10QSB 1 onspan_10q-033101.txt U.S. 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, 2001 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 $.001 per share, as of March 31, 2001 was 10,624,544. 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, 2001 3 Statements of Operations - 4 Three and Six Months Ended March 31, 2001 and 2000 Statement of Stockholders' Equity - 5 Six Months Ended March 31, 2001 Statements of Cash Flows - 6-7 Six Months Ended March 31, 2001 and 2000 Notes to Financial Statements - 8-15 Six Months Ended March 31, 2001 and 2000 Item 2. Managements Discussion and Analysis of Financial Condition 16-18 and Results of Operations Part II. Other Information 19 2 ONSPAN NETWORKING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 2001 (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,174,434 Accounts receivable, less allowance of $10,000 314,305 Marketable equity securities 439,375 Prepaid expenses 64,915 Income taxes receivable 119,457 Deferred income taxes 31,000 ------------ Total current assets 2,143,486 Property and equipment, net 20,155 Goodwill, less accumulated amortization of $34,151 375,681 Deferred income taxes 8,700 ------------ $ 2,548,022 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 25,936 Accounts payable 128,770 Accrued expenses 100,382 Amounts due to purchasers of discontinued operations 74,804 Due to shareholders 2,186 ------------ Total current liabilities 332,078 STOCKHOLDERS' EQUITY Preferred stock; $.001 par value; authorized 12,500 3 shares; issued and outstanding 3,268 shares; liquidation preference $326,800 Common stock, $.001 par value. Authorized 100,000,000 10,624 shares; issued and outstanding 10,624,544 shares Paid-in capital 7,272,268 Retained earnings (5,066,951) ------------ Total stockholders' equity 2,215,944 ------------ $ 2,548,022 ============ 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, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- SALES AND REVENUES $ 515,933 $ - $ 1,499,942 $ - COSTS AND EXPENSES: Cost of goods sold 417,621 - 1,191,431 - Salaries and wages 98,630 - 198,141 - Other selling, general and administrative expenses 103,785 - 236,611 - ------------- ------------- ------------- ------------- 620,036 - 1,626,183 - ------------- ------------- ------------- ------------- Earnings (loss) from operations (104,103) - (126,241) - OTHER INCOME (EXPENSE): Interest income 2,283 - 5,070 - Unrealized gain on marketable equity securities 17,575 - 17,575 - Interest expense (746) - (1,443) - ------------- ------------- ------------- ------------- Total other income (expense) 19,112 - 21,202 - ------------- ------------- ------------- ------------- LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (84,991) - (105,039) - INCOME TAX EXPENSE (32,000) - (39,700) - ------------- ------------- ------------- ------------- LOSS FROM CONTINUING OPERATIONS (52,991) - (65,339) - LOSS FROM DISCONTINUED OPERATIONS - (739,866) - (1,442,354) ------------- ------------- ------------- ------------- NET LOSS $ (52,991) $ (739,866) $ (65,339) $ (1,442,354) DIVIDENDS ON PREFERRED SHARES - 8,343 - 17,292 ------------- ------------- ------------- ------------- NET LOSS APPLICABLE TO COMMON SHARES $ (52,991) $ (748,209) $ (65,339) $ (1,459,646) ============= ============= ============= ============= NET EARNINGS (LOSS) PER SHARE BASIC AND DILUTED $ (0.01) $ (0.00) $ (0.01) $ (0.00) ============= ============= ============= ============= DISCONTINUED OPERATIONS $ - $ (0.10) $ - $ (0.19) ============= ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING BASIC 10,295,654 7,803,154 10,228,465 7,795,786 ============= ============= ============= ============= DILUTED 10,295,654 7,803,154 10,228,465 7,795,786 ============= ============= ============= ============= 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, 2001 (UNAUDITED)
Preferred Stock Common Stock Paid-in Retained Shares Par Value Shares Par Value Capital Earnings Total ------------ ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, September 30, 2000 3,268 $ 3 9,989,171 $ 9,989 $ 6,410,620 $(5,001,612) $ 1,419,000 Acquisition of interLAN - - 250,000 250 337,250 - 337,500 Issuance of restricted common stock: For services - - 22,000 22 27,962 - 27,984 For marketable securities - - 313,373 313 421,486 - 421,799 Exercise of common stock options 50,000 50 74,950 75,000 Net income (loss) - - - - - (65,339) (65,339) ------------ ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, March 31, 2001 3,268 $ 3 10,624,544 $ 10,624 $ 7,272,268 $(5,066,951) $ 2,215,944 ============ ============ ============ ============ ============ ============ ============ 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, 2001 AND 2000 (UNAUDITED) 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (65,339) $(1,442,354) Adjustments to reconcile net loss to net cash provided by operating activities: Loss from discontinued operations, net of tax - 1,442,354 Depreciation and amortization 38,432 - Deferred income taxes (39,700) - Unrealized gain from marketable securities (17,575) - Allowance for bad debts 10,000 - Change in assets and liabilities (excluding effects of acquisitions): Accounts receivable 348,526 - Notes receivable 1,500,000 - Prepaid expenses (22,735) - Accounts payable (505,331) - Accrued expenses 38,682 - Income taxes payable (81,176) - ------------ ------------ Net cash provided by operating activities 1,203,784 - ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net cash received in acquisition of interLAN 152,239 - Capital expenditures (19,843) - ------------ ------------ Net cash provided by investing activities 132,396 - ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Exercise of common stock options 75,000 - Payment of notes payable (805,132) - Payment of notes payable to shareholders (150,000) Payment to purchasers of discontinued operations (31,614) - ------------ ------------ Net cash used in financing activities (911,746) - ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS 424,434 - CASH AND CASH EQUIVALENTS, beginning of period from continuing operations 750,000 - ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 1,174,434 $ - ============ ============ See accompanying notes to condensed consolidated financial statements. Continued 6 ONSPAN NETWORKING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) (CONTINUED)
2001 2000 ------------ ------------ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: Interest $ 1,443 $ 138,665 Income taxes $ 81,176 $ - ------------ ------------ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Purchase of interLAN: Fair value of assets acquired, excluding cash $ 1,100,296 Liabilities assumed (915,035) Stock issued (337,500) ------------ Cash acquired in excess of cash paid (152,239) Cash paid (150,000) ------------ Cash acquired $ 302,239 ============ Financed insurance premiums $ 42,180 Issuance of common stock in exchange for marketable securities $ 421,799 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, 2001 AND 2000 (UNAUDITED) A ORGANIZATION OnSpan Networking, Inc. (the "Company" or "OnSpan"), a Nevada corporation, is a holding company that develops data communications and networking infrastructure solutions and provides consulting services for business, government and education. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, interLAN Communications, Inc. ("interLAN")(http://www.interlancom.com). OnSpan changed its name from Network Systems International, Inc. effective February 14, 2001. On November 10, 2000, OnSpan completed the acquisition of 100% of the issued and outstanding common stock of interLAN, a Virginia corporation, in exchange for $150,000 in cash, 250,000 shares of the common stock of OnSpan and promissory notes in the amount of $150,000. InterLAN is a provider of data communications and networking infrastructure solutions and consulting for business, government and education. InterLAN specializes in Remote Access including VPN (Virtual Private Networking), Wide Area and Local Area technologies to include Fiber Optic and Gigabit. The product line includes High Speed Switches, Routers, VPN Gateways, Servers and Workstations. InterLAN's products assist in the transmission of data, voice, and Internet information. 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. Effective September 30, 2000, the Company completed the sale of all operating lines of business to its former management group. Until the sale, it was a vertical market company that was the developer of the NET COLLECTION(TM) and Primac software systems. These products are suites of supply chain management and enterprise-wide software products for the textile, apparel, home furnishing, and printing industries. The Company offered hardware products as well as consulting and implementation services in order to provide a solution to its customer's technology needs. 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, 2000, which is included in the Company's Form 10-KSB for the year ended September 30, 2000. The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year. Certain reclassifications of the amounts presented for the comparative period have been made to conform to the current presentation. B. ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, interLAN Communications, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. 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. 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. 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. Goodwill - Goodwill represents the excess of the cost of interLAN over the fair market value of identifiable net assets at the date of acquisition. Goodwill is amortized on a straight-line basis over 5 years. The carrying value of goodwill is evaluated periodically in relation to the operating performance and future undiscounted cash flows of the underlying businesses. Revenue recognition - Revenue from product sales is recognized when the related goods are shipped and all significant obligations of the Company have been satisfied. 9 Stock option plans - The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board 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. Deferred income taxes - Deferred income taxes are provided for temporary differences between financial and tax reporting in accordance with the liability method under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Earnings per common share - Earnings per common share are calculated under the provisions of SFAS No. 128, "Earnings per Share," which established new standards for computing and presenting earnings per share. SFAS No. 128 requires the Company to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive common shares outstanding. Estimates - Use of estimates and assumptions are made by management in the preparation of the financial statements in conformity with generally accepted accounting principles that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. C. MARKETABLE INVESTMENT SECURITIES The amortized cost of investment securities as shown in the accompanying balance sheet and their estimated market value at March 31, 2001 is as follows: 2001 Trading securities: Cost $ 421,800 Unrealized gain 17,575 ---------- $ 439,375 ========== The Company included an unrealized gain in the amount of $17,575 in earnings for the three and six month periods ended March 31, 2001, respectively. 10 D. ACQUISITION OF INTERLAN COMMUNICATIONS, INC. On November 10, 2000, NESI completed acquisition of 100% of the issued and outstanding common stock of InterLAN, in exchange for $150,000 in cash, 250,000 shares of the restricted common stock of NESI, with a discounted value of $337,500, and promissory notes in the amount of $150,000. InterLAN is a provider of data communications and networking infrastructure solutions and consulting for business, government and education. InterLAN specializes in Remote Access including VPN (Virtual Private Networking), Wide Area and Local Area technologies to include Fiber Optic and Gigabit. The product line includes High Speed Switches, Routers, VPN Gateways, Servers and Workstations. InterLAN's products assist in the transmission of data, voice, and Internet information. The transaction is accounted for using the purchase method of accounting, with the assets and liabilities of InterLAN being recorded at fair values. The transaction resulted in goodwill in the amount of $409,832, which will be amortized over five years. Unaudited pro forma results of operations for the six-month periods ended March 31, 2001 and 2000, as if the acquisition had occurred as of the beginning of each period, follow. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future. The pro forma results exclude the results of discontinued operations. The purchase price allocation is a preliminary estimate and the actual amounts could differ from this estimate. 2001 2000 Sales $ 2,095,423 $ 1,260,160 ============ ============ Net earnings (loss) from continuing operations (86,985) (39,801) Dividends on preferred shares - 17,292 ------------ ------------ Net earnings (loss) applicable to common shares $ (86,985) $ (57,093) ============ ============ Net earnings (loss) per common share, basic and diluted, from continuing operations $ (.01) $ (.01) ============ ============ E. NOTES PAYABLE In connection with the Stock Purchase Agreement and transactions discussed in Note I, the Company entered into an Assignment and Assumption Agreement with the Company's lender whereby the Company committed to remit $3,000,000 of the proceeds from the transactions to the lender in exchange for a release from any further liability under a revolving credit agreement assigned to the discontinued operations. The Company's commitment has now been fully paid. The Company was fully and completely released and discharged of all of its obligations with the lender on April 11, 2001, including any guaranty of $400,000 of debt assigned to the discontinued operation. 11 The Company incurred additional debt in the amount of $42,180 to finance insurance premiums, which had been paid down to $25,936 at March 31, 2001. F. EARNINGS PER SHARE The following data for the six months ended March 31, 2001 and 2000 shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. 2001 2000 Loss from continuing operations $ (65,339) $ - Less preferred stock dividends - 17,292 ------------- ------------- Loss available to common shareholders used in basic and diluted EPS $ (65,339) $ (17,292) ============= ============= Loss from discontinued operations available to common shareholders used in basic and diluted EPS $ - $ (1,442,354) ============= ============= Weighted average number of common shares used in basic and diluted EPS 10,228,465 7,795,786 ============= ============= The following data for the three months ended March 31, 2001 and 2000 shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. 2001 2000 Loss from continuing operations $ (52,991) $ - Less preferred stock dividends - 8,343 ------------- ------------- Loss available to common shareholders used in basic and diluted EPS $ (52,991) $ (8,343) ============= ============= Loss from discontinued operations available to common shareholders used in basic and diluted EPS $ - $ (739,866) ============= ============= Weighted average number of common shares used in basic and diluted EPS 10,295,654 7,803,154 ============= ============= At March 31, 2001 and 2000, all common stock equivalents were antidilutive and are not included in the earnings per share calculations. The Company has 147,000 and 748,000 options to purchase common shares and 3,268 and 3,505 shares of preferred stock that were antidilutive and are not included in the earnings per share calculations for 2001 and 2000, respectively. 12 F. INCOME TAXES Income tax expense for continuing operations for the six months ended March 31, 2001 and 2000 consists of: 2001 2000 Current tax expense: Federal $ - $ - State - - --------- --------- Deferred tax expense (39,700) - --------- --------- Total income tax expense $(39,700) $ - ========= ========= Actual income tax expense applicable to earnings, from continuing operations, before income taxes is reconciled with the "normally expected" federal income tax expense as follows for the six months ended March 31, 2001 and 2000: 2001 2000 "Normally expected" income tax expense $(35,700) $ - State income taxes, net of Federal Income tax benefit (4,200) - Non-deductible meals and other 200 - --------- --------- $(39,700) $ - ========= ========= The deferred income tax assets at March 31, 2001 are comprised of the following: CURRENT NONCURRENT Net operating loss $ 33,900 $ - Allowance for bad debts 3,800 - Marketable equity securities (6,700) - Goodwill - 8,700 --------- --------- Net deferred income tax assets $ 31,000 $ 8,700 ========= ========= 13 G. STOCK OPTIONS During 1999, the Company adopted the Network Systems International, Inc. "1999 Long Term Stock Incentive Plan." The maximum number of shares available under the plan is 500,000 of shares, which are authorized but unissued. As of March 31, 2001, 50,000 of the shares authorized under the plan have been issued. Under the terms of the plan, the options expire after 10 years, as long as the employees remain employed with the Company. The following is a summary of option activity for the six months ended March 31, 2001. OPTIONS OUTSTANDING OPTIONS ------------------- AVAILABLE WEIGHTED AVERAGE FOR GRANT OPTIONS EXERCISE PRICE Balance, Sept. 30, 2000 274,000 226,000 $ 4.18 --------- --------- --------- Granted (197,000) 197,000 1.26 Exercised - (50,000) 1.50 Cancelled 226,000 (226,000) 4.18 --------- --------- --------- Balance, March 31, 2001 303,000 147,000 $ 1.22 ========= ========= ========= The employee option grants provide that the option will be cancelled sixty days after an employee leaves employment with the Company. As a result of the transactions discussed in Note H, Divestitures, the remaining options outstanding at September 30, 2000 were cancelled on November 29, 2000, as all employees left employment with the Company effective September 30, 2000. SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"), requires the Company to disclose pro forma information regarding option grants made to its employees. SFAS 123 specifies certain valuation techniques that produce estimated compensation charges that are included in the pro forma results below. These amounts have not been reflected in the Company's Statement of Operations, because Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," specifies that no compensation charge arises when the price of the employees' stock options equal the market value of the underlying stock at the grant date, as in the case of options granted to the Company's employees and consultants. SFAS No. 123 pro forma numbers are as follows for the six-months ended March 31, 2001 and 2000: 2001 2000 Actual net loss $ (65,339) $(1,442,354) ============= ============ Pro forma net loss $ (96,414) $(1,442,354) ============= ============ Pro forma basic and diluted net loss per share $ (.01) $ (.19) ============= ============ 14 Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. At March 31, 2001, the following weighted average assumptions were used: risk-free interest rate of 6.0%, no expected dividends, a volatility factor of 122.97%, and a weighted average expected life of the options of 1 year. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of the Company's options. H. DIVESTITURES Effective September 30, 2000, the Company sold its interest in its wholly owned subsidiaries, Network Systems International of North Carolina, Inc. and Vercom Software, Inc. to its former management group for $3,000,000, $1,500,000 in cash at closing and $1,500,000 in notes receivable. The discontinued operations during the six months ended March 31, 2000 were as follows: 2000 Net sales $ 5,012,789 ============ Loss before income tax benefit (2,171,620) Income tax benefit (729,266) ------------ Net loss from discontinued operations $(1,442,354) ============ The notes receivable in the amount of $1,500,000 were collected in January 2001. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- 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. The Company's continuing operations consist of the operations of interLAN. InterLAN is a provider of data communications and networking infrastructure solutions and also provides consulting for business, government and education. InterLAN specializes in Remote Access including VPN (Virtual Private Networking), Wide Area and Local Area technologies to include Fiber Optic and Gigabit. The product line includes High Speed Switches, Routers, VPN Gateways, Servers and Workstations. InterLAN's products assist in the transmission of data, voice, and Internet information. On April 18, 2001, the Company received a Nasdaq Staff Determination that the Company was no longer in compliance with the minimum $2,000,000 net tangible assets requirement for the Nasdaq Small Cap Market under Marketplace Rule 4310(c)(2)(B). Additionally, as of April 17, 2001 the Nasdaq staff determined that the Company's market capitalization was $19,494,225. Accordingly, the Company's securities were to be delisted from the Nasdaq Small Cap Market at the opening of business on April 26, 2001. The Company requested a hearing before a Nasdaq Listing Qualifications Panel to review the Staff Determination pursuant to the procedures set forth in Nasdaq Marketplace Rule 4800. The hearing is scheduled for June 6, 2001. Until the Panel has made a decision the Company's stock will continue to trade on Nasdaq. There can be no assurance the Panel will grant the Company's request for continued listing. In the event the Panel does not grant the Company's request, the Company's stock will be eligible to trade in the over-the-counter market and would be quoted on the NASD Over The Counter Bulletin Board. A. LIQUIDITY AND CAPITAL RESOURCES Because of the nature of the fiber optics and data and optical communications industry, the Company is seeking acquisitions and alliances that will: (i) add key technologies that can leverage the business, (ii) broaden product offerings, and (iii) expand marketing opportunities. In November 2000, the Company acquired interLAN and expects to continue to pursue other potential acquisitions. 16 During the six months ended March 31, 2001, working capital increased $392,408 to $1,811,408 from $1,419,000, including the effects of the acquisition of interLAN. The majority of the reason for the increase is a result of the common stock issued to acquire marketable securities, which have a value at March 31, 2001 of $439,375. During this same period, stockholders' equity increased $796,944 to $2,215,944 from $1,419,000. The increase in stockholders' equity is primarily due to the common stock issued as a part of the purchase of interLAN and the common stock issued to acquire marketable securities. The Company has not budgeted any significant capital expenditures for the current fiscal year for its current operations. The Company has adequate cash resources to meet its current needs. However, with the planned additional acquisitions, additional financial resources will be required. The Company expects to obtain sufficient working capital to accomplish its near-term objectives through sale of its unregistered common stock in a private placement. In the event the Company is unable to raise sufficient capital to complete its business plan, it may be required to delay implementation. Any significant delay in implementation of its business plan in an industry characterized by technological change could result in the loss of any edge they might have in the development of new technology. Additionally, in the event the Company's stock is delisted from the Nasdaq Small Cap Market and required to trade in the over-the-counter market, the Company's ability to raise additional equity capital may be sufficiently limited to require them to modify their business plan. B. RESULTS OF OPERATIONS InterLAN is a provider of data communications and networking infrastructure solutions and consulting for business, government and education. InterLAN specializes in Remote Access including VPN (Virtual Private Networking), Wide Area and Local Area technologies to include Fiber Optic and Gigabit. The product line includes High Speed Switches, Routers, VPN Gateways, Servers and Workstations. InterLAN's products assist in the transmission of data, voice, and Internet information. InterLAN offers products from ADC, Adtran, APC, Lucent, AVAYA, Cisco Systems, Compaq, D-Link, RSA, Nortel Networks and Intel. InterLAN's staff members are certified as: Cisco Premier, Intel/Shiva Premier, Compaq SMB, D-Link Diamond and as a Sonic WALL Gold Partner. InterLAN has provided design, consulting, product and maintenance services to national and international companies and organizations such as Sprint, Global One, The United States Securities and Exchange Commission, CLC - Computer Learning Center, The United States Department of Labor, The United States Army, GTE, Software AG and the Federal Aviation Administration. 17 SALES AND COST OF SALES - The Company's sales consist solely of those provided by interLAN. Pro forma sales for the six months ended March 31, 2001 were $2,095,423 as compared to $1,263,160 for the year earlier period, an increase of $832,263 (66%). Sales for the three months ended March 31, 2001 were $515,933 as compared to $544,534 during the same year earlier period, a decline of 5%. The Company has expanded its marketing to include both new and used equipment. Future sales increases are dependant upon the ability of the Company's management to continue to expand sales to existing customers and to seek and secure new customers. During an economic downturn, which the country is currently experiencing, most companies in similar businesses have found customers with substantially lowered budgets for computers and associated equipment. The Company has managed to continue to increase sales and maintain a gross profit percentage of approximately 20% before salaries, wages and other selling, general and administrative expenses, although its ability to continue will be impacted by the current economic situation in the country. The Company experienced a 5% decline in sales during the quarter ended March 31, 2001 as compared to the same year earlier period, which the Company attributes primarily to the economic downturn. However, preliminary results for April indicate that certain sales that might normally have been completed during the quarter ended March 31, 2001 may only have been delayed until the quarter ending June 30, 2001. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The Company's selling, general and administrative expenses, including salaries and wages amounted to $434,752 during the six months ended March 31, 2001 ($504,140 on a pro forma basis, as if interLAN were acquired on October 1, 2000) as compared to $270,857, on a pro forma basis for interLAN only, during the six months ended March 31, 2000. The increase of $233,283 includes $100,588 for the Company and an increase of $132,695 for interLAN. The interLAN increase includes $34,151 in goodwill amortization; accordingly the operating costs increased $98,544 or 36% during the period when sales increased 66%. The majority of the increase is a result of higher compensation costs. OnSpan's administrative costs include $40,000 for the completion of its audit for the year ended September 30, 2000, $19,578 for insurance, $19,195 for other professional services and $21,815 for other miscellaneous costs. INCOME TAXES - The Company recorded $39,700 in deferred income tax benefits that included benefit for a net operating loss of $33,900 and other net benefits of $5,800. DISCONTINUED OPERATIONS - The operations of the Company, for the three and six months ended March 31, 2000, which were sold effective September 30, 2000, have been reclassified as loss from discontinued operations. 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - Not applicable (b) Reports on Form 8-K (1) Form 8-K filed with the Securities and Exchange Commission on October 17, 2000 that reported the Company's sale of Network International Systems of North Carolina, Inc. and Vercom Software, Inc. and Form 8-K/A filed with the Securities and Exchange Commission on January 19, 2001 that reported the pro forma effect of the sale. No other financial statements were included. (2) Form 8-K filed with the Securities and Exchange Commission on November 22, 2000 that reported the Company's acquisition of interLAN Communications, Inc. and Form 8-K/A filed with the Securities and Exchange Commission on January 19, 2001 that reported the pro forma effect of the acquisition and the audited financial statements of interLAN Communications, Inc. for the year ended December 31, 1999. (3) Form 8-K filed with the Securities and Exchange Commission on February 7, 2001 that reported the dismissal of its former principal accountants, KPMG LLP of Greensboro, North Carolina and the engagement of Daszkal Bolton Manela Devlin & Co. of Boca Raton, Florida, as the principal accountants for the Company. 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 11, 2001 By: /s/ Herbert Tabin ------------------------------------ Herbert Tabin, President Date: May 11, 2001 By: /s/ Marissa Dermer ------------------------------------ Marissa Dermer, Chief Financial and Principal Accounting Officer 19