-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HY9NtD0gBB3qaye8/+EoeBUL2ni32NGd78yxfbSvHs4fuMcPgtCAiZ+qJaUpKl5+ urqQpC92XWuvilFkXhmkrQ== 0001128778-01-500058.txt : 20010814 0001128778-01-500058.hdr.sgml : 20010814 ACCESSION NUMBER: 0001128778-01-500058 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONSPAN NETWORKING INC CENTRAL INDEX KEY: 0000842722 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 870460247 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22991 FILM NUMBER: 1707327 BUSINESS ADDRESS: STREET 1: 6413 CONGRESS AVE STREET 2: SUITE 230 CITY: BOCA RATON STATE: FL ZIP: 33487 BUSINESS PHONE: 6024648900 MAIL ADDRESS: STREET 1: 6413 CONGRESS AVE STREET 2: SUITE 230 CITY: BOCA RATON STATE: FL ZIP: 33487 FORMER COMPANY: FORMER CONFORMED NAME: AQUA AUSTRALIS INC DATE OF NAME CHANGE: 19940322 FORMER COMPANY: FORMER CONFORMED NAME: FUTURE TECH INC DATE OF NAME CHANGE: 19911015 FORMER COMPANY: FORMER CONFORMED NAME: NETWORK SYSTEMS INTERNATIONAL INC DATE OF NAME CHANGE: 19960516 10QSB 1 june302001-10qsb.txt 10QSB 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: June 30, 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 June 30, 2001 was 11,574,619. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]. OnSpan Networking, Inc. and Subsidiary INDEX Page No. ---- Part I. Unaudited Financial Information Item 1. Condensed Consolidated: Balance Sheet - June 30, 2001 3 Statements of Operations - 4 Three and Nine Months Ended June 30, 2001 and 2000 Statement of Stockholders' Equity - 5 Nine Months Ended June 30, 2001 Statements of Cash Flows - 6-7 Nine Months Ended June 30, 2001 and 2000 Notes to Financial Statements - 8-16 Nine Months Ended June 30, 2001 and 2000 Item 2. Managements Discussion and Analysis of Financial 17-19 Condition and Results of Operations Part II. Other Information 19 2
OnSpan Networking, Inc. and Subsidiary Condensed Consolidated Balance Sheet June 30, 2001 (Unaudited) Assets Current assets Cash and cash equivalents $ 1,514,861 Accounts receivable, less allowance of $10,000 367,919 Marketable equity securities 975,850 Inventory 3,975 Prepaid expenses 56,056 Income taxes receivable 119,457 ------------------- Total current assets 3,038,118 Property and equipment, net 24,131 Goodwill, less accumulated amortization of $54,643 355,189 Deferred income taxes 13,900 ------------------- $ 3,431,338 =================== Liabilities and Stockholders' Equity Current liabilities Notes payable $ 11,632 Accounts payable 230,222 Accrued expenses 48,543 Accrued dividend 24,313 Amounts due to purchasers of discontinued operations 70,460 Due to shareholders 2,186 Deferred income taxes 155,650 ------------------- Total current liabilities 543,006 Stockholders' equity Preferred stock; $.001 par value; authorized 12,500 shares; issued and outstanding 2,763 shares; liquidation preference $276,300 2 Common stock, $.001 par value. Authorized 100,000,000 shares; issued and outstanding 11,574,619 shares 11,575 Paid-in capital 7,671,319 Retained earnings (4,794,564) ------------------- Total stockholders' equity 2,888,332 ------------------- $ 3,431,338 =================== See accompanying notes to condensed consolidated financial statements.
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OnSpan Networking, Inc. and Subsidiary Condensed Consolidated Statements of Operations Three and Nine Months Ended June 30, 2001 and 2000 (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2001 2000 2001 2000 Sales and revenues $ 858,620 $ - $ 2,358,562 $ - Costs and expenses: Cost of goods sold 731,795 - 1,923,226 - Salaries and wages 99,796 - 297,937 - Other selling, general and administrative expenses 126,826 - 363,437 - ---------------- ------------------- ------------------ ------------------- 958,417 - 2,584,600 - ---------------- ------------------- ------------------ ------------------- Earnings (loss) from operations (99,797) - (226,038) - Other income (expense): Interest income 7,552 - 12,622 - Gain on sale of marketable equity securities 16,299 16,299 Unrealized gain (loss) on marketable equity securities 554,475 - 572,050 - Interest expense (378) - (1,821) - ---------------- ------------------- ------------------ ------------------- Total other income (expense) 577,948 - 599,150 - ---------------- ------------------- ------------------ ------------------- Earnings (loss) before income taxes and discontinued operations 478,151 - 373,112 - Income tax expense 181,450 - 141,750 - ---------------- ------------------- ------------------ ------------------- Earnings (loss) from continuing operations 296,701 - 231,362 - Loss from discontinued operations - (1,079,317) - (2,522,780) ---------------- ------------------- ------------------ ------------------- Net earnings (loss) $ 296,701 $ (1,079,317) $ 231,362 $ (2,522,780) Dividends on preferred shares 24,314 8,193 24,314 25,485 ---------------- ------------------- ------------------ ------------------- Net earnings (loss) applicable to common shares $ 272,387 $ (1,087,510) $ 207,048 $ (2,548,265) ================ =================== ================== =================== Net earnings (loss) per share Basic and diluted $ 0.03 $ (0.00) $ 0.02 $ (0.00) ================ =================== ================== =================== Discontinued operations $ - $ (0.14) $ - $ (0.33) ================ =================== ================== =================== Weighted average shares outstanding Basic 10,651,524 7,805,544 10,369,484 7,799,027 ================ =================== ================== =================== Diluted 10,972,028 7,805,544 10,677,300 7,799,027 ================ =================== ================== =================== See accompanying notes to condensed consolidated financial statements.
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OnSpan Networking, Inc. and Subsidiary Condensed Consolidated Statement of Stockholders' Equity Nine Months Ended June 30, 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 Conversion of preferred stock (505) (1) 25,250 26 (24) - 1 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 For cash - - 750,000 750 299,250 - 300,000 Exercise of common stock options - - 224,825 225 174,775 175,000 Dividend on preferred stock (24,314) (24,314) Net income (loss) - - - - - 231,362 231,362 -------- ---------- ------------- ------------ --------------- --------------- ---------------- Balance, June 30, 2001 2,763 $ 2 11,574,619 $ 11,575 $ 7,671,319 $ (4,794,564) $ 2,888,332 ======== ========== ============= ============ =============== =============== ================ See accompanying notes to condensed consolidated financial statements.
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OnSpan Networking, Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows Nine Months Ended June 30, 2001 and 2000 (Unaudited) 2001 2000 Cash flows from operating activities Net income (loss) $ 231,362 $ (2,522,780) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss from discontinued operations, net of tax - 2,522,780 Depreciation and amortization 61,304 - Deferred income taxes 141,750 - Common stock issued for services 27,984 Unrealized gain from marketable securities (572,050) - Gain on sale of marketable securities (16,299) Allowance for bad debts 10,000 - Change in assets and liabilities (excluding effects of acquisitions): Accounts receivable 294,912 - Notes receivable 1,500,000 - Inventory (3,975) Prepaid expenses (13,876) - Accounts payable (403,880) - Accrued expenses (41,141) - Income taxes payable (81,176) - ------------------- -------------------- Net cash provided by operating activities 1,134,915 - ------------------- -------------------- Cash flows from investing activities Proceeds from sale of marketable securities 34,299 Net cash received in acquisition of interLAN 152,239 - Capital expenditures (26,198) - ------------------- -------------------- Net cash provided by investing activities 160,340 - ------------------- -------------------- Cash flows from financing activities Sales of common stock 475,000 - Payment of notes payable (819,436) - Payment of notes payable to shareholders (150,000) Payment to purchasers of discontinued operations (35,958) - ------------------- -------------------- Net cash used in financing activities (530,394) - ------------------- -------------------- Net increase in cash and cash equivalents from continuing operations 764,861 - Cash and cash equivalents, beginning of period from continuing operations 750,000 - ------------------- -------------------- Cash and cash equivalents, end of period $ 1,514,861 $ - =================== ==================== See accompanying notes to condensed consolidated financial statements. Continued
6 OnSpan Networking, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows Nine Months Ended June 30, 2001 and 2000 (Unaudited) (Continued) 2001 2000 Supplemental Cash Flow Information Cash paid for interest and income taxes are as follows: Interest $ 1,821 $ 208,845 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 Nine Months Ended June 30, 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 9, 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. The Company now trades under the symbol ONSP. 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. 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." 9 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 June 30, 2001 is as follows: 2001 Trading securities: Cost $ 403,800 Unrealized gain 572,050 ----------------- $ 975,850 ================= The Company included unrealized gains in the amount of $554,475 and $572,050 in earnings for the three and nine-month periods ended June 30, 2001, respectively. 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 nine-month periods ended June 30, 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. 10
2001 2000 Sales $ 2,954,043 $ 2,337,725 ================= =============== Net earnings (loss) from continuing operations 209,716 (19,461) Dividends on preferred shares 24,314 25,485 ----------------- --------------- Net earnings (loss) applicable to common shares $ 185,402 $ (44,946) ================= =============== Net earnings (loss) per common share, basic and diluted, from continuing operations $ .02 $ (.01) ================= ===============
E. Notes payable In connection with the Stock Purchase Agreement and transactions discussed in Note K, 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. The Company incurred additional debt in the amount of $42,180 to finance insurance premiums. The balance was $11,632 at June 30, 2001. F. Stockholder's Equity On July 27, 2001, the Company filed a Form S-8 with the Securities and Exchange Commission reporting that on June 28, 2001, Herbert Tabin, the Company's Chief Executive Officer was issued and exercised 174,825 stock options, for a total of $100,000, under the long-term incentive plan. These stock options were exercised at a price of $.572. On June 28, 2001, the Company raised in a private financing $300,000 under 4(2) from three investors in exchange for 750,000 shares of the Company's restricted common stock. 11 G. Earnings per share The following data for the nine months ended June 30, 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 Income from continuing operations $ 231,362 $ - Less preferred stock dividends 24,314 25,485 ------------------ ------------------ Imcome(loss) available to common shareholders used in basic and diluted EPS $ 207,048 $ (25,485) ================== ================== Loss from discontinued operations available to common shareholders used in basic and diluted EPS $ - $ (2,522,780) ================== ================== Weighted average number of common shares used in basic EPS 10,369,484 7,799,027 Effect of dilutive securities: stock options and Warrants 307,816 - ------------------ ------------------ Weighted average number of common shares used in diluted EPS 10,677,300 7,799,027 ================== ==================
The following data for the three months ended June 30, 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 Earnings from continuing operations $ 296,701 $ - Less preferred stock dividends 24,314 8,193 ------------------ ------------------ Income(loss) available to common shareholders used in basic and diluted EPS $ 272,387 $ (8,193) ================== ================== Loss from discontinued operations available to common shareholders used in basic and diluted EPS $ - $ (2,522,780) ================== ================== Weighted average number of common shares used in basic EPS 10,651,524 7,805,544 Effect of dilutive securities: stock options and warrents 320,504 - ------------------ ------------------ Weighted average number of common shares used in dilutive EPS 10,972,028 7,805,544 ================== ==================
At June 30, 2001 the Company had 172,00 options to purchase common shares and 2,763 shares of preferred stock, convertible into 138,150 shares of common stock included in the dilutive earnings per share calculations . 12 At June 30, 2000, all common stock equivalents were antidilutive and are not included in the earnings per share calculations. The Company had 704,000 options to purchase common shares and 3,455 shares of preferred stock that were antidilutive and are not included in the earnings per share calculations for 2000. H. Income Taxes Income tax expense for continuing operations for the nine months ended June 30, 2001 and 2000 consists of: 2001 2000 Current tax expense: Federal $ - $ - State - - ------------- ------------- - - Deferred tax expense (141,750) - -------------- ------------- Total income tax expense $ (141,750) $ - ============== ============= 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 nine months ended June 30, 2001 and 2000: 2001 2000 "Normally expected" income tax expense $ (141,350) $ - State income taxes, net of Federal Income tax benefit (600) - Non-deductible meals and other 200 - ------------- ------------- $ (141,750) $ - ============== ============= The deferred income tax assets at June 30, 2001 are comprised of the following: Current Non-current Net operating loss $ 57,700 $ - Marketable equity securities (217,150) - Allowance for bad debts 3,800 - Goodwill - 13,900 ------------ ------------- Net deferred income tax assets $ (155,650) $ 13,900 ============= ============= I. Legal Proceedings Canton Financial Services Corporation vs. Network Systems International, Inc., a Nevada corporation, Network Information Services, Inc., a North Carolina corporation, Network Investment Group, Inc., a North Carolina corporation, and Network Partners, L.L.C. , a North Carolina limited liability corporation; Hillsborough County Circuit Court Case No. 98-00657, Hillsborough County Florida - The Company is currently a party in a contract dispute in which the plaintiff, "Canton Financial Services Corporation", is seeking damages from the Company for an alleged breach of contract . The plaintiff is 13 contending that the company owes Plaintiff a fee because it located an entity with which the Company merged. The Company is vigorously defending the case. The Company contends that it did not have a contract with the Plaintiff, and that it did not ratify the actions of the Renno Group, which did enter into a Consulting Agreement with the Plaintiff. The Company did have a contract with the Renno Group. The Plaintiff contends that it is entitled to between 340,000 shares and 600,000 shares of the Company's common stock. The amount of the Plaintiff's claim in dollars is difficult to quantify because it would depend upon the date the shares are valued. The Company also contends that the Plaintiff is estopped from pursuing its claim, because the Plaintiff took the position in another lawsuit that Renno alone was responsible for paying it under the Consulting Agreement. Prior Company management attempted without success to settle the case. The Company is now defending the case vigorously. Additionally, the Company has retained new counsel. There is still outstanding discovery from the Plaintiff. Trial previously set for Spring 2001 now may be set for Fall 2001. The likelihood of an unfavorable outcome is unknown. The Company has strong defenses, but it is possible that there will be an unfavorable outcome. It is impossible to precisely quantify the maximum potential loss to the Company, as any potential loss would depend on the valuation date of the stock. J. Stock Options During 1999, the Company adopted the Network Systems International, Inc. "1999 Long Term Stock Incentive Plan." The maximum number of shares authorized and available under the plan is 500,000 shares. As of June 30, 2001, 224,825 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 nine months ended June 30, 2001.
Options Options Outstanding Available Weighted Average For Grant Options Exercise Price Balance, September 30, 2000 274,000 226,000 $ 4.18 --------- --------- ------------ Granted (371,825) 371,825 .93 Exercised - (224,825) .78 Cancelled 201,000 (201,000) 4.63 --------- --------- ------------ Balance, June 30, 2001 103,175 172,000 $ 1.09 ========= ========= ============
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, 201,000 of 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 14 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 nine-month periods ended June 30, 2001 and 2000: 2001 2000 Actual net income $ 231,362 $ (2,522,780) ============== ================== Pro forma net income (loss) $ 176,892 $ (2,522,780) ============== ================== Pro forma basic and diluted net Income (loss) per share $ .02 $ (.33) ============== ================== 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 June 30, 2001, the following weighted average assumptions were used: risk-free interest rate of 6.0%, no expected dividends, a volatility factor of 158.85%, 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. K. 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 nine months ended June 30, 2000 were as follows: 2000 Net sales $ 6,569,496 ================== Loss before income tax benefit (3,603,509) Income tax benefit (1,080,729) ------------------ Net loss from discontinued operations $ (2,522,780) ================== The notes receivable in the amount of $1,500,000 were collected in January 2001. L. Recent Accounting Pronouncements In June 1998, FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June, 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments -- Deferral of the Effective date of SFAS Statement No. 133. SFAS No. 137 deferred the effective date of SFAS No. 15 133 until June 15, 2000. The Company has adopted SFAS No. 133 as required for its first quarterly filing of fiscal year 2001. SFAS No. 133 shall be effective for all subsequent quarters and annual filings. The adoption of SFAS No. 133 did not have a material effect on the financial position or results of operations of the Company. In July 2001, FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We believe that the adoption of SFAS No. 141 will not have a significant impact on our financial statements. In July 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. We are currently assessing but have not yet determined the impact of SFAS No. 142 on our financial position and results of operations. In June 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF Issue No. 00-25 addresses whether consideration from a vendor to a reseller is (a) an adjustment of the selling prices of the vendor's products and, therefore, should be deducted from revenue when recognized in the vendor's income statement or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be included as a cost or expense when recognized in the vendor's income statement. The Company will adopt EITF Issue No. 00-25 effective January 1, 2002. The adoption of EITF Issue No. 00-25 is not expected to have a material impact on the Company's financial statements. 16 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 common stock was to be delisted from the Nasdaq SmallCap 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. On June 6, 2001 the Company furnished the Nasdaq Listing Qualifications Panel with a plan of compliance. August 1, 2001, the Company was notified by the Panel that it failed to demonstrate a closing bid price of at least $1.00 per share for 30 consecutive trading days. The Company was invited to make an additional submission to the Panel to address the bid price deficiency. In correspondence dated August 8, 2001, the Company indicated that shareholders' equity at June 30, 2001 was approximately $2,900,000. Further, the Company represented that prior to June 30th it had closed a private placement and exercised options, for an additional $400,000. Accordingly, the Panel determined to continue the listing of the Company's securities on The Nasdaq SmallCap Market pursuant to the following exception: On or before November 7, 2001, the Company must evidence a closing price of at least $1.00 per share for a minimum of ten consecutive trading days. In order to comply with the terms of this exception, the Company must be able to demonstrate compliance with all requirements for continued listing on The Nasdaq SmallCap Market. In the event the Company fails to comply with any of the terms of the exception, the Company's securities may be delisted from the Nasdaq Stock Market. A. LIQUIDITY AND CAPITAL RESOURCES Because of the nature of the data and 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. 17 During the nine months ended June 30, 2001, working capital increased $1,076,112 to $2,495,112 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 June 30, 2001 of $975,850 and the cash received from the sale of common stock in the amount of $475,000. During this same period, stockholders' equity increased $1,469,332 to $2,888,332 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, the common stock issued to acquire marketable securities and the common stock issued for cash consisting primarily of a private financing under which the Company raised $300,000 under 4(2) from three investors in exchange for 750,000 shares of the Company's restricted stock. 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. The Company anticipates to obtain sufficient working capital to accomplish its near-term objectives through the sale of its unregistered common stock in a private placement. 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. SALES AND COST OF SALES - The Company's sales consist solely of those provided by interLAN. Pro forma sales for the nine months ended June 30, 2001 were $2,954,043 as compared to $2,337,725 for the year earlier period, an increase of $616,318 (26%). Sales for the three months ended June 30, 2001 were $858,620 as compared to $1,074,565 during the same year earlier period, a decline of 20%. 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. During the three month period ended June 30, 2001, the Company experienced a gross profit percentage of approximately 15% before salaries, wages and other selling, general and administrative expenses, as compared to 18% for the nine-month period ended June 30, 2001. The Company experienced a 20% decline in sales during the quarter ended June 30, 2001 as compared to the same year earlier period, which the Company attributes primarily to the economic downturn. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The Company's selling, general and administrative expenses, including salaries and wages amounted to $661,374 during the nine months ended June 30, 2001 ($730,762 on a pro forma basis, as if interLAN were acquired on October 1, 2000) as compared to $400,436, on a pro forma basis for interLAN 18 only, during the nine months ended June 30, 2000. The increase of $330,326 includes $133,151 for OnSpan and an increase of $197,175 for interLAN. The interLAN increase includes $54,643 in goodwill amortization; accordingly the operating costs increased $142,532 or 35% during the period when sales increased 26%. 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, $32,763 for insurance, $23,583 for other professional services, $19,661 for filing fees and $17,144 for other miscellaneous costs. INCOME TAXES - The Company recorded $141,750 in deferred income tax expense for the nine-month period ended June 30, 2001. DISCONTINUED OPERATIONS - The operations of the Company, for the three and nine months ended June 30, 2000, which were sold effective September 30, 2000, have been reclassified as loss from discontinued operations. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)Exhibits - (1) On July 27, 2001, the Company filed a Form S-8 with the Securities and Exchange Commission reporting that on June 28, 2001, Herbert Tabin, the Company's Chief Executive Officer was issued and exercised 174,825 options, for a total of $100,000, under the long-term incentive plan. These shares were exercised at a price of $.572. (b)Reports on Form 8-K - Not applicable SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ONSPAN NETWORKING, INC. Date: August 14, 2001 By: /s/ Herbert Tabin -------------------------------- Herbert Tabin, President Date: August 14, 2001 By: /s/ Marissa Dermer -------------------------------- Marissa Dermer, Chief Financial and Principal Accounting Officer 19 -----END PRIVACY-ENHANCED MESSAGE-----