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: MARCH 31, 2003
Commission File Number: 0-22991
ONSPAN NETWORKING, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 87-0460247
(State of Incorporation) (IRS Employer ID No)
6413 CONGRESS AVENUE, SUITE 230, BOCA RATON, FL 33487
(Address of principal executive office)
(561) 988-2334
(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 May 12, 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 - March 31, 2003 ..................................3
Statements of Operations -
Three and Six Months Ended March 31, 2003 and 2002 ..............4
Statement of Stockholders' Equity -
Six Months Ended March 31, 2003 .................................5
Statements of Cash Flows -
Six Months Ended March 31, 2003 and 2002 ......................6-7
Notes to Financial Statements -
Six Months Ended March 31, 2003 and 2002 .....................8-13
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations .........................13-19
Part II - Other Information
Item 1. Legal Proceedings ..............................................20
Item 5. Other Information ..............................................21
Item 6. Exhibits and Reports Form 8-K ..................................22
2
OnSpan Networking, Inc. and Subsidiary
Condensed Consolidated Balance Sheet
March 31, 2003
(Unaudited)
Assets
Current assets
Cash and cash equivalents ................................... $ 826,699
Marketable equity securities ................................ 31,000
Escrow Deposit .............................................. 130,000
-----------
Total current assets .......................................... 987,699
Property and equipment, net ................................... 1,825
-----------
$ 989,524
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ............................................ $ 5,161
Accrued dividend ............................................ 30,946
Amounts due to purchasers of discontinued operations ........ 55,929
-----------
Total current liabilities ..................................... 92,036
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 ............................................. 7,773,134
Accumulated deficit ......................................... (6,887,272)
-----------
Total stockholders' equity .................................... 897,488
-----------
$ 989,524
===========
See accompanying notes to condensed consolidated financial statements.
3
OnSpan Networking, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
Three and Six Months Ended March 31, 2003 and 2002
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Costs and expenses:
Salaries and wages ............... 40,000 21,000 79,000 36,000
Other selling, general and
administrative expenses ........ 25,624 44,715 59,289 131,562
--------- --------- --------- ---------
65,624 65,715 138,289 167,562
--------- --------- --------- ---------
Loss from operations ............... (65,624) (65,715) (138,289) (167,562)
Other income (expense):
Interest income .................. 3,208 5,368 7,321 13,251
Unrealized (loss) on
marketable equity securities ... (30,000) (56,000) (49,000) (364,000)
Other expense .................... - (1,101) (30,000) (1,101)
--------- --------- --------- ---------
Total other income (expense) ... (26,792) (51,733) (71,679) (351,850)
--------- --------- --------- ---------
Loss before income taxes and ....... (92,416) (117,448) (209,968) (519,412)
discontinued operations
Income tax (benefit) expense ....... - 107,056 - (71,037)
--------- --------- --------- ---------
Loss from continuing operations .... (92,416) (224,504) (209,968) (448,375)
Loss from discontinued operations .. - (46,108) - (14,587)
--------- --------- --------- ---------
Net loss ........................... (92,416) (270,612) (209,968) (462,962)
Dividends on preferred shares ...... - - - -
--------- --------- --------- ---------
Net loss applicable to
common shares .................... $ (92,416) $(270,612) $(209,968) $(462,962)
========= ========= ========= =========
Basic and diluted net loss per share
Continued operations ............. $ (0.10) $ (0.23) $ (0.22) $ (0.46)
========= ========= ========= =========
Discontinued operations .......... $ - $ (0.05) $ - $ (0.02)
========= ========= ========= =========
Total .......................... $ (0.10) $ (0.28) $ (0.22) $ (0.48)
========= ========= ========= =========
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
Six Months Ended March 31, 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
Net (loss) ................ - - - - - (209,968) (209,968)
----- --- ------- ------- ---------- ----------- -----------
Balance, March 31, 2003 ... 2,713 $ 2 968,677 $11,624 $7,773,134 $(6,887,272) $ 897,488
===== === ======= ======= ========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
OnSpan Networking, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
---- ----
Cash flows from operating activities
Net loss ........................................... $ (209,968) $ (462,962)
Less: Loss from discontinued operations, net ....... - (14,587)
----------- -----------
Loss from continuing operations .................... $ (209,968) $ (448,375)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation ..................................... 454 412
Deferred income taxes ............................ - (46,356)
Unrealized loss from marketable securities ....... 49,000 364,000
Change in assets and liabilities (excluding
effects of acquisitions):
Income tax receivable .......................... 45,147 (25,681)
Prepaid expenses ............................... 11,833 (50,027)
Accounts payable ............................... (378) 4,368
Accrued expenses ............................... 30,000 -
----------- -----------
Net cash used in operating activities .............. (73,912) (201,659)
----------- -----------
Cash flows from investing activities
Escrow Deposit .................................. (130,000)
Capital expenditures ............................. - (773)
----------- -----------
Net cash used in investing activities .............. (130,000) (773)
----------- -----------
Cash flows from financing activities
Payment of notes payable ......................... - 31,628
Payment to purchasers of discontinued operations . - (33,594)
----------- -----------
Net cash used in financing activities .............. - (1,966)
----------- -----------
Net decrease in cash and cash equivalents from
continuing operations ............................ (203,912) (204,398)
Net cash provided by discontinued operations ....... - 13,264
Net (decrease) in cash and cash equivalents ........ (203,912) (191,134)
Cash and cash equivalents, beginning of period
from continuing operations ....................... 1,030,611 1,283,673
----------- -----------
Cash and cash equivalents, end of period ........... $ 826,699 $ 1,092,539
=========== ===========
Continued
See accompanying notes to condensed consolidated financial statements.
6
OnSpan Networking, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31, 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
SIX MONTHS ENDED MARCH 31, 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 its wholly owned subsidiary InterLAN
Communications, Inc. ("InterLAN") (http://www.interlancom.com). 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. On November 10, 2000, NESI completed the acquisition of 100% of
the issued and outstanding common stock of InterLAN, a Virginia corporation.
Effective February 10, 2001, Network Systems International, Inc. changed its
name to OnSpan Networking, Inc. ("OnSpan") and the Company's common stock began
trading under the symbol ONSP. On October 9, 2001, the Company affected a 1 for
12 reverse stock split of its issued and outstanding common stock. On 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. 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 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. The assets OnSpan retained included cash of
$1,078,883, marketable securities, 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. 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.
8
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 March 31, 2003 and 2002,
include the accounts of the Company and the discontinued operations of InterLAN
Communications, Inc.
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 March
31, 2003, because of the short maturity of these instruments.
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 March 31, 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 March 31,
2003.
9
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.
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 March 31, 2003 is as follows:
2003
Trading securities:
Cost .......... $ 504,000
Unrealized loss (473,000)
---------
$ 31,000
=========
10
The Company included unrealized losses in the amount of $49,000 and $364,000 in
earnings for the six months ended March 31, 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 .............. $ - $ 1,490,218
------- -----------
Income from discontinued operations $ - $ (14,587)
------- -----------
Net income per common share
Basic ......................... - (.02)
Diluted ....................... - (.02)
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 ........................ $(209,968) $(448,375)
Loss from discontinued operations ...................... - (14,587)
--------- ---------
Net loss ............................................... $(209,968) $(462,962)
========= =========
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 ........................ $ (.22) $ (.46)
Loss from discontinued operations ...................... - (.02)
--------- ---------
Net earnings (loss) .................................... $ (.22) $ (.48)
========= =========
11
F. 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 not yet filed an answer to the
Complaint. The Company disputes the amounts claimed and intends to seek
reimbursement for certain expenses incurred by the Company on behalf of
the plaintiff. The Company has made a settlement offer.
2. Soles Brower Smith & Company v. Network Systems International Inc. and
Network Systems International of North Carolina, Inc. 02-CvS-7103
(Complaint filed June 11, 2002)
This action was brought by a business broker that formerly represented
the Company in attempts to sell Vercom Software, Inc. a former
subsidiary of the Company. The Complaint seeks relief for breach of
contract.
The Company has asserted a defense based on the fact that it
transferred its shares of Vercom and had no involvement in the sale of
Vercom, which forms the basis of Plaintiff's complaint. In addition,
the Company has asserted a crossclaim against Network Systems
International of North Carolina, Inc. for indemnification. The Company
intends to oppose plaintiff's claims vigorously and will seek early
dismissal of the action. Given the early stage of this action, we are
unable to assess the likely outcome of this action or the magnitude of
loss if any were to occur.
3. 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, 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 answer or other
response to the action is due on June 2, 2003. No discovery has taken
place.
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.
12
The case was filed in Texas state court on May 2, 2002. The answer or
other response is due no earlier than May 22, 2003. No discovery has
taken place.
The Company will vigorously defend both of these actions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING 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
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 its wholly owned subsidiary InterLAN
Communications, Inc. ("InterLAN") (http://www.interlancom.com). 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. On November 10, 2000, NESI completed the acquisition of 100% of
the issued and outstanding common stock of InterLAN, a Virginia corporation.
Effective February 10, 2001, Network Systems International, Inc. changed its
name to OnSpan Networking, Inc. ("OnSpan") and the Company's common stock began
trading under the symbol ONSP. On October 9, 2001, the Company affected a 1 for
12 reverse stock split of its issued and outstanding common stock. On 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. 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 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. The assets OnSpan retained included cash of
13
$1,078,883, marketable securities, 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. 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.
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. The Company's recently changed its business focus to
residential real estate development and building construction services. In April
of 2003, the Company changed its focus to investing in and revitalizing single
family homes in established residential neighborhoods in suburban areas. If
successful, the Company plans to continue to either buy single unit vacant
properties and build single-family homes on them or buy existing homes, which it
intends to renovate and sell. In April 2003, the Company entered into a contract
to purchase its first property and left a deposit of $130,000. The property is
expected to close by June 1, 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 on this site. This
project, known as Coventry 1 Inc., is expected to enter the permitting stage
immediately following closing.
REAL ESTATE DEVELOPMENT INDUSTRY
Ownership of properties in the categories of which the Company may invest 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, may 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
14
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; 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 $6,887,272.
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 anticipates,
based on its current proposed growth plans and assumptions relating to its
growth and operations, that the proceeds from the existing capital and
borrowings and planned revenues will be sufficient to satisfy the Company's
contemplated cash requirements for the next twelve months. In the event that the
Company's plans change or its assumptions prove to be inaccurate (due to
unanticipated expenses, delays, problems, or otherwise), the Company would be
required to seek additional funding sooner than anticipated. 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.
15
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 is traded on the OTC Bulletin Board. The Company
believes that factors such as (but not limited to) the sale of common stock,
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.
THE COMPANY WILL NEED ADDITIONAL FUNDS.
The Company will require additional funding to further its real estate
operations and business objectives. Although management believes that such funds
may become available from sources including cash flow from business operations,
bank loans, mortgage loans, sale of debt or stock, there is no assurance that
the Company will be able to obtain such funds in the amount necessary for its
existing operations or to acquire new projects, or that the terms of funding
will be acceptable to the Company. If the Company's capital is insufficient to
conduct its business and if the Company is unable to obtain needed financing, it
will be unable to pursue its business plan.
16
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 plans to compete in a 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. As a
result, demand and market acceptance for our houses and projects will be subject
to a high level of uncertainty. The Company currently has limited financial,
personnel and other resources to undertake the extensive activities that will be
necessary to acquire property and build houses and related real estate projects.
If the Company is unable to expand its marketing 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 is currently quoted on the OTC Bulletin Board (R)
(OTCBB) Market under the symbol "ONSP." The Company's common stock is thinly
traded. According to the OTC Bulletin Board (R) website, in 2003, the OTC
Bulletin Board(R) (OTCBB) will be phased out, and replaced by a new market, the
BBXSM (Bulletin Board ExchangeSM). The BBX will have qualitative listing
standards, but will have no minimum share price, market capitalization, or
shareholder equity requirements. There are no assurances the Company will
maintain its OTC Bulletin Board (R) listing or obtain a future Bulletin Board
ExchangeSM listing. If the Company's common stock should be delisted from the
OTC Bulletin Board (R) Market, or Bulletin Board ExchangeSM it is likely that
the stock would then be quoted on the Pink Sheets Market, which could materially
and / or adversely effect any future liquidity in the Company's common stock.
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 March 31, 2003, a 100% valuation allowance
has been established and no deferred tax asset recognized.
17
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 March 31, 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 March 31, 2003, aggregated
($473,000).
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 March 31, 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.
18
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 six month period ended March 31,
2002 have been reclassified as loss from discontinued operations.
A. LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 2003, working capital decreased $209,514
to $895,663 from $1,105,177. During this same period, stockholders' equity
decreased $209,968 to $897,488 from $1,107,456. The decrease in stockholders'
equity is entirely due to the net loss for the period. The Company has adequate
cash resources to meet its current needs
B. RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The Company's selling, general and
administrative expenses, including salaries and wages amounted to $138,289
during the six months ended March 31, 2003 as compared to $167,562 during the
six months ended March 31, 2002. The decrease of $29,273 includes a increase of
$43,000 for salaries, off set by a decreases of ($31,000) for accounting fees,
(14,000) for insurance, ($7,000) in costs related to annual shareholder
meeting, ($4,500) in stock transfer fees related to the reverse split, ($6,000)
in legal fees due to the reverse split, and ($8,800) in filing fees due to
being not listed on the Nasdaq.
INCOME TAXES - The Company recorded a 100% valuation allowance against the
$78,374 deferred tax asset as of March 31, 2003. The Company recorded $(71,037)
in deferred income tax benefit for the six-month period ended March 31, 2002.
MARKETABLE EQUITY SECURITIES - As of March 31, 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 six months ended March 31, 2003, the Company
recorded an unrealized loss from trading securities of ($49,000) on the
eResources stock and had a quoted market value of $31,000 or $0.31 (thirty one
cents) per share.
19
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 not yet filed an answer to the
Complaint. The Company disputes the amounts claimed and intends to seek
reimbursement for certain expenses incurred by the Company on behalf of
the plaintiff. The Company has made a settlement offer.
2. Soles Brower Smith & Company v. Network Systems International Inc. and
Network Systems International of North Carolina, Inc. 02-CvS-7103
(Complaint filed June 11, 2002)
This action was brought by a business broker that formerly represented
the Company in attempts to sell Vercom Software, Inc. a former
subsidiary of the company. The Complaint seeks relief for breach of
contract.
The Company has asserted a defense based on the fact that it
transferred its shares of Vercom and had no involvement in the sale of
Vercom, which forms the basis of Plaintiff's complaint. In addition,
the Company has asserted a crossclaim against Network Systems
International of North Carolina, Inc. for indemnification. The Company
intends to oppose plaintiff's claims vigorously and will seek early
dismissal of the action. Given the early stage of this action, we are
unable to assess the likely outcome of this action or the magnitude of
loss if any were to occur.
3. 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, 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 answer or other
response to the action is due on June 2, 2003. No discovery has taken
place.
20
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 answer or
other response is due no earlier than May 22, 2003. No discovery has
taken place.
The Company will vigorously defend both of these actions.
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
Within the 90 days prior to the filing date of this report, 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.
21
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit # Description
--------- -----------
4.0 Long Term Incentive Stock Options Plan (1)
99.1 Certification of President Relating to a Periodic Report
containing Financial Statements
99.2 Certification of Chief Financial Officer Relating to a
Periodic Report containing Financial Statements
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.
----------
(1) Incorporated by reference to the company's report on form S-8 dated
July 27, 2001
22
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: May 14, 2003 By: /s/ Herbert Tabin
-----------------
Herbert Tabin, President
Date: May 14, 2003 By: /s/ Marissa Dermer
------------------
Marissa Dermer, Chief Financial
and Principal Accounting Officer
23
CERTIFICATION OF PRESIDENT
I, Herbert Tabin, President of OnSpan Networking, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of OnSpan Networking,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors: (or persons performing the equivalent
functions)
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls, and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Herbert Tabin
Herbert Tabin,
President
24
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Marissa Dermer, Chief Financial Officer of OnSpan Networking, Inc., certify
that:
1 I have reviewed this quarterly report on Form 10-KSB of OnSpan Networking,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors: (or persons performing the equivalent
functions)
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls, and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Marissa Dermer
Marissa Dermer,
Chief Financial Officer
25
Exhibit Index
Exhibit # Description
99.1 Certification of President Relating to a Periodic Report
containing Financial Statements
99.2 Certification of Chief Financial Officer Relating to a
Periodic Report containing Financial Statements
26