10QSB 1 form10-qsb_jun302002.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: June 30, 2002 Commission File Number: 0-22991 ONSPAN NETWORKING, INC. (Exact name of small business issuer as specified in its charter) NEVADA 87-0460247 (State of Incorporation) (IRS Employer ID No) 6413 CONGRESS AVENUE, SUITE 230, BOCA RATON, FL 33487 (Address of principal executive office) (561) 988-2334 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. The number of shares outstanding of registrant's common stock, par value $.012 per share, as of June 30, 2002 was 964,552. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]. ONSPAN NETWORKING, INC. AND SUBSIDIARY INDEX Page No. ---- Part I. Unaudited Financial Information Item 1. Condensed Consolidated: Balance Sheet - June 30, 2002 ...................................3 Condensed Consolidated Statements of Operations - Three and Nine Months Ended June 30, 2002 and 2001 ..............4 Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended June 30, 2002 .................................5 Condensed Consolidated Statements of Cash Flows - Nine Months Ended June 30, 2002 and 2001 ......................6-7 Condensed Consolidated Notes to Financial Statements - Nine Months Ended June 30, 2002 and 2001 .....................8-14 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations ...................................14-18 Part II. Other Information ..............................................19 2 ONSPAN NETWORKING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 2002 (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents ................................... $ 1,110,299 Accounts receivable, less allowance of $102,754 ............. 110,281 Marketable equity securities, net ........................... 95,000 Prepaid expenses ............................................ 75,389 Income taxes receivable ..................................... 54,007 ----------- Total current assets .......................................... 1,444,976 Property and equipment, net ................................... 19,216 ----------- $ 1,464,192 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable ............................................... $ 19,410 Accounts payable ............................................ 136,081 Accrued expenses ............................................ 23,190 Accrued dividend ............................................ 30,946 Amounts due to purchasers of discontinued operations ........ 25,929 Due to shareholders ......................................... 2,186 ----------- Total current liabilities ..................................... 237,742 STOCKHOLDERS' EQUITY Preferred stock; $.001 par value; authorized 12,500 ......... 2 shares; issued and outstanding 2,763 shares; liquidation preference $276,300 Common stock, $.012 par value. Authorized 8,333,333 ........ 11,575 shares; issued and outstanding 964,552 shares Paid-in capital ............................................. 7,755,319 Accumulated deficit ......................................... (6,540,446) ----------- Total stockholders' equity .................................... 1,226,450 ----------- $ 1,464,192 =========== See accompanying notes to condensed consolidated financial statements. 3 ONSPAN NETWORKING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 SALES AND REVENUES ................... $ 527,494 $ 858,620 $ 2,017,712 $ 2,358,562 COSTS AND EXPENSES: Cost of goods sold ................. 439,159 731,795 1,752,602 1,923,226 Salaries and wages ................. 100,676 99,796 326,043 297,937 Other selling, general and administrative expenses .......... 480,888 126,826 705,921 363,437 ----------- ----------- ----------- ----------- 1,020,723 958,417 2,784,566 2,584,600 ----------- ----------- ----------- ----------- Earnings (loss) from operations ...... (493,229) (99,797) (766,854) (226,038) OTHER INCOME (EXPENSE): Interest income .................... 5,341 7,552 20,063 12,622 Other expenses ..................... - - (2,359) - Gain on sale of marketable equity securities ................ - 16,299 - 16,299 Unrealized gain (loss) on marketable equity securities ................ (3,000) 554,475 (367,000) 572,050 Interest expense ................... (797) (378) (1,898) (1,821) ----------- ----------- ----------- ----------- Total other income (expense) ..... 1,544 577,948 (351,194) 599,150 ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES ............. (491,685) 478,151 (1,118,048) 373,112 INCOME TAX EXPENSE (BENEFIT) ......... 248,615 181,450 85,213 141,750 ----------- ----------- ----------- ----------- NET LOSS ............................. $ (740,300) $ 296,701 $(1,203,261) $ 231,362 DIVIDENDS ON PREFERRED SHARES ........ - 24,314 - 24,314 NET LOSS APPLICABLE TO ----------- ----------- ----------- ----------- COMMON SHARES ...................... $ (740,300) $ 272,387 $(1,203,261) $ 207,048 =========== =========== =========== =========== NET EARNINGS (LOSS) PER SHARE BASIC AND DILUTED .................. $ (0.77) $ 0.31 $ (1.25) $ 0.24 =========== =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING BASIC .............................. 964,552 887,627 964,552 864,124 =========== =========== =========== =========== DILUTED ............................ 964,552 914,336 964,552 888,942 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 ONSPAN NETWORKING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Preferred Stock Common Stock Paid-in Retained Shares Par Value Shares Par Value Capital Earnings Total ------ --------- ------ --------- ------- -------- ----- BALANCE, September 30, 2001 2,763 $ 2 964,552 $ 11,575 $ 7,755,319 $(5,337,185) $ 2,429,711 Net income (loss) - - - - - (1,203,261) (1,203,261) ----- -------- ------- -------- ----------- ----------- ----------- BALANCE, June 30, 2002 2,763 $ 2 964,552 $ 11,575 $ 7,755,319 $(6,540,446) $ 1,226,450 ===== ======== ======= ======== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 5 ONSPAN NETWORKING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Net loss ........................................... $(1,203,261) $ 231,362 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .................... 5,268 61,304 Deferred income taxes ............................ 93,743 141,750 Common stock issued for services ................. - 27,984 Unrealized loss (gain) from marketable securities 367,000 (572,050) Gain on sale of marketable securities ............ - (16,299) Allowance for bad debts .......................... 82,200 10,000 Goodwill ........................................ 334,697 - Change in assets and liabilities (excluding effects of acquisitions): Accounts receivable ............................ 494,975 294,912 Income tax receivable .......................... 64,876 - Notes receivable ............................... - 1,500,000 Inventory ...................................... 1,485 (3,975) Prepaid expenses ............................... (33,576) (13,876) Accounts payable ............................... (443,984) (403,880) Accrued expenses ............................... 12,225 (41,141) Income taxes payable ........................... - (81,176) ----------- ----------- Net cash provided by (used in) operating activities (224,352) 1,134,915 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of marketable securities ...... - 34,299 Net cash received in acquisition of interLAN ..... - 152,239 Capital expenditures ............................. (1,995) (26,198) ----------- ----------- Net cash provided by (used in) investing activities (1,995) 160,340 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Exercise of common stock options ................. - 475,000 Proceeds from notes payable ...................... 71,000 - Payment of notes payable ......................... (58,371) (819,436) Payment of notes payable to shareholders ......... - (150,000) Payment to purchasers of discontinued operations . (44,531) (35,958) ----------- ----------- Net cash used in financing activities .............. (31,902) (530,394) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS .......... (258,249) 764,861 CASH AND CASH EQUIVALENTS, beginning of period ..... 1,368,548 750,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period ........... $ 1,110,299 $ 1,514,861 =========== =========== See accompanying notes to condensed consolidated financial statements. Continued 6 ONSPAN NETWORKING, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (CONTINUED) 2002 2001 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes are as follows: Interest .......................................... $ 1,898 $ 1,821 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 ......................... $57,000 $ 42,180 Issuance of common stock in exchange for marketable securities ............................. $ - $ 421,799 See accompanying notes to condensed consolidated financial statements. 7 ONSPAN NETWORKING, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED JUNE 30, 2002 AND 2001 (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 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 10, 2001. On October 9, 2001 the Company effected a 1 for 12 reverse stock split of its issued and outstanding common stock. InterLAN, a Virginia corporation, is a provider of data communications and networking infrastructure solutions 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 November 10, 2000, OnSpan completed the acquisition of 100% of the issued and outstanding common stock of InterLAN. 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 20,833 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 $54,000 owing to InterLAN. These individuals also resigned in all capacities as directors, officers and/or employees of OnSpan. Onspan will retain the following assets of the corporation $1,078,883 in cash, the marketable securities, the prepaid expenses, the entire income tax receivable, and $2,611 in property. The liabilities Onspan will retain include a $30,946 dividend payable, $25,929 due to purchasers of discontinued operations, and $19,410 note payable. 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. 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, 2001, which is included in the Company's Form 10-KSB for the year ended September 30, 2001. 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. PREFERRED STOCK - At June 30, 2002 the Company had 2,763 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 to 4 shares of the Company's common stock as adjusted for the 1 for 12 reverse stock split. Dividends on the Series A were to be paid monthly in cash at a rate of 12% of the original issue. The Company's Board of Directors, elected for the payment of cash dividends on its Series A to be suspended. This decision was made in light of the general economic conditions. In particular, the Board took such actions as necessary to preserve the Company's working capital in order to ensure the continued viability of the Company as well as to maintain the continued listing of the Company's common stock on The Nasdaq SmallCap Market. These actions include, among others, ensuring that the Company can continue to meet or exceed Nasdaq's continued listing standards. 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 June 30, 2002. 9 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 was amortized on a straight-line basis over 5 years. As of October 1, 2001 the company has adopted SFAS No. 142, which requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon the adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and testing for impairment of existing goodwill and other intangibles. The carrying value of goodwill was evaluated at June 30, 2002 in relation to the operating performance and future discounted cash flows of the underlying businesses As of June 30, 2002 due to the disposition of InterLAN the remaining balance of $334,697 was completely amortized and the goodwill written off. 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. REVENUE RECOGNITION - Revenue from product sales is recognized when the related goods are shipped and all significant obligations of the Company have been satisfied. C. MARKETABLE EQUITY SECURITIES The cost of investment securities as shown in the accompanying balance sheet and their estimated market value at June 30, 2002 is as follows: 2002 Trading securities: Cost .............. $ 504,000 Unrealized loss.... (409,000) -------- $ 95,000 ========= The Company included unrealized losses in the amount of $3,000 and $367,000 in earnings for the three and nine month periods ended June 30, 2002, respectively. D. ACQUISITION OF INTERLAN COMMUNICATIONS, INC. On November 10, 2000, Onspan completed the acquisition of 100% of the issued and outstanding common stock of InterLAN, in exchange for $150,000 in cash, 20,883 shares of the restricted common stock of Onspan, with a value of $337,500, and promissory notes in the amount of $150,000. The Company also issued an additional 1,832 shares of restricted common stock to employees at a value of $27,984 The transaction was 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 was being amortized over five years, until September 30, 2001 when SFAS No. 142 was adopted. Unaudited pro forma results of operations for the nine-month periods ended June 30, 2002 and 2001, as if the acquisition had occurred as of the beginning of each period, follow. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future. The pro forma results exclude the results of discontinued operations. 10 2002 2001 Sales ............................... $ 2,017,712 $2,954,043 =========== ========== Net earnings (loss) from continuing operations ............. (1,203,261) 209,716 Dividends on preferred shares ....... - 24,314 ----------- ---------- Net earnings (loss) applicable to common shares ................. $(1,203,261) $ 185,402 =========== ========== Net earnings (loss) per common share, basic and diluted, from continuing operations ........................ $ (1.25) $ .02 =========== ========== E. NOTE PAYABLE The Company incurred debt in the amount of $57,000 to finance insurance premiums. The balance was $19,410 at June 30, 2002 F. EARNINGS PER SHARE The following data for the nine months ended June 30, 2002 and 2001 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. 2002 2001 Net income (loss) .............................. $(1,203,261) $231,362 Less preferred stock dividends ................. - 24,314 ----------- -------- Income (loss) available to common shareholders used in basic and diluted EPS ................ $(1,203,261) $207,048 =========== ======== Weighted average number of common shares used in basic EPS ............................ 964,552 864,124 Effect of dilutive securities: stock options and Warrants ....................................... - 25,651 ----------- -------- Weighted average number of common shares used in diluted EPS .......................... 964,552 838,473 =========== ======== 11 The following data for the three months ended June 30, 2002 and 2001 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. 2002 2001 Net income (loss) .............................. $(740,300) $296,701 Less preferred stock dividends ................. - 24,314 --------- -------- Income (loss) available to common shareholders used in basic and diluted EPS ................ $(740,300) $272,387 ========= ======== Weighted average number of common shares used in basic EPS ............................ 964,552 887,627 Effect of dilutive securities: stock options and Warrants ....................................... - 26,709 --------- -------- Weighted average number of common shares used in diluted EPS .......................... 964,552 914,336 ========= ======== At June 30, 2002, all common stock equivalents were antidilutive and are not included in the earnings per share calculations. The Company had 14,334 options to purchase common shares and 2,763 shares of preferred stock, convertible into 11,052 shares of common stock. At June 30, 2001 the Company had 172,000 options to purchase common shares and 2,763 shares of preferred stock, convertible into 138,150 shares of common stock included in the dilutive earnings per share calculations G. INCOME TAXES Income tax expense(benefit) for continuing operations for the nine months ended June 30, 2002 and 2001 consists of: 2002 2001 Current tax expense: Federal ......................... $ (8,513) $ - State ........................... - - -------- --------- Deferred tax benefit ..................... (93,726) (141,750) -------- --------- Total income tax expense(benefit) $ 85,213 $(141,750) ======== ========= Actual income tax expense applicable to earnings, from continuing operations, before income taxes is reconciled with the "normally expected" federal income tax expense as follows for the six months ended June 30, 2002 and 2001: 2002 2001 "Normally expected" income tax expense $(284,694) $(141,350) State income taxes, net of Federal Income tax benefit ................. - (600) Income tax receivable ................ (8,513) - Increase in valuation allowance ...... 375,450 - Non-deductible meals and other ....... 2,988 200 --------- --------- $ 85,213 $(141,750) ========= ========= 12 The deferred income tax assets at June 30, 2002 are comprised of the following: CURRENT NON-CURRENT Unrealized loss on marketable securities .......... $ 139,313 $ - Accounts receivable allowance for doubtful accounts 39,005 - N.O.L Carry forward ............................... 252,772 - Goodwill .......................................... - - --------- ----------- Net deferred income tax assets ................ $ 431,090 $ - Allowance for Deferred Taxes .................. (431,090) - --------- ----------- $ - $ - ========= =========== H. STOCK OPTIONS During 1999, the Company adopted the Network Systems International, Inc. "1999 Long Term Stock Incentive Plan." The maximum number of shares authorized and available under the plan was increased from 41,667 to 500,000 shares on December 31, 2001 as a result of an amendment voted for at the annual shareholder meeting. As of December 31, 2001, 18,735 of the shares authorized under the plan have been issued. Under the terms of the plan, the options expire after 10 years, as long as the employees remain employed with the Company. The following is a summary of option activity for the nine months ended June 30, 2002. OPTIONS OPTIONS OUTSTANDING AVAILABLE WEIGHTED AVERAGE FOR GRANT OPTIONS EXERCISE PRICE Balance, September 30, 2001 8,598 14,334 $ 13.08 ------- ------ --------- Plan Amendment ............ 458,333 - - Granted ................... - - - Exercised ................. - - - Cancelled ................. - - - ------- ------ --------- Balance, June 30, 2002 .... 466,931 14,334 $ 13.08 ======= ====== ========= The employee option grants provide that the option will be canceled sixty days after an employee leaves employment with the Company. 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 13 SFAS No. 123 pro forma numbers are as follows for the nine-month periods ended June 30, 2002 and 2001: 2002 2001 Actual net (loss) ................ $(1,203,261) $231,362 =========== ======== Pro forma net income (loss) ...... $(1,203,261) $176,892 =========== ======== Pro forma basic and diluted net Income (loss) per share ........ $ (1.25) $ .24 =========== ======== Under SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used: risk-free interest rate of 5.0%, no expected dividends, a volatility factor of 172.50%, 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. I. SUBSEQUENT EVENT 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 20,833 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. The listing is not intended to be a comprehensive list of all of our 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 our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Notes to the Consolidated Financial Statements. Note that our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. These can be no assurance that actual results will not differ from those estimates. 14 ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company evaluates the collectibility of its trade accounts receivable based on a number of factors. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the company's recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding. The allowance was increased by $82,200 at June 30, 2002. GOODWILL In the first quarter of 2002, the Company adopted the provisions of SFAS No. 142. The Company anticipates the adoption of SFAS No. 142 will reduce amortization expense in 2002 by approximately $75,000 for the Company. As of June 30, 2002 due to the disposition of InterLAN the remaining balance of $334,697 was completely amortized and the goodwill written off. DEFERRED TAX ASSETS The Company records a 100% 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 trading securities and are held for resale in anticipation of short-term market movements or until such securities are registered or are otherwise unrestricted. Trading account assets, consisting of marketable equity securities, are stated at fair value. At June 30, 2002 investments consisted entirely of common stock held for resale. Unrealized gains or losses 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 June 30, 2002, aggregated ($367,000 ). BUSINESS On October 9, 2001, the Company effected a 1 for 12 reverse stock split of its issued and outstanding common stock. The total number of authorized shares of its common stock before the stock split was 100,000,000; the total number of authorized shares of common stock after the stock split was 8,333,333. The total number of issued and outstanding shares of its common stock on the record date were 11,574,619; giving effect to the stock split, there were 964,552 shares of common stock issued and outstanding after the split. All information contained in this filing gives proforma effect to this stock split. The Company's continuing operations consist of the operations of InterLAN. InterLAN is a provider of data communications and networking infrastructure solutions 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. 15 On February 12, 2002, the Nasdaq Staff notified the Company that it did not comply with either the minimum $2,000,000 net tangible assets or the minimum $2,250,000 stockholders' equity requirement for continued listing set forth in Marketplace Rule 4310(c)(2)(B). According to the Form 10-QSB for the period ended December 31, 2001, the Nasdaq Staff determined that the Company's net tangible assets and stockholders' equity were $1,902,665 and $2,237,363, respectively. The Company reported net results from continuing operations of ($304,627), and ($53,460), in its annual filings for the years ended September 30, 2001, and 2000 respectively. Finally, the Nasdaq Staff determined that the market capitalization for its common stock was $1,022,425 as of February 8, 2002 and $636,604 on March 21, 2002. Based on Staff's review, the Nasdaq had determined to deny the Company's request for continued listing on the Nasdaq SmallCap Market. Accordingly, the Company's securities were de-listed from the Nasdaq SmallCap Market at the opening of business on April 2, 2002. The securities now trade on the Over-The-Counter Bulletin Board under the symbol ONSP 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. A. LIQUIDITY AND CAPITAL RESOURCES Because of the nature of the data and communications industry, the Company is seeking acquisitions and alliances that will: (i) add key technologies that can leverage the business, (ii) broaden product offerings, and (iii) expand marketing opportunities. In November 2000, the Company acquired InterLAN and expects to continue to pursue other potential acquisitions. During the nine months ended June 30, 2002, working capital decreased $846,191 to $1,207,234 from $2,053,425. During this same period, stockholders' equity decreased $1,203,261 to $1,226,450 from $2,429,711. The decrease in stockholders' equity is entirely due to the net loss for the period. The Company has not budgeted any significant capital expenditures for the current fiscal year for its current operations. The Company has adequate cash resources to meet its current needs. The Company anticipates to obtain sufficient working capital to accomplish its near-term objectives through the sale of its unregistered common stock in a private placement. B. RESULTS OF OPERATIONS InterLAN is a provider of data communications and networking infrastructure solutions 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 16 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, Northrup Grumman, The United States Department of Labor, The United States Army, GTE, Software AG, and the Federal Aviation Administration. SALES AND COST OF SALES - The Company's sales consist solely of those provided by InterLAN. Sales for the nine months ended June 30, 2002 were $2,017,712 as compared to $2,358,562 , ($2,954,043 pro forma for the year earlier period as if InterLAN was acquired on October 1, 2000, a decrease of $936,331 (32%). Sales for the three months ended June 30, 2002 were $527,484 as compared to $858,620, a decrease of $331,136 (39%). During the nine month period ended June 30, 2002, the Company experienced a gross profit percentage of approximately 13% before salaries, wages and other selling, general and administrative expenses, as compared to 18% for the nine-month period ended June 30, 2001. On August 5, 2002, the Company discontinued the operations of InterLAN(See Note I in the accompanying condensed financial statements). The majority of the Company's sales consist of sales of computer hardware and software. The revenue generated by consulting and maintenance services is not significant or material at this time. Consulting and maintenance services revenue, although not material, are recognized when services are rendered. The majority of the products purchased for resale are purchased from either the original equipment manufacturer or another reseller. All warranties of products sold are held with the original equipment manufacturer. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The Company's selling, general and administrative expenses, including salaries and wages amounted to $1,031,964 during the nine months ended June 30, 2002 as compared to $661,374 ($730,762 on a pro forma basis as if InterLAN was acquired on October 1, 2000) during the nine months ended June 30, 2001. The increase of $301,202 includes an increase of $92,856 for OnSpan and an increase of $208,346 for InterLAN. The Onspan increase primarily is from $57,000 for salaries, $7,250 in costs related to annual shareholder meeting, $5,000 in stock transfer fees related to the reverse split, $11,200 due to increase in D&O insurance premiums, $6,700 increase in legal fees due to the reverse split, and $3,000 due to an increase in rent. InterLAN's increase of $208,346 is primarily from a increase in goodwill amortization of $280,054 due to the write off of remaining goodwill, a increase of $71,265 due to write off of bad debt of $82,200 in 2002 and $10,935 in 2001, a decrease of $21,014 due to use of temp workers in 2001, and a decrease of $57,000 in salaries, commissions and bonuses due to no bonuses given out in 2002, the firing of one salesperson, and one administrative person, and the stoppage of payment of all commissions. On August 5, 2002, the Company discontinued the operations of InterLAN (See Note I in the accompanying condensed financial statements). INCOME TAXES - The Company recorded $85,213 in deferred income tax expense for the nine-month period ended June 30, 2002. In 2002, the deferred tax expense consists primarily of a change in the deferred tax valuation allowance. Subsequent to year end 2001 a refund application was filed with the Internal Revenue Service for approximately $118,000 for prior year overpaid income taxes. Onspan has received $56,072 in refunds to date. A refund for the full amount is expected in fiscal year 2002. 17 GOODWILL - In July 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon the adoption for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and testing for impairment of existing goodwill and other intangibles. A decline in the fair value of our common stock may precipitate a goodwill impairment in the future. Goodwill resulted from the acquisition of InterLAN Communications. An asset of $409,832 was recognized at the time of purchase and was being amortized over five years. Total amortization to date is $75,135. The carrying value of goodwill was evaluated at June 30, 2002 in relation to the operating performance and future discounted cash flows of the underlying businesses As of June 30, 2002 due to the disposition of InterLAN the remaining balance of $334,697 was completely amortized and the goodwill written off. MARKETABLE EQUITY SECURITIES - As of June 30, 2002, the Company held 100,000 shares of eResource Capital Group (AMEX:RCG)("eResource") with a cost basis of $504,000 (5.04 cents per share). For the nine months ended June 30, 2002, the Company recorded an unrealized loss from trading securities of ($367,000) on the Company's restricted 144 stock of eResource, which will become free trading as of August 22, 2002 and had a quoted market value of $95,000 or $0.95 (fourteen cents) per share. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On December 31, 2001 the annual shareholder meeting of OnSpan Networking, Inc., took place at 350 East Las Olas Boulevard, Fort Lauderdale, FL 33301 . During the meeting the following nominees were elected to the position of directors - Elizabeth Capra, Thomas Cerami, G Anthony Munno, Marissa Dermer - Treasurer, CFO and Director and Herbert Tabin - President, CEO, and Director. Shares for Herbert Tabin by proxy were 323,672. Shares for Marissa Dermer by proxy were 323,522 and shares against by proxy were 150. Shares for G. Anthony Munno by proxy were 323,666 and shares against by proxy were 6. Shares for Thomas Cerami by proxy were 323,666 and shares against by proxy were 6. Shares for Elizabeth Capra by proxy were 323,522 and shares against by proxy were 150. The following matters were voted on and approved, Ratification of Daszkal Bolton LLP as independent auditors of the Company for the fiscal year ending September 30, 2002. Shares for by proxy were 323,572, shares against by proxy were 37, and 63 abstained by proxy. Approval of an amendment to the Company's 1999 Long Term incentive Stock Incentive Plan increasing the number of shares of the Company's Common Stock available for issuance under the plan from 41,667 shares to 500,000 shares. Shares for by proxy were 322,790, shares against by proxy were 406 and 536 abstained by proxy. 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND 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 20,833 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. Exhibits Exhibit No. Description of Item 4.0 Long Term Incentive Stock Options Plan (1) 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer ---------- (1) Incorporated by reference to the company's report on form S-8 dated July 27, 2001 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ONSPAN NETWORKING, INC. Date: August 14, 2002 By: /S/ HERBERT TABIN ----------------- Herbert Tabin, President Date: August 14, 2002 By: /S/ MARISSA DERMER ------------------ Marissa Dermer, Chief Financial and Principal Accounting Officer