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.
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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.
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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