UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: JUNE 30, 2003
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Commission File Number: 0-22991
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ONSPAN NETWORKING, INC.
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(Exact name of small business issuer as specified in its charter)
NEVADA 87-0460247
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(State of Incorporation) (IRS Employer ID No)
6413 CONGRESS AVENUE, SUITE 230, BOCA RATON, FL 33487
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(Address of principal executive office)
(561) 988-2334
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of registrant's common stock, par value $.012
per share, as of August 14, 2003 was 968,677.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
ONSPAN NETWORKING, INC. AND SUBSIDIARY
INDEX
Page
No.
Part I. Unaudited Financial Information
Item 1. Condensed Consolidated:
Balance Sheet - June 30, 2003 .................................... 3
Statements of Operations -
Three and Nine Months Ended June 30, 2003 and 2002 ............... 4
Statement of Stockholders' Equity -
Nine Months Ended June 30, 2003 .................................. 5
Statements of Cash Flows -
Nine Months Ended June 30, 2003 and 2002 ......................... 6-7
Notes to Financial Statements -
Nine Months Ended June 30, 2003 and 2002 ......................... 8-14
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations ........................................15-22
Part II.
Item 1. Legal Proceedings ................................................ 22
Item 5. Other Information ................................................ 23
Item 6. Exhibits and Reports Form 8-K ....................................23-24
SIGNATURE ................................................................. 25
EXHIBIT INDEX ............................................................. 26
2
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 124,932
Marketable equity securities ................................ 55,000
Deposits .................................................... 1,004
Inventory - Home ............................................ 1,444,365
-----------
Total current assets .......................................... 1,625,301
Property and equipment, net ................................... 1,598
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$ 1,626,899
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................ $ 54,504
Accrued dividend ............................................ 30,946
Loan Payable ................................................ 675,000
Amounts due to purchasers of discontinued operations ........ 55,929
-----------
Total current liabilities ..................................... 816,379
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value; authorized 12,500
shares; issued and outstanding 2,713 shares;
liquidation preference $271,300 ........................... 2
Common stock, $.012 par value. Authorized 8,333,333
shares; issued and outstanding 968,677 shares ............. 11,624
Paid-in capital ............................................. 7,873,709
Accumulated deficit ......................................... (7,074,815)
-----------
Total stockholders' equity .................................... 810,520
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$ 1,626,899
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See accompanying notes to condensed consolidated financial statements.
3
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- -----------
COSTS AND EXPENSES:
Salaries and wages ............... 39,000 21,000 118,000 57,000
Other selling, general and
administrative expenses ........ 74,184 37,445 133,473 169,007
--------- --------- --------- -----------
113,184 58,445 251,473 226,007
--------- --------- --------- -----------
Loss from operations ............... (113,184) (58,445) (251,473) (226,007)
OTHER INCOME (EXPENSE):
Interest income .................. 2,215 5,224 9,537 18,475
Unrealized (loss) on
marketable equity securities ... 24,000 (3,000) (25,000) (367,000)
Interest expense ................. (100,575) - (100,575) -
Other expense .................... - (694) (30,000) (1,795)
--------- --------- --------- -----------
Total other income (expense) ... (74,360) 1,530 (146,038) (350,320)
--------- --------- --------- -----------
Loss before income taxes and
discontinued operations........... (187,544) (56,915) (397,511) (576,327)
Income tax (benefit) expense ....... - 157,615 - 86,477
--------- --------- --------- -----------
Loss from continuing operations .... (187,544) (214,530) (397,511) (662,804)
Loss from discontinued operations .. - (525,770) - (540,457)
--------- --------- --------- -----------
Net loss ........................... (187,544) (740,300) (397,511) (1,203,261)
Dividends on preferred shares ...... - - - -
--------- --------- --------- -----------
Net loss applicable to
common shares .................... $(187,544) $(740,300) $(397,511) $(1,203,261)
========= ========= ========= ===========
Basic and diluted net loss per share
Continued operations ............. $ (0.19) $ (0.22) $ (0.41) $ (0.69)
========= ========= ========= ===========
Discontinued operations .......... $ - $ (0.55) $ - $ (0.56)
========= ========= ========= ===========
Total .......................... $ (0.19) $ (0.77) $ (0.41) $ (1.25)
========= ========= ========= ===========
Weighted average shares outstanding
Basic ............................ 968,677 964,552 968,677 964,552
========= ========= ========= ===========
Diluted .......................... 968,677 964,552 968,677 964,552
========= ========= ========= ===========
See accompanying notes to condensed consolidated financial statements.
4
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
Preferred Stock Common Stock Paid-in Accumulated
Shares Par Value Shares Par Value Capital Deficit Total
------ --------- ------ --------- ------- ------- -----
Balance,
September 30, 2002 2,713 $2 968,677 $11,624 $7,773,134 $(6,677,304) $ 1,107,456
Issuance of options
for loan payable . - - - - $ 100,575 - 100,575
Net (loss) ........ - - - - - (397,511) (397,511)
----- -- ------- ------- ---------- ----------- -----------
Balance,
June 30, 2003 .... 2,713 $2 968,677 $11,624 $7,873,709 $(7,074,815) $ 810,520
===== == ======= ======= ========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
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Cash flows from operating activities
Net loss .............................................. $ (397,511) $(1,203,261)
Less: Loss from discontinued operations,net ........... - (540,457)
----------- -----------
Loss from continuing operations ....................... $ (397,511) $ (662,804)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation ........................................ 681 658
Stock options granted in loan agreement ............. 100,575
Deferred income taxes ............................... - 42,643
Unrealized loss from marketable securities .......... 25,000 367,000
Change in assets and liabilities (excluding
effects of acquisitions):
Income tax receivable ............................. 45,147 105,843
Inventory - home .................................. (1,445,369) -
Prepaid expenses .................................. 11,833 (33,639)
Accounts payable .................................. 48,965 6,000
Accrued expenses .................................. 30,000 -
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Net cash used in operating activities ................. (1,580,679) (174,299)
----------- -----------
Cash flows from investing activities
Capital expenditures ................................ - (1,589)
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Net cash used in investing activities ................. - (1,589)
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Cash flows from financing activities
Loan from Eone ...................................... 675,000 -
Payment of notes payable ............................ - (12,629)
Payment to purchasers of discontinued operations .... - (44,531)
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Net cash used in financing activities ................. 675,000 (57,160)
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Net decrease in cash and cash equivalents from
continuing operations ............................... (905,679) (233,048)
Net cash provided by discontinued operations .......... - 28,258
Net (decrease) in cash and cash equivalents ........... (905,679) (204,790)
Cash and cash equivalents, beginning of period
from continuing operations .......................... 1,030,611 1,283,673
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Cash and cash equivalents, end of period .............. $ 124,932 $ 1,078,883
=========== ===========
Continued
See accompanying notes to condensed consolidated financial statements.
6
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(Continued)
2003 2002
----------- -----------
Supplemental Cash Flow Information
Cash paid for interest and income taxes are as follows:
Interest ............................................ $ - $ -
Income taxes ........................................ $ - $ -
Financed insurance premiums ........................... $ - $ 57,000
See accompanying notes to condensed consolidated financial statements.
7
ONSPAN NETWORKING, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
A. ORGANIZATION
Onspan Networking, Inc. (the "Company" or "Onspan"), a Nevada corporation, is a
holding company. The financial statements include the accounts of the Company
and the discontinued operations of InterLAN Communications, Inc. ("InterLAN")
(http://www.interlancom.com). Onspan changed its name from Network Systems
International, Inc. effective February 10, 2001.
Originally incorporated in 1985, as Network Information Services, Inc., Network
Systems International, Inc. ("NESI"), a Nevada corporation, was the surviving
corporation of a reverse merger completed in April 1996. The Company became a
publicly traded entity in connection with the re-organization.
On July 10, 1998, the Company's stock was officially approved for listing on the
NASDAQ small cap market and the Company's common stock began trading on NASDAQ
Small Cap under the symbol NESI. As of April 2, 2002, the securities were
de-listed from the Nasdaq SmallCap market and now trade on the Over-The-Counter
Bulletin Board under the symbol ONSP.
On November 10, 2000, Onspan completed the acquisition of 100% of the issued and
outstanding common stock of InterLAN, a Virginia corporation.
On August 5, 2002, the Company sold and transferred the stock of its
wholly-owned subsidiary, InterLAN Communications, Inc. to G. Anthony Munno,
Martin Sainsbury Carter and Brian Ianniello, who were executives and employees
of InterLAN. In exchange for the assignment of the InterLAN stock, Messrs.
Munno, Carter and Ianniello transferred 21,168 shares of Onspan common shares,
and Onspan was relieved of substantially all obligations and guarantees provided
to third parties. Onspan also retained the right to a certain tax refund in
amount of $45,147 owing to InterLAN. These individuals also resigned in all
capacities as directors, officers and/or employees of Onspan. Onspan retained
the following assets of the corporation in cash of $1,078,883, the marketable
securities, the prepaid expenses, the entire income tax receivable, and $2,611
in property. The liabilities Onspan retained include the dividend payable amount
due to purchasers of discontinued operations, and the balance of the note
payable.
8
On April 22, 2003 the Company created a new subsidiary, Coventry 1 Inc. which
is a Nevada Corporation. The Company's other subsidiary OnSpan SmartHouse, Inc.,
is a Florida Corporation.
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation. These financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the year ended
September 30, 2002, which is included in the Company's Form 10-KSB for the year
ended September 30, 2002. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the complete year.
B. ACCOUNTING POLICIES
BASIS OF PREPARATION - The financial statements at June 30, 2003 and 2002,
include the accounts of the Company and the discontinued operations of InterLAN
Communications, Inc.
REVENUE AND COST RECOGNITION - The Company recognizes revenue from all
homebuilding activities at the closing of the sale using the deposit method.
During construction, all direct material and labor costs and those indirect
costs related to acquisition and construction are capitalized, and all customer
deposits are treated as liabilities. Capitalized costs are charged to earnings
upon closing. Costs incurred in connection with completed homes and selling,
general, and administrative costs are charged to expense as incurred. Provision
for estimated losses on uncompleted contracts and on speculative projects is
made in the period in which such losses are determined
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash and cash
equivalents, accounts receivable, marketable equity securities, notes
receivable, income taxes receivable, accounts payable, amounts due to purchasers
of discontinued operations and note payable approximate fair value as of June
30, 2003, because of the short maturity of these instruments.
9
INVESTMENT SECURITIES - Investments are classified into three categories as
follows:
o Trading securities reported at fair value with unrealized gains and
losses included in earnings;
o Securities available-for-sale reported at fair value with unrealized
gains and losses reported in other comprehensive income;
o Held-to-maturity securities reported at amortized cost.
PREFERRED STOCK - At June 30, 2003, the Company had 2,713 shares outstanding of
its Series A Convertible Preferred Stock ("Series A"). This issue has a stated
liquidation preference value of $100 per share redeemable at the Company's
option, has no voting rights, and each preferred share is convertible into 4
shares of the Company's common stock as adjusted for the 1 for 12 reverse stock
split. Dividends on the Series A were to be paid monthly in cash at a rate of
12% of the original issue. The Company's Board of Directors, elected for the
payment of cash dividends on its Series A to be suspended. This decision was
made in light of the general economic conditions. In particular, the Board took
such actions as necessary to preserve the Company's working capital in order to
ensure the continued viability of the Company. The Board of Directors is unable
at this time to predict if the Company will resume the payment of cash dividends
on its Series A 12% Cumulative Convertible Preferred Stock. However, the Company
has accrued dividends on these shares in the amount of $30,946 at June 30, 2003.
INCOME TAXES - The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, the liability method is used in accounting
for income taxes and deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK OPTION PLAN - The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its stock option plan. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
EARNINGS PER SHARE - The financial statements are presented in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share". Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution from the exercise or conversion of securities
into common stock.
10
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Expenditures
for significant renewals and improvements are capitalized. Repairs and
maintenance are charged to expense as incurred. Depreciation is computed using
an accelerated method for both financial and tax purposes based upon the useful
lives of the assets.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with current year
presentation.
C. MARKETABLE EQUITY SECURITIES
The cost of investment securities as shown in the accompanying balance sheet and
their estimated market value at June 30, 2003 is as follows:
2003
Trading securities:
Cost .............................. $ 504,000
Unrealized loss ................... (449,000)
---------
$ 55,000
=========
The Company included unrealized losses in the amount of $25,000 and $367,000 in
earnings for the nine months ended June 30, 2003 and 2002, respectively.
Unrealized gains and losses are recognized based on changes in the fair value of
the securities as quoted on national and inter-dealer stock exchanges.
D. DISCONTINUED OPERATIONS
2003 2002
Net Sales - Interlan ................ $ - $2,017,712
Loss from discontinued operations ... $ - $ (540,457)
==== ==========
Net income per common share
Basic ........................... - (.56)
Diluted ......................... - (.56)
11
E. EARNINGS PER SHARE
Basic earning (loss) per share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect per share amounts that
would have resulted if dilutive potential common stock had been converted to
common stock. The following reconciles amounts reported in the financial
statements:
2003 2002
Loss from continuing operations .................... $ (397,511) $ (662,804)
Loss from discontinued operations .................. - (504,457)
----------- -----------
Net loss ........................................... $ (397,511) $(1,203,261)
=========== ===========
Denominator for basic earnings per share -
Weighted average shares ............................ 968,677 964,552
Effect of dilutive securities - stock options ...... - -
----------- -----------
Denominator for diluted earnings per share -
Weighted average shares
adjusted for dilutive securities ................. 968,677 964,522
=========== ===========
Basic and diluted earnings (loss) per common share:
Loss from continuing operations .................... $ (.41) $ (.69)
Loss from discontinued operations .................. - (.56)
----------- -----------
Net earnings (loss) ................................ $ (.41) $ (1.25)
=========== ===========
F. OPTION AGREEMENT
On June 19, 2003 the Company granted 67,500 stock options to Evolve One Inc in a
revolving note agreement see footnote G. The options have an exercise price of
$.10 per share. The Company also granted on June 19, 2003 607,500 stock options
to Evolve One Inc in the same note agreement. These options have an exercise
price of $.30 per share. The Company recognized a non-cash interest expense of
$100,575 during the nine month period ended June 30, 2003.
G. REVOLVING CREDIT NOTE
The Company has a demand line of credit with a related party, totaling
$1,000,000, under which the Company may borrow on an unsecured basis at 5%
annually. There was $675,000 outstanding under this line of credit at June 30,
2003.
12
The terms of the demand line of credit state that the Company must issue options
to purchase common stock equal to 10% of the dollar amount of the loan advance
at an exercise price of $0.10 per share, and options to purchase common stock
equal to 90% of the dollar amount of the loan advance at the ten trading day
average at the time of the draw ($0.30 at June 30, 2003). Under these terms, the
Company issued 675,000 stock options resulting in a charge to interest expense
of $100,575.
H. CONCENTRATIONS
GEOGRAPHICAL
Currently, all of the Company's material revenues to be derived in 2004 are from
Palm Beach County within the State of Florida. Accordingly, the Company could be
adversely affected by natural disasters, such as hurricanes or other tropical
storms or events, economic downturns, significant unemployment, and other
economic conditions that may occur from time to time in Florida, which may not
have as much impact on more geographically diversified competitors.
FINANCIAL
The Company is currently reliant on construction/mortgage financing provided by
only one lender. Any financial or legal impairment of this lender may have an
impact on our current projects. An impairment of our lender may force the
Company to cancel outstanding projects, may cause project delays or may
ultimately force the Company to sell its projects.
I. GOING CONCERN ISSUES - LEGAL PROCEEDINGS
The accompanying condensed financials were prepared assuming that the Company
will continue as a going concern. The Company is currently a party to several
legal proceedings and although the Company will vigorously defend all of these
actions, the Company is unable to estimate with any reasonable certainty what
liability it may have to these litigants. There are no assurances that the
Company will be successful in defending these legal proceedings, or if
successful the cost of defending these legal proceedings may significantly
deplete the capital of the Company impairing the Company's ability to continue
as a viable entity. Accordingly, there are no assurances that the Company will
be successful in achieving the above plans, or that such plans, if consummated,
will enable the Company to obtain profitable operations or continue as a going
concern.
13
J. LEGAL PROCEEDINGS
1. Network Systems International of North Carolina, Inc. v Network Systems
International, Inc. and OnSpan Networking, Inc. (02-CvS-10154) (Complaint filed
September 13, 2002). This action asserts a claim for beach of contract against
the Company, seeking certain tax refunds obtained by the Company. The plaintiff,
a former subsidiary of the Company, claims that these tax refunds belong to the
plaintiff. The Company has filed an answer disputing the amounts claimed and
seeking reimbursement for certain expenses incurred by the Company on behalf of
the plaintiff. The parties have engaged in settlement discussions which have
been unsuccessful to date.
2. Securities Actions:
a. Richard T. Clark and Joel C. Holt v. OnSpan Networking, Inc. and Herbert
Tabin, Case No. 03-CV-298K (N.D. Okla.) (Removed from state court May 1, 2003);
This action assets claims for violation of Oklahoma securities law, fraud,
breach of contract, and breach of fiduciary duties. The action seeks damages in
the amount of $300,000, for each plaintiff, the plaintiffs' attorneys fees and
costs, and certain other relief. The case was filed in Oklahoma State court on
March 28, 2003, and it was removed to federal court on May 1, 2003. The Company
has filed a Motion to Dismiss the matter.
b. D. Mark White v OnSpan Networking, Inc. and Herbert Tabin, Case No. 352198686
03 (District Court, Tarrant County Texas) (Complaint filed May 2, 2003) This
action assets claims for violation of Texas securities law, fraud, and breach of
fiduciary duties. The action seeks unspecified damages, restitution in the
amount of $300,000, punitive damages, pre-judgment interest, the plaintiffs'
attorneys fees and costs, and certain other relief. The case was filed in Texas
state court on May 2, 2002. The Company has filed a Motion to Dismiss
Plaintiff's Amended Complaint.
No discovery has taken place in either of these two actions. The Company will
vigorously defend both of these actions.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The Company has identified the policies outlined below as critical to its
business operations and an understanding of its results of operations. The
listing is not intended to be a comprehensive list of all of the Company's
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States, with no need for management's judgment in their
application. The impact and any associated risks related to these policies on
the Company's business operations is discussed throughout Management's
Discussion and Analysis or plan of operations where such policies affect the
Company's reported and expected financial results. For a detailed discussion on
the application of these and other accounting policies, see the Notes to
Consolidated Financial Statements. The Company's preparation of the financial
statements requires it to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. There can be no
assurance that actual results will not differ from those estimates.
HISTORY OF BUSINESS
Originally incorporated in 1985, as Network Information Services, Inc., Network
Systems International, Inc. ("NESI"), a Nevada corporation, was the surviving
corporation of a reverse merger completed in April 1996. The Company became a
publicly traded entity in connection with the re-organization. On July 10, 1998,
the Company's stock was officially approved for listing on the NASDAQ small cap
market and the Company's common stock began trading on NASDAQ Small Cap under
the symbol NESI. As of April 2, 2002, the securities were de-listed from the
Nasdaq SmallCap market and now trade on the Over-The-Counter Bulletin Board(R)
under the symbol ONSP.
Effective February 10, 2001 the Company changed its name from Network Systems
International, Inc., to Onspan Networking, Inc. (the "Company" or "Onspan"). On
October 9, 2001, the Company affected a 1 for 12 reverse stock split of its
issued and outstanding common stock.
PLAN OF OPERATION
Prior to August 5, 2002, the Company, a Nevada corporation, was a holding
Company, that through its wholly owned subsidiary, InterLAN Communications, Inc.
("InterLAN"), developed data communications and networking infrastructure
solutions for business, government and education. Following August 5, 2002, the
Company, announced a change in its strategy and subsequently sold its operating
division InterLAN.
15
The Company's recently changed its business focus to residential real estate
development and building construction services. From 1985 until 2002, the
Company's business primarily concentrated on sales of computer hardware and
software. In April of 2003, the Company changed its focus to investing in and
revitalizing single family homes in established residential neighborhoods in
suburban areas. In April 2003, the Company entered into contract to purchase its
first property and left a deposit of $130,000. The Company closed on this
property on June 19, 2003. The Company has entered into a contract with Garcia
Brenner & Stromberg architects to design the project. The Company intends to
renovate and expand the existing single-family home project on this site. This
project, known as Coventry 1 Inc., has entered into the permitting stage.
REAL ESTATE DEVELOPMENT INDUSTRY
Ownership of properties in the categories of which the Company invests is highly
fragmented among individuals, partnerships, public and private corporations, and
REITs. No single entity or person dominates the market for such properties. At
any given time, a significant number of home properties as well as individual
lots and tracts suitable for single-family homes are available for purchase in
the various markets where the Company may seek additional acquisitions. Industry
risks include environmental hazards; changes in general or local economic
conditions; changes in interest rates and the availability of permanent mortgage
financing which may render the acquisition, sale, or refinancing of a property
difficult or unattractive and which may make debt service burdensome; changes in
real estate and zoning laws; changes in income taxes, real estate taxes, or
federal or local economic or rent controls; floods, earthquakes, and other acts
of nature; and other factors beyond the control of any firm involved in the real
estate development industry. Further, the Company, as other companies it size,
will in all probability continue to encounter problems in obtaining contractors
who, in turn, are able to obtain performance bonds for building contracts;
obtaining bank financing for construction; and obtaining financing without
personal guarantees of its officers and directors, all of which materially
adversely affect its ability to carry on its business. The illiquidity of real
estate investments generally may impair an industry participant's ability to
respond promptly to changing circumstances. See "Risk Factors," below.
CERTAIN RISK FACTORS CERTAIN FACTORS ASSOCIATED WITH REAL ESTATE AND RELATED
INVESTMENTS.
The Company is subject to the risks associated with ownership, operation, and
financing of real estate. These risks include, but are not limited to, liability
for environmental hazards; changes in general or local economic conditions;
changes in interest rates and the availability of construction and permanent
mortgage financing which may render the acquisition, sale, or refinancing of a
property difficult or unattractive and which may make debt service burdensome;
changes in real estate and zoning laws; bonding requirements; permitting
requirements, changes in income taxes, real estate taxes, or federal or local
economic or rent controls; floods, earthquakes, and other acts of nature;
16
and other factors beyond the company's control. The illiquidity of real estate
investments generally may impair the Company's ability to respond promptly to
changing circumstances. Under federal, state, and local environmental laws,
ordinances, and regulations, the Company may be liable for removal or
remediation costs, as well as other costs (such as fines or injuries to persons
and property) where our employees may have arranged for removal, disposal, or
treatment of hazardous or toxic substances. In addition, environmental laws
impose liability for release of asbestos-containing materials into the air, and
third parties can seek recovery from the Company for personal injury associated
with those materials.
LIMITED REVENUES; LIMITED RELEVANT OPERATING HISTORY; SIGNIFICANT AND CONTINUING
OPERATING LOSSES; NEGATIVE CASH FLOW; ACCUMULATED DEFICIT.
Since its change in focus the Company has not had any revenues from sales of its
properties. Accordingly, the Company has a limited relevant operating history
upon which an evaluation of its prospects can be made. Such prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in the establishment of a relatively new business in the real estate
development industry, which is a continually evolving industry characterized by
an increasing number of market entrants and intense competition, as well as the
risks, expenses and difficulties encountered in the real estate development and
building construction business. The Company prior to its change has incurred
operating losses and has an accumulated deficit of approximately $7,074,815.
There can be no assurance that the Company will be successful in generating
revenues at a sufficient quantity or margin or that the Company will ever
achieve profitable operations.
SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL CAPITAL.
The Company's capital requirements have been and will continue to be
significant. The Company has been dependent primarily on existing capital and a
credit line. Future capital needs may be satisfied by either the private
placement of equity securities and/or debt financings. The Company based on its
cash requirements and exposure to liability from shareholder lawsuits is unsure
if existing capital will be sufficient for the next twelve months. In the event
that the Company's plans (due to unanticipated expenses, delays, problems, or
otherwise), the Company would be required to seek additional funding. Any such
additional funding could be in the form of additional equity capital. The
Company is currently, contemplating, pursuing potential funding opportunities.
However, there can be no assurance that any of such opportunities will result in
actual funding or that additional financing will be available to the Company
when needed, on commercially reasonable terms, or at all. If the Company is
unable to obtain additional financing if needed, it will likely be required to
curtail its real estate development plans and may possibly cease its operations.
Any additional equity financings may involve substantial dilution to the
Company's then-existing shareholders.
17
MANAGEMENT OF GROWTH AND ATTRACTION AND RETENTION OF KEY PERSONNEL.
Management of the Company's growth may place a considerable strain on the
Company's management, operations and systems. The Company's ability to execute
any future business strategy will depend in part upon its ability to manage the
demands of a growing business. Any failure of the Company's management team to
effectively manage growth could have a material adverse affect on the Company's
business, financial condition or results of operations. The Company's future
success depends in large part on the continued service of its key management
personnel. The Company believes that its future success also depends on its
ability to attract and retain skilled technical, managerial and marketing
personnel. Competition for qualified personnel is intense. The Company has from
time to time experienced difficulties in recruiting qualified personnel. Failure
by the Company to attract and retain the personnel it requires could have a
material adverse affect on the financial condition and results of operations of
the Company.
VOLATILITY OF MARKET PRICE; ISSUANCE OF SUBSTANTIAL NUMBER OF SHARES; AUTHORIZED
SHARES; PROXY RULES.
The Company's Common Stock has been traded since 1994. The Company believes that
factors such as (but not limited to) the sale of common stock issued on
conversion of the Company's debentures, announcements of developments related to
the Company's business, fluctuations in the Company's quarterly or annual
operating results, failure to meet expectations, general economic conditions,
interest rate changes or money supply fluctuations and developments in the
Company's relationships with clients and suppliers will cause the price of the
Company's Common Stock to fluctuate substantially. In recent years the stock
market has experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. Such fluctuations
could adversely affect the market price of the Company's Common Stock.
PENNY STOCK REGULATIONS AND REQUIREMENTS FOR LOW PRICED STOCK.
The Commission adopted regulations which generally define a "penny stock" to be
any non-Nasdaq equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. Based upon the price of the Company's
Common Stock as currently traded on the OTC Bulletin Board, the Company's stock
is subject to Rule 15g-9 under the Exchange Act which imposes additional sales
practice requirements on broker-dealers which sell securities to persons other
than established customers and "accredited investors." For transactions covered
by this Rule, a broker-dealer must make a special suitability determination for
the purchaser and have received a purchasers written consent to the transaction
prior to sale. Consequently, the Rule may have a negative effect on the ability
of shareholders to sell common shares of the Company in the secondary market.
18
MANAGEMENT CONTROLS THE COMPANY'S FUNDS.
Management has broad discretion over how to spend the funds held by the Company.
Although management will endeavor to act in the best interests of the
shareholders, there can be no assurance that the decision to utilize proceeds
will prove profitable to the Company.
THE COMPANY MAY NOT BE SUCCESSFUL.
The Company is to compete in the competitive market of real estate development
and housing construction. The Company's prospects for success will depend on
management's ability to successfully market its lots or houses to buyers and its
apartment projects to renters. As a result, demand and market acceptance for our
projects is subject to a high level of uncertainty. The Company currently has
limited resources to undertake the activities that will be necessary to acquire
property and build real estate projects. If the Company is unable to expand its
efforts, it will not generate substantial additional revenues. Investors should
be aware that if the Company is not successful in the operation of its current
business, or any future acquisition endeavors, each investor's entire investment
in the Common Stock of the Company could become worthless. Even if the Company
is successful in our operations and potential acquisitions, it is not certain
that investors will derive a profit from investment in the Company.
THE COMPANY RELIES ON ITS MANAGEMENT.
The Company is dependent upon the members of management set forth herein. If the
current management is no longer able to provide services to the Company, its
business will be negatively affected.
ADDITIONAL DEBT, OR EQUITY FINANCING MAY AFFECT INVESTOR'S ABILITY TO SELL
COMMON STOCK.
The Company's common stock currently trades on the OTC Bulletin Board under the
symbol ONSP. Stocks trading on the OTC Bulletin Board generally attract a
smaller number of market makers and a less active public market and may be
subject to significant volatility. If the Company raises additional money from
the sale of its Common Stock, the market price could drop and investor's ability
to sell stock could be diminished. Further, even if the Company is able to
increase its authorized shares, there can be no assurance that it will be able
to obtain sufficient shareholder votes in the future for any such increase,
which votes are required by Nevada law.
DEFERRED TAX ASSET
The Company records a valuation allowance to reduce the carrying value of its
deferred tax assets to an amount that is more likely than not to be realized.
While the Company has considered future taxable income and prudent and feasible
tax planning strategies in assessing the need for the valuation allowance,
should the Company determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to the carrying value
of the deferred tax assets would be charged to income in the period in which
such determination was made. As of June 30, 2003, a 100% valuation allowance has
been established and no deferred tax asset recognized.
19
INVESTMENTS
Investments are classified as either available-for-sale or trading securities
and are held for resale in anticipation of short-term market movements or until
such securities are registered or are otherwise unrestricted. At June 30, 2003,
investments consisted entirely of common stock held for resale. Trading account
assets, consisting of marketable equity securities, are stated at fair value.
Unrealized gains or losses on trading securities are recognized in the statement
of operations on a monthly basis based on changes in the fair value of the
security as quoted on national or inter-dealer stock exchanges. Net unrealized
losses related to investments held for trading as of June 30, 2003, aggregated
($449,000).
Available-for-sale assets, which are also required to be reported at fair value,
with unrealized gains and losses excluded from earnings are reported as a
separate component of stockholders' equity (net of the effect of income taxes).
As of June 30, 2003, the Company held no available-for-sale securities.
DISCONTINUED OPERATIONS
On August 5, 2002, the Company sold and transferred the stock of its
wholly-owned subsidiary, InterLAN Communications, Inc. to G. Anthony Munno,
Martin Sainsbury Carter and Brian Ianniello, who were executives and employees
of InterLAN. In exchange for the assignment of the InterLAN stock, Messrs.
Munno, Carter and Ianniello transferred 21,168 shares of Onspan common shares,
and Onspan was relieved of substantially all obligations and guarantees provided
to third parties. Onspan also retained the right to a certain tax refund in
amount of $45,147 owing to InterLAN. These individuals also resigned in all
capacities as directors, officers and/or employees of Onspan. Onspan retained
the following assets of the corporation - cash of $1,078,883, the marketable
securities, the prepaid expenses, the entire income tax receivable, and $2,611
in property. The liabilities retained include the dividend payable, amount due
to purchasers of discontinued operations, and the balance of the note payable.
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. All statements other than statements of historical fact included in
this section or elsewhere in this report are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Exchange Act of 1934. Important factors that
could cause actual results to differ materially from those discussed in such
forward-looking statements include: 1. General economic factors including, but
not limited to, changes in interest rates and trends in disposable income; 2.
Information and technological advances; 3. Cost of products sold; 4.
Competition; and 5. Success of marketing, advertising and promotional campaigns.
20
Effective August 5, 2002 the Company completed the sale of its operating line of
business (InterLAN) as discussed under Discontinued Operations in Item 1,
accordingly, the following discussion will deal with the Company's Plan of
Operation. The operations of InterLAN, for the nine month period ended June 30,
2002 have been reclassified as loss from discontinued operations.
A. LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 2003, working capital decreased $296,255
to $808,922 from $1,105,177. During this same period, stockholders' equity
decreased $296,936 to $810,520 from $1,107,456. The decrease in stockholders'
equity consists of ($397,511) due to the net loss for the period, and $100,575
due to the issuance of the stock options to Evolve One Inc.
The accompanying condensed financials were prepared assuming that the Company
will continue as a going concern. The Company is currently a party to several
legal proceedings and although the Company will vigorously defend all of these
actions, the Company is unable to estimate with any reasonable certainty what
liability it may have to these litigants. There are no assurances that the
Company will be successful in defending these legal proceedings, or if
successful the cost of defending these legal proceedings may significantly
deplete the capital of the Company impairing the Company's ability to continue
as a viable entity. Accordingly, there are no assurances that the Company will
be successful in achieving the above plans, or that such plans, if consummated,
will enable the Company to obtain profitable operations or continue as a going
concern.
B. RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The Company's selling, general and
administrative expenses, including salaries and wages amounted to $251,473
during the nine months ended June 30, 2003 as compared to $226,007 during the
nine months ended June 30, 2002. The increase of $25,466 includes a increase of
$61,000 for salaries, and $55,000 for legal expense due to pending lawsuits, off
set by a decreases of ($33,000) for accounting fees, ($32,000) for insurance ,
($7,000) in costs related to annual shareholder meeting, ($4,500) in stock
transfer fees related to the reverse split, and ($13,400) in filing fees due to
being not listed on the Nasdaq .
INCOME TAXES - The Company recorded $141,263 in deferred income tax expense for
the nine-month period ended June 30, 2003, a 100% valuation allowance was taken
against this amount as of June 30, 2003. The Company recorded $(86,477) in
deferred income tax expense for the nine-month period ended June 30, 2002.
21
The North Carolina Department of Revenue has contacted the Company with regard
to state income taxes for the tax year ended September 30, 1999. Upon
investigation, the Company has determined that former management did not file a
state income tax return in North Carolina for that year although a return was
filed in Florida for that year. The Company is in the process of investigating
the situation and of evaluating what action should be taken as a result of the
inquiry by the North Carolina Department of Revenue. The Company has been unable
to estimate with any reasonable certainty what liability it may have to the
State of North Carolina.
MARKETABLE EQUITY SECURITIES - As of June 30, 2003, the Company held 100,000
shares of eResource Capital Group (AMEX:RCG)("eResource") with a cost basis of
$504,000 ($5.04 per share). For the nine months ended June 30, 2003, the Company
recorded an unrealized loss from trading securities of ($25,000) on the
Company's stock and had a quoted market value of $55,000 or $0.55 (fifty five
cents) per share.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Network Systems International of North Carolina, Inc. v Network Systems
International, Inc. and OnSpan Networking, Inc. (02-CvS-10154) (Complaint filed
September 13, 2002). This action asserts a claim for beach of contract against
the Company, seeking certain tax refunds obtained by the Company. The plaintiff,
a former subsidiary of the Company, claims that these tax refunds belong to the
plaintiff. The Company has filed an answer disputing the amounts claimed and
seeking reimbursement for certain expenses incurred by the Company on behalf of
the plaintiff. The parties have engaged in settlement discussions which have
been unsuccessful to date.
2. Securities Actions:
a. Richard T. Clark and Joel C. Holt v. OnSpan Networking, Inc. and Herbert
Tabin, Case No. 03-CV-298K (N.D. Okla.) (Removed from state court May 1, 2003);
This action assets claims for violation of Oklahoma securities law, fraud,
breach of contract, and breach of fiduciary duties. The action seeks damages in
the amount of $300,000, for each plaintiff, the plaintiffs' attorneys fees and
costs, and certain other relief. The case was filed in Oklahoma State court on
March 28, 2003, and it was removed to federal court on May 1, 2003. The Company
has filed a Motion to Dismiss the matter.
b. D. Mark White v OnSpan Networking, Inc. and Herbert Tabin, Case No. 352198686
03 (District Court, Tarrant County Texas) (Complaint filed May 2, 2003) This
action assets claims for violation of Texas securities law, fraud, and breach of
fiduciary duties. The action seeks unspecified damages, restitution in the
amount of $300,000, punitive damages, pre-judgment interest, the plaintiffs'
attorneys fees and costs, and certain other relief. The case was filed in Texas
state court on May 2, 2002. The Company has filed a Motion to Dismiss
Plaintiff's Amended Complaint.
No discovery has taken place in either of these two actions. The Company will
vigorously defend both of these actions.
22
ITEM 5. OTHER INFORMATION
There is no immediate family relationship between or among any of the Directors
and Executive Officers, except Ms. Dermer who is the sister-in-law of Mr. Tabin.
Evaluation of disclosure controls and procedures
As of the end of the period, the Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under
the supervision and with the participation of the Company's President and Chief
Financial Officer. Based upon that evaluation, they concluded that the Company's
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy the Company's disclosure obligations
under the Exchange Act.
Changes in internal controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
4.0 Long Term Incentive Stock Options Plan (1)
31.1 Certification of President Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of President Relating to a Periodic Report
containing Financial Statements Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Relating to a
Periodic Report containing Financial Statements Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
_________
(1) Incorporated by reference to the company's report on form S-8 dated
July 27, 2001
23
b. Reports on Form 8-K
1. Form 8-K filed with the Securities and Exchange Commission
October 16, 2001 announcing the Onspan Networking, Inc. (the
"Company"), filed a Certificate pursuant to Section 78.207 of
the Nevada Statutes whereby the Company decreasing the number
of issued and outstanding shares of common stock, par value
$.012, at a rate of one for twelve (1:12), and proportionately
decreasing the number of authorized shares of common stock at
a rate of one for twelve (1:12). As a result, the Company's
authorized common stock has been reduced from 100,000,000
shares to 8,333,333 shares, and the number of issued and
outstanding shares of common stock were reduced from
11,574,619 to approximately 964,552 shares.
2. Form 8-K filed with the Securities and Exchange Commission
August 8, 2002 announcing on August 5, 2002, the Company sold
and transferred the stock of its wholly-owned subsidiary,
InterLAN Communications, Inc. to G. Anthony Munno, Martin
Sainsbury Carter and Brian Ianniello, who were executives and
employees of InterLAN. In exchange for the assignment of the
InterLAN stock, Messrs. Munno, Carter and Ianniello
transferred 21,168 shares of Onspan common shares, and Onspan
was relieved of substantially all obligations and guarantees
provided to third parties. Onspan also retained the right to a
certain tax refund owing to InterLAN. These individuals also
resigned in all capacities as directors, officers and/or
employees of Onspan. InterLAN provides data communications and
network solutions and consulting services.
24
SIGNATURE
Pursuant to the requirements 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.
ONSPAN NETWORKING, INC.
Date: August 26, 2003 By: /s/ Herbert Tabin
-----------------
Herbert Tabin, President
Date: August 26, 2003 By: /s/ Marissa Dermer
------------------
Marissa Dermer, Chief Financial
and Principal Accounting Officer
25
EXHIBIT INDEX
EXHIBIT # DESCRIPTION
--------- -----------
31.1 Certification of President Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of President Relating to a Periodic Report
containing Financial Statements Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Relating to a
Periodic Report containing Financial Statements Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
26