mr. Dearmin worked on new novel
military applications of lasers and laser systems, as well as the first
successful diode laser for on press digital imaging in graphic arts. Prior to
1986, Mr. Dearmin worked in various capacities in the Gallium Arsenide
semiconductor area, which involved metal organic chemical vapor deposition and
molecular beam epitaxy processes of various structures for digital electronic
devices, as well as photonic devices, such as night vision photocathodes for
military operations and high power lasers. Mr. Dearmin holds patents in the area
of semiconductor laser fabrication as well as high power laser diode
applications.
JOSEPH C. HAYDEN: Joseph C. Hayden has been the Executive Vice President of
Programs for Ionatron since December 2004. Prior to that, Mr. Hayden was the
Executive Vice President of Business Operations from 2003 to 2004. Mr. Hayden
has over 25 years experience in managing large engineering projects and high
technology research and development. Mr. Hayden will be responsible for program
management for Ionatron. Prior to the founding of Ionatron, Mr. Hayden was the
lead Systems Engineer for the Directed Energy Weapons product line for Raytheon,
Inc. ("Raytheon") and worked at two other start-up companies. He has also been a
U.S. Navy surface nuclear engineer.
STEPHEN W. MCCAHON: Stephen W. McCahon has been the Executive Vice President of
Engineering for Ionatron since 2003. Dr. McCahon has an extensive background in
optical physics, solid-state physics, ultra-short pulse lasers and non-linear
optics, and a broad background in Electrical Engineering (BSEE, MSEE, PH.D.
EE/Physics). Dr. McCahon has more than 40 scientific publications and holds 10
issued patents with 3 pending. Dr. McCahon's most recent position, from 1986 to
2003, had been Chief Engineer of Raytheon's Directed Energy Weapon Product Line.
Previously, he had been a Member of the Research Staff at Hughes Research
Laboratories in Malibu, CA (Currently known as HRL Laboratories).
BERNARD WALIK: Bernard Walik has been Executive Vice President of Operations
since March 2005 and was, Vice President Operations from May 2004 until March
2005. Mr. Walik has over 25 years of laser/optics experience in both established
and start-up companies. Prior to joining Ionatron, from March 2000 through May
2004, Mr. Walik was COO of Lasertel Inc., a manufacturer of high-power multi
mode diode lasers. He was also Vice President of Manufacturing at Opto Power
Corporation. During his tenure, Opto Power became the industry's first
high-volume low cost production facility for high power diode lasers. Mr. Walik
has held senior management positions on operations and manufacturing with
industry leading companies in the design and manufacture of lasers for
industrial, defense, medical and commercial global markets.
STEPHEN A. MCCOMMON: Stephen A. McCommon has been the Vice President Finance and
Chief Accounting Officer at Ionatron from March 2005 and prior thereto was the
Accounting Manager since July 2004. Mr. McCommon has over 26 years experience in
financial reporting and internal auditing for publicly held companies with
additional experience in accounting systems conversions and regulatory
compliance. Prior to his joining Ionatron, from March 2003 to July 2004, Mr.
McCommon was an independent accounting consultant for various companies. He was
the Controller of Molecular Diagnostics, Inc., a multi-national medical
technology products company, from February 2002 to March 2003. He was the
Corporate Controller of Heartland Technology, Inc. a hardware technology company
from November 1999 to November 2001, and the Controller/General Manager of The
Executive Registry, a privately held internet company from October 1998 to
October 1999.
19
GEORGE P. FARLEY: George P. Farley, a certified public accountant, has been
providing financial consulting services for the past five years. Within the last
fiscal year, Mr. Farley has been a Director and a member of the Audit Committee
of iCad, Inc. and Acorn Holdings Corp. He has also served as a Director and
member of the Audit Committee of Preserver Insurance Company, Inc. and a
Director for Olympia Leather Company, Inc. From November 1997 to August 1999,
Mr. Farley was a Chief Financial Officer of Talk.com, Inc., which provides
telecommunication services. Mr. Farley was also a director of Talk.com, Inc. Mr.
Farley joined BDO Seidman, LLP in 1962 and was a partner at BDO Seidman, LLP
from 1972 to 1995 with extensive experience in accounting, auditing and SEC
matters.
JAMES K. HARLAN: James K. Harlan is Executive Vice President and Chief Financial
Officer of HNG Storage, LP, a natural gas storage development and operations
business that he helped found in 1992. From 1991 to 1997, Mr. Harlan served as
Group Development Manager for the Pacific Resources Group which was engaged with
various manufacturing and distribution businesses and joint ventures in Asia,
Australia, and North America. He also served as operations research and planning
analyst for the White House Office of Energy Policy and Planning from 1977 to
1978, the Department of Energy from 1978 to 1981, and U.S. Synthetic Fuels
Corporation from 1981 to 1984. He has a PhD in Public Policy with an operations
research dissertation from Harvard University and a BS in Chemical Engineering
from Washington University in St. Louis. Mr. Harlan is a member of the Board of
Directors of iCAD where he Chairs the Audit Committee.
DAVID C. HURLEY: David C. Hurley was appointed Vice Chairman of PrivatAir of
Geneva, Switzerland on February 1, 2003, relinquishing the role of Chief
Executive Officer, a position he held following the acquisition of Flight
Services Group ("FSG") by PrivatAir in 2000. PrivatAir has major business
aviation operations in over fifteen bases in the U.S. and aircraft service
operations at Le Bourget, Paris, France; Dusseldorf, Munich and Hamburg Germany;
and Geneva, Switzerland. Mr. Hurley founded FSG in 1984. FSG is one of the
world's largest providers of corporate aircraft management, executive charter
and aircraft sales and acquisitions in the U.S. Mr. Hurley has over 30 years
experience in marketing and sales in the aerospace and telecommunications
industries. Before founding FSG, as former Senior Vice President of Domestic and
International Sales for Canadair Challenger (at the time, a Division of General
Dynamics), he had been a member of the marketing team that was responsible for
the launch of the program and delivery of the first one hundred Challengers. He
also served as Regional Vice President of the Cessna Aircraft Company and as
Director of Marketing, Government and Military Products Division, for the Harris
Intertype Corporation. Mr. Hurley serves on the Boards of the Smithsonian
Institution's National Air and Space Museum, Washington, D.C., BE Aerospace,
Inc., a public company, Wellington, FL; the Corporate Angel Network, White
Plains, N.Y., the Wings Club, New York City, and Aerosat, Inc., Manchester, NH.
He is an alumnus of Hartwick College and served three years in the Special
Services Branch of the US Army, receiving an honorable discharge.
ADMIRAL THOMAS W. STEFFENS (RET.): Rear Admiral Thomas W. Steffens, U.S. Navy
(Ret) was elected to serve as a member our Board on March 19, 2004. Admiral
Steffens currently serves as the Technical Director for Homeland Security and
special operations for ANTEON Corporation. In 2003, he concluded over 34 years
of naval service as a Navy SEAL. Following the events of September 11th, Admiral
Steffens was recalled by the Chief of Naval Operations to serve as Special
Assistant for Homeland Security to the Commander, Fleet Forces Command. While
serving as such, he also served as the Director of Anti-Terrorism and was
responsible for coordination with the U.S. Northern Command and with the U.S.
Coast Guard for Maritime Homeland Defense and port security. He also regularly
coordinated with the Joint Staff, services and various agencies (CIA, DIA, DISA,
NSA) in the areas of command, control, communications and intelligence. During
his 18 months in this position he established a vision and strategy for Navy
Force Protection, implemented an operational architecture for both the Fleet and
Regional Shore-based Navy, built a force of over 15,000 security personnel, and
set security standards for all CONUS naval installations. Admiral Steffens was
instrumental in establishing the Center for Anti-Terrorism that establishes
security doctrine and trains all leaders for the Navy today.
DIRECTOR INDEPENDENCE
The Board has determined that Messrs. Farley, Harlan, Hurley and Steffens meet
the director independence requirements of the Marketplace Rules of the
Association of Securities Dealers, Inc. applicable to NASDAQ listed companies.
20
COMMITTEES OF THE BOARD OF DIRECTORS:
AUDIT COMMITTEE: The Audit Committee of the Board of Directors is comprised of
Messrs. Farley, Harlan and Hurley. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the scope and results of the audit engagement,
approves professional services provided by the independent public accountants,
reviews the independence of the independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of our internal
accounting controls. Mr. Farley has been designated the audit committee
financial expert serving on the Company's audit committee. Refer to Item 10.
above for Mr. Farley's qualifications.
EMPLOYEE OPTION AND STOCK GRANT COMMITTEE: The Employee Option and Stock Grant
Committee of the Board of Directors is comprised of Messrs. Howard and Harlan.
The Employee Option and Stock Grant Committee Stock Option Committee is
responsible for authorizing grants of awards, whether under the 2004 Stock
Incentive Plan or any other stock option plan or stock incentive plan or outside
of any such plan to employees, consultants and third parties, other than persons
subject to Section 16 of the Securities Exchange Act of 1934 with respect to
Ionatron.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
Section 16(a) of the Securities Exchange Act of 1934 requires certain officers
and directors of Ionatron, Inc., and any persons who own more than ten-percent
of the common stock outstanding to file forms reporting their initial beneficial
ownership of shares and subsequent changes in that ownership with the Securities
and Exchange Commission and the NASDAQ Stock Market. Officers and directors of
Ionatron, Inc., and greater than ten-percent beneficial owners are also required
to furnish the Company with copies of all such Section 16(a) forms they file.
Based solely on a review of the copies of the forms furnished to the Company, or
written representations from certain reporting persons that no Forms 5 were
required, the Company believes that during the 2004 fiscal year we complied with
all section 16(a) filing requirements except that there was one late filing of
Form 4 by each of the following individuals: Robert Howard, Fred Heiden, Brad
Holsworth, Richard Raleigh and Jon Schulberg.
CODE OF ETHICS:
Ionatron has adopted a Code of Business Conduct and Ethics that applies to all
of Ionatron's employees and directors, including its principal executive
officer, principal financial officer and principal accounting officer.
Ionatron's Code of Business Conduct and Ethics covers all areas of professional
conduct including, but not limited to, conflicts of interest, disclosure
obligations, insider trading, confidential information, as well as compliance
with all laws, rules and regulations applicable to Ionatron's business.
Upon request made to us in writing at the following address, our Code of Ethics
and Business Conduct will be provided without charge:
Ionatron, Inc.
Attn: Human Resources
3590 E Columbia St.
Tucson, AZ 85714
21
ITEM 11. EXECUTIVE COMPENSATION:
SUMMARY COMPENSATION TAB LE
The following table discloses for the periods presented the compensation for the
person who served as our Chief Executive Officer and for each of our other
executive officers (not including the Chief Executive Officer) whose total
individual compensation exceeded $100,000 for our fiscal year ended December 31,
2004 (the "Named Executives").
Annual Compensation
-------------------
Long-Term
Compensation Awards
Other Annual Securities Underlying
Name and Principal Position Year Salary Bonus Compensation Options
- --------------------------- ---- -------- ----- ------------ ---------------------
Thomas Dearmin 2004 $200,000 -- -- --
Chief Executive Officer, 2003 200,000 -- -- --
President and Chief Financial
Officer 2002 23,000 -- -- --
Robert Howard (1) 2004 68,750 -- -- --
Chairman of the Board 2003 -- -- -- --
2002 -- -- -- --
Joseph Hayden 2004 175,000 -- -- --
Executive Vice President
Programs 2003 175,000 -- -- --
2002 20,000 -- -- --
Stephen William McCahon 2004 175,000 -- -- --
Executive Vice President of
Engineering 2003 175,000 -- -- --
2002 20,000 -- -- --
Bernard Walik 2004 143,000 -- -- 100,000
Executive Vice President of
Operations
(1) Mr. Howard is compensated at the rate of $150,000 per year. Mr. Howard did
not begin receiving any compensation until the third quarter of 2004 and
worked sparingly prior to the third quarter of 2004.
None of the Named Executives received any long-term compensation awards during
fiscal 2002, 2003 or 2004 except as noted in the table above.
22
OPTION GRANTS IN LAST FISCAL YEAR
The following table discloses the options granted to each of the Named
Executives in 2004.
Individual Grants
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of Stock
Securities Options Exercise of Price Appreciation For
Underlying Granted to of Base Options Term
Options Employees Price Expiration ----------------------
Name Granted (#) in 2004 ($/Sh) Date 5% ($) 10% ($)
---- ---------- ---------- ----------- ---------- ------ -------
(a) (b) ( c ) (d) (e) (f) (g)
- ----------------------------------------------------------------------------------------------------------------------
Thomas Dearmin -- -- -- --
Robert Howard -- -- -- --
Joseph Hayden -- -- -- --
Stephen William McCahon -- -- -- --
Bernard Walik 100,000 6% $ 3.35 03/26/09 $ 92,554 $204,521
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table discloses the options that were exercised by the Named
Executives in 2004 and the value of the remaining unexercised options at
December 31, 2004.
Number of
Securities
Underlying Value of Unexercised
Unexercised In-The-Money Options
Options at at
Fiscal Year-End Fiscal Year-End
Shares (#) ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
---- ----------- ----------- --------------- --------------------
Thomas Dearmin -- -- -- --
Robert Howard -- -- -- --
Joseph Hayden -- -- -- --
Stephen William McCahon -- -- -- --
Bernard Walik -- -- 33,333/66,667 $265,997/$532,003
DIRECTOR COMPENSATION:
None of our directors received any compensation for serving in such capacity
during fiscal 2004.
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS:
The following table sets forth information regarding the beneficial ownership of
our Common Stock, based on information provided by the persons named below in
publicly available filings, as of March 15, 2005:
o each of the our directors and executive officers;
o all directors and executive officers of our as a group; and
o each person who is known by us to beneficially own more than five
percent of the outstanding shares of the our Common Stock.
Unless otherwise indicated, the address of each beneficial owner is care of
Ionatron, 3590 East Columbia Street, Tucson, Arizona 85714. Unless otherwise
indicated, the Company believes that all persons named in the following table
have sole voting and investment power with respect to all shares of common stock
that they beneficially own.
For purposes of this table, a person is deemed to be the beneficial owner of the
securities if that person has the right to acquire such securities within 60
days of March 15, 2005 upon the exercise of options or warrants. In determining
the percentage ownership of the persons in the table below, we assumed in each
case that the person exercised all options and warrants which are currently held
by that person and which are exercisable within such 60 day period, but that
options and warrants held by all other persons were not exercised, and based the
percentage ownership on 71,171,363 shares outstanding on March 15, 2005.
PERCENTAGE OF
SHARES
NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED (1)
- ------------------------------------ ------------------ ------------
Robert Howard(2) 24,606,062(3) 34.6%
Thomas Dearmin 9,222,751 13.0
Joseph C. Hayden 6,240,968 8.8
Stephen McCahon 6,229,968 8.8
Bernard Walik 143,334(4) *
Stephen A. McCommon 25,000(4) *
George Farley 187,500(4) *
James Harlan 125,000(4) *
David Hurley 125,000(4) *
Thomas W. Steffens 125,000(4) *
All directors and executive officers as a group
(10 persons) 47,030,583 65.4%
* Less than 1%
(1) Computed based upon the total number of shares of Common Stock underlying
options held by that person exercisable within 60 days of March 15, 2005.
(2) The address of Mr. Howard is 303 East 57th Street, New York, New York
10022.
(3) Includes 2,500,000 shares of common stock held by Robert Howard Family LLC
("LLC"). Mr. Howard has shared dispositive power over the shares held by
LLC.
(4) Includes options exercisable within 60 days of March 15, 2005
24
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS:
The following table details information regarding our existing equity
compensation plans as of December 31, 2004.
Equity Compensation Plan Information
Number of
securities
remaining available
for future issuance
Number of under equity
securities to be Weighted-average compensation plans
issued upon exercise (excluding
exercise of price of securities
outstanding outstanding reflected in column
Plan category options options (a))
- ------------------------------- ------------------ -------------- ---------------------
(a) (b) (c)
------------------ -------------- ---------------------
Equity compensation plans
approved by security holders 2,906,925 $ 2.30 2,369,575
--------- ----- ---------
Equity compensation plans not
approved by security holders 741,000 $ 2.48 --
--------- ----- ---------
Total 3,647,925 $ 2.34 2,369,575
Following is a description of our stock option plans and stock incentive plan.
Prior to the Merger, Ionatron did not have any stock option plans.
In September 1991, we adopted a stock option plan (the "1991 Plan") pursuant to
which 700,000 shares of Common Stock have been reserved for issuance upon the
exercise of options designated as either (i) options intended to constitute
incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) non-qualified options ("NQOs"). ISOs may be granted
under the 1991 Plan to our employees and officers. NQOs may be granted to
consultants, directors (whether or not they are employees), and to our employees
or officers.
The purpose of the 1991 Plan is to encourage stock ownership by certain of our
directors, officers and employees and certain other persons instrumental to our
success and give them a greater personal interest in our success. The 1991 Plan
is administered by the Board of Directors. The Board, within the limitations of
the 1991 Plan, determines the persons to whom options will be granted, the
number of shares to be covered by each option, whether the options granted are
intended to be ISOs, the duration and rate of exercise of each option, the
option purchase price per share and the manner of exercise, the time, manner and
form of payment upon exercise of an option, and whether restrictions such as
repurchase rights in Ionatron Inc. are to be imposed on shares subject to
options.
ISOs granted under the 1991 Plan may not be granted at a price less than the
fair market value of the common stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
Ionatron Inc.). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all of our stock option plans and those of any related
corporation) may not exceed $100,000. NQOs granted under the 1991 Plan may not
be granted at a price less than the fair market value of the Common Stock on the
date of grant. Options granted under the 1991 Plan will expire not more than ten
years from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of our voting stock).
25
We have adopted a Non-Employee Director Stock Option Plan (the "Director Plan").
Only non-employee directors of Ionatron Inc. are eligible to receive grants
under the Director Plan. The Director Plan provided that eligible directors
automatically receive a grant of options to purchase 5,000 shares of common
stock at fair market value upon first becoming a director and, thereafter, an
annual grant, in January of each year, of 5,000 options at fair market value.
Options to purchase an aggregate of up to 100,000 shares of Common Stock are
available for automatic grants under the Director Plan. No additional grants
shall be made under the Director Plan.
We have adopted a 1995 Stock Option Plan ("1995 Plan") which provides for grants
of options to purchase up to 1,500,000 shares of common stock. The Board of
Directors or the Stock Option Committee (the "Committee"), as the case may be,
will have discretion to determine the number of shares subject to each NQO
(subject to the number of shares available for grant under the 1995 Plan and
other limitations on grant set forth in the 1995 Plan), the exercise price
thereof (provided such price is not less than the par value of the underlying
shares of Common Stock), the term thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances), and
the manner in which the option becomes exercisable (amounts, intervals and other
conditions). Directors who are also employed by us will be eligible to be
granted ISOs or NQOs under such plan. The Board or Committee, as the case may
be, also has discretion to determine the number of shares subject to each ISO,
the exercise price and other terms and conditions thereof, but their discretion
as to the exercise price, the term of each ISO and the number of ISOs that may
vest in any calendar year is limited by the same Code provisions applicable to
ISOs granted under the 1995 Plan.
We have adopted a 1997 Stock Option Plan ("1997 Plan") which provides for grants
of options to purchase up to 1,500,000 shares of Common Stock. The Board of
Directors or the Committee of the 1997 Plan, as the case may be, will have
discretion to determine the number of shares subject to each NQO (subject to the
number of shares available for grant under the 1997 Plan and other limitations
on grant set forth in the 1997 Plan), the exercise price thereof (provided such
price is not less than the par value of the underlying shares of Common Stock),
the term thereof (but not in excess of 10 years from the date of grant, subject
to earlier termination in certain circumstances), and the manner in which the
option becomes exercisable (amounts, intervals and other conditions). Directors
who are also our employees will be eligible to be granted ISOs or NQOs under
such plan. The Board or Committee, as the case may be, also has discretion to
determine the number of shares subject to each ISO, the exercise price and other
terms and conditions thereof, but their discretion as to the exercise price, the
term of each ISO and the number of ISOs that may vest in any calendar year is
limited by the same Code provisions applicable to ISOs granted under the 1997
Plan.
We have also adopted a 1999 Stock Option Plan ("1999 Plan") which provides for
grants of options to purchase up to 900,000 shares of common stock. The Board of
Directors or the Committee of the 1999 Plan, as the case may be, will have
discretion to determine the number of shares subject to each NQO (subject to the
number of shares available for grant under the 1999 Plan and other limitations
on grant set forth in the 1999 Plan), the exercise price thereof (provided such
price is not less than the fair market value of the underlying shares of Common
Stock), the term thereof (but not in excess of 10 years from the date of grant,
subject to earlier termination in certain circumstances), and the manner in
which the option becomes exercisable (amounts, intervals and other conditions).
Directors who are also our employees will be eligible to be granted ISOs or NQOs
under such plan. The Board or Committee, as the case may be, also has discretion
to determine the number of shares subject to each ISO, the exercise price and
other terms and conditions thereof, but their discretion as to the exercise
price, the term of each ISO and the number of ISOs that may vest in any calendar
year is limited by the same Code provisions applicable to ISOs granted under the
1999 Plan.
On April 29, 2004, our stockholders approved our 2004 Stock Incentive Plan
("2004 Plan"), which provides for the grant of any or all of the following types
of awards: (1) stock options, which may be either incentive stock options or
non-qualified stock options, (2) restricted stock, (3) deferred stock and (4)
other stock-based awards. A total of 3,000,000 shares of common stock have been
reserved for distribution pursuant to the 2004 Plan. As of December 31, 2004,
approximately 651,000 shares of common stock issuable upon exercise of options
have been granted under the 2004 Plan.
We have, from time to time, also granted non-plan options to certain officers,
directors, employees and consultants.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The Company's Chairman, a significant stockholder, has provided funds from the
inception of the Company under a revolving credit arrangement. The maximum
amount borrowed was $5.3 million. After pay down of $500,000 and contribution of
$2 million of the revolving credit into equity in the first quarter of 2004, the
remainder of $2.8 million was incorporated into a new $3 million revolving
credit arrangement with the same terms as the original revolving credit
agreement. The note payable to stockholder bears interest at a variable annual
rate equal to the prime rate plus two percent (2%), is due upon demand subject
to Board approval, and is collateralized by the assets of our subsidiary,
Ionatron Technologies, Inc. $2.8 million and $4.3 million were outstanding under
the revolving credit arrangements at December 31, 2004 and December 31, 2003,
respectively. Interest paid to stockholder was approximately $211,000 and
$196,000 for the year ended December 31, 2004 and 2003, respectively.
We lease office, manufacturing and storage space at our Tucson facility at an
annual rental of $330,000 under a non-cancelable operating lease agreement from
a company that is majority owned by our Chairman and other principal
stockholders. The lease expires in November 2012, contains renewal options and
an escalation provision at the end of five years that increases our annual rent
by $49,500. We are also responsible for certain property related costs,
including insurance, utilities and property taxes. Our rental payments were
$635,000 for rent expense recognized in both 2003 and 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES:
The following is a summary of the fees billed to the Company by BDO Seidman, LLP
for professional services rendered for the fiscal years ended December 31, 2003
and 2004:
2003 2004
---------- -----------
Audit Fees $29,000 $266,395
Audit-Related Fees -- 77,625
Tax Fees -- 2,450
On March 18, 2004, U.S. Home & Garden ("USHG") merged into Ionatron, Inc. BDO
Seidman was the auditor for both USHG and Ionatron. The fees billed to USHG were
zero and $235,445 for 2004 and 2003, respectively. Fees for audit services
include fees associated with the annual audit of the Company and its
subsidiaries, the review of the Company's quarterly reports on Form 10-Q and the
internal control evaluation under Section 404 of the Sarbanes-Oxley Act of 2002.
Audit-related fees principally include the audit of the historical financial
statements of North Star Research Corp. and advisory work related to SEC
reporting matters. Tax fees include tax compliance, tax advice and tax planning
related to Federal and state tax matters.
PRE-APPROVAL POLICIES AND PROCEDURES
Consistent with the Securities and Exchange Commission requirements regarding
auditor independence, our Audit Committee has adopted a policy to pre-approve
all audit and permissible non-audit services provided by our principal
accountant. Under the policy, the Audit Committee must approve non-audit
services prior to the commencement of the specified service. Our principal
accountants have verified, and will verify annually, to our Audit Committee that
they have not performed, and will not perform any prohibited non-audit service.
27
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K:
The following documents are filed or incorporated by reference as part of this
report:
1. Consolidated Financial Statements from Ionatron's 2004 Financial
Statements which are incorporated herein by reference:
a. Management's Report on Internal Control Over Financial
Reporting.
b. Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting.
c. Report of Independent Registered Public Accountant Firm on
Financial Statements.
d. Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003 and for the period June 3, 2002
(inception) to December 31, 2002.
e. Consolidated Balance Sheets as of December 31, 2004 and 2003.
f. Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 and for the period June 3, 2002
(inception) to December 31, 2002.
g. Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004 and 2003 and for the period June 3,
2002 (inception) to December 31, 2002.
h. Notes to Consolidated Financial Statements.
2. Consolidated Financial Statement Schedules required to be filed by
Item 8 of this Form:
All other schedules are omitted because they are not
applicable, or not required, or because the required
information is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.1 Amended and Restated Plan and Agreement of Merger entered into as of March
17, 2004, by and among U.S. Home & Garden, Inc. ("USHG"), Ionatron
Acquisition Corp., a wholly-owned subsidiary of USHG, Robert Kassel (for
purposes of Sections 5.9, 6.2(d), 6.2(j), 9.4 and 10.10 only), Fred Heiden
(for purposes of Section 9.4 only), and Ionatron, Inc. and Robert Howard,
Stephen W. McCahon, Thomas C. Dearmin and Joseph C. Hayden (incorporated
by reference to the comparable exhibit filed with the Registrant's Form
8-K filed with the SEC on March 24, 2004).
3.1 Certificate of Incorporation, as amended, (incorporated by reference to
the comparable exhibit filed with the Registrant's Form 10-KSB for the
fiscal year ended June 30, 1995).
3.2 Certificate of Amendment of Certificate of Incorporation if the Registrant
filed with the Secretary of State of the State of Delaware on April 29,
2004 (incorporated by reference to the comparable exhibit filed with the
Registrant's Form 10-Q for the quarterly period ended March 31, 2004).
3.3 By-laws of the Registrant (incorporated by reference to Exhibit 3(b) of
the Registrant's Registration Statement on Form S-1 (Registration No.
33-45428)).
4.1 Form of certificate evidencing Common Stock, $.001 par value, of the
Registrant (incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-1 (Registration No. 333-38483)).
28
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
4.2 Rights Agreement dated as of October 1, 1998 between the Registrant and
Continental Stock Transfer & Trust Company (incorporated by reference to
Exhibit 4.1 filed with the Registrant's Current Report on Form 8-K for the
event dated October 1, 1998).
10.1 1991 Stock Option Plan (incorporated by reference to Exhibit 10.5 of the
Registrant's Registration Statement on Form S-1 (Registration No.
33-45428).
10.2 1995 Stock Option Plan, as amended (incorporated by reference to the
comparable exhibit filed with the Registrant's Form 10-K for the fiscal
year ended June 30, 1999).
10.4 1997 Stock Option Plan, as amended (incorporated by reference to the
comparable exhibit filed with the Registrant's Form 10-K for the fiscal
year ended June 30, 1999).
10.5 1999 Stock Option Plan (incorporated by reference to Exhibit A filed with
the Registrant's Proxy Statement dated May 14, 1999 filed on Schedule
14A).
10.6 2004 Stock Incentive Plan (incorporated by reference to Exhibit A filed
with the Registrant's Proxy Statement dated August 12, 2004 filed on
Schedule 14A).
10.7 Tenant Use Contract between the Company and Mason Technology Inc. dated
July 14, 2004 (incorporated by reference to the comparable exhibit filed
with the Registrant's Form 10-Q for the quarterly period ended September
30, 2004).
10.8 Lease, dated August, 1995 by and between McLeod Business Properties, as
Lessor and North Star Research Acquisition Corp. (formerly North Star
Research Corporation), as amended.
21 Subsidiaries
23 Consent of BDO Seidman, LLP
31.1 Certification of Chief Executive and Chief Financial Officer pursuant to
Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Chief Executive Officer and Chief Financial Officer Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Risk Factors
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 16th day of March
2005.
IONATRON, INC.
BY /s/ Thomas C. Dearmin
--------------------------------------------
Thomas C. Dearmin
Chief Executive Officer, President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 16th day of March, 2005 by the following persons on
behalf of the registrant and in the capacity indicated.
Name Title
- ---- -----
/s/ Robert Howard Chairman, Director and Secretary
- ----------------------
Robert Howard
/s/ Thomas C. Dearmin Chief Executive Officer, Director,
- ---------------------- President Chief Financial Officer
Thomas C. Dearmin
/s/ Joseph Hayden Executive Vice President Programs
- ----------------------
Joseph Hayden
/s/ Stephen W. McCahon Executive Vice President Engineering
- ----------------------
Stephen W. McCahon
/s/ Stephen A. McCommon Vice President Finance and Chief
- ----------------------- Accounting Officer
Stephen A. McCommon
/s/ George P. Farley
- ----------------------
George P. Farley Director
/s/ James K. Harlan
- ------------------------ Director
James K. Harlan
/s/ David C. Hurley
- ------------------------
David C. Hurley Director
/s/ Admiral Thomas W. Steffens (Ret) Director
- ------------------------------------
Admiral Thomas W. Steffens (Ret)
30
IONATRON, INC.
FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX
Page No.
Management's Report on Internal Control Over Financial Reporting................................................... F - 2
Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting......................................................................... F - 3
Report of Independent Registered Public Accounting Firm on Financial Statements.................................... F - 5
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations......................................................................... F - 6
Consolidated Balance Sheets................................................................................... F - 7
Consolidated Statements of Cash Flows......................................................................... F - 8
Consolidated Statements of Stockholders' Equity (Deficit)..................................................... F - 9
Notes to Consolidated Financial Statements.................................................................... F - 10
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING:
Ionatron's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f). Under the supervision and with the participation of
management, Ionatron conducted an evaluation of the effectiveness of internal
control over financial reporting based on the framework in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
In conducting Ionatron's evaluation of the effectiveness of its internal control
over financial reporting, Ionatron has excluded the acquisition of the assets
and certain liabilities of North Star Research Corporation completed by Ionatron
in September 2004 through its subsidiary, North Star Acquisition Corp. North
Star Acquisition Corp. constituted $2.8 million and $2.6 million of total and
net assets, respectively, as of December 31, 2004 and $0.6 million and $0.03
million of revenue and net loss, respectively, for the year then ended. Refer to
Note 1 to the consolidated financial statements for further discussion of this
acquisition and its impact on Ionatron's consolidated financial statements.
Based on Ionatron's evaluation under the framework in Internal Control -
Integrated Framework, management concluded that internal control over financial
reporting was effective as of December 31, 2004. Management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2004 has been audited by BDO Seidman, LLP, an independent registered public
accounting firm, as stated in their report which is included herein.
By: /s/ Thomas C. Dearmin
----------------------------
Thomas C. Dearmin
Chief Executive Officer, President
and Chief Financial Officer
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
To the Board of Directors and Stockholders of
Ionatron, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting that Ionatron,
Inc. (the "Company") maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As indicated in the accompanying Assessment of Internal Control Over Financial
Reporting included in Management's Report on Internal Control Over Financial
Reporting, management's assessment of and conclusion on the effectiveness of
internal control over financial reporting did not include the internal controls
of North Star Research Corporation, which are included in the 2004 consolidated
financial statements of Ionatron, Inc. and constituted $2.8 million and $2.6
million of total and net assets, respectively, as of December 31, 2004 and $.6
million and $.03 million of revenues and net loss, respectively, for the year
then ended. North Star Research Corporation was acquired by Ionatron, Inc.
during September 2004. Our audit of internal control over financial reporting of
Ionatron, Inc. also did not include an evaluation of the internal control over
financial reporting of North Star Research Corporation.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on the criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
F-3
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets as
of December 31, 2004 and 2003 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
December 31, 2004 and 2003 and the period June 3, (inception) through December
31, 2002 and our report dated March 11, 2005 expressed an unqualified opinion
thereon.
/s/ BDO Seidman, LLP
Los Angeles, California
March 11, 2005
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
To the Board of Directors and Stockholders of
Ionatron, Inc.
We have audited the accompanying consolidated balance sheets of Ionatron, Inc.
(the "Company") as of December 31, 2004 and 2003 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 2004 and 2003 and the period June 3, (inception)
through December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our 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. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 financial position of Ionatron, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years ended December 31, 2004 and 2003 and the period June 3,
(inception) through December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 11, 2005 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Los Angeles, California
March 11, 2005
F-5
IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31, JUNE 3 THROUGH
---------------------------- DECEMBER 31,
2004 2003 2002
--------------------------------------------
Revenue $ 10,930,522 $ 383,273 $ --
Cost of revenue 10,094,379 356,822 --
------------ ------------ ------------
Gross profit 836,143 26,451 --
Operating expenses:
General and administrative 2,565,778 1,681,174 429,352
Selling and marketing 544,564 239,847 53,524
Research and development 808,242 1,151,350 264,799
------------ ------------ ------------
Total operating expenses 3,918,584 3,072,371 747,675
------------ ------------ ------------
Operating loss (3,082,441) (3,045,920) (747,675)
Other (expense) income
Interest expense (215,593) (196,189) --
Interest income 46,122 -- --
Other income (expense) 484 -- --
------------ ------------ ------------
Total other (168,987) (196,189) (747,675)
------------ ------------ ------------
Loss before provision for taxes (3,251,428) (3,242,109) (747,675)
Income taxes 9,577 -- --
------------ ------------ ------------
Net loss $ (3,261,005) $ (3,242,109) $ (747,675)
============ ============ ============
Net loss per share - basic and diluted $ (0.05) $ (0.07) $ (0.02)
------------ ------------ ------------
Weighted average number of shares outstanding, basic and
diluted 65,264,393 48,452,249 48,452,249
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
IONATRON, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
2004 2003
---------------------------
ASSETS
Current assets
Cash and cash equivalents $ 3,495,779 $ 103,392
Accounts receivable - net 4,497,350 104,454
Inventory 341,334 21,000
Receivables from stockholder -- 107,482
Other receivables 30,403 --
Prepaid expenses 404,619 47,905
---------------------------
Total current assets 8,769,485 384,233
Property and equipment - net 1,416,072 1,141,887
Goodwill 1,487,884 --
Non-amortizable intangible assets 603,000 --
Amortizable intangible assets - net 261,450 --
---------------------------
TOTAL ASSETS $ 12,537,891 $ 1,526,120
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Note payable to stockholder $ 2,800,000 $ 4,300,000
Accounts payable 1,639,018 330,696
Accrued expenses 841,067 365,208
Billings in excess of costs 25,695 --
Current portion of capital lease obligation 2,435 --
---------------------------
Total current liabilities 5,308,215 4,995,904
Capital lease obligation 3,482 --
Deferred tax liabilities 9,577 --
Commitments and contingencies -- --
Stockholders' equity (deficit)
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $.001 par value, 100,000,000 shares
authorized; 70,846,204 shares issued and outstanding at
December 31, 2004 and 48,452,249 shares issued and
outstanding at December 31, 2003 70,846 48,452
Additional paid-in capital 10,406,776 471,548
Accumulated deficit (3,261,005) (3,989,784)
---------------------------
Total stockholders' equity (deficit) 7,216,617 (3,469,784)
---------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 12,537,891 $ 1,526,120
===========================
See accompanying notes to consolidated financial statements.
F-7
IONATRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD
JUNE 3 THROUGH
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31,
------------------------------------------------
2004 2003 2002
------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,261,005) $ (3,242,109) $ (747,675)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 887,154 645,002 230,286
Loss on equipment disposal 470 -- --
Deferred income tax provision 9,577 -- --
Changes in working capital components:
Accounts receivable (4,148,541) (104,454) --
Other receivables (30,403) (7,482) (100,000)
Inventory (320,334) (21,000) --
Prepaid expenses (356,714) (46,105) (1,800)
Accounts payable 1,483,784 (537,626) 868,322
Billings in excess of costs 25,695 -- --
Accrued expenses 141,414 320,228 44,980
------------------------------------------------
Net cash provided by (used in) operating activities (5,568,903) (2,993,546) 294,113
------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment (1,115,672) (625,268) (1,391,907)
Proceeds from disposal of equipment 3,208 -- --
Receivables from stockholder 107,482 -- --
Acquisition of business, net of cash acquired (573,234) -- --
------------------------------------------------
Net cash (used in) investing activities (1,578,216) (625,268) (1,391,907)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to stockholder 1,000,000 3,125,000 1,175,000
Proceeds from issuance of common stock -- -- 20,000
Repayment on note payable to stockholder (500,000) -- --
Principal payments on capital lease obligation (1,545) -- --
Cash acquired from merger 8,816,573 -- --
Proceeds from issuance of warrants -- 500,000 --
Exercise of stock options and warrants 1,224,478 -- --
------------------------------------------------
Net cash provided by financing activities 10,539,506 3,625,000 1,195,000
------------------------------------------------
Net increase in cash and cash equivalents 3,392,387 6,186 97,206
Cash and cash equivalents, beginning of period 103,392 97,206 --
------------------------------------------------
Cash and cash equivalents, end of period $ 3,495,779 $ 103,392 $ 97,206
================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 215,593 $ 196,189 $ --
Income taxes 66,287 -- --
See non-cash investing and financing activities at Note 15
See accompanying notes to consolidated financial statements
F-8
IONATRON, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2004
-------------------------
COMMON STOCK
-------------------------
SHARES AMOUNT APIC DEFICIT TOTAL
-----------------------------------------------------------------------------
Balance at inception, June 3, 2002
Issuance of common stock for cash 48,452,249 $ 48,452 (28,452) $ -- $ 20,000
Net loss for the period -- -- -- (747,675) (747,675)
-----------------------------------------------------------------------------
Balance as of December 31, 2002 48,452,249 48,452 (28,452) (747,675) (727,675)
Issuance of warrants for cash -- -- 500,000 -- 500,000
Net loss for the year -- -- -- (3,242,109) (3,242,109)
-----------------------------------------------------------------------------
Balance as of December 31, 2003 48,452,249 48,452 471,548 (3,989,784) (3,469, 784)
Transfer of deficit on termination of
Subchapter S election -- -- (3,989,784) 3,989,784 --
Contribution of note payable to stockholders'
equity -- -- 2,000,000 -- 2,000,000
Issuance of common stock in merger 19,346,090 19,346 8,797,227 -- 8,816,573
Issuance of common stock in North Star
acquisition 199,063 199 1,699,801 -- 1,700,000
Exercise of stock options and warrants 2,848,802 2,849 1,221,629 -- 1,224,478
Shares issued for services performed
-- -- 206,355 -- 206,355
Net loss for the year -- -- -- (3,261.005) (3,261,005)
-----------------------------------------------------------------------------
Balance as of December 31, 2004 70,846,204 70,846 10,406,776 (3,261,005) 7,216,617
=============================================================================
See accompanying notes to the consolidated financial statements.
F-9
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Ionatron, Inc. and
its wholly owned subsidiaries, Ionatron Technologies, Inc. and North Star
Research Acquisition Corp. as of December 31, 2004 (collectively, "Company,"
"Ionatron," "we," "our" and "us"). All intercompany balances and transactions
have been eliminated.
NATURE OF BUSINESS AND SUMMARY OF OPERATIONS:
Ionatron was formed on June 3, 2002 to develop and market Directed Energy Weapon
technology products initially for sale to the U.S. Government. The goal of the
Company is to produce products that incorporate our technology initially for
specific U.S. Government customer applications and platforms. Ionatron and the
U.S. Government have entered into several contracts for products and services as
well as Cooperative Research and Development Agreements for joint research on
Laser Induced Plasma Channel ("LIPC") based directed energy weapons. We expect
to offer U.S. Government approved versions of our products for commercial
security applications in the future. During 2003 and 2002, the Company engaged
in research and development and business development activities culminating in
our first U.S. Government contract in September of 2003. During 2004 we
demonstrated the laser guided man-made lightning directed energy technology in
the laboratory; demonstrated the technology effects on a variety of targets both
under U.S. Government contract and using internal research and development
funding; delivered a compact laser source specifically designed to enable the
technology under a U.S. Government contract; and commenced a U.S. Government
contract for the development of a system on a mobile platform for field
demonstration and testing.
Through North Star, we are involved in the design and manufacture of a broad
range of high voltage equipment for the defense, aerospace, semi-conductor, and
medical industries.
MERGER AND RECAPITALIZATION:
On March 18, 2004, a subsidiary of U. S. Home & Garden, Inc. (USHG), a
non-operating, publicly traded company merged into Ionatron, Inc. (the
"Merger"). Following the Merger, USHG stockholders held 33.89 % and Ionatron
stockholders held 66.11% of USHG common stock on a fully diluted basis. The
combination has been accounted for as a recapitalization of Ionatron, Inc.,
effective from our inception on June 3, 2002 and the issuance of 19,346,090
common shares and 5,492,009 options and warrants to the USHG stockholders on the
date of merger in exchange for the cash. We also acquired in the Merger a $1.6
million principal amount subordinated promissory note from a highly leveraged
entity. This note matures in 2009 and accrues interest on a compound basis at
the rate of 9% per annum until maturity. We recorded a 100% valuation allowance
for this note due to the uncertainty of collectibility.
The consolidated financial statements reflect the historical results of
Ionatron, Inc., prior to March 18, 2004, and the consolidated results of
operations of the Company since March 18, 2004. All outstanding shares of
Ionatron common stock were converted to 48,452,249 shares of USHG common stock.
On April 29, 2004, our stockholders approved the change of our corporate name to
Ionatron, Inc., an increase of our authorized common stock to 100,000,000
shares, and the classification of the Board of Directors into three classes. We
also changed our fiscal year end from June 30 to December 31.
F-10
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles (GAAP) requires our management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes know which could impact the amounts
reported and disclosed herein. Significant estimates include the purchase price
allocation with respect to the North Star acquisition.
REVENUE RECOGNITION:
Revenues under long-term U.S. Government contracts are recorded under the
percentage of completion method. Revenues, billable monthly, under cost plus
fixed fee contracts are recorded as costs are incurred and include estimated
earned fees in the proportion that costs incurred to date bear to total
estimated costs. Costs include direct labor, direct materials, and subcontractor
costs and manufacturing and administrative overhead allowable under the
contract. As contracts can extend over one or more accounting periods, revisions
in costs and earnings estimated during the course of work are reflected during
the accounting period in which the facts become known. When the current contract
estimate indicates a loss, provision is made for the total anticipated loss in
the current period. Gross revenue is presented as we do not generally provide an
allowance for returns from our customers.
The asset accounts receivable includes costs and estimated earnings in excess of
billing on uncompleted contracts which represents revenues recognized in excess
of amounts billed. Such revenues are billable under the terms of the contracts
at December 31, 2004, yet were not invoiced until January 2005 and are generally
expected to be collected within 60 days. The liability "billings in excess of
costs and estimated earnings on uncompleted contracts" represents billings in
excess of revenues recognized.
Revenues for other products and services are recognized when such products and
services are delivered and, in connection with certain sales to government
agencies, when the products and services are accepted, which is normally
negotiated as part of the initial contract.
COST OF REVENUE:
Cost of revenue under long-term U.S. Government contracts is recorded using the
cost plus fixed fee method. Cost of revenue is recorded as costs are incurred.
Costs include direct labor, direct materials, subcontractor costs and
manufacturing and administrative overhead. General and administrative expenses
allowable under the terms of the contracts are allocated per contract depending
on its direct labor and material proportion to total direct labor and material
of all contracts.
As contracts can extend over one or more accounting periods, revisions in costs
estimated during the course of work are reflected during the accounting period
in which the facts become known.
NET LOSS PER SHARE:
Basic (loss) per share is computed by dividing net loss by the weighted average
number of common shares outstanding for the period. Diluted loss per share
reflect the effect of common shares issuable upon exercise of stock options and
warrants when such effect is dilutive. As such, no diluted weighted average
number of shares outstanding nor diluted loss per share has been reflected as
the effect is anti-dilutive.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents are considered to be all highly liquid investments
purchased with an initial maturity of 3 months or less and municipal bonds with
a variable interest rate that is adjusted to the current market rate of interest
every seven days and are readily convertible into cash.
F-11
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
ACCOUNTS RECEIVABLE - NET:
Our accounts receivable balance includes contract receivables related to
completed and in progress contracts, retentions, and cost and estimated earnings
on uncompleted contracts.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of the
assets from 3 to 10 years. Leasehold improvements are depreciated over the life
of the related lease or asset, which ever is shorter. Amortization of assets
acquired under capital leases is included in depreciation and amortization
expense.
Significant improvements extending the useful life of property are capitalized.
When property is retired or otherwise disposed of, the cost of the property and
the related accumulated depreciation are removed from the accounts, and any
resulting gains or losses are reflected in the consolidated statements of
operations. Repair and maintenance costs are expensed as incurred.
COMPUTER SOFTWARE DEVELOPMENT COSTS:
Direct development costs associated with internal-use computer software are
accounted for under Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" and are capitalized,
including external direct costs of material and services and payroll costs for
employees devoting time to the software projects. Costs incurred during the
preliminary project stage, as well as for maintenance and training, are expensed
as incurred. Amortization is provided on a straight-line basis over the shorter
of 3 years or the estimated useful life of the software.
VALUATION OF LONG-LIVED ASSETS INCLUDING INTANGIBLES SUBJECT TO AMORTIZATION:
We review long-lived assets, including certain identifiable intangibles for
possible impairment whenever events or changes in circumstances, such as the
rapid pace of technology, indicate that the carrying amount of any asset may not
be recoverable. We assess the recoverability of such long-lived assets by
determining whether the amortization of the balances over their remaining lives
can be recovered through undiscounted future operating cash flows. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of long-lived assets will be impacted if
estimated future operating cash flows are not achieved. Factors we consider
important that could trigger an impairment review include the following:
o Significant underperformance relative to historical or projected
future operating results,
o Significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
o Significant negative industry or economic trends; and
o Significant decline in our stock price for a sustained period and
market capitalization relative to net book value.
GOODWILL AND INDEFINITE LIFE INTANGIBLE ASSETS:
We account for Goodwill and Indefinite Life Intangible Assets based on the
method of accounting prescribed by the provisions of SFAS 142, "Goodwill and
Other Intangible Assets," and we have determined that Ionatron and North Star
represent two separate reporting units. We believe that the North Star Research
trade name is an indefinite life intangible asset.
F-12
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
Goodwill and indefinite life intangible assets will be tested annually for
impairment or more frequently if events or changes in circumstances indicate
that the assets might be impaired. In assessing the recoverability of goodwill
and indefinite life intangible assets, we must make assumptions about the
estimated future cash flows and other factors to determine the fair value of
these assets.
Assumptions about future revenue and cash flows require significant judgment
because of the current state of the economy and the fluctuation of actual
revenue and the timing of expenses. We develop future cash flows based on
projected revenues with the assumption that expenses will grow at rates
consistent with historical rates. If the expected cash flows are not realized,
impairment losses may be recorded in the future.
For goodwill, the impairment evaluation includes a comparison of the carrying
value of the reporting unit (including goodwill) to that reporting unit's fair
value. If the reporting unit's estimated fair value exceeds the reporting unit's
carrying value, no impairment of goodwill exists. If the fair value of the
reporting unit does not exceed the unit's carrying value, then an additional
analysis is performed to allocate the fair value of the reporting unit to all of
the assets and liabilities of that unit. If the excess of the fair value of the
reporting unit over the fair value of the identifiable assets and liabilities is
less than the carrying value of the unit's goodwill, an impairment charge is
recorded for the difference.
The impairment evaluation for indefinite life intangible assets is performed by
a comparison of the asset's carrying value to the asset's fair value. When the
carrying value exceeds fair value an impairment charge is recorded for the
amount of the difference. An intangible asset is determined to have an
indefinite useful life when there are no legal, regulatory, contractual,
competitive, economic, or any other factors that may limit the period over which
the asset is expected to contribute directly or indirectly to the future cash
flows of the Company. In addition, each reporting period, we evaluate intangible
assets that are not being amortized to determine whether events and
circumstances continue to support an indefinite useful life. If an intangible
asset that is not being amortized is determined to have a finite useful life,
the asset will be amortized prospectively over the estimated remaining useful
life and accounted for in the same manner as intangible assets subject to
amortization.
INCOME TAXES:
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred tax assets and liabilities are recognized currently for
the future tax consequences attributable to the temporary differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A valuation allowance is recorded to
reduce the carrying amounts of deferred tax assets if it is more likely that
such assets will not be realized.
We consider all available evidence, both positive and negative, to determine
whether, based on the weight of that evidence, a valuation allowance is needed
for some portion or all of a net deferred tax asset. Judgment is used in
considering the relative impact of negative and positive evidence. In arriving
at these judgments, the weight given to the potential effect of negative and
positive evidence is commensurate with the extent to which it can be objectively
verified. We record a valuation allowance to reduce our deferred tax assets and
review the amount of such allowance annually. When we determine certain deferred
tax assets are more likely than not to be utilized, we will reduce our valuation
allowance accordingly.
Prior to January 1, 2004, we elected to be taxed as a Subchapter S-corporation
with the individual shareholders reporting their respective share of our losses
on their income tax return. Accordingly, we have no deferred tax assets or
liabilities arising in prior periods.
We have provided a valuation allowance for the deferred tax assets related to
the $27.1 million operating and $0.5 million capital loss carryovers of USHG.
The USHG operating losses are available for deduction from our taxable income at
a rate of approximately $2.8 million per year. The tax benefits related to
deduction of the USHG losses will be added to paid-in capital.
F-13
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
STOCK-BASED COMPENSATION:
We account for our stock option awards under the intrinsic value based method of
accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations, including FASB Interpretation No. 44
"Accounting for Certain Transactions Including Stock Compensation," an
interpretation of APB Opinion 25. Under the intrinsic value based method,
compensation cost is the excess of the quoted market price of the stock at grant
date or other measurement date over the amount an employee must pay to acquire
the stock. Pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied as required by SFAS 123,
"Accounting for Stock-Based Compensation" and SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
No.123." Non-employee stock-based transactions are accounted for under SFAS
No.123.
Pro-forma compensation and non-employee compensation are based on the fair value
of the options granted which has been estimated at the various dates of the
grants using the Black-Scholes option-pricing model with the following
assumptions:
o Fair market value of the underlying common stock based on our
closing common stock price on the date the option is granted;
o Risk-free interest rate based on the weighted averaged 5-year U.S.
Treasury note strip rates;
o Volatility is based on comparable companies considered as we do not
have sufficient trading history for our common stock;
o No expected dividend yield based on future dividend payment plans;
and
o Expected life of the options is five years.
Pro-forma compensation and non-employee compensation only apply to 2004 as no
stock options and warrants existed prior to re-capitalization.
No compensation cost has been recognized for options granted to employees for
the years ended December 31, 2004, 2003 and 2002. The following presents pro
forma net loss information as if compensation expense had been recognized for
stock options as determined under the fair-value-based method prescribed by SFAS
123 using the Black-Scholes options pricing model and amortized over the vesting
periods of the related options:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2004 2003 2002
------------ ------------ -----------
Net loss:
As reported $(3,261,005) $(3,242,109) $ (747,675)
Pro forma stock compensation expense (1,020,523) -- --
----------- ----------- -----------
Pro forma $(4,281,528) $(3,242,109) $ (747,675)
=========== =========== ===========
Net loss per share - basic and diluted:
As reported $ (0.05) $ (0.07) $ (0.02)
=========== =========== ===========
Pro forma $ (0.07) $ (0.07) $ (0.02)
=========== =========== ===========
Compensation expense recorded for shares and options delivered to non-employees
for the year ended December 31, 2004 was approximately $206,355 which was
charged to operating expenses with an offsetting entry to additional paid in
capital. No compensation expense was recorded for options to purchase shares or
shares delivered for the year ended December 31, 2003.
F-14
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of accounts receivable, accounts payable, and accrued
expenses approximate fair value due to the short maturity of these instruments.
The note payable to stockholder and note payable to a third party is based on
current rates at which the Company reasonably expects it could borrow funds with
similar remaining maturities.
INVENTORIES:
Inventories, primarily consisting of labor, overhead and materials pertaining to
long-term contracts, are carried at cost. At December 31, 2004, inventory was
comprised only of materials.
CONCENTRATIONS OF CREDIT RISK:
We maintain cash balances at a major bank and, at times, balances exceed FDIC
limits. We generally do not have a significant concentration of credit risk on
accounts receivable from the U.S. Government.
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
We do not generally provide an allowance for receivables from the U.S.
Government. We have non-government customers for which we provide for
potentially uncollectible accounts receivable by use of the allowance method.
The allowance is provided based upon a review of the individual accounts
outstanding, and the Company's prior history of uncollectible accounts
receivable.
BILLINGS IN EXCESS OF COSTS AND EARNINGS:
Billings in excess of costs and earnings consists of amount for which contract
billings have been presented but the goods and services required under the
contracts have not yet been provided and the associated revenue has not been
recognized.
RESEARCH AND DEVELOPMENT EXPENSES:
We expense our research and development costs as incurred.
COMPREHENSIVE INCOME:
We have no items of comprehensive income or expense. Accordingly, our
comprehensive income (loss) and net income (loss) are equal for all periods
presented.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS:
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS
123(R)), "Share-Based Payment," which is a revision of SFAS 123. SFAS 123(R)
supersedes APB 25 and amends SFAS 95, "Statement of Cash Flows." Generally, the
approach to accounting for share-based payments in SFAS 123(R) is similar to the
approach described in SFAS 123, however, SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options (for all grant
years), to be recognized in the financial statements based on their fair values.
SFAS 123(R) is effective for public companies at the beginning of the first
interim or annual period beginning after June 15, 2005. Thus, Ionatron must
adopt SFAS 123(R) no later than July 1, 2005.
F-15
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
SFAS 123(R) permits public companies to account for share-based payments using
one of two methods: modified-prospective method or modified-retrospective
method. The modified-prospective method is similar to the modified prospective
method described in SFAS 148. Under this method, compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123(R)
for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123(R) that remain unvested on the effective date.
Under the modified retrospective method, which includes the requirements of the
modified prospective method described above, companies are permitted to restate,
based on the amounts previously recognized under SFAS 123 for purposes of pro
forma disclosures either (a) all prior periods presented or (b) prior interim
periods of the year of adoption.
Ionatron plans to adopt SFAS 123(R) no later than July 1, 2005, but has not yet
determined what method it will use. We account for our stock option awards under
the intrinsic value based method of accounting prescribed by APB Opinion 25,
"Accounting for Stock Issued to Employees," and related interpretations,
including FASB Interpretation 44 "Accounting for Certain Transactions Including
Stock Compensation," an interpretation of APB Opinion 25. Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. Pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by SFAS 123, "Accounting for Stock-Based
Compensation" and SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS 123." Non-employee stock-based
transactions are accounted for under SFAS 123 of accounting prescribed by APB
Opinion 25. Currently, Ionatron uses the Black-Scholes formula to estimate the
value of stock options granted to employees and expects to continue to use this
acceptable option valuation model upon the required adoption of SFAS 123(R).
On November 24, 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 "Inventory Costs--an amendment of ARB No. 43, Chapter 4" (SFAS
No. 151) effective for fiscal years beginning after June 15, 2005. SFAS 151 will
become effective for us on August 1, 2005. This Statement amends the guidance in
ARB 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). This Statement requires that those items be recognized as
current-period charges. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. We are currently reviewing the
requirements of SFAS 151; however, we do not believe that the adoption of SFAS
151 will have a material effect on our results of operations or financial
position.
F-16
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
NOTE 3 - ACCOUNTS RECEIVABLE:
Our accounts receivable balance as of December 31, 2004 includes contract
receivables related to completed and in progress contracts, retentions, and cost
and estimated earnings on uncompleted contracts. Costs and estimated earnings on
uncompleted contracts represent amounts that are billable under the terms of the
contracts at December 31, 2004, were invoiced in January 2005 and are generally
expected to be collected within 60 days.
Contract Receivables December December
31, 2004 31, 2003
---------- ----------
Completed contracts $ 17,432 $ --
Contracts in progress 2,264,509 73,027
Retained 100,000 --
Cost and estimated earnings on
uncompleted contracts 2,132,841 31,427
---------- ----------
4,514,782 104,454
Less: Allowance for doubtful accounts 17,432 --
---------- ----------
Total $4,497,350 $ 104,454
========== ==========
Contract receivables at December 31, 2004 are expected to be collected within
one year. There are no claims or unapproved change orders included in contract
receivables at December 31, 2004 and 2003. The allowance for doubtful accounts
at December 31, 2004 represents an estimate for potentially uncollectible
accounts receivable related to non-governmental customers which is based upon a
review of the individual accounts outstanding and the Company's prior history of
uncollectible accounts receivable.
COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
December 31, December 31,
2004 2003
------------- ----------
Cost incurred on uncompleted contracts $10,054,620 $ 264,752
Estimated earnings 739,332 19,281
------------- ----------
10,793,952 284,003
Less: Billings to date 8,686,806 252,606
------------- ----------
Total $ 2,107,146 $ 31,427
============= ==========
Included in accompanying balance sheet
under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 2,132,841 31,427
Billings in excess of costs and estimated
earnings on uncompleted contract (25,695) --
------------- ----------
Total $ 2,107,146 $ 31,427
============= ==========
F-17
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
NOTE 4 - SIGNIFICANT ASSET ACQUISITION:
In September 2004, Ionatron completed the acquisition of substantially all the
assets of North Star Research Corporation ("North Star"), a New Mexico
corporation engaged in the business of designing and manufacturing a broad range
of high voltage equipment for the defense, aerospace, semi-conductor, and
medical industries. The results of operations of North Star have been included
in the consolidated financial statements from September 30, 2004 to December 31,
2004.
As consideration for North Star's assets, the Company paid $700,000, issued
199,063 shares of the Company's common stock valued at $1,700,000, and assumed
liabilities for warranty claims and other accrued expenses. The Company
recognized goodwill of $1,487,884, and intangible assets of $886,000 in the
acquisition. The assets acquired and liabilities assumed were recorded under the
purchase method of accounting. The transaction was effected through a newly
formed subsidiary, North Star Research Acquisition Corp., a Delaware
corporation, and was funded through cash on hand.
The following table summarizes the estimated fair values of the asset acquired
and liabilities assumed at the date of acquisition:
Purchase Price:
Cash and cash equivalents $ 700,000
Common stock 1,700,000
Advance to North Star 200,000
Acquisition costs 15,000
-----------
Total purchase price 2,615,000
-----------
Allocated as follows:
Working capital assumed:
Cash and cash equivalents 126,765
Accounts receivable 244,355
Accounts payable (30,892)
Warranty reserve (40,000)
Accrued expenses and other (35,670)
-----------
Net working capital 264,558
Fixed assets 20,334
Due to former owners (43,776)
-----------
Net book value of assets acquired and liabilities
assumed 241,116
Excess purchase price to be allocated $ 2,373,884
===========
Allocated as follows:
Goodwill $ 1,487,884
Non-amortizable intangible assets 603,000
Amortizable intangible assets 283,000
-----------
Total allocated $ 2,373,884
===========
F-18
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
Of the $886,000 of acquired intangibles, $603,000 was assigned to Tradename
which is not subject to amortization. The remaining $283,000 of acquired
intangible assets have a weighted-average useful life of approximately five (5)
years. The intangible assets that make up that amount include Technological
know-how of $212,000 (5-year useful life), contractual backlog of $37,000
(1-year useful life), and a patent of $34,000 (5-year useful life).
The $1,487,884 was assigned to the North Star segment, all of which is expected
to be deductible for tax purposes.
We allocate the purchase price of an acquired business, on a preliminary basis,
to the identified assets acquired based on their estimated fair values at the
dates of acquisition, with any residual amounts allocated to goodwill. The
purchase price allocations are considered preliminary until we have obtained all
required information to complete the allocation. Although the time required to
obtain the necessary information will vary with circumstances specific to an
individual acquisition, the allocation period for finalizing purchase price
allocations generally does not exceed one year from the date of consummation of
an acquisition. Adjustments to the allocation of purchase price may decrease or
increase those amounts allocated to goodwill.
The following unaudited Condensed pro forma Statements of Operations (the "Pro
Forma Financial Statements") are based on historical financial statements of the
Company and North Star after giving effect to the Company's purchase of
substantially all of the assets of North Star and assumption of liabilities for
warranty claims and other accrued expenses.
The Pro Forma Financial Statements were prepared as if the transaction has
occurred as of January 1, 2003 for the Statements of Operations. The Pro Forma
Financial Statements are not necessarily indicative of the future results of
operations of the Company after the purchase of North Star's net assets, or of
the results of operations of the Company had the purchase of North Star's net
assets occurred on the dates indicted above or been in effect for the period
presented.
Pro Formas
2004 2003
---- ----
Revenue $ 12,851,819 $ 3,645,876
Net loss $ (3,025,599) $ (3,208,984)
Net loss per share -
Basic and diluted $ (0.05) $ (0.07)
NOTE 5 - PROPERTY AND EQUIPMENT:
Property and Equipment consists of the following:
December 31, December 31,
2004 2003
------------- -------------
Furniture and leasehold improvements $ 201,249 $ 16,559
Equipment and software 2,957,035 2,000,617
------------- -------------
Total 3,158,284 2,017,176
Less accumulated depreciation and
amortization (1,742,212) (875,289)
------------- -------------
Net property and equipment $ 1,416,072 $ 1,141,887
============= =============
F-19
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
NOTE 6 - INTANGIBLE ASSETS:
The Intangible Assets recognized from the North Star acquisition is comprised of
the following as of December 31, 2004:
Contractual Technological
Patent Backlog Know-how Total
------------------------------------------------------------
Intangible assets subject to amortization: $ 34,000 $ 37,000 $ 212,000 $ 283,000
2004 Amortization (1,700) (9,250) (10,600) (21,550)
------------------------------------------------------------
Net intangible asset $ 32,300 $ 27,750 $ 201,400 $ 261,450
============================================================
Estimated amortizable life 5 years 1 year 5 years
Amortization expense related to purchased intangible assets was $21,550 for the
year ended December 31, 2004.
Intangible assets not subject to amortization represent Tradename in the amount
of $603,000 as of December 31, 2004.
NOTE 7 - ACCRUED EXPENSES:
Accrued expenses consist of accruals for professional fees, deferred rent,
interest on note payable to stockholder, payroll liabilities and warranty
claims. Included in the acquisition of North Star's assets, the Company assumed
liabilities for warranty claims against the purchased assets for $40,000. The
warranty is for products sold within the past year and will be re-evaluated
throughout the year.
Aggregate Product Warranty Liability:
-----------------------------------------------------------------
Beginning Balance September 30, 2004 $40,000
Payments made under warranties --
Change for accruals related to product warranties --
Change for accruals related to preexisting
warranties --
-------
Ending Balance December 31, 2004 $40,000
=======
F-20
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
Accrued expenses consisted of the following at December 31, 2004 and 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Payroll Liability $309,818 $ 30,057
Deferred Rent 52,874 333,117
Warranty Reserve 40,000 --
Insurance Premium Financing 199,171 --
Other 239,204 2,034
----------------- -----------------
Total Accrued Expenses $641,896 365,208
================= =================
NOTE 8 - NOTE PAYABLE TO STOCKHOLDER:
The Company's Chairman, a significant stockholder, has provided funds from the
inception of the Company under a revolving credit arrangement. The maximum
amount borrowed was $5.3 million. After pay down of $500,000 and contribution of
$2 million of the revolving credit into equity in the first quarter of 2004, the
remainder of $2.8 million was incorporated into a new $3 million revolving
credit arrangement with the same terms as the original revolving credit
agreement. The note payable to stockholder bears interest at a variable annual
rate equal to the prime rate plus two percent (2%), is due upon demand subject
to Board approval, and is collateralized by the assets of our subsidiary,
Ionatron Technologies, Inc. $2.8 million and $4.3 million were outstanding under
the revolving credit arrangements at December 31, 2004 and December 31, 2003,
respectively. Interest paid to stockholder was approximately $211,000 and
$196,000 for the year ended December 31, 2004 and 2003, respectively.
NOTE 9 - STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
The Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, rights and preference as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights; which could adversely affect
the voting power or other rights of the holders of the Company's common stock.
No shares of the preferred stock are outstanding.
COMMON STOCK:
On April 29, 2004, our stockholders approved the increase in our authorized
common stock to 100,000,000 shares. A Rights Agreement commonly known as a
"poison pill", currently exists which provides that in the event an individual
or entity becomes a beneficial holder of 12% or more of the shares of our
capital stock, without the approval of the Board of Directors other stockholders
of the Company shall have the right to purchase shares of our (or in some cases,
the acquirer's) common stock from the Company at 50% of its then market value.
In connection with the Merger, the Board of Directors approved the acquisition
of greater than 12% of our capital stock by both our Chairman and Chief
Executive Officer.
STOCK WARRANT AND DEVELOPMENT AGREEMENT:
In October 2003, we entered a Development Agreement with a third party whereby
the Company issued a warrant, which expires October 2008, to purchase 1,028,076
common shares at $0. All non-financial terms of development agreements are
considered classified information by the U.S. Government, including the identity
of the third party. The initial $500,000 payment under the agreement was
considered as payment for the warrant and was recorded as additional
paid-in-capital. 1,028,076 shares of common stock issued in the Merger were held
in escrow pending issuance under the warrant. In a subsequent agreement with the
third party, we terminated the Development Agreement and the Warrant was
converted into 725,000 shares of common stock in November 2004.
F-21
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
STOCK OPTIONS AND WARRANTS:
At December 31, 2004 there were options and warrants to purchase approximately
4.3 million shares of common stock outstanding. Options and warrants issued by
USHG covering approximately 5.5 million shares of common stock exercisable, at
exercise prices ranging from $0.25 to $5.00 until 2013 were outstanding at the
date of the merger. Subsequent to the Merger and through December 31, 2004,
options to purchase 1,758,925 shares of common stock were granted and options to
purchase 1,955,083 shares of common stock were exercised. Of the total options
granted, options to purchase 300,000 shares with an exercise price of $3.00 were
granted to consultants for services provided in connection with the Merger, in
which the value of the options and related merger costs were both charged to
additional paid in capital, which netted to zero. Options to purchase 100,000
shares with an exercise price of $5.05 were granted to a non-employee for
consultant services which was charged to expense and recorded as additional paid
in capital. The remainder, some of which vest at date of grant and others which
vest over one year to four year periods, were granted to directors and employees
and have exercise prices ranging from $2.85 to $8.79. We may issue up to
3,000,000 shares of common stock at terms and conditions approved by the Board
at dates of issuances under the stock incentive plan approved by our
stockholders on April 29, 2004. As of December 31, 2004, options to purchase
651,425 shares have been granted under this plan.
A summary of the activity of options under the plan follows:
Number of Weighted Average
Options Exercise Price
--------------- ----------------
Outstanding at March 18, 2004: 3,908,833 $ 0.72
Granted 1,758,925 4.30
Exercised (1,955,083) 1.24
Forfeited (64,750) 3.84
--------------- ----------------
Outstanding at December 31, 2004 3,647,925 $ 2.34
=============== ================
Additional information about outstanding options to purchase the Company's
common stock as of December 31, 2004 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Weighted Avg. Weighted Weighted
Remaining Avg. Avg.
Number of Contractual Life Exercise Number of Exercise
Exercise Price Shares (In Years) Price Shares Price
- --------------- ------------- ------------------ ------------- ------------- -------------
$0.48 - $0.75 1,954,250 4.21 $ 0.63 1,954,250 $ 0.63
$2.85 - $5.77 1,478,300 4.17 $ 3.81 772,208 4.16
$6.00 - $8.79 215,375 4.73 $ 7.71 -- --
------------- -------------
Total 2,726,458 $ 1.63
============= =============
F-22
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
A summary of the activity of warrants follows:
Number of Weighted
Underlying Average Exercise
Shares Price
-------------- ----------------
Outstanding March 18, 2004 1,597,426 $ 0.39
Granted -- $ --
Exercised $ (989,966) $ 0.25
Forfeited -- $ --
-------------- ----------------
Outstanding December 31, 2004 607,460 $ 0.63
============== ================
Additional information about outstanding warrants to purchase the Company's
common stock as of December 31, 2004 is as follows:
Warrants Outstanding Warrants Exercisable
-------------------------------------------------------- --------------------------------
Weighted Avg.
Remaining
Number of Contractual Weighted Avg. Number of Weighted Avg.
Exercise Price Shares Life(In Years) Exercise Price Shares Exercise Price
- --------------------- ---------------- ---------------- ---------------- ------------ ----------------
$0.63 607,460 4.21 $0.63 607,460 $0.63
------------ ----------------
Total 607,460 $0.63
============ ================
NOTE 10 - SIGNIFICANT CUSTOMERS:
The majority of our customers are either the U.S. Government or contractors to
the U.S. Government and represented 99% and 100% of revenues for 2004 and 2003,
respectively.
NOTE 11 - RETIREMENT PLANS:
We established a 401(k) plan for the benefit of our employees. We may make
discretionary contributions to the plan. In the fiscal year 2004, the Company
contributed $3,600 to the 401(k) plan. In the fiscal years 2003 and 2002, the
Company did not contribute to the 401(k) plan.
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES:
We lease office, manufacturing and storage space at our Tucson facility at an
annual rental of $330,000 under a non-cancelable operating lease agreement from
a company that is majority owned by our Chairman and other principal
stockholders. The lease expires in November 2012, contains renewal options and
an escalation provision at the end of five years that increases our annual rent
by $49,500. We are also responsible for certain property related costs,
including insurance, utilities and property taxes. Rent expense was
approximately $411,000, $355,000 and $73,000 for 2004, 2003 and 2002,
respectively.
F-23
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
We also lease office, manufacturing and storage space at our Albuquerque
facility. In November 2004, we entered into the fourth amendment to that
operating lease which increased the leased premises to an annual rental of
approximately $99,420. The lease expires in August 2007 and contains an
escalation provision for the last 12 months of the lease that increases our
annual rent by $2,900. The amended lease also contains an early termination
provision effective after July 1, 2006 which is permissible with a 120 day
advance notice and a payment of approximately $15,000. We are also responsible
for certain property related costs, including insurance and utilities.
The Company also leases vehicles in both the Tucson and Albuquerque facilities
to facilitate our material purchasing activities. These lease commitments total
approximately $854 per month. We are responsible for registration, licensing and
insurance costs.
Future annual minimum lease payments under these leases are:
Years ending December 31, Amount
------------------------------ ----------
2005 $ 439,663
2006 434,287
2007 404,420
2008 379,500
2009 379,500
Thereafter 1,091,063
---------
Total $ 3,128,433
==========
In addition, we have entered into a lease for office, manufacturing and
warehouse facilities at the Stennis Space Center in Mississippi that is expected
to be available for occupancy early April 2005. The lease is for a five-year
term with the annual rent increasing from $266,000 in the first year to $280,000
in the final year for an aggregate commitment of $1,367,000. The lease may be
renewed three times in five-year increments. The facility is being improved by
the landlord to make the space ready for lease and these improvements must be
completed before we will take possession. We do not have access to or control
over the facility and have no financial obligations until the improvements are
completed to our satisfaction and the property is turned over to us. We are not
subject to any incentives or allowances for leasehold improvements from the
landlord. We have paid a $22,000 deposit on the building and will be required to
pay another $22,000 deposit upon acceptance.
F-24
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
CAPITALIZED LEASE:
We rent office equipment under a capitalized lease agreement with approximately
$227 in monthly payments which expires in 2007.
Future annual minimum lease payments under these leases are:
Years ending December 31, Amount
------------------------- ------
2005 $ 2,724
2006 2,724
2007 908
-------
Total payments $ 6,356
Less interest (439)
-------
Total principal $ 5,917
=======
GUARANTEES:
We agree to indemnify our officers and directors for certain events or
occurrences arising as a result of the officers or directors serving in such
capacity. The term of the indemnification period is for the officer's or
director's lifetime. The maximum amount of future payments that we could be
required to make under these indemnification agreements is unlimited. However,
we maintain a director's and officer's liability insurance policy that limits
our exposure and enables us to recover a portion of any future amounts paid. As
a result, we believe the estimated fair value of these indemnification
agreements is minimal because of our insurance coverage and we have not
recognized any liabilities for these agreements as of December 31, 2004.
LITIGATION:
We may from time to time be involved in legal proceedings arising from the
normal course of business. As of the date of this report, we were not involved
in any legal proceedings.
F-25
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
NOTE 13 - INCOME TAXES:
Prior to January 1, 2004, we elected to be taxed as a Subchapter S-corporation
with the individual shareholders reporting their respective share of our losses
on their income tax return. Accordingly, we have no deferred tax assets or
liabilities arising in prior periods except as discussed in the following
paragraphs to this note. On January 1, 2004, we terminated our sub-chapter S
election and converted to a C corporation.
The components of the provision for income taxes are as follows:
December 31, 2004
-------------------
Current:
- --------
Federal $ --
State --
-------------------
Total Current --
Deferred:
- ---------
Federal (7,841)
State (1,736)
-------------------
Total Deferred (9,577)
-------------------
Total provision for income taxes $ (9,577)
===================
The Company's provision for taxes differed from the statutory rate primarily due
to $1.1 million change in the deferred tax asset valuation allowance from March
18, 2004, the date of the merger with USHG.
Deferred tax assets (liabilities) consist of the following:
December 31,
2004
------------
DEFERRED TAX ASSETS:
Accruals & Reserves $ 166,817
Depreciation and Amortization 109,836
Tax Credit Carryforwards 366,221
Net Operating Loss 15,455,319
Capital Loss Carryforwards 176,775
Goodwill Amortization (9,577)
Valuation Allowance (16,274,968)
------------
Total Deferred Tax Assets $ (9,577)
============
The net change in the valuation allowance for the year ended December 31, 2004
was an increase of approximately $1.1 million. Management believes that
sufficient uncertainty exists regarding the future realization of the Company's
deferred tax assets and thus a full valuation allowance is required.
At December 31, 2004, the Company had approximately $42.5 million of Net
Operating Loss ("NOL") carryforwards for federal income tax reporting purposes.
Of this amount, approximately $27.1 million is attributable to losses that were
incurred prior to a "change in ownership" as defined by Internal Revenue Code
rules and, accordingly, have been limited to this amount through the valuation
allowance. The amount that can be utilized each year is fixed; however, annual
limitation amounts not previously utilized carry over to subsequent years and
can be utilized to the extent of the total unexpired NOL carryforward amount.
The pre-change of control NOL carryforwards will begin to expire in 2020.
F-26
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
At December 31, 2004, the Company had approximately $15.4 million of Net
Operating Loss ("NOL") carryforwards for state income tax reporting purposes.
Utilization of these NOL's may be subject to substantial annual limitation due
to the ownership change limitations provision of the respective states.
As of December 31, 2004, we have cumulative unused research and development tax
credits of approximately $63,000 and $60,000 which can be used to reduce future
federal and Arizona income taxes, respectively. We also have federal minimum tax
credit carryforwards of $244,000. Federal research and development credit
carryforwards expire beginning 2025. The Arizona research and development
credits will begin to expire in 2020. The federal minimum tax credit
carryforwards are not subject to expiration under current federal tax law.
Utilization of the company's net operating loss carryforwards and tax credits
may be subject to substantial annual limitations and restrictions due to the
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. Such annual limitations and other restrictions could result in
the expiration or elimination of the net operating loss carryforwards and tax
credit carryforwards in whole or part before utilization. A valuation allowance
was provided in full against the Company's net operating loss carryforwards and
tax credits acquired in the merger with USHG and recapitalization of Ionatron on
March 18, 2004. The benefit from any future reduction in this valuation
allowance will be recorded as an increase in additional paid-in capital.
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION:
For the
Period June 3
Through
Year Ended December 31, December 31,
2004 2003 2002
------------------------------------------
Non-Cash Investing and Financing Activities:
Conversion of note payable to common stock $ 2,000,000 $ -- $ --
Equipment purchased under capital lease 7,462 -- --
Shares delivered to consultants for services
performed 206,355 -- --
Shares issued in acquisition 1,700,000 -- --
Acquisition cost accrued 15,000 -- --
Assets and Liabilities in North Star Acquisition:
Current and other assets, net of cash
acquired (244,355) -- --
Property and equipment (20,333) -- --
Goodwill (1,487,889) -- --
Intangible assets (886,000) -- --
Account payable and accrued expenses 350,338 -- --
F-27
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
NOTE 15 - INDUSTRY SEGMENTS:
The Company is currently engaged in developing and marketing through two
distinct segments: (1) Ionatron, Inc., where the focus is on Directed Energy
Weapon technology products for sale to the U.S. Government and (2) North Star
Research Acquisition Corp., which was acquired September, 30 2004, where the
focus is on the manufacture of custom high voltage equipment for sale in a more
broad-based market. Prior to the acquisition of North Star Research, there was
only one segment.
SEGMENT INFORMATION FOR 2004:
INTEREST INTEREST NET IDENTIFIABLE
BUSINESS SEGMENT REVENUES INCOME EXPENSE LOSS ASSETS
---------------- ------------ ------------ ------------ ------------ ------------
Ionatron $ 10,570,396 $ 45,907 $ 215,593 $ (3,227,793) $ 12,371,883
North Star 568,001 215 -- (33,212) 2,753,210
----------------------------------------------------------------------
Total Company 11,138,397 46,122 215,593 (3,261,005) 15,125,093
Intersegment (207,875) -- -- -- (172,202)
Investment in Subsidiary -- -- -- -- (2,415,000)
----------------------------------------------------------------------
Consolidated Company $ 10,930,522 $ 46,122 $ 215,593 $ (3,261,005) $ 12,537,891
======================================================================
F-28
IONATRON, INC.
NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004
NOTE 16 - QUARTERLY OPERATING RESULTS (UNAUDITED):
Quarterly operating results for 2004 and 2003 were as follows:
1ST 2ND 3RD 4TH
------------ ------------ ------------ ------------
2004
Revenues $ 272,442 $ 1,833,572 $ 2,628,982 $ 6,195,526
Gross profit 17,442 106,819 187,739 524,143
Operating loss (841,378) (1,332,270) (863,139) (45,654)
Net loss $ (915,894) $ (1,354,233) $ (896,026) $ (94,852)
Weighted average number of
shares outstanding, basic
and diluted 51,428,571 69,079,967 69,814,859 70,625,259
Basic and diluted net loss per
share (0.02) (0.02) (0.01) (--)
2003
Revenues $ -- $ -- $ 148,586 $ 234,687
Gross profit -- -- 10,712 15,739
Operating loss (959,050) (1,004,019) (762,816) (320,035)
Net loss $ (992,861) $ (1,051,565) $ (815,648) $ (382,035)
Weighted average number of shares
outstanding, basic and diluted 48,452,249 48,452,249 48,452,249 48,452,249
Basic and diluted net loss per
share (0.02) (0.02) (0.02) (0.01)
F-29