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: December 31, 2003
Commission File Number: 0-22991
ONSPAN NETWORKING, INC.
-----------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 87-0460247
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(State of Incorporation) (IRS Employer ID No)
6413 CONGRESS AVENUE, SUITE 230, BOCA RATON, FL 33487
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(Address of principal executive office)
(561) 988-2334
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of registrant's common stock, par value $.012
per share, as of December 31, 2003 was 968,677.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
ONSPAN NETWORKING, INC. AND SUBSIDIARY
INDEX
Page
No.
----
Part I. Unaudited Financial Information
Item 1. Condensed Consolidated:
Balance Sheet - December 31, 2003 ...............................3
Statements of Operations -
Three Months Ended December 31, 2003 and 2002 ...................4
Statement of Stockholders' Equity -
Three Months Ended December 31, 2003 ............................5
Statements of Cash Flows -
Three Months Ended December 31, 2003 and 2002 ...................6
Notes to Financial Statements -
Three Months Ended December 31, 2003 and 2002 ................7-14
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations ...............14-23
Part II.
Item 1. Legal Proceedings ..............................................23
Item 5. Other Information ..............................................24
Item 6. Exhibits and Reports Form 8-K ..................................25
2
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 12,049
Deposits .................................................... 3,705
Prepaid Insurance ........................................... 5,367
Inventory - Home ............................................ 1,489,776
-----------
Total current assets .......................................... 1,510,897
Property and equipment, net ................................... 1,908
-----------
$ 1,512,805
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................ $ 33,199
Accrued dividend ............................................ 30,946
Accrued wages ............................................... 22,000
Accrued interest ............................................ 17,940
Note Payable ................................................ 100,000
Loan Payable ................................................ 675,000
Amounts due to purchasers of discontinued operations ........ 55,929
-----------
Total current liabilities ..................................... 935,014
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value; authorized 12,500
shares; issued and outstanding 2,713 shares;
liquidation preference $271,300 ........................... 2
Common stock, $.012 par value. Authorized 8,333,333
shares; issued and outstanding 968,677 shares .............. 11,624
Paid-in capital ............................................. 7,873,709
Accumulated deficit ......................................... (7,307,544)
-----------
Total stockholders' equity .................................... 577,791
-----------
$ 1,512,805
===========
See accompanying notes to condensed consolidated financial statements.
3
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
2003 2002
COSTS AND EXPENSES:
Salaries and wages ............................... $ 22,000 $ 39,000
Other selling, general and
administrative expenses ........................ 82,641 63,665
--------- ---------
104,641 102,665
--------- ---------
Earnings (loss) from operations .................... (104,641) (102,665)
OTHER INCOME (EXPENSE):
Interest income .................................. - 4,113
Unrealized (loss) on
marketable equity securities ................... - (19,000)
--------- ---------
Total other income (expense) ................... - (14,887)
--------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES ................ (104,641) (117,552)
INCOME TAX (BEFEFIT) EXPENSE ....................... - -
--------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS ......... (104,641) (117,552)
--------- ---------
NET EARNINGS (LOSS) ................................ (104,641) (117,552)
DIVIDENDS ON PREFERRED SHARES ...................... - -
--------- ---------
NET EARNINGS (LOSS) APPLICABLE TO
COMMON SHARES .................................... $(104,641) $(117,552)
========= =========
BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
CONTINUED OPERATIONS ............................. $ (0.11) $ (0.12)
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC ............................................ 968,677 968,677
========= =========
DILUTED .......................................... 968,677 968,677
========= =========
See accompanying notes to condensed consolidated financial statements.
4
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Preferred Stock Common Stock Paid-in Retained
Shares Par Value Shares Par Value Capital Earnings Total
------ --------- ------ --------- ------- -------- -----
BALANCE, September 30, 2003 2,713 $ 2 968,677 $ 11,624 $7,873,709 $(7,202,903) $ 682,432
Net (loss) ................ - - - - - (104,641) (104,641)
------ --------- ------- --------- ---------- ----------- ---------
BALANCE, December 31, 2003 2,713 $ 2 968,677 $ 11,624 $7,873,709 $(7,307,544) $ 577,791
====== ========= ======= ========= ========== =========== =========
See accompanying notes to condensed consolidated financial statements.
5
ONSPAN NETWORKING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................... $(104,641) $ (117,552)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ...................... 148 230
Deferred income taxes .............................. - -
Unrealized loss from marketable securities ......... - 19,000
Change in assets and liabilities (excluding
effects of acquisitions):
Accounts receivable .............................. - -
Income tax receivable ............................ - 45,147
Inventory ........................................ (25,433) -
Prepaid expenses ................................. 4,918 11,833
Accounts payable ................................. (32,835) (378)
Accrued expenses ................................. 30,507 30,000
--------- -----------
Net cash used in operating activities ................ (127,336) (11,720)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................... (689) -
--------- -----------
Net cash (used in) provided by investing activities . (689) -
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan payable ....................................... 100,000 -
Payment to purchasers of discontinued operations ... - -
--------- -----------
Net cash used in financing activities ................ 100,000 -
--------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............ (28,025) (11,720)
CASH AND CASH EQUIVALENTS, beginning of period
from continuing operations ......................... 40,074 1,030,611
--------- -----------
CASH AND CASH EQUIVALENTS, end of period ............. $ 12,049 $ 1,018,891
========= ===========
See accompanying notes to condensed consolidated financial statements.
6
ONSPAN NETWORKING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
A. ORGANIZATION
Onspan Networking, Inc. (the "Company" or "Onspan"), a Nevada corporation, is a
holding company. The financial statements include the accounts of the Company
and the discontinued operations of InterLAN Communications, Inc. ("InterLAN")
(http://www.interlancom.com). Onspan changed its name from Network Systems
International, Inc. effective February 10, 2001.
Originally incorporated in 1985, as Network Information Services, Inc., Network
Systems International, Inc. ("NESI"), a Nevada corporation, was the surviving
corporation of a reverse merger completed in April 1996. The Company became a
publicly traded entity in connection with the re-organization.
On July 10, 1998, the Company's stock was officially approved for listing on the
NASDAQ small cap market and the Company's common stock began trading on NASDAQ
Small Cap under the symbol NESI. As of April 2, 2002, the securities were
de-listed from the Nasdaq SmallCap market and now trade on the Over-The-Counter
Bulletin Board under the symbol ONSP.
On November 10, 2000, Onspan completed the acquisition of 100% of the issued and
outstanding common stock of InterLAN, a Virginia corporation.
On August 5, 2002, the Company sold and transferred the stock of its
wholly-owned subsidiary, InterLAN Communications, Inc. to G. Anthony Munno,
Martin Sainsbury Carter and Brian Ianniello, who were executives and employees
of InterLAN. In exchange for the assignment of the InterLAN stock, Messrs.
Munno, Carter and Ianniello transferred 21,168 shares of Onspan common shares,
and Onspan was relieved of substantially all obligations and guarantees provided
to third parties. Onspan also retained the right to a certain tax refund in
amount of $45,147 owing to InterLAN. These individuals also resigned in all
capacities as directors, officers and/or employees of Onspan. Onspan retained
the following assets of the corporation in cash of $1,078,883, the marketable
securities, the prepaid expenses, the entire income tax receivable, and $2,611
in property. The liabilities Onspan retained include the dividend payable amount
due to purchasers of discontinued operations, and the balance of the note
payable.
On April 22, 2003 the Company created a new subsidiary, Coventry 1 Inc. which is
a Nevada Corporation. The Company's other subsidiary Onspan SmartHouse, Inc., is
a Florida Corporation.
7
Prior to August 5, 2002, the Company, a Nevada corporation, was a holding
Company, that through its wholly owned subsidiary, InterLAN Communications, Inc.
("InterLAN"), developed data communications and networking infrastructure
solutions for business, government and education. Following August 5, 2002, the
Company, announced a change in its strategy and subsequently sold its operating
division InterLAN. The Company's recently changed its business focus to
residential real estate development and building construction services. From
1985 until 2002, the Company's business primarily concentrated on sales of
computer hardware and software. In April of 2003, the Company changed its focus
to investing in and revitalizing single family homes in established residential
neighborhoods in suburban areas. The Company closed on this property on June 19,
2003. The Company has entered into a contract with Garcia Brenner & Stromberg
architects to design the project. The Company intends to renovate and expand the
existing single-family home project on this site. This project, known as
Coventry 1 Inc., has entered into the permitting stage.
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation. These financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the year ended
September 30, 2003, which is included in the Company's Form 10-KSB for the year
ended September 30, 2003. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the complete year.
B. ACCOUNTING POLICIES
BASIS OF PREPARATION - The financial statements at December 31, 2003 and 2002,
include the accounts of the Company and its wholly owned subsidiaries.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
for the period ended December 31, 2003 include the accounts of Onspan
Networking, Inc. and its subsidiaries, Coventry 1, Inc. and Onspan Smarthouse
Inc. All significant intercompany accounts and transactions have been
eliminated.
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.
8
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash and cash
equivalents, accounts receivable, marketable equity securities, notes
receivable, income taxes receivable, accounts payable, amounts due to purchasers
of discontinued operations and note payable approximate fair value as of
December 31, 2003, because of the short maturity of these instruments.
REVENUE RECOGNITION - The Company recognizes revenue from all homebuilding
activities at the closing of the sale using the deposit method. During
construction, all direct material and labor costs and those indirect costs
related to acquisition and construction are capitalized, and all customer
deposits are treated as liabilities. Capitalized costs are charged to earnings
upon closing. Costs incurred in connection with completed homes and selling,
general, and administrative costs are charged to expense as incurred. Provision
for estimated losses on uncompleted contracts and on speculative projects is
made in the period in which such losses are determined
INVESTMENT SECURITIES - Investments are classified into three categories as
follows:
1. Trading securities reported at fair value with unrealized gains and
losses included in earnings;
2. Securities available-for-sale reported at fair value with unrealized
gains and losses reported in other comprehensive income; and
3. Held-to-maturity securities reported at amortized cost.
PREFERRED STOCK - At December 31, 2003, the Company had 2,713 shares outstanding
of its Series A Convertible Preferred Stock ("Series A"). This issue has a
stated liquidation preference value of $100 per share redeemable at the
Company's option, has no voting rights, and each preferred share is convertible
into 4 shares of the Company's common stock as adjusted for the 1 for 12 reverse
stock split. Dividends on the Series A were to be paid monthly in cash at a rate
of 12% of the original issue. The Company's Board of Directors, elected for the
payment of cash dividends on its Series A to be suspended. In particular, the
Board took such actions as necessary to preserve the Company's working capital
in order to ensure the continued viability of the Company. The Board of
Directors is unable at this time to predict if the Company will resume the
payment of cash dividends on its Series A 12% Cumulative Convertible Preferred
Stock. However, the Company has accrued dividends on these shares in the amount
of $30,946 at December 31, 2003.
9
INCOME TAXES - The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, the liability method is used in accounting
for income taxes and deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK OPTION PLAN - The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its stock option plan. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
EARNINGS PER SHARE - The financial statements are presented in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share". Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share
reflect the potential dilution from the exercise or conversion of securities
into common stock.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Expenditures
for significant renewals and improvements are capitalized. Repairs and
maintenance are charged to expense as incurred. Depreciation is computed using
an accelerated method for both financial and tax purposes based upon the useful
lives of the assets.
C. INVENTORY HOME
Inventory - home which is reflected at cost consists of the following at
December 31, 2003 :
Home Basis .............................. $1,440,865
Improvements ............................ 48,911
----------
Total Basis ............................. $1,489,776
==========
10
D. PROPERTY AND EQUIPMENT
Property and equipment, which are reflected at cost, consist of the following at
December 31, 2003:
Computer equipment ...................... $ 4,378
-------
Total property and equipment ............ $ 4,378
Less: accumulated depreciation .......... (2,470)
-------
Property and equipment, net ............. $ 1,908
=======
Depreciation expense for the three months ended December 31, 2003 and
2002 is $148 and $230, respectively.
E. REVOLVING CREDIT NOTE
The Company has a demand line of credit with a related party (Evolve One Inc),
totaling $1,000,000, under which the Company may borrow on an unsecured basis at
5% annually. There was $675,000 outstanding under this line of credit at
December 31, 2003. Evolve One has deferred receiving the first payment of
interest due under the Note at December 19, 2003.As of December 31,2003 the
Company has accrued $17,940 in interest on this note. As of December 31, 2003,
Evolve One, Inc did not have sufficient cash reserves to fully fund the
available credit under the line of credit.
The terms of the demand line of credit state that the Company must issue options
to purchase common stock equal to 10% of the dollar amount of the loan advance
at an exercise price of $0.10 per share, and options to purchase common stock
equal to 90% of the dollar amount of the loan advance at the ten trading day
average at the time of the draw ($0.30 at June 30, 2003). Under these terms, the
Company issued 675,000 stock options resulting in a charge to interest expense
of $110,008.
F. NOTE PAYABLE - SHAREHOLDER
On October 24, 2003 the Company entered into a Note Purchase Agreement with our
President, Herbert Tabin. If the note is not repaid or converted by the due date
, then the company will issue to Mr. Tabin a three year warrant to purchase
shares of the Company's common stock, par value $.012 per share for the
aggregate exercise price of $5,000, at a price per share equal to $0.01.
The Note Purchase agreement, is a Convertible Prommisory Note for $100,000 was
issued by the Company on October 24, 2003 to Mr. Tabin. This note is due on July
31, 2004,and accrues interest at a rate of 5.25% per annum payable at maturity.
If the Company defaults on this note, the aggregate principle plus accrued
interest will be eligible to be converted immediately into shares of common
stock . If the note is not repaid or converted by the due date, then the company
will issue to Mr. Tabin a three year warrant to purchase shares of the Company's
common stock, par value $.012 per share for the aggregate exercise price of
$5,000, at a price per share equal to $0.01.
11
G. EARNINGS PER SHARE
Basic earning (loss) per share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect per share amounts that
would have resulted if dilutive potential common stock had been converted to
common stock. The following reconciles amounts reported in the financial
statements:
2003 2002
Net loss from continuing operations .................... $(104,641) $(117,552)
Denominator for basic earnings per share -
Weighted average shares ................................ 968,677 968,677
Effect of dilutive securities - stock options .......... - -
--------- ---------
Denominator for diluted earnings per share -
Weighted average shares adjusted for dilutive securities 968,677 968,677
========= =========
Basic and diluted earnings (loss) per common share:
Net loss) .............................................. $ (.11) $ (.12)
========= =========
H. LEGAL PROCEEDINGS
1. Network Systems International of North Carolina, Inc. v Network Systems
International, Inc. and OnSpan Networking, Inc. (02-CvS-10154) (Complaint filed
September 13, 2002). This action asserts a claim for breach of contract against
the Company, seeking certain tax refunds obtained by the Company. The plaintiff,
a former subsidiary of the Company, claims that these tax refunds belong to the
plaintiff. The Company has filed an answer disputing the amounts claimed and
seeking reimbursement for certain expenses incurred by the Company on behalf of
the plaintiff. The parties have engaged in settlement discussions, which have
been unsuccessful to date.
2. Securities Actions:
a. Richard T. Clark and Joel C. Holt v. OnSpan Networking, Inc. and Herbert
Tabin, Case No. 03-CV-298K (N.D. Okla.) (Removed from state court May 1, 2003);
This action asserts claims for violation of Oklahoma securities law, fraud,
breach of contract, and breach of fiduciary duties. The action seeks damages in
the amount of $300,000, for each plaintiff, the plaintiffs' attorneys' fees and
costs, and certain other relief. The case was filed in Oklahoma State court on
March 28, 2003, and it was removed to federal court on May 1, 2003. The Company
has filed a Motion to Dismiss the matter.
12
b. D. Mark White v OnSpan Networking, Inc. and Herbert Tabin, Case No. 352198686
03 (District Court, Tarrant County Texas) (Complaint filed May 2, 2003) This
action asserts claims for violation of Texas securities law, fraud, and breach
of fiduciary duties. The action seeks unspecified damages, restitution in the
amount of $300,000, punitive damages, pre-judgment interest, the plaintiffs'
attorneys' fees and costs, and certain other relief. The case was filed in Texas
state court on May 2, 2002. The Company has filed a Motion to Dismiss
Plaintiff's Amended Complaint.
No discovery has taken place in either of these two actions. The Company will
vigorously defend both of these actions.
I. GOING CONCERN
The accompanying condensed financials were prepared assuming that the Company
will continue as a going concern. The Company is currently a party to several
legal proceedings and although the Company will vigorously defend all of these
actions, the Company is unable to estimate with any reasonable certainty what
liability it may have to these litigants. There are no assurances that the
Company will be successful in defending these legal proceedings, or if
successful the cost of defending these legal proceedings may significantly
deplete the capital of the Company impairing the Company's ability to continue
as a going concern. Accordingly, there are no assurances that the Company will
be successful in achieving the above plans, or that such plans, if consummated,
will enable the Company to obtain profitable operations or continue as a going
concern, in addition the Company's lender does not have sufficient cash reserves
to fund the available credit line.
J. CONCENTRATIONS
GEOGRAPHICAL
Currently, all of the Company's material revenues to be derived in 2004 are from
one house located in Palm Beach County within the State of Florida. Accordingly,
the Company could be adversely affected by natural disasters, such as hurricanes
or other tropical storms or events, economic downturns, significant
unemployment, and other economic conditions that may occur from time to time in
Florida, which may not have as much impact on more geographically diversified
competitors.
FINANCIAL
The Company is currently reliant on construction/mortgage financing provided by
one lender - Evolve One Inc. Any financial or legal impairment of this lender
may have an impact on our current projects. An impairment of our lender may
force the Company to cancel outstanding projects, may cause project delays or
may ultimately force the Company to sell its projects.
13
K. SUBSEQUENT EVENTS
On January 26, 2004 , Gary Schultheis exercised 122,000 employee stock options.
These options had an exercisable price of .30 a share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Company has identified the policies outlined below as critical to its
business operations and an understanding of its results of operations. The
listing is not intended to be a comprehensive list of all of the Company's
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States, with no need for management's judgment in their
application. The impact and any associated risks related to these policies on
the Company's business operations is discussed throughout Management's
Discussion and Analysis or plan of operations where such policies affect the
Company's reported and expected financial results. For a detailed discussion on
the application of these and other accounting policies, see the Notes to
Consolidated Financial Statements. The Company's preparation of the financial
statements requires it to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the Company's financial statements, and the reported
amounts of revenue and expenses during the reporting period. There can be no
assurance that actual results will not differ from those estimates.
PLAN OF OPERATION
Prior to August 5, 2002, the Company, a Nevada corporation, was a holding
Company, that through its wholly owned subsidiary, InterLAN Communications, Inc.
("InterLAN"), developed data communications and networking infrastructure
solutions for business, government and education. Following August 5, 2002, the
Company, announced a change in its strategy and subsequently sold its operating
division InterLAN. The Company's recently changed its business focus to
residential real estate development and building construction services. From
1985 until 2002, the Company's business primarily concentrated on sales of
computer hardware and software. In April of 2003, the Company changed its focus
to investing in and revitalizing single family homes in established residential
neighborhoods in suburban areas. The Company closed on this property on June 19,
2003. The Company has entered into a contract with Garcia Brenner & Stromberg
architects to design the project. The Company intends to renovate and expand the
existing single-family home project on this site. This project, known as
Coventry 1 Inc., has entered the permitting stage.
14
RISK FACTORS
REAL ESTATE DEVELOPMENT INDUSTRY
Ownership of properties in the categories of which the Company invests is highly
fragmented among individuals, partnerships, public and private corporations, and
REITs. No single entity or person dominates the market for such properties. At
any given time, a significant number of home properties as well as individual
lots and tracts suitable for single-family homes are available for purchase in
the various markets where the Company may seek additional acquisitions. Industry
risks include environmental hazards; changes in general or local economic
conditions; changes in interest rates and the availability of permanent mortgage
financing which may render the acquisition, sale, or refinancing of a property
difficult or unattractive and which may make debt service burdensome; changes in
real estate and zoning laws; changes in income taxes, real estate taxes, or
federal or local economic or rent controls; floods, earthquakes, and other acts
of nature; and other factors beyond the control of any firm involved in the real
estate development industry. Further, the Company, as other companies it size,
will in all probability continue to encounter problems in obtaining contractors
who, in turn, are able to obtain performance bonds for building contracts;
obtaining bank financing for construction; and obtaining financing without
personal guarantees of its officers and directors, all of which materially
adversely affect its ability to carry on its business. The illiquidity of real
estate investments generally may impair an industry participant's ability to
respond promptly to changing circumstances. See "Risk Factors," below.
CERTAIN RISK FACTORS ASSOCIATED WITH REAL ESTATE AND RELATED INVESTMENTS.
The Company is subject to the risks associated with ownership, operation, and
financing of real estate. These risks include, but are not limited to, liability
for environmental hazards; changes in general or local economic conditions;
changes in interest rates and the availability of construction and permanent
mortgage financing which may render the acquisition, sale, or refinancing of a
property difficult or unattractive and which may make debt service burdensome;
changes in real estate and zoning laws; bonding requirements; permitting
requirements, changes in income taxes, real estate taxes, or federal or local
economic or rent controls; floods, earthquakes, and other acts of nature; and
other factors beyond the company's control. The illiquidity of real estate
investments generally may impair the Company's ability to respond promptly to
changing circumstances. Under federal, state, and local environmental laws,
ordinances, and regulations, the Company may be liable for removal or
remediation costs, as well as other costs (such as fines or injuries to persons
and property) where our employees may have arranged for removal, disposal, or
treatment of hazardous or toxic substances. In addition, environmental laws
impose liability for release of asbestos-containing materials into the air, and
third parties can seek recovery from the Company for personal injury associated
with those materials.
15
LIMITED REVENUES; LIMITED RELEVANT OPERATING HISTORY; SIGNIFICANT AND CONTINUING
OPERATING LOSSES; NEGATIVE CASH FLOW; ACCUMULATED DEFICIT.
Since its change in focus the Company has not had any revenues from sales of its
properties. Accordingly, the Company has a limited relevant operating history
upon which an evaluation of its prospects can be made. Such prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in the establishment of a relatively new business in the real estate
development industry, which is a continually evolving industry characterized by
an increasing number of market entrants and intense competition, as well as the
risks, expenses and difficulties encountered in the real estate development and
building construction business. The Company prior to its change has incurred
operating losses and has an accumulated deficit of approximately $7,307,544.
There can be no assurance that the Company will be successful in generating
revenues at a sufficient quantity or margin or that the Company will ever
achieve profitable operations.
SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL CAPITAL.
The Company's capital requirements have been and will continue to be
significant. The Company has been dependent primarily on existing capital and a
credit line. Future capital needs may be satisfied by either the private
placement of equity securities and/or debt financings. The Company based on its
cash requirements and exposure to liability from shareholder lawsuits is unsure
if existing capital will be sufficient for the next twelve months. In the event
that the Company's plans (due to unanticipated expenses, delays, problems, or
otherwise), the Company would be required to seek additional funding. Any such
additional funding could be in the form of additional equity capital. The
Company is currently, contemplating, pursuing potential funding opportunities.
However, there can be no assurance that any of such opportunities will result in
actual funding or that additional financing will be available to the Company
when needed, on commercially reasonable terms, or at all. If the Company is
unable to obtain additional financing if needed, it will likely be required to
curtail its real estate development plans and may possibly cease its operations.
Any additional equity financings may involve substantial dilution to the
Company's then-existing shareholders.
MANAGEMENT OF GROWTH AND ATTRACTION AND RETENTION OF KEY PERSONNEL.
Management of the Company's growth may place a considerable strain on the
Company's management, operations and systems. The Company's ability to execute
any future business strategy will depend in part upon its ability to manage the
demands of a growing business. Any failure of the Company's management team to
effectively manage growth could have a material adverse affect on the Company's
business, financial condition or results of operations. The Company's future
success depends in large part on the
16
continued service of its key management personnel. The Company believes that its
future success also depends on its ability to attract and retain skilled
technical, managerial and marketing personnel. Competition for qualified
personnel is intense. The Company has from time to time experienced difficulties
in recruiting qualified personnel. Failure by the Company to attract and retain
the personnel it requires could have a material adverse affect on the financial
condition and results of operations of the Company.
VOLATILITY OF MARKET PRICE; ISSUANCE OF SUBSTANTIAL NUMBER OF SHARES; AUTHORIZED
SHARES; PROXY RULES.
The Company's Common Stock has been traded since 1994. The Company believes that
factors such as (but not limited to) the sale of common stock issued on
conversion of the Company's debentures, announcements of developments related to
the Company's business, fluctuations in the Company's quarterly or annual
operating results, failure to meet expectations, general economic conditions,
interest rate changes or money supply fluctuations and developments in the
Company's relationships with clients and suppliers will cause the price of the
Company's Common Stock to fluctuate substantially. In recent years the stock
market has experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. Such fluctuations
could adversely affect the market price of the Company's Common Stock.
PENNY STOCK REGULATIONS AND REQUIREMENTS FOR LOW PRICED STOCK.
The Commission adopted regulations which generally define a "penny stock" to be
any non-Nasdaq equity security that has a market price of less than $5.00 per
share, subject to certain exceptions. Based upon the price of the Company's
Common Stock as currently traded on the OTC Bulletin Board, the Company's stock
is subject to Rule 15g-9 under the Exchange Act which imposes additional sales
practice requirements on broker-dealers which sell securities to persons other
than established customers and "accredited investors." For transactions covered
by this Rule, a broker-dealer must make a special suitability determination for
the purchaser and have received a purchasers' written consent to the transaction
prior to sale. Consequently, the Rule may have a negative effect on the ability
of shareholders to sell common shares of the Company in the secondary market.
MANAGEMENT CONTROLS THE COMPANY'S FUNDS.
Management has broad discretion over how to spend the funds held by the Company.
Although management will endeavor to act in the best interests of the
shareholders, there can be no assurance that the decision to utilize proceeds
will prove profitable to the Company.
THE COMPANY MAY NOT BE SUCCESSFUL.
The Company is to compete in the competitive market of real estate development
and housing construction. The Company's prospects for success will depend on
management's ability to successfully market its lots or houses to buyers and its
17
apartment projects to renters. As a result, demand and market acceptance for our
projects is subject to a high level of uncertainty. The Company currently has
limited resources to undertake the activities that will be necessary to acquire
property and build real estate projects. If the Company is unable to expand its
efforts, it will not generate substantial additional revenues. Investors should
be aware that if the Company is not successful in the operation of its current
business, or any future acquisition endeavors, each investor's entire investment
in the Common Stock of the Company could become worthless. Even if the Company
is successful in our operations and potential acquisitions, it is not certain
that investors will derive a profit from investment in the Company.
THE COMPANY RELIES ON ITS MANAGEMENT.
The Company is dependent upon the members of management set forth herein. If the
current management is no longer able to provide services to the Company, its
business will be negatively affected.
ADDITIONAL DEBT, OR EQUITY FINANCING MAY AFFECT INVESTOR'S ABILITY TO SELL
COMMON STOCK.
The Company's common stock currently trades on the OTC Bulletin Board under the
symbol ONSP. Stocks trading on the OTC Bulletin Board generally attract a
smaller number of market makers and a less active public market and may be
subject to significant volatility. If the Company raises additional money from
the sale of its Common Stock, the market price could drop and investor's ability
to sell stock could be diminished. Further, even if the Company is able to
increase its authorized shares, there can be no assurance that it will be able
to obtain sufficient shareholder votes in the future for any such increase,
which votes are required by Nevada law.
THE COMPANYS STRATEGY INCLUDES PURSUING STRATEGIC ACQUISITIONS THAT MAY NOT BE
SUCCESSFUL
The Company will consider acquiring businesses that are intended to add products
and or services. Acquisitions involve a number of operational risks that the
acquired business may not be successfully integrated, may distract management
attention, may involve unforeseen costs and liabilities, and possible regulatory
costs, some or all of which could have a materially adverse effect on the
Company's financial condition or results of operations. Additionally, the
Company may make acquisitions with cash or with stock, or a combination thereof.
If the Company does make any such acquisitions, various associated risks may be
encountered, including potential dilution to the Company's then current
shareholders, as a result of additional shares of common stock being issued in
connection with the acquisitions.
18
THE COMPANY'S STOCK PRICE WILL FLUCTUATE AND MAY FALL BELOW EXPECTATIONS OF
SECURITIES ANALYSTS AND INVESTORS, WHICH COULD SUBJECT THE COMPANY TO LITIGATION
The market price of the Company's common stock may fluctuate significantly in
response to a number of factors, some of which are beyond its control. These
factors include:
- quarterly variations in operating results;
- changes in accounting treatments or principles;
- existing litigation;
- announcements by the Company or its competitors of new products and
services offerings, significant contracts, acquisitions or strategic
relationships;
- additions or departures of key personnel;
- any future sales of the Company's common stock or other securities;
- stock market price and volume fluctuations of publicly-traded
companies in general and Internet-related companies in particular;
and
- general political, economic and market conditions.
It is likely that in some future quarter the Company's operating results may
fall below the expectations of securities analysts and investors, which could
result in a decrease in the trading price of the Company's common stock. In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
The Company may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm the Company's business and operating
results.
THERE IS A LIMITED PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK AND THERE ARE NO
ASSURANCES OF A CONTINUED TRADING MARKET FOR THE COMPANY'S COMMON STOCK
The Company's common stock is currently quoted on the OTC Bulletin Board (R)
Market (OTCBB) under the symbol "ONSP". The Company's common stock is thinly
traded. There are no assurances the Company will maintain its OTC Bulletin Board
(R) listing. If the Company's common stock should be delisted from the OTC
19
Bulletin Board(R) Market, it is likely that the stock would then be quoted on
the Pink Sheets Market, which could materially and / or adversely effect any
future liquidity in the Company's common stock.
INABILITY TO SECURE AN INDEPENDENT AUDIT COMMITTEE MEMBER
Due to the potential exposure to litigation and small compensation, it may be
difficult to secure an Independent Audit Committee Member. If the Company is
unable to secure an Independent Audit Committee Member, it may be in violation
of current audit standards and may be subject to possible de-listing of which
could have a materially adverse affect on the Company's financial condition or
results of operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. Changes in
circumstances such as technological advances, changes to the Company's business
model or changes in the Company's capital strategy could result in the actual
useful lives differing from the Company's estimates. In those cases where the
Company determines that the useful life of property, plant and equipment should
be shortened, the Company will depreciate the net book value in excess of the
estimated salvage value over its revised remaining useful life.
DEFERRED TAX ASSETS
The Company records a valuation allowance to reduce the carrying value of its
deferred tax assets to an amount that is more likely than not to be realized.
While the Company has considered future taxable income and prudent and feasible
tax planning strategies in assessing the need for the valuation allowance,
should the Company determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to the carrying value
of the deferred tax assets would be charged to income in the period in which
such determination was made.
INVESTMENTS
Investments are classified as either available-for-sale or trading securities
and are held for resale in anticipation of short-term market movements or until
such securities are registered or are otherwise unrestricted. At December 31,
2002, investments consisted entirely of common stock held for resale. Trading
account assets, consisting of marketable equity securities, are stated at fair
value. Unrealized gains or losses on trading securities are recognized in the
statement of operations on a monthly basis based on changes in the fair value of
the security as quoted on national or inter-dealer stock exchanges. Net
unrealized losses related to investments held for trading as of December 31,2003
and 2002, aggregated $0 and ($19,000), respectively.
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Available-for-sale assets, which are also required to be reported at fair value,
unrealized gains and losses excluded from earnings are reported as a separate
component of stockholders' equity (net of the effect of income taxes). As of
December 31, 2003, the Company held no available-for-sale securities.
HISTORY OF BUSINESS
Originally incorporated in 1985, as Network Information Services, Inc., Network
Systems International, Inc. ("NESI"), a Nevada corporation, was the surviving
corporation of a reverse merger completed in April 1996. The Company became a
publicly traded entity in connection with the re-organization. On July 10, 1998,
the Company's stock was officially approved for listing on the NASDAQ Small Cap
market and the Company's common stock began trading on NASDAQ Small Cap under
the symbol NESI. As of April 2, 2002, the securities were de-listed from the
NASDAQ Small Cap market and now trade on the Over-The-Counter Bulletin Board
under the symbol ONSP. Effective February 10, 2001, the Company changed its name
from Network Systems International, Inc., to Onspan Networking, Inc. (the
"Company" or "Onspan"). On October 9, 2001, the Company effected a 1 for 12
reverse stock split of its issued and outstanding common stock. Prior to August
5, 2002, the Company, a Nevada corporation, was a holding company, that through
its wholly owned subsidiary, InterLAN Communications, Inc. ("InterLAN"),
developed data communications and networking infrastructure solutions for
business, government and education. On August 5, 2002, the Company completed the
sale of its operating division InterLAN and announced a change in its strategy
of business as discussed under Discontinued Operations below. April 22, 2003 the
Company created a new subsidiary, Coventry 1 Inc. that is a Nevada Corporation.
The Company's other subsidiary Onspan SmartHouse, Inc., is a Florida
Corporation.
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. All statements other than statements of historical fact included in
this section or elsewhere in this report are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Exchange Act of 1934. Important factors that
could cause actual results to differ materially from those discussed in such
forward-looking statements include: 1. General economic factors including, but
not limited to, changes in interest rates and trends in disposable income; 2.
Information and technological advances; 3. Cost of products sold; 4.
Competition; and 5. Success of marketing, advertising and promotional campaigns.
21
A. LIQUIDITY AND CAPITAL RESOURCES
Originally incorporated in 1985, as Network Information Services, Inc., Network
Systems International, Inc. ("NESI"), a Nevada corporation, was the surviving
corporation of a reverse merger completed in April 1996. The Company became a
publicly traded entity in connection with the re-organization. On July 10, 1998,
the Company's stock was officially approved for listing on the NASDAQ Small Cap
market and the Company's common stock began trading on NASDAQ Small Cap under
the symbol NESI. As of April 2, 2002, the securities were de-listed from the
NASDAQ Small Cap market and now trade on the Over-The-Counter Bulletin Board
under the symbol ONSP. Effective February 10, 2001, the Company changed its name
from Network Systems International, Inc., to Onspan Networking, Inc. (the
"Company" or "Onspan"). On October 9, 2001, the Company effected a 1 for 12
reverse stock split of its issued and outstanding common stock. Prior to August
5, 2002, the Company, a Nevada corporation, was a holding company, that through
its wholly owned subsidiary, InterLAN Communications, Inc. ("InterLAN"),
developed data communications and networking infrastructure solutions for
business, government and education. On August 5, 2002, the Company completed the
sale of its operating division InterLAN and announced a change in its strategy
of business as discussed under Discontinued Operations below. April 22, 2003 the
Company created a new subsidiary, Coventry 1 Inc. that is a Nevada Corporation.
The Company's other subsidiary Onspan SmartHouse, Inc., is a Florida
Corporation.
During the three months ended December 31, 2003, working capital decreased
$105,182 to $575,883 from $681,065. During this same period, stockholders'
equity decreased $104,641 to $577,791 from $682,432. The decrease in
stockholders' equity is entirely due to the net loss for the period. The Company
has budgeted significant capital expenditures for the current fiscal year to
make improvements on the house. The Company is currently reliant on
construction/mortgage financing provided by one lender - Evolve One Inc. As of
December 31, 2003, Evolve One, Inc did not have sufficient cash reserves to
fully fund the available credit under the line of credit. Any financial or legal
impairment of this lender may have an impact on our current project. An
impairment of our lender may force the Company to cancel outstanding project,
may cause project delays or may ultimately force the Company to sell its
project.
The Company is currently a party to several legal proceedings and although the
Company will vigorously defend all of these actions, the Company is unable to
estimate with any reasonable certainty what liability it may have to these
litigants. There are no assurances that the Company will be successful in
defending these legal proceedings, or if successful the cost of defending these
legal proceedings may significantly deplete the capital of the Company impairing
the Company's ability to continue as a going concern. Accordingly, there are no
assurances that the Company will be successful in achieving the above plans, or
that such plans, if consummated, will enable the Company to obtain profitable
operations or continue as a going concern.
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B. RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The Company's selling, general and
administrative expenses, including salaries and wages amounted to $104,641
during the three months ended December 31, 2003 as compared to $102,665 during
the three months ended December 31, 2002. The increase of $1,976 includes
primarily a decrease of ($17,000) for salaries , ($30,000) legal settlement and
($11,883) for D & O insurance , off set by a increase of $46,568 for legal fees
due to the three ongoing lawsuits and $7,225 in rent.
INCOME TAXES - The Company recorded $39,360 in deferred income tax expense for
the three-month period ended December 31, 2003, a 100% valuation allowance was
taken against this amount as of December 31, 2003. The Company recorded $43,655
in deferred income tax expense for the three-month period ended December 31,
2002, a 100% valuation allowance was taken against this amount as of December
31, 2002
MARKETABLE EQUITY SECURITIES - As of December 31, 2002, the Company held 100,000
shares of eResource Capital Group (AMEX:RCG)("eResource") with a cost basis of
$504,000 ($5.04 per share). For the three months ended December 31, 2002, the
Company recorded an unrealized loss from trading securities of ($19,000) on the
Company's stock and had a quoted market value of $61,000 or $0.61 (sixty one
cents) per share.
PART II - OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
1. Network Systems International of North Carolina, Inc. v Network
Systems International, Inc. and OnSpan Networking, Inc. (02-CvS-10154)
(Complaint filed September 13, 2002). This action asserts a claim for breach of
contract against the Company, seeking certain tax refunds obtained by the
Company. The plaintiff, a former subsidiary of the Company, claims that these
tax refunds belong to the plaintiff. The Company has filed an answer disputing
the amounts claimed and seeking reimbursement for certain expenses incurred by
the Company on behalf of the plaintiff. The parties have engaged in settlement
discussions, which have been unsuccessful to date.
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2. Securities Actions:
a. Richard T. Clark and Joel C. Holt v. OnSpan Networking,
Inc. and Herbert Tabin, Case No. 03-CV-298K (N.D. Okla.) (Removed from
state court May 1, 2003); This action asserts claims for violation of
Oklahoma securities law, fraud, breach of contract, and breach of
fiduciary duties. The action seeks damages in the amount of $300,000,
for each plaintiff, the plaintiffs' attorneys' fees and costs, and
certain other relief. The case was filed in Oklahoma State court on
March 28, 2003, and it was removed to federal court on May 1, 2003. The
Company has filed a Motion to Dismiss the matter.
b. D. Mark White v OnSpan Networking, Inc. and Herbert Tabin,
Case No. 352198686 03 (District Court, Tarrant County Texas) (Complaint
filed May 2, 2003) This action asserts claims for violation of Texas
securities law, fraud, and breach of fiduciary duties. The action seeks
unspecified damages, restitution in the amount of $300,000, punitive
damages, pre-judgment interest, the plaintiffs' attorneys' fees and
costs, and certain other relief. The case was filed in Texas state
court on May 2, 2002. The Company has filed a Motion to Dismiss
Plaintiff's Amended Complaint.
ITEM 5.
OTHER INFORMATION
There is no immediate family relationship between or among any of the Directors
and Executive Officers, except Ms. Dermer who is the sister-in-law of Mr. Tabin.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This
evaluation was done under the supervision and with the participation of the
Company's President and Chief Financial Officer. Based upon that evaluation,
they concluded that the Company's disclosure controls and procedures are
effective in gathering, analyzing and disclosing information needed to satisfy
the Company's disclosure obligations under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.
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ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
4.0 Long Term Incentive Stock Options Plan (1)
31.1 Certification of President Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of President Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
---------
(1) Incorporated by reference to the company's report on form S-8 dated
July 27, 2001
b) Reports on Form 8-K
1. Form 8-K filed with the Securities and Exchange Commission October 16,
2001 announcing the Onspan Networking, Inc. (the "Company"), filed a
Certificate pursuant to Section 78.207 of the Nevada Statutes whereby the
Company decreasing the number of issued and outstanding shares of common
stock, par value $.012, at a rate of one for twelve (1:12), and
proportionately decreasing the number of authorized shares of common stock
at a rate of one for twelve (1:12). As a result, the Company's authorized
common stock has been reduced from 100,000,000 shares to 8,333,333 shares,
and the number of issued and outstanding shares of common stock were
reduced from 11,574,619 to approximately 964,552 shares.
2. Form 8-K filed with the Securities and Exchange Commission August 8, 2002
announcing on August 5, 2002, the Company sold and transferred the stock
of its wholly-owned subsidiary, InterLAN Communications, Inc. to G.
Anthony Munno, Martin Sainsbury Carter and Brian Ianniello, who were
executives and employees of InterLAN. In exchange for the assignment of
the InterLAN stock, Messrs. Munno, Carter and Ianniello transferred 21,168
shares of Onspan common shares, and Onspan was relieved of substantially
all obligations and guarantees provided to third parties. Onspan also
retained the right to a certain tax refund owing to InterLAN. These
individuals also resigned in all capacities as directors, officers and/or
employees of Onspan. InterLAN provides data communications and network
solutions and consulting services.
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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: February 13, 2004 By: /s/ Herbert Tabin
-----------------
Herbert Tabin, President
Date: February 13, 2004 By: /s/ Marissa Dermer
------------------
Marissa Dermer, Chief Financial
and Principal Accounting Officer
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